IRON MOUNTAIN INC/PA - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
or
o	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

IRON MOUNTAIN INCORPORATED
(Exact Name of Registrant as Specified in its Charter)

Pennsylvania (State or Other Jurisdiction of Incorporation or Organization)		23-2588479 (I.R.S. Employer Identification No.)
745 Atlantic Avenue, Boston, MA 02111 (Address of Principal Executive Offices, Including Zip Code)
(617) 535-4766 (Registrant's Telephone Number, Including Area Code)

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

Number of shares of the registrant's Common Stock at August 2, 2004: 129,240,684

IRON MOUNTAIN INCORPORATED

Index

		Page
PART I—FINANCIAL INFORMATION
Item 1 —	Unaudited Consolidated Financial Statements
	Consolidated Balance Sheets at December 31, 2003 and June 30, 2004 (Unaudited)	3
	Consolidated Statements of Operations for the Three Months Ended June 30, 2003 and 2004 (Unaudited)	4
	Consolidated Statements of Operations for the Six Months Ended June 30, 2003 and 2004 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2004 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2 —	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3 —	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4 —	Controls and Procedures	48
PART II—OTHER INFORMATION
Item 1 —	Legal Proceedings	50
Item 4 —	Submission of Matters to a Vote of Security-Holders	50
Item 6 —	Exhibits and Reports on Form 8-K	52
	Signature	53

Part I. Financial Information

Item 1. Unaudited Consolidated Financial Statements

IRON MOUNTAIN INCORPORATED

CONSOLIDATED BALANCE SHEETS

(In Thousands, except Share and Per Share Data)

(Unaudited)

			December 31, 2003			June 30, 2004
ASSETS
Current Assets:
	Cash and cash equivalents		$	74,683		$	40,006
	Accounts receivable (less allowances of $20,922 and $16,082, respectively)			279,800			322,444
	Deferred income taxes			33,043			35,310
	Prepaid expenses and other			84,057			63,627

		Total Current Assets		471,583			461,387
Property, Plant and Equipment:
	Property, plant and equipment			1,950,893			2,071,260
	Less—Accumulated depreciation			(458,626	)		(528,370	)

		Net Property, Plant and Equipment		1,492,267			1,542,890
Other Assets, net:
	Goodwill			1,776,279			1,864,946
	Customer relationships and acquisition costs			116,466			151,279
	Deferred financing costs			23,934			37,953
	Other			11,570			8,432

		Total Other Assets, net		1,928,249			2,062,610

		Total Assets	$	3,892,099		$	4,066,887

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
	Current portion of long-term debt		$	115,781		$	18,381
	Accounts payable			87,006			85,154
	Accrued expenses			234,426			231,122
	Deferred revenue			107,857			115,443
	Other current liabilities			39,675			422

		Total Current Liabilities		584,745			450,522
Long-term Debt, net of current portion				1,974,147			2,260,473
Other Long-term Liabilities				24,499			23,770
Deferred Rent				20,578			20,577
Deferred Income Taxes				146,231			168,337
Commitments and Contingencies (see Note 9)
Minority Interests				75,785			11,940
Shareholders' Equity:
	Preferred stock (par value $0.01; authorized 10,000,000 shares; none issued and outstanding)			—			—
	Common stock (par value $0.01; authorized 200,000,000 shares; issued and outstanding 128,362,881 shares and 129,224,623 shares, respectively)			1,284			1,292
	Additional paid-in capital			1,033,642			1,049,715
	Retained earnings			39,234			85,088
	Accumulated other comprehensive items, net			(8,046	)		(4,827	)

		Total Shareholders' Equity		1,066,114			1,131,268

		Total Liabilities and Shareholders' Equity	$	3,892,099		$	4,066,887

The accompanying notes are an integral part of these consolidated financial statements.

IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except Per Share Data)

(Unaudited)

			Three Months Ended June 30,
			2003			2004
Revenues:
	Storage		$	208,969		$	255,770
	Service and storage material sales			150,301			189,640

		Total Revenues		359,270			445,410
Operating Expenses:
	Cost of sales (excluding depreciation)			162,032			200,827
	Selling, general and administrative			96,134			118,488
	Depreciation and amortization			30,765			40,363
	Loss (Gain) on disposal/writedown of property, plant and equipment, net			1,688			(1,134	)

		Total Operating Expenses		290,619			358,544
Operating Income				68,651			86,866
Interest Expense, Net				36,397			42,659
Other (Income) Expense, Net				(4,722	)		4,945

		Income Before Provision for Income Taxes and Minority Interest		36,976			39,262
Provision for Income Taxes				15,285			15,825
Minority Interest in Earnings of Subsidiaries				1,558			580

		Net Income	$	20,133		$	22,857

Net Income per Share—Basic			$	0.16		$	0.18

Net Income per Share—Diluted			$	0.15		$	0.17

Weighted Average Common Shares Outstanding—Basic				127,851			128,956

Weighted Average Common Shares Outstanding—Diluted				130,190			131,036

The accompanying notes are an integral part of these consolidated financial statements.

IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except Per Share Data)

(Unaudited)

			Six Months Ended June 30,
			2003			2004
Revenues:
	Storage		$	411,800		$	504,365
	Service and storage material sales			299,281			374,967

		Total Revenues		711,081			879,332
Operating Expenses:
	Cost of sales (excluding depreciation)			322,183			399,137
	Selling, general and administrative			187,290			230,948
	Depreciation and amortization			60,714			77,643
	Loss (Gain) on disposal/writedown of property, plant and equipment, net			16			(1,014	)

		Total Operating Expenses		570,203			706,714
Operating Income				140,878			172,618
Interest Expense, Net				71,962			86,118
Other (Income) Expense, Net				(7,982	)		7,215

		Income Before Provision for Income Taxes and Minority Interest		76,898			79,285
Provision for Income Taxes				32,623			32,375
Minority Interest in Earnings of Subsidiaries				2,858			1,056

		Net Income	$	41,417		$	45,854

Net Income per Share—Basic			$	0.32		$	0.36

Net Income per Share—Diluted			$	0.32		$	0.35

Weighted Average Common Shares Outstanding—Basic				127,748			128,757

Weighted Average Common Shares Outstanding—Diluted				130,008			130,901

The accompanying notes are an integral part of these consolidated financial statements.

IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

		Six Months Ended June 30,
		2003			2004
Cash Flows from Operating Activities:
	Net income	$	41,417		$	45,854
Adjustments to reconcile net income to cash flows provided by operating activities:
	Minority interests		2,858			1,056
	Depreciation		57,250			72,931
	Amortization (includes deferred financing costs and bond discount of $2,162 and $1,285, respectively)		5,626			5,997
	Provision for deferred income taxes		29,752			27,766
	Loss on early extinguishment of debt		15,665			2,425
	Loss (Gain) on disposal/writedown of property, plant and equipment, net		16			(1,014	)
	(Gain) Loss on foreign currency and other, net		(23,250	)		2,418
Changes in Assets and Liabilities (exclusive of acquisitions):
	Accounts receivable		(10,550	)		(36,459	)
	Prepaid expenses and other current assets		9,084			(4,603	)
	Accounts payable		(3,129	)		(2,479	)
	Accrued expenses, deferred revenue and other current liabilities		7,877			14,776
	Other assets and long-term liabilities		(1,959	)		1,069

	Cash Flows from Operating Activities		130,657			129,737
Cash Flows from Investing Activities:
	Capital expenditures		(106,037	)		(101,558	)
	Cash paid for acquisitions, net of cash acquired		(24,109	)		(181,858	)
	Additions to customer relationship and acquisition costs		(4,713	)		(6,400	)
	Investment in convertible preferred stock		(1,357	)		—
	Proceeds from sales of property and equipment		6,376			2,362

	Cash Flows from Investing Activities		(129,840	)		(287,454	)
Cash Flows from Financing Activities:
	Repayment of debt and term loans		(139,951	)		(672,218	)
	Proceeds from borrowings and term loans		51,968			588,457
	Early retirement of senior subordinated notes		(254,407	)		(20,797	)
	Net proceeds from sales of senior subordinated notes		455,590			269,427
	Debt financing (repayment to) and equity contribution from (distribution to) minority shareholders, net		4,484			(41,824	)
	Other, net		2,657			(606	)

	Cash Flows from Financing Activities		120,341			122,439
Effect of exchange rates on cash and cash equivalents			413			601

Increase (Decrease) in Cash and Cash Equivalents			121,571			(34,677	)
Cash and Cash Equivalents, Beginning of Period			56,292			74,683

Cash and Cash Equivalents, End of Period		$	177,863		$	40,006

The accompanying notes are an integral part of these consolidated financial statements.

IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(1) General

The interim consolidated financial statements are presented herein without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation. Interim results are not necessarily indicative of results for a full year.

The consolidated balance sheet presented as of December 31, 2003 has been derived from the consolidated financial statements that have been audited by our independent auditors. The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2003.

On May 27, 2004, the Company's Board of Directors authorized and approved a three-for-two stock split effected in the form of a dividend on the Company's common stock. Such additional shares of common stock were issued on June 30, 2004 to all shareholders of record as of the close of business on June 15, 2004. All share and per share amounts have been restated to reflect the stock split.

Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation.

(2) Summary of Significant Accounting Policies

a.: Principles of Consolidation

The accompanying financial statements reflect our financial position and results of operations on a consolidated basis. Financial position and results of operations of Iron Mountain Europe Limited ("IME"), our European subsidiary, are consolidated for the appropriate periods based on its fiscal year ended October 31. All significant intercompany account balances have been eliminated or presented to reflect the underlying economics of the transactions.

b.: Foreign Currency Translation

Local currencies are considered the functional currencies for most of our operations outside the United States. All assets and liabilities are translated at period-end exchange rates, and revenues and expenses are translated at average exchange rates for the applicable period, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." Resulting translation adjustments are reflected in the accumulated other comprehensive items component of shareholders' equity. The gain or loss on foreign currency transactions, including those related to (a) U.S. dollar denominated 8¹/8% senior notes of our Canadian subsidiary (the "Subsidiary notes"), (b) our 7¹/4% GBP Senior Subordinated Notes due 2014 (the "7¹/4% notes"), (c) the borrowings in certain foreign currencies under our revolving credit agreements, and (d) the foreign currency denominated intercompany obligations of our foreign subsidiaries to us, are included in other (income) expense, net, on our consolidated statements of operations. The total of such net gains

amounted to $18,550 and $23,634 for the three and six months ended June 30, 2003, respectively, and the total of such net losses amounted to $5,046 and $4,938 for the three and six months ended June 30, 2004, respectively.

c.: Goodwill and Other Intangible Assets

We apply the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized but are reviewed annually for impairment or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have indefinite lives are amortized over their useful lives.

We have selected October 1 as our annual goodwill impairment review date. We performed our last annual goodwill impairment review as of October 1, 2003 and noted no impairment of goodwill at our reporting units as of that date. As of June 30, 2004, no factors were identified that would alter this assessment.

The changes in the carrying value of goodwill attributable to each reportable operating segment for the six month period ended June 30, 2004 are as follows:

	Business Records Management			Off-Site Data Protection			International			Corporate & Other		Total Consolidated
Balance as of December 31, 2003	$	1,218,472		$	244,621		$	311,815		$	1,371	$	1,776,279
Goodwill acquired during the period		14,140			2,718			60,510			—		77,368
Adjustments to purchase reserves		(334	)		(78	)		8,072			—		7,660
Fair value adjustments		(1,753	)		(31	)		(1,571	)		—		(3,355	)
Other adjustments and currency effects		(4,592	)		—			11,586			—		6,994

Balance as of June 30, 2004	$	1,225,933		$	247,230		$	390,412		$	1,371	$	1,864,946

The components of our amortizable intangible assets at June 30, 2004 are as follows:

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer Relationships and Acquisition Costs	$	169,334	$	18,055	$	151,279
Non-Compete Agreements		8,776		7,700		1,076
Deferred Financing Costs		45,020		7,067		37,953

Total	$	223,130	$	32,822	$	190,308

d.: Stock Based Compensation

As of January 1, 2003, we adopted the measurement provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." As a result we adopted the fair value method of accounting in our financial statements beginning January 1, 2003 using the prospective method. The prospective method involves recognizing expense for the fair value for all awards granted or modified in the year of

adoption and thereafter with no expense recognition for previous awards. Additionally, we recognize expense related to the discount embedded in our employee stock purchase plan. We will apply the fair value recognition provisions to all stock based awards granted, modified or settled on or after January 1, 2003 and will continue to provide the required pro forma information for all awards previously granted, modified or settled before January 1, 2003.

