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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, 1997
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 333-9963
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
----- -----
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 16, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $178,498,277.
As of March 16, 1998, 16,477,728 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 1998 Annual Meeting of Shareholders to be filed no later
than 120 days after the end of the Registrant's Fiscal year.
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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 its approximately 64 million
cubic feet of records under management as of March 1, 1998. The Company
operates a total of 188 records management facilities of which 171 are in the
United States and 17 are in Canada.
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 over 90% 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.
The Company serves a diversified group of over 30,000 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 expects that acquisitions will remain an important part of its
growth strategy. During 1997, the Company completed and integrated 17
acquisitions, totaling approximately 10.3 million cubic feet of records at the
time of acquisition. Since January 1, 1998, the Company has completed five
acquisitions, totaling approximately 3.9 million cubic feet of records at the
time of acquisition. In addition, the Company has signed a definitive agreement
to purchase Archivex Inc., a regional records management company in Canada, for
Cdn. $90.0 million, which it intends to finance through borrowings under its
credit facility or issuance of additional debt securities. The acquisition is
subject to customary conditions and is expected to close in April 1998.
2
The following table summarizes certain information for each acquisition since
January 1, 1997:
EXISTING/ DATE OF
ACQUISITION LOCATION NEW LOCATION ACQUISITION
- ------------------------- ---------- -------------- --------------
Security Archives & Storage Company Wilmington Existing January 1997
The Records Center Tampa Existing January 1997
Data Archives Trenton Existing January 1997
Professional Records Storage & Delivery West Palm Existing January 1997
Advanced File Storage Systems Jacksonville Existing April 1997
RMS Various Existing/New April 1997
Austin FileRoom Austin Existing May 1997
Corporate Storage Chicago Existing June 1997
Smithfield Archives El Paso New July 1997
FilExpress Pittsburgh New September 1997
National Records Management Louisville New September 1997
Records Management & Projection New Orleans New October 1997
Davidson Archives Kansas City Existing October 1997
Datafilms, Inc. Denver Existing October 1997
dataLOK Partners San Fernando Existing November 1997
Binyon O'Keefe Ft. Worth Existing December 1997
Records Depository Buffalo New December 1997
Records Archives Corp. Houston Existing January 1998
Automated Records Centre Toronto Existing January 1998
DataStor St. Louis Existing January 1998
Offsite Records Management Dallas Existing February 1998
Deliverex of Denver Denver Existing March 1998
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 59% of total revenues during 1997. Nearly all of the
Company's storage fees are derived from hard copy storage. During 1997, the
Company generated 94% of its storage revenues from hard copy storage and 6% 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 locations
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.
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
3
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 internally
developed file management software, or maintain 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.
CUSTOMER SERVICE
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. Both customer 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).
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.
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 acquiring other records management companies. 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, accounts receivable and management
reporting on a centralized basis. PLUS(R) utilizes database technology,
proprietary software and extensive bar coding in a flexible, enterprise-wide,
client/server environment.
PLUS(R) offers several additional features which enhance the Company's
customer support functions. The system is continuously updated when any account
activity is undertaken, providing customers with real time access to information
regarding box location and retrievals. The PLUS(R) system is flexible and
allows the Company to design and implement customized records management
solutions for various industries
4
utilizing a set of standardized options. The PLUS(R) system's on-line customer
support network allows certain customers to place orders for both records
storage and retrieval directly from their own in-house terminals resulting in a
more efficient system of records management.
SALES AND MARKETING
During the past five years, the Company has invested significant effort in
developing its sales and marketing department, which is currently comprised of
approximately 110 employees in the United States and 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 offer recommendations on how to implement such a system.
The Company's sales and marketing department is divided into five regions:
Northeast; South; Midwest; West; and Canada. The Company's Vice President,
Sales and Marketing directs five regional sales managers. In addition, the
Company's sales force is divided between sales representatives who focus on
large accounts which are frequently multi-location and a recently expanded group
of sales representatives who focus on smaller, single-location customers. 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.
CUSTOMERS
The Company serves a diversified group of over 30,000 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 3% of the
Company's total revenues during 1997. 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 provide for annual renewals thereafter (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 these competitors 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 smaller storage media is currently not cost effective for inactive
records, primarily due to the high labor cost of preparing the documents for
5
imaging, indexing the images for subsequent retrieval, and ensuring that all the
documents were imaged legibly.
EMPLOYEES
As of December 31, 1997, the Company had 2,295 employees, including 260
employees in Canada. None of the Company's employees 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 $400 million.
ENVIRONMENTAL MATTERS
The Company's properties and operations 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 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 material.
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
existing at the time of the Company's acquisition of this property, with a
$250,000 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 is August 10, 1995 through August 11, 1998.
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.
6
ITEM 2. PROPERTIES.
- ------- -----------
As of March 1, 1998, the Company operated a total of 188 records management
facilities of which 171 are in the United States and 17 are in Canada. Of the
13.6 million square feet of floor space (representing over 95.8 million cubic
feet of storage capacity) in the Company's records facilities, approximately
35.6% and 64.4% (37.9% and 62.1% on a cubic footage basis) are in owned and
leased facilities, respectively. The Company's facilities are located as
follows:
Records
Management Cubic Feet
Region Facilities of Capacity
- --------------------------------------------------------- ---------- ------------
United States
Southern Region........................................ 26 10.7 million
(includes Alabama, Florida,
Georgia, Kentucky, Louisiana,
North Carolina, and Tennessee)
Northern Region........................................ 52 43.0 million
(includes Connecticut, Delaware,
Maryland, Massachusetts, New Jersey
New York, Ohio, Pennsylvania and
Virginia)
Midwest Region......................................... 69 24.5 million
(includes Colorado, Illinois
Indiana, Michigan, Missouri,
New Mexico, Oklahoma and Texas)
Western Region......................................... 24 8.4 million
--- ------------
(includes Arizona, California,
Nevada, Utah and Washington)
Total U.S.................................. 171 86.6 million
Canada................................................. 17 9.2 million
--- -------------
(includes Calgary, Montreal, Ottawa,
Toronto and Vancouver)
Total.................................................. 188 95.8 million
=== =============
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
7
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 .................. 52 President, Chief Executive Chief Operating
Officer and Director Officer
(1995 - Present) (1984-1995)
Douglas B. Huntley ............ 37 Vice President, Chief Assistant to the
Financial Officer President
and Director (1993)
(1994 - Present)
Joseph A. Nezi .................. 51 Vice President Sales and
Marketing
(1991 - Present)
David Marsh ..................... 49 Vice President, Chief Assistant to the
Information Officer President (1994),
(1995 - Present) Manager Mass.
