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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549



FORM 10-Q

(Mark One)    

ý

 

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

For the Quarterly Period Ended June 30, 2010

OR

o

 

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

For the Transition Period from                             to                            

Commission file number 1-13045



IRON MOUNTAIN INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or other Jurisdiction of
Incorporation or Organization)
  23-2588479
(I.R.S. Employer
Identification No.)

745 Atlantic Avenue, Boston, MA 02111
(Address of Principal Executive Offices, Including Zip Code)

(617) 535-4766
(Registrant's Telephone Number, Including Area Code)



        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

        Number of shares of the registrant's Common Stock at July 26, 2010: 201,511,311


Table of Contents


IRON MOUNTAIN INCORPORATED

Index

 
  Page  

PART I—FINANCIAL INFORMATION

       

Item 1—Unaudited Consolidated Financial Statements

       
 

Consolidated Balance Sheets at December 31, 2009 (Unaudited) and June 30, 2010 (Unaudited)

   
3
 
 

Consolidated Statements of Operations for the Three Months Ended June 30, 2009 and 2010 (Unaudited)

   
4
 
 

Consolidated Statements of Operations for the Six Months Ended June 30, 2009 and 2010 (Unaudited)

   
5
 
 

Consolidated Statements of Equity for the Six Months Ended June 30, 2009 and 2010 (Unaudited)

   
6
 
 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2009 and 2010 (Unaudited)

   
7
 
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2010 (Unaudited)

   
8
 
 

Notes to Consolidated Financial Statements (Unaudited)

   
9
 

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

   
41
 

Item 4—Controls and Procedures

   
62
 

PART II—OTHER INFORMATION

       

Item 1—Legal Proceedings

   
63
 

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

   
64
 

Item 6—Exhibits

   
64
 

Signatures

   
66
 

2


Table of Contents

Part I. Financial Information

Item 1.    Unaudited Consolidated Financial Statements

        


IRON MOUNTAIN INCORPORATED

CONSOLIDATED BALANCE SHEETS

(In Thousands, except Share and Per Share Data)

(Unaudited)

 
  December 31,
2009
  June 30,
2010
 
 
  (As Adjusted—see note 2.a.)
   
 

ASSETS

             

Current Assets:

             
 

Cash and cash equivalents

  $ 446,656   $ 340,479  
 

Restricted cash

        35,103  
 

Accounts receivable (less allowances of $25,529 and $25,553, respectively)

    585,376     581,176  
 

Deferred income taxes

    37,924     25,759  
 

Prepaid expenses and other

    141,469     142,717  
           
     

Total Current Assets

    1,211,425     1,125,234  

Property, Plant and Equipment:

             
 

Property, plant and equipment

    4,184,631     4,161,771  
 

Less—Accumulated depreciation

    (1,616,431 )   (1,704,952 )
           
     

Net Property, Plant and Equipment

    2,568,200     2,456,819  

Other Assets, net:

             
 

Goodwill

    2,534,713     2,544,474  
 

Customer relationships and acquisition costs

    438,812     415,694  
 

Deferred financing costs

    35,206     32,579  
 

Other

    58,478     72,296  
           
     

Total Other Assets, net

    3,067,209     3,065,043  
           
     

Total Assets

  $ 6,846,834   $ 6,647,096  
           

LIABILITIES AND EQUITY

             

Current Liabilities:

             
 

Current portion of long-term debt

  $ 40,561   $ 37,662  
 

Accounts payable

    175,231     124,310  
 

Accrued expenses

    390,860     361,698  
 

Deferred revenue

    208,062     207,980  
           
     

Total Current Liabilities

    814,714     731,650  

Long-term Debt, net of current portion

    3,211,223     3,129,153  

Other Long-term Liabilities

    105,856     128,615  

Deferred Rent

    90,503     90,756  

Deferred Income Taxes

    467,067     450,867  

Commitments and Contingencies (see Note 8)

             

Equity:

             
 

Iron Mountain Incorporated Stockholders' Equity:

             
   

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

         
   

Common stock (par value $0.01; authorized 400,000,000 shares; issued and outstanding 203,546,757 shares and 201,975,650 shares, respectively)

    2,035     2,020  
   

Additional paid-in capital

    1,298,657     1,267,745  
   

Retained earnings

    825,014     866,511  
   

Accumulated other comprehensive items, net

    27,661     (23,963 )
           
       

Total Iron Mountain Incorporated Stockholders' Equity

    2,153,367     2,112,313  
           
 

Noncontrolling Interests

    4,104     3,742  
           
   

Total Equity

    2,157,471     2,116,055  
           
       

Total Liabilities and Equity

  $ 6,846,834   $ 6,647,096  
           

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

3


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IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except Per Share Data)

(Unaudited)

 
  Three Months Ended
June 30,
 
 
  2009   2010  

Revenues:

             
 

Storage

  $ 415,810   $ 435,644  
 

Service

    330,218     344,147  
           
   

Total Revenues

    746,028     779,791  

Operating Expenses:

             
 

Cost of sales (excluding depreciation and amortization)

    312,698     308,527  
 

Selling, general and administrative

    215,854     235,656  
 

Depreciation and amortization

    78,680     85,318  
 

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

    742     (144 )
           
   

Total Operating Expenses

    607,974     629,357  

Operating Income (Loss)

    138,054     150,434  

Interest Expense (Income), Net (includes Interest Income of $578 and $378, respectively)

    55,175     56,245  

Other (Income) Expense, Net

    (18,394 )   4,019  
           
   

Income (Loss) Before Provision (Benefit) for Income Taxes

    101,273     90,170  

Provision (Benefit) for Income Taxes

    13,761     48,418  
           

Net Income (Loss)

    87,512     41,752  
   

Less: Net (Loss) Income Attributable to Noncontrolling Interests

    (126 )   460  
           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 87,638   $ 41,292  
           

Earnings per Share—Basic and Diluted:

             

Net Income (Loss) Attributable to Iron Mountain Incorporated per Share—Basic

  $ 0.43   $ 0.20  
           

Net Income (Loss) Attributable to Iron Mountain Incorporated per Share—Diluted

  $ 0.43   $ 0.20  
           

Weighted Average Common Shares Outstanding—Basic

    202,502     203,006  
           

Weighted Average Common Shares Outstanding—Diluted

    204,199     204,210  
           

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

4


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IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except Per Share Data)

(Unaudited)

 
  Six Months Ended
June 30,
 
 
  2009   2010  

Revenues:

             
 

Storage

  $ 825,667   $ 870,892  
 

Service

    643,707     685,405  
           
   

Total Revenues

    1,469,374     1,556,297  

Operating Expenses:

             
 

Cost of sales (excluding depreciation and amortization)

    629,678     633,759  
 

Selling, general and administrative

    426,247     469,508  
 

Depreciation and amortization

    154,960     171,102  
 

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

    (762 )   (1,197 )
           
   

Total Operating Expenses

    1,210,123     1,273,172  

Operating Income (Loss)

    259,251     283,125  

Interest Expense (Income), Net (includes Interest Income of $1,367 and $800, respectively)

    110,696     112,807  

Other (Income) Expense, Net

    (11,239 )   12,838  
           
   

Income (Loss) Before Provision (Benefit) for Income Taxes

    159,794     157,480  

Provision (Benefit) for Income Taxes

    45,338     89,889  
           

Net Income (Loss)

    114,456     67,591  
   

Less: Net (Loss) Income Attributable to Noncontrolling Interests

    (1,981 )   733  
           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 116,437   $ 66,858  
           

Earnings per Share—Basic and Diluted:

             

Net Income (Loss) Attributable to Iron Mountain Incorporated per Share—Basic

  $ 0.58   $ 0.33  
           

Net Income (Loss) Attributable to Iron Mountain Incorporated per Share—Diluted

  $ 0.57   $ 0.33  
           

Weighted Average Common Shares Outstanding—Basic

    202,284     203,294  
           

Weighted Average Common Shares Outstanding—Diluted

    203,755     204,458  
           

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

5


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IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF EQUITY

(In Thousands, except Share Data)

(Unaudited)

 
   
   
  Iron Mountain Incorporated Stockholders' Equity    
 
 
   
   
  Common Stock    
   
  Accumulated
Other
Comprehensive
Items, Net
   
 
 
   
  Comprehensive
Income (Loss)
  Additional
Paid-in Capital
  Retained
Earnings
  Noncontrolling
Interests
 
 
  Total   Shares   Amounts  

Balance, December 31, 2008, as adjusted (see Note 2.a.)

  $ 1,818,553   $     201,931,332   $ 2,019   $ 1,250,064   $ 604,137   $ (41,215 ) $ 3,548  

Issuance of shares under employee stock purchase plan and option plans and stock-based compensation, including tax benefit of $2,483

    22,865         786,197     8     22,857              

Comprehensive Income (Loss):

                                                 
 

Currency translation adjustment

    8,412     8,412                     6,653     1,759  
 

Net income (loss)

    114,456     114,456                 116,437         (1,981 )
                                                 

Comprehensive Income (Loss)

        $ 122,868                          
                                                 

Noncontrolling interests equity contributions

    530                               530  

Noncontrolling interests dividends

    (1,025 )                             (1,025 )
                                     

Balance, June 30, 2009

  $ 1,963,791           202,717,529   $ 2,027   $ 1,272,921   $ 720,574   $ (34,562 ) $ 2,831  
                                     

 

 
   
   
  Iron Mountain Incorporated Stockholders' Equity    
 
 
   
   
  Common Stock    
   
  Accumulated
Other
Comprehensive
Items, Net
   
 
 
   
  Comprehensive
Income (Loss)
  Additional
Paid-in Capital
  Retained
Earnings
  Noncontrolling
Interests
 
 
  Total   Shares   Amounts  

Balance, December 31, 2009, as adjusted (see Note 2.a.)

  $ 2,157,471   $     203,546,757   $ 2,035   $ 1,298,657   $ 825,014   $ 27,661   $ 4,104  

Issuance of shares under employee stock purchase plan and option plans and stock-based compensation, including tax benefit of $1,284

    21,392         614,536     6     21,386              

Stock options issued in connection with acquisition

    1,997                 1,997              

Stock repurchases

    (54,316 )       (2,185,643 )   (21 )   (54,295 )            

Parent cash dividends declared (See Note 1)

    (25,361 )                   (25,361 )        

Comprehensive Income (Loss):

                                                 
 

Currency translation adjustment

    (52,008 )   (52,008 )                   (51,624 )   (384 )
 

Net income (loss)

    67,591     67,591                 66,858         733  
                                                 

Comprehensive Income (Loss)

        $ 15,583                          
                                                 

Noncontrolling interests dividends

    (711 )                             (711 )
                                     

Balance, June 30, 2010

  $ 2,116,055           201,975,650   $ 2,020   $ 1,267,745   $ 866,511   $ (23,963 ) $ 3,742  
                                     

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

6


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IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

(Unaudited)

 
  Three Months Ended
June 30,
 
 
  2009   2010  

Net Income (Loss)

  $ 87,512   $ 41,752  

Other Comprehensive Income (Loss):

             
 

Foreign Currency Translation Adjustments

    31,173     (32,450 )
           

Total Other Comprehensive Income (Loss)

    31,173     (32,450 )
           

Comprehensive Income (Loss)

    118,685     9,302  
 

Comprehensive (Loss) Income Attributable to Noncontrolling Interests

    (123 )   156  
           

Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated

  $ 118,808   $ 9,146  
           

 

 
  Six Months Ended
June 30,
 
 
  2009   2010  

Net Income (Loss)

  $ 114,456   $ 67,591  

Other Comprehensive Income (Loss):

             
 

Foreign Currency Translation Adjustments

    8,412     (52,008 )
           

Total Other Comprehensive Income (Loss)

    8,412     (52,008 )
           

Comprehensive Income (Loss)

    122,868     15,583  
 

Comprehensive (Loss) Income Attributable to Noncontrolling Interests

    (222 )   349  
           

Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated

  $ 123,090   $ 15,234  
           

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

7


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IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
  Six Months Ended
June 30,
 
 
  2009   2010  

Cash Flows from Operating Activities:

             
 

Net income (loss)

  $ 114,456   $ 67,591  

Adjustments to reconcile net income (loss) to cash flows from operating activities:

             
 

Depreciation

    137,606     151,752  
 

Amortization (includes deferred financing costs and bond discount of $2,517 and $2,647, respectively)

    19,871     21,997  
 

Stock-based compensation expense

    9,136     10,809  
 

Provision for deferred income taxes

    15,425     2,685  
 

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

    (762 )   (1,197 )
 

