0000950137-01-504321.txt : 20011128
0000950137-01-504321.hdr.sgml : 20011128
ACCESSION NUMBER: 0000950137-01-504321
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010930
FILED AS OF DATE: 20011107
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: INSURANCE AUTO AUCTIONS INC /CA
CENTRAL INDEX KEY: 0000880026
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLES & MOTOR VEHICLE PARTS & SUPPLIES [5010]
IRS NUMBER: 953790111
STATE OF INCORPORATION: IL
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-19594
FILM NUMBER: 1776787
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
c65840e10-q.txt
QUARTERLY REPORT
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, 2001
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
incorporation or organization) Identification No.)
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 October 31, 2001:
Class Outstanding October 31, 2001
----- ----------------------------
Common Stock, $0.001 Par Value 12,134,290 shares
1
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, 2001 and September 30, 2000.............. 3
Condensed Consolidated Balance Sheets
as of September 30, 2001 and December 31, 2000......... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods ended September 30, 2001
and September 30, 2000...................................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 14
PART II. OTHER INFORMATION.......................................... 15
Item 1. Legal Proceedings........................................... 15
Item 2. Changes in Securities....................................... 15
Item 3. Defaults upon Senior Securities............................. 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 5. Other Information........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES ................................................... 16
2
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
THREE MONTH PERIODS NINE MONTH PERIODS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2001 2000 2001 2000
----------------------- ----------------------
(UNAUDITED) (UNAUDITED)
Net sales:
Vehicle sales $ 32,618 $ 47,307 $ 109,777 $ 153,116
Fee income 38,348 32,825 114,547 98,252
--------- --------- --------- ---------
70,966 80,132 224,324 251,368
Cost and expenses:
Cost of sales 49,072 58,525 155,219 182,469
Direct operating expenses 20,188 16,587 58,121 46,014
Business transformation costs 668 -- 752 --
Amortization of acquisition costs 1,013 1,003 3,024 2,936
Special charges -- -- 6,047 --
--------- --------- --------- ---------
Earnings from operations 25 4,017 1,161 19,949
Other (income) expense:
Interest expense 441 455 1,353 1,376
Interest income (205) (436) (888) (1,317)
--------- --------- --------- ---------
Earnings (loss) before income taxes (211) 3,998 696 19,890
Provision (benefit) for income taxes (5) 1,639 376 8,155
--------- --------- --------- ---------
Net earnings (loss) $ (206) $ 2,359 $ 320 $ 11,735
========= ========= ========= =========
Earnings (loss) per share:
Basic $ (.02) $ .20 $ .03 $ 1.01
========= ========= ========= =========
Diluted $ (.02) $ .20 $ .03 $ .99
========= ========= ========= =========
Weighted average shares outstanding:
Basic 12,077 11,704 11,868 11,632
Effect of dilutive securities -
stock options -- 262 158 227
--------- --------- --------- ---------
Diluted 12,077 11,966 12,026 11,859
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
3
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 29,875 $ 30,938
Short-term investments 4,376 4,859
Accounts receivable, net 52,445 48,091
Inventories 15,581 10,588
Other current assets 4,607 3,112
-------- --------
Total current assets 106,884 97,588
-------- --------
Property and equipment, net 38,215 30,492
Investments in marketable securities 534 2,240
Deferred income taxes 5,366 5,123
Other assets, principally goodwill, net 127,181 130,264
-------- --------
$278,180 $265,707
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 20,039 $ 37
Accounts payable 42,107 38,176
Accrued liabilities 5,645 6,171
Accrued restructuring charges 2,053 --
-------- --------
Total current liabilities 69,844 44,384
-------- --------
Long-term debt, excluding current installments 111 20,141
Other liabilities 3,366 3,001
Deferred income taxes 11,714 10,440
-------- --------
Total liabilities 85,035 77,966
-------- --------
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
12,133,165 and 11,715,936 and shares as of
September 30, 2001 and December 31, 2000, respectively 12 12
Additional paid-in capital 142,046 136,962
Retained earnings 51,087 50,767
-------- --------
Total shareholders' equity 193,145 187,741
-------- --------
$278,180 $265,707
======== ========
See accompanying notes to condensed consolidated financial statements.
