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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 1-13045
IRON MOUNTAIN INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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PENNSYLVANIA 23-2588479
(STATE OF OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
745 ATLANTIC AVENUE, BOSTON, MASSACHUSETTS 02111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
617-535-4766
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value per share ("Common Stock") New York Stock Exchange
11 1/8% Senior Subordinated Notes Due 2006 New York Stock Exchange
9 1/8% Senior Subordinated Notes Due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 1, 2000, the aggregate market value of the Common Stock of the
registrant held by non-affiliates of the registrant was $1,127,635,777.13 based
on the closing price on the New York Stock Exchange on such date.
Number of shares of the registrant's Common Stock at March 1, 2000: 54,301,237
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IRON MOUNTAIN INCORPORATED
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
--------
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters....................................... 15
Item 6. Selected Consolidated Financial and Operating Information... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 36
Item 8. Financial Statements and Supplementary Data................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 37
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 38
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 47
Item 13. Certain Relationships and Related Transactions.............. 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 50
EXPLANATORY NOTE
On February 1, 2000, Iron Mountain Incorporated, a Delaware corporation
("Old Iron Mountain"), acquired Pierce Leahy Corp., a Pennsylvania corporation
("Pierce Leahy"). Because the transaction was structured as a reverse merger,
Old Iron Mountain merged with and into Pierce Leahy, and Pierce Leahy survived
the merger. Immediately after the merger, Pierce Leahy changed its name from
Pierce Leahy Corp. to Iron Mountain Incorporated ("Iron Mountain," the "Company"
or "we"). Based on the number of shares of Old Iron Mountain and Pierce Leahy
common stock outstanding, immediately after the merger former stockholders of
Old Iron Mountain owned approximately 65% of the Company's Common Stock. Because
of this share ownership, Old Iron Mountain is considered the acquiring entity
for accounting purposes, and the Company adopted Old Iron Mountain's financial
statements as its own upon the completion of the merger. In connection with the
merger, Old Iron Mountain's Board of Directors and top executive officers became
the Board of Directors and executive officers of the Company, except that J.
Peter Pierce and Howard D. Ross were also elected Directors, J. Peter Pierce
became the President of the
Company and David S. Wendell became the Senior Vice President of the Company. In
order to provide comprehensive disclosure, items in this Annual Report on
Form 10-K containing historical information include disclosures for both Old
Iron Mountain and Pierce Leahy.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this annual report on Form 10-K that constitute
"forward-looking statements" as that term is defined in the federal securities
laws. These forward-looking statements concern the operations, economic
performance and financial condition of Iron Mountain. The forward-looking
statements are subject to various known and unknown risks, uncertainties and
other factors. When we use words such as "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,
the following:
- unanticipated costs as a result of Old Iron Mountain's acquisition of
Piercy Leahy;
- difficulties related to the integration of acquisitions generally and,
more specifically, the integration of the operations of Old Iron Mountain
and Pierce Leahy;
- our significant indebtedness and the cost and availability of financing
for contemplated growth;
- the cost and availability of appropriate storage facilities;
- changes in customer preferences and demand for our services;
- rapid and significant changes in technology;
- intense competition in the industry; and
- other general economic and business conditions.
These cautionary statements should not be construed by you to be exhaustive,
and they are made only as of the date of this report. You should read these
cautionary statements as being applicable to all forward-looking statements
wherever they appear. We assume no obligation to update or revise the
forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
ii
PART I
ITEM 1. BUSINESS.
A. DEVELOPMENT OF BUSINESS.
Iron Mountain is the leading records and information management services
("RIMS") company. The Company is an international, full-service provider of
records and information management and related services, enabling customers to
outsource these functions. Iron Mountain has a diversified customer base, which
includes more than half of the Fortune 500 and numerous commercial, legal,
banking, healthcare, accounting, insurance, entertainment and government
organizations. The Company provides storage for all major media, including
paper, which is the dominant form of records storage, magnetic media, including
computer tapes, microfilm and microfiche, master audio and video tapes, film and
optical disks, X-rays and blueprints. Iron Mountain's principal services
provided to its storage customers include courier pick-up and delivery, filing,
retrieval and destruction of records, database management, customized reporting
and disaster recovery support. The Company also sells storage materials,
including cardboard boxes and magnetic media, and provides consulting,
facilities management, fulfillment and other outsourcing services.
On February 1, 2000, Old Iron Mountain completed its acquisition of Pierce
Leahy in a stock-for-stock merger valued at approximately $1.1 billion,
including the assumption of debt and related transaction costs. Pierce Leahy was
one of Old Iron Mountain's largest competitors in the RIMS industry, with a
particular focus on business records storage and related services. The Company
is in the process of integrating the operations and headquarters functions of
Old Iron Mountain and Pierce Leahy on a "best practices" basis. During fiscal
years 2000 and 2001, the Company expects to integrate overhead and support
functions and to begin combining field operations, with the goal of full
integration within three years of the merger. Management expects the Company
will realize an estimated $15 million in annual operating cost savings within
three years after the merger.
As of March 1, 2000, the Company provided services to over 100,000 customer
accounts in 77 domestic markets in the United States and to over 15,000 customer
accounts in 30 markets outside the United States. Iron Mountain's domestic
operations employ about 7,400 people and operate nearly 500 facilities, while
outside the United States, the Company employs approximately 1,500 people and
operates approximately 90 facilities.
B. DESCRIPTION OF BUSINESS.
THE RECORDS AND INFORMATION MANAGEMENT SERVICES INDUSTRY
OVERVIEW
Companies in the RIMS industry store and manage information in a variety of
media formats, which can broadly be divided into paper and electronic records,
and provide a wide range of services related to the records stored. The Company
refers to its general paper storage and management services as "business records
management." Medical records constitute a large and growing specialty subset
within the paper records market. Paper records are defined to include paper
documents, as well as all other non-electronic media such as microfilm and
microfiche, master audio and video tapes, film, X-rays and blueprints. Based on
publicly available information, organizations in the United States generate an
estimated four trillion documents each year, many of which must be retained and
available for reference for many years. Electronic records primarily include
computer tapes and optical disks. The Company refers to its electronic records
storage and management services as "data security services."
PAPER RECORDS
Paper records may be broadly divided into two categories: active and
inactive. Active records relate to ongoing and recently completed activities or
contain information that is frequently referenced. Active
1
records are usually stored and managed on-site by the organization that
originated them to ensure ready availability. Inactive paper records are the
principal focus of the RIMS industry. Inactive records consist of those records
that are not needed for immediate access but which must be retained for legal,
regulatory and compliance reasons or for occasional reference in support of
ongoing business operations. Based on industry studies, the Company believes
that inactive records make up approximately 80% of all paper records.
ELECTRONIC RECORDS
Electronic records management focuses on the storage of, and related
services for, computer media that are either archival in nature or a back-up
copy of recently processed data. Archival data is generally not needed for
access but is retained for legal, regulatory and compliance reasons or for
occasional reference in support of ongoing business operations. Back-up data
exists because of the need of many businesses to maintain back-up copies of data
in order to be able to operate in the event of a system failure, casualty loss
or other disaster. It is customary for data processing groups to rotate back-up
tapes to off-site locations on a regular basis and to require multiple copies of
such information at multiple sites.
GROWTH OF MARKET
The Company believes that the volume of stored paper and electronic records
will continue to increase for a number of reasons, including: (i) the rapid
growth of inexpensive document producing technologies such as facsimile and
desktop printing, (ii) the continued proliferation of data processing
technologies such as personal computers and networks, (iii) increased regulatory
requirements, (iv) concerns over possible future litigation and the resulting
increases in volume and holding periods of documentation, (v) the high cost of
reviewing records and deciding whether to retain or destroy them, (vi) the
failure of many entities to adopt or follow policies on records destruction and
(vii) audit requirements to keep back-up copies of certain records in off-site
locations.
Despite the growth of new "paperless" technologies, such as the Internet and
e-mail, management believes that stored information remains predominantly
paper-based and that such technologies have promoted the creation of hard copies
of such electronic information. In addition, management believes that the
proliferation of digital information technologies and distributed data networks
has led to increased demand for data security services, such as the storage and
off-site rotation of back-up copies of magnetic media, and outsourcing support
services that address the needs of data center operations and disaster recovery
programs.
HIGHLY FRAGMENTED INDUSTRY
Most RIMS companies serve a single local market, and are often either
owner-operated or ancillary to another business, such as a moving and storage
company. According to Professional Records and Information Services Management
("PRISM"), a trade group of approximately 530 members, as of December 31, 1998,
approximately 3,300 firms offered records and information management services in
the United States. The Company has made, and intends to continue to make,
acquisitions of its competitors, many of whom are small, single city operators.
INDUSTRY CONSOLIDATION
Over the past several years, there has been consolidation in the RIMS
industry. The Company believes that this trend will continue because of the
industry's capital requirements for growth, opportunities for large RIMS
providers to achieve economies of scale and customer demands for more
sophisticated technology-based solutions. In particular, the RIMS business
requires significant up-front capital investment for real estate, racking
systems and management information technology.
Management believes that the consolidation trend in the industry is also due
to, and will continue as a result of, the preference of certain large
organizations to contract with one vendor in multiple cities for
2
multiple services. In particular, customers increasingly demand a single, large,
sophisticated company to handle all of their important medical, electronic and
vital records needs. Large, national companies are better able to satisfy these
demands than smaller competitors.
FINANCIAL CHARACTERISTICS OF IRON MOUNTAIN'S BUSINESS
Iron Mountain's business has the following financial characteristics:
- RECURRING REVENUES. Iron Mountain derives a majority of its consolidated
revenues from fixed periodic, usually monthly, fees charged to customers
based on the volume of records stored. Revenues from these fixed periodic
fees have grown for 44 consecutive quarters in the case of Old Iron
Mountain and 33 consecutive quarters in the case of Pierce Leahy. Once a
customer places paper records in storage with the Company and until those
records are destroyed or permanently removed, for which the Company
typically receives a service fee, the Company receives recurring payments
for storage fees without incurring additional labor or marketing expenses
or significant capital costs. Similarly, contracts for the storage of
electronic media consist primarily of fixed monthly payments. The stable
and growing storage base also provides the foundation for increases in
revenues and earnings before interest, taxes, depreciation, amortization,
extraordinary items, other income and merger-related expenses ("EBITDA")
from related service activities and sales of storage materials.
Merger-related expenses are primarily those expenses directly related to
the merger of Old Iron Mountain and Pierce Leahy that cannot be
capitalized and include costs of exiting certain facilities, certain
severance and pay-to-stay payments, certain system conversion costs and
other transaction-related costs (some of the aforementioned costs may be
reported separately as restructuring charges).
- HISTORICALLY NON-CYCLICAL BUSINESS. Iron Mountain has not experienced a
reduction of its business as a result of past general economic downturns,
although the Company can give no assurance that this would be the case in
the future. Management believes that the outsourcing of RIMS may
accelerate during economic downturns as companies focus on reducing costs
through outsourcing non-core operating functions. In addition, management
believes that companies that have outsourced RIMS are less likely during
economic downturns to incur the move-out costs and other expenses
associated with switching vendors or moving RIMS in-house.
- INHERENT GROWTH FROM EXISTING PAPER RECORDS CUSTOMERS. The Company's paper
records customers have on average generated additional Cartons(1) at a
faster rate than stored Cartons have been destroyed or permanently
removed. From January 1, 1996 through December 31, 1999, the combined Net
Carton Growth From Existing Customers(2) of each of Old Iron Mountain and
Pierce Leahy increased at an average annual rate of approximately 6%. The
Company believes the consistent growth of its paper storage revenues is
the result of a number of factors, including: (i) the trend toward
increased records retention, (ii) customer satisfaction with the Company's
services and (iii) the costs and inconvenience of moving storage
operations in-house or to another provider of RIMS.
- DIVERSIFIED AND STABLE CUSTOMER BASE. As of March 1, 2000, the Company had
over 115,000 customer accounts in a variety of industries. The Company
currently provides services to more than half of the Fortune 500 and
numerous commercial, legal, banking, healthcare, accounting, insurance,
entertainment and government organizations. No customer of either Old Iron
Mountain or Pierce
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(1) The term "Carton" is defined as a measurement of volume equal to a single
standard storage carton, approximately 1.2 cubic feet. The number of
cartons stored does not include storage volumes in the Company's vital
records services and data security services, which are described below.
(2) The term "Net Carton Growth From Existing Customers" is defined as the
increase in net Cartons attributable to existing customers without giving
effect to the loss of approximately 1.0 million Cartons in fires attributed
to arson in March 1997 in two of Old Iron Mountain's facilities in South
Brunswick Township, New Jersey. See "Item 3. Legal Proceedings."
3
Leahy accounted for more than 2% of its consolidated revenues for the year
ended December 31, 1999. From January 1, 1996 through December 31, 1999,
average annual permanent removals of Cartons represented only
approximately 4% of total Cartons stored for each of Old Iron Mountain and
Pierce Leahy.
- CAPITAL EXPENDITURES RELATED PRIMARILY TO GROWTH. The Company's RIMS
business requires limited annual capital expenditures made in order to
maintain the Company's current revenue stream. Historically, over 90% of
each of Old Iron Mountain's and Pierce Leahy's aggregate capital
expenditures were growth-related investments, primarily in racking
systems, management information systems, new buildings and improvements to
existing facilities. These growth-related capital expenditures are
primarily discretionary and create additional capacity for increases in
revenues and EBITDA.
GROWTH STRATEGY
The Company's domestic objective is to be one of the largest RIMS providers
in each of its geographic markets and to maintain its position as the largest
national RIMS provider. The Company's international objective is to continue to
capitalize on its expertise in the RIMS industry and to make additional
acquisitions and investments in international markets. The Company seeks to
expand through: (i) increased business with existing customers, including the
provision of new services, (ii) additions of new customers and (iii) selective
acquisitions in existing and new markets.
GROWTH FROM EXISTING CUSTOMERS
Existing Iron Mountain customers storing paper records contribute to storage
and services revenues growth because on average they generate additional Cartons
at a faster rate than old Cartons are destroyed or permanently removed. In order
to maximize growth opportunities from existing customers, the Company seeks to
maintain high levels of customer retention by providing premium customer service
through its decentralized customer service approach complemented by its local
management staff.
Through its local account management staff, the Company leverages existing
business relationships with its customers by selling complementary services and
products. Services include records tracking, indexing, customized reporting,
vital records management and consulting services.
ADDITIONS OF NEW CUSTOMERS
The Company's sales force is dedicated to establishing new account
relationships and servicing existing customer accounts and draws on the
Company's national marketing organization and senior management. As a result of
acquisitions and the Company's decision to increase its sales force by
recruiting additional qualified sales professionals, from December 31, 1997
through March 1, 2000, the Company increased the size of its sales force from
approximately 150 (giving effect to the sales forces of Old Iron Mountain and
Pierce Leahy on a combined basis) to approximately 250 sales professionals.
GROWTH THROUGH DOMESTIC ACQUISITIONS
The Company's acquisition strategy includes both expanding geographically,
focusing primarily on the 100 largest U.S. markets, and increasing the Company's
presence and scale within existing markets through "fold-in" acquisitions. Both
Old Iron Mountain and Pierce Leahy have successful records of acquiring and
integrating smaller RIMS companies. See "Completed and Pending Acquisitions."
The Company intends to continue its domestic acquisition program. However, given
the small number of large acquisition prospects and the Company's increased
revenue base, future acquisitions are expected to be less significant to overall
domestic revenue growth than they have been historically. The Company's
corporate development staff is engaged in an ongoing review of acquisition
candidates.
4
The Company seeks to acquire RIMS companies in markets where management
believes there is the potential for growth and where the high start-up costs of
commencing operations make acquisitions an attractive means of entering new
markets. Following a new-market acquisition, the Company seeks to increase its
business with the acquired customer base and to supplement that growth with new
customers and, potentially, with appropriate fold-in acquisitions.
The Company's goal in its existing markets is to exploit economies of scale
while maintaining high quality service. The Company has proven its ability to
successfully reduce the cost structure of its acquired operations. Certain of
these cost savings, including labor reductions and certain general and
administrative costs, are generally obtained within 12 months of an acquisition.
Other cost savings, including occupancy costs, may take longer to achieve. The
Company's goal is to achieve substantially all of the targeted cost savings
within 24 months of an acquisition.
INTERNATIONAL GROWTH STRATEGY
Iron Mountain also intends to continue to make acquisitions and investments
in RIMS businesses outside the United States. The Company has acquired and
invested in, and seeks to acquire and invest in, RIMS companies in countries,
and, more specifically, markets within such countries, where it believes there
is the potential for growth. From January 1, 1999 through March 1, 2000, Old
Iron Mountain, Pierce Leahy and the Company, directly and through joint
ventures, entered Europe and Mexico and expanded operations in Latin America and
Canada. These transactions have taken, and may continue to take, the form of
acquisitions of the entire business or controlling or minority investments, with
a long-term goal towards eventual full ownership. In addition to the criteria
the Company uses to evaluate domestic acquisition candidates, Iron Mountain also
evaluates the presence in the potential market of existing Iron Mountain clients
as well as the risks uniquely associated with an international investment,
including those risks described below.
The experience, depth and strength of local management are particularly
important in Iron Mountain's international acquisition strategy. As a result,
Iron Mountain has formed joint ventures with, or acquired significant interests
from, target businesses throughout Europe and Latin America. Iron Mountain
believes this strategy, rather than an outright acquisition, may, in certain
markets, better position the Company to expand the existing business, although
the Company's long-term goal is to eventually acquire full ownership of each
such business. The local partner will benefit from Iron Mountain's expertise in
the RIMS industry and, in certain cases, Iron Mountain's technology, and Iron
Mountain will benefit from its local partner's relationships with customers and
its presence in the community.
As Old Iron Mountain did in Europe and Pierce Leahy did in Canada, the
Company intends to continue to make fold-in acquisitions to augment its
operations in international markets. Fold-in acquisitions will be done directly
by Iron Mountain or through the local joint venture, depending in part on
whether Iron Mountain's initial investment was an acquisition or a joint
venture. As with domestic acquisitions, the Company believes that with
appropriate fold-in acquisitions it can benefit from economies of scale.
Iron Mountain's international investments are subject to risks and
uncertainties relating to the indigenous political, social, regulatory, tax and
economic structures of other countries, as well as fluctuations in currency
valuation, exchange controls, expropriation and governmental policies limiting
returns to foreign investors. At this time, there can be no assurance as to
whether any international investment will be successful in achieving its
objectives.
The amount of revenues from international operations for Old Iron Mountain
and Pierce Leahy for fiscal year 1999 is set forth in Note 12 to Notes to Iron
Mountain's Consolidated Financial Statements and Note 13 to Notes to Pierce
Leahy's Consolidated Financial Statements. During 1999, Old Iron Mountain and
Pierce Leahy derived approximately 6% and 17%, respectively, of their revenues
from outside of the United States.
5
COMPLETED AND PENDING ACQUISITIONS
MERGER OF OLD IRON MOUNTAIN AND PIERCE LEAHY
On February 1, 2000, Old Iron Mountain acquired Pierce Leahy. Because the
transaction was structured as a reverse merger, Old Iron Mountain merged with
and into Pierce Leahy and Pierce Leahy survived the merger. Immediately after
the merger the Company changed its name from Pierce Leahy Corp. to Iron Mountain
Incorporated.
As a result of the merger, each share of Old Iron Mountain common stock was
converted into one share of Common Stock of the Company and each share of Pierce
Leahy common stock continued to remain outstanding. The aggregate merger
consideration was valued at approximately $1.1 billion including assumption of
debt and related transaction costs. No cash consideration was paid in the
merger. Prior to the merger, Pierce Leahy had declared a one-for-ten stock
dividend on its common stock. Based on the number of shares of Old Iron Mountain
and Pierce Leahy common stock outstanding immediately prior to the completion of
the merger, immediately after the merger former stockholders of Old Iron
Mountain owned approximately 65% of the Company's Common Stock, while Pierce
Leahy stockholders owned approximately 35%. Because of this share ownership, Old
Iron Mountain is considered the acquiring entity for accounting purposes, and
the Company adopted Old Iron Mountain's financial statements as its own upon the
completion of the merger.
Old Iron Mountain and Pierce Leahy were the two largest national providers
of RIMS services prior to the merger. Before the merger, Old Iron Mountain
operated in 70 domestic and 17 international markets, and Pierce Leahy operated
in 60 domestic and 16 international markets. As a result of the merger, the two
companies combined operations in 53 domestic markets and the Company now serves
a total of 77 domestic markets. The two companies' international markets were
largely complementary and only overlapped in three markets, so that the Company
now serves 30 international markets.
RECENT ACQUISITIONS AND DISPOSITION
As part of their growth strategies, from January 1, 1997 through
December 31, 1999, Old Iron Mountain and Pierce Leahy acquired 50 and 37 RIMS
businesses, respectively. Old Iron Mountain and the Company have acquired a
total of two additional companies (excluding the merger of Old Iron Mountain and
Pierce Leahy) through March 1, 2000, and the Company has entered into a
definitive agreement to acquire Data Storage Centers, Inc. ("DSC").
The following table presents certain information with respect to the
acquisitions completed by Old Iron Mountain and Pierce Leahy on a combined basis
between January 1, 1997 and December 31, 1999. All dollar amounts presented are
in millions.
COMPONENTS OF PURCHASE PRICE CONSIDERATION
-----------------------------------------------------
TOTAL AGGREGATE FAIR VALUE OF COMMON
REVENUES CASH AND DEBT STOCK AND OPTIONS TOTAL PURCHASE
NUMBER REPRESENTED(1) ASSUMED ISSUED PRICE
-------- --------------- ------------- -------------------- --------------
1997 Acquisitions....... 35 $136 $296 $94 $390
1998 Acquisitions....... 31 218 383(2) 81 464
1999 Acquisitions....... 21 113 257(3) 46 303
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(1) Total annual aggregate revenues were calculated in each case by reference
to the revenues of each of the acquired businesses during the year in which
they were acquired. This calculation includes an estimate of total revenues
for the portion of the year of acquisition during which any such acquired
business was included in Old Iron Mountain's or Pierce Leahy's results of
operations.
(2) Includes approximately $3 million attributable to assets that Old Iron
Mountain exchanged as part of the consideration in connection with one
acquisition.
(3) Includes approximately $2.5 million attributable to the capital stock of
Arcus Data Security Limited contributed as part of the consideration in Old
Iron Mountain's acquisition of a 50.1% interest in Iron Mountain Europe
Limited ("Iron Mountain Europe") (formerly known as Britannia Data
Management Limited).
6
In addition, in November 1999, Old Iron Mountain sold substantially all of
the assets of Arcus Staffing Resources, Inc. ("Arcus Staffing"), its information
technology staffing ("IT Staffing") business. Old Iron Mountain had acquired the
IT Staffing business in January 1998 as part of its acquisition of Arcus
Group, Inc. ("Arcus Group"). Old Iron Mountain's 1998 and 1999 financial
statements have been restated to show the classification of the IT Staffing
business as a discontinued operation.
PENDING ACQUISITION
On February 18, 2000, the Company entered into an agreement with DSC and
Suddath Van Lines, Inc. to acquire substantially all of the assets of DSC. As a
result, the Company will acquire the RIMS business of DSC, and will also lease
or sublease from DSC, or assume DSC's leases with regard to, certain related
real estate. At closing, the Company will pay aggregate consideration of
approximately $54 million in cash in connection with the DSC acquisition,
including payments to certain officers as consideration for non-competition
covenants. The closing of the DSC acquisition is subject to customary conditions
and is expected to occur in the second quarter of 2000, although no assurance
can be given that it will be completed.
Management believes that DSC is a premier provider of business records
management services and data security services, serving over 2,700 customers. As
of February 18, 2000, DSC, headquartered in Jacksonville, Florida, operated in
14 markets located primarily in the southeastern United States. DSC had
annualized revenues of approximately $19 million based on its results for the
fourth quarter of 1999.
7
The following table presents certain information for Old Iron Mountain's,
Pierce Leahy's and the Company's acquisitions in 1999 and 2000 and the pending
DSC acquisition, excluding the merger of Old Iron Mountain and Pierce Leahy.
PRINCIPAL STATE(S)/
COUNTRY
ACQUISITION* OF OPERATION COMPLETION DATE
- ------------ ------------------- ---------------
1999 ACQUISITIONS:
Iron Mountain Europe Limited (50.1% interest) (OIM)....... United Kingdom January 1999
Allards Record Center (PL)................................ New Hampshire January 1999
Medex Systems Storage, Inc. (PL).......................... Canada January 1999
Datavault Limited (PL).................................... United Kingdom February 1999
Secure Accessible Files Environment, Inc. (OIM)........... Connecticut February 1999
Confidential Records Center, Inc. (OIM)................... Maine March 1999
Information Storage Service Center, Inc. (OIM)............ New Mexico March 1999
First American Records Management, Inc. (OIM)............. Various(1) April 1999
Data Base, Inc. (OIM)..................................... Various(2) April 1999
Datavault/United States Safe Deposit
Company (OIM)........................................... California May 1999
File Management, Inc. (OIM)............................... Alabama May 1999
MAP, S.A. (Memogarde) (IME)............................... France June 1999
Tippet-Richardson, Ltd. (PL).............................. Canada July 1999
Carter Media Management, Inc. (OIM)....................... Kentucky June 1999
Central File, Inc. (OIM).................................. Puerto Rico June 1999
A Jacksonville, Florida RIMS business (OIM)............... Florida June 1999
Sistemas de Archivo Corporativo, S. de R.L. de C.V. Mexico
(50.1% interest) (OIM).................................. August 1999
Stortext (Holdings) Ltd. (IME)............................ United Kingdom September 1999
Datavault S.A. (IME)...................................... Spain September 1999
Midtown Professional Records Centre, Inc. (OIM)........... Ohio October 1999
Secur' Archiv (IME)....................................... Germany November 1999
2000 ACQUISITIONS (THROUGH MARCH 1, 2000):
Records Disposal, Inc. (OIM).............................. Texas January 2000
Documentalia S.A. (IME)................................... Spain February 2000
PENDING ACQUISITION:
Data Storage Centers, Inc. (IM)........................... Various(3) Pending
- ------------------------
* OIM = Acquisition by Old Iron Mountain; PL = Acquisition by Pierce Leahy;
IME = Acquisition by Iron Mountain Europe, a 50.1% owned subsidiary of the
Company; and IM = Acquisition by the Company after the merger of Old Iron
Mountain and Pierce Leahy.
(1) California, Colorado, Oregon and Washington.
(2) Illinois, Maryland, North Carolina, Ohio, Pennsylvania, Texas, Virginia,
Washington and Wisconsin.
(3) California, Florida, Georgia, Massachusetts, North Carolina, Texas, Virginia
and District of Columbia.
8
DESCRIPTION OF IRON MOUNTAIN'S BUSINESS
BUSINESS RECORDS MANAGEMENT
The business records stored by the Company's customers with the Company by
their nature are not very active. These types of records are stored in cartons,
which are packed by the customer. The Company uses bar-coded tracking systems
known as SAFEKEEPER-TM- and PIERCE LEAHY USER SOLUTION-Registered Trademark-
(PLUS-Registered Trademark-) and other procedures to ensure the integrity of the
contents of a customer's cartons and to efficiently store and later retrieve a
customer's cartons. Storage charges are generally billed monthly on a per
storage unit basis, usually either per carton or per cubic foot of records, and
include the provision of space, racking, computerized inventory and activity
tracking and physical security.
DATA SECURITY SERVICES
Data security services consist of the storage and rotation of back-up and
archival computer media as part of corporate disaster and business recovery
plans. Computer tapes, cartridges and disk packs are transported off-site by the
Company's courier operations on a scheduled basis to secure, climate-controlled
facilities, where they are available to customers 24 hours a day, 365 days a
year, to facilitate data recovery in the event of a disaster. Iron Mountain's
MEDIALINK-TM- software manages this process. Iron Mountain also manages tape
library relocation and supports disaster recovery testing and execution.
HEALTHCARE INFORMATION SERVICES
Healthcare information services principally include the handling, storage,
filing, processing and retrieval of medical records used by hospitals, private
practitioners and other medical institutions. Medical records tend to be more
active in nature and are typically stored on specialized shelving systems that
provide access to individual files. Healthcare information services also include
recurring project work and ancillary services. Recurring project work involves
the on-site removal of aged patient files and related computerized file
indexing. Ancillary healthcare information services include release of
information, temporary staffing, contract coding, facilities management and
imaging.
VITAL RECORDS SERVICES
Vital records contain critical or irreplaceable data such as master audio
and video recordings, film, software source code and other highly proprietary
information. Vital records may require special facilities or services, either
because of the data they contain or the media on which they are recorded. The
Company's charges for providing enhanced security and special climate-controlled
environments for vital records are higher than for typical storage functions.
The Company provides the same ancillary services for vital records as it
provides for its other storage operations.
SERVICE AND COURIER OPERATIONS
Service and courier operations include adding records to storage, temporary
removal of records from storage, refiling of removed records, permanent
withdrawals from storage and destruction of records. Service charges are
generally assessed for each procedure on a per unit basis. The SAFEKEEPER and
PLUS systems control the service processes from order entry through
transportation and invoicing.
Courier operations consist primarily of the pickup and delivery of records
upon customer request. Charges for courier services are based on urgency of
delivery, volume and location and are billed monthly. As of March 1, 2000, Iron
Mountain was utilizing a fleet of more than 1,600 owned or leased delivery
vehicles.
9
ADDITIONAL SERVICES AND PRODUCTS
Iron Mountain offers a variety of additional services, which customers may
request or contract for on an individual basis. These services include
inventorying records, packing records into cartons or other containers, and
creating computerized indexes of files and individual documents. The Company
also provides services for the management of active records programs. The
Company can provide these services, which generally include document and file
processing and storage, both off-site at its own facilities and by supplying its
own personnel to perform management functions on-site at the customer's
premises.
Other complementary lines of business operated by the Company include
fulfillment services and confidential document destruction. Fulfillment services
are performed by the Company's COMAC division. The division stores customer
marketing literature and delivers this material to sales offices, trade shows
and prospective customers' sites based on current and prospective customer
orders. COMAC also assembles custom marketing packages and orders, manages and
provides detailed reporting on customer marketing literature inventories.
Confidential document destruction involves the shredding of sensitive
documents for corporate customers that, in many cases, also use the Company's
services for management of less sensitive archival records. These services
typically include the scheduled pick-up of loose office records accumulated by
customers in specially designed containers provided by Iron Mountain. The
Company currently performs these services in five of its markets and seeks to
expand its presence in this business through acquisitions and internal
start-ups.
In addition, the Company provides professional consulting services to large
customers, enabling them to develop and implement comprehensive records and
information management programs. Iron Mountain's consulting business draws on
the Company's experience in RIMS to analyze the practices of such companies and
assist them in creating more effective programs of records and information
management. The Company's consultants work with these customers to develop
policies for document review, analysis and evaluation and for scheduling of
document retention and destruction.
The Company also sells a full line of specially designed corrugated
cardboard, metal and plastic storage containers and magnetic media products.
Iron Mountain is exploring opportunities to leverage its customer
relationships, geographic presence and brand image to provide additional
information management systems for digital records. The growth rate of mission
critical digital information is accelerating, driven in part by the use of the
Internet as a distribution and transaction medium. The rising cost and
increasing importance of digital information management, coupled with the
increasing availability of telecommunications bandwidth at lower costs, may
create meaningful opportunities for Iron Mountain. The Company is evaluating
opportunities to partner with technology providers to develop a number of
applications.
CUSTOMERS
The Company's customer base is diversified in terms of revenues and industry
concentration. Iron Mountain tracks customer accounts, which are based on
invoices. Accordingly, depending upon how many invoices have been arranged at
the request of a customer, one organization may represent multiple customer
accounts. As of March 1, 2000, the Company had over 100,000 domestic and over
15,000 international customer accounts in a variety of industries. The Company
currently provides services to more than half of the Fortune 500 and numerous
commercial, legal, banking, healthcare, accounting, insurance, entertainment and
government organizations. No customer accounted for more than 2% of either Old
Iron Mountain's or Pierce Leahy's consolidated revenues for the year ended
December 31, 1999.
10
COMPETITION; ALTERNATIVE TECHNOLOGY
The Company competes with its current and potential customers' internal
records and information management services capabilities. The Company can
provide no assurance that these organizations will begin or continue to use an
outside company such as Iron Mountain for their future records and information
management services.
The Company competes with multiple RIMS providers in all geographic areas
where it operates. Iron Mountain believes that competition for customers is
based on price, reputation for reliability, quality of service and scope and
scale of technology and that it generally competes effectively based on these
factors.
Iron Mountain also competes with other RIMS providers for companies to
acquire. Some of the Company's competitors possess greater financial and other
resources than Iron Mountain. If any such competitor were to devote additional
resources to the RIMS business and such acquisition candidates or focus its
strategy on Iron Mountain's markets, Iron Mountain's results of operations could
be adversely affected.
Iron Mountain derives most of its revenues from the storage of paper
documents and related services. This storage requires significant physical
space. Alternative storage technologies exist, many of which require
significantly less space than paper. These technologies include computer media,
microform, CD-ROM and optical disk. To date, none of these technologies has
replaced paper as the principal means for storing information. However, the
Company can provide no assurance that its customers will continue to store most
of their records in paper format. A significant shift by Iron Mountain's
customers to storage of data through non-paper based technologies, whether now
existing or developed in the future, would adversely affect the Company's
business.
EMPLOYEES
A key feature of the Company's operating strategy is its decentralized
management structure and empowerment of local management operating in local
business environments. The Company is divided into geographic Areas, Regions and
Districts. Generally, Areas are managed by Executive Vice Presidents, Regions
are managed by Vice Presidents and Districts are managed by General Managers.
The Company's international operations are managed by operating personnel
located in the particular country. The Company's headquarters staff performs a
variety of central administrative and support functions in order to maximize the
time and resources that local personnel can devote to customer service and
client development.
The Company's selling organization, which includes approximately 250 sales
professionals, consists of telemarketing, direct sales and account management,
all supported by a corporate marketing group. Telemarketing sales people use
advanced database telemarketing techniques to identify and source account leads.
Leads are pursued by the direct sales force, which is comprised of local sales
representatives and regional and national account managers. Once an account is
established, it is assigned to an account manager, who focuses on serving the
needs of new and existing customers and selling additional services to this
customer base. The corporate marketing organization provides training and
marketing communications as sales support functions.
As of March 1, 2000, the Company domestically employed about 7,400 full-time
employees. Directly and through majority-owned joint ventures, as of March 1,
2000, the Company employed approximately 1,500 full-time employees outside of
the United States.
A small percentage of the Company's employees are represented by unions.
These unionized employees are located in California, one city in Canada and in
the United Kingdom. As of March 1, 2000, the aggregate number of unionized
employees was less than 300.
11
All domestic non-union employees are eligible to participate in the
Company's benefit programs, which include medical, dental, life, short and
long-term disability and accidental death and dismemberment plans. Unionized
employees receive these types of benefits through their unions. In addition to
base compensation and other usual benefits, all full-time domestic employees
participate in some form of incentive-based compensation program that provides
payments based on profits, collections or attainment of specified objectives for
the unit in which they work. Management believes that the Company has good
relationships with its employees and unions. International employees participate
in separate benefit and incentive-based compensation programs.
INSURANCE
For strategic risk transfer purposes, the Company maintains a comprehensive
insurance program with insurers that it believes to be reputable and in amounts
that it believes to be appropriate. Property insurance is purchased on an
all-risk basis, including flood and earthquake, subject to certain sublimits and
deductibles, and inclusive of the replacement cost of real and personal
property, including leasehold improvements, business income loss and extra
expense. Separate policies for California earthquake exposures are maintained at
what the Company believes to be appropriate limits and deductibles for that
exposure. Included among other types of insurance carried by Iron Mountain are:
Workers Compensation, General, Umbrella, Automobile, and Directors and Officers
policies.
The Company's standard form of storage contract sets forth an agreed maximum
valuation for each carton or other storage unit held by the Company, which
serves as a limitation of liability for loss or damage, as permitted under the
Uniform Commercial Code. In contracts containing such limits, such values are
nominal, and the Company believes that in typical circumstances its liability
would be so limited in the event of loss or damage to stored items for which the
Company may be held liable. However, some of the Company's agreements with large
volume accounts and some of the contracts assumed in the Company's acquisitions
contain no such limits or contain higher limits or supplemental insurance
arrangements. See "Item 3. Legal Proceedings" for a description of claims by
particular customers seeking to rescind their contracts, including limitations
on liability, as a result of the 1997 fires experienced at Old Iron Mountain's
South Brunswick Township, New Jersey facilities.
ENVIRONMENTAL MATTERS
Some of the Company's current and formerly owned or operated properties were
previously used for industrial or other purposes that involved the use or
storage of hazardous substances or petroleum products or the generation and
disposal of hazardous wastes. In some instances these properties included the
operation of underground storage tanks or the presence of asbestos-containing
materials. The Company may be potentially liable for environmental costs or for
the failure to clean up contaminated properties, if any.
The Company currently transfers a portion of its risk of financial loss due
to environmental matters by purchasing a Pollution Liability Insurance Policy,
which covers all owned and leased locations. Coverage is provided for both
liability and remediation exposures.
In addition, at one of the Company's New Jersey facilities, certain
contamination has been discovered resulting from operations of the prior owner
thereof. The prior owner, which has agreed to be responsible for the cost of
remediation, is completing remediation of the property under a consent order
with the New Jersey Department of Environmental Protection. The Company has
purchased an environmental liability insurance policy covering the cleanup costs
to the Company, if any, which it believes to be appropriate.
The Company has from time to time conducted limited environmental
investigations and remedial activities at some of its former and current
facilities, but it has not undertaken an in-depth environmental review of all of
the Company's properties.
12
Environmental conditions for which Iron Mountain might be liable may exist
at its properties or at properties that it may acquire in the future. In
addition, future regulatory action and environmental laws may impose costs for
environmental compliance that do not exist today.
ITEM 2. PROPERTIES.
As of March 1, 2000, Iron Mountain conducted operations through 479 leased
and 117 owned facilities containing a total of 36.8 million square feet of
space. The leased facilities typically have initial lease terms of ten years
with options to renew for an additional ten years. In addition, many of the
leases contain either a purchase option or a right of first refusal upon the
sale of the property. The Company's facilities are located throughout North
America, Latin America and Europe, with the largest numbers of facilities in
California, Florida, Massachusetts, Michigan, New Jersey, New York, Ohio, Texas,
Canada and the United Kingdom. The Company believes that the space available in
its facilities is adequate to meet its current needs. See Note 13 of Notes to
Old Iron Mountain's Consolidated Financial Statements and Note 7 of Notes to
Pierce Leahy's Consolidated Financial Statements for information regarding the
minimum annual rental commitments of Old Iron Mountain and Pierce Leahy,
respectively.
ITEM 3. LEGAL PROCEEDINGS.
In March 1997, Old Iron Mountain experienced three fires, all of which
authorities have determined were caused by arson. The fires resulted in damage
to one and destruction of Old Iron Mountain's other RIMS facility in South
Brunswick Township, New Jersey.
Sixty-one of Old Iron Mountain's customers or their insurance carriers have
asserted claims as a consequence of the destruction of, or damage to, their
records as a result of the fires, including claims with specific requests for
compensation and allegations of negligence or other culpability on the part of
Old Iron Mountain. The Company and its insurers have denied any liability on the
part of Old Iron Mountain as to all of these claims.
The Company is presently aware of six lawsuits that have been filed against
Old Iron Mountain by certain of its customers and/or their insurers, and of two
lawsuits filed by the insurers of abutters of the South Brunswick facility, all
alleging damages in unspecified amounts arising out of the fires. These lawsuits
were filed in the U.S. District Court for the District of New Jersey; the New
Jersey Superior Court, Middlesex County, Law Division; and the Supreme Court for
New York County, New York.
