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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-13045
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IRON MOUNTAIN INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2588479
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
745 ATLANTIC AVENUE, BOSTON, MASSACHUSETTS 02111
(Address of principal executive offices) (Zip Code)
617-535-4766
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value per share ("Common Stock") 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. /X/
As of March 1, 2001, the aggregate market value of the Common Stock of the
registrant held by non-affiliates of the registrant was $1,625,654,468.28 based
on the closing price on the New York Stock Exchange on such date.
Number of shares of the registrant's Common Stock at March 1, 2001:
55,440,279
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IRON MOUNTAIN INCORPORATED
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters....................................... 13
Item 6. Selected Consolidated Financial and Operating Information... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 26
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 26
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 27
Item 11. Executive Compensation...................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 33
Item 13. Certain Relationships and Related Transactions.............. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 36
EXPLANATORY NOTE
On February 1, 2000, Iron Mountain Incorporated, a Delaware corporation,
acquired Pierce Leahy Corp., a Pennsylvania corporation. The acquisition was
structured as a reverse merger with Pierce Leahy surviving and immediately
changing its name to Iron Mountain Incorporated. Immediately after the merger
former stockholders of Iron Mountain owned approximately 65% of the Company's
Common Stock. Because of this share ownership, Iron Mountain is considered the
acquiring entity for accounting purposes. We use the terms "Iron Mountain," the
"Company" or "we" herein to refer to both Iron Mountain Incorporated, prior to
the merger, and the combined company after the merger.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made and incorporated by reference statements in this annual report
on Form 10-K that constitute "forward-looking statements" as that term is
defined in the federal securities laws. These forward-looking statements concern
our operations, economic performance and financial condition. The
forward-looking statements are subject to various known and unknown risks,
uncertainties and other factors. When we use words such as "believes,"
"expects," "anticipates," "estimates" or similar expressions, we are making
forward-looking statements.
i
Although we believe that our forward-looking statements are based on
reasonable assumptions, our expected results may not be achieved, and actual
results may differ materially from our expectations. Important factors that
could cause actual results to differ from expectations include, among others:
- difficulties related to the integration of acquisitions generally and,
more specifically, the integration of our operations and those of Pierce
Leahy;
- unanticipated costs as a result of our acquisition of Pierce Leahy;
- uncertainties related to international expansion;
- uncertainties related to expansion into digital businesses, including the
timing of introduction and market acceptance of the Company's products and
services;
- rapid and significant changes in technology;
- the cost and availability of appropriate storage facilities;
- changes in customer preferences and demand for our services;
- our significant indebtedness and the cost and availability of financing
for contemplated growth; and
- other general economic and business conditions.
These cautionary statements should not be construed by you to be exhaustive,
and they are made only as of the date of this Annual Report on Form 10-K. You
should read these cautionary statements as being applicable to all
forward-looking statements wherever they appear. We assume no obligation to
update or revise the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements.
ii
PART I
ITEM 1. BUSINESS.
A. DEVELOPMENT OF BUSINESS.
Iron Mountain is the leader in records and information management services
("RIMS"). The Company is an international, full-service provider of records and
information management and related services, enabling customers to outsource
these functions. Iron Mountain has a diversified customer base that includes
more than half of the Fortune 500 and numerous commercial, legal, banking,
healthcare, accounting, insurance, entertainment and government organizations.
The Company provides storage for all major media, including paper, which is the
dominant form of records storage, magnetic media, including computer tapes,
microfilm and microfiche, master audio and videotapes, film and optical disks,
X-rays and blueprints. Iron Mountain's principal services provided to its
storage customers include courier pick-up and delivery, filing, retrieval and
destruction of records, database management, customized reporting and disaster
recovery support. The Company also sells storage materials, including cardboard
boxes and magnetic media, and provides confidential destruction, consulting,
facilities management, fulfillment and other outsourcing services.
Iron Mountain was founded in 1951 in an underground facility near Hudson,
New York. Now in its 50th year, the Company has experienced tremendous growth
and organizational change particularly since successfully completing the initial
public offering of its common stock in February 1996. Over those five years, the
Company has built itself from a regional business with limited product offerings
and annual revenues of $104 million for 1995 into the global leader in records
and information management services providing a full range of services to
customers in 114 markets around the world. For the year ended December 31, 2000,
Iron Mountain had total revenues of approximately $1 billion.
This growth has been accomplished primarily through the acquisition of 68
domestic and 16 international records management companies, including six
acquisitions completed in the first quarter of 2001. The goal of the Company's
current acquisition program is to supplement internal growth by continuing to
establish a footprint in targeted international markets and adding fold-in
acquisitions both domestically and internationally. Having substantially
completed its North American geographic expansion, the Company is shifting its
focus from growth through acquisitions to internal revenue growth. As a result
of this shift, the Company expects that internal revenue growth will comprise an
increasing percentage of total revenue growth. The Company intends to achieve
this internal growth through the use of aggressive selling efforts to acquire
new customers and capture market share and by offering a wide range of
complementary and ancillary services to expand its new and existing customer
relationships.
On February 1, 2000, Iron Mountain completed its most important acquisition
to date by merging with Pierce Leahy in a stock-for-stock merger valued at
$1.0 billion, including the assumption of debt and related transaction costs.
Since the merger, the Company has been integrating the cultures, operating
systems and procedures, and information technology systems of Iron Mountain and
Pierce Leahy. The integration process is continuing and is expected to proceed
for up to two more years.
As of December 31, 2000, the Company provided services to over 125,000
customer accounts in 77 markets in the United States and 37 markets outside of
the United States. Iron Mountain employs over 10,000 people and operates more
than 625 records management facilities in the United States, Canada, Europe and
Latin America.
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B. DESCRIPTION OF BUSINESS.
THE RECORDS AND INFORMATION MANAGEMENT SERVICES INDUSTRY
OVERVIEW
Companies in the RIMS industry store and manage information in a variety of
media formats, which can broadly be divided into paper and electronic records,
and provide a wide range of services related to the records stored. The Company
refers to its general paper storage and management services as "business records
management." Paper records are defined to include paper documents, as well as
all other non-electronic media such as microfilm and microfiche, master audio
and videotapes, film, X-rays and blueprints. Electronic records include various
forms of magnetic media such as computer tapes and hard drives and optical
disks. The Company refers to its electronic records storage and management
services as "data security services" and "digital archiving services."
PAPER RECORDS
Paper records may be broadly divided into two categories: active and
inactive. Active records relate to ongoing and recently completed activities or
contain information that is frequently referenced. Active records are usually
stored and managed on-site by the organization that originated them to ensure
ready availability. Inactive paper records are the principal focus of the RIMS
industry. Inactive records consist of those records that are not needed for
immediate access but which must be retained for legal, regulatory and compliance
reasons or for occasional reference in support of ongoing business operations.
Based on industry studies, the Company believes that inactive records make up
approximately 80% of all paper records. A large and growing specialty subset of
the paper records market is medical records. These are active and semi-active
records that are often stored off-site with and serviced by a RIMS vendor.
ELECTRONIC RECORDS
Electronic records management focuses on the storage of, and related
services for, computer media that are either a back-up copy of recently
processed data or archival in nature. Back-up data exists because of the need of
many businesses to maintain back-up copies of data in order to be able to
operate in the event of a system failure, casualty loss or other disaster. It is
customary for data processing groups to rotate back-up tapes to off-site
locations on a regular basis and to require multiple copies of such information
at multiple sites. In addition to the management of physical back-up copies of
data, the Company is introducing new services that allow for the direct
transfer, storage and retrieval of back-up data between its customers and its
secure storage facilities via public broadband communications networks. The
Company refers to these services as "e-Vaulting."
Archival data is generally not needed for access but is retained for legal,
regulatory and compliance reasons or for occasional reference in support of
ongoing business operations. Historically, archival data, as well as back-up
data, has been stored on physical media such as computer tapes or optical disks.
The Company is collaborating with other companies to develop technologies to
provide storage and related services for this data electronically in its
original digital format. Customers' data will be captured via telecommunication
lines or the Internet. Based on the nature of the data, customers can choose to
store their data on-line for real-time access, near-line access for a slightly
lower cost or off-line on computer tapes or disks for less time-critical data.
The Company refers to these developing services as "digital archiving services."
GROWTH OF MARKET
The Company believes that the volume of stored paper and electronic records
will continue to increase for a number of reasons, including: (i) the rapid
growth of inexpensive document producing
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technologies such as facsimile, desktop publishing software and desktop
printing, (ii) the continued proliferation of data processing technologies such
as personal computers and networks, (iii) regulatory requirements,
(iv) concerns over possible future litigation and the resulting increases in
volume and holding periods of documentation, (v) the high cost of reviewing
records and deciding whether to retain or destroy them, (vi) the failure of many
entities to adopt or follow policies on records destruction and (vii) audit
requirements to keep back-up copies of certain records in off-site locations.
Despite the growth of new "paperless" technologies, such as the Internet and
e-mail, management believes that stored information remains predominantly
paper-based. These technologies have promoted the creation of hard copies of
such electronic information and have also led to increased demand for data
security services, such as the storage and off-site rotation of back-up copies
of magnetic media, and outsourcing support services that address the needs of
data center operations and disaster recovery programs. In addition, management
believes that the proliferation of digital information technologies and
distributed data networks has created an emerging need for efficient,
cost-effective, high quality solutions for electronic archiving and the
management of electronic documents.
CONSOLIDATION OF A HIGHLY FRAGMENTED INDUSTRY
Over the past several years, there has been consolidation in the highly
fragmented RIMS industry. Most RIMS companies serve a single local market, and
are often either owner-operated or ancillary to another business, such as a
moving and storage company. The Company believes that this trend will continue
because of the industry's capital requirements for growth, opportunities for
large RIMS providers to achieve economies of scale and customer demands for more
sophisticated technology-based solutions.
Management believes that the consolidation trend in the industry is also due
to, and will continue as a result of, the preference of certain large
organizations to contract with one vendor in multiple cities and countries for
multiple services. In particular, customers increasingly demand a single, large,
sophisticated company to handle all of their important business and electronic
records needs. Large, national and multinational companies are better able to
satisfy these demands than smaller competitors. The Company has made, and
intends to continue to make, acquisitions of its competitors, many of whom are
small, single city operators.
