-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MPaQN8PZqch8GcMZrTQN2zGXATiSu17q0oxrWca1aO0jVnWxaZMuJLAV/03BCCmN Q9qyOqA5D6g/rwwNd51OtQ== /in/edgar/work/0000950137-00-004852/0000950137-00-004852.txt : 20001115 0000950137-00-004852.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950137-00-004852 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSURANCE AUTO AUCTIONS INC /CA CENTRAL INDEX KEY: 0000880026 STANDARD INDUSTRIAL CLASSIFICATION: [5010 ] IRS NUMBER: 953790111 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19594 FILM NUMBER: 765037 BUSINESS ADDRESS: STREET 1: 850 E ALGONQUIN RD STREET 2: STE 100 CITY: SCHAUMGURG STATE: IL ZIP: 60173 BUSINESS PHONE: 8478393939 MAIL ADDRESS: STREET 1: 850 E ALGONQUIN RD STREET 2: STE 100 CITY: SCHAUMGURG STATE: IL ZIP: 60173 10-Q 1 c58619e10-q.txt QUARTERLY REPORT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ---------------------- Commission File Number: 0-19594 INSURANCE AUTO AUCTIONS, INC. (Exact name of registrant as specified in its charter) Illinois 95-3790111 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 850 East Algonquin Road, Suite 100, Schaumburg, Illinois 60173-3855 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (847) 839-3939 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS Number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2000: Class Outstanding September 30, 2000 ----- ------------------------------ Common Stock, $0.001 Par Value 11,715,936 2 INDEX INSURANCE AUTO AUCTIONS, INC. PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION..................................... 3 Item 1. Financial Statements (Unaudited).......................... 3 Condensed Consolidated Statements of Operations for the Three Month and Nine Month Periods ended September 30, 2000 and September 30, 1999............ 3 Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999....... 4 Condensed Consolidated Statements of Cash Flows for the Nine Month Periods ended September 30, 2000 and September 30, 1999............................... 5 Notes to Condensed Consolidated Financial Statements...... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 6 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................... 13 PART II. OTHER INFORMATION........................................ 13 Item 1. Legal Proceedings......................................... 13 Item 2. Changes in Securities..................................... 13 Item 3. Defaults upon Senior Securities........................... 13 Item 4. Submission of Matters to a Vote of Security Holders....... 13 Item 5. Other Information......................................... 13 Item 6. Exhibits and Reports on Form 8-K.......................... 14 SIGNATURES......................................................... 15 2 3 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIODS NINE MONTH PERIODS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net Revenues: Vehicle sales $ 47,307,000 $ 49,562,000 $153,116,000 $155,231,000 Fee income 32,825,000 27,452,000 98,252,000 84,192,000 ------------ ------------ ------------ ------------ 80,132,000 77,014,000 251,368,000 239,423,000 Cost and expenses: Cost of sales 58,525,000 56,465,000 182,469,000 176,242,000 Direct operating expenses 16,587,000 14,195,000 46,014,000 42,018,000 Amortization of goodwill 1,003,000 949,000 2,936,000 2,848,000 ------------ ------------ ------------ ------------ Earnings from operations 4,017,000 5,405,000 19,949,000 18,315,000 Other (income) expense: Interest expense 455,000 492,000 1,376,000 1,479,000 Interest (income) (436,000) (365,000) (1,317,000) (916,000) ------------ ------------ ------------ ------------ Earnings before income taxes 3,998,000 5,278,000 19,890,000 17,752,000 Income taxes 1,639,000 2,092,000 8,155,000 7,456,000 ------------ ------------ ------------ ------------ Net earnings $ 2,359,000 $ 3,186,000 $ 11,735,000 $ 10,296,000 ============ ============ ============ ============ Earnings per share: Basic $ .20 $ .28 $ 1.01 $ .90 ============ ============ ============ ============ Diluted $ .20 $ .27 $ .99 $ .89 ============ ============ ============ ============ Weighted average shares outstanding: Basic 11,704,000 11,530,000 11,632,000 11,432,000 Effect of dilutive securities - stock options 262,000 300,000 227,000 173,000 ------------ ------------ ------------ ------------ Diluted 11,966,000 11,830,000 11,859,000 11,605,000 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 3 4 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------- ASSETS (UNAUDITED) Current assets: Cash and cash equivalents $ 31,052,000 $ 27,186,000 Short-term investments 5,646,000 6,845,000 Accounts receivable, net 45,384,000 40,188,000 Inventories 12,617,000 11,998,000 Other current assets 2,477,000 1,655,000 ------------- ------------- Total current assets 97,176,000 87,872,000 ------------- ------------- Property and equipment, net 31,659,000 27,458,000 Investments in marketable securities 3,160,000 3,336,000 Deferred income taxes 4,626,000 4,338,000 Other assets, principally goodwill, net 131,913,000 125,128,000 ------------- ------------- $ 268,534,000 $ 248,132,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 36,000 $ 135,000 Accounts payable 38,858,000 33,216,000 Accrued liabilities 6,167,000 6,306,000 Income taxes 1,416,000 1,226,000 ------------- ------------- Total current liabilities 46,477,000 40,883,000 ------------- ------------- Long-term debt, excluding current installments 20,143,000 20,180,000 Accumulated postretirement benefits obligation 3,044,000 3,178,000 Deferred income taxes 9,890,000 8,605,000 ------------- ------------- Total liabilities 79,554,000 72,846,000 ------------- ------------- Shareholders' equity: Preferred stock, par value of $.001 per share Authorized 5,000,000 shares; none issued. - - Common stock, par value of $.001 per share Authorized 20,000,000 shares; issued and outstanding 11,715,936 and 11,575,010 shares as of September 30, 2000 and December 31, 1999, respectively 12,000 12,000 Additional paid-in capital 136,955,000 134,996,000 Retained earnings 52,013,000 40,278,000 ------------- ------------- Total shareholders' equity 188,980,000 175,286,000 ------------- ------------- $ 268,534,000 $ 248,132,000 ============= ============= See accompanying notes to condensed consolidated financial statements. 4 5 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTH PERIODS ENDED SEPTEMBER 30, -------------------- 2000 1999 ---- ---- Cash flows from operating activities: Net earnings $ 11,735,000 $ 10,296,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 7,241,000 6,791,000 Gain on disposal of fixed assets (31,000) (79,000) Change in assets and liabilities (net of effects of acquired companies): (Increase) decrease in: Short-term investments 1,375,000 (8,580,000) Accounts receivable, net (4,288,000) 1,796,000 Inventories (619,000) (1,034,000) Other current assets (822,000) (587,000) Other assets (204,000) (6,000) Increase (decrease) in: Accounts payable (4,765,000) (3,183,000) Accrued liabilities (279,000) 21,000 Income taxes payable 1,187,000 555,000 ------------- ------------- Total adjustments 8,326,000 (4,306,000) ------------- ------------- Net cash provided by operating activities 20,060,000 5,990,000 ------------- ------------- Cash flows from investing activities: Capital expenditures (8,762,000) (5,951,000) Proceeds from disposal of fixed assets 670,000 107,000 Payments made in connection with acquired companies, net of cash acquired (9,925,000) - ------------- ------------- Net cash used in investing activities (18,017,000) (5,844,000) ------------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock 1,959,000 2,269,000 Principal payments on long-term debt (136,000) (320,000) ------------- ------------- Net cash provided by financing activities 1,823,000 1,949,000 ------------- ------------- Net increase in cash and cash equivalents 3,866,000 2,095,000 Cash and cash equivalents at beginning of period 27,186,000 11,682,000 ------------- ------------- Cash and cash equivalents at end of period $ 31,052,000 $ 13,777,000 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,720,000 $ 1,720,000 ============= ============= Income taxes $ 6,584,000 $ 7,001,000 ============= ============= See accompanying notes to condensed consolidated financial statements. 5 6 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The unaudited condensed consolidated financial statements of Insurance Auto Auctions, Inc. and its subsidiaries (collectively, the "Company") have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of the Company, reflect all adjustments (consisting of normal recurring adjustments, except as otherwise described in Note 3) necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results for full fiscal years. As contemplated by the Securities and Exchange Commission ("SEC") under Rule 10-01 of Regulation S-X, the accompanying consolidated financial statements and related notes have been condensed and do not contain certain information that is included in the Company's annual consolidated financial statements and notes thereto. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. 2. INCOME TAXES Income taxes were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by the Company. 3. ACQUISITIONS In March 2000, the Company acquired two companies, Wisconsin Auto Auction, L.L.C. of Milwaukee and Valley Auto Pool, Inc. of Appleton, Wisconsin, for $6.0 million cash. In June 2000, the Company acquired Insurance Salvage Services of South Carolina ("ISS") for $925,000 cash. ISS operated two sites in South Carolina located in Greenville and Charleston. In July 2000, the Company acquired Auto City Auto Recovery ("ACAR") of Detroit, Michigan for $3.0 million cash. ACAR's operations will be integrated into the Company's existing operations in the Detroit marketplace. These acquisitions were accounted for under the purchase method of accounting for business combinations, and the results of their operations are included in the Company's consolidated financial statements from their respective dates of acquisition. 