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UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
Commission file number 1-13045
IRON MOUNTAIN INCORPORATED (Exact Name of Registrant as Specified in its Charter)
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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
Number of shares of the registrant's Common Stock at November 3, 2003: 85,362,615
IRON MOUNTAIN INCORPORATED Index
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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)
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except Per Share Data)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
(1) General
The interim consolidated financial statements are presented herein without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation. Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 2002 has been derived from the consolidated financial statements that have been audited by our independent auditors. The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K/A for the year ended December 31, 2002.
Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 presentation.
(2) Summary of Significant Accounting Policies
We apply the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually for impairment or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives.
Upon adoption of SFAS No. 142, as of January 1, 2002, we recorded a charge of $6,396 (net of minority interest of $8,487), that was reported in the caption "cumulative effect of change in accounting principle" in the accompanying consolidated statement of operations. Impairment adjustments recognized in the future, if any, are generally required to be recognized as operating expenses. The $6,396 charge related to our South American reporting unit within our international reporting segment. The South American reporting unit failed the impairment test primarily due to a reduction in the expected future performance of the unit resulting from a deterioration of the local economic environment and the devaluation of the currency in Argentina. As goodwill amortization expense in our South American reporting unit is not deductible for tax purposes, this impairment charge is not net of a tax benefit. We have selected October 1 as our annual goodwill impairment review date. We performed our annual goodwill impairment review as of October 1, 2002 and noted no impairment of goodwill at our reporting units as of that date. As of September 30, 2003, no factors were identified that would alter this assessment and we are in the process of completing our annual 2003 assessment, utilizing data as of October 1, 2003.
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The changes in the carrying value of goodwill attributable to each reportable operating segment for the period ended September 30, 2003 are as follows:
The components of our amortizable intangible assets at September 30, 2003 are as follows:
As of January 1, 2003, we adopted the measurement provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." As a result we began using the fair value method of accounting in our financial statements beginning January 1, 2003 using the prospective method. The prospective method involves recognizing expense for the fair value for all awards granted or modified in the year of adoption and thereafter with no expense recognition for previous awards. We will apply the fair value recognition provisions to all stock based awards granted, modified or settled on or after January 1, 2003 and will continue to provide the required pro forma information for all awards previously granted, modified or settled before January 1, 2003.
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Had we elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123 and No. 148, net income and net income per share would have been changed to the pro forma amounts indicated in the table below:
The weighted average fair value of options granted for the nine months ended September 30, 2002 and 2003 was $9.31 and $10.97 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:
In accordance with SFAS No. 128, "Earnings per Share," basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. The calculation of diluted net income (loss) per share is consistent with that of basic net income (loss) per share but gives effect to all potential common shares (that is, securities such as options, warrants or convertible securities) that were outstanding during the period, unless the effect is antidilutive. Potential common shares, substantially attributable to stock options, included in the calculation of diluted net income per share totaled 1,228,121 shares and 1,467,641 shares for the three and nine months ended September 30, 2002 and 1,423,341 shares and 1,478,821 shares for the three and nine months ended September 30, 2003, respectively.
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For the three months ended September 30, 2002 and 2003, 491,899 and 307,176, respectively, potential common shares have been excluded from the calculation of diluted net income per share, as their effects are antidilutive.
For the nine months ended September 30, 2002 and 2003, cash payments for interest were $96,763 and $95,043, respectively, and cash payments for income taxes were $1,810 and $3,967, respectively.
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, amendment of FASB Statement No. 13, and Technical Corrections," which, among other things, limits the classification of gains and losses from extinguishment of debt as extraordinary to only those transactions that are unusual and infrequent in nature as defined by APB Opinion No. 30 "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." We adopted SFAS No. 145 on January 1, 2003. Gains and losses on certain future debt extinguishments, if any, will be recorded in pre-tax income. Losses on early extinguishment of debt of $0 and $1,222 for the three and nine months ended September 30, 2002 and $5,510 and $21,175 for the three and nine months ended September 30, 2003, respectively, are included in other income, net in our accompanying consolidated statements of operations to conform to the requirements under SFAS No. 145.
(3) Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," requires presentation of the components of comprehensive income (loss), including the changes in equity from non-owner sources such as unrealized gains (losses) on hedging transactions, securities and foreign currency translation adjustments. Our total comprehensive income (loss) is as follows:
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(4) Variable Interest Entities
During the third quarter of 2002 we changed the characterization and the related accounting for properties in one variable interest entity ("VIE III") at such time and prospectively for new property acquisitions added to VIE III. In addition, anticipating the requirement to consolidate, and in line with our objective of transparent reporting, we voluntarily guaranteed all of the at-risk equity in VIE III and our two other variable interest entities (together, the "Other Variable Interest Entities" and, collectively with VIE III, our "Variable Interest Entities"). These guarantees resulted in our consolidating all of our Variable Interest Entities' assets and liabilities as of December 31, 2002. As a result of the consolidation of our Variable Interest Entities, (1) rent expense decreased $214 and interest expense and depreciation increased $3,377 and $945, respectively, in our consolidated statement of operations for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002, and (2) rent expense decreased $5,261 and interest expense and depreciation increased $10,291 and $2,835, respectively, in our consolidated statement of operations for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002.
(5) Derivative Instruments and Hedging Activities
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," requires that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. Periodically, we acquire derivative instruments that are intended to hedge either cash flows or values that are subject to 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 hedge items, as well as our risk management objectives and strategies for undertaking each hedge transaction.
We have entered into two interest rate swap agreements, which are derivatives as defined by SFAS No. 133 and designated as cash flow hedges. These swap agreements hedge interest rate risk on certain amounts of our term loan. We have recorded, in the accompanying consolidated balance sheets, the estimated cost to terminate these swaps (fair value of the derivative liability), a deferred tax asset and a corresponding charge to accumulated other comprehensive items of $16,038 ($8,444 recorded in accrued expenses and $7,594 recorded in other long-term liabilities), $5,851 and $10,187, respectively, as of September 30, 2003. For the three and nine months ended September 30, 2002, we recorded additional interest expense of $1,881 and $5,560, respectively, resulting from interest rate swap settlements. For the three and nine months ended September 30, 2003, we recorded additional interest expense of $2,198 and $6,471, respectively, resulting from interest rate swap settlements. These interest rate swap agreements were determined to be highly effective, and therefore no ineffectiveness was recorded in earnings.
In addition, we have entered into a third interest rate swap agreement, which was designated as a cash flow hedge through December 31, 2002. This swap agreement hedged interest rate risk on certain amounts of our variable operating lease commitments. We have recorded, in the accompanying consolidated balance sheets, the estimated cost to terminate this swap (fair value of the derivative liability), a deferred tax asset and a corresponding charge to accumulated other comprehensive items of $1,803 ($1,406 recorded in accrued expenses and $397 recorded in other long-term liabilities), $658 and $1,145, respectively, as of September 30, 2003. From inception through December 31, 2002, this interest
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rate swap agreement was determined to be highly effective, and therefore no ineffectiveness was recorded in earnings. As a result of the consolidation of one of the Other Variable Interest Entities ("VIE I") on December 31, 2002, we consolidated the real estate term loans of VIE I and the operating lease commitments that were hedged by this swap are now considered to be inter-company transactions. As a result, this interest rate swap agreement was deemed to be no longer effective on a prospective basis. For the three and nine months ended September 30, 2002, we recorded additional rent expense of $452 and $1,330, respectively, resulting from the settlements associated with this interest rate swap agreement. For the three and nine months ended September 30, 2003, we recorded additional interest expense of $539 and $1,541, respectively, resulting from the settlements associated with this interest rate swap agreement.
Also, we consolidated VIE III which had entered into an interest rate swap agreement upon its inception that was designated as a cash flow hedge. This swap agreement hedges the majority of interest rate risk associated with VIE III's real estate term loans. We have recorded, in the accompanying consolidated balance sheets, the estimated cost to terminate this swap (fair value of the derivative liability), a deferred tax asset and a corresponding charge to accumulated other comprehensive items of $12,820 ($4,768 recorded in accrued expenses and $8,052 recorded in other long-term liabilities), $4,677 and $8,143, respectively, as of September 30, 2003. For the three and nine months ended September 30, 2003, we recorded additional interest expense of $1,231 and $3,576, respectively, resulting from interest rate swap settlements. This interest rate swap agreement has been since inception and continues to be a highly effective hedge, and therefore no ineffectiveness was recorded in earnings.
