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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 20032006
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) | (I.R.S. Employer Identification No.) | |
745 Atlantic Avenue, Boston, Massachusetts |
| |
(Address of principal executive offices) | (Zip Code) |
617-535-4766
(Registrant'sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Exchange on Which Registered | |||||||
Common Stock, $.01 par value per share | New York Stock Exchange | |||||||
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 ýx No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 10-K o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large 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 Rule 12b-2)Act). Yes ýo No ox
As of June 30, 2003,2006, the aggregate market value of the Common Stock of the registrant held by non-affiliates of the registrant was $2,658,636,421$4,377,632,337 based on the closing price on the New York Stock Exchange on such date.
Number of shares of the registrant'sregistrant’s Common Stock at March 1, 2004: 85,775,503February 15, 2007: 199,153,514
IRON MOUNTAIN INCORPORATED20032006 FORM 10-K ANNUAL REPORT
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References in this Annual Report on Form 10-K to "the Company", "we", "us"“the Company,” “we,” “us” or "our"“our” include Iron Mountain Incorporated and its consolidated subsidiaries, unless the context indicates otherwise.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference from our definitive Proxy Statement for the Annual Meeting of ShareholdersStockholders to be held on or about May 27, 2004.24, 2007.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this Annual Report on Form 10-K that constitute "forward-looking statements"“forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 and in other federal securities laws. These forward-looking statements concern our operations, economic performance, financial condition, goals, beliefs, future growth strategies, investments objectives, plans and current expectations. The forward-looking statements are subject to various known and unknown risks, uncertainties and other factors. When we use words such as "believes," "expects," "anticipates," "estimates"“believes,” “expects,” “anticipates,” “estimates” or similar expressions, we are making forward-looking statements.
Although we believe that our forward-looking statements are based on reasonable assumptions, our expected results may not be achieved, and actual results may differ materially from our expectations. Important factors that could cause actual results to differ from expectations include, among others:
·changes in customer preferences and demand for our services;
·changes in the price for our services relative to the cost of providing such services;
·in the various digital businesses in which we are engaged, capital and technical requirements will be beyond our means, markets for our services will be less robust than anticipated, or competition will be more intense than anticipated;
· the cost to comply with current and future legislation or regulation relating to privacy issues;
· the impact of litigation that may arise in connection with incidents of inadvertent disclosures of customers’ confidential information;
· our ability or inability to complete acquisitions on satisfactory terms and to integrate acquired companies efficiently;
·the politicalcost and economic environments in the countries in which our international subsidiaries operate, including foreign currency fluctuations;
· business partners upon whom we depend for technical assistance or management and acquisition expertise outside the U.S. will not perform as anticipated;
· changes in the political and
·other trends in competitive or economic conditions affecting our financial condition or results of operations not presently contemplated.
Other risks may adversely impact us, as described more fully under “Item 1A. Risk Factors.”
You should not rely upon forward-looking statements except as statements of our present intentions and of our present expectations, which may or may not occur. You should read these cautionary statements as being applicable to all forward-looking statements wherever they appear. WeExcept as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures we have made in this document, as well as our other periodic reports filed with the Securities and Exchange Commission (the "Commission"“Commission” or "SEC"“SEC”).
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We believe we are the global leader in recordsinformation protection and information managementstorage services. We are an international, full-service provider ofhelp organizations around the world reduce the costs and risks associated with information protection and storage. We offer comprehensive records and information management and related services, enabling customersdata protection solutions, along with the expertise and experience to outsource these functions.address complex information challenges such as rising storage costs, litigation, regulatory compliance and disaster recovery. Founded in 1951, Iron Mountain is a trusted partner to more than 90,000 corporate clients throughout North America, Europe, Latin America and Asia Pacific. We have a diversified customer base comprised of numerous commercial, legal, banking, healthcare, accounting, insurance, entertainment and government organizations, including more than half90% of the Fortune 5001000 and more than two thirds85% of the FTSE 100.
Our comprehensiveinformation protection and storage services can be broadly divided into three major service categories: records management, data protection & recovery, and information destruction. We offer both physical services and technology solutions help customers save moneyin each of these categories, and manage risks associated with legalwe continue to expand our geographic footprint in order to protect and regulatory compliance, protection of vital assets, and business continuity challenges.store our customers’ information without regard to media format or geographic location.
Our core businessphysical records management services include: records management program development and implementation based on best-practices to help customers comply with specific regulatory requirements;requirements, implementation of policy-based programs that feature secure, cost-effective storage for all major media, including paper which(which is the dominant form of records storage,storage), flexible retrieval access and retention management;management. Our technology-based records management services are comprised primarily of digital archiving and related services for secure, legally compliant and cost-effective long-term archiving of electronic records; secure shreddingrecords. Within the records management services that ensure privacy and a secure chain of record custody; andcategory, we have developed specialized services for vital records film and sound and regulated industries such as healthcare, energy and financial services.
Our off-sitephysical data protection & recovery services include:include disaster preparedness, planning, support;support and secure, off-site vaulting of data backup media for fast and efficient data recovery in the event of a disaster, human error or virus; electronic vaulting to provide managed,virus. Our technology-based data protection & recovery services include online data backup and recovery servicessolutions (also known as electronic vaulting) for personaldesktop and laptop computers and server data;remote servers. Additionally, we serve as a trusted, neutral third party and intellectual propertyoffer technology escrow services to protect and manage source code and other proprietary information.
Our information destruction services are comprised almost exclusively of secure shredding services. Secure shredding services complete the life cycle of a record and involve the shredding of sensitive documents in a way that ensures privacy and a secure chain of record custody. These services typically include the scheduled pick-up of loose office records which customers accumulate in specially designed secure containers we provide. Our technology-based information destruction services include DataDefense, which provides automatic, intelligent encryption of sensitive PC data and, when behaviors that are inconsistent with a trusted, neutral third party.authorized use are detected, that data is automatically eliminated and the PC is disabled—this is designed to render the data useless to unauthorized users.
In addition to our core records management, and off-site data protection & recovery, and information destruction services, we sell storage materials, including cardboard boxes and magnetic media, and provide consulting, facilities management, fulfillment and other outsourcing services.
Our vision is to protect and store the world’s information and to that end we have organized our business into a geographic model with separate management teams for each of the following major geographic regions: North America, Europe, Latin America and Asia Pacific. The one exception to this
model is our Digital Services business unit. Digital services, by their nature, are deployed in a virtual fashion leveraging a common set of intellectual property and a global technology infrastructure. Our largest segment, the North American Physical Business, offers all of our physical records management services, data protection & recovery services, and information destruction services. We expect that over time all of these products and services will be available on a global basis throughout all of our geographic segments.
Iron Mountain was founded in 1951 in an underground facility near Hudson, New York. Now in our 53rd56th year, we have experienced tremendous growth and organizational change, particularly since successfully completing the initial public offering of our common stock in February 1996. Since then, we have built ourselvesgrown from a regional business with limited product offerings and annual revenues of $104 million in 1995 into the leader in records and information management services,a global enterprise providing a fullbroad range of information protection and storage services to customers in markets around the world. For the year ended December 31, 2003,2006, we had total revenues of $1.5$2.4 billion.
TheOur growth since 1995 has been accomplished primarily through the acquisition of U.S. and international records managementinformation protection and storage services companies. The goalgoals of our current acquisition program isare: to supplement internal growth in our physical businesses by continuing to establish a footprint in targeted international markets and adding fold-in acquisitions both in the U.S. and internationally. internationally; and to accelerate our strategy, leadership and time to market in our digital businesses. We expect our digital acquisitions will be of two primary types, those that bring us new or improved technologies to enhance our existing technology portfolio and those that increase our market position through technology and established revenue streams. To date, we completed two significant technology acquisitions: Connected Corporation (“Connected”) in November 2004 and LiveVault Corporation (“LiveVault”) in December 2005.
Having substantially completed our North American geographic expansion by the end of 2000, we shifted our focus from growth through acquisitions to internal revenue growth. In 2001, as a result of this shift, internal revenue growth exceeded growth through acquisitions for the first time since we began our acquisition program in 1996. This was also1996.This has been the case in 2002 and 2003, and ineach year since 2001 with the absenceexception of unusual acquisition activity, we expect this trend to continue. We expect to achieve our2004, when revenue growth from acquisitions exceeded internal revenue growth through a sophisticated new sales and account management coverage model that is designeddue primarily to drive incremental revenue by acquiring new customer relationships, increasing the revenue generated by existing customer relationships and by effectively selling a wide range of complementary and ancillary services to expand our new and existing customer relationships.
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In July 2003, we and Iron Mountain Europe ("IME"), our European joint venture, completed the acquisition of the records management operations of Hays plc ("(“Hays IMS"IMS”) in two simultaneous transactions for aggregate cash consideration (including transactions costs)July 2003. In the absence of approximately 205 million British pounds sterling ($333 million). IME acquired the European operations andunusual acquisition activity, we acquired the U.S. operations. IME's acquisitionexpect to achieve most of Hays IMS has more than doubled our revenue basegrowth internally in Europe2007 and has significantly strengthenedbeyond.
We expect to achieve our energyinternal revenue growth objectives primarily through a sophisticated sales and U.K. public sectoraccount management coverage model designed to drive incremental revenues by acquiring new customer relationships and increasing business lines. Since the acquisition,with new and existing customers by selling them our products and services in new geographies and selling additional products and services such as secure shredding and digital data protection. These selling efforts will be augmented and supported by an expanded marketing program, which includes product management as a core discipline. We are also developing an extensive worldwide network of channel partners through which we have been integrating the cultures, operating systemsare selling a wide array of technology solutions, primarily our digital data protection and procedures,recovery products and information technology systems of IME and Hays IMS.services.
In February 2004, we completed the acquisition of Mentmore plc's 49.9% equity interest in IME for total consideration of 82.5 million British pounds sterling ($154 million) in cash. Included in this amount is the repayment of all trade and working capital funding owed to Mentmore by IME. Completion of the transaction gives us 100% ownership of IME, affording us full access to all future cash flows and greater strategic and financial flexibility.
As of December 31, 2003,2006, we provided services to over 200,000 customer accounts90,000 corporate clients in 8285 markets in the U.S. and 5886 markets outside of the U.S., employed over 13,00018,600 people and operated approximately 800over 900 records management facilities in the U.S., Canada, Europe, Latin America and Latin America.Asia Pacific.
The RecordsInformation Protection and Information ManagementStorage Services Industry
Overview
Companies in the recordsinformation protection and information managementstorage services industry store and manage information in a variety of media formats, which can broadly be divided into physical and electronic records, and provide a wide range of services related to the records stored. We refer to our general physical records storage and management services as business records management. We define physical records to include paper documents, as well as all other non-electronic media such as microfilm and microfiche, master audio and videotapes, film, X-rays and blueprints. Electronic records include various forms of magnetic media such as computer tapes and hard drives and optical disks. We include in our electronic records storage and management services (1) off-site data protection and (2) digital archiving services.
Physical Records
Physical records may be broadly divided into two categories: active and inactive. Active records relate to ongoing and recently completed activities or contain information that is frequently referenced. Active records are usually stored and managed on-site by the organization that originated them to ensure ready availability. Inactive physical records are the principal focus of the recordsinformation protection and information managementstorage services industry. Inactive records consist of those records that are not needed for immediate access but which must be retained for legal, regulatory and compliance reasons or for occasional reference in support of ongoing business operations. A large and growing specialty subset of the physical records market is medical records. These are active and semi-active records that are often stored off-site with and serviced by a recordsan information protection and information managementstorage services vendor. Special regulatory requirements often apply to medical records.
Electronic Records
Electronic records management focuses on the storage of, and related services for, computer media that is either a backup copy of recently processed data or archival in nature. Customer needs for data backup and recovery and archiving are distinctively different. Backup data exists because of the need of many businesses to maintain backup copies of their data in order to be able to recover the data in the event of a system failure, casualty loss or other disaster. It is customary (and a
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best-practice) best practice) for data processing groups to rotate backup tapes to off-site locations on a regular basis and to require multiple copies of such information at multiple sites. We refer to these services as off-site data protection.
In addition to the physical rotation and storage of backup data we offerthat our physical business segments provide, our Worldwide Digital Business segment offers electronic vaulting services as an alternative way for businesses to transfer data to us, and to access the data they have stored with us. Electronic vaulting is a Web-based service that automatically backs up computer data from servers or directly from desktop and laptop computers over the Internet and stores it off site in one of our secure data centers. In early 2003, we announced an expansion of the electronic vaulting service to include backup and recovery for personal computer data, answering customers'customers’ needs to protect critical business data, which is often orphaned and unprotected on employee laptopslaptop and desktop personal computers. In November 2004, we acquired Connected, a market leader in the backup and recovery of this distributed data, and in December 2005, we acquired LiveVault, a market leader in the backup and recovery of server data.
There is a growing need for better ways of archiving dataelectronic records for legal, regulatory and compliance reasons and for occasional reference in support of ongoing business operations. Historically, businesses have relied on backup tapes for storing archived data in electronic format, but this process can be costly and ineffective when attempting to search and retrieve the data for litigation or other needs. In addition, many industries, such as healthcare and financial services, are facing increased governmental regulation mandating the way in which electronic records are stored and managed. To help customers
meet these growing storage challenges, we introduced digital archiving services. We have experienced earlyincreasing market adoption of these services, especially for e-mail archiving, which enables businesses to identify and retrieve electronic records quickly and cost-effectively, while maintaining regulatory compliance.
We believe the issues encountered by customers trying to manage their electronic records are similar to the ones they face in their physical records management programs and consist primarily of: (1) storage capacity and the preservation of data; (2) access to and control over the data in a secure environment; and (3) the need to retain electronic records due to regulatory compliance or for litigation support. Our digital services offerings are representative of our commitment to address evolving records management needs and expand the array of services we offer.
Growth of Market
We believe that the volume of stored physical and electronic records will continue to increase for a number of reasons, including: (1) the rapid growth of inexpensive document producing technologies such as facsimile, desktop publishing software and desktop printing; (2) the continued proliferation of data processing technologies such as personal computers and networks; (3) regulatory requirements; (4) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation;records; (5) the high cost of reviewing records and deciding whether to retain or destroy them; (6) the failure of many entities to adopt or follow policies on records destruction; and (7) audit requirements to keep backup copies of certain records in off-site locations.
We believe that paper-based information will continue to grow, not in spite of, but because of, new "paperless"“paperless” technologies such as e-mail and the Internet. These technologies have prompted the creation of hard copies of such electronic information and have also led to increased demand for electronic records services, such as the storage and off-site rotation of backup copies of magnetic media. In addition, we believe that the proliferation of digital information technologies and distributed data networks has created an emerginga growing need for efficient, cost-effective, high quality technology solutions for electronic data protection, digital archiving and the management of electronic documents.
Consolidation of a Highly Fragmented Industry
There was significant consolidation within the highly fragmented recordsinformation protection and information managementstorage services industry in North America from 1995 to 2000.2000 and at a slower but continuing pace in recent years. Most recordsinformation protection and information managementstorage services companies serve a single local market, and are often either owner-operated or ancillary to another business, such as a moving and storage company. We believe that the consolidation trend, both in North America and other regions, will continue because of the industry'sindustry’s capital requirements for growth, opportunities for large recordsinformation protection and information managementstorage services providers to achieve economies of scale and customer demands for more sophisticated technology-based solutions.
We believe that the consolidation trend in the industry is also due to, and will continue as a result of, the preference of certain large organizations to contract with one vendor in multiple cities and countries for multiple services. In particular, customers increasingly demand a single, large, sophisticated company to handle all of their important physical and electronic records needs. Large
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national and multinational companies are better able to satisfy these demands than smaller competitors. We have made, and intend to continue to make, acquisitions of our competitors, many of whom are small, single citysingle-city operators.
We generate our revenues by providing storage for both physical and electronic records in a variety of information media formats, core records management, data protection & recovery, and information
destruction services and an expanding menu of complementary products and services to a large and diverse customer base. Providing outsourced information protection and storage for records and informationservices is the mainstay of our customer relationships and provides the foundation for our revenue growth. The coreCore services, which are a vital part of a comprehensive records management program, are highly recurring in nature and therefore very predictable. Core services consist primarily of the handling and transportation of stored records and information. In our secure shredding business,operations, core services consist primarily of the scheduled collection and handling of sensitive records. As is the case with storage revenues, core service revenues are highly recurring in nature and therefore very predictable. In 2003,2006, our storage and core service revenues represented approximately 87% of our total consolidated revenues. In addition to our core services, we offer a wide array of complementary products and services such as performing special project work, selling records and information management services related products, providing fulfillment services and consulting on records management issues. These services address more specific needs and are designed to enhance our customers'customers’ overall records management programs. These services complement our core services; however, they are more episodic and discretionary in nature. Revenue generated by all of our business records and off-site data protection businessesoperating segments includes both core and complementary components.
Our various operating segments offer the products and services discussed below. In general, our North American Physical Business segment offers physical records management services, including business records management, segment offers records management, secure shredding, healthcare information services, vital records services, andphysical data protection & recovery services, service and courier operations, secure shredding, fulfillment and consulting services, in the U.S. and Canada. Our off-site data protection segment offers data backup and disaster recovery services, vital records services, service and courier operations, and intellectual property protection services in the U.S. Our internationalInternational Physical Business segment offers elements of all our physical product and services lines outside the U.S. and Canada. Our corporate and otherWorldwide Digital Business segment includes our fulfillment, consultingonline backup and recovery solutions for server data and personal computers, digital archiving services, intellectual property management services and electronic information destruction services. Some of our complementary services and products are offered within all of our segments. The amount of revenues derived from our business records management, off-site data protection, international,North American Physical Business, International Physical Business and corporate and otherWorldwide Digital Business operating segments and other relevant data, including financial information about geographic areas and product and service lines, for fiscal years 2001, 20022004, 2005 and 20032006 are set forth in Note 129 to Notes to Consolidated Financial Statements.
Business Records Management
The hard copy business records stored by our customers with us by their nature are not very active. These types of records are stored in cartons packed by the customer. We use a proprietary order processing and inventory management system known as theSafekeeperPLUS® system to efficiently store and later retrieve a customer'scustomer’s cartons. Storage charges are generally billed monthly on a per storage unit basis, usually either per carton or per cubic foot of records, and include the provision of space, racking, computerized inventory and activity tracking and physical security.
Off-Site Data Protection
Off-site data protection services consist of the storage and rotation of backup computer media as part of corporate disaster recovery and business continuity plans. Computer tapes, cartridges and disk packs are transported off-site by our courier operations on a scheduled basis to secure, climate-controlled facilities, where they are available to customers 24 hours a day, 365 days a year, to facilitate data recovery in the event of a disaster. We use various proprietary information technology systems such asMediaLink™ andSecureBase™ software to manage this process. We also manage tape library relocations and support disaster recovery testing and execution. In addition, we have introduced electronic vaulting services as part of our off-site data protection services product line. Our electronic
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vaulting service automatically backs up personal computer and server data over the Internet and stores it off site in one of our secure data centers, always available in the event of a disaster.
Healthcare Information Services
Healthcare information services principally include the handling, storage, filing, processing and retrieval of medical records used by hospitals, private practitioners and other medical institutions. Medical records tend to be more active in nature and are typically stored on specialized open shelving systems that provide easier access to individual files. Healthcare information services also include recurring project work and ancillary services. Recurring project work involves the on-site removal of aged patient files and related computerized file indexing. Ancillary healthcare information services include release of information (medical record copying), temporary staffing, contract coding, facilities management and imaging.
Vital Records Services
Vital records contain critical or irreplaceable data such as master audio and video recordings, film software source code and other highly proprietary information. Vital records may require special facilities or services, either because of the data they contain or the media on which they are recorded. Our charges for providing enhanced security and special climate-controlled environments for vital records are higher than for typical storage functions.services. We provide the same ancillary services for vital records as we provide for our other storage operations.
Physical Data Protection & Recovery Services
Physical data protection & recovery services consist of the storage and rotation of backup computer media as part of corporate disaster recovery and business continuity plans. Computer tapes, cartridges and disk packs are transported off-site by our courier operations on a scheduled basis to secure, climate-controlled facilities, where they are available to customers 24 hours a day, 365 days a year, to facilitate data recovery in the event of a disaster. We use various proprietary information technology systems such as MediaLink™ and SecureBase™ software to manage this process. We also manage tape library relocations and support disaster recovery testing and execution.
Service and Courier Operations
Service and courier operations are an integral part of a comprehensive records management program for all physical media including paper and certain electronic records. They include adding records to storage, temporary removal of records from storage, refiling of removed records, permanent withdrawals from storage, and destruction of records.records and the rotation of back-up computer media. Service charges are generally assessed for each procedure on a per unit basis. TheSafekeeperPLUS® system controls the service processes from order entry through transportation and invoicing for business records management while theMediaLink™ andSecureBase™ systems manage the process for the off-sitephysical data protection services business.
Courier operations consist primarily of the pickuppick-up and delivery of records upon customer request. Charges for courier services are based on urgency of delivery, volume and location and are billed monthly. As of December 31, 2003,2006, we were utilizing a fleet of more than 2,000approximately 3,000 owned or leased vehicles.
Secure Shredding
Secure shredding is a natural extension of our records management services, completing the lifecyclelife cycle of a record. The servicerecord, and involves the shredding of sensitive documents for corporate customers that, in many cases, also use our services for management of less sensitive archival records. We believe that customers are motivated by increased privacy regulation and the desire to protect their proprietary trade secrets. These services typically include the scheduled pick-up of loose office records which customers accumulate in specially designed secure containers we provide. We believe that customers are motivated by increased privacy regulations, such as the Fair and Accurate Credit Transaction Act (“FACTA”) and the desire to protect their proprietary trade secrets and personal information. Regulations issued pursuant to FACTA list secure shredding as a preferred method of destroying personal data that exists in many hard copy records. Complementary to our shredding operations is the sale of the resultant waste paper to third-party recyclers. Through a combination of plant basedplant-based shredding operations and mobile shredding units comprised of custom built trucks, we are able to offer secure shredding services to our customers in all of our existing business records management markets throughout the U.S. and Canada. In December 2005, we acquired Secure Destruction Limited, the largest provider of secure shredding services in the U.K.
We seek to expand our presence in this business through acquisitions and internal start-ups that leverage our existing records management infrastructure.
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Intellectual Property ProtectionElectronic Vaulting Services
We provide intellectual property protection services throughElectronic vaulting is our wholly-owned subsidiary, DSI Technology Escrow Services, Inc. DSI specializesWeb-based service that automatically backs up computer data from servers or directly from desktop or laptop computers over the Internet and stores it in third party technology escrow services that protect intellectual property assets suchone of our secure data centers. Customers using electronic vaulting for the online backup of desktop or laptop computer and server data can choose our off-site hosted Software as a Service solution or they can license the software source code. In addition, DSI assists in securing intellectual propertyfrom us as collateral for lending, investments and other joint ventures, in managing domain name registrations and transfers, and provides expertise and assistance to brokers and dealers in complying with electronic records regulationspart of the SEC.a customer on-site solution.
Digital Archiving Services
Our digital archiving services focus on archiving digital information with long-term preservation requirements. These services represent the digital analogy to our physical records management services. Because of increased litigation risks and regulatory mandates, companies are increasingly aware of the need to apply the same records management policies and retention schedules to electronic data as they do physical records. Typical digital records include e-mail, e-statements, images, electronic documents retained for legal or compliance purposes and other data documenting business transactions.
The growth rate of mission-critical digital information is accelerating, driven in part by the use of the Internet as a distribution and transaction medium. The rising cost and increasing importance of digital information management, coupled with the increasing availability of telecommunications bandwidth at lower costs, may create meaningful opportunities for us. We continue to cultivate marketing and technology partnerships to support this anticipated growth.
We believe the issues encountered by customers tryingIntellectual Property Management Services
Our intellectual property management services specialize in third party technology escrow services that protect intellectual property assets such as software source code. In addition, we assist in securing intellectual property as collateral for lending, investments and joint ventures, in managing domain name registrations and transfers, and in providing expertise and assistance to manage theirbrokers and dealers in complying with electronic records are similar toregulations of the ones they face in their business records management programs and consist primarily of: (1) storage capacity and the preservation of data; (2) access to and control over the data in a secure environment; and (3) the need to retain electronic records due to regulatory compliance or for litigation support. Our digital archiving service is representative of our commitment to address evolving records management needs and expand the array of services we offer.SEC.
Complementary Services and Products
We offer a variety of additional services which customers may request or contract for on an individual basis. These services include conducting records inventories, packing records into cartons or other containers, and creating computerized indices of files and individual documents. We also provide services for the management of active records programs. We can provide these services, which generally include document and file processing and storage, both off-site at our own facilities and by supplying our own personnel to perform management functions on-site at the customer'scustomer’s premises.
Other complementary lines of business that we operate include fulfillment services and professional consulting services. Fulfillment services are performed by our wholly-owned subsidiary, COMAC, Inc. (“COMAC”). COMAC stores customer marketing literature and delivers this material to sales offices, trade shows and prospective customers'customers’ sites based on current and prospective customer orders. In addition, COMAC assembles custom marketing packages and orders, and manages and provides detailed reporting on customer marketing literature inventories.
We provide professional consulting services to customers, enabling them to develop and implement comprehensive records and information management programs. Our consulting business draws on our experience in recordsinformation protection and information managementstorage services to analyze the practices of companies and assist them in creating more effective programs of records and information management. Our consultants work with these customers to develop policies for document review, analysis and evaluation andschedules for scheduling of document retention and destruction.
We sell software licenses to our electronic vaulting customers who prefer an on-site solution for the online backup and recovery of server and personal computer data. We also sell: (1) a full line of specially designed corrugated cardboard, metal and plastic storage containers; (2) magnetic media products including computer tapes, cartridges and drives, tape cleaners
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and supplies and CDs; and (3) computer room equipment and supplies such as racking systems furniture, bar code scanners and printers.furniture.
Financial Characteristics of Our Business
Our financial model is based on the recurring nature of our revenues.various revenue streams. The historical predictability of this revenue streamour revenues and the resulting operating income before depreciation and amortization (OIBDA)(“OIBDA”)1 allow us to operate with a high degree of financial leverage. Our primary financial goal has always been, and continues to be, to increase consolidated OIBDA in relation to capital invested, even as our focus has shifted from growth through acquisitions to internal revenue growth. Our business has the following financial characteristics:
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·
·
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inconvenience of moving storage operations in-house or to another provider of recordsinformation protection and storage services.
1 For a more detailed definition and reconciliation of OIBDA and a discussion of why we believe this measure provides relevant and useful information management services.to our current and potential investors, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures.”
·Diversified and Stable Customer Base. As of December 31, 2003,2006, we had over 200,000 customer accounts90,000 corporate clients in a variety of industries. We currently provide services to numerous commercial, legal, banking, healthcare, accounting, insurance, entertainment and government organizations, including more than half90% of the Fortune 5001000 and more than two thirds85% of the FTSE 100. No customer accounted for more than 2% of our consolidated revenues for the yearyears ended December 31, 2003. From January 1, 19992004, 2005 and 2006. For each of the three years 2004 through December 31, 2003,2006, the average annual permanent removals of Cartons, not including destructions, represented approximately 3% of total Cartons stored.
volume reduction due to customers terminating their relationship with us was less than 2%.
·
Our objective is to maintain a leadership position in the information protection and storage services industry around the world, protecting and storing our position as the leader in records andcustomers’ information management services.without regard to media format or geographic location. In the U.S. and Canada, we seek to be one of the largest recordsinformation protection and information managementstorage services providers in each of our geographic markets. Internationally, our objectives are to continue to capitalize on our expertise in the recordsinformation protection and information managementstorage services industry and to make additional acquisitions and investments in selected international markets. Our primary avenues of growth are: (1) increased business with existing customers; (2) the addition of new customers; (3) the introduction of new products and services such as secure shredding and electronic vaulting and digital archiving;vaulting; and (4) selective acquisitions in new and existing markets.
Growth from Existing Customers
Our existing customers storing physical records contribute to storage and storage-related service revenues growth because on average they generate additional Cartonscartons at a faster rate than old Cartonscartons are destroyed or permanently removed. In order to maximize growth opportunities from existing customers, we seek to maintain high levels of customer retention by providing premium customer service through our local account management staff.
Our new sales coverage model is designed to identify and capitalize on incremental revenue opportunities by reallocatingallocating our sales resources based on a more sophisticated segmentation of our customer base and selling additional business records management, and off-site data protection & recovery and information destruction services, in new and existing markets, within our existing customer relationships. We also seek to leverage existing business relationships with our customers by selling complementary services and products. Services include records tracking, indexing, customized reporting, vital records management and consulting services.
Addition of New Customers
Our sales forces are dedicated to three primary objectives: (1) establishing new customer account relationships,relationships; (2) generating additional revenue from existing customerscustomers; and (3) expanding new and
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existing customer relationships by effectively selling a wide array of complementary services and products. In order to accomplish these objectives, our sales forces draw on our U.S. and international marketing organizations and senior management. As a result of acquisitions and our decision to recruit additional qualified sales professionals, we have increased the size of our sales force to approximately 600 such professionals as of December 31, 2003 from approximately 450 as of December 31, 2002.
Introduction of New Products and Services
We continue to expand our menu of products and services. We have established a national presence in the U.S. and Canadian secure shredding industry in the U.S., Canada and the U.K. and offer newour electronic vaulting and digital archiving services.management services worldwide. These new products and services allow us to further penetrate our existing customer accounts and attract new customers in previously untapped markets.
Growth through Acquisitions
Our acquisition strategy includes expanding geographically, as necessary, and increasing our presence and scale within existing markets through "fold-in"“fold-in” acquisitions. We have a successful record of acquiring and integrating recordsinformation protection and information managementstorage services companies. Between January 1, 1996, when we began our acquisition program, and December 31, 2000, the height of our acquisition activity,2006, we completed 78187 acquisitions in the U.S., Canada,North America, Europe, and Latin America and Asia Pacific for total consideration of approximately $2 billion.$3.1 billion, including approximately $1 billion associated with our merger with Pierce Leahy Corp. (“Pierce Leahy”) in February 2000. During that period, we substantially completed our geographic expansion in the U.S. and Canada and began to expand inNorth America, Europe and Latin America. Between January 1, 2001America and December 31, 2003, we completed an additional 34 acquisitions for total consideration of approximately $500 million (including the Hays IMS acquisition in July 2003 for approximately $333 million), primarily in the secure shredding industry in the U.S. and the records and information management industry in the U.S., Canada, Europe and Latin America.began our expansion into Asia Pacific.
Acquisitions in the U.S. and Canada
We intend to continue our acquisition program in the U.S. and Canada focusing primarily on the secure shredding industry, expanding geographically, as necessary and building scale in some of our smaller markets through "fold-in"“fold-in” acquisitions. However, given the small number of large acquisition prospects and our increased revenue base, future acquisitions are expected to be less significant to overall U.S. and Canadian revenue growth than they were prior to 2001.growth.
International GrowthAcquisition Strategy
We also intend to continue to make acquisitions and investments in recordsinformation protection and information managementstorage services businesses outside the U.S. and Canada. We have acquired and invested in, and seek to acquire and invest in, recordsinformation protection and information managementstorage services companies in countries, and, more specifically, markets within such countries, where we believe there is sufficient demand from existing multinational customers or the potential for significant growth. Since beginning our international expansion program in January 1999, we have directly and through joint ventures, expanded our operations into 1926 countries in Europe, Latin America and Latin America.Asia Pacific. These transactions have taken, and may continue to take, the form of acquisitions of the entire business or controlling or minority investments, with a long-term goal of full ownership. In addition to the criteria we use to evaluate U.S. and Canadian acquisition candidates, we also evaluate the presence in the potential market of our existing customers as well as the risks uniquely associated with an international investment, including those risks described below.
The experience, depth and strength of local management are particularly important in our international acquisition strategy. As a result, we have formed joint ventures with, or acquired significant interests in, target businesses throughout Europe, Latin America and Latin America.Asia Pacific. We began our international expansion by acquiring a 50.1% controlling interest in each of our IME, Iron Mountain Europe
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Limited, Iron Mountain South America, Ltd. (“IMSA”) and Sistemas de Archivo Corporativo (a Mexican limited liability company) subsidiaries. Iron Mountain South America has
In 2006, we established a majority-owned joint venture serving four major markets in some cases bought controlling, yet not full, ownershipIndia, completed minority investments in localinformation protection and storage businesses with operations in orderPoland and Russia, and signed a definitive agreement to enhance our local market expertise. establish a majority-owned joint venture in Asia Pacific. The Asia Pacific transaction is expected to close in the first quarter of 2007 for consideration of approximately $2 million and gives us an initial presence in Singapore, Hong Kong-SAR, China, Indonesia, Sri Lanka, Taiwan and Malaysia.
We believe this strategy, rather than an outright acquisition, may, in certain markets, better position us to expand the existing business. The local partner benefits from our expertise in the recordsinformation protection and information managementstorage services industry, our multinational customer relationships, our access to capital and our technology, and we benefit from our local partner'spartner’s knowledge of the market, relationships with local customers and their presence in the community.
Our long-term goal is to acquire full ownership of each such business, as evidenced by our recent acquisition of Mentmore'sbusiness. To that end, in February 2004, we acquired the remaining 49.9% minority equity interest in IME, discussed previously under "—A. Developmentin January 2005, we acquired the remaining 49.9% minority equity interest in IMSA and in April 2006, we acquired the remaining minority equity ownership in our Mexican operations. In addition, we have bought out partnership interests, in whole or in part, in Chile, Eastern Europe and the Netherlands. As a result of Business."these transactions we own more than 98% of our international operations, measured as a percentage of consolidated revenues.
Our international investments are subject to risks and uncertainties relating to the indigenous political, social, regulatory, tax and economic structures of other countries, as well as fluctuations in currency valuation, exchange controls, expropriation and governmental policies limiting returns to foreign investors.
The amount of our revenues derived from international operations and other relevant financial data for fiscal years 2001, 20022004, 2005 and 20032006 are set forth in Note 129 to Notes to Consolidated Financial Statements. For the yearyears ended December 31, 2003,2004, 2005 and 2006, we derived approximately 19%27%, 28%and 30%, respectively, of our total revenues from outside of the U.S. As of December 31, 2004, 2005 and 2006, we have long-lived assets of approximately 31%, 31% and 33%, respectively, from outside of the U.S.
Digital Growth and Technology Innovation Strategy
Similar to our physical businesses, we seek to grow revenues in our Worldwide Digital Segment by selling our products and services to existing and new customers. Our focus on technology innovation allows us to bring leading products and services to market designed to solve customer problems in the areas of data protection and e-records management. Our approach to innovation has three major components: build, buy and partner. We expect this percentagewill build or develop our own technology in areas core to increaseour strategy in 2004 dueorder to protect and extend our lead in the market. Examples include, back up and archiving Software as a Service and data reduction technologies. Our technology acquisition strategy is designed to accelerate our product strategy, leadership and time to market and past examples include the Connected and LiveVault acquisitions. Finally, we are developing global technology partnerships that complement our product and service offerings, allow us to offer a complete solution to the acquisition of the European operations of Hays IMS.marketplace and keep us in contact with emerging technology companies.
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Our customer base is diversified in terms of revenues and industry concentration. We track customer accounts based on invoices. Accordingly, depending upon how many invoices have been arranged at the request of a customer, one organization may represent multiple customer accounts. As of December 31, 2003,2006, we had over 200,000 customer accounts90,000 corporate clients in a variety of industries. We currently provide services to numerous commercial, legal, banking, healthcare, accounting, insurance, entertainment and government organizations, including more than half90% of the Fortune 5001000 and more than two thirds85% of the FTSE 100. No customer accounted for more than 2% of our consolidated revenues for the yearyears ended December 31, 2003.2004, 2005 and 2006.
We compete with our current and potential customers'customers’ internal recordsinformation protection and information managementstorage services capabilities. We can provide no assurance that these organizations will begin or continue to use an outside company such as Iron Mountain for their future recordsinformation protection and information managementstorage services.
We compete with multiple recordsinformation protection and information managementstorage services providers in all geographic areas where we operate. We believe that competition for customers is based on price, reputation for reliability, quality of service and scope and scale of technology and that we generally compete effectively based on these factors.
We also compete with other recordsinformation protection and information managementstorage services providers for companies to acquire. Some of our competitors may possess substantial financial and other resources. If any such competitor were to devote additional resources to the recordsinformation protection and information managementstorage services business and such acquisition candidates or focus their strategy on our markets, our results of operations could be adversely affected.
We derive most of our revenues from the storage of paper documents and storage-related services. This storage requires significant physical space. Alternative storage technologies exist, many of which
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require significantly less space than paper documents. These technologies include computer media, microform, CD-ROM and optical disk. To date, none of these technologies has replaced paper documents as the principal means for storing information. However, we can provide no assurance that our customers will continue to store most of their records in paper documents format. A significant shift by our customers to storage of data through non-paper documents based technologies, whether now existing or developed in the future, could adversely affect our business. We continue to invest in additional services such as electronic vaulting and digital archiving,e-records management, designed to address our customers'customers’ need for efficient, cost-effective, high quality solutions for electronic records and information management.
As of December 31, 2003,2006, we employed over 9,00010,400 employees in the U.S. Directly and through majority-owned joint ventures, as of December 31, 2003, we employed over 4,0008,200 employees outside of the U.S. A small percentageAt December 31, 2006, an aggregate of our600 employees arewere represented by unions. These unionized employees are locatedunions in California,Georgia and two cities in Canada. As of December 31, 2003, the aggregate number of unionized employees was less than 450.
All non-union employees are generally eligible to participate in our benefit programs, which include medical, dental, life, short and long-term disability, retirement/401(k) and accidental death and dismemberment plans. Unionized employees receive these types of benefits through their unions. In addition to base compensation and other usual benefits, all full-time employees participate in some form of incentive-based compensation program that provides payments based on revenues, profits, collections or attainment of specified objectives for the unit in which they work. Management believes that we have good relationships with our employees and unions. However, as of December 31 2006, certain of our labor contracts had expired, and we were operating under the expired contracts while attempting to negotiate replacement agreements.
Insurance
For strategic risk transfer purposes, we maintain a comprehensive insurance program with insurers that we believe to be reputable and that have adequate market securitycapitalization in amounts that we believe to be appropriate. Property insurance is purchased on an all-risk basis, including flood and earthquake, subject to certain policy conditions, sublimits and deductibles, and inclusive of the replacement cost of real and personal property, including leasehold improvements, business income loss and extra expense. Separate excess policies for insurer defined Critical Earthquake Zone exposures are maintained at what we believe to be appropriate limits and deductibles for that exposure. Included among other types of insurance that we carry, subject to certain policy conditions, sublimits and deductibles, are: workers compensation, general liability, umbrella, automobile, professional, warehouse legal and directors and officers liability policies, subject to certain policy conditions, sublimits and deductibles.policies. In 2002, we established a wholly-owned Vermont domiciled captive insurance company as a subsidiary; through the subsidiary we retain and reinsure a portion of our property loss exposure.
Our standard form of storage contract in the U.S. sets forth an agreed maximum valuation for each carton or other storage unit held by us, which serves as a limitation of liability for loss or damage, as permitted under the Uniform Commercial Code. In contracts containing such limits, such values are nominal, and we believe that in typical circumstances our liability would be so limited in the event of loss or damage to stored items for which we may be held liable. Outside the U.S., most of our contracts have similar limited valuation and liability provisions that we believe are in accordance with local business customs and statutes. However, some of our agreements with large volume accounts and some of the contracts assumed in our acquisitions contain no such limits or contain higher limits or supplemental insurance arrangements. See "Item 3. Legal Proceedings" for a description of claims by particular customers seeking to rescind their contracts, including limitations on liability, as a result of the fires experienced at our South Brunswick Township, New Jersey facilities in 1997.
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Some of our currentlycurrent and formerly owned or operatedleased properties were previously used by entities other than us for industrial or other purposes that involved the use, storage, generation and/or storagedisposal of hazardous substances orand wastes, including petroleum products or may have involved the generation of hazardous wastes.products. In some instances these properties included the operation of underground storage tanks or the presence of asbestos-containing materials. WeAlthough we have undertaken remediationfrom time to time conducted limited environmental investigations and remedial activities at some of our properties. Although we regularly conduct limited environmental reviews of real property that we intend to purchase,former and current facilities, we have not undertaken an in-depth environmental review of all of our properties. We therefore may be potentially liable for environmental costs and may be unable to sell, rent, mortgage or use contaminated real estate owned and operated properties.or leased by us. Under various federal, state and local environmental laws, we may be potentially liable for environmental compliance and remediation costs to address contamination, if any, located at owned and operatedleased properties as well as damages arising from such contamination.contamination, whether or not we know of, or were responsible for, the contamination, or the contamination occurred while we owned or leased the property. Environmental conditions for which we might be liable may also exist at properties that we may acquire in the future. In addition, future regulatory action and environmental laws may impose costs for environmental compliance that do not exist today.
We currently transfer a portion of our risk of financial loss due to currently undetected environmental matters by purchasing an environmental impairment liability insurance policy, which covers all owned and leased locations. Coverage is provided for both liability and remediation costs.
On May 27, 2005, Iron Mountain Incorporated, a Pennsylvania corporation (“Iron Mountain PA”), reincorporated as a Delaware corporation. The reincorporation was effected by means of a statutory merger (the “Merger”) of Iron Mountain PA with and into Iron Mountain Incorporated, a Delaware corporation (“Iron Mountain DE”), a wholly owned subsidiary of Iron Mountain PA. In connection with
the Merger, Iron Mountain DE succeeded to and assumed all of the assets and liabilities of Iron Mountain PA. Apart from the change in its state of incorporation, the Merger had no effect on Iron Mountain PA’s business, board composition, management, employees, fiscal year, assets or liabilities, or location of its facilities, and did not result in any relocation of management or other employees. The Merger was approved at the Annual Meeting of Stockholders held on May 26, 2005. Upon consummation of the Merger, Iron Mountain DE succeeded to Iron Mountain PA’s reporting obligations and continued to be listed on the New York Stock Exchange under the symbol “IRM.”
Our Internet address iswww.ironmountain.com. Under the "Investor Relations"“Investor Relations” category on our Internet website, we make available through a hyperlink to a third party SEC website, free of charge, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"“Exchange Act”) as soon as reasonably practicable after such forms are electronically filed with or furnished to the SEC. We are not including the information contained on or available through our website as a part of, or incorporating such information by reference into, this Annual Report.Report on Form 10-K. Copies of our corporate governance guidelines, code of ethics and the charters of our audit, compensation, and nominating and governance committees may be obtained free of charge by writing to our Secretary, Iron Mountain Incorporated, 745 Atlantic Avenue, Boston, Massachusetts, 02111 and will beare available on our website www.ironmountain.com under the heading "Corporate Governance" prior“Corporate Governance.”
Our business faces many risks. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer and the trading price of our debt or equity securities could decline. Our investors and prospective investors should consider the following risks and the information contained under the heading “Cautionary Note Regarding Forward-Looking Statements” before deciding to invest in our securities.
We face competition for customers.
We compete with our current and potential customers’ internal information protection and storage services capabilities. These organizations may not begin or continue to use an outside company, such as our company, for their future information protection and storage services needs or may not use us to provide these services. We also compete with multiple information protection and storage services providers in all geographic areas where we operate.
Governmental focus on data security could increase our costs of operations. In addition, our failure to protect our customers’ confidential information against security breaches could damage our reputation, harm our business and adversely impact our results of operations.
Many new state and federal laws and regulations are being contemplated and enacted relative to privacy issues in general and the care and handling of personal information in particular. In reaction to publicized incidents in which electronically stored information has been lost, illegally accessed or stolen, many states have adopted breach of data security statutes and regulations that require notification to consumers if the security of their personal information, such as social security numbers, is breached. In addition, the United States Congress is considering several bills that are intended to address data security, including by requiring notification to affected persons of breaches of data security. We have cooperated with a U.S. federal agency in a non-public inquiry regarding our information security practices, and we may
be subject to additional inquiries in the future. We have experienced incidents in which customers’ backup tapes or other records have been lost, and we have been informed by customers in some incidents that the lost media or records contained personal information. The increased focus on data security may lead to governmental action and/or changes in customer demand as a result of which we may modify our operations with the goal of further improving data security or accept increased liabilities or obligations if breaches of data security occur with respect to data in our custody. However, we may be unable to increase our rates sufficiently to counter our increased expenses due to such modifications in operations or such acceptance of increased liabilities and obligations, and that would adversely impact our results of operations. In addition, any compromise of security, accidental loss or theft of customer data in our possession could damage our reputation and expose us to risk of liability, which could harm our business and adversely impact our results of operations.
We may not be able to effectively expand our digital businesses.
We are implementing our planned expansion into various digital businesses. Our entrance into these markets poses certain unique risks. For example, we may be unable to:
· raise the amount of capital necessary to effectively participate in these businesses;
· develop, hire or otherwise obtain the necessary technical expertise;
· accurately predict the size of the markets for any of these services; or
· compete effectively against other companies that possess greater technical expertise, capital or other necessary resources.
In addition, the digital solutions we offer may not gain or retain market acceptance, or business partners upon whom we depend for technical and management expertise, as well as the hardware and software products we need to complement our services, may not perform as expected.
Our customers may shift from paper storage to alternative technologies that require less physical space.
We derive most of our revenues from the storage of paper documents and storage related services. This storage requires significant physical space. Alternative storage technologies exist, many of which require significantly less space than paper documents. These technologies include computer media, microform, CD-ROM and optical disk. We can provide no assurance that our customers will continue to store most of their records in paper documents format. A significant shift by our customers to storage of data through non-paper based technologies, whether now existing or developed in the future, could adversely affect our business.
We may be subject to certain costs and potential liabilities associated with the real estate required for our businesses.
Because our businesses are heavily dependent on real estate, we face special risks attributable to the real estate we own or lease. Such risks include:
· variable occupancy costs and difficulty locating suitable sites due to fluctuations in the real estate market;
· uninsured losses or damage to our Annual Meetingstorage facilities due to an inability to obtain full coverage on a cost-effective basis for some casualties, such as earthquakes, or any coverage for certain losses, such as losses from riots or terrorist activities;
· loss of Shareholdersour investment in, and anticipated profits and cash flow from, damaged property that is uninsured; and
· liability under environmental laws for the costs of investigation and cleanup of contaminated real estate owned or leased by us, whether or not we know of, or were responsible for, the contamination, or the contamination occurred while we owned or leased the property.
Some of our current and formerly owned or leased properties were previously used by entities other than us for industrial or other purposes that involved the use, storage, generation and/or disposal of hazardous substances and wastes, including petroleum products. In some instances these properties included the operation of underground storage tanks or the presence of asbestos-containing materials. Although we have from time to time conducted limited environmental investigations and remedial activities at some of our former and current facilities, we have not undertaken an in-depth environmental review of all of our properties. We therefore may be held onpotentially liable for environmental costs like those discussed above and may be unable to sell, rent, mortgage or about May 27, 2004.use contaminated real estate owned or leased by us. Environmental conditions for which we might be liable may also exist at properties that we may acquire in the future. In addition, future regulatory action and environmental laws may impose costs for environmental compliance that do not exist today.
International operations may pose unique risks.Item 2. Properties.
As of December 31, 2003,2006, we provided services in 86 markets outside the U.S. As part of our growth strategy, we expect to continue to acquire information protection and storage services businesses in foreign markets. International operations are subject to numerous risks, including:
· the impact of foreign government regulations;
· the volatility of certain foreign economies in which we operate;
· political uncertainties;
· the risk that the business partners upon whom we depend for technical assistance or management and acquisition expertise outside of the U.S. will not perform as expected;
· differences in business practices; and
· foreign currency fluctuations.
In particular, our net income can be significantly affected by fluctuations in currencies associated with certain intercompany balances among our U.S. entities and our foreign subsidiaries and our U.K. entity and subsidiaries on the European continent.
Risks Relating to Our Common Stock
No Intention to Pay Dividends
We have never declared or paid cash dividends on our capital stock. We intend to retain future earnings for use in our business and do not anticipate declaring or paying any cash dividends on shares of common stock in the foreseeable future. The terms of our credit agreement and our indentures contain provisions permitting the payment of cash dividends and stock repurchases subject to certain limitations.
Risks Relating to Our Indebtedness
Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our various indebtedness.
We have a significant amount of indebtedness. The following table shows important credit statistics as of December 31, 2006:
|
| At December 31, 2006 |
| |||
|
| (Dollars in millions) |
| |||
Total long-term debt |
|
| $ | 2,668.8 |
|
|
Stockholders’ equity |
|
| $ | 1,553.3 |
|
|
Debt to equity ratio |
|
| 1.72 | x |
| |
Our substantial indebtedness could have important consequences to you. Our indebtedness may increase as we continue to borrow under existing and future credit arrangements in order to finance future acquisitions and for general corporate purposes, which would increase the associated risks. These risks include:
· inability to satisfy our obligations with respect to our various indebtedness;
· inability to adjust to adverse economic conditions;
· inability to fund future working capital, capital expenditures, acquisitions and other general corporate requirements, including possible required repurchases of our various indebtedness;
· limits on our flexibility in planning for, or reacting to, changes in our business and the information protection and storage services industry;
· limits on future borrowings under our existing or future credit arrangements, which could affect our ability to pay our indebtedness or to fund our other liquidity needs;
· inability to generate sufficient funds to cover required interest payments; and
· restrictions on our ability to refinance our indebtedness on commercially reasonable terms.
Restrictive loan covenants may limit our ability to pursue our growth strategy.
Our credit facility and our indentures contain covenants restricting or limiting our ability to, among other things:
· incur additional indebtedness;
· pay dividends or make other restricted payments;
· make asset dispositions;
· create or permit liens; and
· make capital expenditures and other investments.
These restrictions may adversely affect our ability to pursue our acquisition and other growth strategies.
We may not have the ability to raise the funds necessary to finance the repurchase of outstanding senior subordinated indebtedness upon a change of control event as required by our indentures.
Upon the occurrence of a change of control, we will be required to offer to repurchase all outstanding senior subordinated indebtedness. However, it is possible that we will not have sufficient funds at the time
of the change of control to make the required repurchase of the notes or that restrictions in our revolving credit facility will not allow such repurchases. In addition, certain important corporate events, such as leveraged recapitalizations that would increase the level of our indebtedness, would not constitute a ‘‘change of control’’ under our indentures.
Since Iron Mountain is a holding company, our ability to make payments on our various indebtedness depends in part on the operations of our subsidiaries.
Iron Mountain is a holding company, and substantially all of our assets consist of the stock of our subsidiaries and substantially all of our operations are conducted by our direct and indirect wholly owned subsidiaries. As a result, our ability to make payments on our various indebtedness will be dependent upon the receipt of sufficient funds from our subsidiaries. However, our various indebtedness is guaranteed, on a joint and several and full and unconditional basis, by most, but not all, of our direct and indirect wholly owned U.S. subsidiaries.
Acquisition and International Expansion Risks
Failure to successfully integrate acquired operations could reduce our future results of operations.
The success of any acquisition depends in part on our ability to integrate the acquired company. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our management’s attention and our financial and other resources. We can give no assurance that we will ultimately be able to effectively integrate and manage the operations of any acquired business. Nor can we assure you that we will be able to maintain or improve the historical financial performance of Iron Mountain or our acquisitions. The failure to successfully integrate these cultures, operating systems, procedures and information technologies could have a material adverse effect on our results of operations.
We may be unable to continue our international expansion.
Our growth strategy involves expanding operations into international markets, and we expect to continue this expansion. Europe and Latin America have been our primary areas of focus for international expansion and we recently began our expansion into the Asia Pacific region. We have entered into joint ventures and have acquired all or a majority of the equity in information protection and storage services businesses operating in these areas and are actively pursuing additional opportunities. This growth strategy involves risks. We may be unable to pursue this strategy in the future. For example, we may be unable to:
· identify suitable companies to acquire;
· complete acquisitions on satisfactory terms;
· incur additional debt necessary to acquire suitable companies if we are unable to pay the purchase price out of working capital, common stock or other equity securities; or
· enter into successful business arrangements for technical assistance or management and acquisition expertise outside of the U.S.
We also compete with other information protection and storage services providers for companies to acquire. Some of our competitors may possess substantial financial and other resources. If any such competitor were to devote additional resources to such acquisition candidates or focus its strategy on our international markets, our results of operations could be adversely affected.
Item 1B. Unresolved Staff Comments.
None.
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As of December 31, 2006, we conducted operations through 582739 leased facilities and 207214 facilities that we own or are owned by variable interest entities that we consolidate.own. Our facilities are divided among our reportable segments as follows: North American Physical Business Records Management (524), Off-Site Data Protection (60)(644), International (187)Physical Business (301) and Corporate and Other (18)Worldwide Digital Business (8). These facilities contain a total of 49.359.2 million square feet of space. RentFacility rent expense was $134.4$153.1 million and $169.9 million for the yearyears ended December 31, 2003.2005 and 2006, respectively. The leased facilities typically have initial lease terms of ten to fifteen years with one or more five year options to renew for an additional five to ten years.extend. In addition, some of the leases contain either a purchase option or a right of first refusal upon the sale of the property. Our facilities are located throughout North America, Europe, and Latin America and Asia Pacific, with the largest number of facilities in California, Florida, Illinois, New Jersey, Texas, Canada and the U.K. We believe that the space available in our facilities is adequate to meet our current needs, although future growth may require that we acquire additional real property either by leasing or purchasing. See Note 1310 to Notes to Consolidated Financial Statements for information regarding our minimum annual rental commitments.
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Sequedex, H-W Associates, Pioneer and Pierce Proceedings
On March 28, 2002, Iron Mountain and Iron Mountain Information Management, Inc. ("IMIM"), one of our wholly owned subsidiaries, commenced an action in the Middlesex County, New Jersey, Superior Court, Chancery Division, captioned Iron Mountain Incorporated and Iron Mountain Information Management, Inc. v. J. Peter Pierce, Sr., Douglas B. Huntley, J. Michael Gold, Fred A. Mathewson, Jr., Michael DiIanni, J. Anthony Hayden, Pioneer Capital, LLC, and Sequedex, LLC. In the complaint, we alleged that defendant J. Peter Pierce, Sr., a former member of our Board of Directors and the former President of IMIM until his termination without cause effective June 30, 2000, violated his fiduciary obligations, as well as various noncompetition and other provisions of an employment agreement with Iron Mountain, dated February 1, 2000, by providing direct and/or indirect financial, management and other support to defendant Sequedex. Sequedex was established in October 2000, and competed directly with us in the records information management services industry. The complaint also alleged that Mr. Pierce and certain of the other defendants, who were employed by or affiliated with Pierce Leahy Corp. prior to the merger of Pierce Leahy with Iron Mountain in February 2000, misappropriated and used our trade secrets and other confidential information. Finally, the complaint asserted claims against Sequedex and others for tortious interference with contractual relations, against all of the defendants for civil conspiracy in respect of the matters described above, and against defendant Michael DiIanni for breach of his employment agreement with IMIM, dated September 6, 2000. The litigation seeks injunctions in respect of certain matters and recovery of damages against the defendants.
On April 12, 2002, Iron Mountain also initiated a related arbitration proceeding against Mr. Pierce before the Philadelphia, Pennsylvania, Office of the American Arbitration Association (the "AAA") pursuant to an arbitration clause in the employment agreement between Iron Mountain and Mr. Pierce. In the arbitration, Mr. Pierce counterclaimed for indemnification of his expenses, including attorneys' fees. We disputed Mr. Pierce's claim. On July 19, 2002, the litigation was stayed pending the outcome of the arbitration proceeding. On February 25, 2003, in response to Iron Mountain's request, the AAA removed the arbitrator. The arbitration proceeding was transferred by agreement of the parties to ADR Options, Inc. On February 4, 2004, the arbitrator rendered a decision. The arbitrator did not find the evidence provided by us in our action against Mr. Pierce sufficient to rule in our favor on the particular claims at issue. In addition, the arbitrator ruled that, pursuant to an indemnification provision in Mr. Pierce's employment agreement, we must pay Mr. Pierce's attorneys fees and costs that are attributable to this single arbitration. The arbitrator has established a procedure to ascertain the amount of these fees and expenses, which, in any case are not expected to be material to our financial position or results of operations. We have recently filed a motion to vacate the arbitrator's decision and award in Middlesex County, New Jersey, where the pending action against Mr. Pierce and others is currently stayed.
On December 16, 2002, Hartford Windsor Associates, L.P. ("H-W Associates"), Hartford General, LLC, J. Anthony Hayden, Mr. Pierce, Frank Seidman and John H. Greenwald, Jr. commenced an action in the Court of Common Pleas, Montgomery County, Pennsylvania, against Iron Mountain Incorporated. In the complaint, the plaintiffs allege that H-W Associates purchased a warehouse property in Connecticut to serve as a records storage facility, and entered into a lease for the facility with Sequedex, then a competitor of ours, and that the remaining plaintiffs were limited or general partners of H-W Associates. The plaintiffs also allege that we tortiously interfered with Sequedex's contractual relations with an actual or prospective customer of Sequedex and, as a result, caused Sequedex to default on its lease to H-W Associates. The complaint seeks damages in excess of $100,000. We have denied the material allegations in the complaint filed against us by H-W Associates and the other plaintiffs and have since filed counterclaims against the plaintiffs alleging tortious
13
interference with our business relationship with one of our longstanding customers. Discovery is proceeding.
Also on December 16, 2002, Pioneer Capital L.P. ("Pioneer"), Pioneer Capital Genpar, Inc. ("PCG"), the general partner of Pioneer, and Mr. Pierce, the President of PCG, commenced an action in the Court of Common Pleas, Montgomery County, Pennsylvania, against Iron Mountain Incorporated, C. Richard Reese, John F. Kenny, Jr., Garry Watzke, Schooner Capital LLC ("Schooner") and Vincent J. Ryan. The named individuals are Directors and/or officers of Iron Mountain and Schooner is a shareholder of Iron Mountain. In the complaint, the plaintiffs allege that the defendants had numerous conversations and arrangements with Mr. Carr, one of Mr. Pierce's and Pioneer's business partners in a company named Logisteq LLC. The plaintiffs further allege that, as a result of such conversations and arrangements, defendants conspired to, and did intentionally, interfere with Pioneer's relationship with its partner and Logisteq. The plaintiffs also allege that defendants damaged Mr. Pierce's reputation in the community by telling Iron Mountain employees and other third parties that Mr. Pierce breached his employment agreement with Iron Mountain, misappropriated and used Iron Mountain's confidential information, breached his fiduciary duties to Iron Mountain's shareholders and assisted Sequedex, then a competitor of Iron Mountain, in unfairly competing with Iron Mountain. Finally, the complaint alleges that the business partner in Logisteq taped conversations with Mr. Pierce and others which allegedly violated privacy laws, that the defendants knew, or should have known, that the tapes were being made without the consent of the individuals and, as a result, Mr. Pierce was harmed. The complaint seeks damages in excess of $5,000,000. Iron Mountain and the other defendants have challenged the legal sufficiency of the plaintiffs' pleadings in each of these cases.
On September 10, 2003, IMIM filed a complaint in the Court of Common Pleas, Montgomery County, Pennsylvania in a matter related to the litigation between the Company and Sequedex, Mr. Pierce and others disclosed above. The new matter names Sequedex, J. Michael Gold and Peter Hamilton as defendants, and alleges that in 2000 defendants Gold and Hamilton, both former IMIM employees, used confidential and proprietary business information that they had obtained while employed by IMIM to form their own records management company, Sequedex. The complaint also alleges unlawful interference with IMIM's contractual relationship with a certain customer and other matters. The defendants filed preliminary objections to our complaint and Iron Mountain has answered those preliminary objections.
Prior to the litigation directly pertaining to Mr. Pierce having been filed, in approximately October 2000, three former management employees of IMIM became employed by or otherwise associated with Sequedex. IMIM commenced actions against these three former employees to enforce its rights under their confidentiality and non-competition agreements. IMIM has also asserted claims against Sequedex for tortious interference with these agreements, and against both Sequedex and the former employees for misappropriation and use of IMIM's trade secrets and confidential information.