4. RECLASSIFICATIONS Certain reclassifications have been made to the 1999 financial statements and footnotes to conform with the current year presentation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This report on Form 10-Q contains forward-looking information that is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected, expressed or implied by such forward looking information. In some cases, you can identify forward looking statements by our use of words such as "may, will, should, anticipates, believes, expects, plans, future, intends, could, estimate, predict, targeting, potential or contingent," the negative of these terms or other similar expressions. The Company's actual results could differ materially from those discussed or implied herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Factors That May Affect Future Results" below and the Company's annual report on Form 10-K for the fiscal year ended 6 7 December 31, 1999. Among these risks are: conducting business pursuant to the purchase agreement method of sale; fluctuations in the actual cash value of salvage vehicles; the ability to successfully renegotiate existing purchase agreement contracts; the quality and quantity of inventory available from suppliers; the ability to pass through increased towing costs; that vehicle processing time will improve; that the Company's towing business will reach forecasted levels of profitability; legislative or regulatory acts; changes in the market value of salvage; competition; the availability of suitable acquisition candidates; the ability to bring new facilities to expected earnings targets; dependence on key insurance company suppliers; and the level of energy and labor costs. OVERVIEW The Company offers insurance companies and other vehicle suppliers cost-effective salvage processing solutions through a variety of different methods of sale, including percentage of sale consignment ("Percentage Plus"), fixed fee consignment, and purchase agreement. Under the Percentage Plus and fixed fee sales methods, the vehicle is not owned by the Company and only the fees associated with the processing and sale of the vehicle are recorded in net sales. The Percentage Plus method offers potentially increased profits over fixed fee consignment by providing incentive to both the Company and the salvage provider to invest in vehicle enhancements thereby maximizing the vehicle selling prices. Under the purchase agreement sales method, the vehicle is owned by the Company and the sales price of the vehicle is recorded in revenue. By assuming some of the risk inherent in owning the salvage vehicle instead of selling on a consignment basis, the Company is potentially able to increase profits by improving the value of the salvage vehicle prior to the sale. Under the purchase agreement method, IAA generally pays the insurance company a pre-determined percentage of the Actual Cash Value ("ACV") to purchase the vehicle. ACV's are the estimated pre-accident fair value of a vehicle, adjusted for additional equipment, mileage and other factors. Because the Company's purchase price is fixed by contract, changes in ACV's or in the market or auction prices for salvage vehicles have an impact on the profitability of the sale of vehicles under the purchase agreement method. If increases in used car prices and ACV's are not associated with a corresponding increase in prices at salvage auctions, there can be a negative impact on the profitability of purchase agreement sales. To mitigate these risks, the Company has adjustment and risk-sharing clauses in its standard purchase agreement contracts designed to provide some protection to the Company and its customers from certain unexpected, significant changes in the ACV/salvage price relationship. Since its initial public offering, the Company has grown primarily through a series of acquisitions to now include 56 locations as of September 30, 2000. The Company's operating results are subject to fluctuations, including quarterly fluctuations, that can result from a number of factors, some of which are more significant for sales under the purchase agreement method. See "Factors That May Affect Future Results" below for a further discussion of some of the factors that affect or could affect the Company's business, operating results and financial condition. RESULTS OF OPERATIONS Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999 Net revenues of the Company increased to $80.1 million for the three months ended September 30, 2000, from $77.0 million for the same three month period in 1999. Unit volume increased 12%, compared to the same period in 1999. Gross profit increased 5% to $21.6 million for the three months ended September 30, 2000, from $20.5 million for the same period in 1999. The Company's gross profit for the quarter was adversely affected by a temporary slow down in the processing of titles in some key areas of the country that had resulted from a change in DMV titling procedures in New Jersey and an internal reorganization by one of the Company's largest customers. Substantial progress has been made in resolving these issues. Gross profit per 7 8 unit of $162 for the three months ended September 30, 2000 was 6% lower than for the comparable period of 1999. The decrease in gross profit per unit has been primarily the result of (i) a decrease in the profitability of vehicles sold under purchase agreement contracts. This decrease was primarily caused by an increase in Actual Cash Values ("ACVs") without a corresponding or proportional increase in average sales prices. This problem is continuing and is the basis of the Company's effort to reduce units sold under purchase contracts, (ii) less than targeted levels of profitability for the Company's towing initiative. Driver shortages, increases in fuel and labor costs and other logistical issues have all had a negative impact on the success of this initiative. The Company remains committed to the towing initiative and continues to work on resolving the profitability issues, although it has slowed implementation through 2001, and (iii) increased tow charges from outside tow contractors due primarily to higher fuel and labor costs. The Company is attempting to pass these cost increases on in most cases to its customers, however, as of the end of the third quarter, this had not yet been fully accomplished. Direct operating expenses increased to $16.6 million for the three months ended September 30, 2000, from $14.2 million for the same period in 1999. This increase is partially a result of the Company's acquisitions in Wisconsin, South Carolina and Michigan, which were made in March, June and July of 2000, respectively, along with generally higher facility, labor and training related expenses. Direct operating expenses per unit increased to $125 for the three months ended September 30, 2000, as compared to $119 for the same period in 1999. Interest expense decreased to $455,000 for the three months ended September 30, 2000, from $492,000 for the same period in 1999. Interest income increased to $436,000 for the three month period ended September 30, 2000, from $365,000 for the comparable period in 1999 reflecting higher levels of cash equivalents and short-term investments due to strong cash flow from operations in 2000. Income taxes decreased to $1.6 million for the three months ended September 30, 2000, from $2.1 million for the comparable period in 1999. This decrease is the result of a decrease in earnings, slightly offset by an increase in the Company's effective tax rate for the three months ended September 30, 2000 to 41% versus 40% for the comparable period in 1999. The effective tax rate is subject to ongoing review and evaluation by the Company. The Company's net earnings were $2.4 million for the three months ended September 30, 2000, a 26% decrease from $3.2 million for the comparable period in 1999. Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999. Net revenues of the Company increased to $251.4 million for the nine months ended September 30, 2000, from $239.4 million for the same nine month period in 1999, a 5% increase. This is the result of an increase in the number of units sold, as compared to the same period in 1999, and increased fee revenues including increased buyer fees and the continued roll out of our profitability enhancement initiatives. Fee income increased 17% versus last year. This increase reflects the continued emphasis on converting customers to the Percentage Plus method as well as other enhancement initiatives and certain price increases. For the first nine months of 2000, 23% of the units sold were on the Percentage Plus method versus 16% in 1999. The Purchase Agreement sales method of processing accounted for 26% of the total units sold versus 29% for the same period in 1999. Gross profit increased 9% to $68.9 million for the nine months ended September 30, 2000, from $63.2 million for the same period in 1999. Gross profit per unit of $174 for the nine months ended September 30, 2000 was 2% higher than for the comparable period of 1999. Direct operating expenses increased to $46.0 million for the nine months ended September 30, 2000, from $42.0 million for the same period in 1999. Direct operating expenses per unit increased to $116 for the nine months ended September 30, 2000, as compared to $114 for the same period in 1999. This 8 9 increase in direct operating expense per unit is reflective of higher facility, labor and training related expenses. Interest expense decreased to $1.4 million for the nine months ended September 30, 2000, from $1.5 million for the same period in 1999. The change in interest expense was attributable to a decrease in long-term debt as a result of the Company's repayment in 1999 of several notes payable to sellers related to certain acquisitions. Interest income increased to $1.3 million for the nine month period ended September 30, 2000, from $916,000 for the comparable period in 1999. The increase is the result of an increase in cash equivalents and short-term investments. Income taxes increased to $8.2 million for the nine months ended September 30, 2000, from $7.5 million for the comparable period in 1999. This increase is the result of the increase in earnings. The Company's effective tax rate for the nine months ended September 30, 2000 was 41% versus 42% for the comparable period in 1999. The effective tax rate is subject to ongoing review and evaluation by the Company. The Company's net earnings were $11.7 million for the nine months ended September 30, 2000, a 14% increase from $ 10.3 million for the comparable period in 1999. FINANCIAL CONDITION AND LIQUIDITY At September 30, 2000, the Company