Institute of Tech.
(1986-1994)
Ross Engelman .................. 34 Vice President, Operations Vice President
South Information Services
(1994 - Present) Services (1993-1994)
J. Michael Gold ................ 38 Vice President, Operations
Northeast
(1993 - Present)
Christopher J. Williams...... 39 Vice President, Operations
West
(1993 - Present)
Joseph P. Linaugh ............ 48 Vice President, Treasurer Vice President, Chief
(1994 - Present) Financial Officer and
Director
(1990-1993)
8
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 Company's 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
HOLDERS OF RECORD
Based on requests for proxy materials, the Company believes there are
approximately 1,700 holders of the Company's 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.
9
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
Year Ended December 31,
(dollars in thousands)
1997 1996 1995 1994 1993
--------------------------------------------------------- ------------
Statement of Operations Data:
Revenues
Storage $ 107,879 $ 75,900 $ 55,501 $ 47,123 $ 42,122
Service and storage material sales 75,638 53,848 39,895 35,513 31,266
------------ ------------ ------------ ------------ ------------
Total Revenues 183,517 129,748 95,396 82,636 73,388
Cost of sales, excluding depreciation
and amortization 101,940 73,870 55,616 49,402 45,391
Selling, general, & administrative 30,070 20,007 16,148 15,882 11,977
Depreciation & amortization 21,528 12,869 8,163 8,436 6,888
Special compensation charge 1,752 -- -- -- --
Foreign currency exchange 702 -- -- -- --
Consulting payments to related parties -- -- 500 500 --
Non-recurring charge -- 3,254 -- -- --
------------ ------------ ------------ ------------ ------------
Operating income 27,525 19,748 14,969 8,416 9,132
Interest expense 29,262 17,225 9,622 7,216 6,160
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and extraordinary (1,737) 2,523 5,347 1,200 2,972
Income taxes 7,424 -- -- -- --
Extraordinary Charge 6,036 2,015 3,279 5,991 9,174
------------ ------------ ------------ ------------ ------------
Net Income (loss) (15,197) 508 2,068 (4,791) (6,202)
Accretion (cancellation) of redeemable warrants -- 1,561 889 16 (746)
------------ ------------ ------------ ------------ ------------
Net Income (loss) applicable to Common Shareholders $ (15,197) $ (1,053) $ 1,179 $ (4,807) $ (5,456)
============ ============ ============ ============ ============
BASIC AND DILUTED EARNINGS PER COMMON SHARE
Income (loss) before extraordinary charge $ (0.69) $ 0.09 $ 0.41 $ 0.18 $ 0.34
Extraordinary charge (0.45) (0.19) (0.30) (0.56) (0.85)
------------ ------------ ------------ ------------ ------------
Basic and diluted income (loss) per Common share $ (1.14) $ (0.10) $ 0.11 $ (0.38) $ (0.51)
------------ ------------ ------------ ------------ ------------
Shares used in computing net income (loss)
per Common share 13,385,243 10,546,871 10,591,090 10,591,090 10,591,090
Shares used in computing diluted net income (loss)
per Common share 13,385,243 10,630,922 10,890,188 10,888,441 10,782,025
------------ ------------ ------------ ------------ ------------
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 13,385,243
============
Other Data:
EBITDA(a) $ 51,507 $ 35,871 $ 23,632 $ 17,352 $ 16,020
EBITDA margin 28.1% 27.6% 24.8% 21.0% 21.8%
Balance Sheet Data:
Working capital deficit $ (12,906) $ (23,933) $ (8,139) $ (5,202) $ (9,143)
Total assets 394,713 234,820 131,328 79,746 74,621
Total debt (including redeemable warrants) 279,197 217,423 120,071 77,683 69,736
Shareholders' equity (deficit) 59,323 (25,438) (18,201) (19,341) (14,508)
(a) Earnings before interest, taxes, depreciation and amortization,
non-recurring charges, special compensation charge, and foreign currency
exchange (EBITDA)
10
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 its 64.0 million 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 43 acquisitions through 1997 and the
completion of three acquisitions in January 1998, one in February 1998, and one
March 1998.
The Company's income (loss) was $(15.2) million, $.5 million and $2.1 million in
1997, 1996, and 1995, 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, income taxes related to the termination of the
Company's status as a Subchapter S corporation, and extraordinary charges
related to the early extinguishment of debt due to refinancings in 1997, 1996
and 1995.
Another tool for measuring the performance of records management companies is
EBITDA. Substantially all of the Company's financing agreements, including its
11.125% Senior Subordinated Notes due 2006 ("1996 Notes") and its 9.125% Senior
Subordinated Notes due 2007 ("1997 Notes"; together, 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.
11
The following table illustrates the growth in stored cubic feet from new and
existing customers, and acquisitions from 1993 through 1997:
Net Additions of Cubic Feet of Storage by Category
(cubic feet in thousands)
Year Ended December 31,
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Additions of Cubic Feet:
New and Existing Customer Accounts(a) 8,170 3,956 2,740 2,695 2,660
Acquisitions ........................ 10,285 6,931 4,623 440 117
------- ------- ------- ------- -------
Total ............................... 18,455 10,887 7,363 3,135 2,777
% Increase From:
New and Existing Customer Accounts(a) 20% 13% 12% 14% 16%
Acquisitions ........................ 26% 24% 21% 2% 1%
------- ------- ------- ------- -------
Total ............................... 46% 37% 33% 16% 17%
Cubic Feet Under Management:
Beginning of Period ................. 40,410 29,523 22,160 19,025 16,248
End of Period ....................... 58,865 40,410 29,523 22,160 19,025
(a)Net of permanent removals. Includes effect of records destruction
program of 475 and 372 cubic feet of records in 1996 and 1995, respectively, for
a major customer, as recommended by the Company pursuant to a consulting
agreement with the Company.
Revenues
The Company's revenues consist of storage revenues (58.8% of total revenues in
1997), and related service and storage material sales revenues (41.2% of total
revenues in 1997). 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.
While the Company's total revenues have increased from 1995 to 1997, total
revenue per annual average cubic foot during such period has declined. 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, facilities and
leasehold improvements, equipment for new facilities and computer systems.
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, which were accounted for
under the pooling
12
of interests method. Since the purchase price for records management companies
is usually 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).