Old Iron Mountain has denied liability, asserted affirmative defenses and,
in certain of the cases, moved for dismissal and asserted counterclaims for
indemnification against the plaintiffs. In February 2000, following a trial, the
United States District Court of New Jersey entered judgment in favor of Old Iron
Mountain on all counts in one of the customer lawsuits. Discovery is ongoing in
all remaining cases. The Company denies any liability as a result of the
destruction of, or damage to, customer records as a result of the fires, which
were beyond its control, and intends to vigorously defend itself against these
and any other lawsuits that may arise. The Company is also pursuing coverage of
these claims and proceedings with its various insurers.
Old Iron Mountain was paid by its general liability and property insurance
carrier for costs incurred as a result of business interruption and property
damage due to the fires. However, Old Iron Mountain's errors and omissions
carrier made an initial determination denying coverage as to these claims. In
November 1998, Old Iron Mountain filed an action in the United States District
Court for the District of Massachusetts seeking a declaration of coverage and
other relief. The parties, together with the general liability and property
carrier, have reached a partial settlement for pre-June 30, 1999 defense costs
and continue to be in active negotiations to resolve all remaining coverage
issues.
The outcome of these proceedings cannot be predicted. Based on its present
assessment of the situation, after consultation with legal counsel, management
does not believe that the outcome of these
13
proceedings will have a material adverse effect on the Company's financial
condition or results of operations, although there can be no assurance in this
regard.
In addition to the matters discussed above, the Company is involved in
litigation from time to time in the ordinary course of business. In the opinion
of management, no other material legal proceedings are pending to which the
Company, or any of its properties, is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders of either Old
Iron Mountain or Pierce Leahy during the fourth quarter of the fiscal year ended
December 31, 1999.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The Common Stock of the Company is traded on the New York Stock Exchange
("NYSE") under the symbol "IRM." Prior to the merger, the common stock of each
of Pierce Leahy and Old Iron Mountain were listed on the NYSE under the symbols
"PLH" and "IRM," respectively. Pierce Leahy first issued its common stock to the
public in July 1997, while Old Iron Mountain first issued its common stock to
the public in February 1996. Prior to April 26, 1999, the common stock of Old
Iron Mountain was traded on the Nasdaq National Market ("Nasdaq") under the
symbol "IMTN."
The following table sets forth the high and low sale prices for Old Iron
Mountain's common stock on the NYSE and the Nasdaq, for the years 1998 and 1999,
giving effect to a three-for-two split effected in the form of a dividend on Old
Iron Mountain's common stock declared and paid in July 1998:
SALE PRICES
-------------------
HIGH LOW
-------- --------
1998
First Quarter............................................. $25.08 $20.92
Second Quarter............................................ 30.67 24.58
Third Quarter............................................. 30.50 22.50
Fourth Quarter............................................ 36.25 23.00
1999
First Quarter............................................. $36.25 $27.38
Second Quarter............................................ 33.13 25.38
Third Quarter............................................. 34.38 27.88
Fourth Quarter............................................ 39.50 25.13
The following table sets forth the high and low sale prices on the NYSE for
Pierce Leahy's common stock, for the years 1998 and 1999, giving effect to a
one-for-ten stock split effected in the form of a dividend declared and paid by
Pierce Leahy in January 2000:
SALE PRICES
-------------------
HIGH LOW
-------- --------
1998
First Quarter............................................. $24.55 $18.52
Second Quarter............................................ 26.25 21.14
Third Quarter............................................. 23.52 15.23
Fourth Quarter............................................ 23.64 16.02
1999
First Quarter............................................. $24.55 $21.82
Second Quarter............................................ 24.32 20.57
Third Quarter............................................. 23.64 18.24
Fourth Quarter............................................ 39.32 21.31
The closing price of the Company's Common Stock on the NYSE on March 1, 2000
was $30.44. As of March 1, 2000, there were 826 holders of record of the
Company's Common Stock. The Company believes that there are more than 5,800
beneficial owners of the Company's Common Stock.
The Company's Board of Directors (the "Company Board") currently intends to
retain future earnings, if any, for the development of the Company's businesses
and does not anticipate paying cash dividends on the Company's Common Stock in
the foreseeable future. Future determinations by the Company Board to pay
dividends on the Common Stock would be based primarily upon the financial
condition, results of operations and business requirements of the Company.
Dividends, if any, would be payable at the sole discretion of the Company Board
out of the funds legally available for that purpose. Some of the Company's
agreements pursuant to which the Company has borrowed funds contain provisions
that limit the amount of dividends and stock repurchases that the Company may
make.
Neither Old Iron Mountain nor Pierce Leahy has paid dividends on its shares
of common stock, other than stock dividends, during the last two years.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION.
A. OLD IRON MOUNTAIN
The following selected consolidated statements of operations and balance
sheet data of Old Iron Mountain have been derived from Old Iron Mountain's
audited consolidated financial statements. The selected consolidated financial
and operating information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Old Iron Mountain" and with Old Iron Mountain's Consolidated
Financial Statements and the Notes thereto included elsewhere in this filing.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Storage............................................. $ 64,165 $ 85,826 $ 125,968 $ 230,702 $ 317,387
Service and Storage Material Sales.................. 40,271 52,892 82,797 153,259 202,162
---------- ---------- ---------- ---------- ----------
Total Revenues.................................... 104,436 138,718 208,765 383,961 519,549
Operating Expenses:
Cost of Sales (excluding depreciation).............. 52,277 70,747 106,879 192,113 260,930
Selling, General and Administrative................. 26,035 34,342 51,668 95,867 128,948
Depreciation and Amortization....................... 12,341 16,936 27,107 48,301 65,422
---------- ---------- ---------- ---------- ----------
Total Operating Expenses.......................... 90,653 122,025 185,654 336,281 455,300
---------- ---------- ---------- ---------- ----------
Operating Income...................................... 13,783 16,693 23,111 47,680 64,249
Interest Expense, Net................................. 11,838 14,901 27,712 45,673 54,425
Other Income, Net..................................... -- -- -- 1,384 17
---------- ---------- ---------- ---------- ----------
Income (Loss) from Continuing Operations Before
Provision (Benefit) for Income Taxes and Minority
Interest Expense.................................... 1,945 1,792 (4,601) 3,391 9,841
Provision (Benefit) for Income Taxes.................. 1,697 1,435 (80) 6,558 10,579
Minority Interest Expense............................. -- -- -- -- 322
---------- ---------- ---------- ---------- ----------
Income (Loss) from Continuing Operations.............. 248 357 (4,521) (3,167) (1,060)
Income from Discontinued Operations................... -- -- -- 201 241
Loss on Sale of Discontinued Operations............... -- -- -- -- (13,400)
---------- ---------- ---------- ---------- ----------
Income (Loss) Before Extraordinary Charge............. 248 357 (4,521) (2,966) (14,219)
Extraordinary Charge (net of tax benefit)............. -- 2,126 -- -- --
---------- ---------- ---------- ---------- ----------
Net Income (Loss) Before Warrant Accretion............ 248 (1,769) (4,521) (2,966) (14,219)
Accretion of Redeemable Put Warrant................... 2,107 280 -- -- --
---------- ---------- ---------- ---------- ----------
Net Loss Applicable to Common Stockholders............ $ (1,859) $ (2,049) $ (4,521) $ (2,966) $ (14,219)
========== ========== ========== ========== ==========
Net Loss per Common Share--Basic and Diluted:
Income (Loss) from Continuing Operations............ $ (32.61) $ 0.00 $ (0.26) $ (0.12) $ (0.03)
Income from Discontinued Operations................. -- -- -- 0.01 0.01
Loss on Sale of Discontinued Operations............. -- -- -- -- (0.41)
---------- ---------- ---------- ---------- ----------
Income (Loss) Before Extraordinary Charge............. (32.61) 0.00 (0.26) (0.11) (0.43)
Extraordinary Charge (net of tax benefit)........... -- (0.15) -- -- --
---------- ---------- ---------- ---------- ----------
Net Loss Applicable to Common Stockholders.......... $ (32.61) $ (0.15) $ (0.26) $ (0.11) $ (0.43)
========== ========== ========== ========== ==========
Weighted Average Common Shares
Outstanding--Basic and Diluted.................... 57 13,911 17,172 27,470 33,345
========== ========== ========== ========== ==========
Pro Forma(1):
Net Loss Applicable to Common Stockholders.......... $ (0.16) $ (0.13) $ (0.26) $ (0.11) $ (0.43)
========== ========== ========== ========== ==========
Weighted Average Common Shares Outstanding.......... 11,676 15,206 17,172 27,470 33,345
========== ========== ========== ========== ==========
16
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OTHER DATA:
EBITDA from Continuing Operations(2).................. $ 26,124 $ 33,629 $ 50,218 $ 95,981 $ 129,671
EBITDA from Continuing Operations as a Percentage of
Total Revenues...................................... 25.0% 24.2% 24.1% 25.0% 25.0%
AS OF DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Cash and Cash Equivalents............................. $ 1,585 $ 3,453 $ 24,510 $ 1,715 $ 3,830
Total Assets.......................................... 186,881 281,799 636,786 967,385 1,317,212
Total Debt............................................ 121,874 184,733 428,018 456,178 612,947
Stockholders' Equity.................................. 21,011 52,384 137,733 338,882 488,754
- ------------------------------
(1) Represents pro forma earnings per share as if the preferred stock that was
converted into Old Iron Mountain common stock in connection with Old Iron
Mountain's initial public offering had been converted for all periods
presented.
(2) Based on Old Iron Mountain's experience in the RIMS industry, management
believes that EBITDA is an important tool for measuring the performance of
RIMS companies (including potential acquisition targets) in several areas,
such as liquidity, operating performance and leverage. In addition, lenders
use EBITDA-based calculations as a criterion in evaluating RIMS companies,
and substantially all of Old Iron Mountain's and the Company's financing
agreements contain covenants in which EBITDA-based calculations are used as
a measure of financial performance. However, EBITDA should not be considered
an alternative to operating or net income (as determined in accordance with
generally accepted accounting principles ("GAAP")) as an indicator of Old
Iron Mountain's performance or to cash flow from operations (as determined
in accordance with GAAP) as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation--Old
Iron Mountain--Overview" and "--Liquidity and Capital Resources" for
discussions of other measures of performance determined in accordance with
GAAP and Old Iron Mountain's sources and applications of cash flow.
17
B. PIERCE LEAHY
The following selected consolidated statements of operations and balance
sheet data of Pierce Leahy have been derived from Pierce Leahy's audited
consolidated financial statements. The selected consolidated financial and
operating information set forth below should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pierce Leahy" and with Pierce Leahy's Consolidated Financial
Statements and the Notes thereto included elsewhere in this filing.
All share and per share data have been restated to reflect the stock
dividend of one-tenth of a share of common stock for each share of common stock
outstanding that was paid on January 14, 2000.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Storage................................................... $ 55,501 $ 75,900 $107,879 $153,533 $190,095
Service and Storage Material Sales........................ 39,895 53,848 75,638 116,767 152,167
-------- -------- -------- -------- --------
Total Revenues.......................................... 95,396 129,748 183,517 270,300 342,262
Operating Expenses:
Cost of Sales (excluding depreciation and amortization)... 55,616 73,870 101,940 154,435 191,510
Selling, General and Administrative....................... 16,148 20,007 30,070 36,994 45,856
Merger-Related Expenses(1)................................ -- -- -- -- 2,361
Depreciation and Amortization............................. 8,163 12,869 21,528 35,772 43,655
Special Compensation Charge............................... -- -- 1,752 -- --
Foreign Currency Exchange................................. -- -- 702 7,907 (7,473)
Consulting Payments to Related Parties.................... 500 -- -- -- --
Non-Recurring Charge...................................... -- 3,254 -- -- --
-------- -------- -------- -------- --------
Total Operating Expenses................................ 80,427 110,000 155,992 235,108 275,909
Operating Income............................................ 14,969 19,748 27,525 35,192 66,353
Interest Expense, Net....................................... 9,622 17,225 29,262 42,864 52,363
-------- -------- -------- -------- --------
Income (Loss) Before Income Taxes and Extraordinary
Charge.................................................... 5,347 2,523 (1,737) (7,672) 13,990
Income Taxes................................................ -- -- 7,424 3,318 6,290
Extraordinary Charge........................................ 3,279 2,015 6,036 -- --
-------- -------- -------- -------- --------
Net Income (Loss)........................................... 2,068 508 (15,197) (10,990) 7,700
Accretion of Redeemable Warrants............................ 889 1,561 -- -- --
Preferred Stock Dividend and Accretion...................... -- -- -- -- 774
-------- -------- -------- -------- --------
Net Income (Loss) Applicable to Common Shareholders......... $ 1,179 $ (1,053) $(15,197) $(10,990) $ 6,926
======== ======== ======== ======== ========
Net Income (Loss) per Common Share--Basic and Diluted:
Income (Loss) Before Extraordinary Charge................. $ 0.37 $ 0.08 $ (0.62) $ (0.59) $ 0.37
Extraordinary Charge...................................... (0.27) (0.17) (0.41) -- --
-------- -------- -------- -------- --------
Basic Net Income (Loss) per Common Share.................. $ 0.10 $ (0.09) $ (1.03) $ (0.59) $ 0.37
======== ======== ======== ======== ========
Diluted Net Income (Loss) per Common Share................ $ 0.10 $ (0.09) $ (1.03) $ (0.59) $ 0.35
======== ======== ======== ======== ========
Shares Used in Computing Basic Net Income (Loss) per
Common Share............................................ 11,650 11,602 14,724 18,486 18,766
======== ======== ======== ======== ========
Shares Used in Computing Diluted Net Income (Loss) per
Common Share............................................ 11,979 11,694 14,724 18,486 19,525
======== ======== ======== ======== ========
Pro Forma Data (unaudited):(2)
Net Loss Applicable to Common Shareholders................ $ (9,225)
========
Basic and Diluted Net Loss per Common Share:
Loss Before Extraordinary Charge.......................... $ (0.22)
Extraordinary Charge...................................... (0.41)
--------
Pro Forma Basic and Diluted Net Loss per Common Share..... $ (0.63)
========
Shares Used in Computing Pro Forma Basic and Diluted Net
Loss per Common Share................................... 14,724
========
18
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OTHER DATA:
EBITDA(3)................................................... $ 23,632 $ 35,871 $ 51,507 $ 78,871 $104,896
EBITDA as a Percentage of Total Revenues.................... 24.8% 27.6% 28.1% 29.2% 30.6%
AS OF DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash and Cash Equivalents................................... $ 722 $ 1,254 $ 1,782 $ 2,312 $ 2,265
Total Assets................................................ 131,328 234,820 394,713 666,458 760,466
Total Debt (including Redeemable Warrants).................. 120,071 217,423 279,197 518,111 586,797
Shareholders' Equity (Deficit).............................. (18,201) (25,438) 59,323 63,095 69,808
- ------------------------------
(1) Merger-related expenses in 1999 are primarily those expenses directly
related to the merger of Old Iron Mountain and Pierce Leahy that cannot be
capitalized and consist primarily of financial advisor, legal, accounting
and consulting fees, SEC registration fees and other transaction-related
costs.
(2) Until July 1, 1997, Pierce Leahy was taxed as a subchapter S corporation.
Such status was terminated in connection with Pierce Leahy's 1997 initial
public offering. The pro forma data indicates the basic and diluted net loss
per common share as if Pierce Leahy had provided for income taxes for the
entire 1997 period.
(3) Based on Pierce Leahy's experience in the RIMS industry, management believes
that EBITDA (which was defined by Pierce Leahy as earnings before interest,
taxes, depreciation and amortization, extraordinary charge, non-recurring
charges, special compensation charge, consulting payments to related
parties, merger-related expenses and foreign currency exchange) is an
important tool for measuring the performance of RIMS companies (including
potential acquisition targets) in several areas, such as liquidity,
operating performance and leverage. In addition, lenders use EBITDA-based
calculations as a criterion in evaluating RIMS companies, and substantially
all of Pierce Leahy's financing agreements contained covenants in which
EBITDA-based calculations were used as a measure of financial performance.
However, EBITDA should not be considered an alternative to operating or net
income (as determined in accordance with GAAP) as an indicator of Pierce
Leahy's performance or to cash flow from operations (as determined in
accordance with GAAP) as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation--Pierce Leahy--Overview" and "--Liquidity and Capital Resources"
for discussions of other measures of performance determined in accordance
with GAAP and Pierce Leahy's sources and applications of cash flow.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "ITEM 6.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION" AND THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES THERETO OF EACH OF OLD IRON MOUNTAIN AND
PIERCE LEAHY AND THE OTHER FINANCIAL AND OPERATING INFORMATION INCLUDED
ELSEWHERE IN THIS FILING.
This discussion contains "forward-looking statements" as that term is
defined in the federal securities laws. Such forward-looking statements concern
the operations, economic performance and financial condition of Iron Mountain.
The forward-looking statements are subject to various known and unknown risks,
uncertainties and other factors.
Although we believe that our forward-looking statements are based on
reasonable assumptions, our expected results may not be achieved, and actual
results may differ materially from our expectations. Important factors that
could cause actual results to differ from expectations include, among others,
the following:
- unanticipated costs as a result Old Iron Mountain's acquisition of Pierce
Leahy;
- difficulties related to the integration of acquisitions generally and,
more specifically, the integration of the operations of Old Iron Mountain
and Pierce Leahy;
- our significant indebtedness and the cost and availability of financing
for contemplated growth;
- the cost and availability of appropriate storage facilities;
- changes in customer preferences and demand for our services;
- rapid and significant changes in technology;
- intense competition in the industry; and
- other general economic and business conditions.
A. OLD IRON MOUNTAIN
OVERVIEW
Old Iron Mountain's primary financial objective has been to increase
consolidated EBITDA, which is a source of funds for investment in continued
internal growth and growth through acquisitions and to service indebtedness. Old
Iron Mountain has benefited from growth in consolidated EBITDA from continuing
operations, which has increased from $50.2 million for 1997 to $129.7 million
for 1999 (a compound annual growth rate of 60.7%). However, the pursuit of this
objective has negatively affected other measures of Old Iron Mountain's
financial performance, such as consolidated net income.
For the years ended December 31, 1997 through 1999, Old Iron Mountain
experienced consolidated net losses. Old Iron Mountain attributes such losses in
part to significant charges associated with the pursuit of its growth strategy,
namely:
- increases in depreciation expense associated with expansion of storage
capacity;
- increases in goodwill amortization associated with acquisitions accounted
for under the purchase method; and
- increases in interest expense associated with the borrowings used to fund
acquisitions.
In June 1999, in order to focus on its RIMS business, Old Iron Mountain
decided to sell its IT Staffing business, Arcus Staffing. Old Iron Mountain
acquired Arcus Staffing in January 1998 as part of its acquisition of Arcus
Group. Old Iron Mountain has accounted for the sale of Arcus Staffing as a loss
from discontinued operations. Accordingly, the results of operations of Arcus
Staffing have been segregated from continuing operations and reported as a
separate line item on the consolidated statements of operations discussed in
Note 9 of Old Iron Mountain's Notes to Consolidated Financial Statements. The
20
net loss on the sale of Arcus Staffing ($13.4 million) consists primarily of the
write-off of nondeductible goodwill.
Old Iron Mountain's revenues consist of storage revenues as well as service
and storage material sales revenues. Storage revenues consist of periodic
charges related to the storage of materials (either on a per unit or per cubic
foot of records basis) and have accounted for approximately 60% of total
revenues in each of the last five years. In certain circumstances, based upon
customer requirements, storage revenues include periodic charges associated with
normal, recurring service activities. Service and storage material sales
revenues are comprised of charges for related service activities, the sale of
storage materials and courier operations. Courier operations consist primarily
of the pickup and delivery of records upon customer request. Related service
revenues arise from additions of new records, temporary removal of records from
storage, refiling of removed records, destructions of records, permanent
withdrawals from storage and sales of specially designed storage containers,
magnetic media, including computer tapes and related supplies. Customers are
generally billed on a monthly basis on contractually agreed-upon terms.
Cost of sales (excluding depreciation) consists primarily of wages and
benefits for field personnel, facility occupancy costs, vehicle and other
equipment costs and supplies. Of these, wages and benefits and facility
occupancy costs are the most significant.
Selling, general and administrative expenses consist primarily of wages and
benefits for management, administrative, sales and marketing personnel, as well
as expenses related to travel, communications, professional fees, bad debts,
training, office equipment and supplies.
Old Iron Mountain's depreciation and amortization charges result primarily
from the capital-intensive nature of its business and the acquisitions that Old
Iron Mountain has completed. The principal components of depreciation relate to
racking systems and related equipment, new buildings and leasehold improvements,
equipment for new facilities and computer system hardware and software.
Amortization relates primarily to goodwill arising from acquisitions and
customer acquisition costs. Old Iron Mountain has accounted for all of its
acquisitions under the purchase method. Since the purchase price for RIMS
companies is usually substantially in excess of the fair value of their net
assets, these purchases have given rise to significant goodwill and,
accordingly, significant levels of amortization. Although amortization is a
non-cash charge, it does decrease reported consolidated net income. Because
certain of Old Iron Mountain's acquisitions have given rise to nondeductible
goodwill, Old Iron Mountain's effective tax rate is higher than the statutory
rate.
EBITDA is an important financial performance measure in the RIMS industry,
both for determining the value of companies within the industry and for defining
standards for borrowing from institutional lenders. Old Iron Mountain's EBITDA
margins from continuing operations were 24.1% for 1997, 25.0% for 1998 and 25.0%
for 1999. The adoption in 1999 of newly-issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), negatively impacted Old Iron Mountain's 1999 EBITDA
margin. Excluding the impact of SOP 98-1, Old Iron Mountain's EBITDA margin for
1999 would have been 25.6%. SOP 98-1 requires certain computer software costs
associated with internal use software (primarily data conversion costs), which
were previously capitalizable, to be expensed as incurred. Further, Old Iron
Mountain acquired 18 RIMS businesses in 1997, 15 in 1998 and 17 in 1999, most of
which had lower EBITDA margins than the rest of its business. Old Iron Mountain
generally did not realize anticipated synergies relating to such acquisitions
immediately. Nonetheless, Old Iron Mountain was able to increase its recent
EBITDA margins through improved overall operating efficiencies, economies of
scale and the realization of synergies in connection with earlier acquisitions.
On February 1, 2000, Old Iron Mountain completed its acquisition of Pierce
Leahy in a stock-for-stock merger valued at approximately $1.1 billion,
including the assumption of debt and related transaction costs as discussed in
Note 17 of Notes to Old Iron Mountain's Consolidated Financial Statements.
Pierce Leahy's financial statements for the years ended December 31, 1997, 1998
and 1999 are included elsewhere in this report.
21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from Old Iron Mountain's consolidated statements of operations,
expressed as a percentage of total consolidated revenues.
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Revenues:
Storage................................................... 60.3% 60.1% 61.1%
Service and Storage Material Sales........................ 39.7 39.9 38.9
----- ----- -----
Total Revenues.......................................... 100.0 100.0 100.0
Operating Expenses:
Cost of Sales (Excluding Depreciation).................... 51.2 50.0 50.2
Selling, General and Administrative....................... 24.7 25.0 24.8
Depreciation and Amortization............................. 13.0 12.6 12.6
----- ----- -----
Total Operating Expenses................................ 88.9 87.6 87.6
----- ----- -----
Operating Income............................................ 11.1 12.4 12.4
Interest Expense............................................ 13.3 11.9 10.5
Other Income, Net........................................... -- 0.4 0.0
----- ----- -----
Income (Loss) from Continuing Operations Before Provision
for
Income Taxes and Minority Interest Expense................ (2.2) 0.9 1.9
Provision for Income Taxes.................................. -- 1.7 2.0
Minority Interest Expense................................... -- -- 0.1
----- ----- -----
Loss from Continuing Operations............................. (2.2) (0.8) (0.2)
Income from Discontinued Operations......................... -- 0.1 0.1
Loss on Sale of Discontinued Operations..................... -- -- (2.6)
----- ----- -----
Net Loss Applicable to Common Stockholders.................. (2.2)% (0.7)% (2.7)%
===== ===== =====
EBITDA from Continuing Operations........................... 24.1% 25.0% 25.0%
===== ===== =====
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Consolidated storage revenues increased $86.7 million, or 37.6%, to
$317.4 million for the year ended December 31, 1999 from $230.7 million for the
year ended December 31, 1998, primarily due to the completion of 32 acquisitions
during 1999 and 1998. Consolidated internal revenue growth was 10.9% and
resulted primarily from net increases in records and other media stored by
existing customers and from sales to new customers.
Consolidated service and storage material sales revenues increased
$48.9 million, or 31.9%, to $202.2 million for the year ended December 31, 1999
from $153.3 million for the year ended December 31, 1998, primarily due to
acquisitions. Internal revenue growth was 16.7% and resulted from increases in
service and storage material sales to existing customers and the addition of new
customer accounts.
For the reasons discussed above, total consolidated revenues increased
$135.6 million, or 35.3%, to $519.5 million for the year ended December 31, 1999
from $384.0 million for the year ended December 31, 1998. Total internal revenue
growth was 13.2%.
Consolidated cost of sales (excluding depreciation) increased
$68.8 million, or 35.8%, to $260.9 million (50.2% of consolidated revenues) for
the year ended December 31, 1999 from $192.1 million (50.0% of consolidated
revenues) for the year ended December 31, 1998. The dollar increase was
primarily attributable to the additional facility and personnel costs needed to
service the increase in records and other media stored.
22
Consolidated selling, general and administrative expenses increased
$33.1 million, or 34.5%, to $128.9 million (24.8% of consolidated revenues) for
the year ended December 31, 1999 from $95.9 million (25.0% of consolidated
revenues) for the year ended December 31, 1998. The dollar increase is primarily
attributable to:
- the adoption, effective January 1, 1999, of SOP 98-1, which requires
certain computer software costs associated with internal use software
(primarily data conversion costs) that were previously capitalizable to be
expensed as incurred ($3.3 million in 1999);
- the addition of personnel and other overhead costs related primarily to
the acquisitions of First American Records Management, Inc. and Data
Base, Inc. ("Data Base");
- increased investment in sales and marketing to drive internal growth; and
- increased personnel, office and overhead costs to support growth.
Consolidated depreciation and amortization expense increased $17.1 million,
or 35.4%, to $65.4 million (12.6% of consolidated revenues) for the year ended
December 31, 1999 from $48.3 million (12.6% of consolidated revenues) for the
year ended December 31, 1998. The dollar increase is primarily attributable to
the additional depreciation and amortization expense related to acquisitions and
capital expenditures, including racking systems, information systems and
expansion of storage capacity in existing facilities.
As a result of the foregoing factors, consolidated operating income
increased $16.6 million, or 34.8%, to $64.2 million (12.4% of consolidated
revenues) for the year ended December 31, 1999 from $47.7 million (12.4% of
consolidated revenues) for the year ended December 31, 1998.
Consolidated interest expense increased $8.8 million, or 19.2%, to
$54.4 million for the year ended December 31, 1999 from $45.7 million for the
year ended December 31, 1998. The increase was primarily attributable to
increased indebtedness related to the financing of acquisitions and capital
expenditures. Such increase was partially offset by lower effective interest
rates for the year ended December 31, 1999 compared to the same period in 1998.
As a result of the foregoing factors, consolidated income from continuing
operations before the provision for income taxes and minority interest expense
increased $6.5 million to income of $9.8 million (1.9% of consolidated revenues)
for the year ended December 31, 1999 from income of $3.4 million (0.9% of
consolidated revenues) for the year ended December 31, 1998. The provision for
income taxes was $10.6 million for the year ended December 31, 1999 compared to
$6.6 million for the year ended December 31, 1998. Old Iron Mountain's effective
tax rate is higher than statutory rates primarily due to the amortization of the
nondeductible portion of goodwill associated with particular acquisitions (the
tax laws generally permit deduction of goodwill amortization for asset
purchases, but not for acquisitions of stock). In connection with its 1999
acquisitions, Old Iron Mountain recorded approximately $148.5 million in
nondeductible goodwill.
Consolidated net loss increased $11.3 million to a net loss of
$14.2 million (2.7% of consolidated revenues) for the year ended December 31,
1999 from a consolidated net loss of $3.0 million (0.7% of consolidated
revenues) for the year ended December 31, 1998. The increase in net loss is
primarily due to the loss on sale of discontinued operations of $13.4 million.
As a result of the foregoing factors, consolidated EBITDA from continuing
operations increased $33.7 million, or 35.1%, to $129.7 million (25.0% of
consolidated revenues) for the year ended December 31, 1999 from $96.0 million
(25.0% of consolidated revenues) for the year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Consolidated storage revenues increased $104.7 million, or 83.1%, to
$230.7 million for the year ended December 31, 1998 from $126.0 million for the
year ended December 31, 1997, primarily due to the completion of 33 acquisitions
during 1998 and 1997. Internal revenue growth was 10.2% and resulted
23
primarily from net increases in records and other media stored by existing
customers and from sales to new customers.
Consolidated service and storage material sales revenues increased
$70.5 million, or 85.1%, to $153.3 million for the year ended December 31, 1998
from $82.8 million for the year ended December 31, 1997, primarily due to
acquisitions. Internal revenue growth was 14.6% and resulted from increases in
service and storage material sales to existing customers and the addition of new
customer accounts.
For the reasons discussed above, total consolidated revenues increased
$175.2 million, or 83.9%, to $384.0 million for the year ended December 31, 1998
from $208.8 million for the year ended December 31, 1997. Total internal revenue
growth was 11.9%.
Consolidated cost of sales (excluding depreciation) increased
$85.2 million, or 79.7%, to $192.1 million (50.0% of consolidated revenues) for
the year ended December 31, 1998 from $106.9 million (51.2% of consolidated
revenues) for the year ended December 31, 1997. The dollar increase is primarily
attributable to the increase in records and other media stored and expenses
related to facility relocations. The decrease as a percentage of revenues is
primarily attributable to:
- particular data security acquisitions, including the Arcus Group
acquisition and the acquisition of a software escrow business, acquired in
the third quarter of 1997, with a higher gross margin than the rest of Old
Iron Mountain; and
- the closing of redundant facilities associated with particular
acquisitions.
Consolidated selling, general and administrative expenses increased
$44.2 million, or 85.5%, to $95.9 million (25.0% of consolidated revenues) for
the year ended December 31, 1998 from $51.7 million (24.7% of consolidated
revenues) for the year ended December 31, 1997. The dollar increase is primarily
attributable to:
- the addition of overhead attributable to the Arcus Group acquisition;
- additional salespeople, primarily related to the acquisitions of Arcus
Group and Safesite Records Management Corporation and its decision to
significantly increase its selling resources;
- increased personnel, office and overhead costs to support growth; and
- recruiting, relocation and training expenses associated with acquisition
integration.
Consolidated depreciation and amortization expense increased $21.2 million,
or 78.2%, to $48.3 million (12.6% of consolidated revenues) for the year ended
December 31, 1998 from $27.1 million (13.0% of consolidated revenues) for the
year ended December 31, 1997. The dollar increase is primarily attributable to
the additional depreciation and amortization expense related to acquisitions and
capital expenditures, including racking systems, information systems and
expansion of storage capacity in existing facilities.
As a result of the foregoing factors, consolidated operating income
increased $24.6 million, or 106.3%, to $47.7 million (12.4% of consolidated
revenues) for the year ended December 31, 1998 from $23.1 million (11.1% of
consolidated revenues) for the year ended December 31, 1997.
Consolidated interest expense increased $18.0 million, or 64.8%, to
$45.7 million for the year ended December 31, 1998 from $27.7 million for the
year ended December 31, 1997. The increase is primarily attributable to
increased indebtedness related to the financing of acquisitions and capital
expenditures. Such increase was partially offset by lower effective interest
rates for the year ended December 31, 1998 compared to the same period in 1997.
Consolidated other income for the year ended December 31, 1998 is comprised
of a $1.7 million gain resulting from the settlement of several insurance
claims, including a significant claim under Old Iron Mountain's business
interruption insurance policy, related to the March 1997 fires at Old Iron
Mountain's South Brunswick Township, New Jersey facilities. A $0.3 million loss
on a foreign currency transaction in connection with the acquisition of Iron
Mountain Europe partially offset such gain.
24
As a result of the foregoing factors, consolidated income (loss) from
continuing operations before the provision (benefit) for income taxes increased
$8.0 million to income of $3.4 million (0.9% of consolidated revenues) for the
year ended December 31, 1998 from a loss of $4.6 million (2.2% of consolidated
revenues) for the year ended December 31, 1997. The provision for income taxes
was $6.6 million for the year ended December 31, 1998 compared to a benefit of
$0.1 million for the year ended December 31, 1997. Old Iron Mountain's effective
tax rate is higher than statutory rates primarily due to the amortization of the
nondeductible portion of goodwill associated with particular acquisitions (the
tax laws generally permit deduction of goodwill amortization for asset
purchases, but not for acquisitions of stock). In connection with its 1998
acquisitions, Old Iron Mountain recorded approximately $128.1 million in
nondeductible goodwill.
Consolidated net loss decreased $1.5 million to a net loss of $3.0 million
(0.7% of consolidated revenues) for the year ended December 31, 1998 from a
consolidated net loss of $4.5 million (2.2% of consolidated revenues) for the
year ended December 31, 1997.
As a result of the foregoing factors, consolidated EBITDA from continuing
operations increased $45.8 million, or 91.1%, to $96.0 million (25.0% of
consolidated revenues) for the year ended December 31, 1998 from $50.2 million
(24.1% of consolidated revenues) for the year ended December 31, 1997.
RECENT CONSOLIDATED QUARTERLY FINANCIAL DATA
The following table sets forth, for the quarterly periods indicated,
information derived from Old Iron Mountain's consolidated statements of
operations. The unaudited quarterly information has been prepared on the same
basis as the annual financial information and, in management's opinion, includes
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the information for the quarters presented. The operating results for any
quarter are not necessarily indicative of results for the year or for any future
period.
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
1998 1999
----------------------------------------- -----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Revenues:
Storage............. $ 52,948 $ 55,592 $ 59,506 $ 62,656 $ 67,722 $ 79,928 $ 82,339 $ 87,398
Service and Storage
Material Sales.... 36,108 37,872 39,038 40,241 41,649 51,837 54,568 54,108
-------- -------- -------- -------- -------- -------- -------- --------
Total Revenues.... 89,056 93,464 98,544 102,897 109,371 131,765 136,907 141,506
Operating Expenses:
Cost of Sales
(Excluding
Depreciation)..... 44,917 46,756 49,506 50,934 54,435 66,167 69,226 71,102
Selling, General and
Administrative...... 22,360 23,638 24,069 25,800 27,875 32,938 33,381 34,754
Depreciation and
Amortization........ 11,058 11,903 12,630 12,710 13,595 16,281 16,338 19,208
-------- -------- -------- -------- -------- -------- -------- --------
Total Operating
Expenses........ 78,335 82,297 86,205 89,444 95,905 115,386 118,945 125,064
-------- -------- -------- -------- -------- -------- -------- --------
Operating Income...... $ 10,721 $ 11,167 $ 12,339 $ 13,453 $ 13,466 $ 16,379 $ 17,962 $ 16,442
======== ======== ======== ======== ======== ======== ======== ========
EBITDA from Continuing
Operations.......... $ 21,779 $ 23,070 $ 24,969 $ 26,163 $ 27,061 $ 32,660 $ 34,300 $ 35,650
======== ======== ======== ======== ======== ======== ======== ========
25
LIQUIDITY AND CAPITAL RESOURCES
RECENT FINANCINGS AND SOURCES OF FUNDS
In May 1999, Old Iron Mountain issued and sold an aggregate of 5,750,000
shares (including 750,000 to cover over-allotments) of its common stock in an
underwritten public offering (the "1999 Equity Offering"). Net proceeds after
deducting underwriters' discounts were $153.8 million and were used to repay
outstanding bank debt, to repurchase all of Old Iron Mountain's common stock
issued in connection with the Data Base acquisition and for general corporate
purposes.
Old Iron Mountain's net cash provided by financing activities was
$257.9 million for the year ended December 31, 1999, consisting primarily of the
net proceeds of $153.8 million from the 1999 Equity Offering, the net proceeds
of $149.5 million from the sale of Old Iron Mountain's 8 1/4% Senior
Subordinated Notes due 2011 (the "1999 Notes") and $11.6 million of proceeds
from Iron Mountain Europe's minority shareholder to fund Iron Mountain Europe's
acquisitions, offset by $14.5 million of net repayment of indebtedness and a
payment of $39.5 million in connection with the repurchase of Old Iron
Mountain's common stock issued in connection with the Data Base acquisition. As
of December 31, 1999, outstanding borrowings under Old Iron Mountain's
$250 million credit facility (the "Credit Agreement") amounted to $5.0 million.
As of December 31, 1999, the annual maturities of Old Iron Mountain's
indebtedness for the years ending December 31, 2000, 2001, 2002, 2003 and 2004
were $9.9 million, $18.5 million, $8.3 million, $3.4 million and $3.3 million,
respectively. See Note 4 of Notes to Old Iron Mountain's Consolidated Financial
Statements. None of Old Iron Mountain's public debt is subject to scheduled
mandatory redemption before 2006.
Net cash provided by continuing operations was $56.3 million for the year
ended December 31, 1999, compared to $67.1 million for the same period in 1998.
The decrease was primarily attributable to the increase in accounts receivable
and other current assets, offset by the increase in EBITDA and accrued expenses.
At December 31, 1999, Old Iron Mountain had estimated net operating loss
carryforwards of approximately $59 million for federal income tax purposes. As a
result of such loss carryforwards, cash paid for income taxes has historically
been substantially lower than the provision for income taxes. The preceding net
operating loss carryforwards do not include additional preacquisition net
operating loss carryforwards of Arcus Group. Any tax benefit realized will be
recorded as a reduction of goodwill when, and if, realized. The Arcus Group
carryforwards expire in nine years.
CAPITAL INVESTMENTS
As Old Iron Mountain has sought to increase its EBITDA, it has made
significant capital investments, consisting primarily of: (i) acquisitions,
(ii) the purchase and construction of real estate, (iii) other capital
expenditures and (iv) customer acquisition costs. These investments have been
primarily funded through cash flows from operations, borrowings under the Credit
Agreement, a portion of the net proceeds from the sale of the 1999 Notes and the
net proceeds from the 1999 Equity Offering.
Cash paid for acquisitions was $212.2 million in 1999. In connection with
the acquisition of Data Base, Old Iron Mountain issued common stock with an
aggregate fair value of $46.0 million. During 1999, Old Iron Mountain received
net proceeds of $8.2 million in connection with the sale of Arcus Staffing as
discussed in Note 9 of Notes to Old Iron Mountain's Consolidated Financial
Statements.
In connection with its acquisition of Data Base, Old Iron Mountain issued
1,476,577 shares of its common stock with a fair value of $46.0 million.
Subsequently, all 1,476,577 shares were repurchased for $39.5 million.
During 1999, total capital expenditures were $98.7 million, of which
$23.0 million related to the purchase and construction of real estate. A
significant portion of Old Iron Mountain's capital expenditures are related to
growth and consist primarily of racking systems, management information systems,
new buildings and expansion of storage capacity in existing facilities. Less
than 10% of the capital expenditures were expended in order to maintain Old Iron
Mountain's then current revenue stream.
26
In addition, Old Iron Mountain incurred costs (net of revenues received for
the initial transfer of records) related to the acquisition of large volume
accounts. In 1999, Old Iron Mountain's additions to customer acquisition costs
were $8.1 million.
ACQUISITIONS
Old Iron Mountain's liquidity and capital resources have been significantly
impacted by acquisitions made by Old Iron Mountain.
Old Iron Mountain has historically financed the cash portion of its
acquisitions with borrowings under its credit agreements in conjunction with
cash flows provided by operations and with the net proceeds of issuances of debt
securities and common stock.
In connection with its acquisition program, Old Iron Mountain has undertaken
certain restructurings of the acquired businesses. Formalized restructuring
plans for acquisitions are completed within one year of the date of acquisition.
