<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number: 0-19594
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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 Identification No.)
incorporation or organization)
850 East Algonquin Rd., Suite 100, Schaumburg, Illinois 60173
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(847) 839-3939
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares outstanding of each of the issuer's classes of common stock,
as of September 30, 1997:
Class Outstanding September 30, 1997
----- ------------------------------
Common Stock, $0.001 Par Value 11,298,461 shares
<PAGE> 2
INDEX
INSURANCE AUTO AUCTIONS, INC.
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. FINANCIAL INFORMATION........................................................ 3
Item 1. Financial Statements (Unaudited)............................................. 3
Condensed Consolidated Balance Sheets
as of September 30, 1997 and December 31, 1996............................. 3
Condensed Consolidated Statements of Earnings for the
Three Month Periods ended September 30, 1997 and September 30, 1996 and
The Nine Month Periods ended September 30, 1997 and September 30, 1996..... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods ended September 30, 1997 and September 30, 1996......... 5
Notes to Condensed Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 7
PART II. OTHER INFORMATION............................................................ 13
Item 1. Legal Proceedings and Other Matters.......................................... 13
Item 2. Changes in Securities........................................................ 13
Item 3. Defaults upon Senior Securities.............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders.......................... 13
Item 5. Other Information............................................................ 13
Item 6. Exhibits and Reports on Form 8-K ............................................ 13
SIGNATURES............................................................................ 14
EXHIBIT INDEX......................................................................... 15
</TABLE>
2
<PAGE> 3
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents & short-term investments $ 8,982,000 $ 5,888,000
Accounts receivable, net 30,362,000 34,371,000
Inventories 11,021,000 10,162,000
Other current assets 2,280,000 3,630,000
-------------- --------------
Total current assets 52,645,000 54,051,000
-------------- --------------
Property and equipment, at cost, net 21,007,000 21,596,000
Other assets, principally goodwill, net 133,505,000 136,157,000
-------------- --------------
$ 207,157,000 $ 211,804,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 2,017,000 $ 2,571,000
Accounts payable 18,838,000 18,013,000
Accrued liabilities 9,465,000 11,801,000
Income taxes 2,934,000 1,986,000
-------------- --------------
Total current liabilities 33,254,000 34,372,000
-------------- --------------
Long-term debt, excluding current installments 24,199,000 30,843,000
-------------- --------------
Total liabilities 57,453,000 65,215,000
-------------- --------------
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
11,298,461 and 11,282,838 shares as of September 30,
1997 and December 31, 1996, respectively 11,000 11,000
Additional paid-in capital 131,771,000 131,681,000
Retained earnings 17,922,000 13,897,000
------------ ------------
Total shareholders' equity 139,704,000 136,589,000
------------ ------------
$207,157,000 $211,804,000
============ ============
</TABLE>
3
<PAGE> 4
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION> Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
----------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales:
Vehicle sales $ 42,095,000 $ 48,707,000 $132,241,000 $156,922,000
Fee income 19,308,000 19,973,000 63,025,000 60,616,000
------------ ------------ ------------ ------------
61,403,000 68,680,000 195,266,000 217,538,000
Cost and expenses:
Cost of sales 47,113,000 54,941,000 150,850,000 172,568,000
Direct operating expenses 10,887,000 11,010,000 33,766,000 35,200,000
Amortization of acquisition costs 945,000 931,000 2,840,000 2,796,000
Special charges -- -- 750,000 --
------------ ------------ ------------ ------------
Earnings (loss) from operations 2,457,000 1,798,000 7,060,000 6,974,000
Other (income) expense:
Interest expense 668,000 713,000 2,073,000 2,289,000
Interest (income) (210,000) (232,000) (609,000) (632,000
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 1,999,000 1,317,000 5,596,000 5,317,000
Income taxes (benefit) 1,028,000 566,000 2,575,000 2,286,000
------------ ------------ ------------ ------------
Net earnings (loss) $ 971,000 $ 751,000 $ 3,021,000 $ 3,031,000
============ ============ ============ ============
Net earnings (loss) per common and
common equivalent shares outstanding $ .09 $ . 07 $ .27 $ .27
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 11,373,000 11,320,000 11,318,000 11,338,000
