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 September 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 November 1, 2004: 129,380,787

IRON MOUNTAIN INCORPORATED

Index

		Page
PART I—FINANCIAL INFORMATION
Item 1 —	Unaudited Consolidated Financial Statements
	Consolidated Balance Sheets at December 31, 2003 and September 30, 2004 (Unaudited)	3
	Consolidated Statements of Operations for the Three Months Ended September 30, 2003 and 2004 (Unaudited)	4
	Consolidated Statements of Operations for the Nine Months Ended September 30, 2003 and 2004 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 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	29
Item 3 —	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4 —	Controls and Procedures	49
PART II—OTHER INFORMATION
Item 1 —	Legal Proceedings	51
Item 6 —	Exhibits	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			September 30, 2004
ASSETS
Current Assets:
	Cash and cash equivalents		$	74,683		$	44,428
	Accounts receivable (less allowances of $20,922 and $14,010, respectively)			279,800			343,941
	Deferred income taxes			33,043			32,213
	Prepaid expenses and other			84,057			59,046

		Total Current Assets		471,583			479,628
Property, Plant and Equipment:
	Property, plant and equipment			1,950,893			2,143,420
	Less—Accumulated depreciation			(458,626	)		(567,974	)

		Net Property, Plant and Equipment		1,492,267			1,575,446
Other Assets, net:
	Goodwill			1,776,279			1,943,622
	Customer relationships and acquisition costs			116,466			162,121
	Deferred financing costs			23,934			37,149
	Other			11,570			8,262

		Total Other Assets, net		1,928,249			2,151,154

		Total Assets	$	3,892,099		$	4,206,228

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
	Current portion of long-term debt		$	115,781		$	17,923
	Accounts payable			87,006			96,619
	Accrued expenses			234,426			236,219
	Deferred revenue			107,857			119,165
	Other current liabilities			39,675			451

		Total Current Liabilities		584,745			470,377
Long-term Debt, net of current portion				1,974,147			2,330,155
Other Long-term Liabilities				24,499			22,248
Deferred Rent				20,578			22,998
Deferred Income Taxes				146,231			183,602
Commitments and Contingencies (see Note 9)
Minority Interests				75,785			11,735
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 129,359,464 shares, respectively)			1,284			1,293
	Additional paid-in capital			1,033,642			1,053,088
	Retained earnings			39,234			103,538
	Accumulated other comprehensive items, net			(8,046	)		7,194

		Total Shareholders' Equity		1,066,114			1,165,113

		Total Liabilities and Shareholders' Equity	$	3,892,099		$	4,206,228

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 September 30,
			2003		2004
Revenues:
	Storage		$	222,973	$	263,867
	Service and storage material sales			158,785		195,463

		Total Revenues		381,758		459,330
Operating Expenses:
	Cost of sales (excluding depreciation)			171,355		209,797
	Selling, general and administrative			98,087		122,508
	Depreciation and amortization			33,197		42,269
	Loss (Gain) on disposal/writedown of property, plant and equipment, net			1,870		(246	)

		Total Operating Expenses		304,509		374,328
Operating Income				77,249		85,002
Interest Expense, Net				38,790		54,313
Other Expense (Income), Net				10,343		(2,979	)

		Income Before Provision for Income Taxes and Minority Interest		28,116		33,668
Provision for Income Taxes				12,012		14,293
Minority Interest in Earnings of Subsidiaries				1,310		925

		Net Income	$	14,794	$	18,450

Net Income per Share—Basic			$	0.12	$	0.14

Net Income per Share—Diluted			$	0.11	$	0.14

Weighted Average Common Shares Outstanding—Basic				127,955		129,288

Weighted Average Common Shares Outstanding—Diluted				130,089		131,366

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)

			Nine Months Ended September 30,
			2003		2004
Revenues:
	Storage		$	634,773	$	768,232
	Service and storage material sales			458,066		570,430

		Total Revenues		1,092,839		1,338,662
Operating Expenses:
	Cost of sales (excluding depreciation)			493,538		608,934
	Selling, general and administrative			285,377		353,456
	Depreciation and amortization			93,911		119,912
	Loss (Gain) on disposal/writedown of property, plant and equipment, net			1,886		(1,260	)

		Total Operating Expenses		874,712		1,081,042
Operating Income				218,127		257,620
Interest Expense, Net				110,752		140,431
Other Expense, Net				2,361		4,236

		Income Before Provision for Income Taxes and Minority Interest		105,014		112,953
Provision for Income Taxes				44,635		46,668
Minority Interest in Earnings of Subsidiaries				4,168		1,981

