SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
-
OF 1934
For the fiscal year ended December 31, 1998
OR
____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-13045
PIERCE LEAHY CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2588479
(State or other jurisdiction of (IRS Employer
incorporated or organization) Identification No.)
631 PARK AVENUE
KING OF PRUSSIA, PENNSYLVANIA 19406
(Address of Principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 992-8200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $.01 par value New York Stock Exchange
11 1/8% Senior Subordinated Notes Due 2006 New York Stock Exchange
9 1/8% Senior Subordinated Notes Due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_____
-----
[X] Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K
As of March 15, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $228,199,848.
As of March 15, 1999, 17,036,581 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's definitive Proxy Statement with respect
to the Registrant's 1999 Annual Meeting of Shareholders to be filed no later
than 120 days after the end of the Registrant's Fiscal year.
================================================================================
PART I
ITEM 1. BUSINESS.
- ------ ---------
GENERAL
Pierce Leahy Corp. ("the Company") is the largest hard copy records
management company in North America, as measured by cubic feet of records under
management. As of March 1, 1999, the Company had approximately 85 million cubic
feet of records under management. The Company operates a total of 246 records
management facilities of which 200 are in the United States, 38 are in Canada,
and eight are in the United Kingdom.
The Company is a full-service provider of records management and related
services, enabling customers to outsource their data and records management
functions. The Company offers storage for all major media, including paper
(which has typically accounted for approximately 95% of the Company's storage
revenues), computer tapes, optical discs, microfilm, video tapes and X-rays. In
addition, the Company provides next day or same day records retrieval and
delivery, allowing customers prompt access to all stored material. The Company
also offers other data management services, including customer records
management programs, imaging services and records management consulting
services, and marketing literature storage and fulfillment services.
The Company serves a diversified group of over 40,000 customer accounts in
a variety of industries such as financial services, manufacturing,
transportation, healthcare and law. The Company's storage and related services
are typically provided pursuant to contracts that include recurring monthly
storage fees, which continue until such records are permanently removed (for
which the Company charges a fee), and additional charges for services such as
retrieval on a per unit basis.
Saved documents, or records, generally fall into two categories: active and
inactive. Active records refer to information that is frequently referenced and
usually stored on-site by the originator. Inactive records are not needed for
frequent access, but must be retained for future reference, legal requirements
or regulatory compliance. Inactive records are the principal focus of the
records management industry.
ACQUISITION HISTORY AND GROWTH STRATEGY
The Company believes that the consolidation trend occurring in the records
management industry will continue and that acquisitions will remain an important
part of its growth strategy. During 1998, the Company completed 16
acquisitions, totaling approximately 13.2 million cubic feet of records at the
time of acquisition. One of these acquisitions, Comac, was a marketing
fulfillment company. Since January 1, 1999, the Company has completed three
acquisitions, totaling approximately 1.6 million cubic feet of records at the
time of acquisition, including a U.K. based records management company with
eight facilities throughout England and Scotland. This acquisition establishes
the Company as the fourth largest records management company in the U.K. and
represents the Company's first major entrance into the European market.
2
The following table summarizes certain information for each acquisition since
January 1, 1998:
EXISTING/ DATE OF
ACQUISITION LOCATION NEW LOCATION ACQUISITION
----------- -------- ------------ -----------
Automated Record Centres Limited Toronto Existing January 1998
Record Archives Corp. Houston Existing January 1998
DataStor, Inc. St. Louis Existing January 1998
Off-Site Records Management, Inc. Dallas Existing February 1998
DVX. Inc. d/b/a Deliverex of Denver Denver Existing March 1998
Amodio Archives New Britain, CT Existing April 1998
Archivex, Inc. Canada-various Existing/New April 1998
All-Safe Archives, Inc. Boston Existing May 1998
The Records Centre Detroit Existing May 1998
Comac Services, Inc. US-various N/A (1) May 1998
Data Protection Services Alabama Existing June 1998
Kestrel Holdings, Inc. Dallas & Houston Existing July 1998
Bender Records Service Reno New July 1998
Keystone Records Management, Inc. Harrisburg New July 1998
Dallas Secured Records Storage, Inc. Dallas Existing July 1998
Data Management Systems, Ltd. Halifax New July 1998
Allards Record Center New Hampshire New January 1999
Medex Systems Storage, Inc. Edmonton Existing January 1999
DataVault, Limited U.K.-various New February 1999
(1) Comac is a marketing fulfillment company.
DESCRIPTION OF SERVICES
The Company's records management services are focused on storage, retrieval
and data management of hard copy documents.
Storage
Storage revenues were 57% of total revenues during 1998. Nearly all of the
Company's storage fees are derived from hard copy storage. During 1998, the
Company generated 95% of its storage revenues from hard copy storage and 5% from
vault storage for special items such as computer tapes, X-rays, films or other
valuable items. Storage charges typically are billed monthly on a per cubic
foot basis.
The Company tracks all of its records stored in cartons, from initial pick-
up through permanent removal, with the use of its Pierce Leahy User Solution(R)
(PLUS(R)) computer system. Bar-coded boxes are packed by the customer and
transported by the Company's transportation department to the appropriate
facility where they are scanned and placed into storage at the location
designated by PLUS(R). At such time, the Company's data input personnel enter
the data twice (i.e., double key verifying) to enhance the integrity of the
information entered into the system.
The Company offers secure, climate-controlled facilities for the storage of
non-paper forms of media such as computer tapes, optical discs, microfilm, video
tapes and X-rays. These types of media often require special facilities due to
the nature of the records. The Company's storage fees for non-paper media are
higher than for typical paper storage. The Company also provides ancillary
services for non-paper records in the same manner as it provides for its hard
copy storage operations.
3
Service and Storage Material Sales
The Company's principal services include adding records to storage,
temporary removal of records from storage to support a customer's need to review
the files, replacing temporarily removed records and permanent withdrawals from
storage or destruction of records. Pick-up and delivery of customer records can
be tailored to a customer's specific needs and range from standard service
(typically requests received by 10:30 a.m. are delivered or picked up that
afternoon and requests received by 3:30 p.m. are delivered or picked up the next
day) to emergency service (typically within three hours or less). Pick-up and
delivery operations are supported by the Company's fleet of over 500 owned or
leased vehicles. The Company charges for pick-up and delivery services on a
per-unit basis depending on the immediacy of delivery requested.
A small percentage of the Company's customers manage their records on a
file by file basis, allowing the customer direct access and traceability of a
specific file (rather than on a box by box basis). The Company provides data
entry services to such customers to input the file by file listings into the
PLUS(R) system.
The Company also offers a records destruction service, which provides
customers with a secure, controlled program to periodically review and remove
records which no longer need to be retained. Although boxes destroyed no longer
generate monthly storage fees, the Company charges for the destruction of
records and increases its available shelving space as a result.
In addition to providing traditional storage, customers may contract with
the Company to manage their on-site records or file services center. Such
management services generally include providing Company personnel to manage the
customer's active files (including records storage and tracking) at the
customer's facilities, supplemented by off-site storage at the Company's
facilities. As part of this service, the Company can use its own specifically
developed PLUSLink(R) active file room management software, or the customer's
existing system. The Company also provides consulting and other services on an
individualized basis, including advisory work for customers setting up in-house
records management systems. In addition, the Company sells cardboard boxes and
other storage containers to its customers.
The Company offers marketing literature storage and fulfillment services
through its Comac Services division, which was acquired in May 1998. This
division stores customer marketing literature and delivers this material to
sales offices, trade shows, and prospective customers' sites based on current
and prospective customer orders. Comac also assembles custom marketing packages,
and orders, manages, and provides detailed reporting on customer marketing
literature inventories.
RECORDS STORAGE CUSTOMER SERVICE
In North America, customer calls are routed into one of the Company's two
centralized customer service departments located in the Company's U.S. and
Canadian corporate headquarters. Corporate headquarters service departments are
staffed and can receive customer calls 24 hours a day, seven days a week.
Routine pick-up and delivery requests are dispatched directly by customer
service representatives to local facilities as directed by PLUS(R). Customers in
the U.K. continue to be serviced by each of the Datavault operation centers.
As a complement to its centralized customer service departments, the
Company provides client service representatives to work with existing customers
at the local level. In addition to maintaining personal contacts with
customers, the local client service representatives help meet the Company's
customers' changing records management needs through advice in efficient record
keeping procedures, and, when appropriate, by offering the sale of additional
services.
4
MANAGEMENT INFORMATION SYSTEMS
The Company believes that PLUS(R), its core management information system,
is the most sophisticated records management system in the industry, and
provides the Company with a significant customer service and cost advantage in
attracting and retaining major accounts with records storage needs in multiple
locations and in acquiring other records management companies. PLUS(R) utilizes
modern database technology, proprietary software and extensive bar coding in a
flexible, enterprise-wide, client/server environment that allows customers and
Company employees real time access to a common shared database of information.
The Company's centralized customer service and billing functions eliminate the
need for redundant functions at individual facilities. In addition, the PLUS(R)
system enables the Company to offer its customers full life cycle records
management, from file creation to destruction, and coordinates inventory
control, order entry, billing, material sales, service activity, and customer
and management reporting on a centralized basis.
Pierce Leahy has developed an integrated set of state-of-the-art
information technology systems around its core PLUS(R) system to support all
major aspects of its customers' records management needs. These include:
. PLUSWeb(R) - Provides customers with a fully interactive, real time,
web-based means to access their off-site records management
information maintained within the PLUS(R) system. With its user-
friendly graphical user interface, customers can perform inventory
research, order entry and order status inquiry, input new boxes and
files to be transmitted, maintain and modify descriptive information
on their inventory, and conduct online invoice inquiries.
. PLUSConnect(R) - Provides larger customers with their own records
management systems, and the ability to place orders from directly
within their own system. Customers' orders are electronically
transmitted to Pierce Leahy without further human intervention via the
Internet or other communications network.
. PLUSLink(R) - Where Pierce Leahy manages customers' on-site, active
file rooms, PLUSLink(R) extends PLUS(R)'s off-site records
management capabilities into customers' active file rooms. It is
designed around Pierce Leahy's workflow and business process methods.
. Web Order Form - For smaller customers not requiring inventory
research or more extensive interaction with the PLUS(R) system, the
web order form provides a convenient and easy to use means of quickly
placing an order without having to make a telephone call or send a
fax.
SALES AND MARKETING
During the past five years, the Company has invested significant effort in
developing its records storage sales and marketing department, which currently
has approximately 130 employees in the United States and 27 employees in Canada.
Sales representatives are trained to sell a "total systems approach," in which a
customer's records management requirements are surveyed and evaluated in order
to determine the file management system which best meets the customer's needs
and to offer recommendations on how to implement such a system.
The Company's U.S. sales and marketing department is divided into groups
that report to the Company's Vice President, Sales and Marketing. Two Canadian
sales managers report to a National Sales Director who reports to the President,
Pierce Leahy Canada. The Company's sales force is divided between sales
representatives who focus on large accounts which frequently have operations in
multiple cities and a group of sales representatives who focus on smaller,
single market customers. In addition the Company has a dedicated healthcare
sales organization. The sales force is primarily compensated on a commission
basis with incentives tied to the Company's sales goals. The Company also uses
telemarketing, direct response and print advertising to assist in its marketing
programs.
5
CUSTOMERS
The Company serves a diversified group of over 40,000 customer accounts in
a variety of industries, including financial services, manufacturing,
transportation, healthcare and law. The Company tracks customer accounts, which
are based on invoices. Accordingly, depending on how invoices have been
arranged at the request of a customer, one customer may have multiple customer
accounts. None of the Company's customers accounted for more than 2% of the
Company's total revenues during 1998. The Company services all types of
customers from small to medium size companies (such as professional groups and
law firms that often have one location) to Fortune 500 companies that have
operations in multiple locations.
The Company's contracts with larger, typically multi-location customers
usually provide for an initial term of five or more years, and contracts with
other customers typically provide for initial terms of one or two years. Both
types of contracts generally have annual renewals after the initial term (with
either party having the right to terminate the contract). Customers are
generally charged monthly storage fees until their records are destroyed or
permanently removed, for which fees are charged.
COMPETITION
The Company competes with numerous records management companies in all
geographic areas in which it operates. The Company believes that competition
for customers is based on price, reputation for reliability, quality of service
and scope and scale of technology, and believes that it generally competes
effectively based on these factors. Management believes that, except for Iron
Mountain Incorporated, all of the Company's competitors in North America have
records management revenues significantly lower than those of the Company. The
Company believes that the trend towards consolidation in the industry will
continue and the Company also faces competition in identifying attractive
acquisition candidates. In addition, the Company faces competition from the
internal document handling capability of its current and potential customers.
The substantial majority of the Company's revenues are derived from the
storage of paper records and from related services. Alternative technologies
for generating, capturing, managing, transmitting and storing information have
been developed, many of which require significantly less space than paper. Such
technologies include computer media, microforms, audio/video tape, film, CD-ROM
and optical disc. Management believes that conversion of paper documents into
these storage media is currently not cost effective for inactive records,
primarily due to the higher labor cost of preparing and converting the documents
for imaging, indexing the images for subsequent retrieval, and ensuring that all
the documents were imaged legibly.
EMPLOYEES
As of December 31, 1998, the Company had 3,263 employees, including 675
employees in Canada. Approximately 65 employees of Archivex, Limited in Canada
are covered by a collective bargaining agreement. Management considers its
employee relations to be good.