We provided the initial financing totaling 190,459 British pounds sterling to Iron Mountain Europe Limited ("IME"), our European joint venture, for all of the consideration associated with the acquisition of the European operations of the information management services business of Hays plc ("Hays IMS") using cash on hand and borrowings under our revolving credit facility. IME is currently seeking permanent financing to repay all or a portion of the funding provided by us. We recorded a foreign currency gain of $6,892 in other (income) expense, net for this intercompany balance as of September 30, 2003. In order to minimize the foreign currency risk associated with providing IME with the consideration necessary for the acquisition of Hay IMS, we borrowed 80,000 British pounds sterling under our revolving credit facility to create a natural hedge. We recorded a foreign currency loss of $2,584 on the translation of this revolving credit balance to U.S. dollars in other (income) expense, net for the three months ended September 30, 2003. Additionally, on July 16, 2003 we entered into two cross currency swaps with a combined notional value of 100,000 British pounds sterling. These swaps each have a term of one year and at maturity we have a right to receive $162,800 in exchange for 100,000 British pounds sterling. We have not designated these swaps as hedges and, therefore, all mark to market fluctuations of the swaps are recorded in other (income) expense, net in our consolidated statements of operations. We have recorded, in the accompanying consolidated balance sheets, the fair value of the derivative liability and the associated swap cost of $6,180 in accrued expenses as of September 30, 2003 and for the three and nine months ended September 30, 2003, we recorded $6,180 in other (income) expense, net in the accompanying consolidated statements of operations.
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(6) Acquisitions
During the nine months ended September 30, 2003, we purchased substantially all of the assets, and assumed certain liabilities, of seven businesses.
In July 2003, we and IME completed the acquisition of Hays IMS in two simultaneous transactions. IME acquired the European operations of Hays IMS for aggregate cash consideration (including transaction costs) of approximately 191,000 pounds sterling ($311,000), while we acquired the U.S. operations of Hays IMS for aggregate cash consideration (including transaction costs) of approximately 14,500 pounds sterling ($24,000). These aggregate cash considerations included an amount of $5,070 associated with the final post-closing purchase price adjustment, which was paid to IME by Hays plc in October 2003 after our third quarter ended. Both transactions were on a cash and debt free basis.
A summary of the consideration paid and the allocation of the purchase price of all 2003 acquisitions is as follows:
Each of the 2003 acquisitions were accounted for using the purchase method of accounting and, accordingly, the results of operations for each acquisition have been included in our consolidated results from their respective acquisition dates.
Allocation of the purchase price for the 2003 acquisitions was based on estimates of the fair value of net assets acquired, and is subject to adjustment. The purchase price allocations of certain 2003 transactions are subject to finalization of the assessment of the fair value of property, plant and equipment, intangible assets (primarily customer relationship assets), operating leases, restructuring purchase reserves and deferred income taxes. We are not aware of any information that would indicate that the final purchase price allocations will differ meaningfully from preliminary estimates.
In connection with each of our acquisitions, we have undertaken certain restructurings of the acquired businesses. The restructuring activities include certain reductions in staffing levels, elimination of duplicate facilities and other costs associated with exiting certain activities of the acquired businesses. The estimated cost of these restructuring activities were recorded as costs of the acquisitions and were
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provided in accordance with Emerging Issues Task Force Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." We finalize restructuring plans for each business no later than one year from the date of acquisition. Unresolved matters at September 30, 2003 primarily include completion of planned abandonments of facilities and severances for certain acquisitions.
The following is a summary of reserves related to such restructuring activities:
At September 30, 2003, the restructuring reserves related to acquisitions consisted of lease losses on abandoned facilities of $4,390, severance costs for two people of $521 and other exit costs of $1,977. These accruals are expected to be used prior to September 30, 2004 except for lease losses of $2,432 and severance contracts of $344, both of which are based on contracts that extend beyond one year.
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(7) Long-term Debt
Long-term debt consists of the following:
On March 15, 2002, we entered into a new amended and restated revolving credit agreement (together with the term loan, the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement replaced our prior credit agreement. As a result, we recorded a charge to other income, net in the accompanying consolidated statement of operations of $1,222 related to the early retirement of debt in conjunction with the refinancing of our credit facility.
As of September 30, 2003, we had $229,253 of borrowings under our revolving credit facility, of which $44,000 was denominated in U.S. dollars and the remaining balance was denominated in British pounds sterling and Canadian dollars in the amount of GBP 80,000 and CDN 70,200, respectively. We also had various outstanding letters of credit totaling $34,098. The remaining availability under the
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revolving credit facility was $136,649 as of September 30, 2003, and the interest rates in effect ranged from 2.9% to 5.4% as of September 30, 2003.
Our Variable Interest Entities were financed with real estate term loans (see Note 4). As of September 30, 2003, these real estate term loans amounted to $202,647. No further financing is currently available to our Variable Interest Entities to fund further property acquisitions. The real estate term loans held by our Variable Interest Entities have always been and continue to be treated as indebtedness for purposes of our financial covenants under our Amended and Restated Credit Agreement. As of the date they were consolidated into our financial statements, they were considered indebtedness under the terms of our Parent notes and Subsidiary notes.
In January 2003, we redeemed the remaining $23,183 of outstanding principal amount of our 91/8% Senior Subordinated Notes due 2007 (the "91/8% notes"), at a redemption price (expressed as a percentage of principal amount) of 104.563%, plus accrued and unpaid interest, with proceeds from our underwritten public offering of $100,000 in aggregate principal of our 73/4% Senior Subordinated Notes due 2015 (the "73/4% notes"). We recorded a charge to other (income) expense, net in the accompanying consolidated statement of operations of $1,804 in the first quarter of 2003 related to the early retirement of the remaining 91/8% notes.
In March 2003, we completed two debt exchanges which resulted in the issuance of $31,255 in face value of our 73/4% notes and the retirement of $30,000 of our 83/4% Senior Subordinated Notes due 2009 (the "83/4% notes"). These non-cash debt exchanges resulted in carryover basis and, therefore, no gain (loss) on extinguishment of debt in accordance with EITF No. 96-19, "Debtor's Accounting for Modification or Exchange of Debt Instruments." These exchanges result in a lower interest rate and, therefore, lower interest expense in future periods as well as extend the maturity of our debt obligations. From time to time, we may enter into similar exchange transactions that we deem appropriate.
In April 2003, we completed an underwritten public offering of an additional $300,000 in aggregate principal amount of our 73/4% notes, which were issued at a price to investors of 104% of par, implying an effective yield to worst of 7.066%. Our net proceeds of $307,340, after paying the underwriters' discounts, commissions and transaction fees, were used to fund our offer to purchase and consent solicitation relating to our outstanding 83/4% notes, to otherwise redeem the 83/4% notes, repay borrowings under our revolving credit facility, and repay other indebtedness and acquisitions.
In April 2003, we received and accepted tenders for $143,317 of the $220,000 aggregate principal amount outstanding of our 83/4% notes. In May 2003, we redeemed the remaining $76,683 of outstanding principal amount of our 83/4% notes, at a redemption price (expressed as a percentage of principal amount) of 104.375%, plus accrued and unpaid interest. We recorded a charge to other (income) expense, net of $13,841 in the second quarter of 2003 related to the early retirement of the 83/4% notes, which consists of redemption premiums and transaction costs, as well as original issue discount and unamortized deferred financing costs related to the 83/4% notes.
In June 2003, we completed an underwritten public offering of $150,000 in aggregate principal amount of our 65/8% Senior Subordinated Notes due 2016 (the "65/8% notes"). The 65/8% notes were
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issued at a price to investors of 100% of par. Our net proceeds of $147,500, after paying the underwriters' discounts, commissions and transaction fees, were used to redeem $50,000 in aggregate principal amount of the outstanding Subsidiary notes in the third quarter of 2003 and the remainder was used for acquisitions.
In July 2003, we redeemed $50,000 of outstanding principal amount of the Subsidiary notes, at a redemption price (expressed as a percentage of principal amount) of 104.063%, plus accrued and unpaid interest. We recorded a charge to other (income) expense, net of $5,530 in the third quarter of 2003 related to the early retirement of these Subsidiary notes, which consists of redemption premiums and transaction costs, as well as original issue discount related to these Subsidiary notes.
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 our indentures and other agreements governing our indebtedness. As of September 30, 2003, we were in compliance in all material respects with all material debt covenants and agreements.
(8) Selected Financial Information of Parent, Guarantors and Non-guarantors
The following financial data summarizes the consolidating Company on the equity method of accounting as of September 30, 2003 and December 31, 2002 and for the three and nine month periods ended September 30, 2003 and 2002. The Guarantors column includes all subsidiaries that guarantee the Parent notes and the Subsidiary notes. The Canada Company column includes Iron Mountain Canada Corporation ("Canada Company"), the issuer of the Subsidiary notes, and our other Canadian subsidiaries that guarantee the Subsidiary notes, but do not guarantee the Parent notes. The Parent
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also guarantees the Subsidiary notes. The subsidiaries that do not guarantee either the Parent notes or the Subsidiary notes are referred to in the table as the "Non-Guarantors."