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 will 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 1997, the Company incurred $10.6 million of client acquisition costs or
approximately $2.04 per cubic foot of client records moved in from new clients.
Amortization of client acquisition costs amounted to $3.2 million in 1997.
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, $2.0 million and $3.3
million in 1997, 1996 and 1995, respectively.
Year 2000 Compliance
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 system databases and programs has been completed and code
modifications and testing are scheduled to be completed by December 31, 1998.
The present version of the Company's internal financial accounting system is not
year 2000 compliant and is scheduled to be upgraded by December 31, 1998. The
Company is also working with its other internal information systems and network
providers to ensure all systems are year 2000 compliant. The Company estimates
that the expenses and capital expenditures associated with achieving year 2000
compliance will not have a material effect on its financial results in 1998 or
1999.
13
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,
------------------------
1997 1996 1995
---- ---- ----
REVENUES:
Storage 58.8% 58.5% 58.2%
Service and storage material sales 41.2% 41.5% 41.8%
------- ------- -------
Total revenues 100.0% 100.0% 100.0%
OPERATING EXPENSES:
Cost of sales, excluding depreciation and amortization 55.5% 57.0% 58.3%
Selling, general and administrative 16.4% 15.4% 16.9%
Depreciation and amortization 11.7% 9.9% 8.6%
Special compensation charge 1.0% 0.0% 0.0%
Foreign currency exchange 0.4% 0.0% 0.0%
Non-recurring charge 0.0% 2.5% 0.0%
Consulting payments to related parties 0.0% 0.0% 0.5%
------- ------- -------
Total operating expenses 85.0% 84.8% 84.3%
Operating income 15.0% 15.2% 15.7%
INTEREST EXPENSE 15.9% 13.3% 10.1%
------- ------- -------
Income (loss) before income taxes and extraordinary item -0.9% 1.9% 5.6%
INCOME TAXES 4.1% 0.0% 0.0%
------- ------- -------
Income (loss) before extraordinary charge -5.0% 1.9% 5.6%
EXTRAORDINARY ITEM-loss on early extinguishment
of debt, net of $4,014 tax benefit in 1997 and none in 1996 and 1995 3.3% 1.5% 3.4%
------- ------- -------
NET INCOME (LOSS) -8.3% 0.4% 2.2%
======= ======= =======
EBITDA 28.1% 27.6% 24.8%
======= ======= =======
14
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 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 slightly 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.
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 the stock options granted on January 1, 1997
in conjunction with the Company's initial public offering of Common Stock.
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 records management facilities and information systems and the
amortization of goodwill from the Company's acquisitions and client acquisition
costs.
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.
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.
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.
15
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.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues increased from $95.4 million in 1995 to $129.7 million in 1996,
an increase of $34.3 million or 36.0%. Revenues from acquisitions represented
$25.7 million or 74.9% of this increase, including $16.3 million from a full
year of operations of five acquisitions made in 1995 and $9.4 million from a
partial year of operations of twelve acquisitions made in 1996. Approximately
$8.6 million or 25.1% of the total revenue growth resulted from sales to new
customers and increases in cubic feet stored from existing customers.
Storage revenues increased from $55.5 million in 1995 to $75.9 million in 1996,
an increase of $20.4 million or 36.8%. Service and storage material sales
revenues increased from $39.9 million in 1995 to $53.8 million in 1996, an
increase of $13.9 million or 35.0%.
Cost of sales (excluding depreciation and amortization) increased from $55.6
million in 1995 to $73.9 million in 1996, an increase of $18.3 million or 32.8%,
but decreased as a percentage of total revenues from 58.3% in 1995 to 57.0% in
1996. The $18.3 million increase was due primarily to increases in wages and
benefits resulting from an increased number of employees and increases in
facility occupancy costs associated with the growth in business. The decrease
as a percentage of total revenue was due primarily to increased operating and
storage efficiencies.
Selling, general and administrative expenses increased from $16.1 million in
1995 to $20.0 million in 1996, an increase of $3.9 million or 23.9%, and
decreased as a percentage of total revenues from 16.9% in 1995 to 15.4% in 1996.
The decrease as a percentage of total revenues was due to operating efficiencies
and the implementation of programs to control and reduce certain administrative
expenses. The purchase of certain real estate interests from affiliates in
August 1996 contributed $0.9 million to the reduction in cost of sales or 0.7%
as a percentage of revenues.
Depreciation and amortization expenses increased from $8.2 million in 1995 to
$12.9 million in 1996, an increase of $4.7 million or 57.7%, and increased as a
percentage of total revenues from 8.6% in 1995 to 9.9% in 1996. This increase
was the result of increased capital expenditures for shelving and improvements
to record management facilities and information systems and the amortization of
goodwill from the Company's acquisitions.
16
The Company incurred non-recurring charges of $3.3 million in 1996 in connection
with the assumption of leasehold interests in certain facilities from affiliated
parties and with the establishment of a pension for Leo W. Pierce, Sr.
As a result of the foregoing factors, excluding the non-recurring charges in
1996, operating income increased from $15.0 million in 1995 to $23.0 million in
1996, an increase of 53.7%, and increased as a percentage of total revenues from
15.7% in 1995 to 17.7% in 1996. The increase reflected the growth in the
Company's business, economies of scale and increased operating efficiencies.
Interest expense increased from $9.6 million in 1995 to $17.2 million in 1996,
an increase of $7.6 million or 79.0%, due primarily to higher levels of
indebtedness. The Company recorded extraordinary charges of $2.0 million in
1996 and $3.3 million in 1995 related to the early extinguishment of debt as a
result of refinancing and expanding its existing credit agreement in 1996 and
1995.
As a result of the foregoing factors, net income was $0.5 million in 1996
compared to net income of $2.1 million in 1995.
EBITDA increased from $23.6 million in 1995 to $35.9 million in 1996, an
increase of $12.3 million or 51.8%, and increased as a percentage of total
revenues from 24.8% in 1995 to 27.7% in 1996. The increase as a percentage of
the total revenues reflected growth in the Company's business, economies of
scale and increased operating efficiencies.