INSURANCE
The Company carries comprehensive property insurance covering replacement
costs of real and personal property. Subject to certain limitations and
deductibles, such policies also cover extraordinary expenses associated with
business interruption and damage or loss from fire, flood or earthquakes (in
certain geographic areas), and losses at the Company's facilities up to
approximately $600 million, in the aggregate.
6
ENVIRONMENTAL MATTERS
The Company's properties and operations past or present, may be subject to
liability under various environmental laws, regardless of fault, for the
investigation, removal or remediation of soil or groundwater, on or off-site,
resulting from the release or threatened release of hazardous materials, as well
as damages to natural resources. The past or present owner or operator of
contaminated property may also be subject to claims for damages and remediation
costs from third parties based upon the migration of any hazardous materials to
other properties.
At certain of the properties owned or leased by the Company, petroleum
products or other hazardous materials are or were stored in underground storage
tanks ("USTs"). Some formerly used USTs have been removed; others were abandoned
in place. The Company believes all of the USTs are registered, where required
under applicable law. The Company also is aware of the presence in some of its
facilities of asbestos-containing materials, but believes that no action is
presently required to be taken as a result of such materials.
At the Company's New Jersey facility, certain contamination has been
discovered resulting from operations of the prior owner thereof. The prior
owner, which has agreed to be responsible for the cost of such remediation, is
completing remediation of the property under a consent order with the New Jersey
Department of Environmental Protection ("NJDEP"). The prior owner has posted a
$1.1 million letter of credit with the NJDEP. The Company has purchased an
environmental liability insurance policy covering the cleanup costs to the
Company, if any, resulting from any on- or off-site environmental condition at
the facility existing at the time of its acquisition by the Company, with a
$500,000 deductible and policy limits of $4 million per occurrence/$8 million in
the aggregate, provided the claim first arises during the term of the policy,
which extends through August 10, 2003.
The Company has not received any written notice from any governmental
authority or third party asserting, and is not otherwise aware of, any material
noncompliance, liability or claim under environmental laws applicable to the
Company other than as described above. No assurance can be given that there are
no environmental conditions for which the Company may be liable in the future or
that future regulatory action, or compliance with future environmental laws,
will not require the Company to incur costs that could have a material adverse
effect on the Company's financial condition or results of operations.
7
ITEM 2. PROPERTIES.
- ------- -----------
As of March 1, 1999, the Company operated a total of 246 records management
facilities of which 200 are in the United States, 38 are in Canada and eight are
in the U.K. Of the 17.2 million square feet of floor space (representing over
115.1 million cubic feet of storage capacity) in the Company's records
facilities, approximately 35% and 65% (37% and 63% on a cubic footage basis) are
in owned and leased facilities, respectively. The Company's facilities are
located as follows:
Records
Management Cubic Feet of
Region Facilities Capacity
------- ---------------- -----------------
United States
Southern Region.............................................. 29 12.2 million
(Includes: Alabama, Florida, Georgia,
Kentucky, Louisiana, North Carolina,
Tennessee, and Virginia)
Northern Region.............................................. 60 42.0 million
(Includes: Connecticut, Delaware, Maryland,
Massachusetts, New Hampshire, New Jersey,
New York, Ohio, and Pennsylvania)
Midwest Region............................................... 82 32.7 million
(Includes: Colorado, Illinois, Indiana, Michigan,
Minnesota, Missouri, New Mexico, Oklahoma,
and Texas)
Western Region.......................................... 29 9.1 million
---------------- -----------------
(Includes: Arizona, California, Nevada, Utah,
and Washington)
Total U.S. ................................................. 200 96.0 million
Canada............................................................ 38 17.0 million
(Includes: Calgary, Edmonton, Halifax,
Montreal, Ottawa, Toronto, Vancouver, and
Winnepeg)
United Kingdom ................................................... 8 2.1 million
---------------- -----------------
(Includes: Bristol, Edinburgh, Glasgow,
Kemble, London, Manchester, and Reading)
Total ...................................................... 246 115.1 million
================ =================
8
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
The Company is involved in litigation from time to time in the ordinary
course of its business. In the opinion of management, no material legal
proceedings are pending to which the Company, or any of its property, is
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
Not Applicable
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- --------------------------------------
The following is a list of the Company's executive officers, their ages and
their positions. Each executive officer serves at the pleasure of the Company's
Board of Directors.
Other Position held
Name Age Position in the last five years
- ----------------------------------------------------------------------------------------------------------------
J. Peter Pierce....................... 53 President, Chief Executive Chief Operating Officer
Officer and Director (1984 - 1995)
(1995 - Present)
Douglas B. Huntley ................... 38 Vice President, Chief
Financial Officer and Director
(1994 - Present)
Joseph A. Nezi........................ 52 Vice President Sales and
Marketing
(1991 - Present)
David Marsh........................... 50 Vice President, Chief Assistant to the President
Information Officer (1994), Manager - Mass.
(1995 - Present) Institute of Technology
(1986 - 1994)
Ross M. Engelman...................... 35 Vice President, Operations Vice President
South Information Services
(1994 - Present) (1993 - 1994)
J. Michael Gold ...................... 39 Vice President, Operations
Northeast
(1993 - Present)
Christopher J. Williams .............. 40 Vice President, Operations
West
(1993 - Present)
Joseph P. Linaugh .................... 49 Vice President, Treasurer
(1994 - Present)
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------- -----------------------------------------------------------------
MATTERS.
-------
MARKET INFORMATION
The Company's Common Stock began trading publicly on the New York Stock
Exchange ("NYSE") under the symbol "PLH" on July 1, 1997. Prior to that
date there was no market for the Common Stock. The following table sets
forth, for the periods indicated, the range of high and low closing prices
for the Common Stock as reported on the New York Stock Exchange, Inc.
Composite Transaction Tape.
QUARTER ENDED HIGH LOW
------------- ---- ---
September 30, 1997 $29 5/16 $23 9/16
December 31, 1997 $31 1/16 $15 7/16
March 31, 1998 $27 $20 3/8
June 30, 1998 $28 7/8 $23 1/4
September 30, 1998 $25 7/8 $16 3/4
December 31, 1998 $26 $17 5/8
HOLDERS OF RECORD
Based on requests for proxy materials, the Company believes there are
approximately 2,400 holders of the Common Stock.
DIVIDENDS
Since the Company's initial public offering of Common Stock in July 1997,
the Company has not paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. The Company intends to retain any future earnings for
use in its business. Additionally, the Company's ability to pay cash
dividends is limited by the terms of its senior subordinated notes and its
credit facility.
10
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1998 1997 1996 1995 1994
---------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenues
Storage $153,533 $107,879 $ 75,900 $ 55,501 $ 47,123
Service and storage material sales 116,767 75,638 53,848 39,895 35,513
--------- --------- --------- --------- ---------
Total Revenues 270,300 183,517 129,748 95,396 82,636
Cost of sales, excluding depreciation
and amortization 154,435 101,940 73,870 55,616 49,402
Selling, general & administrative 36,994 30,070 20,007 16,148 15,882
Depreciation & amortization 35,772 21,528 12,869 8,163 8,436
Special compensation charge - 1,752 - - -
Foreign currency exchange 7,907 702 - - -
Consulting payments to related parties - - - 500 500
Non-recurring charge - - 3,254 - -
--------- --------- --------- --------- ---------
Operating income 35,192 27,525 19,748 14,969 8,416
Interest expense 42,864 29,262 17,225 9,622 7,216
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary charge (7,672) (1,737) 2,523 5,347 1,200
Income taxes 3,318 7,424 - - -
Extraordinary Charge - 6,036 2,015 3,279 5,991
--------- --------- --------- --------- ---------
Net Income (loss) (10,990) (15,197) 508 2,068 (4,791)
Accretion of redeemable warrants - - 1,561 889 16
--------- --------- --------- --------- ---------
Net Income (loss) applicable to Common Shareholders $(10,990) $(15,197) $ (1,053) $ 1,179 $ (4,807)
========= ========= ========= ========= =========
BASIC AND DILUTED EARNINGS PER COMMON SHARE
Income (loss) before extraordinary charge $ (0.65) $ (0.69) $ 0.09 $ 0.41 $ 0.18
Extraordinary charge - (0.45) (0.19) (0.30) (0.56)
--------- --------- --------- --------- ---------
Basic and diluted net income (loss) per Common Share $ (0.65) $ (1.14) $ (0.10) $ 0.11 $ (0.38)
========= ========= ========= ========= =========
Shares used in computing basic net income (loss)
per Common share 16,805 13,385 10,547 10,591 10,591
Shares used in computing diluted net income (loss)
per Common share 16,805 13,385 10,631 10,890 10,888
--------- --------- --------- --------- ---------
Pro forma Data (unaudited):
Pro forma net loss applicable to Common Shareholders $ (9,225)
=========
Pro forma basic and diluted net loss per Common share:
Loss before extraordinary charge $ (0.24)
Extraordinary charge (0.45)
=========
Pro forma basic and diluted net loss per Common share $ (0.69)
=========
Shares used in computing pro forma basic and diluted net
loss per Common share 13,385
=========
OTHER DATA:
EBITDA(a) $ 78,871 $ 51,507 $ 35,871 $ 23,632 $ 17,352
EBITDA margin 29.2% 28.1% 27.6% 24.8% 21.0%
EBITDA per basic share $ 4.69 $ 3.85 $ 3.40 $ 2.23 $ 1.64
BALANCE SHEET DATA:
Working capital deficit $(16,147) $(12,906) $(23,933) $ (8,139) $ (5,202)
Total assets 666,458 394,713 234,820 131,328 79,746
Total debt (including redeemable warrants) 518,111 279,197 217,423 120,071 77,683
Shareholders' equity (deficit) 63,095 59,323 (25,438) (18,201) (19,341)
(a) Earnings before interest, taxes, depreciation and amortization,
extraordinary charge, non-recurring charges, special compensation charge,
consulting payments to related parties, and foreign currency exchange (EBITDA)
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
GENERAL
The Company is the largest hard copy records management company in North
America, as measured by cubic feet of records currently under management. The
Company's operations date to 1957 when its predecessor company, L.W. Pierce Co.,
Inc., was founded to provide filing systems and related equipment to companies
in the Philadelphia area. The Company expanded primarily through internal
growth until 1990, when it acquired Leahy Business Archives, which effectively
doubled its size. Since 1992, the Company has pursued an expansion strategy
combining growth from new and existing customers with the completion and
successful integration of 59 acquisitions through 1998 and the completion of two
acquisitions in January 1999 and one in February 1999.
The Company's income (loss) was $(11.0) million, $(15.2) million, and $.5
million in 1998, 1997 and 1996, respectively. Although the Company's operating
income has increased over the three years, net income (loss) has fluctuated as a
result of increases in interest expense, goodwill amortization from purchase
accounting, income taxes related to the termination of the Company's status as a
Subchapter S corporation, foreign currency exchange gains and losses, and
extraordinary charges related to the early extinguishment of debt due to
refinancings in 1997 and 1996.
Another tool for measuring the performance of records management companies is
EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation and
amortization, extraordinary charge, non-recurring charges, special compensation
charge and foreign currency exchange. Substantially all of the Company's
financing agreements, including its 11 1/8% Senior Subordinated Notes due 2006
("1996 Notes"), its 9 1/8% Senior Subordinated Notes due 2007 ("1997 Notes"),
and the 8 1/8% Senior Notes due 2008 issued by the Company's principal Canadian
Subsidiary, Pierce Leahy Command Company ("Command") ("1998 Notes"; and
collectively, the "Notes"), contain covenants in which EBITDA is used as a
measure of financial performance. However, EBITDA should not be considered an
alternative to operating or net income (as determined in accordance with
generally accepted accounting principles ("GAAP")), as an indicator of the
Company's performance or to cash flow from operations (as determined in
accordance with GAAP) as a measure of liquidity. Moreover, the use of EBITDA by
the Company may not be comparable to similarly titled measures as reported by
other companies.
12
The following table illustrates the growth in stored cubic feet from new and
existing customers, and acquisitions from 1994 through 1998:
NET ADDITIONS OF CUBIC FEET OF STORAGE BY CATEGORY
(CUBIC FEET IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Additions of Cubic Feet:
New and Existing Customer Accounts 9,528 8,170 3,956 2,740 2,695
Acquisitions................. 13,150 10,285 6,931 4,623 440
----------- ----------- ----------- ----------- -----------
Total........................ 22,678 18,455 10,887 7,363 3,135
% Increase From:
New and Existing Customer Accounts 16% 20% 13% 12% 14%
Acquisitions................. 23% 26% 24% 21% 2%
----------- ----------- ----------- ----------- -----------
Total........................ 39% 46% 37% 33% 16%
Cubic Feet Under Management:
Beginning of Period.......... 58,865 40,410 29,523 22,160 19,025
End of Period................ 81,543 58,865 40,410 29,523 22,160
Revenues
The Company's revenues consist of storage revenues (56.8% of total revenues in
1998), and related service and storage material sales revenues (43.2% of total
revenues in 1998). The Company provides records storage and related services
under annual or multi-year contracts that typically provide for recurring
monthly storage fees which continue until such records are permanently removed
(for which the Company charges a service fee) and service charges based on
activity with respect to such records.
The increase in the Company's total revenues from 1997 to 1998 includes $9
million of revenue from the marketing literature storage and fulfillment
business acquired during 1998. With respect to records management, the Company's
total revenue per average cubic foot has declined from 1996 to 1998. The decline
is principally attributable to (i) increases in sales to large volume accounts
under long-term contracts with discounted rates, which generate lower revenue
per cubic foot, but typically generate increased operating income, (ii)
renegotiation of contracts with existing customers to provide for longer term
contracts at lower rates, and (iii) competition.
