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Iron Mountain 10-Q 2006

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2006

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)

Delaware

 

23-2588479

(State or Other Jurisdiction of Incorporation or Organization)

 

(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 x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x         Accelerated filer o         Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

Number of shares of the registrant’s Common Stock at August 1, 2006: 132,242,111

 




IRON MOUNTAIN INCORPORATED

Index

 

Page

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

Item 1—Unaudited Consolidated Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at December 31, 2005 and June 30, 2006 (Unaudited)

 

 

3

 

 

Consolidated Statements of Operations for the Three Months Ended June 30, 2005 and 2006 (Unaudited)

 

 

4

 

 

Consolidated Statements of Operations for the Six Months Ended June 30, 2005 and 2006 (Unaudited)

 

 

5

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2006 (Unaudited)

 

 

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

7

 

 

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

33

 

 

Item 3—Quantitative and Qualitative Disclosures About Market Risk

 

 

48

 

 

Item 4—Controls and Procedures

 

 

49

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

Item 1—Legal Proceedings

 

 

50

 

 

Item 1A—Risk Factors

 

 

50

 

 

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds

 

 

50

 

 

Item 4—Submission of Matters to a Vote of Security-Holders

 

 

50

 

 

Item 6—Exhibits

 

 

52

 

 

Signature

 

 

53

 

 

 

2




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,

 

June 30,

 

 

 

2005

 

2006

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

53,413

 

 

$

40,952

 

Accounts receivable (less allowances of $14,522 and $14,181, respectively)

 

 

408,564

 

 

440,285

 

Deferred income taxes

 

 

27,623

 

 

25,745

 

Prepaid expenses and other

 

 

64,568

 

 

82,614

 

Total Current Assets

 

 

554,168

 

 

589,596

 

Property, Plant and Equipment:

 

 

 

 

 

 

 

Property, plant and equipment

 

 

2,556,880

 

 

2,746,506

 

Less—Accumulated depreciation

 

 

(775,614

)

 

(870,990

)

Net Property, Plant and Equipment

 

 

1,781,266

 

 

1,875,516

 

Other Assets, net:

 

 

 

 

 

 

 

Goodwill

 

 

2,138,641

 

 

2,186,367

 

Customer relationships and acquisition costs

 

 

229,006

 

 

243,902

 

Deferred financing costs

 

 

31,606

 

 

29,046

 

Other

 

 

31,453

 

 

32,485

 

Total Other Assets, net

 

 

2,430,706

 

 

2,491,800

 

Total Assets

 

 

$

4,766,140

 

 

$

4,956,912

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

 

$

25,905

 

 

$

65,762

 

Accounts payable

 

 

148,234

 

 

139,564

 

Accrued expenses

 

 

266,720

 

 

244,203

 

Deferred revenue

 

 

151,137

 

 

159,685

 

Total Current Liabilities

 

 

591,996

 

 

609,214

 

Long-term Debt, net of current portion

 

 

2,503,526

 

 

2,541,996

 

Other Long-term Liabilities

 

 

33,545

 

 

35,150

 

Deferred Rent

 

 

35,763

 

 

47,366

 

Deferred Income Taxes

 

 

225,314

 

 

254,500

 

Commitments and Contingencies (see Note 9)

 

 

 

 

 

 

 

Minority Interests

 

 

5,867

 

 

5,083

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock (par value $0.01; authorized 10,000,000 shares; none issued and outstanding)    

 

 

 

 

 

Common stock (par value $0.01; authorized 400,000,000 shares; issued and outstanding 131,662,871 shares and 132,164,748 shares, respectively)

 

 

1,317

 

 

1,322

 

Additional paid-in capital

 

 

1,105,604

 

 

1,123,622

 

Retained earnings

 

 

244,524

 

 

309,639

 

Accumulated other comprehensive items, net

 

 

18,684

 

 

29,020

 

Total Stockholders’ Equity

 

 

1,370,129

 

 

1,463,603

 

Total Liabilities and Stockholders’ Equity

 

 

$

4,766,140

 

 

$

4,956,912

 

 

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

3




IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except Per Share Data)
(Unaudited)

 

 

Three Months Ended
June 30,

 

 

 

2005

 

2006

 

Revenues:

 

 

 

 

 

Storage

 

$

291,666

 

$

327,863

 

Service and storage material sales

 

220,256

 

253,705

 

Total Revenues

 

511,922

 

581,568

 

Operating Expenses:

 

 

 

 

 

Cost of sales (excluding depreciation)

 

228,088

 

259,290

 

Selling, general and administrative

 

141,313

 

168,285

 

Depreciation and amortization

 

44,745

 

51,273

 

Loss (Gain) on disposal/writedown of property, plant and equipment, net

 

1,083

 

(174

)

Total Operating Expenses

 

415,229

 

478,674

 

Operating Income

 

96,693

 

102,894

 

Interest Expense, Net

 

47,222

 

47,254

 

Other Expense (Income), Net

 

4,946

 

(6,858

)

Income Before Provision for Income Taxes and Minority Interest

 

44,525

 

62,498

 

Provision for Income Taxes

 

18,866

 

24,212

 

Minority Interest in Earnings of Subsidiaries, Net

 

249

 

444

 

Net Income

 

$

25,410

 

$

37,842

 

Net Income per Share—Basic

 

$

0.19

 

$

0.29

 

Net Income per Share—Diluted

 

$

0.19

 

$

0.28

 

Weighted Average Common Shares Outstanding—Basic

 

130,474

 

131,929

 

Weighted Average Common Shares Outstanding—Diluted

 

131,470

 

133,445

 

 

 

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

4




IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except Per Share Data)
(Unaudited)

 

 

Six Months Ended
June 30,

 

 

 

2005

 

2006

 

Revenues:

 

 

 

 

 

Storage

 

$

577,021

 

$

647,018

 

Service and storage material sales

 

436,307

 

498,207

 