had current assets of $97.2 million including $31.1 million of cash and cash equivalents and $5.6 million of short-term investments. Current liabilities were $46.5 million. The Company had working capital of $50.7 million at September 30, 2000, a $3.7 million increase from December 31, 1999. At September 30, 2000, the Company's indebtedness consisted mostly of 8.6% Senior Notes of $20.0 million and amounts due to the sellers related to certain acquisitions. There were no borrowings outstanding on the Revolving Line of Credit Facility at September 30, 2000. Capital expenditures were approximately $8.8 million for the Nine months ended September 30, 2000. These capital expenditures primarily included upgrading and expanding the Company's management information system and the Company's facilities. The Company currently leases most of its facilities and other properties. In March 2000, the Company acquired two companies, Wisconsin Auto Auction LLC of Milwaukee and Valley Auto Pool, Inc. of Appleton, Wisconsin for $6.0 million cash. In June 2000, the Company acquired Insurance Salvage Services ("ISS") of South Carolina for $925,000 cash. ISS operated two sites in South Carolina located in Greenville and Charleston. In July 2000, the Company acquired Auto City Auto Recovery ("ACAR") of Detroit, Michigan for $3.0 million cash. ACAR's operations will be integrated into the Company's existing operations in the Detroit marketplace. On September 7, 2000, the Company's Board of Directors authorized the purchase of up to 1,500,000 shares of its common stock. Purchases may be made from time to time in the open market, subject to the requirements of applicable laws, and, if made will be financed with existing cash and cash equivalents, marketable securities, and cash from operations. As of September 30, 2000, the Company had not purchased any shares pursuant to this authorization. The Company believes that cash generated from operations and its borrowing capacity under its $15 million revolving line of credit will be sufficient to fund capital expenditures and provide adequate working capital for operations for the next twelve months. Part of the Company's plan is continued growth possibly through new facility start-ups, acquisitions, and the development of new claims processing services. At some time in the future, the Company may require additional financing. There can be no assurance that additional financing, if required, will be available on favorable terms. 9 10 The Company's operating results have not historically been materially affected by inflation. OTHER On February 16, 2000, an Emery Worldwide DC-8 cargo jet crashed into the Company's facility in Rancho Cordova, California (the "Rancho Branch"). All three Emery crew members died, but there were no injuries or fatalities on the ground. Approximately 850 vehicles at the Rancho Branch awaiting sale by the Company were destroyed or damaged by the crash and the ensuing fire ("Inventory Damage"). The Emery plane crash and fire caused the release of hazardous substances at the crash site, necessitating certain environmental remediation activities at the site which are ongoing. The Company has made an initial claim with its insurance carrier for the Inventory Damage. In addition, because the Rancho Branch was closed for a brief period after the crash, the Company has made an initial "business interruption" claim with its insurance carrier. The Company believes it has adequate insurance coverage in place to cover these damages. The Company also intends to make a claim with its insurance carrier for property damage at the Rancho Branch, including costs of environmental remediation. Coverage under the Company's insurance policies for environmental remediation may, however, be limited and less than necessary to cover all environmental remediation costs. The Company will also seek recovery of one-half of the cost of environmental remediation from the landlord of the Rancho Branch pursuant to the terms of a lease. Environmental remediation of the site has been completed. The Company believes that Emery Worldwide and others potentially responsible for the crash (the "Responsible Parties") will ultimately be held responsible for any and all damages, including environmental costs, incurred by the Company as a result of the crash. Accordingly, the Company has not recognized any liability as of September 30, 2000. The Company intends to vigorously pursue any and all claims under applicable law against the Responsible Parties to recover its damages. In light of the availability of adequate insurance coverage and its claims against the Responsible Parties, whom the Company believes have adequate financial resources, the Company does not believe the crash will have a material adverse effect on its financial position or future operating results, although no assurance can be given in this regard. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company operates in a changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks. Quarterly Fluctuations. The Company's operating results have in the past and may in the future fluctuate significantly depending on a number of factors, some of which are more significant for sales under the purchase agreement method. These factors include changes in the market value of salvage vehicles, attendance at salvage auctions, delays or changes in state title processing, fluctuations in ACVs of salvage vehicles, changes in regulations governing the processing of salvage vehicles, general weather conditions and the availability and quality of salvage vehicles. The Company is also dependent upon receiving a sufficient number of total loss vehicles as well as recovered theft vehicles to sustain its profit margins. Factors which can effect the number of vehicles received include: reduction of policy writing by insurance providers which would affect the number of claims over a period of time, and changes in direct repair procedures that would reduce the number of newer less damaged total loss vehicles that tend to have the higher salvage values. Additionally in the last few years there has been a declining trend in theft occurrences. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. In 10 11 addition, revenues for any future quarter are not predictable with any significant degree of accuracy, while the Company's expense levels are relatively fixed. If revenue levels are below expectations, operating results are likely to be adversely affected. Due to all of the foregoing factors, it is likely that in some future quarters the Company's operating results will be below the expectations of public market analysts and investors. Quality and Quantity of Inventory Available from Suppliers. The Company is dependent upon receiving a sufficient number of total loss vehicles as well as recovered theft vehicles to sustain its profit margins. Factors which can effect the number of salvage vehicles received include the reduction of policy writing by insurance providers which would affect the number of claims over a period of time, and changes in direct repair procedures that would reduce the number of newer less-damaged total loss vehicles that tend to have higher salvage values. The decreases in the quality and quantity of inventory, and in particular the availability of newer and less-damaged vehicles, are further aggravated under the purchase agreement method of sale and can have a material adverse effect on the operating results and financial condition of the Company. Competition. Historically, the automotive salvage industry has been highly fragmented. As a result, the Company faces intense competition for the supply of salvage vehicles from vehicle suppliers, as well as competition from processors of vehicles from other regional salvage pools. These regional salvage pools generally process vehicles under the fixed fee consignment method and generally do not offer the full range of services provided by the Company. The salvage industry has recently experienced consolidation, however, and the Company believes its principal publicly-held competitor is Copart. Copart has completed a number of acquisitions of regional salvage pools and competes with IAA in most of IAA's geographic markets. Due to the limited number of vehicle suppliers, competition is intense for salvage vehicles from Copart and regional suppliers. It is also possible that the Company may encounter further competition from existing competitors and new market entrants that are significantly larger and have greater financial and marketing resources. Other potential competitors could include used car auction companies, providers of claims software to insurance companies, certain salvage buyer groups and insurance companies, some of which presently supply auto salvage to IAA. While most insurance companies have abandoned or reduced efforts to sell salvage without the use of service providers such as the Company, they may in the future decide to dispose of their salvage directly to customers. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on its operating results and financial condition. Dependence on Key Insurance Company Suppliers. Historically, a limited number of insurance companies has accounted for a substantial portion of the Company's revenues. For example, in 1999, vehicles supplied by the Company's three largest suppliers accounted for approximately 43% of the Company's unit sales. The largest suppliers, State Farm Insurance, Farmers Insurance, and Allstate, each accounted for approximately 16%, 14%, and 13%, respectively, of the Company's unit sales. A loss or reduction in the number of vehicles from any of these suppliers, or adverse change in the agreements that such suppliers have with the Company, could have a material adverse effect on the Company's operating results and financial condition. Purchase Agreement Method of Sale. Under the purchase agreement method, the Company generally pays its insurance company customers a pre-determined percentage of the actual cash value ("ACV") to purchase the vehicle. ACVs are the estimated pre-accident fair value of the vehicle. Because the Company's purchase price is fixed by contract, changes in ACVs or in the market or auction prices for salvage vehicles have an impact on the profitability of the sale of vehicles under the purchase agreement method. If increases in used car prices and ACVs are