The restructuring activities include reductions in staffing levels, elimination
of duplicate facilities and other costs associated with exiting certain
activities of the acquired businesses. In connection with these restructuring
activities, Old Iron Mountain established reserves of $4.2 million in 1999 as
part of the purchase accounting for its acquisitions. During 1999, Old Iron
Mountain expended $4.8 million for restructuring costs. In addition, Old Iron
Mountain made $0.5 million of adjustments, which reduced goodwill, as a result
of management's finalizing restructuring plans within one year of acquisition.
These expenditures consisted primarily of severance costs and costs related to
exiting facilities. At December 31, 1999, Old Iron Mountain had a total of
$9.3 million accrued for restructuring costs for all of its then completed
acquisitions. See Note 6 to Notes to Old Iron Mountain's Consolidated Financial
Statements.
B. PIERCE LEAHY
OVERVIEW
As with Old Iron Mountain, Pierce Leahy's primary financial objective has
been to increase consolidated EBITDA. Pierce Leahy defined EBITDA as earnings
before interest, taxes, depreciation and amortization, extraordinary charge,
non-recurring charge, special compensation charge, merger-related expenses and
foreign currency exchange. Pierce Leahy has benefited from growth in
consolidated EBITDA, which has increased from $51.5 million for 1997 to
$104.9 million for 1999 (a compound annual growth rate of 42.7%). As with Old
Iron Mountain, pursuit of this objective has negatively affected other measures
of Pierce Leahy's financial performance, such as consolidated net income and
consolidated net income applicable to common shareholders.
Although Pierce Leahy's operating income has increased over the last three
years, net income (loss) has fluctuated as a result of increases in interest
expense, goodwill amortization from purchase accounting, income taxes related to
the termination of Pierce Leahy's status as a Subchapter S corporation, foreign
currency exchange gains and losses and an extraordinary charge related to the
early extinguishment of debt due to a refinancing in 1997.
Pierce Leahy's revenues consist of storage revenues and related service and
storage material sales revenues. Storage revenues consist of periodic charges
related to the storage of materials (either on a per unit or per cubic foot of
records basis) and accounted for approximately 56% of total revenues for 1999.
Service and storage material sales revenues are comprised of charges for related
service activities, the sale of storage materials and courier operations.
Courier operations primarily consist of the pickup and delivery of records upon
customer request. Related service revenues arise from additions of new records,
temporary removal of records from storage, refiling of removed records,
destructions of records, permanent withdrawals from storage and sales of
specially designed storage containers and related supplies. Customers are
generally billed on a monthly basis on contractually agreed-upon terms. Included
in Pierce Leahy's service and storage material sales revenues for 1998 and 1999
are approximately $9 million and $18 million, respectively, of revenues from the
marketing literature storage and fulfillment business acquired in May 1998.
27
Cost of sales (excluding depreciation and amortization) is comprised mainly
of wages and benefits, facility occupancy costs, vehicle and other equipment
costs and supplies.
Selling, general and administrative expenses primarily consist of wages and
benefit for management, administrative, marketing and data processing personnel
and also include expenses related to travel, communications, data processing
expenses, professional fees and office expenses.
Merger-related expenses in 1999 primarily represent expenses directly
related to Pierce Leahy's merger with Old Iron Mountain. These expenses
primarily consisted of financial advisor, legal, accounting and consulting fees,
SEC filing fees and other transaction costs.
Pierce Leahy's depreciation and amortization charges result primarily from
the capital-intensive nature of its business and its completed acquisitions. The
principal components of depreciation relate to racking, buildings and
improvements and data processing equipment. Amortization primarily relates to
the amortization of intangible assets associated with acquisitions, including
goodwill and the amortization of customer acquisition costs. Pierce Leahy has
accounted for all of its acquisitions under the purchase method except for two
small acquisitions in 1997, which were accounted for under the pooling of
interests method. Since the purchase price for records management companies is
substantially in excess of the fair market value of their assets, these
purchases have given rise to significant goodwill and, accordingly, significant
levels of amortization. Although amortization is a non-cash charge, it does
impact reported net income (loss).
EBITDA is an important financial performance measure in the RIMS industry,
both for determining the value of companies within the industry and for defining
standards for borrowing from institutional lenders. Pierce Leahy's EBITDA
margins were 28.1% for 1997, 29.2% for 1998 and 30.6% for 1999. Pierce Leahy has
been able to increase its EBITDA margins through improved overall operating
efficiencies and economies of scale and the realization of synergies in
connection with its acquisitions. The Company has adopted Old Iron Mountain's
accounting policies as its own upon completion of Iron Mountain's merger with
Pierce Leahy. If Pierce Leahy had been using Old Iron Mountain's accounting
policies, its 1999 EBITDA margin would have been 28.6%.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from Pierce Leahy's consolidated statements of operations, expressed as
a percentage of total consolidated revenues.
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
Revenues: -------- -------- --------
Storage................................................... 58.8% 56.8% 55.5%
Service and Storage Material Sales........................ 41.2 43.2 44.5
----- ----- -----
Total Revenues.......................................... 100.0 100.0 100.0
Operating Expenses:
Cost of Sales (Excluding Depreciation and
Amortization)......................................... 55.5 57.1 56.0
Selling, General and Administrative..................... 16.4 13.7 13.4
Merger-Related Expenses................................. -- -- 0.7
Depreciation and Amortization........................... 11.7 13.2 12.8
Special Compensation Charge............................. 1.0 -- --
Foreign Currency Exchange............................... 0.4 2.9 (2.2)
----- ----- -----
Total Operating Expenses.............................. 85.0 86.9 80.7
----- ----- -----
Operating Income............................................ 15.0 13.1 19.3
Interest Expense............................................ 15.9 15.9 15.3
----- ----- -----
Income (Loss) before Income Taxes and Extraordinary Item.... (0.9) (2.8) 4.0
Provision for Income Taxes.................................. 4.1 1.2 1.8
----- ----- -----
Income (Loss) before Extraordinary Item..................... (5.0) (4.0) 2.2
Extraordinary Item--Loss on Early Extinguishment of Debt.... 3.3 -- --
Preferred Stock Dividend and Accretion...................... -- -- 0.2
----- ----- -----
Net Income (Loss)........................................... (8.3)% (4.0)% 2.0%
===== ===== =====
EBITDA...................................................... 28.1% 29.2% 30.6%
===== ===== =====
28
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Storage revenues increased from $153.5 million in 1998 to $190.1 million in
1999, an increase of $36.6 million or 23.8%. Service and storage material sales
revenues increased from $116.8 million in 1998 to $152.2 million in 1999, an
increase of $35.4 million, or 30.3%, due in part to a $6.4 million increase in
service revenues derived from the marketing literature storage and fulfillment
business acquired in May 1998.
Total revenues increased from $270.3 million in 1998 to $342.3 million in
1999, an increase of $72.0 million or 26.6%. Revenues from acquisitions
accounted for $34.4 million, or 12.7%, of such increase. The balance of the
revenue growth ($37.6 million) resulted from sales to new customers and from net
increases in cubic feet stored from existing customers. This represents a base
business revenue growth of 13.9% for the year ended December 31, 1999 as
compared to the year ended December 31, 1998.
Cost of sales (excluding depreciation and amortization) increased from
$154.4 million in 1998 to $191.5 million in 1999, an increase of $37.1 million
or 24.0%, but decreased as a percentage of total revenues from 57.1% in 1998 to
56.0% in 1999. The increase in dollars resulted primarily from an additional
number of employees and an increase in facility occupancy costs resulting from
the growth in cubic feet stored from existing customers and acquisitions. The
decrease as a percentage of total revenues resulted primarily from increased
operating efficiencies from the conversion of previously acquired operations
into Pierce Leahy's PLUS system.
Selling, general and administrative expenses increased from $37.0 million in
1998 to $45.9 million in 1999, an increase of $8.9 million or 24.0%, but
decreased as a percentage of total revenues from 13.7% in 1998 to 13.4% in 1999.
The dollar increase was primarily attributable to increases in staffing,
including increases in sales personnel and administrative staff and related
training expenses. The decrease as a percentage of total revenues was
attributable to economies realized from administrative efficiencies associated
with operating in a centralized manner.
Merger-related expenses of $2.4 million (0.7% of total revenues) were
incurred in 1999.
Depreciation and amortization expenses increased from $35.8 million in 1998
to $43.7 million in 1999, an increase of $7.9 million or 22.0% and decreased as
a percentage of total revenues from 13.2% in 1998 to 12.8% in 1999. The dollar
increase was primarily attributable to the additional depreciation and
amortization expense related to a full year of depreciation and amortization on
the 1998 acquisitions and the four acquisitions completed during 1999, to
capital expenditures for racking, buildings, improvements to records management
facilities and information systems and to customer acquisition costs. The
decrease as a percentage of total revenues was attributable to an increase in
revenue growth from existing and new customers and from a decrease in
acquisitions, which generally have a higher component of depreciation and
amortization expense.
Pierce Leahy had a foreign currency exchange gain for the year ended
December 31, 1999 of $7.5 million (2.2% of total revenues) as compared to a loss
of $7.9 million (2.9% of total revenues) for the year ended December 31, 1998.
The change in the foreign currency exchange is primarily due to a change in the
value of the Canadian dollar as compared to the U.S. dollar, as it relates to
Pierce Leahy Canada Company's $135.0 million of senior notes due 2008 (the
"Pierce Leahy 1998 Notes").
Interest expense increased from $42.9 million in 1998 to $52.4 million in
1999, an increase of $9.5 million or 22.2%. The increase was primarily
attributable to increased indebtedness incurred to finance acquisitions and
capital expenditures.
As a result of the foregoing factors, Pierce Leahy had income before income
taxes of $14.0 million (4.1% of revenues) for 1999, as compared to a loss before
income taxes of $7.7 million (2.8% of revenues) for 1998.
29
Pierce Leahy recorded a provision for income taxes of $6.3 million (or 1.8%
of revenues) for 1999 as compared to a provision for income taxes of
$3.3 million (or 1.2% of revenues) for 1998.
Pierce Leahy issued $5 million of the pay-in-kind ("PIK") redeemable
preferred stock in March 1999. On November 1, 1999 Pierce Leahy redeemed all of
the outstanding redeemable PIK preferred stock. Preferred stock dividends and
accretion of $0.8 million relating to the PIK preferred stock were recognized in
1999.
As a result of the foregoing items, Pierce Leahy had net income applicable
to common shareholders of $6.9 million for 1999 as compared to a net loss of
$11.0 million for 1998.
EBITDA increased from $78.9 million in 1998 to $104.9 million in 1999, an
increase of $26.0 million or 33.0%, and increased as a percentage of total
revenues from 29.2% in 1998 to 30.6% in 1999. The increase as a percentage of
total revenues reflected growth in Pierce Leahy's business, economies of scale
and increased operating efficiencies.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Storage revenues increased from $107.9 million in 1997 to $153.5 million in
1998, an increase of $45.6 million or 42.3%. Service and storage material sales
revenues increased from $75.6 million in 1997 to $116.8 million in 1998, an
increase of $41.2 million or 54.4%, in part due to $8.0 million of service
revenues derived from the marketing literature storage and fulfillment business
acquired during 1998.
Total revenues increased from $183.5 million in 1997 to $270.3 million in
1998, an increase of $86.8 million or 47.3%. Revenues from acquisitions
represented $60.4 million of this increase. The balance of total revenue growth
(approximately $26.4 million) resulted from sales to new customers and increases
in cubic feet stored from existing customers, a base business revenue growth of
approximately 14.4% compared to 1997.
Cost of sales (excluding depreciation and amortization) increased from
$101.9 million in 1997 to $154.4 million in 1998, an increase of $52.5 million
or 51.5%, and increased as a percentage of total revenues from 55.5% in 1997 to
57.1% in 1998. The increase in dollars resulted primarily from an additional
number of employees and an increase in facility occupancy costs resulting from
the growth in cubic feet stored from existing customers and acquisitions. The
increase as a percentage of total revenues resulted primarily from increased
cost of sales from acquisitions not yet integrated into Pierce Leahy's PLUS
system.
Selling, general and administrative expenses increased from $30.1 million in
1997 to $37.0 million in 1998, an increase of $6.9 million or 23.0%, but
decreased as a percentage of total revenues from 16.4% in 1997 to 13.7% in 1998.
The dollar increase was primarily attributable to increases in staffing,
including increases in sales personnel and administrative staff. The decrease as
a percentage of total revenues was attributable to economies realized from
administrative efficiencies associated with operating in a centralized manner.
Depreciation and amortization expenses increased from $21.5 million in 1997
to $35.8 million in 1998, an increase of $14.3 million or 66.2%, and increased
as a percentage of total revenues from 11.7% in 1997 to 13.2% in 1998. This
increase in both dollars and percentage of total revenues was primarily
attributable to the additional depreciation and amortization expense related to
the 16 acquisitions completed during 1998, to capital expenditures for racking,
buildings, improvements to record management facilities and information systems,
and to customer acquisition costs.
A special compensation charge of $1.8 million was recorded during 1997. This
charge relates to the write-off of unamortized compensation expense due to the
acceleration of the vesting of stock options granted on January 1, 1997 in
conjunction with Pierce Leahy's initial public offering of common stock.
30
Pierce Leahy had a foreign currency exchange loss for the year ended
December 31, 1998 of $7.9 million (2.9% of total revenues) as compared to a loss
of $0.7 million (0.4% of total revenues) for the year ended December 31, 1997.
The change in the foreign currency exchange is primarily due to a change in the
value of the Canadian dollar as compared to the U.S. dollar, as it relates to
the Pierce Leahy 1998 Notes.
Interest expense increased from $29.3 million in 1997 to $42.9 million in
1998, an increase of $13.6 million or 46.5%. The increase was primarily
attributable to increased indebtedness related to financing acquisitions and
capital expenditures.
As a result of the foregoing factors, Pierce Leahy had a loss before income
taxes and extraordinary charge of $7.7 million (2.8% of revenues) for 1998, as
compared to a loss before income taxes and extraordinary charge of $1.7 million
(0.9% of revenues) for 1997.
Pierce Leahy recorded an extraordinary charge of $6.0 million (3.3% of total
revenues) in 1997 which related to the early extinguishment of debt as a result
of refinancing and expanding its existing credit agreement in 1997. The
$6.0 million extraordinary charge is net of a tax benefit of $4.0 million.
Pierce Leahy recorded a provision for income taxes of $7.4 million (or 4.1%
of revenues) for 1997 and a provision for income taxes of $3.3 million (or 1.2%
of revenues) for 1998. For 1997, these taxes were comprised of the tax effect
from the termination of Pierce Leahy's Subchapter S corporation status
($6.6 million) and the provision for the results of operations after the
termination of its status as an S corporation on July 1, 1997 ($0.8 million).
As a result of the foregoing items, Pierce Leahy had a net loss of
$11.0 million for 1998, as compared to a net loss of $15.2 million for 1997.
EBITDA increased from $51.5 million in 1997 to $78.9 million in 1998, an
increase of $27.4 million or 53.1% and increased as a percentage of total
revenues from 28.1% in 1997 to 29.2% in 1998. The increase as a percentage of
the total revenues reflected growth in Pierce Leahy's business, economies of
scale and increased operating efficiencies.
RECENT CONSOLIDATED QUARTERLY FINANCIAL DATA
The following table sets forth, for the quarterly periods indicated,
information derived from Pierce Leahy's consolidated statements of operations.
The unaudited quarterly information has been prepared on the same basis as the
annual financial information and, in management's opinion, includes all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the information for the quarters
31
presented. The operating results for any quarter are not necessarily indicative
of results for the year or for any future period.
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
1998 1999
----------------------------------------- -----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Revenues:
Storage.............................. $33,214 $37,183 $40,820 $42,316 $44,174 $46,921 $48,761 $50,239
Service and, Storage Material
Sales.............................. 23,076 26,963 33,777 32,951 36,020 38,608 39,275 38,264
------- ------- ------- ------- ------- ------- ------- -------
Total Revenues....................... 56,290 64,146 74,597 75,267 80,194 85,529 88,036 88,503
Operating Expenses:
Cost of Sales (Excluding Depreciation
and Amortization).................. 32,915 36,279 41,961 43,280 45,595 48,261 49,573 48,081
Selling, General and Administrative.... 8,774 8,856 9,882 9,482 10,578 11,562 11,423 12,293
Depreciation and Amortization.......... 7,219 8,577 9,385 10,591 9,943 11,253 10,888 11,571
Merger-Related Expenses................ -- -- -- -- -- -- -- 2,361
Foreign Currency Exchange.............. (62) 3,724 4,246 (1) (1,815) (3,150) (540) (1,968)
------- ------- ------- ------- ------- ------- ------- -------
Total Operating Expenses............. 48,846 57,436 65,474 63,352 64,301 67,926 71,344 72,338
------- ------- ------- ------- ------- ------- ------- -------
Operating Income....................... $ 7,444 $ 6,710 $ 9,123 $11,915 $15,893 $17,603 $16,692 $16,165
======= ======= ======= ======= ======= ======= ======= =======
EBITDA................................. $14,601 $19,011 $22,754 $22,505 $24,021 $25,706 $27,040 $28,129
======= ======= ======= ======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF FUNDS
Net cash provided by financing activities was $47.6 million for the year
ended December 31, 1999, consisting primarily of $112.3 million of borrowings
under Pierce Leahy's credit facility, $6.9 million of proceeds from the issuance
of long-term debt and $4.6 million of proceeds from the issuance of the
redeemable PIK preferred stock, offset by payments of $64.6 million on
borrowings under the credit facility, payments of $5.3 million on long-term
debt, payments of $5.0 million on the redeemable PIK preferred stock and
payments of $1.2 million for debt financing costs.
In December 1999, Pierce Leahy amended the U.S. portion of its credit
facility to provide an increase in the amount available for borrowing from
$175 million to $195 million; all other material terms and conditions remained
the same.
Pierce Leahy's credit facility contained a number of financial and other
covenants restricting its ability to incur additional indebtedness and make
certain types of expenditures. Covenants in the indentures governing Pierce
Leahy's and Pierce Leahy Canada Company's notes also restrict borrowings under
its credit facility. As of December 31, 1999, $165.7 million was outstanding
under its credit facility and an additional $17.3 million of the credit facility
was reserved to secure the issuance of letters of credit to guarantee the seller
notes issued in conjunction with the Datavault Limited acquisition. The
effective interest rate on the credit facility, as of December 31, 1999, was
approximately 9.1%. Pierce Leahy's credit facility was terminated and paid in
full upon the acquisition of Pierce Leahy by Old Iron Mountain on February 1,
2000.
As of December 31, 1999, the annual maturities of Pierce Leahy's
indebtedness for the years ending December 31, 2000, 2001, 2002, 2003 and 2004
were $22.8 million, $3.2 million, $33.6 million, $63.4 million and $75.0,
respectively. See Note 3 of Pierce Leahy's Notes to Consolidated Financial
Statements.
Net cash provided by operating activities was $38.5 million and
$51.2 million for 1998 and 1999, respectively. The $12.7 million increase from
1998 to 1999 primarily resulted from the $26.0 million
32
increase in EBITDA and an increase in working capital of $2.1 million, offset by
an increase in cash paid for interest of $12.7 million, unfavorable foreign
currency cash translations of $2.3 million and the payment of merger-related
expenses of $2.4 million.
At December 31, 1999, Pierce Leahy had estimated net operating loss
carryforwards of approximately $20.4 million for federal and state income tax
purposes. In addition, Pierce Leahy had an additional $8.3 million of foreign
net operating loss carryforwards. As a result of such loss carryforwards, cash
paid for income taxes has historically been substantially lower than the
provision for income taxes. See Note 5 of Notes to Pierce Leahy's Consolidated
Financial Statements.
CAPITAL INVESTMENTS
As Pierce Leahy has sought to increase its EBITDA, it has made significant
capital investments, consisting primarily of: (i) acquisitions, (ii) the
purchase and construction of real estate, (iii) other capital expenditures and
(iv) customer acquisition costs. These investments were primarily funded through
cash flows from operations and borrowings under Pierce Leahy's credit facility.
In 1999, Pierce Leahy completed four acquisitions for an aggregate purchase
price of approximately $42.2 million, consisting of $23.3 million in net cash
and $18.9 million in seller notes. The most significant of these acquisitions
was Datavault Limited, a U.K. based RIMS company with operations in seven
markets throughout England and Scotland. This acquisition was financed by
borrowings under Pierce Leahy's credit facility and the issuance of seller
notes.
Total 1999 capital expenditures were $57.5 million, of which $7.7 million
related to the purchase and construction of real estate. A significant portion
of Pierce Leahy's capital expenditures are related to growth and consist
primarily of racking systems, management information systems, new buildings and
expansion of storage capacity in existing facilities. Pierce Leahy's data
processing capital expenditures are also largely related to growth. Less than
10% of the capital expenditures were expended in order to maintain Pierce
Leahy's then current revenue stream.
Additions to customer acquisition costs in 1999 were $17.4 million. Customer
acquisition costs consist primarily of sales commissions and move-in costs.
Customer acquisition costs are capitalized and amortized over six years, which
is the average initial contract term of new customer accounts.
ACQUISITIONS
In connection with its acquisition program, Pierce Leahy has undertaken
certain restructurings of the acquired businesses. Formalized restructuring
plans for acquisitions are completed within one year of the date of acquisition.
The restructuring activities include reductions in staffing levels, elimination
of duplicate facilities and other costs associated with exiting certain
activities of the acquired businesses. In connection with these restructuring
activities, Pierce Leahy established reserves of $1.5 million in 1999, as part
of the purchase accounting for its 1999 acquisitions. During 1999, Pierce Leahy
expended $0.9 million for restructuring costs. These expenditures consisted
primarily of severance costs and costs related to exiting facilities. At
December 31, 1999, Pierce Leahy had a total of $2.4 million accrued for
restructuring costs for all of its then completed acquisitions. See Note 12 to
Notes to Pierce Leahy's Consolidated Financial Statements.
33
C. THE COMPANY
LIQUIDITY AND CAPITAL RESOURCES
RECENT FINANCINGS AND SOURCES OF FUNDS
Effective February 1, 2000, Old Iron Mountain amended and restated the
Credit Agreement (the "Amended Credit Agreement") to repay Pierce Leahy's credit
facility, to increase the aggregate principal amount available to
$400.0 million and to include the ability to borrow in certain foreign
currencies. The facility matures on January 27, 2005. Interest on borrowings
under the Amended Credit Agreement will be paid at the Company's choice of four
different variable interest rates. Restrictive covenants under the Amended
Credit Agreement are similar to those contained in the Credit Agreement. See
Note 4 of Notes to Old Iron Mountain's Consolidated Financial Statements.
As of March 1, 2000, the Company had outstanding borrowings of approximately
$201 million under the Amended Credit Agreement, which were used to fund, among
other things, the repayment of Pierce Leahy's revolving credit facility, the
purchase price of recent acquisitions, general corporate expenses and merger
costs.
As of March 1, 2000, the Company had approximately $1.2 billion of total
debt, of which $1.0 billion had fixed interest rates and $0.2 billion had
variable interest rates.
CAPITAL INVESTMENTS
Given its acquisition strategy, the Company's liquidity and capital
resources may be significantly impacted for the foreseeable future. The
Company's future interest expense may increase significantly as a result of the
additional indebtedness it may incur to finance possible future acquisitions. To
the extent that future acquisitions are financed by additional borrowings under
the Amended Credit Agreement or other credit facilities, or the future issuance
of debt securities, the resulting increase in debt and interest expense could
have a negative effect on such measures of liquidity as debt to equity, EBITDA
to debt and EBITDA to interest expense.
From January 1, 2000 through the date of its merger with Pierce Leahy, Old
Iron Mountain acquired one additional business (excluding the acquisition of
Pierce Leahy), and from February 1, 2000 through March 1, 2000, the Company
acquired one additional business. The total cost of these two acquisitions was
$11.7 million in cash.
The Company expects to record reserves for the acquisitions completed
between January 1, 2000 and March 1, 2000 and is currently evaluating its
restructuring plans. The Company will continue to re-evaluate its restructuring
plans regarding these acquisitions, as well as those made by Old Iron Mountain
and Pierce Leahy during 1999, during the year following their consummation.
On February 1, 2000, Old Iron Mountain completed the acquisition of Pierce
Leahy in a stock-for-stock merger valued at approximately $1.1 billion. Because
immediately after the merger Old Iron Mountain stockholders owned approximately
65% of the Company's outstanding Common Stock, the acquisition will be accounted
for as a reverse acquisition, with Old Iron Mountain treated as the acquirer.
The total consideration for this transaction was comprised of:
(i) 18.8 million shares of the Company's Common Stock with a fair value of
approximately $444 million; (ii) options to acquire approximately 1.5 million
shares of the Company's Common Stock with a fair value of approximately
$25 million; (iii) assumed Pierce Leahy debt with a fair value of approximately
$579 million; and (iv) approximately $4 million of capitalized transaction
costs. The acquisition will be accounted for under the purchase method.
On February 18, 2000, the Company entered into an agreement with DSC and
Suddath Van Lines, Inc. to acquire substantially all of the assets of DSC, as a
result of which the Company will acquire the RIMS business of DSC, and will also
lease or sublease from DSC, or assume DSC's leases with regard to,
34
certain related real estate. At closing, the Company will pay aggregate
consideration of approximately $54 million in cash in connection with the DSC
acquisition, including payments to certain officers as consideration for
non-competition covenants. The closing of the DSC acquisition is subject to
customary conditions and is expected to occur in the second quarter of 2000,
although no assurance can be given that it will be completed. The acquisition
will be funded with borrowings under the Amended Credit Agreement.
The Company currently estimates that its capital expenditures (other than
capital expenditures related to future acquisitions, which cannot be presently
estimated) for 2000 will be approximately $160 million. The Company expects to
fund these expenditures with cash flows from operations and borrowings under the
Amended Credit Agreement.
The Company has begun to assess opportunities in the digital storage
business driven by e-commerce and facilitated by the Internet. Services
associated with this business would expand the Company's range of services into
the use of the Internet to facilitate the backup and storage of customer data.
The Company is in the early stages of exploring these new business
opportunities, and anticipates investing approximately $10 million to
$20 million over the next two years to further develop these opportunities. The
Company intends to fund this effort with cash flows from operations and
borrowings under the Amended Credit Agreement.
PIERCE LEAHY/OLD IRON MOUNTAIN INTEGRATION
The Company is currently in the process of integrating the operations and
headquarters functions of Old Iron Mountain and Pierce Leahy on a "best
practices" basis. This process includes the planning, development and execution
of an integration plan. During fiscal years 2000 and 2001, the Company expects
to integrate overhead and support functions and to begin combining field
operations, with the goal of full integration within three years after the
merger. Management's current estimate is that the expenditures to integrate the
two companies, the majority of which will be incurred over the next two years,
will total approximately $15 million. These costs will consist primarily of
severance and relocation of employees, transition bonuses, consultants' fees,
reimaging expenses and system conversion costs. The accounting treatment will
vary based on the nature of the expenses and will be finalized as the
integration plans are completed. The Company expects to take a restructuring
charge of not more than $5 million during fiscal year 2000 related to the
merger. As a result of the integration effort, management expects that the
Company will realize an estimated $15 million in annual operating cost savings
within three years after the merger. These cost savings will primarily result
from the elimination of redundant corporate expenses and more efficient
operations and utilization of real estate. The Company intends to fund the
integration effort with cash flows from operations and borrowings under the
Amended Credit Agreement.
FUTURE CAPITAL NEEDS
The Company's primary financial objective continues to be to increase
consolidated EBITDA, which is a source of funds for investment in continued
internal growth and growth through acquisitions and to service indebtedness. The
Company's ability to generate sufficient cash to fund its needs depends
generally on the results of its operations and the availability of financing.
Management believes that cash flows from operations in conjunction with
borrowings from existing and possible future debt financings will be sufficient
for the foreseeable future to meet debt service requirements and to make
possible future acquisitions and capital expenditures. However, there can be no
assurance in this regard or that the terms available for any future financing,
if required, would be favorable to the Company.
35
SEASONALITY
Historically, the Company's businesses have not been subject to seasonality
in any material respect.
INFLATION
Certain of the Company's expenses, such as wages and benefits, occupancy
costs and equipment repair and replacement, are subject to normal inflationary
pressures. Although the Company to date has been able to offset inflationary
cost increases through increased operating efficiencies and the negotiation of
favorable long-term real estate leases, the Company cannot assure that it will
be able to offset any future inflationary cost increases through similar
efficiencies, leases or increased storage or service charges.
FOREIGN CURRENCY EXCHANGE RATES
The Company generally views its investment in foreign businesses with a
functional currency other than the Company's reporting currency as long-term.
These investments are sensitive to fluctuations in foreign currency exchange
rates. The functional currencies of the Company's foreign subsidiaries are
principally denominated in Canadian dollars, British pounds sterling, French
francs, Spanish pesetas and Mexican pesos. The effect of a change in foreign
exchange rates on the Company's net investment in foreign subsidiaries is
reflected in the "Accumulated other comprehensive items" component of
shareholders' equity. A 10% depreciation in year-end 1999 functional currencies,
relative to the U.S. dollar, would result in a $4.2 million reduction in
stockholders' equity of Old Iron Mountain, and a $1.3 million reduction in
shareholders' equity of Pierce Leahy.
YEAR 2000 IMPACT
As of the date of this report, the Company has completed its year 2000
initiatives which included: (i) testing and upgrading its operational systems
and facilities; (ii) assessing the year 2000 readiness of its key suppliers,
vendors and customers; and (iii) developing contingency plans.
As a result of completing these initiatives, the Company believes that all
of its operational systems and critical non-information technology systems are
year 2000 compliant. In addition, the Company is not aware of any significant
supplier or vendor that has experienced material disruption due to year 2000
issues. The Company has also developed a contingency plan to allow its primary
business operations to continue despite disruptions due to year 2000 problems,
if any, that might yet arise in the future.
While to date the Company has not experienced any negative consequences
arising from year 2000 issues, there can be no assurance that in the future the
Company's business operations or financial condition may not be impacted by year
2000 problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not hold any derivative financial instruments or derivative
commodity instruments. Old Iron Mountain's investment in Iron Mountain Europe,
which was financed with British pounds, as described in Note 2 to Old Iron
Mountain's Notes to Consolidated Financial Statements, and other international
investments may be subject to risks and uncertainties relating to fluctuations
in currency valuation.
One of the Company's Canadian subsidiaries, Pierce Leahy Canada Company, has
U.S. dollar denominated debt. Gains and losses due to exchange rate fluctuations
related to this debt are recognized in Pierce Leahy's consolidated statements of
operations.
The Company engages neither in speculative nor derivative trading
activities. As of December 31, 1999, Old Iron Mountain had approximately
$43 million of debt outstanding with a weighted average variable interest rate
of 5.69% and approximately $570 million of fixed rate debt outstanding, while
Pierce
36
Leahy had approximately $166 million of debt outstanding with a weighted average
variable interest rate of 7.99% and approximately $421 million of fixed rate
debt outstanding. If the weighted average variable interest rate had increased
by 1%, such increase would have had a negative impact on Old Iron Mountain's net
income for the year ended December 31, 1999 of approximately $683,000 and on
Pierce Leahy's net income for the year ended December 31, 1999 of approximately
$1.5 million. See Note 4 to Notes to Old Iron Mountain's Consolidated Financial
Statements for a discussion of Old Iron Mountain's long-term indebtedness,
including the fair values of such indebtedness as of December 31, 1999 and
Note 3 to Notes to Pierce Leahy's Consolidated Financial Statements for a
discussion of Pierce Leahy's long-term indebtedness, including the fair values
of such indebtedness as of December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Directors and executive officers of the Company are as follows (all
information is as of March 30, 2000):
NAMES OF DIRECTORS AND
EXECUTIVE OFFICERS AGE POSITION
- ------------------------------------------ -------- ------------------------------------------
C. Richard Reese(1)....................... 54 Chairman of the Board of Directors and
Chief Executive Officer
J. Peter Pierce(1)........................ 54 President and Director
David S. Wendell.......................... 46 Senior Vice President
John F. Kenny, Jr......................... 42 Executive Vice President, Chief Financial
Officer and Director
Harold E. Ebbighausen..................... 45 President of Arcus Data Security, Inc.
Clarke H. Bailey(1)(3).................... 45 Director
Constantin R. Boden(2)(3)................. 63 Director
Kent P. Dauten(2)......................... 44 Director
Eugene B. Doggett......................... 63 Director
B. Thomas Golisano........................ 58 Director
Arthur D. Little(2)(3).................... 56 Director
Howard D. Ross............................ 48 Director
Vincent J. Ryan(1)(3)..................... 64 Director
- ------------------------------
(1) Member of the Executive Committee; Mr. Ryan is the Chairman of the Executive
Committee.
(2) Member of the Audit Committee; Mr. Boden is the Chairman of the Audit
Committee.
(3) Member of the Compensation Committee; Mr. Little is the Chairman of the
Compensation Committee.
The Company Board currently consists of 11 Directors. There are three
classes of Directors who serve for three year terms and are elected on a
staggered basis, one class of Directors standing for election each year.
Directors of each class hold office until the third annual meeting of the
shareholders of the Company following their election or until their successors
are elected and qualified. Mr. Wendell was elected a Director of the Company
upon the closing of the merger of Old Iron Mountain and Pierce Leahy. He
subsequently resigned, and Mr. Kenny was elected a Director by the Company Board
to serve out Mr. Wendell's term.
The executive officers were elected following the merger of Old Iron
Mountain and Pierce Leahy as of February 1, 2000. All executive officers hold
office at the discretion of the Company Board until the first meeting of the
Company Board following the next annual meeting of shareholders and until their
successors are chosen and qualified.
DIRECTORS AND EXECUTIVE OFFICERS
C. RICHARD REESE is the Chairman of the Company Board and Chief Executive
Officer of the Company, positions he has held since February 2000. Prior to the
merger with Pierce Leahy, Mr. Reese had been the Chairman of the Old Iron
Mountain Board of Directors since November 1995, a Director of Old Iron Mountain
since 1990 and the Chief Executive Officer of Old Iron Mountain since 1981.
Mr. Reese was also the President of Old Iron Mountain from 1981 until
November 1985. Mr. Reese is a member of the investment committee of Schooner
Capital LLC ("Schooner"), a shareholder of the Company. Prior to joining Old
Iron Mountain, Mr. Reese lectured at Harvard Business School in
"Entrepreneurship" and provided consulting services to small- and medium-sized
emerging enterprises. Mr. Reese has also served as the President and a Director
of PRISM. He holds a Master of Business Administration degree from Harvard
Business School.
38
J. PETER PIERCE is the President and a Director of the Company, positions he
has held since February 2000. Prior to the merger, Mr. Pierce had been the
President and Chief Executive Officer of Pierce Leahy since 1995, and a Director
of Pierce Leahy since the early 1970s. From 1984 to 1995, Mr. Pierce was the
President and the Chief Operating Officer of Pierce Leahy. Prior to 1984, he
served in various other capacities with Pierce Leahy, including as Vice
President of Operations, General Manager of Connecticut, New York and New
Jersey, and Sales Executive. Mr. Pierce attended the University of Pennsylvania
and served in the United States Marine Corps.
DAVID S. WENDELL is a Senior Vice President of the Company, a position he
has held since February 2000. He was also a Director of the Company from the
date of the merger until his resignation on February 28, 2000. Prior to the
merger, he had been the President and Chief Operating Officer and a Director of
Old Iron Mountain since November 1995. After practicing law with Brown & Wood,
Mr. Wendell joined Old Iron Mountain in 1984, where he served in a variety of
positions. Prior to November 1995, he was Executive Vice President, Atlantic
Area, and prior to 1991, he was Vice President, New England Region. Mr. Wendell
holds a Master of Business Administration degree from Harvard Business School
and a Juris Doctor degree from the University of Virginia.
JOHN F. KENNY, JR. is the Executive Vice President and the Chief Financial
Officer of the Company, positions he has held since February 2000. He was also
recently appointed as a Director of the Company to fill the vacancy created by
the resignation of Mr. Wendell. Prior to the merger, he had been the Executive
Vice President and the Chief Financial Officer of Old Iron Mountain since
May 1997. Mr. Kenny joined Old Iron Mountain in 1991 and held a number of
operating positions before assuming the position of Vice President of Corporate
Development in 1995. Prior to 1991, Mr. Kenny was a Vice President of CS First
Boston Merchant Bank, New York, with responsibility for risk capital
investments. Mr. Kenny has also served as a Director and the Treasurer of PRISM.
He holds a Master of Business Administration degree from Harvard Business
School.
HAROLD E. EBBIGHAUSEN is the President of Arcus Data Security, Inc., a
subsidiary of the Company, a position he has held since July 1998.
Mr. Ebbighausen was an Executive Vice President of Old Iron Mountain from
July 1997 until July 1998 and a Vice President of Data Security Services of Old
Iron Mountain from September 1996 through June 1997. Prior to joining Old Iron
Mountain, Mr. Ebbighausen was Vice President of Data Management Services with
INSCI Corporation, a software provider for computer output and data storage
solutions to optical and CD technology. Previously, he held a number of field
management positions with Anacomp, Inc., a service bureau provider in the
micrographics industry.
CLARKE H. BAILEY is a Director of the Company, a position he has held since
February 2000. Prior to the merger, he had been a Director of Old Iron Mountain
since January 1998. He is Co-Chairman and a Director of Hudson River Capital
LLC, a private equity firm, and Chairman, Chief Executive Officer and a Director
of National Fulfillment, Inc., a private company. Mr. Bailey was the Chairman
and Chief Executive Officer of each of Arcus Group, United Acquisition Company
and Arcus Technology Services, Inc. from 1995 until their acquisition by Old
Iron Mountain in January 1998. He is a Director of Connectivity
Technologies Inc., Swiss Army Brands, Inc. and SWWT, Inc. (formerly known as
Sweetwater, Inc.). Mr. Bailey also serves as Chairman and a Director of Glenayre
Technologies, Inc. (formerly N-W Group, Inc.), a manufacturing company in the
telecommunications industry. He holds a Master of Business Administration degree
from The Wharton School, University of Pennsylvania.
CONSTANTIN R. BODEN is a Director of the Company, a position he has held
since February 2000. Prior to the merger, he had been a Director of Old Iron
Mountain since December 1990. Mr. Boden is the principal of Boden Partners LLC
and chairman of the advisory board of Boston Capital Ventures, a risk capital
concern. For 34 years, until January 1995, Mr. Boden was employed by The First
National Bank of Boston, most recently as Executive Vice President,
International Banking. He holds a Master of Business Administration degree from
Harvard Business School.
KENT P. DAUTEN is a Director of the Company, a position he has held since
February 2000. Prior to the merger, he had been a Director of Old Iron Mountain
since November 1997. He also serves as President of
39
Keystone Capital, Inc., a management and consulting advisory service firm, a
position he has held since March 1994. In February 1995, Mr. Dauten founded
HIMSCORP, Inc. (d/b/a Records Masters) and served as its President until its
acquisition by Old Iron Mountain in November 1997. Mr. Dauten currently serves
as a Director of Health Management Associates, Inc., a hospital management firm,
and is a Trustee of ElderTrust, a healthcare real estate investment trust.
Mr. Dauten holds a Master of Business Administration degree from Harvard
Business School.
EUGENE B. DOGGETT is a Director of the Company, a position he has held since
February 2000. Prior to the merger, he had been a Director of Old Iron Mountain
since 1990. From 1987 until May 1997, Mr. Doggett was the Chief Financial
Officer of Old Iron Mountain, and from 1990 until May 1998, Mr. Doggett was an
Executive Vice President of Old Iron Mountain. Mr. Doggett is also a Director of
Mac-Gray Corporation, a publicly held supplier of card and coin-operated laundry
services in multiple housing facilities. Prior to joining Old Iron Mountain, he
had extensive experience in commercial and investment banking, as well as
financial and general management experience at senior levels. He holds a Master
of Business Administration degree from Harvard Business School.
B. THOMAS GOLISANO is a Director of the Company, a position he has held
since February 2000. Prior to the merger, he had been a Director of Old Iron
Mountain since June 1997. Mr. Golisano was Chairman of Safesite Records
Management Corporation until its acquisition by Old Iron Mountain in June 1997.
