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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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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)
New York 23-2588479
(State or other jurisdiction of (I.R.S. Employer
incorporation 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: None
Securities registered pursuant to Section 12(g) of the Act: None
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(Title of Class)
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
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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. [X]
As of March 1, 1997, the aggregate market value of the voting stock held by non-
affiliates of the Registrant was $0.
As of March 1, 1997, 900 shares of Class A Common Stock, $.01 par value, and
9,000 shares of Class B Common Stock, $.01 par value, were outstanding.
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PART I
Item 1. Business.
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General
The Company is the largest archive records management company in North
America, as measured by its 42.3 million cubic feet of records currently under
management. The Company operates a total of 136 records management facilities
of which 123 are in the United States and 13 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 approximately 95% of the Company's storage
revenues), computer tapes, optical discs, microfilm, video tapes and X-rays. In
addition, the Company provides next day or same day records retrieval and
delivery, allowing customers prompt access to all stored material. The Company
also offers other data management services, including customer records
management programs, imaging services and records management consulting
services.
The Company serves a diversified group of over 19,000 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 the its
growth strategy. During 1996, the Company completed and integrated 12
acquisitions, totaling approximately 6.9 million cubic feet of records at the
time of acquisition. Since January 1, 1997, the Company has completed four
acquisitions, totalling approximately 1.5 million cubic feet of records at the
time of acquisition. In addition, the Company has signed a definitive
agreement to purchase a regional records management company for approximately
$62.0 million, which it intends to finance through borrowings under its credit
facility. The acquisition is subject to due diligence and other customary
conditions.
-2-
The following table summarizes certain information for each acquisition since
January 1, 1996:
Existing/ Date of
Acquisition Location New Location Acquisition
- ----------- -------- ------------ -----------
Brambles (Ottawa Division) Ottawa Existing March 1996
The File Cabinet Atlanta Existing March 1996
File Box Austin New April 1996
Security Archives Dallas Existing May 1996
Archives America of San San Diego New July 1996
Diego
Security Archives of Denver Denver New August 1996
Data Protection Services Birmingham New September 1996
Info-Stor Calgary Existing October 1996
Archives Denver Existing October 1996
InTrust Denver, Albuquerque, Existing/New October 1996
Colorado Springs,
Ft. Wayne
Security Archives of Las Las Vegas New October 1996
Vegas
Records Management Birmingham Existing December 1996
Security Archives & Wilmington Existing January 1997
Storage Company
The Records Center Tampa Existing January 1997
Data Archives Trenton Existing January 1997
Professional Records West Palm Beach Existing January 1997
Storage & Delivery
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 1996. Nearly all of the
Company's storage fees are derived from hard copy storage. During 1996, 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 Product 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 400 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 recordkeeping 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.
-4-
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 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. 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 who are each responsible for
one of the regions. 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 19,000 customers 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 1996. 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.
-5-
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.
Employees
As of December 31, 1996, the Company had 1,553 employees, including 209
employees in Canada. None of the Company's employees is 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 flood or earthquakes (in certain
geographic areas), and losses at the Company's facilities up to approximately
$225 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
-6-
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.
-7-
Item 2. Properties.
- ------ ----------
The Company operates a total of 136 records management facilities of which 123
are in the United States and 13 are in Canada. Of the 8.6 million square feet
of floor space (representing over 67 million cubic feet of storage capacity) in
the Company's records storage facilities, approximately 33% and 67% (39% and 61%
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......................... 23 7.3 million
(includes Alabama, Florida,
Georgia, North Carolina and
Tennessee)
Northern Region......................... 45 38.7 million
(includes Connecticut, Delaware,
Maryland, Massachusetts, New Jersey,
New York, Ohio, Pennsylvania and
Virginia)
Midwest Region.......................... 38 11.1 million
(includes Colorado, Illinois,
Indiana, Michigan, Missouri,
New Mexico and Texas)
Western Region.......................... 17 4.5 million
(includes Arizona, California, --- ------------
Nevada and Washington)
Total U.S............................... 123 61.6 million
Canada.................................... 13 6.1 million
(includes Calgary, Montreal, Ottawa, --- ------------
Toronto and Vancouver)
Total................................... 136 67.7 million
=== ============
Item 3. Legal Proceedings.
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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.
-8-
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ------ -----------------------------------------------------------------
Matters.
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Not Applicable.
-9-
Item 6. Selected Financial Data
(dollars in thousands)
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Year Ended December 31,
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1996 1995 1994 1993 1992
----------- ------------ ------------ ----------- -----------
Statement of Operations Data:
Revenues
Storage $ 75,900 $ 55,501 $ 47,123 $ 42,122 $ 37,633
Service and storage material sales 53,848 39,895 35,513 31,266 25,202
----------- ------------ ----------- ----------- ------------
Total revenues 129,748 95,396 82,636 73,388 62,835
Cost of sales, excluding depreciation and
amortization 73,870 55,616 49,402 45,391 39,702
Selling, general and administrative 20,007 16,148 15,882 11,977 9,012
Depreciation and amortization 12,869 8,163 8,436 6,888 5,734
Consulting payments to related parties (a) -- 500 500 -- --
Non-recurring charges (b) 3,254 -- -- -- --
----------- ------------ ----------- ----------- -----------
Operating income 19,748 14,969 8,416 9,132 8,387
Interest expense 17,225 9,622 7,216 6,160 6,388
----------- ------------ ----------- ----------- ------------
Income before extraordinary charge 2,523 5,347 1,200 2,972 1,999
Extraordinary charge (c) 2,015 3,279 5,991 9,174 --
----------- ------------ ----------- ----------- ------------
Net income (loss) 508 2,068 (4,791) (6,202) 1,999
Accretion (cancellation) of redeemable warrants 1,561 889 16 (746) --
----------- ------------ ----------- ----------- ------------
Net income (loss) applicable to Common shareholders $ (1,053) $ 1,179 $ (4,807) $ (5,456) $ 1,999
=========== ============ =========== =========== ============
As of December 31,
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1996 1995 1994 1993 1992
----------- ------------ ----------- ----------- ------------
Balance Sheet Data:
Working capital (deficit) $ (23,933) $ (8,139) $ (5,202) $ (9,143) $ (11,656)
Total assets 234,820 131,328 79,746 74,621 65,869
Total debt (including redeemable warrants) 217,423 120,071 77,683 69,736 55,027
Shareholders' deficit (25,438) (18,201) (19,341) (14,508) (9,028)
Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ----------- ------------ -----------
Other Data:
Operating margin 17.7% 15.7% 10.2% 12.4% 13.3%
EBITDA (d) $ 35,871 $ 23,632 $ 17,352 $ 16,020 $ 14,121
EBITDA margin 27.7% 24.8% 21.0% 21.8% 22.5%
a) Represents aggregate payments made to eight Pierce family members.