The defendants in all three cases have denied the material allegations in IMIM's complaints and asserted various affirmative defenses. In addition, Sequedex and the individual defendants filed counterclaims against IMIM and third party complaints against Iron Mountain. The counterclaims and third party complaints assert claims for tortious interference with certain contracts and prospective business relations between Sequedex and its current and potential customers as well as a claim for trade disparagement and defamation. The defendant in one of these actions sought a declaratory judgment regarding the enforceability of the confidentiality and non-competition agreements at issue in that case and filed a motion for summary judgment seeking to have the non-competition agreement declared void, or to limit its scope. IMIM and Iron Mountain filed motions in all three cases to dismiss the various counterclaims and third-party complaints. All of these motions, i.e., the defendants' motion for summary judgment and IMIM's and Iron Mountain's motions to dismiss, were denied by the court following a hearing on May 7, 2002. As previously disclosed in our quarterly report on Form 10-Q for the quarter ended September 30, 2003, Sequedex furnished a preliminary statement of damages with an
14
estimate of compensatory damages of approximately $172 million and an indication that Sequedex intended to seek punitive damages of approximately $1.5 billion. Sequedex is no longer seeking damages in this amount and in connection with its proposed amended counterclaim, Sequedex has recently furnished a litigation expert's report of damages claiming approximately $59 million plus approximately $6.6 million of pre-judgment interest. Sequedex has indicated that it also intends to seek punitive damages in an undisclosed amount. Extensive discovery has been conducted in the three cases and is ongoing; on the basis of that discovery, it is our belief that Sequedex has not produced any material evidence that we or IMIM acted wrongfully in any respect. Further, limited discovery has been conducted in respect of Sequedex's damages claim; on the basis of that discovery, we do not believe that Sequedex has any foundation, and we believe that it cannot provide any foundation, for its damages calculations. We believe that the damages calculations submitted by Sequedex are not supported by credible evidence and are subject to serious legal, methodological and factual deficiencies. A trial of the three actions in which the Sequedex counterclaims and third party complaints have been asserted is scheduled to commence in April of 2004. IMIM, Sequedex and one of the individual defendants recently filed dispositive motions, including motions for summary judgment as to certain of the claims. All of these motions were denied by the court following a hearing on February 24, 2004.
Discovery is proceeding in each of these cases, other than the arbitration. We intend to prosecute these actions vigorously, as well as to defend ourselves vigorously against the counterclaims and the third party complaints.
South Brunswick Fires Litigation
In March 1997, we experienced three fires, all of which authorities have determined were caused by arson. The fires resulted in damage to one and destruction of another records and information management services facility in South Brunswick Township, New Jersey.
Certain of our customers or their insurance carriers have asserted claims as a consequence of the destruction of, or damage to, their records as a result of the fires, including claims with specific requests for compensation and allegations of negligence or other culpability on the part of Iron Mountain. We and our insurers have denied any liability on the part of Iron Mountain as to all of these claims.
We are presently aware of five pending lawsuits that have been filed against Iron Mountain by certain of our customers and/or their insurers, and one pending lawsuit filed by the insurers of an abutter of one of the South Brunswick facilities. Five of these six lawsuits have been consolidated for pre-trial purposes in the Middlesex County, New Jersey, Superior Court. The sixth lawsuit, brought by a single customer, is pending in the Supreme Court for New York County, New York. A seventh lawsuit, also brought by a single customer, was tried before a federal judge in New Jersey in February 2000, with a defendant's verdict entered in favor of Iron Mountain. An eighth lawsuit filed by an injured firefighter is currently being settled by our insurer for a nominal amount. Several other claims that were originally filed in relation to these lawsuits have been voluntarily dismissed without prejudice by the customers, abutting business owners, and/or their insurance carriers.
We have denied liability and asserted affirmative defenses in all of the remaining cases arising out of the fires and, in certain of the cases, have asserted counterclaims for indemnification against the plaintiffs. Discovery is ongoing. We deny any liability as a result of the destruction of, or damage to, customer records or property of abutters as a result of the fires, which were beyond our control. We intend to vigorously defend ourselves against these and any other lawsuits that may arise.
Our professional liability insurer, together with our general liability and property insurance carriers, have entered into a binding agreement with us regarding reimbursement of defense costs and have agreed to ongoing discussions regarding any remaining coverage issues, further defense and/or settlement of these claims.
15
General
In addition to the matters discussed above, we are involved in litigation from time to time in the ordinary course of business with a portion of the defense and/or settlement costs being covered by various commercial liability insurance policies purchased by us. In the opinion of management, no other material legal proceedings are pending to which we, or any of our properties, are subject.
The outcome of the South Brunswick fires, Sequedex, H-W Associates, Pioneer and Pierce proceedings cannot be predicted with certainty. Based on our present assessment of the situation, after consultation with legal counsel, management does not believe that the outcome of these proceedings will have a material adverse effect on our financial condition or results of operations, although there can be no assurance in this regard.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of Iron Mountain during the fourth quarter of the fiscal year ended December 31, 2003.2006.
16
Item 5. Market for the Registrant'sRegistrant’s Common StockEquity, Related Stockholder Matters and Related Shareholder Matters.
Issuer Purchases of Equity Securities.
Our common stock is traded on the New York Stock Exchange, ("NYSE")or NYSE, under the symbol "IRM." “IRM.” On December 7, 2006, our board authorized and approved a three-for-two stock split effected in the form of a dividend on our common stock. We issued the additional shares of common stock resulting from this stock dividend on December 29, 2006 to all stockholders of record as of the close of business on December 18, 2006.
The following table sets forth the high and low sale prices on the NYSE, for the years 20022005 and 2003:2006, giving effect to such stock split:
| | Sale Prices | ||||||
|---|---|---|---|---|---|---|---|
| | High | Low | |||||
| 2002 | |||||||
| First Quarter | $ | 32.83 | $ | 29.19 | |||
| Second Quarter | 33.17 | 29.10 | |||||
| Third Quarter | 31.30 | 22.72 | |||||
| Fourth Quarter | 34.20 | 20.14 | |||||
| 2003 | |||||||
| First Quarter | $ | 39.49 | $ | 30.23 | |||
| Second Quarter | 40.64 | 36.63 | |||||
| Third Quarter | 39.94 | 33.56 | |||||
| Fourth Quarter | 40.15 | 34.78 | |||||
|
| Sale Prices |
| ||||
|
| High |
| Low |
| ||
2005 |
|
|
|
|
| ||
First Quarter |
| $ | 21.33 |
| $ | 17.77 |
|
Second Quarter |
| 20.81 |
| 18.17 |
| ||
Third Quarter |
| 25.17 |
| 20.13 |
| ||
Fourth Quarter |
| 30.06 |
| 22.80 |
| ||
2006 |
|
|
|
|
| ||
First Quarter |
| $ | 29.91 |
| $ | 26.29 |
|
Second Quarter |
| 27.24 |
| 22.91 |
| ||
Third Quarter |
| 29.48 |
| 22.64 |
| ||
Fourth Quarter |
| 29.72 |
| 27.03 |
| ||
The closing price of our common stock on the NYSE on March 1, 2004February 15, 2007 was $45.23.$28.51. As of March 1, 2004,February 15, 2007, there were 576526 holders of record of our common stock. We believe that there are more than 15,00077,000 beneficial owners of our common stock.
WeThe only dividends we have not paid dividends on our common stock during the last two years.years was the stock dividend paid in connection with the stock split referenced above. Our Board currently intends to retain future earnings, if any, for the development of our business and does not anticipate paying cash dividends on our common stock in the foreseeable future. Any determinations by our Board to pay cash dividends on our common stock in the future will be based primarily upon our financial condition, results of operations and business requirements. Our Fifth Amended and Restated Credit Agreement dated March 15, 2002 (the "Amended and Restated Credit Agreement") contains provisions that limitFacility permits the amountpayment of cash dividends we may pay and stock repurchases that we may make.subject to certain limitations.
There was no common stock repurchased or sales of unregistered securities for the fourth quarter ended December 31, 2006.
Item 6. Selected Financial Data.
The following selected consolidated statements of operations, balance sheet and other data have been derived from our audited consolidated financial statements. The selected consolidated financial and operating information set forth below, giving effect to stock splits, should be read in conjunction with Item 7. "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and our Consolidated Financial Statements and the Notes thereto included elsewhere in this filing.
|
| Year Ended December 31, |
| |||||||||||||
|
| 2002(1) |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||
|
| (In thousands, except per share data) |
| |||||||||||||
Consolidated Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||||
Storage |
| $ | 759,536 |
| $ | 875,035 |
| $ | 1,043,366 |
| $ | 1,181,551 |
| $ | 1,327,169 |
|
Service and Storage Material Sales |
| 558,961 |
| 626,294 |
| 774,223 |
| 896,604 |
| 1,023,173 |
| |||||
Total Revenues |
| 1,318,497 |
| 1,501,329 |
| 1,817,589 |
| 2,078,155 |
| 2,350,342 |
| |||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of Sales (excluding depreciation and amortization)(2) |
| 622,299 |
| 680,747 |
| 823,899 |
| 938,239 |
| 1,074,268 |
| |||||
Selling, General and Administrative(2) |
| 333,050 |
| 383,641 |
| 486,246 |
| 569,695 |
| 670,074 |
| |||||
Depreciation and |
| 108,992 |
| 130,918 |
| 163,629 |
| 186,922 |
| 208,373 |
| |||||
Merger-related Expenses |
| 796 |
| — |
| — |
| — |
| — |
| |||||
Loss (Gain) on Disposal/Writedown of Property, Plant and Equipment, Net |
| 774 |
| 1,130 |
| (681 | ) | (3,485 | ) | (9,560 | ) | |||||
Total Operating Expenses |
| 1,065,911 |
| 1,196,436 |
| 1,473,093 |
| 1,691,371 |
| 1,943,155 |
| |||||
Operating Income |
| 252,586 |
| 304,893 |
| 344,496 |
| 386,784 |
| 407,187 |
| |||||
Interest Expense, Net |
| 136,632 |
| 150,468 |
| 185,749 |
| 183,584 |
| 194,958 |
| |||||
Other Expense (Income), Net |
| 1,435 |
| (2,564 | ) | (7,988 | ) | 6,182 |
| (11,989 | ) | |||||
Income from Continuing Operations Before Provision for Income Taxes and Minority Interest |
| 114,519 |
| 156,989 |
| 166,735 |
| 197,018 |
| 224,218 |
| |||||
Provision for Income Taxes |
| 47,318 |
| 66,730 |
| 69,574 |
| 81,484 |
| 93,795 |
| |||||
Minority Interests in Earnings of Subsidiaries, Net |
| 3,629 |
| 5,622 |
| 2,970 |
| 1,684 |
| 1,560 |
| |||||
Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle |
| 63,572 |
| 84,637 |
| 94,191 |
| 113,850 |
| 128,863 |
| |||||
Income from Discontinued Operations (net of tax) |
| 1,116 | (4) | — |
| — |
| — |
| — |
| |||||
Cumulative Effect of Change in Accounting Principle (net of minority interest and tax benefit) |
| (6,396 | )(5) | — |
| — |
| (2,751 | )(6) | — |
| |||||
Net Income |
| $ | 58,292 |
| $ | 84,637 |
| $ | 94,191 |
| $ | 111,099 |
| $ | 128,863 |
|
17
| | Year Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 1999 | 2000(1) | 2001(1) | 2002(1)(2) | 2003(2) | |||||||||||||
| | (In thousands, except per share data) | |||||||||||||||||
| Consolidated Statements of Operations Data: | ||||||||||||||||||
| Revenues: | ||||||||||||||||||
| Storage | $ | 317,387 | $ | 585,664 | $ | 694,474 | $ | 759,536 | $ | 875,035 | ||||||||
| Service and Storage Material Sales | 214,002 | 418,501 | 491,244 | 558,961 | 626,294 | |||||||||||||
| Total Revenues | 531,389 | 1,004,165 | 1,185,718 | 1,318,497 | 1,501,329 | |||||||||||||
| Operating Expenses: | ||||||||||||||||||
| Cost of Sales (excluding depreciation) | 272,770 | 500,565 | 576,538 | 622,299 | 680,747 | |||||||||||||
| Selling, General and Administrative | 128,948 | 246,998 | 307,800 | 333,050 | 383,641 | |||||||||||||
| Depreciation and Amortization | 65,214 | 126,662 | 153,271 | 108,992 | 130,918 | |||||||||||||
| Stock Option Compensation Expense | — | 15,110 | — | — | — | |||||||||||||
| Merger-related Expenses | — | 9,133 | 3,673 | 796 | — | |||||||||||||
| Loss on Disposal/Writedown of Property, Plant and Equipment, Net | 208 | 148 | 320 | 774 | 1,130 | |||||||||||||
| Total Operating Expenses | 467,140 | 898,616 | 1,041,602 | 1,065,911 | 1,196,436 | |||||||||||||
| Operating Income | 64,249 | 105,549 | 144,116 | 252,586 | 304,893 | |||||||||||||
| Interest Expense, Net | 54,425 | 117,975 | 134,742 | 136,632 | 150,468 | |||||||||||||
| Other (Income) Expense, Net | (17 | ) | 10,865 | 37,485 | 1,435 | (2,564 | ) | |||||||||||
| Income (Loss) from Continuing Operations Before Provision for Income Taxes and Minority Interest | 9,841 | (23,291 | ) | (28,111 | ) | 114,519 | 156,989 | |||||||||||
| Provision for Income Taxes | 10,579 | 6,758 | 17,875 | 47,318 | 66,730 | |||||||||||||
| Minority Interests in Earnings (Losses) of Subsidiaries, Net | 322 | (2,224 | ) | (1,929 | ) | 3,629 | 5,622 | |||||||||||
| (Loss) Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle | (1,060 | ) | (27,825 | ) | (44,057 | ) | 63,572 | 84,637 | ||||||||||
| Income from Discontinued Operations (net of tax) | 241 | — | — | 1,116 | — | |||||||||||||
| Loss on Sale of Discontinued Operations (net of tax benefit) | (13,400 | ) | — | — | — | — | ||||||||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | — | — | — | (6,396 | ) | — | ||||||||||||
| Net (Loss) Income | $ | (14,219 | ) | $ | (27,825 | ) | $ | (44,057 | ) | $ | 58,292 | $ | 84,637 | |||||
| Net (Loss) Income per Common Share—Basic: | ||||||||||||||||||
| (Loss) Income from Continuing Operations | $ | (0.02 | ) | $ | (0.35 | ) | $ | (0.53 | ) | $ | 0.75 | $ | 0.99 | |||||
| Income from Discontinued Operations (net of tax) | 0.01 | — | — | 0.01 | — | |||||||||||||
| Loss on Sale of Discontinued Operations (net of tax benefit) | (0.27 | ) | — | — | — | — | ||||||||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | — | — | — | (0.08 | ) | — | ||||||||||||
| Net (Loss) Income—Basic | $ | (0.28 | ) | $ | (0.35 | ) | $ | (0.53 | ) | $ | 0.69 | $ | 0.99 | |||||
| Net (Loss) Income per Common Share—Diluted: | ||||||||||||||||||
| (Loss) Income from Continuing Operations | $ | (0.02 | ) | $ | (0.35 | ) | $ | (0.53 | ) | $ | 0.74 | $ | 0.98 | |||||
| Income from Discontinued Operations (net of tax) | 0.01 | — | — | 0.01 | — | |||||||||||||
| Loss on Sale of Discontinued Operations (net of tax benefit) | (0.27 | ) | — | — | — | — | ||||||||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | — | — | — | (0.07 | ) | — | ||||||||||||
| Net (Loss) Income—Diluted | $ | (0.28 | ) | $ | (0.35 | ) | $ | (0.53 | ) | $ | 0.68 | $ | 0.98 | |||||
| Weighted Average Common Shares Outstanding—Basic | 50,018 | 79,688 | 83,666 | 84,651 | 85,267 | |||||||||||||
| Weighted Average Common Shares Outstanding—Diluted | 50,018 | 79,688 | 83,666 | 86,071 | 86,718 | |||||||||||||
Net Income per Common |
|
|
|
|
|
|
|
|
|
|
| |||||
Income from Continuing Operations |
| $ | 0.33 |
| $ | 0.44 |
| $ | 0.49 |
| $ | 0.58 |
| $ | 0.65 |
|
Income from Discontinued Operations (net of tax) |
| 0.01 |
| — |
| — |
| — |
| — |
| |||||
Cumulative Effect of Change in Accounting Principle (net of minority interest and tax benefit) |
| (0.03 | ) | — |
| — |
| (0.01 | ) | — |
| |||||
Net Income—Basic |
| $ | 0.31 |
| $ | 0.44 |
| $ | 0.49 |
| $ | 0.57 |
| $ | 0.65 |
|
Net Income per Common |
|
|
|
|
|
|
|
|
|
|
| |||||
Income from Continuing Operations |
| $ | 0.33 |
| $ | 0.43 |
| $ | 0.48 |
| $ | 0.57 |
| $ | 0.64 |
|
Income from Discontinued Operations (net of tax) |
| 0.01 |
| — |
| — |
| — |
| — |
| |||||
Cumulative Effect of Change in Accounting Principle (net of minority interest and tax benefit) |
| (0.03 | ) | — |
| — |
| (0.01 | ) | — |
| |||||
Net Income—Diluted |
| $ | 0.30 |
| $ | 0.43 |
| $ | 0.48 |
| $ | 0.56 |
| $ | 0.64 |
|
Weighted Average Common Shares Outstanding—Basic |
| 190,464 |
| 191,851 |
| 193,625 |
| 195,988 |
| 198,116 |
| |||||
Weighted Average Common Shares Outstanding— |
| 193,660 |
| 195,116 |
| 196,764 |
| 198,104 |
| 200,463 |
| |||||
(footnotes follow)
|
| Year Ended December 31, |
| |||||||||||||
|
| 2002(1) |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||
|
| (In thousands) |
| |||||||||||||
Other Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
OIBDA(2)(3) |
| $ | 361,578 |
| $ | 435,811 |
| $ | 508,125 |
| $ | 573,706 |
| $ | 615,560 |
|
OIBDA Margin(2)(3) |
| 27.4 | % | 29.0 | % | 28.0 | % | 27.6 | % | 26.2 | % | |||||
Ratio of Earnings to Fixed Charges |
| 1.6 | x | 1.8 | x | 1.7 | x | 1.8 | x | 1.8 | x | |||||
|
| As of December 31, |
| |||||||||||||
|
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||
|
| (In thousands) |
| |||||||||||||
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and Cash Equivalents |
| $ | 56,292 |
| $ | 74,683 |
| $ | 31,942 |
| $ | 53,413 |
| $ | 45,369 |
|
Total Assets |
| 3,230,655 |
| 3,892,099 |
| 4,442,387 |
| 4,766,140 |
| 5,209,521 |
| |||||
Total Long-Term Debt (including Current Portion of Long-Term Debt) |
| 1,732,097 |
| 2,089,928 |
| 2,478,022 |
| 2,529,431 |
| 2,668,816 |
| |||||
Stockholders’ Equity |
| 944,861 |
| 1,066,114 |
| 1,218,568 |
| 1,370,129 |
| 1,553,273 |
| |||||
18
| | Year Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 1999 | 2000(1) | 2001(1) | 2002(1) | 2003 | |||||||||||
| | (In thousands) | |||||||||||||||
| Other Data: | ||||||||||||||||
| OIBDA (3) | $ | 129,463 | $ | 232,211 | $ | 297,387 | $ | 361,578 | $ | 435,811 | ||||||
| OIBDA Margin (3) | 24.4 | % | 23.1 | % | 25.1 | % | 27.4 | % | 29.0 | % | ||||||
| Ratio of Earnings to Fixed Charges | 1.1 | x | 0.8 | x(4) | 0.8 | x(4) | 1.6 | x | 1.8 | x | ||||||
| | As of December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 1999 | 2000(1) | 2001 | 2002 | 2003 | ||||||||||
| | (In thousands) | ||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||
| Cash and Cash Equivalents | $ | 3,830 | $ | 6,200 | $ | 21,359 | $ | 56,292 | $ | 74,683 | |||||
| Total Assets | 1,317,212 | 2,659,096 | 2,859,906 | 3,230,655 | 3,892,099 | ||||||||||
| Total Long-Term Debt (including Current Portion of Long-Term Debt) | 612,947 | 1,355,131 | 1,496,099 | 1,732,097 | 2,089,928 | ||||||||||
| Shareholders' Equity | 488,754 | 924,458 | 885,959 | 944,861 | 1,066,114 | ||||||||||
Reconciliation of OIBDA to Operating Income and Net (Loss) Income:
| | | Year Ended December 31, |
| Year Ended December 31, |
| |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 1999 | 2000(1) | 2001(1) | 2002(1)(2) | 2003(2) |
| 2002(1) |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||||||||||||||
| | | (In thousands) |
| (In thousands) |
| |||||||||||||||||||||||||||||
| OIBDA | OIBDA | $ | 129,463 | $ | 232,211 | $ | 297,387 | $ | 361,578 | $ | 435,811 | OIBDA |
| $ | 361,578 |
| $ | 435,811 |
| $ | 508,125 |
| $ | 573,706 |
| $ | 615,560 |
| ||||||
| Less: Depreciation and Amortization | Less: Depreciation and Amortization | 65,214 | 126,662 | 153,271 | 108,992 | 130,918 |
| 108,992 |
| 130,918 |
| 163,629 |
| 186,922 |
| 208,373 |
| |||||||||||||||||
| Operating Income | Operating Income | 64,249 | 105,549 | 144,116 | 252,586 | 304,893 |
| 252,586 |
| 304,893 |
| 344,496 |
| 386,784 |
| 407,187 |
| |||||||||||||||||
| Less: Interest Expense, Net | Less: Interest Expense, Net | 54,425 | 117,975 | 134,742 | 136,632 | 150,468 |
| 136,632 |
| 150,468 |
| 185,749 |
| 183,584 |
| 194,958 |
| |||||||||||||||||
| Other (Income) Expense, Net | (17 | ) | 10,865 | 37,485 | 1,435 | (2,564 | ) | |||||||||||||||||||||||||||
| Provision for Income Taxes | 10,579 | 6,758 | 17,875 | 47,318 | 66,730 | |||||||||||||||||||||||||||||
| Minority Interests in Earnings (Losses) of Subsidiaries | 322 | (2,224 | ) | (1,929 | ) | 3,629 | 5,622 | |||||||||||||||||||||||||||
| Income from Discontinued Operations (net of tax) | (241 | ) | — | — | (1,116 | ) | — | |||||||||||||||||||||||||||
| Loss on Sale of Discontinued Operations (net of tax benefit) | 13,400 | — | — | — | — | |||||||||||||||||||||||||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | — | — | — | 6,396 | — | |||||||||||||||||||||||||||||
| Net (Loss) Income | $ | (14,219 | ) | $ | (27,825 | ) | $ | (44,057 | ) | $ | 58,292 | $ | 84,637 | |||||||||||||||||||||
Other Expense (Income), Net |
| 1,435 |
| (2,564 | ) | (7,988 | ) | 6,182 |
| (11,989 | ) | |||||||||||||||||||||||
Provision for Income Taxes |
| 47,318 |
| 66,730 |
| 69,574 |
| 81,484 |
| 93,795 |
| |||||||||||||||||||||||
Minority Interests in Earnings of Subsidiaries |
| 3,629 |
| 5,622 |
| 2,970 |
| 1,684 |
| 1,560 |
| |||||||||||||||||||||||
Income from Discontinued Operations (net of tax) |
| (1,116 | )(4) | — |
| — |
| — |
| — |
| |||||||||||||||||||||||
Cumulative Effect of Change in Accounting Principle (net of minority interest and tax benefit) |
| 6,396 | (5) | — |
| — |
| 2,751 | (6) | — |
| |||||||||||||||||||||||
Net Income |
| $ | 58,292 |
| $ | 84,637 |
| $ | 94,191 |
| $ | 111,099 |
| $ | 128,863 |
| ||||||||||||||||||
(footnotes follow)
(1)
19
(2)
(3)
reconciliation of OIBDA and a discussion of why we believe these measures provide relevant and useful information to our current and potential investors, see Item 7. "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures."
(4)
(5) Effective January 1, 2002, we reviewed goodwill for income taxesimpairment consistent with the guidelines of SFAS No. 142, “Goodwill and other Intangible Assets,” using a discounted future cash flow approach to approximate fair value. The result of testing our goodwill for impairment in accordance with SFAS No. 142, as of January 1, 2002, was a non-cash charge of $6,396 (net of minority interest of $23,291$8,487) related to the impairment of goodwill associated with our investment in South America due primarily to the deterioration of the economy and $28,111, respectively,the devaluation of the currency in Argentina.
(6) Effective December 31, 2005, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” As a result, a non-cash charge of $2,751 net of tax benefit was recorded in the fourth quarter of 2005 as a cumulative effect of change in accounting principle in the accompanying consolidated statements of operations. See Note 2(f) to cover our fixed charges of $154,975 and $177,032, respectively.
20
Notes to Consolidated Financial Statements.
Item 7. Management's Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with "Item“Item 6. Selected Financial Data"Data” and the Consolidated Financial Statements and Notes thereto and the other financial and operating information included elsewhere in this filing.
This discussion contains "forward-looking“forward-looking statements,"” as that term is defined in the Private Securities Litigation Reform Act of 1995 and in other federal securities laws. See "Cautionary“Cautionary Note Regarding Forward-Looking Statements"Statements” on page ii of this filing and “Item 1A. Risk Factors” beginning on page 14 of this filing.
Our revenues consist of storage revenues as well as service and storage material sales revenues. Storage revenues, both physical and digital, which are considered a key performance indicator for the recordsinformation protection and information managementstorage services industry, consist of largely recurring periodic charges related to the storage of materials (eitheror data (generally on a per unit or per cubic foot of records basis), which are typically retained by customers for many years, and have accounted for approximately 58%over 56% of total consolidated revenues in each of the last five years. Our quarterly revenues from these fixed periodic storage fees have grown for 6072 consecutive quarters. In certain circumstances, based upon customer requirements, storage revenues include periodic charges associated with normal, recurring service activities. Service and storage material sales revenues are comprised of charges for related service activities and courier operations and the sale of software licenses and storage materials. RelatedIncluded in service and storage materials sales are related core service revenues arise from additionsarising from: (1) the handling of records including the addition of new records, temporary removal of records from storage, refiling of removed records, destructionsdestruction of records, and permanent withdrawals from storage and other complementary and ancillary services, and sales of specially designed storage containers, magnetic media including computer tapes and related supplies. Courierstorage; (2) courier operations, consistconsisting primarily of the pickup and delivery of records upon customer request. Customers are generally billed on a monthly basis on contractually agreed-upon terms.request; (3) secure shredding of sensitive documents; and (4) other recurring services including maintenance and support contracts. Our complementary services revenues arise from special project work, including data restoration, providing fulfillment services, consulting services and product sales, including software licenses, specially designed storage containers, magnetic media (including computer tapes) and related supplies. Our consolidated revenues are subject to variations caused by the net effect of foreign currency
translation on revenue derived from outside the U.S. For the years ended December 31, 20032004, 2005 and 2002,2006, we derived 19.0%approximately 27%, 28% and 14.0%30%, respectively, of our total revenues from outside the U.S.
We expectrecognize revenue when the percentagefollowing criteria are met: persuasive evidence of total revenues that we derive from outsidean arrangement exists, services have been rendered, the U.S. to increase in 2004 due to our acquisitionsales price is fixed or determinable, and collectability of the European operationsresulting 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 (less than 1% of Hays IMS.consolidated revenues in 2006). 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.
Cost of sales (excluding depreciation) consists primarily of wages and benefits for field personnel, facility occupancy costs including(including rent and utilities,utilities), transportation expenses including(including vehicle leases and fuel,fuel), other product cost of sales and other equipment costs and supplies. Of these, wages and benefits and facility occupancy costs are the most significant. Trends in total wages and benefits dollars and as a percentage of total consolidated revenue are influenced by changes in headcount and compensation levels, achievement of incentive compensation targets, workforce productivity and variability in costs associated with medical insurance and workers compensation. Trends in facility occupancy costs are similarly impacted by the total number of facilities we occupy, the mix of properties we own versus properties we occupy under operating leases, fluctuations in per square foot occupancy costs, and the levels of utilization of these properties.
The expansion of our European, and secure shredding operations have resulted in changes toand digital services businesses has impacted the mix of certainmajor cost of sales components. We expect that until we complete the integration of the European operations of Hays IMS, rationalize our European facilities and maximize their utilization, our facilities costs may increase as a percentage of consolidated revenue, as our European operations become a greater percentage of our consolidated results. Our European and secure shredding operations are more labor intensive;intensive than our core physical businesses and therefore increase our labor expense will be highercosts as a percentagepercent of revenue as compared toconsolidated revenues. This trend is partially offset by our mature operations. In addition, ourdigital services businesses, which require significantly less direct labor. Our secure shredding operations incur less facility costs and higher transportation costs and lower facility costs, as a percentagepercent of consolidated revenue, asrevenues compared to our mature operations.core physical businesses.
21
Selling, general and administrative expenses consist primarily of wages and benefits for management, administrative, information technology, sales, account management and marketing personnel, as well as expenses related to communications and data processing, travel, professional fees, bad debts, training, office equipment and supplies. Trends in total wages and benefits dollars and as a percentage of total consolidated revenue are influenced by changes in headcount and compensation levels, achievement of incentive compensation targets, workforce productivity and variability in costs associated with medical insurance. We expect our adoption of 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," will result in increasing amounts of selling, general and administrative expenses in the future. We began using 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. As we continue to grant new options subject to these standards and amortize compensation expense associated with options granted after January 1, 2003, we expect our stock compensation expense will grow significantly over the $1.5 million we recorded for such expense in selling, general and administrative expenses for the year ended December 31, 2003. It is not possible to predict the increase in stock compensation expense for 2004 as it is dependent upon the number of options that will be granted throughout 2004 and the valuation assumptions in use at the time those options are granted. The overhead structure of our expanding European operations, as compared to our matureNorth American operations, is more labor intensive and has not achieved the same level of overhead leverage, which may result in an increase in selling, general and administrative expenses, as a percentage of consolidated revenue, as our European operations become a more meaningful percentage of our consolidated results. Similarly, our digital services business requires a higher level of overhead, particularly in the area of information technology, than our core physical businesses.
25
Our adoption of the measurement provisions of SFAS No. 123 as amended by SFAS No. 148 has resulted in increasing amounts of selling, general and administrative expenses. We began using the fair value method of accounting for stock-based compensation 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 adopted SFAS No. 123R, “Share-Based Payment” 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 based on the requirements of SFAS No. 123R beginning January 1, 2006. We recorded approximately $0.9 million of additional stock compensation expense in 2006 associated with unvested stock option grants issued prior to January 1, 2003 associated with adopting SFAS No. 123R.
Our depreciation and amortization charges result primarily from the capital-intensive nature of our business. The principal components of depreciation relate to storage systems, which include racking, building and leasehold improvements, computer systems hardware and software, and buildings. Amortization relates primarily to customer relationships and acquisition costs.costs and core technology and is impacted by the nature and timing of acquisitions.
Effective July 1, 2001Our consolidated revenues and January 1, 2002, we adopted the provisions of SFAS No. 141, "Business Combinations" and SFAS No. 142. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer 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 will continue to be amortized over their useful lives. Had SFAS No. 142 been effective January 1, 2001, goodwill amortization expense would have been reduced by $59.2 million ($50.9 million, net of tax) for the year ended December 31, 2001. See Note 2(g) to Notes to Consolidated Financial Statements.
In February 2004, we completed the acquisition of Mentmore plc's 49.9% equity interest in IME. This transaction should have no impact on revenue or operating income since we already fully consolidate IME's financial results. Since we will be using the purchase method of accounting for this acquisition, 49.9% of the net assets of IME will be adjusted to reflect their fair market value if different from their current carrying value. As a result, we expect this transaction will increase depreciation and amortization expenses going forward. Additionally, we will record an increase in interest expense, net associated with debt used to fund this acquisition and will no longer record the minority interest in earnings of subsidiaries, net related to Mentmore's ownership interest in IME.
All of our costs are subject to variations caused by the net effect of foreign currency translation on costsrevenues and expenses incurred by our entities outside the U.S. During 2003,2006, we have seen increases in costsboth revenues and expenses as a result of the strengthening of the British pound sterling, the Euro, and the Canadian dollar against the U.S. dollar, and decreases in both revenues and expenses as a result of the weakening of the British pound sterling and the Euro, based on an analysis of weighted average rates for the comparable periods. It is impossibledifficult to predict how much foreign currency exchange rates will fluctuate in the future and how those
22
fluctuations will impact individual balances reported in our consolidated statement of operations; however, givenoperations. Given the relative increase in our international operations, these fluctuations may become material.
Reclassificationsmaterial on individual balances. However, because both the revenues and Changesexpenses are denominated in Presentation
Previously, consolidated losses (gains) on disposal/writedown of property, plant and equipment, net were recorded within various captions of our consolidated statements of operations based on the naturelocal currency of the underlying asset. Duringcountry in which they are derived or incurred, the first quarterimpact of 2003, we determined that it was more appropriate to record these gainscurrency fluctuations on our operating income, operating margin and losses separately within our results from operations. We have reflected this change in all applicable tables and discussions for all periods presented within the following discussion of results of operations.net income is mitigated.
Previously, debt extinguishment expenses were recorded as an extraordinary charge within our consolidated statements of operations. Effective January 1, 2003, we have reflected these charges to other (income) expense, net in accordance with recent changes in accounting pronouncements. We have reflected this change in all applicable tables and discussions for all periods presented within the following discussion of results of operations.
Operating Income Before Depreciation and Amortization, or OIBDA
OIBDA is defined as operating income before depreciation and amortization expenses. OIBDA Margin is calculated by dividing OIBDA by total revenues. Our management usesWe use these measures to evaluate the operating performance of our consolidated business. As such, we believe these measures provide relevant and useful information to our current and potential investors. We use OIBDA for planning purposes and multiples of current or projected OIBDA-based calculations in conjunction with our discounted cash flow models to determine our overall enterprise valuation and to evaluate acquisition targets. We believe OIBDA and OIBDA Margin are useful measures to evaluate our ability to grow our revenues faster than our operating expenses and they are an integral part of ourthe internal reporting system utilized by managementwe use to assess and evaluate the operating performance of our business. OIBDA does not include certain items, specifically (1) minority interest in earnings (losses) of subsidiaries, net,net; (2) other (income) expense, net,net; (3) income from discontinued operations and loss on sale of discontinued operationsoperations; and (4) cumulative effect of change in accounting principle that we believe are not indicative of our core operating results. OIBDA also does not include interest expense, net and the provision for income taxes. These expenses are associated with our capitalization and tax structures, which management doeswe do not consider when evaluating the operating profitability of our core operations. Finally, OIBDA does not include depreciation and amortization expenses, in order to eliminate the impact of capital investments, which management believes is better evaluatedwe evaluate by comparing capital expenditures to incremental revenue generated and as a percentage of total revenues. OIBDA and OIBDA Margin should be considered in addition to, but not as a substitute for, other measures of financial
performance reported in accordance with accounting principles generally accepted in the Unites States of America, or GAAP, such as operating or net income or cash flows from operating activities (as determined in accordance with GAAP).
23
Reconciliation of OIBDA to Operating Income and Net (Loss) Income (In Thousands):
| | | Year Ended December 31, |
| Year Ended December 31, |
| ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2001 | 2002 | 2003 |
| 2004 |
| 2005 |
| 2006 |
| ||||||||||
| OIBDA | OIBDA | $ | 297,387 | $ | 361,578 | $ | 435,811 |
| $ | 508,125 |
| $ | 573,706 |
| $ | 615,560 |
| ||||
| Less: Depreciation and Amortization | Less: Depreciation and Amortization | 153,271 | 108,992 | 130,918 |
| 163,629 |
| 186,922 |
| 208,373 |
| ||||||||||
| Operating Income | Operating Income | 144,116 | 252,586 | 304,893 |
| 344,496 |
| 386,784 |
| 407,187 |
| ||||||||||
| Less: Interest Expense, Net | Less: Interest Expense, Net | 134,742 | 136,632 | 150,468 |
| 185,749 |
| 183,584 |
| 194,958 |
| ||||||||||
| Other Expense (Income), Net | 37,485 | 1,435 | (2,564 | ) | |||||||||||||||||
| Provision for Income Taxes | 17,875 | 47,318 | 66,730 | ||||||||||||||||||
| Minority Interest | (1,929 | ) | 3,629 | 5,622 | |||||||||||||||||
| Income from Discontinued Operations | — | (1,116 | ) | — | |||||||||||||||||
| Cumulative Effect of Change in Accounting Principle | — | 6,396 | — | ||||||||||||||||||
| Net (Loss) Income | $ | (44,057 | ) | $ | 58,292 | $ | 84,637 | ||||||||||||||
Other (Income) Expense, Net |
| (7,988 | ) | 6,182 |
| (11,989 | ) | ||||||||||||||
Provision for Income Taxes |
| 69,574 |
| 81,484 |
| 93,795 |
| ||||||||||||||
Minority Interests in Earnings of Subsidiaries |
| 2,970 |
| 1,684 |
| 1,560 |
| ||||||||||||||
Cumulative Effect of Change in Accounting Principle (net of tax benefit) |
| — |
| 2,751 |
| — |
| ||||||||||||||
Net Income |
| $ | 94,191 |
| $ | 111,099 |
| $ | 128,863 |
| |||||||||||
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.GAAP. The preparation of these financial statements 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 theaccounting for acquisitions, allowance for doubtful accounts impairmentsand credit memos, impairment of tangible and intangible assets, income taxes, purchase accounting related reserves, self-insurance liabilities, incentivestock-based compensation liabilities, litigation liabilities and contingencies.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. We use these estimates to assist us in the identification and assessment of the accounting treatment necessary with respect to commitments and contingencies. Actual results may differ from these estimates. Our critical accounting policies include the following, andwhich are listed in no particular order:
Accounting for Acquisitions
Part of our growth strategy has included the acquisition of numerous businesses. The purchase price of these acquisitions has been determined after due diligence of the acquired business, market research, strategic planning, and the forecasting of expected future results and synergies. Estimated future results and expected synergies are subject to revisions as we integrate each acquisition and attempt to leverage resources.
Each acquisition has been accounted for using the purchase method of accounting as defined under the applicable accounting standards at the date of each acquisition, including, Accounting Principles Board Opinion No. 16, "Accounting“Accounting for Business Combinations,"” and more recently, SFAS No. 141.141, “Business Combinations.” Accounting for these acquisitions has resulted in the capitalization of the cost in excess of fair value of the net assets acquired in each of these acquisitions as goodwill. We estimated the fair values of the assets acquired in each acquisition as of the date of acquisition and these estimates are subject to adjustment. These estimates are subject to final assessments of the fair value of property, plant and equipment, intangible assets, operating leases and deferred income taxes. We complete these assessments within one year of the date of acquisition. We are not aware of any information that would
24
indicate that the final
purchase price allocations for acquisitions completed in 20032006 would differ meaningfully from preliminary estimates. See Note 76 to Notes to Consolidated Financial Statements.
In connection with each of our acquisitions, we have undertaken certain restructurings of the acquired businesses to realize efficiencies and potential cost savings. Our restructuring activities include the elimination of duplicate facilities, reductions in staffing levels, and other costs associated with exiting certain activities of the businesses we acquire. The estimated cost of these restructuring activities are included as costs of the acquisition and are recorded as goodwill consistent with the guidance of Emerging Issues Task Force ("EITF"(“EITF”) Issue No. 95-3, "Recognition“Recognition of Liabilities in Connection with a Purchase Business Combination."” While we finalize our plans to restructure the businesses we acquire within one year of the date of acquisition, it may take more than one year to complete all activities related to the restructuring of an acquired business.
Our acquisitions have resulted in a significant accumulation of goodwill. Beginning on January 1, 2002, we ceased to amortize goodwill in accordance with SFAS No. 142. We reviewed goodwill for impairment consistent with the guidelines of SFAS No. 142 using a discounted future cash flow approach to approximate fair value. The result of testing our goodwill for impairment in accordance with SFAS No. 142, as of January 1, 2002, was a non-cash charge of $6.4 million (net of minority interest of $8.5 million), which, consistent with SFAS No. 142, is reported in the caption "cumulative effect of change in accounting principle" in our consolidated statement of operations. Impairment adjustments recognized in the future, if any, are generally required to be recognized as operating expenses. The $6.4 million charge relates to our South American reporting unit within our international reporting segment. The South American reporting unit failed the impairment test primarily due to a reduction in the expected future performance of the unit resulting from a deterioration of the local economic environment and the devaluation of the currency in Argentina. As goodwill amortization expense in our South American reporting unit is not deductible for tax purposes, this impairment charge is not net of a tax benefit. We have a controlling 50.1% interest in Iron Mountain South America, Ltd ("IMSA") and the remainder is owned by an unaffiliated entity. IMSA has acquired a controlling interest in entities in which local partners have retained a minority interest in order to enhance our local market expertise. These local partners have no ownership interest in IMSA. This has caused the minority interest portion of the non-cash goodwill impairment charge ($8.5 million) to exceed our portion of the non-cash goodwill impairment charge ($6.4 million). In accordance with SFAS No. 142, we selected October 1 as our annual goodwill impairment review date. We performed our 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 December 31, 2003, no factors were identified that would alter this assessment.
Allowance for Doubtful Accounts and Credit Memos
We maintain an allowance for doubtful accounts and credit memos for estimated losses resulting from the potential inability of our customers to make required payments.payments and disputes regarding billing and service issues. When calculating the allowance, we consider our past loss experience, current and prior trends in our aged receivables and credit memo activity, current economic conditions, and specific circumstances of individual receivable balances. If the financial condition of our customers were to significantly change, resulting in a significant improvement or impairment of their ability to make payments, an adjustment of the allowance may be required. As of December 31, 20022005 and 2003,2006, our allowance for doubtful accounts and credit memos balance totaled $20.3$14.5 million and $18.3$15.2 million, respectively.
Impairment of Tangible and Intangible Assets
Assets subject to amortization:In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review long-lived assets and all amortizable intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to their carrying amount. The decreaseoperations are generally distinguished by the business segment and geographic region in which they operate. If the allowanceoperation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is based on discounted cash flows or appraised values, depending upon the nature of the assets.
Goodwill—Assets not subject to amortization:We apply the provisions of SFAS No. 142 to goodwill and intangible assets with indefinite lives which are not amortized but are reviewed annually for doubtful accountsimpairment 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 annual goodwill impairment review as of December 31, 2003 comparedOctober 1, 2004, 2005 and 2006 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, and transactions and market place data. There are inherent uncertainties related to December 31, 2002 is primarily attributablethese factors and our judgment in applying them to the successanalysis of our centralized collection efforts within the U.S. and Canada, which resulted in improved cash collections and an improved accounts receivable aging that enabled us to significantly reduce our allowance for doubtful accounts in the year ended December 31, 2003. The decrease in the allowance for doubtful accounts was partially offset by an increase in the
25
allowance for doubtful accounts associated with businesses acquired during the year ended December 31, 2003, including Hays IMS.
Accounting for Variable Interest Entities
Three variable interest entities were established to acquire properties and lease those properties to us. These leases were designed to qualify as operating leases for accounting purposes, where the monthly lease expense was recorded as rent expense in our consolidated statements of operations and where the related underlying assets and liabilities were not consolidated in our consolidated balance sheets. We changed the characterization and the related accounting for properties in one variable interest entity ("VIE III") during the third quarter of 2002 and prospectively for new property acquisitions in the fourth quarter of 2002. In addition, anticipating the requirement to consolidate, and in line with our objective of transparent reporting, we voluntarily guaranteed all of the at-risk equity in VIE III and our two other variable interest entities (together, the "Other Variable Interest Entities" and, collectively with VIE III, our "Variable Interest Entities") as of December 31, 2002. These guarantees resulted in our consolidating all of our Variable Interest Entities' assets and liabilities.
Our Variable Interest Entities were financed with real estate term loans. These real estate term loans have always been and continue to be treated as indebtedness for purposes of our financial covenants under our Amended and Restated Credit Agreement. As of the date they were consolidated into our financial statements, they were also considered indebtedness under our indentures for certain of our senior subordinated notes.goodwill impairment. As of December 31, 2003, these real estate term loans amounted2006, no factors were identified that would alter this assessment. When changes occur in the composition of one or more reporting units, the goodwill is reassigned to $202.6 million. No further financing is currently available tothe reporting units affected based on their relative fair values. Our reporting units at which level we performed our Variable Interest Entities to fund further property acquisitions. See Note 5 to Notes to Consolidated Financial Statements.
Asgoodwill impairment analysis as of DecemberOctober 31, 2002, we voluntarily guaranteed all of2006 were as follows: North America excluding Fulfillment; Fulfillment; U.K.; Continental Europe; Worldwide Digital Business excluding Iron Mountain Intellectual Property Management, Inc. (“IPM”); IPM; South America; Mexico and Asia Pacific. Goodwill valuations have been calculated using an income
approach based on the at-risk equity in VIE III. This resulted in our consolidating all of its remaining assets and liabilities. VIE III's remaining assets and liabilities relate to an interest rate swap agreement, which it entered into upon its inception. This swap agreement hedges the majority of interest rate risk associated with VIE III's real estate term loans. Specifically, VIE III has swapped $97.0 million of floating rate debt to fixed rate debt. Since the time it entered into the swap agreement, interest rates have fallen. As a result, the estimated fairpresent value of the derivative liability held by VIE III, and now consolidated on our balance sheet, related to the swap agreement was $11.0 million at December 31, 2003. This swap has been since inception and continues to be, as of December 31, 2003, an effective hedge in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." During the years ended December 31, 2002 and 2003, we recorded depreciation expense of $1.7 million and $1.8 million, respectively, associated with the properties and interest expense of $6.2 million and $8.2 million, respectively, associated with the real estate term loans. See Notes 3, 4 and 5 to Notes to Consolidated Financial Statements.
In addition, as of December 31, 2002, we voluntarily guaranteed all of the at-risk equity in the Other Variable Interest Entities. This resulted in our consolidating all of their assets and liabilities. As of December 31, 2002, the total impact of consolidating the Other Variable Interest Entities was an increase of $103.9 million both in property, plant and equipment and long-term debt. The underlying leases associated with the Other Variable Interest Entities were treated as operating leases from inception (as early as 1998) through consolidation on December 31, 2002. As a result, during the years ended December 31, 2001 and 2002, we recorded $6.7 million and $5.9 million, respectively, in rent expense in our consolidated statements of operations related to these leases. In 2003, we began recording depreciation expense associated with the properties, interest expense associated with the real estate term loans and no longer have rent expense related to leases associated with the Other Variable Interest Entities in our consolidated financial results. During the year ended December 31, 2003, we recorded depreciation expense of $2.0 million associated with the properties and interest expense of $5.5 million associated with the real estate term loans. If the Other Variable Interest Entities had been consolidated in our historical financial statements as of January 1, 2002: (1) depreciation expense would
26
have increased in an amount equal to $2.0 million for the twelve months ended December 31, 2002; and (2) rent expense for these properties would have been reclassified as interest expense in an amount equal to $5.9 million for the twelve months ended December 31, 2002. Consequently, our OIBDA, operating income and interest expense would have increased by $5.9 million, $3.9 million and $5.9 million, respectively, for the twelve months ended December 31, 2002. In addition, net income before provision for income taxes would have decreased by $2.0 million for the twelve months ended December 31, 2002.
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 must apply FIN 46R to our interests in all entities subject to the interpretation as of the first interim or annual period ending after March 15, 2004. Adoption of this new method of accounting for variable interest entities did not and is not expected to have a material impact on our consolidated results of operations and financial position. As a result of the actions described above, as of December 31, 2002 and December 31, 2003, we did not have any unconsolidated variable interest entities.
Accounting for Derivative Instruments and Hedging Activities
SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities on its balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (2) a hedge of the exposure to variablefuture cash flows of a forecasted transaction; or (3) a hedge of the foreign currency exposure of a net investmenteach reporting unit. 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 a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changesgoodwill impairment in the fair value of a derivative depends on the intended use of the derivative and resulting designation. Unrealized gains and losses are recognized each period as other comprehensive income which is a component of accumulated other comprehensive items included in shareholders' equity, assets and liabilities or earnings depending on the nature of such derivatives. See Note 4 to Notes to Consolidated Financial Statements for a detailed description of our derivative instruments.future periods.
In order for a derivative contract to be designated as a hedge, the relationship between the hedging instrument and the hedged item or transaction must be highly effective. The effectiveness test is performed at the inception of the hedge and each reporting period thereafter, throughout the period that the hedge is designated. Any amounts determined to be ineffective are recorded currently in earnings.
For fair value hedges, the gains and losses are recorded in earnings each period along with the change in the fair value of the hedged item. For cash flow hedges, the effective portions of the gains and losses are recorded to other comprehensive income and are recognized in earnings concurrent with the disposition of the hedged risks. For hedges of foreign currency the accounting treatment generally follows the treatment for cash flow hedges or fair value hedges depending on the nature of the foreign currency hedge.
Although we apply some judgment in the assessment of hedge effectiveness to designate certain derivatives as hedges, the nature of the contracts used to hedge the underlying risks is such that the
27
correlation of the changes in fair values of the derivatives and underlying risks is generally high. We had $25.6 million of interest rate risk management liabilities and had a corresponding amount for unrealized losses to other comprehensive income ($16.2 million, net of tax) related to cash flow hedges at December 31, 2003.
We provided the initial financing totaling 190.5 million British pounds sterling to IME, our European joint venture, for all of the consideration associated with the acquisition of the European operations of Hays IMS using cash on hand and borrowings under our revolving credit facility. We recorded a foreign currency gain of $27.8 million in other (income) expense, net for this intercompany balance for the year ended December 31, 2003. In order to minimize the foreign currency risk associated with providing IME with the consideration necessary for the acquisition of Hay IMS, we borrowed 80.0 million British pounds sterling under our revolving credit facility to create a natural hedge. We recorded a foreign currency loss of $11.5 million on the translation of this revolving credit balance to U.S. dollars in other (income) expense, net for the year ended December 31, 2003. In addition, we entered into two cross currency swaps with a combined notional value of 100.0 million British pounds sterling. These swaps each have a term of one year and at maturity we have a right to receive $162.8 million in exchange for 100.0 million British pounds sterling. We have not designated these swaps as hedges and, therefore, all mark to market fluctuations of the swaps are recorded in other (income) expense, net in our consolidated statements of operations. We have recorded, for the year ended December 31, 2003, a foreign currency loss of $19.0 million in other (income) expense, net.
One of our interest rate swaps was used to hedge interest rate risk on certain variable operating lease commitments. As a result of the December 31, 2002 consolidation of one of the Other Variable Interest Entities ("VIE I"), the operating lease commitments that were hedged by this swap are now considered to be inter-company transactions and we determined that this hedge was no longer effective on a prospective basis. We have consolidated the real estate term loans of VIE I and we will prospectively record interest expense instead of rent expense as we make cash interest payments on this debt. The unrealized mark to market losses previously recorded in other comprehensive income attributable to this swap ($1.9 million and $0.8 million, net of tax, as of December 31, 2002 and 2003, respectively) will be amortized through other (income) expense, net in our consolidated statement of operations based on the changes in the fair value of the swap each period that the remaining interest payments are made on VIE I's external debt. We are accounting for mark to market changes in the derivative liability of this swap agreement through other (income) expense, net in our consolidated statement of operations. This accounting has a net zero impact within our consolidated statement of operations as it relates to the amortization of unrealized mark to market losses and the fair valuing of the derivative liability.
Accounting for Internal Use Software
We develop various software applications for internal use. We account for those costs in accordance with the provisions of Statement of Position ("SOP"(“SOP”) 98-1, "Accounting“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use."” SOP 98-1 requires computer software costs associated with internal use software to be expensed as incurred until certain capitalization criteria are met. SOP 98-1 also defines which types of costs should be capitalized and which should be expensed. Payroll and related costs for employees who are directly associated with, and who devote time to, the development of internal use computer software projects, to the extent time is spent directly on the project, are capitalized and depreciated over the estimated useful life of the software. Capitalization begins when the design stage of the application has been completed and it is probable that the project will be completed and used to perform the function intended. Depreciation begins when the software is placed in service. Computer software costs that are capitalized are evaluated for impairment in accordance with SFAS No.144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets."”
28
It may be necessary for us to write-off amounts associated with the development of internal use software if the project cannot be completed as intended. Our expansion into new technology-based service offerings requires the development of internal use software that will be susceptible to rapid and significant changes in technology. We may be required to write-off unamortized costs or shorten the estimated useful life if an internal use software program is replaced with an alternative tool prior to the end of the software'ssoftware’s estimated useful life. General uncertainties related to expansion into digital businesses, including the timing of introduction and market acceptance of our services, may adversely impact the recoverability of these assets. See Note 2(f) to Notes to Consolidated Financial Statements.
During the yearsyear ended December 31, 20022006, we wrote-off $6.3 million of previously deferred costs, primarily internal labor costs, associated with internal use software development projects that were discontinued, and 2003,such costs are included as a component of selling, general and administrative expenses. During the year ended December 31, 2005, we replaced internal use software programs, which resulted in the write-off to loss on disposal/writedown of property, plant and equipment, net of the remaining net book value of $1.1 million and $0.7 million, respectively.million. We did not have any such write-offs during 2004.
Deferred Income Taxes
We recordhave recorded a valuation allowance, amounting to $27.3 million as of December 31, 2006, to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable incomeIn the ordinary course of business, there are many transactions and ongoingcalculations where the ultimate tax planning strategies in assessing the amount needed for the valuation allowance.outcome is uncertain. If actual results differ unfavorably from thosecertain of our estimates used, we may not be able to realize all or part of our net deferred income tax assets and additional valuation allowances may be required. Although we believe our estimates are reasonable, no assurance can be given that our estimates reflected in the tax provisions and accruals will equal our actual results. These differences could have a material impact on our income tax provision and operating results in the period in which such determination is made.
Stock-based CompensationWe are subject to examination by various tax authorities in jurisdictions in which we have significant business operations. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. As of December 31, 2006, we had approximately $62 million of reserves related to uncertain tax positions. Although we believe our tax estimates are appropriate, the final
determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates.
We have not provided deferred taxes on book basis differences related to certain foreign subsidiaries because such basis differences are not expected to reverse in the foreseeable future and we intend to reinvest indefinitely outside the U.S. These basis differences arose primarily through the undistributed book earnings of our foreign subsidiaries. The basis differences could be reversed through a sale of the subsidiaries, the receipt of dividends from subsidiaries as well as certain other events or actions on our part, which would result in an increase in our provision for income taxes.
Stock-Based Compensation
As of January 1, 2003, we adopted the measurement provisions of SFAS No. 123, andas amended by SFAS No. 148. As a result we began using the fair value method of accounting for stock-based compensation 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 will applyhave applied the fair value recognition provisions to all stock based awards granted, modified or settled on or after January 1, 2003 and will continue to provideprovided the required pro forma information for all awards previously granted, modified or settled before January 1, 2003 in our consolidated financial statements. During
In December 2004, the year ended December 31, 2003, we recorded $1.7 millionFinancial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R is a revision of stock compensation expense in our consolidated statement of operations. Had we elected to recognize compensation cost based on the fair value of all options as of their grant dates as prescribed by SFAS No. 123 and supersedes Accounting Principles Board Opinion No. 148, we would have recorded stock25, “Accounting for Stock Issued to Employees”. 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 $4.9 million, $4.5 millionstock options, restricted stock and $5.6 millionshares issued under the employee stock purchase plan based on the requirements of SFAS No. 123R beginning January 1, 2006. Stock-based compensation expense, included in ourthe accompanying consolidated statements of operations, for the yearsyear ended December 31, 2001, 20022006 was $12.4 million ($9.2 million after tax or $0.05 per basic and 2003, respectively.diluted share). For the year ended December 31, 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 $0.9 million, and net income to decrease by $0.5 million, and had no impact on basic and diluted earnings per share.
29SFAS 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, reducing net operating cash flows and increasing net financing cash flows in future periods.
The fair values of option, employee stock purchase and restricted stock grants are estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility and the expected term are the input factors to that model which require the most significant management judgment. Expected volatility is calculated utilizing daily historical volatility over a period that equates to the expected life of the option. The expected life (estimated period of time outstanding) is estimated using the historical exercise behavior of employees.
Self-Insured Liabilities
We are self-insured up to certain limits for costs associated with workers’ compensation claims, vehicle accidents, property and general business liabilities, and benefits paid under employee healthcare and long-term disability programs. At December 31, 2005 and 2006 there were approximately $30.4 million and $28.2 million, respectively, of self-insurance accruals reflected in our consolidated balance sheets. The measurement of these costs requires the consideration of historical cost experience and judgments about the present and expected levels of cost per claim. We account for these costs primarily through actuarial
methods, which develop estimates of the undiscounted liability for claims incurred, including those claims incurred but not reported. These methods provide estimates of future ultimate claim costs based on claims incurred as of the balance sheet date.
We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals. However, the use of any estimation technique in this area is inherently sensitive given the magnitude of claims involved and the length of time until the ultimate cost is known. We believe our recorded obligations for these expenses are appropriate. Nevertheless, changes in healthcare costs, accident frequency and severity, and other factors can materially affect the estimates for these liabilities.
Recent 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. 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 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.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles in the United States and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We do not expect the adoption of SFAS No. 157 to have a material impact on our financial position or results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. We have completed our analysis related to the implementation of SAB 108 and have concluded it has no effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect of SFAS No. 159 on our consolidated results of operations and financial position.
The following table sets forth, for the periods indicated, information derived from our consolidated statementsComparison of operations, expressed as a percentageYear Ended December 31, 2006 to Year Ended December 31, 2005 and Comparison of total consolidated revenues.Year Ended December 31, 2005 to Year Ended December 31, 2004:
| | Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | ||||||
| Revenues: | |||||||||
| Storage | 58.6 | % | 57.6 | % | 58.3 | % | |||
| Service and Storage Material Sales | 41.4 | 42.4 | 41.7 | ||||||
| Total Revenues | 100.0 | 100.0 | 100.0 | ||||||
| Operating Expenses: | |||||||||
| Cost of Sales (excluding depreciation) | (48.6 | ) | (47.2 | ) | (45.3 | ) | |||
| Selling, General and Administrative | (26.0 | ) | (25.3 | ) | (25.6 | ) | |||
| Depreciation and Amortization | (12.9 | ) | (8.3 | ) | (8.7 | ) | |||
| Merger-related Expenses | (0.3 | ) | (0.1 | ) | — | ||||
| Loss on Disposal/Writedown of Property, Plant and Equipment, Net | — | (0.1 | ) | (0.1 | ) | ||||
| Total Operating Expenses | (87.8 | ) | (80.8 | ) | (79.7 | ) | |||
| Operating Income | 12.2 | 19.2 | 20.3 | ||||||
| Interest Expense, Net | (11.4 | ) | (10.4 | ) | (10.0 | ) | |||
| Other (Expense) Income, Net | (3.2 | ) | (0.1 | ) | 0.2 | ||||
| (Loss) Income from Continuing Operations Before Provision for Income Taxes and Minority Interest | (2.4 | ) | 8.7 | 10.5 | |||||
| Provision for Income Taxes | (1.5 | ) | (3.6 | ) | (4.4 | ) | |||
| Minority Interest in Losses (Earnings) of Subsidiaries | 0.2 | (0.3 | ) | (0.4 | ) | ||||
| (Loss) Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle | (3.7 | ) | 4.8 | 5.6 | |||||
| Income from Discontinued Operations (net of tax) | — | 0.1 | — | ||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | — | (0.5 | ) | — | |||||
| Net (Loss) Income | (3.7 | )% | 4.4 | % | 5.6 | % | |||
| Other Data: | |||||||||
| OIBDA Margin (1) | 25.1 | % | 27.4 | % | 29.0 | % | |||
|
| Year Ended December 31, |
| Dollar |
| Percent |
| |||||||
|
| 2005 |
| 2006 |
| Change |
| Change |
| |||||
Revenues |
| $ | 2,078,155 |
| $ | 2,350,342 |
| $ | 272,187 |
|
| 13.1 | % |
|
Operating Expenses |
| 1,691,371 |
| 1,943,155 |
| 251,784 |
|
| 14.9 | % |
| |||
Operating Income |
| 386,784 |
| 407,187 |
| 20,403 |
|
| 5.3 | % |
| |||
Other Expenses, Net |
| 275,685 |
| 278,324 |
| 2,639 |
|
| 1.0 | % |
| |||
Net Income |
| $ | 111,099 |
| $ | 128,863 |
| $ | 17,764 |
|
| 16.0 | % |
|
OIBDA(1) |
| $ | 573,706 |
| $ | 615,560 |
| $ | 41,854 |
|
| 7.3 | % |
|
OIBDA Margin(1) |
| 27.6 | % | 26.2 | % |
|
|
|
|
|
| |||
|
| Year Ended December 31, |
| Dollar |
| Percent |
| |||||||
|
| 2004 |
| 2005 |
| Change |
| Change |
| |||||
Revenues |
| $ | 1,817,589 |
| $ | 2,078,155 |
| $ | 260,566 |
|
| 14.3 | % |
|
Operating Expenses |
| 1,473,093 |
| 1,691,371 |
| 218,278 |
|
| 14.8 | % |
| |||
Operating Income |
| 344,496 |
| 386,784 |
| 42,288 |
|
| 12.3 | % |
| |||
Other Expenses, Net |
| 250,305 |
| 275,685 |
| 25,380 |
|
| 10.1 | % |
| |||
Net Income |
| $ | 94,191 |
| $ | 111,099 |
| $ | 16,908 |
|
| 18.0 | % |
|
OIBDA(1) |
| $ | 508,125 |
| $ | 573,706 |
| $ | 65,581 |
|
| 12.9 | % |
|
OIBDA Margin(1) |
| 28.0 | % | 27.6 | % |
|
|
|
|
|
| |||
(1)See "Non-GAAP“Non-GAAP Measures—Operating Income Before Depreciation and Amortization, or OIBDA" for definition, reconciliation and a discussion of why we believe this measure provides relevant and useful information to our current and potential investors.