He founded Paychex Inc., a publicly held, national payroll service company, in
1971 and serves as its Chairman, President and Chief Executive Officer.
Mr. Golisano serves on the Board of Trustees of Rochester Institute of
Technology and on the boards of several privately held companies. He has also
served on the boards of numerous non-profit organizations and is the founder of
the B. Thomas Golisano Foundation.
ARTHUR D. LITTLE is a Director of the Company, a position he has held since
February 2000. Prior to the merger, he had been a Director of Old Iron Mountain
since November 1995. Mr. Little is a principal of The Little Investment Company,
which he founded in 1992. Prior to that, he was Managing Director of and also a
partner in Narragansett Capital, Inc., a private investment firm. He holds a
Bachelor of Arts degree in history from Stanford University.
HOWARD D. ROSS is a Director of the Company, a position he has held since
February 2000. In 1999, Mr. Ross was involved in the formation, and is currently
a partner, of LLR Equity Partners, L.P., a venture capital fund. From 1984 to
October 1999, he was a partner at Arthur Andersen LLP. He is also a Director of
Premier Research Worldwide, Ltd., a provider of clinical testing and software
services primarily to the pharmaceutical industry. Mr. Ross holds a Bachelor of
Science degree in economics from The Wharton School, University of Pennsylvania,
and is a certified public accountant.
VINCENT J. RYAN is a Director of the Company, a position he has held since
February 2000. Prior to the merger, Mr. Ryan had been a Director of Old Iron
Mountain for over ten years. Mr. Ryan is the founder of Schooner and has served
as the Chairman and Chief Executive Officer of Schooner since 1971. Prior to
November 1995, Mr. Ryan served as Chairman of the Old Iron Mountain Board of
Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers and Directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, must file
reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the
Securities and Exchange Commission (the "Commission"). Such executive officers,
Directors and ten percent shareholders are also required by Commission rules to
furnish to the Company copies of all Section 16(a) reports that they file. Based
solely on its review of the copies of such forms received by it, or written
representations from certain reporting persons that they were not required to
file a Form 5, the Company believes that, during the fiscal year ended
December 31, 1999, the executive officers, Directors and ten percent
shareholders of both Old Iron Mountain and Pierce Leahy complied with all
Section 16(a) filing requirements applicable to such persons.
40
ITEM 11. EXECUTIVE COMPENSATION.
A. OLD IRON MOUNTAIN
The following table provides certain information concerning compensation
earned by the Chief Executive Officer and the other four most highly compensated
executive officers of Old Iron Mountain measured as of December 31, 1999 (the
"Old Iron Mountain Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
NUMBER OF
ANNUAL COMPENSATION SHARES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- --------------------------- -------- -------- -------- ------------ ---------------
C. Richard Reese....................... 1999 $358,000 $250,000 0 $3,200
Chairman of the Board and 1998 $308,538 $190,000 0 $4,000
Chief Executive Officer 1997 $298,381 $200,000 0 $4,000
David S. Wendell(2).................... 1999 $243,800 $171,000 0 $3,200
President and Chief 1998 $224,981 $138,588 0 $4,000
Operating Officer 1997 $221,723 $150,000 47,244 $4,000
John F. Kenny, Jr...................... 1999 $218,300 $153,000 26,765 $3,200
Executive Vice President and 1998 $192,788 $135,000 0 $2,400
Chief Financial Officer 1997 $166,723 $150,000 158,268 $2,400
Harold E. Ebbighausen.................. 1999 $193,300 $ 80,000 35,690 $3,200
President of Arcus Data 1998 $148,269 $110,000 0 $2,400
Security, Inc. 1997 $128,213 $ 49,365 16,536 $ 0
Robert P. Swift(3)..................... 1999 $160,268 $ 64,107 11,895 $2,870
Executive Vice President 1998 $150,750 $ 30,150 0 $5,000
1997 $145,542 $ 54,991 0 $4,000
- ------------------------------
(1) Reflects Old Iron Mountain's matching contribution to The Iron Mountain
Companies 401(k) Plan for each individual. Amounts shown for 1999 are
estimated maximum contributions; the actual contributions have not yet been
calculated.
(2) Mr. Wendell is currently the Senior Vice President of the Company.
(3) Following the merger of Old Iron Mountain and Pierce Leahy, Mr. Swift is no
longer classified as an executive officer of the Company.
41
The following table sets forth certain information concerning the grant of
options to purchase Old Iron Mountain common stock to the Old Iron Mountain
Named Executive Officers during the year ended December 31, 1999.
OPTION GRANTS IN 1999
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT ANNUAL RATES OF STOCK
OF TOTAL APPRECIATION
NUMBER OF OPTIONS FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM(1)
NAME AND UNDERLYING OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
PRINCIPAL POSITION GRANTED FISCAL YEAR 1999 ($/SH) DATE 5% 10%
- ------------------------------ ------------------ ---------------- -------- ---------- -------- ----------
John F. Kenny, Jr............. 26,765 6.18% $33.625 9/12/2009 $565,988 $1,434,325
Executive Vice President and
Chief Financial Officer
Harold E. Ebbighausen......... 35,690 8.24% $33.625 9/12/2009 $754,722 $1,912,612
President of Arcus
Data Security, Inc.
Robert P. Swift(2)............ 11,895 2.75% $33.625 9/12/2009 $251,539 $ 637,448
Executive Vice President
- --------------------------
(1) Potential Realizable Value is based on the assumed growth rates for an
assumed ten-year option term. Five percent annual growth results in a common
stock price per share of $54.77, and ten percent annual growth results in a
common stock price per share of $87.21, respectively, for such term. The
actual value, if any, an executive may realize will depend on the excess of
the market price of the common stock over the exercise price on the date the
option is exercised. There is no assurance that the value realized by an
executive will be at or near the amounts reflected in this table.
(2) Following the merger of Old Iron Mountain and Pierce Leahy, Mr. Swift is no
longer classified as an executive officer of the Company.
The following table sets forth certain information with respect to stock
options during the year ended December 31, 1999 exercised by, and the
unexercised options to purchase common stock held by, the Old Iron Mountain
Named Executive Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
VALUE OF UNEXERCISED IN-
NUMBER OF UNEXERCISED THE-MONEY-
OPTIONS AT OPTIONS AT
DECEMBER 31, 1999(1) DECEMBER 31, 1999
NAME AND PRINCIPAL SHARES ACQUIRED VALUE --------------------------- ---------------------------
POSITION ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ --------------- -------- ----------- ------------- ----------- -------------
David S. Wendell(2)............. 1,200 $24,825 211,444 73,631 $6,536,461 $1,766,883
President and Chief
Operating Officer
John F. Kenny, Jr............... 0 $0 155,453 155,693 $3,885,510 $2,766,105
Executive Vice President,
Chief Financial Officer
Harold E. Ebbighausen........... 0 $0 18,764 53,712 $ 338,139 $ 498,831
President of Arcus
Data Security Inc.
Robert P. Swift(3).............. 0 $0 49,700 25,753 $1,576,424 $ 449,462
Executive Vice President
- ------------------------------
(1) Based on a year-end value of $38.59375 per share, less the exercise price.
(2) Mr. Wendell is currently the Senior Vice President of the Company.
(3) Following the merger of Old Iron Mountain and Pierce Leahy, Mr. Swift is no
longer classified as an executive officer of the Company.
42
B. PIERCE LEAHY
The following table provides certain information concerning compensation
earned by the Chief Executive Officer and the other five most highly compensated
executive officers of Pierce Leahy measured as of December 31, 1999 (the "Pierce
Leahy Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
------------------- NUMBER OF SHARES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION(1)
- --------------------------- -------- -------- -------- ------------------ ---------------
J. Peter Pierce................. 1999 $267,981 $192,500 0 $2,587(1)
President and Chief 1998 $250,000 $110,000 0 $5,744(1)
Executive Officer 1997 $250,000 $ 87,760 0 $7,122(1)
Ross M. Engelman................ 1999 $144,385 $ 82,500 5,500 $2,074(2)
Vice President 1998 $130,000 $ 60,000 0 $4,149(2)
Operations-South 1997 $130,000 $ 45,635 34,750 $5,212(2)
J. Michael Gold................. 1999 $144,385 $ 82,500 5,500 $2,086(3)
Vice President 1998 $130,000 $ 60,000 0 $4,153(3)
Operations-Northeast 1997 $130,000 $ 45,635 34,750 $3,890(3)
Douglas B. Huntley.............. 1999 $144,385 $ 82,500 5,500 $2,074(4)
Vice President and 1998 $130,000 $ 60,000 0 $4,153(4)
Chief Financial Officer 1997 $130,000 $ 45,635 34,750 $5,442(4)
Joseph A. Nezi.................. 1999 $144,385 $134,500(5) 5,500 $2,529(6)
Vice President 1998 $130,000 $112,000(5) 24,750 $3,667(6)
Sales & Marketing 1997 $130,000 $ 97,635(5) 0 $6,385(6)
Christopher J. Williams......... 1999 $144,385 $ 82,500 5,500 $2,086(7)
Vice President 1998 $130,000 $ 60,000 0 $4,244(7)
Operations-West 1997 $130,000 $ 45,635 34,750 $5,442(7)
- ------------------------------
(1) Included in such amounts for 1999, 1998 and 1997, respectively, are $1,966,
$2,400 and $2,250 representing an employer match under the Pierce Leahy
Corp. Profit Sharing/401(k) Plan (the "Pierce Leahy 401(k) Plan"), and $621,
$1,659 and $1,872 in net premiums for a guaranteed term life insurance
policy on behalf of Mr. Pierce. In addition, included in such amounts for
1998 and 1997, respectively, are $1,685 and $3,000 representing profit
sharing contributions made by Pierce Leahy to the Pierce Leahy 401(k) Plan.
The Company anticipates that it will make a profit sharing contribution to
the Pierce Leahy 401(k) Plan with respect to 1999, but the amount of such
contribution has not yet been determined.
(2) Included in such amounts for 1999, 1998 and 1997, respectively, are $1,966,
$2,296 and $2,245 representing an employer match under the Pierce Leahy
401(k) Plan, and $108, $168 and $158 in net premiums for a guaranteed term
life insurance policy on behalf of Mr. Engelman. In addition, included in
such amounts for 1998 and 1997, respectively, are $1,685 and $2,809
representing profit sharing contributions made by Pierce Leahy to the Pierce
Leahy 401(k) Plan. The Company anticipates that it will make a profit
sharing contribution with respect to 1999, but the amount of such
contribution has not yet been determined.
(3) Included in such amounts for 1999, 1998 and 1997, respectively, are $1,966,
$2,302 and $900 representing an employer match under the Pierce Leahy 401(k)
Plan, and $120, $166 and $192 in net premiums for a guaranteed term life
insurance policy on behalf of Mr. Gold. In addition, included in such
amounts for 1998 and 1997, respectively, are $1,685 and $2,798 representing
profit sharing contributions made by Pierce Leahy to the Pierce Leahy 401(k)
Plan. The Company anticipates that it will make a profit sharing
contribution with respect to 1999, but the amount of such contribution has
not yet been determined.
(4) Included in such amounts for 1999, 1998 and 1997, respectively, are $1,966,
$2,302 and $2,250 representing an employer match under the Pierce Leahy
401(k) Plan, and $108, $166 and $192 in net premiums for a guaranteed term
life insurance policy on behalf of Mr. Huntley. In addition, included in
such amounts for 1998 and 1997, respectively, are $1,685 and $3,000
representing profit sharing contributions made by Pierce Leahy to the Pierce
Leahy 401(k) Plan. The Company anticipates that it will make a profit
sharing contribution with respect to 1999, but the amount of such
contribution has not yet been determined.
(5) Includes $52,000, $52,000 and $52,000 paid as commissions in 1999, 1998 and
1997, respectively.
(6) Included in such amounts for 1999, 1998 and 1997, respectively, are $1,966,
$957 and $2,250 representing an employer match under the Pierce Leahy 401(k)
Plan, and $563, $1,025 and $1,135 in net premiums for a guaranteed term life
insurance policy on
43
behalf of Mr. Nezi. In addition, included in such amounts for 1998 and 1997,
respectively, are $1,685 and $3,000 representing profit sharing
contributions made by Pierce Leahy to the Pierce Leahy 401(k) Plan. The
Company anticipates that it will make a profit sharing contribution with
respect to 1999, but the amount of such contribution has not yet been
determined.
(7) Included in such amounts for 1999, 1998 and 1997, respectively, are $1,966,
$2,302 and $2,250 representing an employer match under the Pierce Leahy
401(k) Plan, and $120, $257 and $192 in net premiums for a guaranteed term
life insurance policy on behalf of Mr. Williams. In addition, included in
such amounts for 1998 and 1997, respectively, are $1,685 and $3,000
representing profit sharing contributions made by Pierce Leahy to the Pierce
Leahy 401(k) Plan. The Company anticipates that it will make a profit
sharing contribution with respect to 1999, but the amount of such
contribution has not yet been determined.
The following table sets forth certain information concerning the grant of
options to purchase Pierce Leahy common stock to the Pierce Leahy Named
Executive Officers during the year ended December 31, 1999.
OPTION GRANTS IN 1999
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT ANNUAL RATES OF
OF TOTAL STOCK APPRECIATION
NUMBER OF OPTIONS FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM(2)
NAME AND UNDERLYING OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
PRINCIPAL POSITION GRANTED(1) FISCAL YEAR 1999 ($/SH) DATE 5% 10%
- -------------------------------- ------------------ ---------------- -------- ---------- --------- ---------
Ross M. Engelman................ 5,500 3.3% $23.18 1/1/2009 $80,178 $203,186
Vice President
Operations-South
J. Michael Gold................. 5,500 3.3% $23.18 1/1/2009 $80,178 $203,186
Vice President
Operations-Northeast
Douglas B. Huntley.............. 5,500 3.3% $23.18 1/1/2009 $80,178 $203,186
Vice President and
Chief Financial Officer
Joseph A. Nezi.................. 5,500 3.3% $23.18 1/1/2009 $80,178 $203,186
Vice President
Sales & Marketing
Christopher J. Williams......... 5,500 3.3% $23.18 1/1/2009 $80,178 $203,186
Vice President
Operations-West
- ------------------------------
(1) The options were granted under the Pierce Leahy Corp. 1997 Stock Option Plan
and vest in five equal annual installments beginning on the first
anniversary of the date of grant.
(2) Illustrates the value that might be received upon exercise of options
immediately prior to the assumed expiration of their term at the specified
compounded rates of appreciation based on the market price for the Pierce
Leahy common stock when the options were granted. Assumed rates of
appreciation are not necessarily indicative of future stock performance.
44
The following table sets forth certain information with respect to the
exercise of stock options during the year ended December 31, 1999 by, and the
unexercised options to purchase Pierce Leahy common stock of, the Pierce Leahy
Named Executive Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME AND PRINCIPAL POSITIONS ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- --------------- -------- ----------- ------------- ----------- -------------
Ross M. Engelman............. 0 $ 0 149,821 49,071 $5,171,587 $1,583,567
Vice President
Operations-South
J. Michael Gold.............. 0 $ 0 149,821 49,071 $5,171,587 $1,583,567
Vice President
Operations-Northeast
Douglas B. Huntley........... 5,500 $101,700 144,321 49,071 $4,980,823 $1,583,567
Vice President and
Chief Financial Officer
Joseph A. Nezi............... 0 $ 0 108,636 61,415 $3,681,343 $1,739,489
Vice President
Sales & Marketing
Christopher J. Williams...... 0 $ 0 149,821 49,071 $5,171,587 $1,583,567
Vice President
Operations-West
- ------------------------------
(1) The value of unexercised in-the-money options is based on the difference
between the last sale price of a share of Pierce Leahy common stock as
reported by the NYSE on December 31, 1999 ($39.32, as adjusted for the
one-for-ten stock dividend paid on January 14, 2000) and the exercise price
of the options, multiplied by the number of options.
In connection with the merger of Old Iron Mountain and Pierce Leahy, all
options granted to Messrs. Engelman, Gold, Huntley, Nezi and Williams under the
Pierce Leahy Corp. 1997 Stock Option Plan that had not vested prior to the
merger vested upon the completion of the merger. The numbers of shares subject
to the options accelerated were 10,803, 10,803, 10,803, 7,414 and 10,803,
respectively.
45
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as Directors. Each Director who is not an employee of
the Company receives an annual retainer fee of $5,000 as compensation for his or
her services as a member of the Company Board and $500 for attendance at
committee meetings. In addition, the Company has a program by which it grants
its nonemployee Directors options to purchase $100,000 of the Company's Common
Stock every three years. Each option is granted under the Iron Mountain
Incorporated 1995 Stock Incentive Plan (the "Old Iron Mountain Stock Incentive
Plan"), has an exercise price equal to fair market value (as defined in the Old
Iron Mountain Stock Incentive Plan), vests in equal amounts over a period of
three years and has a ten year term. All Directors are reimbursed for
out-of-pocket expenses incurred in attending meetings of the Company Board or
committees thereof, and for other expenses incurred in their capacities as
Directors.
Old Iron Mountain paid a total of $34,000 in cash for Directors fees in
respect of services for 1999; and Pierce Leahy paid a total of $80,000 in cash
for Directors fees in respect of services for 1999.
CHANGE OF CONTROL ARRANGEMENT
The Old Iron Mountain Stock Incentive Plan provides for acceleration of the
vesting of options and stock appreciation rights ("SARs") if the Company or any
wholly owned subsidiary of the Company is a party to a merger or consolidation
(whether or not the Company is the surviving corporation) in any transaction or
series of related transactions and there is a "Limited Change of Control" of the
Company. A Limited Change of Control occurs if after the merger or consolidation
(a) individuals who immediately prior to the merger or consolidation served as
members of the Company Board no longer constitute a majority of the Company
Board or the board of directors of the surviving corporation and (b) the voting
securities of the Company outstanding immediately prior to the merger or
consolidation do not represent (either by remaining outstanding or upon
conversion into securities of the surviving corporation) more than 50% of the
voting power of the securities of the Company or the surviving corporation
immediately after the merger or consolidation. The merger of Old Iron Mountain
and Pierce Leahy did not constitute a Limited Change of Control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company Board consists of Mr. Little, who
is the Chairman, and Messrs. Boden, Ryan and Bailey. Mr. Reese is a member of
the investment committee of Schooner and a Trustee of Schooner Capital Trust,
the sole member of Schooner. Mr. Ryan is the Chairman of the Board and principal
shareholder of Schooner Capital Trust. See "Item 13. Certain Relationships and
Related Transactions."
46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock by (i) each
Director; (ii) the Chief Executive Officer and the other four most highly
compensated executive officers in the Company; (iii) all executive officers and
Directors of the Company as a group; and (iv) each shareholder known by the
Company to be the beneficial owner of more than five percent of the Company's
Common Stock. Such information is presented as of March 1, 2000, except as
otherwise indicated.
AMOUNT OF BENEFICIAL
OWNERSHIP(1)
---------------------------
NAME(1) SHARES PERCENT OWNED
- ------- ----------- -------------
DIRECTORS AND EXECUTIVE OFFICERS
C. Richard Reese(2)......................................... 1,690,729 3.1%
J. Peter Pierce(3).......................................... 7,283,894 13.4%
John F. Kenny, Jr.(4)....................................... 191,667 *
David S. Wendell(5)......................................... 242,041
Harold E. Ebbighausen(6).................................... 19,399 *
Clarke H. Bailey(7)......................................... 56,926 *
Constantin R. Boden(8)...................................... 33,775 *
Kent P. Dauten(9)........................................... 1,411,682 2.6%
Eugene B. Doggett(10)....................................... 14,955 *
B. Thomas Golisano(11)...................................... 1,523,095 2.8%
Arthur D. Little(12)........................................ 41,220 *
Howard D. Ross(13).......................................... 0 *
Vincent J. Ryan(14)......................................... 5,043,080 9.3%
All Directors and executive officers as a group (13
persons)(15).............................................. 17,552,463 32.1%
FIVE PERCENT SHAREHOLDERS
Leo W. Pierce, Sr.(16)...................................... 7,422,756 13.7%
Schooner Capital LLC(17).................................... 2,736,076 5.0%
Thomas W. Smith(18)......................................... 3,850,130 7.1%
Thomas N. Tryforos(19)...................................... 3,107,393 5.7%
Wellington Management Company, LLP(20)...................... 3,557,400 6.6%
- ------------------------------
* Less than 1%
(1) Except as otherwise indicated, the persons named in the table above have
sole voting and investment power with respect to all shares of Company
Common Stock shown as beneficially owned by them.
(2) Mr. Reese is a Director, Chairman of the Board and Chief Executive Officer
of the Company. Includes 22,825 shares of Common Stock held in trusts for
the benefit of Mr. Reese's children, as to which Mr. Reese disclaims
beneficial ownership. Also includes 874,249 shares of Common Stock as to
which Mr. Reese shares beneficial ownership with Schooner as a result of a
1988 deferred compensation arrangement, as amended, between Schooner and
Mr. Reese relating to Mr. Reese's former services as President of the
predecessor corporation to Schooner. Pursuant to such arrangement, upon the
earlier to occur of (i) Schooner's sale or exchange of substantially all of
the shares of Common Stock held by Schooner or (ii) the cessation of
Mr. Reese's employment with the Company, Schooner is required to transfer
such shares of Common Stock to Mr. Reese or remit to Mr. Reese cash in an
amount equal to the then current fair market value of such shares of Common
Stock. Schooner has agreed to vote the shares of Common Stock subject to
such arrangement at the direction of Mr. Reese.
(3) Mr. Pierce is a Director and President of the Company. Includes 7,265,744
shares held in a voting trust pursuant to a Voting Trust Agreement dated
June 24, 1997 (as amended or restated from time to time, the "Voting
Trust"), some of which are also subject to proxies (the "Proxies") granted
under such Voting Trust Agreement. Mr. Pierce and Leo W. Pierce, Sr., as
co-trustees of the Voting Trust (the "Trustees") and the persons granted
voting rights under the Proxies, share power to vote the shares held in the
Voting Trust or subject to the Proxies. In the event that the two Trustees
disagree as to how to vote the shares held subject to the Voting Trust or
the Proxies, one-half of the shares subject to the Voting Trust and/or
Proxies will be voted at the direction of each
47
Trustee. The beneficial owners of the interests in the Voting Trust and/or
subject to the Proxies have the right to dispose of the shares to which they
have beneficial interests.
(4) Mr. Kenny is the Executive Vice President and Chief Financial Officer and a
Director of the Company. Includes 179,520 shares that Mr. Kenny has the
right to acquire pursuant to currently exercisable options.
(5) Mr. Wendell is a Senior Vice President of the Company. Includes 234,924
shares that Mr. Wendell has the right to acquire pursuant to currently
exercisable options.
(6) Mr. Ebbighausen is the President of Arcus Data Security, Inc., a subsidiary
of Iron Mountain. Includes 18,764 shares that Mr. Ebbighausen has the right
to acquire pursuant to currently exercisable options.
(7) Mr. Bailey is a Director of the Company. Includes 2,455 shares that
Mr. Bailey has the right to acquire pursuant to currently exercisable
options.
(8) Mr. Boden is a Director of the Company. Includes 2,455 shares that
Mr. Boden has the right to acquire pursuant to currently exercisable
options.
(9) Mr. Dauten is a Director of Company. Includes 2,455 shares that Mr. Dauten
has the right to acquire pursuant to currently exercisable options.
(10) Mr. Doggett is a Director of the Company. Includes 2,455 shares that
Mr. Doggett has the right to acquire pursuant to currently exercisable
options.
(11) Mr. Golisano is a Director of the Company. Includes 7,882 shares that
Mr. Golisano has the right to acquire pursuant to currently exercisable
options.
(12) Mr. Little is a Director of the Company. Includes 37,500 shares held by The
Little Family Trust, as to which Mr. Little disclaims beneficial ownership,
as well as 2,455 shares that Mr. Little has the right to acquire pursuant to
currently exercisable options.
(13) Mr. Ross is a Director of the Company.
(14) Mr. Ryan is a Director of the Company. Includes 2,455 shares that Mr. Ryan
has the right to acquire pursuant to currently exercisable options. Also
includes 2,736,076 shares of Common Stock held by Schooner, as to which
Mr. Ryan has sole voting power and investment power as the Chairman of the
Board of Schooner and the principal shareholder of Schooner Capital Trust,
the sole member of Schooner. Mr. Ryan's address is c/o Schooner Capital LLC,
745 Atlantic Avenue, Boston, Massachusetts 02111. See footnote
(17) regarding shares held by Schooner.
(15) Includes 455,820 shares that Directors and executive officers have the
right to acquire pursuant to currently exercisable options.
(16) Includes 153,712 shares held in the Pierce Family Foundation, of which
Mr. Pierce is a co-trustee, and 7,265,744 shares held in the Voting Trust
described in footnote (3). Mr. Pierce's address is 443 Silver Moss Drive,
John's Island, Vero Beach, Florida 32963.
(17) Mr. Ryan is the Chairman of the Board of Schooner and the principal
shareholder of Schooner Capital Trust, the sole member of Schooner, and,
accordingly, has sole voting and investment power with respect to the shares
of Common Stock held by Schooner. Includes 874,249 shares of Common Stock as
to which Schooner shares beneficial ownership with Mr. Reese as described in
footnote (2). Schooner has agreed to vote the shares of Common Stock subject
to such arrangement at the direction of Mr. Reese. The address of Schooner
Capital LLC is 745 Atlantic Avenue, Boston, Massachusetts 02111.
(18) This information is presented as of December 31, 1999, and is based solely
on a Schedule 13G filed with the Commission on March 15, 2000. Mr. Smith has
sole voting and dispositive power over 766,490 shares and has shared voting
and dispositive power over 3,083,640 shares with Mr. Tryforos. The address
of Mr. Smith is 323 Railroad Avenue, Greenwich, Connecticut 06830.
(19) This information is presented as of December 31, 1999, and is based solely
on a Schedule 13G filed with the Commission on March 15, 2000. Mr. Tryforos
has sole voting and dispositive power over 23,753 shares and has shared
voting and dispositive over 3,083,640 shares with Mr. Smith. The address of
Mr. Tryforos is 323 Railroad Avenue, Greenwich, Connecticut 06830.
(20) This information is presented as of December 31, 1999, and is based solely
on a Schedule 13G/A filed with the Commission on February 11, 2000.
Wellington Management Company, LLP has shared voting power over 2,538,600
shares and shared dispositive power over 3,557,400 shares. The address of
Wellington Management Company, LLP is 75 State Street, Boston, Massachusetts
02109.
48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
REAL ESTATE TRANSACTIONS
Iron Mountain Records Management, Inc., a subsidiary of the Company
("IMRM"), was the tenant under a lease dated January 1, 1991 for a 31,500
square-foot building in Houston, Texas. The owner of the building was IM Houston
(CR) Limited Partnership, a Texas limited partnership, of which Mountain
Realty, Inc., a Massachusetts corporation whose sole shareholder is Mr. Ryan,
was the sole general partner, and the limited partners of which were
Messrs. Reese and Doggett. IMRM paid annual rent of approximately $99,326 for
the year ended December 31, 1998. As tenant, IMRM was responsible for taxes,
insurance and maintenance. Iron Mountain Statutory Trust--1998 ("IMST"), a
non-affiliated entity formed to acquire and lease records storage properties to
IMRM, purchased the property from IM Houston (CR) Limited Partnership in
January 1999 for a purchase price of approximately $930,000. The purchase price
was determined through an independent appraisal of the property. IMRM leases the
space from IMST and will continue to use the space as a records management
facility. The prior lease and the acquisition of the property by IMST were, in
the opinion of management, on commercially reasonable terms and no less
favorable to IMRM than could have been obtained from an unaffiliated party at
the time of the transactions.
Schooner leases space from the Company at the Company's corporate
headquarters. Such lease is a tenancy-at-will and may be terminated by either
the Company or by Schooner at any time. As consideration for such lease,
Schooner pays rent to the Company based on its pro rata share of all expenses
related to the use and occupancy of the premises. The rent paid by Schooner to
Old Iron Mountain under such lease was approximately $93,930 in the year ended
December 31, 1999, and Schooner currently pays annual rent of approximately
$98,182. The Company believes that the terms of this lease are no less favorable
to it than would have been negotiated with an unrelated third party.
The Company leases from four separate limited partnerships the headquarters
of its paper records storage operations in King of Prussia, Pennsylvania and its
facilities in Suffield, Connecticut, Orlando, Florida and Charlotte, North
Carolina. J. Peter Pierce, the Company's President, is the general partner of
three of the limited partnerships and members of the Pierce family and their
affiliates own substantial limited partnership interests in each of the four
limited partnerships. The lease for the headquarters of the Company's paper
records storage operations expires on April 30, 2003, without any renewal
options. The leases for the Suffield, Orlando and Charlotte facilities terminate
on December 31, 2005, October 31, 2004 and August 31, 2001, respectively. Each
of such leases contains two five-year renewal options. The aggregate rental
payments by Pierce Leahy for such properties during 1999 was $902,000. The
Company believes that the terms of these leases are no less favorable to the
Company than would have been negotiated with unrelated third parties.
OTHER TRANSACTIONS
Old Iron Mountain paid compensation of approximately $186,110 for the year
ended December 31, 1999 to Mr. T. Anthony Ryan. Mr. Ryan is Vice President, Real
Estate, of the Company and is the brother of Mr. Vincent J. Ryan, a Director of
the Company. The Company believes that the terms of Mr. Ryan's employment are no
less favorable to it than would be negotiable with an unrelated third party.
Pierce Leahy provided an annual pension in the amount of $96,000 to Leo W.
Pierce, Sr., the Chairman Emeritus of the Company Board and the beneficial owner
of approximately 13.7% of the Company's Common Stock, for the year ended
December 31, 1999. The Company will continue to provide a pension to
Mr. Pierce, or his spouse, if she survives him, in 2000.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FILED
AS PART OF THIS REPORT:
A. OLD IRON MOUNTAIN
PAGE
--------
Report of Independent Public Accountants.................... 52
Consolidated Balance Sheets, December 31, 1998 and 1999..... 53
Consolidated Statements of Operations, Years ended December
31, 1997, 1998 and 1999................................... 54
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss, Years ended December 31, 1997, 1998
and 1999.................................................. 55
Consolidated Statements of Cash Flows, Years ended December
31, 1997, 1998 and 1999................................... 56
Notes to Consolidated Financial Statements.................. 57
Financial Statement Schedule:
Report of Independent Public Accountants.................. 81
Schedule II--Valuation and Qualifying Accounts............ 82
B. PIERCE LEAHY
PAGE
--------
Report of Independent Public Accountants.................... 83
Consolidated Balance Sheets, December 31, 1998 and 1999..... 84
Consolidated Statements of Operations, Years ended December
31, 1997, 1998 and 1999................................... 85
Consolidated Statements of Shareholders' Equity, Years ended
December 31, 1997, 1998 and 1999.......................... 86
Consolidated Statements of Cash Flows, Years ended December
31, 1997, 1998 and 1999................................... 87
Notes to Consolidated Financial Statements.................. 88
Financial Statement Schedule:
Report of Independent Public Accountants.................. 112
Schedule II--Valuation and Qualifying Accounts............ 113
C. IRON MOUNTAIN EUROPE
PAGE
--------
Report of the Independent Auditors.......................... 114
Consolidated Balance Sheet, October 31, 1999................ 115
Consolidated Statement of Operations, Ten Months ended
October 31, 1999.......................................... 116
Consolidated Statement of Stockholders' Equity and
Comprehensive Loss, Ten Months ended October 31, 1999..... 117
Consolidated Statement of Cash Flows, Ten Months ended
October 31, 1999.......................................... 118
Notes to Consolidated Financial Statements.................. 119
Financial Statement Schedule:
Report of the Independent Auditors........................ 128
Schedule II--Valuation and Qualifying Accounts............ 129
(a)(3) EXHIBITS FILED AS PART OF THIS REPORT:
As listed in the Exhibit Index following the signature page hereof.
50
(b) REPORTS ON FORM 8-K:
On October 21, 1999 and October 22, 1999, Old Iron Mountain and Pierce
Leahy, respectively, filed Current Reports on Form 8-K under Item 5 announcing
the execution of the definitive agreement relating to the merger of Old Iron
Mountain and Pierce Leahy.
On November 24, 1999, Old Iron Mountain filed a Current Report on Form 8-K
under Items 5 and 7 containing certain pro forma financial information relating
to the merger of Old Iron Mountain and Pierce Leahy and the financial statements
of Old Iron Mountain's acquisitions of Central File, Inc., Sistemas de Archivo
Corporativo, S. de R.L. de C.V., Stortext (Holdings) Limited and Midtown
Professional Records Centre, Inc., completed by Old Iron Mountain in 1999.
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Iron Mountain Incorporated:
We have audited the accompanying consolidated balance sheets of Iron
Mountain Incorporated (a Delaware corporation) and its subsidiaries as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and comprehensive loss and cash flows for each
of the three years in the period ended December 31, 1999. 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 financial statements of Iron Mountain Europe
Limited as of October 31, 1999, which statements reflect total assets and total
revenues of 12 percent and 6 percent in 1999, 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, 1998 and 1999 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 28, 2000
52
IRON MOUNTAIN INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
---------------------
1998 1999
-------- ----------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,715 $ 3,830
Accounts receivable (less allowances of $3,316 and $5,740
as of 1998 and 1999, respectively)...................... 75,565 104,074
Foreign currency transaction receivable................... 45,885 --
Deferred income taxes..................................... 10,474 12,475
Prepaid expenses and other................................ 10,298 23,285
-------- ----------
Total Current Assets.................................... 143,937 143,664
Property, Plant and Equipment:
Property, plant and equipment............................. 354,101 497,369
Less--Accumulated depreciation............................ (87,358) (93,630)
-------- ----------
Net Property, Plant and Equipment....................... 266,743 403,739
Other Assets:
Goodwill, net............................................. 527,235 729,213
Customer acquisition costs, net........................... 9,574 16,742
Deferred financing costs, net............................. 13,392 16,549
Other..................................................... 6,504 7,305
-------- ----------
Total Other Assets...................................... 556,705 769,809
-------- ----------
Total Assets............................................ $967,385 $1,317,212
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt......................... $ 1,731 $ 9,890
Accounts payable.......................................... 20,620 25,770
Accrued expenses.......................................... 48,539 68,519
Foreign currency transaction payable...................... 46,200 --
Deferred income........................................... 26,043 32,981
Other current liabilities................................. 339 13,188
-------- ----------
Total Current Liabilities............................... 143,472 150,348
Long-term Debt, net of current portion...................... 454,447 603,057
Other Long-Term Liabilities................................. 8,925 5,749
Deferred Rent............................................... 9,616 10,819
Deferred Income Taxes....................................... 12,043 16,207
Commitments and Contingencies (see Note 13)
Minority Interest........................................... -- 42,278
Stockholders' Equity:
Common stock.............................................. 294 369
Additional paid-in capital................................ 355,927 560,620
Accumulated deficit....................................... (17,339) (31,558)
Accumulated other comprehensive items..................... -- (1,193)
Treasury stock............................................ -- (39,484)
-------- ----------
Total Stockholders' Equity.............................. 338,882 488,754
-------- ----------
Total Liabilities and Stockholders' Equity.............. $967,385 $1,317,212
======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
53
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Revenues:
Storage................................................... $125,968 $230,702 $317,387
Service and storage material sales........................ 82,797 153,259 202,162
-------- -------- --------
Total Revenues.......................................... 208,765 383,961 519,549
Operating Expenses:
Cost of sales (excluding depreciation).................... 106,879 192,113 260,930
Selling, general and administrative....................... 51,668 95,867 128,948
Depreciation and amortization............................. 27,107 48,301 65,422
-------- -------- --------
Total Operating Expenses................................ 185,654 336,281 455,300
-------- -------- --------
Operating Income............................................ 23,111 47,680 64,249
Interest Expense............................................ 27,712 45,673 54,425
Other Income, net........................................... -- 1,384 17
-------- -------- --------
Income (Loss) from Continuing Operations Before
Provision (Benefit) for Income Taxes and Minority
Interest Expense...................................... (4,601) 3,391 9,841
Provision (Benefit) for Income Taxes........................ (80) 6,558 10,579
Minority Interest Expense................................... -- -- 322
-------- -------- --------
Loss from Continuing Operations......................... (4,521) (3,167) (1,060)
Income from Discontinued Operations......................... -- 201 241
Loss on Sale of Discontinued Operations..................... -- -- (13,400)
-------- -------- --------
Net Loss Applicable to Common Stockholders.............. $ (4,521) $ (2,966) $(14,219)
======== ======== ========
Net Loss per Common Share--Basic and Diluted:
Loss from Continuing Operations........................... $ (0.26) $ (0.12) $ (0.03)
Income (Loss) from Discontinued Operations................ -- 0.01 (0.40)
-------- -------- --------
Net Loss per Common Share............................... $ (0.26) $ (0.11) $ (0.43)
======== ======== ========
Weighted Average Common Shares Outstanding--
Basic and Diluted......................................... 17,172 27,470 33,345
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
54
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK COMMON STOCK ACCUMULATED
VOTING NON-VOTING ADDITIONAL OTHER
--------------------- ------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ITEMS
STOCKHOLDERS' EQUITY: ---------- -------- -------- -------- ---------- ------------ --------------
Balance, December 31, 1996......... 14,486,486 $145 715,942 $ 7 $ 62,084 $ (9,852) $ --
Exercise of stock options,
including tax benefit............ 123,657 1 -- -- 1,532 -- --
Issuance of shares for services.... 2,751 -- -- -- 52 -- --
Shares and options issued in
connection with acquisitions, net
of issuance costs................ 4,851,341 49 -- -- 88,236 -- --
Conversion of common
stock--nonvoting to common
stock--voting.................... 715,942 7 (715,942) (7) -- -- --
Net loss........................... -- -- -- -- -- (4,521) --
---------- ---- -------- ---- -------- -------- -------
Balance, December 31, 1997......... 20,180,177 202 -- -- 151,904 (14,373) --
Shares and options issued in
connection with acquisitions, net
of issuance costs................ 2,645,913 26 -- -- 66,888 -- --
Issuance of shares in secondary
public offering, net of issuance
costs............................ 6,037,500 60 -- -- 131,961 -- --
Exercise of stock options,
including tax benefit............ 566,615 6 -- -- 5,174 -- --
Net loss........................... -- -- -- -- -- (2,966) --
---------- ---- -------- ---- -------- -------- -------
Balance, December 31, 1998......... 29,430,205 294 -- -- 355,927 (17,339) --
Shares and options issued in
connection with acquisitions, net
of issuance costs................ 1,476,577 15 -- -- 45,745 -- --
Issuance of shares in secondary
public offering, net of issuance
costs............................ 5,750,000 57 -- -- 152,486 -- --
Issuance of shares under employee
stock purchase plan and option
plans, including tax benefit..... 286,830 3 -- -- 6,179 -- --
Acceleration of option vesting in
connection with sale of
business......................... -- -- -- -- 283 -- --
Currency translation adjustment.... -- -- -- -- -- -- (1,193)
Purchase of treasury shares........ -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- (14,219) --
---------- ---- -------- ---- -------- -------- -------
Balance, December 31, 1999......... 36,943,612 $369 -- $ -- $560,620 $(31,558) $(1,193)
========== ==== ======== ==== ======== ======== =======
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
STOCKHOLDERS' EQUITY: -------- -------------
Balance, December 31, 1996......... $ -- $ 52,384
Exercise of stock options,
including tax benefit............ -- 1,533
Issuance of shares for services.... -- 52
Shares and options issued in
connection with acquisitions, net
of issuance costs................ -- 88,285
Conversion of common
stock--nonvoting to common
stock--voting.................... -- --
Net loss........................... -- (4,521)
-------- --------
Balance, December 31, 1997......... -- 137,733
Shares and options issued in
connection with acquisitions, net
of issuance costs................ -- 66,914
Issuance of shares in secondary
public offering, net of issuance
costs............................ -- 132,021
Exercise of stock options,
including tax benefit............ -- 5,180
Net loss........................... -- (2,966)
-------- --------
Balance, December 31, 1998......... -- 338,882
Shares and options issued in
connection with acquisitions, net
of issuance costs................ -- 45,760
Issuance of shares in secondary
public offering, net of issuance
costs............................ -- 152,543
Issuance of shares under employee
stock purchase plan and option
plans, including tax benefit..... -- 6,182
Acceleration of option vesting in
connection with sale of
business......................... -- 283
Currency translation adjustment.... -- (1,193)
Purchase of treasury shares........ (39,484) (39,484)
Net loss........................... -- (14,219)
-------- --------
Balance, December 31, 1999......... $(39,484) $488,754
======== ========
1997 1998 1999
-------- -------- --------
COMPREHENSIVE LOSS:
Net loss.................................................... $(4,521) $(2,966) $(14,219)
Foreign currency translation adjustment..................... -- -- (1,193)
------- ------- --------
Comprehensive loss.......................................... $(4,521) $(2,966) $(15,412)
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
55
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Cash Flows from Operating Activities:
Net loss.................................................. $ (4,521) $ (2,966) $(14,219)
Adjustments to reconcile net loss to loss from continuing
operations:
Income from discontinued operations....................... -- (201) (241)
Loss on sale of discontinued operations................... -- -- 13,400
-------- -------- --------
Loss from Continuing Operations............................. (4,521) (3,167) (1,060)
Adjustments to reconcile loss from continuing operations
to cash flows provided by operating activities:
Minority interest expense................................. -- -- 322
Depreciation and amortization............................. 27,107 48,301 65,422
Amortization of financing costs........................... 1,095 1,801 1,981
Provision for doubtful accounts........................... 874 1,730 2,733
Other, net................................................ 52 316 238
Changes in Assets and Liabilities (exclusive of
acquisitions):
Accounts receivable....................................... (4,433) (12,924) (22,996)
Prepaid expenses and other current assets................. (2,949) 4,410 (9,691)
Deferred income taxes..................................... 1,190 9,058 8,989
Other assets.............................................. -- 13 663
Accounts payable.......................................... 4,653 5,282 2,009
Accrued expenses.......................................... (1,115) (127) 5,934
Other current liabilities................................. 485 -- 372
Deferred rent............................................. 551 1,414 1,203
Deferred income........................................... 671 7,369 3,331
Other long-term liabilities............................... (1,240) 3,587 (3,176)
-------- -------- --------
Cash Flows Provided by Continuing Operations................ 22,420 67,063 56,274
Cash Flows Provided by (Used in) Discontinued Operations.... -- 67 (836)
-------- -------- --------
Cash Flows Provided by Operating Activities................. 22,420 67,130 55,438
Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired.......... (192,230) (189,729) (212,160)
Capital expenditures...................................... (38,320) (55,927) (98,657)
Additions to customer acquisition costs................... (1,635) (3,024) (8,122)
Other, net................................................ (333) -- --
-------- -------- --------
Cash Flows Used in Continuing Operations.................... (232,518) (248,680) (318,939)
Cash Flows Provided by (Used in) Discontinued Operations.... -- (527) 7,814
-------- -------- --------
Cash Flows Used in Investing Activities..................... (232,518) (249,207) (311,125)
-------- -------- --------
Cash Flows from Financing Activities:
Repayment of debt......................................... (178,181) (171,080) (249,654)
Proceeds from borrowings.................................. 167,850 194,811 235,141
Debt financing from minority shareholder.................. -- -- 11,636
Net proceeds from sale of senior subordinated notes....... 242,640 -- 149,460
Proceeds from secondary equity offering, net of
underwriting discount................................... -- 132,905 153,755
Repurchase of common stock................................ -- -- (39,484)
Exercise of stock options................................. 786 4,482 3,589
Financing costs........................................... (1,291) (764) (5,138)
Stock issuance costs...................................... (649) (1,072) (1,452)
-------- -------- --------
Cash Flows Provided by Continuing Operations................ 231,155 159,282 257,853
Cash Flows Provided by Discontinued Operations.............. -- -- --
-------- -------- --------
Cash Flows Provided by Financing Activities................. 231,155 159,282 257,853
Effect of exchange rates on cash and cash equivalents....... -- -- (51)
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents............ 21,057 (22,795) 2,115
Cash and Cash Equivalents, Beginning of Year................ 3,453 24,510 1,715
-------- -------- --------
Cash and Cash Equivalents, End of Year...................... $ 24,510 $ 1,715 $ 3,830
======== ======== ========
Supplemental Information:
Cash Paid for Interest...................................... $ 22,440 $ 42,407 $ 46,555
======== ======== ========
Cash Paid for Income Taxes.................................. $ 1,306 $ 1,700 $ 1,916
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
56
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
1. NATURE OF BUSINESS
The accompanying financial statements represent the consolidated accounts of
Iron Mountain Incorporated, a Delaware corporation, and its subsidiaries
(collectively "Old Iron Mountain"). Old Iron Mountain is an international
full-service provider of records and information management and related services
for all media in various locations throughout the United States, Europe and
Mexico to Fortune 500 companies and numerous legal, banking, health care,
accounting, insurance, entertainment and government organizations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The accompanying financial statements reflect the financial position and
results of operations of Old Iron Mountain on a consolidated basis. All
significant intercompany account balances have been eliminated.