</TABLE>
4
<PAGE> 5
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Month Periods
Ended September 30,
------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,021,000 $ 3,031,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,930,000 6,195,000
Change in assets and liabilities (net of effects of acquired companies):
(Increase) decrease in:
Accounts receivable, net 4,009,000 (2,287,000)
Inventories (859,000) 118,000
Other current assets 1,350,000 818,000
Other assets (188,000) (84,000)
Increase (decrease) in:
Accounts payable 824,000 2,351,000
Accrued liabilities (2,136,000) 1,241,000
Income taxes payable 948,000 457,000
----------- ------------
Total adjustments 9,878,000 8,809,000
----------- ------------
Net cash provided by operating activities 12,899,000 11,840,000
----------- ------------
Cash flows from investing activities:
Sale (purchase) of short-term investments -- (1,982,000)
Capital expenditures (2,501,000) (4,939,000)
Payments made in connection with acquired companies,
net of cash acquired (196,000) (1,797,000)
----------- ------------
Net cash used in investing activities (2,697,000) (8,718,000)
Cash flows from financing activities:
Payment of line of credit and notes payable to acquired companies (2,541,000) (3,770,000)
Net proceeds (payment) of line of credit and notes payable (4,657,000) 4,568,000
Proceeds from issuance of common stock 90,000 101,000
----------- ------------
Net cash provided by financing activities (7,108,000) 899,000
----------- ------------
Net increase (decrease) in cash 3,094,000 4,021,000
Cash and cash equivalents at beginning of period 5,888,000 362,000
---------- ------------
Cash and cash equivalents at end of period $8,982,000 $ 4,383,000
========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $4,205,000 $ 2,597,000
Income taxes 1,627,000 1,858,000
========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The unaudited condensed consolidated financial statements of Insurance
Auto Auctions, Inc. and its subsidiaries (collectively, the "Company") have
been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of the Company, reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation for each of the periods presented. The results of operations
for interim periods are not necessarily indicative of results for full
fiscal years.
As contemplated by the Securities and Exchange Commission ("SEC") under
Rule 10-01 of Regulation S-X, the accompanying consolidated financial
statements and related notes have been condensed and do not contain certain
information that will be included in the Company's annual consolidated
financial statements and notes thereto. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1996.
2. INCOME TAXES
Income taxes were computed using the effective tax rate estimated to be
applicable for the full fiscal year, which is subject to ongoing review and
evaluation by the Company.
3. NET EARNINGS PER SHARE
Net earnings per share is based on the weighted average number of shares
of common and common share equivalents outstanding.
4. RECENT DEVELOPMENTS
The Financial Accounting Standards Board has recently issued several
pronouncements that may affect the Company's financial reporting.
Statement of Financial Accounting Standards ("S.F.A.S.") No. 128, "Earnings
per Share", was issued in March 1997 and is effective for interim and
annual periods ending after December 15, 1997. The Company will adopt
S.F.A.S. No. 128 in the fourth quarter of 1997. S.F.A.S. No. 128 requires
the presentation of "Basic" earnings per share, which represents net
earnings divided by the weighted average share outstanding excluding the
effects of common stock equivalents. Dual presentation of "Diluted"
earnings per share reflecting the dilutive effects of all common stock
equivalents as determined by the treasury stock method, will also be
required. The Diluted presentation is similar to the historical
presentation of fully diluted earnings per share. Management believes the
adoption of S.F.A.S. No. 128 will not have a material impact on the
Company's financial position or results of operations.
S.F.A.S. No. 130, "Reporting Comprehensive Income", was issued in June
1997 and is effective for fiscal years beginning after December 15, 1997.
S.F.A.S. No. 130 requires that changes in the balances of certain items
that are reported directly in a separate component of equity in a statement
of financial position also be reported in a separate statement of
comprehensive income. S.F.A.S. No. 130 will not affect the statements of
operations, financial position or cash flows.
S.F.A.S. No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was issued in June 1997 and is effective for fiscal years
beginning after December 15, 1997. S.F.A.S. No. 131 establishes new
standards for disclosing information about operating segments, S.F.A.S. No.
131 will not affect the statements of operations, financial position or
cash flows.