4
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
NINE MONTH PERIODS ENDED
SEPTEMBER 30,
2001 2000
-------------
(UNAUDITED)
Cash flows from operating activities:
Net earnings $ 320 $ 11,735
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 7,663 7,241
Gain on disposal of fixed assets (411) (31)
Special charges 6,047 --
Changes in assets and liabilities (excluding effects of acquired businesses):
(Increase) decrease in:
Investments, net 2,189 1,375
Accounts receivable, net (4,291) (4,288)
Inventories (4,993) (619)
Other current assets (1,495) (822)
Other assets 85 (204)
Increase (decrease) in:
Accounts payable 3,877 4,765
Accrued liabilities (4,167) (279)
Deferred income taxes, net 1,032 1,187
-------- --------
Total adjustments 5,536 8,325
-------- --------
Net cash provided by operating activities 5,856 20,060
-------- --------
Cash flows from investing activities:
Capital expenditures (15,845) (8,762)
Proceeds from disposal of property and equipment 3,975 670
Payments made in connection with acquired companies,
net of cash acquired (105) (9,925)
-------- --------
Net cash used in investing activities (11,975) (18,017)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,084 1,959
Principal payments on long-term debt (28) (136)
-------- --------
Net cash provided by financing activities 5,056 1,823
-------- --------
Net increase (decrease) in cash and cash equivalents (1,063) 3,866
Cash and cash equivalents at beginning of period 30,938 27,186
-------- --------
Cash and cash equivalents at end of period $ 29,875 $ 31,052
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,720 $ 1,720
======== ========
Income taxes $ 7 $ 6,584
======== ========
See accompanying notes to condensed consolidated financial statements.
5
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 annual 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 2) 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,
2000.
Effective January 1, 2001, the Company adopted a fiscal year ending on
the last Sunday in December of each year. Fiscal year 2001 will consist
of 52 weeks and will end on December 30, 2001.
2. SPECIAL CHARGES
In March 2001, the Company announced an organizational realignment.
During the first quarter of 2001, the Company recorded pretax
restructuring charges of $6.0 million. As part of this plan, the Company
offered involuntary severance packages to approximately 30 staff
employees primarily located at its headquarters and recognized $2.4
million in employee termination benefits associated with this workforce
reduction. The Company also recorded approximately $1.7 million related
to the abandonment of certain facilities including cancellation of a
planned expansion at its headquarters building. The remaining balance
includes amounts related to repositioning the Company's towing operations
and other restructuring charges. The Company expects to substantially
complete these restructuring activities by the end of 2001.
The restructuring charges were determined based upon formal plans
approved by the Company's management. The amounts the Company ultimately
incurs may change as the plans are executed. The activity affecting the
accrual for restructuring charges, which is included in Accrued
Liabilities and Other Non-current Liabilities, for the nine months ended
September 30, 2001 is as follows (in thousands of dollars):
Workforce Facility Towing
Reduction Closings and Other Total
--------- -------- --------- -----
Balance at December 31, 2000....... $ - $ - $ - $ -
Charges to operations................. 2,376 1,739 1,932 6,047
Utilization of accrual................ (1,741) (728) (1,034) (3,503)
--------- -------- --------- -------
Balance at September 30, 2001...... $ 635 $ 1,011 $ 898 $ 2,544
========= ======== ========= =======
6
3. 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.
4. EARNINGS PER SHARE
For the three months ended September 30, 2001, the Company would have
reported an additional 195,000 dilutive shares outstanding in the form of
stock options assumed exercised. However, the Company incurred a net loss
for the period; therefore, those options were excluded from the
calculation of diluted earnings per share amounts because the effect
would have been anti-dilutive.
5. ACQUISITIONS
In February 2001, the Company acquired Pittsburgh Auto Salvage Service.
This acquisition was accounted for as a purchase, and the results of
operations are included in the Company's consolidated financial
statements from the date of acquisition. In October 2001, the Company
acquired Austin Salvage Pool. The acquisition will be accounted for as a
purchase in the Company's fourth quarter financial statements.
6. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and SFAS No. 142, Goodwill and Intangible Assets. In October
2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the
purchase method of accounting and prohibits the use of the
pooling-of-interests method for such transactions. SFAS No. 141 also
requires identified intangible assets acquired in a business combination
to be recognized as an asset apart from goodwill if they meet certain
criteria. Management has adopted SFAS 141, which has had no material
impact on its condensed consolidated financial statements.
SFAS No. 142 applies to all goodwill and identified intangible assets
acquired in a business combination. Under the new standard, all goodwill,
including that acquired before initial application of the standard,
should not be amortized but should be tested for impairment at least
annually. Identified intangible assets should be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 144.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001, (although early adoption would be permitted in certain
circumstances) and must be adopted as of the beginning of a fiscal year.