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
c. Cash and Cash Equivalents
Old Iron Mountain defines cash and cash equivalents to include cash on hand
and cash invested in short-term securities which have original maturities of
less than 90 days. Cash and cash equivalents are carried at cost, which
approximates fair market value.
d. Foreign Currency Transaction
On December 31, 1998, Old Iron Mountain had a receivable denominated in
British pounds from, and a payable in U.S. dollars to, a bank as a result of
exercising a foreign exchange agreement on December 30, 1998. Included in
other income, net, for the year ended December 31, 1998 is a $316 loss on
the remeasurement of the receivable based on the applicable exchange rate on
December 31, 1998. The British pounds were being acquired to finance the
acquisition of Iron Mountain Europe Limited ("IM Europe") on January 4,
1999. As of December 31, 1999, Old Iron Mountain did not have any such
foreign exchange agreement.
All assets and liabilities of Old Iron Mountain's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are
translated at average exchange rates for the year, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency
57
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Translation." Resulting translation adjustments are reflected in the
"Accumulated Other Comprehensive Items" component of stockholders' equity.
Foreign currency transaction gains and losses in fiscal 1999 are included in
the accompanying statements of operations and are not material.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). This statement establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities and is effective for
all fiscal years beginning after June 15, 2000, as amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities." Management
has not yet completed its assessment of the effects of SFAS 133.
e. 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, whichever is shorter
Racking.............................. 5 to 20 years
Warehouse equipment/vehicles......... 4 to 20 years
Furniture and fixtures............... 3 to 10 years
Computer hardware and software....... 3 to 5 years
Property, plant and equipment consist of the following:
DECEMBER 31,
-------------------
1998 1999
-------- --------
Land and buildings...................................... $ 99,678 $158,648
Leasehold improvements.................................. 27,509 35,011
Racking................................................. 127,287 180,876
Warehouse equipment/vehicles............................ 23,239 28,954
Furniture and fixtures.................................. 9,241 11,886
Computer hardware and software.......................... 47,400 60,998
Construction in progress................................ 19,747 20,996
-------- --------
$354,101 $497,369
======== ========
Minor maintenance costs are expensed as incurred. Major improvements to the
leased buildings are capitalized as leasehold improvements and depreciated.
Old Iron Mountain develops 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 amortized over the useful life of the software.
Capitalization begins when the design stage of the application has been
completed, it is probable that the project will be completed and the
58
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
application will be used to perform the function intended. Amortization
begins when the software is placed in service.
Effective January 1, 1999, Old Iron Mountain adopted the provisions of
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). 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. The new accounting pronouncement resulted in certain costs being
expensed starting in 1999 that would have been capitalized under the
previous policy.
f. Goodwill
Goodwill reflects the cost in excess of fair value of the net assets of
companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method from the date of acquisition over the expected period
to be benefited, currently estimated at 25 to 30 years. Old Iron Mountain
assesses the recoverability of goodwill, as well as other long-lived assets,
based upon expectations of future undiscounted cash flows in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Accumulated amortization of goodwill
was $46,333 and $76,865 as of December 31, 1998 and 1999, respectively.
g. Customer Acquisition Costs
Costs related to the acquisition of large volume accounts, net of revenues
received for the initial transfer of the records, are capitalized and
amortized for an appropriate period not to exceed 12 years. If the customer
terminates its relationship with Old Iron Mountain, the unamortized cost is
charged to expense. However, in the event of such termination, Old Iron
Mountain collects, and records as income, permanent removal fees that
generally equal or exceed the amount of the unamortized costs. As of
December 31, 1998 and 1999, those costs were $12,793 and $20,746,
respectively, and accumulated amortization of those costs were $3,219 and
$4,004, respectively.
h. 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,
unamortized deferred financing costs are written off as an extraordinary
charge in the period the debt is retired. As of December 31, 1998 and 1999,
deferred financing costs were $16,928 and $22,066, respectively, and
accumulated amortization of those costs was $3,536 and $5,517, respectively.
i. Other Assets
Effective January 1, 1999, Old Iron Mountain adopted the provisions of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires the costs of start-up activities, including
organization costs, to be expensed as incurred. The adoption of SOP 98-5 did
not have a material impact on Old Iron Mountain's financial statements.
59
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
j. Accrued Expenses
Accrued expenses consist of the following:
DECEMBER 31,
-------------------
1998 1999
-------- --------
Incentive compensation.................................... $ 5,934 $ 6,492
Interest.................................................. 9,975 15,950
Workers' compensation..................................... 2,948 4,712
Payroll and vacation...................................... 7,451 10,149
Restructuring costs....................................... 10,482 9,340
Other..................................................... 11,749 21,876
------- -------
$48,539 $68,519
======= =======
k. Revenues
Old Iron Mountain's revenues consist of storage revenues as well as service
and storage material sales revenues. Storage revenues consist of periodic
charges related to the storage of materials (either on a per unit or per
cubic foot of records basis). In certain circumstances, based upon customer
requirements, storage revenues include periodic charges associated with
normal, recurring service activities. Service and storage material sales
revenues are comprised of charges for related service activities, the sale
of storage materials and courier operations. In certain circumstances,
storage material sales are recorded net of product costs when Old Iron
Mountain functions as a sales representative of the product manufacturer and
does not receive or take title to the products. Customers are generally
billed on a monthly basis on contractually agreed-upon terms.
Storage and service revenues are recognized in the month the respective
service is provided. Storage material sales are recognized when shipped to
the customer. Amounts related to future storage for customers where storage
fees are billed in advance are accounted for as deferred income and
amortized over the applicable period.
l. Deferred Rent
Old Iron Mountain has entered into various leases for buildings used in the
storage of records. 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
balance sheets. In addition, Old Iron Mountain has assumed various above
market leases in connection with certain of its acquisitions. The discounted
present value of these lease obligations in excess of market rate at the
date of the acquisition was recorded as a deferred rent liability and is
being amortized over the remaining lives of the respective leases.
m. Stock-Based Compensation
Effective January 1, 1996, Old Iron Mountain adopted the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Old Iron Mountain has
elected to continue to account for stock
60
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
options at their intrinsic value with disclosure of the effects of fair
value accounting on net income (loss) and earnings (loss) per share on a pro
forma basis.
n. Reclassifications
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform to the 1999 presentation.
3. COMMON STOCK SPLIT
On June 30, 1998, Old Iron Mountain's Board of Directors authorized and
approved a three-for-two stock split effected in the form of a dividend on Old
Iron Mountain's common stock. Such additional shares of common stock were issued
on July 31, 1998 to all stockholders of record as of the close of business on
July 17, 1998. All issued and outstanding share and per share amounts in the
accompanying consolidated financial statements and Notes thereto have been
restated to reflect the stock split.
4. DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------------
1998 1999
-------- --------
Revolving Credit Facility............................... $ 35,300 $ 5,000
10 1/8% Senior Subordinated Notes due 2006 (the "1996
Notes")............................................... 165,000 165,000
8 3/4% Senior Subordinated Notes due 2009 (the "1997
Notes")............................................... 249,566 249,606
8 1/4% Senior Subordinated Notes due 2011 (the "1999
Notes")............................................... -- 149,490
Real Estate Mortgage.................................... 2,349 2,048
Other................................................... 3,963 41,803
-------- --------
Long-term debt.......................................... 456,178 612,947
Less current portion.................................... (1,731) (9,890)
-------- --------
Long-term debt, net of current portion.................. $454,447 $603,057
======== ========
61
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
a. Revolving Credit Facility
As of December 31, 1999, Old Iron Mountain had a $250 million revolving
credit facility, as amended (the "Credit Agreement"), which was scheduled to
mature on September 30, 2002.
The Credit Agreement specified certain minimum or maximum relationships
between EBITDA (as defined therein) and interest, total debt and fixed
charges. There were restrictions on dividends declared by Old Iron Mountain,
sales or pledging of assets, investments and changes in business and
ownership; cash dividends were effectively prohibited. Old Iron Mountain was
in compliance with all debt covenants as of December 31, 1999. Loans under
the Credit Agreement were secured by pledges of the capital stock of all of
Old Iron Mountain's domestic subsidiaries.
The interest rate on loans under the Credit Agreement varied depending on
Old Iron Mountain's choice of base rates, plus an applicable margin. The
applicable margin varied depending on the base rate selected and certain
debt ratios. The timing of interest payments also varied with the base rate
selected. At December 31, 1999, the effective interest rate was 7.71%.
Effective February 1, 2000, Old Iron Mountain amended and restated its
revolving credit facility (the "Amended Credit Agreement") to increase the
aggregate principal amount available to $400 million and to include the
ability to borrow in certain foreign currencies. The Amended Credit
Agreement matures on January 31, 2005. The interest rate on borrowings under
this Amended Credit Agreement varies depending on Old Iron Mountain's choice
of base rates, plus an applicable margin. Restrictive covenants under this
agreement are similar to those under the Credit Agreement.
b. 1996 Notes
On October 1, 1996, Old Iron Mountain issued $165 million of 10 1/8% Senior
Subordinated Notes due 2006. Interest on the 1996 Notes is payable
semiannually on April 1 and October 1 and commenced on April 1, 1997. The
net proceeds of $160.1 million after underwriting discounts and commissions
were used to repay outstanding indebtedness under Old Iron Mountain's
revolving credit facility, to fund the purchase price of acquisitions and
for general corporate purposes.
The 1996 Notes contain covenants and restrictions similar to, or less
restrictive than, the Amended Credit Agreement. After September 30, 2001,
and subject to certain restrictions, Old Iron Mountain may, at its option,
redeem any or all of the 1996 Notes at face value, plus a premium ranging
from approximately 2% to 5% through September 30, 2004. Thereafter, the 1996
Notes may be redeemed at face value. Additionally, under certain
circumstances, including a change of control or following certain asset
sales, the holders of the 1996 Notes may require Old Iron Mountain to
repurchase the 1996 Notes.
c. 1997 Notes
On October 24, 1997, Old Iron Mountain issued $250 million of 8 3/4% Senior
Subordinated Notes due 2009. Interest on the 1997 Notes is payable
semiannually on March 31 and September 30 and commenced on March 31, 1998.
The net proceeds of $242.6 million after an original issue discount of $485
and underwriting discounts and commissions were used to repay outstanding
indebtedness under
62
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
Old Iron Mountain's revolving credit facility, to fund the purchase price of
acquisitions and for general corporate purposes.
The 1997 Notes contain covenants and restrictions similar to, or less
restrictive than, the Amended Credit Agreement. Prior to September 30, 2002,
and subject to certain restrictions, Old Iron Mountain may, at its option,
redeem any or all of the 1997 Notes at a make-whole price, as defined in the
related indenture. On or after September 30, 2002, and subject to certain
restrictions, Old Iron Mountain may, at its option, redeem any or all of the
1997 Notes at face value, plus a premium of up to approximately 4% through
September 30, 2005. Thereafter, the 1997 Notes may be redeemed at face
value. Also, any time through October 23, 2000, Old Iron Mountain may redeem
a portion of the 1997 Notes, subject to restrictions, with the net proceeds
of one or more Qualified Equity Offerings, as defined, at a redemption price
of 108.75% of the principal amount of such 1997 Notes. Additionally, under
certain circumstances, including a change of control or following certain
asset sales, the holders of the 1997 Notes may require Old Iron Mountain to
repurchase the 1997 Notes.
d. 1999 Notes
On April 26, 1999, Old Iron Mountain issued $150 million of 8 1/4% Senior
Subordinated Notes due 2011. Interest on the 1999 Notes is payable
semiannually on January 1 and July 1 and commenced on July 1, 1999. The net
proceeds of $149.5 million after an original issue discount of $540 and
underwriting discounts and commissions were used to repay outstanding
indebtedness under the Credit Agreeement.
The 1999 Notes contain covenants and restrictions similar to, or less
restrictive than, the Amended Credit Agreement. Prior to July 1, 2004, and
subject to certain restrictions, Old Iron Mountain may, at its option,
redeem any or all of the 1999 Notes at a make-whole price, as defined in the
related indenture. On or after July 1, 2004, and subject to certain
restrictions, Old Iron Mountain may, at its option, redeem any or all of the
1999 Notes at a redemption price of 104.125%, 102.750% and 101.375% of the
principal amount of such 1999 Notes through July 1, 2005, 2006 and 2007,
respectively. Thereafter, the 1999 Notes may be redeemed at face value.
Also, any time through July 1, 2002, Old Iron Mountain may redeem a portion
of the 1999 Notes, subject to restrictions, with the net proceeds of one or
more Qualified Equity Offerings, as defined in the related indenture, at a
redemption price of 108.25% of the principal amount of such 1999 Notes.
Additionally, under certain circumstances, including a change of control or
following certain asset sales, the holders of the 1999 Notes may require Old
Iron Mountain to repurchase the 1999 Notes.
e. Real Estate Mortgage
The real estate mortgage consists of a $3 million, 8% note that is payable
in various installments commencing in 1997 and maturing in November 2006.
f. Other
Other long-term debt includes various notes and obligations assumed by Old
Iron Mountain as a result of certain acquisitions completed by Old Iron
Mountain during 1998 and 1999. At December 31, 1999, Old Iron Mountain's
50.1% owned subsidiary, IM Europe, had various agreements with
63
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
its local banks that provide for $44.8 million of credit and carried an
average effective interest rate of 5.41%.
Maturities of long-term debt are as follows:
YEAR AMOUNT
- ---- --------
2000........................................................ $ 9,890
2001........................................................ 18,527
2002........................................................ 8,284
2003........................................................ 3,375
2004........................................................ 3,263
Thereafter.................................................. 569,608
--------
$612,947
========
Based on the borrowing rates currently available to Old Iron Mountain for
loans with similar terms and average maturities, Old Iron Mountain has estimated
the following fair values for its long-term debt as of December 31:
1998 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Revolving Credit Facility........................... $ 35,300 $ 35,300 $ 5,000 $ 5,000
1996 Notes.......................................... 165,000 178,200 165,000 167,900
1997 Notes.......................................... 249,566 257,500 249,606 237,500
1999 Notes.......................................... -- -- 149,490 136,100
Real estate mortgage................................ 2,349 2,349 2,048 2,048
Other............................................... 3,963 3,963 41,803 41,803
5. SELECTED CONSOLIDATED FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS
As of December 31, 1999, the 1996, 1997 and 1999 Notes were fully and
unconditionally guaranteed, on a joint and several basis, and on a senior
subordinated basis, by most, but not all, of Old Iron Mountain's direct and
indirect domestic subsidiaries (the "Subsidiary Guarantors"). At December 31,
1999, IM Europe and its subsidiaries, Sistemas de Archivo Corporativo, S. de
R.L. de C.V. and its subsidiaries, Iron Mountain Records Management (Puerto
Rico), Inc. and certain parent holding companies (the "Non-Guarantors") are the
only subsidiaries that do not guarantee the 1996 Notes, the 1997 Notes or the
1999 Notes.
Prior to the acquisition of a 50.1% interest in IM Europe in January 1999,
substantially all of Old Iron Mountain's operations were conducted by its direct
and indirect wholly owned subsidiaries, all of which, other than Arcus Data
Security Limited ("ADS"), were guarantors of the 1996 Notes and 1997 Notes. ADS
represented less than 1% of Old Iron Mountain's consolidated revenues and was
not material to its results of operations. Old Iron Mountain's management does
not believe that separate financial statements of, and other disclosures with
respect to, the Guarantors for periods prior to 1999 are meaningful or material
to investors. Accordingly, no such financial statements were provided for fiscal
1997 and 1998.
64
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SELECTED CONSOLIDATED FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
The following financial data summarizes the consolidating Old Iron Mountain
on the equity method of accounting as of and for the year ended December 31,
1999:
DECEMBER 31, 1999
------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
ASSETS
Current Assets:
Cash and Cash Equivalents............... $ -- $ 2,260 $ 1,570 $ -- $ 3,830
Accounts Receivable..................... -- 93,076 10,998 -- 104,074
Other Current Assets.................... -- 42,312 6,718 (13,270) 35,760
---------- ---------- -------- ----------- ----------
Total Current Assets.................. -- 137,648 19,286 (13,270) 143,664
Property, Plant and Equipment, net........ -- 352,784 50,955 -- 403,739
Other Assets:
Due From Affiliates..................... 224,826 -- -- (224,826) --
Long-term Notes Receivable from
Affiliates............................ 557,123 -- -- (557,123) --
Investment in Subsidiaries.............. 276,291 52,971 -- (329,262) --
Goodwill, net........................... -- 623,285 105,928 -- 729,213
Other................................... 15,908 24,036 652 -- 40,596
---------- ---------- -------- ----------- ----------
Total Other Assets.................... 1,074,148 700,292 106,580 (1,111,211) 769,809
---------- ---------- -------- ----------- ----------
Total Assets.......................... $1,074,148 $1,190,724 $176,821 $(1,124,481) $1,317,212
========== ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Current Liabilities............... $ 15,398 $ 100,630 $ 47,590 $ (13,270) $ 150,348
Long-Term Debt, Net of Current
Portion............................... 569,996 2,942 30,119 -- 603,057
Due to Affiliates....................... -- 224,793 33 (224,826) --
Long-Term Notes Payable to Affiliates... -- 557,123 -- (557,123) --
Other Long-Term Liabilities............. -- 31,497 1,278 -- 32,775
Minority Interest....................... -- -- 42,278 -- 42,278
Stockholders' Equity.................... 488,754 273,739 55,523 (329,262) 488,754
---------- ---------- -------- ----------- ----------
Total Liabilities and Stockholders'
Equity.............................. $1,074,148 $1,190,724 $176,821 $(1,124,481) $1,317,212
========== ========== ======== =========== ==========
65
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SELECTED CONSOLIDATED FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
Revenues:
Storage................................. $ -- $ 297,988 $ 19,399 $ -- $ 317,387
Service and Storage Material Sales...... -- 189,127 13,035 -- 202,162
---------- ---------- -------- ----------- ----------
Total Revenues........................ -- 487,115 32,434 -- 519,549
Operating Expenses:
Cost of Sales (Excluding
Depreciation)......................... -- 242,537 18,393 -- 260,930
Selling, General and Administrative..... 258 122,276 6,414 -- 128,948
Depreciation and Amortization........... -- 61,248 4,174 -- 65,422
---------- ---------- -------- ----------- ----------
Total Operating Expenses.............. 258 426,061 28,981 -- 455,300
---------- ---------- -------- ----------- ----------
Operating Income (Loss)................... (258) 61,054 3,453 -- 64,249
Interest Income........................... (51,420) -- -- 51,420 --
Interest Expense.......................... 52,877 51,655 1,313 (51,420) 54,425
Equity in the (Earnings) Losses of
Subsidiaries............................ 12,504 (43) -- (12,461) --
Other Expense (Income).................... -- (50) 33 -- (17)
---------- ---------- -------- ----------- ----------
Income (Loss) from Continuing
Operations Before Provision for
Income Taxes and Minority Interest
Expense............................. (14,219) 9,492 2,107 12,461 9,841
Provision for Income Taxes................ -- 8,990 1,589 -- 10,579
Minority Interest in Net Income of
Consolidated Subsidiaries............... -- -- 322 -- 322
---------- ---------- -------- ----------- ----------
Income (Loss) from Continuing
Operations.......................... (14,219) 502 196 12,461 (1,060)
Income from Discontinued Operations....... -- 241 -- -- 241
Loss on Sale of Discontinued Operations... -- (13,400) -- -- (13,400)
---------- ---------- -------- ----------- ----------
Net Income (Loss)..................... $ (14,219) $ (12,657) $ 196 $ 12,461 $ (14,219)
========== ========== ======== =========== ==========
66
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SELECTED CONSOLIDATED FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Flows Provided by (Used in) Continuing
Operations................................... $ (17,837) $ 73,389 $ 722 -- $ 56,274
Cash Flows Used in Discontinued Operations..... -- (836) -- -- (836)
--------- --------- -------- --------- ---------
Cash Flows Provided by (Used in) Operating
Activities................................. (17,837) 72,553 722 -- 55,438
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Paid for Acquisitions, net of cash
acquired..................................... (2,398) (132,078) (77,684) -- (212,160)
Capital Expenditures........................... -- (85,079) (13,578) -- (98,657)
Intercompany Loans to Subsidiaries............. (158,657) -- -- 158,657 --
Investment in Subsidiaries..................... (51,550) (51,550) -- 103,100 --
Additions to Customer Acquisition Costs........ -- (8,122) -- -- (8,122)
--------- --------- -------- --------- ---------
Cash Flows Used in Continuing Operations..... (212,605) (276,829) (91,262) 261,757 (318,939)
Cash Flows Provided by Discontinued
Operations................................. -- 7,814 -- -- 7,814
--------- --------- -------- --------- ---------
Cash Flows Used in Investing Activities...... (212,605) (269,015) (91,262) 261,757 (311,125)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Debt.............................. (246,400) (916) (2,338) -- (249,654)
Proceeds from Borrowings....................... 216,100 -- 19,041 -- 235,141
Debt Financing from Minority Shareholder....... -- -- 11,636 -- 11,636
Net Proceeds from Sale of Senior Subordinated
Notes........................................ 149,460 -- -- -- 149,460
Net Proceeds from Equity Offering.............. 153,755 -- -- -- 153,755
Repurchase of Common Stock..................... (39,484) -- -- -- (39,484)
Intercompany Loans from Parent................. -- 146,385 12,272 (158,657) --
Equity Contribution from Parent................ -- 51,550 51,550 (103,100) --
Proceeds from Exercise of Stock Options........ 3,589 -- -- -- 3,589
Debt Financing and Stock Issuance Costs........ (6,590) -- -- -- (6,590)
--------- --------- -------- --------- ---------
Cash Flows Provided by Continuing
Operations................................. 230,430 197,019 92,161 (261,757) 257,853
Cash Flows Provided by Discontinued
Operations................................. -- -- -- -- --
--------- --------- -------- --------- ---------
Cash Flows Provided by Financing
Activities................................. 230,430 197,019 92,161 (261,757) 257,853
EFFECT OF EXCHANGE RATES ON CASH AND CASH
EQUIVALENTS.................................... -- -- (51) -- (51)
--------- --------- -------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (12) 557 1,570 -- 2,115
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... 12 1,703 -- -- 1,715
--------- --------- -------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $ -- $ 2,260 $ 1,570 $ -- $ 3,830
========= ========= ======== ========= =========
6. ACQUISITIONS
Old Iron Mountain purchased substantially all of the assets and assumed
certain liabilities of 18, 15 and 17 records management businesses during 1997,
1998 and 1999, 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 the consolidated results of Old Iron
Mountain from their respective acquisition dates. The excess of the purchase
price over the underlying fair value of the assets and
67
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACQUISITIONS (CONTINUED)
liabilities of each acquisition has been assigned to goodwill and is being
amortized over the estimated benefit period of 25 to 30 years. Consideration for
the various acquisitions included: (i) cash, which was provided through Old Iron
Mountain's credit facilities, Old Iron Mountain's 1998 and 1999 equity offerings
and the issuance of the 1996, 1997 and 1999 Notes; (ii) issuances of Old Iron
Mountain's common stock and options to purchase Old Iron Mountain's common
stock; and (iii) certain net assets of businesses previously acquired.
A summary of the consideration paid and the allocation of the purchase price
of the acquisitions is as follows:
1997 1998 1999
-------- -------- --------
Cash Paid................................................... $192,230 $189,729 $212,160
Fair Value of Common Stock Issued........................... 85,863 51,448 46,000
Fair Value of Options Issued................................ 3,071 15,655 --
Fair Value of Certain Net Assets of Businesses Previously
Acquired.................................................. -- 3,000 2,489
-------- -------- --------
Total Consideration..................................... 281,164 259,832 260,649
-------- -------- --------
Fair Value of Assets Acquired............................... 68,774 89,053 110,206
Liabilities Assumed......................................... (26,932) (38,165) (92,044)
-------- -------- --------
Fair Value of Net Assets Acquired....................... 41,842 50,888 18,162
-------- -------- --------
Recorded Goodwill........................................... $239,322 $208,944 $242,487
======== ======== ========
Allocation of the purchase price for these acquisitions was based on
estimates of the fair value of net assets acquired and, for acquisitions
completed in 1999, is subject to adjustment upon finalization of the purchase
price allocation. Old Iron Mountain is not aware of any information that would
indicate that the final purchase price allocations will differ significantly
from preliminary estimates.
The following unaudited pro forma combined information shows the results of
Old Iron Mountain's operations for the years ended December 31, 1998 and 1999 as
though each of the significant acquisitions completed during 1998 and 1999 had
occurred on January 1, 1998:
1998 1999
-------- --------
Revenues................................................ $488,587 $547,209
Net Loss from Continuing Operations..................... (10,353) (1,980)
Loss from Continuing Operations per Common Share--Basic
and Diluted........................................... (0.36) (0.06)
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions taken place as of January 1, 1998 or the results that may occur in
the future. Furthermore, the pro forma results do not give effect to all cost
savings or incremental costs which may occur as a result of the integration and
consolidation of the acquired businesses. Certain acquisitions completed in 1998
and 1999 are not included in the pro forma results as their effect was
immaterial.
In connection with the acquisitions completed in 1997, 1998 and 1999, Old
Iron Mountain has undertaken certain restructurings of the acquired businesses.
The restructuring activities include certain
68
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACQUISITIONS (CONTINUED)
reductions in staffing levels, elimination of duplicate facilities and other
costs associated with exiting certain activities of the acquired businesses.
These restructuring activities were recorded as costs of the acquisitions and
were provided in accordance with Emerging Issues Task Force Issue No. 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination."
Old Iron Mountain finalizes its restructuring plans for each business no later
than one year from the date of acquisition. Unresolved matters at December 31,
1999 primarily include completion of planned abandonments of facilities and
severances for certain acquisitions completed during 1998 and 1999.
The following is a summary of reserves related to such restructuring
activities:
1997 1998 1999
-------- -------- --------
Reserves, beginning of the year.................. $ 1,340 $ 5,443 $10,482
Reserves established............................. 6,574 11,368 4,234
Expenditures..................................... (2,163) (4,690) (4,843)
Adjustments to goodwill.......................... (308) (1,639) (533)
------- ------- -------
Reserves, end of the year........................ $ 5,443 $10,482 $ 9,340
======= ======= =======
At December 31, 1998 the restructuring reserves related to acquisitions
consisted of lease losses on abandoned facilities ($4.4 million), severance
costs for approximately 12 people ($1.8 million) and other exit costs
($4.3 million). These accruals are expected to be used within one year of the
finalization of the restructuring plan except for lease losses of $4.0 million,
which are based on contracts that extend through 2005 and long-term severance
contracts of approximately $1.2 million that extend through 2013.
At December 31, 1999 the restructuring reserves related to acquisitions
consisted of lease losses on abandoned facilities ($4.8 million), severance
costs for approximately 12 people ($1.5 million) and other exit costs
($3.0 million). These accruals are expected to be used within one year of the
finalization of the restructuring plan except for lease losses of $4.6 million,
which are based on contracts that extend through 2005 and long-term severance
contracts of approximately $1.1 million that extend through 2013.
69
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL STOCK AND STOCK OPTIONS
a. Capital Stock
On April 3, 1998, Old Iron Mountain issued and sold an aggregate of
6,037,500 shares (including 787,500 shares to cover over-allotments) of its
common stock in an underwritten public offering. Net proceeds to Old Iron
Mountain after deducting underwriters' discounts and commissions were
$132.9 million.
On May 17, 1999, Old Iron Mountain issued and sold an aggregate of 5,750,000
shares (including 750,000 shares to cover over-allotments) of its common stock
in an underwritten public offering. Net proceeds to Old Iron Mountain after
deducting underwriters' discounts and commissions were $153.8 million and were
used to repay outstanding bank debt, to repurchase all of Old Iron Mountain's
common stock issued in connection with the acquisition of Data Base, Inc.
completed in 1999 and for general corporate purposes.
The following table summarizes the number of shares authorized, issued and
outstanding for each issue of Old Iron Mountain's capital stock as of
December 31:
NUMBER OF SHARES
-----------------------------------------------------------------------------
AUTHORIZED ISSUED OUTSTANDING
PAR ------------------------- ----------------------- -----------------------
EQUITY TYPE VALUE 1998 1999 1998 1999 1998 1999
- ----------- -------- ----------- ----------- ---------- ---------- ---------- ----------
Preferred stock........................ $.01 2,000,000 2,000,000 -- -- -- --
Common stock--voting................... .01 100,000,000 100,000,000 29,430,205 36,943,612 29,430,205 35,467,035
Common stock--nonvoting................ .01 1,000,000 1,000,000 -- -- -- --
b. Stock Options
A total of 3,000,000 shares of common stock had been reserved for future
grants of options and other rights under the Iron Mountain Incorporated 1995
Stock Incentive Plan (the "Stock Incentive Plan").
During 1997, Old Iron Mountain issued options to employees of two acquired
companies to purchase 218,879 shares of Old Iron Mountain's common stock. The
options replaced options held by the employees for the acquired companies'
common stock. The options were accounted for as additional purchase price based
on the fair value of the options when issued.
During 1998, Old Iron Mountain assumed two existing stock option plans from
an acquired company and options under the existing plans were converted into
options to purchase 885,944 shares of Old Iron Mountain's common stock under
such plans. No new options may be issued under these plans. The options were
accounted for as additional purchase price based on the fair value of the
options when issued.
70
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
The following is a summary of stock option transactions, including those
issued to employees of acquired companies, during the applicable periods:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Options outstanding, December 31, 1996...................... 1,144,292 $ 8.68
Granted..................................................... 703,670 17.01
Exercised................................................... (125,711) 6.59
Canceled.................................................... (46,203) 14.73
---------
Options outstanding, December 31, 1997...................... 1,676,048 12.17
Granted..................................................... 1,173,018 12.02
Exercised................................................... (566,615) 7.88
Canceled.................................................... (116,132) 12.36
---------
Options outstanding, December 31, 1998...................... 2,166,319 13.21
Granted..................................................... 442,043 32.07
Exercised................................................... (263,281) 10.86
Canceled.................................................... (90,276) 20.27
---------
Options outstanding, December 31, 1999...................... 2,254,805 16.91
========= ======
Except for the options granted in connection with acquisitions, the stock
options were granted with exercise prices equal to the market price of the stock
at the date of grant. The majority of options become exercisable ratably over a
period of five years unless the holder terminates employment. The number of
shares available for grant at December 31, 1999 was 552,896.
Effective January 1, 1996, Old Iron Mountain adopted the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Old Iron Mountain has
elected to continue to account for stock options issued to employees at their
intrinsic value with disclosure of fair value accounting on net income (loss)
and earnings (loss) per share on a pro forma basis. Had Old Iron Mountain
elected to recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by SFAS No. 123, net loss applicable to
common stockholders and net loss per common share would have been increased to
the pro forma amounts indicated in the table below:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Loss from continuing operations, as reported................ $(4,521) $(3,167) $ (1,060)
Loss from continuing operations, pro forma.................. (5,411) (4,071) (2,486)
Net loss applicable to common stockholders, as reported..... (4,521) (2,966) (14,219)
Net loss applicable to common stockholders, pro forma....... (5,411) (3,870) (15,645)
Loss from continuing operations--basic and diluted, as
reported.................................................. (0.26) (0.12) (0.03)
Loss from continuing operations--basic and diluted, pro
forma..................................................... (0.31) (0.15) (0.07)
Net loss per common share--basic and diluted, as reported... (0.26) (0.11) (0.43)
Net loss per common share--basic and diluted, pro forma..... (0.31) (0.14) (0.47)
71
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
The weighted average fair value of options granted in 1997, 1998 and 1999
was $11.06, $8.92 and $12.31 per share, respectively. The values were estimated
on the date of grant using the Black-Scholes option pricing model. The following
table summarizes the weighted average assumptions used for grants in the year
ended December 31:
ASSUMPTION 1997 1998 1999
- ---------- --------- --------- ---------
Expected volatility......................................... 29.2% 28.4% 31.5%
Risk-free interest rate..................................... 5.91 5.11 5.69
Expected dividend yield..................................... None None None
Expected life of the option................................. 7.0 years 5.0 years 5.0 years
The following table summarizes additional information regarding options
outstanding and exercisable at December 31, 1999:
OUTSTANDING EXERCISABLE
--------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL LIFE EXERCISE EXERCISE
EXERCISE PRICES NUMBER (IN YEARS) PRICE NUMBER PRICE
- --------------------------------------- --------- ---------------- -------- --------- --------
$0.75 to $0.87......................... 24,230 7.0 $ 0.87 24,230 $ 0.87
$4.32 to $5.77......................... 395,144 2.9 4.68 394,354 4.68
$6.63 to $9.10......................... 140,979 4.9 8.25 111,492 8.23
$10.25 to $10.94....................... 600,547 5.4 10.42 382,987 10.47
$17.17 to $25.03....................... 564,559 7.6 21.67 205,086 21.45
$26.79 to $33.63....................... 529,346 9.4 31.37 27,005 27.77
--------- --- ------ --------- ------
2,254,805 6.4 $16.91 1,145,154 $10.43
========= === ====== ========= ======
8. INCOME (LOSS) PER COMMON SHARE--BASIC AND DILUTED
In accordance with SFAS No. 128, basic income (loss) per common share is
calculated by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding. The calculation of diluted
income (loss) per share is consistent with that of basic income (loss) per share
but gives effect to all dilutive potential common shares (that is, securities
such as options, warrants or convertible securities) that were outstanding
during the period, unless the effect is antidilutive.
72
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME (LOSS) PER COMMON SHARE--BASIC AND DILUTED (CONTINUED)
Income (loss) per common share--basic and diluted has been calculated as
follows:
1997 1998 1999
-------- -------- --------
Loss from continuing operations............................. $(4,521) $(3,167) $ (1,060)
Income from discontinued operations......................... -- 201 241
Loss on sale of discontinued operations..................... -- -- (13,400)
------- ------- --------
Net loss applicable to common stockholders.................. $(4,521) $(2,966) $(14,219)
======= ======= ========
Income (loss) per common share--basic and diluted:
Loss from continuing operations............................. $ (0.26) $ (0.12) $ (0.03)
Income (Loss) from discontinued operations.................. -- 0.01 (0.40)
------- ------- --------
Net loss applicable to common stockholders.................. $ (0.26) $ (0.11) $ (0.43)
======= ======= ========
Weighted average common shares outstanding (in
thousands)--basic and diluted............................. 17,172 27,470 33,345
======= ======= ========
Because their effect is antidilutive, 1,676,048, 2,166,319 and 2,254,805
shares of potential common stock underlying outstanding options have been
excluded from the above calculation for the years ended December 31, 1997, 1998
and 1999, respectively.
9. DISCONTINUED OPERATIONS
In June 1999, in order to focus on its records and information management
services ("RIMS") business, Old Iron Mountain decided to sell its information
technology staffing business ("IT Staffing"), Arcus Staffing Resources, Inc.