Operating Expenses and Productivity
Operating expenses consist primarily of cost of sales, selling, general and
administrative expenses, and depreciation and amortization. Cost of sales are
comprised mainly of wages and benefits, facility occupancy costs, equipment
costs and supplies. The major components of selling, general and administrative
expenses are management, administrative, marketing and data processing wages and
benefits and also include travel, communication and data processing expenses,
professional fees and office expenses.
The Company's depreciation and amortization charges result primarily from the
capital-intensive nature of its business and the completed acquisitions. The
principal components of depreciation relate to shelving, buildings and
improvements, and data processing equipment. Amortization primarily relates to
the amortization of intangible assets associated with acquisitions, including
goodwill, and the amortization of client acquisition costs. The Company has
accounted for all of its acquisitions under the purchase method except for two
small acquisitions in 1997, which were accounted for under the pooling of
interests method. Since the purchase price for records management companies is
substantially in excess of the fair market value of their assets, these
purchases have given rise to significant goodwill and, accordingly, significant
levels of amortization. Although amortization is a non-cash charge, it does
impact reported net income (loss).
13
Capital Expenditures and Client Acquisition Costs
The majority of the Company's capital expenditures are related to expansion.
The largest single component is the purchase of shelving, which is directly
related to the addition of new records. Shelving has a relatively long life and
rarely needs to be replaced. Most of the Company's storage facilities (both in
number and square feet) are leased, but the Company does purchase facilities on
an opportunistic basis. The Company's data processing capital expenditures are
also largely related to growth.
The Company often incurs client acquisition costs, primarily sales commissions
and move-in costs. Client acquisition costs are capitalized and amortized over
six years, which is the average initial contract term of new customer accounts.
In 1998, the Company incurred $10.9 million of client acquisition costs or
approximately $1.88 per cubic foot of client records moved in from new clients.
Amortization of client acquisition costs amounted to $5.2 million in 1998.
Extraordinary Charge
To provide capital to fund its growth oriented business strategy, the Company
has incurred substantial indebtedness. The Company has completed several
expansions of its credit facilities, primarily utilizing bank debt, which have
resulted in one-time charges, including the repurchase of warrants and the
write-off of deferred financing costs, of $6.0 million and $2.0 million in 1997
and 1996, respectively.
Year 2000 Compliance
The Company uses a number of computer software programs and systems in its
operations, including the PLUS(R) system and embedded systems contained in the
Company's buildings, plant, equipment and other infrastructure. The Company has
developed a plan designed to make its systems compliant with the requirements to
process transactions in the year 2000. Review of the Company's core PLUS(R)
system databases and programs has been performed and code modifications and
testing were completed in July 1998. The Company's internal financial
accounting system was upgraded to a vendor certified year 2000 compliant version
in December 1998. The Company is also working with its other internal
information systems, network service providers, and other key vendors to ensure
overall year 2000 readiness. The Company estimates that its remediation costs
incurred to date in achieving Year 2000 compliance, including the replacement of
non-compliant systems, software modifications and validation, have been
approximately $325,000. In addition, the Company estimates the cost to complete
its Year 2000 evaluation, remediation and validation of all systems will
approximate an additional $25,000. Funding for costs incurred to date has come
from cash flows from operations, and future costs are expected to be funded in a
similar manner. The Company has not deferred any significant system projects due
to its Year 2000 efforts.
Foreign Operations
The Company's expansion plans have included markets outside of the United
States. At December 31, 1998, 13% of the Company's revenues and 11% of the
Company's EBITDA were derived from, and 19% of the Company's total assets were
employed in, operations located in 38 facilities throughout Canada. In February
1999, the Company acquired Datavault, Limited, a records management company with
eight facilities throughout the United Kingdom. In addition, the Company has
established joint ventures with other records management companies in Chile,
Peru, India, and the Netherlands.
14
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of operations, expressed as a
percentage of revenue. There can be no assurance that the trends in revenue
growth or operating results shown below will continue in the future.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996
---- ---- ----
REVENUES:
Storage 56.8% 58.8% 58.5%
Service and storage material sales 43.2% 41.2% 41.5%
---------------- ---------------- ---------------
Total revenues 100.0% 100.0% 100.0%
OPERATING EXPENSES:
Cost of sales, excluding depreciation and amortization 57.1% 55.5% 57.0%
Selling, general and administrative 13.7% 16.4% 15.4%
Depreciation and amortization 13.2% 11.7% 9.9%
Special compensation charge 0.0% 1.0% 0.0%
Foreign currency exchange 2.9% 0.4% 0.0%
Non-recurring charge 0.0% 0.0% 2.5%
---------------- ---------------- ---------------
Total operating expenses 86.9% 85.0% 84.8%
Operating income 13.1% 15.0% 15.2%
INTEREST EXPENSE 15.9% 15.9% 13.3%
---------------- ---------------- ---------------
Income (loss) before income taxes and extraordinary item (2.8%) (0.9%) 1.9%
INCOME TAXES 1.2% 4.1% 0.0%
---------------- ---------------- ---------------
Income (loss) before extraordinary charge (4.0%) (5.0%) 1.9%
EXTRAORDINARY ITEM-loss on early extinguishment
of debt, net of $4,014 tax benefit in 1997 and none in 1996 0.0% 3.3% 1.5%
---------------- ---------------- ---------------
NET INCOME (LOSS) (4.0%) (8.3%) 0.4%
================ ================ ===============
EBITDA 29.2% 28.1% 27.6%
15
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total revenues increased from $183.5 million in 1997 to $270.3 million in 1998,
an increase of $86.8 million or 47.3%. Revenues from acquisitions represented
$60.4 million of this increase. Approximately $26.4 million of the total revenue
growth resulted from sales to new customers and increases in cubic feet stored
from existing customers, a base business revenue growth of approximately 14.4%
year over year.
Storage revenues increased from $107.9 million in 1997 to $153.5 million in
1998, an increase of $45.6 million or 42.3%. Service and storage material sales
revenues increased from $75.6 million in 1997 to $116.8 million in 1998, an
increase of $41.2 million or 54.4%, in part due to $8.0 million of service
revenues derived from the marketing literature storage and fulfillment business
acquired during 1998.
Cost of sales (excluding depreciation and amortization) increased from $101.9
million in 1997 to $154.4 million in 1998, an increase of $52.5 million or
51.5%, and, increased as a percentage of total revenues from 55.5% in 1997 to
57.1% in 1998. The increase in dollars resulted primarily from an additional
number of employees and an increase in facility occupancy costs resulting from
the growth in cubic feet stored from existing customers and acquisitions. The
increase as a percentage of total revenues resulted primarily from increased
cost of sales from acquisitions not yet integrated into the Company's PLUS(R)
system.
Selling, general and administrative expenses increased from $30.1 million in
1997 to $37.0 million in 1998, an increase of $6.9 million or 23.0%, but
decreased as a percentage of total revenues from 16.4% in 1997 to 13.7% in 1998.
The dollar increase was primarily attributable to increases in staffing,
including increases in sales personnel and administrative staff. The decrease as
a percentage of total revenues was attributable to economies realized from
administrative efficiencies of operating in a centralized manner.
Depreciation and amortization expenses increased from $21.5 million in 1997 to
$35.8 million in 1998, an increase of $14.3 million or 66.2%, and increased as a
percentage of total revenues from 11.7% in 1997 to 13.2% in 1998. The increase
in both dollars and percentage of total revenues was primarily attributable to
the additional depreciation and amortization expense related to the 16
acquisitions completed during 1998, to capital expenditures for shelving,
buildings, improvements to records management facilities and information
systems, and to client acquisition costs.
A special compensation charge of $1.8 million was incurred during 1997. This
charge relates to the write-off of the unamortized compensation expense due to
the acceleration of the vesting of stock options granted on January 1, 1997 in
conjunction with the Company's initial public offering of Common Stock.
The Company had a foreign currency exchange loss for the year ended December 31,
1998 of $7.9 million (2.9% of total revenues) as compared to a loss of $0.7
million (0.4% of total revenues) for the year ended December 31, 1997. The
increase in the foreign currency exchange loss is primarily due to a decrease in
the value of the Canadian dollar compared to the U.S. dollar. This movement
affects U.S. dollar denominated liabilities of the Company's Canadian
subsidiaries, primarily the $135.0 million principal amount of the 1998 Notes
issued by Pierce Leahy Command Company, a Canadian Subsidiary of the Company
("Command").
Interest expense increased from $29.3 million in 1997 to $42.9 million in 1998,
an increase of $13.6 million or 46.5%. The increase was primarily attributable
to increased indebtedness related to financing acquisitions and capital
expenditures.
As a result of the foregoing factors, the Company had a loss before income taxes
and extraordinary charge of $7.7 million (2.8% of revenues) for 1998, as
compared to a loss before income taxes and extraordinary charge of $1.7 million
(0.9% of revenues) for 1997.
16
The Company recorded an extraordinary charge of $6.0 million (3.3% of total
revenues) in 1997 which related to the early extinguishment of debt as a result
of refinancing and expanding its existing credit agreement in 1997. The $6.0
million extraordinary charge is net of a tax benefit of $4.0 million.
The Company recorded a provision for income taxes of $7.4 million (or 4.1% of
revenues) for 1997 and a provision for income taxes of $3.3 million (or 1.2% of
revenues) for 1998. For 1997, these taxes were comprised of the tax effect from
the termination of the Company's Subchapter S corporation status ($6.6 million)
and the provision for the results of operations after the termination of its
status as a S corporation on July 1, 1997 ($0.8 million).
As a result of the foregoing items, the Company had a net loss of $11.0 million
for 1998 and a net loss of $15.2 million for 1997.
EBITDA increased from $51.5 million in 1997 to $78.9 million in 1998, an
increase of $27.4 million or 53.1%, and increased as a percentage of total
revenues from 28.1% in 1997 to 29.2% in 1998. The increase as a percentage of
the total revenues reflected growth in the Company's business, economies of
scale and increased operating efficiencies.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total revenues increased from $129.7 million in 1996 to $183.5 million in 1997,
an increase of $53.8 million or 41.4%. Revenues from acquisitions represented
$34.9 million or 64.9% of this increase. Approximately $18.9 million of the
total revenue growth resulted from sales to new customers and increases in cubic
feet stored from existing customers, a base business revenue growth of
approximately 16% year over year.
Storage revenues increased from $75.9 million in 1996 to $107.9 million in 1997,
an increase of $32.0 million or 42.1%. Service and storage material sales
revenues increased from $53.8 million in 1996 to $75.6 million in 1997, an
increase of $21.8 million or 40.5%.
Cost of sales (excluding depreciation and amortization) increased from $73.9
million in 1996 to $101.9 million in 1997, an increase of $28.1 million or
38.0%, but decreased as a percentage of total revenues from 57.0% in 1996 to
55.5% in 1997. The $28.1 million increase was due primarily to increases in
wages and benefits resulting from an increased number of employees and to
increases in facility occupancy costs resulting from an increase in cubic feet
associated with the growth in business and entry into 14 new markets during
1997. Capacity utilization is generally lower in new markets than in existing
markets. The decrease as a percentage of total revenue was due primarily to
increased labor operating efficiencies.
Selling, general and administrative expenses increased from $20.0 million in
1996 to $30.1 million in 1997, an increase of $10.1 million or 50.3%, and
increased as a percentage of total revenues from 15.4% in 1996 to 16.4% in 1997.
The increase as a percentage of total revenues was due to increases in sales
personnel and training costs associated with the increased staff, enhancements
to the PLUS(R) computer system, and temporarily carrying duplicate
administrative costs from recent acquisitions.
Depreciation and amortization expenses increased from $12.9 million in 1996 to
$21.5 million in 1997, an increase of $8.7 million or 67.3%, and increased as a
percentage of total revenues from 9.9% in 1996 to 11.7% in 1997. This increase
was the result of increased capital expenditures for shelving, building, and
improvements to record management facilities and information systems and the
amortization of goodwill from the Company's acquisitions and client acquisition
costs.
17
The Company incurred non-recurring charges of $3.3 million, or 2.5% of total
revenues, in 1996 in connection with the assumption of leasehold interests in
certain facilities from affiliated parties completed in connection with the sale
of the 1996 Notes and with the establishment of a pension for Leo W. Pierce, Sr.
A special compensation charge of $1.8 million was incurred during 1997. This
charge relates to the write-off of the unamortized compensation expense due to
the acceleration of the vesting of stock options granted on January 1, 1997 in
conjunction with the Company's initial public offering of Common Stock.
The Company incurred a foreign currency exchange adjustment during 1997 of $0.7
million during which time the Company had an intercompany loan with its Canadian
subsidiary. This exchange adjustment was directly related to the decrease in
the Canadian dollar to U.S. dollar exchange rate during the last quarter of
1997.
Interest expense increased from $17.2 million in 1996 to $29.3 million in 1997,
an increase of $12.0 million or 69.9%. The increase was primarily attributable
to increased indebtedness related to financing acquisitions and capital
expenditures, as well as the higher interest rate on the 1997 Notes issued in
July 1997 and a full year of interest expense on the 1996 Notes compared to the
bank debt repaid upon the issuance of the 1997 Notes and 1996 Notes. Interest
expense was also affected by the proceeds of the Company's initial public stock
offering.
