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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-19594
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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 Number)
850 EAST ALGONQUIN ROAD, SUITE 100
SCHAUMBURG, ILLINOIS 60173
(847) 839-3939
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock (based on the closing price as
reported by the Nasdaq Stock Market(R) on March 20, 2001) held by non-affiliates
of the Registrant as of March 20, 2001 was approximately $45,195,000 For
purposes of this disclosure, shares of Common Stock known to be held by persons
who own 5% or more of the shares of outstanding common stock and shares of
common stock held by each officer and director have been excluded in that such
persons may be deemed to be "affiliates" as that term is defined under the Rules
and Regulations of the Act. This determination of affiliate status is not
necessarily conclusive. As of March 20, 2001, the Registrant had outstanding
11,732,935 shares of Common Stock, $0.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS.
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 "Factors That
May Affect Future Results" below and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Among these risks are:
conducting business pursuant to the purchase agreement method of sale; changes
in the market value of salvage; 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;
competition; the ability to pass through increased towing costs; dependence on
key insurance company suppliers; delays or changes in state title processing;
general weather conditions; legislative or regulatory acts; that vehicle
processing time will improve; the availability of suitable acquisition
candidates; the ability to bring new facilities to expected earnings targets;
that the Company's towing business will reach forecasted levels of profitability
and the level of energy and labor costs.
GENERAL
Insurance Auto Auctions, Inc., together with its subsidiaries
(collectively, "IAA" or the "Company"), offers insurance companies and other
vehicle suppliers cost-effective salvage processing solutions. In an accident,
theft or other claims adjustment process, insurance companies typically take
possession of a vehicle because (i) based on economic and customer service
considerations, the vehicle has been classified as a "total loss" and the
insured replacement value has been paid rather than the cost of repair or (ii) a
stolen vehicle is recovered after the insurance company has settled with the
insured. The Company generally sells these vehicles at live or closed bid
auctions on a competitive-bid basis at one of the Company's facilities.
The Company processes salvage vehicles under three methods: purchase
agreement, fixed fee consignment and percentage of sale consignment. Under the
purchase agreement method, IAA generally purchases vehicles from the insurance
companies upon clearance of title, under financial terms determined by contract
with the insurance company supplier and then resells these vehicles for IAA's
own account at IAA auctions. Under the fixed fee consignment and percentage of
sale consignment methods, the Company sells vehicles on behalf of insurance
companies, which continue to own the vehicles until they are sold to buyers at
auction. Under these methods, the Company generally conducts either live or
closed bid auctions of the automotive salvage in return for agreed upon sales
fees. In addition to fees, the Company generally charges its fixed fee
consignment and percentage of sale consignment vehicle suppliers for various
services, including towing and storage. Under all methods of sale, the Company
also charges the buyer of each vehicle various buyer-related fees.
Prior to 1992, the Company operated almost exclusively using the purchase
agreement system of salvage disposal. Since 1992, IAA has acquired additional
auto salvage pool operations and opened up greenfields in strategic locations,
resulting in a network of 58 salvage pools in 24 states as of December 31, 2000.
Most of these businesses operate primarily using the fixed fee consignment
method of sale. As a result of these site additions, a majority of the vehicles
currently processed by IAA are now sold under fixed fee and percentage of sale
consignment arrangements. In 2000, approximately 50% of the vehicles processed
by IAA were sold under the fixed fee consignment method, 24% were sold under the
percentage of sale consignment method, and 26% were sold under the purchase
agreement method.
The Company obtains the majority of its supply of vehicles from a large
number of insurance companies and smaller quantities from non-insurance company
suppliers such as rental car companies and non-profit organizations.
Historically, a limited number of insurance companies have accounted for a
substantial portion of the
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Company's revenues. In 2000, vehicles supplied by the Company's three largest
suppliers accounted for approximately 40% of the Company's unit sales. The
aggregate number of vehicles supplied in 2000 by the Company's three largest
suppliers increased from 1999. However, due to a significant increase in
vehicles supplied by other customers, the percent of total units sold for the
Company's three largest customers decreased. The largest suppliers, State Farm
Insurance, Farmers Insurance, and Allstate Insurance ("Allstate"), each
accounted for approximately 14%, 14%, and 12% respectively, of the Company's
2000 unit sales.
HISTORY
The Company was organized as a California corporation in 1982 under the
name Los Angeles Auto Salvage, Inc. ("LAAS"). In January 1990, all the
outstanding capital stock of LAAS was acquired in a leveraged buyout and, in
October 1991, LAAS changed its name to Insurance Auto Auctions, Inc. The Company
completed its initial public offering in November 1991 and its common stock is
traded on the Nasdaq Stock Market under the symbol IAAI. In 1997, the Company
reincorporated in the state of Illinois.
IAA PERCENTAGE OF SALE CONSIGNMENT METHOD
Under the Percentage of Sale consignment method, the insurance company
receives a negotiated percentage of the vehicle-selling price. With this method
of sale, the Company acts as an agent for the insurance company. As agent, the
Company arranges for the salvage vehicle to be towed to its facility and
processes the car for sale. The percentage of sale consignment method provides
suppliers with potentially greater upside since IAA's fees are tied to selling
prices and IAA has, thus, more incentive to invest in improvements to salvage
vehicles to maximize sales prices. The Company offers two types of percentage of
sale agreements. The Percentage Plan is a straight percentage of sale agreement
that includes vehicle enhancements as part of the selling price-based fee. The
Percentage-Plus Plan offers a lower percentage of sale fee combined with
discounted pricing for enhancement services. Approximately 24% and 16% of the
vehicles processed by the Company were sold under the percentage of sale
consignment method in 2000 and 1999, respectively. The Company, in 1998,
designated the percentage of sale consignment method its preferred type of
salvage provider agreement. Accordingly, the Company expects the percent of
vehicles sold under this type of contract to total vehicles sold to increase.
IAA PURCHASE AGREEMENT METHOD
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 Actual Cash Value ("ACV" -
the estimated pre-accident fair value of the vehicle), 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. In 2000 and 1999
respectively, approximately 26% and 28% of the units processed by IAA were
processed through the purchase agreement method of sale.
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IAA FIXED FEE CONSIGNMENT SALE METHOD
Approximately 50% of the Company's vehicles for the year ended December
31, 2000 were sold on the fixed fee consignment method of sale, compared with
56% in 1999. As under the percentage of sale consignment method, the Company
typically acts as an agent for the insurance company rather than as a purchaser
of salvage vehicles. Under this method of disposal, the Company charges fees to
the insurance company supplier, typically including a towing fee, a title
processing fee and a storage and salvage sales fee. Since the Company does not
own the vehicle, the Company's revenues per vehicle from consignment sales are
received only from these fees rather than from the revenue from the sale of the
vehicle. As a result, revenue recognized per vehicle under the consignment
method of sale is approximately 5% to 15% of the revenue recognized per vehicle
under the purchase agreement method, where the sale price of the vehicle is also
recorded.
SERVICES PROVIDED TO ALL SUPPLIERS
The process of salvage disposition through the IAA system commences at the
time of loss, or when a stolen vehicle has been subsequently recovered. An
insurance company representative assigns the vehicle to the Company, either by
phone, facsimile or through the Company's on-line electronic DataLink(R) system.
DataLink(R) is the Company's proprietary computer order processing system that
enables insurance company suppliers to access their data electronically and to
retrieve information on a vehicle at any time during the claims adjustment and
disposal process.
The Company's FastTow(R) service also provides towing services which
guarantee that vehicles will be delivered to a Company branch storage facility,
usually within one to two business days of assignment within a designated
service area. In retrieving a vehicle, the FastTow(R) service will also advance,
on behalf of the supplier, any storage and towing charges incurred when the
vehicle was initially towed from the accident scene or recovered theft site to
the temporary storage facility or repair shop. Once these advance towing and
storage charges have been reviewed and verified by the Company, the towing
subcontractor generally will pay the charges at time of vehicle pick up and
deliver the vehicle to the predetermined Company auction and storage facility.
The rapid retrieval time and review of advance charges are also intended to
increase the insurance company's net return on salvage.
In order to further minimize vehicle storage charges incurred by insurance
company suppliers at the temporary storage facility or repair shop and improve
service time to the policyholder, the Company and certain of its insurance
company suppliers have established vehicle inspection centers ("VICs") at many
of the Company's facilities. A VIC is a temporary storage and inspection
facility located at an IAA site that is operated by the insurance company.
Suspected total loss vehicles are brought directly to the VIC from the temporary
storage facility or repair shop. The insurance company typically has appraisers
stationed on the VIC site in order to expedite the appraisal process and
minimize storage charges at outside sites. If the vehicle is totaled by the
insurance company, the vehicle can easily be moved to IAA's vehicle storage
area. If the vehicle is not totaled, it is promptly delivered to the insurer's
selected repair facility. IAA also provides video imaging as a service to its
customers, digitizing pictures of the damaged cars and electronically displaying
them to insurance adjusters in their office.
After a totaled vehicle is received at a Company facility, it remains in
storage but cannot be auctioned until transferable title has been submitted to
and processed by IAA. For most vehicles stored at our facilities, no storage
charges accrue for a contractually specified period. The document processing
departments at the Company's facilities provide management reports to the
insurance company suppliers, including an aging report of vehicles for which
title documents have not been provided. In addition, the Company customarily
offers the insurance companies staff training for each state's Department of
Motor Vehicles ("DMV") document processing. These services expedite the
processing of titles, thereby reducing the time in which suppliers receive their
salvage proceeds and decreasing the suppliers' administrative costs and
expenses. The Company then processes the title documents in order to comply with
DMV requirements for such vehicles. This may involve re-registering the vehicle
and obtaining a salvage certificate, after which the Company is entitled to sell
the salvage vehicle. The Company generally holds auctions every week or
bi-weekly in all of its locations. The auction is either live or sealed bid.
Auction lists can be viewed on-line on the Company's Internet website where
buyers can review all vehicles at a location or search for specific vehicles.
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The Company remits payment to the insurance company suppliers within a
contractual time period or shortly after sale of the vehicle and collection from
the buyer. In addition, most insurance company suppliers generally receive
monthly summary reports of all vehicles processed by the Company. The reports
track the insurance companies' gross return on salvage, net return on salvage,
exact origin and detail of storage charges and other useful management data. The
Company also provides many of its suppliers with quarterly Comprehensive Salvage
Analysis of salvage trends.
OTHER SERVICES
IAA's BidFast(R) service provides insurers with a binding bid for a
salvage vehicle which historically may have been owner-retained. The return on
such vehicles (owner-retained salvage vehicles) is, many times, measurably
improved for the supplier using this service and enables compliance with many
state department of insurance regulations.
IAA also provides certain insurance company suppliers with anti-theft
fraud control programs for vehicle salvage processing. The Company's CarCrush(R)
services helps insurance companies by ensuring that severely damaged or stripped
"high profile" cars are crushed to prevent their vehicle identification numbers
("VINs") from being used in auto theft. IAA also provides computerized reporting
of vehicle sales to the National Insurance Crime Bureau ("NICB"). This includes
detailed buyer information obtained through the Company's registration process.
IAA has also continued its support for consumer protection laws calling for the
nationwide mandatory use of salvage certificates for salvage vehicles.
The Company offers a National Salvage Network, based in Dallas, Texas,
that allows insurance company suppliers to call in all their salvage vehicle
assignments to a single location. This call center enables IAA to distribute
vehicle assignments throughout most of the United States, even in markets where
IAA does not currently have a facility, and is designed to minimize the
administrative workload for insurance companies and provide IAA with broader
geographic coverage. In certain areas where the Company does not have a
facility, such vehicles are distributed to IAA selected ServicePartners(TM).
The Company also offers, through its Specialty Salvage Division, salvage
services for specialty vehicles, such as trucks, heavy equipment, farm
equipment, boats, recreational vehicles and classic and exotic cars. Marketing
these vehicles nationwide to specialty buyers offers insurance companies the
opportunity for better returns on units that typically do not sell for as much
at local salvage pools as a result of the limited number of local buyers. These
vehicles can be viewed on-line through the Company's Internet website,
www.iaai.com.
GROWTH STRATEGIES
The Company seeks to increase sales on a profitable basis by offering to
insurance company suppliers a variety of methods of sale (including percentage
of sale consignment, purchase agreement and fixed fee consignment) and various
other services and by (i) increasing market share at existing sites; (ii)
continued market penetration through acquisitions; (iii) new site expansion;
(iv) development of national/regional supplier agreements, and (v) the offering
of new services to insurance companies to assist them in reducing time and cost
in the claims process.
Increasing Market Share and Profitability at Existing Sites
The Company's primary strategy for growth in its existing markets is to
contract for additional vehicles by promoting better returns on salvage vehicles
and a broad selection of services to prospective suppliers. The expansion of the
number of vehicles processed at existing sites typically makes the Company's
auctions more attractive and results in more buyers attending auctions.
The Company's strategies for increasing profitability at existing sites
include efforts to shift more salvage providers to revenue sharing arrangements
such as the percentage of sale consignment method. The Company is also promoting
its Run & DriveSM service whereby certain salvage vehicles are driven during the
auction
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demonstrating to buyers that the major component parts of a vehicle still
operate. These product offerings are designed to maximize returns to both the
Company and the salvage provider.