Foreign currency transactions and other, net

    (10,811 )   22,717  

Changes in Assets and Liabilities (exclusive of acquisitions):

             
 

Accounts receivable

    (44,037 )   5,429  
 

Prepaid expenses and other current assets

    (2,561 )   9,625  
 

Accounts payable

    (17,202 )   (21,969 )
 

Accrued expenses, deferred revenue and other current liabilities

    19,828     (14,301 )
 

Other assets and long-term liabilities

    7,342     12,960  
           
 

Cash Flows from Operating Activities

    248,291     268,098  

Cash Flows from Investing Activities:

             
 

Capital expenditures

    (133,876 )   (138,008 )
 

Cash paid for acquisitions, net of cash acquired

    (1,448 )   (122,943 )
 

Additions to customer relationship and acquisition costs

    (4,439 )   (5,488 )
 

Investment in restricted cash

        (35,102 )
 

Proceeds from sales of property and equipment and other, net

    1,838     10,973  
           
 

Cash Flows from Investing Activities

    (137,925 )   (290,568 )

Cash Flows from Financing Activities:

             
 

Repayment of revolving credit and term loan facilities and other debt

    (99,904 )   (66,182 )
 

Proceeds from revolving credit and term loan facilities and other debt

    15,574     39,886  
 

Debt financing (repayment to) and equity contribution from (distribution to) noncontrolling interests, net

    530     (65 )
 

Stock repurchases

        (50,564 )
 

Parent cash dividends

        (12,720 )
 

Proceeds from exercise of stock options and employee stock purchase plan

    10,983     9,174  
 

Excess tax benefits from stock-based compensation

    2,483     1,284  
 

Payment of debt financing costs

    (97 )    
           
 

Cash Flows from Financing Activities

    (70,431 )   (79,187 )

Effect of Exchange Rates on Cash and Cash Equivalents

    (2,249 )   (4,520 )
           

Increase (Decrease) in Cash and Cash Equivalents

    37,686     (106,177 )

Cash and Cash Equivalents, Beginning of Period

    278,370     446,656  
           

Cash and Cash Equivalents, End of Period

  $ 316,056   $ 340,479  
           

Supplemental Information:

             
 

Cash Paid for Interest

  $ 110,759   $ 113,198  
           
 

Cash Paid for Income Taxes

  $ 35,574   $ 66,669  
           

Non-Cash Investing and Financing Activities:

             
 

Capital Leases

  $ 29,596   $ 21,276  
           
 

Accrued Capital Expenditures

  $ 27,880   $ 22,904  
           
 

Dividends Payable

  $   $ 12,641  
           
 

Unsettled Purchases of Parent Common Stock

  $   $ 3,752  
           

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

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(1) General

        The interim consolidated financial statements are presented herein without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation. Interim results are not necessarily indicative of results for a full year.

        The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements and notes included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2009 included in our Annual Report on Form 10-K filed on February 26, 2010.

(2) Summary of Significant Accounting Policies

        a.     Principles of Consolidation and Change in Accounting Principle

        The accompanying financial statements reflect our financial position and results of operations on a consolidated basis. Prior to January 1, 2010, the financial position and results of operations of the operating subsidiaries of Iron Mountain Europe (Group) Limited (collectively referred to as "IME"), our European business, were consolidated based on IME's fiscal year ended October 31. Effective January 1, 2010, we changed the fiscal year-end (and the reporting period for consolidation purposes) of IME to coincide with Iron Mountain Incorporated's ("IMI") fiscal year-end of December 31. We believe that the change in accounting principle related to the elimination of the two-month reporting lag for IME is preferable because it will result in more contemporaneous reporting of events and results related to IME. In accordance with applicable accounting literature, a change in subsidiary year-end is treated as a change in accounting principle and requires retrospective application. The cumulative effect of the change was an increase in retained earnings of $12,225 as of January 1, 2008. We also recorded a corresponding decrease in other long-term liabilities for the same amount. The impact of the change was not material to the results of operations for the previously reported annual and interim periods after January 1, 2008, and, thus, those results have not been revised. There is, however, a charge of $4,711 recorded to other (income) expense, net in the six months ended June 30, 2010 to recognize the immaterial differences arising in 2008 and 2009. Had the annual financial statements been revised, operating income, pretax income and net income attributable to Iron Mountain Incorporated in calendar 2008 would have been decreased by $6,950, $11,700 and $9,039, respectively, and operating income, pretax income and net income attributable to Iron Mountain Incorporated in calendar 2009 would have been increased by $3,714, $7,041 and $4,957 (of which $2,417, $4,750 and $4,391 would have been recognized in the three months ended June 30, 2009, respectively, and $3,521, $9,742 and $8,174 would have been recognized in the six months ended June 30, 2009, respectively), respectively. In addition, revenue, operating income, pretax income and net income attributable to Iron Mountain Incorporated for the three and six months ended June 30, 2010 would not have changed materially had we not eliminated the 2-month reporting lag. There were no significant, infrequent or unusual items in the IME two-month period ended December 31, 2009. All intercompany account balances have been eliminated.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        b.     Cash and Cash Equivalents and Restricted Cash

        Cash and cash equivalents include cash on hand and cash invested in short-term securities which have remaining maturities at the date of purchase of less than 90 days. Cash and cash equivalents are carried at cost, which approximates fair value.

        We have restricted cash associated with our worker's compensation self-insurance program, which represents a collateral trust agreement with our insurance carrier. The restricted cash subject to this agreement was $35,103 as of June 30, 2010 and is included in current assets on our consolidated balance sheets. Restricted cash consists primarily of U.S. treasuries.

        c.     Foreign Currency Translation and Foreign Currency Transaction Gains and Losses

        Local currencies are considered the functional currencies for our operations outside the United States, with the exception of certain foreign holding companies and our financing center in Switzerland, whose functional currencies are the U.S. dollar. In those instances where the local currency is the functional currency, assets and liabilities are translated at period-end exchange rates, and revenues and expenses are translated at average exchange rates for the applicable period. Resulting translation adjustments are reflected in the accumulated other comprehensive items, net component of Iron Mountain Incorporated Stockholders' Equity and Noncontrolling Interests. The gain or loss on foreign currency transactions, calculated as the difference between the historical exchange rate and the exchange rate at the applicable measurement date, including those related to (a) our 71/4% GBP Senior Subordinated Notes due 2014, (b) our 63/4 Euro Senior Subordinated Notes due 2018, (c) the borrowings in certain foreign currencies under our revolving credit agreement, and (d) certain foreign currency denominated intercompany obligations of our foreign subsidiaries to us and between our foreign subsidiaries, are included in other expense (income), net, on our consolidated statements of operations. We recorded a net gain of $17,127 and $9,638 for the three and six months ended June 30, 2009, respectively, and a net loss of $3,625 and $8,890 for the three and six months ended June 30, 2010, respectively, of foreign currency transactions gains and losses.

        d.     Goodwill and Other Intangible Assets

        Goodwill and intangible assets with indefinite lives are not amortized but are reviewed annually for impairment or more frequently if impairment indicators arise. We currently have no intangible assets that have indefinite lives and which are not amortized, other than goodwill. Separable intangible assets that are not deemed to have indefinite lives are amortized over their useful lives. We periodically assess whether events or circumstances warrant a change in the life over which our intangible assets are amortized.

        We have selected October 1 as our annual goodwill impairment review date. We performed our annual goodwill impairment review as of October 1, 2009, and noted no impairment of goodwill. In making this assessment, we relied on a number of factors including operating results, business plans, anticipated future cash flows, transactions and market place data. There are inherent uncertainties related to these factors and our judgment in applying them to the analysis of goodwill impairment. As of June 30, 2010, no factors were identified that would alter this assessment. When changes occur in

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)


the composition of one or more reporting units, the goodwill is reassigned to the reporting units affected based on their relative fair values. Our reporting units at which level we performed our goodwill impairment analysis as of October 1, 2009 were as follows: North America (excluding Fulfillment), Fulfillment, Europe, Worldwide Digital Business (excluding Stratify, Inc. ("Stratify")), Stratify, Latin America and Asia Pacific. As of June 30, 2010, the carrying value of goodwill, net amounted to $1,718,139, $1,322, $413,660, $195,884, $130,010, $27,300 and $58,159 for North America (excluding Fulfillment), Fulfillment, Europe, Worldwide Digital Business (excluding Stratify), Stratify, Latin America and Asia Pacific, respectively.

        Our North America (excluding Fulfillment), Fulfillment, Europe, Worldwide Digital Business (excluding Stratify), Stratify and Latin America reporting units have fair values as of October 1, 2009 that significantly exceed their carrying values. Our Asia Pacific reporting unit had a fair value that exceeds its carrying value by 9% as of October 1, 2009. Asia Pacific is still in the investment stage, and, accordingly, its fair value does not exceed its carrying value by a significant margin at this point in time. A deterioration of the Asia Pacific business or the business not achieving the forecasted results could lead to an impairment in future periods.

        Reporting unit valuations have been calculated using an income approach based on the present value of future cash flows of each reporting unit or a combined approach based on the present value of future cash flows and market and transaction multiples of revenues and earnings. The income approach incorporates many assumptions including future growth rates, discount factors, expected capital expenditures and income tax cash flows. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods. In conjunction with our annual goodwill impairment reviews, we reconcile the sum of the valuations of all of our reporting units to our market capitalization as of such dates.

        The changes in the carrying value of goodwill attributable to each reportable operating segment for the six months ended June 30, 2010 is as follows:

 
  North
American
Physical
Business
  International
Physical
Business
  Worldwide
Digital
Business
  Total
Consolidated
 

Balance as of December 31, 2009

  $ 1,720,446   $ 560,218   $ 254,049   $ 2,534,713  

Non-deductible goodwill acquired during the year

        3,561     71,845     75,406  

Adjustments to purchase reserves

    (401 )           (401 )

Fair value and other adjustments(1)

    746             746  

Currency effects

    (1,330 )   (64,660 )       (65,990 )
                   

Balance as of June 30, 2010

  $ 1,719,461   $ 499,119   $ 325,894   $ 2,544,474  
                   

(1)
Fair value and other adjustments primarily include $618 of adjustments to property, plant and equipment, net.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The components of our amortizable intangible assets at June 30, 2010 are as follows:

 
  Gross Carrying
Amount
  Accumulated
Amortization
  Net Carrying
Amount
 

Customer Relationships and Acquisition Costs

  $ 563,047   $ (147,353 ) $ 415,694  

Core Technology(1)

    73,154     (29,009 )   44,145  

Trademarks and Non-Compete Agreements(1)

    7,103     (5,252 )   1,851  

Deferred Financing Costs

    52,925     (20,346 )   32,579  
               

Total

  $ 696,229   $ (201,960 ) $ 494,269  
               

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

        e.     Stock-Based Compensation

        We record stock-based compensation expense, utilizing the straight-line method, for the cost of stock options, restricted stock, restricted stock units and shares of stock issued under the employee stock purchase plan (together, "Employee Stock-Based Awards").

        Stock-based compensation expense for Employee Stock-Based Awards included in the accompanying consolidated statements of operations for the three and six months ended June 30, 2009 was $4,877 ($3,781 after tax or $0.02 per basic and diluted share) and $9,136 ($7,246 after tax or $0.04 per basic and diluted share), respectively, and for the three and six months ended June 30, 2010 was $6,082 ($4,721 after tax or $0.02 per basic and diluted share) and $10,809 ($8,421 after tax or $0.04 per basic and diluted share), respectively.

        The benefits associated with the tax deductions in excess of recognized compensation cost are reported as a financing cash flow. This requirement reduces reported operating cash flows and increases reported financing cash flows. As a result, net financing cash flows included $2,483 and $1,284 for the six months ended June 30, 2009 and 2010, respectively, from the benefits of tax deductions in excess of recognized compensation cost. We used the short form method to calculate the Additional Paid-in Capital ("APIC") pool. The tax benefit of any resulting excess tax deduction increases the APIC pool. Any resulting tax deficiency is deducted from the APIC pool.

Stock Options

        Under our various stock option plans, options were granted with exercise prices equal to the market price of the stock on the date of grant. The majority of our options become exercisable ratably over a period of five years and generally have a contractual life of ten years, unless the holder's employment is terminated. Beginning in 2007, certain of the options we issue become exercisable ratably over a period of ten years and have a contractual life of 12 years, unless the holder's employment is terminated. As of June 30, 2010, ten-year vesting options represent 7.3% of total outstanding options. Our directors are considered employees for purposes of our stock option plans

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)


and stock option reporting. Options granted to our non-employee directors generally become exercisable after one year.