Total Revenues

 

1,013,328

 

1,145,225

 

Operating Expenses:

 

 

 

 

 

Cost of sales (excluding depreciation)

 

458,716

 

521,658

 

Selling, general and administrative

 

276,653

 

327,128

 

Depreciation and amortization

 

89,291

 

101,121

 

Loss (Gain) on disposal/writedown of property, plant and equipment, net

 

865

 

(11

)

Total Operating Expenses

 

825,525

 

949,896

 

Operating Income

 

187,803

 

195,329

 

Interest Expense, Net

 

93,028

 

93,832

 

Other Expense (Income), Net

 

9,609

 

(9,705

)

Income Before Provision for Income Taxes and Minority Interest

 

85,166

 

111,202

 

Provision for Income Taxes

 

36,102

 

45,183

 

Minority Interest in Earnings of Subsidiaries, Net

 

705

 

904

 

Net Income

 

$

48,359

 

$

65,115

 

Net Income per Share—Basic

 

$

0.37

 

$

0.49

 

Net Income per Share—Diluted

 

$

0.37

 

$

0.49

 

Weighted Average Common Shares Outstanding—Basic

 

130,228

 

131,805

 

Weighted Average Common Shares Outstanding—Diluted

 

131,494

 

133,379

 

 

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

5




IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

 

 

Six Months Ended
June 30,

 

 

 

2005

 

2006

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

48,359

 

$

65,115

 

Adjustments to reconcile net income to cash flows from operating activities:

 

 

 

 

 

Minority interest in earnings of subsidiaries, net

 

705

 

904

 

Depreciation

 

81,285

 

91,791

 

Amortization (includes deferred financing costs and bond discount of $2,416 and $2,466, respectively)

 

10,422

 

11,796

 

Stock compensation expense

 

2,146

 

5,823

 

Provision for deferred income taxes

 

29,365

 

32,843

 

Loss (Gain) on disposal/writedown of property, plant and equipment, net

 

865

 

(11

)

Loss (Gain) on foreign currency and other, net

 

7,348

 

(11,432

)

Changes in Assets and Liabilities (exclusive of acquisitions):

 

 

 

 

 

Accounts receivable

 

(17,862

)

(23,828

)

Prepaid expenses and other current assets

 

(1,665

)

(11,117

)

Accounts payable

 

7,272

 

4,629

 

Accrued expenses, deferred revenue and other current liabilities

 

21,186

 

1,484

 

Other assets and long-term liabilities

 

1,929

 

5,738

 

Cash Flows from Operating Activities

 

191,355

 

173,735

 

Cash Flows from Investing Activities:

 

 

 

 

 

Capital expenditures

 

(131,850

)

(154,971

)

Cash paid for acquisitions, net of cash acquired

 

(34,874

)

(68,857

)

Additions to customer relationship and acquisition costs

 

(6,695

)

(7,274

)

Investment in joint ventures

 

 

(3,129

)

Other, net

 

919

 

(732

)

Cash Flows from Investing Activities

 

(172,500

)

(234,963

)

Cash Flows from Financing Activities:

 

 

 

 

 

Repayment of debt and term loans

 

(307,048

)

(299,013

)

Proceeds from debt and term loans

 

275,405

 

339,056

 

Debt financing (repayment to) and equity contribution from (distribution to) minority stockholders, net

 

(1,769

)

(1,984

)

Proceeds from exercise of stock options and employee stock purchase plan

 

12,372

 

10,202

 

Payment of debt financing costs and stock issuance costs

 

(222

)

(15

)

Cash Flows from Financing Activities

 

(21,262

)

48,246

 

Effect of exchange rates on cash and cash equivalents

 

(18

)

521

 

Decrease in Cash and Cash Equivalents

 

(2,425

)

(12,461

)

Cash and Cash Equivalents, Beginning of Period

 

31,942

 

53,413

 

Cash and Cash Equivalents, End of Period

 

$

29,517

 

$

40,952

 

Supplemental Data:

 

 

 

 

 

Cash Paid for Interest

 

$

93,558

 

$

93,133

 

Cash Paid for Income Taxes

 

$

6,745

 

$

11,280

 

Non-Cash Investing Activities:

 

 

 

 

 

Capital Leases

 

$

1,165

 

$

8,608

 

Capital Expenditures

 

$

 

$

27,301

 

 

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

6




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, 2005 has been derived from our audited consolidated financial statements. 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 of America (“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 Current Report on Form 8-K dated May 22, 2006.

(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 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 stockholders’ equity. The gain or loss on foreign currency transactions, calculated as the difference between the historical exchange rate and the exchange rate at the applicable measurement date, including those related to (a) our 71¤4% GBP Senior Subordinated Notes due 2014 (the “71¤4% notes”), (b) the borrowings in certain foreign currencies under our revolving credit agreements, and (c) certain foreign currency denominated intercompany obligations of our foreign subsidiaries to us and between our foreign subsidiaries, are included in other expense (income), net, on our consolidated statements of operations. Included in other expense (income), net are $4,965 and $9,754 of net losses associated with foreign currency transactions for the three and six months ended June 30, 2005, respectively, and $7,186 and $8,515 of net gains associated with foreign currency transactions for the three and six months ended June 30, 2006, respectively.

7




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (In Thousands, Except Share and Per Share Data)
 (Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

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, 2005 and noted no impairment of goodwill. In making this assessment, we rely on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, transactions and market place data. There are inherent uncertainties related to these factors and our judgment in applying them to the analysis of goodwill impairment. As of June 30, 2006, no factors were identified that would alter this assessment. Impairment adjustments recognized in the future, if any, will be recognized as operating expenses. Our operating segments at which level we performed our goodwill impairment analysis for the year ended December 31, 2005 were as follows:  Business Records Management, Data Protection, Fulfillment, Digital Archiving Services, Europe, South America, Mexico and Asia Pacific. When changes occur in the composition of one or more operating segments, the goodwill is reassigned to the segments affected based on their relative fair value. Beginning January 1, 2006, we changed our reportable segments as a result of certain management and organizational changes within our North American business. Therefore, the presentation of all historical segment reporting has been changed to conform to our new management reporting. See Note 8 for more information regarding our changes in segment reporting.