As a result of the foregoing factors, the Company had a loss before income taxes
and extraordinary charge of $1.7 million (0.9% of revenues) for 1997 compared to
income of $2.5 million (1.9% of revenues) in 1996.
The Company recorded a provision for income taxes of $7.4 million (or 4.1% of
revenues) for 1997. These taxes were comprised of the tax effect from the
termination of the Company's Subchapter S corporation status ($6.6 million) and
the provision for the results of operations after the termination of its status
as a S corporation on July 1, 1997 ($0.8 million). There was no provision for
income taxes in the year ended 1996 since the Company operated as a Subchapter S
corporation during the period.
The Company recorded extraordinary charges of $6.0 million in 1997 and $2.0
million in 1996 related to the early extinguishment of debt as a result of
refinancing and expanding its existing credit agreement in 1997 and 1996.
As a result of the foregoing items, the Company had a net loss of $15.2 million
and net income of $0.5 million for 1997 and 1996, respectively.
EBITDA increased from $35.9 million in 1996 to $51.5 million in 1997, an
increase of $15.6 million or 43.6%, and increased as a percentage of total
revenues from 27.6% in 1996 to 28.1% in 1997. The increase as a percentage of
the total revenues reflected growth in the Company's business, economies of
scale and increased operating efficiencies.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been cash flows from operations
and borrowings under various revolving credit facilities and other senior
indebtedness. Historically, the Company's primary uses of capital have been for
acquisitions, capital expenditures and client acquisition costs.
Capital Investments
For 1998, 1997, and 1996, capital expenditures were $48.6 million, $35.4
million, and $23.5 million, respectively, and client acquisition costs were
$10.9 million, $10.6 million, and $6.5 million, respectively. In 1999, the
Company expects its aggregate capital expenditures will approximate $52 million.
Over 85% of 1999 capital expenditures are anticipated to be growth related,
primarily shelving for new client records.
Acquisitions
In order to take advantage of the operating efficiencies of the PLUS(R) computer
system and the opportunities presented by the consolidation undergoing in the
records management industry, the Company has actively pursued acquisitions since
the beginning of 1994, which has significantly impacted liquidity and capital
resources. In 1998, the Company completed 16 acquisitions for an aggregate
purchase price of $204.1 million, consisting of $186.5 million in net cash,
548,262 shares of Common Stock with a deemed value of $14.4 million and $3.2
million in Seller notes. During 1998, Pierce Leahy Command Company issued $135
million principal amount of 1998 Notes, a portion of which was used to finance
the acquisition of Archivex, Ltd., a Canadian records management company. The
1998 Notes are guaranteed by the Company on a senior subordinated basis. Since
the beginning of 1999, the Company has completed three acquisitions for an
aggregate purchase price of approximately $42.1 million, consisting of $23.4
million in net cash and $18.7 million in Seller notes. The most significant of
these acquisitions was Datavault, Limited, a U.K. based records management
company with operations in seven markets throughout England and Scotland. This
acquisition was financed by borrowings under the Company's credit facility and
the issuance of Seller notes. The Company has historically financed its
acquisitions with borrowings under its credit facilities and with cash flows
from existing operating activities. During 1996, the Company issued $200 million
principal amount of 1996 Notes, a small portion of which was used to fund
acquisitions. Funding for 1997 acquisitions was primarily from borrowings under
its credit facility.
In March 1999, the Company signed a letter of intent to form a strategic
partnership with ImageMax, Inc., a digital imaging, micrographics, and data
entry services company. Initially the Company expects to invest approximately $8
million in the purchase of preferred stock of ImageMax, Inc. The transaction is
subject to due diligence, bank and board of directors approval, and other
customary conditions, and there can be no assurances the transaction will occur.
To the extent that future acquisitions are financed by additional borrowings
under the Company's credit facility or other types of indebtedness, the
resulting increase in debt and interest expense could have a negative effect on
measures of liquidity such as debt to equity.
Sources of Funds
Net cash flows provided by operating activities were $40.7 million, $21.0
million, and $26.4 million for 1998, 1997 and 1996, respectively. The $19.7
million increase from 1997 to 1998 primarily resulted from the $27.4 million
increase in EBITDA, favorable foreign currency cash transactions of $2.2
million, and an increase in working capital of $1.8 million, offset by an
increase in the cash paid for interest of $12.7 million.
19
Net cash flows used in investing activities were $253.0 million, $156.5 million,
and $108.8 million for 1998, 1997 and 1996, respectively. The uses of such cash
flows were primarily for acquisitions, capital expenditures and client
acquisition expenditures described above.
Net cash flows provided by financing activities were $212.9 million, $136.1
million, and $82.9 million for 1998, 1997, and 1996, respectively. In 1998, the
$212.9 million in financing activities consisted primarily of the net proceeds
from issuance by Pierce Leahy Command Company of $135.0 million principal amount
of the 1998 Notes and $183.9 million of borrowings under the Company's credit
facility, offset by $86.8 million of payments under the credit facility and a
$10.6 million repayment of long-term debt. In 1997, the $136.1 million in
financing activities consisted primarily of $120.0 million of gross proceeds
from the issuance of the 1997 Notes, $93.6 million in net proceeds from the
Company's initial public offering of Common Stock, and $17.2 million of net
borrowings under the credit facility, offset by the repayment of long-term debt
of $82.5 million, $7.0 million prepayment premium on the redemption of a portion
of the 1996 Notes and payment of $5.2 million of financing costs related to the
issuance of the 1997 Notes and the Company's credit facility. In July 1996, the
Company issued $200 million of the 1996 Notes and used the net proceeds to
retire all of the debt outstanding under the Company's previous credit facility,
to purchase certain properties from affiliates of the Company, to redeem stock
from a shareholder of the Company, to fund an acquisition and for general
corporate purposes. In February 1999, the U.S. portion of the credit facility
was increased from $150 million to $175 million; all other material terms and
conditions remained the same.
The credit facility contains a number of financial and other covenants
restricting the Company's ability to incur additional indebtedness and make
certain types of expenditures. Covenants in the indentures governing the Notes
also restrict borrowings under the credit facility. As of December 31, 1998,
$118 million was outstanding under the credit facility, and the Company could
have borrowed an additional $42.4 million under the credit facility in
accordance with the debt incurrence limitations. Additionally, to the extent
the Company makes acquisitions, it will have additional availability under the
credit facility based upon the pro forma EBITDA of such acquisitions. The
effective interest rate on the credit facility, as of December 31, 1998, was
approximately 7.6%.
In March 1999, the Company entered into an agreement to issue up to $15 million
of redeemable payment-in-kind ("PIK") preferred stock. This stock is redeemable
at any time during the ten year term with an initial annual dividend rate of
11.36%, subject to increase under certain circumstances, including subsequent
issuances of preferred stock (depending on certain interest rates at such time)
and if the preferred stock is not redeemed prior to six months from its initial
issuance. At its option, the Company may issue additional shares of preferred
stock in lieu of quarterly cash interest payments. The Company issued $5 million
of the PIK preferred stock in March 1999.
Future Capital Needs
Management believes that cash flow from operations in conjunction with
borrowings under the credit facility, the recent issuance and availability of
the PIK preferred stock, and possible other sources of financing will be
sufficient for the foreseeable future to meet working capital requirements and
to make possible future acquisitions and capital expenditures. Depending on the
pace and size of future possible acquisitions, the Company may elect to seek
additional debt or equity financing. There can be no assurance that the Company
will be able to obtain any future financing, if required, or that the terms for
any such future financing would be favorable to the Company.
Forward-Looking Statements
This Report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, and is subject to the safe-harbor created by such sections. Such
forward-looking statements concern the Company's operations, economic
performance
20
and Financial condition, including in particular its acquisitions and their
integration into the Company's existing operations. Such statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; changes
in customer preferences; competition; changes in technology; the integration of
acquisitions; changes in business strategy; the indebtedness of the Company;
quality of management, business abilities and judgment of the Company's
personnel; the availability, terms and deployment of capital; and various other
factors referenced in this Report. The forward-looking statements are made as of
the date of this Report, and the Company assumes no obligation to update the
forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Market risks relating to the Company's operations result primarily from changes
in interest rates and foreign currency exchange rates. The Company does not
currently utilize any derivative financial instruments that expose the Company
to significant market risk. The Company is exposed to cash flow and fair value
risk due to changes in interest rates with respect to its long-term debt. The
table below presents principal payments and related weighted average interest
rates of the Company's long-term debt at December 31, 1998 by expected maturity
dates. Weighted average variable rates are based on implied forward rates in the
yield curve at December 31, 1998. Implied forward rates should not be considered
a predictor of actual future interest rates. The information is presented in
U.S. Dollars, the Company's reporting currency.
Expected Maturity Date
------------------------------------------------------------------------
December 31,
------------------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Debt Obligations
- ----------------
Fixed Rate (US) $ 3,523 $ 868 $ 452 $ 513 $ 4,644 $ 253,172 $ 263,172 $ 282,822
Weighted average
interest rate 4.67% 6.30% 8.25% 8.31% 7.56% 10.14% 10.00% 9.31%
Fixed Rate (CDN) $ 60 $ 65 $ 2,111 $ - $ - $ 134,537 (a) $ 136,773 $ 136,100
Weighted average
interest rate 8.00% 8.00% 8.00% - - 8.13% 8.12% 8.16%
Variable rate (US) $ - $ - $ - $ 20,500 $ 45,000 $ 52,500 $ 118,000 $ 118,000
Weighted average
interest rate $ - $ - $ - 8.28% 8.40% 8.51% 8.43% 8.43%
(a) The principal and interest payments due on the 1998 Notes issued by
Command are payable in U.S. dollars, thus subjecting the Company
to foreign currency risk.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pierce Leahy Corp.:
We have audited the accompanying consolidated balance sheets of Pierce Leahy
Corp. (a Pennsylvania corporation) and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pierce Leahy Corp. and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 26, 1999
22
PIERCE LEAHY CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31
----------------------------------------
ASSETS 1998 1997
------ --------------- --------------
CURRENT ASSETS:
Cash $ 2,312 $ 1,782
Accounts receivable, net of allowance for doubtful
accounts of $3,650 and $2,399 43,063 25,201
Inventories 1,056 813
Prepaid expenses and other 1,129 1,772
Deferred income taxes 4,402 2,621
---------- -----------
Total current assets 51,962 32,189
---------- -----------
PROPERTY AND EQUIPMENT 297,216 214,981
Less-Accumulated depreciation and amortization (67,522) (54,500)
---------- -----------
Net property and equipment 229,694 160,481
---------- -----------
OTHER ASSETS:
Intangible assets, net 381,515 196,750
Other 3,287 5,293
---------- -----------
Total other assets 384,802 202,043
---------- -----------
$ 666,458 $ 394,713
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,583 $ 1,084
Current portion of noncompete obligations 166 220
Accounts payable 11,663 8,838
Accrued expenses 40,765 24,754
Deferred revenues 11,932 10,199
---------- -----------
Total current liabilities 68,109 45,095
LONG-TERM DEBT 514,362 277,767
NONCOMPETE OBLIGATIONS - 126
DEFERRED RENT 5,856 3,993
DEFERRED INCOME TAXES 15,036 8,409
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY 63,095 59,323
---------- -----------
$ 666,458 $ 394,713
========== ===========
The accompanying notes are an integral part of these financial statements.
23
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
For the Year Ended December 31
-----------------------------------------
1998 1997 1996
----------- ------------ -----------
REVENUES:
Storage $ 153,533 $ 107,879 $ 75,900
Service and storage material sales 116,767 75,638 53,848
----------- ---------- ---------
Total revenues 270,300 183,517 129,748
----------- ---------- ---------
OPERATING EXPENSES:
Cost of sales, excluding depreciation and amortization 154,435 101,940 73,870
Selling, general and administrative 36,994 30,070 20,007
Depreciation and amortization 35,772 21,528 12,869
Special compensation charge - 1,752 -
Foreign currency exchange 7,907 702 -
Non-recurring charges - - 3,254
----------- ---------- ---------
Total operating expenses 235,108 155,992 110,000
----------- ---------- ---------
Operating income 35,192 27,525 19,748
INTEREST EXPENSE 42,864 29,262 17,225
----------- ---------- ---------
Income (loss) before income taxes and extraordinary charge (7,672) (1,737) 2,523
INCOME TAXES 3,318 7,424 -
----------- ---------- ---------
Income (loss) before extraordinary charge (10,990) (9,161) 2,523
EXTRAORDINARY CHARGE-loss on early extinguishment
of debt, net of $4,014 tax benefit in 1997 and none in 1996 - 6,036 2,015
----------- ---------- ---------
NET INCOME (LOSS) (10,990) (15,197) 508
ACCRETION OF REDEEMABLE WARRANTS - - 1,561
----------- ---------- ---------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (10,990) $ (15,197) $ (1,053)
=========== ========== =========
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Income (loss) before extraordinary charge $ (0.65) $ (0.69) $ 0.09
Extraordinary charge - (0.45) (0.19)
----------- ---------- ---------
Basic and diluted loss per Common share $ (0.65) $ (1.14) $ (0.10)
----------- ---------- ---------
Shares used in computing basic loss
per Common share 16,805 13,385 10,547
=========== ========== =========
Shares used in computing diluted loss
per Common share 16,805 13,385 10,631
=========== ========== =========
PRO FORMA DATA (UNAUDITED) (Note 2):
Historical net loss before income taxes and extraordinary charge $ (1,737)
Pro forma provision for income taxes 1,452
Extraordinary charge, net of tax 6,036
----------
Pro forma net loss applicable to Common shareholders $ (9,225)
==========
Pro forma basic and diluted net loss per Common share
Loss before extraordinary charge $ (0.24)
Extraordinary charge (0.45)
----------
Pro forma basic and diluted net loss per Common share $ (0.69)
==========
Shares used in computing pro forma basic and diluted net loss per Common share 13,385
==========
The accompanying notes are an integral part of these financial statements.