        The weighted average fair value of options granted for the six months ended June 30, 2009 and 2010 was $9.67 and $8.22 per share, respectively. The values were estimated on the date of grant using the Black-Scholes option pricing model. The following table summarizes the weighted average assumptions used for grants in the respective period:

 
  Six Months Ended
June 30,
 
Weighted Average Assumption
  2009   2010  

Expected volatility

  32.0 % 32.7 %

Risk-free interest rate

  2.67 % 2.63 %

Expected dividend yield

  None   1 %

Expected life of the option

  6.4 years   6.4 years  

        Expected volatility was calculated utilizing daily historical volatility over a period that equates to the expected life of the option. The risk-free interest rate was based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. Beginning in the first quarter of 2010, expected dividend yield was considered in the option pricing model as a result of our new dividend program. The expected life (estimated period of time outstanding) of the stock options granted was estimated using the historical exercise behavior of employees.

        A summary of option activity for the six months ended June 30, 2010 is as follows:

 
  Options   Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2009

    12,099,361   $ 24.06              

Granted

    1,857,774     24.60              

Issued in Connection with Acquisitions

    257,366     8.67              

Exercised

    (483,069 )   12.98              

Forfeited

    (473,605 )   27.49              

Expired

    (256,204 )   27.32              
                         

Outstanding at June 30, 2010

    13,001,623   $ 24.05     7.20   $ 26,227  
                   

Options exercisable at June 30, 2010

    6,325,083   $ 21.94     5.81   $ 22,646  
                   

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The following table provides the aggregate intrinsic value of stock options exercised for the three and six months ended June 30, 2009 and 2010:

 
  Three Months
Ended
June 30,
  Six Months
Ended
June 30,
 
 
  2009   2010   2009   2010  

Aggregate intrinsic value of stock options exercised

  $ 6,113   $ 2,461   $ 8,640   $ 5,964  

Restricted Stock and Restricted Stock Units

        Under our various stock option plans, we may also issue grants of restricted stock or restricted stock units ("RSUs"). We issued restricted stock in December 2007 and June 2009, which had a 5-year vesting period. We issued RSUs in June 2010, which had a 4-year vesting period. The fair value of restricted stock and RSUs is the excess of the market price of our common stock at the date of grant over the exercise price (which is typically zero).

        A summary of restricted stock and RSUs activity for the six months ended June 30, 2010 is as follows:

 
  Restricted
Stock and RSUs
  Weighted-
Average
Grant-Date
Fair Value
 

Non-vested at December 31, 2009

    2,276   $ 28.36  

Granted

    56,853     23.75  

Vested

    (452 )   28.36  

Forfeited

         
             

Non-vested at June 30, 2010

    58,677   $ 23.89  
           

        No restricted stock or RSUs vested during the three and six months ended June 30, 2009. The total fair value of restricted stock vested for the three and six months ended June 30, 2010 was $13. No RSUs vested during the three and six months ended June 30, 2010.

Employee Stock Purchase Plan

        We offer an employee stock purchase plan in which participation is available to substantially all U.S. and Canadian employees who meet certain service eligibility requirements (the "ESPP"). The ESPP provides a way for our eligible employees to become stockholders on favorable terms. The ESPP provides for the purchase of our common stock by eligible employees through successive offering periods. We generally have two six-month offering periods per year, the first of which begins June 1 and ends November 30 and the second of which begins December 1 and ends May 31. During each offering period, participating employees accumulate after-tax payroll contributions, up to a maximum of 15% of their compensation, to pay the exercise price of their options. Participating employees may withdraw from an offering period before the purchase date and obtain a refund of the amounts

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)


withheld as payroll deductions. At the end of the offering period, outstanding options are exercised, and each employee's accumulated contributions are used to purchase our common stock. The price for shares purchased under the ESPP is 95% of the fair market price at the end of the offering period, without a look-back feature. As a result, we do not recognize compensation cost for our ESPP shares purchased. The ESPP was amended and approved by our stockholders on May 26, 2005 and the number of shares available for purchase under the ESPP was increased to 3,487,500. For the six months ended June 30, 2009 and 2010, there were 136,966 shares and 137,200 shares, respectively, purchased under the ESPP. The number of shares available for purchase under the ESPP at June 30, 2010 was 674,501.



        As of June 30, 2010, unrecognized compensation cost related to the unvested portion of our Employee Stock-Based Awards was $60,867 and is expected to be recognized over a weighted-average period of 3.9 years.

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

        f.      Income (Loss) Per Share—Basic and Diluted

        Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to Iron Mountain Incorporated by the weighted average number of common shares outstanding. The calculation of diluted net income (loss) per share is consistent with that of basic net income (loss) per share but gives effect to all potential common shares (that is, securities such as options, warrants or convertible securities) that were outstanding during the period, unless the effect is antidilutive.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The following table presents the calculation of basic and diluted net income (loss) per share attributable to Iron Mountain Incorporated:

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2009   2010   2009   2010  

Net income (loss) attributable to Iron Mountain Incorporated

  $ 87,638   $ 41,292   $ 116,437   $ 66,858  
                   

Weighted-average shares—basic

    202,502,000     203,006,000     202,284,000     203,294,000  

Effect of dilutive potential stock options

    1,696,813     1,199,318     1,471,158     1,161,801  

Effect of dilutive potential restricted stock and RSUs

        4,602         2,346  
                   

Weighted-average shares—diluted

    204,198,813     204,209,920     203,755,158     204,458,147  
                   

Net income (loss) per share attributable to Iron Mountain Incorporated—basic

  $ 0.43   $ 0.20   $ 0.58   $ 0.33  
                   

Net income (loss) per share attributable to Iron Mountain Incorporated—diluted

  $ 0.43   $ 0.20   $ 0.57   $ 0.33  
                   

Antidilutive stock options, excluded from the calculation

    7,723,326     8,273,166     8,160,015     8,337,720  
                   

        g.     Revenues

        Our revenues consist of storage revenues as well as service revenues and are reflected net of sales and value added taxes. Storage revenues, both physical and digital, which are considered a key performance indicator for the information management services industry, consist of largely recurring periodic charges related to the storage of materials or data (generally on a per unit basis). Service revenues are comprised of charges for related core service activities and a wide array of complementary products and services. Included in core service revenues are: (1) the handling of records, including the addition of new records, temporary removal of records from storage, refiling of removed records, destruction of records, and permanent withdrawals from storage; (2) courier operations, consisting primarily of the pickup and delivery of records upon customer request; (3) secure shredding of sensitive documents; and (4) other recurring services including maintenance and support contracts. Our complementary services revenues include special project work, data restoration projects, fulfillment services, consulting services and product sales (including software licenses, specially designed storage containers and related supplies). Our secure shredding revenues include the sale of recycled paper (included in complementary services), the price of which can fluctuate from period to period, adding to the volatility and reducing the predictability of that revenue stream.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        We recognize revenue when the following criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectability of the resulting receivable is reasonably assured. Storage and service revenues are recognized in the month the respective storage or service is provided and customers are generally billed on a monthly basis on contractually agreed-upon terms. Amounts related to future storage or prepaid service contracts, including maintenance and support contracts, for customers where storage fees or services are billed in advance are accounted for as deferred revenue and recognized ratably over the applicable storage or service period or when the service is performed. Revenue from the sales of products is recognized when shipped to the customer and title has passed to the customer. Sales of software licenses are recognized at the time of product delivery to our customer or reseller and maintenance and support agreements are recognized ratably over the term of the agreement. Software license sales and maintenance and support accounted for less than 1% of our annual 2009 and the first six months of 2010 consolidated revenues. Within our Worldwide Digital Business segment, in certain instances, we process and host data for customers. In these instances, the processing fees are deferred and recognized over the estimated service period.

        h.     Allowance for Doubtful Accounts and Credit Memo Reserves

        We maintain an allowance for doubtful accounts and credit memos for estimated losses resulting from the potential inability of our customers to make required payments and disputes regarding billing and service issues. When calculating the allowance, we consider our past loss experience, current and prior trends in our aged receivables and credit memo activity, current economic conditions, and specific circumstances of individual receivable balances. If the financial condition of our customers were to significantly change, resulting in a significant improvement or impairment of their ability to make payments, an adjustment of the allowance may be required. We consider accounts receivable to be delinquent after such time as reasonable means of collection have been exhausted. We charge-off uncollectible balances as circumstances warrant, generally, no later than one year past due.

        i.      Income Taxes

        Our effective tax rates for the three and six months ended June 30, 2009 were 13.6% and 28.4%, respectively. Our effective tax rates for the three and six months ended June 30, 2010 were 53.7% and 57.1%, respectively. The primary reconciling items between the statutory rate of 35% and our overall effective tax rate are state income taxes (net of federal benefit) and differences in the rates of tax at which our foreign earnings are subject, including foreign exchange gains and losses in different jurisdictions with different tax rates. During the three and six months ended June 30, 2009, foreign currency gains were recorded in lower tax jurisdictions associated with our marking-to-market of intercompany loan positions while foreign currency losses were recorded in higher tax jurisdictions associated with our marking-to-market of debt and derivative instruments, which reduced the 2009 tax rate by 25.8% and 11.6% for the three and six months ended June 30, 2009, respectively. During the three and six months ended June 30, 2010, foreign currency gains were recorded in higher tax jurisdictions associated with our marking-to-market of debt and derivative instruments while foreign currency losses were recorded in lower tax jurisdictions associated with our marketing-to-market of

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)


intercompany loan positions, which increased the 2010 tax rate by 13.1% and 16.0%, for the three and six months ended June 30, 2010, respectively. We provide for income taxes during interim periods based on our estimate of the effective tax rate for the year. Discrete items and changes in our estimate of the annual effective tax rate are recorded in the period they occur.

        Accounting for income taxes requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of assets and liabilities and for loss and credit carryforwards. Valuation allowances are provided when recovery of deferred tax assets is not considered more likely than not. There were no material changes related to uncertain tax position during the six months ended June 30, 2010.

        We have elected to recognize interest and penalties associated with uncertain tax positions as a component of the provision (benefit) for income taxes in the accompanying consolidated statements of operations. We recorded $486 and $1,736 for gross interest and penalties for the three and six months ended June 30, 2009, respectively. We recorded $1,578 and $2,750 for gross interest and penalties for the three and six months ended June 30, 2010, respectively. We had $12,874 and $15,624 accrued for the payment of interest and penalties as of December 31, 2009 and June 30, 2010, respectively.

        j.      Fair Value Measurements

        Entities are permitted under GAAP to elect to measure many financial instruments and certain other items at either fair value or cost. We did not elect the fair value measurement option for any of our financial assets or liabilities.

        Our financial assets or liabilities are measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2010:

 
   
  Fair Value Measurements at
June 30, 2010 Using
 
Description
  Total Carrying
Value at
June 30,
2010
  Quoted prices
in active
markets
(Level 1)
  Significant other
observable
inputs
(Level 2)
  Significant
unobservable
inputs
(Level 3)
 

Money Market Funds(1)

  $ 147,342   $   $ 147,342   $  

Time Deposits(1)

    119,355         119,355      

Trading Securities

    9,575     8,838 (2)   737 (1)    

Derivative Assets(3)

    1,005         1,005      

(1)
Money market funds and time deposits (including certain trading securities) are measured based on quoted prices for similar assets and/or subsequent transactions.

(2)
Securities are measured at fair value using quoted market prices.

(3)
Our derivative assets primarily relate to short-term (six months or less) foreign currency contracts that we have entered into to hedge our intercompany exposures denominated in British pounds sterling. We calculate the fair value of such forward contracts by adjusting the spot rate utilized at the balance sheet date for translation purposes by an estimate of the forward points observed in active markets.

        Disclosures are required in the financial statements for items measured at fair value on a non-recurring basis. We did not have any material items that are measured at fair value on a non-recurring basis for the three and six months ended June 30, 2010.

        k.     New Accounting Pronouncements

        Effective at the start of a reporting entity's first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity, the Financial Accounting Standards Board (the "FASB") Accounting Standards Codification™ (the "Codification") will require more information about transfers of financial assets, including securitization transactions, and transactions where entities have continuing exposure to the risks related to transferred financial assets. The Codification eliminates the concept of a "qualifying special-purpose entity", changes the requirements for derecognizing financial assets, and requires additional disclosures about an entity's involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects such reporting entity's financial statements. The adoption of these Codification updates did not have a material impact on our consolidated financial statements and results of operations.