DESCRIPTION OF IRON MOUNTAIN'S BUSINESS
BUSINESS RECORDS MANAGEMENT
The hard copy business records stored by the Company's customers with the
Company by their nature are not very active. These types of records are stored
in cartons, which are packed by the customer. The Company uses bar-coded
tracking technologies known as the SAFEKEEPER-TM- system and the PIERCE LEAHY
USER SOLUTION(-Registered Trademark-) (PLUS(-Registered Trademark-)) system and
other procedures to ensure the integrity of the contents of a customer's cartons
and to efficiently store and later retrieve a customer's cartons. As a central
component of its integration plan for the Pierce Leahy transaction, the Company
has developed the SAFEKEEPERPLUS-TM- system, combining the architecture of PLUS
and the enhanced functionality of SAFEKEEPER, and has begun a city-by-city
conversion program that is expected to be completed in 2002. Storage charges are
generally billed monthly on a per storage unit basis, usually either per carton
or per cubic foot of records, and include the provision of space, racking,
computerized inventory and activity tracking and physical security.
DATA SECURITY SERVICES
Data security services consist of the storage and rotation of back-up
computer media as part of corporate disaster and business recovery plans.
Computer tapes, cartridges and disk packs are
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transported off-site by the Company's courier operations on a scheduled basis to
secure, climate-controlled facilities, where they are available to customers
24 hours a day, 365 days a year, to facilitate data recovery in the event of a
disaster. Iron Mountain uses various information technology systems such as
MEDIALINK-TM- and SECUREBASE-TM- software to manage this process. Iron Mountain
also manages tape library relocation and supports disaster recovery testing and
execution. The Company is now in the early stages of offering e-Vaulting as part
of its data security services product line. E-Vaulting allows customers
different levels of electronic transfer, storage and recovery of critical
back-up data ranging from real time transfers using storage silos to electronic
transfer and off-line storage for less immediate needs.
HEALTHCARE INFORMATION SERVICES
Healthcare information services principally include the handling, storage,
filing, processing and retrieval of medical records used by hospitals, private
practitioners and other medical institutions. Medical records tend to be more
active in nature and are typically stored on specialized shelving systems that
provide access to individual files. Healthcare information services also include
recurring project work and ancillary services. Recurring project work involves
the on-site removal of aged patient files and related computerized file
indexing. Ancillary healthcare information services include release of
information, temporary staffing, contract coding, facilities management and
imaging.
VITAL RECORDS SERVICES
Vital records contain critical or irreplaceable data such as master audio
and video recordings, film, software source code and other highly proprietary
information. Vital records may require special facilities or services, either
because of the data they contain or the media on which they are recorded. The
Company's charges for providing enhanced security and special climate-controlled
environments for vital records are higher than for typical storage functions.
The Company provides the same ancillary services for vital records as it
provides for its other storage operations.
SERVICE AND COURIER OPERATIONS
Service and courier operations are an integral part of a comprehensive
records management program for all physical media including paper and electronic
records. They include adding records to storage, temporary removal of records
from storage, refiling of removed records, permanent withdrawals from storage
and destruction of records. Service charges are generally assessed for each
procedure on a per unit basis. The SAFEKEEPER, PLUS and SAFEKEEPERPLUS systems
control the service processes from order entry through transportation and
invoicing for business records while MEDIALINK and SECUREBASE manage the process
for the data security services business.
Courier operations consist primarily of the pickup and delivery of records
upon customer request. Charges for courier services are based on urgency of
delivery, volume and location and are billed monthly. As of December 31, 2000,
Iron Mountain was utilizing a fleet of more than 1,900 owned or leased delivery
vehicles.
DIGITAL ARCHIVING SERVICES
Iron Mountain currently provides storage and related services for computer
media, primarily computer tapes and optical disks, that is archival in nature.
In addition, the Company is collaborating with other companies to develop
technologies and is exploring opportunities to leverage its customer
relationships, geographic presence and brand image to provide additional
information management services for digital records. The growth rate of
mission-critical digital information is accelerating, driven in part by the use
of the Internet as a distribution and transaction medium. The rising cost and
increasing importance of digital information management, coupled with the
increasing availability of
4
telecommunications bandwidth at lower costs, may create meaningful opportunities
for Iron Mountain. The Company is cultivating partnerships with technology
providers to develop a number of applications.
The Company believes the issues encountered by customers trying to manage
their electronic records are similar to the ones they face in their business
records management programs and consist primarily of: (i) storage capacity and
the preservation of data; (ii) access to and control over the data in a secure
environment; and (iii) the need to keep electronic records due to regulatory
compliance or for litigation support. Products and services are currently being
developed to address these needs and expand the array of services offered by the
Company for electronic records.
ADDITIONAL SERVICES AND PRODUCTS
Iron Mountain offers a variety of additional services, which customers may
request or contract for on an individual basis. These services include
inventorying records, packing records into cartons or other containers, and
creating computerized indices of files and individual documents. The Company
also provides services for the management of active records programs. The
Company can provide these services, which generally include document and file
processing and storage, both off-site at its own facilities and by supplying its
own personnel to perform management functions on-site at the customer's
premises.
Other complementary lines of business operated by the Company include
fulfillment services and confidential destruction. Fulfillment services are
performed by the Company's wholly owned subsidiary, COMAC, Inc. COMAC stores
customer marketing literature and delivers this material to sales offices, trade
shows and prospective customers' sites based on current and prospective customer
orders. In addition, COMAC assembles custom marketing packages and orders, and
manages and provides detailed reporting on customer marketing literature
inventories.
Confidential destruction involves the shredding of sensitive documents for
corporate customers that, in many cases, also use the Company's services for
management of less sensitive archival records. These services typically include
the scheduled pick-up of loose office records accumulated by customers in
specially designed containers provided by Iron Mountain. The Company currently
performs these services in 17 markets and seeks to expand its presence in this
business through acquisitions and internal start-ups.
In addition, the Company provides professional consulting services to large
customers, enabling them to develop and implement comprehensive records and
information management programs. Iron Mountain's consulting business draws on
the Company's experience in RIMS to analyze the practices of such companies and
assist them in creating more effective programs of records and information
management. The Company's consultants work with these customers to develop
policies for document review, analysis and evaluation and for scheduling of
document retention and destruction.
The Company also sells: (i) a full line of specially designed corrugated
cardboard, metal and plastic storage containers; (ii) magnetic media products
including computer tapes, cartridges and drives, tape cleaners and supplies and
CDs; and (iii) computer room equipment and supplies such as racking systems,
furniture, bar code scanners and printers.
The amount of the Company's revenues derived from business records
management, data security services and other operating segments (including
digital archiving services, confidential destruction and fulfillment services)
and other relevant financial data for fiscal years 1999 and 2000 is set forth in
Note 12 of Notes to Consolidated Financial Statements.
5
FINANCIAL CHARACTERISTICS OF IRON MOUNTAIN'S BUSINESS
Iron Mountain's financial model is based on the recurring nature of its
revenues. The historical predictability of this revenue stream and the resulting
EBITDA(1) allows the Company to operate with a high degree of financial
leverage. Since 1995, the Company has invested approximately $2.5 billion in
acquisitions, accounted for using the purchase method of accounting, as its
primary avenue of growth and in property, plant and equipment to support that
growth. Iron Mountain's primary financial goal has always been to increase
consolidated EBITDA, which is a source of funds for investment in continued
growth and for servicing indebtedness. Even as the Company shifts its focus from
growth through acquisitions to internal revenue growth, its primary financial
objective continues to be the growth in EBITDA in relation to capital invested
on a per share basis. Iron Mountain's business has the following financial
characteristics:
- RECURRING REVENUES. Iron Mountain derives a majority of its consolidated
revenues from fixed periodic, usually monthly, fees charged to customers
based on the volume of records stored. The Company's revenues from these
fixed periodic fees have grown for 48 consecutive quarters. Once a
customer places paper records in storage with the Company and until those
records are destroyed or permanently removed, for which the Company
typically receives a service fee, the Company receives recurring payments
for storage fees without incurring additional labor or marketing expenses
or significant capital costs. Similarly, contracts for the storage of
electronic back-up media consist primarily of fixed monthly payments. Over
each of the last five years, storage revenues, which are stable and
recurring, have accounted for approximately 60% of the Company's total
revenues. This stable and growing storage base also provides the
foundation for increases in revenues and EBITDA.
- HISTORICALLY NON-CYCLICAL BUSINESS. Iron Mountain has not experienced a
reduction of its business as a result of past general economic downturns,
although the Company can give no assurance that this would be the case in
the future. Management believes that the outsourcing of RIMS may
accelerate during economic downturns as companies focus on reducing costs
through outsourcing non-core operating functions. In addition, management
believes that companies that have outsourced RIMS are less likely during
economic downturns to incur the move-out costs and other expenses
associated with switching vendors or moving RIMS in-house.
- INHERENT GROWTH FROM EXISTING PAPER RECORDS CUSTOMERS. The Company's paper
records customers have on average generated additional Cartons(2) at a
faster rate than stored Cartons have been destroyed or permanently
removed. From January 1, 1996 through December 31, 2000, the Net Carton
Growth From Existing Customers(3) of Iron Mountain increased at an average
annual rate of approximately 6%. The Company believes the consistent
growth of its paper storage revenues is the result of a number of factors,
including: (i) the trend toward increased records retention,
(ii) customer satisfaction with the Company's services and (iii) the costs
and inconvenience of moving storage operations in-house or to another
provider of RIMS.
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1 EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, extraordinary items, other income, merger-related expenses and
stock option compensation expense. Merger-related expenses are primarily
those expenses directly related to the Company's merger with Pierce Leahy
that cannot be capitalized and include severance and pay-to-stay payments,
costs of exiting certain facilities, system conversion costs and other
transaction-related costs.
2 The term "Carton" is defined as a measurement of volume equal to a single
standard storage carton, approximately 1.2 cubic feet. The number of cartons
stored does not include storage volumes in the Company's vital records
services and data security services, which are described below.
3 The term "Net Carton Growth From Existing Customers" is defined as the
increase in net Cartons attributable to existing customers without giving
effect to the loss of approximately 1.0 million Cartons in fires attributed
to arson in March 1997 in two of Iron Mountain's facilities in South
Brunswick Township, New Jersey. See "Item 3. Legal Proceedings."