24
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive
Stock Capital Deficit Income Total
---------------------------------------------------------------------
BALANCE, JANUARY 1, 1996 $ - $ 24 $(18,225) $ - $ (18,201)
Accretion of redeemable warrants - - (1,561) - (1,561)
Repurchase of Common stock - - (1,450) - (1,450)
Deemed distribution due to purchase of real estate
and other assets from related parties - - (4,132) - (4,132)
Net income - - 508 - 508
Distributions to shareholders - - (602) - (602)
------ -------- -------- ----------- ---------
BALANCE, DECEMBER 31, 1996 - 24 (25,462) - (25,438)
Comprehensive Income-
Net loss - - (15,197) - (15,197)
Foreign currency translation adjustment - - - (309) (309)
---------
Total Comprehensive Income (15,506)
Transfer of accumulated deficit to additional paid-in
capital upon conversion from S Corporation to
C Corporation - (32,234) 32,234 - -
Stock split and recapitalization 105 (105) - - -
Net proceeds from initial public offering
of Common stock 57 93,551 - - 93,608
Accelerated vesting of stock options - 1,752 - - 1,752
Issuance of Common stock for acquisitions 3 4,904 - - 4,907
------ -------- -------- ----------- ---------
BALANCE, DECEMBER 31, 1997 165 67,892 (8,425) (309) 59,323
Comprehensive Income-
Net loss - - (10,990) - (10,990)
Foreign currency translation adjustment - - - 299 299
---------
Total Comprehensive Income (10,691)
Issuance of Common stock for acquisitions 5 14,404 - - 14,409
Stock Option exercise - 54 - - 54
------ -------- -------- ----------- ---------
BALANCE, DECEMBER 31, 1998 $ 170 $ 82,350 $(19,415) $ (10) $ 63,095
====== ======== ======== =========== =========
The accompanying notes are an integral part of these financial statements.
25
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31
---------------------------------------
1998 1997 1996
------------ ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (10,990) $ (15,197) $ 508
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item - 6,036 2,015
Special compensation charge - 1,752 -
Depreciation and amortization 35,772 21,528 12,869
Gain (loss) on sale of property and equipment 16 (44) (32)
Deferred income tax provision 3,322 7,241 (128)
Amortization of deferred financing costs 1,393 1,069 516
Change in deferred rent 1,280 1,042 302
Foreign currency adjustment 10,122 (435) 31
Changes in assets and liabilities, excluding the effects
from the purchase of businesses:
(Increase) decrease in -
Accounts receivable, net (10,731) (3,870) (2,408)
Inventories (102) (154) 150
Prepaid expenses and other 1,282 (1,137) 747
Other assets 2,296 746 (486)
Increase (decrease) in -
Accounts payable 2,545 185 1,630
Accrued expenses 4,457 1,872 10,732
Deferred revenue 25 330 (8)
--------- -------- ---------
Net cash provided by operating activities 40,687 20,964 26,438
========= ======== =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for businesses acquired, net of cash acquired (186,486) (102,068) (61,176)
Capital expenditures (48,591) (35,397) (23,493)
Purchase of real estate and other assets from related parties - - (11,018)
Client acquisition costs (10,921) (10,629) (6,477)
Deposits on pending acquisitions (214) (2,398) (850)
Increase in intangible assets (6,659) (5,625) (5,618)
Payments on noncompete agreements (220) (496) (333)
Proceeds from sale of property and equipment 60 64 123
--------- -------- ---------
Net cash used in investing activities (253,031) (156,549) (108,842)
========= ======== =========
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of credit 183,925 156,983 54,750
Payments on revolving line of credit (86,771) (139,784) (49,513)
Proceeds from issuance of long-term debt 128,951 120,000 210,229
Proceeds from issuance of Common stock - 93,608 -
Payments on long-term debt (10,627) (82,464) (118,570)
Payment of debt financing costs (2,658) (5,230) (9,283)
Proceeds from exercise of stock options 54 - -
Prepayment penalties and cancellation of warrants - (7,000) (2,625)
Repurchase of Common stock - - (1,450)
Distributions to shareholders - - (602)
--------- -------- ---------
Net cash provided by financing activities 212,874 136,113 82,936
========= ======== =========
NET INCREASE IN CASH 530 528 532
CASH, BEGINNING OF YEAR 1,782 1,254 722
--------- -------- ---------
CASH, END OF YEAR $ 2,312 $ 1,782 $ 1,254
========= ======== =========
SUPPLEMENTAL DISCLOSURE-CASH PAID FOR INTEREST $ 39,013 $ 26,288 $ 7,443
========= ======== =========
SUPPLEMENTAL DISCLOSURE-CASH PAID FOR INCOME TAXES $ 75 $ - $ -
========= ======== =========
The accompanying notes are an integral part of these financial statements.
26
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BACKGROUND:
----------
Pierce Leahy Corp., (the "Company"), stores and services business records for
clients throughout the United States and Canada. The Company also sells storage
containers and provides records management consulting services, imaging
services, and marketing literature storage and fulfillment services.
On June 25, 1997, the Company effected a stock split, reclassified its Class A
and Class B Common stock to Common stock, authorized 10,000,000 shares of
undesignated Preferred stock and increased its authorized Common stock to
80,000,000 shares. All references in the accompanying financial statements to
the number of Common shares and per-share amounts have been retroactively
restated to reflect the stock split.
In July 1997, the Company completed an initial public offering of 5,664,017
shares of Common stock, raising net proceeds of $93,608. The proceeds of the
offering were used to redeem a portion of the Company's 11 1/8% Senior
Subordinated Notes and to repay outstanding borrowings under the Company's
credit facility (see Note 6).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Pierce Leahy
Corp., its 99%-owned subsidiary, Pierce Leahy Command Company, and its wholly-
owned subsidiaries, Archivex, Ltd., Monarch Box, Inc. and Advanced Box, Inc. All
intercompany accounts and transactions have been eliminated in consolidation.
The minority interest in Pierce Leahy Command Company is not material to the
consolidated financial statements.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories
- -----------
Inventories, which consist primarily of storage containers, are stated at the
lower of cost (first-in, first-out) or market.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation is provided using
straight-line and accelerated methods over the estimated useful lives of the
assets. In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Software
Developed or Obtained for Internal Use." This statement requires that certain
costs related to the development
27
or purchase of internal-use software be capitalized and amortized over the
estimated useful life of the software, and also requires that costs related to
the preliminary project stage and post implementation/operations stage in an
internal-use computer software development project be charged to expense as
incurred. The Company's capitalization policy was in accordance with the
requirements of SOP 98-1 throughout 1998, 1997 and 1996.
Goodwill
- --------
Goodwill reflects the cost in excess of fair value of the net assets of
companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method from the date of acquisition over the expected period to be
benefited, estimated at 30 years. The Company assesses the recoverability of
goodwill, as well as other long-lived assets, based upon expectations of future
undiscounted cash flows in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." At December 31, 1998, no
adjustment of the carrying values of long-lived assets was necessary.
Client Acquisition Costs
- ------------------------
The unreimbursed costs of moving the records of new clients into the Company's
facilities and sales commissions related to new client contracts have been
capitalized and are included in intangible assets in the accompanying balance
sheets (see Note 4). All such costs are being amortized on a straight-line
basis over six years, which represents the average initial contract term. The
Company assesses whether amortization using a six year average initial contract
term varies significantly from using a specific contract basis. Such difference
has not been material.
Deferred Rent
- -------------
Certain of the Company's leases for warehouse space provide for scheduled rent
increases over the lease terms. The Company recognizes rent expense on a
straight-line basis over the lease terms, with the excess rent charged to
expense over the amount paid recorded as deferred rent in the accompanying
balance sheets.
Health Insurance Reserve
- ------------------------
The Company self-insures for benefit claims under a health insurance plan
provided to employees. The self-insurance was limited to $100 in claims per
insured individual per year for both 1998 and 1997, and a liability for claims
incurred but not reported is reflected in the accompanying balance sheets.
Specific stop-loss insurance coverage is maintained to cover claims in excess of
the coverage per insured individual per year.
Income Taxes
- ------------
Prior to July 1, 1997, the Company was an S Corporation for federal and state
income tax purposes and, accordingly, income and losses were passed through to
the shareholders and taxed at the individual level. On July 1, 1997, in
connection with the Company's initial public offering, the Company terminated
its S Corporation election and currently provides for federal and state income
taxes.
The Company applies SFAS No. 109, "Accounting for Income Taxes," which requires
the liability method of accounting for income taxes. Under the liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences, measured by enacted tax rates, attributable to temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards, for years in which taxes are expected to be paid or recovered.
28
Revenue Recognition
- -------------------
Storage and service revenues are recognized in the month the respective service
is provided. Storage material sales are recognized when shipped to the
customer. Deferred revenues represent amounts invoiced for storage services in
advance of the rendering of the services. The costs of storage and service
revenues are not separately distinguishable, as the revenue producing activities
are interdependent and costs are not directly attributable or allocable in a
meaningful way to those activities.
Foreign Currency
- ----------------
The balance sheets of Pierce Leahy Command Company and Archivex, Limited, the
Company's Canadian subsidiaries, are translated into U.S. dollars using the rate
of exchange at period end. The statements of operations for the Canadian
subsidiaries are translated into U.S. dollars using the average exchange rate
for the period. Net unrecognized exchange gains or losses resulting from the
translation of the balance sheets are accumulated and included as comprehensive
income on the statement of shareholders' equity (deficit). Exchange gains and
losses are recognized during the period, including those related to the U.S.
dollar denominated 8 1/8% Senior Notes of Pierce Leahy Command Company due in
2008, and are included in the Company's consolidated statements of operations.
Comprehensive Income
- --------------------
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires the reporting and disclosure of comprehensive income and
its components which encompasses net income and foreign currency translation
adjustments. The Company reports comprehensive income in the consolidated
statement of shareholders' equity (deficit). The prior year financial statements
have been restated to conform to the reporting requirements of SFAS No. 130.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes standards for reporting and classification of derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. This pronouncement is not expected to have any impact on the Company's
financial position or results of operations as the Company has not currently
entered into any such instruments or hedging activities.
Fair Value of Financial Instruments
- -----------------------------------
For certain of the Company's financial instruments, including accounts
receivable, accounts payable and accrued expenses, management believes that the
carrying amounts approximate fair value due to their short maturities. The
carrying amount and estimated fair value of the Company's 11 1/8% Senior
Subordinated Notes at December 31, 1998 was $130,000 and $143,650, respectively.
The carrying amount and estimated fair value of the Company's 9 1/8% Senior
Subordinated Notes at December 31, 1998 was $120,000 and $126,000, respectively.
The carrying amount and estimated fair value of the Company's 8 1/8% Senior
Notes at December 31, 1998 was $134,537 and $133,864, respectively. All of the
Notes are publicly traded, and accordingly, the fair value of the Notes was
estimated based on the quoted market price offered for such securities.
Pro Forma Basic and Diluted Net Loss Per Share
- ----------------------------------------------
Prior to July 1, 1997, the Company was an S Corporation for federal and state
income tax purposes. The pro forma income tax provision for 1997 reflects taxes
that would have been recorded on the historical loss before income taxes, at an
effective rate of 39%, had the Company not been an S Corporation during such
29
period. The basic and diluted pro forma net loss per share is computed by
dividing pro forma net loss by the weighted average number of shares outstanding
during the period.
3. PROPERTY AND EQUIPMENT:
----------------------
December 31,
--------------------------------
Life 1998 1997
-------------- ------------ -------------
Land - $ 16,785 $ 10,501
Buildings and improvements 10-40 years 107,210 79,119
Warehouse equipment (primarily shelving) 12-20 years 131,090 95,005
Data processing equipment and software 7 years 24,063 18,364
Furniture and fixtures 7 years 6,688 5,615
Transportation equipment 5 years 9,125 6,377
Construction in progress - 2,255 -
------------ -------------
297,216 214,981
Less-Accumulated depreciation and amortization (67,522) (54,500)
------------ -------------
Net property and equipment $229,694 $160,481
============ =============
Depreciation expense was $15,127, $9,599 and $6,652 for the years ended December
31, 1998, 1997 and 1996, respectively.
4. INTANGIBLE ASSETS:
-----------------
December 31,
--------------------------------
1998 1997
------------ ------------
Goodwill $337,409 $160,119
Client acquisition costs 37,033 26,233
Noncompete agreements 23,257 14,263
Deferred financing costs 13,825 11,174
Other intangible assets 25,405 18,525
------------ ------------
436,929 230,314
Less-Accumulated amortization (55,414) (33,564)
------------ ------------
Net intangible assets $381,515 $196,750
============ ============
December 31, 1998
---------------------------------------------------------
Accumulated Net Book
Life Cost Amortization Value
----------- ------------- --------------- ---------------
Goodwill 30 years $337,409 $(17,646) $319,763
Client acquisition costs 6 years 37,033 (13,396) 23,637
Noncompete agreements 3-7 years 23,257 (11,857) 11,400
Deferred financing costs 10 years 13,825 (2,514) 9,095
Other intangible assets 5-6 years 25,405 (10,001) 17,620
------------- --------------- ---------------
$436,929 $(55,414) $381,515
============= =============== ===============
Amortization of all intangible assets, other than deferred financing costs which
are charged to interest expense, was $20,645, $11,929 and $6,217 for the years
ended December 31, 1998, 1997 and 1996,
30
respectively. Amortization of deferred financing costs was $1,393, $1,069 and
$516 for the years ended December 1998, 1997 and 1996, respectively. Capitalized
client acquisition costs were $10,921, $10,629 and $6,477 for the years ended
December 31, 1998, 1997 and 1996, respectively.