        In October 2009, the FASB issued amended guidance on multiple-deliverable revenue arrangements and software revenue recognition. The multiple-deliverable revenue arrangements updates to the Codification apply to all deliverables in contractual arrangements in all industries in

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)


which a vendor will perform multiple revenue-generating activities. The change to the Codification creates a selling price hierarchy that an entity must use as evidence of fair value in separately accounting for all deliverables on a relative-selling-price basis which qualify for separation. The selling price hierarchy includes: (1) vendor-specific objective evidence; (2) third-party evidence and (3) estimated selling price. Broadly speaking, this update to the Codification will result in the possibility for some entities to recognize revenue earlier and more closely align with the economics of certain revenue arrangements if the other criteria for separation (e.g. standalone value to the customer) are met. The software revenue recognition guidance was issued to address factors that entities should consider when determining whether the software and non-software components of a product function together to deliver the product's essential functionality. The software revenue recognition updates to the Codification will allow revenue arrangements in which software and non-software components deliver together a product's essential functionality to follow the multiple-deliverable revenue recognition criteria as opposed to the criteria applicable to software revenue recognition. Both updates are effective for fiscal years beginning on or after June 15, 2010 and apply prospectively to new or materially modified revenue arrangements after its effective date. Early adoption is permitted; however, we do not anticipate early adopting. We are currently evaluating the impact of these Codification updates to our consolidated financial statements and results of operations.

        In January 2010, the FASB issued amended guidance improving disclosures about fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The new guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The change in the Codification requires an entity, in determining the appropriate classes of assets and liabilities, to consider the nature and risks of the assets and liabilities as well as their placement in the fair value hierarchy (Level 1, 2 or 3). The Codification update is effective for the first reporting period, including interim periods, beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. However, those disclosures are required for periods ending after initial adoption. Early adoption is permitted for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis; however, we do not anticipate early adopting. We do not expect adoption to have a material impact on our consolidated financial statements and results of operations.

        l.      Use of Estimates

        The preparation of financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended. On an on-going basis, we evaluate the estimates used. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)


for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. Actual results may differ from these estimates.

        m.    Accumulated Other Comprehensive Items, Net

        Accumulated other comprehensive items, net consists of foreign currency translation adjustments as of December, 31, 2009 and June 30, 2010, respectively.

        n.     Other Expense (Income), Net

        Other expense (income), net consists of the following:

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2009   2010   2009   2010  

Foreign currency transaction (gains) losses, net

  $ (17,127 ) $ 3,625   $ (9,638 ) $ 8,890  

Other, net

    (1,267 )   394     (1,601 )   3,948  
                   

  $ (18,394 ) $ 4,019   $ (11,239 ) $ 12,838  
                   

(3) Derivative Instruments and Hedging Activities

        Every derivative instrument is required to be recorded in the balance sheet as either an asset or a liability measured at its fair value. Periodically, we acquire derivative instruments that are intended to hedge either cash flows or values which are subject to foreign exchange or other market price risk, and not for trading purposes. We have formally documented our hedging relationships, including identification of the hedging instruments and the hedged items, as well as our risk management objectives and strategies for undertaking each hedge transaction. Given the recurring nature of our revenues and the long term nature of our asset base, we have the ability and the preference to use long-term, fixed interest rate debt to finance our business, thereby preserving our long term returns on invested capital. We target approximately 75% of our debt portfolio to be fixed with respect to interest rates. Occasionally, we will use interest rate swaps as a tool to maintain our targeted level of fixed rate debt. In addition, we will use borrowings in foreign currencies, either obtained in the U.S. or by our foreign subsidiaries, to naturally hedge foreign currency risk associated with our international investments. Sometimes we enter into currency swaps to temporarily hedge an overseas investment, such as a major acquisition, while we arrange permanent financing or to hedge our exposures due to foreign currency exchange movements related to our intercompany accounts with and between our foreign subsidiaries. As of December 31, 2009 and June 30, 2010, none of our derivative instruments contained credit-risk related contingent features.

        We have entered into a number of forward contracts to hedge our exposures in British pounds sterling. As of June 30, 2010, we had an outstanding forward contract to purchase 188,464 U.S. dollars and sell 125,000 British pounds sterling to hedge our intercompany exposures with IME. At the maturity of the forward contracts, we may enter into new forward contracts to hedge movements in the underlying currencies. At the time of settlement, we either pay or receive the net settlement amount

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(3) Derivative Instruments and Hedging Activities (Continued)


from the forward contract and recognize this amount in other (income) expense, net in the accompanying statement of operations as a realized foreign exchange gain or loss. We have not designated these forward contracts as hedges. During the three and six months ended June 30, 2009, there was $17,414 and $2,392 in net cash disbursements, respectively, included in cash from operating activities related to settlements associated with these foreign currency forward contracts. During the three and six months ended June 30, 2010, there was $946 in net cash disbursements and $10,006 in net cash receipts, respectively, included in cash from operating activities related to settlements associated with these foreign currency forward contracts. The following table provides the fair value of our derivative instruments as of December 31, 2009 and June 30, 2010 and their gains and losses for the three and six months ended June 30, 2009 and 2010:

 
  Asset Derivatives  
 
  December 31, 2009   June 30, 2010  
 
  Balance Sheet
Location
  Fair
Value
  Balance Sheet
Location
  Fair
Value
 

Derivatives Not Designated as Hedging Instruments

                     
 

Foreign exchange contracts

  Current assets   $ 4,115   Current assets   $ 1,005  
                   
 

Total

      $ 4,115       $ 1,005  
                   

 

 
   
  Amount of (Gain) Loss
Recognized in Income
on Derivatives
 
 
   
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  Location of (Gain) Loss
Recognized in Income
on Derivative
 
Derivatives Not Designated as
Hedging Instruments
  2009   2010   2009   2010  

Foreign exchange contracts

  Other expense (income), net   $ 17,520   $ (1,391 ) $ 16,170   $ (6,895 )
                       

Total

      $ 17,520   $ (1,391 ) $ 16,170   $ (6,895 )
                       

        In the third quarter of 2007, we designated a portion of our 63/4% Euro Senior Subordinated Notes due 2018 issued by IMI (the "63/4% Euro Notes") as a hedge of net investment of certain of our Euro denominated subsidiaries. For the six months ended June 30, 2009 and 2010, we designated on average 113,500 and 76,000 Euros, respectively, of the 63/4% Euro Notes as a hedge of net investment of certain of our Euro denominated subsidiaries. As a result, we recorded foreign exchange losses of $7,729 ($4,830, net of tax) and foreign exchange gains of $4,272 ($2,491, net of tax) for the three and six months ended June 30, 2009, respectively, related to the change in fair value of such debt due to currency translation adjustments which is a component of accumulated other comprehensive items, net included in stockholders' equity. We recorded foreign exchange gains of $8,775 ($5,486, net of tax) and $15,636 ($9,774, net of tax) for the three and six months ended June 30, 2010, respectively, related to the change in fair value of such debt due to currency translation adjustments which is a component of accumulated other comprehensive items, net included in stockholders' equity. As of June 30, 2010, net gains of $13,133 are recorded in accumulated other comprehensive items, net associated with this net investment hedge.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(4) Acquisitions

        We account for acquisitions using the purchase method of accounting, and, accordingly, the results of operations for each acquisition have been included in our consolidated results from their respective acquisition dates. Cash consideration for our various acquisitions was primarily provided through borrowings under our credit facilities and cash equivalents on-hand. The unaudited pro forma results of operations for the period ended June 30, 2010 are not presented due to the insignificant impact of the 2010 acquisitions on our consolidated results of operations.

        In February 2010, we acquired 100% of Mimosa Systems, Inc. ("Mimosa"), a leader in enterprise-class digital content archiving solutions, for approximately $112,000 in cash and approximately $2,000 in fair value of options issued. Mimosa, based in Santa Clara, California, provides an on-premises integrated archive for email, SharePoint data and files, and complements IMI's existing enterprise-class, cloud-based digital archive services. NearPoint, Mimosa's enterprise archiving platform, has applications for retention and disposition, eDiscovery, compliance supervision, classification, recovery, and end-user search, enabling customers to reduce risk and lower their eDiscovery and storage costs. Goodwill associated with the Mimosa acquisition was allocated to the Worldwide Digital Business (excluding Stratify) reporting unit. We deposited $11,200 of the cash consideration payable in our acquisition of Mimosa into escrow to secure certain indemnification obligations of the former stockholders of Mimosa (the "Mimosa Stockholders") and to satisfy certain other obligations of the Mimosa Stockholders. On the 15-month anniversary of the closing of the acquisition, or May 16, 2011, amounts remaining in the escrow fund will be distributed to the Mimosa Stockholders, minus (i) $750 which shall continue to be held as security for certain types of claims and (ii) any amounts held for unresolved indemnification claims made by us. On the 24-month anniversary of the closing, or February 16, 2012, the balance of the escrow fund less any amounts held for unresolved claims will be distributed to the Mimosa Stockholders. The allocation of the purchase price will be finalized upon the final settlement of the purchase price with the Mimosa Stockholders and the subsequent completion of the analyses of the fair value of Mimosa's assets and liabilities and certain tax matters. The analyses include examination of the underlying books and tax records, completion of an appraisal of certain intangible assets and liabilities and a full assessment of legal and tax contingencies.

        To expand our geographical footprint in Europe, in May 2010 we acquired the remaining 87% interest of our joint venture in Greece (Safe doc S.A.) for a cash purchase price of approximately $4,700 and now control 100% of our Greek operations, which provide storage and records management services. The carrying value of the 13% interest that we had previously acquired and accounted for under the equity method of accounting amounted to approximately $416 and the fair value of such interest on the date of acquisition was approximately $473 and resulted in a gain being recorded on the date of the transaction to other (income) expense, net included in the accompanying consolidated statement of operations of approximately $57 during the second quarter of 2010.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(4) Acquisitions (Continued)

        A summary of the consideration paid for acquisitions in 2010 and the allocation of the purchase price of the acquisitions is as follows:

Cash Paid (gross of cash acquired)(1)

  $ 116,675  

Fair Value of Options Issued

    1,997  

Fair Value of Previously Held Equity Interest

    473  
       
 

Total Consideration

    119,145  

Fair Value of Identifiable Assets Acquired:

       
 

Cash, Accounts Receivable, Prepaid Expenses, Deferred Income Taxes and Other

    28,378  
 

Property, Plant and Equipment(2)

    2,087  
 

Customer Relationship Assets(3)

    7,765  
 

Core Technology(3)

    22,000  
 

Liabilities Assumed(4)

    (16,491 )
       
 

Total Fair Value of Identifiable Net Assets Acquired

    43,739  
       

Recorded Goodwill

  $ 75,406  
       

(1)
Included in cash paid for acquisitions in the consolidated statements of cash flows for the six months ended June 30, 2009 and 2010 are contingent and other payments of $1,448 and $7,082, respectively, related to acquisitions made in previous years.

(2)
Consists primarily of racking, leasehold improvements and computer hardware and software.

(3)
The weighted average lives of customer relationship assets and core technology associated with acquisitions to date in 2010 were 11 and nine years, respectively.

(4)
Consists primarily of accounts payable, accrued expenses, deferred revenue and deferred income taxes.

        Allocations of the purchase price for the 2010 acquisitions were based on estimates of the fair value of net assets acquired and are subject to adjustment. The purchase price allocations of the 2010 acquisitions are subject to finalization of the assessment of the fair value of intangible assets (primarily customer relationship assets and core technology), racking, deferred revenue, sales and use tax and deferred income taxes (including taxes payable, tax reserves and valuation allowances). We are not aware of any information that would indicate that the final purchase price allocations will differ meaningfully from preliminary estimates. Our acquisitions after January 1, 2009 will be accounted for under newly promulgated accounting guidance and all acquisition costs and restructuring activity has been charged to operations rather than being capitalized as part of the purchase price.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(5) Long-term Debt

        Long-term debt consists of the following:

 
  December 31, 2009   June 30, 2010  
 
  Carrying
Amount
  Fair
Value
  Carrying
Amount
  Fair
Value
 

Revolving Credit Facility(1)

  $ 21,799   $ 21,799   $ 12,054   $ 12,054  

Term Loan Facility(1)

    400,300     400,300     398,250     398,250  

71/4% GBP Senior Subordinated Notes due 2014 (the "71/4% notes")(2)(3)

    238,920     236,531     225,008     220,507  

73/4% Senior Subordinated Notes due 2015 (the "73/4% notes")(2)(3)

    435,856     433,411     435,399     435,028  

65/8% Senior Subordinated Notes due 2016 (the "65/8% notes")(2)(3)

    317,035     313,200     317,282     314,400  

71/2% CAD Senior Subordinated Notes due 2017 (the "Subsidiary Notes")(2)(4)

    166,810     165,142     165,751     167,409  

83/4% Senior Subordinated Notes due 2018 (the "83/4% notes")(2)(3)

    200,000     207,750     200,000     207,125  

8% Senior Subordinated Notes due 2018 (the "8% notes")(2)(3)

    49,749     48,464     49,763     47,479  

63/4% Euro Senior Subordinated Notes due 2018 (the "63/4% notes")(2)(3)

    363,166     343,562     310,185     290,509  

8% Senior Subordinated Notes due 2020 (the "8% notes due 2020")(2)(3)

    300,000     305,250     300,000     304,493  

83/8% Senior Subordinated Notes due 2021 (the "83/8% notes")(2)(3)

    548,002     567,188     548,088     562,031  

Real Estate Mortgages, Capital Leases and Other(5)

    210,147     210,147     205,035     205,035  
                       

Total Long-term Debt

    3,251,784           3,166,815        

Less Current Portion

    (40,561 )         (37,662 )      
                       

Long-term Debt, Net of Current Portion

  $ 3,211,223         $ 3,129,153        
                       

(1)
The capital stock or other equity interests of most of our U.S. subsidiaries, and up to 66% of the capital stock or other equity interests of our first tier foreign subsidiaries, are pledged to secure these debt instruments, together with all intercompany obligations of foreign subsidiaries owed to us or to one of our U.S. subsidiary guarantors. The fair value of this long-term debt approximates the carrying value (as borrowings under these debt instruments are based on current variable market interest rates as of December 31, 2009 and June 30, 2010, respectively).