Goodwill valuations have been calculated using an income approach based on the present value of future cash flows of each operating segment. This approach incorporates many assumptions including future growth rates, discount factors, expected capital expenditures and income tax cash flows. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods.

The changes in the carrying value of goodwill attributable to each reportable operating segment for the six month period ended June 30, 2006 are as follows:

 

 

North
 American
 Physical
 Business

 

International
 Physical
 Business

 

Worldwide
 Digital
 Business

 

Total
 Consolidated

 

Balance as of December 31, 2005

 

$

1,543,037

 

 

$

463,742

 

 

$

131,862

 

 

$

2,138,641

 

 

Deductible Goodwill acquired during the period

 

3,265

 

 

7,810

 

 

 

 

11,075

 

 

Nondeductible Goodwill acquired during the period

 

3,358

 

 

7,802

 

 

 

 

11,160

 

 

Adjustments to purchase reserves

 

(373

)

 

430

 

 

9

 

 

66

 

 

Fair value adjustments

 

(173

)

 

(9,532

)

 

497

 

 

(9,208

)

 

Currency effects and other adjustments

 

6,866

 

 

27,606

 

 

161

 

 

34,633

 

 

Balance as of June 30, 2006

 

$

1,555,980

 

 

$

497,858

 

 

$

132,529

 

 

$

2,186,367

 

 

 

8




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (In Thousands, Except Share and Per Share Data)
 (Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

The components of our amortizable intangible assets at June 30, 2006 are as follows:

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

Customer Relationships and Acquisition Costs

 

 

$

287,512

 

 

 

$

43,610

 

 

 

$

243,902

 

 

Core Technology(1)

 

 

25,960

 

 

 

4,720

 

 

 

21,240

 

 

Non-Compete Agreements(1)

 

 

1,418

 

 

 

1,106

 

 

 

312

 

 

Deferred Financing Costs

 

 

46,910

 

 

 

17,864

 

 

 

29,046

 

 

Total

 

 

$

361,800

 

 

 

$

67,300

 

 

 

$

294,500

 

 


(1)       Included in other assets, net in the accompanying consolidated balance sheet.

d.                Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123 and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). 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” 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. We have applied the fair value recognition provisions to all stock based awards granted, modified or settled on or after January 1, 2003.

Among other items, SFAS No. 123R eliminates the use of APB No. 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. We adopted SFAS No. 123R effective January 1, 2006 using the modified prospective method, as permitted under SFAS No. 123R. We record stock-based compensation expense for the cost of stock options, restricted stock and shares issued under the employee stock purchase plan (together, “Employee Stock-Based Awards”) based on the requirements of SFAS No. 123R beginning January 1, 2006 and based on the requirements of SFAS No. 123 for all unvested awards granted prior to January 1, 2006.

Stock-based compensation expense, included in the accompanying consolidated statements of operations, for the three and six months ended June 30, 2005 was $1,103 ($833 after tax or $0.01 per basic and diluted share) and $2,146 ($1,692 after tax or $0.01 per basic and diluted share), respectively, and for the three and six months ended June 30, 2006 was $3,117 ($2,860 after tax or $0.02 per basic and diluted share) and $5,823 ($4,518 after tax or $0.03 per basic and diluted share), respectively, for Employee Stock-Based Awards. For the three and six months ended June 30, 2006, the incremental stock-based compensation expense due to the adoption of SFAS No. 123R caused income before provision for income taxes and minority interest to decrease by $257 and $554, respectively, and net income to decrease by $158 and $340, respectively, and had no impact on basic and diluted earnings per share.

9




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (In Thousands, Except Share and Per Share Data)
 (Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow, potentially reducing net operating cash flows and increasing net financing cash flows in future periods.

The following table details the effect on net income and earnings per share had stock-based compensation expense for the Employee Stock-Based Awards been recorded in the three and six months ended June 30,  2005 based on SFAS No. 123R. The reported and pro forma net income and earnings per share for the three and six months ended June 30, 2006 in the table below are the same since stock-based compensation expense is calculated under the provisions of SFAS No. 123R. These amounts for the three and six months ended June 30, 2006 are included in the table below only to provide the detail for a comparative presentation to the same periods of 2005.

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2006

 

2005

 

2006

 

Net income, as reported

 

$

25,410

 

$

37,842

 

$

48,359

 

$

65,115

 

Add: Stock-based employee compensation expense included in reported net income, net of tax benefit

 

833

 

2,860

 

1,692

 

4,518

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax benefit

 

(1,135

)

(2,860

)

(2,333

)

(4,518

)

Net income, pro forma

 

$

25,108

 

$

37,842

 

$

47,718

 

$

65,115

 

Net Income per share:

 

 

 

 

 

 

 

 

 

Basic—as reported

 

0.19

 

0.29

 

0.37

 

0.49

 

Basic—pro forma

 

0.19

 

0.29

 

0.37

 

0.49

 

Diluted—as reported

 

0.19

 

0.28

 

0.37

 

0.49

 

Diluted—pro forma

 

0.19

 

0.28

 

0.36

 

0.49

 

 

Stock Options

Under our various stock option plans, options were granted with exercise prices equal to the market price of the stock at the date of grant. The majority of our options become exercisable ratably over a period of five years and generally have a contractual life of 10 years, unless the holder’s employment is terminated. Our Directors are considered employees under the provisions of SFAS No. 123R.