6
- DIVERSIFIED AND STABLE CUSTOMER BASE. As of December 31, 2000, the Company
had over 125,000 customer accounts in a variety of industries. The Company
currently provides services to more than half of the Fortune 500 and
numerous commercial, legal, banking, healthcare, accounting, insurance,
entertainment and government organizations. No customer accounted for more
than 2% of the Company's consolidated revenues for the year ended
December 31, 2000. From January 1, 1996 through December 31, 2000, average
annual permanent removals of Cartons, not including destructions,
represented approximately 4% of total Cartons stored.
- CAPITAL EXPENDITURES RELATED PRIMARILY TO GROWTH. The Company's RIMS
business requires limited annual capital expenditures made in order to
maintain the Company's current revenue stream. From January 1, 1996
through December 31, 2000, approximately 90% of Iron Mountain's aggregate
capital expenditures were growth-related investments, primarily in racking
systems, management information systems, new buildings and improvements to
existing facilities. These growth-related capital expenditures are
primarily discretionary and create additional capacity for increases in
revenues and EBITDA.
GROWTH STRATEGY
Iron Mountain's objective is to maintain its position as the leader in
records and information management services. Domestically, the Company seeks to
be one of the largest RIMS providers in each of its geographic markets.
Internationally, the objectives are to continue to capitalize on its expertise
in the RIMS industry and to make additional acquisitions and investments in
selected international markets. The Company's primary avenues of growth are:
(i) increased business with existing customers; (ii) additions of new customers;
(iii) the introduction of new products and services such as e-Vaulting, digital
archiving and confidential destruction; and (iv) selective acquisitions in new
and existing markets.
GROWTH FROM EXISTING CUSTOMERS
Existing Iron Mountain customers storing paper records contribute to storage
and services revenues growth because on average they generate additional Cartons
at a faster rate than old Cartons are destroyed or permanently removed. In order
to maximize growth opportunities from existing customers, the Company seeks to
maintain high levels of customer retention by providing premium customer service
through its local management staff.
Through its local account management staff, the Company leverages existing
business relationships with its customers by selling complementary services and
products. Services include records tracking, indexing, customized reporting,
vital records management and consulting services.
ADDITIONS OF NEW CUSTOMERS
The Company's sales force is dedicated to two primary objectives:
establishing new customer account relationships and expanding new and existing
customer relationships by offering a wide array of complementary services and
products. In order to accomplish these objectives, the sales force draws on the
Company's national marketing organization and senior management. As a result of
acquisitions and its decision to recruit additional qualified sales
professionals, the Company has increased the size of its sales force to
approximately 250 such professionals.
INTRODUCTION OF NEW PRODUCTS AND SERVICES
Iron Mountain continues to expand its menu of products and services. The
Company has significantly increased its presence in the confidential destruction
industry and is in the process of developing new e-Vaulting and digital
archiving services. These new products and services allow the
7
Company to further penetrate its existing customer accounts and attract new
customers in previously untapped markets.
GROWTH THROUGH DOMESTIC ACQUISITIONS
The Company's acquisition strategy includes both expanding geographically,
focusing primarily on the 100 largest U.S. markets, and increasing the Company's
presence and scale within existing markets through "fold-in" acquisitions. Iron
Mountain has a successful record of acquiring and integrating RIMS companies.
See "Completed Acquisitions." The Company intends to continue its domestic
acquisition program. However, given the small number of large acquisition
prospects and the Company's increased revenue base, future acquisitions are
expected to be less significant to overall domestic revenue growth than they
have been historically.
INTERNATIONAL GROWTH STRATEGY
Iron Mountain also intends to continue to make acquisitions and investments
in RIMS businesses outside the United States. The Company has acquired and
invested in, and seeks to acquire and invest in, RIMS companies in countries,
and, more specifically, markets within such countries, where it believes there
is sufficient demand from existing multinational customers or the potential for
growth. Since beginning its international expansion program in January 1999,
Iron Mountain, directly and through joint ventures, has expanded its operations
into Canada, Europe and Latin America. These transactions have taken, and may
continue to take, the form of acquisitions of the entire business or controlling
or minority investments, with a long-term goal towards full ownership. In
addition to the criteria the Company uses to evaluate domestic acquisition
candidates, Iron Mountain also evaluates the presence in the potential market of
existing Iron Mountain clients as well as the risks uniquely associated with an
international investment, including those risks described below.
The experience, depth and strength of local management are particularly
important in Iron Mountain's international acquisition strategy. As a result,
Iron Mountain has formed joint ventures with, or acquired significant interests
from, target businesses throughout Europe and Latin America. Iron Mountain
believes this strategy, rather than an outright acquisition, may, in certain
markets, better position the Company to expand the existing business, although
the Company's long-term goal is to acquire full ownership of each such business.
The local partner will benefit from Iron Mountain's expertise in the RIMS
industry and, in certain cases, Iron Mountain's technology, and Iron Mountain
will benefit from its local partner's knowledge of the market, relationships
with customers and its presence in the community.
Iron Mountain's international investments are subject to risks and
uncertainties relating to the indigenous political, social, regulatory, tax and
economic structures of other countries, as well as fluctuations in currency
valuation, exchange controls, expropriation and governmental policies limiting
returns to foreign investors. At this time, there can be no assurance as to
whether any international investment will be successful in achieving its
objectives.
The amount of the Company's revenues derived from international operations
and other relevant financial data for fiscal years 1998, 1999 and 2000 is set
forth in Note 12 of Notes to Consolidated Financial Statements. During 2000,
Iron Mountain derived approximately 12% of its revenues from outside of the
United States.
COMPLETED ACQUISITIONS
MERGER OF IRON MOUNTAIN AND PIERCE LEAHY
On February 1, 2000, Iron Mountain completed its most important acquisition
to date as it acquired Pierce Leahy, a Pennsylvania corporation, in a
stock-for-stock merger. Because the transaction
8
was structured as a reverse merger, Iron Mountain merged with and into Pierce
Leahy and Pierce Leahy survived the merger. Immediately after the merger, the
Company changed its name from Pierce Leahy Corp. to Iron Mountain Incorporated.
See Note 6 of Notes to Consolidated Financial Statements.
RECENT ACQUISITIONS
As part of its growth strategy, from January 1, 1998 through December 31,
2000, Iron Mountain acquired 44 RIMS businesses. The following table presents
certain information with respect to the acquisitions completed by the Company
between January 1, 1998 and December 31, 2000.
COMPONENTS OF PURCHASE PRICE CONSIDERATION
------------------------------------------
(DOLLARS IN MILLIONS)
TOTAL AGGREGATE CASH PAID FAIR VALUE OF TOTAL
REVENUES AND DEBT COMMON STOCK AND PURCHASE
NUMBER REPRESENTED(1) ASSUMED OPTIONS ISSUED PRICE
-------- --------------- ---------- ---------------- ----------
1998 Acquisitions................... 15 $152 $193 $ 67 $ 260
1999 Acquisitions................... 17 98 215 46 261
2000 Acquisitions(2)................ 12 401 732 447 1,179
- ------------------------
(1) Total annual aggregate revenues were calculated in each case by reference to
the revenues of each of the acquired businesses during the year in which
they were acquired. This calculation includes an estimate of total revenues
for the portion of the year of acquisition during which any such acquired
business was included in Iron Mountain's results of operations.
(2) The total purchase price for the 2000 Acquisitions includes $1.0 billion for
the acquisition of Pierce Leahy on February 1, 2000.
CUSTOMERS
The Company's customer base is diversified in terms of revenues and industry
concentration. Iron Mountain tracks customer accounts, which are based on
invoices. Accordingly, depending upon how many invoices have been arranged at
the request of a customer, one organization may represent multiple customer
accounts. As of December 31, 2000, the Company had over 125,000 customer
accounts in a variety of industries. The Company currently provides services to
more than half of the Fortune 500 and numerous commercial, legal, banking,
healthcare, accounting, insurance, entertainment and government organizations.
No customer accounted for more than 2% of the Company's consolidated revenues
for the year ended December 31, 2000.
COMPETITION; ALTERNATIVE TECHNOLOGIES
The Company competes with its current and potential customers' internal
records and information management services capabilities. The Company can
provide no assurance that these organizations will begin or continue to use an
outside company such as Iron Mountain for their future records and information
management services.
The Company competes with multiple RIMS providers in all geographic areas
where it operates. Iron Mountain believes that competition for customers is
based on price, reputation for reliability, quality of service and scope and
scale of technology and that it generally competes effectively based on these
factors.
Iron Mountain also competes with other RIMS providers for companies to
acquire. Some of the Company's competitors may possess substantial financial and
other resources. If any such competitor were to devote additional resources to
the RIMS business and such acquisition candidates or focus its strategy on Iron
Mountain's markets, Iron Mountain's results of operations could be adversely
affected.
9
Iron Mountain derives most of its revenues from the storage of paper
documents and related services. This storage requires significant physical
space. Alternative storage technologies exist, many of which require
significantly less space than paper. These technologies include computer media,
microform, CD-ROM and optical disk. To date, none of these technologies has
replaced paper as the principal means for storing information. However, the
Company can provide no assurance that its customers will continue to store most
of their records in paper format. A significant shift by Iron Mountain's
customers to storage of data through non-paper based technologies, whether now
existing or developed in the future, could adversely affect its business. The
Company is collaborating with other companies to develop e-Vaulting and digital
archiving service products designed to address its customers' emerging need for
efficient, cost-effective, high quality solutions for electronic archiving and
the management of electronic documents.
EMPLOYEES
As of December 31, 2000, the Company employed about 8,300 full-time
employees in the United States. Directly and through majority-owned joint
ventures, as of December 31, 2000, the Company employed approximately 2,000
full-time employees outside of the United States. A small percentage of the
Company's employees are represented by unions. These unionized employees are
located in California, one city in Canada and in the United Kingdom. As of
December 31, 2000, the aggregate number of unionized employees was approximately
300.
All domestic non-union employees are eligible to participate in the
Company's benefit programs, which include medical, dental, life, short and
long-term disability and accidental death and dismemberment plans. Unionized
employees receive these types of benefits through their unions. In addition to
base compensation and other usual benefits, all full-time domestic employees
participate in some form of incentive-based compensation program that provides
payments based on profits, collections or attainment of specified objectives for
the unit in which they work. International employees participate in separate
benefit and incentive-based compensation programs. Management believes that the
Company has good relationships with its employees and unions.