(2)
The fair values of these debt instruments are based on quoted market prices for these notes on December 31, 2009 and June 30, 2010, respectively.

(3)
Collectively referred to as the Parent Notes. IMI is the direct obligor on the Parent Notes, which are fully and unconditionally guaranteed, on a senior subordinated basis, by substantially all of its direct and indirect 100% owned U.S. subsidiaries (the "Guarantors"). These guarantees are joint and several

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(5) Long-term Debt (Continued)

(4)
Canada Company is the direct obligor on the Subsidiary Notes, which are fully and unconditionally guaranteed, on a senior subordinated basis, by IMI and the Guarantors. These guarantees are joint and several obligations of IMI and the Guarantors.

(5)
We believe the fair value of this debt approximates its carrying value.

        Our credit facility consists of (i) revolving credit facilities, where we can borrow, subject to certain limitations as defined in the credit agreement we entered into on April 16, 2007 governing this facility (the "Credit Agreement"), up to an aggregate amount of $765,000 (including Canadian dollar and multi-currency revolving credit facilities), and (ii) a $410,000 term loan facility. Our revolving credit facility is supported by a group of 24 banks. Our subsidiaries, Canada Company and Iron Mountain Switzerland GmbH, may borrow directly under the Canadian revolving credit and multi-currency revolving credit facilities, respectively. Additional subsidiary borrowers may be added under the multi-currency revolving credit facility. The revolving credit facility terminates on April 16, 2012. With respect to the term loan facility, quarterly loan payments of approximately $1,000 are required through maturity on April 16, 2014, at which time the remaining outstanding principal balance of the term loan facility is due. The interest rate on borrowings under the Credit Agreement varies depending on our choice of interest rate and currency options, plus an applicable margin. IMI guarantees the obligations of each of the subsidiary borrowers under the Credit Agreement, and substantially all of our U.S. subsidiaries guarantee the obligations of IMI and the subsidiary borrowers. The capital stock or other equity interests of most of our U.S. subsidiaries, and up to 66% of the capital stock or other equity interests of our first tier foreign subsidiaries, are pledged to secure the Credit Agreement, together with all intercompany obligations of foreign subsidiaries owed to us or to one of our U.S. subsidiary guarantors. As of June 30, 2010, we had $12,054 of outstanding borrowings under the revolving credit facility, of which $4,500 was denominated in U.S. dollars and the remaining balance was denominated in Euro (EUR 2,700) and Australian dollars (AUD 5,000); we also had various outstanding letters of credit totaling $2,550. The remaining availability, based on IMI's leverage ratio, which is calculated based on the last 12 months' earnings before interest, taxes, depreciation and amortization ("EBITDA"), and other adjustments as defined in the Credit Agreement and current external debt, under the revolving credit facility on June 30, 2010, was $750,396. The interest rate in effect under the revolving credit facility and term loan facility was 3.2% and 2.1%, respectively, as of June 30, 2010. For the three and six months ended June 30, 2009, we recorded commitment fees of $493 and $975, respectively, and for the three and six months ended June 30, 2010, we recorded commitment fees of $585 and $1,152, respectively, based on the unused balances under our revolving credit facilities.

        The Credit Agreement, our indentures and other agreements governing our indebtedness contain certain restrictive financial and operating covenants, including covenants that restrict our ability to complete acquisitions, pay cash dividends, incur indebtedness, make investments, sell assets and take certain other corporate actions. The covenants do not contain a rating trigger. Therefore, a change in our debt rating would not trigger a default under the Credit Agreement and our indentures and other agreements governing our indebtedness. Our revolving credit and term loan facilities, as well as our indentures, use EBITDA based calculations as primary measures of financial performance, including

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(5) Long-term Debt (Continued)

leverage ratios. IMI's revolving credit and term leverage ratio was 3.3 and 3.1 as of December 31, 2009 and June 30, 2010, respectively, compared to a maximum allowable ratio of 5.5. Similarly, our bond leverage ratio, per the indentures, was 4.1 and 3.8 as of December 31, 2009 and June 30, 2010, respectively, compared to a maximum allowable ratio of 6.5. Noncompliance with these leverage ratios would have a material adverse effect on our financial condition and liquidity.

(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors

        The following data summarizes the consolidating Company on the equity method of accounting as of December 31, 2009 and June 30, 2010 and for the three and six months ended June 30, 2009 and 2010.

        The Parent Notes and the Subsidiary Notes are guaranteed by the subsidiaries referred to below as the "Guarantors." These subsidiaries are 100% owned by the Parent. The guarantees are full and unconditional, as well as joint and several.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)

        Additionally, the Parent guarantees the Subsidiary Notes, which were issued by Canada Company. Canada Company does not guarantee the Parent Notes. The other subsidiaries that do not guarantee the Parent Notes or the Subsidiary Notes are referred to below as the "Non-Guarantors."

 
  December 31, 2009  
 
  Parent   Guarantors   Canada
Company
  Non-
Guarantors
  Eliminations   Consolidated  

Assets

                                     

Current Assets:

                                     
   

Cash and Cash Equivalents

  $   $ 382,588   $ 3,906   $ 60,162   $   $ 446,656  
   

Accounts Receivable

        387,670     36,776     160,930         585,376  
   

Intercompany Receivable

    1,047,805         8,886         (1,056,691 )    
   

Other Current Assets

    4,216     118,780     10,367     46,030         179,393  
                           
     

Total Current Assets

    1,052,021     889,038     59,935     267,122     (1,056,691 )   1,211,425  

Property, Plant and Equipment, Net

        1,613,985     197,272     756,943         2,568,200  

Other Assets, Net:

                                     
   

Long-term Notes Receivable from Affiliates and Intercompany Receivable

    2,192,476     1,000             (2,193,476 )    
   

Investment in Subsidiaries

    1,797,439     1,534,577             (3,332,016 )    
   

Goodwill

        1,762,409     191,856     580,448         2,534,713  
   

Other

    32,837     300,582     12,210     187,324     (457 )   532,496  
                           
     

Total Other Assets, Net

    4,022,752     3,598,568     204,066     767,772     (5,525,949 )   3,067,209  
                           
     

Total Assets

  $ 5,074,773   $ 6,101,591   $ 461,273   $ 1,791,837   $ (6,582,640 ) $ 6,846,834  
                           

Liabilities and Equity

                                     

Intercompany Payable

  $   $ 999,182   $   $ 57,509   $ (1,056,691 ) $  

Current Portion of Long-term Debt

    4,639     25,024     2,170     8,728         40,561  

Total Other Current Liabilities

    62,987     480,557     31,664     198,945         774,153  

Long-term Debt, Net of Current Portion

    2,848,927     76,728     181,318     104,250         3,211,223  

Long-term Notes Payable to Affiliates and Intercompany Payable

    1,000     2,192,476             (2,193,476 )    

Other Long-term Liabilities

    3,853     544,233     24,025     91,772     (457 )   663,426  

Commitments and Contingencies (See Note 8)

                                     
 

Total Iron Mountain Incorporated Stockholders' Equity

    2,153,367     1,783,391     222,096     1,326,529     (3,332,016 )   2,153,367  
 

Noncontrolling Interests

                4,104         4,104  
                           
     

Total Equity

    2,153,367     1,783,391     222,096     1,330,633     (3,332,016 )   2,157,471  
                           
     

Total Liabilities and Equity

  $ 5,074,773   $ 6,101,591   $ 461,273   $ 1,791,837   $ (6,582,640 ) $ 6,846,834  
                           

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)


 
  June 30, 2010  
 
  Parent   Guarantors   Canada
Company
  Non-
Guarantors
  Eliminations   Consolidated  

Assets

                                     

Current Assets:

                                     
   

Cash and Cash Equivalents

  $ 2,366   $ 255,715   $ 19,345   $ 63,053   $   $ 340,479  
   

Restricted Cash

    35,103                     35,103  
   

Accounts Receivable

        388,666     38,302     154,208         581,176  
   

Intercompany Receivable

    1,048,044         9,244         (1,057,288 )    
   

Other Current Assets

    1,106     114,985     11,319     41,066         168,476  
                           
     

Total Current Assets

    1,086,619     759,366     78,210     258,327     (1,057,288 )   1,125,234  

Property, Plant and Equipment, Net

        1,575,060     196,489     685,270         2,456,819  

Other Assets, Net:

                                     
   

Long-term Notes Receivable from Affiliates and Intercompany Receivable

    2,164,502     1,000             (2,165,502 )    
   

Investment in Subsidiaries

    1,697,921     1,434,871             (3,132,792 )    
   

Goodwill

        1,834,596     190,638     519,240         2,544,474  
   

Other

    30,556     313,319     11,656     165,744     (706 )   520,569  
                           
     

Total Other Assets, Net

    3,892,979     3,583,786     202,294     684,984     (5,299,000 )   3,065,043  
                           
     

Total Assets

  $ 4,979,598   $ 5,918,212   $ 476,993   $ 1,628,581   $ (6,356,288 ) $ 6,647,096  
                           

Liabilities and Equity

                                     

Intercompany Payable

  $   $ 998,126   $   $ 59,162   $ (1,057,288 ) $  

Current Portion of Long-term Debt

    4,692     20,357     2,317     10,296         37,662  

Total Other Current Liabilities

    77,865     431,102     37,637     147,384         693,988  

Long-term Debt, Net of Current Portion

    2,779,875     74,306     180,134     94,838         3,129,153  

Long-term Notes Payable to Affiliates and Intercompany Payable

    1,000     2,164,502             (2,165,502 )    

Other Long-term Liabilities

    3,853     546,134     23,876     97,081     (706 )   670,238  

Commitments and Contingencies (See Note 8)

                                     
 

Total Iron Mountain Incorporated Stockholders' Equity

    2,112,313     1,683,685     233,029     1,216,078     (3,132,792 )   2,112,313  
 

Noncontrolling Interests

                3,742         3,742  
                           
     

Total Equity

    2,112,313     1,683,685     233,029     1,219,820     (3,132,792 )   2,116,055  
                           
     

Total Liabilities and Equity

  $ 4,979,598   $ 5,918,212   $ 476,993   $ 1,628,581   $ (6,356,288 ) $ 6,647,096  
                           

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)


 
  Three Months Ended June 30, 2009  
 
  Parent   Guarantors   Canada
Company
  Non-
Guarantors
  Eliminations   Consolidated  

Revenues:

                                     
 

Storage

  $   $ 309,697   $ 22,475   $ 83,638   $   $ 415,810  
 

Service

        222,328     23,331     84,559         330,218  
                           
   

Total Revenues

        532,025     45,806     168,197         746,028  

Operating Expenses:

                                     
 

Cost of Sales (Excluding

                                     
   

Depreciation and Amortization)

        205,740     19,434     87,524         312,698  
 

Selling, General and Administrative

    20     161,191     8,062     46,581         215,854  
 

Depreciation and Amortization

    64     57,197     3,746     17,673         78,680  
 

(Gain) Loss on Disposal/Writedown of Property, Plant and Equipment, Net

        (27 )   183     586         742  
                           
   

Total Operating Expenses

    84     424,101     31,425     152,364         607,974  
                           

Operating (Loss) Income

    (84 )   107,924     14,381     15,833         138,054  

Interest Expense (Income), Net

    48,988     (6,936 )   10,291     2,832         55,175  

Other Expense (Income), Net

    66,328     (6,184 )       (78,538 )       (18,394 )
                           