Continued Market Penetration Through Acquisitions
Since the Company's initial public offering in November 1991, the
Company has acquired additional pool operations across the United States to
offer better national coverage to its insurance company customers. The Company
currently operates 58 salvage pools in 24 states.
IAA intends to continue to pursue acquisitions of strategically-located
salvage pools. Through such acquisitions, it seeks to enhance a geographically
broad-based relationship with key insurance company suppliers, as well as to
offer its specialized salvage services to new insurance companies and certain
non-insurance company suppliers. In pursuing its acquisition strategy and plans,
the Company recognizes that there will be continuing challenges in effectively
and efficiently integrating new facilities into existing IAA operations. This
will require continuing investment in infrastructure. See "Factors That May
Affect Future Results."
New Site Expansion
While the Company will continue to pursue growth through acquisitions, it
also will continue to seek growth through the opening of new sites. The opening
of new sites offers advantages in certain markets and capitalizes on regional
and national customer accounts.
Development of National/Regional Supplier Agreements
The Company's expanded geographic base of operations, plus its National
Network, facilitates its strategy of offering its customers and prospective
customers national and regional supplier agreements. These can provide a more
consistent reporting and control function to our customers, who benefit from a
reduction in the number of suppliers through which they must do business.
Offering of New Services
The Company is actively pursuing opportunities for growth through the
identification and development of new, non-traditional customer-valued services
and business offerings that leverage the Company's current competencies,
geographic presence and assets. The primary focus of these new services is to
provide to the insurance industry new, innovative options and alternatives for
reducing the time and costs associated with processing insurance claims.
In 1999, the Company introduced its new approach to total-loss
appraisal in the FastTrack(R) appraisal solution. FastTrack(R) utilizes an early
total-loss recognition system to identify, move and appraise probable total-loss
vehicles sooner than the conventional claims process. This streamlined system
generates direct cost savings on accrued shop storage and car rental expenses.
Completed appraisals, including a condition report and an array of
digital images, are electronically transmitted to a secure, password-protected
Web site, providing adjusters with same-day access to the information via the
Internet.
Electronic Data Interchange and Electronic Funds Transfer, (EDI/EFT)
facilitates faster, more accurate service from assignment and vehicle pickup
through sale and final settlement. EDI helps minimize insurance staff
involvement, lowers error rates and diminishes administrative requirements
through direct communication between IAA's system and the insurance company's
computer system. EDI/EFT electronically expedites the total-loss recovery
process. Less manual intervention combined with faster, more accurate service
quickly translates into quicker turnaround on the final settlement.
SurePay(R) is IAA's electronic funds transfer service that improves the
speed and accuracy of the billing and final settlement process by automatically
depositing salvage proceeds directly into our customers' bank account.
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The IAA Auction Center at www.iaaI-BID.comSM is an on-line Internet-based
bidding forum to preview and bid on salvage vehicles at all IAA facilities
throughout the United States. It provides buyers with an open, competitive
bidding environment that reflects the dynamics of the live salvage vehicle
auction. The Auction Center includes such services as comprehensive auction
lists featuring links to digital images of vehicles available for sale, an "Auto
Locator" function that promotes the search of specific vehicles within the
auction system, and special "Flood" or other catastrophe auction notification.
Higher returns are driven by broader market exposure and increased competitive
bidding.
MARKETING
The Company markets its services to insurance company and non-insurance
company salvage suppliers. Based upon historical data supplied by a prospective
supplier, the Company can provide prospective suppliers with a detailed analysis
of their current salvage returns and a proposal setting forth ways in which the
Company can improve salvage returns, reduce administrative costs and expenses
and provide proprietary turnkey claims processing services.
In addition to providing insurance companies and certain non-insurance
company suppliers with a means for disposing of salvage vehicles, the Company
provides services that are intended to increase the net amount of salvage sale
proceeds received by the suppliers and reduce the time in which the suppliers
receive net proceeds. The Company seeks to become an integral part of its
suppliers' salvage process. The Company views such mutually beneficial
relationships as an essential component of its effort to retain existing
suppliers and attract new suppliers.
The Company also seeks to expand its supply relationships through
recommendations from individual branch offices of an insurance company supplier
to other offices of the same insurance company. The Company believes that its
existing relationships and the recommendations of branch offices currently play
a significant role in its marketing of services to national insurance companies
from its growing network of salvage locations. Indeed, as the Company has
expanded its geographic coverage, it has been able to market its services to
insurance suppliers offering to handle salvage on a national basis or for a
large geographic area.
The Company sells the majority of its vehicles through live auctions.
IAA maintains databases which currently contain information regarding nearly
20,000 registered buyers. No single buyer accounted for more than 10% of the
Company's net sales in 2000. The Company generally accepts cash, money orders,
cashier's checks, wire transfers and pre-approved checks, at the time the
vehicle is picked up. Vehicles are sold "as is" and "where is." Sales notices
listing the vehicles to be auctioned on a particular day at a particular
location are generally mailed, faxed or available online on the Company's
Internet website to the Company's buyers in advance of the auction. Such notices
list the rules of the auction and details about the vehicle, including the year
and make of the vehicle, the nature of the damage, the status of title and the
order of the vehicles in the auction. Multiple images of certain vehicles are
available for review on the Company's Internet site at www.iaai.com.
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 for 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 been going through a period of 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. The Company attempts to differentiate itself
from its competition through the wide range and quality of services it provides
to its insurance customers and buyers. 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 processing software to insurance companies, certain salvage
buyer groups and insurance companies, some of which presently supply auto
salvage to IAA. While many insurance companies have abandoned or reduced efforts
to sell salvage
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without the use of service providers such as the Company, they may in the future
decide to dispose of their salvage. 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.
GOVERNMENT 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 total loss and recovered theft vehicles
is regulated by governmental agencies in each of the locations in which the
Company operates. In many of these states, regulations require that the title of
a salvage vehicle be forever "branded" with a salvage notice in order to notify
prospective purchasers of the vehicle's previous salvage status. 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 and
operation of its auction and storage facilities. Some state and local
regulations also limit who can purchase salvage vehicles, as well as determine
whether a salvage vehicle can be sold as rebuildable or must be sold for parts
only. Such regulations can reduce the number of potential buyers of vehicles at
Company auctions. The Company is also subject to environmental regulations. The
Company believes that it is in material compliance with all applicable
regulatory requirements. The Company will be subject to similar types of
regulations by federal, state and local governmental agencies in new markets and
to new legislation in existing markets.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations governing, among other things, the handling, storage, transportation
and disposal of waste and other materials. The Company believes that its
business, operations and facilities have been and are being operated in
compliance in all material respects with applicable environmental laws and
regulations. The Company believes the overall impact of compliance with laws and
regulations protecting the environment will not have a material adverse effect
on its operating results and financial condition, although no assurance can be
given in this regard.
EMPLOYEES
At December 31, 2000, the Company employed 863 full-time persons. The
Company is not subject to any collective bargaining agreements and believes that
its relationship with its employees is good.
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
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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 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. 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 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 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 early 2001, 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
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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.
The Company expects that approximately 20% of total units sold in 2001 will be
sold under the purchase agreement 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 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
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
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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 2. PROPERTIES.
The Company's principal administrative, sales, marketing and support
functions are located in Schaumburg, Illinois. The lease on the office space in
Schaumburg expires in May 2004. The Company and its subsidiaries also lease
approximately 52 properties in Alabama, Arizona, California, Connecticut,
Florida, Georgia, Hawaii, Idaho, Illinois, Kansas, Maryland, Massachusetts,
Michigan, Minnesota, Nebraska, New Jersey, New York, North Carolina, Oregon,
Pennsylvania, South Carolina, Texas, Virginia, Washington and Wisconsin. The
Company owns 6 properties located in Illinois, Kansas, Massachusetts, New York
and Texas. Most of these properties are used primarily for auction and storage
purposes. Management believes that the Company's properties are adequate for its
current needs and that suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is traded on The Nasdaq Stock Market under the
symbol IAAI. The following table sets forth the range of high and low per share
sales information, available on Nasdaq OnlineSM for each quarter of 2000 and
1999. At March 20, 2001, the Company had 213 holders of record of its Common
Stock, approximately 960 beneficial owners and 11,732,935 shares outstanding.
FISCAL 2000 FISCAL 1999
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $16.88 $13.56 $13.13 $ 10.00
Second Quarter 24.63 13.94 16.19 11.94
Third Quarter 23.88 14.13 19.75 14.06
Fourth Quarter 16.14 8.13 16.75 11.75
The Company has never declared or paid any cash dividends on its common
stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain any future earnings to finance
the growth and development of its business. In addition, the Company's financing
agreements limit the Company's ability to pay cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA.
The tables below summarize the Selected Consolidated Financial Data of the
Registrant as of and for each of the last five fiscal years. This selected
financial information should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Report. The selected consolidated financial data presented
below have been derived from the Company's Consolidated Financial Statements
that have been audited by KPMG LLP, independent certified public accountants,
whose report is included herein covering the Consolidated Financial Statements
as of December 31, 2000 and 1999 and for each of the years in the three year
period ended December 31, 2000. The statement of earnings data for the years
ended December 31, 1997 and 1996 and the balance sheet data as of December 31,
1998, 1997 and 1996 are derived from audited Consolidated Financial Statements
not included herein.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- ------------
(in thousands except per share amounts)
Selected Statement of Earnings
Data:
Net sales $333,176 $ 317,391 $ 287,063 $259,325 $281,893
Earnings from operations(1) 17,894 23,904 14,081 9,756 7,190
Net earnings 10,489 13,705 7,181 4,495 3,102
Earnings per
common share (2) .88 1.18 .63 .40 .27
Weighted average common
shares outstanding (2) 11,950 11,623 11,437 11,337 11,333
AS OF DECEMBER 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- ------------
(in thousands)
Selected Balance Sheet Data:
Working capital $ 53,204 $ 46,989 $ 26,593 $ 25,708 $ 21,665
Total assets 265,707 248,132 227,543 224,777 226,981
Long-term debt, excluding
current installments 20,141 20,180 20,315 20,246 26,670
Total shareholders' equity 187,741 175,286 158,755 151,212 146,589
(1) Amount includes special charges of $4,772,000, $1,564,000, $750,000,
and $1,395,000 in 2000, 1998, 1997 and 1996, respectively.
(2) Earnings per share and weighted average common shares outstanding are
presented on a diluted basis.
ITEM 7. 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
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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" above. Among these
risks are: conducting business pursuant to the purchase agreement method of
sale; changes in the market value of salvage; 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; competition; the ability to pass through increased towing costs;
dependence on key insurance company suppliers; delays or changes in state title
processing; general weather conditions; legislative or regulatory acts; that
vehicle processing time will improve; the availability of suitable acquisition
candidates; the ability to bring new facilities to expected earnings targets;
that the Company's towing business will reach forecasted levels of profitability
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 sales. The percentage of sale consignment 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 ACV to purchase the vehicle. ACVs 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 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. However, 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. 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.
The Company began renegotiating many of its purchase agreement contracts
in 1999 and continued this process in 2000. The Company seeks to renegotiate
certain others in 2001. The Company has added adjustment and risk-sharing
clauses to its new 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. These renegotiated
agreements, although less profitable in some cases than the purchase agreements
they replace, help to provide the Company with a more stable revenue from
quarter-to-quarter.
Since its initial public offering, the Company has grown primarily
through a series of acquisitions to now include 58 locations as of February 28,
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" above 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
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Net revenues of the Company increased to $333.2 million for the year
ended December 31, 2000, from $317.4 million in 1999, a 5% increase. Vehicle
sales revenue reflected a decrease in the average selling price of cars
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sold under purchase agreements. Purchase agreement volume was flat when compared
to 1999. Fee income increased 18% in 2000 versus 1999 reflecting increases in
both volume and revenues per unit.
Gross profit increased 7.1% to $89.4 million for the year ended
December 31, 2000, compared to $83.4 million in 1999. The increase in gross
profit dollars is the result of increased unit volumes offset by lower gross
profit per unit for the year. The decline in gross profit per unit occurred in
the second half of the year and resulted from a combination of factors that
include (i) regional title processing difficulties, (ii) a decrease in the
profitability of vehicles sold under purchase agreement contracts, (iii) a
shortfall in profitability associated with the Company's towing initiative, and
(iv) increased tow charges stemming from higher fuel and labor cost.
Approximately 24% of vehicles sold in 2000 were sold under the percentage of
sale consignment method versus 16% for the same period last year. The purchase
agreement sales method of processing accounted for 26% of total volume, compared
with 28% for the same period in 1999.
Direct operating expenses increased to $62.8 million for the year ended
December 31, 2000, versus $55.7 million in 1999. The increase is primarily a
result of (i) legal and consulting fees associated with the Company pursuing
various strategic alternatives, (ii) expenses related to the Company upgrading
its computer systems, (iii) an increase in variable costs due to the higher 2000
volume and (iv) increased facility costs.
The Company recorded a special charge of $4.8 million during the fourth
quarter of 2000. The $4.8 million charge includes $3.0 million associated with
the abandonment or disposal of computer hardware and software, $1.2 million to
cover expenses related to the February 2000 plane crash that damaged the
Company's facility in Rancho Cordova, California and $600,000 of other
miscellaneous special charges. The after-tax charge of $2.8 million does not
require any additional cash outflow.