Retroactive application is not permitted. The Company is in the process
of evaluating the impact that adoption of SFAS No. 142 may have on the
financial statements; however, such impact, if any, is not known or
reasonably estimable at this time.
SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, it retains many of
the fundamental provisions of that Statement. SFAS No. 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. However, it retains the requirement in Opinion 30 to report
separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for
sale. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. The Company is in
the process of evaluating the impact that adoption of SFAS No. 144 may
have on the financial statements; however, such impact, if any, is not
known or reasonably estimable at this time.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion in this section 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 the Company's
annual report on Form 10-K for the fiscal year ended December 31, 2000. Among
these risks are: accelerated departure from conducting business pursuant to the
purchase agreement method of sale which could adversely affect the Company's
client base; the ability to successfully renegotiate existing purchase agreement
contracts; fluctuations in the actual cash value of salvage vehicles; 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 and the dependence on key
insurance company suppliers; the ability of Synergetics to successfully
implement standardized key processes throughout the Company's operations as well
as the ability of SEI Information Technology's ability to successfully complete
the re-design of the Company's information systems, both in a timely manner and
according to costs and operational specifications; 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, fixed fee
consignment, and purchase agreement. Under the percentage of sale consignment
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 revenues. The percentage of sale consignment method offers potentially
increased profits over fixed fee consignment by providing incentives to both the
Company and the salvage provider to invest in vehicle enhancements thereby
maximizing 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.
In October 2001, the Company announced that it intends to accelerate
its plan to discontinue offering the purchase agreement method of sale. Given
the overall economics and risks associated with purchase agreement contracts,
their level of performance has been unacceptable. The Company expects that the
percentage of vehicle assignments received under the purchase agreement method
will be less than 8 percent by the beginning of 2002. Insurance Auto Auctions
began advising its significant purchase agreement customers of this decision in
September 2001. The Company intends to convert these customers to more
manageable consignment-based contracts. Although the Company has found that
these customers have been open to this change, there can be no guarantee that
the Company will not lose some of its volume as a result of this effort.
Since its initial public offering in 1991, the Company has grown
primarily through a series of acquisitions to now include 60 locations as of
October 31, 2001.
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.
8
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared to the Three Months Ended
September 30, 2000
Third quarter earnings from operations were $25,000 in 2001 versus $4.0
million in 2000. Earnings from operations reflected $668,000 of business
transformation costs that encompass the enterprise-wide system re-design and
business process re-engineering. Net earnings for the quarter, before business
transformation costs, would have been $210,000, or $0.02 per diluted share,
versus net earnings of $2.4 million, or $0.20 per diluted share, for the third
quarter of 2000.
Net revenues of the Company decreased to $71.0 million for the three
months ended September 30, 2001, from $80.1 million for the same three month
period in 2000, an 11.4% decrease. The decline in net revenues is primarily due
to the plan to exit the purchase agreement method of sale. Under the purchase
agreement method, the entire purchase price of the vehicle is recorded as
revenue compared to only recording the fees collected on the sale of a vehicle
under the lower risk consignment fee based arrangements. This change in contract
mix also contributed to the significant increase in fee income for the quarter.
Fee income in the third quarter increased 16.8% to $38.3 million versus $32.8
million in the third quarter of last year. This increase is the result of both
increased volume and pricing changes.
Gross profit increased slightly to $21.9 million for the three months
ended September 30, 2001, from $21.6 million for the comparable period in 2000.
The increase in fee income contributed to the increase in gross profit, however,
the underlying economics on purchase agreement contracts had an adverse effect
on gross profit dollars in 2001.
Direct operating expenses increased to $20.2 million for the three
months ended September 30, 2001, from $16.6 million for the comparable period in
2000. The increase in operating expenses is due in large part to new facilities,
the Houston flood and expenses related to maintaining the Company's existing IT
infrastructure.
Interest expense decreased slightly to $441,000 for the three months
ended September 30, 2001, from $455,000 for the comparable period in 2000.
Interest income decreased to $205,000 for the 2001 third quarter versus $436,000
for the fiscal year 2000 third quarter.
