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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
850 East Algonquin Road, Suite 100, Schaumburg, Illinois 60173-3855
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(847) 839-3939
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares outstanding of each of the issuer's classes of common stock, as
of September 30, 1999:
Class Outstanding September 30, 1999
- ------------------------------ ------------------------------
Common Stock, $0.001 Par Value 11,568,300 shares
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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, 1999 and December 31, 1998................................ 3
Condensed Consolidated Statements of Operations for the
Three Month and Nine Month Periods ended
September 30, 1999 and September 30, 1998..................................... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods ended September 30, 1999 and September 30, 1998............ 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 13
PART II. OTHER INFORMATION................................................................. 13
Item 1. Legal Proceedings.................................................................. 13
Item 2. Changes in Securities.............................................................. 13
Item 3. Defaults upon Senior Securities.................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................................ 13
Item 5. Other Information.................................................................. 13
Item 6. Exhibits and Reports on Form 8-K................................................... 13
SIGNATURES.................................................................................. 14
</TABLE>
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,777,000 $ 11,682,000
Short-term investments 19,718,000 11,138,000
Accounts receivable, net 35,619,000 37,415,000
Inventories 12,263,000 11,229,000
Other current assets 2,263,000 1,676,000
------------ ------------
Total current assets 83,640,000 73,140,000
------------ ------------
Property and equipment, at cost, net 24,292,000 22,312,000
Deferred income taxes 3,637,000 2,976,000
Other assets, principally goodwill, net 126,074,000 128,916,000
------------ ------------
$237,643,000 $227,344,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 216,000 $ 216,000
Accounts payable 27,756,000 30,939,000
Accrued liabilities 6,118,000 6,097,000
Income taxes 692,000 582,000
------------ ------------
Total current liabilities 34,782,000 37,834,000
------------ ------------
Long-term debt, excluding current installments 20,020,000 20,116,000
Accumulated postretirement benefits obligation 3,261,000 3,485,000
Deferred income taxes 8,260,000 7,154,000
------------ ------------
Total liabilities 66,323,000 68,589,000
------------ ------------
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
11,568,300 and 11,320,419 shares as of September 30,
1999 and December 31, 1998, respectively 12,000 11,000
Additional paid-in capital 134,439,000 132,171,000
Retained earnings 36,869,000 26,573,000
------------ ------------
Total shareholders' equity 171,320,000 158,755,000
------------ ------------
$237,643,000 $227,344,000
============ ============
</TABLE>
3
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTH PERIODS NINE MONTH PERIODS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net Sales:
Vehicle sales $ 49,562,000 $ 45,726,000 $ 155,231,000 $ 144,789,000
Fee income 27,452,000 24,321,000 84,192,000 69,216,000
------------- ------------- ------------- -------------
77,014,000 70,047,000 239,423,000 214,005,000
Cost and expenses:
Cost of sales 56,465,000 53,265,000 176,242,000 161,731,000
Direct operating expenses 14,195,000 12,650,000 42,018,000 37,779,000
Amortization of acquisition costs 949,000 935,000 2,848,000 2,833,000
Special charges -- -- -- 1,564,000
------------- ------------- ------------- -------------
Earnings from operations 5,405,000 3,197,000 18,315,000 10,098,000
Other (income) expense:
Interest expense 492,000 496,000 1,479,000 1,560,000
Interest (income) (365,000) (193,000) (916,000) (589,000)
------------- ------------- ------------- -------------
Earnings before income taxes 5,278,000 2,894,000 17,752,000 9,127,000
Income taxes 2,092,000 1,331,000 7,456,000 4,198,000
------------- ------------- ------------- -------------
Net earnings $ 3,186,000 $ 1,563,000 $ 10,296,000 $ 4,929,000
============= ============= ============= =============
Earnings per share:
Basic $ .28 $ .14 $ 90 $ .44
============= ============= ============= =============
Diluted $ .27 $ .14 $ 89 $ .43
============= ============= ============= =============
Weighted average shares outstanding:
Basic 11,530,000 11,320,000 11,432,000 11,313,000
============= ============= ============= =============
Diluted 11,830,000 11,474,000 11,605,000 11,432,000
============= ============= ============= =============
</TABLE>
4
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIODS
ENDED SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 10,296,000 $ 4,929,000
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 6,791,000 6,539,000
(Gain) loss on disposal of fixed assets (79,000) 79,000
Change in assets and liabilities (net of effects of acquired companies):
(Increase) decrease in:
Short-term investments (8,580,000) (9,595,000)
Accounts receivable, net 1,796,000 (5,042,000)
Inventories (1,034,000) 1,606,000
Other current assets (587,000) 106,000
Other assets (6,000) 56,000
Increase (decrease) in:
Accounts payable (3,183,000) (3,981,000)
Accrued liabilities 21,000 (1,852,000)
Income taxes payable 555,000 711,000
------------ ------------
Total adjustments (4,306,000) (11,373,000)
------------ ------------
Net cash provided by (used in) operating activities 5,990,000 (6,444,000)
------------ ------------
Cash flows from investing activities:
Capital expenditures (5,951,000) (4,339,000)
Proceeds from disposal of fixed assets 107,000 22,000
Payments made in connection with acquired companies,
net of cash acquired -- (1,806,000)
------------ ------------
Net cash used in investing activities (5,844,000) (6,123,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,269,000 282,000
Principal payments of long-term debt (320,000) (2,180,000)
------------ ------------
Net cash provided by (used in) financing activities 1,949,000 (1,898,000)
------------ ------------
Net increase (decrease) in cash 2,095,000 (14,465,000)
Cash and cash equivalents at beginning of period 11,682,000 25,972,000
------------ ------------
Cash and cash equivalents at end of period $ 13,777,000 $ 11,507,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,720,000 $ 1,793,000
============ ============
Income taxes $ 7,001,000 $ 3,500,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The unaudited condensed consolidated financial statements of Insurance
Auto Auctions, Inc. and its subsidiaries (collectively, the "Company")
have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of the Company, reflect all
adjustments (consisting of normal recurring adjustments) 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 notes
thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1998
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. SPECIAL CHARGES
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 first quarter 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 the
evaluation and development of new business offerings that leverage the
company's current competencies, geographic presence and assets. The cost
of the project of $990,000 was recorded as a special charge in the first
quarter of 1998.