Interest expense decreased to $1.8 million for the year ended December 31,
2000, from $2.0 million in 1999. Interest income increased to $1.7 million for
the year ended December 31, 2000, from $1.3 million in 1999 reflecting higher
levels of cash equivalents and short-term investments due to continued strong
cash flow from operations in 2000.
Income taxes decreased to $7.3 million for 2000, from $9.5 million for
1999. This decrease is the result of the decrease in earnings. The Company's
effective tax rate for the years 2000 and 1999 was 41%.
The Company's net earnings were $10.5 million, after special charges, for
the year ended December 31, 2000, a 23% decrease from $13.7 million for the
comparable period in 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Net sales of the Company increased to $317.4 million for the year ended
December 31, 1999, from $287.1 million in 1998, an 11% increase. Vehicle sales
revenue reflected an increase in the average selling price of cars sold under
purchase agreements. Purchase agreement volume was flat when compared to 1998.
Fee income increased 18% in 1999 versus 1998 reflecting increases in both volume
and revenues per unit.
Gross profit increased 19% to $83.4 million for the year ended December
31, 1999, compared to $70.3 million in 1998. The increase in gross profit
dollars was largely due to improved gross profit on a per unit basis. The
increase in gross profit per unit has been primarily the result of (i) the
implementation and faster than expected rollout of the Company's gross profit
enhancement initiatives, including the conversion of fixed-fee consignment
contracts to the generally more profitable percent of sale contract type, and
(ii) the Company's focus on increasing the number and variety of vehicle
enhancement services. Approximately 16% of vehicles sold in 1999 were sold under
the percent of sale method versus 8% for the same period last year. The purchase
agreement sales method of processing accounted for 28% of total volume, compared
with 30% for the same period in 1998.
Direct operating expenses increased to $55.7 million for the year ended
December 31, 1999, versus $50.9 million in 1998. The increase reflects higher
labor costs associated with the increased number of vehicle enhancement
services, an increase in variable costs due to the higher 1999 volume and
increased facility costs.
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Interest expense decreased to $2.0 million for the year ended December
31, 1999, from $2.1 million in 1998. Interest income increased to $1.3 million
for the year ended December 31, 1999, from $797,000 in 1998 reflecting higher
levels of cash equivalents and short-term investments due to strong cash flow
from operations in 1999.
Income taxes increased to $9.5 million for 1999, from $5.6 million for
1998. This increase is the result of the increase in earnings, offset by a
decrease in the Company's effective tax rate from 44% in 1998 to 41% for 1999.
The Company's net earnings were $13.7 million for the year ended December
31, 1999, a 91% increase from $7.2 million, after special charges, for the
comparable period in 1998.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 2000, the Company had current assets of $97.6 million,
including $31.0 million of cash and cash equivalents, current liabilities of
$44.4 million and working capital of $53.2 million, a $6.2 million increase from
December 31, 1999.
At December 31, 2000, the Company's indebtedness included 8.6% Senior
Notes of $20.0 million that mature in 2002 and other debt aggregating $178,000,
which bears interest at 8.0%. The Company's $15.0 million revolving credit
facility will expire on April 1, 2001. The Company is currently considering
alternatives for a new revolving credit facility.
Long-term liabilities include a post-retirement benefits liability that
relates to the Company's prior acquisition of Underwriters Salvage Company. The
amount recorded at December 31, 2000 for the post-retirement benefits liability
is approximately $3.0 million.
Capital expenditures were approximately $12.2 million for the year ended
December 31, 2000. These capital expenditures included upgrading and expanding
the Company's facilities and management information systems. The Company
currently leases certain equipment, 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 an
aggregate of $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 December 31, 2000, the
Company had not purchased any shares pursuant to this authorization.
The Company believes that cash generated from operations and its borrowing
capacity will be sufficient to fund capital expenditures and provide adequate
working capital for operations for at least 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.
The Company's operating results have not historically been materially
affected by inflation.
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OTHER
On February 16, 2000, an Emery Worldwide DC-8 cargo jet crashed into the
Company's facility in Rancho Cordova, California. Although no buildings were
affected, approximately 850 vehicles at the branch were either damaged or
destroyed. In addition, the plane crash caused the release of hazardous
substances at the crash site, requiring certain environmental remediation
activities.
The Company made a claim with its insurance carrier for inventory damage,
business interruption and property damage. At December 31, 2000, IAA had
received approximately $1.0 million from its insurance carrier related to these
claims. The Company's insurance policy is limited for environmental remediation
expenses and is more than likely not sufficient to cover all costs. As of
December 31, 2000, the Company had incurred approximately $1.1 million of
expenses related to environmental remediation related to the crash.
Pursuant to the terms of the Company's lease at this facility, IAA is
seeking recovery of one-half of the cost of environmental remediation from the
property's landlord. Environmental remediation at the site has been completed.
The Company believes that it has pursued all avenues of reimbursement for
expenses incurred to date. In spite of this effort, IAA believes that at
December 31, 2000, it is probable that not all expenses incurred will be
reimbursed. As such, the Company increased its reserves by $1.2 million. This
amount is included within the "Special Charge" for the fourth quarter.
New Accounting Standards. 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 differently depending on
the use of a derivative and whether it qualifies for hedge accounting. The
Company does not have any derivative instruments or engage in hedging activities
that are subject to the provisions of SFAS No. 133.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has approximately $7.1 million of investments as of December
31, 2000. These investments 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 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the financial statements which are attached
hereto.
See Footnote 10 to the Consolidated Financial Statements for the
supplementary financial information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
DIRECTORS
Set forth below is information regarding the Directors of the Company,
including information furnished by them as to principal occupations, certain
other directorships held by them, any arrangements pursuant to which they were
or are selected as Directors and their ages as of March 31, 2001:
YEAR FIRST
ELECTED OR
DIRECTORS AGE APPOINTED DIRECTOR
--------- --- ------------------
Joseph F. Mazzella....................... 49 1999
Thomas C. O'Brien........................ 47 2000
Maurice A. Cocca (1)(2)(3).............. 57 1997
Susan B. Gould (2)....................... 63 1991
Peter H. Kamin(1)........................ 39 1999
Melvin R. Martin (3)..................... 70 1992
Jeffrey W. Ubben......................... 41 2001
John K. Wilcox (1)....................... 65 1998
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Governance Committee
JOSEPH F. MAZZELLA was appointed Chairman in February 2001 and has been a
Director of the Company since January 1999. In March 2000, Mr. Mazzella joined
Nutter McClennen & Fish, LLC, a law firm in Boston, Massachusetts as a partner.
From 1980 until March 2000, Mr. Mazzella was a partner of Lane, Altman & Owens,
a law firm in Boston, Massachusetts. He is a director of Alliant Techsystems,
Inc. and Data Transmission Network Systems, Inc.
THOMAS C. O'BRIEN became President and Chief Executive Officer in November
2000. As President and Chief Executive Officer, Mr. O'Brien oversees the
Company's overall corporate administration as well as strategic planning. Prior
to joining IAA, Mr. O'Brien served as President of Thomas O'Brien & Associates
from 1999 to 2000, Executive Vice President of Safelite Glass Corporation from
1998 to 1999, Executive Vice President of Vistar, Inc. from 1996 to 1997 and
President of U.S.A. Glass, Inc. from 1992 to 1996.
MAURICE A. COCCA has been a Director of the Company since February 1997.
From November 1993 to November 1995, Mr. Cocca was Managing Director of The
Fisons Laboratory Supplies Division of Fisons PLC. This Division is a
distributor of laboratory supplies that was later acquired by Fisher Scientific.
Mr. Cocca has served as Vice Chairman of J & W Scientific Holdings from April
1996 through April 2000.
SUSAN B. GOULD has been a Director of the Company since October 1991.
Ms. Gould is the founder, and since 1988 has been President, of Gould &
Associates, a human resources consulting firm specializing in outplacement and
organizational team building. Ms. Gould is also a director of the Zitter Group.
PETER H. KAMIN became a Director of the Company in February 2001 and was
previously a director from January 1999 through October 2000. Since July 2000,
Mr. Kamin has been a partner of ValueAct Capital Partners, L.P. From January
1992 to July 2000, Mr. Kamin was a Partner of Peak Investment, L.P. Mr. Kamin is
also a director of TFC Enterprises, Inc. Mr. Kamin was appointed to the Board
pursuant to the ValueAct Shareholder Agreement described below.
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MELVIN R. MARTIN has been a Director of the Company since January 1992.
Since December 1992, Mr. Martin has been a General Partner of MRM Investments
Limited Partnership, owners and operators of rental properties.
JEFFREY W. UBBEN became a Director of the Company in February, 2001. Mr.
Ubben is the founder and Managing Partner of ValueAct Capital Partners, L.P., an
investment partnership focused primarily on making a limited number of
investments in small capitalization public companies. From 1995 to 2000, Mr.
Ubben was Managing Partner of Blum Capital Partners. Mr. Ubben is also a
director of Playtex Products. Mr. Ubben was appointed to the Board pursuant to
the ValueAct Shareholder Agreement described below.
JOHN K. WILCOX has been a Director of the Company since February 1998. From
November 1994 until November 1997, Mr. Wilcox was Group Vice President, personal
lines finance and planning of Allstate Insurance Company.
On February 15, 2001, the Company entered into a Shareholder Agreement (the
"Shareholder Agreement") with ValueAct Capital Partners, L.P., ValueAct Capital
Partners II, L.P., VA Partners, LLC, Jeffrey W. Ubben, Peter H. Kamin, and
George F. Hamel, Jr. (the "ValueAct Shareholders"). Pursuant to the terms of the
Shareholder Agreement, among other things, the ValueAct Shareholders agreed to
vote all of their shares in favor of electing Mr. Ubben, Mr. Kamin, Mr. Cocca,
Ms. Gould, Mr. Martin, Mr. Mazzella, Mr. O'Brien and Mr. Wilcox to the Board at
the Company's June 2001 annual meeting of shareholders.
Executive Officers of the Company
The following table sets forth the names, ages and offices of all of the
executive officers of the Company as of March 31, 2001:
Name Age Office Held
---- --- -----------
Thomas C. O'Brien 47 President and Chief Executive Officer
Peter B. Doder 40 Vice President, Business Development
Donald J. Hermanek 52 Senior Vice President, Sales and Marketing
Marcia A. McAllister 49 Vice President, Government Affairs
Mark W. Russell 44 Controller, Chief Accounting Officer and
Assistant Secretary
Cynthia L. Schnier 42 Vice President of Information Services,
Chief Information Officer
THOMAS C. O'BRIEN became President and Chief Executive Officer in November
2000. As President and Chief Executive Officer, Mr. O'Brien oversees the
Company's overall corporate administration as well as strategic planning. Prior
to joining IAA, Mr. O'Brien served as President of Thomas O'Brien & Associates
from 1999 to 2000, Executive Vice President of Safelite Glass Corporation from
1998 to 1999, Executive Vice President of Vistar, Inc. from 1996 to 1997 and
President of U.S.A. Glass, Inc. from 1992 to 1996.
PETER B. DODER became Vice President of Business Development in March
2001. Mr. Doder is responsible for the Company's acquisitions, start-ups,
re-facilitation projects, and strategic growth initiatives. Prior to that Mr.
Doder was Vice President of the Western Division from February 1997 to March
2001 From February 1996 to February 1997, Mr. Doder was Vice President,
Financial Planning & Analysis of the Company. From June 1992 through February
1996, Mr. Doder held various positions with the Company, including Regional
Sales Manager, Manager of Marketing Support & Analysis and Director of
Marketing.
DONALD J. HERMANEK joined the Company in August 2000 as Senior Vice
President of Sales and Marketing. Mr. Hermanek is responsible for the sales and
marketing functions, including the corporate accounts group and the specialty
salvage business. Prior to joining IAA, Mr. Hermanek served as Vice President of
Business Development for Consolidated Services Corp. from 1997 to 2000. Prior to
that he served as Vice President - National Sales for Safety Glass Corp. from
1992 to 1997.
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MARCIA A. MCALLISTER has been Vice President, Government Affairs of the
Company since February 1995. Ms. McAllister is responsible for monitoring
legislation and participating on behalf of the Company with a variety of
industry and agency groups.
MARK W. RUSSELL was appointed Controller, Chief Accounting Officer and
Assistant Secretary in March 2001. Mr. Russell is responsible for maintaining
the accounting books and records of the Company and insuring adequate internal
accounting controls are in place. From June 1997 to March 2001, Mr. Russell held
various accounting and financial positions in the Company. Prior to joining the
Company, Mr. Russell served as General Accounting Manager at Velsicol Chemical
Corporation from October 1996 to June 1997. From 1978 to 1996 he served in
various accounting and financial functions at DeSoto, Inc.
CYNTHIA L. SCHNIER became Vice President of Information Services and Chief
Information Officer in August 2000. She is responsible for all information
services functions, including software application acquisition and development,
computer operations and telecommunications. From September 1999 to August 2000,
Ms. Schnier served as Executive Director of Electronic Products. Prior to
joining the Company, Ms. Schnier served as Vice President of Product Management
for Delphi Information Systems, Inc. from 1997 to 1999. From 1993 to 1997 she
served as Vice President of CCC Information Services, Inc.
Officers are appointed to serve, at the discretion of the Board of
Directors, until their successors are appointed.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors and Executive Officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Officers, Directors and greater than ten percent shareholders are
required by Securities and Exchange Commission regulation to furnish the Company
with copies of all Section 16(a) reports they file.
