UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
- --------------------------------------------------------------------------------
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended September 30, 1998
------------------
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 0-27584
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IRON MOUNTAIN INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3107342
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
745 Atlantic Avenue, Boston, MA 02111
-------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(617) 535-4766
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of November 10, 1998, there were 29,284,569 shares of the Registrant's Common
Stock, par value $0.01 per share, and no shares of the Registrant's Nonvoting
Common Stock, par value $0.01 per share, outstanding.
<PAGE>
IRON MOUNTAIN INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 (Unaudited) 3
Condensed Consolidated Statements of Operations for the Three Months Ended
September 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statements of Operations for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations 11-18
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 19-20
Signature 21
</TABLE>
2
<PAGE>
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 522 $ 24,510
Accounts Receivable (less allowances
of $2,971 and $1,929, respectively) 72,174 40,545
Receivable from Insurance Company 79 5,410
Deferred Income Taxes 15,048 5,896
Prepaid Expenses and Other Current Assets 4,633 5,566
-------- --------
Total Current Assets 92,456 81,927
PROPERTY, PLANT AND EQUIPMENT:
Property, Plant and Equipment 331,140 245,174
Less: Accumulated Depreciation (80,897) (61,276)
-------- --------
Net Property, Plant and Equipment 250,243 183,898
OTHER ASSETS:
Goodwill, net 522,184 340,852
Customer Acquisition Costs, net 9,084 7,319
Deferred Financing Costs, net 13,423 14,429
Other 7,316 8,361
-------- --------
Total Other Assets 552,007 370,961
-------- --------
Total Assets $894,706 $636,786
======== ========
CURRENT LIABILITIES:
Current Portion of Long-term Debt $ 1,893 $ 520
Notes Payable -- 3,000
Accounts Payable 9,553 11,022
Accrued Expenses and Other Current Liabilities 44,765 29,280
Deferred Income 24,172 11,931
-------- --------
Total Current Liabilities 80,383 55,753
LONG-TERM DEBT, NET OF CURRENT PORTION 441,296 424,498
OTHER LONG-TERM LIABILITIES 9,506 5,336
DEFERRED RENT 9,309 8,202
DEFERRED INCOME TAXES 13,752 5,264
STOCKHOLDERS' EQUITY:
Common Stock 293 135
Additional Paid-in Capital 356,184 151,971
Accumulated Deficit (16,017) (14,373)
-------- --------
Total Stockholders' Equity 340,460 137,733
-------- --------
Total Liabilities and Stockholders' Equity $894,706 $636,786
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------------
1998 1997
---------------- ------------------
<S> <C> <C>
REVENUES:
Storage $ 59,506 $ 32,390
Service and Storage Material Sales 48,454 22,265
-------- ---------
Total Revenues 107,960 54,655
OPERATING EXPENSES:
Cost of Sales (Excluding Depreciation) 56,335 27,870
Selling, General and Administrative 26,447 14,180
Depreciation and Amortization 12,839 6,530
-------- --------
Total Operating Expenses 95,621 48,580
-------- --------
OPERATING INCOME 12,339 6,075
INTEREST EXPENSE 10,999 6,550
-------- --------
Income (Loss) Before Provision (Credit) for Income Taxes 1,340 (475)
PROVISION (CREDIT) FOR INCOME TAXES 2,409 (150)
-------- --------
Net Loss $ (1,069) $ (325)
======== ========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.04) $ (0.02)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 29,209 18,072
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
REVENUES:
Storage $168,046 $ 86,199
Service and Storage Material Sales 142,461 57,195
-------- --------
Total Revenues 310,507 143,394
OPERATING EXPENSES:
Cost of Sales (Excluding Depreciation) 162,609 73,742
Selling, General and Administrative 76,666 35,682
Depreciation and Amortization 36,225 18,495
-------- --------
Total Operating Expenses 275,500 127,919
-------- --------
OPERATING INCOME 35,007 15,475
INTEREST EXPENSE 34,228 17,631
OTHER INCOME 1,700 --
-------- --------
Income (Loss) Before Provision (Credit) for Income Taxes 2,479 (2,156)
PROVISION (CREDIT) FOR INCOME TAXES 4,123 (346)
-------- --------
Net Loss $ (1,644) $ (1,810)
======== ========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.06) $ (0.11)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 26,848 16,359
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,644) $ (1,810)
Adjustments to Reconcile Net Loss to Cash
Flows Provided by Operating Activities:
Depreciation and Amortization 36,226 18,495
Amortization of Financing Costs 1,350 685
Provision for Doubtful Accounts 1,230 155
Deferred Income Taxes and Other 2,490 (1,452)
Changes in Assets and Liabilities (Exclusive of Acquisitions):
Accounts Receivable (6,209) (5,039)
Receivable from Insurance Company 5,331 --
Prepaid Expenses and Other Current Assets 2,722 (4,315)
Other Assets 950 362
Accounts Payable (5,824) 1,220
Accrued Expenses and Other Current Liabilities 2,295 4,951
Deferred Income 537 (426)
Deferred Rent 1,107 558
Other Long-term Liabilities 4,170 (8)
--------- ---------
Cash Flows Provided by Operating Activities 44,731 13,376
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Paid for Acquisitions (175,029) (81,265)
Capital Expenditures (37,219) (20,618)
Additions to Customer Acquisition Costs (2,326) (688)
--------- ---------
Cash Flows Used in Investing Activities (214,574) (102,571)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Debt (142,286) (10,407)
Proceeds from Borrowings 153,600 99,050
Financing Costs (344) (852)
Net Proceeds from Equity Offering 132,905 --
Proceeds from Exercise of Stock Options 2,961 653
Stock Issuance Costs (981) (460)
--------- ---------
Cash Flows Provided by Financing Activities 145,855 87,984
DECREASE IN CASH AND CASH EQUIVALENTS (23,988) (1,211)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,510 3,453
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 522 $ 2,242
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands except Per Share Data)
(Unaudited)
(1) GENERAL
The interim condensed consolidated financial statements presented herein have
been prepared by Iron Mountain Incorporated ("Iron Mountain" or the "Company")
without audit and, in the opinion of management, reflect all adjustments of a
normal recurring nature necessary for a fair presentation. Interim results are
not necessarily indicative of results for a full year.