30
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Consolidated Results (in thousands)
| | Year Ended December 31, | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Dollar Change | Percent Change | ||||||||||||
| | 2002 | 2003 | ||||||||||||
| Revenues: | ||||||||||||||
| Storage | $ | 759,536 | $ | 875,035 | $ | 115,499 | 15.2 | % | ||||||
| Service and Storage Material Sales | 558,961 | 626,294 | 67,333 | 12.0 | % | |||||||||
| Total Revenues | 1,318,497 | 1,501,329 | 182,832 | 13.9 | % | |||||||||
| Operating Expenses: | ||||||||||||||
| Cost of Sales (excluding depreciation) | 622,299 | 680,747 | 58,448 | 9.4 | % | |||||||||
| Selling, General and Administrative | 333,050 | 383,641 | 50,591 | 15.2 | % | |||||||||
| Depreciation and Amortization | 108,992 | 130,918 | 21,926 | 20.1 | % | |||||||||
| Merger-related Expenses | 796 | — | (796 | ) | — | |||||||||
| Loss on Disposal/Writedown of Property, Plant and Equipment, Net | 774 | 1,130 | 356 | 46.0 | % | |||||||||
| Total Operating Expenses | 1,065,911 | 1,196,436 | 130,525 | 12.2 | % | |||||||||
| Operating Income | 252,586 | 304,893 | 52,307 | 20.7 | % | |||||||||
| Interest Expense, Net | 136,632 | 150,468 | 13,836 | 10.1 | % | |||||||||
| Other Expense (Income), Net | 1,435 | (2,564 | ) | (3,999 | ) | (278.7 | %) | |||||||
| Income from Continuing Operations Before Provision for Income Taxes and Minority Interest | 114,519 | 156,989 | 42,470 | 37.1 | % | |||||||||
| Provision for Income Taxes | 47,318 | 66,730 | 19,412 | 41.0 | % | |||||||||
| Minority Interest in Earnings of Subsidiaries | 3,629 | 5,622 | 1,993 | 54.9 | % | |||||||||
| Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle | 63,572 | 84,637 | 21,065 | 33.1 | % | |||||||||
| Income from Discontinued Operations (net of tax) | 1,116 | — | (1,116 | ) | — | |||||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | (6,396 | ) | — | 6,396 | — | |||||||||
| Net Income | $ | 58,292 | $ | 84,637 | $ | 26,345 | 45.2 | % | ||||||
| Other Data: | ||||||||||||||
| OIBDA (1) | $ | 361,578 | $ | 435,811 | $ | 74,233 | 20.5 | % | ||||||
| OIBDA Margin (1) | 27.4 | % | 29.0 | % | ||||||||||
31
RevenueComparison of Year Ended December 31, 2003 to Year Ended December 31, 2002
Revenue
Our consolidated storage revenues increased $115.5$145.6 million, or 15.2%12.3%, to $875.0$1,327.2 million for the year ended December 31, 2003.2006 and $138.2 million, or 13.2%, to $1,181.6 million for the year ended December 31, 2005, in comparison to the years ended December 31, 2005 and 2004, respectively. The increase is attributable to internal revenue growth (8%)(10% during 2006 and 9% during 2005) resulting from net increases in records and other media stored by existing customers, and sales to new customers and the net result of pricing actions, acquisitions (5%)(2% during 2006 and 3% during 2005), primarily consisting of $30.0 million from the operations of Hays IMS, and foreign currency exchange rate fluctuations (2%). Foreign currency exchange rate fluctuations were primarily due to the strengthening of the British pound sterling, Canadian dollar,(0% during 2006 and Euro against the U.S. dollar, offset by a weakening of the Mexican peso and Brazilian real against the U.S. dollar, based on an analysis of weighted average rates for the comparable periods.1% during 2005).
Consolidated service and storage material sales revenues increased $67.3$126.6 million, or 12.0%14.1%, to $626.3$1,023.2 million for the year ended December 31, 2003.2006 and $122.4 million, or 15.8%, to $896.6 million for the year ended December 31, 2005, in comparison to the years ended December 31, 2005 and 2004, respectively. The increase is attributable to acquisitions (7%) during 2006 and 7% during 2005), including revenue from the Hays IMS operations of $24.6 million, internal revenue growth (3%)(7% during 2006 and 7% during 2005) resulting from net increases in service and storage material sales to existing customers and sales to new customers, and foreign currency exchange rate fluctuations (2%)(0% during 2006 and 1% during 2005). Foreign
For the reasons stated above, our consolidated revenues increased $272.2 million, or 13.1%, to $2,350.3 million for the year ended December 31, 2006 and $260.6 million, or 14.3%, to $2,078.2 million for the year ended December 31, 2005, in comparison to the years ended December 31, 2005 and 2004, respectively. For the year ended December 31, 2005, foreign currency exchange rate fluctuations that impacted our revenues were primarily due to the strengthening of the British pound sterling, Canadian dollar and Euro against the U.S. dollar, offset by abased on an analysis of weighted average rates for the comparable periods. For the year ended December 31, 2006, foreign currency exchange rate fluctuations that impacted our revenues were primarily due to the weakening of the Mexican pesoBritish pound sterling and Brazilian realEuro, net of the strengthening of the Canadian dollar, against the U.S. dollar, based on an analysis of weighted average rates for the comparable periods.
For the reasons stated above, our consolidated revenues increased $182.8 million, or 13.9%, to $1,501.3 million. Internal revenue growth was 8%, 8% and 9% for the yearyears ended December 31, 2003 was 6%.2004, 2005 and 2006, respectively. We calculate internal revenue growth in local currency for our international operations.
Internal Growth—Eight-Quarter Trend
| | 2002 | 2003 |
| 2005 |
| 2006 |
| |||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year |
| First |
| Second |
| Third |
| Fourth |
| First |
| Second |
| Third |
| Fourth |
| |||||||||||||||||||||||||||
| Storage Revenue | 8 | % | 9 | % | 9 | % | 8 | % | 8 | % | 8 | % | 8 | % | 9 | % | 8 | % | 8 | % |
|
| 8 | % |
|
| 9 | % |
|
| 9 | % |
|
| 10 | % |
|
| 10 | % |
|
| 11 | % |
|
| 11 | % |
|
| 10 | % |
| |
| Service and Storage Material Sales Revenue | 9 | % | 10 | % | 15 | % | 10 | % | 11 | % | 8 | % | 3 | % | 2 | % | 1 | % | 3 | % |
|
| 3 | % |
|
| 6 | % |
|
| 12 | % |
|
| 9 | % |
|
| 8 | % |
|
| 8 | % |
|
| 3 | % |
|
| 10 | % |
| |
| Total Revenue | 9 | % | 9 | % | 11 | % | 9 | % | 10 | % | 8 | % | 6 | % | 6 | % | 5 | % | 6 | % |
|
| 6 | % |
|
| 8 | % |
|
| 10 | % |
|
| 9 | % |
|
| 10 | % |
|
| 9 | % |
|
| 7 | % |
|
| 10 | % |
| |
Our internal revenue growth rate represents the weighted average year over year growth rate of our revenues after removing the effects of acquisitions, and foreign currency exchange rate fluctuations.fluctuations and the impact of the fire in our London, England facility. Over the past eight quarters, the internal growth rate of our storage revenues has ranged betweenincreased from a range of 8% to 9% to a range of 10% to 11%. Our storage revenue internal growth rate trend for the year ended December 31, 2003 reflects higher growth rates inIn our international businesses, primarily Europe, stabilizedNorth American Physical Business, net carton volume growth remained stable and we benefited from an increasingly positive pricing environment in our North American records management business2005 and higher2006. Strong growth rates in our digital businesses. We experienced higher volumesservices business more than offset the impact of carton destructions and permanent removalsreduced growth rates in Europe in 2005 resulting from the fourth quarterinclusion of 2003 as compared to the first three quarters of 2003, which contributed to the declineslower growing Hays IMS business in our base revenues for internal growth rate forcalculation purposes. In 2006, our European business posted improved storage internal revenue from the third quarter to the fourth quarter of 2003. We experienced similar volumes of destructions and permanent removals in the fourth quarter of 2002.growth rates. Net carton volume growth is a function of the rate new cartons are added by existing and new customers offset by the rate of carton destructions and other permanent removals.
The internal growth rate for service and storage material sales revenue is inherently more volatile than the storage revenue internal growth rate due to the more discretionary nature of the services we offer such as large special projects or data products and carton sales, andas well as the price of recycled paper. These revenues are often event driven and impacted to a greater extent by economic downturns as customers defer or cancel the purchase of these services as a way to reduce their short-term costs. As a commodity, recycled paper prices are subject to the volatility
32
of that market.
The quarterlyinternal growth rate for service and storage material sales revenues reflects the following: (1) stronger data product sales in 2005; (2) a large data restoration project completed by our digital services business in the third quarter of 2005; (3) improved growth rates in 2003our data protection and fulfillment businesses; (4) continued growth in our secure shredding operations; and (5) growth in North American storage related service revenues. These positive factors were negatively impactedpartially offset by several factors: (1) largelower special project service revenue did not achieverevenues related to the same high levels experiencedpublic sector business in the corresponding periods of 2002, (2) product sales, primarily data product sales, decreased and (3) carton destructions and other permanent removals have decreased relative to prior periods. In addition, our off-site data protection business continued to operateU.K. in a market experiencing downward pressure on information technology spending as companies look to reduce their costs.2005.
33
Cost of Sales
Consolidated cost of sales (excluding depreciation)depreciation and amortization) is comprised of the following expenses (in thousands):
| | | | | | % of Consolidated Revenues |
|
|
|
|
|
|
|
|
| % of Consolidated |
| Percent |
| ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | Dollar Change | Percent Change | 2002 | 2003 | Percent Change (Favorable)/ Unfavorable |
| 2005 |
| 2006 |
| Dollar |
| Percent |
| 2005 |
| 2006 |
| (Favorable)/ |
| ||||||||||||||||||||||
| Labor | $ | 318,707 | $ | 344,761 | $ | 26,054 | 8.2 | % | 24.2 | % | 23.0 | % | (1.2 | )% |
| $ | 447,600 |
| $ | 523,401 |
| $ | 75,801 |
|
| 16.9 | % |
|
| 21.5 | % |
|
| 22.3 | % |
|
| 0.8 | % |
| ||||
| Facilities | 184,988 | 211,597 | 26,609 | 14.4 | % | 14.0 | % | 14.1 | % | 0.1 | % |
| 275,987 |
| 321,268 |
| 45,281 |
|
| 16.4 | % |
|
| 13.3 | % |
|
| 13.7 | % |
|
| 0.4 | % |
| ||||||||||
| Transportation | 56,972 | 65,142 | 8,170 | 14.3 | % | 4.3 | % | 4.3 | % | — |
| 97,997 |
| 111,086 |
| 13,089 |
|
| 13.4 | % |
|
| 4.7 | % |
|
| 4.7 | % |
|
| 0.0 | % |
| |||||||||||
| Product Cost of Sales | 34,552 | 30,987 | (3,565 | ) | (10.3 | )% | 2.6 | % | 2.1 | % | (0.5 | )% |
| 51,254 |
| 49,853 |
| (1,401 | ) |
| (2.7 | )% |
|
| 2.5 | % |
|
| 2.1 | % |
|
| (0.4 | )% |
| |||||||||
| Other | 27,080 | 28,260 | 1,180 | 4.4 | % | 2.1 | % | 1.9 | % | (0.2 | )% |
| 65,401 |
| 68,660 |
| 3,259 |
|
| 5.0 | % |
|
| 3.1 | % |
|
| 2.9 | % |
|
| (0.2 | )% |
| ||||||||||
| $ | 938,239 |
| $ | 1,074,268 |
| $ | 136,029 |
|
| 14.5 | % |
|
| 45.1 | % |
|
| 45.7 | % |
|
| 0.6 | % |
| |||||||||||||||||||
| $ | 622,299 | $ | 680,747 | $ | 58,448 | 9.4 | % | 47.2 | % | 45.3 | % | (1.9 | )% | |||||||||||||||||||||||||||||||
Labor
|
|
|
|
|
|
|
|
| % of Consolidated |
| Percent |
| ||||||||||||||
|
| 2004 |
| 2005 |
| Dollar |
| Percent |
| 2004 |
| 2005 |
| (Favorable)/ |
| |||||||||||
Labor |
| $ | 419,345 |
| $ | 447,600 |
| $ | 28,255 |
|
| 6.7 | % |
|
| 23.1 | % |
|
| 21.5 | % |
|
| (1.6 | )% |
|
Facilities |
| 246,325 |
| 275,987 |
| 29,662 |
|
| 12.0 | % |
|
| 13.6 | % |
|
| 13.3 | % |
|
| (0.3 | )% |
| |||
Transportation |
| 81,976 |
| 97,997 |
| 16,021 |
|
| 19.5 | % |
|
| 4.5 | % |
|
| 4.7 | % |
|
| 0.2 | % |
| |||
Product Cost of Sales |
| 35,908 |
| 51,254 |
| 15,346 |
|
| 42.7 | % |
|
| 2.0 | % |
|
| 2.5 | % |
|
| 0.5 | % |
| |||
Other |
| 40,345 |
| 65,401 |
| 25,056 |
|
| 62.1 | % |
|
| 2.2 | % |
|
| 3.1 | % |
|
| 0.9 | % |
| |||
|
| $ | 823,899 |
| $ | 938,239 |
| $ | 114,340 |
|
| 13.9 | % |
|
| 45.3 | % |
|
| 45.1 | % |
|
| (0.2 | )% |
|
Labor expense decreased as a percentage of revenue as a result of improved labor management in our North American operations and lower incentive compensation expense for
For the year ended December 31, 20032006 as compared to the year ended December 31, 2002. This improvement was offset by increases in wages, medical expenses,2005, labor expense as a percentage of consolidated revenue increased as a result of higher labor costs resulting from our Australia/New Zealand acquisition and headcount due to growth andour recent shredding acquisitions in Europe, which have a higher service revenue component and are therefore more labor intensive. Our digital business had higher costs of labor associated with internal information technology personnel and consultants dedicated to revenue producing projects.
For the year ended December 31, 2005 as compared to the year ended December 31, 2004, labor expense as a percentage of consolidated revenue decreased as a result of strong revenue growth, an increasing proportion of revenue from less labor intensive digital services and product sales. We also experienced improvement in our secure shreddingratio of labor costs to revenues in our European operations andas a result of completing the acquisitionintegration of Hays IMS. We expect labor expensesIMS in 2004.
Facilities
Facilities costs as a percentage of consolidated revenues increased to 13.7% for the year ended December 31, 2006 from 13.3% for the year ended December 31, 2005. The increase in 2004 may increasefacilities costs as we report a fullpercentage of consolidated revenues was primarily a result of increases in utilities and maintenance costs, as well as, increased insurance deductibles and security costs associated with protecting our assets, as a response to the fires in Ottawa, Canada and London, England. Rent expense decreased slightly as a percentage of consolidated revenues for the year ended December 31, 2006 compared to the year ended December 31, 2005 as a result of integrated Hays IMS operations.
Facilities
a decrease in overall base rent per square foot in our North American operations when comparing 2005 to 2006. The largest component of our facilities cost is rent expense, which increased $6.9in dollar terms by $17.3 million for the year ended December 31, 2003 primarily as a result of increased rent in our European operations of $9.0 million attributable to new facilities and properties acquired through acquisitions, including our acquisition of Hays IMS. In addition, after adjusting for the consolidation of properties owned by our Variable Interest Entities, we have increased the number of leased facilities we occupy in the U.S. and Canada as of December 31, 2003 compared to December 31, 2002 primarily due to acquisitions. The increase in rent is offset by the consolidation of 38 properties owned by our Variable Interest Entities during the third and fourth quarter of 2002. The leases associated with these properties were accounted for as operating leases prior to December 31, 2002. We recorded $5.9 million of rent expense for these 38 properties during the year ended December 31, 2002 and no rent expense in the year ended December 31, 2003. Rather than rent expense, we recorded interest expense and depreciation expense associated with these properties for the year ended December 31, 2003. Excluding our European operations, the dollar increase in facilities expenses is attributable to property taxes, utilities, and property insurance, which increased $5.5 million, $4.0 million, and $1.9 million, respectively, for the year ended December 31, 20032006 compared to the year ended December 31, 2002. 2005. Given current property insurance market conditions, especially in relation
to catastrophe exposures of earthquake, flood and wind, we expect our insurance costs associated with our real estate portfolio to rise in 2007 when compared to 2006.
Facilities expenses in our European operations increased $6.4 million primarily duecosts as a percentage of consolidated revenues decreased to the growth of operations and acquisitions13.3% for the year ended December 31, 20032005 from 13.6% for the year ended December 31, 2004. The decrease in facilities costs as a percentage of consolidated revenues was primarily a result of maintaining approximately the same overall base rent per square foot in our North American operations during 2004 and 2005 while consolidated revenues increased. The largest component of our facilities cost is rent expense, which increased $15.2 million for the year ended December 31, 2005 compared to the year ended December 31, 2002.
33
We anticipate that reporting2004 primarily as a full yearresult of integrated Hays IMS operationsproperties under lease acquired through acquisitions in both Europe and no longer having the offsetting impact caused byNorth America. The expansion of our Variable Interest Entities could cause an increase in rent expense and possibly in total facilitysecure shredding business, which incurs lower facilities costs than our core physical businesses, also helped lower our facilities costs as a percentage of consolidated revenues in 2004.revenues.
Transportation
Our transportation expenses, which were flatremained consistent as a percentage of consolidated revenues for the year ended December 31, 2006 compared to the year ended December 31, 2005, are influenced by several variables including total number of vehicles, owned versus leased vehicles, use of subcontracted couriers, fuel expenses and maintenance. InHigher fuel costs, increased maintenance expenses resulting from the accelerated implementation of a fleet-wide maintenance program in North America and vehicle leasing expenses were primarily responsible for the dollar increase in transportation expenses.
Our transportation expenses, which increased 0.2% as a percentage of consolidated revenues for the year ended December 31, 2003, we experienced a $3.4 million increase in transportation expenses in our European operations as2005 compared to the year ended December 31, 2002, which is primarily attributable to an increase in fleet size and vehicles under operating lease resulting from the acquisition of Hays IMS and growth of operations. Transportation efficiencies achieved in our North American operations, partially offset2004, are influenced by higher fuel costs and an increased percentageseveral variables including total number of vehicles, under operating lease, mitigatedowned versus leased vehicles, use of subcontracted couriers, fuel expenses and maintenance. Higher fuel expenses during the impact of our European operations onyear ended December 31, 2005 compared to the year ended December 31, 2004 were primarily responsible for the increase in transportation expenses as a percentage of consolidated revenues.
Product Cost of Sales and Other Cost of Sales
Product and other cost of sales are highly correlated to complementary revenue streams. Product cost of sales for the year ended December 31, 2003 was lower2006 decreased due to a corresponding reduction in product sales in the comparable periods. Product and other cost of sales for the year ended December 31, 2005 were higher than the year ended December 31, 20022004 as a percentage of productconsolidated revenues due to more focused selling efforts on higher marginincreased sales of data products at lower margins in North America, increased royalty payments associated with our electronic vaulting revenues and improved product sourcing.increases in technology costs associated with these revenue producing activities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are comprised of the following expenses (in thousands):
| | | | | | % of Consolidated Revenues |
|
|
|
|
|
|
|
|
| % of Consolidated |
| Percent |
| ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | Dollar Change | Percent Change | 2002 | 2003 | Percent Change (Favorable)/ Unfavorable |
| 2005 |
| 2006 |
| Dollar |
| Percent |
| 2005 |
| 2006 |
| (Favorable)/ |
| ||||||||||||||||||||||
| General and Administrative | $ | 179,550 | $ | 206,575 | $ | 27,025 | 15.1 | % | 13.6 | % | 13.8 | % | 0.2 | % |
| $ | 285,558 |
| $ | 331,021 |
| $ | 45,463 |
|
| 15.9 | % |
|
| 13.7 | % |
|
| 14.1 | % |
|
| 0.4 | % |
| ||||
| Sales, Marketing & Account Management | 85,932 | 111,408 | 25,476 | 29.6 | % | 6.5 | % | 7.4 | % | 0.9 | % |
| 180,558 |
| 214,007 |
| 33,449 |
|
| 18.5 | % |
|
| 8.7 | % |
|
| 9.1 | % |
|
| 0.4 | % |
| ||||||||||
| Information Technology | 55,971 | 67,950 | 11,979 | 21.4 | % | 4.2 | % | 4.5 | % | 0.3 | % |
| 99,177 |
| 122,211 |
| 23,034 |
|
| 23.2 | % |
|
| 4.8 | % |
|
| 5.2 | % |
|
| 0.4 | % |
| ||||||||||
| Bad Debt Expense | 11,597 | (2,292 | ) | (13,889 | ) | (119.8 | )% | 0.9 | % | (0.2 | )% | (1.1 | )% |
| 4,402 |
| 2,835 |
| (1,567 | ) |
| (35.6 | )% |
|
| 0.2 | % |
|
| 0.1 | % |
|
| (0.1 | )% |
| ||||||||
| $ | 569,695 |
| $ | 670,074 |
| $ | 100,379 |
|
| 17.6 | % |
|
| 27.4 | % |
|
| 28.5 | % |
|
| 1.1 | % |
| |||||||||||||||||||
| $ | 333,050 | $ | 383,641 | $ | 50,591 | 15.2 | % | 25.3 | % | 25.6 | % | 0.3 | % | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| % of Consolidated |
| Percent |
| ||||||||||||||
|
| 2004 |
| 2005 |
| Dollar |
| Percent |
| 2004 |
| 2005 |
| (Favorable)/ |
| |||||||||||
General and Administrative |
| $ | 259,209 |
| $ | 285,558 |
| $ | 26,349 |
|
| 10.2 | % |
|
| 14.3 | % |
|
| 13.7 | % |
|
| (0.6 | )% |
|
Sales, Marketing & Account Management |
| 150,419 |
| 180,558 |
| 30,139 |
|
| 20.0 | % |
|
| 8.3 | % |
|
| 8.7 | % |
|
| 0.4 | % |
| |||
Information Technology |
| 81,187 |
| 99,177 |
| 17,990 |
|
| 22.2 | % |
|
| 4.5 | % |
|
| 4.8 | % |
|
| 0.3 | % |
| |||
Bad Debt Expense |
| (4,569 | ) | 4,402 |
| 8,971 |
|
| 196.3 | % |
|
| (0.3 | )% |
|
| 0.2 | % |
|
| 0.5 | % |
| |||
|
| $ | 486,246 |
| $ | 569,695 |
| $ | 83,449 |
|
| 17.2 | % |
|
| 26.8 | % |
|
| 27.4 | % |
|
| 0.6. | % |
|
General and Administrative
The increase in general and administrative expenses as a percentage of consolidated revenues for the year ended December 31, 20032006 compared to the year ended December 31, 2005 is primarilymainly attributable to a $16.4 million increase in general and administrative expenses in our European operations(a) increased compensation expense due to the growth of operations and acquisitions. Inexpansion through acquisitions, (b) costs associated with our North American reorganization which added a new level of field management, and (c) costs associated with a North American field operations general and administrative expenses increased as a result of higher wages due to normal inflation and merit increases, and increasesmeeting held in worker's compensation and medical expenses. 2006 that was not held in 2005.
The increasedecrease in labor expenses was partially offset by decreases in general insurance expenses and lower incentive compensation expenses. We anticipate increased pressure on our general and administrative expenses as a percentage of consolidated revenues as we integratefor the year ended December 31, 2005 compared to the year ended December 31, 2004 is attributable to strong revenue growth and controls over overhead spending implemented in late 2004. These decreases were partially offset by increased incentive compensation expense and growth of our North American and European operations of Hays IMS.due to expansion and acquisitions.
34
Sales, Marketing & Account Management
The majority of our sales, marketing and account management costs are labor related and are primarily driven by the headcount in each of these departments. Increased headcount and related compensation and commissions are the most significant contributors to the increase in sales, and marketing expenses and account management for the yearyears ended December 31, 2003.2006 and 2005. Throughout the years ended December 31, 20022004, 2005 and 2003,into 2006, we continued to investinvested in the expansion and improvement of our sales, forcemarketing and account management personnel. Excludingfunctions.
During 2006 in North America, while our European operations, sincesales force headcount increased at a slower rate than revenue growth, the shift to higher end resources drove an increase in the level of spending due to higher costs per sales person and the additional support required. We have significantly increased the size of our digital sales force through our acquisition of LiveVault and the hiring of new sales employees, particularly in Europe. Additionally, costs associated with an enterprise-wide sales meeting held in 2006 and not held in 2005 also contributed to this increase. Our larger North American sales force generated a $6.3 million increase in sales commissions and an increase of $13.6 million of compensation expense for the year ended December 31, 2002, we added 662006 compared to the year ended December 31, 2005.
Our North American sales and marketing employees,force generated a 16%$3.0 million increase in headcount,sales commissions and an increase of $14.8 million of compensation expense for the year ended December 31, 2005 compared to the year ended December 31, 2004. Marketing expenses for the year ended December 31, 2005 increased our account management force and initiated$3.3 million due to the introduction of several new marketing and promotional efforts to continue to develop awareness in the marketplace of our entire service offerings. The costs associated with these efforts have contributed to the increase inportfolio of services, especially our sales, marketing and account management expenses. In addition, costs associated with our European sales and account management teamsdigital services.
Information Technology
Information technology expenses increased by $4.1 millionas a percentage of consolidated revenues for the year ended December 31, 2003 as2006 compared to the year ended December 31, 2002,2005 due to increases in technology
development activities within our digital services business, including the hiringacquisition of new personnelLiveVault and the expansionassociated research and development activities and increased spending to support our growing digital archiving business. Additionally, during 2006, we wrote-off $5.9 million of previously deferred costs, primarily internal labor costs, associated with internal use software development projects that were discontinued. Higher utilization of existing information technology resources to revenue producing projects, which are charged to costs of goods sold and decreased information technology spending in our European sales force. We expect that sales, marketing and account managementoperations, partially offset this increase.
Information technology expenses will continue to increaseincreased as a percentage of consolidated revenues as we continue to expand and train our sales force and develop new marketing initiatives.
Information Technology
Information technology expenses increased $12.0 million for the year ended December 31, 2003 principally due to higher compensation costs resulting from increased headcount, normal inflation and merit increases, as well as an increase in external resources, which was partially offset by lower incentive compensation expenses. As our technology initiatives mature, less of our efforts are development related, thus decreasing capitalizable expenditures, which results in increased information technology expenses. In addition, we incurred additional costs to expand bandwidth and international connectivity in the year ended December 31, 2003 as2005 compared to the year ended December 31, 20022004 due to satisfy growthincreases in internal software development projects within our digital services business, the acquisitions of Connected and LiveVault and associated research and development activities, and increased information technology spending in our business andEuropean operations. Higher utilization of existing information technology resources to integrate acquisitions.revenue producing projects, which are charged to cost of goods sold, partially offset this increase.
Bad Debt Expense
Consolidated bad debt expense for the years ended December 31, 2005 and 2006 reflects what we believe to be more normal levels of bad debt expense compared to 2004. The decrease in consolidated bad debt expense for the year ended December 31, 2003 compared to the year ended December 31, 20022004 is primarily attributable to the success of our centralized collection efforts within the U.S. and Canada, during 2002 and 2003, which resulted in improved cash collections and an improved accounts receivable aging that enabledallowed us to significantly reduce our allowance for doubtful accounts in the year ended December 31, 2003. We do not expect to experience a similar decrease during 2004 and expect bad debt expense to be approximately 0.5% of consolidated revenues in 2004.accounts.
Depreciation, Amortization, Merger-Related Expensesand (Gain) and Loss on Disposal/Writedown of Property, Plant and Equipment, Net
Consolidated depreciation and amortization expense increased $21.9$21.5 million to $130.9$208.4 million (8.7%(8.9% of consolidated revenues) for the year ended December 31, 20032006 from $109.0$187.0 million (8.3%(9.0% of consolidated revenues) for the year ended December 31, 2002.2005. Consolidated depreciation and amortization expense increased $23.3 million to $187.0 million (9.0% of consolidated revenues) for the year ended December 31, 2005 from $163.6 million (9.0% of consolidated revenues) for the year ended December 31, 2004. Depreciation expense increased $19.8$17.0 million for the year ended December 31, 2006 compared to the year ended December 31, 2005 and increased $18.8 million for the year ended December 31, 2005 compared to the year ended December 31, 2004, primarily due to the additional depreciation expense related to recent capital expenditures and acquisitions, including storage systems, which include racking, building and leasehold improvements, computer systems hardware and software, and buildings, and depreciation associated with facilities accounted for as capital leases. Depreciation associated with our digital initiatives increased $5.4 million during the year ended December 31, 2003 as a result of software and hardware assets placed in service throughout the years ended December 31, 2002 and 2003. The consolidation of the properties owned by our Variable Interest Entities during the year ended December 31, 2002 resulted in $2.2 million of additional depreciation in the year ended December 31, 2003. buildings.
Amortization expense increased as a
35
result of the amortization of intangible assets associated with acquisitions we completed in the fourth quarter of 2002 and during the year ended December 31, 2003.
Merger-related expenses are certain expenses directly related to our merger with Pierce Leahy that cannot be capitalized and included system conversion costs, costs of exiting certain facilities, severance, relocation and pay-to-stay payments and other transaction-related costs. Merger-related expenses were $0.8$4.4 million for the year ended December 31, 2002. All merger related activities associated with2006 compared to the Pierce Leahy merger were completed in 2002.year ended December 31, 2005 and increased $4.5 million for the year ended December 31, 2005 compared to the year ended December 31, 2004, primarily due to amortization of intangible assets, such as customer relationship intangible assets and intellectual property acquired through business combinations. We expect that amortization expense will continue to increase as we acquire new businesses and reflect the full year impact of our 2006 acquisitions.
Consolidated lossgains on disposal/writedown of property, plant and equipment, net consisted of disposals and asset writedowns partially offset by $4.2$9.6 million of gains on the sale of properties in Texas, Florida and the U.K. infor the year ended December 31, 2003 and2006, consisted primarily of a gain of $2.1 million on the sale of a property in the U.K. inof $10.5 million offset by disposals and writedowns. Consolidated gains on disposal/writedown of property, plant and equipment, net of $3.5 million for the year ended December 31, 2002.2005, consisted primarily of a gain on the sale of a property in the U.K. of $4.5 million offset primarily by software asset writedowns of $1.1 million. Consolidated gains on disposal/writedown of property, plant and equipment, net of
$0.7 million for the year ended December 31, 2004, consisted primarily of a $1.2 million gain on the sale of a property in Florida during the second quarter of 2004 offset by disposals and asset writedowns.
As a result of all the foregoing factors, consolidated operating income increased $52.3$20.4 million, or 20.7%5.3%, to $304.9$407.2 million (20.3%(17.3% of consolidated revenues) for the year ended December 31, 20032006 from $252.6$386.8 million (19.2%(18.6% of consolidated revenues) for the year ended December 31, 2002.2005.
OIBDA
As a result of the foregoing factors, consolidated OIBDAConsolidated operating income increased $74.2$42.3 million, or 20.5%12.3%, to $435.8$386.8 million (29.0%(18.6% of consolidated revenues) for the year ended December 31, 20032005 from $361.6$344.5 million (27.4%(19.0% of consolidated revenues) for the year ended December 31, 2002.2004.
Consolidated interest expense, netAs a result of all the foregoing factors, consolidated OIBDA increased $13.8$41.9 million, or 7.3%, to $150.5$615.6 million (10.0%(26.2% of consolidated revenues) for the year ended December 31, 20032006 from $136.6$573.7 million (10.4%(27.6% of consolidated revenues) for the year ended December 31, 2002. This increase2005.
Consolidated OIBDA increased $65.6 million, or 12.9%, to $573.7 million (27.6% of consolidated revenues) for the year ended December 31, 2005 from $508.1 million (28.0% of consolidated revenues) for the year ended December 31, 2004.
Consolidated interest expense, net increased $11.4 million to $195.0 million (8.3% of consolidated revenues) for the year ended December 31, 2006 from $183.6 million (8.8% of consolidated revenues) for the year ended December 31, 2005. The change is primarily due to increased borrowings to fund our 2005 and 2006 acquisitions, particularly LiveVault and Pickfords Records Management (“Pickfords”).
Consolidated interest expense, net decreased $2.2 million to $183.6 million (8.8% of consolidated revenues) for the year ended December 31, 2005 from $185.7 million (10.2% of consolidated revenues) for the year ended December 31, 2004. The dollar decrease in interest expense, net was primarily attributabledue to (1) $7.4 millionthe recording of interest expense associated with real estate term loans held by our Variable Interest Entities that were consolidated intotaling $21.5 million for the second halfyear ending December 31, 2004 compared to interest expense totaling $2.3 million for the year ending December 31, 2005 related to the net impact of 2002, (2) borrowings under our revolving credit facilitymark-to-market adjustments and the issuancecash payments on all of our 65/8% Senior Subordinated Notes due 2016 (the "65/8% notes") which were used to finance the Hays IMS acquisition, and (3) an increase in our overall weighted average outstanding borrowings. The increaseinterest rate swap contracts. This was offset by a declineincreased borrowings, primarily an additional $150.0 million of term loans borrowed in November 2004 as permitted under our overall weighted average interest rate from 8.3% asIMI Credit Agreement and the full year effect of December 31, 2002 to 7.7% as of December 31, 2003 resulting from our refinancing efforts and a decline in variable interest rates.the March 2004 IME Credit Agreement.
Other (Income) Expense, (Income), Net (in thousands)
| | 2002 | 2003 | Change |
| 2005 |
| 2006 |
| Change |
| ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Foreign currency transaction gains | $ | (5,045 | ) | $ | (30,220 | ) | $ | (25,175 | ) | |||||||||||
Foreign currency transaction (gains) losses, net |
| $ | 7,201 |
| $ | (12,534 | ) | $ | (19,735 | ) | ||||||||||
| Debt extinguishment expense | 5,431 | 28,174 | 22,743 |
| — |
| 2,972 |
| 2,972 |
| ||||||||||
| Loss on investments | 901 | (462 | ) | (1,363 | ) | |||||||||||||||
| Other, net | 148 | (56 | ) | (204 | ) |
| (1,019 | ) | (2,427 | ) | (1,408 | ) | ||||||||
| $ | 6,182 |
| $ | (11,989 | ) | $ | (18,171 | ) | |||||||||||
| $ | 1,435 | $ | (2,564 | ) | $ | (3,999 | ) | |||||||||||||
| 2004 |
| 2005 |
| Change |
| ||||
Foreign currency transaction (gains) losses, net |
| $ | (8,915 | ) | $ | 7,201 |
| $ | 16,116 |
|
Debt extinguishment expense |
| 2,454 |
| — |
| (2,454 | ) | |||
Other, net |
| (1,527 | ) | (1,019 | ) | 508 |
| |||
|
| $ | (7,988 | ) | $ | 6,182 |
| $ | 14,170 |
|
Foreign currency gains of $30.2$12.5 million based on period-end exchange rates were recorded in the year ended December 31, 20032006 primarily due to the strengthening of the British pound sterling and Canadian dollar, and British pound sterlingthe weakening of the Euro against the U.S. dollar as these currencies relate to our intercompany balances with and between our Canadian, U.K., and U.K.European subsidiaries, U.S. dollarborrowings denominated in certain foreign currencies under our revolving credit facility and British pounds sterling denominated debt held by our U.S. parent company.
Foreign currency losses of $7.2 million based on period-end exchange rates were recorded in the year ended December 31, 2005 primarily due to the weakening of the British pound sterling, and Euro, net of the strengthening of the Canadian subsidiary,
36
dollar against the U.S. dollar as these currencies relate to our inter-company balances with and between our Canadian, U.K. and European subsidiaries, borrowings denominated in foreign currencies under our revolving credit facility and British pounds sterling denominated debt held by our U.S. parent company.
Foreign currency gains $8.9 million based on period-end exchange rates were recorded during the year ended December 31, 2004, primarily due to the strengthening of the British pound sterling, Euro, and the Canadian dollar against the U.S. dollar as these currencies relate to our inter-company balances with and between our Canadian, U.K., and European subsidiaries, U.S. dollar denominated debt held by our Canadian subsidiary, borrowings denominated in foreign currencies under our revolving credit facility, British pounds sterling denominated debt held by our U.S. parent company, British pounds sterling currency held in the U.S. and our British pound sterling denominated cross currency swap.swap, which was terminated in March 2004.
During the year ended December 31, 2003,2006, we redeemed or purchased a portion of our outstanding 81¤4% Senior Subordinated Notes due 2011 and 85¤8% Senior Subordinated Notes due 2013 resulting in a charge of $2.8 million, which consists of tender premiums and transaction costs, deferred financing costs, as well as original issue discounts and premiums. During 2004, we redeemed the remaining outstanding principal amount of our 91/8% Senior Subordinated Notes due 2007 (the "91/8% notes"), resulting in a charge of $1.8 million, the remaining outstanding principal amount of our 83/4% Senior Subordinated Notes due 2009 (the "83/4% notes"), resulting in a charge of $13.8 million, and $115.0 million of the outstanding principal of the 81/¤8% Senior Notes due 2008 of our Canadian subsidiary, (the "Subsidiary notes"), resulting in a charge of $12.6 million. During the year ended December 31, 2002,$2.0 million, and we recorded a charge of $1.2 million related to the early retirement of debt in conjunction with the refinancing of our revolving credit facility and a charge of $4.2 million related to the early retirement ofrepaid a portion of our 91/8% notes.real estate term loans, which resulted in a charge of $0.4 million. The charges consisted primarily of the call and tender premiums associated with the extinguished debt and the write-off of unamortized deferred financing cost and discounts.
Our effective tax raterates for the yearyears ended December 31, 2003 was 42.5%.2004, 2005, and 2006 were 41.7%, 41.4% and 41.8%, respectively. The primary reconciling itemitems between the statutory rate of 35% and our effective tax rate isare state income taxes (net of federal benefit). The disallowance and differences in the rates of certain intercompany interest charges by states, includingtax at which our foreign earnings are subject. During 2006, we recorded a changereduction in Massachusettsincome tax laws, retroactive to January 1, 2002, increased our provision for income taxes for the year ended December 31, 2003 by 1.1%. Our effective tax rate was 41.3% for the year ended December 31, 2002. There may be future volatility with respect to our effective tax rate related to items including unusual unforecasted permanent items, significant changes in tax rates in foreign jurisdictions and the need for additional valuation allowances. Also,expense as a result of our net operating loss carryforwards, we do not expect to pay any significant international, U.S. federal anda new Texas law changing the way state income tax is calculated in that state. As a result of this change, we have reversed a deferred tax liability of $1.7 million, net of federal tax benefit, related to our Texas state taxes. We are subject to income taxes during 2004.in both the U.S. and numerous foreign jurisdictions. We are subject to examination by various tax authorities in jurisdictions in which we have significant business operations. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in changes in our estimates.
39
Minority Interest Discontinued Operations, and Cumulative Effect of Change in Accounting Principle
Minority interest in earnings of subsidiaries, net resulted in a charge to income of $5.6$3.0 million (0.4%(0.2% of consolidated revenues), $1.7 million (0.1% of consolidated revenues) and $1.6 million (0.1% of consolidated revenues) for the yearyears ended December 31, 2003 compared to $3.6 million (0.3% of consolidated revenues) for the year ended December 31, 2002.2004, 2005, and 2006, respectively. This represents our minority partners'partners’ share of earnings in our majority-owned international subsidiaries that are consolidated in our operating results. The increasedecrease during 2005 is athe result of our acquisition of various Latin American minority partner interests.
Cumulative Effect of Change in Accounting Principle
In March 2005, the improved profitabilityFASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), an interpretation of our EuropeanSFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). FIN 47 clarifies that conditional asset retirement obligations meet the definition of liabilities and South American businesses.
Inshould be recognized when incurred if their fair values can be reasonably estimated. Uncertainty surrounding the fourth quartertiming and method of 2002, wesettlement that may be conditional on events occurring in the future are factored into the measurement of the liability rather than the existence of the liability. SFAS No. 143 established accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets legally required by law, regulatory rule or contractual agreement and the associated asset retirement costs. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, income from discontinued operationsthe entity capitalizes the cost by increasing the carrying amount of $1.1 million (netthe related long-lived asset, which is then depreciated over the useful life of tax of $0.8 million)the related asset. The liability is increased over time through income as a component of depreciation expense, such that the liability will equate to the future cost to retire the long-lived asset at the expected retirement date. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. Our obligations are primarily the result of resolving several outstanding contingencies remaining fromrequirements under our facility lease agreements which generally have “return to original condition” clauses which would require us to remove or restore items such as shred pits, vaults, demising walls and office build-outs, among others. As of December 31, 2005, we have recognized the salecumulative effect of the Arcus Staffing Resources, Inc. business unit in 1999. There was no such income recorded in 2003.
In the first quarter of 2002, we recordedinitially applying FIN 47 as a non-cash charge for the cumulative effect of change in accounting principle as prescribed in FIN 47, which resulted in a gross charge of $6.4$4.4 million (net($2.8 million, net of minority interest of $8.5 million) as a result of our implementation of SFAS No. 142. There was no such charge in 2003.tax).
As a result of all the foregoing factors, for the year ended December 31, 2006, consolidated net income increased $26.3$17.8 million, or 45.2%16.0%, to $84.6$128.9 million (5.6%(5.5% of consolidated revenues) from net income of $111.1 million (5.3% of consolidated revenues) for the year ended December 31, 20032005.
As a result of all the foregoing factors, for the year ended December 31, 2005, consolidated net income increased $16.9 million, or 18.0%, to $111.1 million (5.3% of consolidated revenues) from net income of $58.3$94.2 million (4.4%(5.2% of consolidated revenues) for the year ended December 31, 2002.2004.
37
Segment Analysis (in thousands)
The results of our various operating segments are discussed below. In general,Beginning January 1, 2006, we changed our business recordsreportable 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. Our reportable segments are now North American Physical Business, International Physical Business and Worldwide Digital Business. See Note 9 of Notes to Consolidated Financial Statements. Our North American Physical Business, which consists of the United States and Canada, offers records management, secure shredding,the storage of paper documents, as well as all other non-electronic media such as microfilm and microfiche, master audio and videotapes, film, X-rays and blueprints, including healthcare
information services, vital records services, and service and courier operations in the U.S. and Canada. Our off-site data protection segment offers data backup and disaster recovery services, vital records services, service and courier operations, and the collection, handling and disposal of sensitive documents for corporate customers (“Hard Copy”); the storage and rotation of backup computer media as part of corporate disaster recovery plans, including service and courier operations (“Data Protection”); secure shredding services (“Shredding”); and the storage, assembly, and detailed reporting of customer marketing literature and delivery to sales offices, trade shows and prospective customers’ sites based on current and prospective customer orders, which we refer to as the “Fulfillment” business. Our International Physical Business segment offers information protection and storage services throughout Europe, South America, Mexico and Asia Pacific, including Hard Copy, Data Protection and Shredding. Our Worldwide Digital Business offers information protection and storage services for electronic records conveyed via telecommunication lines and the Internet, including online backup and recovery solutions for server data and personal computers, as well as email archiving and third party technology escrow services that protect intellectual property protection services inassets such as software source code.
North American Physical Business
Segment Revenue |
| Increase in Revenues |
| Percentage Increase in Revenues |
| ||||||||
For Years Ended |
| ||||||||||||
December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
| December 31, 2005 |
| December 31, 2006 |
| December 31, 2005 |
| December 31, 2006 |
|
$1,387,977 |
| $1,529,612 |
| $1,671,009 |
| $141,635 |
| $141,397 |
| 10.2% |
| 9.2% |
|
Segment Contribution(1) |
| Segment Contribution(1) as a Percentage of Segment Revenue |
| ||||||||
For Years Ended |
| ||||||||||
December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
| December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
|
$427,579 |
| $444,343 |
| $478,653 |
| 30.8% |
| 29.0% |
| 28.6% |
|
Items Excluded from the U.S. Our international segment offers elementsCalculation of all our product and services lines outside the U.S. and Canada. Our corporate and other segment includes our corporate overhead functions and our fulfillment, consulting and digital archiving services.Segment Contribution(1)
| | Business Records Management | Off-Site Data Protection | International | Corporate & Other | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Segment Revenue | |||||||||||||
Year Ended | |||||||||||||
| December 31, 2003 | $ | 1,022,335 | $ | 251,141 | $ | 198,068 | $ | 29,785 | |||||
| December 31, 2002 | 944,845 | 239,081 | 109,381 | 25,190 | |||||||||
| Increase in Revenues | $ | 77,490 | $ | 12,060 | $ | 88,687 | $ | 4,595 | |||||
| Percentage Increase in Revenues | 8.2 | % | 5.0 | % | 81.1 | % | 18.2 | % | |||||
Segment Contribution (1) | |||||||||||||
Year Ended | |||||||||||||
| December 31, 2003 | $ | 286,208 | $ | 71,240 | $ | 46,825 | $ | 32,668 | |||||
| December 31, 2002 | 262,541 | 61,729 | 21,988 | 16,890 | |||||||||
Segment Contribution (1) as a Percentage of Segment Revenue | |||||||||||||
Year Ended | |||||||||||||
| December 31, 2003 | 28.0 | % | 28.4 | % | 23.6 | % | 109.7 | % | |||||
| December 31, 2002 | 27.8 | % | 25.8 | % | 20.1 | % | 67.1 | % | |||||
Depreciation and Amortization |
| ||||||||||
December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
| ||||||
$115,975 |
|
| $ | 118,493 |
|
|
| $ | 127,562 |
|
|
(1)See Note 12 to9 of Notes to Consolidated Financial Statements for definition of Contribution and for the basis on which allocations are made and a reconciliation of Contribution to net income (loss)before provision for income taxes and minority interest on a consolidated basis.
Business Records Management
During the year ended December 31, 2003,2006, revenue in our business records managementNorth American Physical Business segment increased 8.2%9.2% primarily due to increasedincreasing storage revenues,internal growth rates resulting from stable net volume growth and an increasingly positive pricing environment, increasing service revenue growth rates particularly in data protection and fulfillment, growth of our secure shredding operations, and acquisitions (including revenue from the U.S. operations of Hays IMS of $8.2 million), and was offset by lower special project service revenue and lower permanent removal and destruction fees.acquisitions. In addition, favorable currency fluctuations during the year ended December 31, 20032006 in Canada increased revenue, $9.6as measured in U.S. dollars, by $9.8 million when compared to the year ended December 31, 2002.2005. Contribution as a percent of segment revenue increased primarily due to lower bad debt expense and lower incentive compensation expense which were partially offset by higher property taxes, utilities and our increased investmentdecreased in our sales and account management force. Items excluded from the calculation of Contribution include the following: (1) depreciation and amortization expense for the year ended December 31, 20032006 due mainly to (a) higher transportation costs, primarily fuel and rental costs associated with a larger fleet of $71.7 million comparedleased vehicles, and the accelerated implementation of a fleet-wide maintenance program in North America, (b) increased facility costs, primarily utilities, maintenance and insurance, (c) increased investment in sales, marketing and account management primarily related to $67.7 million fora shift in hiring more experienced personnel at a higher cost, (d) costs associated with the North American reorganization, including a new level of field management, and (e) costs associated with our enterprise-wide sales meeting and a field operations meeting, both held in 2006 but not in 2005.
During the year ended December 31, 2002, (2) foreign currency gains of $29.5 million and $1.6 million for the years ended December 31, 2003 and 2002, respectively, and (3) gain on disposal/writedown of property plant and equipment, net of
38
$0.6 million for the year ended December 31, 2003 and a loss on disposal/writedown of property plant and equipment, net of $1.5 million for the year ended December 31, 2002.
Off-Site Data Protection
Revenue2005, revenue in our off-site data protectionNorth American Physical Business segment increased 5.0%10.2% primarily due to increasing storage internal growth rates resulting from higher net volume growth and a more positive pricing environment, increasing service revenue growth from both existing and new customers in the face of increasing pressure in the marketplace to reduce information technology related spending. Contribution as a percent of segment revenue increased primarily due to reduced bad debt expense, increased product sales margins and improved labor management. This increase was partially offset by therates, growth of our secure shredding operations, higher internal growth rates from product sales and account management force. Items excluded from the calculation of Contribution include the following: (1) depreciation and amortization expense for the year ended December 31, 2003 of $13.8 million compared to $12.8 million for the year ended December 31, 2002 and (2) a loss on disposal/writedown of property plant and equipment, net of $1.9 million and $0.2 million for the year ended December 31, 2003 and 2002, respectively.acquisitions. In addition,
International
Revenue in our international segment increased 81.1% primarily due to acquisitions completed in Europe, including $46.4 million from the acquisition of Hays IMS, and in South America, as well as increased sales efforts and a large service project in the U.K. Favorablefavorable currency fluctuations during the year ended December 31, 20032005 in EuropeCanada increased revenue, as measured in U.S. dollars, by $17.5$8.7 million when compared to the year ended December 31, 2002. This increase was offset by $1.2 million of unfavorable currency fluctuations in Mexico and South America during the year ended December 31, 2003 compared to the year ended December 31, 2002.2004. Contribution as a percent of segment revenue increased primarily due to improved gross margins from our European, South American, and Mexican operations and overall increased direct labor utilization and lower bad debt expenses. This increase was partially offset by increased overhead expenses associated with the growth of these emerging businesses. Items excluded from the calculation of Contribution include the following: (1) depreciation and amortization expense for the year ended December 31, 2003 of $16.0 million compared to $7.1 million for the year ended December 31, 2002, including $3.6 million associated with the acquisition of Hays IMSdecreased in the year ended December 31, 2003, (2) gains on disposal/writedown of property plant and equipment, net of $0.8 million and $2.1 million for the years ended December 31, 2003 and 2002, respectively, and (3) a foreign currency gain of $1.2 million in the year ended December 31, 2003 compared to a loss of $0.3 million in the year ended December 31, 2002.
39
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Consolidated Results (in thousands)
| | Year Ended December 31, | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Dollar Change | Percent Change | ||||||||||||
| | 2001 | 2002 | ||||||||||||
| Revenues: | ||||||||||||||
| Storage | $ | 694,474 | $ | 759,536 | $ | 65,062 | 9.4 | % | ||||||
| Service and Storage Material Sales | 491,244 | 558,961 | 67,717 | 13.8 | % | |||||||||
| Total Revenues | 1,185,718 | 1,318,497 | 132,779 | 11.2 | % | |||||||||
| Operating Expenses: | ||||||||||||||
| Cost of Sales (excluding depreciation) | 576,538 | 622,299 | 45,761 | 7.9 | % | |||||||||
| Selling, General and Administrative | 307,800 | 333,050 | 25,250 | 8.2 | % | |||||||||
| Depreciation and Amortization | 153,271 | 108,992 | (44,279 | ) | (28.9 | )% | ||||||||
| Merger-related Expenses | 3,673 | 796 | (2,877 | ) | (78.3 | )% | ||||||||
| Loss on Disposal/Writedown of Property, Plant and Equipment, Net | 320 | 774 | 454 | 141.9 | % | |||||||||
| Total Operating Expenses | 1,041,602 | 1,065,911 | 24,309 | 2.3 | % | |||||||||
| Operating Income | 144,116 | 252,586 | 108,470 | 75.3 | % | |||||||||
| Interest Expense, Net | 134,742 | 136,632 | 1,890 | 1.4 | % | |||||||||
| Other Expense, Net | 37,485 | 1,435 | (36,050 | ) | (96.2 | )% | ||||||||
| (Loss) Income from Continuing Operations Before Provision for Income Taxes and Minority Interest | (28,111 | ) | 114,519 | 142,630 | 507.4 | % | ||||||||
| Provision for Income Taxes | 17,875 | 47,318 | 29,443 | 164.7 | % | |||||||||
| Minority Interest in (Losses) Earnings of Subsidiaries | (1,929 | ) | 3,629 | 5,558 | 288.1 | % | ||||||||
| (Loss) Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle | (44,057 | ) | 63,572 | 107,629 | 244.3 | % | ||||||||
| Income from Discontinued Operations (net of tax) | — | 1,116 | 1,116 | — | ||||||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | — | (6,396 | ) | (6,396 | ) | — | ||||||||
| Net (Loss) Income | $ | (44,057 | ) | $ | 58,292 | $ | 102,349 | 232.3 | % | |||||
| Other Data: | ||||||||||||||
| OIBDA (1) | $ | 297,387 | $ | 361,578 | $ | 64,191 | 21.6 | % | ||||||
| OIBDA Margin (1) | 25.1 | % | 27.4 | % | ||||||||||
40
Comparison of Year Ended December 31, 2002account management, including higher sales commissions and compensation due to Year Ended December 31, 2001
Revenue
For the year ended December 31, 2002, our consolidated revenues increased $132.8 million, or 11.2%, compared to the same period of 2001. This increase was principally a result of internalheadcount, (b) increased bad debt expense, (c) increased incentive compensation expense, (d) higher transportation costs, primarily fuel, and (e) product sales at lower margins, offset by strong revenue growth, which for the year ended December 31, 2002 was 10%, comprised of 8% for storage revenue and 11% for service and storage material sales revenue. We calculate internal revenue growth in local currency for our international operations.
Consolidated storage revenues increased $65.1 million, or 9.4%, to $759.5 million for the year ended December 31, 2002. The increase was primarily attributable to internal revenue growth of 8% resulting from net increases in records and other media stored by existing customers and sales to new customers. The net effect of foreign currency translation on storage revenues was a decrease in revenue of $2.4 million. This was a result of a weakening of the Argentine peso, the Canadian dollar,reduced facility expenses and the Brazilian real against the U.S. dollar, offset by a strengtheningeffectiveness of the British pound sterlingrecent labor and the Euro against the U.S. dollar, based on an analysis of weighted average rates for the comparable periods.
Consolidated service and storage material sales revenues increased $67.7 million, or 13.8%, to $559.0 million for the year ended December 31, 2002.cost management initiatives, including controls over overhead spending implemented in late 2004. The increase was primarily attributable to internal revenue growth of 11% resulting from net increases in service and storage material sales to existing customers and sales to new customers. The net effect of foreign currency translation on service and storage material sales revenues was a decrease in revenue of $0.7 million. This was a result of a weakening of the Argentine peso, the Canadian dollar, and the Brazilian real against the U.S. dollar, offset by a strengthening of the British pound sterling and the Euro against the U.S. dollar, based on an analysis of weighted average rates for the comparable periods.
Internal Growth—Eight-Quarter Trend
| | 2001 | 2002 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | |||||||||||
| Storage Revenue | 13 | % | 12 | % | 11 | % | 10 | % | 11 | % | 8 | % | 9 | % | 9 | % | 8 | % | 8 | % | |
| Service and Storage Material Sales Revenue | 9 | % | 9 | % | 5 | % | 11 | % | 8 | % | 9 | % | 10 | % | 15 | % | 10 | % | 11 | % | |
| Total Revenue | 11 | % | 10 | % | 9 | % | 10 | % | 10 | % | 9 | % | 9 | % | 11 | % | 9 | % | 10 | % | |
The consecutive quarter storage revenue internal growth trend over the last eight quarters, as calculated quarterly comparing the current quarter to the applicable quarter in the prior year, is primarily attributable to a decline in the rate at which customers have added new cartons to their inventory, which may be a result of current economic conditions. However, we have not seen a decline in the duration that our customers maintain their cartons in inventory nor an increase in the rate of cartons destroyed or permanently removed from inventory as a percentage of the total population. In addition, growth from new sales was adversely affected in 2001 and 2002 as a result of the disruption caused by the merging of our sales force with that of Pierce Leahy in 2000. The sales force reorganization has been completed and growth from new sales has begun to increase.
Service and storage material sales revenue internal growth is subject to fluctuations in the timing of non-recurring service projects ordered by customers and in some cases can be affected by delays or cancellations as some customers seek to reduce short-term costs. During the year ended December 31, 2002, we benefited from a number of large non-recurring service projects in North America and Europe. The volatility in the service revenue growth for the third and fourth quarters of 2001 and 2002 is primarily due to a disruption in the normal pattern of services we provide to our customers following
41
the events of September 11, 2001 and the resulting shift of some services and related revenue, to the fourth quarter of 2001. This caused a favorable comparison for the service revenue growth rate in the third quarter of 2002 and a difficult comparison in the fourth quarter of 2002.
Cost of Sales
Consolidated cost of sales (excluding depreciation) is comprised of the following expenses (in thousands):
| | | | | | % of Consolidated Revenues | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | Dollar Change | Percent Change | 2001 | 2002 | Percent Change (Favorable)/Unfavorable | |||||||||||
| Labor | $ | 286,951 | $ | 318,707 | $ | 31,756 | 11.1 | % | 24.2 | % | 24.2 | % | — | |||||
| Facilities | 173,610 | 184,988 | 11,378 | 6.6 | % | 14.6 | % | 14.0 | % | (0.6 | )% | |||||||
| Transportation | 55,167 | 56,972 | 1,805 | 3.3 | % | 4.7 | % | 4.3 | % | (0.4 | )% | |||||||
| Product Cost of Sales | 31,363 | 34,552 | 3,189 | 10.2 | % | 2.6 | % | 2.6 | % | — | ||||||||
| Other | 29,447 | 27,080 | (2,367 | ) | (8.0 | %) | 2.5 | % | 2.1 | % | (0.4 | )% | ||||||
| $ | 576,538 | $ | 622,299 | $ | 45,761 | 7.9 | % | 48.6 | % | 47.2 | % | (1.4 | )% | |||||
Labor
The dollar increase in labor expense is primarily attributable to increases in headcount and changes in our labor mix resulting from the expansion of our secure shredding operations. Our secure shredding operations are more labor intensive, therefore, labor expense will be higherbusiness, which incurs lower facilities costs than our core physical business, also lowers our facilities costs as a percentage of revenue as compared to our mature operations. In the year ended December 31, 2002, this impact was mitigated by improved labor managementrevenues.
Included in our off-site data protection segment. In addition, our operations inNorth American Physical Business segment are certain costs related to staff functions, including finance, human resources and information technology, which benefit the U.S. and Canada, which comprise approximately 75% of our workforce, experienced an overall increase in wages due to normal inflation, merit increases and significant increases in medical insurance and worker's compensation expenses of approximately $12.0 million. The majority of these increases are attributable to higher premiums and self-insurance requirements.
Facilities
Our property management activities combined with a higher utilization of our space has driven the decrease of our facilities expensesenterprise as a percentage of consolidated revenues from 14.6% in the year ended December 31, 2001 to 14.0% in the year ended December 31, 2002. The largest component of our facilities cost is rent expense, which decreased $0.3 million for the year ended December 31, 2002. We reduced the number of leased facilities we occupy by 23 in the year ended December 31, 2002 primarily through the consolidation of our property portfolio as we exited less desirable facilities and consolidated our remaining properties subsequent to the Pierce Leahy merger.
The decrease in leased properties is also a result of the recharacterization of eight properties held by our Variable Interest Entities at the end of 2001, which are now consolidated on our balance sheet at the end of 2002. During the years ended December 31, 2001 and 2002, we recorded $1.8 million and $0.0 million of rent expense for these eight properties, respectively. An additional 23 properties held by our Variable Interest Entities were consolidated as of December 31, 2002; however, they were accounted for as operating leases during the year ended December 31, 2002 and theirwhole. These costs were included in rent expense. For the years ended December 31, 2001 and 2002, we recorded rent expense of $6.7 million and $5.9 million, respectively, on these 23 properties and we recorded rent expense as interest expense beginning in 2003.
42
The dollar increase in facilities expenses is attributable to property insurance, which increased $4.7 million for the year ended December 31, 2002 compared to the year ended December 31, 2001. The market-wide increase in property insurance premiums in the wake of the events of September 11, 2001, in addition to experience based annual premium adjustments, resulted in this dramatic increase. Increased rent and facilities expenses in our European operations of $4.6 million and higher property taxes in the U.S. and Canada of $1.8 million have also contributed to the dollar increase in facilities expenses.
Transportation
Our transportation expenses are influenced by several variables including total number of vehicles, owned versus leased vehicles, use of subcontracted couriers, fuel expenses, and maintenance. For the years ended December 31, 2002 and 2001 our fleet of vehicles used in operations totaled 2,140 and 2,032, respectively, of which 1,429 and 1,269, respectively, were under operating leases. The net increase in vehicles is primarily attributable to an increase of 40 vehicles in our secure shredding division that were either acquired through acquisitions or added to support growth in the business. We reduced our operating lease expense by $0.6 million during the year ended December 31, 2002 as a result of our fleet leasing program, which has benefited from an overall reduction in interest rates and our improving credit rating.
The results of our ongoing transportation efficiency projects and the completion of our conversions to theSafeKeeper Plus® system have been significant in reducing transportation expenses, including fuel and outside courier fees, as a percentage of consolidated revenues. In the year ended December 31, 2002 we had an overall reduction in fuel consumption and a decrease in fuel expense of $0.4 million in spite of an average increase in the price per gallon of fuel during the year ended December 31, 2002. We also benefited from a $0.9 million decline in subcontracted courier expenses, which we believe is the result of better management of internal transportation resources. Our improvements in transportation have been partially offset by increased vehicle insurance and repair costs of $0.7 million and $0.9 million, respectively, for the year ended December 31, 2002 over the year ended December 31, 2001, as a result of the increased size of our fleet. We experienced a $2.0 million increase in transportation expenses in our European operations, which is primarily attributable to the growth of operations and is also impacted by the weakening of the U.S. dollar in comparison to the British pound sterling in the year ended December 31, 2002 versus the year ended December 31, 2001.