Based solely upon a review of the copies of such reports furnished to the
Company and written representations from such Officers, Directors and greater
than ten percent shareholders, all Section 16(a) filing requirements applicable
to the Company's Directors, Executive Officers and greater than ten percent
shareholders have been met except Mr. Martin was late on one occasion in filing
his Form 4 "Statement of Changes in Beneficial Ownership".
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ITEM 11. EXECUTIVE COMPENSATION.
The following Summary Compensation Table provides certain summary
information concerning the compensation earned, for services rendered in all
capacities to the Company and its subsidiaries during each of the last three
years, by the Company's current and former Chief Executive Officer and each of
the Company's other four most highly compensated executive officers. The
individuals whose compensation is disclosed in the following tables are
hereafter referred to as the "Named Officers."
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($)(1) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- ----------------------------- ------- ------------ -------- --------------- ----------- ---------------
Thomas C. O'Brien............ 2000 34,000(2) -- 2,000(3) 300,000(4) --
President and Chief 1999 -- -- -- -- --
Executive Officer 1998 -- -- -- -- --
Christopher G. Knowles(5)(10) 2000 298,000 33,000 17,000(3) -- 6,000(6)
Chief Executive Officer 1999 284,000 146,000 10,000(3) 100,000(7) --
1998 18,000 -- -- 42,000(8) 24,000(9)
Gerald C. Comis.............. 2000 155,000 17,000 17,000(3) -- 6,000(6)
Vice President, Customer 1999 155,000 60,000 18,000(3) -- 6,000(6)
Service and Industry 1998 153,000 33,000 18,000(3) 37,500 6,000(6)
Relations
Marcia A. McAllister(10)..... 2000 152,000 17,000 17,000(3) -- 6,000(6)
Vice President, 1999 152,000 59,000 18,000(3) -- 6,000(6)
Government Affairs 1998 150,000 33,000 18,000(3) 38,000 6,000(6)
Stephen L. Green(11)......... 2000 150,000 37,000 17,000(3) -- 6,000(6)
Vice President-Finance and 1999 146,000 57,000 18,000(3) -- 6,000(6)
Chief Financial Officer 1998 121,000 27,000 18,000(3) 38,000 5,000(6)
Gaspare G. Ruggirello(12).... 2000 145,000 36,000 17,000(3) -- 6,000(6)
Vice President, Corporate 1999 141,000 55,000 17,000(3) -- 5,000(6)
Counsel & Secretary 1998 132,000 9,000 15,000(3) -- 3,000(6)
Christine J. Atkins(13)...... 2000 94,000 28,000 20,000(3) -- 74,000(14)
Vice President, Information 1999 89,000 36,000 11,000(3) 10,000(15) --
Technology, CIO -- -- -- -- -- --
- ----------
(1) Includes salary deferred under the Company's 401(k) Plan and Section
125 Plan. All amounts are rounded to the nearest thousand.
(2) Mr. O'Brien became an employee on November 28, 2000. The salary paid
to Mr. O'Brien for the 2000 fiscal year was based on his employment
agreement dated November 17, 2000.
(3) Automobile allowance.
(4) Mr. O'Brien received a stock option grant for 300,000 shares pursuant
to his employment agreement dated November 17, 2000.
(5) Mr. Knowles was a Director of the Company from 1994 until his
resignation in February 2001. He served as Chief Executive Officer of
the Company from December 1998 through November 2000.
(6) Represents matching contributions that the Company made to its 401(k)
Plan on behalf of the Named Officer.
(7) Mr. Knowles received a stock option grant for 100,000 shares pursuant
to his employment agreement dated June 3, 1999.
(8) Mr. Knowles received a stock option grant for 40,000 shares at the
time he became Chief Executive Officer in December 1998. In June 1998,
Mr. Knowles received an automatic option grant for 2,000
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shares for serving as a Director of the Company.
(9) Director's fees paid to Mr. Knowles prior to becoming Chief
Executive Officer.
(10) Mr. Knowles and Ms. McAllister are married.
(11) Mr. Green resigned as Vice President, Finance, Chief Financial Officer
and Assistant Secretary on March 9, 2001. (12) Mr. Ruggirello resigned
as Vice President, Corporate Counsel and Secretary on March 9, 2001.
(13) Ms. Atkins resigned as Vice President, Information Technology and
Chief Information Officer on August 22, 2000.
(14) Represents a payment of $70,000 made to Ms. Atkins in connection with
her resignation and $4,000 matching contributions that the Company
made to its 401(k) Plan on behalf of Ms. Atkins.
(15) Ms. Atkins received a stock option grant for 10,000 shares pursuant to
her employment on May 10, 1999.
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STOCK OPTIONS
The following table sets forth information with respect to the Named
Officers concerning grants of stock options made during 2000.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION
TERM
-------------------------------------------------------------- ----------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN
OPTIONS FISCAL EXERCISE
NAME GRANTED YEAR (2) PRICE EXPIRATION
- ---- (#) (1) ($/SH) (3) DATE 5% ($) (4) 10% ($) (4)
--------------- ------------------ ----------- ------------- ---------------- -----------------
Thomas C. O'Brien 300,000(5) 83.6 $10.813 11/20/10 $1,320,593 $3,077,543
Christopher G. Knowles -- -- -- -- -- --
Gerald C. Comis -- -- -- -- -- --
Marcia A. McAllister -- -- -- -- -- --
Stephen L. Green -- -- -- -- -- --
Gaspare G. Ruggirello -- -- -- -- -- --
Christine J. Atkins -- -- -- -- -- --
(1) Each option was granted under the Company's 1991 Stock Option Plan.
Each option will become immediately exercisable for all the option
shares in the event of a change of control of the Company. Each option
has a maximum term of 7 or 10 years, subject to earlier termination in
the event that the optionee ceases to provide services to the Company.
(2) Based upon options to purchase an aggregate of 359,000 shares granted
to employees in 2000.
(3) The exercise price may be paid in cash, in shares of the Company's
Common Stock valued at fair market value on the exercise date or
through a cashless exercise procedure involving a same-day sale of the
purchased shares. The Company may, at its discretion, also loan the
optionee sufficient funds to pay the exercise price for the purchased
shares and the federal and state income tax liability incurred by the
optionee in connection with such exercise.
(4) The 5% and 10% assumed annual rates of compounded stock price
appreciation from the date of grant are mandated by the Securities and
Exchange Commission. There is no assurance provided to any executive
officer or any other holder of the Company's Common Stock that the
actual stock price appreciation over the option term will be at the
assumed 5% or 10% levels or at any other specific level. No gain will
in fact be realized by the optionees unless the stock price
appreciates over the option term, which will also benefit all
shareholders of the Company.
(5) The option becomes exercisable in four equal annual installments with
the first such installment exercisable upon Mr. O'Brien's completion
of one year of service. In the event of a Change of Control or a
Corporate Transaction, in each case, within six (6) months following
the date of the Agreement, the Option shall immediately terminate
prior to such occurrence and shall neither accelerate pursuant to the
Option Plan nor be exercisable from and after such time.
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The following table sets forth information with respect to unexercised
options held as of the end of the 2000 fiscal year by the Named Officers. No
stock options were exercised during the 2000 fiscal year by the Named Officers.
No stock appreciation rights were outstanding at the end of 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END ($)(1)(2)
---------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ----------- ------------- ----------- --------------
Thomas C. O'Brien...... -- 300,000 -- 356,100
Christopher G. Knowles 184,000 -- 45,500(3) --
Gerald C. Comis........ 48,250 11,250 69,450 6,325
Marcia A. McAllister... 36,250 11,250 69,450 6,325
Stephen L. Green....... 30,000 12,500 32,575 10,700
Gaspare G. Ruggirello.. 30,000 12,500 29,059(4) 9,528
Christine J. Atkins.... 10,000 -- -- --
- ----------
(1) "In-the-money" options are options whose exercise price was less than the
market price of the Common Stock on December 31, 2000, the last day of the
2000 fiscal year.
(2) Based upon the market price of $12.00 per share, which was the closing
price per share of the Company's Common Stock on the Nasdaq Stock Market(R)
on December 31, 2000, less the exercise price payable per share.
(3) Upon the termination of the Knowles agreement, the Company accelerated the
vesting of options for 184,000 shares and extended the exercisability of
all of Mr. Knowles outstanding vested options until March 31, 2002.
(4) Per Mr. Ruggirello's separation agreement, all of his outstanding stock
options became 100% vested and exercisable on March 3, 2001. Such vested
stock options will continue to be exercisable until the earlier of such
stock options' expiration date or June 30, 2002.
COMPENSATION OF DIRECTORS
For 2000, each non-employee Director was entitled to receive an annual
retainer fee of $18,000, a $1,000 fee for each regularly scheduled Board meeting
attended, a $500 fee for each committee meeting attended (other than on the date
of a regularly scheduled Board meeting), and an annual fee of $3,000 if such
non-employee Director served as a Chairperson of a Committee. Non-employee
Directors are also reimbursed for expenses incurred in attending such meetings.
Each non-employee Director is also eligible to receive periodic option
grants for shares of the Company's Common Stock pursuant to the automatic option
grant program in effect under the Company's 1991 Stock Option Plan. Under this
automatic option grant program, each individual who becomes a non-employee Board
member is granted an option to purchase 10,000 shares of Common Stock on the
date such individual joins the Board. In addition, each non-employee Director is
also entitled to receive an automatic option to purchase 2,000 shares of Common
Stock on the last business day of the second quarter of each fiscal year during
which such individual continues to serve on the Board. Each automatic option
grant becomes exercisable in four successive quarterly installments with the
first such installment to become exercisable on the last day of the fiscal
quarter immediately following the date of grant, provided the non-employee
Director continues to serve on the Board. However, each option will become
immediately exercisable for all of the option shares in the event of a change of
control of the Company.
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Mr. Martin and the Company are parties to an agreement for services
pursuant to which Mr. Martin is compensated on a daily basis for consulting
services, primarily in the areas of acquisitions and real estate. In 2000, Mr.
Martin received no compensation pursuant to the agreement.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
The following is a description of the employment or consulting
agreements in effect between the Company and certain of its Directors and the
Named Officers.
The compensation paid to Thomas C. O'Brien, President and Chief
Executive Officer of the Company, for the 2000 fiscal year was based on a
November 17, 2000 employment agreement (the "O'Brien Agreement"). Under the
O'Brien Agreement, Mr. O'Brien is entitled to an annual base salary of $350,000
and a performance incentive bonus of 40% of his annual salary based upon the
achievement of target performance goals. Mr. O'Brien will be entitled to receive
in excess of 40% of his annual salary as a performance incentive if his
performance exceeds the goals and objectives determined by the Board. Also,
pursuant to the O'Brien Agreement, the Company granted Mr. O'Brien an option to
purchase 300,000 shares of the Company's Common Stock. The option becomes
exercisable in four equal annual installments with the first such installment
exercisable upon Mr. O'Brien's completion of one year of service.
The compensation paid to Christopher G. Knowles, former Chief Executive
Officer of the Company, for the 2000 fiscal year was based on a June 3, 1999
employment agreement (the "Knowles Agreement"). Under the Knowles Agreement, Mr.
Knowles was entitled to an annual base salary of $310,000 and a performance
incentive bonus of up to 40% of his annual salary based upon the achievement of
target performance goals. Mr. Knowles was entitled to receive additional
incentive amounts to the extent target performance goals were exceeded, all in
accordance with the provisions of the Company's incentive program for officers..
Also, pursuant to the Knowles Agreement, the Company granted Mr. Knowles an
option to purchase 100,000 shares of the Company's Common Stock. The Knowles
Agreement was terminated on December 31, 2000. Upon the termination of the
Knowles agreement, the Company accelerated the vesting of options for 184,000
shares and extended the exercisability of all of Mr. Knowles outstanding vested
options until March 31, 2002. In connection with his resignation as a Director
of the Company, Mr. Knowles entered into a letter agreement with the Company
dated February 15, 2001.
In connection with his resignation as Chairman of the Board and as a
Director of the Company, Mr. Thomas O'Malia entered into a letter agreement with
the Company dated February 15, 2001. In consideration for Mr. O'Malia's
resignation from all positions with the Company and its subsidiaries and the
termination of his Consulting Agreement, originally entered into on December 1,
1988, the Company agreed to pay Mr. O'Malia a lump sum payment of $100,000.
In connection with her resignation as Vice President, Information
Technology and Chief Information Officer, Ms. Atkins entered into an Agreement
dated as of August 22, 2000. In consideration for Ms. Atkin's resignation from
all positions with the Company and its subsidiaries, the Company agreed to pay
Ms. Atkins a lump sum payment of $94,960. In addition, the Company accelerated
the vesting of 10,000 previously granted options and extended the exercisability
of all of Ms. Atkin's outstanding vested options until May 31, 2001. Ms. Atkins
released the Company from any and all claims arising from or relating to her
employment with the Company (except for indemnification claims under any
applicable law or the Company's standard form of Indemnification Agreement).
In connection with his resignation as Vice President, Corporate Counsel
and Secretary, Mr. Ruggirello entered into an Agreement dated as of February 23,
2001. In consideration for Mr. Ruggirello's resignation from all positions with
the Company and its subsidiaries, the Company agreed to pay Mr. Ruggirello a
lump sum payment of $206,200. In addition, the Company accelerated the vesting
of 42,500 previously granted options and extended the exercisability of all of
Mr. Ruggirello's outstanding vested options until June 30, 2002. Mr. Ruggirello
released the Company from any and all claims arising from or relating to his
employment with the Company (except for indemnification claims under any
applicable law or the Company's standard form of Indemnification Agreement).