The condensed consolidated balance sheet presented as of December 31, 1997, has
been derived from the consolidated financial statements that have been audited
by the Company's independent public accountants. The unaudited condensed
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to those rules and regulations, but the Company believes that
the disclosures are adequate to make the information presented not misleading.
The condensed consolidated financial statements and notes included herein should
be read in conjunction with the consolidated financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
On June 30, 1998, the Company's Board of Directors authorized and approved a
three-for-two stock split effected in the form of a dividend on the Company's
Common Stock. Such additional shares of Common Stock were issued on July 31,
1998 to all stockholders of record as of the close of business on July 17, 1998.
All share and per share amounts in the accompanying financial statements and
Notes thereto have been restated to reflect the stock split.
(2) ACQUISITIONS
During the nine months ended September 30, 1998, the Company purchased
substantially all of the assets, and assumed certain liabilities, of nine
records management businesses and, through mergers, acquired all of the
outstanding capital stock of Arcus Group, Inc. ("Arcus"), a leading provider of
off-site data security and a provider of information technology staffing
services, InterMation, Inc. and National Underground Storage, Inc.
(collectively, the "1998 Acquisitions").
Each of the 1998 Acquisitions and all 18 of the records management businesses
acquired during 1997 (the "1997 Acquisitions"), were 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 the Company
from their respective acquisition dates. In connection with certain 1998 and
1997 acquisitions, related real estate was also purchased.
The aggregate purchase price for the 1998 Acquisitions exceeded the underlying
fair value of the net assets acquired by $196,176 which has been assigned to
goodwill and is being amortized over 25 to 30 years. The purchase price
allocations are preliminary and subject to adjustment. To finance the 1998
Acquisitions, the Company issued 2,646 shares of its Common Stock, par value
$.01 per share (the "Common Stock"), issued options to purchase approximately
900 shares of Common Stock and paid $175,029 in cash. The cash portion of the
purchase price was funded with a portion of the net proceeds from the sale of
the 1997 Notes and the Equity Offering, each as defined herein, and borrowings
under the Company's revolving credit facility.
7
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands except Per Share Data)
(Unaudited)
(Continued)
A summary of the total consideration and the preliminary allocation of the
aggregate purchase price of the 1998 Acquisitions, as of the acquisition dates,
is as follows:
<TABLE>
<S> <C>
Cash Paid $175,029
Fair Value of Common Stock Issued 51,448
Fair Value of Options Issued 15,655
--------
Total Consideration 242,132
Fair Value of Assets Acquired During 1998 78,151
Liabilities Assumed (32,195)
--------
Fair Value of Net Assets Acquired 45,956
--------
Recorded Goodwill $196,176
========
</TABLE>
The following unaudited pro forma combined information shows the results of the
Company's operations for the nine months ended September 30, 1998 and the year
ended December 31, 1997 as though each of the 1998 and 1997 acquisitions had
occurred as of the beginning of the respective period:
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
September 30, December 31,
1998 1997
------------------ ---------------------
<S> <C> <C>
Revenues $320,568 $387,668
Net Loss (1,220) (4,241)
Net Loss Per Share - Basic and Diluted (0.05) (0.15)
</TABLE>
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 the beginning of each period 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 businesses. Certain 1997 Acquisitions,
representing annual revenues of approximately $2,800, were not included in the
pro forma results, as their effect was immaterial.