b) Represents non-recurring charges in 1996 of $2.8 million paid to a
related party partnership to assume the partnership's position in certain
leases with third parties and of $.5 million for the establishment of an
annual pension for Leo W. Pierce, Sr. and his spouse.
c) Represents loss on early extinguishment of debt due to refinancings in
1996, 1995, 1994 and 1993. Amounts include write-off of unamortized
deferred financing costs and discount, along with prepayment penalties and
other costs.
Item 6. Selected Financial Data (Continued)
d) "EBITDA" is defined as net income (loss) before interest expense, taxes,
depreciation and amortization, consulting payments to related parties, non-
recurring charges, and extraordinary charge. EBITDA is not a measure of
performance under GAAP. While EBITDA should not be considered in isolation or
as a substitute for net income, cash flows from operating activities and
other income or cash flow statement data prepared in accordance GAAP, or as a
measure of profitability or liquidity, management understands that EBITDA is
customarily used as a criteria in evaluating records management companies.
Moreover, substantially all of the Company's financing agreements, including
the Notes, contain covenants in which EBITDA is used as a measure of
financial performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of other measures of
performance determined in accordance with GAAP and the Company's sources and
applications of cash flows.
-11-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations.
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General
The Company is the largest archive records management company in North
America, as measured by its 42.3 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 26 acquisitions through 1996 and the
completion of four acquisitions since January 1, 1997.
Another tool for measuring the performance of records management companies is
EBITDA. Substantially all of the Company's financing agreements, including its
11-1/8% Senior Subordinated Notes due 2006 (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.
The following table illustrates the growth in stored cubic feet from existing
customers, new customers and acquisitions from 1992 through 1996:
Net Additions of Cubic Feet of Storage by Category
(cubic feet in thousands)
Year Ended December 31,
-----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Additions of Cubic Feet:
Customer Accounts(a)....... 2,096 2,660 2,695 2,740 3,956
Acquisitions............... 294 117 440 4,623 6,931
------ ------ ------ ------ ------
Total....................... 2,390 2,777 3,135 7,363 10,887
% Increase From:
Customer Accounts(a)....... 15% 16% 14% 12% 13%
Acquisitions............... 2% 1% 2% 21% 24%
------ ------ ------ ------ ------
Total...................... 17% 17% 16% 33% 37%
Cubic Feet Under Management:
Beginning of Period........ 13,858 16,248 19,025 22,160 29,523
End of Period.............. 16,248 19,025 22,160 29,523 40,410
- --------------
(a) Net of permanent removals. Includes effect of a records destruction program
of 372,000 and 475,000 cubic feet of records in 1995 and 1996, respectively,
for a major customer, as recommended by the Company pursuant to a consulting
agreement with the Company.
-12-
Revenues
The Company's revenues consist of storage revenues (58.5% of total revenues in
1996), and related service and storage material sales revenues (41.5% of total
revenues in 1996). 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 1994 to 1996, 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 acquisitions the Company has
completed. 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 to the amortization of
client acquisition costs. The Company has accounted for all of its acquisitions
under the purchase 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 decrease reported net income.
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.
In connection with the acquisition of new large volume accounts, the Company
often incurs client acquisition costs, primarily sales commissions and move-in
costs. Client acquisition costs are capitalized and amortized over six years.
In 1996, the Company incurred $6.5 million of client acquisition costs.
Amortization of client acquisition costs amounted to $1.7 million in 1996.
-13-
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, $3.3 million and $2.0 million
in 1994, 1995 and 1996, respectively.
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,
------------------------
1994 1995 1996
----- ----- -----
Revenues:
Storage............................................... 57.0% 58.2% 58.5%
Service and storage material sales.................... 43.0 41.8 41.5
----- ----- -----
Total revenues......................................... 100.0 100.0 100.0
Cost of sales, excluding depreciation and amortization. 59.8 58.3 57.0
Selling, general and administrative.................... 19.2 16.9 15.4
Depreciation and amortization.......................... 10.2 8.6 9.9
Consulting payments to related parties................. 0.6 0.5 0
Non-recurring charges.................................. 0 0 2.5
----- ----- -----
Operating income...................................... 10.2 15.7 15.2
Interest expense....................................... 8.7 10.1 13.3
----- ----- -----
Income (loss) before extraordinary charge............. 1.5 5.6 1.9
Extraordinary charge................................... 7.3 3.4 1.5
----- ----- -----
Net income (loss)..................................... (5.8%) 2.2% 0.4%
===== ===== =====
Other Data:
EBITDA................................................. 21.0% 24.8% 27.7%
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
-14-
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 to 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.
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 L.W. Pierce, Sr.
See Item 11, "Executive Compensation--Compensation Committee Interlocks and
Insider Participation."
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 $3.3 million in
1995 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 1995 and
again in 1996.