10




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (In Thousands, Except Share and Per Share Data)
 (Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

The weighted average fair value of options granted for the six months ended June 30, 2005 and 2006 was $10.38 and $14.64 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:

 

 

Six Months Ended

 

Six Months Ended

 

Weighted Average Assumption

 

 

 

June 30, 2005

 

June 30, 2006

 

Expected volatility

 

 

26.8%

 

 

 

24.7%

 

 

Risk-free interest rate

 

 

4.02%

 

 

 

4.75%

 

 

Expected dividend yield

 

 

None

 

 

 

None

 

 

Expected life of the option

 

 

6.6 years

 

 

 

6.6 years

 

 

 

Expected volatility was calculated utilizing daily historical volatility over a period that equates to the expected life of the option. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing model since we do not pay dividends and have no current plans to do so in the future. The expected life (estimated period of time outstanding) of the stock options granted was estimated using the historical exercise behavior of employees.

A summary of option activity for the six months ended June 30, 2006 is as follows:

 

 

Options

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2005

 

5,495,274

 

 

$

22.41

 

 

 

 

 

 

 

 

 

 

Granted

 

497,914

 

 

39.07

 

 

 

 

 

 

 

 

 

 

Exercised

 

(308,544

)

 

13.82

 

 

 

 

 

 

 

 

 

 

Forfeited

 

(73,216

)

 

25.96

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2006

 

5,611,428

 

 

$

24.30

 

 

 

6.6

 

 

 

$

73,398

 

 

Options exercisable at June 30, 2006

 

2,785,711

 

 

$

16.68

 

 

 

4.7

 

 

 

$

57,664

 

 

 

The aggregate intrinsic value of stock options exercised during the three and six months ended June 30, 2006 was approximately $2,964 and $8,169, respectively.

Restricted Stock

Under our various stock option plans, we may also issue grants of restricted stock. We granted restricted stock in July 2005 which had a 3-year vesting period. The fair value of restricted stock is the excess of the market price of our common stock at the date of grant over the exercise price, which is zero. Included in our stock-based compensation expense for the six months ended June 30, 2006 is a portion of the cost related to restricted stock granted in July 2005. We did not grant restricted stock in the first six months of 2006.

11




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (In Thousands, Except Share and Per Share Data)
 (Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

A summary of restricted stock activity for the six months ended June 30, 2006 is as follows:

 

 

Restricted
Stock

 

Weighted-
Average
Grant-Date
Fair Value

 

Non-vested at December 31, 2005

 

 

64,641

 

 

 

$

30.94

 

 

Granted

 

 

 

 

 

 

 

Vested

 

 

(26,106

)

 

 

30.94

 

 

Forfeited

 

 

 

 

 

 

 

Non-vested at June 30, 2006

 

 

38,535

 

 

 

$

30.94

 

 

 

The total fair value of shares vested for the three and six months ended June 30, 2006 was $1,003.

Employee Stock Purchase Plan

We offer an employee stock purchase plan in which participation is available to substantially all U.S. and Canadian employees who meet certain service eligibility requirements (the “ESPP”). The ESPP provides a way for our eligible employees to become stockholders on favorable terms. The ESPP provides for the purchase of our common stock by eligible employees through successive offering periods. We generally have two 6-month offering periods, the first of which begins June 1 and ends November 30 and the second begins December 1 and ends May 31. During each offering period, participating employees accumulate after-tax payroll contributions, up to a maximum of 15% of their compensation, to pay the exercise price of their options. Participating employees may withdraw from an offering period before the purchase date and obtain a refund of the amounts withheld as payroll deductions. At the end of the offering period, outstanding options are exercised, and each employee’s accumulated contributions are used to purchase our common stock. The price for shares purchased under the ESPP is 85% of the fair market price at either the beginning or the end of the offering period, whichever is lower. For the six months ended June 30, 2005 and 2006, there were 193,890 shares and 193,778 shares, respectively, purchased under the ESPP. Beginning with the December 1, 2006 ESPP offering period, the price for shares purchased under the ESPP will be changed to 95% of the fair market price at the end of the offering period without a look back feature.

12




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (In Thousands, Except Share and Per Share Data)
 (Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

The fair value of the ESPP offerings is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table for the respective periods. Expected volatility was calculated utilizing daily historical volatility over a period that equates to the expected life of the option. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The expected life equates to the 6-month offering period over which employees accumulate payroll deductions to purchase our common stock. Expected dividend yield was not considered in the option pricing model since we do not pay dividends and have no current plans to do so in the future.

Weighted Average Assumption

 

 

 

December 2004
Offering

 

May 2005
Offering

 

December 2005
Offering

 

May 2006
Offering

 

Expected volatility

 

 

24.0%

 

 

27.5%

 

 

26.6%

 

 

20.1%

 

Risk-free interest rate

 

 

3.41%

 

 

3.96%

 

 

4.04%

 

 

4.75%

 

Expected dividend yield

 

 

None

 

 

None

 

 

None

 

 

None

 

Expected life of the option

 

 

6 months

 

 

6 months

 

 

6 months

 

 

6 months

 

 

The weighted average fair value for the ESPP options was $6.07, $6.02, $8.70 and $7.20 for the December 2004, May 2005, December 2005 and May 2006 offerings, respectively.

As of June 30, 2006, unrecognized compensation cost related to the unvested portion of our Employee Stock-Based Awards was $27,008 and is expected to be recognized over a weighted-average period of 4.1 years.

We generally issue shares for the exercises of stock options, issuance of restricted stock and issuance of shares under our ESPP from unissued reserved shares.