INSURANCE
For strategic risk transfer purposes, the Company maintains a comprehensive
insurance program with insurers that it believes to be reputable and in amounts
that it believes to be appropriate. Property insurance is purchased on an
all-risk basis, including flood and earthquake, subject to certain sublimits and
deductibles, and inclusive of the replacement cost of real and personal
property, including leasehold improvements, business income loss and extra
expense. Separate policies for California earthquake exposures are maintained at
what the Company believes to be appropriate limits and deductibles for that
exposure. Included among other types of insurance carried by Iron Mountain are:
workers compensation, general liability, umbrella, automobile, and directors and
officers policies.
The Company's standard form of storage contract sets forth an agreed maximum
valuation for each carton or other storage unit held by the Company, which
serves as a limitation of liability for loss or damage, as permitted under the
Uniform Commercial Code. In contracts containing such limits, such values are
nominal, and the Company believes that in typical circumstances its liability
would be so limited in the event of loss or damage to stored items for which the
Company may be held liable. However, some of the Company's agreements with large
volume accounts and some of the contracts assumed in the Company's acquisitions
contain no such limits or contain higher limits or supplemental insurance
arrangements. See "Item 3. Legal Proceedings" for a description of claims by
particular customers seeking to rescind their contracts, including limitations
on liability, as a result of the fires experienced at Iron Mountain's South
Brunswick Township, New Jersey facilities in 1997.
10
ENVIRONMENTAL MATTERS
Some of the Company's currently and formerly owned or operated properties
were previously used for industrial or other purposes that involved the use or
storage of hazardous substances or petroleum products or may have involved the
generation of hazardous wastes. In some instances these properties included the
operation of underground storage tanks or the presence of asbestos-containing
materials. Although the Company has from time to time conducted limited
environmental investigations and remedial activities at some of its former and
current facilities, it has not undertaken an in-depth environmental review of
all of its properties. Under various federal, state and local environmental
laws, the Company may be potentially liable for environmental compliance and
remediation costs to address contamination, if any, located at these properties
as well as damages arising from such contamination. Environmental conditions for
which the Company might be liable may also exist at properties that it may
acquire in the future. In addition, future regulatory action and environmental
laws may impose costs for environmental compliance that do not exist today.
The Company currently transfers a portion of its risk of financial loss due
to environmental matters by purchasing a pollution liability insurance policy,
which covers all owned and leased locations. Coverage is provided for both
liability and remediation exposures.
ITEM 2. PROPERTIES.
As of December 31, 2000, Iron Mountain conducted operations through 504
leased and 131 owned facilities containing a total of 39.4 million square feet
of space. The leased facilities typically have initial lease terms of ten years
with options to renew for an additional five to ten years. In addition, many of
the leases contain either a purchase option or a right of first refusal upon the
sale of the property. The Company's facilities are located throughout North
America, Europe and Latin America, with the largest number of facilities in
California, Florida, Illinois, New Jersey, Texas, Canada and the United Kingdom.
The Company believes that the space available in its facilities is adequate to
meet its current needs. See Note 13 of Notes to Consolidated Financial
Statements for information regarding the Company's minimum annual rental
commitments.
ITEM 3. LEGAL PROCEEDINGS.
In March 1997, the Company experienced three fires, all of which authorities
have determined were caused by arson. The fires resulted in damage to one and
destruction of Iron Mountain's other RIMS facility in South Brunswick Township,
New Jersey.
Certain of the Company's customers or their insurance carriers have asserted
claims as a consequence of the destruction of, or damage to, their records as a
result of the fires, including claims with specific requests for compensation
and allegations of negligence or other culpability on the part of Iron Mountain.
The Company and its insurers have denied any liability on the part of Iron
Mountain as to all of these claims.
The Company is presently aware of five pending lawsuits that have been filed
against Iron Mountain by certain of its customers and/or their insurers, and of
two lawsuits filed by the insurers of abutters of the South Brunswick facility,
and of one lawsuit filed by a fire official who claims that he was injured in
the course of fighting the first fire. Six of these seven lawsuits have been
consolidated for pre-trial purposes in the Middlesex County, New Jersey,
Superior Court. The seventh lawsuit, brought by a single customer, is pending in
the Supreme Court for New York County, New York. An eighth lawsuit, also brought
by a single customer, was tried before a federal judge in New Jersey in
February 2000. After trial, judgment was entered in favor of Iron Mountain; no
appeal was filed in this matter.
11
Iron Mountain has denied liability and asserted affirmative defenses in all
of the remaining cases arising out of the fires and, in certain of the cases,
has asserted counterclaims for indemnification against the plaintiffs. Discovery
is ongoing. The Company denies any liability as a result of the destruction of,
or damage to, customer records or property of abutters as a result of the fires,
which were beyond its control. It also denies any liability for the injuries
allegedly sustained by the fire official. The Company intends to vigorously
defend itself against these and any other lawsuits that may arise.
The Company was paid by its general liability and property insurance carrier
for costs incurred as a result of business interruption and property damage due
to the fires. However, Iron Mountain's errors and omissions carrier made an
initial determination denying coverage as to these claims. In November 1998,
Iron Mountain filed an action in the United States District Court for the
District of Massachusetts seeking a declaration of coverage and other relief.
The parties, together with the general liability and property carrier, have
entered into a settlement agreement regarding reimbursement of defense costs and
continue to be in ongoing discussions regarding all remaining coverage issues.
The outcome of these proceedings cannot be predicted. Based on its present
assessment of the situation, after consultation with legal counsel, management
does not believe that the outcome of these proceedings will have a material
adverse effect on the Company's financial condition or results of operations,
although there can be no assurance in this regard.
In addition to the matters discussed above, the Company is involved in
litigation from time to time in the ordinary course of business. In the opinion
of management, no other material legal proceedings are pending to which the
Company, or any of its properties, is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders of Iron
Mountain during the fourth quarter of the fiscal year ended December 31, 2000.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The Common Stock of the Company is traded on the New York Stock Exchange
("NYSE") under the symbol "IRM." Prior to the merger, the common stock of each
of Pierce Leahy and the Company were listed on the NYSE under the symbols "PLH"
and "IRM," respectively. Pierce Leahy first issued its common stock to the
public in July 1997, while Iron Mountain first issued its common stock to the
public in February 1996. Prior to April 26, 1999, the Common Stock of Iron
Mountain was traded on the Nasdaq National Market ("Nasdaq") under the symbol
"IMTN."
The following table sets forth the high and low sale prices for Pierce Leahy
and Iron Mountain common stock on the NYSE and the Nasdaq, for the years 1999
and 2000:
SALE PRICES
-------------------
HIGH LOW
-------- --------
1999--Pierce Leahy(1)
First Quarter............................................. $24.55 $21.82
Second Quarter............................................ 24.32 20.57
Third Quarter............................................. 23.64 18.24
Fourth Quarter............................................ 39.32 21.31
1999--Iron Mountain
First Quarter............................................. $36.25 $27.38
Second Quarter............................................ 33.13 25.38
Third Quarter............................................. 34.38 27.88
Fourth Quarter............................................ 39.50 25.13
2000--Iron Mountain
First Quarter(2).......................................... $34.88 $27.75
Second Quarter............................................ 36.81 29.63
Third Quarter............................................. 37.00 31.00
Fourth Quarter............................................ 37.50 29.50
- ------------------------
(1) The high and low sale prices on the NYSE for Pierce Leahy's common stock for
1999 have been adjusted to give effect to a one-for-ten stock split effected
in the form of a dividend declared and paid by Pierce Leahy in
January 2000.
(2) The high and low sale prices on the NYSE for the Iron Mountain Incorporated
common stock for the first quarter of 2000 include only the months of
February and March as the merger incurred on February 1, 2000.
The closing price of the Company's Common Stock on the NYSE on March 1, 2001
was $39.57. As of March 1, 2001, there were 682 holders of record of the
Company's Common Stock. The Company believes that there are more than 6,900
beneficial owners of the Company's Common Stock.
The Company's Board of Directors (the "Company Board") currently intends to
retain future earnings, if any, for the development of the Company's businesses
and does not anticipate paying cash dividends on the Company's Common Stock in
the foreseeable future. Future determinations by the Company Board to pay
dividends on the Common Stock would be based primarily upon the financial
condition, results of operations and business requirements of the Company.
Dividends, if any, would be payable at the sole discretion of the Company Board
out of the funds legally available for that purpose. Some of the Company's
agreements pursuant to which the Company has borrowed funds contain provisions
that limit the amount of dividends and stock repurchases that the Company may
make.
13
Pierce Leahy and Iron Mountain have not paid dividends on their shares of
common stock, other than stock dividends, during the last two years.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION.