not associated with a corresponding increase in prices at salvage auctions, there can be a negative impact on the profitability of purchase agreement sales. The Company has entered into a number of purchase agreements, including agreements with its most significant insurance suppliers, that obligate the Company to purchase most salvage vehicles offered to it at a formula percentage of ACV. From 1993 to 1996, increased ACVs on which the Company's costs are based reduced the profitability that the Company realized on purchase agreement contracts. Beginning late in the second quarter of 2000 and continuing through the end of the third quarter, purchase agreement profitability was 11 12 impaired by a combination of rising ACVs and flat to lower sales (auction) prices in certain parts of the country. Further increases in ACVs or declines in the market or auction prices for salvage vehicles could have a material adverse effect on the Company's operating results and financial condition. The Company has added adjustment and risk-sharing clauses to its new standard purchase agreement contracts that are designed to provide some protection to the Company and its customers from certain unexpected, significant changes in ACV's that are not accompanied by a comparable increase in sales prices. In addition, the Company has renegotiated certain purchase agreements, converting them to either the Percent of Sale or Fixed Fee Consignment method of sale. Governmental Regulation. The Company's operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations. The acquisition and sale of totaled and recovered theft vehicles is regulated by state motor vehicle departments in each of the locations in which the Company operates. Changes in governmental regulations or interpretations of existing regulations can result in increased costs, reduced salvage vehicle prices and decreased profitability for the Company. For example, the Company believes legislation currently being considered by Congress could have a negative impact on the number of buyers attending an auction as well as increase some of the costs to those buyers. This legislation could increase governmental regulation of certain operations of the Company. In addition to the regulation of sales and acquisitions of vehicles, the Company is also subject to various local zoning requirements with regard to the location of its auction and storage facilities. These zoning requirements vary from location to location. Failure to comply with present or future regulations or changes in existing regulations could have a material adverse effect on the Company's operating results and financial condition. Provision of Services as a National or Regional Supplier. The provision of services to insurance company suppliers on a national or regional basis requires that the Company expend resources and dedicate management to a small number of individual accounts, resulting in a significant amount of fixed costs. The development of a referral based national network service, in particular, has required the devotion of financial resources without immediate reimbursement of such expenses by the insurance company suppliers. Integration and Expansion of Facilities. The Company seeks to increase sales and profitability through acquisition of other salvage auction facilities, new site expansion and the increase of salvage vehicle volume at existing facilities. There can be no assurance that the Company will continue to acquire new facilities on terms economical to the Company or that the Company will be able to add additional facilities on terms economical to the Company or that the Company will be able to increase revenues at newly acquired facilities above levels realized prior to acquisition. The Company's ability to achieve these objectives is dependent, among other things, on the integration of new facilities, and their information systems, into its existing operations, the identification and lease of suitable premises and the availability of capital. There can be no assurance that this integration will occur, that suitable premises will be identified or that additional capital will be available to fund expansion and integration of the Company's business. Any delays or obstacles in this integration process could have a material adverse effect on the Company's operating results and financial condition. Furthermore, the Company has limited sources of additional capital available for acquisitions, expansions and start-ups. The Company's ability to integrate and expand its facilities will depend on its ability to identify and obtain additional sources of capital to finance such integration and expansion. In the future, the Company will be required to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employee work force. The failure to improve these systems on a timely basis and to successfully expand and train the Company's work force could have a material adverse effect on the Company's operating results and financial condition. Volatility of Stock Price. The market price of the Company's common stock has been and could continue to be subject to significant fluctuations in response to various factors and events, including variations