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.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased from $82.6 million in 1994 to $95.4 million in 1995,
an increase of $12.8 million or 15.4%. Almost one-half of the total revenue
growth resulted from sales to new customers and increases in cubic feet stored
from existing customers, partially offset by the reduction of records of a major
customer pursuant to a records destruction program recommended by the Company
pursuant to a consulting agreement with the Company. Five acquisitions completed
from February 1995 to October 1995 accounted for $6.6 million (or 51.6%) of the
increase.
-15-
Storage revenues increased from $47.1 million in 1994 to $55.5 million in
1995, an increase of $8.4 million or 17.8%. Service and storage material sales
revenues increased from $35.5 million in 1994 to $39.9 million in 1995, an
increase of $4.4 million or 12.3%.
Cost of sales (excluding depreciation and amortization) increased from $49.4
million in 1994 to $55.6 million in 1995, an increase of $6.2 million or 12.6%,
but decreased as a percentage of total revenues from 59.8% in 1994 to 58.3% in
1995. The $6.2 million increase was due primarily to increases in storage volume
and the associated cost of additional storage capacity. The decrease as a
percentage of total revenues was due primarily to increased operating and
storage efficiencies, in part reflecting the full implementation of the PLUS(R)
system during the first quarter of 1995.
Selling, general and administrative expenses increased from $15.9 million in
1994 to $16.1 million in 1995, an increase of $0.2 million or 1.7%, and
decreased as a percentage of total revenues from 19.2% in 1994 to 16.9% in 1995.
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.
Depreciation and amortization expenses decreased from $8.4 million in 1994 to
$8.2 million in 1995, a decrease of $0.2 million or 3.2%, and decreased as a
percentage of total revenues from 10.2% in 1994 to 8.6% in 1995. This decrease,
both in dollars and as a percentage of total revenues, was due primarily to the
Company's revision of the estimated useful lives of certain long-term assets,
effective January 1, 1995, to more accurately reflect the estimated economic
lives of the related assets and to be more in conformity with industry
practices. The aggregate effect of adopting these revised lives was to decrease
amortization and depreciation expense by approximately $4.9 million. This change
more than offset what would have been an increase in depreciation charges
resulting from capital expenditures for shelving and improvements to records
management facilities and information systems and the amortization of goodwill
from the Company's acquisitions.
As a result of the foregoing factors, operating income increased from $8.4
million in 1994 to $15.0 million in 1995, an increase of 77.9%, and increased as
a percentage of the total revenues from 10.2% in 1994 to 15.7% in 1995. The
increases reflect the growth in the Company's business, economies of scale and
increased operating efficiencies.
Interest expense increased from $7.2 million in 1994 to $9.6 million in 1995,
an increase of $2.4 million or 33.3%, due primarily to higher levels of
indebtedness. The Company recorded extraordinary charges of $6.0 million in 1994
and $3.3 million in 1995 related to the early extinguishment of debt as a result
of refinancing and expanding its then existing credit agreement in 1994 and
again in 1995.
As a result of the foregoing factors, net income was $2.1 million in 1995
compared to a net loss of $4.8 million in 1994.
EBITDA increased from $17.4 million in 1994 to $23.6 million in 1995, an
increase of $6.2 million or 36.2%, and increased as a percentage of total
revenues from 21.0% in 1994 to 24.8% in 1995. The increase as a percentage of
total revenues reflected growth in the Company's business, economies of scale
and increased operating efficiencies.
-16-
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
acquisitions, capital expenditures and client acquisition costs.
Capital Investments
For 1994, 1995 and 1996, capital expenditures were $6.4 million, $16.3 million
and $23.5 million, respectively, and client acquisition costs were $1.9 million,
$2.2 million and $6.5 million, respectively.
In 1997, the Company expects its aggregate capital expenditures will
approximate $30 million. Of this amount, approximately $10 million is expected
to be related to the purchase of facilities. Of the remaining $20 million,
shelving for new records is the largest anticipated expenditure.
Acquisitions
In order to capitalize on industry consolidation opportunities, the Company
has actively pursued acquisitions since the beginning of 1994, which has
significantly impacted liquidity and capital resources. From 1994 to 1996, the
Company acquired 21 records management companies for an aggregate cash purchase
price of $104.3 million. Since the beginning of 1997, the Company has made four
acquisitions for an aggregate cash purchase price of $18.5 million. In
addition, the Company has signed a definitive agreement to purchase a regional
records management company for approximately $62.0 million, which it intends to
finance through borrowings under its credit facility. 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 $200.0 million principal amount of Notes, a small portion of which was
used to fund acquisitions.
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 $11.0 million, $17.5
million and $26.4 million for 1994, 1995 and 1996, respectively. The $6.5
million increase from 1994 to 1995 was primarily comprised of a $6.9 million
increase in net income and a $3.4 million decrease in working capital offset in
part by a $2.7 million decline in extraordinary charges. The $8.9 million
increase from 1995 to 1996 was primarily comprised of a $4.7 million increase in
depreciation and amortization and a $6.8 million decrease in working capital,
offset by a $1.6 million decrease in net income and a $1.3 million decline in
extraordinary charges.
Net cash flows used in investing activities were $13.9 million, $51.3 million
and $108.8 million for 1994, 1995 and 1996, 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 $2.8 million, $34.2
million and $82.9 million for 1994, 1995 and 1996, respectively. In 1994, the
Company's previous credit facility was expanded
-17-
to $120.0 million and included a substantial acquisition facility. In 1995, the
Company's previous credit facility was expanded to $170.0 million, including a
substantial acquisition facility, and provided funds for the acquisition of PLC
Command in Canada. In July 1996, the Company issued $200.0 million of 11-1/8%
Senior Subordinated Notes due 2006 (the "Notes") and used the net proceeds to
retire all of the debt outstanding under the Company's previous credit facility,
to purchase certain properties from affiliates of the Company, to redeem stock
from a shareholder of the Company, to fund an acquisition and for general
corporate purposes. In August 1996, the Company entered into its current Credit
Facility which provides $100.0 million in U.S. dollar borrowings and Cdn $35.0
million in Canadian dollar borrowings.