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(9) Segment Information
An analysis of our business segment information and reconciliation to the consolidated financial statements is as follows:
The accounting policies of the reportable segments are the same as those described in Note 2 to Notes to Consolidated Financial Statements in our Annual Report on Form 10-K/A for the year ended December 31, 2002 except that certain costs are allocated from Corporate to the other segments in both 2002 and 2003, primarily to our Business Records Management and Off-Site Data Protection segments. These allocations, which include rent, worker's compensation, property, general liability, auto and other insurance, pension/medical costs, sick and vacation costs, incentive compensation, real estate property taxes and provision for bad debts, are based on rates set at the beginning of each year. Contribution for each segment is defined as total revenues less cost of sales (excluding depreciation) and selling, general and administrative expenses including the costs allocated to each segment as described above. Internally, we use Contribution as the basis for evaluating the performance of and allocating resources to our operating segments.
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A reconciliation of Contribution to net income on a consolidated basis is as follows:
Our secure shredding business, previously analyzed as part of Corporate & Other, is now analyzed within the Business Records Management segment. Our film and sound business, previously analyzed as part of Business Records Management, is now analyzed within the Off-Site Data Protection segment. Our electronic vaulting business, previously analyzed as part of Corporate & Other, is now analyzed within the Off-Site Data Protection segment. Our Canadian business, previously analyzed as part of our International segment, is now analyzed within the Business Records Management segment. In addition, certain allocations from Corporate & Other to Business Records Management and Off-Site Data Protection have been changed. To the extent practicable, the prior period numbers shown above have been adjusted to reflect all of these changes.
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Information about our operations in different geographical areas is as follows:
(10) Commitments and Contingencies
We are a party to numerous operating leases. No material changes in the obligations associated with these leases have occurred since December 31, 2002. See our Annual Report on Form 10-K/A for the year ended December 31, 2002 for amounts outstanding at December 31, 2002.
As previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2002, in October, 2000, Iron Mountain Information Management, Inc., one of our wholly-owned subsidiaries ("IMIM"), commenced three actions in Middlesex County, New Jersey against three former management employees of IMIM who became employed by or associated with Sequedex LLC ("Sequedex"), alleging that the employees' association with Sequedex breached non-competition and confidentiality agreements that each had signed with IMIM. In addition, these actions asserted claims against Sequedex for tortious interference with the confidentiality and non-competition agreements as well as claims against all defendants for misappropriation and misuse of trade secrets and confidential information. The three individual defendants have denied the material allegations and asserted various affirmative defenses. Sequedex and the individual defendants have also filed counterclaims and third party complaints for tortious interference with certain contracts and prospective business relationships between Sequedex and its actual and potential customers, as well as a claim for trade disparagement and defamation. Sequedex subsequently served, but has not received permission to file, an amended counterclaim and third party complaint that includes an allegation that Sequedex incurred damages caused by our March 28, 2002 filing of the complaint in the action against J. Peter Pierce, Sr. and
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others. Sequedex claims that IMIM acted maliciously and in bad faith in filing the March 28, 2002 complaint.
In connection with its proposed amended counterclaim, Sequedex has recently furnished a preliminary statement of damages and answered an interrogatory seeking information concerning the damages that Sequedex alleges it incurred. Sequedex's estimate of compensatory damages is approximately $172,000, and Sequedex has indicated that it intends to seek punitive damages of approximately $1,500,000. Extensive discovery has been conducted in the three cases; on the basis of that discovery, it is our belief that Sequedex has not produced any material evidence that we or IMIM acted wrongfully in any respect. Further, limited discovery has been conducted in respect of Sequedex's damages claim; on the basis of that discovery, we do not believe that Sequedex has any foundation, and we believe that it cannot provide any foundation, for its damages calculations. We believe that the damages calculations submitted by Sequedex are not supported by credible evidence and are subject to serious legal, methodological and factual deficiencies. A trial of the three actions in which the Sequedex counterclaim has been asserted is scheduled to commence in the spring of 2004.
Discovery is proceeding in each of the cases except the Pierce arbitration (in which the evidence portion of the arbitration has been completed, and final arguments are scheduled for December, 2003). We intend to prosecute these and the related actions vigorously, as well as to similarly defend against the counterclaims and third party complaints. At this time, the outcome of these and the related proceedings cannot be predicted. Based on our present assessment of the situation, after consultation with legal counsel, we believe that the outcome of these and the related proceedings will not have a material adverse effect on our financial condition or results of operations, although there can be no assurance in this regard.
In addition to the matters discussed above, we are involved in litigation from time to time in the ordinary course of business with a portion of the defense and/or settlement costs being covered by various insurance policies purchased by us. In the opinion of our management, no other material legal proceedings are pending to which we, or any of our properties, are subject.
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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 nine months ended September 30, 2003 and 2002 should be read in conjunction with the consolidated financial statements and footnotes for the three and nine months ended September 30, 2003 included herein, and the year ended December 31, 2002, included in our Annual Report on Form 10-K/A for the year ended December 31, 2002.
Forward Looking Statements
This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe-harbor created by such Act. Forward-looking statements include our statements regarding our goals, beliefs, strategies, objectives, plans or current expectations. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from those contemplated in the forward-looking statements. Such factors include, but are not limited to: (i) changes in customer preferences and demand for our services; (ii) changes in the price for our services relative to the cost of providing such services; (iii) the cost and availability of financing for contemplated growth; (iv) our ability or inability to complete acquisitions on satisfactory terms and to integrate acquired companies efficiently; (v) in the various digital businesses in which we are engaged, capital and technical requirements will be beyond our means, markets for our services will be less robust than anticipated, or competition will be more intense than anticipated; (vi) the possibility that business partners upon whom we depend for technical assistance or management and acquisition expertise outside the United States will not perform as anticipated; (vii) changes in the political and economic environments in the countries in which our international subsidiaries operate; and (viii) other trends in competitive or economic conditions affecting our financial condition or results of operations not presently contemplated. 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 on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission, or SEC.
Non-GAAP Measures
Operating Income Before Depreciation and Amortization, or OIBDA
OIBDA is defined as operating income before depreciation and amortization expenses. OIBDA Margin is calculated by dividing OIBDA by total revenues. Our management uses these measures to evaluate the operating performance of our consolidated business. As such, we believe these measures provide relevant and useful information to our current and potential investors. We use OIBDA for planning purposes and multiples of current or projected OIBDA-based calculations in our discounted cash flow models to determine our overall enterprise valuation. Additionally, we use OIBDA and OIBDA Margin to evaluate acquisition targets. We believe OIBDA and OIBDA Margin are useful measures of our ability to grow our revenues faster than our operating expenses and they are an integral part of our internal reporting system utilized by management to assess and evaluate the operating performance of our business. OIBDA does not include certain items, including (1) minority interest in earnings of subsidiaries, net, (2) other (income) expense, net, which primarily consists of extinguishment charges and foreign currency gains and losses, and (3) cumulative effect of change in accounting principle that we believe are not indicative of our core operating results. OIBDA also does not include interest expense, net and the provision (benefit) for income taxes. These expenses are associated with our capitalization and tax structures, which management does not consider when
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evaluating the profitability of our core operations. Finally, OIBDA does not include depreciation and amortization expenses, in order to eliminate the impact of capital investments, which management believes is better evaluated by comparing capital expenditures to incremental revenue generated and as a percentage of total revenues. OIBDA and OIBDA Margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with accounting principles generally accepted in the Unites States of America, or GAAP, such as operating or net income or cash flows from operating activities (as determined in accordance with GAAP).
Reconciliation of OIBDA to Operating Income and Net Income (In Thousands):
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 accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended. On an on-going basis, we evaluate the estimates used, including those related to the allowance for doubtful accounts, impairments of tangible and intangible assets, income taxes, purchase accounting related reserves, self-insurance liabilities, incentive compensation liabilities, litigation liabilities and contingencies. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. We use these estimates to assist us in the identification and assessment of the accounting treatment necessary with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies include the following and are in no particular order:
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Further detail regarding our critical accounting policies can be found in the consolidated financial statements and the notes included in our latest Annual Report on Form 10-K/A as filed with the SEC. Management has determined that no material changes concerning our critical accounting policies has occurred since our Annual Report on Form 10-K/A for the year ended December 31, 2002.
Results of Operations
The following table sets forth, for the periods indicated, information derived from our consolidated statements of operations (in thousands).
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The following table sets forth, for the periods indicated, information derived from our consolidated statements of operations, expressed as a percentage of total consolidated revenues.