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 1997, 1996 and 1995, capital expenditures were $35.4 million, $23.5 million
and $16.3 million, respectively, and client acquisition costs were $10.6
million, $6.5 million and $2.2 million, respectively. In 1998, the Company
expects its aggregate capital expenditures will approximate $35.0 million. Over
85% of 1998 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
record management industry, the Company has actively pursued acquisitions since
the beginning of 1994, which has significantly impacted liquidity and capital
resources. In 1997, the Company completed 17 acquisitions for an aggregate
purchase price of $109.1 million, consisting of $102.1 million in cash, 328,621
shares of Common stock with a deemed value of $4.5 million and $1.7 million in
Sellers notes. Since the beginning of 1998, the Company has completed five
acquisitions for an aggregate cash purchase price of approximately $41.7
million. In addition, the Company has signed a definitive agreement to purchase
a regional records management company for approximately CDN $90.0 million, which
it intends to finance through the issuance of additional debt securities. The
acquisition is subject to due diligence and other customary conditions. The
Company has historically financed its acquisitions with borrowings under its
credit agreements and with cash flows from existing operating activities.
During 1996, the Company also 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 agreements.
17
The Company believes that future cash flows from operations, together with
borrowings under the Credit Facility, will be sufficient to fund future working
capital needs, capital expenditure requirements and debt service requirements of
the Company for the foreseeable future.
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
such measures of liquidity as debt to equity.
Sources of Funds
Net cash flows provided by operating activities were $21.0 million, $26.4
million and $17.5 million for 1997, 1996 and 1995, respectively. The $5.5
million decrease from 1996 to 1997 was primarily comprised of a reduction in net
income of $15.7 million and a $14.1 million increase in working capital, offset
by a $9.2 million increase in depreciation and amortization, an increase in
deferred income taxes of $7.4 million, a $4.0 million increase in extraordinary
charge and a special compensation charge of $1.8 million in 1997.
Net cash flows used in investing activities were $156.5 million, $108.8 million
and $51.3 million for 1997, 1996 and 1995, respectively. The uses of such cash
flows were primarily for acquisitions, capital expenditures and client
acquisition expenditures detailed above.
Net cash flows provided by financing activities were $136.1 million, $82.9
million and $34.2 million for 1997, 1996, and 1995, respectively. In 1997, the
$136.1 million in financing activities consisted primarily of $120 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 borrowings on the revolving line of credit, offset by the repayment
of long-term debt of $82.5 million and the $7.0 million prepayment premium on
the redemption of a portion of the 1996 Notes and the payment of $5.2 million of
financing costs related to the issuance of the 1997 Notes and the Company's
credit facility. In August 1997, the Company entered into its current Credit
Facility, which provides $140 million in U.S. dollar borrowings, and CDN $35
million in Canadian dollar borrowings. The credit facility was amended in
February 1998 to provide for borrowings of U.S. $150 million and CDN $40
million. 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.
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, 1997,
CDN $31.9 million was outstanding under the Credit Facility and the Company
could have borrowed an additional $64.0 million under the Credit Facility in
accordance with the debt incurrence limitations. Additionally, to the extent
the Company makes acquisitions, it would 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, 1997, was
approximately 6.38%.
Future Capital Needs
Management believes that cash flow from operations in conjunction with
borrowings under the Credit Facility 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.
18
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, as amended, and is subject to the safe-harbor created by such sections.
Such forward-looking statements concern the Company's operations, economic
performance 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
- -------------------------------------------------------------------
Not Applicable
19
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, 1997 and
1996, 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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 27, 1998
20
PIERCE LEAHY CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31
-----------------------
ASSETS 1997 1996
------ ---------- ----------
CURRENT ASSETS:
Cash $ 1,782 $ 1,254
Accounts receivable, net of allowance for doubtful
accounts of $2,399 and $795 25,201 17,828
Inventories 813 611
Prepaid expenses and other 1,772 688
Deferred income taxes 2,621 --
---------- ----------
Total current assets 32,189 20,381
---------- ----------
PROPERTY AND EQUIPMENT 214,981 158,154
Less-Accumulated depreciation and amortization (54,500) (45,020)
---------- ----------
Net property and equipment 160,481 113,134
---------- ----------
OTHER ASSETS:
Intangible assets, net 196,750 97,544
Other 5,293 3,761
---------- ----------
Total other assets 202,043 101,305
---------- ----------
$ 394,713 $ 234,820
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,084 $ 7,310
Current portion of noncompete obligations 220 466
Accounts payable 8,838 6,757
Accrued expenses 24,754 20,563
Deferred revenues 10,199 9,218
---------- ----------
Total current liabilities 45,095 44,314
LONG-TERM DEBT 277,767 209,330
NONCOMPETE OBLIGATIONS 126 317
DEFERRED RENT 3,993 2,841
DEFERRED INCOME TAXES 8,409 3,456
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY (DEFICIT) 59,323 (25,438)
---------- ----------
$ 394,713 $ 234,820
========== ==========
The accompanying notes are an integral part of these financial statements.
21
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
For the Year Ended December 31
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
REVENUES:
Storage $ 107,879 $ 75,900 $ 55,501
Service and storage material sales 75,638 53,848 39,895
------------ ------------ ------------
Total revenues 183,517 129,748 95,396
------------ ------------ ------------
OPERATING EXPENSES:
Cost of sales, excluding depreciation and amortization 101,940 73,870 55,616
Selling, general and administrative 30,070 20,007 16,148
Depreciation and amortization 21,528 12,869 8,163
Special compensation charge 1,752 -- --
Foreign currency exchange 702 -- --
Non-recurring charges -- 3,254 --
Consulting payments to related parties -- -- 500
------------ ------------ ------------
Total operating expenses 155,992 110,000 80,427
------------ ------------ ------------
Operating income 27,525 19,748 14,969
INTEREST EXPENSE 29,262 17,225 9,622
------------ ------------ ------------
Income (loss) before income taxes and extraordinary charge (1,737) 2,523 5,347
INCOME TAXES 7,424 -- --
------------ ------------ ------------
Income (loss) before extraordinary charge (9,161) 2,523 5,347
EXTRAORDINARY CHARGE-loss on early extinguishment
of debt, net of $4,014 tax benefit in 1997 and none in 1996 and 1995 6,036 2,015 3,279
------------ ------------ ------------
NET INCOME (LOSS) (15,197) 508 2,068
ACCRETION OF REDEEMABLE WARRANTS -- 1,561 889
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ (15,197) $ (1,053) $ 1,179
============ ============ ============
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Income (loss) before extraordinary charge $ (0.69) $ 0.09 $ 0.41
Extraordinary charge (0.45) (0.19) (0.30)
------------ ------------ ------------
Basic and diluted income (loss) per Common share $ (1.14) $ (0.10) $ 0.11
------------ ------------ ------------
Shares used in computing basic income (loss)
per Common share 13,385,243 10,546,871 10,591,000
============ ============ ============
Shares used in computing diluted income (loss)
per Common share 13,385,243 10,630,922 10,690,186
============ ============ ============
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 13,385,243
============
The accompanying notes are an integral part of these financial statements.