in the Company's operating results, the timing and size of acquisitions and facility openings, the loss of vehicle suppliers or buyers, the announcement of new vehicle supply agreements by the Company or 12 13 its competitors, changes in regulations governing the Company's operations or its vehicle suppliers, environmental problems or litigation. Environmental Regulation. The Company's operations are subject to federal, state and local laws and regulations regarding the protection of the environment. In the salvage vehicle auction industry, large numbers of wrecked vehicles are stored at auction facilities for short periods of time. Minor spills of gasoline, motor oils and other fluids may occur from time to time at the Company's facilities and may result in soil, surface water or groundwater contamination. Petroleum products and other hazardous materials are contained in aboveground or underground storage tanks located at certain of the Company's facilities. Waste materials such as waste solvents or used oils are generated at some of the Company's facilities and are disposed of as nonhazardous or hazardous wastes. The Company believes that it is in compliance in all-material respects with applicable environmental regulations and does not anticipate any material capital expenditures for environmental compliance or remediation. Environmental laws and regulations, however, could become more stringent over time and there can be no assurance that the Company or its operations will not be subject to significant compliance costs in the future. To date, the Company has not incurred expenditures for preventive or remedial action with respect to contamination or the use of hazardous materials that have had a material adverse effect on the Company's operating results or financial condition. The contamination that could occur at the Company's facilities and the potential contamination by previous users of certain acquired facilities create the risk, however, that the Company could incur substantial expenditures for preventive or remedial action, as well as potential liability arising as a consequence of hazardous material contamination, which could have a material adverse effect on the Company's operating results and financial condition. Current and Pending Accounting Changes. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137 and 138, is effective for fiscal 2001. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of a derivative and whether it qualifies for hedge accounting. The Company will adopt SFAS No 133, as amended, in the first quarter of 2001; however, the Company does not feel that the adoption will have a material affect on its financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company had approximately $8.8 million of investments as of September 30, 2000. These investments largely consisted of state government obligations and had either variable rates of interest or stated interest rates ranging from 3.55% to 6.55%. The Company's investments are exposed to certain market risks inherent with such assets. This risk is mitigated by the Company's policy of investing in securities with high credit ratings and investing through major financial institutions with high credit ratings. The Company has senior notes payable of $20.0 million at an interest rate of 8.6%. The terms of the note agreement are such that pre-payment of such debt may not be advantageous to the Company in the event that funds may be available to the Company at a lower rate of interest. PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. INAPPLICABLE ITEM 2. CHANGES IN SECURITIES. INAPPLICABLE ITEM 3. DEFAULTS UPON SENIOR SECURITIES. INAPPLICABLE ITEM 4. SUBMISSION OF MATTERS TO A VOTE ON SECURITY HOLDERS. INAPPLICABLE ITEM 5. OTHER INFORMATION. INAPPLICABLE 13 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS. 27.1 Financial Data Schedule (B) REPORTS ON FORM 8-K. The Company filed a current report on Form 8-K on August 31, 2000 to report that third quarter earnings were expected to be below analysts' expectations. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSURANCE AUTO AUCTIONS, INC. Date: November 14, 2000 By: /s/ Stephen L. Green ----------------- ----------------------------------------- Name: Stephen L. Green Title: Vice President - Finance, Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 15 16 EXHIBIT INDEX EXHIBIT NO. 27.1 Financial Data Schedule *This item is a management contract or compensating plan or arrangement required to be filed as an exhibit to this form pursuant to Item 601(b)(10)(iii) of Regulation S-K. 16 EX-27 2 c58619ex27.txt FINANCIAL DATA SCHEDULE
5 3-MOS 9-MOS DEC-31-2000 DEC-31-2000 JUL-01-2000 JAN-01-2000 SEP-30-2000 SEP-30-2000 31,052,000 0 5,646,000 0 45,384,000 0 0 0 12,617,000 0 97,176,000 0 59,462,000 0 27,803,000 0 268,534,000 0 46,477,000 0 20,143,000 0 0 0 0 0 12,000 0 136,955,000 0 268,534,000 0 80,132,000 251,368,000 80,132,000 251,368,000 58,525,000 182,469,000 58,525,000 182,469,000 17,590,000 48,950,000 0 0 455,000 1,376,000 3,998,000 19,890,000 1,639,000 8,155,000 2,359,000 11,735,000 0 0 0 0 0 0 2,359,000 11,735,000 0.20 1.01 0.20 0.99
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