6
<PAGE> 7
5. SPECIAL CHARGE
During the second quarter of 1997, the Company settled a securities class
action lawsuit that had been pending against the Company and certain of its
present and former officers and directors, in the United States District
Court for the Central District of California. The litigation was settled
for $3.75 million, the substantial portion of which was paid by the
Company's directors' and officers' liability insurance company. The
difference of $750,000 was recognized as a special charge to earnings in
the second quarter of 1997. The settlement is subject to finalization of
formal settlement documents and court approval.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The discussion in this section contains forward-looking information that is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected or implied. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and this Form 10Q. Among these risks are legislative
acts, weather conditions, market value of salvage declining, management
changes, outcome of litigation, competition, quality and quantity of inventory
available from suppliers, and dependence on key insurance company suppliers.
OVERVIEW
The Company offers insurance companies and other vehicle suppliers
cost-effective salvage processing solutions through a variety of different
methods of sale, including fixed fee consignment, purchase agreement and
percentage of sale consignment. Under the purchase agreement sales method, the
vehicle is owned by the Company and the sales price of the vehicle is recorded
in revenue. Under the fixed fee and percentage of sale consignment 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. By
assuming some of the risk inherent in owning the salvage vehicle instead of
selling on a consignment basis, the Company is potentially able to increase
profits by improving the value of the salvage vehicle prior to the sale.
Under the purchase agreement method, IAA generally pays the insurance
company a pre-determined percentage of the Actual Cash Value ("ACV") to purchase
the vehicle, pursuant to the purchase agreement. ACVs are the estimated
pre-accident fair value of a vehicle, adjusted for additional equipment, mileage
and other factors. Until the significant rise in used car prices and ACVs
during 1995, the conversion from consignment sales to purchase agreement sales
generally benefited the Company. During 1995, however, used car prices and ACVs
rose significantly. Despite the increase in used car prices and ACVs, prices at
salvage auctions did not increase correspondingly. Because the Company's
purchase price is fixed by contract, the increased ACVs has reduced
profitability on the sale of vehicles under the purchase agreement method.
The Company has renegotiated some of its purchase agreement contracts
and is seeking to renegotiate certain others. If the relationship between ACVs
and salvage prices remains at its present level, the Company may continue to
encounter reduced profitability from purchase agreement contracts until they
expire or are renegotiated. The Company continues to offer purchase agreements
to those customers who select it, but generally at a lower percentage of ACV
than previously offered to customers, based on current vehicle values. The
Company has added adjustment and risk-sharing clauses to its new standard
purchase agreements designed to provide some protection to the Company and its
customers from certain unexpected, significant changes in the ACV/salvage price
relationship. Further changes in ACVs or the market or auction prices for
salvage vehicles could have a material effect on the Company's business,
operating results and financial condition.
7
<PAGE> 8
Since its initial public offering, the Company has grown mostly through
acquisitions. From 1993 to mid 1995, the Company acquired numerous salvage
pools (the "Acquisitions") strategically located throughout the United States.
In 1996, the Company acquired one pool and developed one new site. Acquisitions
continue to be a key part of the Company's strategic plan for growth.
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" in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and this Form 10Q for further
discussion of some of the factors that affect or could affect the Company's
business, operating results and financial condition.
Results of Operations
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996
Net sales for the third quarter of 1997 were $61,403,000, which represented
a 11% decrease from 1996 third quarter net sales of $68,680,000. This is
substantially the result of the change in mix of unit volume from purchase
agreement to the consignment method due to the Company's decision to renegotiate
or terminate specific, unprofitable purchase agreements. In addition, there was
a slowing of title processing from several state departments of motor vehicles.
Consistent with this, unit volumes in the third quarter of 1997 were down 6%
compared with the third quarter of the prior year. Same store changes were the
same as for the Company overall.
Gross Profit increased 4% to $13,289,000 for the three months ended
September 30, 1997, from $13,739,000 for the same period in 1996. Gross profit
per unit increased to $130 per unit in the 1997 third quarter versus $127 per
unit in the third quarter of 1996. Gross profit as a percentage of net sales
increased to 23% versus 20% for the comparable period of 1996. These increases
are attributable to the change in unit volume mix and the elimination of certain
unprofitable purchase agreements.