(Loss) Income Before Provision (Benefit) for Income Taxes

    (115,400 )   121,044     4,090     91,539         101,273  

Provision (Benefit) for Income Taxes

        8,578     (270 )   5,453         13,761  

Equity in the (Earnings) Losses of Subsidiaries, Net of Tax

    (203,038 )   (89,775 )           292,813      
                           

Net Income (Loss)

    87,638     202,241     4,360     86,086     (292,813 )   87,512  
   

Less: Net (Loss) Income Attributable to Noncontrolling Interests

                (126 )       (126 )
                           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 87,638   $ 202,241   $ 4,360   $ 86,212   $ (292,813 ) $ 87,638  
                           

30


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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)

 
  Three Months Ended June 30, 2010  
 
  Parent   Guarantors   Canada
Company
  Non-
Guarantors
  Eliminations   Consolidated  

Revenues:

                                     
 

Storage

  $   $ 315,964   $ 27,531   $ 92,149   $   $ 435,644  
 

Service

        228,191     28,851     87,105         344,147  
                           
   

Total Revenues

        544,155     56,382     179,254         779,791  

Operating Expenses:

                                     
 

Cost of Sales (Excluding Depreciation and Amortization)

        195,840     21,187     91,500         308,527  
 

Selling, General and Administrative

    20     170,812     9,340     55,484         235,656  
 

Depreciation and Amortization

    53     59,454     4,692     21,119         85,318  
 

(Gain) Loss on Disposal/Writedown of Property, Plant and Equipment, Net

        (154 )   (29 )   39         (144 )
                           
   

Total Operating Expenses

    73     425,952     35,190     168,142         629,357  
                           

Operating (Loss) Income

    (73 )   118,203     21,192     11,112         150,434  

Interest Expense (Income), Net

    49,469     (8,025 )   11,290     3,511         56,245  

Other Expense (Income), Net

    (26,417 )   236     (10 )   30,210         4,019  
                           

(Loss) Income Before Provision (Benefit) for Income Taxes

    (23,125 )   125,992     9,912     (22,609 )       90,170  

Provision (Benefit) for Income Taxes

        44,247     3,222     949         48,418  

Equity in the (Earnings) Losses of Subsidiaries, Net of Tax

    (64,417 )   17,231             47,186      
                           

Net Income (Loss)

    41,292     64,514     6,690     (23,558 )   (47,186 )   41,752  
   

Less: Net Income (Loss) Attributable to Noncontrolling Interests

                460         460  
                           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 41,292   $ 64,514   $ 6,690   $ (24,018 ) $ (47,186 ) $ 41,292  
                           

31


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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)


 
  Six Months Ended June 30, 2009  
 
  Parent   Guarantors   Canada
Company
  Non-
Guarantors
  Eliminations   Consolidated  

Revenues:

                                     
 

Storage

  $   $ 616,634   $ 43,160   $ 165,873   $   $ 825,667  
 

Service

        435,098     45,575     163,034         643,707  
                           
   

Total Revenues

        1,051,732     88,735     328,907         1,469,374  

Operating Expenses:

                                     
 

Cost of Sales (Excluding Depreciation and Amortization)

        419,251     38,340     172,087         629,678  
 

Selling, General and Administrative

    40     319,290     15,283     91,634         426,247  
 

Depreciation and Amortization

    110     112,084     7,124     35,642         154,960  
 

Loss (Gain) on Disposal/Writedown of Property, Plant and Equipment, Net

        276     144     (1,182 )       (762 )
                           
   

Total Operating Expenses

    150     850,901     60,891     298,181         1,210,123  
                           

Operating (Loss) Income

    (150 )   200,831     27,844     30,726         259,251  

Interest Expense (Income), Net

    98,766     (13,385 )   20,175     5,140         110,696  

Other Expense (Income), Net

    49,970     (3,083 )       (58,126 )       (11,239 )
                           

(Loss) Income Before Provision (Benefit) for Income Taxes

    (148,886 )   217,299     7,669     83,712         159,794  

Provision (Benefit) for Income Taxes

        38,116     1,025     6,197         45,338  

Equity in the (Earnings) Losses of Subsidiaries, Net of Tax

    (265,323 )   (84,462 )           349,785      
                           

Net Income (Loss)

    116,437     263,645     6,644     77,515     (349,785 )   114,456  
   

Less: Net (Loss) Income Attributable to Noncontrolling Interests

                (1,981 )       (1,981 )
                           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 116,437   $ 263,645   $ 6,644   $ 79,496   $ (349,785 ) $ 116,437  
                           

32


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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)


 
  Six Months Ended June 30, 2010  
 
  Parent   Guarantors   Canada
Company
  Non-
Guarantors
  Eliminations   Consolidated  

Revenues:

                                     
 

Storage

  $   $ 630,230   $ 54,432   $ 186,230   $   $ 870,892  
 

Service

        451,102     57,070     177,233         685,405  
                           
   

Total Revenues

        1,081,332     111,502     363,463         1,556,297  

Operating Expenses:

                                     
 

Cost of Sales (Excluding Depreciation and Amortization)

        405,416     42,979     185,364         633,759  
 

Selling, General and Administrative

    47     341,998     18,133     109,330         469,508  
 

Depreciation and Amortization

    109     118,984     9,287     42,722         171,102  
 

(Gain) Loss on Disposal/Writedown of Property, Plant and Equipment, Net

        (1,239 )   (55 )   97         (1,197 )
                           
   

Total Operating Expenses

    156     865,159     70,344     337,513         1,273,172  
                           

Operating (Loss) Income

    (156 )   216,173     41,158     25,950         283,125  

Interest Expense (Income), Net

    99,459     (16,022 )   22,365     7,005         112,807  

Other Expense (Income), Net

    (59,099 )   261     (8 )   71,684         12,838  
                           

(Loss) Income Before Provision (Benefit) for Income Taxes

    (40,516 )   231,934     18,801     (52,739 )       157,480  

Provision (Benefit) for Income Taxes

        81,495     6,206     2,188         89,889  

Equity in the (Earnings) Losses of Subsidiaries, Net of Tax

    (107,374 )   43,828             63,546      
                           

Net Income (Loss)

    66,858     106,611     12,595     (54,927 )   (63,546 )   67,591  
   

Less: Net Income (Loss) Attributable to Noncontrolling Interests

                733         733  
                           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 66,858   $ 106,611   $ 12,595   $ (55,660 ) $ (63,546 ) $ 66,858  
                           

33


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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)

 
  Six Months Ended June 30, 2009  
 
  Parent   Guarantors   Canada
Company
  Non-
Guarantors
  Eliminations   Consolidated  

Cash Flows from Operating Activities

  $ (100,822 ) $ 293,375   $ 15,562   $ 40,176   $   $ 248,291  

Cash Flows from Investing Activities:

                                     
 

Capital expenditures

        (90,669 )   (6,539 )   (36,668 )       (133,876 )
 

Cash paid for acquisitions, net of cash acquired

        (186 )       (1,262 )       (1,448 )
 

Intercompany loans to subsidiaries

    145,709     1,236             (146,945 )    
 

Investment in subsidiaries

    (6,236 )   (6,236 )           12,472      
 

Additions to customer relationship and acquisition costs

        (3,181 )   (362 )   (896 )       (4,439 )
 

Proceeds from sales of property and equipment and other, net

        889     26     923         1,838  
                           
   

Cash Flows from Investing Activities

    139,473     (98,147 )   (6,875 )   (37,903 )   (134,473 )   (137,925 )

Cash Flows from Financing Activities:

                                     
 

Repayment of revolving credit and term loan facilities and other debt

    (52,117 )   (9,214 )   (25,066 )   (13,507 )       (99,904 )
 

Proceeds from revolving credit and term loan facilities and other debt

                15,574         15,574  
 

Debt financing (repayment to) and equity contribution from (distribution to) noncontrolling interests, net

                530         530  
 

Intercompany loans from parent

        (147,283 )   3,452     (3,114 )   146,945      
 

Equity contribution from parent

        6,236         6,236     (12,472 )    
 

Proceeds from exercise of stock options and employee stock purchase plan

    10,983                     10,983  
 

Excess tax benefits from stock-based compensation

    2,483                     2,483  
 

Payment of debt financing costs

            (37 )   (60 )       (97 )
                           
   

Cash Flows from Financing Activities

    (38,651 )   (150,261 )   (21,651 )   5,659     134,473     (70,431 )

Effect of exchange rates on cash and cash equivalents

            742     (2,991 )       (2,249 )
                           

Increase (Decrease) in cash and cash equivalents

        44,967     (12,222 )   4,941         37,686  

Cash and cash equivalents, beginning of period

        210,636     17,069     50,665         278,370  
                           

Cash and cash equivalents, end of period

  $   $ 255,603   $ 4,847   $ 55,606   $   $ 316,056  
                           

34


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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(6) Selected Consolidated Financial Statements of Parent, Guarantors, Canada Company and Non-Guarantors (Continued)

 
  Six Months Ended June 30, 2010  
 
  Parent   Guarantors   Canada
Company
  Non-
Guarantors
  Eliminations   Consolidated  

Cash Flows from Operating Activities

  $ (78,404 ) $ 248,740   $ 26,375   $ 71,387   $   $ 268,098  

Cash Flows from Investing Activities:

                                     
 

Capital expenditures

        (77,019 )   (8,194 )   (52,795 )       (138,008 )
 

Cash paid for acquisitions, net of cash acquired

        (113,149 )       (9,794 )       (122,943 )
 

Intercompany loans to subsidiaries

    179,167     5,597             (184,764 )    
 

Investment in subsidiaries

    (8,419 )   (8,419 )           16,838      
 

Investment in restricted cash

    (35,102 )                   (35,102 )
 

Additions to customer relationship and acquisition costs

        (3,688 )   (453 )   (1,347 )       (5,488 )
 

Proceeds from sales of property and equipment and other, net

        5,023     12     5,938         10,973  
                           
   

Cash Flows from Investing Activities

    135,646     (191,655 )   (8,635 )   (57,998 )   (167,926 )   (290,568 )

Cash Flows from Financing Activities:

                                     
 

Repayment of revolving credit and term loan facilities and other debt

    (2,050 )   (14,244 )   (1,257 )   (48,631 )       (66,182 )
 

Proceeds from revolving credit and term loan facilities and other debt

                39,886         39,886  
 

Debt financing (repayment to) and equity contribution from (distribution to) noncontrolling interests, net

                (65 )       (65 )
 

Intercompany loans from parent

        (178,133 )   (442 )   (6,189 )   184,764      
 

Equity contribution from parent

        8,419         8,419     (16,838 )    
 

Stock repurchases

    (50,564 )                   (50,564 )
 

Parent cash dividends

    (12,720 )                   (12,720 )
 

Proceeds from exercise of stock options and employee stock purchase plan

    9,174                     9,174  
 

Excess tax benefits from stock-based compensation

    1,284                     1,284  
                           
   

Cash Flows from Financing Activities

    (54,876 )   (183,958 )   (1,699 )   (6,580 )   167,926     (79,187 )

Effect of exchange rates on cash and cash equivalents

            (602 )   (3,918 )       (4,520 )
                           

Increase (Decrease) in cash and cash equivalents

    2,366     (126,873 )   15,439     2,891         (106,177 )

Cash and cash equivalents, beginning of period

        382,588     3,906     60,162         446,656  
                           

Cash and cash equivalents, end of period

  $ 2,366   $ 255,715   $ 19,345   $ 63,053   $   $ 340,479  
                           

35


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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(7) Segment Information

        Corporate and our five operating segments are as follows:

        The Latin America, Asia Pacific and Europe operating segments have been aggregated given their similar economic characteristics, products, customers and processes and reported as one reportable segment, "International Physical Business." The Worldwide Digital Business does not meet the quantitative criteria for a reportable segment; however, management determined that it would disclose such information on a voluntary basis.