("Arcus Staffing"), which was acquired in January 1998 as part of the
acquisition of Arcus Group, Inc. ("Arcus Group"). Effective November 1, 1999,
Old Iron Mountain completed the sale of substantially all of the assets of Arcus
Staffing. The terms of the sale include contingent payments for a period of
18 months which may result in a revision of the recorded loss during 2000 or
2001. In accordance with the provisions of Accounting Principles Board Opinion
No. 30, the sale of Arcus Staffing was accounted for as a discontinued
operation. Accordingly, the Arcus Staffing operations were segregated from Old
Iron Mountain's continuing operations and reported as a separate line item on
Old Iron Mountain's consolidated statement of operations. The following table
sets forth the revenue and net income from discontinued operations for the years
ended December 31, 1998 and the ten months ended October 31, 1999:
1998 1999
-------- --------
Revenues.................................................. $39,551 $35,455
Income from Discontinued Operations, net of tax benefit... 201 241
Old Iron Mountain has recorded an estimated loss on the sale of Arcus
Staffing of $13,400. The estimated loss is comprised of a write-off of
nondeductible and deductible 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.
73
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
Old Iron Mountain accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes," which requires the recognition of
deferred tax assets and liabilities for the expected tax consequences of
temporary differences between the tax and financial reporting bases of assets
and liabilities.
The components of income (loss) from continuing operations before provision
(benefit) for income taxes and minority interest are:
1997 1998 1999
-------- -------- --------
Domestic........................................... $(4,601) $3,391 $7,606
Foreign............................................ -- -- 2,235
------- ------ ------
$(4,601) $3,391 $9,841
======= ====== ======
Old Iron Mountain has estimated federal net operating loss carryforwards of
approximately $59,000 at December 31, 1999 to reduce future federal income
taxes, if any, which begin to expire in 2005. The preceding net operating loss
carryforwards do not include preacquisition net operating loss carryforwards of
Arcus Group. Any tax benefit related to these loss carryforwards will be
recorded as a reduction of goodwill, if and when realized. Old Iron Mountain
also has estimated state net operating loss carryforwards of approximately
$25,000 to reduce future state income taxes, if any. Additionally, Old Iron
Mountain has alternative minimum tax credit carryforwards of $587, which have no
expiration date and are available to reduce future income taxes, if any.
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,
-------------------
1998 1999
-------- --------
Deferred Tax Assets:
Accrued liabilities................................... $ 8,033 $ 8,812
Deferred rent......................................... 3,767 4,316
Net operating loss carryforwards...................... 16,759 21,857
AMT credit............................................ 587 587
Other................................................. 6,151 6,606
-------- --------
35,297 42,178
Valuation Allowance................................... (4,369) --
-------- --------
30,928 42,178
-------- --------
Deferred Tax Liabilities:
Other assets, principally due to differences in
amortization........................................ (6,389) (9,727)
Plant and equipment, principally due to differences in
depreciation........................................ (22,284) (29,619)
Customer acquisition costs............................ (3,824) (6,564)
-------- --------
(32,497) (45,910)
-------- --------
Net deferred tax liability............................ $ (1,569) $ (3,732)
======== ========
74
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Old Iron Mountain receives a tax deduction upon exercise of non-qualified
stock options by employees for the difference between the exercise price and the
market price of the underlying common stock on the date of exercise, which is
included in the net operating loss carryforwards above. A valuation allowance
was recorded in 1998 for this tax asset because of the uncertainty of its
realization. The valuation allowance was reversed in 1999 and the tax benefit
credited to paid in capital or, for options granted in connection with
acquisitions, to goodwill.
Old Iron Mountain and its U.S. subsidiaries file a consolidated federal
income tax return. The provision (benefit) for income tax consists of the
following components:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Federal--current............................................ $ -- $ -- $ --
Federal--deferred........................................... (459) 4,509 6,304
State--current.............................................. 399 505 645
State--deferred............................................. (20) 1,544 2,041
Foreign..................................................... -- -- 1,589
----- ------ -------
$ (80) $6,558 $10,579
===== ====== =======
A reconciliation of total income tax expense (benefit) and the amount
computed by applying the federal income tax rate of 34% to income (loss) before
income taxes is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Computed "expected" tax provision (benefit)................. $(1,564) $1,153 $ 3,346
Increase in income taxes resulting from:
State taxes (net of federal tax benefit).................. 250 1,367 1,726
Nondeductible goodwill amortization....................... 1,221 3,675 5,025
Foreign tax rate and tax law differential................. -- -- 104
Other, net................................................ 13 363 378
------- ------ -------
$ (80) $6,558 $10,579
======= ====== =======
75
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ------------- -------- -------- -------- --------
1998
Revenues............................................ $ 89,056 $ 93,464 $ 98,544 $102,897
Gross profit........................................ 44,139 46,708 49,038 51,963
Loss from continuing operations..................... (548) (395) (1,019) (1,205)
Net loss............................................ (314) (261) (1,069) (1,322)
Loss per common share from continuing
operations--basic and diluted..................... (0.02) (0.01) (0.04) (0.05)
Net loss per common share--basic and diluted........ (0.01) (0.01) (0.04) (0.05)
1999
Revenues............................................ $109,371 $131,765 $136,907 $141,506
Gross profit........................................ 54,936 65,598 67,681 70,404
Income (Loss) from continuing operations............ (248) (1,395) 999 (416)
Net loss............................................ (149) (10,653) (3,001) (416)
Income (Loss) per common share from continuing
operations--basic and diluted..................... (0.01) (0.04) 0.03 (0.01)
Net loss per common share--basic and diluted........ (0.01) (0.32) (0.08) (0.01)
12. SEGMENT INFORMATION
On December 31, 1998, Old Iron Mountain adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). The new
rules establish revised standards for public companies relating to the reporting
of financial and descriptive information about their operating segments in
financial statements. The adoption of SFAS 131 did not have a material effect on
Old Iron Mountain's financial statements.
During 1998, Old Iron Mountain classified its operations into two
fundamental businesses: RIMS and IT Staffing. The reportable segments were
managed separately since each business has different economic characteristics
based on the differing customer requirements and the nature of the services
provided. In June 1999, Old Iron Mountain decided to sell its IT Staffing
business, Arcus Staffing, as discussed in Note 9 of Notes to Consolidated
Financial Statements. The results of operations of Arcus Staffing have been
classified and reported as discontinued operations in Old Iron Mountain's
statements of operations. Consequently, Old Iron Mountain now operates in a
single segment, the RIMS business.
76
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION (CONTINUED)
Information as to Old Iron Mountain's operations in different geographical
areas is as follows:
1998 1999
-------- ----------
Revenues:
United States......................................... $381,959 $ 487,931
International......................................... 2,002 31,618
-------- ----------
Total Revenues.................................... $383,961 $ 519,549
======== ==========
Long-lived Assets:
United States......................................... $822,963 $1,018,943
International......................................... 485 154,605
-------- ----------
Total Long-lived Assets........................... $823,448 $1,173,548
======== ==========
Information is not provided for 1997 because Old Iron Mountain had no
international operations in that year.
13. COMMITMENTS AND CONTINGENCIES
a. Leases
Old Iron Mountain leases most of its facilities under various operating
leases. A majority of these leases have renewal options of five to ten years
and have either fixed or Consumer Price Index escalation clauses. Old Iron
Mountain also leases 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. Rent expense was $29,332, $47,049 and $59,113 for the years ended
December 31, 1997, 1998 and 1999, respectively.
Minimum future lease payments are as follows:
YEAR OPERATING
- ---- ---------
2000........................................................ $ 61,179
2001........................................................ 57,407
2002........................................................ 53,824
2003........................................................ 47,796
2004........................................................ 41,738
Thereafter.................................................. 178,595
--------
Total minimum lease payments................................ $440,539
========
Included in the lease commitments disclosed in the preceding paragraph are
certain five-year operating lease agreements signed in 1998 and 1999 for
specified records storage warehouses. At the end of the lease term, Old Iron
Mountain, at its option, may: (i) negotiate a renewal of the lease;
(ii) purchase the properties at a price equal to the lessor's original cost
(approximately $32.9 million); or (iii) allow the lease to expire and cause
the properties to be sold. Old Iron Mountain's ability to cause the
properties to be sold depends upon its compliance with certain terms of the
lease. Under certain conditions, Old Iron Mountain would receive any excess
of the net sales proceeds over the
77
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
properties' original cost. In the event that the net sales proceeds are less
than 85% of the properties' original cost, Old Iron Mountain would make
certain contingent rental payments to the lessor equal to that difference,
subject to a maximum amount.
b. Facility Fire
In March 1997, Old Iron Mountain experienced three fires, all of which
authorities have determined were caused by arson. These fires resulted in
damage to one and destruction of Old Iron Mountain's other RIMS facility in
South Brunswick Township, New Jersey.
Some of Old Iron Mountain's customers or their insurance carriers have
asserted claims as a consequence of the destruction of or damage to their
records as a result of the fires, some of which allege negligence or other
culpability on the part of Old Iron Mountain. Old Iron Mountain has received
notices of claims and lawsuits filed by customers and abutters seeking
damages against Old Iron Mountain and to rescind their written contracts
with Old Iron Mountain. Old Iron Mountain denies any liability as a result
of the destruction of or damage to customer records as a result of the
fires, which were beyond its control, and intends to vigorously defend
itself against these and any other lawsuits that may arise. Old Iron
Mountain is also pursuing coverage of these claims and lawsuits with its
various insurers. The claims process is lengthy and its outcome cannot be
predicted with certainty.
Based on its present assessment of the situation, management, after
consultation with legal counsel, does not believe that the fires will have a
material adverse effect on Old Iron Mountain's financial condition or
results of operations, although there can be no assurance in this regard.
In June 1998, Old Iron Mountain settled several insurance claims, including
a significant claim under its business interruption policy, related to the
fires. Other income, net, for the year ended December 31, 1998 includes a
$1.7 million gain related to the settlement.
c. Other Litigation
Old Iron Mountain is presently involved as a defendant in various litigation
which has occurred in the normal course of business. Management believes it
has meritorious defenses in all such actions, and in any event, the amount
of damages, if such matters were decided adversely, would not have a
material adverse effect on Old Iron Mountain's financial condition or
results of operations.
14. RELATED PARTY TRANSACTIONS
Old Iron Mountain leases space to an affiliated company, Schooner Capital
LLC ("Schooner"), for its corporate headquarters located in Boston,
Massachusetts. For the years ended December 31, 1997, 1998 and 1999, Schooner
paid Old Iron Mountain rent totaling $85, $90 and $94, respectively. Prior to
1999, Old Iron Mountain leased one facility from a landlord who was a related
party. Total rental payments for the years ended December 31, 1997 and 1998 for
this facility totaled $99 each year. In the opinion of management, both of these
leases were entered into at market prices and terms.
78
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. EMPLOYEE BENEFIT PLANS
a. Profit Sharing Retirement Plan
Old Iron Mountain has 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 20% of compensation per pay period
up to the amount allowed by the Internal Revenue Code. Old Iron Mountain
makes matching contributions based on the amount of an employee's
contribution, according to a schedule as described in the plan documents.
Old Iron Mountain has expensed $642, $910 and $1,890 for the years ended
December 31, 1997, 1998 and 1999, respectively.
b. Employee Stock Purchase Plan
On March 23, 1998, Old Iron Mountain introduced an employee stock purchase
plan (the "Plan"), which is available for participation by substantially all
employees who have met certain service requirements. The Plan was approved
by the shareholders of Old Iron Mountain on May 28, 1998 and commenced
operations on October 1, 1998. The Plan provides a way for eligible
employees of Old Iron Mountain to become shareholders of Old Iron Mountain
on favorable terms. The Plan provides for the purchase of up to 375,000
shares of Old Iron Mountain's common stock by eligible employees through
successive offering periods. At the start of each offering period,
participating employees are granted options to acquire Old Iron Mountain's
common stock. 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 end of the
offering period, outstanding options are exercised, and each employee's
accumulated contributions are used to purchase common stock of Old Iron
Mountain. The price for shares purchased under the Plan is 85% of their
market price at either the beginning or the end of the offering period,
whichever is lower.
The first offering period commenced on October 1, 1998 and expired on
September 30, 1999. The second offering period of the Plan commenced on
October 1, 1999 and will expire on March 31, 2000. With respect to the first
offering period, participants are not permitted to sell or assign any common
stock acquired under the Plan until October 2, 2000. Effective as of the
second offering period, restrictions on the transfer of common stock
acquired under the Plan have been eliminated. There were 0 and 50,907 shares
purchased under the Plan for the years ended December 31, 1998 and 1999,
respectively.
16. NONCASH TRANSACTIONS
Old Iron Mountain used the following as part of the consideration paid for
certain acquisitions:
1997 1998 1999
-------- -------- --------
Fair Value of Common Stock Issued........................... $85,863 $51,448 $46,000
Fair Value of Options Issued................................ 3,071 15,655 --
Fair Value of Certain Net Assets of Businesses Previously
Acquired.................................................. -- 3,000 2,489
In December 1998, Old Iron Mountain entered into a foreign currency exchange
agreement and has recorded an asset and a liability based upon the exchange
rates as of December 31, 1998. A cash settlement of the agreement occurred in
January 1999.
79
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. NONCASH TRANSACTIONS (CONTINUED)
During 1997, $3,086 of property and equipment, destroyed in a fire, was
transferred to a receivable from insurance company.
See Note 6 for liabilities assumed in acquisitions.
17. SUBSEQUENT EVENTS
a. Completed Acquisitions
On February 1, 2000, Old Iron Mountain completed the acquisition of Pierce
Leahy Corp. ("Pierce Leahy") in a stock-for-stock merger valued at
approximately $1.1 billion. The acquisition was structured as a reverse
merger with Pierce Leahy being the surviving legal entity and immediately
changing its name to Iron Mountain Incorporated (the "Company"). Based on
the number of shares of Old Iron Mountain and Pierce Leahy common stock
outstanding immediately prior to the completion of the merger, immediately
after the merger former stockholders of Old Iron Mountain owned
approximately 65% of the Company's Common Stock. Because of this share
ownership, Old Iron Mountain is considered the acquiring entity for
accounting purposes. The total consideration for this transaction was
comprised of: (i) approximately 18.8 million shares of the Company's Common
Stock with a fair value of approximately $444 million; (ii) options to
acquire approximately 1.5 million shares of the Company's Common Stock with
a fair value of approximately $25 million; (iii) assumption of Pierce Leahy
debt with a fair value of approximately $579 million; and (iv) incurrence of
approximately $4 million of capitalized transaction costs. The acquisition
will be accounted for as a purchase.
In addition, in January 2000, Old Iron Mountain acquired one, and in
February 2000, the Company acquired another, records management business for
total consideration of approximately $11.7 million in cash. The acquisitions
will be accounted for using the purchase method of accounting.
b. Pending Acquisition (Unaudited)
In February 2000, the Company entered into an agreement to acquire all of
the assets of a RIMS business for aggregate consideration of approximately
$54 million in cash. The acquisition, which is subject to customary closing
conditions, is expected to close in May 2000, though there can be no
assurances in this regard, and will be accounted for as a purchase.
80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Iron 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 Delaware corporation) for each of the three years in the period
ended December 31, 1999 and have issued our report thereon dated February 28,
2000. Our audits were made for the purpose of forming an opinion on those basic
financial statements taken as a whole. We did not audit the financial statements
of Iron Mountain Europe Limited as of October 31, 1999. 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. The supplemental schedule listed in
the accompanying index is the responsibility of the 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, based on our
audit and the report of other auditors, is fairly stated, in all material
respects, in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 28, 2000
81
SCHEDULE II
IRON MOUNTAIN INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT
BALANCE AT END OF
BEGINNING OF CHARGED TO OTHER THE
YEAR ENDED DECEMBER 31, THE YEAR EXPENSE ADDITIONS(1) DEDUCTIONS YEAR
- ----------------------- ------------ ---------- ------------ ---------- ----------
Allowance for doubtful accounts and
credit memos:
1997......................................... $1,061 $ 874 $483 $ (489) $1,929
1998......................................... 1,929 1,730 834 (1,177) 3,316
1999......................................... 3,316 2,733 336 (645) 5,740
BALANCE AT
BALANCE AT END OF
BEGINNING OF THE
YEAR ENDED DECEMBER 31, THE YEAR ADDITIONS DEDUCTIONS ADJUSTMENTS(2) YEAR
- ----------------------- ------------ --------- ---------- -------------- ----------
Reserve for restructuring activities:
1997........................................ $1,340 $ 6,574 $(2,163) $ (308) $ 5,443
1998........................................ 5,443 11,368 (4,690) (1,639) 10,482
1999........................................ 10,482 4,234 (4,843) (533) 9,340
- ------------------------------
(1) Includes allowance of businesses acquired during the year as described in
Note 6 of Notes to Consolidated Financial Statements.
(2) The adjustments represent changes to goodwill as a result of management's
finalizing its restructuring plan within one year of each acquisition.
82
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Iron Mountain Incorporated (formerly known as Pierce Leahy Corp.):
We have audited the accompanying consolidated balance sheets of Pierce Leahy
Corp. (a Pennsylvania corporation) and Subsidiaries as of December 31, 1998 and
1999, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. 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. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pierce Leahy Corp. and
Subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
February 22, 2000
83
PIERCE LEAHY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------
1998 1999
-------- --------
ASSETS
Current Assets:
Cash...................................................... $ 2,312 $ 2,265
Accounts receivable (less allowance of $3,650 and $3,378
as of 1998
and 1999, respectively)................................. 43,063 54,051
Prepaid expenses and other................................ 2,185 3,537
Deferred income taxes..................................... 4,402 4,340
-------- --------
Total Current Assets.................................. 51,962 64,193
-------- --------
Property, Plant and Equipment............................. 297,216 361,401
Less-Accumulated depreciation........................... (67,522) (85,367)
-------- --------
Net Property, Plant, and Equipment.................... 229,694 276,034
-------- --------
Other Assets:
Goodwill, net........................................... 319,763 351,138
Customer acquisition costs, net......................... 23,637 33,836
Deferred financing costs, net........................... 11,311 11,017
Other................................................... 30,091 24,248
-------- --------
Total other assets.................................... 384,802 420,239
-------- --------
Total Assets.......................................... $666,458 $760,466
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt......................... $ 3,583 $ 22,800
Accounts payable.......................................... 11,663 13,140
Accrued expenses.......................................... 40,931 47,287
Deferred income........................................... 11,932 15,162
-------- --------
Total Current Liabilities............................. 68,109 98,389
Long-Term Debt, net of current portion.................... 514,362 563,997
Deferred Rent............................................. 5,856 7,192
Deferred Income Taxes..................................... 15,036 21,080
Commitments and Contingencies (Note 7)
Shareholders' Equity:
Common stock............................................ 170 170
Additional paid-in capital.............................. 82,350 82,597
Cummulative translation adjustment...................... (10) (470)
Accumulated deficit..................................... (19,415) (12,489)
-------- --------
Total Shareholders' Equity............................ 63,095 69,808
-------- --------
Total Liabilities and Shareholders' Equity............ $666,458 $760,466
======== ========
The accompanying notes are an integral part of these financial statements.
84
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
Revenues:
Storage................................................... $107,879 $153,533 $190,095
Service and storage material sales........................ 75,638 116,767 152,167
-------- -------- --------
Total revenues........................................ 183,517 270,300 342,262
-------- -------- --------
Operating Expenses:
Cost of sales, excluding depreciation and amortization.... 101,940 154,435 191,510
Selling, general and administrative....................... 30,070 36,994 45,856
Depreciation and amortization............................. 21,528 35,772 43,655
Foreign currency exchange................................. 702 7,907 (7,473)
Special compensation charge............................... 1,752 -- --
Merger-related expenses................................... -- -- 2,361
-------- -------- --------
Total operating expenses.............................. 155,992 235,108 275,909
-------- -------- --------
Operating income...................................... 27,525 35,192 66,353
Interest Expense............................................ 29,262 42,864 52,363
-------- -------- --------
Income (loss) before income taxes and extraordinary
charge.............................................. (1,737) (7,672) 13,990
Income Taxes................................................ 7,424 3,318 6,290
-------- -------- --------
Income (loss) before extraordinary charge............. (9,161) (10,990) 7,700
Extraordinary Charge--loss on early extinguishment of debt,
net of $4,014 tax benefit in 1997......................... 6,036 -- --
-------- -------- --------
Net Income (Loss)........................................... (15,197) (10,990) 7,700
Preferred Stock Dividend and Accretion...................... -- -- 774
-------- -------- --------
Net Income (Loss) Applicable to Common Shareholders......... $(15,197) $(10,990) $ 6,926
======== ======== ========
Basic and Diluted Earnings Per Common Share:
Income (loss) before extraordinary charge................. $ (0.62) $ (0.59) $ 0.37
Extraordinary charge...................................... (0.41) -- --
-------- -------- --------
Basic income (loss) per common share...................... $ (1.03) $ (0.59) $ 0.37
======== ======== ========
Diluted income (loss) per common share.................... $ (1.03) $ (0.59) $ 0.35
======== ======== ========
Shares used in computing basic income (loss) per common
share..................................................... 14,724 18,486 18,766
======== ======== ========
Shares used in computing diluted income (loss) per common
share..................................................... 14,724 18,486 19,525
======== ======== ========
Pro Forma Data (Unaudited) (Note 2):
Historical net loss before income taxes and extraordinary
charge.................................................. $ (1,737)
Pro forma provision for income taxes...................... 1,452
Extraordinary charge, net of tax.......................... 6,036
---------
Pro forma net loss applicable to common shareholders........ $ (9,225)
=========
Pro forma basic and diluted net loss per common share
Loss before extraordinary charge.......................... (0.22)
Extraordinary charge...................................... (0.41)
---------
Pro forma basic and diluted net loss per common share....... $ (0.63)
=========
Shares used in computing pro forma basic and diluted net
loss per common share..................................... 14,724
=========
The accompanying notes are an integral part of these financial statements.
85
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT ITEMS TOTAL
-------- ---------- ----------- ------------- --------
Balance, December 31, 1996................... $ -- $ 24 $(25,462) $ -- $(25,438)
Comprehensive Income--
Net loss................................. -- -- (15,197) -- (15,197)
Foreign currency translation
adjustment............................. -- -- -- (309) (309)
--------
Total Comprehensive Loss............... (15,506)
Transfer of accumulated deficit to
additional paid-in capital upon
conversion from S Corporation to C
Corporation.............................. -- (32,234) 32,234 -- --
Stock split and recapitalization........... 105 (105) -- -- --
Net proceeds from initial public offering
of common stock.......................... 57 93,551 -- -- 93,608
Accelerated vesting of stock options....... -- 1,752 -- -- 1,752
Issuance of common stock for
acquisitions............................. 3 4,904 -- -- 4,907
---- -------- -------- ----- --------
Balance, December 31, 1997................... 165 67,892 (8,425) (309) 59,323
Comprehensive Income--
Net loss................................. -- -- (10,990) -- (10,990)
Foreign currency translation
adjustment............................. -- -- -- 299 299
--------
Total Comprehensive Loss............... (10,691)
Issuance of common stock for
acquisitions............................. 5 14,404 -- -- 14,409
Stock option exercise...................... -- 54 -- -- 54
---- -------- -------- ----- --------
Balance, December 31, 1998................... 170 82,350 (19,415) (10) 63,095
Comprehensive Income--
Net income............................... -- -- 7,700 -- 7,700
Foreign currency translation
adjustment............................. -- -- -- (460) (460)
--------
Total Comprehensive Income............. 7,240
Stock option exercise...................... -- 247 -- -- 247
Accretion of redeemable preferred stock.... -- -- (774) -- (774)
---- -------- -------- ----- --------
Balance, December 31, 1999................... $170 $ 82,597 $(12,489) $(470) $ 69,808
==== ======== ======== ===== ========
The accompanying notes are an integral part of these financial statements.
86
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
Cash Flows from Operating Activities:
Net income (loss)......................................... $(15,197) $(10,990) $ 7,700
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item...................................... 6,036 -- --
Special compensation charge............................. 1,752 -- --
Depreciation and amortization........................... 21,528 35,772 43,655
Amortization of deferred financing costs................ 1,069 1,393 1,624
Gain (loss) on sale of property and equipment........... (44) 16 (222)
Deferred income tax provision........................... 7,241 3,322 6,290
Change in deferred rent................................. 1,042 1,280 1,141
Foreign currency adjustment............................. 702 7,907 (7,473)
Changes in Assets and Liabilities (exclusive of
acquisitions):
(Increase) decrease in--
Accounts receivable, net.............................. (3,870) (10,731) (7,565)
Inventory, prepaid expenses and other................. (1,291) 1,180 (717)
Other assets.......................................... 746 2,296 1,723
Increase in--
Accounts payable...................................... 185 2,545 652
Accrued expenses...................................... 1,872 4,457 3,110
Deferred income....................................... 330 25 1,326
-------- -------- --------
Net Cash Provided by Operating Activities........... 22,101 38,472 51,244
-------- -------- --------
Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired.......... (102,068) (186,486) (23,326)
Capital expenditures...................................... (35,397) (48,591) (57,543)
Customer acquisition costs................................ (10,629) (10,921) (17,367)
Deposits on pending acquisitions.......................... (2,398) (214) --
Increase in intangible assets............................. (5,625) (6,659) (1,715)
Payments on noncompete agreements......................... (496) (220) --
Proceeds from sale of property and equipment.............. 64 60 1,168
-------- -------- --------
Net Cash Used in Investing Activities............... (156,549) (253,031) (98,783)
-------- -------- --------
Cash Flows from Financing Activities:
Borrowings on revolving line of credit.................... 156,983 183,925 112,282
Payments on revolving line of credit...................... (139,784) (86,771) (64,550)
Proceeds from issuance of long-term debt.................. 120,000 128,951 6,862
Proceeds from issuance of common stock.................... 93,608 -- --
Issuance of redeemable preferred stock.................... -- -- 4,615
Payments on long-term debt................................ (82,464) (10,627) (5,331)
Payment of debt financing costs........................... (5,230) (2,658) (1,185)
Proceeds from exercise of stock options................... -- 54 247
Payment of redeemable preferred stock dividend............ -- -- (389)
Redemption of redeemable preferred stock.................. -- -- (5,000)
Prepayment penalties and cancellation of warrants......... (7,000) -- --
-------- -------- --------
Net Cash Provided by Financing Activities........... 136,113 212,874 47,551
-------- -------- --------
Effect of exchange rates on cash and cash equivalents....... (1,137) 2,215 (59)
-------- -------- --------
Increase (Decrease) in Cash................................. 528 530 (47)
Cash, Beginning of Year..................................... 1,254 1,782 2,312
-------- -------- --------
Cash, End of Year........................................... $ 1,782 $ 2,312 $ 2,265
======== ======== ========
Supplemental Information:
Cash Paid for Interest.................................... $ 26,288 $ 39,013 $ 51,748
======== ======== ========
Cash Paid for Income Taxes................................ $ -- $ 75 $ 203
======== ======== ========
The accompanying notes are an integral part of these financial statements.
87
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS
Pierce Leahy Corp. ("Pierce Leahy") stores and services business records for
customers throughout the United States, Canada and the United Kingdom. Pierce
Leahy also sells storage containers and provides records management consulting
services, imaging services and marketing literature storage and fulfillment
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of Pierce Leahy
Corp. and its wholly and majority-owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation.
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
c. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
using straight-line and accelerated methods over the estimated useful lives of
the assets.
DECEMBER 31,
-------------------
LIFE 1998 1999
----------- -------- --------
Land........................................ -- $ 16,785 $ 19,883
Buildings and improvements.................. 10-40 years 107,210 122,036
Warehouse equipment (primarily shelving).... 12-20 years 131,090 158,545
Data processing equipment and software...... 7 years 24,063 29,604
Furniture and fixtures...................... 7 years 6,688 7,885
Transportation equipment.................... 5 years 9,125 9,905
Construction in progress.................... -- 2,255 13,543
-------- --------
297,216 361,401
Less-Accumulated depreciation............... (67,522) (85,367)
-------- --------
Net property, plant and equipment......... $229,694 $276,034
======== ========
Depreciation expense was $9,599, $15,127 and $16,781 for the years ended
December 31, 1997, 1998 and 1999, respectively.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Software
Developed or Obtained for Internal Use." This statement requires that certain
costs related to the development or purchase of internal-use software be
88
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
capitalized and amortized over the estimated useful life of the software and
also requires that costs related to the preliminary project stage and
post-implementation/operations stage in an internal-use computer software
development project be charged to expense as incurred. Pierce Leahy adopted SOP
98-1 effective January 1, 1999 and charged $451 of costs to expense in 1999 that
would have been capitalized under the previous policy.
d. Goodwill
Goodwill reflects the cost in excess of fair value of the net assets of
companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method from the date of acquisition over the expected period to be
benefited, estimated at 30 years. Pierce Leahy assesses the recoverability of
goodwill, as well as other long-lived assets, based upon expectations of future
undiscounted cash flows in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." At December 31, 1999, no
adjustment of the carrying values of long-lived assets was necessary. As of
December 31, 1998 and 1999, goodwill was $337,409 and $381,449, respectively,
and accumulated amortization of goodwill was $17,646 and $30,311, respectively.
e. Customer Acquisition Costs
The unreimbursed costs of moving the records of new customers into Pierce
Leahy facilities and sales commissions related to new customers contracts have
been capitalized and are included in other assets in the accompanying balance
sheets. All such costs are being amortized on a straight-line basis over six
years, which represents the average initial contract term. Pierce Leahy assesses
whether amortization using a six year average initial contract term varies
significantly from using a specific contract basis. Such difference has not been
material. As of December 31, 1998 and 1999, those costs were $37,033 and
$54,603, respectively, and accumulated amortization of those costs were $13,396
and $20,767, respectively.
f. Deferred Financing costs
Deferred financing costs are amortized over the term of the related debt
using the straight-line method. If debt is retired early, unamortized deferred
financing costs are written off as an extraordinary charge in the period the
debt is retired. As of December 31, 1998 and 1999, deferred financing costs were
$13,825 and $15,169, respectively, and accumulated amortization of those costs
were $2,514 and $4,152, respectively.
g. Deferred Rent
Certain Pierce Leahy leases for warehouse space provide for scheduled rent
increases over the lease terms. Pierce Leahy recognizes rent expense on a
straight-line basis over the lease terms, with the excess rent charged to
expense over the amount paid recorded as deferred rent in the accompanying
balance sheets.
89
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h. Accrued Expenses
DECEMBER 31,
-------------------
1998 1999
-------- --------
Accrued salaries and commissions.......................... $ 4,863 $ 7,259
Accrued vacation and other absences....................... 5,646 6,549
Accrued interest.......................................... 14,312 13,538
Other..................................................... 16,110 19,941
------- -------
$40,931 $47,287
======= =======
i. Health Insurance Reserve
Pierce Leahy self-insures for benefit claims under a health insurance plan
provided to employees. The self-insurance was limited to $100 in claims per
insured individual per year for both 1998 and 1999, and a liability for claims
incurred but not reported is reflected in the accompanying balance sheets.
Specific stop-loss insurance coverage is maintained to cover claims in excess of
the coverage per insured individual per year.
j. Income Taxes
Prior to July 1, 1997, Pierce Leahy was an S Corporation for federal and
state income tax purposes, and, accordingly, income and losses were passed
through to the shareholders and taxed at the individual level. On July 1, 1997,
in connection with Pierce Leahy's initial public offering, Pierce Leahy
terminated its S Corporation election and currently is subject to federal and
state income taxes.
Pierce Leahy applies SFAS No. 109, "Accounting for Income Taxes," which
requires the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences, measured by enacted tax rates, attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards, for years in which taxes are expected to be
paid or recovered.
k. Revenue Recognition
Storage and service revenues are recognized in the month the respective
service is provided. Storage material sales are recognized when shipped to the
customer. Deferred income represents amounts invoiced for storage services in
advance of the rendering of the services. The costs of storage and service
revenues are not separately distinguishable, as the revenue producing activities
are interdependent and costs are not directly attributable or allocable in a
meaningful way to those activities.
l. Merger-Related Expenses
Merger-related expenses in 1999 represent primarily non-capitalizable
expenses directly related to Pierce Leahy's merger with Iron Mountain
Incorporated, a Delaware corporation ("Old Iron Mountain"). These expenses
consist primarily of financial advisor, legal, accounting and consulting fees,
SEC filing fees and other transaction-related costs.
90
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
m. Foreign Currency
The balance sheets of Pierce Leahy Canada Company and Archivex Limited,
Pierce Leahy's Canadian subsidiaries, and the balance sheet of Pierce Leahy
Europe Limited, Pierce Leahy's U.K. subsidiary, are translated into U.S. dollars
using the rate of exchange at period end. The statements of operations for the
Canadian and U.K. subsidiaries are translated into U.S. dollars using the
average exchange rate for the period. Net unrecognized exchange gains or losses
resulting from the translation of the balance sheets are accumulated and
included as comprehensive income (loss) on the statement of shareholders'
equity. Exchange gains and losses are recognized during the period, including
those related to the U.S. dollar denominated 8 1/8% Senior Notes of Pierce Leahy
Canada Company due in 2008, and are included in Pierce Leahy's consolidated
statements of operations.
n. Comprehensive Income
In 1998, Pierce Leahy adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires the reporting and disclosure of comprehensive
income, and the components that apply to Pierce Leahy include net income and
foreign currency translation adjustments. Pierce Leahy reports comprehensive
income in the consolidated statement of shareholders' equity. The prior year
financial statements have been restated to conform to the reporting requirements
of SFAS No. 130.
o. Pro Forma Basic and Diluted Net Loss Per Share
Prior to July 1, 1997, Pierce Leahy was an S Corporation for federal and
state income tax purposes. The pro forma income tax provision for 1997 reflects
taxes that would have been recorded on the historical loss before income taxes,
at an effective rate of 39%, had Pierce Leahy not been an S Corporation during
such period. The basic and diluted pro forma net loss per share is computed by
dividing pro forma net loss by the weighted average number of shares outstanding
during the period.
All share and per share data has been restated to reflect the stock dividend
of one-tenth of a share of common stock for each share of common stock
outstanding that was paid on January 14, 2000.
p. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities and is effective for all fiscal years beginning after
June 15, 2000. Management has not yet completed its assessment of the effects of
this pronouncement.
q. Reclassification
The prior year financial statements have been reclassified to conform with
the current year presentation.
91
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------------
1998 1999
-------- --------
11 1/8% Senior Subordinated Notes due 2006.............. $130,000 $130,000
9 1/8% Senior Subordinated Notes due 2007............... 120,000 120,000
8 1/8% Senior Notes due 2008............................ 134,537 134,574
U.S. Revolver........................................... 118,000 159,500
Canadian Revolver....................................... -- 6,232
Mortgage Notes.......................................... 7,368 11,084
Seller Notes............................................ 3,475 17,862
Other................................................... 4,565 7,545
-------- --------
517,945 586,797
Less-Current portion.................................... (3,583) (22,800)
-------- --------
$514,362 $563,997
======== ========
a. 11 1/8% Senior Subordinated Notes due 2006
In July 1996, Pierce Leahy issued $200,000 of Senior Subordinated Notes in a
private offering that were later exchanged for registered notes with
substantially identical terms (the "1996 Notes"). The 1996 Notes are general
unsecured obligations of Pierce Leahy, subordinated in right of payment to
senior indebtedness of Pierce Leahy and senior in right of payment to any
current or future subordinated indebtedness. The 1996 Notes are guaranteed by
the U.S. subsidiaries of Pierce Leahy and secured by a second lien on 65% of the
stock of Pierce Leahy's Canadian subsidiaries. The 1996 Notes mature on
July 15, 2006, and bear interest at 11 1/8% per year, payable semiannually in
arrears on January 15 and July 15. The proceeds from the sale of the 1996 Notes
were used to retire certain existing indebtedness of Pierce Leahy under its
previous credit facilities, to purchase certain properties from related party
partnerships, to redeem stock from a shareholder, to fund an acquisition and for
general corporate purposes. Upon completion of Pierce Leahy's initial public
offering of its common stock in July 1997 (see Note 5), Pierce Leahy exercised
an option to redeem $70,000 principal amount of the 1996 Notes. The resulting
$7,000 prepayment penalty along with the write-off of a portion of the
unamortized deferred financing costs of $3,050, net of an income tax benefit of
$4,014, was recorded as an extraordinary charge in the accompanying consolidated
statements of operations.
b. 9 1/8% Senior Subordinated Notes due 2007
In July 1997, Pierce Leahy issued $120,000 of Senior Subordinated Notes (the
"1997 Notes") in a public offering. The 1997 Notes are general unsecured
obligations of Pierce Leahy, subordinated in right of payment to the senior
indebtedness of Pierce Leahy and senior in right of payment to any current or
future subordinated indebtedness. The 1997 Notes are guaranteed by the U.S.
subsidiaries of Pierce Leahy and secured by a third lien on 65% of the stock of
Pierce Leahy's Canadian subsidiaries. The 1997 Notes are equal in right of
payment with the 1996 Notes. The 1997 Notes mature on July 7, 2007, and bear
interest at 9 1/8% per year, payable semiannually in arrears on January 15 and
July 15. The proceeds from the sale of
92
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. LONG-TERM DEBT (CONTINUED)
the 1997 Notes were used to repay outstanding borrowings under a previous credit
facility and for general corporate purposes.
c. 8 1/8% Senior Notes due 2008
In April 1998, Pierce Leahy Canada Company, Pierce Leahy's principal
Canadian subsidiary, issued $135,000 of Senior Notes in a private offering that
were later exchanged for registered notes with substantially identical terms
(the "1998 Notes"). The 1998 Notes are general unsecured obligations of Pierce
Leahy Canada Company ranking PARI PASSU in right of payment to all existing and
future senior unsecured indebtedness of Pierce Leahy Canada Company. The 1998
Notes are effectively subordinated to secured indebtedness of Pierce Leahy
Canada Company to the extent of the assets securing such indebtedness. The 1998
Notes are guaranteed on a senior subordinated basis by Pierce Leahy and Pierce
Leahy's U.S. subsidiaries, which guarantees are equal in right of payment with
the 1996 Notes and 1997 Notes. The 1998 Notes mature on May 15, 2008, and bear
interest at 8 1/8% per year, payable semi-annually in arrears in U.S. dollars on
May 15 and November 15. The proceeds from the sale of the 1998 Notes were used
primarily to finance the acquisition of Archivex Inc., to repay outstanding
borrowings under the credit facility and for general corporate purposes.
d. Revolving Credit Facility
In December 1999, Pierce Leahy amended its credit facility to provide for a
revolving line of credit of U.S. $195,000 in borrowings and CDN $40,000 in
borrowings for Pierce Leahy Canada Company. The credit facility is senior to all
subordinated indebtedness of Pierce Leahy and is secured by substantially all of
the assets of Pierce Leahy, and a first lien on 65% of the stock of Pierce
Leahy's Canadian subsidiaries. Borrowings under the facility bear interest at
prime plus an applicable margin, or at LIBOR plus an applicable margin, at the
option of Pierce Leahy. In addition to interest and other customary fees, Pierce
Leahy is obligated to remit a fee of 0.375% per year on unused commitments,
payable quarterly. The aggregate available commitment under the credit facility
will be reduced on a quarterly basis beginning September 30, 2001. The credit
facility matures on June 30, 2004, unless previously terminated. Pierce Leahy's
available borrowing capacity under the credit facility is contingent upon Pierce
Leahy meeting certain financial ratios and other criteria.
The weighted average interest rate on outstanding borrowings on the U.S.
portion of the revolver at December 31, 1999 was 9.18%. The highest amount
outstanding during the year ended December 31, 1999 was $159,500, the average
amount outstanding during the year was $152,500, and the weighted average
interest rate was 7.61%. The highest amount outstanding under the U.S. revolver
during the year ended December 31, 1998 was $125,500, the average amount
outstanding during the year was $79,150, and the weighted average interest rate
was 7.95%.
The weighted average interest rate on outstanding borrowings on the Canadian
portion of the revolver at December 31, 1999 was 7.44%. The highest amounts
outstanding during the years ended December 31, 1998 and 1999, were CDN $35,000
and $33,500, respectively. The average amounts outstanding in 1998 and 1999,
respectively, were CDN $8,750 and $8,083, while the weighted average interest
rates were 8.51% and 7.18%, respectively.