5. ACCRUED EXPENSES:
----------------
December 31,
--------------------------------------
1998 1997
-------------- --------------
Accrued salaries and commissions $ 4,863 $ 3,329
Accrued vacation and other absences 5,646 3,981
Accrued interest 14,312 12,004
Other 15,944 5,440
-------------- --------------
$ 40,765 $ 24,754
============== ==============
6. LONG-TERM DEBT:
--------------
December 31,
--------------------------------------
1998 1997
-------------- --------------
11 1/8% Senior Subordinated Notes due 2006 $ 130,000 $ 130,000
9 1/8% Senior Subordinated Notes due 2007 120,000 120,000
8 1/8% Senior Notes due 2008 134,537 -
U.S. Revolver 118,000 -
Canadian Revolver - 22,303
Mortgage Notes 7,368 5,369
Seller Notes 3,475 1,051
Other 4,565 128
-------------- --------------
517,945 278,851
Less-Current portion (3,583) (1,084)
-------------- --------------
$ 514,362 $ 277,767
============== ==============
11 1/8% SENIOR SUBORDINATED NOTES DUE 2006
- ------------------------------------------
In July 1996, the Company issued $200,000 of Senior Subordinated Notes in a
private offering that were later exchanged for registered notes with
substantially identical terms (the "1996 Notes"). The 1996 Notes are general
unsecured obligations of the Company, subordinated in right of payment to senior
indebtedness of the Company and senior in right of payment to any current or
future subordinated indebtedness. The 1996 Notes are guaranteed by the U.S.
subsidiaries of the Company and secured by a second lien on 65% of the stock of
the Company's Canadian subsidiaries. The 1996 Notes mature on July 15, 2006, and
bear interest at 11 1/8% per year, payable semiannually in arrears on January 15
and July 15. The proceeds from the sale of the 1996 Notes were used to retire
certain existing indebtedness of the Company under its previous credit
facilities, to purchase certain properties from related party partnerships (see
Note 12), to redeem stock from a shareholder (see Note 8), to fund an
acquisition and for general corporate purposes. Upon completion of the Company's
initial public offering of its Common stock in July 1997 (see Note 1), the
Company exercised an option to redeem $70,000 principal amount of the 1996
Notes. The resulting $7,000 prepayment penalty along with the write-off of a
portion of the unamortized deferred financing costs of $3,050, net of an income
tax benefit of $4,014, was recorded as an extraordinary charge in the
accompanying consolidated statements of operations.
31
9 1/8% SENIOR SUBORDINATED NOTES DUE 2007
- -----------------------------------------
In July 1997, the Company issued $120,000 of Senior Subordinated Notes (the
"1997 Notes") in a public offering. The 1997 Notes are general unsecured
obligations of the Company, subordinated in right of payment to the senior
indebtedness of the Company and senior in right of payment to any current or
future subordinated indebtedness. The 1997 Notes are guaranteed by the U.S.
subsidiaries of the Company and secured by a third lien on 65% of the stock of
the Company's Canadian subsidiaries. The 1997 Notes are equal in right of
payment with the 1996 Notes. The 1997 Notes mature on July 7, 2007, and bear
interest at 9 1/8% per year, payable semiannually in arrears on January 15 and
July 15. The proceeds from the sale of the 1997 Notes were used to repay
outstanding borrowings under a previous credit facility and for general
corporate purposes.
8 1/8% SENIOR NOTES DUE 2008
- ----------------------------
In April 1998, Pierce Leahy Command Company, the Company's principal Canadian
subsidiary, issued $135,000 of Senior Notes in a private offering that were
later exchanged for registered notes with substantially identical terms (the
"1998 Notes"). The 1998 Notes are general unsecured obligations of Pierce Leahy
Command Company ranking pari passu in right of payment to all existing and
future senior unsecured indebtedness of Command. The 1998 Notes are effectively
subordinated to secured indebtedness of Command to the extent of the assets
securing such indebtedness. The 1998 Notes are guaranteed on a senior
subordinated basis by the Company, which guarantee is equal in right of payment
with the 1996 and 1997 Notes. The 1998 Notes mature on May 15, 2008, and bear
interest at 8 1/8% per year, payable semi-annually in arrears on May 15 and
November 15. The proceeds from the sale of the 1998 Notes were used primarily to
finance the acquisition of Archivex Inc., to repay outstanding borrowings under
the credit facility and for general corporate purposes.
REVOLVING CREDIT FACILITY
- --------------------------
In February 1998, the Company amended its credit facility to provide for a
revolving line of credit of U.S. $150 million in borrowings and CDN $40 million
in borrowings for Pierce Leahy Command Company. The credit facility is senior
to all subordinated indebtedness of the Company and is secured by substantially
all of the assets of the Company, and a first lien on 65% of the stock of the
Company's Canadian subsidiaries. Borrowings under the facility bear interest at
prime plus an applicable margin, or at LIBOR plus an applicable margin, at the
option of the Company. In addition to interest and other customary fees, the
Company is obligated to remit a fee of 0.375% per year on unused commitments,
payable quarterly. The aggregate available commitment under the credit facility
will be reduced on a quarterly basis beginning September 30, 2001. The credit
facility matures on June 30, 2004, unless previously terminated. The Company's
available borrowing capacity under the credit facility is contingent upon the
Company meeting certain financial ratios and other criteria.
The weighted average interest rate on outstanding borrowings on the U.S. portion
of the revolver at December 31, 1998 was 7.6%. The highest amount outstanding
during the year ended December 31, 1998 was $125,500, the average amount
outstanding during the year was $79,150, and the weighted average interest rate
was 7.95%. The highest amount outstanding under the U.S. revolver during the
year ended December 31, 1997 was $117,763, the average amount outstanding during
the year was $69,338, and the weighted average interest rate was 7.85%.
There were no outstanding borrowings on the Canadian portion of the credit
facility at December 31, 1998. The highest amounts outstanding during the years
ended December 31, 1998 and 1997, were CDN $35,000 and $31,900, respectively.
The average amounts outstanding in 1998 and 1997, respectively, were CDN $8,750
and $17,100, while the weighted average interest rates were 8.51% and 6.12%,
respectively.
32
In February 1999, the Company amended the U.S. portion of the credit facility to
provide for borrowings of up to $175 million. All other material terms and
conditions remained the same.
MORTGAGE NOTES
- --------------
In connection with the purchase of real estate from related parties in 1996 (see
Note 12), the Company assumed a mortgage of $1,114. The mortgage bears interest
at 10.5% and requires monthly principal and interest payments of $20 through
2002. The Company also assumed mortgage notes in connection with certain
acquisitions during 1998, 1997 and 1996 of $2,465, $2,000 and $2,630,
respectively. The notes bear interest at rates of approximately 8% and require
monthly principal and interest payments ranging from $12 to $22 through 2009.
SELLER NOTES
- ------------
In connection with certain acquisitions completed in 1998 and 1997, notes for
$3,175, and $1,652, respectively, were issued to the sellers. The notes bear
interest at rates ranging from 5% to 7% per year. The outstanding balances on
the notes as of December 31, 1998 mature through 1999.
Future scheduled principal payments on all of the Company's long-term debt at
December 31, 1998 are as follows:
1999 $ 3,583
2000 933
2001 2,563
2002 21,013
2003 49,644
2004 and thereafter 440,209
--------
$517,945
========
Upon entering into prior credit facilities in 1993 and 1994, the Company issued
warrants to certain lenders to purchase common stock. Warrants to purchase
229,825 shares at $.01 per share were issued in 1993 and 55,073 shares at $2.68
per share were issued in 1994. Management assigned an initial value of $338 to
the 1993 warrants and $87 to the 1994 warrants for financial reporting purposes.
The Company called the warrants in February 1996 at an amount which was
determined by a formula defined in the credit agreement. The change in value of
the redeemable warrants from the initial value has been accreted through a
charge to shareholder's equity (deficit) in the accompanying financial
statements. The warrants were redeemed for $2,625 in 1996. There were no
warrants outstanding during 1997 or 1998.
Debt refinancings occurred in 1997 and 1996, resulting in the write-off of
previously deferred financing costs of $3,050 and $2,015, respectively, and
prepayment and other charges of $7,000 in 1997. Such write-offs and charges have
been recorded as extraordinary charges, net of tax, in the accompanying
consolidated statements of operations. No debt refinancings occurred in 1998.
The Company is in compliance with all financial and operating covenants required
under all indentures and under the Credit Facility.
33
7. INCOME TAXES:
------------
The components of income taxes for the years ended December 31, 1998 and 1997
are as follows:
Year Ended December 31,
--------------------------------------------
1998 1997
---------------- ----------------
Current-
Federal $ 95 $ -
State 55 -
Foreign - 150
---------------- ----------------
150 150
Deferred-
Federal 5,309 8,895
State (144) 1,172
Foreign (1,997) 1,221
---------------- ----------------
3,168 11,288
---------------- ----------------
$ 3,318 $ 11,438
================ ================
The provision for income taxes for the years ended December 31, 1998 and 1997
consists of a current tax provision for alternative minimum taxes on domestic
operations and foreign taxes due on taxable income of the Company's Canadian
subsidiaries, and deferred federal, state and foreign income taxes. The total
deferred income tax provision in 1997 includes a one-time tax charge of $6,600
recorded upon the termination of the Company's S corporation status.
The statement of operations for the year ended December 31, 1997 includes a pro
forma adjustment for the income taxes which would have been recorded if the
Company had been a C corporation for the entire period based on tax laws in
effect during the period. The reconciliation of the federal statutory income
tax rate and the effective income tax rate for the year ended December 31, 1998,
and the reconciliation of the federal statutory income tax rate and the pro
forma effective income tax rate for the year ended December 31, 1997, are as
follows:
Year Ended December 31,
---------------------------------
1998 1997
------------- -------------
Federal statutory rate 34.0% 34.0%
State income taxes 2.7 (1.2)
Non-deductible expenses (86.3) (7.9)
Foreign 6.4 (3.2)
------ ----
(43.2)% 21.7%
====== ====
34
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax basis of assets and
liabilities given the provisions of enacted tax laws. Deferred taxes are
comprised of the following:
Year Ended December 31,
----------------------------------------
1998 1997
--------------- ----------------
Current deferred income tax asset $ 4,402 $ 2,621
--------------- ----------------
Gross non-current deferred tax assets 12,190 10,269
Gross non-current deferred tax liabilities (27,226) (18,678)
--------------- ----------------
Total non-current deferred taxes 15,036 8,409
--------------- ----------------
Net deferred tax liability $(10,634) $ (5,788)
=============== ================
The tax effect of significant temporary differences representing deferred tax
assets and liabilities at December 31, 1998 and 1997 are as follows:
Year Ended December 31,
----------------------------------------
1998 1997
--------------- ----------------
Basis difference of property and equipment $ (16,493) $ (10,312)
Basis difference in intangible assets (8,170) (5,076)
Net operating loss carryforward 7,464 5,112
Deferred rent 2,295 1,526
Expenses not currently deductible
for tax purposes 4,270 2,962
--------------- ----------------
Net deferred tax liability $ 10,634 $ 5,788
=============== ================
The Company has federal and state net operating loss carryforwards available
for income tax and financial reporting purposes of approximately $12,056 at
December 31, 1998. The net operating loss carryforwards begin to expire in
2012.
8. CAPITAL STOCK:
-------------
At December 31, 1998 and 1997, the Company's capital stock was comprised of the
following:
Preferred Common
--------------- ----------------
Par value $ .01 $ .01
Shares authorized 10,000,000 80,000,000
Shares issued and outstanding December 31, 1998 - 17,036,581
Shares issued and outstanding December 31, 1997 - 16,477,728
In 1996, the Company redeemed 105,910 shares of Common stock for $1,450 and
canceled these shares.
Certain shareholders of the Company entered into a voting trust agreement on
June 24, 1997. The shares held in trust represent 48.5% of the outstanding
Common stock at December 31, 1998. The trustees of the voting trust include the
President and Chief Executive Officer of the Company and the Chairman of the
Board of Directors. Each of the trustees has shared power to vote the shares
held in the voting trust. The beneficial owners of interests in the voting
trust have the right to dispose of the shares to which they have beneficial
interests.
35
9. STOCK OPTIONS:
-------------
In September 1994, the Company established a non-qualified stock option plan
which provides for the granting of options to key employees to purchase an
aggregate of 1,208,433 shares of Common stock. The shares available for grant
were increased by 284,898 in December 1996. Option grants have an exercise price
equal to the fair market value of the Common stock on the date of grant. Before
the Company consummated its initial public offering of Common stock in July 1997
(see Note 1), the fair market value of the options was determined based upon a
formula, as defined in the option plan. The options granted vest in five equal
annual installments beginning on the first anniversary of the date of grant,
except as discussed below.