8
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands except Per Share Data)
(Unaudited)
(Continued)
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
8-3/4% Senior Subordinated Notes (the "1997 Notes") $249,555 $249,525
10-1/8% Senior Subordinated Notes (the "1996 Notes") 165,000 165,000
Revolving Credit Facility 14,500 --
Real Estate Mortgages 10,028 10,312
Other 4,106 181
-------- --------
Total Long-term Debt 443,189 425,018
Less: Current Portion (1,893) (520)
-------- --------
Long-term Debt, Net of Current Portion $441,296 $424,498
======== ========
</TABLE>
The 1996 Notes and 1997 Notes are fully and unconditionally guaranteed, on a
joint and several basis, on a senior subordinated basis, by substantially all of
the Company's direct and indirect subsidiaries (the "Subsidiary Guarantors").
The Company is a holding company, substantially all of the assets of which are
the Subsidiary Guarantors, and substantially all of the operations of which are
conducted by the Subsidiary Guarantors. Accordingly, the aggregate assets,
liabilities, earnings and equity of the Subsidiary Guarantors are substantially
equivalent to the assets, liabilities, earnings and equity of the Company on a
consolidated basis. Management of the Company believes that separate financial
statements of, and other disclosures with respect to, the Subsidiary Guarantors
are not meaningful or material to investors.
(4) COMMON STOCK
On April 3, 1998, the Company issued and sold an aggregate of 6,038 shares
(including 788 shares to cover over-allotments) of its Common Stock in an
underwritten public offering (the "Equity Offering"). Net proceeds to the
Company after deducting underwriters' discounts and commissions were $132.9
million and were used to repay outstanding bank debt, to fund the cash portion
of the purchase price of certain 1998 Acquisitions and for general corporate
purposes.
On June 30, 1998, the Company's Board of Directors authorized and approved a
three-for-two stock split effected in the form of a dividend on the Company's
Common Stock. Such additional shares of Common Stock were issued on July 31,
1998 to all stockholders of record as of the close of business on July 17, 1998.
All share and per share amounts in the accompanying financial statements and
Notes thereto have been restated to reflect the stock split.
(5) OTHER INCOME
In June 1998, the Company settled several insurance claims, including a
significant claim under its business interruption insurance policy, related to
the March 1997 fires at its South Brunswick Township, New Jersey
9
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands except Per Share Data)
(Unaudited)
(Continued)
facilities. Other income for the nine month period ended September 30, 1998 is
comprised of a $1,700 gain related to this settlement.
(6) EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
basic net loss per common share is calculated by dividing net loss by the
weighted average number of common shares outstanding. The calculation of diluted
net loss per share is consistent with that of basic net 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. As of September 30, 1998 and 1997,
2,341 and 1,612 potential common shares, respectively, have been excluded from
the calculation of diluted net loss per share, as their effects are
antidilutive.
(7) ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes new standards regarding accounting and reporting requirements for
derivative instruments and hedging activities. The new standard is effective for
fiscal years beginning after June 15, 1999. The Company is presently studying
the effect of the new pronouncement and, as required, expects to adopt SFAS No.
133 beginning January 1, 2000. As of September 30, 1998, the Company did not own
any derivative instruments.
In April 1998, the American Institute of Certified Public Accountants issued
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 Company is presently
studying the effect of the new pronouncement and, as required, expects to adopt
SOP 98-5 beginning January 1, 1999.
In March 1998, the American Institute of Certified Public Accountants issued
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 Company is
presently studying the effect of the new pronouncement and, as required, expects
to adopt SOP 98-1 prospectively beginning January 1, 1999. Simultaneously, the
Company is also reviewing the estimated useful lives of its software for
internal use and may revise its lives in connection with the adoption of SOP
98-1.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The new
standard establishes new guidelines regarding the disclosure requirements for
business segments. The Company is required to adopt the new standard in its 1998
year-end financial statements.
(8) SUBSEQUENT EVENTS
Through November 13, 1998, the Company acquired two additional records
management businesses and certain related real estate for aggregate
consideration of approximately $13.5 million, including cash and certain assets
of a business acquired in 1997, in transactions that were accounted for as
purchases.
10
<PAGE>
IRON MOUNTAIN INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations for the three and nine month periods ended September 30,
1998 and 1997 should be read in conjunction with the consolidated financial
statements and footnotes for the three and nine month periods ended September
30, 1998 included herein, and the year ended December 31, 1997, included in the
Company's Annual Report on Form 10-K.
Overview
The Company's consolidated revenues increased $53.3 million, or 97.5%, to $108.0
million for the third quarter of 1998 from $54.7 million for the third quarter
of 1997. Included in consolidated revenues for the third quarter of 1998 is
$98.6 million attributable to the Company's records and information management
services ("RIMS") business and $9.4 million attributable to the Company's
information technology staffing services business ("IT Staffing"). Internal
revenue growth, adjusted for the effect of the March 1997 fires at the Company's
South Brunswick Township, New Jersey facilities ("Adjusted Internal Revenue
Growth"), was 10.0% for the three month period ended September 30, 1998 compared
with the same period in 1997.
For the nine months ended September 30, 1998, the Company's consolidated
revenues were $310.5 million compared to $143.4 million for the same period in
1997, an increase of 116.5%. Included in consolidated revenues for the first
nine months of 1998 is $281.1 million attributable to the Company's RIMS
business and $29.4 million attributable to the Company's IT Staffing business.