93
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. LONG-TERM DEBT (CONTINUED)
As a result of the merger with Old Iron Mountain on February 1, 2000,
borrowings outstanding under the credit facility became due and payable. The
credit facility was terminated when the surviving Company of the merger paid in
full the outstanding balance with borrowings from the amended and restated
credit facility of the combined Company after the merger.
e. Mortgage Notes
In connection with the purchase of real estate and acquisitions during 1997
and 1998, Pierce Leahy assumed several mortgages on real property. The mortgages
bear interest at rates ranging from 8% to 10.5% and require monthly principal
and interest payments of approximately $65 per month through 2002 and $34
through 2009. During 1999, there were no mortgage notes assumed in connection
with any purchase of real estate or acquisitions.
f. Seller Notes
In connection with certain acquisitions completed in 1998 and 1999, notes
for $3,175 and $18,923, respectively, were issued to the sellers. The notes bear
interest at rates ranging from 5% to 8% per year. One of the Seller notes has an
outstanding balance of $17,462 at December 31, 1999, is due on demand through
2009 and is classified as a current portion of long-term debt. The outstanding
balances on the other notes at December 31, 1999 mature through 2000.
Future scheduled principal payments on all of Pierce Leahy's long-term debt
at December 31, 1999 are as follows:
2000........................................................ $ 22,800
2001........................................................ 3,162
2002........................................................ 33,647
2003........................................................ 63,408
2004........................................................ 74,982
2005 and thereafter......................................... 388,798
--------
$586,797
========
Pierce Leahy is in compliance with all financial and operating covenants
required under all indentures and under its credit facility.
g. Fair Value of Financial Instruments
For certain of Pierce Leahy's financial instruments, including accounts
receivable, accounts payable, accrued expenses, mortgages, Seller notes and
credit facility, management believes that the carrying amounts approximate fair
value due to the short maturities.
94
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. LONG-TERM DEBT (CONTINUED)
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, management has estimated the
following fair values for Pierce Leahy's long-term debt as of December 31:
1998 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
1996 Notes.......................... $130,000 $143,650 $130,000 $139,750
1997 Notes.......................... 120,000 126,000 120,000 119,400
1998 Notes.......................... 134,537 133,864 134,574 125,827
4. SELECTED CONSOLIDATED FINANCIAL STATEMENTS OF PARENT, GUARANTORS, AND
NON-GUARANTORS
The 1996 Notes and the 1997 Notes are general unsecured obligations of
Pierce Leahy, subordinated in right of payment to senior indebtedness of Pierce
Leahy and senior in right of payment to any current or future subordinated
indebtedness. The 1996 Notes and the 1997 Notes are guaranteed by Pierce Leahy's
wholly-owned, domestic subsidiaries (the "Guarantors") and are secured by a
second lien on 65% of the stock of Pierce Leahy's Canadian subsidiaries. The
1998 Notes are general unsecured obligations of Pierce Leahy Canada Company
ranking PARI PASSU in right of payment to all existing and future senior
unsecured indebtedness. The 1998 Notes are guaranteed on a senior subordinated
basis by Pierce Leahy and by Pierce Leahy's U.S. subsidiaries. Pierce Leahy's
Canadian subsidiaries do not guarantee the 1996 Notes or the 1997 Notes. Pierce
Leahy's wholly-owned international subsidiary, Pierce Leahy Europe Limited, does
not guarantee the 1996 Notes, 1997 Notes or the 1998 Notes. Together, the
Canadian and international subsidiaries are termed the "Non-Guarantors" below.
95
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. SELECTED CONSOLIDATED FINANCIAL STATEMENTS OF PARENT, GUARANTORS, AND
NON-GUARANTORS (CONTINUED)
The following financial data summarizes Pierce Leahy's consolidating results
on the equity method of accounting as of and for the year ended December 31,
1999:
DECEMBER 31, 1999
--------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
ASSETS
Current Assets:
Cash..................................................... $ 1,584 $ 241 $ 440 $ -- $ 2,265
Accounts receivable (less allowance of $3,650 and $3,378
as of 1998 and 1999, respectively)..................... 41,392 -- 12,659 -- 54,051
Due from affiliates...................................... 6,011 25,196 23,478 (54,685) --
Prepaid expenses and other............................... 2,641 4 892 -- 3,537
Deferred income taxes.................................... 4,303 -- 37 -- 4,340
-------- -------- -------- --------- --------
Total Current Assets................................... 55,931 25,441 37,506 (54,685) 64,193
-------- -------- -------- --------- --------
Property, Plant and Equipment.............................. 290,339 8,855 62,207 -- 361,401
Less-Accumulated depreciation............................ (78,921) -- (6,446) -- (85,367)
-------- -------- -------- --------- --------
Net Property, Plant, and Equipment..................... 211,418 8,855 55,761 -- 276,034
-------- -------- -------- --------- --------
Other Assets:
Goodwill, net............................................ 246,967 -- 104,171 -- 351,138
Customer acquisition costs, net.......................... 29,514 -- 4,322 -- 33,836
Deferred financing costs, net............................ 8,661 -- 2,356 -- 11,017
Other.................................................... 33,321 (3,356) (5,717) -- 24,248
Long-Term note receivable from affiliates................ -- 124,100 -- (124,100) --
Investment in subsidiaries................................. 142,601 -- -- (142,601) --
-------- -------- -------- --------- --------
Total other assets..................................... 461,064 120,744 105,132 (266,701) 420,239
-------- -------- -------- --------- --------
Total Assets........................................... $728,413 $155,040 $198,399 $(321,386) $760,466
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt........................ $ 999 $ 3,996 $ 17,805 -- $ 22,800
Accounts payable......................................... 9,950 -- 3,190 -- 13,140
Due to affiliates........................................ 23,478 -- 31,207 (54,685) --
Accrued expenses......................................... 37,645 1,420 8,222 -- 47,287
Deferred income.......................................... 12,621 -- 2,541 -- 15,162
-------- -------- -------- --------- --------
Total Current Liabilities.............................. 84,693 5,416 62,965 (54,685) 98,389
Long-Term Debt, net of current portion..................... 418,481 -- 145,516 -- 563,997
Long-Term note payable to affiliates....................... 124,100 -- -- (124,100) --
Deferred Rent.............................................. 6,942 -- 250 -- 7,192
Deferred Income Taxes...................................... 24,389 -- (3,309) -- 21,080
Commitments and Contingencies (Note 7)
Shareholders' Equity:
Common stock............................................. 170 -- 1,704 (1,704) 170
Additional paid-in capital............................... 82,597 94,010 5,842 (99,852) 82,597
Cumulative translation adjustment........................ (470) -- -- -- (470)
Accumulated deficit........................................ (12,489) 55,614 (14,569) (41,045) (12,489)
-------- -------- -------- --------- --------
Total Shareholders' Equity............................... 69,808 149,624 (7,023) (142,601) 69,808
-------- -------- -------- --------- --------
Total Liabilities and Shareholders' Equity............... $728,413 $155,040 $198,399 $(321,386) $760,466
======== ======== ======== ========= ========
96
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. SELECTED CONSOLIDATED FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
Revenues:
Storage.......................... $161,649 $ -- $28,446 $ -- $190,095
Service and storage material
sales.......................... 125,139 -- 30,095 (3,067) 152,167
-------- -------- ------- -------- --------
Total revenues............... 286,788 -- 58,541 (3,067) 342,262
-------- -------- ------- -------- --------
Operating Expenses:
Cost of sales, excluding
depreciation and
amortization................... 167,173 12 36,539 (12,214) 191,510
Selling, general and
administrative................. 28,883 12 7,814 9,147 45,856
Depreciation and amortization.... 34,861 -- 8,794 -- 43,655
Foreign currency exchange........ 583 (33) (8,023) -- (7,473)
Merger-related expenses.......... 1,903 -- 458 -- 2,361
-------- -------- ------- -------- --------
Total operating expenses..... 233,403 (9) 45,582 (3,067) 275,909
-------- -------- ------- -------- --------
Operating income............. 53,385 9 12,959 -- 66,353
Interest Expense (Income).......... 52,873 (13,085) 12,575 -- 52,363
Royalty (Income) / Expense......... 10,527 (12,244) 1,717 -- --
Equity in the (Earnings) Losses of
Subsidiaries..................... (25,786) -- -- 25,786 --
-------- -------- ------- -------- --------
Income (loss) before income
taxes............................ 15,771 25,338 (1,333) (25,786) 13,990
Income Taxes....................... 8,071 198 (1,979) -- 6,290
-------- -------- ------- -------- --------
Net Income (Loss).................. 7,700 25,140 646 (25,786) 7,700
Preferred Stock Dividend and
Accretion........................ 774 -- -- -- 774
-------- -------- ------- -------- --------
Net Income (Loss) Applicable to
Common Shareholders.............. $ 6,926 $ 25,140 $ 646 $(25,786) $ 6,926
======== ======== ======= ======== ========
97
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. SELECTED CONSOLIDATED FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ----------- -------------- ------------ ------------
Cash Flows from Operating Activities:
Net income (loss).................................. $ 7,700 $ 25,140 $ 646 (25,786) $ 7,700
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Equity in earnings of subsidiaries............. (25,786) -- -- 25,786 --
Depreciation and amortization.................. 34,862 -- 8,793 -- 43,655
Amortization of deferred financing costs....... 1,310 -- 314 -- 1,624
(Gain) loss on sale of property and
equipment.................................... (255) -- 33 -- (222)
Deferred income tax provision.................. 8,071 198 (1,979) -- 6,290
Change in deferred rent........................ 1,270 -- (129) -- 1,141
Foreign currency adjustment.................... 583 (33) (8,023) -- (7,473)
Changes in Assets and Liabilities (exclusive of
acquisitions):
(Increase) decrease in--
Accounts receivable, net....................... (6,321) -- (1,244) -- (7,565)
Inventory, prepaid expenses and other.......... (759) (4) 46 -- (717)
Other assets................................... (1,544) 3,356 (89) -- 1,723
Increase (decrease) in--
Accounts payable............................... (56) -- 708 -- 652
Accrued expenses............................... 2,853 1,420 (1,163) -- 3,110
Deferred income................................ 1,505 -- (179) -- 1,326
-------- -------- -------- -------- --------
Net Cash Provided by (Used in) Operating
Activities................................. 23,433 30,077 (2,266) -- 51,244
-------- -------- -------- -------- --------
Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired... (2,977) -- (20,349) -- (23,326)
Capital expenditures............................... (31,580) (8,855) (17,108) -- (57,543)
Intercompany loans to subsidiaries................. (7,751) (25,096) -- 32,847 --
Investment in subsidiaries......................... (1,615) -- -- 1,615 --
Customer acquisition costs......................... (15,002) -- (2,365) -- (17,367)
Increase in intangible assets...................... (1,333) -- (382) -- (1,715)
Proceeds from sale of property and equipment....... 1,075 -- 93 -- 1,168
-------- -------- -------- -------- --------
Net Cash Provided by (Used in) Investing
Activities................................. (59,183) (33,951) (40,111) 34,462 (98,783)
-------- -------- -------- -------- --------
Cash Flows from Financing Activities:
Borrowings on revolving line of credit............. 78,700 -- 33,582 -- 112,282
Payments on revolving line of credit............... (37,200) -- (27,350) -- (64,550)
Proceeds from issuance of long-term debt........... 431 3,996 2,435 -- 6,862
Issuance of redeemable preferred stock............. 4,615 -- -- -- 4,615
Payments on long-term debt......................... (3,639) -- (1,692) -- (5,331)
Payment of debt financing costs.................... (1,106) -- (79) -- (1,185)
Proceeds from exercise of stock options............ 247 -- -- -- 247
Payment of redeemable preferred stock dividend..... (389) -- -- -- (389)
Payment of redeemable preferred stock.............. (5,000) -- -- -- (5,000)
Intercompany loans from subsidiaries............... -- -- 32,847 (32,847) --
Investment in subsidiaries......................... -- -- 1,615 (1,615) --
-------- -------- -------- -------- --------
Net Cash Provided by (Used in) Financing
Activities................................. 36,659 3,996 41,358 (34,462) 47,551
-------- -------- -------- -------- --------
Effects of exchange rates on cash and cash
equivalents........................................ (582) (165) 688 -- (59)
-------- -------- -------- -------- --------
Increase (Decrease) in Cash.......................... 327 (43) (331) -- (47)
Cash, Beginning of Year.............................. 1,257 284 771 -- 2,312
-------- -------- -------- -------- --------
Cash, End of Year.................................... $ 1,584 $ 241 $ 440 $ -- $ 2,265
======== ======== ======== ======== ========
98
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. INCOME TAXES
Pierce Leahy accounts for income taxes in accordance with SFAS No. 109,
which requires the recognition of deferred tax assets and liabilities for the
expected tax consequences of temporary differences between the tax and financial
reporting basis of assets and liabilities.
Pierce Leahy has estimated federal and state net operating loss
carryforwards of approximately $20,400 for the United States, $8,210 for Canada
and $129 for the United Kingdom at December 31, 1999 to reduce future income
taxes, if any. These net operating loss carryforwards will begin to expire in
2012.
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,
-------------------
1998 1999
-------- --------
Deferred Tax Assets:
Deferred rent......................................... $ 2,295 $ 2,644
Net operating loss carryforwards...................... 7,464 16,295
Other................................................. 4,270 3,899
-------- --------
14,029 22,838
-------- --------
Deferred Tax Liabilities:
Other assets, principally due to differences in
amortization........................................ (8,170) (15,234)
Plant and equipment, principally due to differences in
depreciation........................................ (16,493) (24,344)
-------- --------
(24,663) (39,578)
-------- --------
Net deferred tax asset (liability)...................... $(10,634) $(16,740)
======== ========
Pierce Leahy and its subsidiaries file a consolidated federal income tax
return. The provision (benefit) for income tax consists of the following
components:
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Federal--current................................. $ -- $ 95 $ --
Federal--deferred................................ 8,895 5,309 7,778
State--current................................... -- 55 69
State--deferred.................................. 1,172 (144) 422
Foreign--current................................. 150 -- --
Foreign--deferred................................ 1,221 (1,997) (1,979)
------- ------- -------
$11,438 $ 3,318 $ 6,290
======= ======= =======
The provision for income taxes for the years ended December 31, 1997, 1998
and 1999 consists of a current tax provision for state, and alternative minimum
taxes on domestic operations and foreign taxes due on taxable income of Pierce
Leahy's Canadian subsidiaries, and deferred federal, state and foreign
99
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. INCOME TAXES (CONTINUED)
income taxes. The total deferred income tax provision in 1997 includes a
one-time tax charge of $6,600 recorded upon the termination of Pierce Leahy's S
Corporation status.
The statement of operations for the year ended December 31, 1997 includes a
pro forma adjustment for the income taxes that would have been recorded if
Pierce Leahy had been a C Corporation for the entire period based on tax laws in
effect during the period. A reconciliation of total income tax expense (benefit)
and the amount computed by applying the federal statutory income tax rate and
the pro forma effective income tax rate for the year ended December 31, 1997,
and the reconciliation of the federal statutory income tax rate and the
effective income tax rate for the years ended December 31, 1998 and 1999 are as
follows:
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Computed "expected" tax provision (benefit)................. $(4,008) $(2,608) $4,493
Increase in income taxes resulting from:
State taxes............................................... 141 (207) 453
Foreign taxes............................................. 379 (488) 379
Non-deductible expenses................................... 926 6,621 965
Tax on extraordinary charge............................... 4,014 -- --
------- ------- ------
$ 1,452 $ 3,318 $6,290
======= ======= ======
6. CAPITAL STOCK AND STOCK OPTIONS
a. Capital Stock
At December 31, 1998 and 1999, Pierce Leahy's capital stock was comprised of
the following:
PREFERRED COMMON
----------- -----------
Par value.......................................... $ .01 $ .01
Shares authorized.................................. 10,000,000 80,000,000
Shares issued and outstanding December 31, 1998.... -- 18,740,239
Shares issued and outstanding December 31, 1999.... -- 18,783,848
Certain shareholders of Pierce Leahy entered into a voting trust agreement
on June 24, 1997. The shares held in trust represent 38.6% of the outstanding
common stock at December 31, 1999. The trustees of the voting trust include the
President and Chief Executive Officer of Pierce Leahy and the Chairman of the
Board of Directors. Each of the trustees has shared power to vote the shares
held in the voting trust. The beneficial owners of interests in the voting trust
have the right to dispose of the shares as to which they have beneficial
interests.
On June 25, 1997, Pierce Leahy effected a stock split, reclassified its
Class A and Class B common stock to common stock, authorized 10,000,000 shares
of undesignated preferred stock and increased its authorized common stock to
80,000,000 shares. All references in the accompanying financial statements to
100
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
the number of common shares and per-share amounts have been retroactively
restated to reflect the stock split.
In July 1997, Pierce Leahy completed an initial public offering of 6,230,419
shares of common stock, raising net proceeds of $93,608. The proceeds of the
offering were used to redeem a portion of Pierce Leahy's 11 1/8% Senior
Subordinated Notes and to repay outstanding borrowings under Pierce Leahy's
credit facility (see Note 3).
On January 14, 2000, Pierce Leahy paid a stock dividend of one-tenth of a
share of its common stock for each share of common stock outstanding, payable to
holders of record of the common stock as of January 7, 2000. As a result of this
stock dividend, Pierce Leahy increased common stock by $17, additional paid-in
capital by $64,213 and accumulated deficit by $64,230 in January 2000. All share
and per share amounts have been retroactively adjusted to reflect this change.
b. Stock Options
In September 1994, Pierce Leahy established a non-qualified stock option
plan which provides for the granting of options to key employees to purchase an
aggregate of 1,329,276 shares of common stock. The shares available for grant
were increased by 313,388 in December 1996. Option grants have an exercise price
equal to the fair market value of the common stock on the date of grant. Before
Pierce Leahy consummated its initial public offering of common stock in
July 1997 (see above), the fair market value of the options was determined based
upon a formula, as defined in the option plan. The options granted vest in five
equal annual installments beginning on the first anniversary of the date of
grant, except as discussed below.
Upon the consummation of Pierce Leahy's initial public offering of common
stock in July 1997, options granted during 1997 became fully vested and
exercisable as provided for under the plan. Pierce Leahy recorded a
non-recurring, non-cash compensation charge of $1,752 relating to those options,
representing the difference between the exercise price and the deemed value for
accounting purposes.
In April 1997, Pierce Leahy adopted its 1997 Stock Option Plan (the "1997
Plan") which provides for the granting of stock options to purchase up to
1,650,000 shares of common stock to employees, officers, directors, consultants
and advisors of Pierce Leahy. The 1997 Plan is administered by the Compensation
Committee of the Board of Directors (the "Committee"). Grants may consist of
incentive stock options or nonqualified stock options. The option price of any
incentive stock option granted will not be less than the fair value of the
underlying shares of common stock on the date of grant. The option price of a
non-qualified stock option will be determined by the Committee and may be
greater than, equal to or less than the fair market value of the underlying
shares of common stock on the date of grant. The term of each option will be
determined by the Committee, provided that the exercise period may not exceed
10 years from the date of grant. The options granted may be subject to vesting
and other conditions.
101
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
The following is a summary of stock option transactions during the
applicable periods:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Options outstanding, December 31, 1996............. 1,056,664 $ 4.89
Granted............................................ 168,927 $ 4.63
Exercised.......................................... -- --
Canceled........................................... -- --
--------- ------
Options outstanding, December 31, 1997............. 1,225,591 $ 4.85
Granted............................................ 171,875 $18.64
Exercised.......................................... (11,650) $ 4.63
Canceled........................................... (9,625) $18.64
--------- ------
Options outstanding, December 31, 1998............. 1,376,191 $ 6.48
Granted............................................ 166,100 $23.18
Exercised.......................................... (43,608) $ 5.75
Canceled........................................... (36,512) $13.01
--------- ------
Options outstanding, December 31, 1999............. 1,462,171 $ 8.24
========= ======
The following table summarizes additional information regarding options
outstanding and exercisable at December 31, 1999:
OUTSTANDING EXERCISABLE
--------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL LIFE EXERCISE EXERCISE
EXERCISE PRICES NUMBER (IN YEARS) PRICE NUMBER PRICE
- --------------- --------- ---------------- -------- ------------ --------
$4.63 to $5.33................. 1,152,521 2.6 $ 4.84 1,084,189 $ 4.81
$18.64......................... 155,650 8.0 $18.64 62,260 $18.64
$23.18......................... 154,000 9.0 $23.18 30,800 $23.18
--------- ---- ------ ------------ ------
1,462,171.. 3.85 $ 8.24 1,177,249 $ 6.02
========= ==== ====== ============ ======
Subsequent to December 31, 1999, Pierce Leahy issued 184,800 options to
employees at an exercise price of $32.88 per share.
The Pierce Leahy Board of Directors determined that it was appropriate,
prior to completion of the merger with Old Iron Mountain, to accelerate in
January 2000 the vesting of certain remaining unvested options. These included
all remaining options granted under Pierce Leahy's nonqualified stock option
plan and the unvested options granted under the 1997 Plan for four nonemployee
directors, as these directors will not continue as directors of the combined
Company after the merger. Pierce Leahy recorded in January 2000 a non-cash
compensation charge of approximately $2,021 relating to these options,
representing the difference between the exercise price and the fair market value
for accounting purposes, after the adjustment for the one-tenth of a share stock
dividend paid on January 14, 2000.
102
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair value
based method of accounting for stock-based compensation plans. This statement
also applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. SFAS No. 123 requires that an
employer's financial statements include certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
the plan.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
the grants in 1997, 1998 and 1999:
1997 1998 1999
-------- -------- --------
Risk free interest rates........................ 6.4% 5.5% 4.8%
Expected lives of options....................... 7 years 10 years 10 years
Expected dividend yields........................ N/A N/A N/A
Expected volatility............................. 20% 45% 32%
The approximate fair value of each option granted in 1997, 1998 and 1999 is
$1.89, $10.35 and $10.30, respectively, as determined under the provisions of
SFAS No. 123. The following pro forma results would have been reported had
compensation cost been recorded for the fair value of the options granted:
1997 1998 1999
-------- -------- --------
Net loss applicable to common shareholders, as reported..... $(15,197) $(10,990) $6,926
Net loss applicable to common shareholders, pro forma for
compensation cost and income taxes in 1997 (Note 2)....... $ (9,681) $(11,506) $6,155
Net loss per share applicable to common shareholders, pro
forma for compensation cost and income taxes in 1997 (Note
2)........................................................ $ (0.72) $ (0.68) $ 0.35
The SFAS No. 123 method of accounting is applied only to options granted on
or after January 1, 1995. The resulting pro forma compensation cost may not be
representative of the amount to be expected in future years due to the vesting
schedule of the options.
All share and per share data has been restated to reflect the stock dividend
of one-tenth of a share of common stock for each share of common stock
outstanding that was paid on January 14, 2000.
103
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. COMMITMENTS AND CONTINGENCIES
a. Operating Leases At December 31, 1999, Pierce Leahy was obligated under
non-cancelable operating leases, including the related-party leases
discussed below, for warehouse and office space, office equipment and
transportation equipment. These leases expire at various times through
2024 and require minimum rentals, subject to escalation, as follows:
2000........................................................ $ 41,906
2001........................................................ 40,031
2002........................................................ 36,163
2003........................................................ 32,244
2004........................................................ 29,105
2005 and thereafter......................................... 127,166
--------
$306,615
========
Rent expense for all leases was approximately $21,657, $31,077 and $37,481
for the years ended December 31, 1997, 1998 and 1999, respectively. Some of the
leases for warehouse space provide for purchase options on the facilities at
certain dates.
Pierce Leahy leases office and warehouse space that is owned by certain
shareholders, officers and employees of Pierce Leahy at prices which, in the
opinion of management, approximate market rates. Rent expense on these leases
was approximately $845, $901 and $901 for the years ended December 31, 1997,
1998 and 1999, respectively.
b. Other Matters
Pierce Leahy is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management, after consultation with legal counsel, does not
believe that the resolution of these matters will have a material adverse effect
on Pierce Leahy's consolidated financial position or results of operations.
In June 1997, Pierce Leahy entered into a tax indemnification agreement with
its then current shareholders that provides for: (i) the distribution to such
shareholders of cash equal to the product of Pierce Leahy's taxable income for
the period from January 1, 1997 until July 1, 1997 and the sum of the highest
effective federal and state income tax rate applicable to any current
shareholder, less any prior distributions to such shareholders to pay taxes for
such period, and (ii) an indemnification of such shareholders for any losses or
liabilities with respect to any additional taxes (including interest, penalties
and legal fees) resulting from Pierce Leahy's operations during the period in
which it was a Subchapter S Corporation.
8. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation of basic
and diluted earnings per share. According to SFAS No. 128, basic earnings per
share, which replaces primary earnings per share, is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding for
the period.
104
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. EARNINGS PER SHARE (CONTINUED)
Diluted earnings per share, which replaces fully diluted earnings per share,
reflects the potential dilution from the exercise or conversion of securities
into common stock, such as stock options and warrants. Pierce Leahy adopted SFAS
No. 128 in 1997.
The weighted average common and common equivalent shares outstanding for
purposes of calculating net income (loss) per common share are computed as
follows:
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Weighted average common shares outstanding used for
basic net income (loss) per common share.......... 14,724 18,486 18,766
Dilutive effect of common stock options
outstanding....................................... -- -- 759
------ ------ ------
Weighted average common and common equivalent shares
used for diluted net income (loss) per common
share............................................. 14,724 18,486 19,525
====== ====== ======
For 1997 and 1998 there were no dilutive effects of stock options as Pierce
Leahy had a loss for the year. For 1999, Pierce Leahy had income which caused a
dilutive effect of stock options. Options for 553 shares for 1997 and 623 shares
for 1998 were not considered as they were anti-dilutive.
All share and per share data has been restated to reflect the stock dividend
of one-tenth of a share of common stock for each share of common stock
outstanding that was paid on January 14, 2000.
9. RELATED PARTY TRANSACTIONS
Pierce Leahy has an agreement with a shareholder of Pierce Leahy that
requires pension payments of $8 per month until the later of the death of the
shareholder or his spouse. The present value of the benefit is recorded in
accrued expenses in the accompanying consolidated balance sheets.
Pierce Leahy paid financial advisory fees to an investment banking firm of
which a director of Pierce Leahy was a managing director. The fees were
approximately $62 in 1997, $0 in 1998, and $0 in 1999. In addition, the
investment banking firm received $1,800 from the underwriters of the 1997 Notes
and Pierce Leahy's initial public offering and $310 from the placement agent for
the 1998 Notes.
Pierce Leahy paid real estate advisory fees to a firm of which a director of
Pierce Leahy is the owner. The fees were approximately $88 in 1997 and $8 in
1998.
10. EMPLOYEE BENEFIT PLANS
Pierce Leahy maintains a discretionary profit sharing plan with a 401(k)
feature for substantially all full-time employees over the age of 20 1/2 and
with more than 1,000 hours of service. Participants in the plan may elect to
defer a specified percentage of their compensation on a pretax basis. Pierce
Leahy is required to make matching contributions equal to 25% of the employee's
contribution up to a maximum of 2% of the employee's annual compensation. Pierce
Leahy may also make a discretionary profit sharing contribution to the plan. A
discretionary profit sharing contribution was made in 1997 and 1998 and is
anticipated for 1999. Participants become vested in Pierce Leahy's matching
contribution over three to seven years.
105
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The expense relating to these plans was $892, $1,209 and $1,792 for the years
ended December 31, 1997, 1998 and 1999, respectively.
11. REDEEMABLE PAY-IN-KIND PREFERRED STOCK
In February 1999, Pierce Leahy entered into an agreement to issue up to
$15,000 of redeemable payment-in-kind ("PIK") preferred stock. This stock was
redeemable at any time during the 10 year term with an initial annual dividend
rate of 11.36%, subject to increase under certain circumstances, including
subsequent issuances of preferred stock (depending on certain interest rates at
such time) and if the preferred stock is not redeemed prior to six months from
its initial issuance. Pierce Leahy issued $5,000 of the redeemable PIK preferred
stock in March 1999 and incurred fees of approximately $385, providing net
proceeds of approximately $4,615. On November 1, 1999, Pierce Leahy redeemed all
of the outstanding redeemable PIK preferred stock and paid all remaining
dividends. For the year ended December 31, 1999, the accretion to redemption
value was $385 and dividend payments of $389 were made to the preferred
shareholders.
12. ACQUISITIONS
In 1997, Pierce Leahy completed 17 acquisitions, of which 15 were recorded
under the purchase method of accounting, while the other two acquisitions were
accounted for as poolings of interests. The 15 acquisitions accounted for under
the purchase method had an aggregate purchase price of $108,627, consisting
primarily of $102,068 in net cash, 179,593 shares of common stock with a fair
value of $4,907 and $1,652 in Seller notes. For purposes of computing the
purchase price for accounting purposes, the value of the shares issued is
determined using a discount of 10% from the market value at the day of issuance
due to certain restrictions on the sale and transferability of shares issued.
The most significant of these acquisitions was one acquisition for $9,084 in
January 1997 and another for $62,000 in April 1997; all others were individually
less than $8,000.
During 1997, Pierce Leahy also completed two mergers with records management
businesses by exchanging an aggregate of 181,891 shares of common stock for the
stock of these entities. These mergers constituted tax free reorganizations and
have been accounted for as poolings of interests under Accounting Principles
Board Opinion No. 16. Prior periods have not been restated for the acquisitions
due to the immateriality of the transactions, and the book value of net assets
acquired of $407 has been recorded as additional paid-in capital. The results of
operations for each acquisition have been included in the consolidated results
of Pierce Leahy from their respective acquisition dates.
In 1998, Pierce Leahy completed 16 acquisitions for an aggregate purchase
price of $204,070, consisting primarily of $186,486 in net cash, 603,088 shares
of common stock with a deemed value of $14,409 and $3,175 in Seller notes. The
most significant of these acquisitions was one transaction for $59,000 in
April 1998, another for $30,000 in May 1998 and a third for $52,000 in
July 1998; all others were individually less than $15,000. All of the
acquisitions in 1998 were recorded under the purchase method of accounting.
In 1999, Pierce Leahy completed four acquisitions for an aggregate purchase
price of $42,249, consisting primarily of $23,326 in net cash and $18,923 in
Seller notes. The most significant of these
106
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. ACQUISITIONS (CONTINUED)
acquisitions was Datavault Limited, a U.K. based records management company with
operations in seven markets throughout England and Scotland. The acquisition was
financed with borrowings under Pierce Leahy's credit facility and the issuance
of Seller notes. All of the acquisitions in 1999 were recorded under the
purchase method of accounting.
In addition to these payments, the acquisitions in 1997 and 1998 provided
for non-compete obligations of $60 and $40, respectively, payable over one year.
The non-compete obligations at December 31, 1998 and 1999 were $166 and $0,
respectively. The results of operations for each of these acquisitions have been
included in the consolidated results of Pierce Leahy from the respective
acquisition dates. For acquisitions accounted for under the purchase method, the
excess of the fair value of the assets and liabilities acquired has been
allocated to goodwill ($91,047 in 1997, $178,049 in 1998 and $39,924 in 1999)
and is being amortized over the estimated benefit period of 30 years.
A summary of the consideration paid and the allocation of the purchase price
of the acquisitions is as follows:
1997 1998 1999
-------- -------- --------
Cash Paid, net of cash acquired................ $102,068 $186,486 $23,326
Seller Notes Issued............................ 1,652 3,175 18,923
Fair Value of Common Stock Issued.............. 4,907 14,409 --
-------- -------- -------
Total Consideration........................ 108,627 204,070 42,249
-------- -------- -------
Fair Value of Assets Acquired.................. 27,533 53,988 8,702
Liabilities Assumed............................ (9,953) (27,967) (6,377)
-------- -------- -------
Fair Value of Net Assets Acquired.......... 17,580 26,021 2,325
-------- -------- -------
Recorded Goodwill.............................. $ 91,047 $178,049 $39,924
======== ======== =======
The fair value of common stock issued and the Seller notes represent the
only non-cash consideration paid for the acquisitions.
The following unaudited pro forma information presents the results of Pierce
Leahy's operations for the years ended December 31, 1998 and 1999 as though each
of the completed acquisitions had occurred as of January 1, 1998:
DECEMBER 31,
-------------------
1998 1999
-------- --------
Total revenues.......................................... $306,099 $344,529
Net income (loss)....................................... $(18,132) $ 7,591
Basic net income (loss) per common share................ $ (0.96) $ 0.40
Diluted net income (loss) per common share.............. $ (0.96) $ 0.39
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions taken place as of January 1, 1998, or the results that may occur in
the future. Furthermore, the pro forma results do not give effect to all cost
107
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. ACQUISITIONS (CONTINUED)
savings or incremental costs which may occur as a result of the integration and
consolidation of the acquired companies.
Allocation of the purchase price for these acquisitions was based on
estimates of the fair value of net assets acquired and, for acquisitions
completed in 1999, is subject to adjustment upon finalization of the purchase
price allocation. Pierce Leahy is not aware of any information that would
indicate that the final purchase price allocations will differ significantly
from preliminary estimates.
In connection with the acquisitions completed in 1998 and 1999, Pierce Leahy
has undertaken certain restructurings of the acquired businesses. The
restructuring activities include certain reductions in staffing levels, costs
related to the exit of duplicate facilities ("exit costs") and other costs
associated with exiting certain activities of the acquired businesses. These
restructuring activities were recorded as costs of the acquisitions in
accordance with Emerging Issues Task Force Issue No. 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination."
Pierce Leahy finalizes its restructuring plans for each business no later
than one year from the date of acquisition. Unresolved matters at December 31,
1999 primarily include completion of planned abandonments of facilities and
severances for certain acquisitions completed during 1999.
The following is a summary of reserves related to such restructuring
activities:
1998 1999
-------- --------
Reserves, beginning of the year............................. $ -- $1,785
Reserves established........................................ 2,370 1,525
Expenditures................................................ (585) (910)
------ ------
Reserves, end of the year................................... $1,785 $2,400
====== ======
At December 31, 1998, the acquisition accruals were for other exit costs of
$1,240 and severance costs of $545. These accounts are expected to be used
within one year of the finalization of the restructuring plan.
At December 31, 1999, the acquisition accruals were for other exit costs of
$1,865 and severance costs of $535. These accruals are expected to be used
within one year of the finalization of the restructuring plan.
108
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. SEGMENT AND SUBSIDIARY INFORMATION (UNAUDITED)
Pierce Leahy stores and services business records for customers throughout
the United States, Canada and the United Kingdom ("U.K."). The following
unaudited information is a summary of the operating results and financial
position for Pierce Leahy's U.S., Canadian and U.K. operations:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
Revenues:
United States............................................. $166,337 $235,649 $283,691
Canada.................................................... $ 17,180 $ 34,651 $ 46,502
United Kingdom............................................ $ -- $ -- $ 12,039
-------- -------- --------
Total..................................................... $183,517 $270,300 $342,232
EBITDA:
United States............................................. $ 43,451 $ 70,194 $ 91,166
Canada.................................................... $ 8,056 $ 8,677 $ 11,790
United Kingdom............................................ $ -- $ -- $ 1,940
-------- -------- --------
Total..................................................... $ 51,507 $ 78,871 $104,896
Operating income (loss):
United States............................................. $ 25,238 $ 41,917 $ 55,110
Canada.................................................... $ 2,287 $ (6,725) $ 10,993
United Kingdom............................................ $ -- $ -- $ 250
-------- -------- --------
Total..................................................... $ 27,525 $ 35,192 $ 66,353
Net income (loss):
United States............................................. $(15,443) $ 2,928 $ 6,280
Canada.................................................... $ 246 $(13,918) $ 1,729
United Kingdom............................................ $ -- $ -- $ (1,083)
-------- -------- --------
Total..................................................... $(15,197) $(10,990) $ 6,926
109
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. SEGMENT AND SUBSIDIARY INFORMATION (UNAUDITED) (CONTINUED)
AT DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Current assets:
United States............................................. $ 28,602 $ 42,896 $ 50,166
Canada.................................................... $ 3,587 $ 9,066 $ 9,345
United Kingdom............................................ $ -- $ -- $ 4,682
-------- -------- --------
Total..................................................... $ 32,189 $ 51,962 $ 64,193
Total assets:
United States............................................. $361,657 $542,378 $571,260
Canada.................................................... $ 33,056 $124,080 $146,248
United Kingdom............................................ $ -- $ -- $ 42,958
-------- -------- --------
Total..................................................... $394,713 $666,458 $760,466
Current liabilities:
United States............................................. $ 43,077 $ 59,885 $ 66,632
Canada.................................................... $ 2,018 $ 8,224 $ 8,210
United Kingdom............................................ $ -- $ -- $ 23,547
-------- -------- --------
Total..................................................... $ 45,095 $ 68,109 $ 98,389
Long-term liabilities:
United States............................................. $264,643 $399,739 $449,812
Canada.................................................... $ 25,652 $135,515 $141,973
United Kingdom............................................ $ -- $ -- $ 484
-------- -------- --------
Total..................................................... $290,295 $535,254 $592,269
The summarized financial information of the Canadian and U.K. subsidiaries
has been prepared from the books and records maintained by each subsidiary. The
summarized financial information may not necessarily be indicative of the
results of operations or financial position had the Canadian and U.K.
subsidiaries operated as independent entities. Certain intercompany sales and
charges, and intercompany loans among Pierce Leahy and its Canadian and U.K.
subsidiaries are included in the subsidiaries' records and are eliminated in
consolidation.
There are no restrictions on the ability of any of the subsidiaries to
transfer funds to Pierce Leahy in the form of loans, advances or dividends,
except as provided by applicable law.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." This
statement establishes additional standards for segment reporting in the
financial statements and is effective for fiscal years beginning after
December 15, 1997. Management has determined that all of their operations have
similar economic characteristics and may be aggregated into a single segment for
disclosure under SFAS 131. Information concerning the geographic operations of
Pierce Leahy as prescribed by SFAS 131 is provided above.
110
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
SUMMARIZED QUARTERLY FINANCIAL DATA FOR 1998 AND 1999 IS AS FOLLOWS:
1998 QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total Revenues.......................................... $56,290 $64,146 $74,597 $75,267
Cost of sales, excluding depreciation and
amortization.......................................... $32,915 $36,279 $41,961 $43,280
Operating income........................................ $ 7,444 $ 6,710 $ 9,123 $11,915
Net loss................................................ $(1,037) $(4,457) $(4,614) $ (882)
Basic and diluted loss per common share:................ $ (0.05) $ (0.25) $ (0.25) $ (0.04)
1999 QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total Revenues.......................................... $80,194 $85,529 $88,036 $88,503
Cost of sales, excluding depreciation and
amortization.......................................... $45,595 $48,261 $49,573 $48,081
Operating income........................................ $15,893 $17,603 $16,692 $16,165
Net income (loss)....................................... $ 2,312 $ 3,364 $ 1,505 $ (255)
Basic income (loss) per common share:................... $ 0.12 $ 0.18 $ 0.08 $ (0.01)
Diluted income (loss) per common share:................. $ 0.11 $ 0.17 $ 0.08 $ (0.01)
All share and per share data has been restated to reflect the stock dividend
of one-tenth of a share of common stock for each share of common stock
outstanding that was paid on January 14, 2000.
15. SUBSEQUENT EVENTS
a. Completed Acquisitions
On February 1, 2000, Old Iron Mountain completed the acquisition of Pierce
Leahy in a stock-for-stock merger valued at approximately $1.1 billion. The
acquisition was structured as a reverse merger with Pierce Leahy being the
surviving legal entity and immediately changing its name to Iron Mountain
Incorporated (the "Company"). Based on the number of shares of Old Iron Mountain
and Pierce Leahy common stock outstanding immediately prior to the completion of
the merger, immediately after the merger former stockholders of Old Iron
Mountain owned approximately 65% of the Company's Common Stock. Because of this
share ownership, Old Iron Mountain is considered the acquiring entity for
accounting purposes. The total consideration for this transaction was comprised
of: (i) approximately 18.8 million shares of the Company's Common Stock with a
fair value of approximately $444 million; (ii) options to acquire approximately
1.5 million shares of the Company's Common Stock with a fair value of
approximately $25 million; (iii) assumption of Pierce Leahy debt with a fair
value of approximately $579 million; and (iv) incurrence of approximately
$4 million of capitalized transaction costs. The aquisition will be accounted
for using the purchase method of accounting.