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 995,719 and 1,515,643 shares for the three months ended June 30, 2005 and 2006, respectively, and 1,265,868 shares and 1,573,996 shares for the six months ended June 30, 2005 and 2006, respectively. Potential common shares of 569,643 and 495,302 for the three and six months ended June 30, 2005, respectively, and potential common shares of 580,113 and 463,483 for the three and six months ended June 30, 2006, respectively, have been excluded from the calculation of diluted net income per share, as their effects are antidilutive.

f.                   Revenue

Our 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 or data (generally on a per unit or per cubic foot of records basis). Service and storage material sales revenues are comprised of

13




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (In Thousands, Except Share and Per Share Data)
 (Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

charges for related service activities and courier operations and the sale of software licenses and storage materials. Related core service revenues arise from: (a) the handling of records including the addition of new records, temporary removal of records from storage, refiling of removed records, destruction of records, and permanent withdrawals from storage; (b) courier operations, consisting primarily of the pickup and delivery of records upon customer request; (c) secure shredding of sensitive documents; and (d) other recurring services including maintenance and support contracts. Our complementary services revenues arise from special project work, including data restoration; and providing fulfillment services, consulting services and product sales, including software licenses, specially designed storage containers, magnetic media including computer tapes and related supplies.

We recognize revenue when the following criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectability of the resulting receivable is reasonably assured. Storage and service revenues are recognized in the month the respective storage or service is provided and customers are generally billed on a monthly basis on contractually agreed-upon terms. Amounts related to future storage or prepaid service contracts, including maintenance and support contracts, for customers where storage fees or services are billed in advance are accounted for as deferred revenue and recognized ratably over the applicable storage or service period or when the service is performed. Storage material sales are recognized when shipped to the customer and include software license sales. Sales of software licenses to distributors are recognized at the time a distributor reports that the software has been licensed to an end-user and all revenue recognition criteria have been satisfied.

g.                 New Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is a recognition process whereby the company determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The provisions of FIN 48 are effective January 1, 2007. Earlier application is permitted as long as the company has not yet issued financial statements, including interim financial statements, in the period of adoption. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more likely than not recognition threshold at the effective date

14




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (In Thousands, Except Share and Per Share Data)
 (Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings for that fiscal year. We are in the process of evaluating the effect of FIN 48 on our consolidated results of operations and financial position.

h.                Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended. On an on-going basis, we evaluate the estimates used, including those related to accounting for acquisitions, allowance for doubtful accounts and credit memos, impairments of tangible and intangible assets, income taxes, stock-based compensation and self-insured liabilities. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. Actual results may differ from these estimates.

(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,

 

 

 

2005

 

2006

 

2005

 

2006

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

Net Income

 

$

25,410

 

$

37,842

 

$

48,359

 

$

65,115

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Foreign Currency Translation Adjustments

 

1,398

 

11,843

 

3,753

 

10,061

 

Market Value Adjustments for Hedging Contracts, Net of Tax

 

715

 

48

 

1,839

 

262

 

Market Value Adjustments for Securities, Net of Tax

 

(20

)

7

 

(11

)

13

 

Comprehensive Income

 

$

27,503

 

$

49,740

 

$

53,940

 

$

75,451

 

 

 

15




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)

(4) Derivative Instruments and Hedging Activities

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” requires that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. Periodically, we acquire derivative instruments that are intended to hedge either cash flows or values which are subject to foreign exchange or other market price risk, and not for trading purposes. We have formally documented our hedging relationships, including identification of the hedging instruments and the hedged items, as well as our risk management objectives and strategies for undertaking each hedge transaction. Given the recurring nature of our revenues and the long term nature of our asset base, we have the ability and the preference to use long term, fixed interest rate debt to finance our business, thereby preserving our long term returns on invested capital. We target a range 80% to 85% of our debt portfolio to be fixed with respect to interest rates. Occasionally, we will use floating to fixed interest rate swaps as a tool to maintain our targeted level of fixed rate debt. In addition, we will use borrowings in foreign currencies, either obtained in the U.S. or by our foreign subsidiaries, to economically hedge foreign currency risk associated with our international investments. Sometimes we enter into currency swaps to temporarily hedge an overseas investment, such as a major acquisition, while we arrange permanent financing.

We previously entered into two interest rate swap agreements, which were derivatives as defined by SFAS No. 133 and designated as cash flow hedges. These swap agreements hedged interest rate risk on certain amounts of our term loan. Both of these swap agreements expired in the first quarter of 2006. As a result of the foregoing, for the three and six months ended June 30, 2005, we recorded additional interest expense of $1,235 and $2,768, respectively, and for the three months ended March 31, 2006, we recorded additional interest expense of $127, resulting from interest rate swap payments. These interest rate swap agreements were determined to be highly effective, and therefore no ineffectiveness was recorded in earnings.

In connection with certain real estate loans, we swapped $97,000 of floating rate debt to fixed rate debt. Since the time we entered into the swap agreement, interest rates have fallen. We have recorded, in the accompanying consolidated balance sheet, the estimated cost to terminate this swap (fair value of the derivative liability) of $818 (which was recorded in accrued expenses) as of June 30, 2006. As a result of the repayment of the real estate term loans in the third quarter of 2004, we began marking to market the fair value of the derivative liability through earnings. The total impact of marking to market the fair market value of the derivative liability and cash payments associated with the interest rate swap agreement resulted in our recording interest expense of $1,035 and interest income of $393 for the three and six months ended June 30, 2005, respectively, and interest income of $410 and $978 for the three and six months ended June 30, 2006.

In April 2004, IME entered into two floating for fixed interest rate swap contracts, each with a notional value of 50,000 British pounds sterling and a duration of two years, which were designated as cash flow hedges. These swap agreements hedge interest rate risk on IME’s 100,000 British pounds multi-currency term loan facility. As of June 30, 2006, both of these swap agreements had expired. For the three and six months ended June 30, 2005, we recorded additional interest income of $23 and $43, respectively, and for the three and six months ended June 30, 2006, we recorded interest expense of $71 and $184, respectively, resulting from interest rate swap cash payments.

Subsequent to its second quarter of 2006, IME entered into a floating for fixed interest rate swap contract with a notional value of 75,000 British pounds sterling, which will expire on March 2008 and was designated as a cash flow hedge. This swap agreement hedges interest rate risk on IME’s 100,000

16




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)

(4) Derivative Instruments and Hedging Activities (Continued)

British pounds multi-currency term loan facility. The notional value of the swap will decline to 60,000 British pounds sterling in March 2007 to match the remaining term loan amount outstanding as of that date.