Adjusted Internal Revenue Growth was 12.0% for the nine month period ended
September 30, 1998 compared with the same period in 1997.
In June 1998, the Company settled several insurance claims, including a
significant claim under its business interruption insurance policy, related to
the March 1997 fires at its South Brunswick Township, New Jersey facilities.
Other income for the nine month period ended September 30, 1998 is comprised of
a $1.7 million gain related to this settlement. The calculation of earnings
before interest, taxes, depreciation, amortization and extraordinary items
("EBITDA") will not include this gain.
In June 1998, the Company's Board of Directors authorized and approved a
three-for-two stock split effected in the form of a dividend on the Company's
Common Stock. Such additional shares of Common Stock were issued on July 31,
1998 to all stockholders of record as of the close of business on July 17, 1998.
Except as otherwise noted, all share and per share amounts included herein have
been restated to reflect the stock split.
In April 1998, the Company issued and sold an aggregate of approximately 6.0
million shares of its Common Stock in an underwritten public offering. Net
proceeds to the Company after deducting underwriters' discounts and commissions
were $132.9 million and were used to repay outstanding bank debt, to fund the
cash portion of the purchase price of certain 1998 Acquisitions and for general
corporate purposes.
11
<PAGE>
IRON MOUNTAIN INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Consolidated storage revenues increased $27.1 million, or 83.7%, to $59.5
million for the third quarter of 1998 from $32.4 million for the third quarter
of 1997, primarily due to acquisitions. Adjusted Internal Revenue Growth was
9.3%. The internal storage revenue growth resulted primarily from net increases
in records and other media stored by existing customers and from sales to new
customers. The RIMS business accounted for all $59.5 million and $32.4 million
of storage revenues for the third quarter of 1998 and 1997, respectively.
Consolidated service and storage material sales revenues increased $26.2
million, or 117.6%, to $48.5 million for the third quarter of 1998 from $22.3
million for the third quarter of 1997, primarily due to acquisitions. Adjusted
Internal Revenue Growth was 11.0%. The internal revenue growth resulted from
increases in service and storage material sales to existing customers and the
addition of new customer accounts. Included within the $26.2 million increase is
$9.4 million attributable to the IT Staffing business. Service and storage
material sales revenues for the Company's RIMS business increased $16.8 million,
or 75.3%, to $39.1 million from $22.3 million for the third quarter of 1997.
For the reasons discussed above, total consolidated revenues increased $53.3
million, or 97.5%, to $108.0 million for the third quarter of 1998 from $54.7
million for the same period last year. Total revenues for the RIMS business
increased $43.9 million, or 80.3%, to $98.6 million for the third quarter of
1998 from $54.7 million for the third quarter of 1997. Adjusted Internal Revenue
Growth was 10.0%.
Consolidated cost of sales (excluding depreciation) increased $28.4 million to
$56.3 million (52.2% of consolidated revenues) for the third quarter of 1998
from $27.9 million (51.0% of consolidated revenues) for the third quarter of
1997. The dollar increase was primarily attributable to the increase in records
and other media stored and costs associated with the Company's new IT Staffing
business. The increase as a percentage of consolidated revenues was primarily
attributable to the IT Staffing business having a lower gross margin than the
rest of the Company. Cost of sales (excluding depreciation) for the Company's
RIMS business increased $21.6 million to $49.5 million (50.2% of RIMS revenues)
for the third quarter of 1998 from $27.9 million (51.0% of RIMS revenues) for
the same period last year. The decrease as a percentage of revenues was
primarily attributable to the January 1998 acquisition of the Arcus data
security business and the September 1997 acquisition of a software escrow
business having higher gross margins than the rest of the Company. The IT
Staffing business reported cost of sales (excluding depreciation) of $6.8
million (72.5% of IT Staffing revenues).
Consolidated selling, general and administrative expenses increased $12.2
million to $26.4 million (24.5% of consolidated revenues) for the third quarter
of 1998 from $14.2 million (25.9% of consolidated revenues) for the third
quarter of 1997. The dollar increase was primarily attributable to: (i) the
addition of overhead attributable to the 1998 Acquisitions; and (ii) additional
salespeople, primarily related to the acquisition of Arcus and the decision by
the Company to significantly increase its selling resources. Selling, general
and administrative expenses for the RIMS business increased $9.9 million to
$24.1 million (24.4% of RIMS revenues) for the third quarter of 1998 from $14.2
million (25.9% of RIMS revenues) for the third quarter of 1997. The IT Staffing
business reported selling, general and administrative expenses of $2.3 million
(25.3% of IT Staffing revenues).