The following selected consolidated statements of operations and balance
sheet data of the Company have been derived from the Company's audited
consolidated financial statements. The selected consolidated financial and
operating information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Iron Mountain's Consolidated Financial Statements and the Notes
thereto included elsewhere in this filing.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Storage................................................... $ 85,826 $125,968 $230,702 $317,387 $585,664
Service and Storage Material Sales........................ 52,892 82,797 153,259 202,162 400,707
-------- -------- -------- -------- --------
Total Revenues.......................................... 138,718 208,765 383,961 519,549 986,371
Operating Expenses:
Cost of Sales (excluding depreciation).................... 70,747 106,879 192,113 260,930 482,771
Selling, General and Administrative....................... 34,342 51,668 95,867 128,948 246,559
Depreciation and Amortization............................. 16,936 27,107 48,301 65,422 126,810
Stock Option Compensation Expense......................... -- -- -- -- 15,110
Merger-Related Expenses................................... -- -- -- -- 9,133
-------- -------- -------- -------- --------
Total Operating Expenses................................ 122,025 185,654 336,281 455,300 880,383
Operating Income............................................ 16,693 23,111 47,680 64,249 105,988
Interest Expense, Net....................................... 14,901 27,712 45,673 54,425 117,975
Other Income (Expense), Net................................. -- -- 1,384 17 (6,045)
-------- -------- -------- -------- --------
Income (Loss) from Continuing Operations Before Provision
(Benefit) for Income Taxes and Minority Interest.......... 1,792 (4,601) 3,391 9,841 (18,032)
Provision (Benefit) for Income Taxes........................ 1,435 (80) 6,558 10,579 9,125
Minority Interest in Earnings (Losses) of Subsidiaries...... -- -- -- 322 (2,224)
-------- -------- -------- -------- --------
Income (Loss) from Continuing Operations before
Extraordinary
Item...................................................... 357 (4,521) (3,167) (1,060) (24,933)
Income from Discontinued Operations......................... -- -- 201 241 --
Loss on Sale of Discontinued Operations..................... -- -- -- (13,400) --
Extraordinary Charge (net of tax benefit)................... (2,126) -- -- -- (2,892)
-------- -------- -------- -------- --------
Loss Before Warrant Accretion............................... (1,769) (4,521) (2,966) (14,219) (27,825)
Accretion of Redeemable Put Warrant......................... 280 -- -- -- --
-------- -------- -------- -------- --------
Net Loss Applicable to Common Shareholders.................. $ (2,049) $ (4,521) $ (2,966) $(14,219) $(27,825)
======== ======== ======== ======== ========
Net Loss per Common Share--Basic and Diluted:
Income (Loss) from Continuing Operations.................. $ 0.00 $ (0.26) $ (0.12) $ (0.03) $ (0.47)
Income from Discontinued Operations....................... -- -- 0.01 0.01 --
Loss on Sale of Discontinued Operations................... -- -- -- (0.41) --
-------- -------- -------- -------- --------
Income (Loss) Before Extraordinary Charge................... 0.00 (0.26) (0.11) (0.43) (0.47)
Extraordinary Charge (net of tax benefit)................. (0.15) -- -- -- (0.05)
-------- -------- -------- -------- --------
Net Loss Applicable to Common Shareholders.................. $ (0.15) $ (0.26) $ (0.11) $ (0.43) $ (0.52)
======== ======== ======== ======== ========
Weighted Average Common Shares Outstanding--Basic
and Diluted............................................... 13,911 17,172 27,470 33,345 53,125
======== ======== ======== ======== ========
Pro Forma(1):
Net Loss Applicable to Common Shareholders................ $ (0.13)
========
Weighted Average Common Shares Outstanding................ 15,206
========
(FOOTNOTES ON FOLLOWING PAGE)
14
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- ---------- ----------
(IN THOUSANDS)
OTHER DATA:
EBITDA from Continuing Operations(2)... $ 33,629 $ 50,218 $ 95,981 $ 129,671 $ 257,041
EBITDA from Continuing Operations as a
Percentage of Total Revenues......... 24.2% 24.1% 25.0% 25.0% 26.1%
AS OF DECEMBER 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- ---------- ----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and Cash Equivalents.............. $ 3,453 $ 24,510 $ 1,715 $ 3,830 $ 6,200
Total Assets........................... 281,799 636,786 967,385 1,317,212 2,659,096
Total Debt............................. 184,733 428,018 456,178 612,947 1,355,131
Shareholders' Equity................... 52,384 137,733 338,882 488,754 924,458
- ------------------------
(1) Represents pro forma earnings per share as if the preferred stock that was
converted into the Company Common Stock in connection with the Company's
initial public offering had been converted as of January 1, 1996.
(2) Based on the Company's experience in the RIMS industry, management believes
that EBITDA (which we define as earnings before interest, taxes,
depreciation, amortization, extraordinary items, other income,
merger-related expenses and stock option compensation expense) is an
important tool for measuring the performance of RIMS companies (including
potential acquisition targets) in several areas, such as liquidity,
operating performance and leverage. In addition, lenders use EBITDA-based
calculations as a criterion in evaluating RIMS companies, and substantially
all of the Company's financing agreements contain covenants in which
EBITDA-based calculations are 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and "Liquidity and Capital Resources" for
discussions of other measures of performance determined in accordance with
GAAP and the Company's sources and applications of cash flow.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "ITEM 6.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION" AND THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO AND THE OTHER FINANCIAL AND OPERATING
INFORMATION INCLUDED ELSEWHERE IN THIS FILING.
This discussion contains "forward-looking statements" as that term is
defined in the federal securities laws. Such forward-looking statements concern
the operations, economic performance and financial condition of Iron Mountain.
The forward-looking statements are subject to various known and unknown risks,
uncertainties and other factors.
Although we believe that our forward-looking statements are based on
reasonable assumptions, our expected results may not be achieved, and actual
results may differ materially from our expectations. Important factors that
could cause actual results to differ from expectations include, among others,
the following:
- difficulties related to the integration of acquisitions generally and,
more specifically, the integration of our operations and those of Pierce
Leahy;
- unanticipated costs as a result of our acquisition of Pierce Leahy;
- the uncertainties related to international expansion;
- the uncertainties related to expansion into digital businesses, including
the timing of introduction and market acceptance of the Company's products
and services;
- rapid and significant changes in technology;
- the cost and availability of appropriate storage facilities;
- changes in customer preferences and demand for our services;
- our significant indebtedness and the cost and availability of financing
for contemplated growth; and
- other general economic and business conditions.
OVERVIEW
The Company's primary financial objective has been to increase consolidated
EBITDA, which is a source of funds for investment in continued growth and to
service indebtedness. The Company has benefited from growth in consolidated
EBITDA from continuing operations, which has increased from $96.0 million for
1998 to $257.0 million for 2000 (a compound annual growth rate of 63.6%).
However, the pursuit of this objective has negatively affected other measures of
the Company's financial performance, such as consolidated net income.
For the years ended December 31, 1998 through 2000, the Company experienced
consolidated net losses. The Company attributes such losses in part to
significant charges associated with the pursuit of its growth strategy, namely:
- increases in depreciation expense associated with expansion of storage
capacity;
- increases in goodwill amortization associated with acquisitions accounted
for under the purchase method;
- increases in interest expense associated with the borrowings used to fund
acquisitions; and
- in 2000, charges for stock option compensation expense and merger-related
expenses associated with the integration of the operations of Iron
Mountain and Pierce Leahy.
16
On February 1, 2000, the Company completed its acquisition of Pierce Leahy
in a stock-for-stock merger valued at $1.0 billion. The acquisition was
structured as a reverse merger with Pierce Leahy being the surviving legal
entity and immediately changing its name to Iron Mountain Incorporated. Based on
the number of shares of Iron Mountain and Pierce Leahy common stock outstanding
immediately prior to the completion of the merger, immediately after the merger
former stockholders of Iron Mountain owned approximately 65% of the Company's
Common Stock. Because of this share ownership, Iron Mountain is considered the
acquiring entity for accounting purposes. The total consideration for this
transaction was comprised of: (i) 18.8 million shares of the Company's Common
Stock with a fair value of $421.2 million; (ii) 1.6 million options to acquire
the Company's Common Stock with a fair value of $25.3 million; (iii) assumed
debt with a fair value of $584.9 million; and (iv) $4.3 million of capitalized
transaction costs. Consolidated revenues of Pierce Leahy were $342.3 million for
the year ended December 31, 1999.
The Company's revenues consist of storage revenues as well as service and
storage material sales revenues. Storage revenues consist of periodic charges
related to the storage of materials (either on a per unit or per cubic foot of
records basis) and have accounted for approximately 60% of total revenues in
each of the last five years. In certain circumstances, based upon customer
requirements, storage revenues include periodic charges associated with normal,
recurring service activities. Service and storage material sales revenues are
comprised of charges for related service activities, the sale of storage
materials and courier operations. Courier operations consist primarily of the
pickup and delivery of records upon customer request. Related service revenues
arise from additions of new records, temporary removal of records from storage,
refiling of removed records, destructions of records, permanent withdrawals from
storage and sales of specially designed storage containers, magnetic media
including computer tapes and related supplies. Customers are generally billed on
a monthly basis on contractually agreed-upon terms.
Cost of sales (excluding depreciation) consists primarily of wages and
benefits for field personnel, facility occupancy costs, vehicle and other
equipment costs and supplies. Of these, wages and benefits and facility
occupancy costs are the most significant.
Selling, general and administrative expenses consist primarily of wages and
benefits for management, administrative, sales and marketing personnel, as well
as expenses related to travel, communications, data processing expenses,
professional fees, bad debts, training, office equipment and supplies.
The Company's depreciation and amortization charges result primarily from
the capital-intensive nature of its business and the acquisitions that the
Company has completed. The principal components of depreciation relate to
racking systems and related equipment, new buildings and leasehold improvements,
equipment for new facilities and computer system hardware and software.
Amortization relates primarily to goodwill arising from acquisitions and
customer acquisition costs. The Company has accounted for all of its
acquisitions under the purchase method. Since the purchase price for RIMS
companies is usually substantially in excess of the fair value of their net
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 consolidated net income. Because
certain of the Company's acquisitions have given rise to nondeductible goodwill,
the Company's effective tax rate is higher than the statutory rate.
EBITDA is an important financial performance measure in the RIMS industry,
both for determining the value of companies within the industry and for defining
standards for borrowing from institutional lenders. The Company's EBITDA margins
from continuing operations were 25.0% for 1998, 25.0% for 1999 and 26.1% for
2000. The Company acquired 15 RIMS businesses in 1998, 17 in 1999 and 12 in
2000. With the exception of the Pierce Leahy merger in 2000, most acquisitions
had lower EBITDA margins than the rest of the Company's business. The Company
generally does not
17
realize anticipated synergies relating to acquisitions immediately. The Company
was able to increase its recent EBITDA margins through improved overall
operating efficiencies, economies of scale and the realization of synergies in
connection with earlier acquisitions, as well as the addition of the higher-
margin Pierce Leahy business in 2000. This increase was partially offset by
additional labor expense due to wage and incentive compensation equalization as
a result of the Pierce Leahy integration.
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 total consolidated revenues.