Revenue
Consolidated storage revenues increased $31.6 million, or 16.5%, to $223.0 million for the three months ended September 30, 2003. The increase is attributable to internal revenue growth (8.6%) resulting from net increases in records and other media stored by existing customers and sales to new customers, acquisitions (5.9%), primarily $8.0 million from the operations of the information services business of Hays plc ("Hays IMS"), and foreign currency exchange rate fluctuations (2.0%). Foreign currency exchange rate fluctuations were primarily due to the strengthening 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.
Consolidated service and storage material sales revenues increased $17.0 million, or 12.0%, to $158.8 million for the three months ended September 30, 2003. The increase is attributable to internal revenue growth (2.3%) resulting from net increases in service and storage material sales to existing customers and sales to new customers, acquisitions (7.5%), including revenue from the Hays IMS operations of $6.8 million, and foreign currency exchange rate fluctuations (2.2%). Foreign currency exchange rate fluctuations were primarily due to the strengthening 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.
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For the reasons stated above, our consolidated revenues increased $48.6 million, or 14.6%, to $381.8 million. Internal revenue growth for the three months ended September 30, 2003 was 5.9%. We calculate internal revenue growth in local currency for our international operations.
Internal Growth—Eight-Quarter Trend
Our internal revenue growth rate represents the weighted average year over year growth rate of our revenues after removing the effects of acquisitions and foreign currency exchange rate fluctuations. Over the past eight quarters, the internal growth rate of our storage revenues has ranged from a high of 9.6% to a low of 8.0%. The most recent three quarters show our storage revenue internal growth rate coming off its two-year low and increasing steadily. We attribute this recent trend to higher growth rates in our international businesses, primarily Europe, stabilized net carton volume growth in our North American records management business and higher growth rates in our digital businesses. Net carton volume growth is a function of the rate new cartons are added by existing and new customers offset by the rate of carton destructions and other permanent removals.
The internal growth rate for service and storage material sales revenue is inherently more volatile than the storage revenue internal growth rate. The volatility arises from the more discretionary services we offer such as large special projects, data products and carton sales and recycled paper. These revenues are impacted to a greater extent by economic downturns as customers defer or cancel the purchase of these services as a way to reduce their short-term costs. As a commodity, recycled paper prices are subject to the volatility of that market. The quarterly growth rates in 2003 were negatively impacted by several factors: (1) large special project service revenue did not achieve the same high levels experienced in the corresponding periods of 2002, (2) product sales, primarily data product sales, decreased and (3) carton destructions and other permanent removals have decreased relative to prior periods. In addition, our off-site data protection business continued to operate in a market experiencing downward pressure on information technology spending as companies look to reduce their costs.
Cost of Sales
Consolidated cost of sales (excluding depreciation) is comprised of the following expenses (in thousands):
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Labor
Labor expense decreased as a percentage of revenue due to improved labor management and reductions in incentive compensation expenses due to changes in our estimates of those expenses during the third quarter of 2003. These were partially offset by increases in headcount due to growth and acquisitions and the expansion of our secure shredding operations and its associated higher labor mix. In addition, our domestic operations, which comprise the majority of our workforce, experienced an overall increase in wages due to normal inflation, merit increases and increases in medical insurance expense of $0.6 million.
Facilities
The largest component of our facilities cost is rent expense, which increased $4.4 million for the three months ended September 30, 2003, primarily as a result of increased rent in our European operations of $3.1 million attributable to new facilities and properties occupied through acquisitions, including our acquisition of Hays IMS. In addition, after adjusting for the consolidation of properties owned by our variable interest entities, we have increased the number of leased facilities we occupy domestically by 17 as of September 30, 2003 compared to September 30, 2002 primarily due to acquisitions. Excluding our European operations, the dollar increase in facilities expenses is attributable to property taxes, utilities, and property insurance, which increased $1.0 million, $1.3 million, and $0.5 million, respectively, for the three months ended September 30, 2003 compared to the three months ended September 30, 2002. Facilities expenses in our European operations increased $1.0 million primarily due to the growth of operations and acquisitions for the three months ended September 30, 2003 compared to the three months ended September 30, 2002.
Transportation
Our transportation expenses, which were flat as a percentage of consolidated revenues, are influenced by several variables including total number of vehicles in our fleet, the number of owned versus leased vehicles, use of subcontracted couriers, fuel expenses, and maintenance. Domestic operating lease expense increased $0.3 million for the three months ended September 30, 2003 as a result of an increased percentage of vehicles within our fleet subject to operating leases. For the three months ended September 30, 2003, domestic fuel expense increased $0.3 million due to an increase in the average price per gallon of fuel of approximately 15% in 2003 and an increase in the size of our fleet. We experienced a $1.0 million increase in transportation expenses in our European operations, which is primarily attributable to the growth of operations and acquisitions.
Product Cost of Sales and Other Cost of Sales
Product and other cost of sales are highly correlated to complementary revenue streams. Product cost of sales for the three months ended September 30, 2003 was lower than the three months ended September 30, 2002 as a percentage of product revenues due to more focused selling efforts on higher margin product and improved product sourcing.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses are comprised of the following expenses (in thousands):
General and Administrative
The dollar increase in general and administrative expenses is primarily attributable to an increase in headcount, normal inflation and merit increases and an increase in worker's compensation expenses. We also experienced a $4.4 million increase in general and administrative expenses in our European operations, which is primarily attributable to the growth of operations and acquisitions. The increase in labor expenses was offset by reductions in incentive compensation expenses due to changes in our estimates of those expenses during the third quarter of 2003.
Sales, Marketing & Account Management
The majority of our sales, marketing and account management costs are labor related and are primarily driven by the headcount in each of these departments. Increased headcount and commissions are the most significant contributors to the increase in sales and marketing expenses for the three months ended September 30, 2003. Throughout 2002 and 2003, we continued to invest in the expansion and improvement of our sales force. Excluding our European operations, we added 75 sales and marketing employees since September 30, 2002, a 20% increase in headcount, increased our account management force and initiated several new marketing and promotional efforts in 2003 to develop awareness in the marketplace of our entire service offerings. The costs associated with these efforts have contributed to the increase in our sales, marketing and account management expenses. In addition, costs associated with our European sales and account management teams have increased by $1.5 million for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002, due to the hiring of new personnel and the integration of the Hays IMS sales force.
Information Technology
Information technology expenses increased $2.3 million, but remained flat as a percentage of consolidated revenues, for the three months ended September 30, 2003. The dollar increase was principally due to higher compensation costs resulting from increased headcount, normal inflation and merit increases, as well as an increase in external resources offset by reductions in incentive compensation expenses due to changes in our estimates of those expenses during the third quarter of 2003. The net dollar impact was $0.9 million. As our technology initiatives mature, less of our efforts are development related thus decreasing capitalizable expenditures, which results in increased information technology expenses. We also incurred $1.0 million of additional costs for expanding
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bandwidth and international connectivity and other telecommunication expenses in 2003 as compared to 2002.
Bad Debt Expense
The decrease in consolidated bad debt expense for the three months ended September 30, 2003 compared to the three months ended September 30, 2002 is primarily attributable to the centralization of our collection efforts within our divisions which resulted in improved cash collections.
Depreciation, Amortization, Merger-Related Expenses and Loss on Disposal/Writedown of Property, Plant and Equipment, Net
Consolidated depreciation and amortization expense increased $4.2 million to $33.2 million (8.7% of consolidated revenues) for the three months ended September 30, 2003 from $29.0 million (8.7% of consolidated revenues) for the three months ended September 30, 2002. Depreciation expense increased $3.8 million, primarily due to the additional depreciation expense related to recent capital expenditures, including storage systems, which include racking, building improvements and leasehold improvements, computer systems hardware and software, and new buildings, and depreciation associated with facilities accounted for as capital leases. Depreciation associated with our digital initiatives increased $1.2 million during the three months ended September 30, 2003 as a result of software and hardware assets placed in service throughout 2002 and 2003.
Merger-related expenses are certain expenses directly related to our merger with Pierce Leahy Corp. that cannot be capitalized and include system conversion costs, costs of exiting certain facilities, severance, relocation and pay-to-stay payments and other transaction-related costs. Merger-related expenses were $0.2 million for the three months ended September 30, 2002. All merger related activities associated with the Pierce Leahy merger were completed in 2002.
Consolidated loss on disposal/writedown of property, plant and equipment, net was $1.9 million during the third quarter of 2003 compared to $0.1 million during the third quarter of 2002.
Operating Income
As a result of the foregoing factors, consolidated operating income increased $11.3 million, or 17.1%, to $77.2 million (20.2% of consolidated revenues) for the three months ended September 30, 2003 from operating income of $66.0 million (19.8% of consolidated revenues) for the three months ended September 30, 2002.