		Net Income	$	56,211	$	64,304

Net Income per Share—Basic			$	0.44	$	0.50

Net Income per Share—Diluted			$	0.43	$	0.49

Weighted Average Common Shares Outstanding—Basic				127,817		128,934

Weighted Average Common Shares Outstanding—Diluted				130,035		131,056

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

IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

		Nine Months Ended September 30,
		2003			2004
Cash Flows from Operating Activities:
	Net income	$	56,211		$	64,304
Adjustments to reconcile net income to cash flows provided by operating activities:
	Minority interests		4,168			1,981
	Depreciation		88,921			112,334
	Amortization (includes deferred financing costs and bond discount of $2,939 and $2,466, respectively)		7,929			10,044
	Provision for deferred income taxes		40,738			41,448
	Loss on early extinguishment of debt		21,175			2,454
	Loss (Gain) on disposal/writedown of property, plant and equipment, net		1,886			(1,260	)
	(Gain) Loss on foreign currency, stock-based employee compensation expense, interest rate swap expense and other, net		(18,024	)		8,607
Changes in Assets and Liabilities (exclusive of acquisitions):
	Accounts receivable		(14,880	)		(52,035	)
	Prepaid expenses and other current assets		5,098			685
	Accounts payable		(6,516	)		7,719
	Accrued expenses, deferred revenue and other current liabilities		(2,014	)		10,476
	Other assets and long-term liabilities		(1,073	)		2,222

	Cash Flows from Operating Activities		183,619			208,979
Cash Flows from Investing Activities:
	Capital expenditures		(148,039	)		(159,090	)
	Cash paid for acquisitions, net of cash acquired		(378,803	)		(253,528	)
	Additions to customer relationship and acquisition costs		(8,638	)		(9,512	)
	Investment in convertible preferred stock		(1,357	)		—
	Proceeds from sales of property and equipment		6,621			2,508

	Cash Flows from Investing Activities		(530,216	)		(419,622	)
Cash Flows from Financing Activities:
	Repayment of debt and term loans		(485,408	)		(891,151	)
	Proceeds from borrowings and term loans		626,029			862,042
	Early retirement of senior subordinated notes		(306,439	)		(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		20,099			(41,741	)
	Other, net		3,165			765

	Cash Flows from Financing Activities		313,036			178,545
Effect of exchange rates on cash and cash equivalents			813			1,843

Decrease in Cash and Cash Equivalents			(32,748	)		(30,255	)
Cash and Cash Equivalents, Beginning of Period			56,292			74,683

Cash and Cash Equivalents, End of Period		$	23,544		$	44,428

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 Board of Directors of Iron Mountain Incorporated (the "Company" or "IMI") 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 losses amounted to $4,838 and net gains of $18,796 for the three and nine months ended September 30, 2003, respectively, and the total of such net gains amounted to $2,753 and net losses of $2,185 for the three and nine months ended September 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 September 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 nine month period ended September 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		75,972			2,617			56,597			—			135,186
Adjustments to purchase reserves		(442	)		(70	)		10,799			—			10,287
Fair value adjustments		(1,701	)		(31	)		(225	)		—			(1,957	)
Other adjustments and currency effects		3,399			—			20,474			(46	)		23,827

Balance as of September 30, 2004	$	1,295,700		$	247,137		$	399,460		$	1,325		$	1,943,622

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

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer Relationships and Acquisition Costs	$	182,853	$	20,732	$	162,121
Non-Compete Agreements		8,780		7,949		831
Deferred Financing Costs		45,221		8,072		37,149

Total	$	236,854	$	36,753	$	200,101

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 apply the fair value recognition provisions to all stock based awards granted, modified or settled on or after January 1, 2003 and we 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 September 30,						Nine Months Ended September 30,
		2003			2004			2003			2004
Net income, as reported		$	14,794		$	18,450		$	56,211		$	64,304
Add: Stock-based employee compensation expense included in reported net income, net of tax benefit			380			1,578			502			2,501
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax benefit			(881	)		(2,017	)		(2,061	)		(3,890	)

Net income, pro forma		$	14,293		$	18,011		$	54,652		$	62,915

Earnings per share:
	Basic—as reported	$	0.12		$	0.14		$	0.44		$	0.50
	Basic—pro forma		0.11			0.14			0.43			0.49
	Diluted—as reported		0.11			0.14			0.43			0.49
	Diluted—pro forma		0.11			0.14			0.42			0.48

The weighted average fair value of options granted for the nine months ended September 30, 2003 and 2004 was $10.97 and $8.48 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	Nine Months Ended September 30, 2003		Nine Months Ended September 30, 2004
Expected volatility	27.3	%	24.9	%
Risk-free interest rate	2.85		3.41
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 2,135,012 shares and 2,078,369 shares for the three months ended September 30, 2003 and 2004, respectively, and 2,218,232 shares and 2,122,218 shares for the nine months ended September 30, 2003 and 2004, respectively. Potential common shares of 460,058 for the three and nine months ended September 30, 2003, respectively, and no shares for the three and nine months ended September 30, 2004 have been excluded from the calculation of diluted net income per share, as their effects are antidilutive.

f.: Supplemental Cash Flow Information

For the nine months ended September 30, 2003 and 2004, cash payments for interest were $95,043 and $134,211, respectively, and cash payments for income taxes (net of refunds) were $3,720 and $7,820, respectively.

(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 September 30,				Nine Months Ended September 30,
			2003		2004		2003		2004
Comprehensive Income:
	Net Income		$	14,794	$	18,450	$	56,211	$	64,304
	Other Comprehensive Income (Loss):
		Foreign Currency Translation Adjustments