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Revenues:
Storage................................................... 60.1 % 61.1 % 59.4 %
Service and Storage Material Sales........................ 39.9 38.9 40.6
------- ------- -------
Total Revenues.......................................... 100.0 100.0 100.0
Operating Expenses:
Cost of Sales (Excluding Depreciation).................... 50.0 50.2 48.9
Selling, General and Administrative....................... 25.0 24.8 25.0
Depreciation and Amortization............................. 12.6 12.6 12.9
Stock Option Compensation Expense......................... -- -- 1.6
Merger-Related Expenses................................... -- -- 0.9
------- ------- -------
Total Operating Expenses................................ 87.6 87.6 89.3
Operating Income............................................ 12.4 12.4 10.7
Interest Expense............................................ 11.9 10.5 12.0
Other Income, Net........................................... 0.4 0.0 (0.5)
------- ------- -------
Income (Loss) from Continuing Operations Before Provision
for Income Taxes and Minority Interest.................... 0.9 1.9 (1.8)
Provision for Income Taxes.................................. 1.7 2.0 0.9
Minority Interest in (Losses) Earnings of Subsidiaries...... -- 0.1 (0.2)
------- ------- -------
Loss from Continuing Operations before Extraordinary Item... (0.8) (0.2) (2.5)
Income from Discontinued Operations......................... 0.1 0.1 --
Loss on Sale of Discontinued Operations..................... -- (2.6) --
Extraordinary Charge from Early Extinguishment of Debt (net
of Tax Benefit)........................................... -- -- (0.3)
------- ------- -------
Net Loss.................................................... (0.7)% (2.7)% (2.8)%
======= ======= =======
EBITDA from Continuing Operations........................... 25.0% 25.0% 26.1%
======= ======= =======
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Consolidated storage revenues increased $268.3 million, or 84.5%, to
$585.7 million for the year ended December 31, 2000 from $317.4 million for the
year ended December 31,1999. Consolidated storage revenues increased primarily
due to acquisitions, particularly the Pierce Leahy acquisition. Pierce Leahy's
1999 storage revenues were $190.1 million. Internal storage revenue growth,
calculated as if Pierce Leahy had merged with Iron Mountain on January 1, 1999,
was 11.7%. The internal storage revenue growth resulted primarily from net
increases in records and other media stored by existing customers and from sales
to new customers.
18
Consolidated service and storage material sales revenues increased
$198.5 million, or 98.2%, to $400.7 million for the year ended December 31,
2000, from $202.2 million for the year ended December 31, 1999. Consolidated
service and storage material sales revenues increased primarily due to
acquisitions, particularly the Pierce Leahy acquisition. Pierce Leahy's 1999
service and storage material sales revenues were $152.2 million. Internal
service and storage material sales revenue growth, calculated as if Pierce Leahy
had merged with Iron Mountain on January 1, 1999, was 13.3%. The internal
revenue growth resulted from increases in service and storage material sales to
existing customers and the addition of new customer accounts.
For the reasons discussed above, total consolidated revenues increased
$466.9 million, or 89.9%, to $986.4 million for the year ended December 31, 2000
from $519.5 million for the year ended December 31, 1999. Total internal revenue
growth, calculated as if Pierce Leahy had merged with Iron Mountain on
January 1, 1999, was 12.3%.
Consolidated cost of sales (excluding depreciation) increased
$221.9 million, or 85.0%, to $482.8 million (48.9% of consolidated revenues) for
the year ended December 31, 2000 from $260.9 million (50.2% of consolidated
revenues) for the year ended December 31, 1999. The dollar increase was
primarily attributable to the acquisition of Pierce Leahy. The decrease as a
percentage of revenues was primarily attributable to operating efficiencies,
particularly related to labor and transportation, gained as a result of an
increase in scale, offset by the increased facilities costs of Pierce Leahy,
which are typical of a more paper storage-intensive business. The Company's
business records and international segments are substantially paper-based.
Revenues for these segments have increased from 73% to 80% of total revenues
from 1999 to 2000.
Consolidated selling, general and administrative expenses increased
$117.7 million, or 91.2%, to $246.6 million (25.0% of consolidated revenues) for
the year ended December 31, 2000 from $128.9 million (24.8% of consolidated
revenues) for the year ended December 31, 1999. The dollar increase was
primarily attributable to the Pierce Leahy acquisition. The increase as a
percentage of revenues was primarily attributable to increased spending on
information technology related to: (i) the conversion of new systems for the
Company's data security business; (ii) increased staffing in preparation for
systems conversions related to the integration of Pierce Leahy with the Company;
and (iii) the Company's efforts to explore complementary digital service
offerings. These increases were partially offset by general management overhead
efficiencies driven by an increase in scale.
As a result of the foregoing factors, consolidated EBITDA increased
$127.3 million, or 98.2%, to $257.0 million (26.1% of consolidated revenues) for
the year ended December 31, 2000 from $129.7 million (25.0% of consolidated
revenues) for the year ended December 31, 1999.
EBITDA from the Company's international segment increased $13.3 million, or
180.7%, to $20.6 million (17.7% of international revenues) for the year ended
December 31, 2000 from $7.3 million (23.2% of international revenues) for the
year ended December 31, 1999. The Company acquired several foreign businesses in
late 1999 and 2000, some of which had lower EBITDA margins than the rest of the
Company's international segment. The Company generally does not recognize
anticipated synergies relating to acquisitions immediately.
Consolidated depreciation and amortization expense increased $61.4 million,
or 93.8%, to $126.8 million (12.9% of consolidated revenues) for the year ended
December 31, 2000 from $65.4 million (12.6% of consolidated revenues) for the
year ended December 31, 1999. The dollar increase was primarily attributable to
the additional depreciation and amortization expense related to the 1999 and
2000 acquisitions, particularly the Pierce Leahy acquisition, and capital
expenditures including racking systems, information systems and expansion of
storage capacity in existing facilities.
Stock option compensation expense represents a non-cash charge resulting
from the acceleration of vesting and extension of exercise periods for
previously granted stock options as a part of separation
19
agreements with certain executives relating to the Pierce Leahy merger. Stock
option compensation expense was $15.1 million (1.6% of consolidated revenues)
for the year ended December 31, 2000.
Merger-related expenses are certain expenses directly related to the
Company's merger with Pierce Leahy that cannot be capitalized and include
severance, relocation and pay-to-stay payments, costs of exiting certain
facilities, system conversion costs and other transaction-related costs.
Merger-related expenses were $9.1 million (0.9% of consolidated revenues) for
the year ended December 31, 2000.
As a result of the foregoing factors, consolidated operating income
increased $41.8 million, or 65.0%, to $106.0 million (10.7% of consolidated
revenues) for the year ended December 31, 2000 from $64.2 million (12.4% of
consolidated revenues) for the year ended December 31, 1999.
Consolidated interest expense increased $63.6 million, or 116.8%, to
$118.0 million for the year ended December 31, 2000 from $54.4 million for the
year ended December 31, 1999. The increase was primarily attributable to
increased indebtedness related to: (i) the debt assumed as a result of the
Pierce Leahy acquisition; (ii) the financing of acquisitions and capital
expenditures; (iii) the increase in the Company's effective interest rate from
the same period in 1999; and (iv)the debt refinancing of the Company on
August 14, 2000, resulting in additional principal outstanding and additional
commitment fees, which were only partially offset by interest earned on excess
cash.
Consolidated other income (expense) was an expense of $6.0 million for the
year ended December 31, 2000 compared to income of $0.0 million for the year
ended December 31, 1999. The increase in expense was primarily due to a
weakening of the Canadian dollar against the U.S. dollar, as it relates to Iron
Mountain Canada Corporation's 8 1/8% Senior Subordinated Notes due 2008, and a
weakening of the British pound sterling against the U.S. dollar on intercompany
balances with the Company's European subsidiaries.
As a result of the foregoing factors, consolidated income (loss) from
continuing operations before provision for income taxes and minority interests
decreased $27.8 million to a loss of $18.0 million (1.8% of consolidated
revenues) for the year ended December 31, 2000 from income of $9.8 million (1.9%
of consolidated revenues) for the year ended December 31, 1999. The provision
for income taxes was $9.1 million for the year ended December 31, 2000 compared
to $10.6 million for the year ended December 31, 1999. The Company's effective
tax rate is higher than statutory rates primarily due to the amortization of the
nondeductible portion of goodwill associated with certain acquisitions (the tax
laws generally permit deduction of such expenses for asset purchases, but not
for acquisitions of stock). For the year ended December 31, 2000, the Company
recorded approximately $35 million in nondeductible goodwill amortization
expense.
Consolidated loss from continuing operations increased $23.8 million to
$24.9 million (2.5% of consolidated revenues) for the year ended December 31,
2000 from $1.1 million (0.2% of consolidated revenues) for the year ended
December 31, 1999.
In addition, in August 2000, the Company recorded an extraordinary charge of
$2.9 million (net of tax benefit of $1.9 million) related to the early
extinguishment of debt in conjunction with the refinancing of the Company's
senior credit facility. The charge primarily represented the write-off of
unamortized deferred financing costs associated with the extinguished debt.
As a result of the foregoing factors, consolidated net loss increased
$13.6 million, or 95.7%, to $27.8 million (2.8% of consolidated revenues) for
the year ended December 31, 2000 from $14.2 million (2.7% of consolidated
revenues) for the year ended December 31, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Consolidated storage revenues increased $86.7 million, or 37.6%, to
$317.4 million for the year ended December 31, 1999 from $230.7 million for the
year ended December 31, 1998, primarily due to
20
the completion of 32 acquisitions during 1999 and 1998. Consolidated internal
revenue growth was 10.9% and resulted primarily from net increases in records
and other media stored by existing customers and from sales to new customers.
Consolidated service and storage material sales revenues increased
$48.9 million, or 31.9%, to $202.2 million for the year ended December 31, 1999
from $153.3 million for the year ended December 31, 1998, primarily due to
acquisitions. Internal revenue growth was 16.7% and resulted from increases in
service and storage material sales to existing customers and the addition of new
customer accounts.
For the reasons discussed above, total consolidated revenues increased
$135.6 million, or 35.3%, to $519.5 million for the year ended December 31, 1999
from $384.0 million for the year ended December 31, 1998. Total internal revenue
growth was 13.2%.
Consolidated cost of sales (excluding depreciation) increased
$68.8 million, or 35.8%, to $260.9 million (50.2% of consolidated revenues) for
the year ended December 31, 1999 from $192.1 million (50.0% of consolidated
revenues) for the year ended December 31, 1998. The dollar increase was
primarily attributable to the additional facility and personnel costs needed to
service the increase in records and other media stored.
Consolidated selling, general and administrative expenses increased
$33.1 million, or 34.5%, to $128.9 million (24.8% of consolidated revenues) for
the year ended December 31, 1999 from $95.9 million (25.0% of consolidated
revenues) for the year ended December 31, 1998. The dollar increase is primarily
attributable to:
- the adoption, effective January 1, 1999, of SOP 98-1, which requires
certain computer software costs associated with internal use software
(primarily data conversion costs) that were previously capitalizable to be
expensed as incurred ($3.3 million in 1999);
- the addition of personnel and other overhead costs related primarily to
the acquisitions of First American Records Management, Inc. and Data
Base, Inc.;
- increased investment in sales and marketing to drive internal growth; and
- increased personnel, office and overhead costs to support growth.