OIBDA
As a result of the foregoing factors, consolidated OIBDA increased $15.5 million, or 16.3%, to $110.4 million (28.9% of consolidated revenues) for the three months ended September 30, 2003 from $94.9 million (28.5% of consolidated revenues) for the three months ended September 30, 2002.
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Interest Expense, Net
Consolidated interest expense, net increased $2.8 million to $38.8 million (10.2% of consolidated revenues) for the three months ended September 30, 2003 from $36.0 million (10.8% of consolidated revenues) for the three months ended September 30, 2002. This increase was primarily attributable to borrowings under our revolving credit facility and the issuance of our 65/8% Senior Subordinated Notes dues 2016 (the "65/8% notes") which were used to finance the Hays IMS acquisition. The increase was offset by a decline in our overall weighted average interest rate from 8.5% as of September 30, 2002 to 7.6% as of September 30, 2003 resulting from our refinancing efforts, a higher percentage of variable rate debt and a decline in variable interest rates.
Other Expense, Net
Significant items included in other (income) expense, net include the following (in thousands):
Foreign currency losses of $4.8 million based on period-end exchange rates were recorded in the three months ended September 30, 2003 primarily due to the weakening of the Canadian dollar and the strengthening of the British pound sterling against the U.S. dollar as these currencies relate to our intercompany balances with our Canadian and U.K. subsidiaries, U.S. dollar denominated debt held by our Canadian subsidiary, British pound sterling borrowings under our revolving credit facility, and our British pound sterling denominated cross currency swaps.
During the three months ended September 30, 2003, we redeemed $50.0 million of the outstanding principal amount of the 81/8% Senior Notes due 2008 of our Canadian subsidiary (the "Subsidiary notes") resulting in a charge of $5.5 million. The charge consisted primarily of redemption premiums and transaction costs, as well as original issue discounts related to these Subsidiary notes.
Provision for Income Taxes
Our effective tax rate for the three months ended September 30, 2003 was 42.7%. The primary reconciling item between the statutory rate of 35% and our effective tax rate is state income taxes (net of federal benefit). The effective tax rate projected for 2003 is 42.4%. The disallowance of certain intercompany interest charges, including a change in Massachusetts tax laws, retroactive to January 1, 2002, increased our provision for income taxes for the three months ended September 30, 2003 by 0.9%. Our effective tax rate was 41.1% for the three months ended September 30, 2002. There may be future volatility with respect to our effective tax rate related to items including unusual unforecasted permanent items, significant changes in tax rates in foreign jurisdictions and the need for additional valuation allowances. Also, as a result of our net operating loss carryforwards, we do not expect to pay any significant federal and state income taxes during 2003.
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Minority Interest
Minority interest in earnings of subsidiaries, net resulted in a charge to income of $1.3 million (0.3% of consolidated revenues) for the three months ended September 30, 2003 compared to $0.4 million (0.1% of consolidated revenues) for the three months ended September 30, 2002. This represents our minority partners' share of earnings in our majority-owned international subsidiaries that are consolidated in our operating results. The increase is a result of the improved profitability of our European and South American businesses.
Net Income
As a result of the foregoing factors, consolidated net income decreased $0.9 million, or 5.8%, to $14.8 million (3.9% of consolidated revenues) for the three months ended September 30, 2003 from net income of $15.7 million (4.7% of consolidated revenues) for the three months ended September 30, 2002.
Segment Analysis (In Thousands)
Business Records Management
Revenue in our business records management segment increased 9.2% primarily due to increased storage revenues, growth of our secure shredding operations and acquisitions (including revenue from the U.S. operations of Hays IMS of $4.1 million), and was offset by lower special project service revenue and lower permanent removal fees during 2003. In addition, favorable currency fluctuations during the three months ended September 30, 2003 in Canada increased revenue $2.6 million when compared to the three months ended September 30, 2002. Contribution as a percent of segment revenue decreased primarily due to higher property taxes, utilities and increased investment in our sales
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and account management force which was partially offset by lower bad debt expense. Items excluded from the calculation of Contribution include the following: (1) depreciation and amortization expense for the three months ended September 30, 2003 of $17.6 million compared to $17.1 million for the three months ended September 30, 2002, (2) foreign currency losses of $3.0 million and $7.2 million for the three months ended September 30, 2003 and 2002, respectively, and (3) a loss on disposal/writedown of property, plant and equipment, net of $1.6 million for the three months ended September 30, 2003.
Off-Site Data Protection
Revenue in our off-site data protection segment increased 5.7% primarily due to internal revenue growth from both existing and new customers in the face of increasing pressure in the marketplace to reduce information technology related spending. Contribution as a percent of segment revenue increased primarily due to increased product sales margins and improved labor management. This increase was partially offset by increased investment in our sales and account management force. Excluded from the calculation of Contribution was depreciation and amortization expense for the three months ended September 30, 2003 of $3.6 million compared to $3.2 million for the three months ended September 30, 2002.
International
Revenue in our international segment increased 83.8% primarily due to acquisitions completed in Europe, including $10.7 million from the acquisition of Hays IMS, and in South America, as well as increased sales efforts in the United Kingdom. Favorable currency fluctuations during the three months ended September 30, 2003 in Europe increased revenue, as measured in U.S. dollars, by $4.3 million compared to the three months ended September 30, 2002. Contribution as a percent of segment revenue increased primarily due to improved gross margins from both our European and South American operations and overall increased overhead utilization. This increase was partially offset by increased rent associated with new properties in Europe. Excluded from the calculation of Contribution was depreciation and amortization expense for the three months ended September 30, 2003 of $4.4 million compared to $1.8 million for the three months ended September 30, 2002, including $1.3 million associated with the acquisition of Hays IMS in 2003. A foreign currency gain of $0.3 million in the third quarter of 2003 compared to a loss of $1.0 million in the third quarter of 2002 is also excluded from the calculation of Contribution.
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Consolidated storage revenues increased $73.0 million, or 13.0%, to $634.8 million for the nine months ended September 30, 2003. The increase is attributable to internal revenue growth (8.5%) resulting from net increases in records and other media stored by existing customers and sales to new customers, acquisitions (3.0%), primarily $8.0 million from the operations of Hays IMS, and foreign currency exchange rate fluctuations (1.5%). Foreign currency exchange rate fluctuations were primarily due to the strengthening of the British pound sterling, Canadian dollar, and Euro against the U.S. dollar, offset by a weakening of the Mexican peso and Brazilian real against the U.S. dollar, based on an analysis of weighted average rates for the comparable periods.
Consolidated service and storage material sales revenues increased $41.8 million, or 10.1%, to $458.1 million for the nine months ended September 30, 2003. The increase is attributable to internal revenue growth (4.1%) resulting from net increases in service and storage material sales to existing
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customers and sales to new customers, acquisitions (4.2%), including revenue from the Hays IMS operations of $6.8 million and foreign currency exchange rate fluctuations (1.8%). Foreign currency exchange rate fluctuations were primarily due to the strengthening of the British pound sterling, Canadian dollar, Euro against the U.S. dollar, offset by a weakening of the Mexican peso and Brazilian real against the U.S. dollar, based on an analysis of weighted average rates for the comparable periods.
For the reasons stated above, our consolidated revenues increased $114.8 million, or 11.7%, to $1,092.8 million. Internal revenue growth for the nine months ended September 30, 2003 was 6.6%. We calculate internal revenue growth in local currency for our international operations.
Labor expense decreased as a percentage of revenue due to improved labor management and reductions in incentive compensation expenses due to changes in our estimates of those expenses during the third quarter of 2003. These were partially offset by increases in headcount due to growth and acquisitions and the expansion of our secure shredding operations and its associated higher labor mix. In addition, our domestic operations, which comprise the majority of our workforce, experienced an overall increase in wages due to normal inflation, merit increases and increases in medical insurance expense of $1.5 million.
The largest component of our facilities cost is rent expense, which increased $1.3 million for the nine months ended September 30, 2003, primarily as a result of increased rent in our European operations of $5.3 million attributable to new facilities and properties occupied through acquisitions, including our acquisition of Hays IMS. In addition, after adjusting for the consolidation of properties owned by our variable interest entities, we have increased the number of leased facilities we occupy domestically by 17 as of September 30, 2003 compared to September 30, 2002 primarily due to acquisitions. The increase in rent is offset by our consolidating 38 properties owned by our Variable Interest Entities during the third and fourth quarters of 2002. The leases associated with these properties were accounted for as operating leases prior to December 31, 2002. We recorded $5.3 million of rent expense for these 38 properties during the nine months ended September 30, 2002 and no rent expense in 2003. Rather than rent expense, we recorded interest expense and depreciation
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expense associated with these properties for the nine months ended September 30, 2003. Excluding our European operations, the dollar increase in facilities expenses is attributable to property taxes, utilities, and property insurance, which increased $4.4 million, $3.5 million, and $1.4 million, respectively, for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. Facilities expenses in our European operations increased $2.6 million primarily due to the growth of operations and acquisitions for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. On a year to date basis, facilities costs were flat as a percentage of revenues compared to the prior year.