Product Cost of Sales and Other Cost of Sales
Product and other cost of sales are highly correlated to complementary revenue streams. Product cost of sales for the year ended December 31, 2002 was consistent with the year ended December 31, 2001 as a percentage of product revenues. The decrease in other cost of sales of $2.4 million is directly attributable to decreases in variable expenses from our changing mix of complementary services and will vary as our mix of special projects changes from period to period.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses are comprised of the following expenses (in thousands):
| | | | | | % of Consolidated Revenues | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | Dollar Change | Percent Change | 2001 | 2002 | Percent Change (Favorable)/Unfavorable | |||||||||||
| General and Administrative | $ | 175,639 | $ | 179,550 | $ | 3,911 | 2.2 | % | 14.8 | % | 13.6 | % | (1.2 | )% | ||||
| Sales, Marketing & Account Management | 70,956 | 85,932 | 14,976 | 21.1 | % | 6.0 | % | 6.5 | % | 0.5 | % | |||||||
| Information Technology | 50,866 | 55,971 | 5,105 | 10.0 | % | 4.3 | % | 4.2 | % | (0.1 | %) | |||||||
| Bad Debt Expense | 10,339 | 11,597 | 1,258 | 12.2 | % | 0.9 | % | 0.9 | % | — | ||||||||
| $ | 307,800 | $ | 333,050 | $ | 25,250 | 8.2 | % | 26.0 | % | 25.3 | % | (0.7 | )% | |||||
General and Administrative
The dollar increase in general and administrative expenses is primarily attributable to an increase in professional fees, office facilities, telephone, and supplies expenses. However, these costs were consistent with the increasing scale of our business, as indicated by the decrease of 1.2% as a percentage of consolidated revenues. Increased overhead leverage offset an increase in wages due to normal inflation and merit increases.
Sales, Marketing & Account Management
The majority of our sales, marketing and account management expenses are labor related and are primarily driven by the headcount in each of these departments. Throughout the year ended December 31, 2002, we continued to expand our sales force and account management teams. We added approximately 60 new sales and marketing employees since December 31, 2001, a 15% increase in headcount.
Information Technology
Information technology expenses increased $5.1 million, or 10.0%, to $56.0 million (4.2% of consolidated revenues) for the year ended December 31, 2002 principally due to increased compensation costs as a result of increased headcount and normal inflation and merit increases, as well as, a decrease in capitalizable projects. Additionally, these costs were offset by savings of $1.7 million realized through improved management of information technology telecommunication expenses and a reduction of $1.1 million of information technology equipment lease expenses.
Bad Debt Expense
Consolidated bad debt expense increased $1.3 million, or 12.2%, to $11.6 million (0.9% of consolidated revenues) for the year ended December 31, 2002. Our projects to centralize collection efforts within our divisions have contributed significantly to holding bad debt expense flat as a percentage of consolidated revenues.
Depreciation, Amortization, Merger-Related Expenses and Loss on Disposal/Writedown of Property, Plant and Equipment, Net
Consolidated depreciation and amortization expense decreased $44.3 million, or 28.9%, to $109.0 million (8.3% of consolidated revenues) for the year ended December 31, 2002 from $153.3 million (12.9% of consolidated revenues) for the year ended December 31, 2001. Depreciation
44
expense increased $16.7 million, primarily due to the additional depreciation expense related to capital expenditures, including storage systems, which include racking, building and leasehold improvements, computer systems hardware and software, and buildings, and depreciation associated with facilities accounted for as capital leases. Depreciation associated with our digital initiatives increased $3.7 million during the year ended December 31, 2002 as a result of software and hardware assets placed in service during late 2001 and throughout the years ended December 31, 2002. In the year ended December 31, 2002, the recharacterization of eight properties added in the year ended December 31, 2001 under one of our synthetic lease programs, as well as nine properties added to such program in the year ended December 31, 2002, resulted in $1.7 million of additional depreciation. Amortization expense decreased $61.3 million, primarily due to eliminating amortization expense related to goodwill in accordance with SFAS No. 142. See Note 2(g) to Notes to Consolidated Financial Statements and "—Critical Accounting Policies—Accounting for Acquisitions."
Merger-related expenses are certain expenses directly related to our merger with Pierce Leahy that cannot be capitalized and include system conversion costs, costs of exiting certain facilities, severance, relocation and pay-to-stay payments and other transaction-related costs. Merger-related expenses were $0.8 million (0.1% of consolidated revenues) for the year ended December 31, 2002 compared to $3.7 million (0.3% of consolidated revenues) for the same period of 2001. All merger related activities associated with the Pierce Leahy merger were completed in the year ended December 31, 2002.
Consolidated loss on disposal/writedown of property, plant and equipment, net for the year ended December 31, 2002 consisted of disposals and asset write-downs partially offset by a gain of $2.1 million recorded on the sale of a property in the U.K. during the second quarter of 2002.
Operating Income
As a result of the foregoing factors, consolidated operating income increased $108.5 million, or 75.3%, to $252.6 million (19.2% of consolidated revenues) for the year ended December 31, 2002 from $144.1 million (12.2% of consolidated revenues) for the year ended December 31, 2001.
OIBDA
As a result of the foregoing factors, consolidated OIBDA increased $64.2 million, or 21.6%, to $361.6 million (27.4% of consolidated revenues) for the year ended December 31, 2002 from $297.4 million (25.1% of consolidated revenues) for the year ended December 31, 2001.
Interest Expense, Net
Consolidated interest expense, net increased $1.9 million, or 1.4%, to $136.6 million for the year ended December 31, 2002 from $134.7 million for the year ended December 31, 2001. This increase was primarily attributable to $6.2 million of interest expense associated with 17 properties within one of our Variable Interest Entities and increased long-term borrowings through our 2001 bond offerings. These increases were offset by a decline in our overall weighted average interest rate resulting from a general decline in interest rates coupled with our refinancing efforts.
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Other (Income) Expense, Net
Significant items included in other (income) expense, net include the following (in thousands):
| | 2001 | 2002 | Change | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Foreign currency transaction (gains) and losses | $ | 10,437 | $ | (5,045 | ) | $ | (15,482 | ) | ||
| Debt extinguishment expense | 19,978 | 5,431 | (14,547 | ) | ||||||
| Loss on investments | 6,900 | 901 | (5,999 | ) | ||||||
| Other, net | 170 | 148 | (22 | ) | ||||||
| $ | 37,485 | $ | 1,435 | $ | (36,050 | ) | ||||
Foreign currency gains of $5.0 million based on period-end exchange rates were recorded in the year ended December 31, 2002 primarily due to the strengthening of the Canadian dollar and British pound sterling against the U.S. dollar as these currencies relate to our intercompany balances with our Canadian and European subsidiaries. During the year ended December 31, 2001, the Canadian dollar had weakened compared to the U.S. dollar and was the primary reason for the foreign currency loss of $10.4 million, based on period-end exchange rates.
The loss on investments is the result of a $6.9 million impairment charge taken on our investment in convertible preferred stock of a technology development company in the third quarter of 2001. In the year ended December 31, 2002, we recorded $0.9 million of similar write-downs.
During the year ended December 31, 2002, we recorded a debt extinguishment charge of $1.2 million related to the early retirementgeneral management of debt in conjunction withthese functions on a corporate level and the refinancingdesign and development of our revolving credit facilityprograms, policies and procedures that are then implemented in the fourth quarterindividual segments, with each segment bearing its own cost of 2002 we recorded a debt extinguishment charge of $4.2 relatedimplementation. Management has decided to allocate these costs to the early retirement of a portion of our 91/8% notes in conjunction with our underwritten public offering of the 73/4% Senior Subordinated Notes due 2015 (the "73/4% notes"). For the year ended December 31, 2001, we recorded a debt extinguishment charge of $20.0 million related to the early retirement of the 111/8% senior subordinated notes and 101/8% senior subordinated notes in conjunction with our underwritten public offerings of the 85/8% Senior Subordinated Notes due 2013 (the "85/8% notes"). The charges consisted primarily of the write-off of unamortized deferred financing costs and call and tender premiums associated with the extinguished debt.North American segment as further allocation is impracticable.
Provision for Income TaxesInternational Physical Business
Segment Revenue |
| Increase in Revenues |
| Percentage Increase in Revenues |
| ||||||||
For Years Ended |
| ||||||||||||
December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
| December 31, 2005 |
| December 31, 2006 |
| December 31, 2005 |
| December 31, 2006 |
|
$380,033 |
| $435,106 |
| $539,335 |
| $55,073 |
| $104,229 |
| 14.5% |
| 24.0% |
|
Segment Contribution(1) |
| Segment Contribution(1) as a Percentage of Segment Revenue |
| ||||||||
For Years Ended |
| ||||||||||
December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
| December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
|
$89,751 |
| $113,417 |
| $117,568 |
| 23.6% |
| 26.1% |
| 21.8% |
|
��The provision for income taxes was $47.3 million for the year ended December 31, 2002 compared to $17.9 million for the year ended December 31, 2001. The effective rate was 41.3% for the year ended December 31, 2002 and the primary reconciling item between the statutory rate of 35% and the effective rate is state income taxes (net of federal benefit). The effective rate was (63.6%) for the year ended December 31, 2001. During the year ended December 31, 2001, we amortized non-deductible goodwill for book purposes, however, as result of the adoption of SFAS No. 142 in 2002, goodwill amortization ceased, thereby reducing the effective rate and some of the volatility with respect to our effective rate in the future. Additionally, the 2001 effective rate was impacted by state income taxes (net of federal benefit).
Minority Interest, Discontinued Operations, and Cumulative Effect of Change in Accounting Principle
Minority interest in earnings (losses) of subsidiaries, net resulted in a charge to income of $3.6 million (0.3% of consolidated revenues) for the year ended December 31, 2002. This represents our minority partners' share of earnings (losses) in our majority-owned international subsidiaries that are consolidated in our operating results. In the year ended December 31, 2001, our subsidiaries incurred losses and the minority interest resulted in a credit to income of $1.9 million. The improved results are primarily a result of (1) the elimination of goodwill amortization expense in accordance with
46
SFAS No. 142, (2) increased profitability in our European business and (3) our European minority partners' share ($0.7 million, net of tax) of the $2.1 million gain recorded on the sale of a property held by one of our European subsidiaries during the second quarter of 2002.
In the fourth quarter of 2002, we recorded income from discontinued operations of $1.1 million (net of tax of $0.8 million) as a result of resolving several outstanding contingencies remainingItems Excluded from the saleCalculation of the Arcus Staffing Resources, Inc. business unit in 1999.Segment Contribution(1)
In the first quarter of 2002, we recorded a non-cash charge for the cumulative effect of change in accounting principle of $6.4 million (net of minority interest of $8.5 million) as a result of our implementation of SFAS No. 142. There was no such charge in 2001.
Depreciation and Amortization |
| ||||
December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
|
$33,234 |
| $43,285 |
| $54,803 |
|
Net Income (Loss)(1)
As a result of the foregoing factors, consolidated net income increased $102.3 million, or 232.3%, to $58.3 (4.4% of consolidated revenues) for the year ended December 31, 2002 from a net loss of $44.1 (3.7% of consolidated revenues) for the year ended December 31, 2001.
Segment Analysis (in thousands)
The results of our various operating segments are discussed below. In general, our business records management segment offers records management, secure shredding, healthcare information services, vital records services, and service and courier operations in the U.S. and Canada. Our off-site data protection segment offers data backup and disaster recovery services, vital records services, service and courier operations, and intellectual property protection services in the U.S. Our international segment offers elements of all our product and services lines outside the U.S. and Canada. Our corporate and other segment includes our corporate overhead functions and our fulfillment, consulting and digital archiving services.
| | Business Records Management | Off-Site Data Protection | International | Corporate & Other | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Segment Revenue | |||||||||||||
Year Ended | |||||||||||||
| December 31, 2002 | $ | 944,845 | $ | 239,081 | $ | 109,381 | $ | 25,190 | |||||
| December 31, 2001 | 861,302 | 209,429 | 89,475 | 25,512 | |||||||||
| Increase (Decrease) in Revenues | $ | 83,543 | $ | 29,652 | $ | 19,906 | $ | (322 | ) | ||||
| Percentage Increase in Revenues | 9.7 | % | 14.2 | % | 22.2 | % | (1.3 | %) | |||||
| Segment Contribution (1) | |||||||||||||
Year Ended | |||||||||||||
| December 31, 2002 | $ | 262,541 | $ | 61,729 | $ | 21,988 | $ | 16,890 | |||||
| December 31, 2001 | 227,164 | 50,254 | 16,250 | 7,712 | |||||||||
Segment Contribution (1) as a Percentage of Segment Revenue | |||||||||||||
Year Ended | |||||||||||||
| December 31, 2002 | 27.8 | % | 25.8 | % | 20.1 | % | 67.1 | % | |||||
| December 31, 2001 | 26.4 | % | 24.0 | % | 18.2 | % | 30.2 | % | |||||
47
Business Records Management
Revenue in our business records managementInternational Physical Business segment increased 9.7%24.0% during the year ended December 31, 2006 primarily due to increased storage revenues, strong special projects revenues and acquisitions. The increase in Contribution,acquisitions, which we use as our internal measurement of financial performance and as the basis for allocating resources to our segments, as a percent of segment revenue for our business records management segment is primarily due to labor and transportation efficiencies gained by the increasing scale of our business and the completion of our integration of Pierce Leahy. Lower facilities expenditures, including rent expense and utilities, and lower bad debt expense resulting from our improved collection efforts also contributed to the improvement of Contribution, as a percentage of segment revenue.$92.0 million or 18.6%. This increase was partially offset by higher insurance premiums for propertynet unfavorable currency fluctuations in Europe and casualty insurance and an increased investmentLatin America of $6.3 million or 1.5% during the year ended December 31, 2006. The balance of the increase in our sales force. Reductions in spending related to telecommunication expenditures, as a percentage of segment revenue also contributed to increasing Contribution.
Off-Site Data Protection
Revenue in our off-site data protection segment increased 14.2% primarily due torepresents internal revenue growth from both existing and new customers.growth. Contribution as a percent of segment revenue for our off-site data protection segment increaseddecreased primarily due to improved laborthe acquisition of two shredding businesses in the U.K. that operate at lower margins, the acquisition of Pickfords, which is in the process of rationalizing its real estate portfolio, and transportation management. This increase was partially offset by higher insurance premiums for property and casualty insurance and an increasecosts associated with the facility fire in bad debt expense.London, England.
International
Revenue in our internationalInternational Physical Business segment increased primarily due to increased sales efforts and a large service project in the U.K., as well as, acquisitions completed in Europe and South America in the fourth quarter of 2002. Contribution as a percent of segment revenue for our international segment increased primarily due to improved gross margins from our European operations and reduced bad debt expense. This increase was partially offset by higher insurance premiums for property and casualty insurance and reduced margins in our South American operations due to the deteriorating local economic conditions and devaluation of the currency in Argentina. Unfavorable currency fluctuations in South America and Mexico14.5% during the year ended December 31, 2002 reduced revenues, as measured2005 primarily due to acquisitions completed in U.S. dollars, by $5.0 million. This reduction wasEurope and in South America and strong internal growth in Latin America, offset by the impact of favorablelower revenue in our U.K. public sector business. Favorable currency fluctuations during the year ended December 31, 20022005 in Europe, thatMexico and South America increased revenue, $2.9as measured in U.S. dollars, by $13.8 million when compared to the prior year rates.ended December 31,
2004. Contribution as a percent of segment revenue increased primarily due to improvements in both cost of sales and overhead labor ratios as a result of completing the integration of Hays IMS in the second half of 2004 offset by increased compensation associated with additional sales, marketing, and account management personnel, several new marketing and promotional efforts, and increased bad debt expense.
Worldwide Digital Business
Segment Revenue |
| Increase in Revenues |
| Percentage Increase in Revenues |
| ||||||||
For Years Ended |
| ||||||||||||
December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
| December 31, 2005 |
| December 31, 2006 |
| December 31, 2005 |
| December 31, 2006 |
|
$49,579 |
| $113,437 |
| $139,998 |
| $63,858 |
| $26,561 |
| 128.8% |
| 23.4% |
|
Segment Contribution(1) |
| Segment Contribution(1) as a Percentage of Segment Revenue |
| ||||||||
For Years Ended |
| ||||||||||
December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
| December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
|
$(9,886) |
| $12,461 |
| $9,779 |
| (19.9)% |
| 11.0% |
| 7.0% |
|
Items Excluded from the Calculation of Segment Contribution(1)
Depreciation and Amortization |
| ||||
December 31, 2004 |
| December 31, 2005 |
| December 31, 2006 |
|
$14,420 |
| $25,144 |
| $ 26,008 |
|
(1) See Note 9 of Notes to Consolidated Financial Statements for definition of Contribution and for the basis on which allocations are made and a reconciliation of Contribution to income before provision for income taxes and minority interest on a consolidated basis.
During the year ended December 31, 2006, revenue in our Worldwide Digital Business segment increased 23.4% primarily due to internal growth of 16%, primarily attributable to growth in digital storage revenue and our online backup service offerings for both personal computer and server data. The internal growth rate of our digital business was offset by a large data restoration project in the third quarter of 2005, which was not repeated in 2006 but drove the increase in the digital storage growth rate beginning in the fourth quarter of 2005. The acquisition of LiveVault in December 2005 contributed approximately $12 million in revenue during the year ended December 31, 2006. Contribution as a percent of segment revenue decreased primarily due to the acquisition of LiveVault, increased investment in the European sales force, increases in information technology costs, including the write-off of $5.9 million of previously deferred costs, primarily internal labor costs, associated with internal use software development projects that were discontinued, and the benefit of a large data restoration project in the third quarter of 2005. This decrease was offset by higher absorption of fixed costs as a result of increased revenues and a reduction in royalty payments.
During the year ended December 31, 2005, revenue in our Worldwide Digital Business segment increased 128.8% primarily due to the acquisition of Connected in November 2004, which represents an increase of $33.7 million over the partial year of revenue recorded in 2004 and strong internal growth of 41%, including the impact of a large data restoration project completed in 2005. Contribution as a percent of segment revenue increased primarily due to strong revenue growth and improved overhead leverage, partially offset by increases in information technology costs, the acquisitions of Connected and LiveVault and associated research and development activities and the growth of our sales and account management force, including higher sales commissions.
Liquidity and Capital Resources
The following is a summary of our cash balances and cash flows for the years ended 2001, 20022004, 2005 and 20032006 (in thousands).
| | 2001 | 2002 | 2003 |
| 2004 |
| 2005 |
| 2006 |
| ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash flows provided by operating activities | $ | 160,909 | $ | 254,948 | $ | 288,693 |
| $ | 305,364 |
| $ | 377,176 |
| $ | 374,282 |
| ||||
| Cash flows used in investing activities | (278,136 | ) | (247,757 | ) | (586,634 | ) |
| (626,523 | ) | (436,175 | ) | (466,714 | ) | |||||||
| Cash flows provided by financing activities | 134,901 | 27,098 | 315,054 |
| 276,569 |
| 81,449 |
| 82,734 |
| ||||||||||
| Cash and cash equivalents at the end of year | $ | 21,359 | $ | 56,292 | $ | 74,683 |
| 31,942 |
| 53,413 |
| 45,369 |
| |||||||
Net cash provided by operating activities was $288.7$377.2 million for the year ended December 31, 20032005 compared to $254.9$374.3 million for the year ended December 31, 2002.2006. The increasedecrease resulted primarily from an increase in operating income and non-cash items, such as depreciation amortization, debt extinguishment expensesoffset by gain on foreign currency, and deferred income taxes.further offset by the net change in working capital. The net change in assets and liabilitiesworking capital is primarily associated with growth in revenues and the resulting increase in receivables and disbursementstiming of accounts payable payments.
Due to
48
vendors contributed $2.0 million to cash flows from operating activities in the year ended December 31, 2003 as compared to $27.6 million in the year ended December 31, 2002.
We have madenature of our businesses, we make significant capital expenditures and additions to customer relationship costs and other investments, primarily acquisitions.acquisition costs. Our capital expenditures are primarily related to growth and include investments in storage systems, information systems and discretionary investments in real estate. Cash paid for our capital expenditures and additions to customer relationship and acquisition costs during the year ended December 31, 20032006 amounted to $204.5$382.0 million and $12.6$14.3 million, respectively. These investments have been funded entirely through cash flows from operations, as wasFrom time to time and in the case innormal course of business we sell certain fixed assets, primarily real estate. In the year ended December 31, 2002, and2006, we expect this to bereceived $17.8 million of net proceeds from the case again insales of assets. For the year ended December 31, 2004. In addition, we received proceeds from sales of property2005 and equipment of $11.7 million in the year ended December 31, 2003.2006, capital expenditures, net and additions to customer acquisition costs were funded primarily with cash flows provided by operating activities. Excluding any potential acquisitions, we expect our capital expenditures to be between approximately $210$390 million and approximately $240$420 million in the year ending December 31, 2004.2007. Included in our estimated capital expenditures for 2007 is $50 million to $60 million of opportunity driven real estate purchases.
In the year ended December 31, 2003,2006, we paid net cash consideration of $381.2$81.2 million for acquisitions, and other investments including $333.0 million forprimarily related to the acquisition of Hays IMS.two shredding businesses in the U.K., the buyout of minority partners in France and Mexico and contingent payments associated with a shredding acquisition in the U.S. and another acquisition in Europe. Cash flows provided from operations funded all but the Hays IMS acquisition, which was funded throughoperating activities, borrowings under our revolving credit facilities, and the net proceeds from other financing transactions. In the year ended December 31, 2002,sale of senior subordinated notes, and cash flows from operationsequivalents on-hand funded all of ourthese acquisitions.
Net cash provided by financing activities was $315.1$82.7 million for the year ended December 31, 2003.2006. During the year ended December 31, 2006, we had gross borrowings under our revolving credit facilities and term loan facilities of $744.0$543.9 million, and we received$282.0 million of net proceeds of $617.2 million from the issuancesale of our 73/4% notesSenior Subordinated Notes and our 65/8% notes.$22.2 million of proceeds from the exercise of stock options and employee stock purchase plan. We used the proceeds from these financing transactions to repay debt and term loans ($698.8655.0 million), retire senior subordinated notesrepurchase $78.1 million of our 81¤4% Senior Subordinated Notes due 2011 and repurchase $33.0 million of our 85¤8% Senior Subordinated Notes due 2013, repay debt financing from minority stockholders, net ($374.31.8 million) and to partially fund the acquisition of Hays IMS.acquisitions.
Since December 31, 2003, we have completed three acquisitions for total consideration of approximately $26 million. In addition, we acquired the remaining 49.9% equity interest in IME for approximately $154 million. These transactions will be reflected in our consolidated statement of cash flows in the first quarter of 2004.
We are highly leveraged and expect to continue to be highly leveraged for the foreseeable future. Our consolidated debt as of December 31, 20032006 was comprised of the following (in thousands):
| Revolving Credit Facility due 2005 | $ | 142,280 | ||
| Term Loan due 2008 | 248,750 | |||
| 81/8% Senior Notes due 2008 | 18,768 | |||
| 81/4% Senior Subordinated Notes due 2011(1) | 149,670 | |||
| 85/8% Senior Subordinated Notes due 2013(1) | 481,075 | |||
| 73/4% Senior Subordinated Notes due 2015(1) | 441,331 | |||
| 65/8% Senior Subordinated Notes due 2016(1) | 314,071 | |||
| Real Estate Term Loans | 202,647 | |||
| Real Estate Mortgages | 17,584 | |||
| Seller Notes | 12,607 | |||
| Other | 61,145 | |||
| Long-term Debt | 2,089,928 | |||
| Less Current Portion | (115,781 | ) | ||
| Long-term Debt, Net of Current Portion | $ | 1,974,147 | ||
IMI Revolving Credit Facility(1) |
| $ | 170,472 |
|
IMI Term Loan Facility(1) |
| 312,000 |
| |
IME Revolving Credit Facility(2) |
| 77,819 |
| |
IME Term Loan Facility(2) |
| 189,005 |
| |
81¤4% Senior Subordinated Notes due 2011(3) |
| 71,789 |
| |
85¤8% Senior Subordinated Notes due 2013(3) |
| 448,001 |
| |
71¤4% GBP Senior Subordinated Notes due 2014(3) |
| 293,865 |
| |
73¤4% Senior Subordinated Notes due 2015(3) |
| 438,594 |
| |
65¤8% Senior Subordinated Notes due 2016(3) |
| 315,553 |
| |
83¤4% Senior Subordinated Notes due 2018(3) |
| 200,000 |
| |
8% Senior Subordinated Notes due 2018(3) |
| 49,663 |
| |
63¤4% Euro Senior Subordinated Notes due 2018(3) |
| 39,429 |
| |
Real Estate Mortgages |
| 4,081 |
| |
Seller Notes |
| 8,757 |
| |
Other |
| 49,788 |
| |
Long-term Debt |
| 2,668,816 |
| |
Less Current Portion |
| (63,105 | ) | |
Long-term Debt, Net of Current Portion |
| $ | 2,605,711 |
|
(1) All intercompany notes and the capital stock of most of our U.S. subsidiaries are pledged to secure these debt instruments.
(2) Most of IME’s non-dormant subsidiaries have either guaranteed this indebtedness or their shares of capital stock and intercompany indebtedness have been pledged to secure this indebtedness. Iron Mountain has not guaranteed or otherwise provided security for this indebtedness nor have any of Iron Mountain’s U.S., Canadian, Asia Pacific, Mexican or South American subsidiaries.
(3)These debt instruments are collectively referred to as the "Parent Notes." The Parent notes, along with our revolving credit facility and term loan, are fully and unconditionally guaranteed, on a
49
senior subordinated basis, by substantially all of our direct and indirect wholly owned U.S. subsidiaries (the "Guarantors"“Guarantors”). These guarantees are joint and several obligations of the Guarantors. The remainder of our subsidiaries do not guarantee the Parent notes or the revolving credit facility and term loan.these debt instruments.
Our indentures use OIBDA-based calculations as primary measures of financial performance, including leverage ratios. Our key bond leverage ratio, as calculated per our bond indentures, increased towas 5.0 as of December 31, 2003 from 4.82005 and 4.6 as of December 31, 2002. The increase was primarily attributable to indebtedness incurred by us and lent to IME to fund IME's acquisition of the European operations of Hays IMS.2006. Noncompliance with this leverage ratio would have a material adverse effect on our financial condition and liquidity. Subsequent to December 31, 2003, our key bond leverage ratio decreased to 4.9. The decrease was the result of the partial repayment by IME of the financing we provided to acquire Hays IMS offset by our January 2004 offering of 150 million British pounds sterling in aggregate principal amount of our 71/4% Senior Subordinated Notes due 2014 (the "71/4% notes") and the related use of the proceeds to acquire Mentmore's 49.9% equity interest in IME and to repay existing debts. Our target for this ratio is generally in the range of 4.5 to 5.5 while the maximum ratio allowable under the bond indentures is 6.5.
Our ability to pay interest on or to refinance our indebtedness depends on our future performance, working capital levels and capital structure, which are subject to general economic, financial, competitive, legislative, regulatory and other factors which may be beyond our control. There can be no assurance that we will generate sufficient cash flow from our operations or that future financings will be available on acceptable terms or in amounts sufficient to enable us to service or refinance our indebtedness, or to make necessary capital expenditures.
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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 million British pounds sterling, including a 100 million 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 million British pounds sterling 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 million 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 December 31, 2006 includes 77 million British pounds sterling and 94.7 million Euro of borrowings (totaling $266.8 million) under the IME Credit Agreement; we also had various outstanding letters of credit totaling 1.7 million British pounds sterling ($3.2 million). The remaining availability, based on IME’s current leverage ratio which is calculated based on current earnings before interest, taxes, depreciation and amortization (“EBITDA”) and current external debt, under the IME revolving credit facility on October 31, 2006, was approximately 59.0 million British pounds sterling ($112.1 million). The interest rate in effect under the IME revolving credit facility ranged from 4.4% to 6.2% as of October 31, 2006.
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 million and was comprised of a $350 million revolving credit facility (the “IMI revolving credit facility”), which included the ability to borrow in certain foreign currencies, and a $200 million 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 $0.5 million 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 million 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 $0.4 million that began in the first quarter of 2005 and are 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 facility from $350 million to $400 million. As a result, the IMI Credit Agreement had an aggregate maximum principal amount of $750 million as of December 31, 2006. 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 December 31, 2006, we had $170.5 million of borrowings under our IMI revolving credit facility, of which $4 million was denominated in U.S. dollars and the remaining balance was denominated in Canadian dollars (“CAD”) (CAD 194 million); we also had various outstanding letters of credit totaling $27.0 million. The remaining availability, based on Iron Mountain’s current leverage ratio which is calculated based on current EBITDA and current external debt, under the IMI revolving credit facility on December 31, 2006, was $113.8 million. The interest rate in effect under the IMI revolving credit facility and IMI term loan facility ranged from 6.0% to 9.0% and 7.0% to 7.2%, respectively, as of December 31, 2006.
In July 2006, we completed an underwritten public offering of $200.0 million in aggregate principal amount of our 83¤4% Senior Subordinated Notes due 2018, which were issued at par. Our net proceeds of $196.6 million, after paying the underwriters’ discounts, commissions and transaction fees, were used to (a) fund our offer to purchase and consent solicitation of $78.1 million in aggregate principle amount of our outstanding 81¤4% Senior Subordinated Notes due 2011, (b) fund our purchase in the open market of $33.0 million in aggregate principal amount of our 85¤8% Senior Subordinated Notes due 2013 and (c) repay borrowings under our revolving credit facility. As a result, we recorded a charge to other expense (income), net of $2.8 million in the third quarter of 2006 related to the early extinguishment of the 81¤4% and 85¤8% Senior Subordinated Notes, which consists of tender premiums and transaction costs, deferred financing costs, as well as, original issue discounts and premiums related to the 81¤4% and 85¤8% Senior Subordinated Notes.
In July 2006, we experienced a significant fire in a records and information management facility in London, England that resulted in the complete destruction of the leased facility. London fire authorities recently issued a report in which it was concluded that the fire resulted from a deliberate act of arson; the report also stated that the actions of a guard employed by a third-party security service contractor resulted in the disabling of the automatic sprinkler system in the building. We believe we carry adequate property and liability insurance and are in the process of assessing the cause of, and other circumstances involved with, the fire. We do not expect that this event will have a material impact to our consolidated results of operations or financial condition. Revenues from this facility represent less than 1% of our consolidated enterprise revenues. As of December 31, 2006, we have approximately $9.6 million recorded as an insurance receivable which is included in prepaid expenses and other in the accompanying consolidated balance sheet which primarily represents the net book value of the property, plant and equipment associated with this facility at the time of the incident, net of $1.8 million of property insurance proceeds received through IME’s October 31, 2006 fiscal year-end. Subsequent to IME’s October 31, 2006 fiscal year-end, IME received payment from our insurance carrier of approximately 8.6 million British pounds sterling ($16.9 million). We expect to utilize cash received from our insurance carriers to fund capital expenditures and for general working capital needs. Such amount represents a portion of our business personal property, business interruption, and expense claims with our insurance carrier. We will record approximately $8.8 million to other (income) expense, net in the first quarter of 2007 related to recoveries associated with our business interruption portion of our insurance claim to date. We expect to settle the remaining property portion of our insurance claim with our insurance carriers within the next twelve months and have, therefore, classified the remaining insurance receivable as a current asset. We expect to receive recoveries related to our property claim with our insurance carriers that will exceed the carrying value of such assets. We, therefore, expect to record gains on the disposal/writedown of property, plant and equipment, net in our statement of operations in future periods when the cash received to date exceeds the remaining carrying value of the related property, plant and equipment, net. Recoveries from the insurance carriers related to business personal property claims are reflected in our statement of cash flows under proceeds from sales of property and equipment and other, net included in investing activities section when received. Recoveries from the insurance carriers related to business interruption claims are reflected in our statement of cash flows as a component of net income included in the operating activities section when received.
In October 2006, we issued, in a private placement, $50 million in aggregate principal amount of our 8% Senior Subordinated Notes due 2018, which were issued at a price of 99.3% of par; and 30 million Euro in aggregate principal amount of our 63¤4% Euro Senior Subordinated Notes due 2018, which were issued at a price of 99.5% of par. Our net proceeds of $85.5 million, after sales commission, were used to repay outstanding indebtedness under the IMI term loan and IME revolving credit facilities.
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. As of December 31, 2003, weWe were in compliance with all material debt covenants and agreements.
As of December 31, 2003, we had $142.3 million of borrowings outstanding under our revolving credit facility, all of which was denominated in British pounds sterling in the amount of GBP 80.0 million. We also had various outstanding letters of credit totaling $34.4 million. The remaining availability under the revolving credit facility on December 31, 2003 was $223.3 million based on our current level of external debt and the leverage ratio under the Amended and Restated Credit Agreement. The interest rate in effect was 5.6%material agreements as of December 31, 2003.2006.
In January 2003, we redeemed the remaining $23.2 million of outstanding principal amount of our 91/8% notes, at a redemption price (expressed as a percentage of principal amount) of 104.563%, plus accrued and unpaid interest, with proceeds from our underwritten public offering of $100.0 million in aggregate principal of our 73/4% notes. We recorded a charge to other (income) expense, net in the accompanying consolidated statement of operations of $1.8 million in the first quarter of 2003 related to the early retirement of the remaining 91/8% notes.
In March 2003, we completed two debt exchanges, which resulted in the issuance of $31.3 million in face value of our 73/4% notes and the retirement of $30.0 million of our 83/4% notes. These non-cash debt exchanges resulted in carryover basis and, therefore, no gain (loss) on extinguishment of debt in accordance with EITF No. 96-19, "Debtor's Accounting for Modification or Exchange of Debt Instruments." These exchanges result in a lower interest rate and, therefore, lower interest expense in future periods, as well as extend the maturity of our debt obligations. From time to time, we may enter into similar exchange transactions that we deem appropriate.
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In April 2003,2007, we completed an underwritten public offering of an additional $300225.0 million Euro in aggregate principal amount of our 763/¤4% notes,Euro Senior Subordinated Notes due 2018, which were issued at a price to investors of 104%98.99% of par implying an effectiveand priced to yield to worst of 7.066%6.875%. Our net proceeds of $307.3219.2 million Euro ($283.8 million), after paying the underwriters'underwriters’ discounts and commissions and transaction fees,estimated expenses (excluding accrued interest payable by purchasers of the notes from October 17, 2006). These net proceeds were used to fund our offer to purchaserepay outstanding indebtedness under the IMI term loan and consent solicitation relating to our outstanding 83/4% notes, redeem the 83/4% notes not purchased in the offer, repay borrowings under our revolving credit facility, repay other indebtedness and pay for acquisitions.
In April 2003, we received and accepted tenders for $143.3 million of the $220 million aggregate principal amount outstanding of our 83/4% notes. In May 2003, we redeemed the remaining $76.7 million of outstanding principal amount of our 83/4% notes, at a redemption price (expressed as a percentage of principal amount) of 104.375%, plus accrued and unpaid interest.facilities. We recorded a charge to other (income) expense, net of $13.8$0.5 million in the secondfirst quarter of 20032007 related to the early retirement of the 83/4% notes, which consistsIMI term loans, representing the write-off of redemption premiums and transaction costs, as well as original issue discount and unamortizeda portion of our deferred financing costs related to the 83/4% notes.
costs. In June 2003, we completed an underwritten public offering of $150 millionaddition, in aggregate principal amount of our 65/8% notes. The 65/8% notes were issued at a price to investors of 100% of par. Our net proceeds of $147.5 million, after paying the underwriters' discounts, commissions and transaction fees, were used to redeem $50 million in aggregate principal amount of the outstanding Subsidiary notes in the third quarter of 2003 and pay for acquisitions.
In July 2003, using proceeds from our June 2003 offering of 65/8% notes, we redeemed $50 million of outstanding principal amount of the Subsidiary notes, at a redemption price (expressed as a percentage of principal amount) of 104.063%, plus accrued and unpaid interest. We recorded a charge to other (income) expense, net of $5.5 million in the third quarter of 2003 related to the early retirement of these Subsidiary notes, which consists of redemption premiums and transaction costs, as well as original issue discount related to these Subsidiary notes.
In July 2003, we and IME completed the acquisition of Hays IMS in two simultaneous transactions. IME acquired the European operations of Hays IMS for aggregate cash consideration (including transaction costs) of approximately 190.0 million British pounds sterling ($309.0 million), while we acquired the U.S. operations of Hays IMS for aggregate cash consideration (including transaction costs) of 14.5 million British pounds sterling ($24.0 million). Both transactions were on a cash and debt free basis.
We provided the initial financing totaling 190.5 million British pounds sterling to IME for all of the consideration associated with the acquisition of the European operations of Hays IMS using cash on hand and borrowings under our revolving credit facility. We recorded a foreign currency gain of $27.8 million in other (income) expense, net for this intercompany balance for the year ended December 31, 2003. In order to minimize the foreign currency risk associated with providing IME with the consideration necessary for the acquisition of the European operations of Hay IMS, we borrowed 80.0 million British pounds sterling under our revolving credit facility to create a natural hedge. We recorded a foreign currency loss of $11.5 million on the translation of this revolving credit balance to U.S. dollars in other (income) expense, net for the year ended December 31, 2003. Additionally, on July 16, 2003January 2007, we entered into two crossforward contracts to exchange U.S. dollars for 96 million Euros and 194 million CAD for 127.5 million Euros to hedge our intercompany exposures with Canada and our subsidiaries whose functional currency swaps with a combined notional value of 100.0 million British pounds sterling. These swaps each have a term of one year and at maturity we have a right to receive $162.8 million in exchange for 100.0 million British pounds sterling. We have not designated these swaps as hedges and, therefore, all mark to market fluctuations of the swaps are recorded in other (income) expense, net in our consolidated statements of operations. We have recorded, as of December 31, 2003, a foreign currency loss of $19.0 million in other (income) expense, net.
In December 2003, we completed an underwritten public offering of an additional $170 million in aggregate principal amount of our 65/8% notes, which were issued at a price to investors of 96.5% of
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par, implying an effective yield to worst of 7.06%. Our net proceeds of $161.3 million, after paying the underwriters' discounts, commissions and transaction fees, were used to redeem $65.0 million in aggregate principal amount of the outstanding Subsidiary notes in the fourth quarter of 2003, repay borrowings under our revolving credit facility, repay other indebtedness and pay for acquisitions.
In December 2003, using proceeds from our December 2003 offering of 65/8% notes, we redeemed $65.0 million of outstanding principal amount of the Subsidiary notes, at a redemption price (expressed as a percentage of principal amount) of 104.313%, plus accrued and unpaid interest. We recorded a charge to other (income) expense, net of $7.0 million in the fourth quarter of 2003 related to the early retirement of these Subsidiary notes, which consists of redemption premiums and transaction costs, as well as original issue discount related to these Subsidiary notes.
In January 2004, we completed an offering of 150 million British pounds sterling in aggregate principal amount of our 71/4% notes, which were issued at a price of 100.0% of par. Our net proceeds of 146.9 million British pounds sterling, after paying the initial purchasers' discounts, commissions and transaction fees, were used to fund our acquisition of Mentmore plc's 49.9% equity interest in IME for total consideration of 82.5 million British pounds sterling, to redeem $20.0 million in aggregate principal amount of the outstanding Subsidiary notes in the first quarter of 2004, repay borrowings under our revolving credit facility, repay other indebtedness and pay for other acquisitions.
In February 2004, using proceeds from our January 2004 offering of 71/4% notes, we redeemed the remaining $20 million of outstanding principal amount of the Subsidiary notes, at a redemption price (expressed as a percentage of principal amount) of 104.063%, plus accrued and unpaid interest. We will record a charge of approximately $2 million to other (income) expense, net in the first quarter of 2004 related to the early retirement of these remaining Subsidiary notes, which consists of redemption premiums and transaction costs, as well as original issue discount related to these Subsidiary notes.
In February 2004, we completed the acquisition of Mentmore plc's 49.9% equity interest in IME for total consideration of 82.5 million British pounds sterling ($154 million) in cash from proceeds of our 71/4% notes issued in January 2004. Included in this amount is the repaymentEuro. These forward contracts settle on a monthly basis, at which time we enter into new forward contracts for the same underlying amounts, to continue to hedge movements in CAD and Euros against the U.S. dollar. At the time of all trade and working capital funding owed to Mentmore by IME. Completion of the transaction gives us 100% ownership of IME, affording us full access to all future cash flows and greater strategic and financial flexibility. This transaction should have no impact on revenuesettlement, we either pay or operating income since we already fully consolidate IME's financial results. Since we will be using the purchase method of accounting for this acquisition, 49.9% ofreceive the net assets of IME will be adjusted to reflect their fair market value if differentsettlement amount from their current carrying value. As a result, we expect this transaction will increase depreciation and amortization expenses going forward. Additionally, we will record an increase in interest expense, net associated with the 71/4% notes used to fund this acquisition and will no longer record the minority interest in earnings of subsidiaries, net related to Mentmore's ownership interest in IME.forward contract.
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 210 million British pounds sterling, including a 100 million British pounds sterling revolving credit facility,Contractual Obligations(which includes the ability to borrow in certain other foreign currencies), a 100 million British pounds sterling term loan, and a 10 million British pounds sterling overdraft protection line. The revolving credit facility matures on March 2, 2009. The term loan facility is payable in three installments; two installments of 20 million British pounds sterling on March 2, 2007 and 2008, respectively, and the final payment of the remaining balance on March 2, 2009. The interest rate on borrowings under the IME Credit Agreement is based on LIBOR and varies depending on IME's choice of 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
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Agreement and with third parties. Each of IME's subsidiaries will either guarantee the obligations or pledge shares to secure 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, Mexican and South American subsidiaries.
In March 2004, IME borrowed approximately 147 million British pounds sterling under the IME Credit Agreement, including the full amount of the term loan. IME used those proceeds to repay us 135 million British pounds sterling related to our initial financing of the acquisition of the European operations of Hays IMS. We expect to use those proceeds to: (1) pay down approximately $104 million of real estate term loans, (2) settle all obligations associated with terminating our two cross currency swaps used to hedge the foreign currency impact of our intercompany financing with IME, and (3) to pay down amounts outstanding under our Amended and Restated Credit Agreement. After the initial balance, IME's availability under the IME Credit Agreement, based on its current level of external debt and the leverage ratio under the IME Credit Agreement, was approximately 9 million British pounds sterling.
The real estate term loans held by our Variable Interest Entities have always been and continue to be treated as indebtedness for purposes of our financial covenants under our Amended and Restated Credit Agreement. As of the date they were consolidated into our financial statements, they were also considered indebtedness under our Indentures for our Senior Subordinated Notes and our Subsidiary notes. As of December 31, 2002 and 2003, these real estate term loans amounted to $202.6 million. No further financing is currently available to our Variable Interest Entities to fund further property acquisitions. See Notes 3, 4 and 5 to Notes to Consolidated Financial Statements and "—Critical Accounting Policies." The details of each real estate term loan is a follows:
The following table summarizes our contractual obligations as of December 31, 20032006 and the anticipated effect of these obligations on our liquidity in future years (in thousands):
| | Payments Due by Period |
| Payments Due by Period |
| |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years |
| Total |
| Less than 1 Year |
| 1-3 Years |
| 3-5 Years |
| More than |
| |||||||||||||||||
| Long-term Debt (including Capital Lease Obligations) | $ | 2,087,127 | $ | 116,998 | $ | 228,472 | $ | 347,209 | $ | 1,394,448 | |||||||||||||||||||||||
Capital Lease Obligations |
| $ | 41,384 |
|
| $ | 8,829 |
|
| $ | 6,622 |
| $ | 2,157 |
| $ | 23,776 |
| |||||||||||||||
Long-Term Debt Obligations (excluding Capital Lease Obligations) |
| 2,625,023 |
|
| 54,276 |
|
| 412,232 |
| 374,350 |
| 1,784,165 |
| ||||||||||||||||||||
Interest Payments(1) |
| 1,567,691 |
|
| 212,794 |
|
| 401,893 |
| 342,429 |
| 610,575 |
| ||||||||||||||||||||
| Operating Lease Obligations | 902,884 | 135,512 | 222,238 | 158,722 | 386,412 |
| 2,871,269 |
|
| 176,842 |
|
| 322,327 |
| 302,457 |
| 2,069,643 |
| |||||||||||||||
| Purchase Obligations | 42,528 | 16,011 | 23,888 | 2,629 | — | ||||||||||||||||||||||||||||
Purchase and Asset Retirement Obligations(2) |
| 62,881 |
|
| 26,555 |
|
| 22,407 |
| 6,620 |
| 7,299 |
| ||||||||||||||||||||
| Total | $ | 3,032,539 | $ | 268,521 | $ | 474,598 | $ | 508,560 | $ | 1,780,860 |
| $ | 7,168,248 |
|
| $ | 479,296 |
|
| $ | 1,165,481 |
| $ | 1,028,013 |
| $ | 4,495,458 |
| |||||
(1) Amounts include variable rate interest payments, which are calculated utilizing the applicable interest rates as of December 31, 2006; see Note 4 to Notes to Consolidated Financial Statements.
(2) In addition, in connection with some of our acquisitions, we have potential earn-out obligations that wouldmay be payable in the event businesses we acquired meet certain operational objectives. These payments are
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based on the future results of these operations, and our estimate of the maximum contingent earn-out payments we wouldmay be required to make under all such agreements as of December 31, 20032006 is approximately $5$6.6 million.
We expect to meet our cash flow requirements for the next twelve months from cash generated from operations, existing cash, cash equivalents, and marketable securities, borrowings under ourthe IMI and IME revolving credit facilityfacilities and other financings, which may include secured credit facilities, securitizations and mortgage or capital lease financings. We expect to meet our long-term cash flow requirements using the same means described
above, as well as the potential issuance of debt or equity securities as we deem appropriate. See Notes 5,4, 7 and 10 and 13 to Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4)(ii).
Net Operating Loss Carryforwards
At December 31, 2003, we had estimatedWe have federal net operating loss carryforwards of approximately $123 million for federal income tax purposes. As a result of such loss carryforwards, cash paid for income taxes has historically been substantially lower than the provision for income taxes. These net operating loss carryforwards do not include approximately $103 million of potential preacquisition net operating loss carryforwards of Arcus Group, Inc. and certain foreign acquisitions. Any tax benefit realized related to preacquisition net operating loss carryforwards will be recorded as a reduction of goodwill when, and if, realized. The Arcus Group carryforwardswhich begin to expire in two years.2018 through 2021 of $172.7 million at December 31, 2006 to reduce future federal taxable income, if any. We also have an asset for state net operating loss of $18.2 million (net of federal tax benefit), which begins to expire in 2007 through 2024, subject to a valuation allowance of approximately 98%. As a result of these loss carryforwards, we do not expect to pay any significant international, U.S. federal and state income taxes in 2004.2007.
SeasonalityInflation
Historically, our businesses have not been subject to seasonality in any material respect.
Inflation
Certain of our expenses, such as wages and benefits, insurance, occupancy costs and equipment repair and replacement, are subject to normal inflationary pressures. Although to date we have been able to offset inflationary cost increases through increased operating efficiencies and the negotiation of favorable long-term real estate leases, we can give no assurance that we will be able to offset any future inflationary cost increases through similar efficiencies, leases or increased storage or service charges.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
In December 2000, JanuaryGiven 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 helping to preserve 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. As part of this strategy, in May 2001 and May 2001,June 2006 we and our Variable Interest Entities, which we now consolidate,IME entered into a total of fourtwo derivative financial contracts, which are variable-for-fixed interest rate swaps consisting of (a) two contracts forone contract based on interest payments payable on our term loan of an aggregate principal amount of $195.5 million, (b) one contract for interest payments payable (previously certain variable operating lease commitments payable) on our real estate term loans of an aggregate principal amount of $47.5 million and (c) one contract for interest paymentspreviously payable on our real estate term loans of an aggregate principal amount of $97.0 million.million that have been subsequently repaid, and (b) one contract for interest payments payable on IME’s term loan facility of an aggregate principal amount of 75.0 million British pounds sterling. See Note 43 to Notes to Consolidated Financial Statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies" in this Form 10-K.Statements.
After consideration of the swap contracts mentioned above, as of December 31, 2003,2006, we had $308.1$517.9 million of variable rate debt outstanding with a weighted average variable interest rate of 4.72%6.4%, and $1,781.8$2,150.9 million of fixed rate debt outstanding. As of December 31, 2003, 85%2006, 80.6% of our total debt outstanding was fixed. If the weighted average variable interest rate on our variable rate debt had increased by 1%, our net income for the year ended December 31, 20032006 would have been reduced by $1.7$2.9 million. See Note 54 to Notes to Consolidated Financial Statements included in this Form 10-K for a discussion of our
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long-term indebtedness, including the fair values of such indebtedness as of December 31, 2003 included in this Form 10-K.2006.
Currency Risk
Our investments in IME, Iron Mountain Canada Corporation (“IM Canada”), Iron Mountain South America, Ltd.Mexico, SA de RL de CV, IMSA and other international investments may be subject to risks and uncertainties related to fluctuations in currency valuation. Our reporting currency is the U.S. dollar. However, our international revenues and expenses are generated in the currencies of the countries in which we operate,
primarily the Euro, Canadian dollar and British pound sterling. The currencies of many Latin American countries, particularly the Argentine peso, have experienced substantial volatility and depreciation in the past, including the Argentine peso. In addition, one of our Canadian subsidiaries, Iron Mountain Canada Corporation, has U.S. dollar denominated debt.depreciation. Declines in the value of the local currencies in which we are paid relative to the U.S. dollar will cause revenues in U.S. dollar terms to decrease and dollar-denominated liabilities to increase in local currency.
The impact on our earnings is mitigated somewhat by the fact that most operating and other expenses are also incurred and paid in the local currency. We also have several intercompany obligations between our foreign subsidiaries and Iron Mountain and our U.S.-based subsidiaries.subsidiaries and our foreign subsidiaries and IME. These intercompany obligations are primarily denominated in the local currency of the foreign subsidiary. Our
We have adopted and implemented a number of strategies to mitigate the risks associated with fluctuations in currency valuations. One strategy is to finance our largest international subsidiaries with local debt that is denominated in local currencies, thereby providing a natural hedge. In determining the amount of any such financing, we take into account local tax strategies among other factors. Another strategy we utilize is to borrow in foreign currencies at the U.S. parent level to hedge our intercompany financing activities. Finally, on occasion, we enter into currency swaps to temporarily or permanently hedge an overseas investment, such as a major acquisition to lock in certain transaction economics. We have implemented these strategies for our three foreign investments in the U.K., Canada and Asia Pacific. Specifically, through IME borrowing under the IME Credit Agreement and our 150 million British pounds sterling denominated 71¤4% Senior Subordinated Notes, we effectively hedge most of our outstanding intercompany loan with IME. IM Canada has financed their capital needs through direct borrowings in Canadian dollars under the IMI revolving credit facility. This creates a tax efficient natural currency hedge. To fund the acquisition of Pickfords in Australia and New Zealand, Iron Mountain borrowed Australian and New Zealand dollars under its multi-currency revolving credit facility. These borrowings provided a tax efficient natural hedge against the intercompany loans created at the time of the acquisition. Subsequently, we repaid such borrowings under our multi-currency revolving credit facility and contemporaneously in September 2006, we entered into forward contracts to exchange U.S. dollars for 55 million in Australian dollars (“AUD”) and 20.2 million in New Zealand dollars (“NZD”) to hedge our intercompany exposure in these countries. In addition, in January, 2007 we entered into forward contracts to exchange U.S. dollars for 96 million Euros and 194 million CAD for 127.5 million Euros to hedge our intercompany exposures with Canada and our subsidiaries whose functional currency is the Euro. These forward contracts settle on a monthly basis, at which time we enter into new forward contracts for the same underlying amounts, to continue to hedge movements in AUD, NZD, CAD and Euros against the U.S. dollar. At the time of settlement, we either pay or receive the net settlement amount from the forward contract. As of December 31, 2006, except as noted above, our currency exposures to intercompany borrowingsbalances are generally unhedged, except as discussed below.unhedged.
We provided the initial financing to IME for all of the consideration associated with the acquisition of the European operations of Hays IMS using cash on hand and borrowings under our revolving credit facility. In order to minimize the foreign currency risk associated with providing IME with the consideration necessary for the acquisition of Hay IMS, we borrowed 80.0 million British pounds sterling under our revolving credit facility to create a natural hedge. Additionally, on July 16, 2003 we entered into two cross currency swaps with a combined notional value of 100.0 million British pounds sterling. These swaps each have a term of one year and at maturity we have a right to receive $162.8 million in exchange for 100.0 million British pounds sterling. We have not designated these swaps as hedges and, therefore, all mark to market fluctuations of the swaps are recorded in other (income) expense, net in our consolidated statements of operations.
The impact of devaluation or depreciating currency on an entity depends on the residual effect on the local economy and the ability of an entity to raise prices and/or reduce expenses. Due to our constantly changing currency exposure and the potential substantial volatility of currency exchange rates, we cannot predict the effect of exchange fluctuations on our business. The effect of a change in foreign exchange rates on our net investment in foreign subsidiaries is reflected in the "Accumulated“Accumulated Other Comprehensive Items"Items, net” component of shareholders'stockholders’ equity. A 10% depreciation in year-end 20032006 functional currencies, relative to the U.S. dollar, would result in a $14.5 million reduction in our shareholders' equity.stockholders’ equity of approximately $41.1 million.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is included in Item 15 (a)15(a) of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements withWith Accountants on Accounting and Financial Disclosure.
On June 19, 2002, our Board of Directors, upon recommendation of the Audit Committee and approval of the Executive Committee, dismissed Arthur Andersen LLP as our independent public accountants and engaged Deloitte & Touche LLP as our independent public accountants for the fiscal year ending December 31, 2002.None.
The audit reports of Arthur Andersen on our consolidated financial statements for the fiscal year ended December 31, 2001 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.
55
During the fiscal year ended December 31, 2001 and the subsequent interim period through June 19, 2002, there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Arthur Andersen's satisfaction, would have caused Arthur Andersen to make reference to the subject matter of the disagreement in connection with its reports. None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within the fiscal year ended December 31, 2001 or within the interim period through June 19, 2002.
We provided Arthur Andersen with a copy of the above disclosures. A letter dated June 19, 2002 from Arthur Andersen stating its agreement with our statements was listed under Item 7 and filed as Exhibit 16.1 and incorporated by reference into our report on Form 8-K filed June 19, 2002.
During the fiscal year ended December 31, 2001 and the subsequent interim period through June 19, 2002, we did not consult with Deloitte & Touche with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements or regarding any other matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
Item 9A. Controls and Procedures
Procedures.
Evaluation of Disclosure Controls and Procedures
The term "disclosure“disclosure controls and procedures"procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”). These rules refer to the controls and other procedures of a company that are designed to ensure that information is recorded, processed, summarized and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding what is required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods.Act. As of December 31, 20032006 (the "Evaluation Date"“Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, theour chief executive officer and chief financial officer have concluded that, as of the Evaluation Date, such disclosure controls and procedures were effective in ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.
Changes in Internal Controls
We maintain a system of internal accounting controls that are designed to provide reasonable assurance that our transactions are properly recorded and reported and that our assets are safeguarded against unauthorized or improper use. As part of the evaluation of our disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluatedconducted an evaluation of the effectiveness of our internal controls. control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Iron Mountain Incorporated:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Iron Mountain Incorporated and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2006 of the Company and our report dated March 1, 2007 expressed an unqualified opinion on those financial statements and includes an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 1, 2007
Changes in Internal Control over Financial Reporting
There werehave been no changes toin our internal control over financial reporting during the quarter ended December 31, 20032006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, including any corrective actions taken with regard to any significant deficiencies or material weaknesses.reporting.
56
None.
52
Item 10. Directors, and Executive Officers of the Registrant.
and Corporate Governance.
The information required by Item 10 is incorporated by reference to our definitive Proxy Statement for the Annual Meeting of ShareholdersStockholders to be held on or about May 27, 2004.24, 2007.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to our definitive Proxy Statement for the Annual Meeting of ShareholdersStockholders to be held on or about May 27, 2004.24, 2007.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Management and Related Stockholder Matters.
The information required by Item 12 is incorporated by reference to our definitive Proxy Statement for the Annual Meeting of ShareholdersStockholders to be held on or about May 27, 2004.24, 2007.
Item 13. Certain Relationships and Related Transactions.
Transactions, and Director Independence.
The information required by Item 13 is incorporated by reference to our definitive Proxy Statement for the Annual Meeting of ShareholdersStockholders to be held on or about May 27, 2004.24, 2007.
Item 14. Principal AccountingAccountant Fees and Services.
The information required by Item 14 is incorporated by reference to our definitive Proxy Statement for the Annual Meeting of ShareholdersStockholders to be held on or about May 27, 2004.24, 2007.
57
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Schedules.
(a)(1) and (2) Financial Statements and Financial Statement Schedules filed as part of this report:
Page | ||||||||
A. Iron Mountain Incorporated | ||||||||
Report of Independent Registered Public | 54 | |||||||
Consolidated Balance Sheets, December 31, | 55 | |||||||
Consolidated Statements of Operations, Years Ended December 31, | 56 | |||||||
57 | ||||||||
Consolidated Statements of Cash Flows, Years Ended December 31, | 58 | |||||||
59 | ||||||||
(a)(3) (b)Exhibits filed as part of this report:
As listed in the Exhibit Index following the signature page hereof.
53
(b) Reports on Form 8-K:
On December 5, 2003, the Company filed a Current Report on Form 8-K under Item 7 to file certain exhibits related to the (1) Underwriting Agreement dated December 4, 2003 between the Company, certain of the Company's subsidiaries and certain underwriters as an exhibit, (2) announcement of a proposed public offering of an additional $160 million of the Company's 65/8% Senior Subordinated Notes due 2016, (3) commencement of a tender offer and consent solicitation for any and all of the $85 million aggregate principal amount of 81/8% Senior Notes due 2008 of Iron Mountain Canada Corporation and (4) announcement that the Company priced an underwritten public offering of an additional $170 million in aggregate principal amount of its 65/8% Senior Subordinated Notes due 2016.
On December 10, 2003, the Company filed a Current Report on Form 8-K under Items 5 and 7 to announce that the Company signed an agreement with Mentmore plc to acquire Mentmore's 49.9% equity interest in Iron Mountain Europe Limited for total consideration of 82.5 million British pounds sterling in cash.
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and ShareholdersStockholders of
Iron Mountain Incorporated:Incorporated
We have audited the accompanying consolidated balance sheets of Iron Mountain Incorporated (a Pennsylvania corporation) and its subsidiaries (the "Company"“Company”) as of December 31, 20032006 and 2002,2005, and the related consolidated statements of operations, shareholders'stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years then ended.in the period ended December 31, 2006. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on thesethe financial statements based on our audits. We did not audit the financial statements of Iron Mountain Europe Limited (a consolidated subsidiary) as of October 31, 2003 and 2002, which statements reflect total assets constituting 18% and 8%, respectively, of consolidated total assets as of December 31, 2003 and 2002, and total revenues constituting 12% and 7%, respectively, of the consolidated total revenues for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Iron Mountain Europe Limited, is based solely on the report of such other auditors. The financial statements of Iron Mountain Incorporated and its subsidiaries for the year ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and referred to the report of other auditors in their report dated February 22, 2002 (except with respect to Note 17, as to which the date is March 15, 2002).
We conducted our audits in accordance with auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Iron Mountain Incorporated and its subsidiaries as of December 31, 20032006 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
59
As discussed above, the consolidated financial statements of Iron Mountain Incorporated and its subsidiaries for the year ended December 31, 2001 were audited by other auditors who have ceased operations. As described in Note 2g, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards (Statement) No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 2g for 2001 amounts included (a) agreeing the previously reported net income to the previously issued consolidated financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized and changes in amortization periods for intangible assets that will continue to be amortized as a result of initially applying Statement No. 142 (including any related tax effects) to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 in Note 2g are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.
/s/ DELOITTE & TOUCHE LLP
Boston, MassachusettsMarch 8, 2004
60
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Iron Mountain Incorporated's filing of an Annual Report on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this Annual Report on Form 10-K for the year ended December 31, 2003. See Exhibit 23.3 to the December 31, 2002 Annual Report on Form 10-K filed with the SEC for further discussion. The consolidated balance sheets as of December 31, 2000 and 2001 and the consolidated statements of operations, shareholders' equity and comprehensive loss and cash flows for the years ended December 31, 1999 and 2000 referred to in this report have not been included in the accompanying consolidated financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors ofIron Mountain Incorporated:
We have audited the accompanying consolidated balance sheets of Iron Mountain Incorporated (a Pennsylvania corporation) and its subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, shareholders' equity and comprehensive loss and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of Iron Mountain Incorporated's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Iron Mountain Europe Limited as of October 31, 2000 and 2001, which statements reflect total assets and total revenues of 6 percent and 5 percent in 2000, and 8 percent and 6 percent in 2001, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for this entity, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Iron Mountain Incorporated and its subsidiaries as of December 31, 2000 and 20012005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001,2006, in conformity with accounting principles generally accepted in the United States.States of America.