Consolidated depreciation and amortization expense increased $17.1 million,
or 35.4%, to $65.4 million (12.6% of consolidated revenues) for the year ended
December 31, 1999 from $48.3 million (12.6% of consolidated revenues) for the
year ended December 31, 1998. The dollar increase is primarily attributable to
the additional depreciation and amortization expense related to acquisitions and
capital expenditures, including racking systems, information systems and
expansion of storage capacity in existing facilities.
As a result of the foregoing factors, consolidated operating income
increased $16.6 million, or 34.8%, to $64.2 million (12.4% of consolidated
revenues) for the year ended December 31, 1999 from $47.7 million (12.4% of
consolidated revenues) for the year ended December 31, 1998.
Consolidated interest expense increased $8.8 million, or 19.2%, to
$54.4 million for the year ended December 31, 1999 from $45.7 million for the
year ended December 31, 1998. The increase was primarily attributable to
increased indebtedness related to the financing of acquisitions and capital
expenditures. Such increase was partially offset by lower effective interest
rates for the year ended December 31, 1999 compared to the same period in 1998.
As a result of the foregoing factors, consolidated income from continuing
operations before the provision for income taxes and minority interest expense
increased $6.5 million to income of $9.8 million (1.9% of consolidated revenues)
for the year ended December 31, 1999 from income of $3.4 million (0.9% of
consolidated revenues) for the year ended December 31, 1998. The provision for
21
income taxes was $10.6 million for the year ended December 31, 1999 compared to
$6.6 million for the year ended December 31, 1998. The Company's effective tax
rate is higher than statutory rates primarily due to the amortization of the
nondeductible portion of goodwill associated with particular acquisitions (the
tax laws generally permit deduction of goodwill amortization for asset
purchases, but not for acquisitions of stock). For the year ended December 31,
1999, the Company recorded approximately $15 million in nondeductible goodwill
amortization expense.
Consolidated net loss increased $11.3 million to a net loss of
$14.2 million (2.7% of consolidated revenues) for the year ended December 31,
1999 from a consolidated net loss of $3.0 million (0.7% of consolidated
revenues) for the year ended December 31, 1998. The increase in net loss is
primarily due to the loss on sale of discontinued operations of $13.4 million.
As a result of the foregoing factors, consolidated EBITDA from continuing
operations increased $33.7 million, or 35.1%, to $129.7 million (25.0% of
consolidated revenues) for the year ended December 31, 1999 from $96.0 million
(25.0% of consolidated revenues) for the year ended December 31, 1998.
RECENT CONSOLIDATED QUARTERLY FINANCIAL DATA
The following table sets forth, for the quarterly periods indicated,
information derived from the Company's consolidated statements of operations.
The unaudited quarterly information has been prepared on the same basis as the
annual financial information and, in management's opinion, includes all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the information for the quarters presented. The operating results for any
quarter are not necessarily indicative of results for the year or for any future
period.
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
1999 2000
----------------------------------------- -----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Revenues:
Storage................. $67,722 $79,928 $82,339 $87,398 $124,939 $148,445 $152,959 $159,321
Service and Storage
Material Sales........ 41,649 51,837 54,568 54,108 87,198 104,120 103,174 106,215
------- ------- ------- ------- -------- -------- -------- --------
Total Revenues........ 109,371 131,765 136,907 141,506 212,137 252,565 256,133 265,536
Operating Expenses:
Cost of Sales (Excluding
Depreciation)......... 54,435 66,167 69,226 71,102 104,458 121,973 125,079 131,261
Selling, General and
Administrative........ 27,875 32,938 33,381 34,754 53,457 64,724 63,783 64,595
Depreciation and
Amortization.......... 13,595 16,281 16,338 19,208 26,303 31,644 34,829 34,034
Stock Option
Compensation Expense.. -- -- -- -- -- 14,939 171 --
Merger-Related
Expenses.............. -- -- -- -- 516 3,875 1,262 3,480
------- ------- ------- ------- -------- -------- -------- --------
Total Operating
Expenses............ 95,905 115,386 118,945 125,064 184,734 237,155 225,124 233,370
------- ------- ------- ------- -------- -------- -------- --------
Operating Income.......... $13,466 $16,379 $17,962 $16,442 $ 27,403 $ 15,410 $ 31,009 $ 32,166
======= ======= ======= ======= ======== ======== ======== ========
EBITDA from Continuing
Operations.............. $27,061 $32,660 $34,300 $35,650 $ 54,222 $ 65,868 $ 67,271 $ 69,680
======= ======= ======= ======= ======== ======== ======== ========
22
LIQUIDITY AND CAPITAL RESOURCES
RECENT FINANCINGS AND SOURCES OF FUNDS
On August 14, 2000, the Company entered into an amended and restated
revolving credit agreement (the "Amended Credit Agreement"). The Amended Credit
Agreement replaces the Company's prior credit facility, increases the aggregate
principal amount available to $750.0 million and includes two tranches of term
debt in addition to the $400.0 million revolving credit facility. Tranches A and
B represent term loans to the Company in principal amounts of $150.0 million and
$200.0 million, respectively. The Tranche A term loan and the revolving credit
component of the Amended Credit Agreement mature on January 31, 2005, while the
Tranche B term loan matures on February 28, 2006. The interest rate on
borrowings under the Amended Credit Agreement varies depending on the Company's
choice of base rates, plus an applicable margin. As of December 31, 2000, the
interest rates in effect ranged from 8.72% to 11.25%. In December 2000, and
again in January 2001, the Company entered into interest rate swap contracts for
the interest payments on an aggregate principal amount of $195.5 million of the
Tranche B debt, thereby fixing the interest rate thereon at 8.43%. Restrictive
covenants under this agreement are similar to those under the Company's prior
credit facility. As of December 31, 2000, outstanding borrowings under the
Company's Tranche A and B term loans were $150.0 million and $199.8 million,
respectively and borrowings under the Company's revolving credit facility were
$4 million. These borrowings were used to fund, among other things, the purchase
price of recent acquisitions, general corporate expenses and merger costs.
Net cash provided by financing activities was $172.4 million for the year
ended December 31, 2000, consisting primarily of the proceeds from borrowings
under the Company's revolving credit facility of $399.2 million and term loans
of $350.0 million, which were partially offset by repayments of debt of
$596.7 million.
As of December 31, 2000, the annual maturities of Iron Mountain's
indebtedness for the years ending December 31, 2001, 2002, 2003, 2004 and 2005
were $40.8 million, $8.5 million, $9.6 million, $4.9 million and
$302.0 million, respectively. See Note 4 of Notes to Consolidated Financial
Statements. None of the Company's public debt is subject to scheduled mandatory
redemption before 2006.
As of March 1, 2001, the Company had approximately $1.4 billion of total
debt, of which $1.2 billion, including the $195.5 million of debt subject to the
interest rate swap agreements, had fixed interest rates and $0.2 billion had
variable interest rates.
Net cash provided by continuing operations was $157.6 million for the year
ended December 31, 2000 compared to $56.3 million for the same period in 1999.
The increase was primarily attributable to the increase in EBITDA. The increase
in the provision for doubtful accounts was primarily attributable to the
increase in revenue due to internal growth as well as the Pierce Leahy and other
acquisitions.
At December 31, 2000, the Company had estimated net operating loss
carryforwards of approximately $128.0 million for federal income tax purposes.
As a result of such loss carryforwards, cash paid for income taxes has
historically been substantially lower than the provision for income taxes. The
preceding net operating loss carryforwards do not include potential
preacquisition net operating loss carryforwards of Arcus Group, Inc. and certain
other foreign acquisitions. Any tax benefit realized related to preacquisition
net operating loss carryforwards will be recorded as a reduction of goodwill
when, and if, realized. The Arcus Group carryforwards expire in eight years.
CAPITAL INVESTMENTS
As the Company has sought to increase its EBITDA, it has made significant
capital investments, consisting primarily of: (i) acquisitions; (ii) the
purchase and construction of real estate; (iii) other capital expenditures; and
(iv) customer acquisition costs. These investments have been primarily funded
through cash flows from operations and borrowings under the Company's credit
agreements.
23
Cash paid for acquisitions in 2000 was $140.9 million. In connection with
the acquisition of Pierce Leahy, the Company issued 18.8 million shares of its
Common Stock with a fair value of $421.2 million.
During 2000, total capital expenditures were $168.7 million. A significant
portion of the Company's capital expenditures are related to growth and consist
primarily of racking systems, management information systems, new buildings and
expansion of storage capacity in existing facilities. Approximately 10% of the
capital expenditures were expended in order to maintain the Company's then
current revenue stream.
The Company currently estimates that its capital expenditures (other than
capital expenditures related to future acquisitions, which cannot be presently
estimated, and the Company's digital services offerings, which are described
separately below) for 2001 will be approximately $175 to $200 million. The
Company expects to fund these expenditures with cash flows from operations and
borrowings under the Amended Credit Agreement.
In addition, the Company incurred costs (net of revenues received for the
initial transfer of records) related to the acquisition of large volume
accounts. In 2000, the Company's additions to customer acquisition costs were
$12.8 million.
The Company has begun to assess opportunities in the digital storage
business driven by e-commerce and facilitated by the Internet. Services
associated with this business would expand the Company's range of services into
the use of the Internet to facilitate the backup and storage of customer data.
In 2000, the Company entered into two strategic alliances to jointly develop,
market and sell new products and services for electronic data archiving
business. The Company estimates that expenses associated with the continuing
development and initial market testing phase of its digital service offerings
will be in the range of $3 million to $5 million. In addition, the Company
expects the capital expenditures associated with this phase, which is expected
to continue into the second half of 2001, to be in the range of $7 million to
$10 million. The Company intends to fund this effort with cash flows from
operations and borrowings under the Amended Credit Agreement.
ACQUISITIONS
The Company's liquidity and capital resources may be significantly impacted
by the Company's acquisition strategy in the foreseeable future. The Company's
future interest expense may increase significantly as a result of the additional
indebtedness it may incur to finance possible future acquisitions. To the extent
that future acquisitions are financed by additional borrowings under the Amended
Credit Agreement or other credit facilities, or the future issuance of debt
securities, the resulting increase in debt and interest expense could have a
negative effect on such measures of liquidity as the ratio of debt to equity,
EBITDA to debt and EBITDA to interest expense.
The Company has historically financed the cash portion of its acquisitions
with borrowings under its credit agreements in conjunction with cash flows
provided by operations and with the net proceeds of issuances of debt securities
and common stock.