Our transportation expenses, which were flat as a percentage of consolidated revenues, are influenced by several variables including total number of vehicles in our fleet, the number of owned versus leased vehicles, use of subcontracted couriers, fuel expenses, and maintenance. Domestic operating lease expense increased $1.3 million for the nine months ended September 30, 2003 as a result of an increased percentage of vehicles within our fleet subject to operating leases. For the nine months ended September 30, 2003, domestic fuel expense increased $1.2 million due to an increase in the average price per gallon of fuel of approximately 19% in 2003 and an increase in the size of our fleet, and external courier expenses increased $0.4 million. We experienced a $1.9 million increase in transportation expenses in our European operations, which is primarily attributable to the growth of operations and acquisitions.
Product and other cost of sales are highly correlated to complementary revenue streams. Product cost of sales for the nine months ended September 30, 2003 was lower than the nine months ended September 30, 2002 as a percentage of product revenues due to more focused selling efforts on higher margin products and improved product sourcing.
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The dollar increase in general and administrative expenses is primarily attributable to an increase in headcount, normal inflation and merit increases and an increase in worker's compensation expenses. We also experienced a $7.3 million increase in general and administrative expenses in our European operations, which is primarily attributable to the growth of operations and acquisitions and includes approximately $1.2 million associated with the strengthening of the British pound sterling against the U.S. dollar, based on an analysis of weighted average rates for the comparable periods. The increase in labor expenses was offset by decreases in professional fees and general insurance expenses.
The majority of our sales, marketing and account management costs are labor related and are primarily driven by the headcount in each of these departments. Increased headcount and commissions are the most significant contributors to the increase in sales and marketing expenses for the nine months ended September 30, 2003. Throughout 2002 and 2003, we continued to invest in the expansion and improvement of our sales force. Excluding our European operations, we added 75 sales and marketing employees since September 30, 2002, a 20% increase in headcount, increased our account management force and initiated several new marketing and promotional efforts in 2003 to develop awareness in the marketplace of our entire service offerings. The costs associated with these efforts have contributed to the increase in our sales, marketing and account management expenses. In addition, costs associated with our European sales and account management teams have increased by $2.8 million for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002, due to the hiring of new personnel and the integration of the Hays IMS sales force.
Information technology expenses increased $9.1 million for the nine months ended September 30, 2003 principally due to higher compensation costs resulting from increased headcount, normal inflation and merit increases, as well as an increase in external resources that collectively totaled $6.9 million. As our technology initiatives mature, less of our efforts are development related thus decreasing capitalizable expenditures, which results in increased information technology expenses. In addition, we incurred $1.7 million of additional costs for expanding bandwidth and international connectivity and other telecommunication expenses in 2003 as compared to 2002. These increased costs were offset by a reduction of $0.6 million realized through reduced technology equipment lease expenses.
The decrease in consolidated bad debt expense for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 is primarily attributable to the centralization of our collection efforts within our divisions which resulted in improved cash collections.
Depreciation, Amortization, Merger-Related Expenses and (Gain) Loss on Disposal/Writedown of Property, Plant and Equipment, Net
Consolidated depreciation and amortization expense increased $13.5 million to $93.9 million (8.6% of consolidated revenues) for the nine months ended September 30, 2003 from $80.5 million (8.2% of consolidated revenues) for the nine months ended September 30, 2002. Depreciation expense increased $12.1 million, primarily due to the additional depreciation expense related to recent capital expenditures, including storage systems, which include racking, building improvements and leasehold
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improvements, computer systems hardware and software, and new buildings, and depreciation associated with facilities accounted for as capital leases. Depreciation associated with our digital initiatives increased $3.9 million during the nine months ended September 30, 2003 as a result of software and hardware assets placed in service throughout 2002 and 2003. The consolidation of the properties owned by our Variable Interest Entities during 2002 resulted in $1.7 million of additional depreciation in the nine months ended September 30, 2003. Amortization expense increased as a result of the amortization of intangible assets associated with acquisitions we have completed in the fourth quarter of 2002 and during 2003.
Merger-related expenses are certain expenses directly related to our merger with Pierce Leahy that cannot be capitalized and included system conversion costs, costs of exiting certain facilities, severance, relocation and pay-to-stay payments and other transaction-related costs. Merger-related expenses were $0.8 million for the nine months ended September 30, 2002. All merger related activities associated with the Pierce Leahy merger were completed in 2002.
Consolidated (gain) loss on disposal/writedown of property, plant and equipment, net consisted of disposals and asset writedowns of $4.4 million, offset by a $2.5 million gain on the sale of a property in Texas in 2003 and a gain of $2.1 million on the sale of a property held by one of our European subsidiaries in 2002.
As a result of the foregoing factors, consolidated operating income increased $32.6 million, or 17.6%, to $218.1 million (20.0% of consolidated revenues) for the nine months ended September 30, 2003 from net operating of $185.5 million (19.0% of consolidated revenues) for the nine months ended September 30, 2002.
As a result of the foregoing factors, consolidated OIBDA increased $46.1 million, or 17.3%, to $312.0 million (28.6% of consolidated revenues) for the nine months ended September 30, 2003 from $266.0 million (27.2% of consolidated revenues) for the nine months ended September 30, 2002.
Consolidated interest expense, net increased $9.1 million to $110.8 million (10.1% of consolidated revenues) for the nine months ended September 30, 2003 from $101.7 million (10.4% of consolidated revenues) for the nine months ended September 30, 2002. This increase was primarily attributable to (1) $6.9 million of interest expense associated with real estate term loans held by our Variable Interest Entities that were consolidated in the second half of 2002, (2) borrowings under our revolving credit facility and the issuance of our 65/8% notes which were used to finance the Hays IMS acquisition, as well as (3) an increase in our overall weighted average outstanding borrowings. The increase was offset by a decline in our overall weighted average interest rate from 8.5% as of September 30, 2002 to 7.6% as of September 30, 2003 resulting from our refinancing efforts, a higher percentage of variable rate debt and a decline in variable interest rates.
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Other (Income) Expense, Net
Foreign currency gains of $18.8 million based on period-end exchange rates were recorded in the nine months ended September 30, 2003 primarily due to the strengthening of the Canadian dollar and British pound sterling against the U.S. dollar as these currencies relate to our intercompany balances with our Canadian and U.K. subsidiaries, U.S. dollar denominated debt held by our Canadian subsidiary, borrowings denominated in foreign currencies under our revolving credit facility, and our British pound sterling denominated cross currency swap.
During the nine months ended September 30, 2003, we redeemed the remaining outstanding principal amount of our 91/8% Senior Subordinated Notes due 2007 (the "91/8% notes"), resulting in a charge of $1.8 million, the remaining outstanding principal amount of our 83/4% Senior Subordinated Notes due 2009 (the "83/4% notes"), resulting in a charge of $13.8 million and $50.0 million of the outstanding principal of the Subsidiary notes, resulting in a charge of $5.5 million. The charges consisted primarily of the call and tender premiums associated with the extinguished debt and the write-off of unamortized deferred financing cost and discounts. During the nine months ended September 30, 2002, we recorded a charge of $1.2 million related to the early retirement of debt in conjunction with the refinancing of our credit facility. The charge consisted primarily of the write-off of unamortized deferred financing costs. Effective January 1, 2003, we have reflected these charges in other (income) expense, net in accordance with recent changes in accounting pronouncements.
Our effective tax rate for the nine months ended September 30, 2003 was 42.5%. The primary reconciling item between the statutory rate of 35% and our effective tax rate is state income taxes (net of federal benefit). The disallowance of certain intercompany interest charges, including a change in Massachusetts tax laws, retroactive to January 1, 2002, increased our provision for income taxes for the first nine months of 2003 by 1.4%. The effective tax rate projected for 2003 is 42.4%. Our effective tax rate was 41.2% for the nine months ended September 30, 2002. There may be future volatility with respect to our effective tax rate related to items including unusual unforecasted permanent items, significant changes in tax rates in foreign jurisdictions and the need for additional valuation allowances. Also, as a result of our net operating loss carryforwards, we do not expect to pay any significant federal and state income taxes during 2003.