22
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
Additional Cumulative
Common Paid-in Accumulated Translation
Stock Capital Deficit Adjustment Total
---------------------------------------------------------
BALANCE, JANUARY 1, 1995 $ -- $ 24 $(19,365) $ -- $(19,341)
Accretion of redeemable warrants -- -- (889) -- (889)
Net income -- -- 2,068 -- 2,068
Distributions to shareholders -- -- (39) -- (39)
---------------------------------------------------------
BALANCE, DECEMBER 31, 1995 -- 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)
Net loss (through July 1, 1997) -- -- (6,772) -- (6,772)
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
Net loss (from July 1, 1997) -- -- (8,425) -- (8,425)
Change in cumulative translation adjustment -- -- -- (309) (309)
---------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 165 $ 67,892 $ (8,425) $ (309) $ 59,323
=========================================================
The accompanying notes are an integral part of these financial statements.
23
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31
------------------------------------
1997 1996 1995
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (15,197) $ 508 $ 2,068
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary charge 6,036 2,015 3,279
Special compensation charge 1,752 -- --
Depreciation and amortization 21,528 12,869 8,163
Gain on sale of property and equipment (44) (32) --
Deferred income tax provision 7,241 (128) --
Amortization of deferred financing costs 1,069 516 533
Change in deferred rent 1,042 302 29
Foreign currency adjustment (435) 31 --
Changes in assets and liabilities, excluding the effects
from the purchase of businesses:
(Increase) decrease in -
Accounts receivable, net (3,870) (2,408) (360)
Inventories (154) 150 (347)
Prepaid expenses and other (1,137) 747 57
Other assets 746 (486) (536)
Increase (decrease) in -
Accounts payable 185 1,630 (978)
Accrued expenses 1,872 10,732 4,693
Deferred revenue 330 (8) 921
---------- ---------- ----------
Net cash provided by operating activities 20,964 26,438 17,522
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for businesses acquired, net of cash acquired (102,068) (61,176) (28,355)
Capital expenditures (35,397) (23,493) (16,288)
Purchase of real estate and other assets from related parties -- (11,018) --
Client acquisition costs (10,629) (6,477) (2,245)
Deposits on pending acquisitions (2,398) (850) --
Increase in intangible assets (5,625) (5,618) (4,274)
Payments on noncompete agreements (496) (333) (153)
Proceeds from sale of property and equipment 64 123 --
---------- ---------- ----------
Net cash used in investing activities (156,549) (108,842) (51,315)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving line of credit 17,199 5,237 (900)
Proceeds from issuance of long-term debt 120,000 210,229 128,420
Payments on long-term debt and capital lease obligations (82,464) (118,570) (90,958)
Prepayment penalties and cancellation of warrants (7,000) (2,625) --
Payment of debt financing costs (5,230) (9,283) (2,366)
Proceeds from issuance of Common stock 93,608 -- --
Repurchase of Common stock -- (1,450) --
Distributions to shareholders -- (602) (39)
---------- ---------- ----------
Net cash provided by financing activities 136,113 82,936 34,157
---------- ---------- ----------
NET INCREASE IN CASH 528 532 364
CASH, BEGINNING OF YEAR 1,254 722 358
---------- ---------- ----------
CASH, END OF YEAR $ 1,782 $ 1,254 $ 722
========== ========== ==========
SUPPLEMENTAL DISCLOSURE-CASH PAID FOR INTEREST $ 26,288 $ 7,443 $ 8,356
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
24
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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 and imaging
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 11.125% 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, 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 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.
25
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, 1997, 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 1997 and 1996, 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
carry forward, for years which taxes are expected to be paid or recovered.
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
26
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, the Company's Canadian
subsidiary, are translated into U.S. dollars using the rate of exchange at
period end. The statements of operations for the Canadian subsidiary 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 a separate component of
shareholders' equity (deficit). Exchange gains and losses recognized during the
period are included in the Company's consolidated statements of operations.
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). This statement requires
companies to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. SFAS 130 is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
Management believes that SFAS 130 will not have a material effect on the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("SFAS
131"). This statement establishes additional standards for segment reporting in
the financial statements and is effective for fiscal years beginning after
December 15, 1997. Management is currently evaluating the need to make
additional disclosures under SFAS No. 131. However, this statement will not
have any impact on the Company's reported consolidated financial position or
results of operations.
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 11.125% Senior
Subordinated Notes at December 31, 1997 was $130,000 and $146,575, respectively.
The carrying amount and estimated fair value of the Company's 9.125% Senior
Subordinated Notes at December 31, 1997 was $120,000 and $125,700, respectively.
Both series of Notes are publicly traded, and accordingly, the fair value of the
Senior Subordinated 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
which 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
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.
27
3. PROPERTY AND EQUIPMENT:
----------------------
December 31
------------------------
Life 1997 1996
----------- --------- ---------
Land - $ 10,501 $ 7,353
Buildings and improvements 10-40 years 79,119 57,296
Warehouse equipment (primarily shelving) 12-20 years 95,005 71,773
Data processing equipment and software 7 years 18,364 14,363
Furniture and fixtures 7 years 5,615 3,823
Transportation equipment 5 years 6,377 3,546
--------- ---------
214,981 158,154
Less-Accumulated depreciation and amortization (54,500) (45,020)
--------- ---------
Net property and equipment $ 160,481 $ 113,134
========= =========
Depreciation expense was $9,599, $6,652, and $4,325 for the years ended December
31, 1997, 1996 and 1995, respectively.
4. INTANGIBLE ASSETS:
-----------------
December 31
---------------------------------
1997 1996
-------------- --------------
Goodwill $ 160,119 $ 69,417
Client acquisition costs 26,233 15,157
Noncompete agreements 14,263 11,287
Deferred financing costs 11,174 9,267
Other intangible assets 18,525 13,377
-------------- --------------
230,314 118,505
Less-Accumulated amortization (33,564) (20,961)
-------------- --------------
Net intangible assets $ 196,750 $ 97,544
============== ==============
December 31, 1997
---------------------------------------------------
Accumulated Net Book
Life Cost Amortization Value
---- -------------- --------------- --------------
Goodwill 30 years $ 160,119 $ (8,237) $ 151,882
Client acquisition costs 6 years 26,233 (8,246) 17,987
Noncompete agreements 1-7 years 14,263 (8,675) 5,588
Deferred financing costs 10 years 11,174 (1,129) 10,045
Other intangible assets 3-15 years 18,525 (7,277) 11,248
-------------- --------------- --------------
$ 230,314 $ (33,564) $ 196,750
============== =============== ==============
Amortization of all intangible assets, other than deferred financing costs which
are charged to interest expense, was $11,929, $6,217 and $3,838 for the years
ended December 31, 1997, 1996 and 1995, respectively. Amortization of deferred
financing costs was $1,069, $516 and $533 for the years ended December 1997,
1996 and 1995, respectively. Capitalized client acquisition costs were $10,629,
$6,477 and $2,245 for the years ended December 31, 1997, 1996 and 1995,
respectively.