61
As discussed in Note 2n, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment effective January 1, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 1, 2007
54
IRON MOUNTAIN INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | | December 31, |
| December 31, |
| |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2002 | 2003 |
| 2005 |
| 2006 |
| ||||||||
| ASSETS | ASSETS |
|
| �� |
|
| ||||||||||
| Current Assets: | Current Assets: |
|
|
|
|
| ||||||||||
| Cash and cash equivalents | $ | 56,292 | $ | 74,683 | ||||||||||||
| Accounts receivable (less allowances of $20,274 and $18,310, respectively) | 225,416 | 279,800 | ||||||||||||||
| Deferred income taxes | 34,192 | 33,043 | ||||||||||||||
| Prepaid expenses and other | 51,140 | 84,057 | ||||||||||||||
| Total Current Assets | 367,040 | 471,583 | ||||||||||||||
Cash and cash equivalents |
| $ | 53,413 |
| $ | 45,369 |
| |||||||||
Accounts receivable (less allowances of $14,522 and $15,157, respectively) |
| 408,564 |
| 473,366 |
| |||||||||||
Deferred income taxes |
| 27,623 |
| 60,537 |
| |||||||||||
Prepaid expenses and other |
| 64,568 |
| 100,449 |
| |||||||||||
Total Current Assets |
| 554,168 |
| 679,721 |
| |||||||||||
| Property, Plant and Equipment: | Property, Plant and Equipment: |
|
|
|
|
| ||||||||||
| Property, plant and equipment | 1,577,588 | 1,950,893 | ||||||||||||||
| Less—Accumulated depreciation | (338,400 | ) | (458,626 | ) | ||||||||||||
| Net Property, Plant and Equipment | 1,239,188 | 1,492,267 | ||||||||||||||
Property, plant and equipment |
| 2,556,880 |
| 2,965,995 |
| |||||||||||
Less—Accumulated depreciation |
| (775,614 | ) | (950,760 | ) | |||||||||||
Net Property, Plant and Equipment |
| 1,781,266 |
| 2,015,235 |
| |||||||||||
| Other Assets, net: | Other Assets, net: |
|
|
|
|
| ||||||||||
| Goodwill | 1,544,974 | 1,776,279 | ||||||||||||||
| Customer relationships and acquisition costs | 48,213 | 116,466 | ||||||||||||||
| Deferred financing costs | 19,358 | 23,934 | ||||||||||||||
| Other | 11,882 | 11,570 | ||||||||||||||
| Total Other Assets, net | 1,624,427 | 1,928,249 | ||||||||||||||
| Total Assets | $ | 3,230,655 | $ | 3,892,099 | ||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||
Goodwill |
| 2,138,641 |
| 2,165,129 |
| |||||||||||
Customer relationships and acquisition costs |
| 229,006 |
| 282,756 |
| |||||||||||
Deferred financing costs |
| 31,606 |
| 29,795 |
| |||||||||||
Other |
| 31,453 |
| 36,885 |
| |||||||||||
Total Other Assets, net |
| 2,430,706 |
| 2,514,565 |
| |||||||||||
Total Assets |
| $ | 4,766,140 |
| $ | 5,209,521 |
| |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| |||||||||||
| Current Liabilities: | Current Liabilities: |
|
|
|
|
| ||||||||||
| Current portion of long-term debt | $ | 69,732 | $ | 115,781 | ||||||||||||
| Accounts payable | 76,115 | 87,006 | ||||||||||||||
| Accrued expenses | 168,025 | 234,426 | ||||||||||||||
| Deferred revenue | 95,188 | 107,857 | ||||||||||||||
| Other current liabilities | 18,902 | 39,675 | ||||||||||||||
| Total Current Liabilities | 427,962 | 584,745 | ||||||||||||||
Current portion of long-term debt |
| $ | 25,905 |
| $ | 63,105 |
| |||||||||
Accounts payable |
| 148,234 |
| 148,461 |
| |||||||||||
Accrued expenses |
| 266,720 |
| 266,933 |
| |||||||||||
Deferred revenue |
| 151,137 |
| 160,148 |
| |||||||||||
Total Current Liabilities |
| 591,996 |
| 638,647 |
| |||||||||||
| Long-term Debt, net of current portion | Long-term Debt, net of current portion | 1,662,365 | 1,974,147 |
| 2,503,526 |
| 2,605,711 |
| ||||||||
| Other Long-term Liabilities | Other Long-term Liabilities | 35,433 | 24,499 |
| 33,545 |
| 72,778 |
| ||||||||
| Deferred Rent | Deferred Rent | 19,438 | 20,578 |
| 35,763 |
| 53,597 |
| ||||||||
| Deferred Income Taxes | Deferred Income Taxes | 78,464 | 146,231 |
| 225,314 |
| 280,225 |
| ||||||||
| Commitments and Contingencies (see Note 13) | ||||||||||||||||
Commitments and Contingencies (see Note 10) |
|
|
|
|
| |||||||||||
| Minority Interests | Minority Interests | 62,132 | 75,785 |
| 5,867 |
| 5,290 |
| ||||||||
| Shareholders' Equity: | ||||||||||||||||
| Preferred stock (par value $0.01; authorized 10,000,000 shares; none issued and outstanding) | — | — | ||||||||||||||
| Common stock (par value $0.01; authorized 150,000,000 shares; issued and outstanding 85,049,624 shares and 85,575,254 shares, respectively) | 850 | 856 | ||||||||||||||
| Additional paid-in capital | 1,020,452 | 1,034,070 | ||||||||||||||
| (Accumulated deficit) Retained earnings | (45,403 | ) | 39,234 | |||||||||||||
| Accumulated other comprehensive items, net | (31,038 | ) | (8,046 | ) | ||||||||||||
| Total Shareholders' Equity | 944,861 | 1,066,114 | ||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 3,230,655 | $ | 3,892,099 | ||||||||||||
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 197,494,307 shares and 199,109,581 shares, respectively) |
| 1,975 |
| 1,991 |
| |||||||||||
Additional paid-in capital |
| 1,104,946 |
| 1,144,101 |
| |||||||||||
Retained earnings |
| 244,524 |
| 373,387 |
| |||||||||||
Accumulated other comprehensive items, net |
| 18,684 |
| 33,794 |
| |||||||||||
Total Stockholders’ Equity |
| 1,370,129 |
| 1,553,273 |
| |||||||||||
Total Liabilities and Stockholders’ Equity |
| $ | 4,766,140 |
| $ | 5,209,521 |
| |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6255
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| | | Year Ended December 31, |
| Year Ended December 31, |
| |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2001 | 2002 | 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||||||||
| Revenues: | Revenues: |
|
|
|
|
|
|
| ||||||||||||||
| Storage | $ | 694,474 | $ | 759,536 | $ | 875,035 | ||||||||||||||||
| Service and storage material sales | 491,244 | 558,961 | 626,294 | |||||||||||||||||||
| Total Revenues | 1,185,718 | 1,318,497 | 1,501,329 | |||||||||||||||||||
Storage |
| $ | 1,043,366 |
| $ | 1,181,551 |
| $ | 1,327,169 |
| ||||||||||||
Service and storage material sales |
| 774,223 |
| 896,604 |
| 1,023,173 |
| |||||||||||||||
Total Revenues |
| 1,817,589 |
| 2,078,155 |
| 2,350,342 |
| |||||||||||||||
| Operating Expenses: | Operating Expenses: |
|
|
|
|
|
|
| ||||||||||||||
| Cost of sales (excluding depreciation) | 576,538 | 622,299 | 680,747 | |||||||||||||||||||
| Selling, general and administrative | 307,800 | 333,050 | 383,641 | |||||||||||||||||||
| Depreciation and amortization | 153,271 | 108,992 | 130,918 | |||||||||||||||||||
| Merger-related expenses | 3,673 | 796 | — | |||||||||||||||||||
| Loss on disposal/writedown of property, plant and equipment, net | 320 | 774 | 1,130 | |||||||||||||||||||
| Total Operating Expenses | 1,041,602 | 1,065,911 | 1,196,436 | |||||||||||||||||||
Cost of sales (excluding depreciation and amortization) |
| 823,899 |
| 938,239 |
| 1,074,268 |
| |||||||||||||||
Selling, general and administrative |
| 486,246 |
| 569,695 |
| 670,074 |
| |||||||||||||||
Depreciation and amortization |
| 163,629 |
| 186,922 |
| 208,373 |
| |||||||||||||||
Gain on disposal/writedown of property, plant and equipment, net |
| (681 | ) | (3,485 | ) | (9,560 | ) | |||||||||||||||
Total Operating Expenses |
| 1,473,093 |
| 1,691,371 |
| 1,943,155 |
| |||||||||||||||
| Operating Income | Operating Income | 144,116 | 252,586 | 304,893 |
| 344,496 |
| 386,784 |
| 407,187 |
| |||||||||||
| Interest Expense, Net | Interest Expense, Net | 134,742 | 136,632 | 150,468 |
| 185,749 |
| 183,584 |
| 194,958 |
| |||||||||||
| Other Expense (Income), Net | 37,485 | 1,435 | (2,564 | ) | ||||||||||||||||||
| (Loss) Income from Continuing Operations Before Provision for Income Taxes and Minority Interest | (28,111 | ) | 114,519 | 156,989 | ||||||||||||||||||
Other (Income) Expense, Net |
| (7,988 | ) | 6,182 |
| (11,989 | ) | |||||||||||||||
Income Before Provision for Income Taxes and Minority Interest |
| 166,735 |
| 197,018 |
| 224,218 |
| |||||||||||||||
| Provision for Income Taxes | Provision for Income Taxes | 17,875 | 47,318 | 66,730 |
| 69,574 |
| 81,484 |
| 93,795 |
| |||||||||||
| Minority Interest in (Losses) Earnings of Subsidiaries | (1,929 | ) | 3,629 | 5,622 | ||||||||||||||||||
| (Loss) Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle | (44,057 | ) | 63,572 | 84,637 | ||||||||||||||||||
| Income from Discontinued Operations (net of tax of $768) | — | 1,116 | — | |||||||||||||||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | — | (6,396 | ) | — | ||||||||||||||||||
| Net (Loss) Income | $ | (44,057 | ) | $ | 58,292 | $ | 84,637 | |||||||||||||||
| Net (Loss) Income per Share—Basic: | ||||||||||||||||||||||
| (Loss) Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle | $ | (0.53 | ) | $ | 0.75 | $ | 0.99 | |||||||||||||||
| Income from Discontinued Operations (net of tax) | — | 0.01 | — | |||||||||||||||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | — | (0.08 | ) | — | ||||||||||||||||||
| Net (Loss) Income per Share—Basic | $ | (0.53 | ) | $ | 0.69 | $ | 0.99 | |||||||||||||||
| Net (Loss) Income per Share—Diluted: | ||||||||||||||||||||||
| (Loss) Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle | $ | (0.53 | ) | $ | 0.74 | $ | 0.98 | |||||||||||||||
| Income from Discontinued Operations (net of tax) | — | 0.01 | — | |||||||||||||||||||
| Cumulative Effect of Change in Accounting Principle (net of minority interest) | — | (0.07 | ) | — | ||||||||||||||||||
| Net (Loss) Income per Share—Diluted | $ | (0.53 | ) | $ | 0.68 | $ | 0.98 | |||||||||||||||
Minority Interests in Earnings of Subsidiaries, Net |
| 2,970 |
| 1,684 |
| 1,560 |
| |||||||||||||||
Income before Cumulative Effect of Change in Accounting Principle |
| 94,191 |
| 113,850 |
| 128,863 |
| |||||||||||||||
Cumulative Effect of Change in Accounting Principle (net of tax benefit) |
| — |
| (2,751 | ) | — |
| |||||||||||||||
Net Income |
| $ | 94,191 |
| $ | 111,099 |
| $ | 128,863 |
| ||||||||||||
Net Income per Share—Basic: |
|
|
|
|
|
|
| |||||||||||||||
Income before Cumulative Effect of Change in Accounting Principle |
| $ | 0.49 |
| $ | 0.58 |
| $ | 0.65 |
| ||||||||||||
Cumulative Effect of Change in Accounting Principle (net of tax benefit) |
| — |
| (0.01 | ) | — |
| |||||||||||||||
Net Income per Share—Basic |
| $ | 0.49 |
| $ | 0.57 |
| $ | 0.65 |
| ||||||||||||
Net Income per Share—Diluted: |
|
|
|
|
|
|
| |||||||||||||||
Income before Cumulative Effect of Change in Accounting Principle |
| $ | 0.48 |
| $ | 0.57 |
| $ | 0.64 |
| ||||||||||||
Cumulative Effect of Change in Accounting Principle (net of tax benefit) |
| — |
| (0.01 | ) | — |
| |||||||||||||||
Net Income per Share—Diluted |
| $ | 0.48 |
| $ | 0.56 |
| $ | 0.64 |
| ||||||||||||
| Weighted Average Common Shares Outstanding—Basic | Weighted Average Common Shares Outstanding—Basic | 83,666 | 84,651 | 85,267 |
| 193,625 |
| 195,988 |
| 198,116 |
| |||||||||||
| Weighted Average Common Shares Outstanding—Diluted | Weighted Average Common Shares Outstanding—Diluted | 83,666 | 86,071 | 86,718 |
| 196,764 |
| 198,104 |
| 200,463 |
| |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6356
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
| | Common Stock Voting | | | | | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Additional Paid-in Capital | (Accumulated Deficit) Retained Earnings | Accumulated Other Comprehensive Items | Total Shareholders' Equity | ||||||||||||||
| | Shares | Amount | ||||||||||||||||
| Balance, December 31, 2000 | 82,919,847 | $ | 829 | $ | 990,578 | $ | (59,383 | ) | $ | (7,566 | ) | $ | 924,458 | |||||
| Issuance of shares under employee stock purchase plan and option plans, including tax benefit | 1,374,468 | 14 | 16,258 | — | — | 16,272 | ||||||||||||
| Currency translation adjustment | — | — | — | — | (4,388 | ) | (4,388 | ) | ||||||||||
| Transition adjustment charge | — | — | — | — | (214 | ) | (214 | ) | ||||||||||
| Unrealized loss on hedging contracts | — | — | — | — | (5,857 | ) | (5,857 | ) | ||||||||||
| Adjustment due to differences in consolidation year end | — | — | — | (255 | ) | — | (255 | ) | ||||||||||
| Net loss | — | — | — | (44,057 | ) | — | (44,057 | ) | ||||||||||
| Balance, December 31, 2001 | 84,294,315 | 843 | 1,006,836 | (103,695 | ) | (18,025 | ) | 885,959 | ||||||||||
| Issuance of shares under employee stock purchase plan and option plans, including tax benefit | 755,309 | 7 | 13,373 | — | — | 13,380 | ||||||||||||
| Deferred compensation | — | — | 243 | — | — | 243 | ||||||||||||
| Currency translation adjustment | — | — | — | — | 3,378 | 3,378 | ||||||||||||
| Unrealized loss on hedging contracts | — | — | — | — | (16,391 | ) | (16,391 | ) | ||||||||||
| Net income | — | — | — | 58,292 | — | 58,292 | ||||||||||||
| Balance, December 31, 2002 | 85,049,624 | 850 | 1,020,452 | (45,403 | ) | (31,038 | ) | 944,861 | ||||||||||
| Issuance of shares under employee stock purchase plan and option plans, including tax benefit | 525,630 | 6 | 18,242 | — | — | 18,248 | ||||||||||||
| Deferred compensation | — | — | (4,624 | ) | — | — | (4,624 | ) | ||||||||||
| Currency translation adjustment | — | — | — | — | 16,466 | 16,466 | ||||||||||||
| Unrealized loss on hedging contracts | — | — | — | — | 6,215 | 6,215 | ||||||||||||
| Unrealized gain on securities, net of tax | — | — | — | — | 311 | 311 | ||||||||||||
| Net income | — | — | — | 84,637 | — | 84,637 | ||||||||||||
| Balance, December 31, 2003 | 85,575,254 | $ | 856 | $ | 1,034,070 | $ | 39,234 | $ | (8,046 | ) | $ | 1,066,114 | ||||||
| | 2001 | 2002 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| COMPREHENSIVE (LOSS) INCOME: | ||||||||||
| Net (loss) income | $ | (44,057 | ) | $ | 58,292 | $ | 84,637 | |||
| Other Comprehensive (Loss) Income, Net of Tax: | ||||||||||
| Foreign Currency Translation Adjustments | (4,388 | ) | 3,378 | 16,466 | ||||||
| Transition Adjustment Charge | (214 | ) | — | — | ||||||
| Unrealized (Loss) Gain on Hedging Contracts | (5,857 | ) | (16,391 | ) | 6,215 | |||||
| Unrealized Gain on Securities | — | — | 311 | |||||||
| Comprehensive (Loss) Income | $ | (54,516 | ) | $ | 45,279 | $ | 107,629 | |||
|
| Common Stock Voting |
| Additional |
|
|
| Accumulated Other |
| Total Stockholders’ |
| |||||||||||||||||
|
| Shares |
| Amounts |
| Paid-in Capital |
| Retained Earnings |
| Comprehensive Items |
| Equity |
| |||||||||||||||
Balance, December 31, 2003 |
| 192,544,321 |
|
| $ | 1,925 |
|
|
| $ | 1,033,001 |
|
|
| $ | 39,234 |
|
|
| $ | (8,046 | ) |
|
| $ | 1,066,114 |
|
|
Issuance of shares under employee stock purchase plan and option plans, including tax benefit of $6,904 |
| 2,182,550 |
|
| 22 |
|
|
| 33,443 |
|
|
| — |
|
|
| — |
|
|
| 33,465 |
|
| |||||
Deferred compensation |
| — |
|
| — |
|
|
| (3,533 | ) |
|
| — |
|
|
| — |
|
|
| (3,533 | ) |
| |||||
Currency translation adjustment |
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,669 |
|
|
| 14,669 |
|
| |||||
Market value adjustments for hedging contracts, net of tax |
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13,576 |
|
|
| 13,576 |
|
| |||||
Market value adjustments for securities, net of tax |
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 86 |
|
|
| 86 |
|
| |||||
Net income |
| — |
|
| — |
|
|
| — |
|
|
| 94,191 |
|
|
| — |
|
|
| 94,191 |
|
| |||||
Balance, December 31, 2004 |
| 194,726,871 |
|
| 1,947 |
|
|
| 1,062,911 |
|
|
| 133,425 |
|
|
| 20,285 |
|
|
| 1,218,568 |
|
| |||||
Issuance of shares under employee stock purchase plan and option plans, including tax benefit of |
| 2,767,436 |
|
| 28 |
|
|
| 57,315 |
|
|
| — |
|
|
| — |
|
|
| 57,343 |
|
| |||||
Deferred compensation |
| — |
|
| — |
|
|
| (16,060 | ) |
|
| — |
|
|
| — |
|
|
| (16,060 | ) |
| |||||
Currency translation adjustment |
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,300 | ) |
|
| (4,300 | ) |
| |||||
Stock options issued in connection with an acquisition |
| — |
|
| — |
|
|
| 780 |
|
|
| — |
|
|
| — |
|
|
| 780 |
|
| |||||
Market value adjustments for hedging contracts, net of tax |
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,458 |
|
|
| 2,458 |
|
| |||||
Market value adjustments for securities, net of tax |
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 241 |
|
|
| 241 |
|
| |||||
Net income |
| — |
|
| — |
|
|
| — |
|
|
| 111,099 |
|
|
| — |
|
|
| 111,099 |
|
| |||||
Balance, December 31, 2005 |
| 197,494,307 |
|
| 1,975 |
|
|
| 1,104,946 |
|
|
| 244,524 |
|
|
| 18,684 |
|
|
| 1,370,129 |
|
| |||||
Issuance of shares under employee stock purchase plan and option plans, including tax benefit of $4,387 |
| 1,615,274 |
|
| 16 |
|
|
| 39,155 |
|
|
| — |
|
|
| — |
|
|
| 39,171 |
|
| |||||
Currency translation adjustment |
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,659 |
|
|
| 14,659 |
|
| |||||
Market value adjustments for hedging contracts, net of tax |
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 43 |
|
|
| 43 |
|
| |||||
Market value adjustments for securities, net of tax |
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 408 |
|
|
| 408 |
|
| |||||
Net income |
| — |
|
| — |
|
|
| — |
|
|
| 128,863 |
|
|
| — |
|
|
| 128,863 |
|
| |||||
Balance, December 31, 2006 |
| 199,109,581 |
|
| $ | 1,991 |
|
|
| $ | 1,144,101 |
|
|
| $ | 373,387 |
|
|
| $ | 33,794 |
|
|
| $ | 1,553,273 |
|
|
|
| 2004 |
| 2005 |
| 2006 |
| |||
COMPREHENSIVE INCOME: |
|
|
|
|
|
|
| |||
Net Income |
| $ | 94,191 |
| $ | 111,099 |
| $ | 128,863 |
|
Other Comprehensive (Loss) Income: |
|
|
|
|
|
|
| |||
Foreign Currency Translation Adjustments |
| 14,669 |
| (4,300 | ) | 14,659 |
| |||
Market Value Adjustments for Hedging Contracts, Net of Tax Provision of $4,955, $973 and $13, respectively |
| 13,576 |
| 2,458 |
| 43 |
| |||
Market Value Adjustments for Securities, Net of Tax |
| 86 |
| 241 |
| 408 |
| |||
Comprehensive Income |
| $ | 122,522 |
| $ | 109,498 |
| $ | 143,973 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6457
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | Year Ended December 31, |
| Year Ended December 31, |
| ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2001 | 2002 | 2003 |
| 2004 |
| 2005 |
| 2006 |
| ||||||||||
| Cash Flows from Operating Activities: | Cash Flows from Operating Activities: |
|
|
|
|
|
|
| |||||||||||||
| Net (loss) income | $ | (44,057 | ) | $ | 58,292 | $ | 84,637 | ||||||||||||||
| Adjustments to reconcile net (loss) income to (loss) income from continuing operations before discontinued operations and cumulative effect of change in accounting principle: | |||||||||||||||||||||
| Income from discontinued operations (net of tax of $768) | — | (1,116 | ) | — | |||||||||||||||||
| Cumulative effect of change in accounting principle (net of minority interest) | — | 6,396 | — | ||||||||||||||||||
| (Loss) Income from continuing operations | (44,057 | ) | 63,572 | 84,637 | |||||||||||||||||
| Adjustments to reconcile (loss) income from continuing operations to cash flows provided by operating activities: | |||||||||||||||||||||
| Minority interests, net | (1,929 | ) | 3,629 | 5,622 | |||||||||||||||||
| Depreciation | 87,130 | 104,176 | 123,974 | ||||||||||||||||||
| Amortization (includes deferred financing costs and bond discount of $4,930, $4,921 and $3,654, respectively) | 71,071 | 9,737 | 10,598 | ||||||||||||||||||
| Provision for deferred income taxes | 15,688 | 44,112 | 61,485 | ||||||||||||||||||
| Loss on early extinguishment of debt | 19,980 | 5,430 | 28,175 | ||||||||||||||||||
| Loss on impairment of long-term assets | 6,925 | 1,717 | — | ||||||||||||||||||
| Loss on disposal/writedown of property, plant and equipment, net | 320 | 774 | 1,130 | ||||||||||||||||||
| Loss (Gain) on foreign currency and other, net | 10,399 | (5,773 | ) | (28,961 | ) | ||||||||||||||||
Net income |
| $ | 94,191 |
| $ | 111,099 |
| $ | 128,863 |
| |||||||||||
Adjustments to reconcile net income to cash flows from operating activities: |
|
|
|
|
|
|
| ||||||||||||||
Cumulative effect of change in accounting principle (net of tax benefit) |
| — |
| 2,751 |
| — |
| ||||||||||||||
Minority interests in earnings of subsidiaries, net |
| 2,970 |
| 1,684 |
| 1,560 |
| ||||||||||||||
Depreciation |
| 151,947 |
| 170,698 |
| 187,745 |
| ||||||||||||||
Amortization (includes deferred financing costs and bond discount of $3,646, $4,951 and $5,463, respectively) |
| 15,328 |
| 21,175 |
| 26,091 |
| ||||||||||||||
Stock compensation expense |
| 3,857 |
| 6,189 |
| 12,387 |
| ||||||||||||||
Provision for deferred income taxes |
| 62,165 |
| 59,470 |
| 53,139 |
| ||||||||||||||
Loss on early extinguishment of debt |
| 2,454 |
| — |
| 2,972 |
| ||||||||||||||
Gain on disposal/writedown of property, plant and equipment, net |
| (681 | ) | (3,485 | ) | (9,560 | ) | ||||||||||||||
Loss (Gain) on foreign currency and other, net |
| 5,227 |
| 6,472 |
| (16,990 | ) | ||||||||||||||
| Changes in Assets and Liabilities (exclusive of acquisitions): | Changes in Assets and Liabilities (exclusive of acquisitions): |
|
|
|
|
|
|
| |||||||||||||
| Accounts receivable | (15,677 | ) | (2,547 | ) | (16,004 | ) | |||||||||||||||
| Prepaid expenses and other current assets | (17,158 | ) | (3,792 | ) | 6 | ||||||||||||||||
| Accounts payable | 12,554 | 11,802 | 979 | ||||||||||||||||||
| Accrued expenses, deferred revenue and other current liabilities | 10,448 | 20,575 | 18,134 | ||||||||||||||||||
| Other assets and long-term liabilities | 5,215 | 1,536 | (1,082 | ) | |||||||||||||||||
| Cash Flows Provided by Operating Activities | 160,909 | 254,948 | 288,693 | ||||||||||||||||||
Accounts receivable |
| (48,020 | ) | (45,572 | ) | (53,867 | ) | ||||||||||||||
Prepaid expenses and other current assets |
| (7,462 | ) | (13,360 | ) | (12,317 | ) | ||||||||||||||
Accounts payable |
| 12,366 |
| 21,017 |
| 9,008 |
| ||||||||||||||
Accrued expenses, deferred revenue and other current liabilities |
| 9,852 |
| 34,360 |
| 37,320 |
| ||||||||||||||
Other assets and long-term liabilities |
| 1,170 |
| 4,678 |
| 7,931 |
| ||||||||||||||
Cash Flows from Operating Activities |
| 305,364 |
| 377,176 |
| 374,282 |
| ||||||||||||||
| Cash Flows from Investing Activities: | Cash Flows from Investing Activities: |
|
|
|
|
|
|
| |||||||||||||
| Capital expenditures | (197,039 | ) | (196,997 | ) | (204,477 | ) | |||||||||||||||
| Cash paid for acquisitions, net of cash acquired | (71,397 | ) | (49,361 | ) | (379,890 | ) | |||||||||||||||
| Additions to customer relationship and acquisition costs | (8,420 | ) | (8,419 | ) | (12,577 | ) | |||||||||||||||
| Investment in convertible preferred stock | (2,000 | ) | — | (1,357 | ) | ||||||||||||||||
| Proceeds from sales of property and equipment | 720 | 7,020 | 11,667 | ||||||||||||||||||
| Cash Flows Used in Investing Activities | (278,136 | ) | (247,757 | ) | (586,634 | ) | |||||||||||||||
Capital expenditures |
| (231,966 | ) | (272,129 | ) | (381,970 | ) | ||||||||||||||
Cash paid for acquisitions, net of cash acquired |
| (384,338 | ) | (178,238 | ) | (81,208 | ) | ||||||||||||||
Additions to customer relationship and acquisition costs |
| (12,472 | ) | (13,431 | ) | (14,251 | ) | ||||||||||||||
Investment in joint ventures |
| (858 | ) | — |
| (5,943 | ) | ||||||||||||||
Proceeds from sales of property and equipment and other, net |
| 3,111 |
| 27,623 |
| 16,658 |
| ||||||||||||||
Cash Flows from Investing Activities |
| (626,523 | ) | (436,175 | ) | (466,714 | ) | ||||||||||||||
| Cash Flows from Financing Activities: | Cash Flows from Financing Activities: |
|
|
|
|
|
|
| |||||||||||||
| Repayment of debt and tern loans | (118,278 | ) | (462,243 | ) | (698,817 | ) | |||||||||||||||
| Proceeds from borrowings and term loans | 105,595 | 438,842 | 744,016 | ||||||||||||||||||
| Early retirement of senior subordinated notes | (312,701 | ) | (54,380 | ) | (374,258 | ) | |||||||||||||||
| Net proceeds from sales of senior subordinated notes | 427,924 | 99,000 | 617,179 | ||||||||||||||||||
| Debt financing (repayment to) and equity contribution from (distribution to) minority shareholders, net | 21,216 | (1,241 | ) | 20,225 | |||||||||||||||||
| Other, net | 11,145 | 7,120 | 6,709 | ||||||||||||||||||
| Cash Flows Provided by Financing Activities | 134,901 | 27,098 | 315,054 | ||||||||||||||||||
Repayment of debt and term loans |
| (1,085,013 | ) | (509,595 | ) | (654,960 | ) | ||||||||||||||
Proceeds from debt and term loans |
| 1,148,275 |
| 568,726 |
| 543,940 |
| ||||||||||||||
Early retirement of notes |
| (20,797 | ) | — |
| (112,397 | ) | ||||||||||||||
Net proceeds from sales of senior subordinated notes |
| 269,427 |
| — |
| 281,984 |
| ||||||||||||||
Debt financing (repayment to) and equity contribution from (distribution to) minority stockholders, net |
| (41,978 | ) | (2,399 | ) | (2,068 | ) | ||||||||||||||
Proceeds from exercise of stock options and employee stock purchase plan |
| 18,041 |
| 25,649 |
| 22,245 |
| ||||||||||||||
Excess tax benefits from stock-based compensation |
| — |
| — |
| 4,387 |
| ||||||||||||||
Payment of debt financing costs and stock issuance costs |
| (11,386 | ) | (932 | ) | (397 | ) | ||||||||||||||
Cash Flows from Financing Activities |
| 276,569 |
| 81,449 |
| 82,734 |
| ||||||||||||||
| Effect of Exchange Rates on Cash and Cash Equivalents | Effect of Exchange Rates on Cash and Cash Equivalents | (2,515 | ) | 644 | 1,278 |
| 1,849 |
| (979 | ) | 1,654 |
| |||||||||
| Increase in Cash and Cash Equivalents | 15,159 | 34,933 | 18,391 | ||||||||||||||||||
(Decrease) Increase in Cash and Cash Equivalents |
| (42,741 | ) | 21,471 |
| (8,044 | ) | ||||||||||||||
| Cash and Cash Equivalents, Beginning of Year | Cash and Cash Equivalents, Beginning of Year | 6,200 | 21,359 | 56,292 |
| 74,683 |
| 31,942 |
| 53,413 |
| ||||||||||
| Cash and Cash Equivalents, End of Year | Cash and Cash Equivalents, End of Year | $ | 21,359 | $ | 56,292 | $ | 74,683 |
| $ | 31,942 |
| $ | 53,413 |
| $ | 45,369 |
| ||||
| Supplemental Information: | Supplemental Information: |
|
|
|
|
|
|
| |||||||||||||
| Cash Paid for Interest | Cash Paid for Interest | $ | 133,373 | $ | 133,873 | $ | 126,952 |
| $ | 169,929 |
| $ | 183,657 |
| $ | 185,072 |
| ||||
| Cash Paid for Income Taxes | Cash Paid for Income Taxes | $ | 4,925 | $ | 3,147 | $ | 8,316 |
| $ | 6,888 |
| $ | 21,858 |
| $ | 17,143 |
| ||||
Non-Cash Investing Activities: |
|
|
|
|
|
|
| ||||||||||||||
Capital Leases |
| $ | 1,506 |
| $ | 23,886 |
| $ | 17,027 |
| |||||||||||
Capital Expenditures |
| $ | — |
| $ | 19,124 |
| $ | 32,068 |
| |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6558
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
2006
(In thousands, except share and per share data)
On May 27, 2005, Iron Mountain Incorporated, a Pennsylvania corporation (“Iron Mountain PA”), reincorporated as a Delaware corporation. The reincorporation was effected by means of a statutory merger (the “Merger”) of Iron Mountain PA with and into Iron Mountain Incorporated, a Delaware corporation (“Iron Mountain DE”), a wholly owned subsidiary of Iron Mountain PA. In connection with the Merger, Iron Mountain DE succeeded to and assumed all of the assets and liabilities of Iron Mountain PA. Apart from the change in its state of incorporation, the Merger had no effect on Iron Mountain PA’s business, board composition, management, employees, fiscal year, assets or liabilities, or location of its facilities, and did not result in any relocation of management or other employees. The Merger was approved at the Annual Meeting of Stockholders held on May 26, 2005. Upon consummation of the Merger, Iron Mountain DE succeeded to Iron Mountain PA’s reporting obligations and continued to be listed on the New York Stock Exchange under the symbol “IRM.”
On December 7, 2006, our board authorized and approved a three-for-two stock split effected in the form of a dividend on our common stock. We issued the additional shares of common stock resulting from this stock dividend on December 29, 2006 to all stockholders of record as of the close of business on December 18, 2006. All share data has been adjusted for such stock split.
The accompanying financial statements represent the consolidated accounts of Iron Mountain Incorporated, a PennsylvaniaDelaware corporation, and its subsidiaries. We are an international full-service provider of recordsinformation protection and information managementstorage and related services for all media in various locations throughout the United States, Canada, Europe, Australia, New Zealand, Mexico and South America to Fortune 500 and FTSE 100 companies, and numerouscommercial, legal, banking, health care, accounting, insurance, entertainment and government organizations.organizations, including more than 90% of the Fortune 1000 and more than 85% of the FTSE 100.
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.eliminated or presented to reflect the underlying economics of the transactions.
b. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 theaccounting for acquisitions, allowance for doubtful accounts and credit memos, impairments of tangible and intangible assets, income taxes, purchase accounting related reserves, self-insurance liabilities, incentivestock-based compensation liabilities, litigation liabilities and contingencies.self-insured liabilities. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
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. We use these estimates to assist us in the identification and assessment of the accounting treatment necessary with respect to commitments and contingencies. Actual results may differ from these estimates.
c. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash invested in short-term securities which have remaining maturities at the date of purchase of less than 90 days. Cash and cash equivalents are carried at cost, which approximates fair value. Our balance of cash and cash equivalents as of December 31, 2003 includes $1,959 of restricted cash due to contractual and other arrangements.
d. Foreign Currency Translation
Local currencies are considered the functional currencies for most of our operations outside the United States.States, with the exception of certain foreign holding companies, whose functional currency is the U.S. dollar. All assets and liabilities are translated at year-endperiod-end exchange rates, and revenues and expenses are translated at average exchange rates for the year,applicable period, in accordance with Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 52, "Foreign“Foreign Currency Translation."” Resulting translation adjustments are reflected in the accumulated other comprehensive items component of shareholders'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) U.S. dollar denominated 81/¤8% senior notes of our Canadian subsidiary (the “Subsidiary notes”), which were fully redeemed as of March 31, 2004, (b) our 71¤4% GBP Senior Subordinated Notes due 2014, (c) the borrowings in certain foreign currencies under our revolving credit agreements, and those related to the(d) certain foreign currency
66
denominated intercompany obligations of our foreign subsidiaries to us and between our foreign subsidiaries, are included in Other (Income) Expense,other (income) expense, net, on our Consolidated Statementsconsolidated statements of Operations.operations. The total of such net (gains) lossesgain amounted to $10,437, $(5,043)$8,915, a net loss of $7,201 and $(30,223)a net gain of $12,534 for the years ended December 31, 2001, 20022004, 2005 and 2003,2006, respectively.
e. Derivative Instruments and Hedging Activities
SFAS No. 133, "Accounting“Accounting for Derivative Instruments and Hedging Activities"Activities,” requires that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. The adoption of SFAS No. 133 resulted in the recognition of a derivative liability and a corresponding transition adjustment charge to accumulated other comprehensive items of approximately $214 as of January 1, 2001.
Periodically, we acquire derivative instruments that are intended to hedge either cash flows or fair 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 theour 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 naturally hedge foreign
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
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 or to hedge our exposures related to foreign currency exchange movements related to our intercompany accounts with and between our foreign subsidiaries.
f. Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method with the following useful lives:
Buildings | 40 to 50 years | ||
Leasehold improvements | 8 to 10 years or the life of the lease, | ||
Racking | 5 to 20 years | ||
Warehouse | 3 to | ||
Vehicles | 5 to 10 years | ||
Furniture and fixtures | 2 to 10 years | ||
Computer hardware and software | 3 to 5 years |
Property, plant and equipment, at cost, consist of the following:
| | December 31, |
| December 31, |
| |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 |
| 2005 |
| 2006 |
| ||||||
| Land and buildings | $ | 623,717 | $ | 745,838 |
| $ | 846,171 |
| $ | 931,784 |
| ||
| Leasehold improvements | 96,509 | 144,244 |
| 208,693 |
| 240,341 |
| ||||||
| Racking | 496,919 | 598,101 |
| 809,899 |
| 944,299 |
| ||||||
| Warehouse equipment/vehicles | 66,718 | 88,127 |
| 146,593 |
| 162,735 |
| ||||||
| Furniture and fixtures | 34,005 | 41,996 |
| 58,184 |
| 60,047 |
| ||||||
| Computer hardware and software | 204,444 | 260,190 |
| 381,024 |
| 449,713 |
| ||||||
| Construction in progress | 55,276 | 72,397 |
| 106,316 |
| 177,076 |
| ||||||
| $ | 2,556,880 |
| $ | 2,965,995 |
| |||||||
| $ | 1,577,588 | $ | 1,950,893 | ||||||||||
67
Minor maintenance costs are expensed as incurred. Major improvements which extend the life, increase the capacity or improve the safety or the efficiency of property owned are capitalized. Major improvements to leased buildings are capitalized as leasehold improvements and depreciated.
We develop various software applications for internal use. Payroll and related costs for employees who are directly associated with, and who devote time to, the development of internal use computer software projects (to the extent of the time spent directly on the project) are capitalized and depreciated overin accordance with Statement of Position 98-1, “Accounting for the estimated useful lifeCosts of the software.Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). Capitalization begins when the design stage of the application has been completed and it is probable that the project will be completed and used to perform the function intended. Depreciation beginsCapitalized software costs are depreciated over the estimated useful life of the software beginning when
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
the software is placed in service.
We apply During the provisionsyear ended December 31, 2006, we wrote-off $6,329 of Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") which requires computer softwarepreviously deferred costs, primarily internal labor costs, associated with internal use software to be expenseddevelopment projects that were discontinued, and such costs are included as incurred until certain capitalization criteria are met. SOP 98-1 also defines which typesa component of costsselling, general and administrative expenses in the accompanying consolidated statement of operations.
In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), an interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). FIN 47 clarifies that conditional asset retirement obligations meet the definition of liabilities and should be capitalizedrecognized when incurred if their fair values can be reasonably estimated. Uncertainty surrounding the timing and method of settlement that may be conditional on events occurring in the future are factored into the measurement of the liability rather than the existence of the liability. SFAS No. 143 established accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets legally required by law, regulatory rule or contractual agreement and the associated asset retirement costs. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which should be expensed. The computer software costs incurred and capitalized are being depreciated over their useful lives orit is incurred. When the useful livesliability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related assets,long-lived asset, which is then depreciated over the useful life of the related asset. The liability is increased over time through income such that the liability will equate to the future cost to retire the long-lived asset at the expected retirement date. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. Our obligations are primarily the result of requirements under our facility lease agreements which generally have “return to original condition” clauses which would require us to remove or restore items such as shred pits, vaults, demising walls and are evaluated for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposaloffice build-outs, among others. As of Long-Lived Assets."
During the year ended December 31, 2002 and 2003,2005, we replaced certainhave recognized the cumulative effect of our internal use software programs, which resultedinitially applying FIN 47 as a cumulative effect of change in the write-off to loss on disposal/writedownaccounting principle as prescribed in FIN 47. The impact of adopting FIN 47 as of December 31, 2005 was a gross charge of $4,422 ($2,751, net of tax), an increase in property, plant and equipment, net of $1,889 and long-term liabilities of $6,311. The significant assumptions used in estimating our aggregate asset retirement obligation are the remainingtiming of removals, estimated cost and associated expected inflation rates that are consistent with historical rates and credit-adjusted risk-free rates that approximate our incremental borrowing rate.
A reconciliation of liabilities for asset retirement obligations is as follows:
|
| 2006 |
| |
Asset Retirement Obligations, beginning of the year |
| $ | 6,311 |
|
Liabilities Incurred |
| 537 |
| |
Liabilities Settled |
| (410 | ) | |
Accretion Expense |
| 636 |
| |
Asset Retirement Obligations, end of the year |
| $ | 7,074 |
|
Had we applied the provisions of FIN 47 as of January 1, 2004, the pro forma impacts on net book valueincome and basic and diluted earnings per common share would not be material for 2004 and 2005.
62
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of $1,077 and $710, respectively.Significant Accounting Policies (Continued)
g. Goodwill and Other Intangible Assets
Effective July 1, 2001 and January 1, 2002, we adoptedWe apply the provisions of SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets," respectively. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method.Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longernot 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 will continue to beare amortized over their useful lives. Had SFAS No. 142 been effective January 1, 2001, goodwill amortization expense would have been reduced by $59,217 ($50,903, net of tax) for the year ended December 31, 2001.
Through December 31, 2001, we reviewed our existing goodwill for impairment, consistent with the guidelines of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and determined that no amounts of goodwill were impaired using the undiscounted future cash flow methodology of SFAS No. 121. Effective January 1, 2002, we reviewed goodwill for impairment consistent with the guidelines of SFAS No. 142 using a discounted future cash flow approach to approximate fair value. The result of testing our goodwill for impairment in accordance with SFAS No. 142, as of January 1, 2002, was a non-cash charge of $6,396 (net of minority interest of $8,487), which, consistent with SFAS No. 142, is reported in the caption "cumulative effect of change in accounting principle" in the accompanying consolidated statement of operations. Impairment adjustments recognized in the future, if any, are generally required to be recognized as
68
operating expenses. The $6,396 charge relates to our South American reporting unit within our international reporting segment. The South American reporting unit failed the impairment test primarily due to a reduction in the expected future performance of the unit resulting from a deterioration of the local economic environment and the devaluation of the currency in Argentina. As goodwill amortization expense in our South American reporting unit is not deductible for tax purposes, this impairment charge is not net of a tax benefit. We have a controlling 50.1% interest in Iron Mountain South America, Ltd ("IMSA") and the remainder is owned by an unaffiliated entity. IMSA has acquired a controlling interest in entities in which local partners have retained a minority interest in order to enhance our local market expertise. These local partners have no ownership interest in IMSA. This has caused the minority interest portion of the non-cash goodwill impairment charge ($8,487) to exceed our portion of the non-cash goodwill impairment charge ($6,396). In accordance with SFAS No. 142, we selected October 1 as our annual goodwill impairment review date. We performed our annual goodwill impairment review as of October 1, 20032004, 2005 and 2006 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 at our reporting units as of that date.impairment. As of December 31, 2003,2006, no factors were identified that would alter this assessment. Our reporting units at which level we performed our goodwill impairment analysis as of October 1, 2006 were as follows: North America excluding Fulfillment, Fulfillment, U.K., Continental Europe, Worldwide Digital Business excluding Iron Mountain Intellectual Property Management, Inc. (“IPM”), IPM, South America, Mexico and Asia Pacific. When changes occur in the composition of one or more reporting units, the goodwill is reassigned to the reporting units affected based on their relative fair value.
Goodwill valuations have been calculated using an income approach based on the present value of future cash flows of each reporting unit. 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.
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
The changes in the carrying value of goodwill attributable to each reportable operating segment for the years ended December 31, 20022005 and 20032006 is as follows:
| | Business Records Management | Off-Site Data Protection | International | Corporate & Other | Total Consolidated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of December 31, 2001 | $ | 1,139,212 | $ | 236,850 | $ | 149,928 | $ | 3,557 | $ | 1,529,547 | ||||||
| Goodwill acquired during the year | 19,726 | 895 | 15,163 | — | 35,784 | |||||||||||
| Adjustments to purchase reserves | (5,134 | ) | (85 | ) | 561 | — | (4,658 | ) | ||||||||
| Fair value adjustments | (4,355 | ) | 35 | — | (26 | ) | (4,346 | ) | ||||||||
| Other adjustments and currency effects | 2,311 | (517 | ) | 3,896 | (2,160 | ) | 3,530 | |||||||||
| Impairment losses | — | — | (14,883 | ) | — | (14,883 | ) | |||||||||
| Balance as of December 31, 2002 | 1,151,760 | 237,178 | 154,665 | 1,371 | 1,544,974 | |||||||||||
| Goodwill acquired during the year | 39,330 | 7,675 | 142,065 | — | 189,070 | |||||||||||
| Adjustments to purchase reserves | (613 | ) | (52 | ) | (285 | ) | — | (950 | ) | |||||||
| Fair value adjustments | 3,097 | (150 | ) | (4,385 | ) | — | (1,438 | ) | ||||||||
| Other adjustments and currency effects | 24,898 | (30 | ) | 19,755 | — | 44,623 | ||||||||||
| Balance as of December 31, 2003 | $ | 1,218,472 | $ | 244,621 | $ | 311,815 | $ | 1,371 | $ | 1,776,279 | ||||||
69
|
| North |
| International |
| Worldwide |
| Total |
| ||||||||
Balance as of December 31, 2004 |
| $ | 1,503,224 |
|
| $ | 424,373 |
|
| $ | 112,620 |
|
| $ | 2,040,217 |
|
|
Deductible goodwill acquired during the year |
| 17,260 |
|
| 10,878 |
|
| — |
|
| 28,138 |
|
| ||||
Non-deductible goodwill acquired during the year |
| 15,871 |
|
| 47,209 |
|
| 22,298 |
|
| 85,378 |
|
| ||||
Adjustments to purchase reserves |
| (328 | ) |
| (854 | ) |
| 308 |
|
| (874 | ) |
| ||||
Fair value adjustments |
| 822 |
|
| (1,951 | ) |
| (1,427 | ) |
| (2,556 | ) |
| ||||
Currency effects and other Adjustments(1) |
| 6,188 |
|
| (15,913 | ) |
| (1,937 | ) |
| (11,662 | ) |
| ||||
Balance as of December 31, 2005 |
| 1,543,037 |
|
| 463,742 |
|
| 131,862 |
|
| 2,138,641 |
|
| ||||
Deductible goodwill acquired during the year |
| 5,581 |
|
| 1,726 |
|
| — |
|
| 7,307 |
|
| ||||
Non-deductible goodwill acquired during the year |
| 3,215 |
|
| 5,877 |
|
| — |
|
| 9,092 |
|
| ||||
Adjustments to purchase reserves |
| (369 | ) |
| (2,414 | ) |
| (91 | ) |
| (2,874 | ) |
| ||||
Fair value adjustments |
| (7,514 | ) |
| (15,842 | ) |
| (2,282 | ) |
| (25,638 | ) |
| ||||
Currency effects and other Adjustments(1) |
| (2,125 | ) |
| 46,178 |
|
| (5,452 | ) |
| 38,601 |
|
| ||||
Balance as of December 31, 2006 |
| $ | 1,541,825 |
|
| $ | 499,267 |
|
| $ | 124,037 |
|
| $ | 2,165,129 |
|
|
Actual results of operations for the years ended December 31, 2002 and 2003 and pro forma results of operations for the year ended December 31, 2001 had we applied the non-amortization provisions of SFAS No. 142 as of January 1, 2001 are as follows:
| | Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | ||||||
| | (Proforma) | (Actual) | |||||||
| (Loss) Income from Continuing Operations before Provision for Income Taxes and Minority Interest | $ | (28,111 | ) | $ | 114,519 | $ | 156,989 | ||
| Add: Goodwill Amortization | 59,217 | — | — | ||||||
| Provision for Income Taxes | 26,154 | 47,318 | 66,730 | ||||||
| Minority Interest in Earnings of Subsidiaries, Net | 1,197 | 3,629 | 5,622 | ||||||
| Adjusted Income from Continuing Operations before Discontinued Operations, Extraordinary Charges and Cumulative Effect of Change in Accounting Principle | 3,755 | 63,572 | 84,637 | ||||||
| Income from Discontinued Operations | — | 1,116 | — | ||||||
| Cumulative Effect of Change in Accounting Principle | — | (6,396 | ) | — | |||||
| Net Income | $ | 3,755 | $ | 58,292 | $ | 84,637 | |||
| Net (Loss) Income per Share—Basic: | |||||||||
| (Loss) Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle, as Reported | $ | (0.53 | ) | $ | 0.75 | $ | 0.99 | ||
| Add: Goodwill Amortization, Net of Change in Provision for Income Taxes and Minority Interest | 0.57 | — | — | ||||||
| Adjusted Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle | 0.04 | 0.75 | 0.99 | ||||||
| Income from Discontinued Operations | — | 0.01 | — | ||||||
| Cumulative Effect of Change in Accounting Principle | — | (0.08 | ) | — | |||||
| Net Income per Share—Basic | $ | 0.04 | $ | 0.69 | $ | 0.99 | |||
| Net (Loss) Income per Share—Diluted: | |||||||||
| (Loss) Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle, as Reported | $ | (0.53 | ) | $ | 0.74 | $ | 0.98 | ||
| Add: Goodwill Amortization, Net of Change in Provision for Income Taxes and Minority Interest | 0.56 | — | — | ||||||
| Adjusted Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle | 0.04 | 0.74 | 0.98 | ||||||
| Income from Discontinued Operations | — | 0.01 | — | ||||||
| Cumulative Effect of Change in Accounting Principle | — | (0.07 | ) | — | |||||
| Net Income per Share—Diluted | $ | 0.04 | $ | 0.68 | $ | 0.98 | |||
70
Estimated amortization expense for existing intangible assets (excluding deferred financing costs which are amortized through interest expense) for the next five succeeding fiscal years is as follows:
| | Estimated Amortization Expense | ||
|---|---|---|---|
| 2004 | $ | 6,935 | |
| 2005 | 6,314 | ||
| 2006 | 5,970 | ||
| 2007 | 5,891 | ||
| 2008 | 5,755 | ||
(1) Other adjustments include contingent payments related to acquisitions made in previous years.
h. Long-Lived Assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review long-lived assets and all amortizable intangible assets (excluding goodwill) for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to their carrying amount. The operations are generally distinguished by the business segment and geographic region in which they operate. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets.
Consolidated gains on disposal/writedown of property, plant and equipment, net of $681 for the year ended December 31, 2004, consisted primarily of a gain on the sale of a property in Florida during the second quarter of 2004 of approximately $1,200 offset by disposals and asset writedowns. Consolidated gains on disposal/writedown of property, plant and equipment, net of $3,485 for the year ended December 31, 2005, consisted primarily of a gain on the sale of a facility in the U.K. during the fourth quarter of 2005 of approximately $4,500 offset by software asset writedowns. Consolidated gains on disposal/writedown of property, plant and equipment, net of $9,560 in the year ended December 31, 2006
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
consisted primarily of a gain on the sale of a facility in the U.K. in the fourth quarter of 2006 of approximately $10,499 offset by disposals and asset writedowns.
i. Customer Relationships and Acquisition Costs and Other Intangible Assets
In connection with adopting SFAS No. 142, we reassessed the useful lives and classification of our intangible assets. Costs related to the acquisition of large volume accounts, net of revenues received for the initial transfer of the records, are capitalizedcapitalized. Costs incurred to transport the boxes to one of our facilities, which includes labor and transportation charges, are amortized forover periods ranging from five to 30 years (weighted average of 2927 years at December 31, 2003). These costs had previously been2006) and are included in depreciation and amortization in the accompanying consolidated statements of operations. Payments to a customer’s current records management vendor or direct payments to a customer are amortized over periods notapproximately 5 years to exceed 12 years.the storage and service revenue line items in the accompanying consolidated statements of operations. If the customer terminates its relationship with us, the unamortized cost is charged to expense.expense or revenue. However, in the event of such termination, we generally collect, and record as income, permanent removal fees that generally equal or exceed the amount of the unamortized costs. Customer relationship intangible assets acquired through business combinations, which represents the majority of the balance, are amortized over periods ranging from fivesix to 30 years (weighted average of 2119 years at December 31, 2003)2006). Amounts allocated in purchase accounting to customer relationship intangible assets are calculated based upon estimates of their fair value. As of December 31, 20022005 and 2003,2006, the gross carrying amount of customer relationships and acquisition costs was $58,781$264,728 and $131,294,$339,591, respectively, and accumulated amortization of those costs was $10,568$35,722 and $14,828,$56,835, respectively. For the years ended December 31, 2001, 20022004, 2005 and 2003,2006, amortization expense was $3,053, $1,770,$10,044, $12,910 and $4,395, respectively.$16,292, respectively, included in depreciation and amortization in the accompanying consolidated statements of operations. For the year ended December 31, 2006, the charge to revenues associated with large volume accounts was $3,681, which represents the level anticipated over the next 5 years.
Other intangible assets, including noncompetition agreements, acquired core technology and trademarks, are capitalized and amortized over a weighted average period of fiveeight years. As of December 31, 20022005 and 2003,2006, the gross carrying amount of other intangible assets was $21,088$30,094 and $22,212,$32,985, respectively, and accumulated amortization of those costs was $16,857$5,082 and $20,280, respectively.$9,521, respectively, included in other in other assets in the accompanying consolidated balance sheets. For the years ended December 31, 2001, 20022004, 2005 and 2003,2006, amortization expense was $3,872, $3,046$1,638, $3,314 and $2,559, respectively.$4,336, respectively, included in depreciation and amortization in the accompanying consolidated statements of operations.
71Estimated amortization expense for existing intangible assets (excluding deferred financing costs which are amortized through interest expense) for the next five succeeding fiscal years is as follows:
|
| Estimated Amortization Expense |
| |||
2007 |
|
| $ | 18,779 |
|
|
2008 |
|
| 18,624 |
|
| |
2009 |
|
| 18,600 |
|
| |
2010 |
|
| 18,036 |
|
| |
2011 |
|
| 16,105 |
|
| |
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
j. Deferred Financing Costs
Deferred financing costs are amortized over the life of the related debt using the effective interest rate method. If debt is retired early, the related unamortized deferred financing costs are written off in the period the debt is retired to other (income) expense, net. As of December 31, 20022005 and 2003,2006, gross carrying amount of deferred financing costs was $25,883$46,697 and $29,620,$50,775, respectively, and accumulated amortization of those costs was $6,525$15,091 and $5,686,$20,980, respectively, and was recorded in interest expense, net.
k. Investment in Preferred Stock
In May 2000, we made a $6,500 investment in the convertible preferred stock of LiveVault Corporation, a technology development company. This investment is accounted for at the lower of cost or market. In September 2001, we recorded an impairment charge in other (income) expense, net of $6,900, including the original investment and certain loans related to such investment. In December 2001, in connection with a recapitalization of LiveVault, we made an additional $2,000 investment in LiveVault's convertible preferred stock. In December 2002, we recorded an impairment charge related to this investment in other (income) expense, net of $600. In March 2003, we made an additional $1,357 investment in LiveVault's convertible preferred stock. As of December 31, 2002 and 2003, $1,400 and $2,757, respectively, of carrying value related to this investment is included in other assets, net in the accompanying consolidated balance sheets.sheet.
l.k. Accrued Expenses
Accrued expenses consist of the following:
| | December 31 |
| December 31, |
| |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 |
| 2005 |
| 2006 |
| ||||||
| Interest | $ | 26,647 | $ | 48,960 |
| $ | 49,800 |
| $ | 56,971 |
| ||
| Payroll and vacation | 36,634 | 47,874 |
| 42,456 |
| 48,946 |
| ||||||
| Derivative Liability | 13,778 | 30,633 | |||||||||||
| Restructuring costs (see Note 7) | 9,906 | 16,322 | |||||||||||
Derivative liability |
| 2,359 |
| 1,336 |
| ||||||||
Restructuring costs (see Note 6) |
| 5,541 |
| 2,821 |
| ||||||||
| Incentive compensation | 23,752 | 15,306 |
| 32,364 |
| 34,773 |
| ||||||
| Other | 57,308 | 75,331 |
| 134,200 |
| 122,086 |
| ||||||
| $ | 266,720 |
| $ | 266,933 |
| |||||||
| $ | 168,025 | $ | 234,426 | ||||||||||
m.
l. Revenues
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 (eitheror data (generally on a per unit or per cubic foot of records basis). In certain circumstances, based upon customer requirements, storage revenues include periodic charges associated with normal, recurring service activities. Service and storage material sales revenues are comprised of charges for related service activities and courier
72
operations and the sale of software licenses and storage materials. CustomersIncluded in service and storage materials sales are generally billed on a monthly basis on contractually agreed-upon terms.related core service revenues arising 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 withdrawls 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, 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. Storage material salesprovided and customers are recognized when shipped to the customer.generally billed on a monthly basis on
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
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 amortizedrecognized ratably over the applicable period.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 (less than 1% of consolidated revenues in 2006). 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.
n. Deferredm. Rent Normalization
We have entered into various leases for buildings used in the storage of records.buildings. Certain leases have fixed escalation clauses or other features which require normalization of the rental expense over the life of the lease resulting in deferred rent being reflected in the accompanying consolidated balance sheets. In addition, we have assumed various above and below market leases in connection with certain of our acquisitions. The difference between the present value of these lease obligations and the market rate at the date of the acquisition was recorded as a net deferred rent liability or other long-term asset and is being amortized over the remaining lives of the respective leases.
o. Stock-basedn. Stock-Based Compensation
AsIn December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R is a revision of January 1, 2003, weSFAS 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“Accounting for Stock-Based Compensation,"” as amended by SFAS No. 148, "Accounting“Accounting for Stock-Based Compensation—Transition and Disclosure." As a result we began using the fair value method of accountingDisclosure” 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 applyhave applied the fair value recognition provisions to all stock based awards granted, modified or settled on or after January 1, 20032003.
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, utilizing the straight-line method, for the cost of stock options, restricted stock and will continueshares issued under the employee stock purchase plan (together, “Employee Stock-Based Awards”) based on the requirements of SFAS No. 123R beginning January 1, 2006.
Stock-based compensation expense, included in the accompanying consolidated statements of operations, for the years ended December 31, 2004, 2005 and 2006 was $3,857 ($3,567 after tax or $0.02 per basic and diluted share), $6,189 ($4,757 after tax or $0.02 per basic and diluted share) and $12,387 ($9,188 after tax or $0.05 per basic and diluted share), respectively, for Employee Stock-Based Awards. For the year ended December 31, 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
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
decrease by $894, and net income to decrease by $539, and had no impact on basic and diluted earnings per share.
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 as required under APB No. 25. This requirement reduces reported operating cash flows and increases reported financing cash flows. As a result, net financing cash flows included $4,387 for the year ended December 31, 2006, from the benefits of tax deductions in excess of recognized compensation cost. Under prior accounting rules, this amount would have been included in net operating cash flows. We used the short form method to calculate the Additional Paid-in Capital (“APIC”) pool, the tax benefit of any resulting excess tax deduction should increase the APIC pool; any resulting tax deficiency should be deducted from the APIC pool.
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 based on SFAS No. 123R. The reported and pro forma net income and earnings per share for the year ended December 31, 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 year ended December 31, 2006 are included in the table below only to provide the required pro forma informationdetail for all awards previouslya comparative presentation to the same periods of 2004 and 2005.
|
| Year Ended December 31, |
| |||||||
|
| 2004 |
| 2005 |
| 2006 |
| |||
Net income, as reported |
| $ | 94,191 |
| $ | 111,099 |
| $ | 128,863 |
|
Add: Stock-based employee compensation expense included in reported net income, net of tax benefit |
| 3,567 |
| 4,757 |
| 9,188 |
| |||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax benefit |
| (5,432 | ) | (5,965 | ) | (9,188 | ) | |||
Net income, pro forma |
| $ | 92,326 |
| $ | 109,891 |
| $ | 128,863 |
|
Earnings per share: |
|
|
|
|
|
|
| |||
Basic—as reported |
| $ | 0.49 |
| $ | 0.57 |
| $ | 0.65 |
|
Basic—pro forma |
| 0.48 |
| 0.56 |
| 0.65 |
| |||
Diluted—as reported |
| 0.48 |
| 0.56 |
| 0.64 |
| |||
Diluted—pro forma |
| 0.47 |
| 0.55 |
| 0.64 |
| |||
Stock Options
Under our various stock option plans, options were granted modified or settled before January 1, 2003.
Had we electedwith exercise prices equal to recognize compensation cost based on the fair valuemarket price of the stock at the date of grant. The majority of our options granted at grant date as prescribed bybecome 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. 123123R.