36


Table of Contents


IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(7) Segment Information (Continued)

        An analysis of our business segment information and reconciliation to the consolidated financial statements is as follows:

 
  North
American
Physical
Business
  International
Physical
Business
  Worldwide
Digital
Business
  Corporate   Total
Consolidated
 

Three Months Ended June 30, 2009

                               

Total Revenues

  $ 524,309   $ 163,997   $ 57,722   $   $ 746,028  

Depreciation and Amortization

    43,750     17,345     9,088     8,497     78,680  
 

Depreciation

    40,803     14,346     6,472     8,433     70,054  
 

Amortization

    2,947     2,999     2,616     64     8,626  

Adjusted OIBDA

    212,881     31,728     13,303     (40,436 )   217,476  

Expenditures for Segment Assets

    30,967     23,835     4,112     5,149     64,063  
 

Capital Expenditures

    29,211     23,478     4,117     5,149     61,955  
 

Cash Paid for Acquisitions, Net of Cash acquired

    21         (5 )       16  
 

Additions to Customer Relationship and Acquisition Costs

    1,735     357             2,092  

Three Months Ended June 30, 2010

                               

Total Revenues

    544,295     174,936     60,560         779,791  

Depreciation and Amortization

    45,732     20,722     9,624     9,240     85,318  
 

Depreciation

    42,871     17,266     5,998     9,187     75,322  
 

Amortization

    2,861     3,456     3,626     53     9,996  

Adjusted OIBDA

    242,581     30,817     6,853     (44,643 )   235,608  

Expenditures for Segment Assets

    30,581     23,200     3,322     6,619     63,722  
 

Capital Expenditures

    27,982     18,058     3,401     6,619     56,060  
 

Cash Paid for Acquisitions, Net of Cash acquired

        4,682     (79 )       4,603  
 

Additions to Customer Relationship and Acquisition Costs

    2,599     460             3,059  

Six Months Ended June 30, 2009

                               

Total Revenues

    1,035,840     320,670     112,864         1,469,374  

Depreciation and Amortization

    85,327     34,992     17,890     16,751     154,960  
 

Depreciation

    79,458     28,846     12,661     16,641     137,606  
 

Amortization

    5,869     6,146     5,229     110     17,354  

Adjusted OIBDA

    407,771     60,888     23,496     (78,706 )   413,449  

Total Assets(1)

    4,351,716     1,575,747     434,524     110,512     6,472,499  

Expenditures for Segment Assets

    71,243     47,814     9,266     11,440     139,763  
 

Capital Expenditures

    67,490     45,680     9,266     11,440     133,876  
 

Cash Paid for Acquisitions, Net of Cash acquired

    186     1,262             1,448  
 

Additions to Customer Relationship and Acquisition Costs

    3,567     872             4,439  

Six Months Ended June 30, 2010

                               

Total Revenues

    1,084,781     354,369     117,147         1,556,297  

Depreciation and Amortization

    91,263     41,948     19,434     18,457     171,102  
 

Depreciation

    85,543     35,004     12,857     18,348     151,752  
 

Amortization

    5,720     6,944     6,577     109     19,350  

Adjusted OIBDA

    464,395     64,933     13,954     (90,252 )   453,030  

Total Assets(1)

    4,431,331     1,559,680     498,253     157,832     6,647,096  

Expenditures for Segment Assets

    67,205     63,798     118,084     17,352     266,439  
 

Capital Expenditures

    61,094     52,657     6,905     17,352     138,008  
 

Cash Paid for Acquisitions, Net of Cash acquired

    1,970     9,794     111,179         122,943  
 

Additions to Customer Relationship and Acquisition Costs

    4,141     1,347             5,488  

(1)
Excludes all intercompany receivables or payables and investment in subsidiary balances.

37


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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(7) Segment Information (Continued)

        The accounting policies of the reportable segments are the same as those described in Note 2. Adjusted OIBDA, previously referred to as Contribution, for each segment is defined as operating income before depreciation and amortization expenses, excluding (gain) loss on disposal/writedown of property, plant and equipment, net which are directly attributable to the segment. Internally, we use Adjusted OIBDA as the basis for evaluating the performance of and allocating resources to our operating segments.

        A reconciliation of Adjusted OIBDA to income (loss) before provision (benefit) for income taxes on a consolidated basis is as follows:

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2009   2010   2009   2010  

Adjusted OIBDA

  $ 217,476   $ 235,608   $ 413,449   $ 453,030  
 

Less: Depreciation and Amortization

    78,680     85,318     154,960     171,102  
   

Loss (Gain) on Disposal/Writedown of Property, Plant and Equipment, Net

    742     (144 )   (762 )   (1,197 )
   

Interest Expense (Income), net

    55,175     56,245     110,696     112,807  
   

Other (Income) Expense, net

    (18,394 )   4,019     (11,239 )   12,838  
                   

Income (Loss) before Provision (Benefit) for Income Taxes

  $ 101,273   $ 90,170   $ 159,794   $ 157,480  
                   

(8) Commitments and Contingencies

a.
Litigation

        We are involved in litigation from time to time in the ordinary course of business with a portion of the defense and/or settlement costs being covered by various commercial liability insurance policies purchased by us. In the opinion of management, no material legal proceedings are pending to which we, or any of our properties, are subject, except as discussed below. We record legal costs associated with loss contingencies as expenses in the period in which they are incurred.

b.
Pittsburgh Litigation

        In May 2006, we filed an eviction lawsuit against a tenant, Digital Encoding Factory, LLC ("DEF"), leasing space in our Boyers, Pennsylvania records storage facility for its failure to make required rent payments. In October 2006, DEF and two related companies, EDA Acquisition, LLC, and Media Holdings, LLC, filed a lawsuit against us in the U.S. Federal District Court for the Western District of Pennsylvania alleging that they started a digital scanning business in our Boyers, Pennsylvania, records storage facility because we verbally agreed to refer customer digital scanning business in the facility to them (the "Pittsburgh Lawsuit") and promised substantial business. The plaintiffs contended that we breached this alleged verbal agreement and sought to recover damages in the range of $6,500 to $53,500. We disputed the plaintiffs' claims and contended that there was no such verbal agreement. A bench trial occurred in the case in March 2010. In July 2010, we executed an

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(8) Commitments and Contingencies (Continued)

agreement with the plaintiffs settling the case before the judge reached a decision in the matter. The legal proceedings related to this event did not have a material impact to our consolidated results of operations or financial condition.

c.
London Fire

        In July 2006, we experienced a significant fire in a leased records and information management facility in London, England, that resulted in the complete destruction of the facility and its contents. The London Fire Brigade ("LFB") issued a report in which it was concluded that the fire resulted either from human agency, i.e., arson, or an unidentified ignition device or source, and its report to the Home Office concluded that the fire resulted from a deliberate act. The LFB also concluded that the installed sprinkler system failed to control the fire due to the primary electric fire pump being disabled prior to the fire and the standby diesel fire pump being disabled in the early stages of the fire by third-party contractors. We have received notices of claims from customers or their subrogated insurance carriers under various theories of liabilities arising out of lost data and/or records as a result of the fire. Certain of those claims have resulted in litigation in courts in the United Kingdom. We deny any liability in respect of the London fire and we have referred these claims to our excess warehouse legal liability insurer, which has been defending them to date under a reservation of rights. Certain of the claims have been settled for nominal amounts, typically one to two British pounds sterling per carton, as specified in the contracts, which amounts have been or will be reimbursed to us from our primary property insurer. An entity that provided certain security services related to the destroyed facility as a contractor to us is a defendant in an action by the owner of the property, seeking damages in the amount of approximately 10,700 British pounds sterling for negligence and breach of duty. The security service provider recently petitioned the court hearing the matter to join Iron Mountain (UK) as a third party defendant, seeking contribution in respect of its liability (if any) to the owner of the building, and the court has granted the motion. We believe there are meritorious defenses available to us with respect to the claim. Many claims, including substantial claims, remain outstanding; others have been resolved pursuant to consent orders. We believe we carry adequate property and liability insurance. We do not expect that legal proceedings related to this event will have a material impact to our consolidated results of operations or financial condition.

d.
Chile Earthquake

        As a result of the February 27, 2010 earthquake in Chile, we experienced damage to certain of our 13 owned and leased records management facilities in that region. None of our facilities were destroyed by fire or significantly impacted by water damage. However, the structural integrity of five buildings was compromised, and some of the racking included in certain buildings was damaged or destroyed. Some customer materials were impacted by this event. Revenues from this country represent less than 1% of our consolidated enterprise revenues. We believe we carry adequate property and liability insurance and do not expect that this event will have a material impact to our consolidated results of operations or financial condition.

        During the quarter ended June 30, 2010, we received payments from our insurance carrier of approximately $21,000. Such amount represents a portion of our business personal property, business

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(8) Commitments and Contingencies (Continued)


interruption, and expense claims filed with our insurance carriers. We expect to utilize cash from our insurance settlements to fund capital expenditures and for general working capital needs. Recoveries from the business interruption portion of our insurance claim will be recorded as other income in the consolidated statement of operations when received. We expect to receive proceeds from our property claims that exceed the carrying value of the related assets. We, therefore, expect to record gains on the disposal/writedown of property, plant and equipment, net in our statement of operations in future periods when the cash received to date exceeds the carrying value of the related property, plant and equipment, net. Proceeds from our business personal property claims are reflected in our statement of cash flows under proceeds from sales of property and equipment and other, net included in the investing activities section when received. We have reflected approximately $6,400 of the cash proceeds received to date as proceeds from sales of property and equipment, net in our statement of cash flows for the six months ended June 30, 2010. Proceeds from our business interruption claims are reflected in our statement of cash flows as a component of net income included in the operating activities section when received.

(9) Stockholders' Equity Matters

        In February 2010, our board of directors approved a share repurchase program authorizing up to $150,000 in repurchases of our common stock. This represented approximately 3% of our outstanding common stock based on the closing price on February 19, 2010. All purchases are subject to stock price, market conditions, corporate and legal requirements and other factors. In addition, in February 2010, our board of directors adopted a dividend policy under which we intend to pay quarterly cash dividends on our common stock. The first quarterly dividend of $0.0625 per share was paid on April 15, 2010 to shareholders of record on March 25, 2010 in the aggregate amount of $12,720. The second quarterly dividend of $0.0625 per share was paid on July 15, 2010 to shareholders of record on June 25, 2010 in the aggregate amount of $12,641. Declaration and payment of future quarterly dividends is at the discretion of our board of directors.

(10) Subsequent Events

        In August 2010, we called $200,000 of the $431,255 aggregate principal amount outstanding of our 73/4% notes due 2015 at a redemption price of 101.292% for each one thousand dollars of principal amount of notes redeemed, plus accrued and unpaid interest, all of which will be paid in September 2010. We will record a charge to other expense (income), net of approximately $1,800 in the third quarter of 2010 related to the early extinguishment of the 73/4% notes being redeemed. This charge consists of the call premium and deferred financing costs, net of original issue premiums related to the 73/4% notes.

        We have evaluated subsequent events through the date our financial statements were issued.

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IRON MOUNTAIN INCORPORATED

        

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2010 should be read in conjunction with our Consolidated Financial Statements and Notes thereto for the three and six months ended June 30, 2010, included herein, and for the year ended December 31, 2009, included in our Annual Report on Form 10-K dated February 26, 2010.

FORWARD-LOOKING STATEMENTS

        We have made statements in this Quarterly Report on Form 10-Q that constitute "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements concern our operations, economic performance, financial condition, goals, beliefs, future growth strategies, investment objectives, plans and current expectations, including our intent to repurchase shares and to pay dividends, our financial ability and sources to fund the repurchase program and dividend policy, and the amounts of such repurchases and dividends. 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: (1) the cost to comply with current and future laws, regulations and customer demands relating to privacy issues; (2) the impact of litigation that may arise in connection with incidents in which we fail to protect our customer's information; (3) changes in the price for our services relative to the cost of providing such services; (4) changes in customer preferences and demand for our services; (5) in the various digital businesses in which we are engaged, the cost of capital and technical requirements, demand for our services or competition for customers; (6) the impact of legal restrictions or limitations under stock repurchase plans on price, volume or timing of stock repurchases; (7) the impact of alternative, more attractive investments on dividends or stock repurchases; (8) our ability or inability to complete acquisitions on satisfactory terms and to integrate acquired companies efficiently; (9) the cost or potential liabilities associated with real estate necessary for our business; (10) the performance of business partners upon whom we depend for technical assistance or management expertise outside the U.S.; (11) changes in the political and economic environments in the countries in which our international subsidiaries operate; (12) claims that our technology violates the intellectual property rights of a third party; and (13) other trends in competitive or economic conditions affecting our financial condition or results of operations not presently contemplated. You should not rely upon forward-looking statements except as statements of our present intentions and of our present expectations, which may or may not occur. Other risks may adversely impact us, as described more fully under "Item 1A. Risk Factors" in our Annual Report on Form 10-K dated February 26, 2010. You should read these cautionary statements as being applicable to all forward-looking statements wherever they appear. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures we have made in this document, as well as our other periodic reports filed with the Securities and Exchange Commission (the "SEC").