The Company recorded a small income tax benefit of $5,000 for the third
quarter 2001 versus and income tax expense of $1.6 million in the third quarter
of fiscal year 2000. The Company adjusted its cumulative effective tax rate for
fiscal 2001 to be 54%. As a result of this adjustment, the effective tax rate
for the third quarter 2001 resulted in a rate of 2.4% versus 41% in the third
quarter of 2000.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended
September 30, 2000
Net revenues of the Company decreased to $224.3 million for the nine
months ended September 30, 2001, from $251.4 million for the same nine month
period in 2000, a 10.8% decrease. Fee income for the nine months increased 16.6%
versus last year. This increase is the result of both increased volume and
pricing changes.
Gross profit increased slightly to $69.1 million for the nine months
ended September 30, 2001, from $68.9 million for the same period in 2000. The
increase in fee income contributed to the increased gross profit, however,
continued weakness in purchase agreement profitability has had a negative impact
on gross profit growth in 2001.
Direct operating expenses increased to $58.1 million for the nine
months ended September 30, 2001, from $46.0 million for the comparable period in
2000. The increase is primarily related to acquisitions and greenfields that
were completed in 2000 and 2001. Direct operating expenses were also affected by
costs related to the Houston flood and maintaining the Company's existing IT
infrastructure including related labor costs.
9
Interest expense was flat at $1.4 million for the nine months ended
September 30, 2001 versus the same period in 2000. Interest income decreased to
$888,000 for the nine month period ended September 30, 2001, from $1.3 million
for the comparable period in 2000.
Income taxes decreased to $376,000 for the nine months ended September
30, 2001, from $8.2 million for the comparable period in 2000. The Company's
effective tax rate for the nine months ended September 30, 2001 was 54% versus
41% for the comparable period in 2000. The effective tax rate reflects
management's estimate of the applicable rate for the full year and is subject to
ongoing review and evaluation by the Company.
The Company's net earnings for the nine months ended September 30,
2001, including special charges, were $320,000 with diluted earnings per share
of $0.03 compared to last year's nine month period net earnings of $11.7 million
and diluted earnings per share of $0.99. Excluding the after-tax effect of
special charges and business transformation costs, which encompass the
enterprise-wide system re-design and the business process re-engineering effort,
the Company's net earnings for the nine months ended September 30, 2001 would
have been $3.4 million with diluted earnings per share of $0.29.
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 2001, the Company had current assets of $106.9
million, including $29.9 million of cash and cash equivalents and $4.4 million
of short-term investments. Current liabilities were $69.8 million. The Company
had working capital of $37.0 million at September 30, 2001, a $16.2 million
decrease from December 31, 2000. Current installments of long-term debt include
$20.0 million of 8.6% Senior Notes that mature on February 15, 2002. These notes
were reclassified to current liabilities in 2001 thus accounting for the decline
in working capital since the end of the year. The Company plans to replace these
notes with new external financing.
Other long-term liabilities include a post-retirement benefits
liability that relates to the acquisition in 1994 of Underwriters Salvage
Company. The amount recorded at September 30, 2001 for the post-retirement
benefits liability is approximately $2.9 million. The remaining balance within
other long-term liabilities represents expenditures related to the restructuring
charge that will be made more than one year beyond September 30, 2001.
Capital expenditures were approximately $15.8 million for the nine
months ended September 30, 2001. These capital expenditures primarily
represented facility costs related to expansion into new markets and upgrading
current facilities. The Company has begun operations this year in Philadelphia;
Pennsylvania, Albuquerque, New Mexico and Hartford, Connecticut and has opened a
new facility in Los Angeles, California. Expenditures have also been made toward
two additional facilities that are expected to open late in 2001 or in early
2002.
In February 2001, the Company acquired Pittsburgh Auto Salvage Service
in a cash transaction. This acquisition was accounted for as a purchase, and the
results of operations are included in the Company's consolidated financial
statements from the date of acquisition. In October 2001, the Company acquired
Austin Salvage Pool in a cash transaction. This acquisition was accounted for as
a purchase. The results of Austin Salvage Pool will be included in the Company's
fourth quarter financial statements as of the date of acquisition.
In September 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 October 31, 2001, the
Company had not purchased any shares pursuant to this authorization and has no
immediate plans to do so.
The Company believes that cash generated from operations 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 and acquisitions. At some
10
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.
The Company's operating results have not historically been materially
affected by inflation.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and SFAS No. 142, Goodwill and Intangible Assets. In October 2001,
the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method of
accounting and prohibits the use of the pooling-of-interests method for such
transactions. SFAS No. 141 also requires identified intangible assets acquired
in a business combination to be recognized as an asset apart from goodwill if
they meet certain criteria. Management has adopted SFAS 141, which has had no
material impact on its condensed consolidated financial statements.