28
The Company continually evaluates whether events or circumstances have occurred
that indicate the remaining useful lives of the intangible assets should be
revised or the remaining balance of such assets may not be recoverable. As of
December 31, 1997, the Company believes that no revisions to the remaining
useful lives or write-downs of intangible assets are required.
5. ACCRUED EXPENSES:
----------------
December 31
-------------------------------------
1997 1996
----------------- ------------------
Accrued salaries and commissions $ 3,329 $ 2,613
Accrued vacation and other absences 3,981 2,866
Accrued interest 12,004 9,840
Other 5,440 5,244
================= ==================
$ 24,754 $ 20,563
================= ==================
6. LONG-TERM DEBT:
--------------
December 31
---------------------------------------
1997 1996
----------------- ------------------
Senior Subordinated Notes $ 250,000 $ 200,000
Canadian Revolver 22,303 5,327
Mortgage Notes 5,369 3,679
Sellers Notes 1,051 7,600
Other 128 34
----------------- ------------------
278,851 216,640
Less-Current portion (1,084) (7,310)
----------------- ------------------
$ 277,767 $ $ 209,330
================= ==================
In July 1996, the Company issued $200,000 of Senior Subordinated Notes in a
private offering and 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 Canadian subsidiary. The 1996 Notes mature on July 15, 2006, and bear
interest at 11.125% 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. The Company is in compliance
with all financial and operating covenants required under the indenture for the
1996 Notes.
29
The Company had the option to redeem up to an aggregate of $70,000 principal
amount of the 1996 Notes at any time prior to July 15, 1999 with the net
proceeds of one or more public equity offerings at a redemption price equal to
110% of the aggregate principal amount so redeemed plus accrued interest to the
redemption date. Upon completion of the Company's initial public offering of
its Common stock in July 1997 (see Note 1), the Company exercised this 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.
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 Canadian subsidiary. 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 9.125%
per year, payable semiannually in arrears on January 15 and July 15, commencing
January 15, 1998. The proceeds from the sale of the 1997 Notes were used to
repay outstanding borrowings under its previous credit facility and for general
purposes. The Company is in compliance with all financial and operating
covenants required under the indenture for the 1997 Notes.
In August 1997, the Company entered into a new credit facility (the "Credit
Facility") providing a revolving line of credit of U.S $140 million in
borrowings and CDN $35 million in borrowings for the Company's Canadian
subsidiary. 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 Canadian subsidiary. 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. The weighted average
interest rate on outstanding borrowings on the Canadian portion of the revolver
at December 31, 1997 was 6.38%. 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 is in compliance with all financial and operating
covenants required under the Credit Facility. The Company's available borrowing
capacity under the Credit Facility is contingent upon the Company meeting
certain financial ratios and other criteria.
In February 1998, the Company amended the Credit Facility to provide for
borrowings of U.S. $150 million and CDN $40 million. All other terms and
conditions remained the same.
The highest amount outstanding under the current Canadian revolver during the
year ended December 31, 1997, was CDN $31,900. The average amount outstanding
on the current Canadian portion of the revolver during the year was CDN $17,100,
while the weighted average interest rate was 6.12%. There were no borrowings
under the current U.S. portion of the revolver in 1997. The highest amounts
outstanding under previous U.S. and Canadian revolvers for the years ended
December 31, 1997 and 1996 were $117,763 and $6,000, the average amounts
outstanding were $69,338 and $3,097, and the weighted average interest rates
were 7.85% and 7.91%, respectively.
In connection with certain acquisitions completed in 1997 and 1996, notes for
$1,652 and $7,600, respectively, were issued to the sellers. The notes bear
interest at rates ranging from 5% to 7% per year. The outstanding balance on
these notes as of December 31, 1997 and 1996 was $1,051 and $7,600,
respectively. The outstanding balance on the notes as of December 31, 1997
matures through 1999.
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 1997 and 1996 of $2,000 and $2,630, respectively. The notes
bear interest at
30
rates of approximately 8% and require monthly principal and interest payments
ranging from $15 to $22 through 2001.
Future scheduled principal payments on the Company's long-term debt at December
31, 1997 are as follows:
1998 $ 1,084
1999 552
2000 323
2001 4,004
2002 5,171
2003 and thereafter 267,717
--------
$ 278,851
=========
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.
Debt refinancings occurred in 1997, 1996 and 1995, resulting in the write-off of
previously deferred financing costs of $3,050, $2,015 and $2,779, respectively,
and prepayment and other charges of $7,000 in 1997 and $500 in 1995. Such
write-offs and charges have been recorded as extraordinary charges, net of tax,
in the accompanying consolidated statements of operations.
7. INCOME TAXES:
- ---------------
The components of income taxes for the year ended December 31, 1997 are as
follows:
Current-
Foreign $ 150
-------
Deferred-
Federal 8,895
State 1,172
Foreign 1,221
-------
$11,288
-------
$11,438
=======
The provision for income taxes for the year ended December 31, 1997 consists of
a current tax provision for foreign taxes due on taxable income of the Company's
Canadian subsidiary, and deferred federal, state and foreign income taxes. The
total deferred income tax provision 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 respective period. The reconciliation of the federal
statutory
31
income tax rate and the pro forma effective income tax rate is as follows for
the year ended December 31, 1997:
Federal statutory rate (34.0)%
State income taxes 1.2
Non-deductible depreciation and amortization 7.9
Foreign 3.2
------
(21.7)%
======
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:
Current deferred income tax asset $ 2,621
--------
Gross non-current deferred tax assets 10,269
Gross non-current deferred tax liabilities (18,678)
--------
Total non-current deferred taxes 8,409
--------
Net deferred tax liability $ 5,788
========
The tax effect of significant temporary differences representing deferred tax
assets and liabilities at December 31, 1997 are as follows:
Basis difference of property and equipment $(10,312)
Basis difference in intangible assets (5,076)
Net operating loss carry forward 5,112
Deferred rent 1,526
Expenses not currently deductible
for tax purposes 2,962
--------
Net deferred tax liability $ 5,788
========
The Company had federal and state net operating loss carry forwards available
for income tax and financial reporting purposes of approximately $12,631 and
$11,924, respectively, at December 31, 1997. The net operating loss carry
forwards begin to expire in 2013.