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and No. 148, net (loss) income and net (loss) income per share woulddata)
2. Summary of Significant Accounting Policies (Continued)
A total of 29,112,685 shares of common stock have been changed to the pro forma amounts indicated in the table below:reserved for grants of options and other rights under our various stock incentive plans. The number of shares available for grant at December 31, 2006 was 7,301,608.
| | Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | |||||||
| Net (loss) income, as reported | $ | (44,057 | ) | $ | 58,292 | $ | 84,637 | |||
| Add: Stock-based employee compensation expense included in reported net income, net of tax benefit | — | — | 984 | |||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax benefit | 2,912 | 2,687 | 3,304 | |||||||
| Net (loss) income, pro forma | $ | (46,969 | ) | $ | 55,605 | $ | 82,317 | |||
| (Losses) Earnings per share: | ||||||||||
| Basic—as reported | (0.53 | ) | 0.69 | 0.99 | ||||||
| Basic—pro forma | (0.56 | ) | 0.66 | 0.97 | ||||||
| Diluted—as reported | (0.53 | ) | 0.68 | 0.98 | ||||||
| Diluted—pro forma | (0.56 | ) | 0.65 | 0.95 | ||||||
73
The weighted average fair value of options granted in 2001, 20022004, 2005 and 20032006 was $8.74, $9.70$8.58, $11.85 and $10.97$14.84 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 year ended December 31:
| Assumption | 2001 | 2002 | 2003 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Weighted Average Assumption |
| 2004 |
| 2005 |
| 2006 |
| |||||||
| Expected volatility | 27.0 | % | 27.5 | % | 27.0 | % |
| 24.8 | % | 26.5 | %(1) | 24.2 | %(1) | |
| Risk-free interest rate | 4.65 | 4.08 | 2.91 |
| 3.41 | % | 4.12 | % | 4.66 | % | ||||
| Expected dividend yield | None | None | None |
| None |
| None |
| None |
| ||||
| Expected life of the option | 5.0 years | 5.0 years | 5.0 years |
| 5.0 years |
| 6.6 years |
| 6.6 years |
| ||||
p. Merger-related Expenses(1) Calculated utilizing daily historical volatility over a period that equates to the expected life of the option.
Merger-related expenses as presentedExpected 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 interest rates whose term is consistent with the expected life of the stock options. Expected dividend yield was not considered in the accompanyingoption 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 year ended December 31, 2006 is as follows:
|
| Options |
| Weighted |
| Weighted |
| Aggregate |
| ||||||||
Outstanding at December 31, 2005 |
| 8,242,911 |
|
| $ | 14.94 |
|
|
|
|
|
|
|
|
|
| |
Granted |
| 1,315,916 |
|
| 26.88 |
|
|
|
|
|
|
|
|
|
| ||
Exercised |
| (1,096,729 | ) |
| 10.60 |
|
|
|
|
|
|
|
|
|
| ||
Forfeited |
| (394,771 | ) |
| 20.28 |
|
|
|
|
|
|
|
|
|
| ||
Outstanding at December 31, 2006 |
| 8,067,327 |
|
| $ | 17.21 |
|
|
| 6.4 |
|
|
| $ | 83,498 |
|
|
Options exercisable at December 31, 2006 |
| 3,979,349 |
|
| $ | 12.06 |
|
|
| 4.5 |
|
|
| $ | 61,680 |
|
|
The aggregate intrinsic value of stock options exercised for the years ended December 31, 2004, 2005 and 2006 was approximately $23,090, $31,539 and $18,271, respectively. The aggregate fair value of stock options vested for the years ended December 31, 2004, 2005 and 2006 was approximately $5,386, $4,717 and $7,487, respectively.
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
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 years ended December 31, 2005 and 2006 is a portion of the cost related to restricted stock granted in July 2005. We did not grant restricted stock in 2004 and 2006.
A summary of restricted stock activity for the year ended December 31, 2006 is as follows:
|
| Restricted |
| Weighted- |
| |||||
Non-vested at December 31, 2005 |
|
| 96,962 |
|
|
| $ | 20.63 |
|
|
Granted |
|
| — |
|
|
| — |
|
| |
Vested |
|
| (39,159 | ) |
|
| 20.63 |
|
| |
Forfeited |
|
| — |
|
|
| — |
|
| |
Non-vested at December 31, 2006 |
|
| 57,803 |
|
|
| $ | 20.63 |
|
|
The total fair value of shares vested for the years ended December 31, 2005 and 2006 was $0 and $1,003, respectively.
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. The ESPP was amended and approved by our stockholders on May 26, 2005 to increase the number of shares from 1,687,500 to 3,487,500. For the years ended December 31, 2004, 2005 and 2006, there were 522,480, 579,173 and 535,826 shares, respectively, purchased under the ESPP. The number of shares available for purchase at December 31, 2006 was 1,650,413. 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. As a result, we no longer need to recognize
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
compensation cost for our ESPP shares purchased beginning with the December 1, 2006 offering period and will, therefore, no longer have disclosure relative to our weighted average assumptions associated with determining the fair value stock option expense in our consolidated financial statements relate primarilyon a prospective basis relative to non-capitalizable expenses directlynew offering periods.
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.
|
| December 2003 |
| May 2004 |
| December 2004 |
| May 2005 |
| December 2005 |
| May 2006 |
| ||||||||||||||
Weighted Average Assumption |
|
|
| Offering |
| Offering |
| Offering |
| Offering |
| Offering |
| Offering |
| ||||||||||||
Expected volatility |
|
| 26.5 | % |
|
| 24.5 | % |
|
| 24.0 | % |
|
| 27.5 | % |
|
| 26.6 | % |
|
| 20.1 | % |
| ||
Risk-free interest rate |
|
| 2.85 | % |
|
| 3.36 | % |
|
| 3.41 | % |
|
| 3.96 | % |
|
| 4.04 | % |
|
| 4.75 | % |
| ||
Expected dividend yield |
|
| None |
|
|
| None |
|
|
| None |
|
|
| None |
|
|
| None |
|
|
| None |
|
| ||
Expected life of the option |
|
| 6 months |
|
|
| 6 months |
|
|
| 6 months |
|
|
| 6 months |
|
|
| 6 months |
|
|
| 6 months |
|
| ||
The weighted average fair value for the ESPP options was $7.68, $9.00, $6.07, $6.02, $8.70 and $7.20 for the December 2003, May 2004, December 2004, May 2005, December 2005 and May 2006 offerings, respectively.
As of December 31, 2006, unrecognized compensation cost related to the unvested portion of our merger with Pierce Leahy Corp.Employee Stock-Based Awards was $28,983 and consist primarilyis expected to be recognized over a weighted-average period of severance, relocation3.7 years.
We generally issue shares for the exercises of stock options, issuance of restricted stock and pay-to-stay payments, costsissuance of exiting certain facilities, system conversion costs and other transaction-related costs.shares under our ESPP from unissued reserved shares.
q.o. Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting“Accounting for Income Taxes,"Taxes” (“SFAS No. 109”), which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of assets and liabilities and for loss and credit carryforwards. Valuation allowances are provided when recovery of deferred tax assets is not considered likely.more likely than not.
r.p. Income (Loss) Per Share—Basic and Diluted
In accordance with SFAS No. 128, "Earnings“Earnings per Share,"” basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. The calculation of diluted net income (loss) per share is consistent with that of basic net income (loss) per share but gives
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
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,
2. Summary of Significant Accounting Policies (Continued)
substantially attributable to stock options, included in the calculation of diluted net income per share totaled 1,420,6553,139,247, 2,116,623 and 1,451,4672,347,203 shares for the years ended December 31, 20022004, 2005 and 2003,2006, respectively. Potential common shares of 1,912,069, 316,864136,568, 961,407 and 380,304725,398 for the years ended December 31, 2001, 20022004, 2005 and 2003,2006, respectively, have been excluded from the calculation of diluted net income per share, as their effects are antidilutive.
s. Reclassifications
Certain reclassifications have been made to the 2001 and 2002 consolidated financial statements to conform to the 2003 presentation.
74
t.q. New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, amendment of FASB Statement No. 13, and Technical Corrections," which, among other things, limits the classification of gains and losses from extinguishment of debt as extraordinary to only those transactions that are unusual and infrequent in nature as defined by APB Opinion No. 30 "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." We adopted SFAS No. 145 on January 1, 2003. Gains and losses on certain future debt extinguishments, if any, will be recorded in pre-tax income. Losses on early extinguishment of debt of $19,980, $5,430 and $28,175 for the years ended December 31, 2001, 2002 and 2003, respectively, are included in other (income) expense, net in our accompanying consolidated statements of operations to conform to the requirements under SFAS No. 145.
In January and December 2003,July 2006, the FASB issued FASB Interpretation No. 46 ("48, “Accounting for Uncertainty in Income Taxes” (“FIN 46") and No. 46, revised ("FIN 46R"48”), "Consolidationan interpretation of Variable Interest Entities." These statements, which address perceived weaknesses inSFAS No. 109. FIN 48 clarifies the accounting for entities commonly known as special-purposeuncertainty 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 off-balance-sheet, require consolidationexpected to be taken in a tax return.
The evaluation of certain interestsa 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 arrangements by virtuelitigation processes, based on the technical merits of holdingthe position. The second step is a controllingmeasurement 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 interest in such entities. Certainstatements. 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 46R related48 are effective January 1, 2007. The provisions of FIN 48 are to interests in special purpose entities were applicable forbe applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the period ended December 31, 2003. We must applymore likely than not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 46R to our interests in all entities subject48. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the interpretation asopening balance of retained earnings for that fiscal year. We are in the first interim or annual period ending after March 15, 2004. Adoptionprocess of this new methodevaluating the effect of accounting for variable interest entities did not and is not expected to have a material impactFIN 48 on our consolidated results of operations and financial position.
u.In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles in the United States and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We do not expect the adoption of SFAS No. 157 to have a material impact on our financial position or results of operations.
72
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies (Continued)
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. We have completed our analysis related to the implementation of SAB 108 and have concluded it has no effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect of SFAS No. 159 on our consolidated results of operations and financial position.
r. Rollforward of Allowance for Doubtful Accounts and Credit Memo Reserves
| Year Ended December 31, | Balance at Beginning of the Year | Charged to Expense | Other Additions(1) | Deductions | Balance at End of the Year | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | $ | 17,086 | $ | 11,597 | $ | 783 | $ | (9,192 | ) | $ | 20,274 | ||||
| 2003 | $ | 20,274 | $ | (2,292 | ) | $ | 4,873 | $ | (4,545 | ) | $ | 18,310 | |||
Year Ended December 31, |
|
|
| Balance at |
| Charged to |
| Charged to |
| Other |
| Deductions(2) |
| Balance at |
| ||||||||||||||||||
2004 |
|
| $ | 20,922 |
|
|
| $ | 17,858 |
|
|
| $ | (4,569 | ) |
|
| $ | 4,397 |
|
|
| $ | (24,722 | ) |
|
| $ | 13,886 |
|
| ||
2005 |
|
| 13,886 |
|
|
| 21,124 |
|
|
| 4,402 |
|
|
| 67 |
|
|
| (24,957 | ) |
|
| 14,522 |
|
| ||||||||
2006 |
|
| 14,522 |
|
|
| 23,147 |
|
|
| 2,836 |
|
|
| 596 |
|
|
| (25,944 | ) |
|
| 15,157 |
|
| ||||||||
(1)Includes allowanceduring the year as described in Note 7,and the impact associated with currency translation adjustments.
(2) Primarily consists of the write-off of accounts receivable and adjustments and the reclassificationto allowances of certain allowances and credit memo reserves that were historically presented in other balance sheet accounts.
75
v.s. Accumulated Other Comprehensive Items, Net
Accumulated other comprehensive items, net consists of the following:
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | |||||
| Foreign currency translation adjustments | $ | (8,576 | ) | $ | 7,890 | ||
| Transition adjustment charge | (214 | ) | (214 | ) | |||
| Unrealized loss on hedging contracts | (22,248 | ) | (16,033 | ) | |||
| Unrealized gain on securities | — | 311 | |||||
| $ | (31,038 | ) | $ | (8,046 | ) | ||
|
| December 31, |
| ||||
|
| 2005 |
| 2006 |
| ||
Foreign currency translation adjustments |
| $ | 18,259 |
| $ | 32,918 |
|
Market value adjustments for hedging contracts, net of tax |
| (213 | ) | (170 | ) | ||
Market value adjustments for securities, net of tax |
| 638 |
| 1,046 |
| ||
|
| $ | 18,684 |
| $ | 33,794 |
|
3. Variable Interest EntitiesIRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
Three variable interest entities were established2. Summary of Significant Accounting Policies (Continued)
t. Concentrations of Credit Risk
Financial instruments that potentially subject us to acquire propertiesconcentrations of credit risk consist principally of temporary cash investments and lease those propertiesaccounts receivable. We have no significant concentrations of credit risk as of December 31, 2006.
u. Available-for-sale Securities
We have one trust that holds marketable securities. Marketable securities are classified as available-for-sale, as defined by SFAS No. 115, “Accounting for Certain Investments and Debt and Equity Securities.” As of December 31, 2005 and 2006, the fair value of the money market and mutual funds included in this trust amounted to us. These leases were designed to qualify as operating leases for accounting purposes, where$5,917 and $7,414, respectively, included in prepaid expenses and other in the monthly leaseaccompanying consolidated balance sheets. Included in other (income) expense, was recorded as rent expensenet in ourthe accompanying consolidated statements of operations were net realized gains of $208, $127 and where the related underlying assets and liabilities were not consolidated in our consolidated balance sheets. We changed the characterization and the related accounting for properties in one variable interest entity ("VIE III") during the third quarter of 2002 and prospectively for new property acquisitions in the fourth quarter of 2002. In addition, anticipating the requirement to consolidate, and in line with our objective of transparent reporting, we voluntarily guaranteed all of the at-risk equity in VIE III and our two other variable interest entities (together, the "Other Variable Interest Entities" and, collectively with VIE III, our "Variable Interest Entities") as of December 31, 2002. These guarantees resulted in our consolidating all of our Variable Interest Entities' assets and liabilities.
Our Variable Interest Entities were financed with real estate term loans. These real estate term loans have always been and continue to be treated as indebtedness for purposes of our financial covenants under our Fifth Amended and Restated Credit Agreement dated March 15, 2002 (the "Amended and Restated Credit Agreement"). As of the date they were consolidated into our financial statements, they were also considered indebtedness under our indentures for certain of our senior subordinated notes. As of December 31, 2003, these real estate term loans amounted to $202,647. No further financing is currently available to our Variable Interest Entities to fund further property acquisitions. See Note 5.
As of December 31, 2002, we voluntarily guaranteed all of the at-risk equity in VIE III. This resulted in our consolidating all of its remaining assets and liabilities. VIE III's remaining assets and liabilities relate to an interest rate swap agreement, which it entered into upon its inception. This swap agreement hedges the majority of interest rate risk associated with VIE III's real estate term loans. Specifically, VIE III has swapped $97,000 of floating rate debt to fixed rate debt. Since the time it entered into the swap agreement, interest rates have fallen. As a result, the estimated fair value of the derivative liability held by VIE III, and now consolidated on our balance sheet, related to the swap agreement was $13,658 and $10,960 at December 31, 2002 and 2003, respectively. This swap has been
76
since inception and continues to be, as of December 31, 2003, an effective hedge in accordance with SFAS No. 133. During the years ended December 31, 2002 and 2003, we recorded depreciation expense of $1,675 and $1,779 associated with the properties, respectively, and interest expense of $6,193 and $8,169, respectively, associated with the real estate term loans. See Notes 4 and 5.
In addition, as of December 31, 2002, we voluntarily guaranteed all of the at-risk equity in the Other Variable Interest Entities. This resulted in our consolidating all of their assets and liabilities. As of December 31, 2002, the total impact of consolidating the Other Variable Interest Entities was an increase of $103,932 both in property, plant and equipment and long-term debt. The underlying leases associated with the Other Variable Interest Entities were treated as operating leases from inception (as early as 1998) through consolidation on December 31, 2002. As a result, we recorded $6,733 and $5,915 in rent expense in our consolidated statements of operations related to these leases$336 for the years ended December 31, 20012004, 2005 and 2002,2006, respectively. ForUnrealized gains and losses are reported as a component of accumulated other comprehensive items, net in the year ended December 31, 2003, we recorded depreciation expenseaccompanying consolidated statement of $2,001 associated with the properties, interest expense of $5,464 associated with the real estate term loans and no longer have rent expense related to leases associated with the Other Variable Interest Entities in our consolidated financial results.stockholder’s equity.
4.3. Derivative Instruments and Hedging Activities
We havepreviously entered into two interest rate swap agreements, which arewere derivatives as defined by SFAS No. 133 and designated as cash flow hedges. These swap agreements hedge interest rate risk on certain amounts of our term loan. For all qualifying and highly effective cash flow hedges, the changesBoth of these swap agreements expired in the fair valuefirst quarter of the derivatives are recorded in other comprehensive income (loss) which is a component of accumulated other comprehensive items included in shareholders' equity in the accompanying consolidated balance sheets. Specifically, we chose to swap the interest rates on $195,500 of floating rate debt to fixed rate. Since entering into these two swap agreements, interest rates have fallen.2006. As a result, the estimated cost to terminate these swaps (fair value of derivative liability) would be $18,713 and $13,370 at December 31, 2002 and 2003, respectively. We have recorded, in the accompanying consolidated balance sheets, the fair value of the derivative liability, a deferred tax asset and a corresponding charge to accumulated other comprehensive items of $13,370 ($8,709 recorded in accrued expenses and $4,661 recorded in other long-term liabilities), $4,878 and $8,492, respectively, as of December 31, 2003. Additionally, as a result of the foregoing, for the years ended December 31, 2001, 20022004, 2005 and 2003,2006, we recorded additional interest expense of $2,677, $7,534$8,460, $3,952 and $8,709$127 resulting from interest rate swap settlements. These interest rate swap agreements were determined to be highly effective, and therefore no ineffectiveness was recorded in earnings.
payments. We have entered into a third interest rate swap agreement, which was designated as a cash flow hedge through December 31, 2002.hedge. This swap agreement hedged interest rate risk on certain amounts of our variable operating lease commitments. Specifically, we chose toThis swap the variable componentexpired in March 2005. The total impact of $47,500 of certain operating lease commitments to fixed operating lease commitments. Since entering into the swap agreement, interest rates have fallen. As a result, the estimated cost to terminate these swaps (fair value of derivative liability) would be $2,949 and $1,250 at December 31, 2002 and 2003, respectively. We have recorded, in the accompanying consolidated balance sheets, the estimated cost to terminate this swap, a deferred tax asset and a corresponding charge to accumulated other
77
comprehensive items of $1,250 ($1,135 recorded in accrued expenses and $115 recorded in other long-term liabilities), $456 and $794, respectively, as of December 31, 2003. From inception through December 31, 2002, this interest rate swap agreement was determined to be highly effective, and therefore no ineffectiveness was recorded in earnings. As a result of the consolidation of one of the Other Variable Interest Entities ("VIE I") on December 31, 2002, we consolidated the real estate term loans of VIE I and the operating lease commitments that were hedged by this swap are now considered to be inter-company transactions. As a result, this interest rate swap agreement was deemed to be no longer effective on a prospective basis. The unrealized markmarking to market losses previously recorded in other comprehensive income attributable to this swap ($1,875, net of tax, as of December 31, 2002) will be amortized through other (income) expense, net in the accompanying consolidated statement of operations based on the changes in the fair market value of the swap each period that the remaining interest payments are made on VIE I's real estate term loans. We will prospectively account for mark to market changes in the derivative liability of this swap through other (income) expense, net in the accompanying consolidated statement of operations. This accounting will have a net zero impact within our consolidated statement of operations as it relates to the amortization of unrealized mark to market losses and the fair valuing of the derivative liability. Additionally, as a result of the foregoing, for the years ended December 31, 2001 and 2002, we recorded additional rent expense of $743 and $1,807, respectively, resulting from the settlementscash payments associated with this interest rate swap agreement and for the year ended December 31, 2003 we recordedresulted in our recording additional interest expense of $2,083 resulting from settlements associated with this$1,246 and interest rate swap agreement.
Also, asincome of $6 for the years ended December 31, 2002, we consolidated VIE III which had entered into an interest rate swap agreement upon its inception which was designated as a cash flow hedge. This swap agreement hedges the majority of interest rate risk associated2004 and 2005, respectively.
In connection with VIE III'scertain real estate term loans. Specifically, VIE III hasloans, we swapped $97,000 of floating rate debt to fixed rate debt. Since the time itwe entered into the swap agreement, interest rates have fallen. As a result, the estimated cost to terminate these swaps (fair value of derivative liability) would be $13,658$2,458 and $10,960$760 at December 31, 20022005 and 2003, respectively. We have recorded,2006, respectively, included in the accompanying consolidated balance sheets,sheets. 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 a deferred tax asset and a corresponding chargethrough earnings. The total impact of marking to accumulated other comprehensive items of $10,960 ($4,806 recorded in accrued expenses and $6,154 recorded in other long-term liabilities), $3,998 and $6,962, respectively, as of December 31, 2003. Additionally, as a resultmarket the fair market value of the foregoing, forderivative liability and cash payments associated with the year ended December 31, 2002 and 2003, we recorded additional interest expense of $3,423 and $4,806, respectively, resulting from interest rate swap settlements. This interest rate swap agreement has been since inceptionresulted in our recording interest expense of $11,565, interest income of $1,698 and continues to be a highly effective hedge,interest income of $646 for the years ended December 31, 2004, 2005 and therefore no ineffectiveness was recorded in earnings.2006, respectively.
In July 2003, we provided the initial financing totaling 190,459 British pounds sterling to Iron Mountain Europe Limited ("IME"), our European joint venture,IME for all of the consideration associated with the acquisition of the European information management services
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
3. Derivative Instruments and Hedging Activities (Continued)
business of Hays plc ("(“Hays IMS"IMS”) using cash on hand and borrowings under our revolving credit facility. In March 2004, IME repaid 135,000 British pounds sterling with proceeds from their new credit agreement. We recorded a foreign currency gain of $27,777$11,866 in other (income) expense, net for this intercompany balance forin the year ended December 31, 2003.first quarter of 2004. In order to minimize the foreign currency risk associated with providing IME with the consideration necessary for the acquisition of the European operations of HayHays IMS, we borrowed
78
80,000 British pounds sterling under our revolving credit facility to create a natural hedge. WeIn the first quarter of 2004, these borrowings were repaid and we recorded a foreign currency loss of $11,496$2,995 on the translation of this revolving credit balance to U.S. dollars in other (income) expense, net for the year ended December 31, 2003. net.
In addition, on July 16, 2003, we entered into two cross currency swaps with a combined notional value of 100,000 British pounds sterling. TheseWe settled these swaps each havein March 2004 by paying our counter parties a termtotal of one year$27,714 representing the fair market value of the derivative and at maturitythe associated swap costs, of which $18,978 was accrued for as of December 31, 2003. In the first quarter of 2004, we haverecorded a right to receiveforeign currency loss for this swap of $8,736 in other (income) expense, net in the accompanying consolidated statement of operations. Upon cash payment, we received $162,800 in exchange for 100,000 British pounds sterling. We havedid not designateddesignate these swaps as hedges and, therefore, all mark to market fluctuations of the swaps arewere recorded in other (income) expense, net in our consolidated statements of operations.operations from inception to cash payment of the swaps.
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 hedged interest rate risk on IME’s 100,000 British pounds sterling term loan facility. Both of these swap agreements expired in the second quarter of 2006. We have recorded, in the accompanying consolidated balance sheet, the fair value of the derivative liability, a deferred tax asset and the associated swap costa corresponding charge to accumulated other comprehensive items of $18,978$207 (recorded in accrued expensesexpenses), $68 and $139, respectively, as of December 31, 20032005. For the years ended December 31, 2004, 2005 and 2006, we recorded additional interest expense of $202, $32 and $184 resulting from interest rate swap cash payments.
In June 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 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. We have recorded, in the accompanying consolidated balance sheet, the fair value of the derivative liability, a deferred tax asset and a corresponding charge to accumulated other comprehensive items of $364 ($273 recorded in accrued expenses and $91 recorded in other long-term liabilities), $109 and $255, respectively, as of December 31, 2006. For the year ended December 31, 2006, we recorded additional interest expense of $124 resulting from interest rate swap cash payments.
In September 2006, we entered into a forward contract program to exchange U.S. dollars for 55,000 in Australian dollars (“AUD”) and 20,200 in New Zealand dollars (“NZD”) to hedge our intercompany
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
3. Derivative Instruments and Hedging Activities (Continued)
exposure in these countries. These forward contracts settle on a monthly basis, at which time we enter into new forward contracts for the same underlying AUD and NZD amounts, to continue to hedge movements in AUD and NZD against the U.S. dollar. At the time of settlement, we either pay or receive the net settlement amount from the forward contract and recognize this amount in other expense (income), net in the accompanying statement of operations as a realized foreign exchange gain or loss. We have not designated these forward contracts as hedges. We recorded a realized loss of $3,179 for the year ended December 31, 2003,2006. At the end of each month, we mark the outstanding forward contracts to market and record an unrealized foreign exchange gain or loss for the mark-to-market valuation. For the year ended December 31, 2006, we recorded $18,978an unrealized foreign exchange loss of $303 in other expense (income) expense,, net in the accompanying consolidated statement of operations.
Long-term debt consists of the following:
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | |||||
| Revolving Credit Facility due 2005 | $ | 75,360 | $ | 142,280 | |||
| Term Loan due 2008 | 249,750 | 248,750 | |||||
| 91/8% Senior Subordinated Notes due 2007 (the "91/8% notes") | 22,409 | — | |||||
| 81/8% Senior Notes due 2008 (the "Subsidiary notes") | 124,666 | 18,768 | |||||
| 83/4% Senior Subordinated Notes due 2009 (the "83/4% notes") | 249,727 | — | |||||
| 81/4% Senior Subordinated Notes due 2011 (the "81/4% notes") | 149,625 | 149,670 | |||||
| 85/8% Senior Subordinated Notes due 2013 (the "85/8% notes") | 481,097 | 481,075 | |||||
| 73/4% Senior Subordinated Notes due 2015 (the "73/4% notes") | 100,000 | 441,331 | |||||
| 65/8% Senior Subordinated Notes due 2016 (the "65/8% notes") | — | 314,071 | |||||
| Real Estate Term Loans | 202,647 | 202,647 | |||||
| Real Estate Mortgages | 16,262 | 17,584 | |||||
| Seller Notes | 12,864 | 12,607 | |||||
| Other | 47,690 | 61,145 | |||||
| Long-term Debt | 1,732,097 | 2,089,928 | |||||
| Less Current Portion | (69,732 | ) | (115,781 | ) | |||
| Long-term Debt, Net of Current Portion | $ | 1,662,365 | $ | 1,974,147 | |||
|
| December 31, |
| ||||
|
| 2005 |
| 2006 |
| ||
IMI Revolving Credit Facility |
| $ | 216,396 |
| $ | 170,472 |
|
IMI Term Loan Facility |
| 345,500 |
| 312,000 |
| ||
IME Revolving Credit Facility |
| 84,262 |
| 77,819 |
| ||
IME Term Loan Facility |
| 177,450 |
| 189,005 |
| ||
81¤4% Senior Subordinated Notes due 2011 (the “81¤4% notes”) |
| 149,760 |
| 71,789 |
| ||
85¤8% Senior Subordinated Notes due 2013 (the “85¤8% notes”) |
| 481,032 |
| 448,001 |
| ||
71¤4% GBP Senior Subordinated Notes due 2014 (the “71¤4% notes”) |
| 258,120 |
| 293,865 |
| ||
73¤4% Senior Subordinated Notes due 2015 (the “73¤4% notes”) |
| 439,506 |
| 438,594 |
| ||
65¤8% Senior Subordinated Notes due 2016 (the “65¤8% notes”) |
| 315,059 |
| 315,553 |
| ||
83¤4% Senior Subordinated Notes due 2018 (the “83¤4% notes”) |
| — |
| 200,000 |
| ||
8% Senior Subordinated Notes due 2018 (the “8% notes”) |
| — |
| 49,663 |
| ||
63¤4% Euro Senior Subordinated Notes due 2018 (the “63¤4% notes”) |
| — |
| 39,429 |
| ||
Real Estate Mortgages |
| 4,707 |
| 4,081 |
| ||
Seller Notes |
| 9,398 |
| 8,757 |
| ||
Other(1) |
| 48,241 |
| 49,788 |
| ||
Total Long-term Debt |
| 2,529,431 |
| 2,668,816 |
| ||
Less Current Portion |
| (25,905 | ) | (63,105 | ) | ||
Long-term Debt, Net of Current Portion |
| $ | 2,503,526 |
| $ | 2,605,711 |
|
(1) Includes capital lease obligations of $31,936 and $41,384 as of December 31, 2005 and 2006, respectively.
a. Revolving Credit Facility and Term Loans
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 Amended and RestatedIME Credit Agreement replacedprovides for maximum
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
4. Debt (Continued)
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 sterling 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 December 31, 2006 included 77,000 British pounds sterling and 94,725 Euro of borrowings (totaling $266,824) under the IME Credit Agreement; we also had various outstanding letters of credit totaling 1,686 British pounds sterling ($3,202). The remaining availability, based on IME’s current leverage ratio which is calculated based on current earnings before interest, taxes, depreciation and amortization (“EBITDA”) and current external debt, under the IME revolving credit facility on October 31, 2006, was approximately 59,000 British pounds sterling ($112,100). The interest rates in effect under the IME revolving credit facility ranged from 4.4% to 6.2% as of October 31, 2006. For the years ended December 31, 2004, 2005 and 2006, we recorded commitment fees of $396, $806 and $477, respectively, based on 0.9% (for 2004 and 2005) and 0.6% (for 2006) 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. As a result, we recorded a chargeagreement and to other (income) expense, net in the accompanying consolidated statement of operations of $1,222 related to the early retirement of debt in conjunction with the refinancingreflect more favorable pricing of our revolving credit facility in the year ended December 31, 2002.term loans. The Amended and RestatedIMI Credit Agreement hashad an aggregate principal amount of $650,000$550,000 and includeswas comprised of a $400,000$350,000 revolving credit
79
facility (the “IMI revolving credit facility”), which includesincluded the ability to borrow in certain foreign currencies, and a $250,000$200,000 term loan facility.facility (the “IMI term loan facility”). The IMI revolving credit facility matures on January 31, 2005. QuarterlyApril 2, 2009. With respect to the IMI term loan facility, quarterly loan payments of $250$500 began in the fourththird quarter of 20022004 and will continue through maturity on February 15, 2008,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. On October 31, 2005, we entered into the second amendment to the IMI Credit Agreement, increasing availability under the revolving credit 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, 2006. The interest rate on borrowings under the Amended and RestatedIMI 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 allmost of our U.S. subsidiaries are pledged to secure the Amended and RestatedIMI Credit Agreement. As of December 31, 2003,2005, we had $142,280$216,396 of borrowings outstanding under our IMI revolving
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
4. Debt (Continued)
credit facility, all of which $9,000 was denominated in British pound sterlingU.S. dollars and the remaining balance was denominated in the amount of GBP 80,000. WeCanadian dollars (“CAD”) (CAD 168,328) and in AUD 86,250; we also had various outstanding letters of credit totaling $34,447.$23,974. As of December 31, 2006, we had $170,472 of borrowings under our IMI revolving credit facility, of which $4,000 was denominated in U.S. dollars and the remaining balance was denominated in CAD 194,000; we also had various outstanding letters of credit totaling $26,980. The remaining availability, based on Iron Mountain’s current leverage ratio which is calculated based on current EBITDA and current external debt, under the IMI revolving credit facility on December 31, 20032006, was $223,273 based on our current level of external debt and the leverage ratio under the Amended and Restated Credit Agreement.$113,775. The interest rate in effect was 5.6%under the IMI revolving credit facility and IMI term loan facility ranged from 6.0% to 9.0% and 7.0% to 7.2%, respectively, as of December 31, 2003.
In2006. For the years ended December 2000,31, 2004, 2005 and 2006, we entered into an interest rate swap contract to hedge the riskrecorded commitment fees of changes in market interest rates on our Tranche B term loan. The instrument is a variable-for-fixed swap of quarterly interest payments payable on certain amounts of the Tranche B term loan through 2006. The notional value of the swap equals $99,500$1,112, $846 and has a fixed rate of 5.9% and a variable rate$558, respectively, based on periodic three-month London Inter-Bank Offered Rate (LIBOR). In January 2001, we entered into a second interest rate swap contract on0.5% (for 2004 and 2005) and 0.4% (for 2006) of unused balances under the Tranche B term loan. IMI revolving credit facility.
The notional value of the second swap equals $96,000 and has a fixed rate of 5.5% and a variable rate based on periodic three-month LIBOR. In conjunction with the Amended and RestatedIME Credit Agreement, on March 15, 2002, these interest rate swap contracts hedge the risk of changes in market interest rates on our term loan due 2008 rather than the previous Tranche B term loan due 2006.
The Amended and RestatedIMI Credit Agreement, contains 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 Amended and Restated Credit Agreement. We were in compliance with all material debt covenants as of December 31, 2003.
b. Publicly Issued Notes
As of December 31, 2003, we have four series of senior subordinated notes issued to the public, that are obligations of the parent company, Iron Mountain Incorporated (the "Parent notes"):
80
The Parent notes, along with our revolving credit facility and term loan, are fully and unconditionally guaranteed, on a senior subordinated basis, by substantially all of our direct and indirect wholly owned U.S. subsidiaries (the "Guarantors"). These guarantees are joint and several obligations of the Guarantors. The remainder of our subsidiaries do not guarantee the Parent notes or the revolving credit facility and the term loan.
In addition, Canada Company, our principal Canadian subsidiary, has publicly issued $135,000 principal amount of senior notes that mature on May 15, 2008 and bear interest at a rate of 81/8% per annum, payable semi-annually in arrears on May 15 and November 15. The Subsidiary notes are general unsecured obligations of Canada Company, rankingpari passu in right of payment to all of Canada Company's existing and future senior indebtedness. The Subsidiary notes are fully and unconditionally guaranteed, on a senior subordinated basis, by Iron Mountain Incorporated and the Guarantors. In addition, several of the non-guarantors that are organized under the laws of Canadian provinces fully and unconditionally guarantee the Subsidiary notes on a senior basis. As with the Parent notes, these guarantees are joint and several. In July 2003, we redeemed $50,000 of outstanding principal amount of the Subsidiary notes, at a redemption price (expressed as a percentage of principal amount) of 104.063%, plus accrued and unpaid interest. In December 2003, we redeemed $65,015 of outstanding principal amount of the Subsidiary notes, at a redemption price (expressed as a percentage of principal amount) of 104.313%, plus accrued and unpaid interest. We recorded a charge to other (income) expense, net of $12,530 in 2003 related to the early retirement of these Subsidiary notes, which consists of redemption premiums and transaction costs, as well as original issue discount related to these Subsidiary notes. In February 2004, we redeemed the remaining $19,985 of outstanding principal amount of the Subsidiary notes, at a redemption price (expressed as a percentage of principal amount) of 104.063%, plus accrued and unpaid interest. We will record a charge to other (income) expense, net of approximately $2,000 in the first quarter of 2004 related to the early retirement of these remaining Subsidiary notes, which consists of redemption premiums and transaction costs as well as original issue discount related to these Subsidiary notes.
In January 2003, we redeemed the remaining $23,183 of outstanding principal amount of our 91/8% notes, at a redemption price (expressed as a percentage of principal amount) of 104.563%, plus accrued and unpaid interest, with proceeds from our underwritten public offering of $100,000 in aggregate principal of our 73/4% notes. We recorded a charge to other (income) expense, net in the accompanying consolidated statement of operations of $1,804 in the first quarter of 2003 related to the early retirement of the remaining 91/8% notes.
In March 2003, we completed two debt exchanges which resulted in the issuance of $31,255 in face value of our 73/4% notes and the retirement of $30,000 of our 83/4% notes. These non-cash debt exchanges resulted in carryover basis and, therefore, no gain (loss) on extinguishment of debt in accordance with EITF No. 96-19, "Debtor's Accounting for Modification or Exchange of Debt Instruments." These exchanges result in a lower interest rate and, therefore, lower interest expense in
81
future periods as well as extend the maturity of our debt obligations. From time to time, we may enter into similar exchange transactions that we deem appropriate.
In April 2003, we completed an underwritten public offering of an additional $300,000 in aggregate principal amount of our 73/4% notes, which were issued at a price to investors of 104% of par, implying an effective yield to worst of 7.066%. Our net proceeds of $307,340, after paying the underwriters' discounts, commissions and transaction fees, were used to fund our offer to purchase and consent solicitation relating to our outstanding 83/4% notes, redeem the 83/4% notes not purchased in the offer, repay borrowings under our revolving credit facility, repay other indebtedness and pay for acquisitions.
In April 2003, we received and accepted tenders for $143,317 of the $220,000 aggregate principal amount outstanding of our 83/4% notes. In May 2003, we redeemed the remaining $76,683 of outstanding principal amount of our 83/4% notes, at a redemption price (expressed as a percentage of principal amount) of 104.375%, plus accrued and unpaid interest. We recorded a charge to other (income) expense, net of $13,841 in the second quarter of 2003 related to the early retirement of the 83/4% notes, which consists of redemption premiums and transaction costs, as well as original issue discount and unamortized deferred financing costs related to the 83/4% notes.
In June 2003, we completed an underwritten public offering of $150,000 in aggregate principal amount of our 65/8% notes. The 65/8% notes were issued at a price to investors of 100% of par. Our net proceeds of $147,500, after paying the underwriters' discounts, commissions and transaction fees, were used to redeem $50,000 in aggregate principal amount of the outstanding Subsidiary notes in the third quarter of 2003 and pay for acquisitions.
In December 2003, we completed an underwritten public offering of an additional $170,000 in aggregate principal amount of our 65/8% notes, which were issued at a price to investors of 96.5% of par, implying an effective yield to the worst of 7.06%. Our net proceeds of $161,339, after paying the underwriters' discounts, commissions and transaction fees, were used to redeem $65,015 in aggregate principal amount of our outstanding Subsidiary notes in the fourth quarter of 2003, repay borrowings under our revolving credit facility, repay other indebtedness and pay for acquisitions.
In January 2004, we completed an offering of 150,000 British pounds sterling in aggregate principal amount of our 71/4% Senior Subordinated Notes due 2014 (the "71/4% notes"), which were issued at a price of 100% of par. Our net proceeds of 146,900 British pounds sterling, after paying the initial purchasers' discounts, commissions and transaction fees, were used to fund our acquisition of Mentmore plc's 49.9% equity interest in IME for total consideration of 82,500 British pounds sterling, to redeem $19,985 in aggregate principal amount of our outstanding Subsidiary notes in the first quarter of 2004, repay borrowings under our revolving credit facility, repay other indebtedness and pay for other acquisitions.
Each of the indentures for the notes provides that we may redeem the outstanding notes, in whole or in part, upon satisfaction of certain terms and conditions. In any redemption, we are also required to pay all accrued but unpaid interest on the outstanding notes.
82
The following table presents the various redemption dates and prices of the public notes. The redemption dates reflect the date at or after which the notes may be redeemed at our option at a premium redemption price. After these dates, the notes may be redeemed at 100% of face value:
| Redemption Date | 81/4% notes July 15, | 85/8% notes April 1, | 71/4% notes April 15, | 73/4% notes January 15, | 65/8% notes July 1, | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | — | — | — | — | — | ||||||
| 2004 | 104.125 | % | — | — | — | — | |||||
| 2005 | 102.750 | % | — | — | — | — | |||||
| 2006 | 101.375 | % | 104.313 | % | — | — | — | ||||
| 2007 | — | 102.875 | % | — | — | — | |||||
| 2008 | — | 101.438 | % | — | 103.875 | % | 103.313 | % | |||
| 2009 | — | — | 103.625 | % | 102.583 | % | 102.208 | % | |||
| 2010 | — | — | 102.417 | % | 101.292 | % | 101.104 | % | |||
| 2011 | — | — | 101.208 | % | — | — |
Prior to July 1, 2004, the 81/4% notes are redeemable at our option, in whole or in part, at a specified make-whole price.
In addition, until April 1, 2004, we may under certain conditions redeem up to 35% of the 85/8% notes with the net proceeds of one or more public equity offerings, at a redemption price of 108.625% of the principal amount.
Prior to January 15, 2008, the 73/4% notes are redeemable at our option, in whole or in part, at a specified make-whole price. Prior to January 15, 2006, we may under certain conditions redeem up to 35% of the 73/4% notes with the net proceeds of one or more public equity offerings, at a redemption price of 107.750% of the principal amount.
Prior to July 1, 2008, the 65/8% notes are redeemable at our option, in whole or in part, at a specified make-whole price. Prior to July 1, 2006, we may under certain conditions redeem 65/8% notes with the net proceeds of one or more public equity offerings, at a redemption price of 106.625% of the principal amount.
Prior to April 15, 2009, the 71/4% notes are redeemable at our option, in whole or in part, at a specified make-whole price. Prior to April 15, 2007, we may under certain conditions redeem 71/4% notes with the net proceeds of one or more public equity offerings, at a redemption price of 107.25% of the principal amount.
Each of the indentures for the notes provides that we or, in the case of the Subsidiary notes, Canada Company must repurchase, at the option of the holders, the notes at 101% of their principal amount, plus accrued and unpaid interest, upon the occurrence of a "Change of Control," which is defined in each respective indenture. Except for required repurchases upon the occurrence of a Change of Control or in the event of certain asset sales, each as described in the respective indenture, we are not required to make sinking fund or redemption payments with respect to any of the notes.
83
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 debt covenants in material agreements as of December 31, 2006.
b. Notes Issued under Indentures
As of December 31, 2006, we have eight series of senior subordinated notes issued under various indentures, that are obligations of the parent company, Iron Mountain Incorporated and are subordinated to debt outstanding under the IMI Credit Agreement:
· $71,881 principal amount of notes maturing on July 1, 2011 and bearing interest at a rate of 81¤4% per annum, payable semi-annually in arrears on January 1 and July 1;
· $447,874 principal amount of notes maturing on April 1, 2013 and bearing interest at a rate of 85¤8% per annum, payable semi-annually in arrears on April 1 and October 1;
· 150,000 British pounds sterling principal amount of notes maturing on April 15, 2014 and bearing interest at a rate of 71¤4% per annum, payable semi-annually in arrears on April 15 and October 15 (these notes are listed on the Luxembourg Stock Exchange);
· $431,255 principal amount of notes maturing on January 15, 2015 and bearing interest at a rate of 73¤4% per annum, payable semi-annually in arrears on January 15 and July 15;
· $320,000 principal amount of notes maturing on January 1, 2016 and bearing interest at a rate of 65¤8% per annum, payable semi-annually in arrears on January 1 and July 1;
· $200,000 principal amount of notes maturing on July 15, 2018 and bearing interest at a rate of 83¤4% per annum, payable semi-annually in arrears on January 15 and July 15;
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
4. Debt (Continued)
· $50,000 principal amount of notes maturing on October 15, 2018 and bearing interest at a rate of 8% per annum, payable semi-annually in arrears on April 15 and October 15; and
· $30,000 Euro principal amount of notes maturing on October 15, 2018 and bearing interest at a rate of 63¤4% per annum, payable semi-annually in arrears on April 15 and October 15.
The senior subordinated notes are fully and unconditionally guaranteed, on a senior subordinated basis, by substantially all of our direct and indirect 100% owned U.S. subsidiaries (the “Guarantors”). These guarantees are joint and several obligations of the Guarantors. The remainder of our subsidiaries do not guarantee the senior subordinated notes.
In July 2006, we completed an underwritten public offering of $200,000 in aggregate principal amount of our 83¤4% notes, which were issued at par. Our net proceeds of $196,608, after paying the underwriters’ discounts, commissions and transaction fees, were used to (a) fund our offer to purchase and consent solicitation of $78,119 in aggregate principal amount of our outstanding 81¤4% notes, (b) fund our purchase in the open market of $33,000 in aggregate principal amount of our 85¤8% notes and (c) repay borrowings under our revolving credit facility. As a result, we recorded a charge to other expense (income), net of $2,779 in the third quarter of 2006 related to the early extinguishment of the 81¤4% and 85¤8% notes, which consists of tender premiums and transaction costs, deferred financing costs, as well as original issue discounts and premiums related to the 81¤4% and 85¤8% notes.
In October 2006, we issued, in a private placement, $50,000 in aggregate principal amount of our 8% notes, which were issued at a price of 99.3% of par; and 30,000 Euro in aggregate principal amount of our 63¤4% notes, which were issued at a price of 99.5% of par. Our net proceeds of $85,492, after sales commission, were used to repay outstanding indebtedness under the IMI term loan and IME revolving credit facilities.
Each of the indentures for the notes provides that we may redeem the outstanding notes, in whole or in part, upon satisfaction of certain terms and conditions. In any redemption, we are also required to pay all accrued but unpaid interest on the outstanding notes.
79
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
4. Debt (Continued)
The following table presents the various redemption dates and prices of the senior subordinated notes. The redemption dates reflect the date at or after which the notes may be redeemed at our option at a premium redemption price. After these dates, the notes may be redeemed at 100% of face value:
Redemption |
| 81¤4% |
| 85¤8% |
| 71¤4% |
| 73¤4% |
| 65¤8% |
| 83¤4% |
| 8% |
| 63¤4% |
| ||||||
2006 |
| 101.375 | % | 104.313 | % | — |
|
| — |
|
| — |
| — |
|
| — |
|
|
| — |
|
|
2007 |
| — |
| 102.875 | % | — |
|
| — |
|
| — |
| — |
|
| — |
|
|
| — |
|
|
2008 |
| — |
| 101.438 | % | — |
|
| 103.875 | % |
| 103.313 | % | — |
|
| — |
|
|
| — |
|
|
2009 |
| — |
| — |
| 103.625 | % |
| 102.583 | % |
| 102.208 | % | — |
|
| — |
|
|
| — |
|
|
2010 |
| — |
| — |
| 102.417 | % |
| 101.292 | % |
| 101.104 | % | — |
|
| — |
|
|
| — |
|
|
2011 |
| — |
| — |
| 101.208 | % |
| — |
|
| — |
| 104.375 | % |
| 104.000 | % |
|
| 103.375 | % |
|
2012 |
| — |
| — |
| — |
|
| — |
|
| — |
| 102.917 | % |
| 102.667 | % |
|
| 102.250 | % |
|
2013 |
| — |
| — |
| — |
|
| — |
|
| — |
| 101.458 | % |
| 101.333 | % |
|
| 101.125 | % |
|
Prior to April 15, 2009, the 71¤4% notes are redeemable at our option, in whole or in part, at a specified make-whole price. Prior to April 15, 2007, we may under certain conditions redeem a portion of the 71¤4% notes with the net proceeds of one or more public equity offerings, at a redemption price of 107.25% of the principal amount.
Prior to January 15, 2008, the 73¤4% notes are redeemable at our option, in whole or in part, at a specified make-whole price.
Prior to July 1, 2008, the 65¤8% notes are redeemable at our option, in whole or in part, at a specified make-whole price.
Prior to July 15, 2011, the 83¤4% notes are redeemable at our option, in whole or in part, at a specified make-whole price. Prior to July 15, 2009, we may under certain conditions redeem a portion of the 83¤4% notes with the net proceeds of one or more public equity offerings, at a redemption price of 108.750% of the principal amount.
Prior to October 15, 2011, the 8% notes and 63¤4% notes are redeemable at our option, in whole or in part, at a specified make-whole price.
Each of the indentures for the notes provides that we must repurchase, at the option of the holders, the notes at 101% of their principal amount, plus accrued and unpaid interest, upon the occurrence of a “Change of Control,” which is defined in each respective indenture. Except for required repurchases upon the occurrence of a Change of Control or in the event of certain asset sales, each as described in the respective indenture, we are not required to make sinking fund or redemption payments with respect to any of the notes.
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
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
4. Debt (Continued)
covenants do not contain a rating trigger. Therefore, a change in our debt rating would not trigger a default under our indentures and other agreements governing our indebtedness. As of December 31, 2003,2006, we were in compliance with all material debt covenants andin material agreements.
c. Real Estate Term Loans
Our Variable Interest Entities were financed with real estate term loans. See Note 3. As of December 31, 2003, these real estate term loans amounted to $202,647. No further financing is currently available to our Variable Interest Entities to fund further property acquisitions. The details of each real estate term loan is a follows:
The real estate term loans held by our Variable Interest Entities have always been and continue to be treated as indebtedness for purposes of our financial covenants under our Amended and Restated Credit Agreement. As of the date they were consolidated into our financial statements, they were also considered indebtedness under our Indentures for our Senior Subordinated Notes and our Subsidiary notes. We were in compliance with all material debt covenants under these real estate term loans as of December 31, 2003.
d. Real Estate Mortgages
In connection with the purchase of real estate and acquisitions, we assumed several mortgages on real property. The mortgages bear interest at rates ranging from 5%2.8% to 8.5%8.3% and are payable in various installments through 2025.2023.
84
e.d. Seller Notes
In connection with the merger with Pierce Leahy in 2000, we assumed debt related to certain existing notes as a result of acquisitions which Pierce Leahy completed in 1999. The notes bear interest at a rate of 4.75% per year. The outstanding balance of $12,6074,470 British pounds sterling ($8,757) on these notes at December 31, 20032006 is due on demand through 2009 and is classified as a current portion of long-term debt. The notes are supported by a letter of credit under our revolving credit facility.
f.e. Other
Other long-term debt includes various notes, capital leases and other obligations assumed by us as a result of certain acquisitions. Additionally, IME has term loansacquisitions and revolving credit facilities with its local banks that provide for approximately $87,791other agreements. The outstanding balance of credit, of which $35,801 was available as of$49,788 on these notes at December 31, 2003. As of December 31, 2002, the amounts outstanding under IME's bank overdraft (due on demand), term loan and working capital/revolving credit facilities amounted to $11,175, $11,050 and $12,811, respectively. As of December 31, 2003, the amounts outstanding under IME's term loan and revolving credit facilities amounted to $32,503 and $19,487, respectively. Principal on the term loan and revolving credit facility are due on April 30, 2004 and interest is charged on borrowings at 1.25% over LIBOR. The2006 have a weighted average effective interest rate of IME's debt was 6.05%, 5.80% and 4.22% for the years ending 2001, 2002 and 2003, respectively. IME's various debt and credit facilities are secured by the assets of IME and each of its subsidiaries and includes various financial and non-financial covenants and restrictions based on net worth, net indebtedness and net finance charges. During 2003, IME breached its interest covenant following the acquisition of the European operations of Hays IMS. However, IME obtained from the bank a waiver of the breach.9.1%.
Maturities of long-term debt, excluding (premiums) discounts, net, are as follows:
| Year | Amount |
|
|
| Amount |
| |||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | $ | 116,998 | |||||||
| 2005 | 224,504 | ||||||||
| 2006 | 3,968 | ||||||||
| 2007 | 101,120 | 2007 |
| $ | 63,105 |
| |||
| 2008 | 246,089 | 2008 |
| 50,335 |
| ||||
2009 | 2009 |
| 368,520 |
| |||||
2010 | 2010 |
| 5,153 |
| |||||
2011 | 2011 |
| 375,704 |
| |||||
| Thereafter | 1,394,448 | Thereafter |
| 1,803,590 |
| ||||
|
| $ | 2,666,407 |
| |||||
| $ | 2,087,127 | ||||||||
85
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
4. Debt (Continued)
We have estimated the following fair values for our long-term debt as of December 31:
| | 2002 | 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||
| Revolving Credit Facility (1) | $ | 75,360 | $ | 75,360 | $ | 142,280 | $ | 142,280 | ||||
| Term Loan (1) | 249,750 | 249,750 | 248,750 | 248,750 | ||||||||
| 91/8% notes (2)(3) | 22,409 | 24,241 | — | — | ||||||||
| 83/4% notes (2)(3) | 249,727 | 257,825 | — | — | ||||||||
| 81/4% notes (2)(3) | 149,625 | 154,500 | 149,670 | 156,375 | ||||||||
| 85/8% notes (2)(3) | 481,097 | 502,513 | 481,075 | 521,748 | ||||||||
| 73/4% notes (2)(3) | 100,000 | 100,000 | 441,331 | 456,052 | ||||||||
| 65/8% notes (2)(3) | — | — | 314,071 | 311,200 | ||||||||
| Subsidiary notes (3) | 124,666 | 138,038 | 18,768 | 20,684 | ||||||||
| Real Estate Term Loans (1) | 202,647 | 202,647 | 202,647 | 202,647 | ||||||||
| Real Estate Mortgages (1) | 16,262 | 16,262 | 17,584 | 17,584 | ||||||||
| Seller Notes (1) | 12,864 | 12,864 | 12,607 | 12,607 | ||||||||
| Other (1) | 47,690 | 47,690 | 61,145 | 61,145 | ||||||||
|
| 2005 |
| 2006 |
| ||||||||
|
| Carrying |
| Fair Value |
| Carrying |
| Fair Value |
| ||||
IMI Revolving Credit Facility(1) |
| $ | 216,396 |
| $ | 216,396 |
| $ | 170,472 |
| $ | 170,472 |
|
IMI Term Loan Facility(1) |
| 345,500 |
| 345,500 |
| 312,000 |
| 312,000 |
| ||||
IME Revolving Credit Facility(1) |
| 84,262 |
| 84,262 |
| 77,819 |
| 77,819 |
| ||||
IME Term Loan Facility(1) |
| 177,450 |
| 177,450 |
| 189,005 |
| 189,005 |
| ||||
81¤4% notes(2) |
| 149,760 |
| 151,500 |
| 71,789 |
| 72,240 |
| ||||
85¤8% notes(2) |
| 481,032 |
| 502,513 |
| 448,001 |
| 461,310 |
| ||||
71¤4% notes(2) |
| 258,120 |
| 250,376 |
| 293,865 |
| 287,988 |
| ||||
73¤4% notes(2) |
| 439,506 |
| 435,568 |
| 438,594 |
| 438,802 |
| ||||
65¤8% notes(2) |
| 315,059 |
| 299,200 |
| 315,553 |
| 305,600 |
| ||||
83¤4% notes(2) |
| — |
| — |
| 200,000 |
| 212,500 |
| ||||
8% notes(2) |
| — |
| — |
| 49,663 |
| 50,000 |
| ||||
63¤4% notes(2) |
| — |
| — |
| 39,429 |
| 39,609 |
| ||||
Real Estate Mortgages(1) |
| 4,707 |
| 4,707 |
| 4,081 |
| 4,081 |
| ||||
Seller Notes(1) |
| 9,398 |
| 9,398 |
| 8,757 |
| 8,757 |
| ||||
Other(1) |
| 48,241 |
| 48,241 |
| 49,788 |
| 49,788 |
| ||||
(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, 20022005 and 2003)2006) or it is impracticable to estimate the fair value due to the nature of such long-term debt.