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Effective August 9, 2000, the Company entered into a Executive Severance
Plan for Officers with each of the Executive Officers, except for Mr. Knowles.
Below is a general description of certain terms and conditions of the Executive
Severance Plan.
Unless otherwise increased by the Company in its sole discretion, if the
Company terminates the Named Officer's employment for any reason other than for
"Cause" or if the "Executive Officer" voluntarily terminates employment with the
Company and all of its Affiliates for "Good Reason", the Executive Officer shall
receive, in exchange for providing the Company with a duly executed "Waiver and
Release Agreement" a benefit, generally representing one-month of severance pay
for each year of service with a minimum severance pay of six (6) months and a
maximum severance pay of twelve (12) months, in an amount equal to the product
of (i) times (ii), where:
(i) represents the sum of:
(A) the Executive Officer's annualized base salary at the time the
Executive Officer's employment is terminated, plus
(B) the Executive's average annual bonus received over the eight fiscal
quarters of the Company immediately preceding the Company's fiscal
quarter during which the Participant's employment is terminated,
without exceeding the Executive Officer's target bonus for the
Company's fiscal year during which the Executive Officer's employment
is terminated, plus
(C) the Executive Officer's auto allowance for the Company's fiscal
year during which the Executive Officer's employment is terminated; and
(ii) represents a fraction the numerator of which is the number of whole
completed years of employment with the Company, but not less than six (6) nor
more than twelve (12), and the denominator of which is twelve (12); provided,
however, that in the event that the Executive Officer's termination of
employment occurs within one (1) year following the date on which a new chief
executive officer is hired by the Company, the Executive Officer shall receive
twelve (12) months of severance pay generally calculated on the basis of the
amounts set forth; provided, however, that the amount taken into account as the
Executive Officer's bonus shall be equal to the Executive Officer's target bonus
for the Company's fiscal year during which the Executive Officer's employment is
terminated.
An Executive Officer is not entitled to any benefit if the Company
terminates such Executive Officer's employment for Cause, if the Executive
Officer voluntarily terminates employment with the Company for any reason other
than Good Reason, or if the Executive Officer's employment is terminated as a
result of death or disability.
"Cause" shall mean an Executive Officer's: (A) felony conviction in a
court of law under applicable federal or state laws which results in material
damage to the Company or impairs the value of the Executive Officer's services
to the Company, or (B) engaging in one or more acts, or omitting to act, in a
manner so as to violate a significant Company policy or fiduciary duty owed by
the Executive Officer to the Company which results in material damage to the
Company.
"Good Reason" means a (i) significant diminution of the duties and
responsibilities assigned to the Executive Officer, (ii) any material diminution
in the Executive Officer's compensation or benefits previously provided to the
Executive Officer, or (iii) a relocation, without the consent of the Executive
Officer, of the Executive Officer's office at the Company or any of its
Affiliates more than 75 miles from its current location.
The Company has entered into a Change of Control Employment Agreement (the
"Employment Agreement") with each of the Executive Officers. Below is a general
description of certain terms and conditions of the Employment Agreement.
In the event of a "Change of Control" of the Company followed within two
years by (1) the termination of the executive's employment for any reason other
than death, disability, or "Cause" or (2) the termination of the executive's
employment by the executive for "Good Reason", the Employment Agreement provides
that the
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executive shall be paid a lump sum cash amount equal to one and one-half times
the executive's annual base salary and "Highest Annual Bonus" as defined in the
Employment Agreement. In addition, the executive is entitled to continued
employee welfare benefits for 18 months after termination of employment.
"Change of Control" means (a) the acquisition by an individual, entity or
group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities
Exchange Act of 1934) of 50% or more of the voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors, (b) a change in the majority of the board of directors, (c) a major
corporate transaction, such as a reorganization, merger or consolidation, or
sale or other disposition of all or substantially all of the Company's assets,
or (d) a liquidation or dissolution of the Company.
"Cause" means the willful and continued failure of the executive to
perform substantially the executive's duties or the willful engaging by the
executive in illegal conduct or gross misconduct materially injurious to the
Company.
"Good Reason" means the diminution of responsibilities, assignment to
inappropriate duties, failure of the Company to comply with compensation or
benefit provisions, transfer to a new work location more than 75 miles from the
executive's previous work location, a purported termination of the Employment
Agreement by the Company other than in accordance with the Employment Agreement,
or failure of the Company to require any successor to the Company to comply with
the Employment Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Ms. Gould and Mr.
Cocca. Neither of these individuals was at any time during the fiscal year ended
December 31, 2000 or at any other time an officer or employee of the Company. No
executive officer of the Company serves as a member of the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF SECURITIES
The following table sets forth certain information known to the Company
regarding the ownership of the Company's Common Stock as of March 20, 2001 for
(i) each Director, (ii) all persons who are beneficial owners of five percent or
more of the Company's Common Stock, (iii) any other Named Officer and (iv) all
officers and Directors of the Company as a group. Unless otherwise indicated,
each of the shareholders has sole voting and investment power with respect to
the shares beneficially owned, subject to community property laws where
applicable.
NUMBER OF PERCENT OF TOTAL
NAME AND ADDRESS SHARES SHARES OUTSTANDING(1)
- -------------------------------------------- --------- ---------------------
Wallace R. Weitz & Co. (2).................. 1,949,700 16.6%
1125 S. 103rd St., Ste 600
Omaha, NE 68124-6008
ValueAct Capital Partners. L.P.(3).......... 1,924,457 16.4%
One Financial Center, Suite 1600
Boston, MA 02111
Fidelity Management & Research (4).......... 910,700 7.8%
82 Devonshire St., N4A
Boston, MA 02109
Dimensional Fund Advisors (5)............... 769,200 6.6%
1299 Ocean Ave., 11th Fl.
Santa Monica, CA 90401
State of Wisconsin Investment Board (6)..... 738,700 6.3%
P.O. Box 7842
Madison, Wisconsin 53707
Sterling Capital Management(7).............. 686,282 5.8%
One First Union Center
301 S. College St.
Charlotte, NC 28202-6005
Liberty Wanger Asset Management, L.P. (8)... 664,000 5.7%
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
Christopher G. Knowles(9)................... 229,453 2.0%
Peter H. Kamin(3) (10)...................... 58,457
Jeffrey W. Ubben (3)........................ 0 *
Thomas C. O'Brien(9)........................ 0 *
Gerald C. Comis (9)......................... 57,435 *
Melvin R. Martin (9)........................ 36,125 *
Marcia A. McAllister (9).................... 39,375 *
Stephen L. Green (9)........................ 35,602 *
Gaspare G. Ruggirello(9).................... 43,977 *
Maurice A. Cocca (9)........................ 27,500 *
Susan B. Gould (9).......................... 26,085 *
John K. Wilcox (9) ........................ 16,500 *
Joseph F. Mazzella (9)...................... 15,500 *
Christine J. Atkins(9)...................... 10,000 *
All officers (including Named Officers) and
Directors as a group (18 persons) (11)..... 861,696 7.0%
- ----------
* Less than 1%
(1) Percentage of beneficial ownership is calculated assuming 11,732,935
shares of common stock were outstanding on March 20, 2001. This percentage
includes any shares of common stock of which such individual or entity had
the right to acquire beneficial ownership within sixty days of March 20,
2001, including but not limited to the exercise of an option; however,
such common stock shall not be deemed
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outstanding for the purpose of computing the percentage owned by any other
individual or entity. Such calculation is required by General Rule
13d-3(d)(1) under the Securities Exchange Act of 1934, as amended.
(2) Such information is based on a Schedule 13D filed by Wallace R. Weitz &
Co. with the SEC on November 20, 2000 and reflects stock held as of
December 31, 2000. According to such Schedule 13D, Wallace R. Weitz & Co.
has sole voting and dispositive power for all the shares.
(3) A Schedule 13D was filed jointly by ValueAct Capital Partners, L.P.
("ValueAct Partners"), VA Partners, L.L.C. ("VA Partners"), George F.
Hamel, Jr., Peter H. Kamin and Jeffrey W. Ubben. Messrs. Hamel, Kamin and
Ubben are each Managing Members, principal owners and controlling persons
of VA Partners. Shares beneficially owned by each of ValueAct Partners and
ValueAct Partners II are reported as beneficially owned by VA Partners, as
General Partner of each of such investment partnerships, and by the
Managing Members as controlling persons of the General Partner. VA
Partners and the Managing Members also, directly or indirectly, may own
interests in one or both of such partnerships from time to time. By reason
of such relationships ValueAct Partners is reported as having shared power
to vote or to direct the vote, and shared power to dispose or direct the
disposition of, such shares of Common Stock with VA Partners and the
Managing Members. VA Partners and the Managing Members disclaim beneficial
ownership of the shares of Common Stock held by each of ValueAct Partners
and ValueAct Partners II. ValueAct Partners is the beneficial owner of
1,735,310 shares of Common Stock, representing approximately 14.8% of the
Issuer's outstanding Common Stock. ValueAct Partners II is the beneficial
owner of 130,690 shares of Common Stock, representing approximately 1.1%
of the Issuer's outstanding Common Stock. VA Partners and each of the
Managing Members may be deemed the beneficial owner of an aggregate of
1,866,000 shares of Issuer Common Stock, representing approximately 15.9%
of the Issuer's outstanding Common Stock. In addition to the 1,866,000
shares of Common Stock of which VA Partners and each of the Managing
Members may be deemed to be the beneficial owners. Mr. Kamin owns and has
sole voting power to vote and dispose of 58,457 shares of common stock.
(4) Such information is based on a Schedule 13G filed by FMR Corp. with the
SEC on February 14, 2001 and reflects stock held as of December 31, 2000.
Fidelity Management & Research Company ("Fidelity"), a wholly owned
subsidiary of FMR Corp. is the beneficial owner of 500,000 shares or
4.26%. Edward C. Johnson 3d, FMR Corp, through its control of Fidelity and
the funds, each has sole power to dispose of the 500,000 shares owned by
the Funds. Neither FMR Corp. nor Edward C. Johnson 3d has the sole power
to vote or direct the voting of the shares owned directly by the Fidelity
Funds, which power resides with the Funds' Board of Trustees. Fidelity
carries out the voting of the shares under written guidelines established
by the Funds' Boards of Trustees. Fidelity Management Trust Company, a
wholly-owed subsidiary of FMR Corp. is the beneficial owner of 410,700
shares or 3.5%. Edward C. Johnson 3d and FMR Corp, through its control of
Fidelity Management Trust Company, each has sole dispositive and voting
power over 410,700 shares.
(5) Such information is based on a Schedule 13G filed by the Dimensional Fund
Advisors ("Dimensional") with the SEC on February 2, 2001 and reflects
stock held as of December 31, 2000. According to such Schedule 13G,
Dimensional has sole voting and dispositive power over all the shares.
(6) Such information is based on a Schedule 13G filed by State of Wisconsin
Investment Board with the SEC on February 14, 2001 and reflects stock held
as of December 31, 2000. According to such Schedule 13G, the State of
Wisconsin Investment Board retains sole voting and dispositive power for
all the shares.
(7) Such information is based on a Schedule 13G filed by Sterling Management,
Inc.("Sterling") with the SEC on February 7, 2001 and reflects stock held
as of December 31, 2000. According to such Schedule 13G, Sterling has
shared voting and dispositive power over all the shares.
(8) Such information is based on a Schedule 13G/A filed by Liberty Wanger
Asset Management, L.P., with the SEC on February 14, 2001 and reflects
stock held as of December 31, 2000. According to such Schedule 13G/A,
Liberty Wanger Asset Management, L.P. has shared voting and dispositive
power for all the shares.
29
30
(9) Includes that portion of options to purchase shares of Common Stock
granted under the 1991 Stock Option Plan that are exercisable on March 20,
2001 or will become exercisable within 60 days after that date: Mr.
Knowles, 184,000 shares; Mr. O'Malia, 74,500 shares; Mr. Gerald C. Comis
51,375 shares, Mr. Martin, 25,500 shares; Ms. McAllister, 39,375 shares;
Mr. Green, 42,500 shares, Mr. Ruggirello, 42,500 shares, Mr. Cocca, 17,500
shares, Ms. Gould, 20,700 shares; Mr. Wilcox, 15,500 shares, Mr. Mazzella,
13,500 shares and Ms. Atkins, 10,000 shares.
(10) Peter H. Kamin, a director of the Company, has the sole power to vote or
dispose of 58,457 shares of Common Stock. In addition, by reason of his
position as Partner and managing member of ValueAct Capital Partners, LP,
Mr. Kamin has shared voting and dispositive power over the 1,866,000
shares of Common Stock beneficially owned by such partnership.
Accordingly, Peter H. Kamin may be deemed the beneficial owner of an
aggregate 1,924,457 shares of Common Stock. Such information is based on a
Schedule 13D filed with the SEC on February 16, 2001.