(5) Acquisitions

We account for acquisitions using the purchase method of accounting, and accordingly, the results of operations for each acquisition have been included in our consolidated results from their respective acquisition dates. Cash consideration for the various 2006 acquisitions was provided through borrowings under our credit facilities augmented by cash provided by operating activities and cash equivalents on-hand.

A summary of the consideration paid and the allocation of the purchase price of all 2006 acquisitions is as follows:

Cash Paid (Gross of cash acquired)(1)

 

$

49,204

 

Fair Value of Identifiable Net Assets Acquired:

 

 

 

Fair Value of Identifiable Assets Acquired(2)

 

(32,590

)

Liabilities Assumed(3)

 

6,540

 

Minority Interest(4)

 

(919

)

Total Fair Value of Identifiable Net Assets Acquired

 

(26,969

)

Recorded Goodwill

 

$

22,235

 


        (1) Included in cash paid for acquisitions in the consolidated statements of cash flows for the six months ended June 30, 2006 are contingent payments totaling $21,382 related to acquisitions made in prior years.

        (2) Consisted primarily of accounts receivable, prepaid expenses and other, land, buildings, racking and leasehold improvements. Additionally, includes customer relationship assets of $15,963 for the six months ended June 30, 2006.

        (3) Consisted primarily of accounts payable, accrued expenses and notes payable.

        (4) Consisted primarily of the carrying value of minority interests of European partners at the date of acquisition.

Allocation of the purchase price for the 2006 acquisitions was based on estimates of the fair value of net assets acquired, and is subject to adjustment. The purchase price allocations of certain 2005 and 2006 transactions are subject to finalization of the assessment of the fair value of property, plant and equipment, intangible assets (primarily customer relationship assets), operating leases, restructuring purchase reserves, deferred revenue and deferred income taxes. We are not aware of any information that would indicate that the final purchase price allocations will differ meaningfully from preliminary estimates.

In connection with each of our acquisitions, we have undertaken certain restructurings of the acquired businesses. The restructuring activities include certain reductions in staffing levels, elimination of duplicate facilities and other costs associated with exiting certain activities of the acquired businesses. The estimated costs of these restructuring activities were recorded as costs of the acquisitions and were provided in accordance with EITF No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” We finalize restructuring plans for each business no later than one year from the date of acquisition. Unresolved matters at June 30, 2006 primarily include completion of planned abandonments of facilities and severance contracts in connection with certain acquisitions.

17




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)

(5) Acquisitions (Continued)

The following is a summary of reserves related to such restructuring activities:

 

 

Year Ended
December 31, 2005

 

Six Months
Ended
June 30, 2006

 

Reserves, Beginning Balance

 

 

$

21,414

 

 

 

$

12,698

 

 

Reserves Established

 

 

1,142

 

 

 

1,465

 

 

Expenditures

 

 

(7,360

)

 

 

(2,694

)

 

Adjustments to Goodwill, including currency effect(1)

 

 

(2,498

)

 

 

197

 

 

Reserves, Ending Balance

 

 

$

12,698

 

 

 

$

11,666

 

 


       (1) Includes adjustments to goodwill as a result of finalizing our restructuring plans.

At June 30, 2006, the restructuring reserves related to acquisitions consisted of lease losses on abandoned facilities ($8,656), severance costs ($418), and move and other exit costs ($2,592). These accruals are expected to be used prior to June 30, 2007 except for lease losses ($6,670) and severance contracts ($144), both of which are based on contracts that extend beyond one year.

(6) Long-term Debt

Long-term debt consists of the following:

 

 

December 31, 2005

 

June 30, 2006

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

IMI Revolving Credit Facility(1)

 

$

216,396

 

$

216,396

 

$

249,602

 

$

249,602

 

IMI Term Loan Facility(1)

 

345,500

 

345,500

 

343,750

 

343,750

 

IME Revolving Credit Facility(1)

 

84,262

 

84,262

 

104,928

 

104,928

 

IME Term Loan Facility(1)

 

177,450

 

177,450

 

182,630

 

182,630

 

81¤4% Senior Subordinated Notes due 2011(2)

 

149,760

 

151,500

 

149,782

 

149,250

 

85¤8% Senior Subordinated Notes due 2013(2)

 

481,032

 

502,513

 

481,022

 

483,278

 

71¤4% GBP Senior Subordinated Notes due 2014(2)

 

258,120

 

250,376

 

272,445

 

261,220

 

73¤4% Senior Subordinated Notes due 2015(2)

 

439,506

 

435,568

 

439,049

 

414,005

 

65¤8% Senior Subordinated Notes due 2016(2)

 

315,059

 

299,200

 

315,306

 

287,200

 

Real Estate Mortgages(1)

 

4,707

 

4,707

 

4,420

 

4,420

 

Seller Notes(1)

 

9,398

 

9,398

 

8,189

 

8,189

 

Other(1)

 

48,241

 

48,241

 

56,635

 

56,635

 

Total Long-term Debt

 

2,529,431

 

 

 

2,607,758

 

 

 

Less Current Portion

 

(25,905

)

 

 

(65,762

)

 

 

Long-term Debt, Net of Current Portion

 

$

2,503,526

 

 

 

$

2,541,996

 

 

 


(1)          The fair value of this long-term debt either approximates the carrying value (as borrowings under these debt instruments are based on current variable market interest rates as of December 31, 2005 and June 30, 2006) or it is impracticable to estimate the fair value due to the nature of such long-term debt.

(2)          The fair value of these debt instruments is based on quoted market prices for these notes on December 31, 2005 and June 30, 2006.