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 Indenture governing the Notes
also restrict borrowings under the Credit Facility. As of December 31, 1996,
$5.3 million was outstanding under the Credit Facility and the Company could
have borrowed an additional $28.9 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, 1996, was
approximately 6%.
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.
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 any 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.
-18-
Item 8. Financial Statements.
- ------ --------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants............................... 20
Consolidated Balance Sheets............................................ 21
Consolidated Statements of Operations.................................. 22
Consolidated Statements of Shareholders' Deficit....................... 23
Consolidated Statements of Cash Flows.................................. 24
Notes to Consolidated Financial Statements............................. 25
-19-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pierce Leahy Corp.:
We have audited the accompanying consolidated balance sheets of Pierce Leahy
Corp. (a New York corporation) and Subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' deficit and
cash flows for each of the three years in the period ended December 31, 1996.
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
Subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 28, 1997
20
PIERCE LEAHY CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31
-------------------------------------
ASSETS 1996 1995
------ ----------------- ----------------
CURRENT ASSETS:
Cash $ 1,254 $ 722
Accounts receivable, net of allowance for
doubtful accounts of $795 and $487 17,828 14,182
Inventories 611 762
Prepaid expenses and other 688 1,025
---------------- ----------------
Total current assets 20,381 16,691
---------------- ----------------
PROPERTY AND EQUIPMENT 158,154 109,755
Less- Accumulated depreciation and amortization (45,020) (35,328)
---------------- ----------------
Net property and equipment 113,134 74,427
---------------- ----------------
OTHER ASSETS:
Intangible assets, net 97,544 38,621
Other 3,761 1,589
---------------- ----------------
Total other assets 101,305 40,210
---------------- ----------------
$ 234,820 $ 131,328
================ ================
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,310 $ 1,478
Current portion of noncompete obligations 466 200
Accounts payable 6,757 4,641
Accrued expenses 20,563 9,533
Deferred revenues 9,218 8,978
---------------- ---------------
Total current liabilities 44,314 24,830
LONG-TERM DEBT 209,330 116,812
NONCOMPETE OBLIGATIONS 317 517
DEFERRED RENT 2,841 2,814
DEFERRED INCOME TAXES 3,456 3,492
COMMITMENTS AND CONTINGENCIES (Note 9)
REDEEMABLE WARRANTS -- 1,064
SHAREHOLDERS' DEFICIT (25,438) (18,201)
---------------- ----------------
$ 234,820 $ 131,328
================ ================
The accompanying notes are an integral part of these statements.
21
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
For the Year Ended
December 31
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
REVENUES:
Storage $ 75,900 $ 55,501 $ 47,123
Service and storage material sales 53,848 39,895 35,513
------------- ------------- -------------
Total revenues 129,748 95,396 82,636
------------- ------------- -------------
OPERATING EXPENSES:
Cost of sales, excluding depreciation and
amortization 73,870 55,616 49,402
Selling, general and administrative 20,007 16,148 15,882
Depreciation and amortization 12,869 8,163 8,436
Consulting payments to related parties -- 500 500
Non-recurring charges 3,254 -- --
------------- ------------- ------------
Total operating expenses 110,000 80,427 74,220
------------- ------------- -------------
Operating income 19,748 14,969 8,416
INTEREST EXPENSE 17,225 9,622 7,216
------------- ------------- -------------
Income before extraordinary item 2,523 5,347 1,200
EXTRAORDINARY CHARGE--Loss on early
extinguishment of debt 2,015 3,279 5,991
------------- ------------- -------------
NET INCOME (LOSS) 508 2,068 (4,791)
ACCRETION OF REDEEMABLE WARRANTS 1,561 889 16
------------- ------------- -------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ (1,053) $ 1,179 $ (4,807)
============= ============= =============
The accompanying notes are an integral part of these statements.
22
PIERCE LEAHY CORP.
------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
------------------------------------------------
(in thousands)
--------------
Common Stock
------------ Additional
Class Class Paid-in Accumulated
A B Capital Deficit Total
----- ----- ------------ ------------- ------------
BALANCE, JANUARY 1, 1994 $ -- $ -- $ 24 $ (14,532) $ (14,508)
Accretion of redeemable
warrants -- -- -- (16) (16)
Net loss -- -- -- (4,791) (4,791)
Distributions to shareholders -- -- -- (26) (26)
----- ----- ------- ------------ ------------
BALANCE, DECEMBER 31, 1994 -- -- 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 Class A
common stock (Note 7) -- -- -- (1,450) (1,450)
Deemed distribution due to
purchase of real estate and
other assets from related
parties (Note 10) -- -- -- (4,132) (4,132)
Net income -- -- -- 508 508
Distributions to shareholders -- -- -- (602) (602)
----- ----- ------- ------------ ------------
BALANCE, DECEMBER 31, 1996 $ -- $ -- $ 24 $ (25,462) $ (25,438)
===== ===== ======= ============ ============
The accompanying notes are an integral part of these statements.