Upon the consummation of the Company's initial public offering of Common stock
in July 1997, options granted during 1997 became fully vested and exercisable as
provided for under the plan. The Company recorded a non-recurring, non-cash
compensation charge of approximately $1,752 relating to those options,
representing the difference between the exercise price and the deemed value for
accounting purposes.
In April 1997, the Company adopted its 1997 Stock Option Plan (the "1997 Plan")
which provides for the granting of stock options to purchase up to 1,500,000
shares of Common stock to employees, officers, directors, consultants and
advisors of the Company. The 1997 Plan is administered by the Compensation
Committee of the Board of Directors (the "Committee"). Grants may consist of
incentive stock options or nonqualified stock options. The option price of any
incentive stock option granted will not be less than the fair value of the
underlying shares of Common stock on the date of grant. The option price of a
non-qualified stock option will be determined by the Committee and may be
greater than, equal to or less than the fair market value of the underlying
shares of Common stock on the date of grant. The term of each option will be
determined by the Committee, provided that the exercise period may not exceed 10
years from the date of grant. The options granted may be subject to vesting and
other conditions. In the event of a change in control (as defined in the 1997
Plan), all outstanding options will become fully exercisable.
Information related to all of the Company's existing stock option plans is as
follows:
Weighted Average
Exercise Price Exercise Price Per Aggregate
Options Per Share Share Exercise Price
--------------------------------------------------------------------------------------
Balance as of December 31, 1995 600,512 $ 5.09 $ 5.09 $3,056,606
Granted 360,092 5.86 5.86 2,110,139
--------------------------------------------------------------------------------------
Balance as of December 31, 1996 960,604 5.09-5.86 5.38 5,166,745
Granted 153,570 5.09 5.09 781,671
--------------------------------------------------------------------------------------
Balance as of December 31, 1997 1,114,174 5.09-5.86 5.34 5,948,416
Granted 156,250 20.50 20.50 3,203,125
Exercised (10,591) 5.09 5.09 (53,908)
Terminated (8,750) 20.50 20.50 (179,375)
--------------------------------------------------------------------------------------
Balance as of December 31, 1998 1,251,083 $5.09-20.50 $ 7.13 $8,918,258
========= =========== ====== ==========
At December 31, 1998, 647,333 options to purchase shares of Common stock are
fully vested and exercisable. Subsequent to December 31, 1998, the Company
issued 151,000 options to employees at an exercise price of $25.50 per share.
The Company accounts for its option plans under APB Opinion No. 25, "Accounting
for Stock Issued to Employees," under which no compensation cost has been
recognized. In 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair
value based method of accounting for stock-based compensation plans. This
statement also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-
36
employees. SFAS No. 123 requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for the plan.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for the
grants in 1998, 1997 and 1996:
1998 1997 1996
----------- ----------- -----------
Risk free interest rates 5.5% 6.4% 5.6%
Expected lives of options 7 years 7 years 7 years
Expected dividend yields N/A N/A N/A
Expected volatility 45% 20% 15%
The approximate fair value of each option granted in 1998, 1997 and 1996 is
$11.36, $2.08 and $2.06, respectively, as determined under the provisions of
SFAS No. 123. The following pro forma results would have been reported had
compensation cost been recorded for the fair value of the options granted:
1998 1997 1996
----------- ----------- ----------
Net loss applicable to Common shareholders, as reported $(10,990) $(15,197) $(1,053)
Net loss applicable to Common shareholders, pro forma
for compensation cost and income taxes in 1997 (Note 1) $(11,468) $ (9,681) $(1,311)
Net loss per share applicable to Common shareholders, pro forma
for compensation cost and income taxes in 1997 (Note 1) $ (0.68) $ (0.72) -
The SFAS No. 123 method of accounting is applied only to options granted on or
after January 1, 1995. The resulting pro forma compensation cost may not be
representative of the amount to be expected in future years due to the vesting
schedule of the options.
10. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Operating Leases
- ----------------
At December 31, 1998, the Company was obligated under non-cancelable operating
leases, including the related-party leases discussed below, for warehouse space,
office equipment and transportation equipment. These leases expire at various
times through 2024 and require minimum rentals, subject to escalation, as
follows:
1999 $ 38,320
2000 37,201
2001 34,885
2002 32,094
2003 28,283
2004 and thereafter 97,495
------------
$ 268,278
============
Rent expense for all leases was approximately $31,077, $21,657, and $17,008 for
the years ended December 31, 1998, 1997 and 1996, respectively. Some of the
leases for warehouse space provide for purchase options on the facilities at
certain dates.
The Company leases office and warehouse space at prices which, in the opinion of
management, approximate market rates from entities which are owned by certain
shareholders, officers and employees of the Company. Rent expense on these
leases was approximately $961, $845, and $9,019 for the years ended December 31,
1998, 1997 and 1996, respectively. A significant portion of the related party
rent expense
37
was reduced through the purchase of certain real estate and the buy-out of
certain lease interests in July 1996 (see Note 12).
Other Matters
- -------------
The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management, after consultation with legal counsel, does not
believe that the resolution of these matters will have a material adverse effect
on the Company's consolidated financial position or results of operations.
In June 1997, the Company entered into a tax indemnification agreement with its
then current shareholders which provides for: (i) the distribution to such
shareholders of cash equal to the product of the Company's taxable income for
the period from January 1, 1997 until July 1, 1997 and the sum of the highest
effective federal and state income tax rate applicable to any current
shareholder, less any prior distributions to such shareholders to pay taxes for
such period, and (ii) an indemnification of such shareholders for any losses or
liabilities with respect to any additional taxes (including interest, penalties
and legal fees) resulting from the Company's operations during the period in
which it was a Subchapter S Corporation.
11. EARNINGS PER SHARE:
------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 requires dual presentation of basic and
diluted earnings per share. According to SFAS No. 128, basic earnings per
share, which replaces primary earnings per share, is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding for
the period. Diluted earnings per share, which replaces fully diluted earnings
per share, reflects the potential dilution from the exercise or conversion of
securities into Common stock, such as stock options and warrants. The Company
adopted SFAS No. 128 in 1997.
In 1998 and 1997 there were no dilutive effects of stock options or warrants as
the Company had a loss before extraordinary item. In 1996, the weighted average
of shares outstanding was 10,546,871. The dilutive effects of the weighted
average number of stock options and warrants outstanding was 84,059 shares.
12. RELATED PARTY TRANSACTIONS:
--------------------------
In August 1996, the Company purchased certain real estate previously leased and
other assets from two partnerships, whose partners were shareholders of the
Company. The payment for the purchased real estate and other assets was $11,018
plus the assumption of a $1,114 mortgage. Since the transaction was with
related parties, the real estate was recorded at its depreciated cost. As a
result, the Company charged the elimination of the deferred rent liability on
the leases and the difference between the purchase price and the depreciated
cost, which together totaled $4,132, to shareholders' equity (deficit) as a
deemed distribution. In addition, the Company bought out certain lease
commitments from a related party partnership for $2,764. This lease buy-out was
recorded as a non-recurring charge in the 1996 consolidated statement of
operations.
The Company had an agreement with a shareholder of the Company that required
payments of $60 per year for five years upon the death of the shareholder. The
present value of this benefit was recorded as a liability by the Company. In
July 1996, the Company decided to make monthly pension payments to the
shareholder and terminated the previous agreement. The pension payments are $8
per month until the later of the death of the shareholder or his spouse. The
$490 difference between the present value of this benefit and the liability
previously reported was recorded as a non-recurring charge in the 1996
consolidated statement of operations.
38
The Company paid financial advisory fees to an investment banking firm of which
a director of the Company was a managing director. The fees were approximately
$62 in 1997 and $800 in 1996, respectively. In addition, the investment banking
firm received $1,800 from the underwriters on the 1997 Notes and initial public
offering and $310 from the placement agent on the 1998 Notes.
The Company paid real estate advisory fees to a firm of which a director of the
Company is the owner. The fees were approximately $8 in 1998 and $88 in 1997.
There were no fees paid to the firm in 1996.
13. EMPLOYEE BENEFIT PLANS:
----------------------
The Company maintains a discretionary profit sharing and a 401(k) plan for
substantially all full-time employees over the age of 20 1/2 and with more than
1,000 hours of service. Participants in the 401(k) plan may elect to defer a
specified percentage of their compensation on a pretax basis. The Company is
required to make matching contributions equal to 25% of the employee's
contribution up to a maximum of 2% of the employee's annual compensation.
Participants become vested in the Company's matching contribution over three to
seven years. The expense relating to these plans was $1,209, $892 and $1,122
for the years ended December 31, 1998, 1997 and 1996, respectively.
14. ACQUISITIONS:
------------
In 1996, the Company completed 12 acquisitions for an aggregate cash purchase
price of $62,165 (of which $14,000 was for one transaction in May 1996 and
$13,500 was for another transaction in October 1996; all others were
individually less than $8,000).
In 1997, the Company completed 17 acquisitions, of which 15 were recorded under
the purchase method of accounting while the other two acquisitions were
accounted for as pooling of interests. The 15 acquisitions accounted for under
the purchase method had an aggregate purchase price of $109,098, consisting
primarily of $102,068 in net cash, 163,266 shares of Common stock with a deemed
value of $4,500 and $1,652 in Seller notes. For purposes of computing the
purchase price for accounting purposes, the value of the shares issued is
determined using a discount of 10% from the market value at the day of issuance
due to certain restrictions on the sale and transferability of shares issued.
The most significant of these acquisitions was one acquisition for $9,084 in
January 1997 and another for $62,000 in April 1997; all others were individually
less than $8,000.
During 1997, the Company also completed two mergers with records management
businesses by exchanging an aggregate of 165,355 shares of Common stock for the
stock of these entities. These mergers constituted tax free reorganizations and
have been accounted for as pooling of interests under Accounting Principles
Board Opinion No. 16. Prior periods have not been restated for the acquisitions
due to the immateriality of the transactions, and the book value of net assets
acquired of $407 has been recorded as additional paid-in capital. The results
of operations for each acquisition have been included in the consolidated
results of the Company from their respective acquisition dates.
In 1998, the Company completed 16 acquisitions for an aggregate purchase price
of $204,070, consisting primarily of $186,486 in net cash, 548,262 shares of
Common Stock with a deemed value of $14,409 and $3,175 in Seller notes. The most
significant of these acquisitions was one transaction for $59,000 in April 1998,
another for $30,000 in May 1998 and a third for $52,000 in July 1998, all others
were individually less than $15,000. All of the acquisitions in 1998 were
recorded under the purchase method of accounting.
In addition to these payments, the acquisitions in 1998, 1997, and 1996 provided
for non-compete obligations of $40, $60, and $400, respectively, payable over
one year. The non-compete obligations at December 31, 1998, 1997 and 1996 was
$166, $347 and $783, respectively. The results of operations for each of these
acquisitions have been included in the consolidated results of the Company from
their respective acquisition dates. The excess of the fair value of the assets
and liabilities acquired has been
39
allocated to goodwill ($178,049 in 1998, $91,047, in 1997 and $43,062 in 1996)
and is being amortized over the estimated benefit period of 30 years.
Subsequent to December 31, 1998, the Company completed three acquisitions of
records management businesses for an aggregate purchase price of approximately
$42,146, consisting of $23,402 in net cash and $18,744 in Seller notes. Certain
purchase agreements contain purchase price adjustments that could affect the net
cash paid for such acquisitions. The acquisitions were accounted for under the
purchase method of accounting. The $36,264 excess of the purchase price over
the underlying fair value of the assets and liabilities acquired has been
allocated to goodwill. The most significant of these acquisitions was
Datavault, Limited, a U.K. based records management company with operations in
seven markets throughout England and Scotland. This acquisition was primarily
financed by borrowings under the Company's recently amended credit facility (see
Note 6).
A summary of the net cash paid for the purchase price of the completed
acquisitions is as follows:
Year Ended December 31,
------------------------------------
1998 1997
-------------- -------------
Fair value of assets acquired $230,343 $119,053
Liabilities assumed (27,967) (9,953)
Seller notes issued (3,175) (1,652)
Fair value of Common stock issued (14,409) (4,907)
Cash acquired (1,694) (473)
-------------- -------------
Net cash paid $186,486 $102,068
============== =============
The following unaudited pro forma information shows the results of the Company's
operations for the years ended December 31, 1998 and 1997 as though each of the
completed acquisitions had occurred as of January 1, 1997:
Year Ended December 31,
------------------------------------
1998 1997
-------------- -------------
Total revenues $306,051 $286,108
Net loss $(15,057) $(25,487)
Basic and diluted net loss per Common share $ (0.88) $ (1.50)
The pro forma results have been prepared for comparative purposes only and are
not necessarily indicative of the actual results of operations had the
acquisitions taken place as of January 1, 1997, or the results that may occur in
the future. Furthermore, the pro forma results do not give effect to all cost
savings or incremental costs which may occur as a result of the integration and
consolidation of the acquired companies.