In connection with its acquisition program, the Company has undertaken
certain restructurings of the acquired businesses. Formalized restructuring
plans for acquisitions are completed within one year of the date of acquisition.
The restructuring activities include reductions in staffing levels, elimination
of duplicate facilities and other costs associated with exiting certain
activities of the acquired businesses. In connection with these restructuring
activities, the Company established reserves of $31.4 million in 2000 as part of
the purchase accounting for its acquisitions. During 2000, the Company expended
$7.5 million for restructuring costs. In addition, the Company made
$4.7 million of adjustments, which reduced goodwill, primarily as a result of
management's finalizing restructuring plans within one year of acquisition.
These expenditures consisted primarily of severance costs and costs related to
exiting facilities. At December 31, 2000, the Company had a total of
$28.5 million accrued for restructuring
24
costs for all of its then completed acquisitions. See Note 6 of Notes to
Consolidated Financial Statements.
From January 1, 2001 through March 1, 2001, the Company and its European and
Latin American subsidiaries acquired six additional businesses for aggregate
consideration of approximately $41 million.
PIERCE LEAHY/ IRON MOUNTAIN INTEGRATION
The Company is currently in the process of integrating the operations and
headquarters functions of Iron Mountain and Pierce Leahy on a "best practices"
basis. This process includes the planning, development and execution of an
integration plan. During 2000, the Company completed the integration of sales,
overhead and support functions, and began to combine field operations, with the
goal of full integration within three years after the merger. Management's
current estimate is that the merger-related expenses to integrate the two
companies, the majority of which have been and will be incurred in 2000 and
2001, will total approximately $15 million. These costs consist primarily of
severance and relocation payments to certain employees, transition bonuses,
consultants' fees, reimaging expenses and system conversion costs. The Company
recorded merger-related expenses of $9.1 million during 2000. As a result of the
integration effort, management expects that the Company will realize an
estimated $15 million in annual operating cost savings within three years after
the merger. These cost savings will result primarily from the elimination of
redundant corporate expenses, more efficient operations and utilization of real
estate. The Company intends to fund the integration effort with cash flows from
operations and borrowings under the Amended Credit Agreement.
FUTURE CAPITAL NEEDS
The Company's primary financial objective continues to be to increase
consolidated EBITDA, which is a source of funds for investment in continued
growth and to service indebtedness. The Company's ability to generate sufficient
cash to fund its needs depends generally on the results of its operations and
the availability of financing. Management believes that cash flows from
operations in conjunction with borrowings from existing and possible future debt
financings will be sufficient to meet debt service requirements for the
foreseeable future and to make possible future acquisitions and capital
expenditures. However, there can be no assurance in this regard or that the
terms available for any future financing, if required, would be favorable to the
Company.
SEASONALITY
Historically, the Company's businesses have not been subject to seasonality
in any material respect.
INFLATION
Certain of the Company's expenses, such as wages and benefits, occupancy
costs and equipment repair and replacement, are subject to normal inflationary
pressures. Although the Company to date has been able to offset inflationary
cost increases through increased operating efficiencies and the negotiation of
favorable long-term real estate leases, the Company cannot assure that it will
be able to offset any future inflationary cost increases through similar
efficiencies, leases or increased storage or service charges.
FOREIGN CURRENCY EXCHANGE RATES
The Company generally views its investment in foreign businesses with a
functional currency other than the Company's reporting currency as long-term.
These investments are sensitive to fluctuations in foreign currency exchange
rates. The functional currencies of the Company's foreign subsidiaries are
principally denominated in Canadian dollars, British pounds sterling and several
other European and Latin American currencies. The effect of a change in foreign
exchange rates on the Company's net
25
investment in foreign subsidiaries is reflected in the "Accumulated other
comprehensive items" component of shareholders' equity. A 10% depreciation in
year-end 2000 functional currencies, relative to the U.S. dollar, would result
in a $2.9 million reduction in the Company's shareholders' equity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
In December 2000, the Company entered into a derivative financial contract,
which is a variable-for-fixed swap of interest payments payable on the last two
principal payments of the Company's Tranche B term loan.
Iron Mountain's investments in Iron Mountain Europe Limited, Iron Mountain
South America, Ltd. and other international investments may be subject to risks
and uncertainties relating to fluctuations in currency valuation. One of the
Company's Canadian subsidiaries, Iron Mountain Canada Corporation, has U.S.
dollar denominated debt. Gains and losses due to exchange rate fluctuations
related to this debt are recognized in the Company's consolidated statements of
operations.
As of December 31, 2000, the Company had approximately $378 million of debt
outstanding with a weighted average variable interest rate of 9.05% and
approximately $977 million of fixed rate debt outstanding. If the weighted
average variable interest rate had increased by 1%, such increase would have had
a negative impact on the Company's net income for the year ended December 31,
2000 of approximately $3.0 million. See Note 4 of Notes to Consolidated
Financial Statements for a discussion of the Company's long-term indebtedness,
including the fair values of such indebtedness as of December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Directors and executive officers of the Company are as follows (all
information is as of March 12, 2001):
NAMES OF DIRECTORS AND EXECUTIVE OFFICERS AGE POSITION
- ----------------------------------------- -------- ------------------------------------------
C. Richard Reese(1)....................... 55 Chairman of the Board of Directors, Chief
Executive Officer and President
John F. Kenny, Jr......................... 43 Executive Vice President, Chief Financial
Officer and Director
Harold E. Ebbighausen..................... 46 Executive Vice President of the Company
and President of Arcus Data Security, Inc.
Robert G. Miller.......................... 44 President and Chief Operating Officer of
Iron Mountain Records Management, Inc.
Clarke H. Bailey(1)(3).................... 46 Director
Constantin R. Boden(2)(3)................. 64 Director
Kent P. Dauten(2)......................... 45 Director
Eugene B. Doggett......................... 64 Director
B. Thomas Golisano........................ 59 Director
Arthur D. Little(2)(3).................... 57 Director
J. Peter Pierce........................... 55 Director
Howard D. Ross............................ 49 Director
Vincent J. Ryan(1)(3)..................... 65 Director
- ------------------------
(1) Member of the Executive Committee; Mr. Ryan is the Chairman of the Executive
Committee.
(2) Member of the Audit Committee; Mr. Boden is the Chairman of the Audit
Committee.
(3) Member of the Compensation Committee; Mr. Little is the Chairman of the
Compensation Committee.
The Company Board currently consists of eleven Directors. There are three
classes of Directors who serve for three year terms and are elected on a
staggered basis, one class of Directors standing for election each year.
Directors of each class hold office until the third annual meeting of the
shareholders of the Company following their election or until their successors
are elected and qualified.
The executive officers were elected by the Board of Directors on June 1,
2000 except for individual changes since that date. All executive officers hold
office at the discretion of the Company Board until the first meeting following
the next annual meeting of shareholders and until their successors are chosen
and qualified.
27
DIRECTORS AND EXECUTIVE OFFICERS
C. RICHARD REESE is the Chairman of the Board, a position he has held since
November 1995, and the Chief Executive Officer of the Company, a position he has
held since 1981, and has been a Director of the Company since 1990. He is also
President of the Company, a position he has held since J. Peter Pierce's
resignation in June 2000 and previously held from 1981 until November 1985.
Mr. Reese is a member of the investment committee of Schooner Capital LLC
("Schooner"), a shareholder of the Company. Prior to joining Iron Mountain,
Mr. Reese lectured at Harvard Business School in "Entrepreneurship" and provided
consulting services to small- and medium-sized emerging enterprises. Mr. Reese
has also served as the President and a Director of Professional Records and
Information Services Management ("PRISM"), a trade group of approximately 530
members. He holds a Master of Business Administration degree from Harvard
Business School.
JOHN F. KENNY, JR. is an Executive Vice President and the Chief Financial
Officer of the Company, positions he has held since May 1997. He has also served
as a Director of the Company since March 2000. Mr. Kenny joined Iron Mountain in
1991 and held a number of operating positions before assuming the position of
Vice President of Corporate Development in 1995. Prior to 1991, Mr. Kenny was a
Vice President of CS First Boston Merchant Bank, New York, with responsibility
for risk capital investments. Mr. Kenny has also served as a Director and the
Treasurer of PRISM. He holds a Master of Business Administration degree from
Harvard Business School.
HAROLD E. EBBIGHAUSEN is an Executive Vice President of the Company and the
President of Arcus Data Security, Inc., a subsidiary of the Company.
Mr. Ebbighausen has been an Executive Vice President of the Company since May
1998, and has been the President of Arcus Data Security, Inc. since July 1998.
Mr. Ebbighausen was a Vice President of Data Security Services of Iron Mountain
from September 1996 through June 1997. Prior to joining Iron Mountain,
Mr. Ebbighausen was Vice President of Data Management Services with INSCI
Corporation, a software provider for computer output and data storage solutions
to optical and CD technology. Previously, he held a number of field management
positions with Anacomp, Inc., a service bureau provider in the micrographics
industry.
ROBERT G. MILLER was appointed the President of Iron Mountain Records
Management, Inc., a subsidiary of the Company, on March 12, 2001 and has served
as the Chief Operating Officer of Iron Mountain Records Management, Inc. since
July 2000. Prior to July, 2000 Mr. Miller was an Executive Vice President of
Iron Mountain Records Management, Inc., a position that he had held since
December 1996. Mr. Miller joined Iron Mountain in 1988 and held various
positions including District Manager from 1988 through 1991 and Regional Vice
President from 1991 through 1996. Prior to 1988, Mr. Miller was employed as a
District Manager at Bell & Howell Records Management Company.
CLARKE H. BAILEY is a Director of the Company, a position he has held since
January 1998. He is Co-Chairman and Director of Highgate Capital LLC, a private
equity firm, and Chairman, Chief Executive Officer and a Director of
ShipXact.com, Inc., a private fulfillment and distribution company. Mr. Bailey
also serves as Chairman and a Director of Glenayre Technologies, Inc., a
manufacturing company in the wireless communications industry. Mr. Bailey was
the Chairman and Chief Executive Officer of each of Arcus Group, Inc., United
Acquisition Company and Arcus Technology Services, Inc. from 1995 until their
acquisition by Iron Mountain in January 1998. He is also a Director of
Connectivity Technologies Inc., Swiss Army Brands, Inc. and SWWT, Inc. (formerly
known as Sweetwater, Inc.). He holds a Master of Business Administration degree
from The Wharton School, University of Pennsylvania.
CONSTANTIN R. BOD