23
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended
December 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 508 $ 2,068 $ (4,791)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Extraordinary charge 2,015 3,279 5,991
Depreciation and amortization 12,869 8,163 8,436
Gain on sale of property and equipment (32) -- --
Amortization of deferred financing costs 516 533 1,068
Imputed interest on long-term debt and
noncompete obligation -- -- 229
Increase in deferred rent 302 29 50
Foreign currency adjustment of long-term debt 31 -- --
Change in assets and liabilities, net of the effects
from the purchase of businesses--
(Increase) decrease in-
Accounts receivable, net (2,408) (360) (2,061)
Inventories 150 (347) (46)
Prepaid expenses and other 747 57 (91)
Other assets (486) (536) 255
Increase (decrease) in-
Accounts payable 1,630 (978) 1,763
Accrued expenses 10,732 4,693 (170)
Deferred revenues (8) 921 367
Deferred income taxes (128) -- --
----------- ----------- -----------
Net cash provided by operating activities 26,438 17,522 11,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for businesses acquired, net of cash acquired (61,176) (28,355) (4,663)
Capital expenditures (23,493) (16,288) (6,352)
Purchase of real estate and other assets from related parties (11,018) -- --
Client acquisition costs (6,477) (2,245) (1,905)
Deposits on pending acquisitions (850) -- --
Increase in intangible assets (5,618) (4,274) (943)
Payments on noncompete agreements (333) (153) (70)
Proceeds from sale of property and equipment 123 -- --
----------- ----------- -----------
Net cash used in investing activities (108,842) (51,315) (13,933)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving line of credit 5,237 (900) (7,700)
Proceeds from issuance of long-term debt 210,229 128,420 76,850
Payments on long-term debt and capital lease obligations (118,570) (90,958) (61,195)
Prepayment penalties and cancellation of warrants (2,625) -- (1,781)
Payment of debt financing costs (9,283) (2,366) (3,385)
Repurchase of Common stock (1,450) -- --
Distributions to shareholders (602) (39) (26)
----------- ----------- -----------
Net cash provided by financing activities 82,936 34,157 2,763
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 532 364 (170)
CASH, BEGINNING OF YEAR 722 358 528
----------- ----------- -----------
CASH, END OF YEAR $ 1,254 $ 722 $ 358
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE--CASH PAID FOR INTEREST $ 7,443 $ 8,356 $ 6,738
=========== =========== ===========
The accompanying notes are an integral part of these statements.
24
PIERCE LEAHY CORP.
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1996
-----------------
(In thousands except share data)
--------------------------------
1. BACKGROUND:
----------
Pierce Leahy Corp. and its majority-owned subsidiary, Pierce Leahy Command
Company (together, 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Pierce Leahy Corp.
and its 99%-owned subsidiary, Pierce Leahy Command Company. 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.
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
25
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
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 represent the average initial contract term.
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 of the 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 and $75 in claims
per insured individual per year in 1996 and 1995, respectively, 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
- ------------
The Company is a Subchapter S corporation and, therefore, any taxable income or
loss for federal income tax purposes is passed through to the shareholders.
While not subject to federal income taxes, the Company is subject to income
taxes in certain states. The Company reports certain expenses in different
periods for financial reporting and income tax purposes. In addition, the
carrying value of certain assets acquired exceeded their tax bases. If the
Subchapter S corporation status was terminated, a net deferred income tax
liability of approximately $6,600 would need to be recorded.
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 have been provided for taxes which may be
triggered if the Company disposes of certain assets acquired in connection with
an acquisition.
Revenue Recognition
- -------------------
Storage and service revenues are recognized in the month the respective service
is provided. Storage material sales are recognized when shipped to the customer.
Deferred revenues represent amounts invoiced for storage services in advance of
the rendering of the services. The costs of storage and service revenues are not
separately distinguishable, as the revenue producing activities are
interdependent and costs are not directly attributable or allocable in a
meaningful way to those activities.
26
Change in Accounting Estimates
- ------------------------------
Effective January 1, 1995, the Company revised its estimates of the useful lives
of certain long-term assets, as management re-evaluated in 1995 the appropriate
useful lives of these types of assets given the significant increase in the
level of capital expenditures and payments for businesses acquired (see Note 13)
over prior years. The revised useful lives were determined based on an analysis
of the Company's actual experiences in the use of such assets, along with other
information gained during the acquisition process and the availability of other
industry data. The revised useful lives are as follows:
Useful Life (Years)
---------------------
Long-Term Asset Old New
------------------------- ------- -------
Buildings 25 40
Warehouse equipment 12 12-20
Client acquisition costs 3 6
Other intangibles 3 10
Goodwill 5-20 30
The change in accounting estimates was effective January 1, 1995, and the
aggregate effect of adopting these revised lives was to decrease amortization
and depreciation expense and increase net income for the year ended December 31,
1995 by approximately $4,868.
Foreign Currency Translation
- ----------------------------
The balance sheets and statements of operations of the Canadian operations are
translated into U.S. dollars using the rates of exchange at period end. All
foreign currency transaction gains and losses are included in operations in the
period in which they occur. The cumulative translation adjustment at December
31, 1996 and 1995 was not material to the consolidated financial statements.
New Accounting Pronouncements
- -----------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The
Company has adopted the disclosure requirement of this pronouncement for the
year ended December 31, 1996 (see Note 8). The adoption of this pronouncement
had no impact on the Company's consolidated statements 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 Senior Subordinated
Notes at December 31, 1996 were $200,000 and $182,648. The fair value of the
Senior Subordinated Notes was estimated based on the quoted market prices
offered for the Company's publicly traded debt securities.
27
3. PROPERTY AND EQUIPMENT:
----------------------
December 31
-----------------------------
Life 1996 1995
-------------- ------------- --------------
Land -- $ 7,353 $ 4,780
Buildings and improvements 10-40 years 57,296 35,758
Warehouse equipment (primarily shelving) 12-20 years 71,773 53,943
Data processing equipment and software 7 years 14,363 10,684
Furniture and fixtures 7 years 3,823 2,970
Transportation equipment 5 years 3,546 1,620
------------- --------------
158,154 109,755
Less- Accumulated depreciation
and amortization (45,020) (35,328)
------------- --------------
Net property and equipment $ 113,134 $ 74,427
============= ==============
Depreciation expense was $6,652, $4,325 and $5,066 for the years ended December
31, 1996, 1995, and 1994, respectively.
