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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
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Commission File Number: 0-19594
INSURANCE AUTO AUCTIONS, INC.
(Exact name of registrant as specified in its charter)
Illinois 95-3790111
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
850 East Algonquin Road, Suite 100, Schaumburg, Illinois 60173-3855
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(Address of principal executive offices) (Zip Code)
(847) 839-3939
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[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
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INDEX
INSURANCE AUTO AUCTIONS, INC.
PAGE NUMBER
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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
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS NINE MONTH PERIODS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
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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
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Total current assets 97,176,000 87,872,000
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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
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$ 268,534,000 $ 248,132,000
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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
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Total current liabilities 46,477,000 40,883,000
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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
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Total liabilities 79,554,000 72,846,000
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Shareholders' equity:
Preferred stock, par value of $.001 per share
Authorized 5,000,000 shares; none issued. - -
Common stock, par value of $.001 per share
Authorized 20,000,000 shares; issued
and outstanding 11,715,936 and 11,575,010
shares as of September 30, 2000 and
December 31, 1999, respectively 12,000 12,000
Additional paid-in capital 136,955,000 134,996,000
Retained earnings 52,013,000 40,278,000
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Total shareholders' equity 188,980,000 175,286,000
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$ 268,534,000 $ 248,132,000
============= =============
See accompanying notes to condensed consolidated financial statements.
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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
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Total adjustments 8,326,000 (4,306,000)
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Net cash provided by operating activities 20,060,000 5,990,000
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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) -
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Net cash used in investing activities (18,017,000) (5,844,000)
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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)
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Net cash provided by financing activities 1,823,000 1,949,000
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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
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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.
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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
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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
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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
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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.
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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
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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
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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
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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
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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.
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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)
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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.
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