Had we elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123 and No. 148 for options granted prior to January 1, 2003, net income and net income per share would have been changed to the pro forma amounts indicated in the table below:

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2004			2003			2004
Net income, as reported		$	20,133		$	22,857		$	41,417		$	45,854
Add: Stock-based employee compensation expense included in reported net income, net of tax benefit			99			480			122			923
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax benefit			(642	)		(946	)		(1,180	)		(1,873	)

Net income, pro forma		$	19,590		$	22,391		$	40,359		$	44,904

Earnings per share:
	Basic—as reported	$	0.16		$	0.18		$	0.32		$	0.36
	Basic—pro forma		0.15			0.17			0.32			0.35
	Diluted—as reported		0.15			0.17			0.32			0.35
	Diluted—pro forma		0.15			0.17			0.31			0.34

The weighted average fair value of options granted for the six months ended June 30, 2003 and 2004 was $7.30 and $8.31 per share, respectively. The values were estimated on the date of grant using the Black-Scholes option pricing model. The following table summarizes the weighted average assumptions used for grants in the respective period:

Weighted Average Assumption	Six Months Ended June 30, 2003		Six Months Ended June 30, 2004
Expected volatility	27.5	%	25.1	%
Risk-free interest rate	2.87		3.36
Expected dividend yield	None		None
Expected life of the option	5.0 years		5.0 years

e.: Income Per Share—Basic and Diluted

In accordance with SFAS No. 128, "Earnings per Share," basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding. The calculation of diluted net income per share is consistent with that of basic net income per share but

gives effect to all potential common shares (that is, securities such as options, warrants or convertible securities) that were outstanding during the period, unless the effect is antidilutive. Potential common shares, substantially attributable to stock options, included in the calculation of diluted net income per share totaled 2,338,333 shares and 2,079,513 shares for the three months ended June 30, 2003 and 2004, respectively, and 2,259,843 shares and 2,144,143 shares for the six months ended June 30, 2003 and 2004, respectively. No shares for the three and six months ended June 30, 2003 and 2004, respectively, have been excluded from the calculation of diluted net income per share, as their effects are antidilutive.

f.: Supplemental Cash Flow Information

For the six months ended June 30, 2003 and 2004, cash payments for interest were $58,789 and $80,625, respectively, and cash payments for income taxes (net of refunds) were $1,845 and $6,015, respectively.

g.: New Accounting Pronouncements

In January and December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46") and No. 46, revised ("FIN 46R"), "Consolidation of Variable Interest Entities." These statements, which address perceived weaknesses in accounting for entities commonly known as special-purpose or off-balance-sheet, require consolidation of certain interests or arrangements by virtue of holding a controlling financial interest in such entities. Certain provisions of FIN 46R related to interests in special purpose entities were applicable for the period ended December 31, 2003. We applied FIN 46R to our interests in all entities subject to the interpretation as of and for the six months ended June 30, 2004. Adoption of this new method of accounting for variable interest entities did not have a material impact on our consolidated results of operations and financial position.

(3) Comprehensive Income

SFAS No. 130, "Reporting Comprehensive Income," requires presentation of the components of comprehensive income, including the changes in equity from non-owner sources such as unrealized gains (losses) on hedging transactions, securities and foreign currency translation adjustments. Our total comprehensive income is as follows:

			Three Months Ended June 30,					Six Months Ended June 30,
			2003		2004			2003		2004
Comprehensive Income:
	Net Income		$	20,133	$	22,857		$	41,417	$	45,854
	Other Comprehensive Income (Loss):
		Foreign Currency Translation Adjustments		3,631		(6,730	)		10,437		(3,165	)
		Unrealized (Loss) Gain on Hedging Contracts