12
<PAGE>
IRON MOUNTAIN INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Consolidated depreciation and amortization expense increased $6.3 million to
$12.8 million (11.9% of consolidated revenues) for the third quarter of 1998
from $6.5 million (11.9% of consolidated revenues) for the third quarter of
1997. The dollar increase was primarily attributable to the additional
depreciation and amortization expense related to the aforementioned
acquisitions, and capital expenditures including racking systems, information
systems and improvements to existing facilities. Depreciation and amortization
expense for the RIMS business increased $6.1 million to $12.6 million (12.8% of
RIMS revenues) for the third quarter of 1998 from $6.5 million (11.9% of RIMS
revenues) for the third quarter of 1997. The IT Staffing business reported
depreciation and amortization expenses of $0.2 million (2.2% of IT Staffing
revenues).
As a result of the foregoing factors, consolidated operating income increased
$6.2 million, or 103.1%, to $12.3 million (11.4% of consolidated revenues) for
the third quarter of 1998 from $6.1 million (11.1% of consolidated revenues) for
the third quarter of 1997.
Consolidated interest expense increased $4.4 million to $11.0 million for the
third quarter of 1998 from $6.6 million for the third quarter of 1997. 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 third quarter of 1998 compared
to the same period in 1997.
As a result of the foregoing factors, consolidated income (loss) before
provision (credit) for income taxes increased $1.8 million to income of $1.3
million (1.2% of consolidated revenues) for the third quarter of 1998 from a
loss of $0.5 million (0.9% of consolidated revenues) for the third quarter of
1997. The provision for income taxes was $2.4 million for the third quarter of
1998 compared to a credit of $0.2 million for the third quarter of 1997. The
Company's effective tax rate is higher than statutory rates primarily due to the
amortization of the nondeductible portion of goodwill associated with certain
acquisitions (the tax laws generally permit deduction of such expenses for asset
purchases, but not for acquisitions of stock). In connection with the
acquisitions closed in the third quarter of 1998, the Company recorded
approximately $12.4 million in nondeductible goodwill.
Consolidated net loss increased $0.8 million to a net loss of $1.1 million (1.0%
of consolidated revenues) for the third quarter of 1998 from a consolidated net
loss of $0.3 million (0.6% of consolidated revenues) for the third quarter of
1997.
As a result of the foregoing factors, consolidated EBITDA increased $12.6
million, or 99.7%, to $25.2 million (23.3% of consolidated revenues) for the
third quarter of 1998 from $12.6 million (23.1% of consolidated revenues) for
the third quarter of 1997. EBITDA for the RIMS business increased $12.4 million,
or 98.1%, to $25.0 million (25.3% of RIMS revenues) for the third quarter of
1998 from $12.6 million (23.1% of RIMS revenues) for the third quarter of 1997.
EBITDA for the IT Staffing business was $0.2 million (2.2% of IT Staffing
revenues) for the third quarter of 1998.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Consolidated storage revenues increased $81.8 million, or 94.9%, to $168.0
million for the first nine months of 1998 from $86.2 million for the first nine
months of 1997, primarily due to acquisitions. Adjusted Internal Revenue Growth
was 10.8%. The internal storage revenue growth resulted primarily from net
increases in records and other media stored by existing customers and from sales
to new customers. The RIMS business accounted for all $168.0 million and $86.2
million of storage revenues for the first nine months of 1998 and
13
<PAGE>
IRON MOUNTAIN INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
1997, respectively.
Consolidated service and storage material sales revenues increased $85.3
million, or 149.1%, to $142.5 million for the first nine months of 1998 from
$57.2 million for the first nine months of 1997, primarily due to acquisitions.
Adjusted Internal Revenue Growth was 13.9%. The internal revenue growth resulted
from increases in service and storage material sales to existing customers and
the addition of new customer accounts. Included within the $85.3 million
increase is $29.5 million attributable to the IT Staffing business. Service and
storage material sales revenues for the Company's RIMS business increased $55.8
million, or 97.6%, to $113.0 million from $57.2 million for the first nine
months of 1997. The greater percentage increase in service and storage material
sales revenues, as compared to storage revenues, for the first nine months of
1998 over the same period in 1997, is primarily attributable to certain
acquisitions that have a higher component of service and storage material sales
revenues, compared to storage revenues, than the rest of the Company.
For the reasons discussed above, total consolidated revenues increased $167.1
million, or 116.5%, to $310.5 million for the first nine months of 1998 from
$143.4 million for the same period last year. Total revenues for the RIMS
business increased $137.7 million, or 96.0%, to $281.1 million for the first
nine months of 1998 from $143.4 million for the first nine months of 1997.
Adjusted Internal Revenue Growth was 12.0%.
Consolidated cost of sales (excluding depreciation) increased $88.9 million to
$162.6 million (52.4% of consolidated revenues) for the first nine months of
1998 from $73.7 million (51.4% of consolidated revenues) for the first nine
months of 1997. The dollar increase was primarily attributable to the increase
in records and other media stored, expenses related to certain facility
relocations and costs associated with the Company's new IT Staffing business.