SFAS No. 142 applies to all goodwill and identified intangible assets
acquired in a business combination. Under the new standard, all goodwill,
including that acquired before initial application of the standard, should not
be amortized but should be tested for impairment at least annually. Identified
intangible assets should be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 144. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001, (although early adoption would be
permitted in certain circumstances) and must be adopted as of the beginning of a
fiscal year. Retroactive application is not permitted. The Company is in the
process of evaluating the impact that adoption of SFAS No. 142 may have on the
financial statements; however, such impact, if any, is not known or reasonably
estimable at this time.
SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, it retains many of the fundamental provisions of that
Statement. SFAS No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. However, it retains the requirement in Opinion 30 to report
separately discontinued operations and extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company is in the process of evaluating the
impact that adoption of SFAS No. 144 may have on the financial statements;
however, such impact, if any, is not known or reasonably estimable at this time.
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: fluctuations in ACVs of salvage
vehicles, changes in the market value of salvage vehicles, delays or changes in
state title processing, general weather conditions, changes in regulations
governing the processing of salvage vehicles, the availability and quality of
salvage vehicles and attendance at salvage auctions. 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 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
11
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 salvage 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, Inc.
("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 end users. 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 2000, vehicles supplied by the Company's
three largest suppliers accounted for approximately 40% of the Company's unit
sales. The largest suppliers, State Farm Insurance, Farmers Insurance, and
Allstate, each accounted for approximately 14%, 14%, and 12%, respectively, of
the Company's unit sales. A loss or reduction in the number of vehicles from any
of these suppliers, or adverse changes 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
of sale, the Company is required to purchase, and the insurance company and
other non-insurance company suppliers are required to sell to the Company,
virtually all total loss and recovered theft vehicles generated by the supplier
in a designated geographic area. The agreements are customized to each
supplier's needs, but typically require the Company to pay a specified
percentage of a vehicle's ACV, depending on the vehicle's age and certain other
conditions including whether the vehicle is a total loss or recovered theft
vehicle. IAA assumes the risk of market price variation for vehicles sold under
a purchase agreement and therefore works to enhance the value of purchased
vehicles in the selling process. 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.
Revenue recorded from the sale of a purchase agreement vehicle is the actual
selling price of the vehicle.
From 1993 to 1996, increased ACVs reduced the profitability that the
Company realized on purchase agreement contracts. Beginning late in the second
quarter of 2000 and continuing into 2001,
12
purchase agreement profitability was impaired by a combination of rising ACVs
and flat to lower sale prices at auction 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 included adjustment and
risk-sharing clauses in certain of its purchase agreement contracts to provide
some protection to the Company and its customers from unexpected, significant
changes in ACVs 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.
In 2000 and 1999 respectively, approximately 26% and 28% of the units
processed by IAA were processed through the purchase agreement method of sale.
For the nine months ended September 30, 2001, approximately 20% of total units
sold were sold under the purchase agreement method of sale.
In October 2001, the Company announced that it intends to accelerate
its plan to discontinue offering the purchase agreement method of sale. Given
the overall economics and risks associated with purchase agreement contracts,
their level of performance has been unacceptable. The Company expects that the
percentage of vehicle assignments received under the purchase agreement method
will be less than 8 percent by the beginning of 2002. Insurance Auto Auctions
began advising its significant purchase agreement customers of this decision in
September 2001. The Company intends to convert these customers to more
manageable consignment-based contracts. Although the Company has found that
these customers have been open to this change, there can be no guarantee that
the Company will not lose some of its volume as a result of this effort.
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 law or governmental
regulations or interpretations of existing law or regulations can result in
increased costs, reduced salvage vehicle prices and decreased profitability for
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 of 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.
Expansion and Integration 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
13
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 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 expenditure 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company had approximately $4.9 million of investments as of
September 30, 2001. These investments largely consisted of state government
obligations and had either variable rates of interest or stated interest rates
ranging from 2.20% 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 million at an interest rate
of 8.6% that mature on February 15, 2002. 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.
14
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS. Inapplicable
(B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
fiscal quarter ended September 30, 2001.
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 7, 2001 By: /s/ Scott P. Pettit
---------------- ----------------------------------------------
Name: Scott P. Pettit
Title: Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
16
EXHIBIT INDEX
EXHIBIT NO.
-----------
None