4. INTANGIBLE ASSETS:
-----------------
December 31
-----------------------------
1996 1995
------------- --------------
Goodwill $ 69,417 $ 25,857
Client acquisition costs 15,157 8,680
Noncompete agreements 11,287 6,980
Deferred financing costs 9,267 2,248
Other intangible assets 13,377 9,399
------------- --------------
118,505 53,164
Less- Accumulated amortization (20,961) (14,543)
------------ -----------
Net intangible assets $ 97,544 $ 38,621
============ ===========
December 31, 1996
--------------------------------------------------
Accumulated Net Book
Life Cost Amortization Value
------------- ------------ ------------------ ------------
Goodwill 30 years $ 69,417 $ (3,817) $ 65,600
Client acquisition costs 6 years 15,157 (5,052) 10,105
Noncompete agreements 1 - 7 years 11,287 (6,976) 4,311
Deferred financing costs 10 years 9,267 (385) 8,882
Other intangible assets 3 - 15 years 13,377 (4,731) 8,646
------------ ------------------ ------------
$ 118,505 $ (20,961) $ 97,544
============ ================== ============
28
Amortization of all intangible assets, other than deferred financing costs which
are charged to interest expense, was $6,217, $3,838 and $3,370 for the years
ended December 31, 1996, 1995, and 1994, respectively. Amortization of deferred
financing costs was $516, $533, and $1,068 for the years ended December 31,
1996, 1995, and 1994, respectively. Capitalized client acquisition costs were
$6,477, $2,245, and $1,905 and related amortization expense was $1,688, $909 and
$1,536 for the years ended December 31, 1996, 1995, and 1994, respectively.
The Company continually evaluates whether events or circumstances have occurred
that indicate that the remaining useful lives of the intangible assets should be
revised or that the remaining balance of such assets may not be recoverable. As
of December 31, 1996, the Company believes that no revisions to the remaining
useful lives or write-downs of intangible assets are required.
5. ACCRUED EXPENSES:
----------------
December 31
------------------------------------
1996 1995
----------------- ---------------
Accrued salaries and commissions $ 2,613 $ 2,190
Accrued vacation 2,866 2,140
Accrued interest 9,840 583
Other 5,244 4,620
----------------- ---------------
$ 20,563 $ 9,533
================= ===============
6. LONG-TERM DEBT:
--------------
December 31
------------------------------------
1996 1995
----------------- ---------------
11-1/8% Senior Subordinated Notes, due 2006 $ 200,000 $ --
Canadian Revolver, interest at prime (5.4% at
December 31, 1996) 5,327 --
Seller Notes 7,600 --
Mortgage Notes 3,679 --
Borrowings under previous credit agreement
(repaid in July 1996) -- 118,208
Other 34 82
----------------- ---------------
216,640 118,290
Less- Current portion (7,310) (1,478)
----------------- ----------------
$ 209,330 $ 116,812
================= ================
29
In July 1996, the Company issued $200,000 of Senior Subordinated Notes (the
"Notes") in a private offering. The 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 Notes mature on July 15, 2006, and bear interest at 11-1/8%
per year , payable semiannually in arrears on January 15 and July 15, commencing
January 15, 1997. The proceeds from the sale of the 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 10), to redeem stock from a shareholder (see Note 7), to fund an
acquisition and for general purposes. The Company must comply with all financial
and operating covenants under the indenture for the Notes while the Notes are
outstanding.
In August 1996, the Company entered into a new credit facility (the "Credit
Facility") providing a revolving line of credit of U.S. $100 million in
borrowings and CDN $35 million in borrowings by the Company's Canadian
subsidiary. The Credit Facility is senior to all other indebtedness the Company
may have and is secured by the stock of the Company's shareholders. Borrowings
under the facility bear interest at prime plus an applicable margin, or at LIBOR
plus an applicable margin, at the option of the Company. In addition to interest
and other customary fees, the Company is obligated to remit a fee of 0.375% per
year on unused commitments, payable quarterly. The aggregate available
commitment under the Credit Facility will be reduced on a quarterly basis,
beginning September 30, 1999. The Credit Facility matures on June 30, 2002,
unless previously terminated. The Company must comply with all financial and
operating covenants under the Credit Facility during the term of the agreement.
The Company's available borrowing capacity under the Credit Facility is
contingent upon the Company meeting certain financial ratios and other criteria.
The highest amount outstanding under the current Canadian revolver during the
year ended December 31, 1996, was $5,691. The average amount outstanding on the
Canadian revolver during the year was $5,037, while the weighted average
interest rate was 5.8%. There were no borrowings under the current U.S. revolver
in 1996. The highest amount outstanding under the previous credit facility for
the year ended December 31, 1996 was $6,582, the average amount outstanding was
$3,251, and the weighted average interest rate was 9.62%.
In connection with certain acquisitions completed in 1996, notes for $7,600 were
issued to the sellers. The notes bear interest at 5% per year and $7,100 was
repaid in 1997. The remaining note is due in 1998.
In connection with the purchase of real estate from related parties (see Note
10) and an acquisition completed in 1996, the Company assumed $1,114 and $2,630
of mortgage notes, respectively. The notes bear interest at 10.5% and 8%,
respectively, and require monthly principal and interest payments of $20 and
$22, with balloon payments due in 2002 and 2001, respectively.
30
Future scheduled principal payments on the Company's long-term debt at December
31, 1996 are as follows:
1997 $ 7,310
1998 705
1999 207
2000 218
2001 231
2002 and thereafter 207,969
----------
$ 216,640
----------
Upon entering into the previous credit facilities in 1994 and 1993, the Company
issued warrants to certain lenders to purchase common stock. Warrants to
purchase 52 shares at $3 per share were issued in 1994 and 217 shares at $.01
per share were issued in 1993. Management assigned an initial value of $87 to
the 1994 warrants and $338 to the 1993 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 shareholders' deficit in the accompanying financial statements. The
warrants were redeemed for $2,625 in 1996 and there are no outstanding warrants
at December 31, 1996.