The increase as a percentage of consolidated revenues was primarily attributable
to the IT Staffing business having a lower gross margin than the rest of the
Company. Cost of sales (excluding depreciation) for the Company's RIMS business
increased $67.5 million to $141.2 million (50.2% of RIMS revenues) for the first
nine months of 1998 from $73.7 million (51.4% of RIMS revenues) for the same
period last year. The decrease as a percentage of revenues was primarily
attributable to: (i) certain data security acquisitions, including Arcus and a
software escrow business, acquired in the third quarter of 1997, having a higher
gross margin than the rest of the Company; and (ii) the consolidation of real
estate associated with certain acquisitions. The IT Staffing business reported
cost of sales (excluding depreciation) of $21.4 million (72.8% of IT Staffing
revenues).
Consolidated selling, general and administrative expenses increased $41.0
million to $76.7 million (24.7% of consolidated revenues) for the first nine
months of 1998 from $35.7 million (24.9% of consolidated revenues) for the first
nine months of 1997. The dollar increase was primarily attributable to: (i) the
addition of overhead attributable to the Arcus acquisition; (ii) additional
salespeople, primarily related to the acquisitions of Arcus and Safesite Records
Management Corporation and the decision by the Company to significantly increase
its selling resources; (iii) increased personnel, office and overhead costs to
support the Company's growth; and (iv) recruiting, relocation and training
expenses associated with acquisition integration. Selling, general and
administrative expenses for the RIMS business increased $34.4 million to $70.1
million (24.9% of RIMS revenues) for the first nine months of 1998 from $35.7
million (24.9% of RIMS revenues) for the first nine months of 1997. The IT
Staffing business reported selling, general and administrative expenses of $6.6
million (22.4% of IT Staffing revenues).
Consolidated depreciation and amortization expense increased $17.7 million to
$36.2 million (11.7% of consolidated revenues) for the first nine months of 1998
from $18.5 million (12.9% of consolidated
14
<PAGE>
IRON MOUNTAIN INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
revenues) for the first nine months of 1997. The dollar increase was primarily
attributable to the additional depreciation and amortization expense related to
the aforementioned acquisitions, and capital expenditures including racking
systems, information systems and improvements to existing facilities.
Depreciation and amortization expense for the RIMS business increased $17.1
million to $35.6 million (12.7% of RIMS revenues) for the first nine months of
1998 from $18.5 million (12.9% of RIMS revenues) for the first nine months of
1997. The IT Staffing business reported depreciation and amortization expenses
of $0.6 million (2.2% of IT Staffing revenues).
As a result of the foregoing factors, consolidated operating income increased
$19.5 million, or 126.2%, to $35.0 million (11.3% of consolidated revenues) for
the first nine months of 1998 from $15.5 million (10.8% of consolidated
revenues) for the first nine months of 1997.
Consolidated interest expense increased $16.6 million to $34.2 million for the
first nine months of 1998 from $17.6 million for the first nine months of 1997.
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 first nine months of 1998
compared to the same period in 1997. Consolidated other income for the first
nine months of 1998 is comprised of a $1.7 million gain resulting from the
settlement of several insurance claims, including a significant claim under its
business interruption insurance policy, related to the March 1997 fires at the
Company's South Brunswick Township, New Jersey facilities.
As a result of the foregoing factors, consolidated income (loss) before the
provision (credit) for income taxes increased $4.7 million to income of $2.5
million (0.8% of consolidated revenues) for the first nine months of 1998 from a
loss of $2.2 million (1.5% of consolidated revenues) for the first nine months
of 1997. The provision for income taxes was $4.1 million for the first nine
months of 1998 compared to a credit of $0.4 million for the first nine months of
1997. The Company's effective tax rate is higher than statutory rates primarily
due to the amortization of the nondeductible portion of goodwill associated with
certain acquisitions (the tax laws generally permit deduction of such expenses
for asset purchases, but not for acquisitions of stock). In connection with the
1998 Acquisitions, the Company recorded approximately $168.4 million in
nondeductible goodwill.
Consolidated net loss decreased $0.2 million to a net loss of $1.6 million (0.5%
of consolidated revenues) for the first nine months of 1998 from a consolidated
net loss of $1.8 million (1.3% of consolidated revenues) for the first nine
months of 1997.
As a result of the foregoing factors, consolidated EBITDA increased $37.2
million, or 109.7%, to $71.2 million (22.9% of consolidated revenues) for the
first nine months of 1998 from $34.0 million (23.7% of consolidated revenues)
for the first nine months of 1997. EBITDA for the RIMS business increased $35.8
million, or 105.8%, to $69.8 million (24.8% of RIMS revenues) for the first nine
months of 1998 from $34.0 million (23.7% of RIMS revenues) for the first nine
months of 1997. EBITDA for the IT Staffing business was $1.4 million (4.8% of IT
Staffing revenues) for the first nine months of 1998.