Minority Interest and Cumulative Effect of Change in Accounting Principle
Minority interest in earnings of subsidiaries, net resulted in a charge to income of $4.2 million (0.4% of consolidated revenues) for the nine months ended September 30, 2003 compared to $2.4 million (0.2% of consolidated revenues) for the nine months ended September 30, 2002. This represents our minority partners' share of earnings in our majority-owned international subsidiaries that are consolidated in our operating results. The increase is a result of the improved profitability of our European and South American businesses.
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In the first quarter of 2002, we recorded a non-cash charge for the cumulative effect of change in accounting principle of $6.4 million (net of minority interest of $8.5 million) as a result of our implementation of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets."
As a result of the foregoing factors, consolidated net income increased $14.4 million, or 34.5%, to $56.2 million (5.1% of consolidated revenues) for the nine months ended September 30, 2003 from net income of $41.8 million (4.3% of consolidated revenues) for the nine months ended September 30, 2002.
Revenue in our business records management segment increased 8.2% primarily due to increased storage revenues, growth of our secure shredding operations and acquisitions (including revenue from the U.S. operations of Hays IMS of $4.1 million), and was offset by lower special project service revenue and lower permanent removal and destruction fees during 2003. In addition, favorable currency fluctuations during the nine months ended September 30, 2003 in Canada increased revenue $5.9 million when compared to the nine months ended September 30, 2002. Contribution as a percent of segment revenue increased primarily due to lower bad debt expense which was partially offset by higher property taxes, utilities and our increased investment in our sales and account management force. Items excluded from the calculation of Contribution include the following: (1) depreciation and amortization expense for the nine months ended September 30, 2003 of $52.2 million compared to
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$50.1 million for the nine months ended September 30, 2002, and (2) foreign currency gains of $23.0 million and $1.4 million for the nine months ended September 30, 2003 and 2002, respectively.
Revenue in our off-site data protection segment increased 5.4% primarily due to internal revenue growth from both existing and new customers in the face of increasing pressure in the marketplace to reduce information technology related spending. Contribution as a percent of segment revenue increased primarily due to reduced bad debt expense, increased product sales margins and improved labor management. This increase was partially offset by increased investment in our sales and account management force. Items excluded from the calculation of Contribution include the following: (1) depreciation and amortization expense for the nine months ended September 30, 2003 of $10.2 million compared to $9.6 million for the nine months ended September 30, 2002 and (2) a loss on disposal/writedown of property plant and equipment, net of $1.8 million for the nine months ended September 30, 2003.
Revenue in our international segment increased 56.9% primarily due to acquisitions completed in Europe, including $10.7 million from the acquisition of Hays IMS, and in South America, as well as increased sales efforts and a large service project in the United Kingdom. Favorable currency fluctuations during the nine months ended September 30, 2003 in Europe increased revenue, as measured in U.S. dollars, by $11.4 million compared to the nine months ended September 30, 2002. This increase was offset by $1.5 million of unfavorable currency fluctuations in South America during the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. Contribution as a percent of segment revenue increased primarily due to improved gross margins from both our European and South American operations and overall increased overhead utilization. This increase was partially offset by increased rent associated with new properties in Europe. Items excluded from the calculation of Contribution include the following: (1) depreciation and amortization expense for the nine months ended September 30, 2003 of $9.4 million compared to $5.0 million for the nine months ended September 30, 2002, including $1.3 million associated with the acquisition of Hays IMS in 2003, (2) a gain on disposal/writedown of property plant and equipment, net of $2.1 million for the nine months ended September 30, 2002 and (3) a foreign currency gain of $0.8 million in 2003 compared to a loss of $0.5 million in 2002.
Liquidity and Capital Resources
The following is a summary of our cash balances and cash flows for the nine months ended September 30, 2002 and 2003 (in thousands).
Net cash provided by operating activities was $183.6 million for the nine months ended September 30, 2003 compared to $172.4 million for the nine months ended September 30, 2002. The increase resulted primarily from an increase in operating income and non-cash items, such as depreciation, amortization, debt extinguishment expenses, and deferred income taxes offset by working
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capital variations primarily associated with decreased accounts receivable collections and increased disbursements to vendors and non-cash foreign currency transaction gains.
We have made significant capital investments, including: (1) capital expenditures, primarily related to growth, including investments in storage systems and information systems and discretionary investments in real estate, (2) acquisitions and (3) customer relationship and acquisition costs. Cash paid for these investments during the nine months ended September 30, 2003 amounted to $148.0 million, $378.8 million (net of cash acquired) and $8.6 million, respectively. These investments have been funded primarily through cash flows from operations, borrowings under our revolving credit facilities and other financing transactions. In addition, we received proceeds from sales of property and equipment of $6.3 and $6.6 million in the nine months ended September 30, 2002 and 2003, respectively. Excluding any potential acquisitions, we expect to invest between $190.0 million and $215.0 million on capital expenditures for the 2003 fiscal year.
Net cash provided by financing activities of $313.0 million for the nine months ended September 30, 2003 primarily related to proceeds from the issuance of our 73/4% Senior Subordinated Notes due 2015 (the "73/4notes") and our 65/8% notes totaling $455.6 million, proceeds of $20.1 million received from minority joint venture partners, a net increase in debt under our credit facilities and other debt of $141.0 million offset by the early retirement of our 91/8%, 83/4% and a portion of the Subsidiary notes totaling $306.4 million.
We are highly leveraged and expect to continue to be highly leveraged for the foreseeable future. Our consolidated debt as of September 30, 2003 was comprised of the following (in thousands):
Our indentures use OIBDA-based calculations as primary measures of financial performance, including leverage ratios. Our key bond leverage ratio, as calculated per our bond indentures, increased to 5.1 as of September 30, 2003 from 4.8 as of December 31, 2002. The increase was primarily attributable to indebtedness incurred by us and lent to Iron Mountain Europe Limited ("IME"), our European joint venture, to fund IME's acquisition of Hays IMS. We expect that IME will obtain permanent financing to repay all or a portion of the funding we provided, which will ultimately have the effect of reducing our bond leverage ratio. Noncompliance with this leverage ratio would have a material adverse effect on our financial condition and liquidity. Our target for this ratio is generally in the range of 4.5 to 5.5 while the maximum ratio allowable under the bond indentures is 6.5.
Our ability to pay interest on or to refinance our indebtedness depends on our future performance, working capital levels and capital structure, which are subject to general economic, financial, competitive, legislative, regulatory and other factors which may be beyond our control. There can be no assurance that we will generate sufficient cash flow from our operations or that future financings will be available on acceptable terms or in amounts sufficient to enable us to service or refinance our indebtedness, or to make necessary capital expenditures.
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As of September 30, 2003, we had $229.3 million of borrowings under our revolving credit facility, of which $44.0 million was denominated in U.S. dollars and the remaining balance was denominated in British pounds sterling and Canadian dollars in the amount of GBP 80.0 million and CDN 70.2 million, respectively. We also had various outstanding letters of credit totaling $34.1 million. The remaining availability under the revolving credit facility was $136.6 million as of September 30, 2003, and the interest rates in effect ranged from 2.9% to 5.4% as of September 30, 2003.
In January 2003, we redeemed the remaining $23.2 million of outstanding principal amount of our 91/8% notes, at a redemption price (expressed as a percentage of principal amount) of 104.563%, plus accrued and unpaid interest, with proceeds from our underwritten public offering of $100.0 million in aggregate principal of our 73/4% notes. We recorded a charge to other (income) expense, net in the accompanying consolidated statement of operations of $1.8 million in the first quarter of 2003 related to the early retirement of the remaining 91/8% notes.
In March 2003, we completed two debt exchanges, which resulted in the issuance of $31.3 million in face value of our 73/4% notes and the retirement of $30.0 million of our 83/4% notes. These non-cash debt exchanges resulted in carryover basis and, therefore, no gain (loss) on extinguishment of debt in accordance with EITF No. 96-19, "Debtor's Accounting for Modification or Exchange of Debt Instruments." These exchanges result in a lower interest rate and, therefore, lower interest expense in future periods, as well as extend the maturity of our debt obligations. From time to time, we may enter into similar exchange transactions that we deem appropriate.
In April 2003, we completed an underwritten public offering of an additional $300 million in aggregate principal amount of our 73/4% notes, which were issued at a price to investors of 104% of par, implying an effective yield to worst of 7.066%. Our net proceeds of $307.3 million, after paying the underwriters' discounts, commissions and transaction fees, were used to fund our offer to purchase and consent solicitation relating to our outstanding 83/4% notes, to otherwise redeem the 83/4% notes, repay borrowings under our revolving credit facility, and repay other indebtedness and acquisitions.