111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Iron Mountain Incorporated (formerly known as Pierce Leahy Corp.):
We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements for Pierce Leahy Corp.
and have issued our report thereon dated February 22, 2000. Our audit was made
for the purpose of forming an opinion on the basic financial statements taken as
a whole. The schedule of valuation and qualifying accounts is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
February 22, 2000
112
SCHEDULE II
PIERCE LEAHY CORP.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT BALANCE AT
BEGINNING OF CHARGED TO END OF
YEAR ENDED DECEMBER 31, THE YEAR EXPENSE OTHER (1) DEDUCTIONS THE YEAR
- ----------------------- ------------ ---------- --------- ---------- ----------
Allowance for doubtful accounts and
credit memos:
1997................................. $ 795 $ 947 $953 $(296) $2,399
1998................................. 2,399 1,406 -- (155) 3,650
1999................................. 3,650 1,171 (696) (747) 3,378
BALANCE AT BALANCE AT
BEGINNING OF END OF
YEAR ENDED DECEMBER 31, THE YEAR ADDITIONS DEDUCTIONS THE YEAR
- ----------------------- ------------ --------- ---------- ----------
Reserve for restructuring activities:
1997........................................... $ -- $ -- $ -- $ --
1998........................................... -- 2,370 (585) 1,785
1999........................................... 1,785 1,525 (910) 2,400
- ------------------------
(1) The adjustments represent changes to goodwill for reserves for companies
acquired during the year and as a result of management finalizing its
purchase price allocations.
113
REPORT OF THE INDEPENDENT AUDITORS
To the Board of Directors of Iron Mountain Europe Limited:
We have audited the accompanying consolidated balance sheet of Iron Mountain
Europe Limited as of October 31, 1999 and the related consolidated statement of
operations, changes in stockholders' equity and cash flows for the ten months
ended October 31, 1999. 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 United Kingdom auditing standards
which do not differ in any significant respect from United States generally
accepted auditing standards. 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, 1999 and the consolidated results of
its operations and its consolidated cash flows for the ten months ended
October 31, 1999, in conformity with generally accepted accounting principles in
the United States.
RSM ROBSON RHODES
Chartered Accountants
Birmingham, England
February 28, 2000
114
IRON MOUNTAIN EUROPE LIMITED
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
OCTOBER 31,
NOTE 1999
-------- -----------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,316
Accounts receivable (less allowances of $334)............. 10,773
Inventories, prepaid expenses and other................... 3,023
--------
Total Current Assets........................................ 15,112
--------
Property, Plant and Equipment:
Property, plant and equipment............................. 3e 54,652
Less--Accumulated depreciation............................ (5,459)
--------
Net property, plant and equipment......................... 49,193
Goodwill, net............................................... 90,744
--------
Total Assets................................................ $155,049
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Borrowings under line of credit........................... $ 5,270
Current portion of long-term debt......................... 5 2,169
Obligations under capital leases.......................... 9 798
Accounts payable.......................................... 3,237
Amounts owed to related parties........................... 10 26,458
Accrued expenses and other payables....................... 7 5,765
Deferred income........................................... 2,447
--------
Total Current Liabilities................................... 46,144
Long-term Debt, Net of Current Portion...................... 5 29,752
Obligations under capital leases, Net of Current Portion.... 9 367
Deferred Income Taxes....................................... 6 1,278
Commitments and Contingencies............................... 9
Stockholders' Equity
Common stock.............................................. 4,252
Additional paid-in capital................................ 75,557
Deferred compensation..................................... (838)
Retained earnings......................................... 846
Accumulated other comprehensive items..................... (2,309)
--------
Total Stockholders' Equity.................................. 77,508
--------
Total Liabilities and Stockholders' Equity.................. $155,049
========
The accompanying notes are an integral part of these consolidated financial
statements.
115
IRON MOUNTAIN EUROPE LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS)
TEN MONTHS
ENDED
OCTOBER 31,
NOTE 1999
-------- -----------
Revenues:
Storage................................................... $17,812
Service and storage material sales........................ 12,670
-------
Total revenues.............................................. 30,482
Operating Expenses:
Cost of sales (excluding depreciation).................... 17,293
Selling, general and administrative....................... 5,699
Depreciation and amortization............................. 3,692
-------
Total Operating Expenses.................................... 26,684
Operating Income............................................ 3,798
Interest Expense (includes $398 of related party
interest)................................................. 1,362
-------
Income Before Provision for Income Taxes.................... 2,436
Provision for Income Taxes.................................. 6 1,590
-------
Net Income.................................................. $ 846
=======
The accompanying notes are an integral part of these Consolidated financial
statements.
116
IRON MOUNTAIN EUROPE LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN DEFERRED RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS ITEMS EQUITY
---------- -------- ---------- ------------ -------- ------------- -------------
Balance, January 3, 1999.......... 25,079,751 $4,161 $65,519 $ -- $ -- $ -- $69,680
Issuance of shares to Iron
Mountain (UK) Limited........... 550,000 91 9,033 -- -- -- 9,124
Net income........................ -- -- -- -- 846 -- 846
Translation adjustment............ -- -- -- -- -- (2,309) (2,309)
Issuance of options by
stockholder..................... -- -- 1,005 (1,005) -- -- --
Amortization of deferred
compensation agreement.......... -- -- -- 167 -- -- 167
---------- ------ ------- ------- ---- ------- -------
Balance, October 31, 1999......... 25,629,751 $4,252 $75,557 $ (838) $846 $(2,309) 77,508
========== ====== ======= ======= ==== ======= =======
COMPREHENSIVE LOSS
Net income........................ $ 846
Foreign currency translation
adjustment...................... (2,309)
-------
Total comprehensive loss.......... $(1,463)
=======
The accompanying notes are an integral part of these consolidated financial
statements.
117
IRON MOUNTAIN EUROPE LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
1999
--------
Cash flows from operating activities:
Net income................................................ $ 846
Adjustments to reconcile net income to cash flows provided
by Operating Activities:
Depreciation............................................ 1,571
Amortization............................................ 2,121
Amortization of deferred compensation................... 167
Provision for doubtful accounts......................... 28
Changes in Assets and Liabilities:
Accounts receivable..................................... (2,489)
Inventories, prepaid expenses and other current
assets................................................. (283)
Accounts payable........................................ 325
Accrued expenses and other payables..................... 334
Amounts due to related parties (trade amounts).......... 683
--------
Cash flows provided by operating activities................. 3,303
--------
Cash flows from investing activities:
Capital expenditures...................................... (12,611)
Cash paid for acquisitions, net of cash acquired.......... (38,168)
Cash flows used in investing activities..................... (50,779)
--------
Cash flows from financing activities:
Proceeds from borrowings.................................. 13,771
Proceeds from lines of credit............................. 5,270
Repayment of debt......................................... (2,338)
Related-party financing................................... 23,908
Proceeds from stock issuance.............................. 6,471
--------
Cash flows provided by financing activities................. 47,082
--------
Decrease in cash and cash equivalents....................... (394)
Effect of exchange rate changes on cash and cash
equivalents............................................... (49)
Cash and cash equivalents at beginning of period............ 1,759
--------
Cash and cash equivalents at end of period.................. $ 1,316
========
Supplemental information:
Cash paid for:
Interest................................................ $ 904
--------
Income taxes............................................ $ 1,171
========
The accompanying notes are an integral part of these consolidated financial
statements.
118
IRON MOUNTAIN EUROPE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
1. NATURE OF BUSINESS AND CORPORATE STATUS
NATURE OF BUSINESS
The accompanying financial statements represent the consolidated accounts of
Iron Mountain Europe Limited and its subsidiaries (collectively "Iron Mountain
Europe" or "IM Europe"). IM Europe is a full service provider of records and
information management services throughout Europe to Government departments, as
well as to commercial, professional, financial and energy businesses. IM Europe
operates primarily in this one business segment.
IM Europe's name was changed to Iron Mountain Europe Limited from Britannia
Data Management Limited on September 22, 1999.
2. BASIS OF PRESENTATION
IM Europe maintains its accounts in accordance with accounting principles
and practices employed by enterprises in their respective country of operation,
whereas the accompanying financial statements reflect certain adjustments not
recorded in IM Europe's books, to present these statements in accordance with
generally accepted accounting principles in the United States ("GAAP"). These
financial statements have been translated into US dollars.
IM Europe was acquired by Mentmore Abbey plc ("Mentmore Abbey") in
October 1996. The accompanying financial statements reflect the "push down" of
Mentmore Abbey's purchase accounting. The financial statements do not reflect
the purchase accounting recorded in Iron Mountain (UK) Limited's (a wholly owned
subsidiary of Iron Mountain Incorporated) books for its purchase of a 50.1%
interest in IM Europe (see Note 4).
IM Europe has elected an October 31 fiscal year end. The results of
operations represent the ten month period since the acquisition of 50.1% of IM
Europe by Iron Mountain (UK) Limited on January 4, 1999.
The consolidated financial statements are not comparable to the United
Kingdom consolidated financial statements.
The significant adjustments made to present the financial statements in
accordance with GAAP relate primarily to accounting for goodwill and income
taxes.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements reflect the financial position and
results of operations of Iron Mountain Europe on a consolidated basis. All
significant intercompany account balances have been eliminated.
B. USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
119
IRON MOUNTAIN EUROPE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. REVENUE RECOGNITION
Revenues consist of storage revenues and service and storage material sales
revenues. Storage revenues consist of periodic charges related to the storage of
materials (either on a per unit or per cubic foot of records basis). 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 the sale of storage materials. Customers are generally billed on
a monthly basis on contractually agreed-upon terms.
Storage and service revenues are recognized in the month the respective
service is provided. Storage material sales are recognized when shipped to the
customer. Amounts related to future storage for customers, where storage fees
are billed in advance, are accounted for as deferred income and amortized over
the applicable period.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and cash invested in
short-term securities which have original maturities of less than 90 days. Cash
and cash equivalents are carried at cost, which approximates fair market value.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight line method over the following estimated useful lives:
Buildings............................................... 50 years
Leasehold improvements.................................. over the lease term
Furniture and fixtures.................................. 10 years
Equipment............................................... 5-20 years
Racking................................................. 5-20 years
Motor vehicles.......................................... 4 years
Computer hardware and software.......................... 5 years
The gross fixed assets at October 31, 1999 are as follows;
EQUIP- COMPUTER
LEASEHOLD MENT AND HARDWARE FURNITURE
LAND AND IMPROVE- MOTOR AND AND
BUILDINGS MENTS VEHICLES RACKING SOFTWARE FIXTURES TOTAL
--------- --------- -------- -------- -------- --------- --------
Gross fixed assets at October 31,
1999.............................. $33,882 $693 $275 $12,159 $3,929 $3,714 $54,652
======= ==== ==== ======= ====== ====== =======
Minor maintenance costs are expensed as incurred. Major improvements to the
leased buildings are capitalized as leasehold improvements and depreciated.
F. GOODWILL
Goodwill reflects the cost in excess of fair value of the net assets of
companies acquired in purchase transactions. Goodwill is amortized using the
straight line method from the date of acquisition over the expected period to be
benefited, currently estimated at 30 years. The recoverability of goodwill is
120
IRON MOUNTAIN EUROPE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
periodically assessed based upon the future undiscounted cash flows in
accordance with Statement of Financial Accounting Standards ("SFAS") No 121,
"Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to
be Disposed of."
The net book value of goodwill at October 31, 1999 relates to the following:
MONTH OF GOODWILL - ACCUMULATED NET BOOK
COMPANY/DIVISION ACQUISITION COST AMORTIZATION VALUE
- ---------------- ----------- ---------- ------------ --------
October
Iron Mountain Europe Limited...................... 1996* $58,614 $6,143 $ 52,471
January
Abbey Records Management ("ARM").................. 1999 5,195 216 4,979
January
Arcus Data Security Limited ("Arcus UK").......... 1999 2,406 99 2,307
Memogarde, S.A. ("Memogarde")..................... June 1999 13,913 232 13,681
September
Stortext (Holdings) Limited ("Stortext").......... 1999 12,787 34 12,753
October
Datavault S.A. ("Datavault")...................... 1999 4,553 -- 4,553
------- ------ --------
$97,468 $6,724 $ 90,744
======= ====== ========
- ------------------------
* Relates to the acquisition of Iron Mountain Europe Limited by Mentmore Abbey
plc.
G. INVENTORIES
Inventories are valued at the lower of cost, using the first-in, first-out
basis, or market value. Inventories are comprised of cartons, magnetic tape and
dyeline film and paper.
H. DEFERRED INCOME TAXES
Provision is made at current rates for taxation deferred in respect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes.
I. DEFINED CONTRIBUTION PLAN
IM Europe operates a defined contribution plan. The assets of the plan are
held separately from those of IM Europe in an independently administered fund.
Contributions payable for the period are charged to the statement of operations.
IM Europe contributed and charged to expense $128 for the ten month period.
J. FOREIGN CURRENCY
All assets and liabilities of IM Europe are translated at year-end exchange
rates, and revenues and expenses are translated at average exchange rates for
the year in accordance with SFAS No. 52, "Foreign
121
IRON MOUNTAIN EUROPE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of stockholders' equity.
Foreign currency transaction gains and losses are included in the accompanying
statements of operations and are not material for the ten months presented.
K. COMPREHENSIVE INCOME
Comprehensive income combines net income and "other comprehensive items,
net," which represents certain amounts that are reported as components of
stockholders' equity in the accompanying balance sheet, including foreign
currency translation adjustments. At October 31, 1999 the balance of accumulated
other comprehensive items represents IM Europe's cumulative translation
adjustment.
4. ACQUISITIONS
IM Europe purchased five records management businesses during the ten months
to October 31, 1999. Each acquisition was accounted for using the purchase
method of accounting and accordingly, the results of operations for each
acquisition have been included in the consolidated results of IM Europe from
their respective acquisition dates. The excess of the purchase price over the
underlying fair value of the assets and liabilities of each acquisition has been
assigned to goodwill and is being amortized over the estimated benefit period of
30 years.
A summary of the consideration paid and resulting goodwill is as follows:
ARM ARCUS UK MEMOGARDE STORTEXT DATAVAULT TOTAL
-------- -------- --------- -------- --------- --------
Consideration paid.......................... $5,799 $2,428 $16,796 $14,092 $4,944 $44,059
Fair value of
- --Assets acquired........................... 1,214 1,038 4,630 4,053 2,195 13,130
- --Liabilities assumed....................... (610) (1,016) (1,747) (2,748) (1,804) (7,925)
------ ------ ------- ------- ------ -------
Fair value of net assets acquired........... 604 22 2,883 1,305 391 5,205
------ ------ ------- ------- ------ -------
Recorded goodwill........................... $5,195 $2,406 $13,913 $12,787 $4,553 $38,854
====== ====== ======= ======= ====== =======
The consideration paid for the above acquisitions included $38,685 of cash.
Total cash balances acquired within the above amounted to $517.
In January 1999, Iron Mountain (UK) Limited became a 50.1% stockholder in IM
Europe. This was effected through: i) the purchase of shares by Iron Mountain
(UK) Limited directly from Mentmore Abbey, ii) the issuance of 400,000 shares by
IM Europe to Iron Mountain (UK) Limited in exchange for L4,000 cash, iii) the
purchase of IM Europe shares by Iron Mountain (UK) Limited from Abbey Storage
Limited (a wholly owned subsidiary of Mentmore Abbey) and iv) the contribution
of Arcus UK (a wholly owned subsidiary of Iron Mountain (UK) Limited) to IM
Europe in exchange for 150,000 common shares in IM Europe.
Also, in January 1999, Abbey Storage Limited sold the assets and liabilities
of ARM to British Data Management Limited, a wholly owned subsidiary of Iron
Mountain Europe. The consideration for this acquisition was comprised solely of
cash.
122
IRON MOUNTAIN EUROPE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
4. ACQUISITIONS (CONTINUED)
IM Europe acquired 100% of the issued common stock of Memogarde on June 1,
1999 for cash consideration of $13,743. In addition, debt was assumed with a
fair value of $3,053.
IM Europe acquired 100% of the issued common stock of Stortext on
September 12, 1999. Consideration was comprised of $14,092 in cash.
IM Europe acquired 100% of the voting common stock of Datavault on
September 28, 1999 for cash consideration of $4,944. This represented 92% of
Datavault's total issued stock. The remaining 8% of issued stock was acquired on
January 2, 2000 for cash consideration of $507. IM Europe has included the
results of Datavault in its consolidated financial statements from the date of
acquiring 100% of the voting common stock.
5. DEBT
a. Long term debt consists of the following:
INTEREST RATE AT
OCTOBER 31, BALANCE
DESCRIPTION 1999 MATURITY 1999
- ----------- ---------------- -------- --------
Term Loan................................... 6.53% 03/31/06 $13,691
Term Loan................................... 7.25 02/09/00 855
Revolving credit............................ 3.69 12/30/01 3,461
Revolving credit............................ 3.69 12/30/01 10,382
Other....................................... Various Various 3,532
-------
$31,921
=======
b. Maturities of long term debt are as follows:
2000........................................................ $ 2,169
2001........................................................ 16,502
2002........................................................ 2,634
2003........................................................ 2,937
2004........................................................ 2,842
Thereafter.................................................. 4,837
-------
31,921
Current..................................................... 2,169
-------
Long term debt, net of current portion...................... $29,752
=======
123
IRON MOUNTAIN EUROPE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
5. DEBT (CONTINUED)
c. Facilities
On May 28, 1999, IM Europe entered into a bank facility agreement to fund
future acquisitions and support working capital requirements. The facility was
comprised of a term loan ($15,300), a revolving credit facility ($14,100) and a
working capital facility. All payments are payable in UK Sterling.
The facilities are secured by the assets of IM Europe and guaranteed by
corporate cross guarantees, incorporating letters of offset, by each company in
the consolidated group. The facility agreement includes certain financial and
non-financial covenants and restrictions based on net income and net worth. IM
Europe is in compliance with all covenants at October 31, 1999.
Principal and interest payments on the term loan are payable twice a year
through March 31, 2006. The effective rate of interest on the term loan is 1%
over the London Inter-Bank Offered Rate ("LIBOR"). At October 31, 1999, $13,700
of the principal remained outstanding.
The revolving credit facility and working capital facility mature on
December 30, 2001. Interest payments are payable monthly based on 1% over LIBOR.
On August 25, 1998, Stortext entered into a $900 revolving facility to fund
capital expenditures and the repayment of certain term loans. The facility is
subject to an effective rate of interest of 2% over the banks' base rate and is
secured by certain of Stortext's assets. At October 31, 1999, $900 of the
facility was outstanding. The facility has been repaid in full subsequent to
October 31, 1999.
Also on August 25, 1998, Stortext entered into a $600 line of credit
facility. The effective rate of interest on this facility is 1% over LIBOR. The
facility was unused at October 31, 1999.
At October 31, 1999, Datavault had three unsecured line of credit facilities
to fund ongoing operating activities. All payments are payable in Spanish
pesetas. The effective rate of interest on all three facilities is
EURIBOR plus 1%. The total amount available under the facilities is $300 and
none of the facilities were utilized at October 31, 1999.
At October 31, 1999, Memogarde had a number of facilities to fund capital
expenditure and working capital requirements. The total value outstanding on the
facilities at October 31, 1999 was $13,560. All payments are made in French
francs. The fair value of these facilities is not significantly different from
their carrying value. The facilities include a $3,356 term loan with a fixed
effective interest rate of 4.69%. This was unused at October 31, 1999. The
facilities also include a $10,068 term loan with a fixed effective interest rate
of 4.5%. At October 31, 1999, the outstanding amount on this loan was $10,068.
It has an expiry date of December 30, 2001. Memogarde's facilities include five
facilities with a fixed effective interest rate.
6. INCOME TAXES
Income taxes have been accounted for in accordance with SFAS No. 109, which
requires the recognition of deferred tax assets and liabilities for the expected
tax consequences of temporary differences between the tax and financial
reporting bases of assets and liabilities. The primary temporary differences are
due to timing differences from the depreciation of property, plant and
equipment. IM Europe had aggregate gross deferred tax assets of $74 at
October 31, 1999, and aggregate gross deferred tax liabilities of $1,352 at
October 31, 1999.
124
IRON MOUNTAIN EUROPE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
6. INCOME TAXES (CONTINUED)
All individual companies within IM Europe file individual tax returns.
The provision for income tax consists of the following components:
1999
--------
UK Corporation tax--current................................. $ 936
UK Corporation tax--deferred................................ 259
French Corporation tax--current............................. 395
------
$1,590
======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
1999
--------
DEFERRED TAX ASSETS
Accrued liabilities......................................... $ 45
Deferred rent............................................... 29
DEFERRED TAX LIABILITIES
Plant and equipment, principally due to differences in
depreciation.............................................. (1,352)
-------
Net deferred tax liability.................................. $(1,278)
=======
A reconciliation of total income tax expense and the amount computed by
applying the UK corporation tax rate of 30% to income taxes is as follows:
1999
--------
Computed "expected" tax provision........................... $ 731
Increase in income taxes resulting from:
Non deductible goodwill amortization...................... 636
Other..................................................... 122
Impact of foreign tax rate and tax law differential......... 101
------
$1,590
======
125
IRON MOUNTAIN EUROPE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
7. ACCRUED EXPENSES
Accrued expenses and other payables consist of the following:
1999
--------
Accrued expenses............................................ $3,499
Income taxes................................................ 557
Sales taxes................................................. 949
Accrued payroll taxes....................................... 760
------
$5,765
======
8. STOCKHOLDERS' EQUITY
SHARE CAPITAL
AUTHORIZED:
Common stock is comprised of 32,000 ordinary shares of 10 pence nominal
value.
1999
--------
ALLOTTED, ISSUED AND FULLY PAID:
Common stock--ordinary shares, 10 pence nominal value....... $4,252
======
On January 4, 1999 IM Europe issued 150,000 new ordinary shares in exchange
for the entire issued share capital of Arcus UK, a company wholly owned by Iron
Mountain (UK) Limited. In addition, IM Europe issued 400,000 new ordinary shares
to Iron Mountain (UK) Limited for a consideration of L4,000.
In February 1999, Mentmore Abbey issued stock options with a fair value of
$1,005 to a key executive of Iron Mountain Europe. The related compensation
expense is being amortized over the five-year vesting period of the options.
9. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The present value of the minimum lease payments for capital leases is as
follows:
1999
--------
2000........................................................ $ 798
2001........................................................ 343
2002........................................................ 24
-----
Gross payments.............................................. 1,165
Current portion............................................. 798
-----
Capital leases, net of current portion...................... $ 367
=====
Assets under capital leases consist primarily of equipment and racking. The
gross amount of assets held under capital leases is $2,464 at October 31, 1999.
The accumulated depreciation on these assets is
126
IRON MOUNTAIN EUROPE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$520 at October 31, 1999. The depreciation on these assets charged in 1999 is
included within the depreciation expense.
OPERATING LEASES
IM Europe leases most of its facilities under various operating leases. A
majority of these leases have an average lease life of between ten and twenty
years and have either fixed or Consumer Price Index escalation clauses. IM
Europe also leases motor vehicles under operating leases which have an average
lease life of three years. The amounts paid in respect of operating leases
including rent expense were $2,648 in 1999.
The minimum future lease payments for buildings under operating leases are
as follows:
YEAR 1999
- ---- --------
2000........................................................ $ 3,718
2001........................................................ 3,646
2002........................................................ 3,590
2003........................................................ 3,516
2004........................................................ 3,444
2005 and thereafter......................................... 28,578
-------
Total minimum lease payments................................ $46,492
=======
10. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH RELATED PARTIES
Certain administrative expenses such as insurance and certain professional
fees have been paid on behalf of and charged to Iron Mountain Europe and
subsidiaries, at cost by Mentmore Abbey and Iron Mountain Incorporated. In
addition a management fee has been charged by Mentmore Abbey as IM Europe uses
certain resources and administrative staff of Mentmore Abbey. The management fee
is variable and is calculated on the basis of expenditure incurred. The fee
charged for the ten months ended October 31, 1999 was $65.
11. SUBSEQUENT EVENTS
IM Europe acquired 100% of the stock in Documentalia, a Spanish medical
records storage company, on February 11, 2000. The consideration paid amounted
to approximately $6,900 in cash.
12. NON-CASH TRANSACTIONS
IM Europe used the following as part of the consideration paid for certain
acquisitions:
1999
--------
Fair value of common stock issued........................... $9,124
======
127
REPORT OF THE INDEPENDENT AUDITORS
To the Board of Directors of
Iron Mountain Europe Limited:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Iron Mountain Europe Limited for the
ten months ended October 31, 1999 and have issued our report thereon dated
February 28, 2000. Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The supplemental schedule listed in the
accompanying index is the responsibility of the Company'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.
RSM ROBSON RHODES
Birmingham, England
February 28, 2000
128
SCHEDULE II
IRON MOUNTAIN EUROPE LIMITED
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT BALANCE AT
BEGINNING OF CHARGED TO OTHER END OF THE
YEAR ENDED DECEMBER 31, THE PERIOD EXPENSE ADDITIONS (1) PERIOD
- ----------------------- ------------ ---------- ------------- ----------
Allowance for doubtful accounts and credit memos:
1999............................................. $106 $28 $200 $334
- ------------------------
(1) Includes allowance of businesses acquired during the year as described in
Note 4 of Notes to Consolidated Financial Statements, as well as currency
translation adjustments.
129
SIGNATURES
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: /s/ C. RICHARD REESE
-----------------------------------------
C. Richard Reese, Chairman of the
Board and Chief Executive Officer
Dated: March 30, 2000
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, and Chief Executive March 30, 2000
C. Richard Reese Officer and Director
/s/ J. PETER PIERCE
------------------------------------------- President and Director March 30, 2000
J. Peter Pierce
/s/ JOHN F. KENNY, JR. Executive Vice President,
------------------------------------------- Chief Financial Officer and March 30, 2000
John F. Kenny, Jr. Director
/s/ CLARKE H. BAILEY
------------------------------------------- Director March 30, 2000
Clarke H. Bailey
------------------------------------------- Director March , 2000
Constantin R. Boden
/s/ KENT P. DAUTEN
------------------------------------------- Director March 30, 2000
Kent P. Dauten
/s/ EUGENE B. DOGGETT
------------------------------------------- Director March 30, 2000
Eugene B. Doggett
130
NAME TITLE DATE
---- ----- ----
/s/ B. THOMAS GOLISANO
------------------------------------------- Director March 30, 2000
B. Thomas Golisano
/s/ ARTHUR D. LITTLE
------------------------------------------- Director March 30, 2000
Arthur D. Little
/s/ HOWARD D. ROSS
------------------------------------------- Director March 30, 2000
Howard D. Ross
/s/ VINCENT J. RYAN
------------------------------------------- Director March 30, 2000
Vincent J. Ryan
131
INDEX TO EXHIBITS
Exhibits indicated below are incorporated by reference to documents of the
Company, Old Iron Mountain and Pierce Leahy on file 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). All
other exhibits are filed herewith. Each exhibit marked by a pound sign (#) is a
management contract or compensatory plan.
EXHIBIT NO. ITEM EXHIBIT
- ----------- ---- -------
2.1 Asset Purchase and Sale Agreement, dated February 18, 2000, Filed herewith as
by and among Iron Mountain Records Management, Inc., Data Exhibit 2.1
Storage Center, Inc., DSC of Florida, Inc., DSC of
Massachusetts, Inc., and Suddath Van Lines, Inc.
2.2 Agreement and Plan of Merger, dated as of October 20, 1999, (2.1)(16)
by and between Old Iron Mountain and Pierce Leahy.
2.3 Stock Purchase Agreement, dated as of April 1, 1999, by and (2.2)(13)
among IMRM, First American Records Management, Inc. and all
of the stockholders of First American Records Management,
Inc. (confidential treatment granted as to certain
portions).
2.4 Stock Purchase Agreement, dated as of February 28, 1999, by (2.10)(11)
and among Old Iron Mountain, Data Base, Inc. and all of the
stockholders of Data Base, Inc. (confidential treatment
granted as to certain portions).
2.5 First Amendment to Stock Purchase Agreement, dated as of (10.1)(13)
April 8, 1999, by and among Old Iron Mountain, Data Base,
Inc. and all of the stockholders of Data Base, Inc.
2.6 Share Purchase Agreement, dated February 26, 1999, among (10.14)(25)
Charles Greaves Stuart-Menteth and Others, Pierce Leahy
Europe Limited and Eagle Trustees Limited, as the Sole
Trustee of the Stuart-Menteth Family Trust.
2.7 Agreement and Plan of Merger, dated as of June 5, 1998, by (2.1)(8)
and among IMRM, Iron Mountain/NUS, Inc. and National
Underground Storage, Inc. (confidential treatment granted as
to certain portions).
2.8 Stock Purchase Agreement, dated May 21, 1998, among Pierce (10.1)(22)
Leahy and the shareholders of Kestrel Holdings, Inc.
2.9 Asset Purchase Agreement, dated February 4, 1998, and (10.1 and 10.2)(20)
Amending Agreement, dated April 7, 1998, among Pierce Leahy
Command Company, Archivex Inc., the shareholders of Archivex
Inc., and certain parties related to Archivex Inc.
3.1 Amended and Restated Articles of Incorporation of the (Annex D)( 25)
Company.
3.2 Amended and Restated Bylaws of the Company. (Annex E)(25)
4.1 Form of stock certificate representing shares of Common (4.1)(26)
Stock, $.01 par value per share, of the Company.
9.0 Amended and Restated Voting Trust Agreement, dated as of (9.0)(19)
February 28, 1998, by and among certain shareholders of the
Company. (#)
10.1 Shareholders' Agreement, dated as of October 20, 1999, among (Annex B)(25)
Old Iron Mountain, Pierce Leahy, and those shareholders of
Pierce Leahy listed on Schedule A thereto. (#)
EXHIBIT NO. ITEM EXHIBIT
- ----------- ---- -------
10.2 Stockholders' Agreement, dated as of September 26, 1997, by (10.16)(5)
and among Old Iron Mountain and certain stockholders of
Arcus Group, Inc. (#)
10.3 Stockholders' Agreement, dated as of September 17, 1997, by (10.13)(6)
and between Old Iron Mountain and Kent P. Dauten. (#)
10.4 Stockholders' Agreement, dated as of February 19, 1997, by (10.20)(2)
and between Old Iron Mountain and certain stockholders of
Safesite Records Management Corporation. (#)
10.5 Employment Agreement, dated as of February 1, 2000, by and Filed herewith as
between Pierce Leahy and J. Peter Pierce. (#) Exhibit 10.5
10.6 Pierce Leahy Corp. Non-Qualified Stock Option Plan. (#) (10.3)(17)
10.7 Pierce Leahy Corp. 1997 Stock Option Plan. (#) (10.2)(18)
10.8 Pierce Leahy Corp. Profit Sharing/401(k) Plan, as amended. (10)(23)
10.9 Iron Mountain/ATSI 1995 Stock Option Plan. (#) (10.2)(7)
10.10 Iron Mountain Incorporated 1998 Employee Stock Purchase (10.8)(9)
Plan. (#)
10.11 Iron Mountain Incorporated 1995 Stock Incentive Plan, as (10.3)(13)
amended. (#)
10.12 Third Amended and Restated Credit Agreement, dated as of (10.1)(26)
January 27, 2000, among the Company and certain lenders
party thereto and the Chase Manhattan Bank, as
Administrative Agent.
10.13 Indenture for 8 1/4% Senior Subordinated Notes due 2011, (10.1)(14)
dated April 26, 1999, by and among Old Iron Mountain,
certain of its subsidiaries and The Bank of New York, as
trustee.
10.14 Indenture for 8 3/4% Senior Subordinated Notes due 2009, (4.1)(4)
dated October 24, 1997, by and among Old Iron Mountain,
certain of its subsidiaries and The Bank of New York, as
trustee.
10.15 Indenture for 10 1/8% Senior Subordinated Notes due 2006, (10.3)(2)
dated October 1, 1996, by and among Old Iron Mountain,
certain of its subsidiaries and First National Association,
as trustee.
10.16 Indenture 8 1/8% Senior Notes due 2008, dated as of April 7, (4.1(c))(21)
1998, by and among Pierce Leahy Command Company, as issuer,
Pierce Leahy and The Bank of New York, as trustee.
10.17 Indenture for 9 1/8% Senior Subordinated Notes due 2007, (10.5)(19)
dated as of July 7, 1997, by and between Pierce Leahy, as
issuer, and The Bank of New York, as trustee.
10.18 Indenture for 11 1/8% Senior Subordinated Notes due 2006, (4.4)(17)
dated as of July 15, 1996, between Pierce Leahy, as issuer,
and United States Trust Company of New York, as trustee.
10.19 Amended and Restated Registration Rights Agreement, dated as (10.1)(3)
of June 12, 1997, by and among Old Iron Mountain and certain
stockholders of Old Iron Mountain. (#)
10.20 Joinder to Registration Rights Agreement, dated as of (10.12)(5)
October 31, 1997, by and between Old Iron Mountain and Kent
P. Dauten. (#)
ii
EXHIBIT NO. ITEM EXHIBIT
- ----------- ---- -------
10.21 Registration Rights Agreement Joinder, dated as of February Filed herewith as
1, 2000, by and among Old Iron Mountain and certain Exhibit 10.21
shareholders of the Company. (#)
10.22 Tax Indemnification Agreement among Pierce Leahy and certain (10.9)(18)
of its shareholders.
10.23 Record Center Storage Services Agreement between Old Iron (10.18)(1)
Mountain Records Management, Inc. and Resolution Trust
Corporation, dated July 31, 1992, as renewed by letter
agreement effective May 20, 1999, between Old Iron Mountain
and the Federal Deposit Insurance Corporation.
10.24 Strategic Alliance Agreement, dated as of January 4, 1999, (10.2)(12)
by and among Old Iron Mountain, Iron Mountain (U.K.)
Limited, Britannia Data Management Limited and Mentmore
Abbey plc.
10.25 Lease Agreement, dated as of October 1, 1998, between Iron (10.20)(10)
Mountain Statutory Trust--1998 and IMRM.
10.26 Unconditional Guaranty, dated as of October 1, 1998, from (10.21)(10)
Old Iron Mountain to Iron Mountain Statutory Trust--1998.
10.27 Amendment and Consent to Unconditional Guaranty, dated as of (10.1)(15)
July 1, 1999, between Old Iron Mountain and Iron Mountain
Statutory Trust--1998 and consented to by to by the lenders
listed therein.
10.28 Amended and Restated Agency Agreement, dated October 1, (10.1)(10)
1998, by and between Iron Mountain Statutory Trust--1998 and
IMRM.
10.29 Lease Agreement, dated as of July 1, 1999, by and between (10.2)(16)
Iron Mountain Statutory Trust--1999 and IMRM.
10.30 Agency Agreement, dated as of July 1, 1999, by and between (10.1)(16)
Iron Mountain Statutory Trust--1999 and IMRM.
10.31 Unconditional Guaranty, dated as of July 1, 1999, from Old (10.3)(16)
Iron Mountain to Iron Mountain Statutory Trust--1999.
21 Subsidiaries of the Company. Filed herewith as
Exhibit 21
23.1 Consent of Arthur Andersen LLP (Old Iron Mountain). Filed herewith as
Exhibit 23.1
23.2 Consent of Arthur Andersen LLP (Pierce Leahy). Filed herewith as
Exhibit 23.2
23.3 Consent of RSM Robinson Rhodes (Iron Mountain Europe) Filed herewith as
Exhibit 23.3
27.1 Financial Data Schedule--December 31, 1999 (Old Iron Filed herewith as
Mountain). Exhibit 27.1
27.2 Financial Data Schedule--December 31, 1999 (Pierce Leahy). Filed herewith as
Exhibit 27.2
27.3 Financial Data Schedule--October 31, 1999 (Iron Mountain Filed herewith as
Europe). Exhibit 27.3
- ------------------------------
(1) Filed as an Exhibit to Old Iron Mountain's Registration Statement
No. 33-99950, filed with the Commission on December 1, 1995.
iii
(2) Filed as an Exhibit to Old Iron Mountain's Annual Report on Form 10-K for
the year ended December 31, 1996, filed with the Commission, File
No. 0-27584.
(3) Filed as an Exhibit to Old Iron Mountain's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, filed with the Commission, File
No. 0-27584.
(4) Filed as an Exhibit to Old Iron Mountain's Current Report on Form 8-K dated
October 30, 1997, filed with the Commission, File No. 0-27584.
(5) Filed as an Exhibit to Old Iron Mountain's Registration Statement
No. 333-41045, filed with the Commission on November 26, 1997.
(6) Filed as an Exhibit to Old Iron Mountain's Registration Statement
No. 333-44185, filed with the Commission on January 13, 1998.
(7) Filed as an Exhibit to Old Iron Mountain's Current Report on Form 8-K dated
March 9, 1998, filed with the Commission, File No. 0-27584.
(8) Filed as an Exhibit to Old Iron Mountain's Current Report on Form 8-K dated
July 10, 1998, filed with the Commission, File No. 0-27584.
(9) Filed as an Exhibit to Amendment No. 1 to Old Iron Mountain's Registration
Statement No. 333-44187, filed with the Commission on August 3, 1998.
(10) Filed as an Exhibit to Old Iron Mountain's Registration Statement
No. 333-67765, filed with Commission on November 23, 1998.
(11) Filed as an Exhibit to Old Iron Mountain's Annual Report on Form 10-K for
the year ended December 31, 1998, filed with the Commission, File
No. 0-27584.
(12) Filed as an Exhibit to Old Iron Mountain's Current Report on Form 8-K dated
January 19, 1999, filed with the Commission, File No. 0-27584.
(13) Filed as an Exhibit to Old Iron Mountain's Current Report on Form 8-K dated
April 16, 1999, filed with the Commission, File No. 0-27584.
(14) Filed as an Exhibit to Old Iron Mountain's Current Report of Form 8-K dated
May 11, 1999, filed with the Commission, File No. 0-27584.
(15) Filed as an Exhibit to Old Iron Mountain's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999, filed with the Commission, File
No. 0-27584.
(16) Filed as an Exhibit to Old Iron Mountain's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999, filed with the Commission, File
No. 1-14937.
(17) Filed as an Exhibit to Pierce Leahy's Registration Statement No. 333-9963,
filed with the Commission on August 12, 1996.
(18) Filed as an Exhibit to Pierce Leahy's Registration Statement
No. 333-23121, filed with the Commission on March 11, 1997.
(19) Filed as an Exhibit to Pierce Leahy's Annual Report on Form 10-K for the
year ended December 31, 1997, filed with the Commission, File
No. 333-09963.
(20) Filed as an Exhibit to Pierce Leahy's Current Report on Form 8-K dated
April 20, 1998, filed with the Commission, File No. 1-13045.
(21) Filed as an Exhibit to Pierce Leahy's Registration Statement
No. 333-58569, filed with the Commission on June 6, 1998.
(22) Filed as an Exhibit to Pierce Leahy's Current Report on Form 8-K dated
July 6, 1998, filed with the Commission, File No. 1-13045.
(23) Filed as Exhibit to Pierce Leahy's Registration Statement No. 333-69859,
filed with the Commission on December 29, 1998.
(24) Filed as an Exhibit to Pierce Leahy's Annual Report on Form 10-K for the
year ended December 31, 1998, filed with the Commission, File
No. 333-09963.
(25) Filed as an Annex or Exhibit to Amendment No. 1 to Pierce Leahy's
Registration Statement No. 333-91577, filed with the Commission on
December 13, 1999.
(26) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
February 1, 2000, filed with the Commission, File No. 1-13045.
iv