Direct operating expenses for the third quarter were $10,887,000, a 1%
decrease versus the third quarter of 1996 direct operating expenses of
$11,010,000. The decrease in third quarter units sold resulted in an increase
in direct operating expenses per unit to $107 per unit in 1997 versus $102 per
unit during the third quarter of 1996. Amortization of acquisition costs
associated with the Acquisitions increased to $945,000 for the three month
period ended September 30, 1997 from $931,000 for the comparable period in 1996,
as a result of the amortization of goodwill for the acquisition made in 1996.
Interest expense decreased to $668,000 for the 1997 third quarter, from
$713,000 for the same period in 1996. The change in interest expense was mostly
attributable to a decrease in long-term debt as a result of the Company's
repayment of the proceeds from long term borrowings under the Company's
$15,000,000 Revolving Line of Credit Facility ("the Facility") and the pay down
of other notes payable which were related to acquisitions.
Interest income of $210,000 was slightly lower in the 1997 third quarter
versus $232,000 for the comparable quarter in 1996.
Based on an evaluation completed during the third quarter, the estimated
effective tax rate for the Company for 1997 is 46%. This is in comparison to
the Company's effective tax rate of 43% for 1996. The provision for income
taxes of $1,028,000 for the three months ended September 30, 1997 includes
adjustment of the tax provision for the first six months of 1997 to the new
higher rate.
The Company's net earnings were $971,000 for the three months ended
September 30, 1997 versus the comparable period in 1996 of $751,000. Net
earnings per common share increased to 9 cents per share in 1997 versus 7 cents
per share in 1996.
8
<PAGE> 9
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net sales of the Company decreased to $195,266,000 for the nine months
ended September 30, 1997, from $217,538,000 for the same nine month period in
1996, a 10% decrease. This is substantially the result of the change in mix of
unit volume from purchase agreement to the consignment method due to the
Company's decision to renegotiate or terminate specific, unprofitable purchase
agreements. Unit volume decreased 1%, compared to the same period in 1996. Same
store changes are approximately the same as for the Company overall, when
compared to the same period in 1996. The purchase agreement sales method of
processing accounted for 31% of total volume versus 35% for the same period in
1996.
Gross profit decreased 1% to $44,416,000 for the nine months ended
September 30, 1997 from $44,970,000 for the same period in 1996. Gross profit
per unit decreased slightly to $133 per unit in 1997 versus $134 per unit in
1996. Gross profit as a percentage of net sales, however, increased to 23%
versus 21% for the comparable period of 1996 resulting from the conversion of
selected purchase agreements to consignment agreements.
Direct operating expenses decreased to $33,766,000 for the nine months
ended September 30, 1997, from $35,200,000 for the same period in 1996, a 4%
decrease. The decrease is the result of the Company's continued emphasis on the
reduction of direct operating expenses. Amortization of acquisition costs
associated with the Acquisitions increased to $2,840,000 for the nine month
period ended September 30, 1997 from $2,796,000 for the comparable period in
1996, as a result of the amortization of goodwill for the acquisition made in
1996.
During the second quarter of 1997, the Company settled a securities
class action lawsuit that had been pending against the Company and certain of
its present and former officers and directors, in the United States District
Court for the Central District of California. The litigation was settled for
$3.75 million, the substantial portion of which was paid by the Company's
directors' and officers' liability insurance company. The difference of
$750,000 was recognized as a special charge to earnings in the second quarter of
1997. The settlement is subject to finalization of formal settlement documents
and court approval.
Interest expense decreased to $2,073,000 for the nine months ended
September 30, 1997, from $2,289,000 for the same period in 1996. The change in
interest expense was mostly attributable to a decrease in long-term debt as a
result of the Company's repayment of the proceeds from long term borrowings
under the Company's $15,000,000 Revolving Line of Credit Facility. Interest
income was $609,000 for the nine month period ended September 30, 1997, versus
$632,000 for the comparable period in 1996.
Based on an evaluation completed during the third quarter, the
estimated effective tax rate for the Company for 1997 is 46%. This is in
comparison to the Company's effective tax rate of 43% for 1996. Income taxes
increased to $2,575,000 for the nine months ended September 30, 1997 from
$2,286,000 for the comparable period in 1996. This increase was a result of the
increase in the tax rate as well as an increase in pretax earnings. The
effective tax rate is subject to ongoing review and evaluation by Management.