Liquidity and Capital Resources
As the Company has sought to increase its EBITDA, it has made significant
capital investments, consisting primarily of: (i) acquisitions; (ii) capital
expenditures, primarily related to growth (including investments in
15
<PAGE>
IRON MOUNTAIN INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
real estate, racking systems, information systems and improvements to existing
facilities); and (iii) customer acquisition costs. Cash paid for these
investments during the first nine months of 1998 amounted to $175.0 million,
$37.2 million and $2.3 million, respectively. These investments have been
primarily funded through cash flows from operations, borrowings under the
Company's revolving credit facility, a portion of the net proceeds from the sale
of the 1997 Notes and the net proceeds from the Equity Offering.
Net cash provided by operations was $44.7 million for the first nine months of
1998 compared to $13.4 million for the same period in 1997. The increase
resulted primarily from the $37.2 million increase in EBITDA, which was
partially offset by a $6.2 million increase in trade accounts receivable related
to increased revenues, a $5.8 million decrease in accounts payable and other
changes in assets and liability accounts.
Net cash provided by financing activities was $145.9 million for the nine months
ended September 30, 1998, consisting primarily of the net proceeds from the
Equity Offering of $132.9 million.
In April 1998, the Company issued and sold an aggregate of approximately 6.0
million shares (including approximately 0.8 million shares to cover
over-allotments) of its Common Stock in an underwritten public offering. Net
proceeds to the Company after deducting underwriters' discounts and commissions
were $132.9 million and were used to repay outstanding bank debt, to fund the
cash portion of the purchase price of certain 1998 Acquisitions and for general
corporate purposes.
In January 1998, the Company issued 2.2 million shares of its Common Stock with
a fair value of $39.4 million in connection with the acquisition of Arcus.
Options to acquire approximately 0.9 million shares of Common Stock, valued at
$15.7 million, were also issued in connection with the Arcus acquisition. In
April 1998, the Company issued approximately 0.5 million shares of Common Stock,
valued at $12.0 million, as a portion of the purchase price for the InterMation
acquisition.
Year 2000 Readiness
General
The Year 2000 ("Y2K") problem refers to the inability of systems, primarily
software systems, to properly recognize and process date sensitive information
relating to the year 2000 and beyond. In order to respond to this problem, the
Company has established a Y2K Project Plan (the "Plan"). The Plan is comprised
of five major phases: awareness, assessment, renovation, validation and
implementation. These phases are applied to three general categories:
operational systems (consisting primarily of inventory and billing systems),
financial accounting systems and other products and services obtained from third
parties. In certain cases, multiple phases may be implemented contemporaneously.
Operational Systems
The Company's primary operational systems for its records and information
management services ("RIMS") segment are Safekeeper(TM), an internally developed
software application used mainly in its business records operations, and
MediaLink(TM), a software application obtained from a third party used mainly in
the Company's data security operations. In addition, as an active acquiror of
businesses, the Company currently uses, and will continue to use, several
different legacy operational systems that have been, and will be, inherited
through its ongoing acquisition program. Safekeeper is and MediaLink, based
upon vendor certification, is believed to be Y2K compliant.
16
<PAGE>
IRON MOUNTAIN INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Based on the Company's assessment, approximately 85% of its business units are
currently operating with an operational system that is believed to be Y2K
compliant or upgradable to a currently available Y2K compliant version of the
existing software. Conversion of the remaining business units to a Y2K compliant
operational system is currently underway.
The Company's information technology ("IT") staffing business uses commercially
available, off-the-shelf software packages from nationally recognized vendors
for its primary software applications, which include its financial accounting,
time and billing and resume retrieval database systems. Based on publicly
available certifications from the vendors, the Company believes that these
software packages are Y2K compliant. The IT staffing business is currently
upgrading its accounting and time and billing software to the Y2K compliant
releases. These upgrades are expected to be completed in December 1998.
Financial Accounting Systems
In the normal course of business, the Company has had several system improvement
initiatives underway. One such initiative involves the installation of new
financial accounting software from Oracle Corporation. Oracle has certified that
its accounting software is Y2K compliant. The installation of the Oracle
software is ongoing and is expected to be substantially complete by the end of
the first quarter of 1999. The Company currently uses, and will continue to use,
several different legacy accounting systems that have been, and will be,
inherited through its ongoing acquisition program. The Company has completed its
assessment, and based on vendor certifications, believes these systems to be Y2K
compliant.
Products and Services Obtained from Third Parties
Products and services obtained from third parties are comprised mainly of (i)
facility systems, including telecommunications, climate control systems,
security systems, fire and safety systems ("Facility Systems"), and (ii)
products and services purchased from vendors, including third party payroll
processing and products for resale such as cartons and operating supplies. The
Company has substantially completed assessment of its telecommunications systems
and is in the process of developing a remediation plan for such systems that are
not Y2K compliant. With respect to its other Facility Systems and products and
services purchased from vendors, the Company is in the assessment phase and
expects that assessment to be completed by the end of the first quarter of
1999.
Customers
The Company's customer base is diversified in terms of revenue and industry
concentration. Only one customer accounts for more than 1% of total revenues and
no customer accounts for more than 2% of total revenues. Given the nature of the
services the Company provides to its customers, as well as the diversification
of the customer base, the Company does not believe that Y2K issues associated
with its customers will have a material adverse effect on its financial
condition or results of operations.