(11) Includes options to purchase 803,864 shares of Common Stock granted under
the 1991 Stock Option Plan that are currently exercisable or will become
exercisable within 60 days after March 20, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On February 15, 2001, the Company entered into a Shareholder Agreement (the
"Shareholder Agreement") with ValueAct Capital Partners, L.P., ValueAct Capital
Partners II, L.P., VA Partners, LLC, Jeffrey W. Ubben, Peter H. Kamin, and
George F. Hamel (the "ValueAct Shareholders"). Pursuant to the terms of the
Shareholder Agreement, the Board: (i) elected Mr. Kamin and Mr. Ubben as members
of the Board, (ii) accepted the resignations of Thomas J. O'Malia and
Christopher G. Knowles from the Board, including Mr. O'Malia's resignation as
Chairman of the Board, and (iii) elected Joseph Mazzella as Chairman of the
Board. Additionally, the ValueAct Shareholders agreed to vote all of their
shares in favor of electing Mr. Ubben, Mr. Kamin, Mr. Cocca, Ms. Gould, Mr.
Martin, Mr. Mazzella, Mr. O'Brien and Mr. Wilcox to the Board at the Company's
June 2001 annual meeting of shareholders. The Shareholder Agreement also places
certain restrictions on the ValueAct Shareholders. Without the prior consent of
the Board, which must include the affirmative vote of at least two of the
following "independent directors": Mr. Cocca, Ms. Gould, Mr. Martin and Mr.
Wilcox, the ValueAct Shareholders will not: (i) prior to the second anniversary
of the Shareholder Agreement, acquire any of the Company's shares unless after
the acquisition the ValueAct Shareholders' own 25% or less of the Company's
outstanding shares or the acquisition of shares is by Mr. Kamin or Mr. Ubben
pursuant to the Company's 1991 Stock Option Plan; or (ii) prior to the three
month anniversary of the Company's June 2001 annual meeting, (A) initiate,
propose or otherwise cause a special meeting of the shareholders of the Company
to elect directors of the Company; or (B) subject any shares to any arrangement
which conflicts with the Shareholder Agreement; or (C) enter into any
transaction with the Company unless the terms and conditions are determined by
the Board, which includes the affirmative vote of two of the independent
directors, to be "fair and reasonable" to the Company; or (D) seek, encourage or
support, the election of members to the Board except as provided in the
Shareholder Agreement, or seek the removal of any member of the Board other than
Mr. Kamin or Mr. Ubben.
M & M Acquisition. In January 1992, the Company purchased the auto salvage
pool operations of M & M Auto Storage Pool, Inc. ("M & M"), and acquired a
10-year option to purchase 35 acres of land on which M & M's operation is
located. Melvin R. Martin, the founder, chief executive officer and principal
shareholder of such auto salvage operation, was elected a Director of the
Company in January 1992. The Company is required to pay rent to Mr. Martin
during the ten-year term of the lease relating to the real property owned by Mr.
Martin. In 2000, the Company paid $359,406 pursuant to the lease. The Company
believes the terms of the lease are no less favorable than those available from
unaffiliated third party lessors.
Mr. Martin and the Company are parties to an agreement for services
pursuant to which Mr. Martin is compensated on a daily basis for consulting
services, primarily in the areas of acquisitions and real estate. In 2000, Mr.
Martin received no compensation pursuant to the agreement.
Dallas, Texas Lease. The Company leases certain property located in Dallas,
Texas from a partnership in which Mr. Martin is a partner. In 2000, the Company
paid $468,000 in rent under this lease.
30
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
PAGE
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ----
The following Consolidated Financial Statements of Insurance Auto
Auctions, Inc. and its subsidiaries are filed as part of this report
on Form 10-K:
Independent Auditors' Report................................. 36
Consolidated Balance Sheets - December 31, 2000 and
December 31, 1999............................................ 37
Consolidated Statements of Earnings - Years ended
December 31, 2000, 1999 and 1998 ............................ 39
Consolidated Statements of Shareholders' Equity-
Years ended December 31, 2000, 1999 and 1998................. 40
Consolidated Statements of Cash Flows - Years ended
December 31, 2000, 1999 and 1998............................. 41
Notes to Consolidated Financial Statements................... 43
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the matter or conditions
are not present or the information required to be set forth
therein is included in the Consolidated Financial Statements and
related Notes thereto.
3. EXHIBITS
See Item 14(c) below.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the
Company during the three-month period ended December 31, 2000.
(c) EXHIBITS
Exhibit
No. Description
- ------- -------------
3.1(11) Articles of Incorporation of the Registrant, as filed with the
Illinois Secretary of State on August 7, 1997.
3.2(14) Bylaws of the Registrant.
31
32
4.1(9) Fifth Amended and Restated Registration Rights Agreement, dated
September 23, 1994, by and among the Registrant, William W.
Liebeck, Bradley S. Scott, Bob F. Spence, Corinne Spence, Jimmie
A. Dougherty, Patricia L. Dougherty and Midwest Auto Pool
Corporation.
4.3(1) Specimen Stock Certificate.
4.4(5) Stockholder Agreement dated December 1, 1993, by and among the
Registrant, Tech-Cor, Inc., Bradley S. Scott, Bob F. Spence and
William L. Liebeck.
4.5(5) Registration Agreement dated December 1, 1993, by and among the
Registrant and Tech-Cor.
4.5(8) Note Agreement, dated as of December 1, 1994 among the Registrant
and the purchasers listed therein.
10.36(6)* Form of Notice of Grant of Stock Option -- employee, officer.
10.37(3)* Form of Non-Statutory Stock Option Agreement, Insurance Auto
Auctions, Inc. 1991 Stock Option Plan, as restated (including
Form of Notice of Grant of Stock Option) -- employee.
10.38(3)* Form of Stock Option Agreement: Non-Employee Director, Automatic
Option Grant, Insurance Auto Auctions, Inc. Stock Option Plan, as
restated (including Form of Notice of Grant of Stock Option).
10.39(3)* Form of Incentive Stock Option Agreement, Insurance Auto
Auctions, Inc. 1991 Stock Option Plan, as restated (including
Form of Notice of Grant of Stock Option) -- employee.
10.40(3)* Form of Non-Statutory Stock Option Agreement, Insurance Auto
Auctions, Inc. 1991 Stock Option Plan, as restated (including
Form of Notice of Grant of Stock Option) -- officer.
10.41(3)* Form of Incentive Stock Option Agreement, Insurance Auto
Auctions, Inc. 1991 Stock Option Plan, as restated (including
Form of Notice of Grant of Stock Option) -- officer.
10.66(2) Facilities Lease Agreement dated January 17, 1992, by and
between Melvin R. Martin and MASP.
10.122(5) Asset Purchase Agreement dated December 1, 1993, by and between
the Registrant, BC Acquisition Corp. (a wholly owned subsidiary
of Registrant ("BCAC") and Tech-Cor, Inc. ("Tech-Cor").
10.125(5) Transition Agreement dated December 1, 1993, by and between BCAC
and Tech-Cor.
10.126(5) Lease, dated December 1, 1993, by and between Allstate Insurance
Company and BCAC.
10.127(5) Guaranty, dated December 1, 1993, by Allstate Insurance Company
and delivered to the Registrant and BCAC.
10.134(7) Registration Rights Agreement dated January 20, 1994, by and
among, the Registrant, Christopher G. Knowles, Gerald C. Comis,
F. Peter Haake and Donald J. Comis.
10.149(11)* Form of Change of Control Employment Agreement by and between the
Company and certain of its executive officers.
10.150(10) Revolving Credit Agreement between the Registrant and LaSalle
National Bank dated as of April 4, 1997.
10.151(11) Amendment to Revolving Credit Agreement dated as of December 1,
1997.
32
33
10.152(12) Second amendment to Revolving Credit Agreement dated as of
April 6, 1998.
10.153 Third amendment to Revolving Credit Agreement dated as of March
16, 2000.
10.154(10)* Insurance Auto Auctions, Inc. Employee Stock Purchase Plan, as
amended as of June 18, 1997.
10.155(14) Form of Indemnification Agreement dated as of February 24, 1999
by and between the Company and its Directors and Executive
Officers.
10.156(14)* Consulting Agreement dated as of December 1, 1998 by and between
the Company and Thomas J. O'Malia.
10.157* Amendment dated as of November 18, 1999 to the Consulting
Agreement between the Company and Thomas J. O'Malia.
10.158(15)* Employment agreement, dated June 3, 1999, by and between the
Company and Christopher G. Knowles.
10.159(15)* First Amendment to the Employment Agreement, effective June 3,
1999 by and between the Company and Christopher G. Knowles.
10.160(16) Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as amended
and restated.
10.161 Executive Severance Plan for Officers dated August 9, 2000, by
and between the Company and the Company's executive officers.
10.162 Employment agreement, dated November 17, 2000, by and between the
Company and Thomas C. O'Brien.
10.163(17) Shareholder Agreement, dated February 15, 2001, among the
Company, ValueAct Capital Partners, L.P., ValueAct Capital
Partners II,L.P., VA Partners, LLC, Jeffrey W. Ubben, Peter H.
Kamin and George F. Hamel, Jr.
10.164(17) Registration Rights Agreement, dated February 15, 2000, among the
Company, ValueAct Capital Partners, L.P. and ValueAct Capital
Partners II, L.P.
10.165(17) Separation Agreement, dated February 15, 2001, by and between the
Company and Thomas J. O'Malia.
10.166(17) Separation Agreement, dated February 15, 2001, by and between the
Company and Christopher G. Knowles.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
- ------------------------
33
34
(1) Incorporated by reference from an exhibit filed with the Registrant's
Registration Statement on Form S-1 (File No. 33-43247) declared
effective by the Securities and Exchange Commission ("SEC") on November
20, 1991.
(2) Incorporated by reference from an exhibit included in the Registrant's
Current Report on Form 8-K (File No. O-19594) filed with the SEC on
January 31, 1992.
(3) Incorporated by reference from an exhibit included in the Registrant's
Annual Report on Form 10-K (File No. O-19594) for the fiscal year ended
December 31, 1992.
(4) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10-Q (File No. O-19594) for the fiscal quarter
ended June 30, 1993.
(5) Incorporated by reference from an exhibit included in the Registrant's
Current Report on Form 8-K (File No. O-19594) filed with the SEC on
December 15, 1993.
(6) Incorporated by reference from an exhibit included in the Registrant's
Annual Report on Form 10-K (File No. O-19594) for the fiscal year ended
December 31, 1993.
(7) Incorporated by reference from an exhibit included in the Registrant's
Current Report on Form 8-K (File No. O-19594) filed with the SEC on
February 3, 1994.
(8) Incorporated by reference from an exhibit included in the Registrant's
Current Report on Form 8-K (File No. O-19594) filed with the SEC on
February 10, 1995.
(9) Incorporated by reference from an exhibit included in the Registrant's
Annual Report on Form 10-K (File No. 0-19594) for the fiscal year
ended December 31, 1994.
(10) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10-Q (File No. O-19594) for the fiscal quarter
ended June 30, 1997.
(11) Incorporated by reference from an exhibit included in the Registrant's
Annual Report on Form 10K (File No. O-19594) for the fiscal year ended
December 31, 1997.
(12) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10Q (File No. O-19594) for the fiscal quarter
ended March 31, 1998.
(13) Incorporated by reference from an exhibit included in the Registrant's
Annual Report on Form 10K (File No. O-19594) for the fiscal year ended
December 31, 1998.
(14) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10Q (File No. O-19594) for the fiscal quarter
ended March 31, 1999.
(15) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10Q (File No. O-19594) for the fiscal quarter
ended June 30, 1999.
(16) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10-Q (File No. O-19594) for the fiscal quarter
ended June 30, 2000
(17) Incorporated by reference from an exhibit included in the Registrant's
Current Report on Form 8-K dated February 16, 2001.
* This item is a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to Item
601(b)(10)(iii) of Regulation S-K.
34
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INSURANCE AUTO AUCTIONS, INC.
By: /s/ Thomas C. O'Brien
-----------------------------------------
President and Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on this 30th day of March, 2000.
/s/ Thomas C. O'Brien President and Chief Executive Officer, Director
- ------------------------------ (Principal Executive Officer)
Thomas C. O'Brien
/s/ Mark W. Russell Controller and Assistant Secretary
- ------------------------------ (Principal Accounting Officer)
Mark W. Russell
/s/ * Chairman of the Board of Directors
- ------------------------------
Joseph F. Mazzella
/s/ * Director
- ------------------------------
Maurice A. Cocca
/s/ * Director
- ------------------------------
Susan B. Gould
/s/ * Director
- ------------------------------
Peter H. Kamin
/s/ * Director
- ------------------------------
Melvin R. Martin
/s/ * Director
- ------------------------------
Jeffrey W. Ubben
/s/ * Director
- ------------------------------
John K. Wilcox
*As attorney-in-fact.