The Company's net earnings were flat at $3,021,000, or 27 cents per
share, for the nine months ended September 30, 1997 versus $3,031,000, or 27
cents per share, for the comparable period in 1996. Net earnings excluding the
special charge were $3,426,000 or 30 cents per share, for the first nine months
of 1997.
9
<PAGE> 10
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1997, the Company had current assets of $52,645,000,
including $8,982,000 of cash and cash equivalents, and current liabilities of
$33,254,000. Working capital of $19,391,000 was slightly lower than working
capital at December 31, 1997 of $19,679,000.
On April 4, 1997, the Company refinanced this revolving credit
agreement on similar terms with a different bank. The $15,000,000 facility is
unsecured, bears interest at the bank's prime rate or LIBOR, as defined, and
matures on April 1, 2000.
At September 30, 1997, the Company's indebtedness consisted mostly of
8.6% Senior Notes approximating $20,000,000, a post-retirement benefits
liability relating to the Underwriters Salvage Company acquisition of
approximately $3,915,000, amounts due to the sellers related to an acquisition
aggregating $1,833,000 with imputed interest at 7.5% and amounts due to the
sellers of smaller acquisitions aggregating $780,000 which bear interest at
8.0%. There were no borrowings outstanding on the Facility at September 30,
1997. During 1997 the Company has made scheduled debt repayments to sellers of
$1,798,000 and unscheduled debt repayments of $500,000.
Capital expenditures were approximately $2,501,000 for the nine months
ended September 30, 1997. These capital expenditures primarily included
upgrading and expanding the Company's facilities and management information
system. The Company currently leases most of its facilities and other
properties.
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 the next twelve months. Part of the
Company's plan is continued growth through acquisitions and new facility
start-ups. 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.
RECENT DEVELOPMENTS
The Financial Accounting Standards Board has recently issued several
pronouncements that may affect the Company's financial reporting. Statement of
Financial Accounting Standards ("S.F.A.S.") No. 128, "Earnings per Share", was
issued in March 1997 and is effective for interim and annual periods ending
after December 15, 1997. The Company will adopt S.F.A.S. No. 128 in the fourth
quarter of 1997. S.F.A.S. No. 128 requires the presentation of "Basic" earnings
per share, which represents net earnings divided by the weighted average share
outstanding excluding the effects of common stock equivalents. Dual presentation
of "Diluted" earnings per share reflecting the dilutive effects of all common
stock equivalents as determined by the treasury stock method, will also be
required. The Diluted presentation is similar to the historical presentation of
fully diluted earnings per share. Management believes the adoption of S.F.A.S.
No. 128 will not have a material impact on the Company's financial position or
results of operations.
S.F.A.S. No. 130, "Reporting Comprehensive Income", was issued in June
1997 and is effective for fiscal years beginning after December 15, 1997.
S.F.A.S. No. 130 requires that changes in the balances of certain items that are
reported directly in a separate component of equity in a statement of financial
position also be reported in a separate statement of comprehensive income.
S.F.A.S. No. 130 will not affect the statements of operations, financial
position or cash flows.
S.F.A.S. No. 131, "Disclosures about Segments of an Enterprise and
Related Information", was issued in June 1997 and is effective for fiscal years
beginning after December 15, 1997. S.F.A.S. No. 131 establishes new standards
for disclosing information about operating segments. S.F.A.S. No. 131 will not
affect the statements of operations, financial position or cash flows.
10
<PAGE> 11
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a changing environment that involves a number
of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
Quarterly Fluctuations. The Company's operating results have in the
past and may in the future fluctuate significantly depending on a number of
factors, some of which are more significant for sales under the purchase
agreement method. These factors include changes in the market value of salvage
vehicles, attendance at salvage auctions, delays or changes in state title
processing, fluctuations in Actual Cash Values ("ACVs") of salvage vehicles,
changes in regulations governing the processing of salvage vehicles, the
availability and quality of salvage vehicles and general weather conditions.