40
15. SEGMENT AND SUBSIDIARY INFORMATION (UNAUDITED):
----------------------------------------------
The Company stores and services business records for clients throughout the
United States and Canada. The following information is a summary of the
operating results and financial position for the Company's U.S. and Canadian
operations:
For the Year Ended December 31,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Revenues:
United States $235,649 $166,337 $114,049
Canada $ 34,651 $ 17,180 $ 15,699
----------------------------------------------------
Total $270,300 $183,517 $129,748
EBITDA:
United States $ 70,194 $ 43,451 $ 28,454
Canada $ 8,677 $ 8,056 $ 7,417
----------------------------------------------------
Total $ 78,871 $ 51,507 $ 35,871
Operating income (loss):
United States $ 41,917 $ 25,238 $ 16,986
Canada $ (6,725) $ 2,287 $ 2,762
----------------------------------------------------
Total $ 35,192 $ 27,525 $ 19,748
Net income (loss):
United States $ 2,928 $(15,443) $ (568)
Canada $(13,918) $ 246 $ 1,076
----------------------------------------------------
Total $(10,990) $(15,197) $ 508
At December 31,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Current assets:
United States $ 42,896 $ 28,602 $ 17,155
Canada $ 9,066 $ 3,587 $ 3,226
----------------------------------------------------
Total $ 51,962 $ 32,189 $ 20,381
Total assets:
United States $542,378 $361,657 $203,941
Canada $124,080 $ 33,056 $ 30,879
----------------------------------------------------
Total $666,458 $394,713 $234,820
Current liabilities:
United States $ 59,885 $ 43,077 $ 42,607
Canada $ 8,224 $ 2,018 $ 1,707
----------------------------------------------------
Total $ 68,109 $ 45,095 $ 44,314
Long-term liabilities:
United States $399,739 $264,643 $207,590
Canada $135,515 $ 25,652 $ 8,354
----------------------------------------------------
Total $535,254 $290,295 $215,944
41
The summarized financial information of the Canadian subsidiaries has been
prepared from the books and records maintained by each subsidiary. The
summarized financial information may not necessarily be indicative of the
results of operations or financial position had the Canadian subsidiaries
operated as independent entities. Certain intercompany sales and charges, and
intercompany loans among the Company and its Canadian subsidiaries are
included in the subsidiaries' records and are eliminated in consolidation.
The Company's domestic, wholly-owned subsidiaries are Monarch Box, Inc. and
Advanced Box, Inc. These subsidiaries were established in 1997 to hold
investments and certain intangible assets of the Company. They do not have any
other operations.
There are no restrictions on the ability of any of the subsidiaries to transfer
funds to the Company in the form of loans, advances or dividends, except as
provided by applicable law.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." This
statement established additional standards for segment reporting in the
financial statements and is effective for fiscal years beginning after December
15, 1997. Management has determined that all of their operations have similar
economic characteristics and may be aggregated into a single segment for
disclosure under SFAS 131. Information concerning the geographic operations of
the Company as prescribed by SFAS 131 is provided above.
16. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):
-------------------------------------------------
Summarized quarterly financial data for 1998 and 1997 is as follows:
1998 QUARTER
------------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total Revenues $ 56,290 $ 64,146 $ 74,597 $ 75,267
Cost of sales, excluding depreciation and amortization $ 32,915 $ 36,279 $ 41,961 $ 43,280
Operating income $ 7,444 $ 6,710 $ 9,123 $ 11,915
Net loss $ (1,037) $ (4,457) $ (4,614) $ (882)
Basic and diluted loss per Common share: $ (0.06) $ (0.27) $ (0.27) $ (0.05)
1997 QUARTER
------------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total Revenues $ 40,232 $ 46,208 $ 47,249 $ 49,828
Cost of sales, excluding depreciation and amortization $ 22,298 $ 25,611 $ 25,943 $ 28,088
Operating income $ 6,776 $ 8,040 $ 6,780 $ 5,929
Income (loss) before extraordinary charge $ 64 $ (103) $ (7,870) $ (1,252)
Net income (loss) $ 64 $ (103) $(13,906) $ (1,252)
Basic and diluted loss per Common share:
Income (loss) before extraordinary charge $ 0.01 $ (0.01) $ (0.49) $ (0.08)
Extraordinary charge - - (0.37) -
Net income (loss) $ 0.01 $ (0.01) $ (0.86) $ (0.08)
In the third quarter of 1997, the Company incurred a non-recurring non-cash
compensation charge of $1,752 relating to the accelerated vesting of options as
a result of its initial public offering of Common stock (see Note 9).
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
- --------- ----------
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information called for by the above items, except the information set
forth in Item 4A herein, is incorporated by reference to the Company's
definitive proxy statement for its 1999 Annual Meeting of Shareholders, which
definitive proxy statement is to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the Company's fiscal year.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------
(a) The following documents are filed as part of this Report.
1. Financial Statements
--------------------
Page
----
Report of Independent Public Accountants.................. 22
Consolidated Balance Sheets............................... 23
Consolidated Statement of Operations...................... 24
Consolidated Statement of Shareholders' Equity (Deficit)
and other Comprehensive Income....................... 25
Consolidated Statements of Cash Flows..................... 26
Notes to Consolidated Financial Statements................ 27
2. Financial Statement Schedule:
----------------------------
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts
3. Exhibits:
--------
Exhibit
Number Description of Exhibits.
------ -----------------------
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, File No. 333-23121)
3.2 By-laws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1, File
No. 333-23121)
3.3** Designation, Rights and Preferences of the Series A Redeemable
Senior Pay-In-Kind Preferred Stock
9 Amended and Restated Voting Trust Agreement by and among
certain shareholders of the Company (incorporated by reference
to Exhibit 9 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997)
10.1* Pierce Leahy Corp. Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-4, File No. 333-9963)
10.2* Pierce Leahy Corp. 1997 Stock Option Plan (incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1, File No. 333-23121)
44
Exhibit
Number Description of Exhibits.
------ -----------------------
10.3(a)** Second Amended and Restated Credit Agreement dated as of
February 24, 1999, among the Company, Pierce Leahy Command
Company, the several lenders from time to time parties thereto,
Canadian Imperial Bank of Commerce, as Canadian Administrative
Agent, and Canadian Imperial Bank of Commerce, New York Agency,
as U.S. Administrative Agent
10.3(b) Credit Agreement dated as of August 12, 1997, as amended, among
the Company, Pierce Leahy Command Company, the several lenders
from time to time parties thereto, Canadian Imperial Bank of
Commerce, as Canadian Administrative Agent, and Canadian
Imperial Bank of Commerce, New York Agency, as U.S.
Administrative Agent, together with certain collateral
documents attached thereto, including the form of US$ Note, the
form of Canadian$ Note, and the form of the U.S. Global
Guarantee and Security Agreement made by the Company, certain
of its affiliates and subsidiaries and its shareholders in
favor of the U.S. Administrative Agent (incorporated by
reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
10.4 Indenture, dated as of July 15, 1996, among the Company as
issuer, and United States Trust Company of New York, as trustee
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-4, File No. 333-9963)
10.5 Indenture, dated as of July 7, 1997, among the Company, as
issuer, and The Bank of New York, as trustee (incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
10.6 Indenture, dated as of April 7, 1998, by and among Pierce Leahy
Command Company, as issuer, Pierce Leahy Corp., and The Bank of
New York, as trustee (incorporated by reference to Exhibit
4.1(c) to the Company's Registration Statement on Form S-4,
File No. 333-58569)
10.7 Tax Indemnification Agreement among the Company and certain of
its shareholders (incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form S-1, File No. 333-
23121)
10.8 Pierce Leahy Corp. Profit Sharing/401(K) Plan, as amended,
dated December 29, 1998 (incorporated by reference to Exhibit
10 to the Company's Registration Statement on Form S-8, File
No. 333-69859)
10.9 Asset Purchase Agreement dated February 4, 1998, and Amending
Agreement dated April 7, 1998, among Pierce Leahy Command
Company, Archivex Inc., the shareholders of Archivex Inc., and
certain parties related to Archivex Inc. (incorporated by
reference to Exhibits 10.1 and 10.2 to the Company's Report on
Form 8-K dated April 7, 1998)
10.10 Stock Purchase Agreement dated May 21, 1998 among Pierce Leahy
Corp., and the shareholders of Kestrel Holdings, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 8-K dated July 2, 1998)
45
Exhibit
Number Description of Exhibits.
------ -----------------------
12** Computation of Ratio of Earnings to Fixed Charges
21** Subsidiaries of the Registrant
23** Consent of Arthur Andersen LLP
27** Financial Data Schedule
____________________
* Management contract or compensatory plan required to be filed
pursuant to Item 601(b)(10)(iii) of Regulation S-K.
** Filed herewith.
(b) Reports on Form 8-K.
None
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto, duly authorized.
PIERCE LEAHY CORP.
Dated: March 22, 1999 By /s/ J. Peter Pierce
--------------------------------------
J. Peter Pierce
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ J. Peter Pierce President, Chief Executive Officer March 22, 1999
- ------------------------
J. Peter Pierce Director (Principal Executive Officer)
/s/ Douglas B. Huntley Vice President, Chief Financial March 22, 1999
- ------------------------
Douglas B. Huntley Officer, Director (Principal Financial
and Accounting Officer)
/s/ Leo W. Pierce, Sr. Chairman of the Board, Director March 22, 1999
- ------------------------
Leo W. Pierce, Sr.
/s/ Alan B. Campell Director March 22, 1999
- ------------------------
Alan B. Campell
/s/ Delbert S. Conner Director March 22, 1999
- ------------------------
Delbert S. Conner
/s/ Thomas A. Decker Director March 22, 1999
- ------------------------
Thomas A. Decker
/s/ J. Anthony Hayden Director March 22, 1999
- ------------------------
J. Anthony Hayden
47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pierce Leahy Corp.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements for Pierce Leahy Corp. and have issued our
report thereon dated February 26, 1999. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule of valuation and qualifying accounts is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
February 26, 1999
48
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Charges to
Balance, Charges Other Accounts - Balance,
Beginning of to Purchase Deductions End of
Period Expenses Accounting From Reserve Period
--------------- ---------- ------------------ -------------- --------
December 31, 1998
Reserve for doubtful accounts.......... $2,399 $1,406 $ - $155 $3,650
December 31, 1997
Reserve for doubtful accounts.......... $ 795 $ 947 $953 $296 $2,399
December 31, 1996
Reserve for doubtful accounts.......... $ 487 $ 467 $ - $159 $ 795
49
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits.
- ------ -----------------------
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1, File No. 333-23121)
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1, File No. 333-
23121)
3.3** Designation, Rights and Preferences of the Series A Redeemable
Senior Pay-In-Kind Preferred Stock
9 Amended and Restated Voting Trust Agreement by and among certain
shareholders of the Company (incorporated by reference to Exhibit
9 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
10.1* Pierce Leahy Corp. Non-Qualified Stock Option Plan (incorporated
by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-4, File No. 333-9963)
10.2* Pierce Leahy Corp. 1997 Stock Option Plan (incorporated by
reference to Exhibit to the Company's Registration Statement on
Form S-1, File No. 333-23121)
10.3(a)** Second Amended and Restated Credit Agreement dated as of February
24, 1999, among the Company, Pierce Leahy Command Company, the
several lenders from time to time parties thereto, Canadian
Imperial Bank of Commerce, as Canadian Administrative Agent, and
Canadian Imperial Bank of Commerce, New York Agency, as U.S.
Administrative Agent
10.3(b) Credit Agreement dated as of August 12, 1997, as amended, among
the Company, Pierce Leahy Command Company, the several lenders
from time to time parties thereto, Canadian Imperial Bank of
Commerce, as Canadian Administrative Agent, and Canadian Imperial
Bank of Commerce, New York Agency, as U.S. Administrative Agent,
together with certain collateral documents attached thereto,
including the form of US$ Note, the form of Canadian$ Note, and
the form of the U.S. Global Guarantee and Security Agreement made
by the Company, certain of its affiliates and subsidiaries and its
shareholders in favor of the U.S. Administrative Agent
(incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997)
10.4 Indenture, dated as of July 15, 1996, among the Company as issuer,
and United States Trust Company of New York, as trustee
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-4, File No. 333-9963)
10.5 Indenture, dated as of July 7, 1997, among the Company, as issuer,
and The Bank of New York, as trustee (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997)
50
Exhibit
Number Description of Exhibits.
- ------ -----------------------
10.6 Indenture, dated as of April 7, 1998, by and among Pierce Leahy
Command Company, as issuer, Pierce Leahy Corp., and The Bank of
New York, as trustee (incorporated by reference to Exhibit 4.1(c)
to the Company's Registration Statement on Form S-4, File No. 333-
58569)
10.7 Tax Indemnification Agreement among the Company and certain of its
shareholders (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1, File No. 333-23121)
10.8 Pierce Leahy Corp. Profit Sharing/401(K) Plan, as amended, dated
December 29, 1998 (incorporated by reference to Exhibit 10 to the
Company's Registration Statement on Form S-8, File No. 333-69859)
10.9 Asset Purchase Agreement dated February 4, 1998, and Amending
Agreement dated April 7, 1998, among Pierce Leahy Command Company,
Archivex Inc., the shareholders of Archivex Inc., and certain
parties related to Archivex Inc. (incorporated by reference to
Exhibits 10.1 and 10.2 to the Company's Report on Form 8-K dated
April 7, 1998)
10.10 Stock Purchase Agreement dated May 21, 1998 among Pierce Leahy
Corp., and the shareholders of Kestrel Holdings, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's Report
on Form 8-K dated July 2, 1998)
12** Computation of Ratio of Earnings to Fixed Charges
21** Subsidiaries of the Registrant
23** Consent of Arthur Andersen LLP
27** Financial Data Schedule
________________
* Management contract or compensatory plan required to be filed
pursuant to Item 601(b)(10)(iii) of Regulation S-K.
** Filed herewith.
(b) Reports on Form 8-K.
None
51