The Tax Reform Act of 1986 provides for a tax at the corporate level on gains
realized on asset sales for a specified period following the election of
Subchapter S status. Deferred taxes of $3,456 at December 31, 1996 were
provided for taxes which may have been triggered if the Company disposed of
certain acquired in connection with a certain purchase transaction.
8. CAPITAL STOCK:
- ---- --------------
At December 31, 1997 and 1996, 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, 1997 - 16,477,728
Shares issued and outstanding December 31, 1996 - 10,485,090
In 1996, the Company redeemed 105,910 shares of Common stock for $1,450 and
canceled these shares.
32
Certain shareholders of the Company entered into a voting trust agreement on
June 24, 1997. The shares held in trust represent 56.6% of the outstanding
Common stock at December 31, 1997. The trustees of the voting trust include the
President, Chief Executive Officer and Director 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.
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. Options to purchase 153,570 shares
at $5.09 per share were granted on January 1, 1997, options to purchase 360,092
shares at $5.86 per share were granted on January 1, 1996 and options to
purchase 600,512 shares at $5.10 per share were granted on January 1, 1995.
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 will be 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. At December 31,
1997, no options were granted under the 1997 Plan.
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-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.
At December 31, 1997, the total options outstanding are 1,114,174 with exercise
prices between $5.09 and $5.86 and a weighted average exercise price of $5.34.
The options outstanding at December 31, 1997 contain no expiration dates. At
December 31, 1997, options to purchase 465,793 shares of Common stock are fully
vested and exercisable. 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 1997, 1996 and 1995:
33
1997 1996 1995
---------------------------------------
Risk free interest rates 6.4% 5.6% 8.0%
Expected lives of options 7 years 7 years 7 years
Expected dividend yields N/A N/A N/A
Expected volatility 20% 15% 15%
The approximate fair value of each option granted in 1997, 1996 and 1995 is
$2.08, $2.06 and $2.24, 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:
1997 1996 1995
--------- -------- ------
Net income (loss) applicable to Common shareholders, as reported $(15,197) $(1,053) $1,179
Net income (loss) applicable to Common shareholders, pro forma $ (9,681) $(1,311) $1,012
for compensation cost
Net loss per share applicable to Common shareholders, pro forma
for compensation cost and income taxes (Note 1) $ (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, 1997, 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 2015 and require minimum rentals, subject to escalation, as
follows:
1998 $ 30,963
1999 28,180
2000 25,838
2001 23,818
2002 21.346
2003 and thereafter 76,583
-------
$206,728
-------
Rent expense for all leases was approximately $21,657, $17,008, and $14,098 for
the years ended December 31, 1997, 1996 and 1995, 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 $845, $9,019, and $8,201 for the years ended December
31, 1997, 1996 and 1995, respectively. A significant portion of the related
party rent expense was reduced through the purchase of certain real estate and
the buy-out of certain lease interests in July 1996 (see Note 12).
34
Other Matters
- -------------
The Company entered into consulting agreements with several of the former owners
of acquired businesses (see Note 14). These agreements require minimum payments
of $74 in 1998.
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 the
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 Statement of
Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No. 128").
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 was required to and did
adopt SFAS No. 128 during the period ended December 31, 1997.
In 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. In 1995,
the weighted average number of shares outstanding was 10,591,090. The dilutive
effects of the weighted average number of stock options and warrants outstanding
was 299,186 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 death of the shareholder or his spouse. The $490 difference
between the present value of this benefit and the
35
liability previously reported was recorded as a non-recurring charge in the 1996
consolidated statement of operations.
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, $800 and $700 in 1997, 1996 and 1995, respectively. In addition, in 1997
the investment banking firm received $1,800 from the underwriters on the 1997
Notes and initial public offering.
The Company paid real estate advisory fees to a firm of which a director of the
Company is the owner. The fees were approximately $88 in 1997. There were no
fees paid to the firm in 1996 and 1995.
In December 1993, the Company borrowed $80 from a shareholder which bore
interest at 7%. The note was repaid in 1996.
As of December 31, 1997, an officer had borrowed $210 from the Company.
Interest accrues on the loan at 8.875% a year.
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 $892, $1,122, and $591 for
the years ended December 31, 1997, 1996 and 1995, 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 had an aggregate purchase price of $109,098, consisting of $102,086
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 for one transaction of $9,084 in January
1997 and another for $62,000 in April 1997; all others were individually less
than $8,000. In addition to these cash payments, acquisitions in 1997 and 1996
provided for noncompete obligations of $60 and $400, respectively, payable over
one year. The noncompete liability at December 31, 1997 and 1996 was $347 and
$783, respectively. The results of operations for each of these acquisitions
have been included in the consolidated results of the Company from the
respective acquisition dates. The excess of the fair value of the assets and
liabilities acquired has been allocated to goodwill ($91,047 and $43,062 in 1997
and 1996, respectively) and is being amortized over the estimated benefit period
of 30 years. In connection with certain of the acquisitions, the Company
entered into consulting agreements with several of the former owners of the
acquired businesses which require aggregate commitments of $74 at December 31,
1997 (see Note 10).
During 1997, the Company also completed two mergers with records management
businesses by exchanging 165,355 shares of Common stock for the Common 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
36
capital. The results of operations for each acquisition have been included in
the consolidated results of the Company from their respective acquisition dates.
Subsequent to December 31, 1997, the Company completed five acquisitions of
record management businesses for an aggregate cash purchase price of
approximately $41,700. Certain purchase agreements contain purchase price
adjustments and earn-out provisions contingent upon future performance and other
criteria that could affect the net cash paid for the entity. The acquisitions
were accounted for under the purchase method of accounting. The $36,700 excess
purchase price over the underlying fair value of the assets and liabilities
acquired has been allocated to goodwill.