Inclement weather conditions can result in lower attendance at auctions as well
as impact the availability of salvage. 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 and processing
of titles by state departments of motor vehicles. These factors are further
aggravated in the event the Company fails to renegotiate purchase agreement
contracts that are volume and mix dependent on availability of these types of
sales. 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;
the Company's expense levels are relatively fixed. If revenue levels are below
expectations, operating results are likely to be adversely affected. Due to all
of the foregoing factors, it is likely that in some future quarters the
Company's operating results will be below the expectations of public market
analysts and investors.
Quality and Quantity of Inventory Available from Suppliers. The
Company is dependent upon receiving a sufficient number of total loss vehicles
as well as recovered theft vehicles to sustain its profit margins. Factors
which can effect the number of salvage vehicles received include, reduction of
policy writing by insurance providers which would affect the number of claims
over a period of time and the 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 to newer and less damaged vehicles are
further aggravated under the purchase agreement method of salvage and can have a
negative impact on the operating results and financial condition of the Company.
Dependence on Key Insurance Company Suppliers. Historically, a
limited number of insurance companies have accounted for a substantial portion
of the Company's revenues. For example, in 1996, vehicles supplied by the
Company's three largest suppliers accounted for approximately 49% of the
Company's unit sales. The largest suppliers, Allstate Insurance ("Allstate")
and State Farm Insurance, each accounted for approximately 18% of the Company's
unit sales. A number of other insurance company suppliers have also contributed
to the profitability of the Company including 20th Century Insurance. 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 business, operating results and
financial condition.
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 experienced consolidation, however, and the Company
believes its principal publicly-held competitor is Copart, Inc. Copart, Inc.
has effected 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 for salvage vehicles from Copart and regional
suppliers is intense. 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, certain salvage
buyer groups and insurance companies some of which presently supply auto salvage
to IAA. While most
11
<PAGE> 12
insurance companies have abandoned or reduced efforts to sell salvage without
the use of service providers such as the Company, they may in the future decide
to dispose of their salvage directly to customers. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on its business, operating results and financial
condition.
Purchase Agreement Method of Sale. The Company has entered into a
number of purchase agreements, including agreements with its most significant
insurance suppliers, that obligate the Company to purchase most salvage
vehicles offered to it at a formula percentage of ACV. In recent times,
increased ACVs on which the Company's costs are based have reduced the
profitability that the Company realizes on purchase agreement contracts. The
Company has renegotiated and continues to attempt to renegotiate its agreements
with certain of these suppliers. There can be no assurance, however, that the
Company can renegotiate the terms of these agreements on terms favorable to the
Company. The failure to renegotiate some or all of these agreements could have
a material adverse effect on the Company's operating results and financial
condition. In addition, 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 business, operating results and financial condition.
Governmental Regulation. The Company's operations are subject to
regulation, supervision and licensing under various federal, state and local
statutes, ordinances and regulations. The acquisition and sale of totaled and
recovered theft vehicles is regulated by state motor vehicle departments in each
of the locations in which the Company operates. Changes in governmental
regulations or interpretations of existing regulations can result in increased
costs, reduced salvage vehicle prices and decreased profitability for the
Company. For example, the Company believes legislation currently being
considered by Congress could have a negative impact on the number of buyers
attending an auction as well as increase some of the costs to those buyers.
This legislation could increase governmental regulation of certain operations of
the Company. In addition to the regulation of sales and acquisitions of
vehicles, the Company is also subject to various local zoning requirements with
regard to the location of its auction and storage facilities. These zoning
requirements vary from location to location. Failure to comply with present or
future regulations or changes in existing regulations could have a material
adverse effect of the Company's business, operating results and financial
condition.
Provision of Services as a National or Regional Supplier. The
provision of services to insurance company suppliers on a national or regional
basis requires that the Company expend resources and dedicate management to a
small number of individual accounts, resulting in a significant amount of fixed
costs. The development of a referral based national network service, in
particular, has required the devotion of financial resources without immediate
reimbursement of such expenses by the insurance company suppliers.