Debt refinancings occurred in 1996, 1995 and 1994, resulting in the write-off of
previously deferred financing costs of $2,015, $2,779 and $3,980, respectively,
and prepayment and other charges (including the write-off of unamortized debt
discount) of $500 in 1995 and $2,011 in 1994. Such write-offs and charges have
been recorded as extraordinary items in the accompanying consolidated statements
of operations.
7. COMMON STOCK:
------------
At December 31, 1996 and 1995, the Company's common stock was comprised of the
following:
Class A Class B
----------- -----------
Par value $ .01 $ .01
Shares authorized 1,000,000 1,000,000
Shares issued and outstanding--1996 900 9,000
Shares issued and outstanding--1995 1,000 9,000
In 1996, the Company redeemed 100 shares of Class A common stock for $1,450 and
canceled these shares.
31
8. STOCK OPTIONS:
-------------
In September 1994, the Company established a nonqualified stock option plan
which provides for the granting to key employees of options to purchase an
aggregate of 1,141 shares of common stock. The shares available for grant were
increased by 269 in December 1996. Options to purchase 340 shares at $6 per
share were granted on January 1, 1996 and options to purchase 567 shares at $5
per share were granted on January 1, 1995. An additional option grant for 145
shares at $5 per share was made on January 1, 1997. Option grants, when vested,
are exercisable at the earlier of the tenth anniversary of the date of grant or
the first date on which the Company ceases to be an S Corporation, and have an
exercise price equal to the fair market value of the common stock on the date of
grant. Fair market value is determined based on a formula, as defined in the
option plan. The options vest in five equal annual installments beginning on the
first anniversary of the date of grant. At December 31, 1996, options for 113
shares were vested. As of December 31, 1996 and 1995, no options were
exercisable.
At December 31, 1996, the total options outstanding are 907 with exercise prices
between $5 to $6 and a weighted average exercise price of $6. The options
contain no expiration dates, however, no options are exercisable. The fair value
of each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions used for the
grants in 1996 and 1995.
1996 1995
---------- ----------
Risk free interest rates 5.6% 8.0%
Expected lives of options 7 years 7 years
Expected dividend yields N/A N/A
Expected volatility 15% 15%
The fair value of each option granted in 1996 and 1995 is $2, as determined
under the provisions of Statement of Financial Accounting Standards No. 123. The
Company's net income would have been reduced and the following pro forma results
would have been reported had compensation cost been recorded for the fair value
of the options granted:
1996 1995
---------- ----------
Net income, as reported $ 508 $ 2,068
Pro forma net income 91 1,799
The Statement of Financial Accounting Standards No. 123 method of accounting is
applied only to options granted 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.
32
9. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Operating Leases
- ----------------
At December 31, 1996, the Company was obligated under noncancelable 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:
1997 $ 22,632
1998 21,136
1999 18,870
2000 16,761
2001 15,566
2002 and thereafter 39,487
----------
$ 134,452
==========
Rent expense was approximately $17,008, $14,098, and $12,262 for the years ended
December 31, 1996, 1995 and 1994, 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 $9,019, $8,201, and $7,658 for the years ended December
31, 1996, 1995, and 1994, 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 10).
Other Matters
- -------------
The Company has entered into a consulting agreement with a shareholder of the
Company and consulting agreements with several of the former owners of acquired
businesses (see Note 12). These agreements require the following minimum
payments:
1997 $ 480
1998 98
1999 40
2000 40
2001 40
2002 and thereafter 130
----------
$ 828
==========
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 financial position or results of operations.
33
10. RELATED PARTY TRANSACTIONS:
--------------------------
In July 1996, the Company purchased certain real estate previously leased and
other assets from two partnerships, whose partners are 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 and the deferred
rent liability on the leases was eliminated as a credit to shareholders'
deficit. The $4,312 difference between the purchase price and the depreciated
cost was charged to shareholders' 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 cost 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 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 is the managing director. The fees were approximately
$800, $700 and $800 in 1996, 1995 and 1994, respectively.
In December 1993, the Company borrowed $80 from a shareholder which bears
interest at 7%. The note was repaid in 1996.
11. EMPLOYEE BENEFIT PLANS:
----------------------
The Company maintains a discretionary profit sharing and a 401 (k) plan for
substantially all full-time employees over the age of 20-1/2 and with more than
1,000 hours of service. Participants in the 401(k) plan may elect to defer a
specified percentage of their compensation on a pretax basis. The Company is
required to make matching contributions equal to 25% of the employee's
contribution up to a maximum of 2% of the employee's annual compensation.
Participants become vested in the Company's matching contribution over three to
seven years. The expense relating to these plans was $1,122, $591, and $506 for
the years ended December 31, 1996, 1995 and 1994, respectively.
12. STOCK PURCHASE AGREEMENTS:
-------------------------
The Company and certain shareholders are parties to an agreement which provides
that, in the event of a shareholder's desire to transfer his ownership interest,
the other shareholders party to the agreement and/or the Company have the right
of first refusal to purchase the stock under the terms specified in the
agreement. The agreement also provides that, in the event of a shareholder's
death, the Company will purchase the stock from the estate of the deceased under
the terms and at the amount per share, subject to periodic adjustment, specified
in the agreement. The purchase would be funded, in part, from the proceeds of
insurance policies currently in place ($37,700 face value).