35
36
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Insurance Auto Auctions, Inc.:
We have audited the consolidated financial statements of Insurance Auto
Auctions, Inc. and subsidiaries, as listed in Item 14(a)1. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Insurance Auto
Auctions, Inc. and subsidiaries as of December 31, 2000 and 1999 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Chicago, Illinois
March 27, 2001
36
37
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 30,938,000 $ 27,186,000
Short-term investments 4,859,000 6,845,000
Accounts receivable, net 48,091,000 40,188,000
Inventories 10,588,000 11,998,000
Other current assets 3,112,000 1,655,000
------------- -------------
Total current assets 97,588,000 87,872,000
------------- -------------
Property and equipment, at cost:
Land and buildings 7,396,000 6,502,000
Furniture and fixtures 1,752,000 1,644,000
Machinery and equipment 27,143,000 24,865,000
Leasehold improvements 23,232,000 17,972,000
------------- -------------
59,523,000 50,983,000
Less accumulated depreciation and amortization 29,031,000 23,525,000
------------- -------------
Net property and equipment 30,492,000 27,458,000
Other investments 2,240,000 3,336,000
Deferred income taxes 5,123,000 4,338,000
Intangible assets, principally goodwill, net 130,264,000 125,128,000
------------- -------------
$ 265,707,000 $ 248,132,000
============= =============
37
38
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
2000 1999
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 37,000 $ 135,000
Accounts payable 38,176,000 33,216,000
Accrued liabilities 6,171,000 6,306,000
Income taxes - 1,226,000
------------- -------------
Total current liabilities 44,384,000 40,883,000
------------- -------------
Long-term debt, excluding current installments 20,141,000 20,180,000
Accumulated postretirement benefits obligation 3,001,000 3,178,000
Deferred income taxes 10,440,000 8,605,000
------------- -------------
Total liabilities 77,966,000 72,846,000
------------- -------------
Shareholders' equity:
Preferred stock, par value of $.001 per share.
Authorized 5,000,000 shares; none issued. - -
Common stock, par value of $.001 per share
Authorized 20,000,000 shares; issued and outstanding
11,715,936 and 11,575,010 shares as of December 31,
2000 and December 31, 1999, respectively. 12,000 12,000
Additional paid-in capital 136,962,000 134,996,000
Retained earnings 50,767,000 40,278,000
------------- -------------
Total shareholders' equity 187,741,000 175,286,000
------------- -------------
$ 265,707,000 $ 248,132,000
============= =============
See accompanying Notes to Consolidated Financial Statements
38
39
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
For the years ended December 31,
2000 1999 1998
--------------- --------------- ----------------
Net revenues:
Vehicle sales $200,858,000 $204,785,000 $191,312,000
Fee income 132,318,000 112,606,000 95,751,000
--------------- --------------- ----------------
333,176,000 317,391,000 287,063,000
Costs and expenses:
Cost of sales 243,779,000 233,949,000 216,754,000
Direct operating expenses 62,789,000 55,741,000 50,885,000
Amortization of intangible assets 3,942,000 3,797,000 3,779,000
Special charges 4,772,000 - 1,564,000
--------------- --------------- ----------------
Earnings from operations 17,894,000 23,904,000 14,081,000
Other (income) expense:
Interest expense 1,833,000 1,970,000 2,055,000
Interest income (1,717,000) (1,271,000) (797,000)
--------------- --------------- ----------------
Earnings before income taxes 17,778,000 23,205,000 12,823,000
Income taxes 7,289,000 9,500,000 5,642,000
--------------- --------------- ----------------
Net earnings $ 10,489,000 $ 13,705,000 $ 7,181,000
=============== =============== ================
Earnings per share:
Basic $ .90 $ 1.20 $ .63
=============== =============== ================
Diluted $ .88 $ 1.18 $ .63
=============== =============== ================
Weighted average shares outstanding:
Basic 11,660,000 11,467,000 11,316,000
Effect of dilutive securities - stock options 290,000 156,000 121,000
--------------- --------------- ----------------
Diluted 11,950,000 11,623,000 11,437,000
=============== =============== ================
See accompanying Notes to Consolidated Financial Statements
39
40
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1998, 1999 and 2000
COMMON STOCK
------------------------------ ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------------- ------------ --------------- -------------- ----------------
Balance at December 31, 1997 11,299,561 $ 11,000 $ 131,809,000 $19,392,000 $151,212,000
Issuance of common stock in
connection with exercise of
common stock options 16,400 -- 198,000 -- 198,000
Issuance of common stock in
connection with the employee
stock purchase plan 11,208 -- 164,000 -- 164,000
Net earnings -- -- -- 7,181,000 7,181,000
-------------- ------------ --------------- -------------- ----------------
Balance at December 31, 1998 11,327,169 11,000 132,171,000 26,573,000 158,755,000
Issuance of common stock in
connection with exercise of
common stock options 235,289 1,000 2,653,000 -- 2,654,000
Issuance of common stock in
connection with the employee
stock purchase plan 12,552 -- 172,000 -- 172,000
Net earnings -- -- -- 13,705,000 13,705,000
-------------- ------------ --------------- -------------- ----------------
Balance at December 31, 1999 11,575,010 $ 12,000 $ 134,996,000 $40,278,000 $175,286,000
Issuance of common stock in
connection with exercise of
common stock options 131,714 -- 1,795,000 -- 1,795,000
Issuance of common stock in
connection with the employee
stock purchase plan 9,212 -- 171,000 -- 171,000
Net earnings -- -- -- 10,489,000 10,489,000
-------------- ------------ --------------- -------------- ----------------
Balance at December 31, 2000 11,715,936 $ 12,000 $ 136,962,000 $50,767,000 $187,741,000
============== ============ =============== ============== ================
See accompanying Notes to Consolidated Financial Statements
40
41
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31,
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 10,489,000 $ 13,705,000 $ 7,181,000
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,641,000 9,135,000 8,765,000
Loss (gain) on disposal of property and equipment (98,000) (24,000) 136,000
Non-cash special charges 4,772,000 - -
Changes in assets and liabilities
(net of effects of acquired companies):
(Increase) decrease in:
Investments, net 3,082,000 957,000 (9,771,000)
Accounts receivable, net (8,323,000) (2,773,000) (7,985,000)
Inventories 1,410,000 (769,000) 533,000
Other current assets (1,457,000) 21,000 192,000
Other assets 109,000 345,000
190,000
Increase (decrease) in:
Accounts payable 4,183,000 2,277,000 (3,085,000)
Accrued liabilities (318,000) (98,000) (1,753,000)
Income taxes (176,000) 733,000 1,631,000
------------ ------------ ------------
Total adjustments 12,825,000 9,649,000 (10,992,000)
------------ ------------ ------------
Net cash provided by (used in)
operating activities 23,314,000 23,354,000 (3,811,000)
------------ ------------ ------------
41
42
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the years ended December 31,
2000 1999 1998
-------------- -------------- ---------------
Cash flows from investing activities:
Proceeds from disposition of property and equipment $ 780,000 $ 163,000 $ 151,000
Capital expenditures (12,246,000) (10,623,000) (6,607,000)
Payments made in connection with acquisitions,
net of cash acquired (9,925,000) - (1,806,000)
-------------- -------------- ---------------
Net cash used in investing activities (21,391,000) (10,460,000) (8,262,000)
-------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,966,000 2,826,000 362,000
Principal payments of long-term debt (137,000) (216,000) (2,579,000)
-------------- -------------- ---------------
Net cash provided by (used in) financing activities 1,829,000 2,610,000 (2,217,000)
-------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents 3,752,000 15,504,000 (14,290,000)
Cash and cash equivalents at beginning of year 27,186,000 11,682,000 25,972,000
-------------- -------------- ---------------
Cash and cash equivalents at end of year $ 30,938,000 $ 27,186,000 $ 11,682,000
============== ============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,738,000 $ 1,754,000 $ 1,836,000
Income taxes $ 7,972,000 $ 8,234,000 $ 4,028,000
See accompanying Notes to Consolidated Financial Statements
42
43
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BACKGROUND
Insurance Auto Auctions, Inc. (the Company) provides insurance companies
and other vehicle suppliers cost-effective salvage processing solutions
including selling total loss and recovered theft vehicles. The Company
operates in a single business segment.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
REVENUE RECOGNITION
Revenue (including vehicle sales and fee income) is recognized upon
payment by the buyer for the auctioned vehicle. Certain fee income,
including towing, vehicle enhancements and storage is recognized as
earned.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist principally of commercial paper. The Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
The Company's short-term investment securities are principally
instruments of state governments, agencies and municipalities. All
short-term investment securities are classified as trading securities and
are carried at fair value.
INVENTORIES
Inventories are stated at the lower of cost or estimated realizable
value. Cost includes the cost of acquiring ownership of total loss and
recovered theft vehicles, charges for towing and, less frequently,
reconditioning costs. The costs of inventories are charged to operations
based upon the specific-identification method.
The Company has agreements to purchase total loss and recovered theft
vehicles from insurance companies for a percentage of the vehicle's
actual cash value. The Company has acquired the majority of its inventory
pursuant to these contracts.
ASSET IMPAIRMENT
As part of an ongoing review of the valuation and amortization of assets,
management assesses the carrying value of the Company's assets if facts
and circumstances suggest that such assets may be impaired. If this
review indicates that the assets will not be recoverable, as determined
by an undiscounted cash flow analysis over the remaining amortization
period, the carrying value of the Company's assets would be reduced to
their estimated fair market value.
43
44
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
USE OF ESTIMATES
The Company has made a number of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent
liabilities to prepare these consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America. Actual results could differ from these estimates.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the related
assets ranging from three to ten years. Leasehold improvements are
amortized on a straight-line basis over their estimated economic useful
life or the life of the lease, whichever is less.
Intangible assets, principally goodwill, are amortized over periods of 15
to 40 years on a straight-line basis. Accumulated amortization at
December 31, 2000 and 1999 was $26.6 million and $22.6 million,
respectively.
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method, whereby deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases, as well as operating loss and tax credit
carry forwards.
CREDIT RISK
The Company sells its vehicles principally to customers throughout the
United States under the purchase-agreement method, the
fixed-fee-consignment method and the percentage-of-sale-consignment
method. Vehicles are sold generally for cash; therefore, very little
credit risk is incurred from the selling of vehicles. Receivables arising
from advance charges made on behalf of vehicle suppliers, most of which
are insurance companies, are generally satisfied from the net proceeds
payable to the vehicle suppliers. A small percentage of vehicles sold do
not have sufficient net proceeds to satisfy the related receivables, and
in these cases, the receivable is due from the vehicle suppliers.
Management performs regular evaluations concerning the ability of its
customers and suppliers to satisfy their obligations and records a
provision for doubtful accounts based upon these evaluations. The
Company's credit losses for the periods presented are insignificant and
have not exceeded management's estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate fair value as
of December 31, 2000 and 1999. The carrying amounts related to cash and
cash equivalents, accounts receivable and accounts payable approximate
fair value due to the relatively short maturity of such instruments. The
fair value of long-term debt is estimated by discounting the future cash
flows of each instrument at rates currently available to the Company for
similar debt instruments of comparable maturities by the Company's
bankers. Investments are classified as trading securities and are carried
at fair value based on quoted market prices.
STOCK COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (Statement No. 123) permits, but does not
require, a fair-value based method of accounting for employee stock
options or similar equity instruments. Statement No. 123 allows an
entity to elect to continue to measure compensation cost under Accounting
Principles Board Opinion No. 25, "Accounting for Stock
44
45
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Issued to Employees" (APBO No. 25), but requires pro forma disclosures
of net earnings and net earnings per share as if the fair-value based
method of accounting had been applied. The Company measures compensation
cost under APBO No. 25 and complies with the pro forma disclosure
requirements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements and notes to consolidated financial statements to conform with
the current year presentation.
(2) LONG-TERM DEBT
Long-term debt is summarized as follows:
2000 1999
--------------- ---------------
Senior notes payable, unsecured, interest payable in semiannual
installments through maturity at February 15, 2002, at 8.6%,
principal due at maturity. $ 20,000,000 $ 20,000,000
Notes payable issued in connection with a consulting agreement
related to the acquisition of a subsidiary, unsecured, payable
in monthly installments of $16,666, including interest at 7.5%,
with final payment due June 30, 2000. - 103,000
Notes payable issued in connection with the acquisition of a
subsidiary, unsecured, payable in monthly installments,
including interest at 8%, with final payment due April 1, 2005. 178,000 212,000
--------------- ---------------
20,178,000 20,315,000
Less current installments 37,000 135,000
--------------- ---------------
$ 20,141,000 $ 20,180,000
=============== ===============
45
46
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Total principal repayments required for each of the next five years under all
long-term debt agreements are summarized as follows:
2001 $ 37,000
2002 20,040,000
2003 43,000
2004 47,000
2005 11,000
---------------
$ 20,178,000
===============
The Senior Notes and line of credit require the Company to comply with certain
covenants such as maintenance of net worth and limitations on debt. As of
December 31, 2000, the Company was in compliance with these covenants.
The Company's $15.0 million revolving credit facility will expire on April 1,
2001. The Company is currently considering alternatives for a new revolving
credit facility.
(3) INVESTMENTS
At December 31, 2000 and 1999, the Company has classified all investment
securities as trading securities. The investments are carried at fair value
which is not materially different from amortized cost.