 

18




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)

(6) Long-term Debt (Continued)

In March 2004, IME and certain of its subsidiaries entered into a credit agreement (the “IME Credit Agreement”) with a syndicate of European lenders. The IME Credit Agreement provides for maximum borrowing availability in the principal amount of 200,000 British pounds sterling, including a 100,000 British pounds sterling revolving credit facility (the “IME revolving credit facility”), which includes the ability to borrow in certain other foreign currencies, and a 100,000 British pounds multi-currency term loan (the “IME term loan facility”). The IME revolving credit facility matures on March 5, 2009. The IME term loan facility is payable in three installments; two installments of 20,000 British pounds sterling on March 5, 2007 and 2008, respectively, and the final payment of the remaining balance on March 5, 2009. The interest rate on borrowings under the IME Credit Agreement varies depending on IME’s choice of currency options and interest rate period, plus an applicable margin. The IME Credit Agreement includes various financial covenants applicable to the results of IME, which may restrict IME’s ability to incur indebtedness under the IME Credit Agreement and from third parties, as well as limit IME’s ability to pay dividends to us. Most of IME’s non-dormant subsidiaries have either guaranteed the obligations or have their shares pledged to secure IME’s obligations under the IME Credit Agreement. We have not guaranteed or otherwise provided security for the IME Credit Agreement nor have any of our U.S., Canadian, Asia Pacific, Mexican or South American subsidiaries. Our consolidated balance sheet as of June 30, 2006 included 100,000 British pounds sterling and 82,966 Euro of borrowings (totaling $287,558) under the IME Credit Agreement; we also had various outstanding letters of credit totaling 1,731 British pounds sterling ($3,161). The remaining availability, based on its current level of external debt and the leverage ratio under the IME revolving credit facility on April 30, 2006, was approximately 40,815 British pounds sterling ($74,540). The interest rates in effect under the IME revolving credit facility ranged from 3.9% to 5.9% as of April 30, 2006. For the three and six months ended June 30, 2005, we recorded commitment fees of $213 and $419, respectively, based on 0.9% of unused balances under the IME revolving credit facility. For the three and six months ended June 30, 2006, we recorded commitment fees of $117 and $254, respectively, based on 0.6% of unused balances under the IME revolving credit facility.

On April 2, 2004 and subsequently on July 8, 2004, we entered into a new amended and restated revolving credit facility and term loan facility (the “IMI Credit Agreement”) to replace our prior credit agreement and to reflect more favorable pricing of our term loans. The IMI Credit Agreement had an aggregate principal amount of $550,000 and was comprised of a $350,000 revolving credit facility (the “IMI revolving credit facility”), which included the ability to borrow in certain foreign currencies, and a $200,000 term loan facility (the “IMI term loan facility”). The IMI revolving credit facility matures on April 2, 2009. With respect to the IMI term loan facility, quarterly loan payments of $500 began in the third quarter of 2004 and will continue through maturity on April 2, 2011, at which time the remaining outstanding principal balance of the IMI term loan facility is due. In November 2004, we entered into an additional $150,000 of term loans as permitted under our IMI Credit Agreement. The new term loans will mature at the same time as our current IMI term loan facility with quarterly loan payments of $375 that began in the first quarter of 2005 and will be priced at LIBOR plus a margin of 1.75%. On October 31, 2005, we entered into the second amendment to the IMI Credit Agreement, increasing availability under the revolving credit

19




IRON MOUNTAIN INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)

(6) Long-term Debt (Continued)

facility from $350,000 to $400,000. As a result, the IMI Credit Agreement had an aggregate maximum principal amount of $750,000 as of December 31, 2005. The interest rate on borrowings under the IMI Credit Agreement varies depending on our choice of interest rate and currency options, plus an applicable margin. All intercompany notes and the capital stock of most of our U.S. subsidiaries are pledged to secure the IMI Credit Agreement. As of June 30, 2006, we had $249,602 of borrowings under our IMI revolving credit facility, of which $29,500 was denominated in U.S. dollars and the remaining balance was denominated in Canadian dollars (CAD 188,000), in Australian dollars (AUD 55,000) and in New Zealand dollars (NZD 20,200); we also had various outstanding letters of credit totaling $23,900. The remaining availability, based on Iron Mountain Incorporated’s (“IMI”) current level of external debt and the leverage ratio under the IMI revolving credit facility, on June 30, 2006 was $126,498. The interest rate in effect under the IMI revolving credit facility and IMI term loan facility ranged from 5.5% to 9.1% and 7.0% to 7.9%, respectively, as of June 30, 2006. For the three and six months ended June 30, 2005, we recorded commitment fees of $186 and $443, respectively, and for the three and six months ended June 30, 2006, we recorded commitment fees of $98 and $224, respectively, based on 0.4% of unused balances under the IMI revolving credit facility.

The IME Credit Agreement, IMI Credit Agreement, our indentures and other agreements governing our indebtedness contain certain restrictive financial and operating covenants, including covenants that restrict our ability to complete acquisitions, pay cash dividends, incur indebtedness, make investments, sell assets and take certain other corporate actions. The covenants do not contain a rating trigger. Therefore, a change in our debt rating would not trigger a default under the IME Credit Agreement, IMI Credit Agreement and our indentures and other agreements governing our indebtedness. We were in compliance with all material debt covenants as of June 30, 2006.

20




IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)

(7) Selected Financial Information of Parent, Guarantors and Non-Guarantors

The following financial data summarizes the consolidating Company on the equity method of accounting as of December 31, 2005 and June 30, 2006 and for the three and six months ended June 30, 2005 and 2006. The Guarantors column includes all subsidiaries that guarantee the senior subordinated notes. The subsidiaries that do not guarantee the senior subordinated notes are referred to in the table as the “Non-Guarantors.”