(2)
86
82
6.IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
5. Selected Consolidated Financial Statements of Parent, Guarantors and Non-Guarantors
The following financial data summarizes the consolidating Company on the equity method of accounting as of December 31, 20032005 and 20022006 and for the years ended December 31, 2003, 20022004, 2005 and 2001.2006. The GuarantorGuarantors column includes all subsidiaries that guarantee the Parent notes and the Subsidiary notes. The Canada Company column includes Canada Company and our other Canadian subsidiaries that guarantee the Subsidiary notes, but do not guarantee the Parent notes. The Parent and the Guarantors also guarantee the Subsidiarysenior subordinated notes. The subsidiaries that do not guarantee either the Parent notes or the Subsidiarysenior subordinated notes are referred to in the table as the "non-guarantors."“Non-Guarantors.”
| | | December 31, 2003 |
| December 31, 2005 |
| |||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Parent | Guarantors | Canada Company | Non-Guarantors | Eliminations | Consolidated |
| Parent |
| Guarantors |
| Non- |
| Eliminations |
| Consolidated |
| ||||||||||||||||||||
| Assets | Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| Current Assets: | Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| Cash and Cash Equivalents | $ | — | $ | 54,793 | $ | 2,659 | $ | 17,231 | $ | — | $ | 74,683 | ||||||||||||||||||||||||||
| Accounts Receivable | — | 202,271 | 16,593 | 60,936 | — | 279,800 | ||||||||||||||||||||||||||||||||
| Intercompany Receivable | 870,924 | — | — | 13,935 | (884,859 | ) | — | |||||||||||||||||||||||||||||||
| Other Current Assets | 3,591 | 84,733 | 1,398 | 27,788 | (410 | ) | 117,100 | |||||||||||||||||||||||||||||||
| Total Current Assets | 874,515 | 341,797 | 20,650 | 119,890 | (885,269 | ) | 471,583 | |||||||||||||||||||||||||||||||
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 | Property, Plant and Equipment, Net | — | 973,619 | 108,259 | 410,389 | — | 1,492,267 |
| — |
| 1,225,580 |
| 555,686 |
| — |
|
| 1,781,266 |
|
| ||||||||||||||||||
| Other Assets, Net: | Other Assets, Net: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| Long-term Notes Receivable from Affiliates and Intercompany Receivable | 1,625,796 | 1,000 | — | 98,715 | (1,725,511 | ) | — | |||||||||||||||||||||||||||||||
| Investment in Subsidiaries | 402,045 | 91,336 | — | — | (493,381 | ) | — | |||||||||||||||||||||||||||||||
| Goodwill, Net | — | 1,323,340 | 138,720 | 304,478 | 9,741 | 1,776,279 | ||||||||||||||||||||||||||||||||
| Other, Net | 23,661 | 69,221 | 6,895 | 54,888 | (2,695 | ) | 151,970 | |||||||||||||||||||||||||||||||
| Total Other Assets, Net | 2,051,502 | 1,484,897 | 145,615 | 458,081 | (2,211,846 | ) | 1,928,249 | |||||||||||||||||||||||||||||||
| Total Assets | $ | 2,926,017 | $ | 2,800,313 | $ | 274,524 | $ | 988,360 | $ | (3,097,115 | ) | $ | 3,892,099 | |||||||||||||||||||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||
| Intercompany Payable | $ | — | $ | 237,392 | $ | 233,597 | $ | 413,870 | $ | (884,859 | ) | $ | — | |||||||||||||||||||||||||
| Total Current Liabilities | 74,650 | 257,663 | 41,075 | 211,767 | (410 | ) | 584,745 | |||||||||||||||||||||||||||||||
| Long-term Debt, Net of Current Portion | 1,777,480 | 2,924 | 3,594 | 190,149 | — | 1,974,147 | ||||||||||||||||||||||||||||||||
| Long-term Notes Payable to Affiliates and Intercompany Payable | 1,000 | 1,724,511 | — | — | (1,725,511 | ) | — | |||||||||||||||||||||||||||||||
| Other Long-term Liabilities | 6,773 | 169,695 | 5,152 | 12,383 | (2,695 | ) | 191,308 | |||||||||||||||||||||||||||||||
| Commitments and Contingencies | ||||||||||||||||||||||||||||||||||||||
| Minority Interests | — | — | — | 6,105 | 69,680 | 75,785 | ||||||||||||||||||||||||||||||||
| Shareholders' Equity (Deficit) | 1,066,114 | 408,128 | (8,894 | ) | 154,086 | (553,320 | ) | 1,066,114 | ||||||||||||||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 2,926,017 | $ | 2,800,313 | $ | 274,524 | $ | 988,360 | $ | (3,097,115 | ) | $ | 3,892,099 | |||||||||||||||||||||||||
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 |
| 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 |
|
| ||||||||||||||||||||
83
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
5. Selected Consolidated Financial Statements of Parent, Guarantors and Non-Guarantors (Continued)
|
| December 31, 2006 |
| |||||||||||||||
|
| Parent |
| Guarantors |
| Non- |
| Eliminations |
| Consolidated |
| |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and Cash Equivalents |
| $ | — |
| $ | 16,354 |
| $ | 29,015 |
| $ | — |
|
| $ | 45,369 |
|
|
Accounts Receivable |
| — |
| 320,084 |
| 153,282 |
| — |
|
| 473,366 |
|
| |||||
Intercompany Receivable |
| 867,764 |
| — |
| — |
| (867,764 | ) |
| — |
|
| |||||
Other Current Assets |
| 48 |
| 104,118 |
| 57,278 |
| (458 | ) |
| 160,986 |
|
| |||||
Total Current Assets |
| 867,812 |
| 440,556 |
| 239,575 |
| (868,222 | ) |
| 679,721 |
|
| |||||
Property, Plant and Equipment, Net |
| — |
| 1,362,891 |
| 652,344 |
| — |
|
| 2,015,235 |
|
| |||||
Other Assets, Net: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term Notes Receivable from Affiliates and Intercompany Receivable |
| 1,795,790 |
| 10,962 |
| — |
| (1,806,752 | ) |
| — |
|
| |||||
Investment in Subsidiaries |
| 1,095,821 |
| 797,014 |
| — |
| (1,892,835 | ) |
| — |
|
| |||||
Goodwill |
| — |
| 1,474,120 |
| 691,009 |
| — |
|
| 2,165,129 |
|
| |||||
Other |
| 26,451 |
| 142,382 |
| 181,639 |
| (1,036 | ) |
| 349,436 |
|
| |||||
Total Other Assets, Net |
| 2,918,062 |
| 2,424,478 |
| 872,648 |
| (3,700,623 | ) |
| 2,514,565 |
|
| |||||
Total Assets |
| $ | 3,785,874 |
| $ | 4,227,925 |
| $ | 1,764,567 |
| $ | (4,568,845 | ) |
| $ | 5,209,521 |
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Intercompany Payable |
| $ | — |
| $ | 642,376 |
| $ | 225,388 |
| $ | (867,764 | ) |
| $ | — |
|
|
Current Portion of Long-term Debt |
| 4,260 |
| 6,458 |
| 52,387 |
| — |
|
| 63,105 |
|
| |||||
Total Other Current Liabilities |
| 53,980 |
| 366,192 |
| 155,828 |
| (458 | ) |
| 575,542 |
|
| |||||
Long-term Debt, Net of Current Portion |
| 2,169,508 |
| 17,115 |
| 419,088 |
| — |
|
| 2,605,711 |
|
| |||||
Long-term Notes Payable to Affiliates and Intercompany Payable |
| 1,000 |
| 1,795,790 |
| 9,962 |
| (1,806,752 | ) |
| — |
|
| |||||
Other Long-term Liabilities |
| 3,853 |
| 323,986 |
| 79,797 |
| (1,036 | ) |
| 406,600 |
|
| |||||
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Minority Interests |
| — |
| — |
| 5,290 |
| — |
|
| 5,290 |
|
| |||||
Stockholders’ Equity |
| 1,553,273 |
| 1,076,008 |
| 816,827 |
| (1,892,835 | ) |
| 1,553,273 |
|
| |||||
Total Liabilities and Stockholders’ Equity |
| $ | 3,785,874 |
| $ | 4,227,925 |
| $ | 1,764,567 |
| $ | (4,568,845 | ) |
| $ | 5,209,521 |
|
|
84
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
5. Selected Consolidated Financial Statements of Parent, Guarantors and Non-Guarantors (Continued)
|
| Year Ended December 31, 2004 |
| |||||||||||||||||||||
|
| Parent |
| Guarantors |
| Non- |
| Eliminations |
| Consolidated |
| |||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Storage |
| $ | — |
|
| $ | 774,945 |
|
|
| $ | 268,421 |
|
|
| $ | — |
|
|
| $ | 1,043,366 |
|
|
Service and Storage Material Sales |
| — |
|
| 552,405 |
|
|
| 221,818 |
|
|
| — |
|
|
| 774,223 |
|
| |||||
Total Revenues |
| — |
|
| 1,327,350 |
|
|
| 490,239 |
|
|
| — |
|
|
| 1,817,589 |
|
| |||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of Sales (Excluding Depreciation and Amortization) |
| — |
|
| 586,437 |
|
|
| 237,462 |
|
|
| — |
|
|
| 823,899 |
|
| |||||
Selling, General and Administrative |
| 460 |
|
| 362,635 |
|
|
| 123,151 |
|
|
| — |
|
|
| 486,246 |
|
| |||||
Depreciation and Amortization |
| 36 |
|
| 123,098 |
|
|
| 40,495 |
|
|
| — |
|
|
| 163,629 |
|
| |||||
(Gain) Loss on Disposal/Writedown of Property, Plant and Equipment, Net |
| — |
|
| (861 | ) |
|
| 180 |
|
|
| — |
|
|
| (681 | ) |
| |||||
Total Operating Expenses |
| 496 |
|
| 1,071,309 |
|
|
| 401,288 |
|
|
| — |
|
|
| 1,473,093 |
|
| |||||
Operating (Loss) Income |
| (496 | ) |
| 256,041 |
|
|
| 88,951 |
|
|
| — |
|
|
| 344,496 |
|
| |||||
Interest Expense (Income), Net |
| 150,476 |
|
| (29,598 | ) |
|
| 64,871 |
|
|
| — |
|
|
| 185,749 |
|
| |||||
Other Expense (Income), Net |
| 22,397 |
|
| (34,934 | ) |
|
| 4,549 |
|
|
| — |
|
|
| (7,988 | ) |
| |||||
(Loss) Income Before Provision for Income Taxes and Minority Interest |
| (173,369 | ) |
| 320,573 |
|
|
| 19,531 |
|
|
| — |
|
|
| 166,735 |
|
| |||||
Provision for Income Taxes |
| — |
|
| 60,376 |
|
|
| 9,198 |
|
|
| — |
|
|
| 69,574 |
|
| |||||
Equity in the Earnings of Subsidiaries, Net of Tax |
| (267,560 | ) |
| (6,812 | ) |
|
| — |
|
|
| 274,372 |
|
|
| — |
|
| |||||
Minority Interests in Earnings of Subsidiaries, Net |
| — |
|
| — |
|
|
| 2,970 |
|
|
| — |
|
|
| 2,970 |
|
| |||||
Net Income |
| $ | 94,191 |
|
| $ | 267,009 |
|
|
| $ | 7,363 |
|
|
| $ | (274,372 | ) |
|
| $ | 94,191 |
|
|
|
| Year Ended December 31, 2005 |
| |||||||||||||||||||||
|
| Parent |
| Guarantors |
| Non- |
| Eliminations |
| Consolidated |
| |||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Storage |
| $ | — |
|
| $ | 862,961 |
|
|
| $ | 318,590 |
|
|
| $ | — |
|
|
| $ | 1,181,551 |
|
|
Service and Storage Material Sales |
| — |
|
| 642,659 |
|
|
| 253,945 |
|
|
| — |
|
|
| 896,604 |
|
| |||||
Total Revenues |
| — |
|
| 1,505,620 |
|
|
| 572,535 |
|
|
| — |
|
|
| 2,078,155 |
|
| |||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of Sales (Excluding Depreciation and Amortization) |
| — |
|
| 662,485 |
|
|
| 275,754 |
|
|
| — |
|
|
| 938,239 |
|
| |||||
Selling, General and Administrative |
| 187 |
|
| 432,588 |
|
|
| 136,920 |
|
|
| — |
|
|
| 569,695 |
|
| |||||
Depreciation and Amortization |
| 70 |
|
| 134,509 |
|
|
| 52,343 |
|
|
| — |
|
|
| 186,922 |
|
| |||||
Loss (Gain) on Disposal/Writedown of Property, Plant and Equipment, Net |
| — |
|
| 416 |
|
|
| (3,901 | ) |
|
| — |
|
|
| (3,485 | ) |
| |||||
Total Operating Expenses |
| 257 |
|
| 1,229,998 |
|
|
| 461,116 |
|
|
| — |
|
|
| 1,691,371 |
|
| |||||
Operating (Loss) Income |
| (257 | ) |
| 275,622 |
|
|
| 111,419 |
|
|
| — |
|
|
| 386,784 |
|
| |||||
Interest Expense (Income), Net |
| 156,057 |
|
| (33,325 | ) |
|
| 60,852 |
|
|
| — |
|
|
| 183,584 |
|
| |||||
Other (Income) Expense, Net |
| (32,420 | ) |
| 36,956 |
|
|
| 1,646 |
|
|
| — |
|
|
| 6,182 |
|
| |||||
(Loss) Income Before Provision for Income Taxes and Minority Interest |
| (123,894 | ) |
| 271,991 |
|
|
| 48,921 |
|
|
| — |
|
|
| 197,018 |
|
| |||||
Provision for Income Taxes |
| — |
|
| 63,665 |
|
|
| 17,819 |
|
|
| — |
|
|
| 81,484 |
|
| |||||
Equity in the Earnings of Subsidiaries, Net of Tax |
| (234,993 | ) |
| (28,176 | ) |
|
| — |
|
|
| 263,169 |
|
|
| — |
|
| |||||
Minority Interests in Earnings of Subsidiaries, Net |
| — |
|
| — |
|
|
| 1,684 |
|
|
| — |
|
|
| 1,684 |
|
| |||||
Income Before Cumulative Effect of Change in Accounting Principle, Net of Tax Benefit |
| 111,099 |
|
| 236,502 |
|
|
| 29,418 |
|
|
| (263,169 | ) |
|
| 113,850 |
|
| |||||
Cumulative Effect of Change in Accounting Principle, Net of Tax Benefit |
| — |
|
| (2,215 | ) |
|
| (536 | ) |
|
| — |
|
|
| (2,751 | ) |
| |||||
Net Income |
| $ | 111,099 |
|
| $ | 234,287 |
|
|
| $ | 28,882 |
|
|
| $ | (263,169 | ) |
|
| $ | 111,099 |
|
|
85
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
5. Selected Consolidated Financial Statements of Parent, Guarantors and Non-Guarantors (Continued)
|
| Year Ended December 31, 2006 |
| |||||||||||||||||||
|
|
|
|
|
| Non- |
|
|
|
|
| |||||||||||
|
| Parent |
| Guarantors |
| Guarantors |
| Eliminations |
| Consolidated |
| |||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Storage |
| $ | — |
| $ | 960,421 |
|
| $ | 366,748 |
|
|
| $ | — |
|
|
| $ | 1,327,169 |
|
|
Service and Storage Material Sales |
| — |
| 689,444 |
|
| 333,729 |
|
|
| — |
|
|
| 1,023,173 |
|
| |||||
Total Revenues |
| — |
| 1,649,865 |
|
| 700,477 |
|
|
| — |
|
|
| 2,350,342 |
|
| |||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of Sales (Excluding Depreciation and Amortization) |
| — |
| 718,154 |
|
| 356,114 |
|
|
| — |
|
|
| 1,074,268 |
|
| |||||
Selling, General and Administrative |
| (47 | ) | 497,524 |
|
| 172,597 |
|
|
| — |
|
|
| 670,074 |
|
| |||||
Depreciation and |
| 79 |
| 142,746 |
|
| 65,548 |
|
|
| — |
|
|
| 208,373 |
|
| |||||
Loss (Gain) on Disposal/Writedown of Property, Plant and Equipment, Net |
| — |
| 704 |
|
| (10,264 | ) |
|
| — |
|
|
| (9,560 | ) |
| |||||
Total Operating Expenses |
| 32 |
| 1,359,128 |
|
| 583,995 |
|
|
| — |
|
|
| 1,943,155 |
|
| |||||
Operating (Loss) Income |
| (32 | ) | 290,737 |
|
| 116,482 |
|
|
| — |
|
|
| 407,187 |
|
| |||||
Interest Expense (Income), Net |
| 167,668 |
| (34,689 | ) |
| 61,979 |
|
|
| — |
|
|
| 194,958 |
|
| |||||
Other (Income)Expense, Net |
| 45,253 |
| (42,626 | ) |
| (14,616 | ) |
|
| — |
|
|
| (11,989 | ) |
| |||||
(Loss) Income Before Provision for Income Taxes and Minority Interest |
| (212,953 | ) | 368,052 |
|
| 69,119 |
|
|
| — |
|
|
| 224,218 |
|
| |||||
Provision for Income Taxes |
| — |
| 75,817 |
|
| 17,978 |
|
|
| — |
|
|
| 93,795 |
|
| |||||
Equity in the Earnings of Subsidiaries, Net of Tax |
| (341,816 | ) | (47,328 | ) |
| — |
|
|
| 389,144 |
|
|
| — |
|
| |||||
Minority Interests in Earnings of Subsidiaries, Net |
| — |
| — |
|
| 1,560 |
|
|
| — |
|
|
| 1,560 |
|
| |||||
Net Income |
| $ | 128,863 |
| $ | 339,563 |
|
| $ | 49,581 |
|
|
| $ | (389,144 | ) |
|
| $ | 128,863 |
|
|
86
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
5. Selected Consolidated Financial Statements of Parent, Guarantors and Non-Guarantors (Continued)
|
| Year Ended December 31, 2004 |
| |||||||||||||||||||||
|
| Parent |
| Guarantors |
| Non- |
| Eliminations |
| Consolidated |
| |||||||||||||
Cash Flows from Operating Activities |
| $ | (176,437 | ) |
| $ | 426,230 |
|
|
| $ | 55,571 |
|
|
| $ | — |
|
|
| $ | 305,364 |
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| — |
|
| (162,032 | ) |
|
| (69,934 | ) |
|
| — |
|
|
| (231,966 | ) |
| |||||
Cash paid for acquisitions, net of cash acquired |
| — |
|
| (163,828 | ) |
|
| (220,510 | ) |
|
| — |
|
|
| (384,338 | ) |
| |||||
Intercompany loans to subsidiaries |
| 44,240 |
|
| 28,501 |
|
|
| — |
|
|
| (72,741 | ) |
|
| — |
|
| |||||
Investment in subsidiaries |
| (111,988 | ) |
| (111,988 | ) |
|
| — |
|
|
| 223,976 |
|
|
| — |
|
| |||||
Investment in joint ventures |
| — |
|
| (858 | ) |
|
| — |
|
|
| — |
|
|
| (858 | ) |
| |||||
Additions to customer relationship and acquisition costs |
| — |
|
| (10,050 | ) |
|
| (2,422 | ) |
|
| — |
|
|
| (12,472 | ) |
| |||||
Proceeds from sales of property and equipment |
| — |
|
| 3,053 |
|
|
| 58 |
|
|
| — |
|
|
| 3,111 |
|
| |||||
Cash Flows from Investing Activities |
| (67,748 | ) |
| (417,202 | ) |
|
| (292,808 | ) |
|
| 151,235 |
|
|
| (626,523 | ) |
| |||||
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Repayment of debt and term loans |
| (706,149 | ) |
| (117,246 | ) |
|
| (261,618 | ) |
|
| — |
|
|
| (1,085,013 | ) |
| |||||
Proceeds from debt and term loans |
| 668,882 |
|
| — |
|
|
| 479,393 |
|
|
| — |
|
|
| 1,148,275 |
|
| |||||
Early retirement of notes |
| — |
|
| — |
|
|
| (20,797 | ) |
|
| — |
|
|
| (20,797 | ) |
| |||||
Net proceeds from sales of senior subordinated notes |
| 269,427 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 269,427 |
|
| |||||
Debt financing (repayment to) and equity contribution from (distribution to) minority stockholders, net |
| — |
|
| — |
|
|
| (41,978 | ) |
|
| — |
|
|
| (41,978 | ) |
| |||||
Intercompany loans from parent |
| — |
|
| (47,542 | ) |
|
| (25,199 | ) |
|
| 72,741 |
|
|
| — |
|
| |||||
Equity contribution from parent |
| — |
|
| 111,988 |
|
|
| 111,988 |
|
|
| (223,976 | ) |
|
| — |
|
| |||||
Proceeds from exercise of stock options and employee stock purchase plan |
| 18,041 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,041 |
|
| |||||
Payment of debt financing costs and stock issuance costs |
| (6,016 | ) |
| — |
|
|
| (5,370 | ) |
|
| — |
|
|
| (11,386 | ) |
| |||||
Cash Flows from Financing Activities |
| 244,185 |
|
| (52,800 | ) |
|
| 236,419 |
|
|
| (151,235 | ) |
|
| 276,569 |
|
| |||||
Effect of exchange rates on cash and cash equivalents |
| — |
|
| — |
|
|
| 1,849 |
|
|
| — |
|
|
| 1,849 |
|
| |||||
(Decrease) Increase in cash and cash equivalents |
| — |
|
| (43,772 | ) |
|
| 1,031 |
|
|
| — |
|
|
| (42,741 | ) |
| |||||
Cash and cash equivalents, beginning of |
| — |
|
| 54,793 |
|
|
| 19,890 |
|
|
| — |
|
|
| 74,683 |
|
| |||||
Cash and cash equivalents, end of year |
| $ | — |
|
| $ | 11,021 |
|
|
| $ | 20,921 |
|
|
| $ | — |
|
|
| $ | 31,942 |
|
|
87
| | December 31, 2002 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Guarantors | Canada Company | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
| Assets | ||||||||||||||||||||
| Current Assets: | ||||||||||||||||||||
| Cash and Cash Equivalents | $ | — | $ | 52,025 | $ | 1,759 | $ | 2,508 | $ | — | $ | 56,292 | ||||||||
| Accounts Receivable | — | 183,610 | 13,898 | 27,908 | — | 225,416 | ||||||||||||||
| Intercompany Receivable | 782,547 | — | — | 13,785 | (796,332 | ) | — | |||||||||||||
| Other Current Assets | 3,400 | 72,140 | 2,299 | 7,665 | (172 | ) | 85,332 | |||||||||||||
| Total Current Assets | 785,947 | 307,775 | 17,956 | 51,866 | (796,504 | ) | 367,040 | |||||||||||||
| Property, Plant and Equipment, Net | — | 926,147 | 77,003 | 236,038 | — | 1,239,188 | ||||||||||||||
| Other Assets, Net: | ||||||||||||||||||||
| Long-term Notes Receivable from Affiliates and Intercompany Receivable | 1,150,627 | — | — | 98,715 | (1,249,342 | ) | — | |||||||||||||
| Investment in Subsidiaries | 367,355 | 76,011 | — | — | (443,366 | ) | — | |||||||||||||
| Goodwill, Net | — | 1,273,774 | 114,131 | 147,328 | 9,741 | 1,544,974 | ||||||||||||||
| Other, Net | 21,191 | 52,292 | 9,327 | 4,785 | (8,142 | ) | 79,453 | |||||||||||||
| Total Other Assets, Net | 1,539,173 | 1,402,077 | 123,458 | 250,828 | (1,691,109 | ) | 1,624,427 | |||||||||||||
| Total Assets | $ | 2,325,120 | $ | 2,635,999 | $ | 218,417 | $ | 538,732 | $ | (2,487,613 | ) | $ | 3,230,655 | |||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||||||
| Intercompany Payable | $ | — | $ | 637,941 | $ | 92,259 | $ | 66,132 | $ | (796,332 | ) | $ | — | |||||||
| Total Current Liabilities | 62,025 | 255,016 | 15,249 | 95,844 | (172 | ) | 427,962 | |||||||||||||
| Long-term Debt, Net of Current Portion | 1,306,027 | 1,232 | 126,408 | 228,698 | — | 1,662,365 | ||||||||||||||
| Long-term Notes Payable to Affiliates and Intercompany Payable | — | 1,249,342 | — | — | (1,249,342 | ) | — | |||||||||||||
| Other Long-term Liabilities | 12,207 | 111,415 | 997 | 16,858 | (8,142 | ) | 133,335 | |||||||||||||
| Commitments and Contingencies | ||||||||||||||||||||
| Minority Interests | — | — | — | 4,182 | 57,950 | 62,132 | ||||||||||||||
| Shareholders' Equity (Deficit) | 944,861 | 381,053 | (16,496 | ) | 127,018 | (491,575 | ) | 944,861 | ||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 2,325,120 | $ | 2,635,999 | $ | 218,417 | $ | 538,732 | $ | (2,487,613 | ) | $ | 3,230,655 | |||||||
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
5. Selected Consolidated Financial Statements of Parent, Guarantors and Non-Guarantors (Continued)
|
| Year Ended December 31, 2005 |
| |||||||||||||||||||||
|
| Parent |
| Guarantors |
| Non- |
| Eliminations |
| Consolidated |
| |||||||||||||
Cash Flows from Operating Activities |
| $ | (149,143 | ) |
| $ | 433,730 |
|
|
| $ | 92,589 |
|
|
| $ | — |
|
|
| $ | 377,176 |
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| — |
|
| (190,143 | ) |
|
| (81,986 | ) |
|
| — |
|
|
| (272,129 | ) |
| |||||
Cash paid for acquisitions, net of cash acquired |
| — |
|
| (66,890 | ) |
|
| (111,348 | ) |
|
| — |
|
|
| (178,238 | ) |
| |||||
Intercompany loans to subsidiaries |
| 73,702 |
|
| (107,286 | ) |
|
| — |
|
|
| 33,584 |
|
|
| — |
|
| |||||
Investment in subsidiaries |
| (15,687 | ) |
| (15,687 | ) |
|
| — |
|
|
| 31,374 |
|
|
| — |
|
| |||||
Additions to customer relationship and acquisition costs |
| — |
|
| (7,909 | ) |
|
| (5,522 | ) |
|
| — |
|
|
| (13,431 | ) |
| |||||
Proceeds from sales of property and equipment and other |
| — |
|
| 15,895 |
|
|
| 11,728 |
|
|
| — |
|
|
| 27,623 |
|
| |||||
Cash Flows from Investing Activities |
| 58,015 |
|
| (372,020 | ) |
|
| (187,128 | ) |
|
| 64,958 |
|
|
| (436,175 | ) |
| |||||
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Repayment of debt and term loans |
| (300,322 | ) |
| (2,783 | ) |
|
| (206,490 | ) |
|
| — |
|
|
| (509,595 | ) |
| |||||
Proceeds from debt and term loans |
| 366,352 |
|
| — |
|
|
| 202,374 |
|
|
| — |
|
|
| 568,726 |
|
| |||||
Debt financing (repayment to) and equity contribution from (distribution to) minority stockholders, net |
| — |
|
| — |
|
|
| (2,399 | ) |
|
| — |
|
|
| (2,399 | ) |
| |||||
Intercompany loans from parent |
| — |
|
| (74,977 | ) |
|
| 108,561 |
|
|
| (33,584 | ) |
|
| — |
|
| |||||
Equity contribution from parent |
| — |
|
| 15,687 |
|
|
| 15,687 |
|
|
| (31,374 | ) |
|
| — |
|
| |||||
Proceeds from exercise of stock options and employee stock purchase plan |
| 25,649 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 25,649 |
|
| |||||
Payment of debt financing costs and stock issuance costs |
| (551 | ) |
| — |
|
|
| (381 | ) |
|
| — |
|
|
| (932 | ) |
| |||||
Cash Flows from Financing Activities |
| 91,128 |
|
| (62,073 | ) |
|
| 117,352 |
|
|
| (64,958 | ) |
|
| 81,449 |
|
| |||||
Effect of exchange rates on cash and cash equivalents |
| — |
|
| — |
|
|
| (979 | ) |
|
| — |
|
|
| (979 | ) |
| |||||
(Decrease) Increase in cash and cash equivalents |
| — |
|
| (363 | ) |
|
| 21,834 |
|
|
| — |
|
|
| 21,471 |
|
| |||||
Cash and cash equivalents, beginning of year |
| — |
|
| 11,021 |
|
|
| 20,921 |
|
|
| — |
|
|
| 31,942 |
|
| |||||
Cash and cash equivalents, end of year |
| $ | — |
|
| $ | 10,658 |
|
|
| $ | 42,755 |
|
|
| $ | — |
|
|
| $ | 53,413 |
|
|
88
| | Year Ended December 31, 2003 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Guarantors | Canada Company | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
| Revenues: | |||||||||||||||||||||
| Storage | $ | — | $ | 712,862 | $ | 45,841 | $ | 116,332 | $ | — | $ | 875,035 | |||||||||
| Service and Storage Material Sales | — | 499,992 | 41,751 | 84,551 | — | 626,294 | |||||||||||||||
| Total Revenues | — | 1,212,854 | 87,592 | 200,883 | — | 1,501,329 | |||||||||||||||
| Operating Expenses: | |||||||||||||||||||||
| Cost of Sales (Excluding Depreciation) | — | 545,202 | 43,580 | 91,965 | — | 680,747 | |||||||||||||||
| Selling, General and Administrative | 427 | 314,424 | 15,028 | 53,762 | — | 383,641 | |||||||||||||||
| Depreciation and Amortization | 20 | 106,024 | 6,209 | 18,665 | — | 130,918 | |||||||||||||||
| Loss (Gain) on disposal/writedown of property, plant and equipment, net | — | 1,771 | 238 | (879 | ) | — | 1,130 | ||||||||||||||
| Total Operating Expenses | 447 | 967,421 | 65,055 | 163,513 | — | 1,196,436 | |||||||||||||||
| Operating (Loss) Income | (447 | ) | 245,433 | 22,537 | 37,370 | — | 304,893 | ||||||||||||||
| Interest Expense, Net | 23,809 | 91,881 | 13,481 | 21,297 | — | 150,468 | |||||||||||||||
| Equity in the Earnings of Subsidiaries | (159,933 | ) | (4,334 | ) | — | — | 164,267 | — | |||||||||||||
| Other Expense (Income), Net | 51,040 | (45,492 | ) | (8,612 | ) | 500 | — | (2,564 | ) | ||||||||||||
| Income from Continuing Operations Before Provision for Income Taxes and Minority Interest | 84,637 | 203,378 | 17,668 | 15,573 | (164,267 | ) | 156,989 | ||||||||||||||
| Provision for Income Taxes | — | 53,449 | 7,734 | 5,547 | — | 66,730 | |||||||||||||||
| Minority Interest in Earnings of Subsidiaries | — | — | — | 5,622 | — | 5,622 | |||||||||||||||
| Net Income | $ | 84,637 | $ | 149,929 | $ | 9,934 | $ | 4,404 | $ | (164,267 | ) | $ | 84,637 | ||||||||
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
5. Selected Consolidated Financial Statements of Parent, Guarantors and Non-Guarantors (Continued)
|
| Year Ended December 31, 2006 |
| |||||||||||||||||||||
|
| Parent |
| Guarantors |
| Non- |
| Eliminations |
| Consolidated |
| |||||||||||||
Cash Flows from Operating Activities |
| $ | (153,741 | ) |
| $ | 434,021 |
|
|
| $ | 94,002 |
|
|
| $ | — |
|
|
| $ | 374,282 |
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| — |
|
| (266,310 | ) |
|
| (115,660 | ) |
|
| — |
|
|
| (381,970 | ) |
| |||||
Cash paid for acquisitions, net of cash acquired |
| — |
|
| (24,576 | ) |
|
| (56,632 | ) |
|
| — |
|
|
| (81,208 | ) |
| |||||
Intercompany loans to subsidiaries |
| 76,874 |
|
| (36,506 | ) |
|
| — |
|
|
| (40,368 | ) |
|
| — |
|
| |||||
Investment in subsidiaries |
| (16,800 | ) |
| (16,800 | ) |
|
| — |
|
|
| 33,600 |
|
|
| — |
|
| |||||
Additions to customer relationship and acquisition costs |
| — |
|
| (9,263 | ) |
|
| (4,988 | ) |
|
| — |
|
|
| (14,251 | ) |
| |||||
Investment in joint ventures |
| — |
|
| (2,814 | ) |
|
| (3,129 | ) |
|
| — |
|
|
| (5,943 | ) |
| |||||
Proceeds from sales of property and equipment and other |
| — |
|
| 257 |
|
|
| 16,401 |
|
|
| — |
|
|
| 16,658 |
|
| |||||
Cash Flows from Investing Activities |
| 60,074 |
|
| (356,012 | ) |
|
| (164,008 | ) |
|
| (6,768 | ) |
|
| (466,714 | ) |
| |||||
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Repayment of debt and term loans |
| (571,456 | ) |
| (10,113 | ) |
|
| (73,391 | ) |
|
| — |
|
|
| (654,960 | ) |
| |||||
Proceeds from debt and term loans |
| 469,273 |
|
| — |
|
|
| 74,667 |
|
|
| — |
|
|
| 543,940 |
|
| |||||
Early retirement of senior subordinated notes |
| (112,397 | ) |
| — |
|
|
| — |
|
|
| — |
|
|
| (112,397 | ) |
| |||||
Net proceeds from sales of senior subordinated notes |
| 281,984 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 281,984 |
|
| |||||
Debt financing (repayment to) and equity contribution from (distribution to) minority stockholders, net |
| — |
|
| — |
|
|
| (2,068 | ) |
|
| — |
|
|
| (2,068 | ) |
| |||||
Intercompany loans from parent |
| — |
|
| (79,000 | ) |
|
| 38,632 |
|
|
| 40,368 |
|
|
| — |
|
| |||||
Equity contribution from parent |
| — |
|
| 16,800 |
|
|
| 16,800 |
|
|
| (33,600 | ) |
|
| — |
|
| |||||
Proceeds from exercise of stock options and employee stock purchase plan |
| 22,245 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 22,245 |
|
| |||||
Excess tax benefits from stock-based compensation |
| 4,387 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,387 |
|
| |||||
Payment of debt financing costs and stock issuance costs |
| (369 | ) |
| — |
|
|
| (28 | ) |
|
| — |
|
|
| (397 | ) |
| |||||
Cash Flows from Financing Activities |
| 93,667 |
|
| (72,313 | ) |
|
| 54,612 |
|
|
| 6,768 |
|
|
| 82,734 |
|
| |||||
Effect of exchange rates on cash and cash equivalents |
| — |
|
| — |
|
|
| 1,654 |
|
|
| — |
|
|
| 1,654 |
|
| |||||
Increase (Decrease) in cash and cash equivalents |
| — |
|
| 5,696 |
|
|
| (13,740 | ) |
|
| — |
|
|
| (8,044 | ) |
| |||||
Cash and cash equivalents, beginning of |
| — |
|
| 10,658 |
|
|
| 42,755 |
|
|
| — |
|
|
| 53,413 |
|
| |||||
Cash and cash equivalents, end of year |
| $ | — |
|
| $ | 16,354 |
|
|
| $ | 29,015 |
|
|
| $ | — |
|
|
| $ | 45,369 |
|
|
89
| | Year Ended December 31, 2002 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Guarantors | Canada Company | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
| Revenues: | |||||||||||||||||||||
| Storage | $ | — | $ | 658,613 | $ | 36,169 | $ | 64,754 | $ | — | $ | 759,536 | |||||||||
| Service and Storage Material Sales | — | 473,077 | 38,947 | 46,937 | — | 558,961 | |||||||||||||||
| Total Revenues | — | 1,131,690 | 75,116 | 111,691 | — | 1,318,497 | |||||||||||||||
| Operating Expenses: | |||||||||||||||||||||
| Cost of Sales (Excluding Depreciation) | — | 527,215 | 37,464 | 57,620 | — | 622,299 | |||||||||||||||
| Selling, General and Administrative | 57 | 295,435 | 13,756 | 23,802 | — | 333,050 | |||||||||||||||
| Depreciation and Amortization | — | 95,622 | 5,714 | 7,656 | — | 108,992 | |||||||||||||||
| Merger-related Expenses | — | 796 | — | — | — | 796 | |||||||||||||||
| Loss (Gain) on disposal/writedown of property, plant and equipment, net | — | 2,706 | (8 | ) | (1,924 | ) | — | 774 | |||||||||||||
| Total Operating Expenses | 57 | 921,774 | 56,926 | 87,154 | — | 1,065,911 | |||||||||||||||
| Operating (Loss) Income | (57 | ) | 209,916 | 18,190 | 24,537 | — | 252,586 | ||||||||||||||
| Interest Expense, Net | 7,077 | 101,660 | 14,708 | 13,187 | — | 136,632 | |||||||||||||||
| Equity in the (Earnings) Losses of Subsidiaries | (72,104 | ) | 3,320 | — | — | 68,784 | — | ||||||||||||||
| Other Expense (Income), Net | 6,678 | (4,189 | ) | (1,490 | ) | 436 | — | 1,435 | |||||||||||||
| Income from Continuing Operations Before Provision for Income Taxes and Minority Interest | 58,292 | 109,125 | 4,972 | 10,914 | (68,784 | ) | 114,519 | ||||||||||||||
| Provision for Income Taxes | — | 41,132 | 2,064 | 4,122 | — | 47,318 | |||||||||||||||
| Minority Interest in Earnings of Subsidiaries | — | — | — | 3,629 | — | 3,629 | |||||||||||||||
| Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle | 58,292 | 67,993 | 2,908 | 3,163 | (68,784 | ) | 63,572 | ||||||||||||||
| Income from Discontinued Operations (Net of Tax of $768) | — | 1,116 | — | — | — | 1,116 | |||||||||||||||
| Cumulative Effect of Change in Accounting Principle (net of Minority Interest) | — | — | — | (6,396 | ) | — | (6,396 | ) | |||||||||||||
| Net Income (Loss) | $ | 58,292 | $ | 69,109 | $ | 2,908 | $ | (3,233 | ) | $ | (68,784 | ) | $ | 58,292 | |||||||
90
| | Year Ended December 31, 2001 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Guarantors | Canada Company | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
| Revenues: | |||||||||||||||||||||
| Storage | $ | — | $ | 604,546 | $ | 33,475 | $ | 56,453 | $ | — | $ | 694,474 | |||||||||
| Service and Storage Material Sales | — | 421,735 | 34,549 | 34,960 | — | 491,244 | |||||||||||||||
| Total Revenues | — | 1,026,281 | 68,024 | 91,413 | — | 1,185,718 | |||||||||||||||
| Operating Expenses: | |||||||||||||||||||||
| Cost of Sales (Excluding Depreciation) | — | 493,048 | 35,093 | 48,397 | — | 576,538 | |||||||||||||||
| Selling, General and Administrative | 83 | 270,201 | 12,733 | 24,783 | — | 307,800 | |||||||||||||||
| Depreciation and Amortization | — | 131,003 | 10,144 | 12,124 | — | 153,271 | |||||||||||||||
| Merger-Related Expenses | — | 3,644 | — | 29 | — | 3,673 | |||||||||||||||
| Loss (Gain) on disposal/writedown of property, plant and equipment, net | — | 339 | (8 | ) | (11 | ) | — | 320 | |||||||||||||
| Total Operating Expenses | 83 | 898,235 | 57,962 | 85,322 | — | 1,041,602 | |||||||||||||||
| Operating (Loss) Income | (83 | ) | 128,046 | 10,062 | 6,091 | — | 144,116 | ||||||||||||||
| Interest Expense, Net | 17,755 | 92,823 | 16,244 | 7,920 | — | 134,742 | |||||||||||||||
| Equity in the Losses of Subsidiaries | (672 | ) | 2,117 | — | — | (1,445 | ) | — | |||||||||||||
| Other Expense, Net | 26,891 | 2,887 | 7,338 | 369 | — | 37,485 | |||||||||||||||
| (Loss) Income from Continuing Operations Before Provision for Income Taxes and Minority Interest | (44,057 | ) | 30,219 | (13,520 | ) | (2,198 | ) | 1,445 | (28,111 | ) | |||||||||||
| Provision (Benefit) for Income Taxes | — | 16,077 | (111 | ) | 1,909 | — | 17,875 | ||||||||||||||
| Minority Interest in Losses of Subsidiaries | — | — | — | (1,929 | ) | — | (1,929 | ) | |||||||||||||
| Net Loss | $ | (44,057 | ) | $ | 14,142 | $ | (13,409 | ) | $ | (2,178 | ) | $ | 1,445 | $ | (44,057 | ) | |||||
91
| | Year Ended December 31, 2003 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Guarantors | Canada Company | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
| Cash Flows from Operating Activities: | |||||||||||||||||||||
| Cash Flows (Used in) Provided by Operating Activities | $ | (3,823 | ) | $ | 252,175 | $ | 23,486 | $ | 16,855 | $ | — | $ | 288,693 | ||||||||
| Cash Flows from Investing Activities: | |||||||||||||||||||||
| Capital expenditures | — | (142,744 | ) | (17,829 | ) | (43,904 | ) | — | (204,477 | ) | |||||||||||
| Cash paid for acquisitions, net of cash acquired | — | (66,707 | ) | — | (313,183 | ) | — | (379,890 | ) | ||||||||||||
| Intercompany loans to subsidiaries | (407,292 | ) | (324,980 | ) | — | — | 732,272 | — | |||||||||||||
| Investment in subsidiaries | (1,705 | ) | (1,705 | ) | — | — | 3,410 | — | |||||||||||||
| Additions to customer relationship and acquisition costs | — | (9,549 | ) | (797 | ) | (2,231 | ) | — | (12,577 | ) | |||||||||||
| Investment in convertible preferred stock | — | (1,357 | ) | — | — | — | (1,357 | ) | |||||||||||||
| Proceeds from sales of property and equipment | — | 9,423 | 47 | 2,197 | — | 11,667 | |||||||||||||||
| Cash Flows Used in Investing Activities | (408,997 | ) | (537,619 | ) | (18,579 | ) | (357,121 | ) | 735,682 | (586,634 | ) | ||||||||||
| Cash Flows from Financing Activities: | |||||||||||||||||||||
| Repayment of debt and term loans | (600,445 | ) | (683 | ) | (53,955 | ) | (43,734 | ) | — | (698,817 | ) | ||||||||||
| Proceeds from borrowings and term loans | 643,784 | — | 49,569 | 50,663 | — | 744,016 | |||||||||||||||
| Early retirement of senior subordinated notes | (254,407 | ) | — | (119,851 | ) | — | — | (374,258 | ) | ||||||||||||
| Net proceeds from sales of senior subordinated notes | 617,179 | — | — | — | — | 617,179 | |||||||||||||||
| Debt financing and equity contribution from minority shareholders, net | — | — | — | 20,225 | — | 20,225 | |||||||||||||||
| Intercompany loans from parent | — | 287,190 | 119,829 | 325,253 | (732,272 | ) | — | ||||||||||||||
| Equity contribution from parent | — | 1,705 | — | 1,705 | (3,410 | ) | — | ||||||||||||||
| Other, net | 6,709 | — | — | — | — | 6,709 | |||||||||||||||
| Cash Flows Provided by (Used in) Financing Activities | 412,820 | 288,212 | (4,408 | ) | 354,112 | (735,682 | ) | 315,054 | |||||||||||||
| Effect of exchange rates on cash and cash equivalents | — | — | 401 | 877 | — | 1,278 | |||||||||||||||
| Increase in cash and cash equivalents | — | 2,768 | 900 | 14,723 | — | 18,391 | |||||||||||||||
| Cash and cash equivalents, beginning of year | — | 52,025 | 1,759 | 2,508 | — | 56,292 | |||||||||||||||
| Cash and cash equivalents, end of year | $ | — | $ | 54,793 | $ | 2,659 | $ | 17,231 | $ | — | $ | 74,683 | |||||||||
92
| | Year Ended December 31, 2002 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Guarantors | Canada Company | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
| Cash Flows from Operating Activities: | |||||||||||||||||||||
| Cash Flows Provided by Operating Activities | $ | 2,259 | $ | 223,446 | $ | 11,174 | $ | 18,069 | $ | — | $ | 254,948 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||||||||||||
| Capital expenditures | — | (152,501 | ) | (8,125 | ) | (36,371 | ) | — | (196,997 | ) | |||||||||||
| Cash paid for acquisitions, net of cash acquired | — | (28,041 | ) | (21 | ) | (21,299 | ) | — | (49,361 | ) | |||||||||||
| Intercompany loans to subsidiaries | (19,365 | ) | (17,928 | ) | — | — | 37,293 | — | |||||||||||||
| Investment in subsidiaries | (1,940 | ) | (1,940 | ) | — | — | 3,880 | — | |||||||||||||
| Additions to customer relationship and acquisition costs | — | (7,137 | ) | (613 | ) | (669 | ) | — | (8,419 | ) | |||||||||||
| Proceeds from sales of property and equipment | — | 1,460 | 8 | 5,552 | — | 7,020 | |||||||||||||||
| Cash Flows Used in Investing Activities | (21,305 | ) | (206,087 | ) | (8,751 | ) | (52,787 | ) | 41,173 | (247,757 | ) | ||||||||||
| Cash Flows from Financing Activities: | |||||||||||||||||||||
| Repayment of debt and term loans | (458,929 | ) | (606 | ) | (535 | ) | (2,173 | ) | — | (462,243 | ) | ||||||||||
| Proceeds from borrowings and term loans | 426,235 | — | — | 12,607 | — | 438,842 | |||||||||||||||
| Early retirement of senior subordinated notes | (54,380 | ) | — | — | — | — | (54,380 | ) | |||||||||||||
| Net proceeds from sales of senior subordinated notes | 99,000 | — | — | — | — | 99,000 | |||||||||||||||
| Debt repayment and equity distribution to minority shareholders, net | — | — | — | (1,241 | ) | — | (1,241 | ) | |||||||||||||
| Intercompany loans from parent | — | 21,937 | (2,469 | ) | 17,825 | (37,293 | ) | — | |||||||||||||
| Equity contribution from parent | — | 1,940 | — | 1,940 | (3,880 | ) | — | ||||||||||||||
| Other, net | 7,120 | — | — | — | — | 7,120 | |||||||||||||||
| Cash Flows Provided by (Used in) Financing Activities | 19,046 | 23,271 | (3,004 | ) | 28,958 | (41,173 | ) | 27,098 | |||||||||||||
| Effect of exchange rates on cash and cash equivalents | — | — | 644 | — | — | 644 | |||||||||||||||
| Increase (Decrease) in cash and cash equivalents | — | 40,630 | 63 | (5,760 | ) | — | 34,933 | ||||||||||||||
| Cash and cash equivalents, beginning of year | — | 11,395 | 1,696 | 8,268 | — | 21,359 | |||||||||||||||
| Cash and cash equivalents, end of year | $ | — | $ | 52,025 | $ | 1,759 | $ | 2,508 | $ | — | $ | 56,292 | |||||||||
93
| | Year Ended December 31, 2001 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Guarantors | Canada Company | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
| Cash Flows from Operating Activities: | |||||||||||||||||||||
| Cash Flows Provided by Operating Activities | $ | 2,557 | $ | 141,177 | $ | 8,867 | $ | 8,308 | $ | — | $ | 160,909 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||||||||||||
| Capital expenditures | — | (164,335 | ) | (10,330 | ) | (22,374 | ) | — | (197,039 | ) | |||||||||||
| Cash paid for acquisitions, net of cash acquired | — | (50,467 | ) | (177 | ) | (20,753 | ) | — | (71,397 | ) | |||||||||||
| Intercompany loans to subsidiaries | (114,792 | ) | (15,836 | ) | — | — | 130,628 | — | |||||||||||||
| Investment in subsidiaries | (6,866 | ) | (6,866 | ) | — | — | 13,732 | — | |||||||||||||
| Additions to customer relationship and acquisition costs | — | (7,292 | ) | (319 | ) | (809 | ) | — | (8,420 | ) | |||||||||||
| Investment in convertible preferred stock | — | (2,000 | ) | — | — | — | (2,000 | ) | |||||||||||||
| Proceeds from sales of property and equipment | — | 87 | 21 | 612 | — | 720 | |||||||||||||||
| Cash Flows Used in Investing Activities | (121,658 | ) | (246,709 | ) | (10,805 | ) | (43,324 | ) | 144,360 | (278,136 | ) | ||||||||||
| Cash Flows from Financing Activities: | |||||||||||||||||||||
| Repayment of debt and term loans | (110,869 | ) | (1,066 | ) | (2,590 | ) | (3,753 | ) | — | (118,278 | ) | ||||||||||
| Proceeds from borrowings | 103,411 | 73 | — | 2,111 | — | 105,595 | |||||||||||||||
| Early retirement of senior subordinated notes | (312,701 | ) | — | — | — | — | (312,701 | ) | |||||||||||||
| Net Proceeds from sales of senior subordinated notes | 427,924 | — | — | — | — | 427,924 | |||||||||||||||
| Debt financing and equity contribution from minority shareholders, net | — | — | — | 21,216 | — | 21,216 | |||||||||||||||
| Intercompany loans from parent | — | 107,718 | 7,016 | 15,894 | (130,628 | ) | — | ||||||||||||||
| Equity contribution from parent | — | 6,866 | — | 6,866 | (13,732 | ) | — | ||||||||||||||
| Other, net | 11,145 | — | — | — | — | 11,145 | |||||||||||||||
| Cash Flows Provided by Financing Activities | 118,910 | 113,591 | 4,426 | 42,334 | (144,360 | ) | 134,901 | ||||||||||||||
| Effect of exchange rates on cash and cash equivalents | — | — | (1,094 | ) | (1,421 | ) | — | (2,515 | ) | ||||||||||||
| (Decrease) Increase in cash and cash equivalents | (191 | ) | 8,059 | 1,394 | 5,897 | — | 15,159 | ||||||||||||||
| Cash and cash equivalents, beginning of year | 191 | 3,336 | 302 | 2,371 | — | 6,200 | |||||||||||||||
| Cash and cash equivalents, end of year | $ | — | $ | 11,395 | $ | 1,696 | $ | 8,268 | $ | — | $ | 21,359 | |||||||||
94
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
7.6. Acquisitions
In July 2003,The acquisitions we consummated in 2004, 2005 and IME completed the acquisition of Hays IMS in two simultaneous transactions. IME acquired the European operations of Hays IMS for aggregate cash consideration (including transaction costs) of approximately 190,000 British pounds sterling ($309,000), while we acquired the U.S. operations of Hays IMS for aggregate cash consideration (including transaction costs) of approximately 14,500 British pounds sterling ($24,000). Both transactions2006 were on a cash and debt free basis.
We purchased substantially all of the assets and assumed certain liabilities of 16, 10 and 8 records management businesses during 2001, 2002 and 2003, respectively. Each of these acquisitions was accounted for using the purchase method of accounting, and accordingly, the results of operations for each acquisition have been included in our consolidated results from their respective acquisition dates. ConsiderationCash consideration for the various acquisitions included: (1) cash, which was primarily provided through borrowings under our credit facilities, the proceeds from the sale of senior subordinated notes and (2)cash equivalents on-hand. The significant acquisitions are as follows:
For full access to all future cash flows and greater strategic and financial flexibility, in February 2004, we completed the issuanceacquisition of certainthe 49.9% equity interest held by Mentmore plc (“Mentmore”) in IME for total consideration of 82,500 British pounds sterling ($154,000) in cash. Included in this amount is the repayment of all trade and working capital funding owed to Mentmore by IME. Completion of the transaction gave us 100% ownership of IME. This transaction did not have material impact on revenue or operating income since we already fully consolidated IME’s financial results. Using the purchase method of accounting for this acquisition, the net assets of IME were adjusted to reflect 49.9% of the difference between the fair market value and their carrying value on the date of acquisition.
To build upon our mission to protect our customers’ information regardless of format, in November 2004, we acquired Connected Corporation (“Connected”) for total cash consideration of $109,326 (net of cash acquired). Connected’s technology allows for the protection, archiving and recovery of distributed data.
To develop our presence in Asia Pacific, in December 2005, we acquired the Australian and New Zealand operations of Pickfords Records Management for total cash consideration of approximately Australian Dollar 115,000 ($86,276, net of cash acquired).
To extend our leadership role in the protection of our senior subordinated notes.customer’ business data, in December 2005, we acquired full ownership of LiveVault Corporation (“LiveVault”) for cash consideration of $35,798 (net of cash acquired). As of December 31, 2004, we had a minority interest investment in LiveVault with a carrying value of $3,615. LiveVault is a provider of disk-based online server backup and recovery solutions.
A summary of the consideration paid and the allocation of the purchase price of the acquisitions is as follows:
| | | 2001 | 2002 | 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Paid (gross of cash acquired) | Cash Paid (gross of cash acquired) | $ | 72,222 | (1) | $ | 41,356 | (2) | $ | 387,803 | (3) |
| $ | 388,243 | (1) | $ | 180,457 | (1) | $ | 60,428 | (1) | ||
| Fair Value of Debt Assumed/Issued | 10,352 | — | — | |||||||||||||||||||
| Total Consideration | 82,574 | 41,356 | 387,803 | |||||||||||||||||||
Previous Investment Balance of Businesses Acquired |
| — |
| 3,615 |
| — |
| |||||||||||||||
Fair Value of Options Issued |
| 1,245 |
| 780 |
| — |
| |||||||||||||||
Total Consideration |
| 389,488 |
| 184,852 |
| 60,428 |
| |||||||||||||||
| Fair Value of Identifiable Assets Acquired | Fair Value of Identifiable Assets Acquired | 19,504 | 10,440 | 244,950 | Fair Value of Identifiable Assets Acquired |
| 160,622 |
| 85,070 |
| 55,474 |
| ||||||||||
| Liabilities Assumed | Liabilities Assumed | (10,019 | ) | (4,868 | ) | (46,217 | ) | Liabilities Assumed |
| (50,006 | ) | (21,876 | ) | (12,364 | ) | |||||||
| Fair Value of Identifiable Net Assets Acquired | 9,485 | 5,572 | 198,733 | |||||||||||||||||||
Minority Interest |
| 71,535 | (4) | 8,142 | (5) | 919 | (6) | |||||||||||||||
Total Fair Value of Identifiable Net Assets Acquired |
| 182,151 |
| 71,336 |
| 44,029 |
| |||||||||||||||
| Recorded Goodwill | Recorded Goodwill | $ | 73,089 | $ | 35,784 | $ | 189,070 |
| $ | 207,337 |
| $ | 113,516 |
| $ | 16,399 |
| |||||
(1)Included in cash paid for acquisitions in the consolidated statementstatements of cash flows for the yearyears ended December 31, 20012004, 2005 and 2006 is a $5,524 contingent payment that was paid during 2001of $5,513, $704 and $21,382, respectively, related to acquisitions made before 2001.
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
6. Acquisitions (Continued)
(2) Consisted primarily of cash flowsaccounts receivable, prepaid expenses and other, land, buildings, racking, leasehold improvements. Additionally, includes core technology of $15,460 and $10,500 for the yearyears ended December 31, 2002 is a $7,165 contingent payment that was paid during 2002 related to an acquisition made in 2000.
(3) Consisted primarily of accounts payable, accrued expenses and notes payable.
(4) Consisted primarily of the carrying value of Mentmore’s 49.9% minority interest in 2003 related to an acquisition made in 2001.
(5) Consisted primarily of the carrying value of minority interests of Latin American partners at the date of acquisition.
(6) Consisted primarily of the carrying value of minority interests of European, Latin American and Asia Pacific partners at the date of acquisition.
Allocation of the purchase price for the 20032006 acquisitions was based on estimates of the fair value of net assets acquired, and is subject to adjustment. The purchase price allocations of certain 20032006 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.
95
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 cost of these restructuring activities were recorded as costs of the acquisitions and were provided in accordance with EITF No. 95-3, "Recognition“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 December 31, 20032006 primarily include completion of planned abandonments of facilities and severances forseverance contracts in connection with certain acquisitions.
The following is a summary of reserves related to such restructuring activities:
| | 2002 | 2003 |
| 2005 |
| 2006 |
| |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Reserves, beginning of the year | $ | 16,225 | $ | 9,906 |
| $ | 21,414 |
| $ | 12,698 |
| |||
| Reserves established | 4,963 | 12,526 |
| 1,142 |
| 3,642 |
| |||||||
| Expenditures | (6,745 | ) | (5,436 | ) |
| (7,360 | ) | (5,181 | ) | |||||
| Adjustments to goodwill, including currency effect(1) | (4,537 | ) | (674 | ) |
| (2,498 | ) | (5,606 | ) | |||||
| Reserves, end of the year | $ | 9,906 | $ | 16,322 |
| $ | 12,698 |
| $ | 5,553 |
| |||
(1)Includes adjustments to goodwill as a result of management finalizing its restructuring plans.
At December 31, 2002,2005, the restructuring reserves related to acquisitions consisted of lease losses on abandoned facilities ($5,146)9,760), severance costs for approximately two people ($578) and move569) and other exit costs ($4,182)2,369).
At December 31, 2003, 2006,
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
6. Acquisitions (Continued)
the restructuring reserves related to acquisitions consisted of lease losses on abandoned facilities ($6,849)3,010), severance costs for approximately 158 people ($3,593) and move259) and other exit costs ($5,880)2,284). These accruals are expected to be used prior to December 31, 20042007 except for lease losses of $4,927 and$2,142, severance contracts of $314, both$127, and other exit costs of $463, all of which are based on contracts that extend beyond one year.
In connection with our acquisition in India, we entered into a shareholder agreement in May 2006. The agreement contains a put provision that would allow the minority stockholder to sell the remaining 49.9% equity interest to us beginning on the third anniversary of this agreement for the greater of fair market value or approximately 84,835 Rupees (approximately $1,800). In accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—An Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34,” we recorded a liability representing our estimate of the fair value of the guarantee in the amount of $368, with the offset to goodwill.
In connection with some of our acquisitions, we have potential earn-out obligations that would be payable in the event businesses we acquired meet certain operational objectives. These payments are based on the future results of these operations and our estimate of the maximum contingent earn-out payments we wouldmay be required to make under all such agreements as of December 31, 20032006 is approximately $4,800.$6,600.
96
8. Capital Stock and Stock Options
a. Capital Stock
The following table summarizes the number of shares authorized, issued and outstanding for each issue of our capital stock as of December 31:
| | | Number of Shares | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Authorized | Issued and Outstanding | ||||||||
| Equity Type | | ||||||||||
| Par Value | 2002 | 2003 | 2002 | 2003 | |||||||
| Preferred stock | $ | .01 | 10,000,000 | 10,000,000 | — | — | |||||
| Common stock | .01 | 150,000,000 | 150,000,000 | 85,049,624 | 85,575,254 | ||||||
b. Stock Options
A total of 8,703,771 shares of common stock have been reserved for grants of options and other rights under our various stock incentive plans.
The following is a summary of stock option transactions, including those issued to employees of acquired companies, during the applicable periods, excluding transactions under the employee stock purchase plan:
| | Options | Weighted Average Exercise Price | |||
|---|---|---|---|---|---|
| Options outstanding, December 31, 2000 | 5,048,543 | $ | 12.55 | ||
| Granted | 497,757 | 26.38 | |||
| Exercised | (1,188,316 | ) | 6.94 | ||
| Canceled | (73,592 | ) | 19.28 | ||
| Options outstanding, December 31, 2001 | 4,284,392 | 15.63 | |||
| Granted | 432,560 | 29.96 | |||
| Exercised | (594,049 | ) | 9.26 | ||
| Canceled | (226,087 | ) | 17.01 | ||
| Options outstanding, December 31, 2002 | 3,896,816 | 18.08 | |||
| Granted | 458,567 | 37.20 | |||
| Exercised | (440,868 | ) | 13.27 | ||
| Canceled | (52,346 | ) | 26.40 | ||
| Options outstanding, December 31, 2003 | 3,862,169 | 20.59 | |||
Except for the options granted in connection with acquisitions, these options were granted with exercise prices equal to the market price of the stock at the date of grant. The majority of these options become exercisable ratably over a period of five years unless the holder terminates employment and generally have a contractual life of 10 years. The number of shares available for grant at December 31, 2003 was 969,331.
97
The following table summarizes additional information regarding options outstanding and exercisable at December 31, 2003:
| | | Outstanding | | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Weighted Average Remaining Contractual Life (in Years) | | Exercisable | ||||||||
| Range of Exercise Prices | Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | ||||||||
| $0.50 to $0.58 | 5,239 | 3.2 | $ | 0.57 | 5,239 | $ | 0.57 | |||||
| $2.88 to $3.84 | 245,968 | 2.2 | 3.04 | 245,968 | 3.04 | |||||||
| $4.42 to $6.07 | 84,312 | 4.6 | 5.53 | 84,312 | 5.53 | |||||||
| $6.83 to $7.29 | 456,098 | 2.5 | 6.93 | 456,098 | 6.93 | |||||||
| $11.44 to $16.22 | 554,808 | 3.9 | 14.40 | 535,998 | 14.36 | |||||||
| $18.11 to $26.30 | 1,541,204 | 6.4 | 22.51 | 929,659 | 22.17 | |||||||
| $27.41 to $38.40 | 974,540 | 8.6 | 33.31 | 159,793 | 29.21 | |||||||
| 3,862,169 | 5.8 | 20.59 | 2,417,067 | 15.45 | ||||||||
9. Discontinued Operations
In June 1999, in order to focus on our records and information management services business, we decided to sell our information technology staffing business, Arcus Staffing Resources, Inc., which was acquired in January 1998 as part of the acquisition of Arcus Group, Inc. Effective November 1, 1999, we completed the sale of substantially all of the assets of Arcus Staffing. The terms of the sale included contingent payments for a period of 18 months. In accordance with the provisions of APB No. 30, the sale of Arcus Staffing was accounted for as a discontinued operation. Accordingly, the Arcus Staffing operations were segregated from our continuing operations and reported as a separate line item on our consolidated statement of operations.
In 1999, we recorded an estimated loss on the sale of Arcus Staffing of $13,400, comprised of a write-off of goodwill, a deferred tax benefit and estimated expenses directly related to the transaction partially offset by the estimated income from operations of Arcus Staffing through the date of disposition. In 2002, we recorded income from discontinued operations of $1,116 (net of tax of $768) related to the reversal of remaining liabilities associated with certain contingencies which have been resolved.
98
10.7. Income Taxes
The components of income (loss) from continuing operations before provision for income taxes and minority interest are:
| | 2001 | 2002 | 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. and Canada | $ | (25,156 | ) | $ | 103,561 | $ | 140,638 |
| $ | 157,929 |
| $ | 178,300 |
| $ | 189,844 |
| ||
| Foreign | (2,955 | ) | 10,958 | 16,351 |
| 8,806 |
| 18,718 |
| 34,374 |
| ||||||||
| $ | 166,735 |
| $ | 197,018 |
| $ | 224,218 |
| ||||||||||
| $ | (28,111 | ) | $ | 114,519 | $ | 156,989 | |||||||||||||
We have estimated federal net operating loss carryforwards which begin to expire in 2018 through 2021 of $123,200$172,700 at December 31, 20032006 to reduce future federal taxable income, if any. These net operating loss carryforwards do not include approximately $103,000 of potential preacquisition net operating loss carryforwards of Arcus Group, Inc. and certain foreign acquisitions. Any tax benefit realized related to preacquisition net operating loss carryforwards will be recorded as a reduction of goodwill when, and if, realized. The Arcus Group carryforwards begin to expire in two years. We also have estimatedan asset for state net operating loss carryforwards of $73,776. The state net operating loss carryforwards are$18,200 (net of federal tax benefit), which begins to expire in 2007 through 2024, subject to a valuation allowance of approximately 54%98%. Additionally, we have federal alternative minimum tax credit carryforwards of $1,187,$4,800, which have no expiration date and are available to reduce future income taxes, if any.any, and foreign tax credits, which expire in 2016, of $23,600.
We are subject to examination by various tax authorities in jurisdictions in which we have significant business operations. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. As of December 31, 2006, we had approximately $62,000 of reserves related to uncertain tax positions included in other long-term liabilities in the accompanying consolidated balance sheets. Approximately $36,000 of the reserve is related to pre-acquisition net operating loss carryforwards and other acquisition related items. If the tax position is sustained, the reversal of this reserve will be recorded as a reduction of goodwill. Although we believe our tax estimates
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
7. Income Taxes (Continued)
are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
| | | December 31, |
| December��31, |
| ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2002 | 2003 |
| 2005 |
| 2006 |
| |||||||
| Deferred Tax Assets: | Deferred Tax Assets: |
|
|
|
|
| |||||||||
| Accrued liabilities | $ | 11,809 | $ | 12,854 | |||||||||||
| Deferred rent | 7,941 | 8,399 | |||||||||||||
| Net operating loss carryforwards | 63,445 | 46,611 | |||||||||||||
| AMT credit | 587 | 1,187 | |||||||||||||
| Valuation Allowance | (5,804 | ) | (4,829 | ) | |||||||||||
| Unrealized loss on hedging contracts | 12,858 | 9,332 | |||||||||||||
| Other | 31,567 | 16,589 | |||||||||||||
Accrued liabilities |
| $ | 25,687 |
| $ | 25,223 |
| ||||||||
Deferred rent |
| 11,478 |
| 12,722 |
| ||||||||||
Net operating loss carryforwards |
| 45,783 |
| 78,850 |
| ||||||||||
AMT and foreign tax credits |
| 18,760 |
| 29,285 |
| ||||||||||
Valuation Allowance(1) |
| (9,318 | ) | (27,274 | ) | ||||||||||
Other |
| 3,846 |
| 12,918 |
| ||||||||||
| 122,403 | 90,143 |
| 96,236 |
| 131,724 |
| |||||||||
| Deferred Tax Liabilities: | Deferred Tax Liabilities: |
|
|
|
|
| |||||||||
Other assets, principally due to differences in amortization |
| (120,321 | ) | (136,149 | ) | ||||||||||
Plant and equipment, principally due to differences in depreciation |
| (148,959 | ) | (187,480 | ) | ||||||||||
Customer acquisition costs |
| (24,647 | ) | (27,783 | ) | ||||||||||
| Other assets, principally due to differences in amortization | (47,274 | ) | (68,956 | ) |
| (293,927 | ) | (351,412 | ) | ||||||
| Plant and equipment, principally due to differences in depreciation | (103,606 | ) | (115,061 | ) | |||||||||||
| Customer acquisition costs | (15,795 | ) | (19,314 | ) | |||||||||||
| (166,675 | ) | (203,331 | ) | ||||||||||||
| Net deferred tax liability | $ | (44,272 | ) | $ | (113,188 | ) | |||||||||
Net deferred tax liability |
| $ | (197,691 | ) | $ | (219,688 | ) | ||||||||
99(1) The majority of the increase in our valuation allowance from 2005 to 2006 relates primarily to previously unrecorded state net operating losses that are subject to valuation allowance. Approximately $2,375 of the total 2006 valuation allowance, if realized, will be recorded as a reduction to goodwill.