Costs
Based on the Company's current assessment of its Y2K issues, the total cost
associated with required modifications to become Y2K compliant is not expected
to be material to the Company's financial position. Certain costs associated
with the Company's pre-existing system improvement initiatives and the purchase
of equipment (including the financial accounting software developed by Oracle,
Safekeeper and Medialink) will
17
<PAGE>
IRON MOUNTAIN INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
be capitalized and amortized over their useful lives. Certain payroll and
related costs represent the redeployment of existing staff resources rather than
incremental costs to the Company. All other costs associated with the Plan will
be expensed as incurred. Costs associated with the Plan will be included in the
Company's operating and capital budgets for 1999, which are currently being
prepared.
Contingency Plans
As part of its Y2K project, the Company has analyzed its points of major risk
and is developing contingency plans as a backup to its remediation effort.
Year 2000 Risks
The failure on the part of the Company or one of its suppliers to correct a
material Y2K problem could result in an interruption in, or a failure of,
certain normal business activities or operations, although the extent of such a
business disruption is not known at this time. The implementation of the Plan is
expected to significantly reduce the Company's level of uncertainty about the
Y2K problem. The Company believes that, with the completion of its existing
system improvement initiatives and the successful execution of the Plan, the
likelihood of significant interruptions of normal operations will be
substantially reduced. However, no assurance can be given that the Company will
be able to address the Y2K issues for all of its software applications and major
operating systems in a timely manner or that it will not encounter unexpected
difficulties or significant expenses.
18
<PAGE>
IRON MOUNTAIN INCORPORATED
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Description
------- -------------------------------------------------------
27.1 Financial Data Schedule for the Nine Months Ended September 30,
1998
27.2 Financial Data Schedule for the Nine Months Ended September 30,
1997 (Restated)
(b) Reports on Form 8-K
On July 10 , 1998, the Company filed a Current Report on Form 8-K
pertaining to the consummation of the merger of National Underground
Storage, Inc. into a wholly owned subsidiary of the Company and the
approval by the Company's Board of Directors of a three-for-two stock split
effected in the form of a dividend on the Company's Common Stock. In
accordance with Item 7(a)(4) of Form 8-K, the required financial statements
were filed, by ammendment to the Form 8-K, on August 7, 1998.
On September 18, 1998, the Company filed a Current Report on Form 8-K to
restate its Selected Consolidated Financial and Operating Information so as
to report the effect of the Company's three-for-two stock split effected in
the form of a dividend on the Company's Common Stock which was approved by
the Company's Board of Directors on June 30, 1998. Shares of the Common
Stock were issued on July 31, 1998 to all stockholders of record as of the
close of business on July 17, 1998. The Report on Form 8-K also included
audited financial statements of certain records management businesses that
were acquired by the Company during 1998. Such audited financial statements
were related to businesses that comprised a substantial majority of
businesses acquired by the Company since the date of the most recent
audited balance sheet had been furnished.
CERTAIN IMPORTANT FACTORS
This Quarterly Report on Form 10-Q contains statements that constitute forward
looking statements within the meaning of the Securities Exchange Act of 1934, as
amended. These statements appear in a number of places in this Form 10-Q and
include statements regarding the strategies, beliefs and current expectations of
the Company and its management. Readers are cautioned that any such forward
looking statements are not guarantees of future performance and involve risks
and uncertainties, which could cause actual results to differ materially from
those in the forward looking statements. Such factors include but are not
limited to: (i) the Company's ability or inability to complete acquisitions on
satisfactory terms and to integrate acquired companies efficiently; (ii) the
cost and availability of financing for contemplated growth; (iii) the cost and
availability of appropriate storage facilities; (iv) the possibility of a
natural disaster disrupting operations to an extent greater than the Company is
insured for; (v) the demand and price for the Company's services, relative to
the cost of providing such services; (vi) certain risks and uncertainties
associated with the Company's readiness for the year 2000, including but not
limited to, the Company's inability to recruit and/or retain key staff necessary
for addressing year 2000 issues; failure of major third party suppliers of
products and services to adequately address their year 2000 issues despite
assurances to the contrary; delays in the conversion or upgrade of acquired and
to be acquired bussinesses' software systems to appropriate Y2K compliant
software systems; and actual future costs associated with the Company's year
2000 plan being greater than currently expected; or (vii) other trends in
competitive or economic conditions affecting the Company's financial condition
or results of operations not presently contemplated. The information
19
<PAGE>
IRON MOUNTAIN INCORPORATED
contained in this Form 10-Q and the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, including under the headings "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," identifies other important factors that could cause such
differences.
20
<PAGE>
IRON MOUNTAIN INCORPORATED
SIGNATURE
Pursuant to the requirements 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
November 16, 1998 By: /s/ Jean A. Bua
- ----------------- ----------------------------------------
(date) Jean A. Bua
Vice President and Corporate Controller
(Principal Accounting Officer)
21
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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