 

December 31, 2005

 

 

 

Parent

 

Guarantors

 

Non-
 Guarantors

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

 

$

10,658

 

$

42,755

 

$

 

 

$

53,413

 

 

Accounts Receivable

 

 

290,546

 

118,018

 

 

 

408,564

 

 

Intercompany Receivable

 

868,392

 

 

 

(868,392

)

 

 

 

Other Current Assets

 

48

 

61,531

 

31,074

 

(462

)

 

92,191

 

 

Total Current Assets

 

868,440

 

362,735

 

191,847

 

(868,854

)

 

554,168

 

 

Property, Plant and Equipment, Net

 

 

1,225,580

 

555,686

 

 

 

1,781,266

 

 

Other Assets, Net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term Notes Receivable from Affiliates and Intercompany Receivable

 

2,048,104

 

11,069

 

 

(2,059,173

)

 

 

 

Investment in Subsidiaries

 

541,612

 

252,122

 

 

(793,734

)

 

 

 

Goodwill

 

 

1,482,537

 

646,363

 

9,741

 

 

2,138,641

 

 

Other

 

26,780

 

130,012

 

135,694

 

(421

)

 

292,065

 

 

Total Other Assets, Net

 

2,616,496

 

1,875,740

 

782,057

 

(2,843,587

)

 

2,430,706

 

 

Total Assets

 

$

3,484,936

 

$

3,464,055

 

$

1,529,590

 

$

(3,712,441

)

 

$

4,766,140

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany Payable

 

$

 

$

249,173

 

$

619,219

 

$

(868,392

)

 

$

 

 

Current Portion of Long-term Debt

 

3,841

 

7,613

 

14,451

 

 

 

25,905

 

 

Total Other Current Liabilities

 

48,229

 

389,691

 

128,633

 

(462

)

 

566,091

 

 

Long-term Debt, Net of Current Portion

 

2,057,884

 

10,816

 

434,826

 

 

 

2,503,526

 

 

Long-term Notes Payable to Affiliates and Intercompany Payable

 

1,000

 

2,048,104

 

10,069

 

(2,059,173

)

 

 

 

Other Long-term Liabilities

 

3,853

 

233,805

 

57,385

 

(421

)

 

294,622

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority Interests

 

 

 

2,389

 

3,478

 

 

5,867

 

 

Stockholders’ Equity

 

1,370,129

 

524,853

 

262,618

 

(787,471

)

 

1,370,129

 

 

Total Liabilities and Stockholders’ Equity

 

$

3,484,936

 

$

3,464,055

 

$

1,529,590

 

$

(3,712,441

)

 

$

4,766,140

 

 

 

21




IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)

(7) Selected Financial Information of Parent, Guarantors and Non-Guarantors (Continued)

 

 

June 30, 2006

 

 

 

Parent

 

Guarantors

 

Non-
Guarantors

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

 

$

9,374

 

$

31,578

 

$

 

 

$

40,952

 

 

Accounts Receivable

 

 

299,524

 

140,761

 

 

 

440,285

 

 

Intercompany Receivable

 

868,151

 

 

 

(868,151

)

 

 

 

Other Current Assets

 

48

 

66,263

 

42,922

 

(874

)

 

108,359

 

 

Total Current Assets

 

868,199

 

375,161

 

215,261

 

(869,025

)

 

589,596

 

 

Property, Plant and Equipment, Net

 

 

1,262,169

 

613,347

 

 

 

1,875,516

 

 

Other Assets, Net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term Notes Receivable from Affiliates and Intercompany Receivable

 

2,123,348

 

11,044

 

 

(2,134,392

)

 

 

 

Investment in Subsidiaries

 

584,250

 

292,750

 

 

(877,000

)

 

 

 

Goodwill

 

 

1,489,695

 

686,931

 

9,741

 

 

2,186,367

 

 

Other

 

24,945

 

133,952

 

147,470

 

(934

)

 

305,433

 

 

Total Other Assets, Net

 

2,732,543

 

1,927,441

 

834,401

 

(3,002,585

)

 

2,491,800

 

 

Total Assets

 

$

3,600,742

 

$

3,564,771

 

$

1,663,009

 

$

(3,871,610

)

 

$

4,956,912

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany Payable

 

$

 

$

242,039

 

$

626,112

 

$

(868,151

)

 

$

 

 

Current Portion of Long-term Debt

 

4,073

 

5,256

 

56,433

 

 

 

65,762

 

 

Total Other Current Liabilities

 

48,380

 

346,035

 

149,911

 

(874

)

 

543,452

 

 

Long-term Debt, Net of Current Portion

 

2,079,833

 

14,555

 

447,608

 

 

 

2,541,996

 

 

Long-term Notes Payable to Affiliates and Intercompany Payable

 

1,000

 

2,123,348

 

10,044

 

(2,134,392

)

 

 

 

Other Long-term Liabilities

 

3,853

 

267,410

 

66,687

 

(934

)

 

337,016

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority Interests

 

 

 

958

 

4,125

 

 

5,083

 

 

Stockholders’ Equity

 

1,463,603

 

566,128

 

305,256

 

(871,384

)

 

1,463,603

 

 

Total Liabilities and Stockholders’ Equity

 

$

3,600,742

 

$

3,564,771

 

$

1,663,009

 

$

(3,871,610

)

 

$

4,956,912

 

 

 

22




IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)

(7) Selected Financial Information of Parent, Guarantors and Non-Guarantors (Continued)

 

 

Three Months Ended June 30, 2005

 

 

 

Parent

 

Guarantors

 

Non-
Guarantors

 

Eliminations

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Storage

 

$

 

 

$

212,449

 

 

 

$

79,217

 

 

 

$

 

 

 

$

291,666

 

 

Service and Storage Material Sales

 

 

 

157,123

 

 

 

63,133

 

 

 

 

 

 

220,256

 

 

Total Revenues

 

 

 

369,572

 

 

 

142,350

 

 

 

 

 

 

511,922

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Sales (Excluding Depreciation)

 

 

 

160,096

 

 

 

67,992

 

 

 

 

 

 

228,088