34
13. ACQUISITIONS:
------------
In 1995, the Company completed five acquisitions of records management
businesses for an aggregate cash purchase price of $28,994. The most significant
of these acquisitions was for $16,022 in October 1995; all others were
individually less than $5,000. 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). In addition to these cash payments, an acquisition in 1995 provided for a
$800 noncompete obligation payable over three years and an acquisition during
1996 provided for a $400 noncompete obligation payable over one year. The
noncompete liability at December 31, 1996 was $783. Each of these acquisitions
was accounted for using the purchase method of accounting and, accordingly, the
results of operations for each acquisition have been included in the
consolidated results of the Company from the respective acquisition dates. The
excess of the purchase price over the underlying fair value of the assets and
liabilities acquired has been allocated to goodwill ($17,549 and $43,062 in 1995
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 $498 at December 31, 1996 (see
Note 9).
A summary of the cash paid for the purchase price as of the acquisitions is as
follows:
1996 1995
---------- ----------
Fair value of assets acquired $ 82,515 $ 36,171
Liabilities assumed (1,896) (7,177)
Cash acquired (1,013) (639)
---------- ----------
Net cash paid $ 79,606 $ 28,355
========== ==========
Included in the 1996 amounts are $18,917 of fair value of assets acquired, $464
of liabilities assumed, $23 of cash acquired and $18,430 of net cash paid on
acquisitions that were completed subsequent to December 31, 1996.
The following unaudited pro forma information shows the results of the Company's
operations for the years ended December 31, 1996 and 1995 as though each of the
completed acquisitions had occurred as of January 1, 1995:
Year Ended December 31
-------------------------------
1996 1995
------------- ------------
Total revenues $ 150,788 $ 139,755
Net income 1,721 2,357
35
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, 1995, 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.
Subsequent to December 31, 1996, the Company signed a definitive agreement to
purchase a regional records management company for approximately $62,000, which
it intends to finance through borrowings under its credit facility. The
acquisition is subject to due diligence and customary conditions.
36
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.
- ------- --------------------------------------------------
Set forth below is certain information regarding the Company's directors,
executive officers and other significant management personnel:
Name Age Position
---- --- --------
Leo W. Pierce, Sr........ 78 Chairman of the Board
J. Peter Pierce.......... 50 President, Chief Executive Officer and Director
Douglas B. Huntley....... 36 Vice President, Chief Financial Officer and Director
Joseph A. Nezi........... 50 Vice President, Sales and Marketing
David Marsh.............. 48 Vice President, Chief Information Officer
Ross M. Engelman......... 33 Vice President, Operations--South
J. Michael Gold.......... 37 Vice President, Operations--Northeast
Christopher J. Williams.. 37 Vice President, Operations--West
Leo W. Pierce, Jr........ 52 Vice President, Contracts Administration and
Director
Michael J. Pierce........ 46 Vice President, Equipment Sales and Distribution
Group and Director
Raul A. Fernandez........ 46 Vice President, Information Services
Joseph P. Linaugh........ 47 Vice President, Treasurer
Thomas Grogan............ 42 Vice President and Controller
Lisa G. Goldschmidt...... 28 General Counsel
Alan B. Campell.......... 46 Director
Delbert S. Conner........ 67 Director
Leo W. Pierce, Sr. has served as Chairman of the Board of the Company since
its formation in 1957. Mr. Pierce served as the Chief Executive Officer of the
Company from formation to January 1995 and as its President from formation to
January 1984. Prior to forming the Company, Mr. Pierce was a sales
representative for Lefebure Corporation and an accountant for Price Waterhouse.
Mr. Pierce holds a B.A. degree from St. John's University.
J. Peter Pierce has served as President and Chief Executive Officer of the
Company since January 1995 and has been a director since the early 1970s. Mr.
Pierce served as President and Chief Operating Officer of the Company from
January 1984 to January 1995, prior to which time he served in various other
capacities with the Company, including as Vice President of Operations, General
Manager of Connecticut, New York and New Jersey and Sales Executive. Mr. Pierce
attended the University of Pennsylvania and served in the United States Marine
Corps.
Douglas B. Huntley has served as Chief Financial Officer since January 1994
and a director of the Company since September 1994. From May 1993 until December
1993, Mr. Huntley served as Assistant
-37-
to the President of the Company. From August 1989 to March 1993, he was an
Executive Advisor and a Project Manager of Rockwell International in connection
with a multi-billion dollar NASA contract. Prior thereto, Mr. Huntley was an
accountant for Deloitte Haskin & Sells. Mr. Huntley holds a B.S. degree from
Bucknell University and an M.B.A. from the University of Pennsylvania, Wharton
School of Business and is a Certified Public Accountant.
Joseph A. Nezi has served as Vice President, Sales and Marketing of the
Company since September 1991. From July 1990 to September 1991, Mr. Nezi was
the Vice President, Sales and Marketing of Delaware Valley Wholesale Florist
where he was responsible for the sales and marketing of a firm with $30 million
of sales. Prior thereto, Mr. Nezi was the President and General Manager of
Pomerantz and Company following 17 years in various sales positions of
increasing responsibility with Xerox. Mr. Nezi holds a B.A. degree from
Villanova University.
David Marsh has served as Vice President and Chief Information Officer of the
Company since January 1995 and was Assistant to the President of the Company
from November 1994 to December 1994. From August 1986 to May 1994, Mr. Marsh
was Manager--Corporate Relations for the Massachusetts Institute of Technology
where he was responsible for the management and development of MIT's
relationships with U.S. and European information technology, communications and
service companies. Prior to August 1986, Mr. Marsh held positions of President
of MEA Management Systems, Director of Corporate Strategic Planning with Public
Service Company of New Hampshire, Senior Consultant with Booz, Allen & Hamilton
and Second Vice President with the Chase Manhattan Bank. Mr. Marsh holds a B.S.
degree from University of Salford, U.K. and S.M. degrees in Management and
Nuclear Engineering from MIT.
Ross M. Engelman has served as Vice President, O