A summary of the net cash paid for the purchase price of the completed
acquisitions is as follows:
1997 1996
----------------- -----------------
Fair value of assets acquired $ 164,960 $ 72,210
Liabilities assumed (12,649) (1,432)
Seller notes issued (1,652) (7,600)
Fair value of Common stock issued (4,907) -
Cash acquired (1,974) (1,013)
----------------- -----------------
Net cash paid $ 143,778 $ 62,165
================= =================
The following unaudited pro forma information shows the results of the Company's
operations for the years ended December 31, 1997 and 1996 as though each of the
completed acquisitions had occurred as of January 1, 1996:
1997 1996
----------------- -----------------
Total revenues $ 212,191 $ 195,480
Net loss $ (14,171) $ (14,293)
Basic and diluted net loss per common share $ (1.06) $ (1.32)
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, 1996, 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.
In February 1998, the Company signed a definitive agreement to purchase a
regional records management company for CDN $90.0 million, which it intends to
finance either through borrowings under the Credit Facility or through the
issuance of additional notes. The acquisition is subject to due diligence and
other customary conditions.
37
15. 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 Canadian subsidiary:
For the Year Ended December 31
------------------------------
1997 1996 1995
---- ---- ----
Revenues $17,180 $15,699 $ 2,316
Gross margin (excluding depreciation
and amortization 8,056 7,417 988
Operating income 2,287 2,762 336
Net income (loss) 246 1,076 (15)
At December 31
------------------------------
1997 1996 1995
---- ---- ----
Current assets $ 3,587 $ 3,226 $ 3,433
Total assets 33,056 30,879 25,498
Current liabilities 2,018 1,707 2,711
Long-term liabilities 25,652 8,354 21,132
The summarized financial information of the Canadian subsidiary has been
prepared from the books and records maintained by this subsidiary. The
summarized financial information may not necessarily be indicative of the
results of operations or financial position had the Canadian subsidiary operated
as an independent entity. Certain intercompany sales and charges are included in
the subsidiary records and are eliminated in consolidation. The Company has
borrowed on its Credit Facility and loaned certain amount to the Canadian
subsidiary, which have been recorded as intercompany loans.
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.
38
16. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):
- ---- -------------------------------------------------
Summarized quarterly financial data for 1997 and 1996 is as follows:
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 income (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)
======== ======== ======== ========
1996 Quarter
-------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
(in thousands, except per share amounts)
Total revenues $ 29,699 $ 31,623 $ 32,508 $ 35,918
Cost of sales, excluding depreciation and amortization $ 17,406 $ 17,783 $ 17,706 $ 20,975
Operating income $ 4,740 $ 5,870 $ 3,288 $ 5,850
Income (loss) before extraordinary charge $ 1,894 $ 2,763 $ (2,078) $ (56)
Net income (loss) $ 1,894 $ 2,763 $ (4,093) $ (56)
Basic and diluted income (loss) per Common share:
Loss before extraordinary charge $ 0.18 $ 0.11 $ (0.20) $ (0.01)
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). In the
third quarter of 1996, the Company incurred non-recurring charges of $3,254
relating to the buy-out of certain lease commitments from a related party
partnership and the issuance of a pension to a shareholder (see Note 12).
39
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 1998 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.
40
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.................. 20
Consolidated Balance Sheets............................... 21
Consolidated Statement of Operations...................... 22
Consolidated Statement of Shareholders' Equity (Deficit).. 23
Consolidated Statements of Cash Flows..................... 24
Notes to Consolidated Financial Statements................ 25
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) 9**
Amended and Restated Voting Trust Agreement by and among certain
shareholders of the Company
9** Amended and Restated Voting Trust Agreement by and amoung certain
shareholders of the Company
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** 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,
41
Exhibit
Number Description of Exhibits.
- ------ -----------------------
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
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
10.6 Stock Purchase Agreement dated April 17, 1996 among the Company and
Security Archives, Inc. and Patrick G. Clayton, Carol A. Clayton and
Byron Wood Clayton (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-4, File No. 333-9963)
10.7 Stock Purchase Agreement dated as of February 27, 1997 between the
Company, Records Management Services, Inc. and certain shareholders of
Records Management Services, Inc. (incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
10.8 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)
12** Computation of Ratio of Earnings to Fixed Charges
21** Subsidiaries of the Registrant
23** Consent of Arthur Andersen LLP
27** Financial Data Schedule.
____________________
* 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
42
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 23, 1998 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 23, 1998
- ------------------- Director (Principal Executive Officer)
J. Peter Pierce
/s/ Douglas B. Huntley Vice President, Chief Financial March 23, 1998
- ---------------------- Officer, Director (Principal Financial
Douglas B. Huntley and Accounting Officer)
/s/ Leo W. Pierce, Sr. Chairman of the Board, Director March 23, 1998
- ----------------------
Leo W. Pierce, Sr.
/s/ Alan B. Campell Director March 23, 1998
- -------------------
Alan B. Campell
/s/ Delbert S. Conner Director March 23, 1998
- ---------------------
Delbert S. Conner
/s/ Thomas A. Decker Director March 23, 1998
- --------------------
Thomas A. Decker
/s/ J. Anthony Hayden Director March 23, 1998
- ---------------------
J. Anthony Hayden
43
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 27, 1998. 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 27, 1998
44
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, 1997
Reserve for doubtful accounts...... $ 795 $ 947 $ 953 $ 296 $ 2,399
December 31, 1996
Reserve for doubtful accounts...... $ 487 $ 467 $ -- $ 159 $ 795
December 31, 1995
Reserve for doubtful accounts...... $ 554 $ 418 $ -- $ 485 $ 487
45
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)
9** Amended and Restated Voting Trust Agreement by and amoung certain
shareholders of the Company
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** 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
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
10.6 Stock Purchase Agreement dated April 17, 1996 among the Company and
Security Archives, Inc. and Patrick G. Clayton, Carol A. Clayton and
Byron Wood Clayton (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-4, File No. 333-9963)
10.7 Stock Purchase Agreement dated as of February 27, 1997 between the
Company, Records Management Services, Inc. and certain shareholders of
Records Management Services, Inc. (incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
10.8 Tax Indemnification Agreement among the Company and certain of its
46
Exhibit
Number Description of Exhibits
- ------- -------------------------
shareholders (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1, File No. 333-23121)
12** Computation of Ratio of Earnings to Fixed Charges
21** Subsidiaries of the Registrant
.
23** Consent of Arthur Andersen LLP
27** Financial Data Schedule.
____________________
* Compensatory plan required to be filed pursuant to Item 601(b)(10)(iii)
of Regulation S-K.
** Filed herewith.
47