We receive a tax deduction upon the exercise of non-qualified stock options or upon the disqualifying disposition by employees of incentive stock options and shares acquired under our employee stock purchase plan for the difference between the exercise price and the market price of the underlying common stock on the date of exercise which isor disqualifying disposition. The tax benefit for non-qualified stock options and the 15% discount associated with our employee stock purchase plan are included in the net operating loss carryforwards above. During 2002 and 2003, we recognized $4,476 and $3,950 ofconsolidated financial statements in the period in which compensation expense is recorded. The tax benefit associated with compensation expense recorded in the consolidated financial statements related to the exercise of non-qualifiedincentive stock options and incremental amounts recorded above the 15% discount associated with the employee stock purchase plan are recorded in the period the disqualifying disposition occurs. All tax benefits for awards issued prior to January 1, 2003 and incremental tax benefits in excess of compensation expense recorded in the consolidated financial statements are credited directly to equity and amounted to $6,904, $9,668 and $4,387 for the years ended December 31, 2004, 2005 and 2006, respectively.
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
7. Income Taxes (Continued)
We have not provided deferred taxes on book basis differences related to certain foreign subsidiaries because such basis differences are not expected to reverse in the foreseeable future and we intend to reinvest indefinitely outside the U.S. These basis differences arose primarily through the undistributed book earnings of our foreign subsidiaries. The basis differences could be reversed through a sale of the subsidiaries, the receipt of dividends from subsidiaries as well as certain other events or actions on our part, which was credited to equity.would result in an increase in our provision for income taxes.
We file a consolidated federal income tax return with our U.S. subsidiaries. The provision for income taxes consists of the following components:
| | Year Ended December 31, |
| Year Ended December 31, |
| |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||||||
Federal—current |
| $ | — |
| $ | — |
| $ | 9,156 |
| |||||||||
| Federal—deferred | $ | 8,332 | $ | 33,629 | $ | 43,856 |
| 54,237 |
| 55,891 |
| 44,862 |
| ||||||
| State—current | (726 | ) | 1,447 | 2,758 |
| 4,094 |
| 8,847 |
| 14,433 |
| ||||||||
| State—deferred | 8,359 | 8,121 | 14,871 |
| 9,339 |
| 181 |
| 7,143 |
| |||||||||
| Foreign—current and deferred | 1,910 | 4,121 | 5,245 |
| 1,904 |
| 16,565 |
| 18,201 |
| |||||||||
| $ | 69,574 |
| $ | 81,484 |
| $ | 93,795 |
| ||||||||||
| $ | 17,875 | $ | 47,318 | $ | 66,730 | ||||||||||||||
A reconciliation of total income tax expense and the amount computed by applying the federal income tax rate of 35% to income (loss) from continuing operations before provision for income taxes and minority interests for the years ended December 31, 2001, 20022004, 2005 and 2003,2006, respectively, is as follows:
| | | Year Ended December 31, |
| Year Ended December 31, |
| ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2001 | 2002 | 2003 |
| 2004 |
| 2005 |
| 2006 |
| ||||||||||
| Computed "expected" tax (benefit) provision | $ | (9,838 | ) | $ | 40,082 | $ | 54,946 | ||||||||||||||
Computed “expected” tax provision |
| $ | 58,357 |
| $ | 68,956 |
| $ | 78,477 |
| |||||||||||
| Changes in income taxes resulting from: | Changes in income taxes resulting from: |
|
|
|
|
|
|
| |||||||||||||
State taxes (net of federal tax benefit) |
| 8,732 |
| 6,430 |
| 5,545 |
| ||||||||||||||
Increase in valuation allowance |
| — |
| 1,092 |
| 10,713 |
| ||||||||||||||
Foreign tax rate differential and tax law change |
| (1,584 | ) | (94 | ) | (5,151 | ) | ||||||||||||||
Other, net |
| 4,069 |
| 5,100 |
| 4,211 |
| ||||||||||||||
| State taxes (net of federal tax benefit) | 2,432 | 6,220 | 10,650 |
| $ | 69,574 |
| $ | 81,484 |
| $ | 93,795 |
| ||||||||
| Impact of retroactive state law change (net of federal tax benefit) | — | — | 809 | ||||||||||||||||||
| Nondeductible expenses | 18,066 | — | — | ||||||||||||||||||
| Increase in valuation allowance | 4,832 | 210 | — | ||||||||||||||||||
| Foreign tax rate and tax law differential | 598 | (209 | ) | (540 | ) | ||||||||||||||||
| Other, net | 1,785 | 1,015 | 865 | ||||||||||||||||||
| $ | 17,875 | $ | 47,318 | $ | 66,730 | ||||||||||||||||
100
11.IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
8. Quarterly Results of Operations (Unaudited)
| Quarter Ended | March 31 | June 30 | Sept. 30 | Dec. 31 |
|
|
| March 31 |
| June 30 |
| Sept. 30 |
| Dec. 31 |
| ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | |||||||||||||||||||||||||||
2005 | 2005 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
| Total revenues | $ | 317,198 | $ | 327,720 | $ | 333,113 | $ | 340,466 | Total revenues |
| $ | 501,406 |
| $ | 511,922 |
| $ | 526,472 |
| $ | 538,355 |
| |||||
| Gross profit | 164,752 | 172,313 | 179,255 | 179,878 | |||||||||||||||||||||||
| Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle | 12,518 | 19,989 | 15,697 | 15,368 | |||||||||||||||||||||||
Operating income | Operating income |
| 91,110 |
| 96,693 |
| 102,177 |
| 96,804 |
| |||||||||||||||||
Income before cumulative effect of change in accounting principle | Income before cumulative effect of change in accounting principle |
| 22,949 |
| 25,410 |
| 36,377 |
| 29,114 |
| |||||||||||||||||
| Net income | 6,122 | 19,989 | 15,697 | 16,484 | Net income |
| 22,949 |
| 25,410 |
| 36,377 |
| 26,363 |
| |||||||||||||
| Income from continuing operations per share before discontinued operations and cumulative effect of change in accounting principle—basic | 0.15 | 0.24 | 0.19 | 0.18 | |||||||||||||||||||||||
| Income from continuing operations per share before discontinued operations and cumulative effect of change in accounting principle—diluted | 0.15 | 0.23 | 0.18 | 0.18 | |||||||||||||||||||||||
Income before cumulative effect of change in accounting principle per share—basic | Income before cumulative effect of change in accounting principle per share—basic |
| 0.12 |
| 0.13 |
| 0.19 |
| 0.15 |
| |||||||||||||||||
Income before cumulative effect of change in accounting principle per share—diluted | Income before cumulative effect of change in accounting principle per share—diluted |
| 0.12 |
| 0.13 |
| 0.18 |
| 0.15 |
| |||||||||||||||||
| Net income per share—basic | 0.07 | 0.24 | 0.19 | 0.19 | Net income per share—basic |
| 0.12 |
| 0.13 |
| 0.19 |
| 0.13 |
| |||||||||||||
| Net income per share—diluted | 0.07 | 0.23 | 0.18 | 0.19 | Net income per share—diluted |
| 0.12 |
| 0.13 |
| 0.18 |
| 0.13 |
| |||||||||||||
2003 | |||||||||||||||||||||||||||
2006 | 2006 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
| Total revenues | $ | 351,811 | $ | 359,270 | $ | 381,758 | $ | 408,490 | Total revenues |
| $ | 563,657 |
| $ | 581,568 |
| $ | 595,610 |
| $ | 609,507 |
| |||||
| Gross profit | 191,660 | 197,238 | 210,403 | 221,281 | |||||||||||||||||||||||
Operating income | Operating income |
| 92,435 |
| 102,894 |
| 97,130 |
| 114,728 |
| |||||||||||||||||
| Net income | 21,284 | 20,133 | 14,794 | 28,426 | Net income |
| 27,273 |
| 37,842 |
| 26,613 |
| 37,135 |
| |||||||||||||
| Net income per share—basic | 0.25 | 0.24 | 0.17 | 0.33 | Net income per share—basic |
| 0.14 |
| 0.19 |
| 0.13 |
| 0.19 |
| |||||||||||||
| Net income per share—diluted | 0.25 | 0.23 | 0.17 | 0.33 | Net income per share—diluted |
| 0.14 |
| 0.19 |
| 0.13 |
| 0.18 |
| |||||||||||||
We operate in sevenhave six operating segments, based on their economic environment, geographic area, the nature of their services and the nature of their processes:as follows:
· North American Physical Business—throughout the United States and Canada, the storage of paper documents, as well as all other non-electronic media such as microfilm and microfiche, master audio and videotapes, film, X-rays and blueprints, including healthcare information services, vital records services, service and service, courier operations, and the collection, handling and disposal of sensitive documents for corporate customers
· Worldwide Digital Business—information protection and orders; the management and detailed reporting on customer marketing literature inventories
101
· Europe—information management servicesprotection and off-site data protectionstorage services throughout Europe, including Hard Copy, Data Protection and Shredding
95
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
9. Segment Information (Continued)
·South America—recordsinformation protection and information managementstorage services throughout South America,
· Mexico—information managementprotection and storage services throughout Mexico,
· Asia Pacific—information protection and storage services throughout Australia, New Zealand and India, including Hard Copy, Data Protection and Shredding
The South America, Mexico and MexicoAsia Pacific operating segments do not individually meet the quantitative thresholds for a reportingreportable segment, but have been aggregated and reported with Europe as one reportingreportable segment, "International,"“International Physical Business,” given their similar economic characteristics, products, customers and processes. The Fulfillment andWorldwide Digital Archiving Services operating segments doBusiness does not meet the quantitative thresholdscriteria for a reportable segment and thus are included in the "Corporate and Other" category. Corporate items include non-operating overhead, corporate general and administrative expenses, non-allocated operating expenses and inter-segment eliminations. Corporate assets are principally cash and cash equivalents, prepaid items, certain non-operating fixed assets, deferred income taxes, certain non-trade receivables, certain inter-segment receivables, and deferred financing costs.segment; however, management determined that it would disclose such information on a voluntary basis.
An analysis of our business segment information and reconciliation to the respective information in the consolidated financial statements is as follows:
| | Business Records Management | Off-Site Data Protection | International | Corporate & Other(1) | Total Consolidated |
| North |
| International |
| Worldwide |
| Total |
| ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | ||||||||||||||||||||||||||||||||
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
| Total Revenues | $ | 861,302 | $ | 209,429 | $ | 89,475 | $ | 25,512 | $ | 1,185,718 |
| $ | 1,387,977 |
|
| $ | 380,033 |
|
| $ | 49,579 |
|
| $ | 1,817,589 |
|
| |||||
Depreciation and Amortization |
| 115,975 |
|
| 33,234 |
|
| 14,420 |
|
| 163,629 |
|
| |||||||||||||||||||
| Contribution | 227,164 | 50,254 | 16,250 | 7,712 | 301,380 |
| 427,579 |
|
| 89,751 |
|
| (9,886 | ) |
| 507,444 |
|
| ||||||||||||||
| Total Assets | 2,277,836 | 348,181 | 265,968 | (32,079 | ) | 2,859,906 |
| 3,216,999 |
|
| 1,024,135 |
|
| 201,253 |
|
| 4,442,387 |
|
| |||||||||||||
| 2002 | ||||||||||||||||||||||||||||||||
Expenditures for Segment Assets(1) |
| 256,998 |
|
| 243,030 |
|
| 128,748 |
|
| 628,776 |
|
| |||||||||||||||||||
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
| Total Revenues | 944,845 | 239,081 | 109,381 | 25,190 | 1,318,497 |
| 1,529,612 |
|
| 435,106 |
|
| 113,437 |
|
| 2,078,155 |
|
| ||||||||||||||
Depreciation and Amortization |
| 118,493 |
|
| 43,285 |
|
| 25,144 |
|
| 186,922 |
|
| |||||||||||||||||||
| Contribution | 262,541 | 61,729 | 21,988 | 16,890 | 363,148 |
| 444,343 |
|
| 113,417 |
|
| 12,461 |
|
| 570,221 |
|
| ||||||||||||||
| Total Assets | 2,358,459 | 359,339 | 317,073 | 195,784 | 3,230,655 |
| 3,383,098 |
|
| 1,142,217 |
|
| 240,825 |
|
| 4,766,140 |
|
| ||||||||||||||
| 2003 | ||||||||||||||||||||||||||||||||
Expenditures for Segment Assets(1) |
| 225,178 |
|
| 178,662 |
|
| 59,958 |
|
| 463,798 |
|
| |||||||||||||||||||
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
| Total Revenues | 1,022,335 | 251,141 | 198,068 | 29,785 | 1,501,329 |
| 1,671,009 |
|
| 539,335 |
|
| 139,998 |
|
| 2,350,342 |
|
| ||||||||||||||
Depreciation and Amortization |
| 127,562 |
|
| 54,803 |
|
| 26,008 |
|
| 208,373 |
|
| |||||||||||||||||||
| Contribution | 286,208 | 71,240 | 46,825 | 32,668 | 436,941 |
| 478,653 |
|
| 117,568 |
|
| 9,779 |
|
| 606,000 |
|
| ||||||||||||||
| Total Assets | 2,536,415 | 375,845 | 765,814 | 214,025 | 3,892,099 |
| 3,616,218 |
|
| 1,349,175 |
|
| 244,128 |
|
| 5,209,521 |
|
| ||||||||||||||
Expenditures for Segment Assets(1) |
| 314,317 |
|
| 142,732 |
|
| 20,380 |
|
| 477,429 |
|
| |||||||||||||||||||
(1)Total assets includeinter-segment elimination amountsaccompanying consolidated statements of $1,564,730, $1,277,393cash flows.
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and $1,813,276 as of December 31, 2001, 2002 and 2003, respectively.
per share data)
9. Segment Information (Continued)
The accounting policies of the reportable segments are the same as those described in Note 2 except that certain corporate and centrally controlled costs are allocated from Corporate to the other segments in 2001, 2002 and 2003, primarily to our North American Physical Business Records Management and Off-Site Data ProtectionWorldwide Digital Business segments. These allocations, which include human resources, information technology, finance, rent, worker'sreal estate property taxes, medical costs, incentive compensation, stock option expense, worker’s compensation, 401(k) match contributions and property, general liability, auto and other insurance, pension/medical costs, sick and vacation costs, incentive compensation, real estate property taxes and provision for bad debts, are based on rates setand methodologies established at the beginning of each year. Included in the corporate costs allocated to our North American Physical Business segment are certain costs related to staff functions, including finance, human resources and information technology, which benefit the enterprise as a whole. These costs are primarily related to the general management of these functions on a corporate level and the design and development of programs, policies and procedures that are then implemented in the individual segments, with each segment bearing its own cost of implementation. Management has decided to allocate these costs to the North American segment as further allocation is impracticable.
Contribution for each segment is defined as total revenues less cost of sales (excluding depreciation) and selling,
102
general and administrative expenses including(including the costs allocated to each segment as described above.above). Internally, we use Contribution as the basis for evaluating the performance of and allocating resources to our operating segments.
A reconciliation of Contribution to net (loss) income before provision for income taxes and minority interest on a consolidated basis is as follows:
| | | Years Ended December 31, |
| Years Ended December 31, |
| |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2001 | 2002 | 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||||||||
| Contribution | Contribution | $ | 301,380 | $ | 363,148 | $ | 436,941 |
| $ | 507,444 |
| $ | 570,221 |
| $ | 606,000 |
| |||||
| Less: Depreciation and Amortization | 153,271 | 108,992 | 130,918 | |||||||||||||||||||
| Merger-related Expenses | 3,673 | 796 | — | |||||||||||||||||||
| Loss on Disposal/Writedown of Property, Plant and Equipment, Net | 320 | 774 | 1,130 | |||||||||||||||||||
| Interest Expense, Net | 134,742 | 136,632 | 150,468 | |||||||||||||||||||
| Other Expense (Income), Net | 37,485 | 1,435 | (2,564 | ) | ||||||||||||||||||
| Provision for Income Taxes | 17,875 | 47,318 | 66,730 | |||||||||||||||||||
| Minority Interest in (Losses) Earnings of Subsidiaries | (1,929 | ) | 3,629 | 5,622 | ||||||||||||||||||
| Income from Discontinued Operations, Net of Tax | — | (1,116 | ) | — | ||||||||||||||||||
| Cumulative Effect of Change in Accounting Principle, Net of Minority Interest | — | 6,396 | — | |||||||||||||||||||
| Net (Loss) Income | $ | (44,057 | ) | $ | 58,292 | $ | 84,637 | |||||||||||||||
Less: Depreciation and Amortization |
| 163,629 |
| 186,922 |
| 208,373 |
| |||||||||||||||
Gain on Disposal/Writedown of Property, Plant and Equipment, |
| (681 | ) | (3,485 | ) | (9,560 | ) | |||||||||||||||
Interest Expense, Net |
| 185,749 |
| 183,584 |
| 194,958 |
| |||||||||||||||
Other (Income) Expense, Net |
| (7,988 | ) | 6,182 |
| (11,989 | ) | |||||||||||||||
Income before Provision for Income Taxes and Minority Interest |
| $ | 166,735 |
| $ | 197,018 |
| $ | 224,218 |
| ||||||||||||
Our consulting business, previously analyzed as part of Business Records Management, is now analyzed within the Corporate & Other category. Our secure shredding business, previously analyzed as part of Corporate & Other, is now analyzed within the Business Records Management segment. Our film
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and sound business, previously analyzed as part of Business Records Management, is now analyzed within the Off-Site Data Protection segment. Our electronic vaulting business, previously analyzed as part of Corporate & Other, is now analyzed within the Off-Site Data Protection segment. Our Canadian business, previously analyzed as part of our International segment, is now analyzed within the Business Records Management segment. In addition, certain allocations from Corporate & Other to Business Records Management and Off-Site Data Protection have been changed. To the extent practicable, the prior period numbers shown above have been adjusted to reflect all of these changes.per share data)
1039. Segment Information (Continued)
Information as to our operations in different geographical areas is as follows:
| | | 2001 | 2002 | 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues: | Revenues: |
|
|
|
|
|
|
| ||||||||||||
| United States | United States | $ | 1,028,219 | $ | 1,134,000 | $ | 1,215,669 |
| $ | 1,330,979 |
| $ | 1,504,907 |
| $ | 1,647,265 |
| |||
| United Kingdom | United Kingdom | 59,226 | 79,228 | 145,735 |
| 270,665 |
| 275,426 |
| 312,393 |
| |||||||||
| Canada | Canada | 68,024 | 75,116 | 87,592 |
| 106,577 |
| 132,302 |
| 154,801 |
| |||||||||
| Other International | Other International | 30,249 | 30,153 | 52,333 |
| 109,368 |
| 165,520 |
| 235,883 |
| |||||||||
| Total Revenues | $ | 1,185,718 | $ | 1,318,497 | $ | 1,501,329 | ||||||||||||||
Total Revenues |
| $ | 1,817,589 |
| $ | 2,078,155 |
| $ | 2,350,342 |
| ||||||||||
| Long-lived Assets: | Long-lived Assets: |
|
|
|
|
|
|
| ||||||||||||
| United States | United States | $ | 2,118,828 | $ | 2,395,018 | $ | 2,514,031 |
| $ | 2,735,545 |
| $ | 2,887,981 |
| $ | 3,029,827 |
| |||
| United Kingdom | United Kingdom | 165,443 | 216,040 | 551,924 |
| 618,712 |
| 594,178 |
| 645,218 |
| |||||||||
| Canada | Canada | 200,425 | 200,461 | 253,874 |
| 315,872 |
| 335,929 |
| 354,258 |
| |||||||||
| Other International | Other International | 65,893 | 52,096 | 100,687 |
| 271,104 |
| 393,884 |
| 500,497 |
| |||||||||
| Total Long-lived Assets | $ | 2,550,589 | $ | 2,863,615 | $ | 3,420,516 | ||||||||||||||
Total Long-lived Assets |
| $ | 3,941,233 |
| $ | 4,211,972 |
| $ | 4,529,800 |
| ||||||||||
Information as to our revenues by product and service lines is as follows:
|
| 2004 |
| 2005 |
| 2006 |
| |||
Revenues: |
|
|
|
|
|
|
| |||
Physical Records Management and Secure Shredding |
| $ | 1,462,457 |
| $ | 1,614,905 |
| $ | 1,856,873 |
|
Physical Tape Rotation Services |
| 305,553 |
| 349,813 |
| 353,471 |
| |||
Digital(1) |
| 49,579 |
| 113,437 |
| 139,998 |
| |||
Total Revenues |
| $ | 1,817,589 |
| $ | 2,078,155 |
| $ | 2,350,342 |
|
13.(1) Includes Digital Archiving, Electronic Vaulting, Intellectual Property Management and DataDefense.
10. Commitments and Contingencies
a. Leases
We lease mostMost of our leased facilities are leased under various operating leases. A majority of these leases have renewal options of five to ten years and may have either fixed or Consumer Price Index escalation clauses. We also lease equipment under operating leases, primarily computers which have an average lease life of three years. Trucks and office equipment are also leased and have remaining lease lives ranging from one to seven years. RentTotal rent expense under all of our operating leases was $126,871, $125,866$163,564, $185,542 and $134,371$207,760 for the years ended December 31, 2001, 20022004, 2005 and 2003,2006, respectively. ThereIncluded in total rent expense was $6,733, $5,915sublease income of $2,765, $3,238 and $0 related to synthetic lease facilities included in rent expense$3,740 for the years ended December 31, 2001, 20022004, 2005 and 2003,2006, respectively. See Note 3.
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
Minimum10. Commitments and Contingencies (Continued)
Estimated minimum future lease payments, net of sublease income of $2,238, $1,650, $767, $414, $267$2,879, $2,444, $1,949, $1,228, $269 and $560$544 for 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011 and thereafter, respectively, are as follows:
| Year | Operating |
|
|
| Operating |
| |||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | $ | 135,512 | |||||||
| 2005 | 119,441 | ||||||||
| 2006 | 102,797 | ||||||||
| 2007 | 88,365 | 2007 |
| $ | 176,842 |
| |||
| 2008 | 70,357 | 2008 |
| 164,447 |
| ||||
2009 | 2009 |
| 157,880 |
| |||||
2010 | 2010 |
| 154,055 |
| |||||
2011 | 2011 |
| 148,402 |
| |||||
| Thereafter | 386,412 | Thereafter |
| 2,069,643 |
| ||||
| Total minimum lease payments | $ | 902,884 | Total minimum lease payments |
| $ | 2,871,269 |
| ||
We have guaranteed the residual value of certain vehicle operating leases to which we are a party. The maximum net residual value guarantee obligation for these vehicles as of December 31, 20032006 was
104
$679. $57,129. Such amount does not take into consideration the recovery or resale value associated with these vehicles. We believe that it is not reasonably likely that we will be required to perform under these guarantee agreements or that any performance requirement would have a material impact on our consolidated financial statements.
b. South Brunswick Fires Litigation
In March 1997, we experienced three fires, all of which authorities have determined were caused by arson. The fires resulted in damage to one and destruction of another records and information services facility in South Brunswick Township, New Jersey.
Certain of our customers or their insurance carriers have asserted claims as a consequence of the destruction of, or damage to, their records as a result of the fires, including claims with specific requests for compensation and allegations of negligence or other culpability on the part of Iron Mountain. We and our insurers have denied any liability on the part of Iron Mountain as to all of these claims.
We are presently aware of five pending lawsuits that have been filed against Iron Mountain by certain of our customers and/or their insurers, and one pending lawsuit filed by the insurers of an abutter of one of the South Brunswick facilities. Five of these six lawsuits have been consolidated for pre-trial purposes in the Middlesex County, New Jersey, Superior Court. The sixth lawsuit, brought by a single customer, is pending in the Supreme Court for New York County, New York. A seventh lawsuit, also brought by a single customer, was tried before a federal judge in New Jersey in February 2000, with a defendant's verdict entered in favor of Iron Mountain. An eighth lawsuit filed by an injured firefighter is currently being settled by our insurer for a nominal amount. Several other claims that were originally filed in relation to these lawsuits have been voluntarily dismissed without prejudice by the customers, abutting business owners, and/or their insurance carriers.
We have denied liability and asserted affirmative defenses in all of the remaining cases arising out of the fires and, in certain of the cases, have asserted counterclaims for indemnification against the plaintiffs. Discovery is ongoing. We deny any liability as a result of the destruction of, or damage to, customer records or property of abutters as a result of the fires, which were beyond our control. We intend to vigorously defend ourselves against these and any other lawsuits that may arise.
Our professional liability insurer, together with our general liability and property insurance carriers, have entered into a binding agreement with us regarding reimbursement of defense costs and have agreed to ongoing discussions regarding any remaining coverage issues, further defense and/or settlement of these claims.
c. Sequedex, H-W Associates, Pioneer and Pierce Proceedings
On March 28, 2002, Iron Mountain and Iron Mountain Information Management, Inc. ("IMIM"), one of our wholly owned subsidiaries, commenced an action in the Middlesex County, New Jersey, Superior Court, Chancery Division, captioned Iron Mountain Incorporated and Iron Mountain Information Management, Inc. v. J. Peter Pierce, Sr., Douglas B. Huntley, J. Michael Gold, Fred A. Mathewson, Jr., Michael DiIanni, J. Anthony Hayden, Pioneer Capital, LLC, and Sequedex, LLC. In the complaint, we alleged that defendant J. Peter Pierce, Sr., a former member of our Board of
105
Directors and the former President of IMIM until his termination without cause effective June 30, 2000, violated his fiduciary obligations, as well as various noncompetition and other provisions of an employment agreement with Iron Mountain, dated February 1, 2000, by providing direct and/or indirect financial, management and other support to defendant Sequedex. Sequedex was established in October 2000, and competed directly with us in the records management information services industry. The complaint also alleged that Mr. Pierce and certain of the other defendants, who were employed by or affiliated with Pierce Leahy Corp. prior to the merger of Pierce Leahy with Iron Mountain in February 2000, misappropriated and used our trade secrets and other confidential information. Finally, the complaint asserted claims against Sequedex and others for tortious interference with contractual relations, against all of the defendants for civil conspiracy in respect of the matters described above, and against defendant Michael DiIanni for breach of his employment agreement with IMIM, dated September 6, 2000. The litigation seeks injunctions in respect of certain matters and recovery of damages against the defendants.
On April 12, 2002, Iron Mountain also initiated a related arbitration proceeding against Mr. Pierce before the Philadelphia, Pennsylvania, Office of the American Arbitration Association (the "AAA") pursuant to an arbitration clause in the employment agreement between Iron Mountain and Mr. Pierce. In the arbitration, Mr. Pierce counterclaimed for indemnification of his expenses, including attorneys' fees. We disputed Mr. Pierce's claim. On July 19, 2002, the litigation was stayed pending the outcome of the arbitration proceeding. On February 25, 2003, in response to Iron Mountain's request, the AAA removed the arbitrator. The arbitration proceeding was transferred by agreement of the parties to ADR Options, Inc. On February 4, 2004, the arbitrator rendered a decision. The arbitrator did not find the evidence provided by us in our action against Mr. Pierce sufficient to rule in our favor on the particular claims at issue. In addition, the arbitrator ruled that, pursuant to an indemnification provision in Mr. Pierce's employment agreement, we must pay Mr. Pierce's attorneys fees and costs that are attributable to this single arbitration. The arbitrator has established a procedure to ascertain the amount of these fees and expenses, which, in any case are not expected to be material to our financial position or results of operations. We have recently filed a motion to vacate the arbitrator's decision and award in Middlesex County, New Jersey, where the pending action against Mr. Pierce and others is currently stayed.
On December 16, 2002, Hartford Windsor Associates, L.P. ("H-W Associates"), Hartford General, LLC, J. Anthony Hayden, Mr. Pierce, Frank Seidman and John H. Greenwald, Jr. commenced an action in the Court of Common Pleas, Montgomery County, Pennsylvania, against Iron Mountain Incorporated. In the complaint, the plaintiffs allege that H-W Associates purchased a warehouse property in Connecticut to serve as a records storage facility, and entered into a lease for the facility with Sequedex, then a competitor of ours, and that the remaining plaintiffs were limited or general partners of H-W Associates. The plaintiffs also allege that we tortiously interfered with Sequedex's contractual relations with an actual or prospective customer of Sequedex and, as a result, caused Sequedex to default on its lease to H-W Associates. The complaint seeks damages in excess of $100,000. We have denied the material allegations in the complaint filed against us by H-W Associates and the other plaintiffs and have since filed counterclaims against the plaintiffs alleging tortious interference with our business relationship with one of our longstanding customers. Discovery is proceeding.
106
Also on December 16, 2002, Pioneer Capital L.P. ("Pioneer"), Pioneer Capital Genpar, Inc. ("PCG"), the general partner of Pioneer, and Mr. Pierce, the President of PCG, commenced an action in the Court of Common Pleas, Montgomery County, Pennsylvania, against Iron Mountain Incorporated, C. Richard Reese, John F. Kenny, Jr., Garry Watzke, Schooner Capital LLC ("Schooner") and Vincent J. Ryan. The named individuals are Directors and/or officers of Iron Mountain and Schooner is a shareholder of Iron Mountain. In the complaint, the plaintiffs allege that the defendants had numerous conversations and arrangements with Mr. Carr, one of Mr. Pierce's and Pioneer's business partners in a company named Logisteq LLC. The plaintiffs further allege that, as a result of such conversations and arrangements, defendants conspired to, and did intentionally, interfere with Pioneer's relationship with its partner and Logisteq. The plaintiffs also allege that defendants damaged Mr. Pierce's reputation in the community by telling Iron Mountain employees and other third parties that Mr. Pierce breached his employment agreement with Iron Mountain, misappropriated and used Iron Mountain's confidential information, breached his fiduciary duties to Iron Mountain's shareholders and assisted Sequedex, then a competitor of Iron Mountain, in unfairly competing with Iron Mountain. Finally, the complaint alleges that the business partner in Logisteq taped conversations with Mr. Pierce and others which allegedly violated privacy laws, that the defendants knew, or should have known, that the tapes were being made without the consent of the individuals and, as a result, Mr. Pierce was harmed. The complaint seeks damages in excess of $5,000,000. Iron Mountain and the other defendants have challenged the legal sufficiency of the plaintiffs' pleadings in each of these cases.
On September 10, 2003, IMIM filed a complaint in the Court of Common Pleas, Montgomery County, Pennsylvania in a matter related to the litigation between the Company and Sequedex, Mr. Pierce and others disclosed above. The new matter names Sequedex, J. Michael Gold and Peter Hamilton as defendants, and alleges that in 2000 defendants Gold and Hamilton, both former IMIM employees, used confidential and proprietary business information that they had obtained while employed by IMIM to form their own records management company, Sequedex. The complaint also alleges unlawful interference with IMIM's contractual relationship with a certain customer and other matters. The defendants filed preliminary objections to our complaint and Iron Mountain has answered those preliminary objections.
Prior to the litigation directly pertaining to Mr. Pierce having been filed, in approximately October 2000, three former management employees of IMIM became employed by or otherwise associated with Sequedex. IMIM commenced actions against these three former employees to enforce its rights under their confidentiality and non-competition agreements. IMIM has also asserted claims against Sequedex for tortious interference with these agreements, and against both Sequedex and the former employees for misappropriation and use of IMIM's trade secrets and confidential information.
The defendants in all three cases have denied the material allegations in IMIM's complaints and asserted various affirmative defenses. In addition, Sequedex and the individual defendants filed counterclaims against IMIM and third party complaints against Iron Mountain. The counterclaims and third party complaints assert claims for tortious interference with certain contracts and prospective business relations between Sequedex and its current and potential customers as well as a claim for trade disparagement and defamation. The defendant in one of these actions sought a declaratory judgment regarding the enforceability of the confidentiality and non-competition agreements at issue in
107
that case and filed a motion for summary judgment seeking to have the non-competition agreement declared void, or to limit its scope. IMIM and Iron Mountain filed motions in all three cases to dismiss the various counterclaims and third-party complaints. All of these motions, i.e., the defendants' motion for summary judgment and IMIM's and Iron Mountain's motions to dismiss, were denied by the court following a hearing on May 7, 2002. As previously disclosed in our quarterly report on Form 10-Q for the quarter ended September 30, 2003, Sequedex furnished a preliminary statement of damages with an estimate of compensatory damages of approximately $172 million and an indication that Sequedex intended to seek punitive damages of approximately $1.5 billion. Sequedex is no longer seeking damages in this amount and in connection with its proposed amended counterclaim, Sequedex has recently furnished a litigation expert's report of damages claiming approximately $59 million plus approximately $6.6 million of pre-judgment interest. Sequedex has indicated that it also intends to seek punitive damages in an undisclosed amount. Extensive discovery has been conducted in the three cases and is ongoing; on the basis of that discovery, it is our belief that Sequedex has not produced any material evidence that we or IMIM acted wrongfully in any respect. Further, limited discovery has been conducted in respect of Sequedex's damages claim; on the basis of that discovery, we do not believe that Sequedex has any foundation, and we believe that it cannot provide any foundation, for its damages calculations. We believe that the damages calculations submitted by Sequedex are not supported by credible evidence and are subject to serious legal, methodological and factual deficiencies. A trial of the three actions in which the Sequedex counterclaims and third party complaints have been asserted is scheduled to commence in April of 2004. IMIM, Sequedex and one of the individual defendants recently filed dispositive motions, including motions for summary judgment as to certain of the claims. All of these motions were denied by the court following a hearing on February 24, 2004.
Discovery is proceeding in each of these cases, other than the arbitration. We intend to prosecute these actions vigorously, as well as to defend ourselves vigorously against the counterclaims and the third party complaints.
d. Other Litigation
In addition to the matters discussed above, we are involved in litigation from time to time in the ordinary course of business with a portion of the defense and/or settlement costs being covered by various commercial liability insurance policies purchased by us. In the opinion of management, no other material legal proceedings are pending to which we, or any of our properties, are subject. We record legal costs associated with loss contingencies as expenses in the period in which they are incurred.
The outcome of the South Brunswick fires, Sequedex, H-W Associates, Pioneer and Pierce proceedings cannot be predicted with certainty. Based on our present assessment of the situation, after consultation with legal counsel, management does not believe that the outcome of these proceedings will have a material adverse effect on our financial condition or results of operations, although there can be no assurance in this regard.
14.11. Related Party Transactions
We lease space to an affiliated company, Schooner Capital LLC (“Schooner”), for its corporate headquarters located in Boston, Massachusetts. For the years ended December 31, 2001, 20022004, 2005 and 2003,2006, Schooner paid rent to us totaling $101, $128$153, $161 and $144,$167, respectively. We lease facilities from an officer and three separate
108
limited partnerships, whose general partner was a related party.officer. Our aggregate rental payment for such facilities during 2001, 20022004, 2005 and 20032006 was $1,381, $1,372$955, $978 and $1,309,$1,113, respectively. In the opinion of management, all of these leases were entered into at market prices and terms.
We have an agreement with Leo W. Pierce, Sr., our former Chairman Emeritus and the father of J. Peter Pierce, our former director, that requires pension payments of $8 per month until his death. The totalestimated remaining benefit is recorded in accrued expenses in the accompanying consolidated balance sheets in the amount of $922$634 as of December 31, 2003.2006.
AtIn December 2005, IME made a $2,860 investment in a Polish joint venture in which one of our directors has an indirect 20% interest.
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2003, we have outstanding loans to an officer with an aggregate principal amount of $331. These notes bear interest at a variable rate. This liability was assumed in connection with our merger with Pierce Leahy.2006
(In thousands, except share and per share data)
15. Employee Benefit12. 401(k) Plans
a. Iron Mountain Companies 401(k) Plan
We have a defined contribution plan, which generally covers all non-union U.S. employees meeting certain service requirements. Eligible employees may elect to defer from 1% to 25% of compensation per pay period up to the amount allowed by the Internal Revenue Code. In addition, IME operates a defined contribution plan, which is similar to the U.S.'s’s 401(k) Plan. We make matching contributions based on the amount of an employee'semployee’s contribution in accordance with the plan document.documents. We have expensed $2,466, $3,043$4,320, $6,737 and $4,164$9,997 for the years ended December 31, 2001, 20022004, 2005 and 2003,2006, respectively.
b. Employee Stock Purchase Plan13. London Fire
On March 23, 1998,In July 2006, we introduced an employee stock purchase plan (the "Plan"), participationexperienced a significant fire in a records and information management facility in London, England that resulted in the complete destruction of the leased facility. London fire authorities recently issued a report in which is availableit was concluded that the fire resulted from a deliberate act of arson; the report also stated that the actions of a guard employed by a third-party security service contractor resulted in the disabling of the automatic sprinkler system in the building.
We believe we carry adequate property and liability insurance. We do not expect that this event will have a material impact to substantially all employees who meet certain service eligibility requirements. The Plan was approved by our shareholders on May 28, 1998 and commencedconsolidated results of operations on October 1, 1998. The Plan provided a way for our eligible employees to become shareholders on favorable terms. The Plan provided for the purchase of up to 562,500 sharesor financial condition. Revenues from this facility represent less than 1% of our common stock by eligible employees through successive offering periods. At the startconsolidated enterprise revenues. As of each offering period, participating employees were granted options to acquire our common stock. As there were no shares remainingDecember 31, 2006, we have approximately $9,600 recorded as an insurance receivable which is included in prepaid expenses and other in the Plan on December 31, 2002, a new employee stock purchase plan (the "2003 Plan"),accompanying consolidated balance sheet which provides forprimarily represents the purchase of up to 750,000 shares of our common stock was approved by our shareholders in May 2003 and commenced operations on July 1, 2003. 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. At the endnet book value of the offering period, outstanding options are exercised,property, plant and each employee's accumulated contributions are used to purchase our common stock. The price for shares purchased underequipment associated with this facility at the Plan was, and under the 2003 Plan is, 85% of their market price at either the beginning or the endtime of the offering period, whichever was or is lower. There were 186,152, 160,119 and 88,715 shares purchased under the Plan and the 2003 Plan for the years ended Decemberincident, net of $1,750 of property insurance proceeds received through IME’s October 31, 2001, 2002 and 2003, respectively. The number2006 fiscal year-end. Subsequent to IME’s October 31, 2006 fiscal year-end, IME received payment from our insurance carrier of shares available for grant at December 31, 2003 was 661,285.
109
16. Subsequent Events
In February 2004, we completed the acquisition of Mentmore plc's 49.9% equity interest in IME for total consideration of 82,500approximately 8,600 British pounds sterling ($154,000) in16,850). We expect to utilize cash received from proceedsour insurance carriers to fund capital expenditures and for general working capital needs. Such amount represents a portion of our 71/4% notes issuedbusiness personal property, business interruption, and expense claims with our insurance carrier. We will record approximately $8,833 to other (income) expense, net in January 2004. Includedthe first quarter of 2007 related to recoveries associated with our business interruption portion of our insurance claim to date. We expect to settle the remaining property portion of our insurance claim with our insurance carriers within the next twelve months and have, therefore, classified the remaining insurance receivable as a current asset. We expect to receive recoveries related to our property claim with our insurance carriers that will exceed the carrying value of such assets. We, therefore, expect to record gains on the disposal/writedown of property, plant and equipment, net in this amount isour statement of operations in future periods when the repayment of all trade and working capital funding owedcash received to Mentmore by IME. Completiondate exceeds the remaining carrying value of the transaction gives us 100% ownershiprelated property, plant and equipment, net. Recoveries from the insurance carriers related to business personal property claims are reflected in our statement of IME, affording us full access to all future cash flows under proceeds from sales of property and greater strategicequipment and financial flexibility. This transaction should have no impact on revenue orother, net included in investing activities section when received. Recoveries from the insurance carriers related to business interruption claims are reflected in our statement of cash flows as a component of net income included in the operating income since we already fully consolidate IME's financial results. Since we will be using the purchase method of accounting for this acquisition, 49.9% of the net assets of IME will be adjusted to reflect their fair market value if different from their current carrying value.activities section when received.
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2006
(In thousands, except share and per share data)
In March 2004, IME and certainJanuary 2007, we completed an offering 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 availability225,000 Euro in theaggregate principal amount of 210,000 British pounds sterling, includingour 63¤4% Euro Senior Subordinated Notes due 2018, which were issued at a 100,000 British pounds sterling revolving credit facility(which includesprice of 98.99% of par and priced to yield 6.875%. Our net proceeds of 219,200 Euro ($283,820),after paying the abilityunderwriters’ discounts and commissions and estimated expenses (excluding accrued interest payable by purchasers of the notes from October 17, 2006). These net proceeds were used to borrow in certain other foreign currencies), a 100,000 British pounds sterlingrepay outstanding indebtedness under the IMI term loan and a 10,000 British pounds sterling overdraft protection line. The revolving credit facility matures on March 2, 2009. The term loan facility is payablefacilities. We recorded a charge to other (income) expense, net of $503 in three installments; two installmentsthe first quarter of 20,000 British pounds sterling on March 2, 2007 and 2008, respectively, andrelated to the final paymentearly retirement of the remaining balanceIMI term loans, representing the write-off of a portion of our deferred financing costs. In addition, in January, 2007 we entered into forward contracts to exchange U.S. dollars for 96,000 Euros and 194,000 CAD for 127,500 Euros to hedge our intercompany exposures with Canada and our subsidiaries whose functional currency is the Euro. These forward contracts settle on March 2, 2009. The interest rate on borrowings under the IME Credit Agreement is based on LIBOR and varies depending on IME's choice of interest rate period, plus an applicable margin. The IME Credit Agreement includes various financial covenants applicable to the results of IME,a monthly basis, at which may restrict IME's ability to incur indebtedness under the IME Credit Agreement and with third parties. Each of IME's subsidiaries will either guarantee the obligations or pledge shares to secure the IME Credit Agreement. We have not guaranteed or otherwise provided securitytime we enter into new forward contracts for the IME Credit Agreement nor have any of our U.S., Canadian, Mexican and South American subsidiaries.
In March 2004, IME borrowed approximately 147,000 British pounds sterling under the IME Credit Agreement, including the full amount of the term loan. IME used those proceedssame underlying amounts, to repay us 135,000 British pounds sterling related to our initial financing of the acquisition of the European operations of Hays IMS. We expect to use those proceeds to: (1) pay down approximately $104,000 of real estate term loans, (2) settle all obligations associated with terminating our two cross currency swaps usedcontinue to hedge movements in CAD and Euros against the foreign currency impactU.S. dollar. At the time of our intercompany financing with IME, and (3) tosettlement, we either pay down amounts outstanding under our Amended and Restated Credit Agreement. Afteror receive the initial balance, IME's availability undernet settlement amount from the IME Credit Agreement, based on its current level of external debt and the leverage ratio under the IME Credit Agreement, was approximately 9,000 British pounds sterling.forward contract.
110101
REPORT OF THE INDEPENDENT AUDITORS
To the Board of Directors ofIron Mountain Europe Limited:
We have audited the accompanying consolidated balance sheets of Iron Mountain Europe Limited as of October 31, 2002 and 2003, and the related consolidated statements of operations, stockholders' equity and comprehensive (loss)/income and cash flows for the three years ended October 31, 2003. These consolidated financial statements are the responsibility of the management of Iron Mountain Europe Limited. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Iron Mountain Europe Limited at October 31, 2002 and 2003 and the consolidated results of their operations and their consolidated cash flows for the three years ended October 31, 2003, in conformity with generally accepted accounting principles in the United States of America.
RSM ROBSON RHODES LLP
Chartered AccountantsBirmingham, England
March 8, 2004
111
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Iron Mountain Incorporated's filing of an Annual Report on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this Annual Report on Form 10-K for the year ended December 31, 2003. See Exhibit 23.3 to the December 31, 2002 Annual Report on Form 10-K filed with the SEC for further discussion.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors ofIron Mountain Incorporated:
We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Iron Mountain Incorporated (a Pennsylvania corporation) for each of the three years in the period ended December 31, 2001 and have issued our report thereon dated February 22, 2002 (except with respect to Note 17, as to which the date is March 15, 2002). Our audits were made for the purpose of forming an opinion on those basic financial statements taken as a whole. The supplemental schedule listed in the accompanying index is the responsibility of Iron Mountain Incorporated's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and regulations under the Securities Exchange Act of 1934 and is not a required part of the basic financial statements. The supplemental schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, MassachusettsFebruary 22, 2002(Except with respect to Note 17,as to which the date is March 15, 2002)
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IRON MOUNTAIN INCORPORATEDValuation and Qualifying Accounts(In thousands)
| Year Ended December 31, | Balance at Beginning of the Year | Charged to Expense | Other Additions(1) | Deductions | Balance at End of the Year | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Allowance for doubtful accounts: | |||||||||||||||
| 2001 | $ | 15,989 | $ | 8,499 | $ | 846 | $ | (8,248 | ) | $ | 17,086 | ||||
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
IRON MOUNTAIN INCORPORATED | |||||
By: |
| ||||
C. Richard Reese | |||||
Chairman of the Board and | |||||
Dated: March 1, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Title | Date | |||||||
/s/ C. RICHARD REESE | Chairman of the Board of Directors | March | |||||||
C. Richard Reese | Executive Officer | ||||||||
/s/ BOB BRENNAN | President and Chief Operating Officer | March 1, 2007 | |||||||
Bob Brennan | |||||||||
/s/ JOHN F. KENNY, JR. | Executive Vice President, Chief Financial | March 1, 2007 | |||||||
John F. Kenny, Jr. | Officer and Director (Principal Financial | ||||||||
Officer and | |||||||||
/s/ CLARKE H. BAILEY | Director | March 1, 2007 | |||||||
Clarke H. Bailey | |||||||||
/s/ CONSTANTIN R. BODEN | Director | March 1, 2007 | |||||||
Constantin R. Boden | |||||||||
/s/ KENT P. DAUTEN | Director | March 1, 2007 | |||||||
Kent P. Dauten | |||||||||
/s/ | |||||||||
Director | March 1, 2007 | ||||||||
Arthur D. Little | |||||||||
/s/ VINCENT J. RYAN | Director | March 1, 2007 | |||||||
Vincent J. Ryan |
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102
Certain exhibits indicated below are incorporated by reference to documents we have filed with the Commission. Exhibit numbers in parentheses refer to the exhibit numbers in the applicable filing (which are identified in the footnotes appearing at the end of this index). Each exhibit marked by a pound sign (#) is a management contract or compensatory plan.
Exhibit | ||||||||||
| Exhibit | |||||||||
2.1 | ||||||||||
Agreement, dated July 12, 2003, between Hays plc and Iron Mountain Europe Limited (portions of which have been omitted pursuant to a request for confidential treatment). | (2.1) | |||||||||
2.2 | Agreement and Plan of Merger by and between Iron Mountain Incorporated, a Pennsylvania corporation, and the Company, dated as of May 27, 2005. | (2.1)(19) | ||||||||
3.1 | Amended and Restated | Filed herewith as Exhibit 3.1 | ||||||||
3.2 | Bylaws of the Company. |
| ||||||||
3.3 | Declaration of Trust of IM Capital Trust I, dated as of December 10, 2001 among the Company, The Bank of New York, The Bank of New York (Delaware) and John P. Lawrence, as trustees. | (4.15) | ||||||||
3.4 | Certificate of Trust of IM Capital Trust I. | (4.17) | ||||||||
4.1 | Indenture for 81/ | (10.1) | ||||||||
4.2 | Supplemental Indenture, | (4.1) | ||||||||
4.3 | Indenture for 8 | |||||||||
(4.1) | ||||||||||
4.4 | First Supplemental Indenture, dated as of April 3, 2001, among the Company, the Guarantors named therein and The Bank of New York, as trustee. | (4.2) | ||||||||
4.5 | Second Supplemental Indenture, dated as of September 14, 2001, among the Company, the Guarantors named therein and The Bank of New York, as trustee. | (4.7) | ||||||||
4.6 |
| (4)(23) | ||||||||
4.7 | Senior Subordinated Indenture, dated as of December 30, 2002, among the Company, the Guarantors named therein and The Bank of New York, as trustee. | (4.7) | ||||||||
4.8 | ||||||||||
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| First Supplemental Indenture, dated as of December 30, 2002, among the Company, the Guarantors named therein and | (4.8) | |||||||||
4.9 | Second Supplemental Indenture, dated as of June 20, 2003, among the Company, the Guarantors named therein and The Bank of New York, as trustee. | (4.9)(15) | ||||||||
4.10 | Third Supplemental Indenture, dated as of July 17, 2006, by and among the | (4.1)(24) | ||||||||
4.11 | Fourth Supplemental Indenture, dated as of October 16, 2006, by and among the Company, the Guarantors named therein and The Bank of New York Trust Company, N.A., as trustee. | (4.1)(27) | ||||||||
4.12 | Fifth Supplemental Indenture, dated as of January 19, 2007, by and among the Company, the Guarantors named therein and The Bank of New York Trust Company, N.A., as trustee. | (4.1)(28) | ||||||||
4.13 | Amendment No. 1 to Fifth Supplemental Indenture, dated as of February 23, 2007, by and among the Company, the Guarantors named therein and The Bank of New York Trust Company, N.A., as trustee. | Filed herewith as Exhibit | ||||||||
4.14 | Form of stock certificate representing shares of Common Stock, $.01 par value per share, of the Company. | (4.1) | ||||||||
10.1 | ||||
Iron Mountain Incorporated Executive Deferred Compensation | (10.7) | |||
10.2 | 2002 Amendment to Iron Mountain Incorporated Executive Deferred Compensation Plan.(#) | Filed herewith as Exhibit 10.2 | ||
10.3 | First Amendment to Iron Mountain Incorporated Executive Deferred Compensation Plan.(#) | Filed herewith as Exhibit 10.3 | ||
10.4 | Second Amendment to Iron Mountain Incorporated Executive Deferred Compensation Plan.(#) | Filed herewith as Exhibit 10.4 | ||
10.5 | Nonqualified Stock Option Plan of Pierce Leahy Corp.(#) | (10.3) | ||
10.6 | Iron Mountain Incorporated 1997 Stock Option Plan, as amended.(#) | (10.9) | ||
10.7 | Iron Mountain/ATSI 1995 Stock Option Plan.(#) | (10.2) | ||
10.8 | Iron Mountain Incorporated 1995 Stock Incentive Plan, as amended.(#) | (10.3) | ||
10.9 | Iron Mountain Incorporated 2002 Stock Incentive Plan.(#) | (10.8) | ||
10.10 | Second Amendment to the Iron Mountain Incorporated 2002 Stock Incentive Plan.(#) | (10.1)(20) | ||
10.11 | Form of Iron Mountain Incorporated 1995 Stock Incentive Plan Amended and Restated |
| ||
10.12 | Form of Iron Mountain Incorporated 1995 Stock Incentive Plan Incentive Stock Option Agreement.(#) | (10.10)(17) | ||
10.13 | Form of Iron Mountain Incorporated 1995 Stock Incentive Plan Non-Qualified Stock Option Agreement.(#) | (10.11)(17) | ||
10.14 | Form of Iron Mountain Incorporated 1995 Stock Incentive Plan Amended and Restated Iron Mountain Non-Qualified Stock Option Agreement.(#) | (10.12)(17) | ||
10.15 | Form of Iron Mountain Incorporated 1995 Stock Incentive Plan Incentive Stock Option Agreement.(#) | (10.13)(17) | ||
10.16 | Form of Iron Mountain Incorporated 1995 Stock Incentive Plan Non-Qualified Stock Option Agreement.(#) | (10.14)(17) | ||
10.17 | Form of Iron Mountain Incorporated 1997 Stock Option Plan Stock Option Agreement.(#) | (10.15)(17) | ||
10.18 | Form of Iron Mountain Incorporated 1997 Stock Option Plan Stock Option Agreement.(#) | (10.16)(17) | ||
10.19 | Form of Iron Mountain Incorporated 2002 Stock Incentive Plan Stock Option Agreement.(#) | (10.17)(17) | ||
10.20 | Form of Iron Mountain Incorporated 2002 Stock Incentive Plan Stock Option Agreement.(#) | (10.18)(17) | ||
10.21 | 2005 Categories of Criteria under the 2003 Senior Executive Incentive Plan.(#) | (10.1)(18) | ||
10.22 | Summary Description of Compensation Plan for Executive Officers.(#) | Filed herewith as Exhibit 10.22 | ||
10.23 | Iron Mountain Incorporated 2003 Senior Executive Incentive Program.(#) | (10.4)(18) | ||
10.24 | Amendment to the Iron Mountain Incorporated 2003 Senior Executive Incentive Program. | (10.2)(20) | ||
10.25 | Iron Mountain Incorporated 2006 Senior Executive Incentive Program.(#) | (10.3)(20) | ||
10.26 | Compensation Plan for Non-Employee Directors.(#) | (10.4)(20) | ||
10.27 | Amended and Restated Registration Rights Agreement, dated as of June 12, 1997, by and among the Company and certain | (10.1)(1) | ||
10.28 | ||||
116
| Master Lease and Security Agreement, dated as of May 22, 2001, between Iron Mountain Statutory Trust—2001, as Lessor, and | (10.1) | |||
10.29 | Amendment No. 1 to Master Lease and Security Agreement, dated as of November 1, 2001 between Iron Mountain Statutory Trust—2001, as Lessor, and | (10.28) | ||
10.30 |
117
| Amendment to Master Lease and Security Agreement and Unconditional Guaranty, dated March 15, 2002, between Iron Mountain Statutory Trust—2001, | (10.6) | |||
10.31 | Unconditional Guaranty, dated as of May 22, 2001, from the Company, as Guarantor, to Iron Mountain Statutory | (10.2) |
10.32 | Subsidiary Guaranty, dated as of May 22, 2001, from certain subsidiaries of the Company as guarantors, for the benefit of Iron Mountain Statutory Trust—2001 and consented to by Bank of Nova Scotia. | (10.36) | ||
10.33 | Guaranty Letter, dated December 31, 2002, to Scotiabanc, Inc. from Iron Mountain Information Services, Inc., as Lessee and the Company as Guarantor. | (10.37) | ||
10.34 | Master Construction Agency Agreement, dated as of May 22, 2001, between Iron Mountain Statutory Trust—2001, as Lessor, and | (10.3) | ||
10.35 | Composite Copy of | |||
| Multi-Currency Term, Revolving Credit Facilities Agreement, dated as of March 4, 2004, as amended and in effect on the date hereof, among Iron Mountain Europe Limited, certain lenders party thereto, Barclays Capital and The Governor and Company of the Bank of Scotland, as arrangers, and The Governor and Company of the Bank of Scotland as the facility agent, and security trustee. | (10.5)(22) | |||
10.36 | Seventh Amended and Restated Credit Agreement dated as of July 8, 2004 among the Company, Iron Mountain Canada Corporation, certain lenders party thereto, Fleet National Bank, as Syndication Agent, Wachovia Bank, National Association and The Bank of Nova Scotia, as Co-Documentation Agents, J.P. Morgan Securities Inc., as lead arranger and bookrunner, JPMorgan Chase Bank, Toronto Branch as Canadian Administrative Agent and JPMorgan Chase Bank, as Administrative Agent. | (10.1)(16) | ||
10.37 | First Amendment, dated as of November 9, 2004, to the Seventh Amended and Restated Credit Agreement, dated as of July 8, 2004, as amended, among the Company, Iron Mountain Canada Corporation, the several banks and other lending institutions or entities from time to time parties thereto, Bank of America, N.A. (f/k/a Fleet National Bank), as Syndication Agent, Wachovia Bank, National Association and The Bank of Nova Scotia, as Co-Documentation Agents, JPMorgan Chase Bank, Toronto Branch, as the Canadian Administrative Agent, JPMorgan Chase Bank, as Administrative Agent, and J.P. Morgan Securities Inc., as arranger and bookrunner. | (10.1)(21) | ||
10.38 | Second Amendment, dated as of October 31, 2005, to the Seventh Amended and Restated Credit Agreement, dated as of July 8, 2004, as amended, among the Company, Iron Mountain Canada Corporation, the several banks and other lending institutions or entities from time to time parties thereto, Bank of America, N.A., as Syndication Agent, Wachovia Bank, National Association and The Bank of Nova Scotia, as Co-Documentation Agents, JPMorgan Chase Bank, N.A., Toronto Branch (f/k/a JPMorgan Chase Bank, Toronto Branch), as the Canadian Administrative Agent, JPMorgan Chase Bank, N.A. (f/k/a JPMorgan Chase Bank), as Administrative Agent, and J.P. Morgan Securities Inc., as arranger and bookrunner. | (10.2)(21) | ||
10.39 | Third Amendment, dated as of August 16, 2006, to the Seventh Amended and Restated Credit Agreement, dated as of July 8, 2004, as amended, among the Company, Iron Mountain Canada Corporation, the several banks and other lending institutions or entities from time to time parties thereto, Bank of America, N.A., as Syndication Agent, Wachovia Bank, National Association and The Bank of Nova Scotia, as Co-Documentation Agents, JPMorgan Chase Bank, Toronto Branch, as the Canadian Administrative Agent, JPMorgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Securities Inc., as arranger and bookrunner. | (10.1)(26) | ||
10.40 | Agreement of Resignation, Appointment and Acceptance, dated as of January 28, 2005, by and among the Company, The Bank of New York, as prior trustee, and | (10.1)(23) |
10.41 | Agreement of Resignation, Appointment and Acceptance, dated as | (10.2)(23) | ||
10.42 | Agreement of Resignation, Appointment and Acceptance, dated as of January 28, 2005, by and among the Company, The Bank of New York, as prior trustee, and The Bank of New York Trust Company, N.A., as successor trustee, relating to the Senior Subordinated Indenture for 73¤4% Senior Subordinated Notes due 2015 and 65¤8% Senior Subordinated Notes due 2016, dated as of December 30, 2002. | (10.3)(23) | ||
12 | Statement re: Computation of Ratios. | Filed herewith as Exhibit 12 | ||
21 | ||||
Subsidiaries of the Company. | Filed herewith as Exhibit 21 | |||
23.1 | Consent of Deloitte & Touche LLP (Iron Mountain Incorporated, | Filed herewith as Exhibit 23.1 | ||
31.1 | ||||
Rule 13a-14(a) | Filed herewith as Exhibit 31.1 | |||
31.2 | Rule 13a-14(a) | Filed herewith as Exhibit 31.2 | ||
32.1 | Section 1350 | Furnished herewith as Exhibit 32.1 | ||
32.2 | Section 1350 | Furnished herewith as Exhibit 32.2 |
(1)DE'sDE’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, filed with the Commission, File No. 0-27584.
(2)DE's Current Report on Form 8-K dated October 30, 1997, filed with the Commission, File No. 0-27584.118(3)Filed as an Exhibit to Iron Mountain/DE'sDE’s Current Report on Form 8-K dated March 9, 1998, filed with the Commission, File No. 0-27584.(4)
(3) Filed as an Exhibit to Iron Mountain/DE's Registration Statement No. 333-67765, filed with Commission on November 23, 1998.
(4) Filed as an Exhibit to Iron Mountain/DE'sDE’s Current Report of Form 8-K dated May 11, 1999, filed with the Commission, File No. 0-27584.
(5) Filed as an Exhibit Amendment No. 1 to Pierce Leahy'sLeahy’s Registration Statement No. 333-9963, filed with the Commission on October 4, 1996.
(6) Filed as an Exhibit to the Company'sCompany’s Current Report on Form 8-K dated February 1, 2000, filed with the Commission, File No. 1-13045.
(7) Filed as an Exhibit to the Company's Annual Report on Form 10-K405 for the year ended December 31, 1999, filed with the Commission, File No. 1-13045.
(8) Filed as an Exhibit to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, filed with the Commission, File No. 1-13045.
(9) Filed as an Exhibit to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, filed with the Commission, File No. 1-13045.
(10) Filed as an Exhibit to the Company'sCompany’s Registration Statement No. 333-75068, filed with the Commission on December 13, 2001.
(11) Filed as an Exhibit to the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Commission, File No. 1-13045.
(12) Filed as an Exhibit to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the Commission, File No. 1-13045.
119
(14) Filed as an Exhibit to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed with the Commission, File No. 1-13045.
(15) Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Commission, File No. 1-13045.
(16) Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed with the Commission, File No. 1-13045.
(17) Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission, File No. 1-13045.
(18) Filed as an Exhibit to the Company’s Current Report on Form 8-K dated April 5, 2005, filed with the Commission, File No. 1-13045.
(19) Filed as an Exhibit to the Company’s Current Report on Form 8-K dated May 27, 2005, filed with the Commission, File No. 1-13045.
(20) Filed as an Exhibit to the Company’s Current Report on Form 8-K dated June 1, 2006, filed with the Commission, File No. 1-13045.
(21) Filed as an Exhibit to the Company’s Current Report on Form 8-K dated June 23, 2006, filed with the Commission, File No. 1-13045.
(22) Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, filed with the Commission, File No. 1-13045.
(23) Filed as an Exhibit to the Company’s Current Report on Form 8-K dated July 11, 2006, filed with the Commission, File No. 1-13045.
(24) Filed as an Exhibit to the Company’s Current Report on Form 8-K dated July 20, 2006, filed with the Commission, File No. 1-13045.
(25) Filed as an Exhibit to the Company’s Current Report on Form 8-K dated July 28, 2006, filed with the Commission, File No. 1-13045.
(26) Filed as an Exhibit to the Company’s Current Report on Form 8-K dated August 29, 2006, filed with the Commission, File No. 1-13045.
(27) Filed as an Exhibit to the Company’s Current Report on Form 8-K dated October 17, 2006, filed with the Commission, File No. 1-13045.
(28) Filed as an Exhibit to the Company’s Current Report on Form 8-K dated January 24, 2007, filed with the Commission, File No. 1-13045.
107