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Non-GAAP Measures

Adjusted Operating Income Before Depreciation and Amortization, or Adjusted OIBDA

        Adjusted OIBDA is defined as operating income before depreciation and amortization expenses, excluding (gain) loss on disposal/writedown of property, plant and equipment, net. Adjusted OIBDA Margin is calculated by dividing Adjusted OIBDA by total revenues. We use multiples of current or projected Adjusted OIBDA in conjunction with our discounted cash flow models to determine our overall enterprise valuation and to evaluate acquisition targets. We believe Adjusted OIBDA and Adjusted OIBDA Margin provide current and potential investors with relevant and useful information regarding our ability to generate cash flow to support business investment. These measures are an integral part of the internal reporting system we use to assess and evaluate the operating performance of our business. Adjusted OIBDA does not include certain items that we believe are not indicative of our core operating results, specifically: (1) (gains) and losses on disposal/writedown of property, plant and equipment, net, (2) other (income) expense, net, (3) cumulative effect of change in accounting principle and (4) net income (loss) attributable to noncontrolling interests.

        Adjusted OIBDA also does not include interest expense, net and the provision (benefit) for income taxes. These expenses are associated with our capitalization and tax structures, which we do not consider when evaluating the operating profitability of our core operations. Finally, Adjusted OIBDA does not include depreciation and amortization expenses, in order to eliminate the impact of capital investments, which we evaluate by comparing capital expenditures to incremental revenue generated and as a percentage of total revenues. Adjusted OIBDA and Adjusted OIBDA Margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with accounting principles generally accepted in the United States of America ("GAAP"), such as operating or net income (loss) or cash flows from operating activities (as determined in accordance with GAAP).

Reconciliation of Adjusted OIBDA to Operating Income (Loss) and Net Income (Loss) (in thousands):

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2009   2010   2009   2010  

Adjusted OIBDA

  $ 217,476   $ 235,608   $ 413,449   $ 453,030  
 

Less: Depreciation and Amortization

    78,680     85,318     154,960     171,102  
   

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

    742     (144 )   (762 )   (1,197 )
                   
 

Operating Income (Loss)

    138,054     150,434     259,251     283,125  
 

Less: Interest Expense, Net

    55,175     56,245     110,696     112,807  
   

Other (Income) Expense, Net

    (18,394 )   4,019     (11,239 )   12,838  
   

Provision (Benefit) for Income Taxes

    13,761     48,418     45,338     89,889  
   

Net Income (Loss) Attributable to Noncontrolling interests

    (126 )   460     (1,981 )   733  
                   

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 87,638   $ 41,292   $ 116,437   $ 66,858  
                   

Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions

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that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended.

        On an on-going basis, we evaluate the estimates used. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies include the following, which are listed in no particular order:

        Further detail regarding our critical accounting policies can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes included in our Annual Report on Form 10-K, as filed with the SEC on February 26, 2010. Management has determined that no material changes concerning our critical accounting policies have occurred since December 31, 2009.

        Prior to January 1, 2010, the financial position and results of operations of the operating subsidiaries of Iron Mountain Europe (Group) Limited (collectively referred to as "IME"), our European business, were consolidated based on IME's fiscal year ended October 31. Effective January 1, 2010, we changed the fiscal year-end (and the reporting period for consolidation purposes) of IME to coincide with Iron Mountain Incorporated's ("IMI") fiscal year-end of December 31. We believe that the change in accounting principle related to the elimination of the two-month reporting lag for IME is preferable because it will result in more contemporaneous reporting of events and results related to IME. In accordance with applicable accounting literature, a change in subsidiary year-end is treated as a change in accounting principle and requires retrospective application. The cumulative effect of the change was an increase in retained earnings of $12.2 million as of January 1, 2008. We also recorded a corresponding decrease in other long-term liabilities for the same amount. The impact of the change was not material to the results of operations for the previously reported annual and interim periods after January 1, 2008, and, thus, those results have not been revised. There is, however, a charge of $4.7 million recorded to other (income) expense, net in the six months ended June 30, 2010 to recognize the immaterial differences arising in 2008 and 2009.

Recent Accounting Pronouncements

        Effective at the start of a reporting entity's first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity, the Financial Accounting Standards Board (the "FASB") Accounting Standards Codification™ (the "Codification") will require more information about transfers of financial assets, including securitization transactions, and transactions where entities have continuing exposure to the risks related to transferred financial assets. The Codification eliminates the concept of a "qualifying special-purpose entity", changes the requirements for derecognizing financial assets, and requires additional disclosures about an entity's involvement with variable interest entities

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and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects such reporting entity's financial statements. The adoption of these Codification updates did not have a material impact on our consolidated financial statements and results of operations.

        In October 2009, the FASB issued amended guidance on multiple-deliverable revenue arrangements and software revenue recognition. The multiple-deliverable revenue arrangements updates to the Codification apply to all deliverables in contractual arrangements in all industries in which a vendor will perform multiple revenue-generating activities. The change to the Codification creates a selling price hierarchy that an entity must use as evidence of fair value in separately accounting for all deliverables on a relative-selling-price basis which qualify for separation. The selling price hierarchy includes: (1) vendor-specific objective evidence; (2) third-party evidence and (3) estimated selling price. Broadly speaking, this update to the Codification will result in the possibility for some entities to recognize revenue earlier and more closely align with the economics of certain revenue arrangements if the other criteria for separation (e.g. standalone value to the customer) are met. The software revenue recognition guidance was issued to address factors that entities should consider when determining whether the software and non-software components of a product function together to deliver the product's essential functionality. The software revenue recognition updates to the Codification will allow revenue arrangements in which software and non-software components deliver together a product's essential functionality to follow the multiple-deliverable revenue recognition criteria as opposed to the criteria applicable to software revenue recognition. Both updates are effective for fiscal years beginning on or after June 15, 2010 and apply prospectively to new or materially modified revenue arrangements after its effective date. Early adoption is permitted; however, we do not anticipate early adopting. We are currently evaluating the impact of these Codification updates to our consolidated financial statements and results of operations.

        In January 2010, the FASB issued amended guidance improving disclosures about fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The new guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The change in the Codification requires an entity, in determining the appropriate classes of assets and liabilities, to consider the nature and risks of the assets and liabilities as well as their placement in the fair value hierarchy (Level 1, 2 or 3). The Codification update is effective for the first reporting period, including interim periods, beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. However, those disclosures are required for periods ending after initial adoption. Early adoption is permitted for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis; however, we do not anticipate early adopting. We do not expect adoption to have a material impact on our consolidated financial statements and results of operations.

Overview

        The following discussions set forth, for the periods indicated, management's discussion and analysis of results. Significant trends and changes are discussed for the three and six month periods ended June 30, 2010 within each section. Trends and changes that are consistent within the three and six months periods are not repeated and are discussed on a year-to-date basis.

        Our revenues consist of storage revenues as well as service revenues. Storage revenues, both physical and digital, which are considered a key performance indicator for the information management services industry, consist of largely recurring periodic charges related to the storage of materials or data

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(generally on a per unit basis), which are typically retained by customers for many years. Service revenues are comprised of charges for related core service activities and a wide array of complementary products and services. Included in core service revenues are: (1) the handling of records including the addition of new records, temporary removal of records from storage, refiling of removed records, destruction of records, and permanent withdrawals from storage; (2) courier operations, consisting primarily of the pickup and delivery of records upon customer request; (3) secure shredding of sensitive documents; and (4) other recurring services including maintenance and support contracts. Our complementary services revenues include special project work, data restoration projects, fulfillment services, consulting services and product sales (including software licenses, specially designed storage containers and related supplies). Our secure shredding business generates the sale of recycled paper (included in complementary services revenues), the price of which can fluctuate from period to period, adding to the volatility and reducing the predictability of that revenue stream.

        Our consolidated revenues and expenses are subject to variations caused by the net effect of foreign currency translation on revenues and expenses incurred by our entities outside the U.S. In 2009, we saw decreases in both revenues and expenses as a result of the weakening of the British pound sterling, Canadian dollar and Euro against the U.S. dollar, based on an analysis of weighted average rates for the comparable periods. It is difficult to predict how much foreign currency exchange rates will fluctuate in the future and how those fluctuations will impact our consolidated statement of operations. Due to the expansion of our international operations, these fluctuations have become material on individual balances. However, because both the revenues and expenses are denominated in the local currency of the country in which they are derived or incurred, the impact of currency fluctuations on our operating income and operating margin is mitigated. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the percentage change in the results from one period to another period in this report using constant currency disclosure. The constant currency growth rates are calculated by translating the 2009 results at the 2010 average exchange rates.

        The following table is a comparison of underlying average exchange rates of the foreign currencies that had the most significant impact on our U.S. dollar-reported revenues and expenses:

 
  Average Exchange
Rates for the
Three Months
Ended
June 30,
   
 
 
  Percentage
(Strengthening) /
Weakening of
the U.S. dollar
 
 
  2009(1)   2010  

British pound sterling

  $ 1.445   $ 1.492     3.3 %

Canadian dollar

  $ 0.858   $ 0.973     13.4 %

Euro

  $ 1.302   $ 1.275     (2.1 )%

 

 
  Average Exchange
Rates for the
Six Months
Ended
June 30,
   
 
 
  Percentage
(Strengthening) /
Weakening of
the U.S. dollar
 
 
  2009(1)   2010  

British pound sterling

  $ 1.468   $ 1.526     4.0 %

Canadian dollar

  $ 0.831   $ 0.967     16.4 %

Euro

  $ 1.310   $ 1.330     1.5 %

(1)
Corresponding to the appropriate periods based on the operating subsidiaries of IME fiscal year ended October 31.

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Results of Operations

 
  Three Months Ended
June 30,
   
   
 
 
  Dollar
Change
  Percentage
Change
 
 
  2009   2010  

Revenues

  $ 746,028   $ 779,791   $ 33,763     4.5 %

Operating Expenses

    607,974     629,357     21,383     3.5 %
                     
 

Operating Income

    138,054     150,434     12,380     9.0 %

Other Expenses, Net

    50,542     108,682     58,140     115.0 %
                     
 

Net Income

    87,512     41,752     (45,760 )   (52.3 )%

Net (Loss) Income Attributable to Noncontrolling Interests

    (126 )   460     586     465.1 %
                     
 

Net Income Attributable to Iron Mountain Incorporated

  $ 87,638   $ 41,292   $ (46,346 )   (52.9 )%
                     

Adjusted OIBDA(1)

  $ 217,476   $ 235,608   $ 18,132     8.3 %
                     

Adjusted OIBDA Margin(1)

    29.2 %   30.2 %            

 

 
  Six Months Ended
June 30,
   
   
 
 
  Dollar
Change
  Percentage
Change
 
 
  2009   2010  

Revenues

  $ 1,469,374   $ 1,556,297   $ 86,923     5.9 %

Operating Expenses

    1,210,123     1,273,172     63,049     5.2 %
                     
 

Operating Income

    259,251     283,125     23,874     9.2 %

Other Expenses, Net

    144,795     215,534     70,739     48.9 %
                     
 

Net Income

    114,456     67,591     (46,865 )   (40.9 )%

Net (Loss) Income Attributable to Noncontrolling Interests

    (1,981 )   733     2,714     137.0 %
                     
 

Net Income Attributable to Iron Mountain Incorporated

  $ 116,437   $ 66,858   $ (49,579 )   (42.6 )%
                     

Adjusted OIBDA(1)

  $ 413,449   $ 453,030   $ 39,581     9.6 %
                     

Adjusted OIBDA Margin(1)

    28.1 %   29.1 %            

(1)
See "Non-GAAP Measures—Adjusted Operating Income Before Depreciation and Amortization, or Adjusted OIBDA" for definition, reconciliation and a discussion of why we believe these measures provide relevant and useful information to our current and potential investors.

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REVENUES

 
  Three Months Ended
June 30,
   
  Percentage Change    
 
 
  Dollar
Change
   
  Constant
Currency(1)
  Internal
Growth(2)
 
 
  2009   2010   Actual  

Storage

  $ 415,810   $ 435,644   $ 19,834     4.8 %   3.3 %   3.2 %

Core Service

    235,353     240,618     5,265     2.2 %   0.1 %   (0.6 )%
                                 
 

Total Core Revenue

    651,163     676,262     25,099     3.9 %   2.1 %   1.8 %

Complementary Services

   
94,865
   
103,529
   
8,664
   
9.1

%
 
7.8

%
 
5.1

%
                                 
 

Total Revenue

  $ 746,028   $ 779,791   $ 33,763     4.5 %   2.8 %   2.2 %
                                 

 

 
  Six Months Ended
June 30,
   
  Percentage Change