In April 2003, we received and accepted tenders for $143.3 million of the $220 million aggregate principal amount outstanding of our 83/4% notes. In May 2003, we redeemed the remaining $76.7 million of outstanding principal amount of our 83/4% notes, at a redemption price (expressed as a percentage of principal amount) of 104.375%, plus accrued and unpaid interest. We recorded a charge to other (income) expense, net of $13.8 million in the second quarter of 2003 related to the early retirement of the 83/4% notes, which consists of redemption premiums and transaction costs, as well as original issue discount and unamortized deferred financing costs related to the 83/4% notes.
In June 2003, we completed an underwritten public offering of $150 million in aggregate principal amount of our 65/8% notes. The 65/8% notes were issued at a price to investors of 100% of par. Our net proceeds of $147.5 million, after paying the underwriters' discounts, commissions and transaction fees, were used to redeem $50 million in aggregate principal amount of the outstanding Subsidiary notes in the third quarter of 2003 and the remainder was used for acquisitions.
In July 2003, we redeemed $50 million of outstanding principal amount of the Subsidiary notes, at a redemption price (expressed as a percentage of principal amount) of 104.063%, plus accrued and
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unpaid interest. We recorded a charge to other (income) expense, net of $5.5 million in the third quarter of 2003 related to the early retirement of these Subsidiary notes, which consists of redemption premiums and transaction costs, as well as original issue discount related to these Subsidiary notes.
In July 2003, we and IME completed the acquisition of Hays IMS in two simultaneous transactions. IME acquired the European operations of Hays IMS for aggregate cash consideration (including transaction costs) of approximately 191.0 million pounds sterling ($311.0 million), while we acquired the U.S. operations of Hays IMS for aggregate cash consideration (including transaction costs) of 14.5 million pounds sterling ($24.0 million). These aggregate cash considerations included $5.1 million associated with the final post-closing purchase price adjustment, which was paid to IME by Hays plc in October 2003 after our third quarter ended. Both transactions were on a cash and debt free basis.
We provided the initial financing totaling 190.5 million British pounds sterling to IME for all of the consideration associated with the acquisition of the European operations of Hays IMS using cash on hand and borrowings under our revolving credit facility. IME is currently seeking permanent financing to repay all or a portion of the funding provided by us. We recorded a foreign currency gain of $6.9 million in other (income) expense, net for this intercompany balance as of September 30, 2003. In order to minimize the foreign currency risk associated with providing IME with the consideration necessary for the acquisition of Hay IMS, we borrowed 80.0 million British pounds sterling under our revolving credit facility to create a natural hedge. We recorded a foreign currency loss of $2.6 million on the translation of this revolving credit balance to U.S. dollars in other (income) expense, net for the three months ended September 30, 2003. Additionally, on July 16, 2003 we entered into two cross currency swaps with a combined notional value of 100.0 million British pounds sterling. These swaps each have a term of one year and at maturity we have a right to receive $162.8 million in exchange for 100.0 million British pounds sterling. We have not designated these swaps as hedges and, therefore, all mark to market fluctuations of the swaps are recorded in other (income) expense, net in our consolidated statements of operations. We have recorded, for the three and nine months ended September 30, 2003, $6.2 million in other (income) expense, net in the accompanying consolidated statements of operations.
We expect to meet our cash flow requirements for the next twelve months from cash generated from operations, existing cash, cash equivalents and marketable securities, borrowings under our revolving credit facility and other financings, which may include secured credit facilities, securitizations and mortgage or capital lease financings.
Seasonality
Historically, our businesses have not been subject to seasonality in any material respect.
Inflation
Certain of our expenses, such as wages and benefits, insurance, occupancy costs and equipment repair and replacement, are subject to normal inflationary pressures. Although to date we have been able to offset inflationary cost increases through increased operating efficiencies and the negotiation of favorable long-term real estate leases, we can give no assurance that we will be able to offset any future inflationary cost increases through similar efficiencies, leases or increased storage or service charges.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
In December 2000, January 2001 and May 2001, we and our variable interest entities, which we now consolidate, entered into a total of four derivative financial contracts, which are variable-for-fixed swaps consisting of (a) two contracts for interest payments payable on our term loan of an aggregate principal amount of $195.5 million, (b) one contract for interest payments payable (previously certain variable operating lease commitments payable) on our real estate term loans of an aggregate principal amount of $47.5 million and (c) one contract for interest payments payable on our real estate term loans of an aggregate principal amount of $97.0 million. See Note 4 to Notes to Consolidated Financial Statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies" in our Annual Report on Form 10-K/A for the year ended December 31, 2002.
After consideration of the swap contracts mentioned above, as of September 30, 2003, we had $389.9 million of variable rate debt outstanding with a weighted average variable interest rate of 4.45%, and $1,673.1 million of fixed rate debt outstanding. As of September 30, 2003, 81% of our total debt outstanding was fixed. If the weighted average variable interest rate on our variable rate debt had increased by 1%, our net income for the nine months ended September 30, 2003 would have been reduced by $1.1 million. See Note 7 to Notes to Consolidated Financial Statements for a discussion of our long-term indebtedness, including the fair values of such indebtedness as of September 30, 2003 included in this Form 10-Q.
Currency Risk
Our investments in IME, Iron Mountain Canada Corporation, Iron Mountain South America, Ltd. and other international investments may be subject to risks and uncertainties related to fluctuations in currency valuation. Our reporting currency is the U.S. dollar. However, our international revenues are generated in the currencies of the countries in which we operate, primarily the Canadian dollar and British pound sterling. The currencies of many Latin American countries have experienced substantial volatility and depreciation in the past, including the Argentine peso. In addition, one of our Canadian subsidiaries, Iron Mountain Canada Corporation, has U.S. dollar denominated debt. Declines in the value of the local currencies in which we are paid relative to the U.S. dollar will cause revenues in the U.S. dollar terms to decrease and dollar-denominated liabilities to increase in local currency. We also have several intercompany obligations between our foreign subsidiaries and Iron Mountain and our U.S.-based subsidiaries. These intercompany obligations are primarily denominated in the local currency of the foreign subsidiary. Our currency exposures to intercompany borrowings are generally unhedged, except as discussed below.
We provided the initial financing to IME for all of the consideration associated with the acquisition of the European operations of Hays IMS using cash on hand and borrowings under our revolving credit facility. In order to minimize the foreign currency risk associated with providing IME with the consideration necessary for the acquisition of Hay IMS, we borrowed 80.0 million British pounds sterling under our revolving credit facility to create a natural hedge. Additionally, on July 16, 2003 we entered into two cross currency swaps with a combined notional value of 100.0 million British pounds sterling. These swaps each have a term of one year and at maturity we have a right to receive $162.8 million in exchange for 100.0 million British pounds sterling. We have not designated these swaps as hedges and, therefore, all mark to market fluctuations of the swaps are recorded in other (income) expense, net in our consolidated statements of operations.
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The impact of devaluation or depreciating currency on an entity depends on the residual effect on the local economy and the ability of an entity to raise prices and/or reduce expenses. Due to our constantly changing currency exposure and the potential substantial volatility of currency exchange rates, we cannot predict the effect of exchange fluctuations on our business.
Item 4. Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. As of September 30, 2003 (the "Evaluation Date"), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the chief executive officer and chief financial officer have concluded that, as of the Evaluation Date, such disclosure controls and procedures were effective in ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.
We maintain a system of internal accounting controls that are designed to provide reasonable assurance that our transactions are properly recorded and reported and that our assets are safeguarded against unauthorized or improper use. As part of the evaluation of our disclosure controls and procedures, we evaluated our internal controls. There were no changes to our internal control over financial reporting during the third fiscal quarter of 2003 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting, including any corrective actions taken with regard to any significant deficiencies or material weaknesses.
Part II. Other Information
Item 1. Legal Proceedings
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In connection with its proposed amended counterclaim, Sequedex has recently furnished a preliminary statement of damages and answered an interrogatory seeking information concerning the damages that Sequedex alleges it incurred. Sequedex's estimate of compensatory damages is approximately $172 million, and Sequedex has indicated that it intends to seek punitive damages of approximately $1.5 billion. Extensive discovery has been conducted in the three cases; on the basis of that discovery, it is our belief that Sequedex has not produced any material evidence that we or IMIM acted wrongfully in any respect. Further, limited discovery has been conducted in respect of Sequedex's damages claim; on the basis of that discovery, we do not believe that Sequedex has any foundation, and we believe that it cannot provide any foundation, for its damages calculations. We believe that the damages calculations submitted by Sequedex are not supported by credible evidence and are subject to serious legal, methodological and factual deficiencies. A trial of the three actions in which the Sequedex counterclaim has been asserted is scheduled to commence in the spring of 2004.
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Item 6. Exhibits and Reports on Form 8-K
On October 29, 2003, the Company furnished a Current Report on Form 8-K under Item 12 to announce its third quarter 2003 financial results.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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