Maturities of investment securities classified as trading securities were as
follows:
2000 1999
---- ----
State Government Obligations:
Due within one year $ 4,859,000 $ 6,845,000
Due after one year through ten years 2,240,000 3,336,000
------------ -----------
Total $ 7,099,000 $10,181,000
============ ===========
46
47
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) INCOME TAXES
Income taxes are summarized as follows:
2000 1999 1998
--------------- --------------- ---------------
Current:
Federal $5,345,000 $8,088,000 $3,528,000
State 900,000 1,323,000 569,000
--------------- --------------- ---------------
6,245,000 9,411,000 4,097,000
--------------- --------------- ---------------
Deferred:
Federal 865,000 42,000 1,318,000
State 179,000 47,000 227,000
--------------- --------------- ---------------
1,044,000 89,000 1,545,000
--------------- --------------- ---------------
$7,289,000 $9,500,000 $5,642,000
=============== =============== ===============
Deferred income taxes are comprised of the effects of the components listed
below. A valuation allowance has been recorded to reduce deferred tax assets for
which the Company believes a tax benefit will not be realized.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2000 and
1999 are presented below:
2000 1999
------------ ------------
Deferred tax assets attributable to:
Depreciation $ 3,061,000 $ 2,637,000
State net operating losses carried forward 1,088,000 915,000
Inventories 595,000 548,000
Other 1,291,000 999,000
Valuation allowance (912,000) (761,000)
-------------- ------------
Net deferred tax assets 5,123,000 4,338,000
Deferred tax liabilities attributable to:
Intangible assets (10,440,000) (8,605,000)
-------------- -------------
Net deferred tax liabilities $(5,317,000) $(4,267,000)
============== =============
47
48
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The actual income tax expense differs from the "expected" tax expense computed
by applying the Federal corporate tax rate to earnings before income taxes as
follows:
2000 1999 1998
---------- ----------- ----------
"Expected" income taxes $6,045,000 $7,890,000 $4,360,000
State income taxes, net of Federal benefit 697,000 895,000 484,000
Amortization of intangible assets 358,000 358,000 354,000
Other 189,000 357,000 444,000
---------- ---------- ----------
$7,289,000 $9,500,000 $5,642,000
========== ========== ==========
(5) EMPLOYEE BENEFIT PLANS
The Company adopted the Insurance Auto Auctions, Inc. 1991 Stock Option Plan
(the 1991 Plan), as amended, presently covering 2,350,000 shares of the
Company's common stock. The 1991 Plan provides for the grant of incentive stock
options to key employees and nonqualified stock options and stock appreciation
rights to key employees, directors, consultants and independent contractors. The
1991 Plan expires September 26, 2006. In general, new non-employee directors
will automatically receive grants of nonqualified options to purchase 10,000
shares and subsequent grants to purchase 2,000 shares at specified intervals.
During 1995, the Company adopted the Insurance Auto Auctions, Inc. Supplemental
Stock Option Plan (the 1995 Plan) covering 200,000 shares of the Company's
common stock. The 1995 Plan provides for the grant of nonqualified stock options
to employees, other than executive officers, and consultants and other
independent advisors who provide services to the Company. The 1995 Plan will
expire on October 1, 2005.
Under the plans, as of December 31, 2000, options to purchase an aggregate of
1,260,595 shares were outstanding at a weighted average exercise price of $14.20
per share and 811,771 shares remained available for future grant.
Activity under the plans for the years ended December 31, 2000, 1999 and 1998 is
as follows:
Weighted Weighted Weighted
Average Average Average
2000 Exercise 1999 Exercise 1998 Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Balance at beginning of year 1,087,000 $ 15.01 1,195,000 $ 14.21 1,086,000 $ 21.59
Options granted 359,000 11.62 188,000 12.99 586,000 11.43
Options canceled (54,000) 22.12 (61,000) 14.52 (461,000) 28.13
Options exercised (132,000) 10.67 (235,000) 9.52 (16,000) 7.00
---------- ------- --------- ------- ---------- --------
Balance at end of year 1,261,000 $ 14.20 1,087,000 $ 15.01 1,195,000 $ 14.21
========== ======= ========= ======= ========== ========
Options exercisable at end of year 775,000 780,000 572,000
========== ========= =========
48
49
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2000
- ----------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------
Weighted Average
------------------------------
Remaining Weighted
Contractual Number Average
Range of Exercise Number of Life Exercise of Exercise
Price Options (in years) Price Options Price
- --------------------- ------------ ------------- ---------- --------- --------
$ 7.00 to $10.00 84,000 5.23 $ 8.10 81,000 $ 8.08
10.38 to 13.50 899,000 5.53 11.33 451,000 11.59
14.13 to 23.25 126,000 4.31 17.21 91,000 17.30
28.63 to 37.50 152,000 3.30 32.00 152,000 32.00
------------ --------
$ 7.00 to $37.50 1,261,000 5.12 $14.20 775,000 $15.89
============ ========
The Company applies APBO No. 25 in accounting for its plans, and accordingly, no
compensation cost has been recognized for any stock options in the accompanying
Consolidated Financial Statements. Had the Company determined compensation
expense based upon the fair value at the date of grant, as determined under
Statement No. 123, the Company's net earnings and net earnings per share would
have been reduced to the pro forma amounts as summarized below:
2000 1999 1998
------------ ------------- ------------
Pro forma earnings $9,840,000 $12,329,000 $6,554,000
=========== ============= ===========
Pro forma earnings per share
Basic $ .84 $ 1.08 $ .58
=========== ============= ===========
Diluted $ .82 $ 1.06 $ .57
============= ============= ===========
The per share weighted average fair value of stock options granted during 2000,
1999 and 1998 was $6.73, $7.82 and $5.86, respectively, based upon a grant date
valuation using the Black-Scholes option pricing model with the following
weighted average assumptions in 2000, 1999 and 1998 expected dividend yield of
0.0%, expected volatility of .64, .63 and .61, respectively; risk-free interest
rate of 5.1%, 6.4% and 5.5%, respectively; and an average expected option life
of 5.1, 5.4 and 5.7 years, respectively.
The pro forma net earnings and earnings per share reflect only those options
granted since January 1, 1995. Therefore, the full impact of calculating
compensation cost for stock options under Statement No. 123 is not reflected in
the pro forma net earnings and earnings per share presented above because
compensation cost is generally recorded over the options' vesting period,
generally four years, and compensation cost for options granted prior to
January 1, 1995 is not considered.
The Company has a 401(k) defined contribution plan covering all full-time
employees. Plan participants can elect to contribute up to 15% of their gross
payroll. Company contributions are determined at the discretion of the Board of
Directors and during the years ended December 31, 2000, 1999 and 1998, were
matched 100% up to 4% of eligible earnings. Company contributions to the plan
during the years ended December 31, 2000, 1999 and 1998 were approximately
$676,000, $464,000 and $479,000, respectively.
49
50
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) RELATED PARTY TRANSACTIONS
During the years ended December 31, 2000 1999 and 1998, the Company
recorded fee income of $6.4 million, $5.4 million and $4.7 million,
respectively, related to the consignment sale of vehicles insured by
Allstate Insurance Company ("Allstate") and recorded sales of $28.8
million, $35.0 million and $35.7 million,, respectively, and cost of sales
of $26.7 million, $31.6 million and $32.5 million, respectively, related to
the purchase of Allstate-insured vehicles under the purchase agreement
method. Allstate held 1,667,000 shares of the Company's common stock during
the three years ended December 31, 2000; such shares were sold by Allstate
in February 2001. See also Note 7 with respect to rentals under leases with
other related parties.
(7) COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating
leases with related and nonrelated parties, which expire through December
2009. Rental expense for the years ended December 31, 2000, 1999 and 1998,
respectively, aggregated $15.9 million, $12.2 million and $9.9 million,
respectively, (of which $1.2 million, $1.1 million and $1.0 million
pertained to leases with related parties in 2000, 1999 and 1998,
respectively).
Minimum annual rental commitments for the next five years under
noncancelable leases at December 31, 2000 are as follows:
UNRELATED RELATED
PARTIES PARTIES
---------------- -------------
Year ending December 31:
2001 $11,839,000 $1,181,000
2002 11,207,000 1,015,000
2003 9,440,000 356,000
2004 6,675,000 297,000
2005 3,937,000 -
Thereafter 7,513,000 -
---------------- -------------
$50,611,000 $2,849,000
================ =============
The Company has purchase agreements with certain insurance company
suppliers, which expire at various intervals over the next two years. The
Company's largest supplier accounted for 14% of the Company's supply of
vehicles sold in 2000, 16% in 1999 and 17% in 1998. The second largest
supplier accounted for 14%, 14% and 13% of the Company's supply of vehicles
sold in 2000, 1999 and 1998, respectively. A third supplier accounted for
12%, 13% and 14% of the Company's supply of vehicles sold in 2000, 1999 and
1998, respectively.
The Company has compensation agreements with certain officers and other key
employees.
The Company is subject to certain miscellaneous legal claims, which have
arisen during the ordinary course of its business. None of these claims are
expected to have a material adverse effect on the Company's financial
condition or operating results.
(8) ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATIONS
In connection with the acquisition of the capital stock of Underwriters
Salvage Company (USC), the Company assumed the obligation for certain
health care and death benefits for retired employees of USC. In accordance
with
50
51
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
the provisions of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions,"
costs related to the benefits are accrued over an employee's service life.
A one-percentage point increase or decrease in the assumed health care cost
trend rate for each future year would not have a material impact on the
Accumulated Postretirement Benefit Obligation or the income recognized
relative to the Plan in 2000. The assumed discount rate used to determine
the Accumulated Postretirement Benefit Obligation (APBO) as of December 31,
2000, 1999 and 1998 was 7.5%, 7.8% and 6.5%, respectively. The Company
recorded net post-retirement income of approximately $84,000, $169,000 and
$168,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
The Accumulated Postretirement Benefit Obligation (APBO) is a measure of
the plan's liability, equivalent to the Projected Benefit Obligation used
in pension accounting. The APBO is a factor in the expense calculation and
is included in the footnote disclosure. For retirees, it is the present
value of all benefits expected to be paid from the plan.
Reconciliation of funded status as of December 31,
2000 1999 1998
------------- ---------------- ---------------
Medical $ (747,000) $ (840,000) $ (927,000)
Life Insurance (290,000) (327,000) (361,000)
------------- ---------------- ---------------
Total APBO (1,037,000) (1,167,000) (1,288,000)
Plan assets -- -- --
------------- ---------------- ---------------
Funded status (1,037,000) (1,167,000) (1,288,000)
Unrecognized net loss from past experience (1,964,000) (2,011,000) (2,197,000)
------------- ---------------- ---------------
Accrued postretirement benefit cost $(3,001,000) $ (3,178,000) $ (3,485,000)
============= ================ ===============
Reconciliation of accumulated postretirement benefit cost:
Accrued benefit cost $(3,262,000) $ (3,513,000) $ (3,831,000)
Income 84,000 169,000 168,000
Contributions/premium paid 177,000 166,000 178,000
------------- ---------------- ---------------
Accumulated postretirement benefit cost, December 31, $(3,001,000) $ (3,178,000) $ (3,485,000)
============= ================ ===============
Effective January 20, 1994, the date of acquisition, the Company discontinued
future participation for active employees.
(9) SPECIAL CHARGES
During the fourth quarter of 2000, the Company recorded special charges of
$4,772,000 The $4,772,000 million charge includes $3,000,000 million
associated with the abandonment or disposal of computer hardware and
software, $1,174,000 million to cover expenses related to the February 2000
plane crash that damaged the Company's facility in Rancho Cordova,
California and $598,000 of other miscellaneous special charges.
51
52
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During the first quarter of 1998, a settlement agreement was entered into by the
Company resolving all outstanding differences between Insurance Auto Auctions,
Inc. and a former director, who resigned as a director and Chairman of the
Board. In the settlement agreement, various agreements were terminated
(including agreements providing for compensation and certain benefits through
June 30, 1999, and all outstanding stock options). Per the settlement agreement,
the Company made a lump-sum payment of $700,000 to the former director. This
included a bonus payment for 1997 of $126,000 pursuant to a 1996 agreement
between the Company and the former director. The difference of $574,000 was
recorded as a special charge in 1998.
In addition, McKinsey & Co. had been retained to assist the Company in
identifying and developing additional customer-valued services, focusing on
opportunities to add value to the insurance industry's automobile claims process
and reduce costs for these organizations. The scope of the work completed also
included current competencies, geographic presence and assets. The $990,000 cost
of the project was recorded as a special charge in 1998.
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited financial data for 2000 and 1999 are as follows:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- ------------- -------------- -------------
2000:
Net sales $ 86,960,000 $ 84,276,000 $ 80,132,000 $ 81,808,000
Gross profit 23,105,000 24,187,000 21,607,000 20,498,000
Earnings from operations 7,139,000 8,793,000 4,017,000 (2,055,000)
Net earnings 4,181,000 5,195,000 2,359,000 (1,246,000)
Basic earnings per share $ .36 $ .45 $ .20 $ (.11)
Diluted earnings per share $ .35 $ .44 $ .20 $ (.10)
============== ============== ============== =============
1999:
Net sales $ 79,878,000 $ 82,531,000 $ 77,014,000 $ 77,968,000
Gross profit 19,937,000 22,695,000 20,549,000 20,261,000
Earnings from operations 5,363,000 7,547,000 5,405,000 5,589,000
Net earnings 2,853,000 4,257,000 3,186,000 3,409,000
Basic earnings per share $ .25 $ .37 $ .28 $ .29
Diluted earnings per share $ .25 $ .37 $ .27 $ .29
============== ============== =============== =============
The sum of earnings per share for the quarters may not equal the full year
amount due to rounding and the impact of changes in the average shares
outstanding.
52
53
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No.
- ----------
10.162 Executive Severance Plan for Officers dated August 9, 2000, by and
between the Company and the Company's executive officers.
10.163 Employment agreement, dated November 17, 2000, by and between the
Company and Thomas C. O'Brien.
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
24.1 Power of Attorney
53