Integration and Expansion of Facilities. The Company seeks to
increase sales and profitability through acquisition of other salvage auction
facilities, new site expansion and the increase of salvage vehicle volume at
existing facilities. There can be no assurance that the Company will continue
to acquire new facilities on terms economical to the Company or that the Company
will be able to add additional facilities on terms economical to the Company or
that the Company will be able to increase revenues at newly acquired facilities
above levels realized prior to acquisition. The Company's ability to achieve
these objectives is dependent, among other things, on the integration of new
facilities, and their information systems, into its existing operations, the
identification and lease of suitable premises and the availability of capital.
There can be no assurance that this integration will occur, that suitable
premises will be identified or that additional capital will be available to fund
expansion and integration of the Company's business. Any delays or obstacles in
this integration process could have a material adverse effect on the Company's
business, 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. Finally, the Company has focused, and
continues to focus, a significant amount of effort toward standardizing
operations. 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
12
<PAGE> 13
timely basis and to successfully expand and train the Company's work
force could have a material adverse effect on the Company's business, operating
results and financial condition.
Volatility of Stock Price. The market price of the Company's common
stock has been and could continue to be subject to significant fluctuations in
response to various factors and events, including variations in the Company's
operating results, the timing and size of acquisitions and facility openings,
the loss of vehicle suppliers or buyers, the announcement of new vehicle supply
agreements by the Company or its competitors, changes in regulations governing
the Company's operations or its vehicle suppliers, environmental problems or
litigation.
Environmental Regulation. The Company's operations are subject to
federal, state and local laws and regulations regarding the protection of the
environment. In the salvage vehicle auction industry, large numbers of wrecked
vehicles are stored at auction facilities for short periods of time. Minor
spills of gasoline, motor oils and other fluids may occur from time to time at
the Company's facilities and may result in soil, surface water or groundwater
contamination. Petroleum products and other hazardous materials are contained
in aboveground or underground storage tanks located at certain of the Company's
facilities. Waste materials such as waste solvents or used oils are generated
at some of the Company's facilities and are disposed of as nonhazardous or
hazardous wastes. The Company believes that it is in compliance in all material
respects with applicable environmental regulations and does not anticipate any
material capital expenditures for environmental compliance or remediation.
Environmental laws and regulations, however, could become more stringent over
time and there can be no assurance that the Company or its operations will not
be subject to significant compliance costs in the future. To date, the Company
has not incurred expenditures for preventive or remedial action with respect to
contamination or the use of hazardous materials that have had a material adverse
effect on the Company's results of operations 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 results of operations and financial position.
Part II. Other Information.
Item 1. Legal Proceedings. Inapplicable
Item 2. Changes in Securities. Inapplicable
Item 3. Defaults upon Senior Securities. Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable
Item 5. Other Information. Inapplicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
---------
27.1 Financial Data Schedule
(b) The Company did not file a report on Form 8-K during the
quarter ended September 30, 1997.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INSURANCE AUTO AUCTIONS, INC.
Date: November 14, 1997 By: /s/ Linda C. Larrabee
----------------------
Name: Linda C. Larrabee
Title: Senior Vice President,
Chief Financial Officer and
Secretary
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
14
<PAGE> 15
EXHIBIT INDEX
27.1 Financial Data Schedule
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 8,982,000 0
<SECURITIES> 0 0
<RECEIVABLES> 30,362,000 0
<ALLOWANCES> 0 0
<INVENTORY> 11,021,000 0
<CURRENT-ASSETS> 52,645,000 0
<PP&E> 36,778,000 0
<DEPRECIATION> 15,771,000 0
<TOTAL-ASSETS> 207,157,000 0
<CURRENT-LIABILITIES> 33,254,000 0
<BONDS> 24,199,000 0
0 0
0 0
<COMMON> 11,000 0
<OTHER-SE> 139,693,000 0
<TOTAL-LIABILITY-AND-EQUITY> 207,157,000 0
<SALES> 0 0
<TOTAL-REVENUES> 61,403,000 195,266,000
<CGS> 0 0
<TOTAL-COSTS> 47,113,000 150,850,000
<OTHER-EXPENSES> 11,832,000 37,356,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 668,000 2,073,000
<INCOME-PRETAX> 1,999,000 5,596,000
<INCOME-TAX> 1,028,000 2,575,000
<INCOME-CONTINUING> 971,000 3,021,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 971,000 3,021,000
<EPS-PRIMARY> .09 .27
<EPS-DILUTED> .09 .27
</TABLE>