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 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, potential
or contingent," the negative of these terms or other similar expressions. The
Company's actual results could differ materially from those discussed or implied
herein. Factors that could cause or contribute to such differences include but
are not limited to those discussed in the Company's annual report, Form 10-K for
the fiscal year ended December 31, 1998, or subsequent quarterly
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reports. Among these risks are legislative acts, changes in the market value of
salvage, 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 a purchase agreement. ACV's are the
estimated pre-accident fair value of a vehicle, adjusted for additional
equipment, mileage and other factors. Because the Company's purchase price is
fixed by contract, changes in ACV's or in the market or auction prices for
salvage vehicles have an impact on the profitability of the sale of vehicles
under the purchase agreement method. However, if increases in used car prices
and ACV's are not associated with a corresponding increase in prices at salvage
auctions, there can be a negative impact on the profitability of purchase
agreement sales. To mitigate these risks, the Company has adjustment and
risk-sharing clauses in its standard purchase agreement contracts designed to
provide some protection to the Company and its customers from certain
unexpected, significant changes in the ACV/salvage price relationship.
Since its initial public offering, the Company has grown primarily
through a series of acquisitions to now include 50 locations as of September 30,
1999. In February of 1998, the Company acquired Auto Disposal Company. ADC
operated two pools in Alabama.
The Company's operating results are subject to fluctuations,
including quarterly fluctuations, that can result from a number of factors, some
of which are more significant for sales under the purchase agreement method. See
"Factors That May Affect Future Results" below for a further discussion of some
of the factors that affect or could affect the Company's business, operating
results and financial condition.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Net sales of the Company increased to $77,014,000 for the three
months ended September 30, 1999, from $70,047,000 for the same three month
period in 1998. Unit volume increased 3%, compared to the same period in 1998.
Gross profit increased 22% to $20,549,000 for the three months
ended September 30, 1999, from $16,782,000 for the same period in 1998. Gross
profit per unit of $173 for the three months ended September 30, 1999 was 18%
higher than for the comparable period of 1998. The increase in gross profit per
unit has been primarily the result of (i) the implementation and faster than
expected rollout of the
7
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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 18% of vehicles sold in the third
quarter of 1999 were sold under the percent of sale method versus 10% 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 $14,195,000 for the three
months ended September 30, 1999, from $12,650,000 for the same period in 1998.
Direct operating expenses per unit increased to $119 for the three months ended
September 30, 1999, as compared to $110 for the same period in 1998. The
increase reflects higher earned management incentives due to the improved
earnings as well as increased salary and labor costs largely associated with the
increased number of vehicle enhancement services.
Interest expense decreased to $492,000 for the three months ended
September 30, 1999, from $496,000 for the same period in 1998. Interest income
increased to $365,000 for the three month period ended September 30, 1999, from
$193,000 for the comparable period 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 $2,092,000 for the three months ended
September 30, 1999, from $1,331,000 for the comparable period in 1998. This
increase is the result of the increase in earnings, offset by a decrease in the
Company's effective tax rate from 46% in 1998 to an anticipated 42% for the full
fiscal year of 1999. The third quarter income tax provision included a
retroactive application of the new lower 1999 effective rate. The effective tax
rate is subject to ongoing review and evaluation by the Company.
The Company's net earnings were $3,186,000 for the three months
ended September 30, 1999, a 104% increase from $1,563,000 for the comparable
period in 1998.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998
Net sales of the Company increased to $239,423,000 for the nine
months ended September 30, 1999, from $214,005,000 for the same nine month
period in 1998, a 12% increase. This is the result of an increase in the number
of units sold, as compared to the same period in 1998, and increased fee
revenues including increased buyer fees and the continued roll out of our
profitability enhancement initiatives.
Unit volume for the nine months ended September 30, 1999 increased
7%, as compared to the same period in 1998. The increase was the result of more
units being available for sale due to strong vehicle assignments taken in the
fourth quarter of 1998 and early in the first quarter of 1999. The vehicle
assignments reflect an increase in same store sales due in part to severe winter
storms in select areas of the country and an increase in the charity business.
Flooding in certain east coast markets during September is expected to have a
slight favorable impact on units sold during the fourth quarter.
The purchase agreement sales method of processing accounted for
29% of total volume, down from 30% for the same period in 1998. The percent of
sale agreement sales method of processing accounted for 16% of total volume, up
7 percentage points from the same period in 1998. The Company continues to focus
on converting fixed fee consignment contracts to the generally more profitable
percent of sale contract type.
Gross profit increased 21% to $63,181,000 for the nine months
ended September 30, 1999, from $52,274,000 for the same period in 1998. Gross
profit per unit of $171 for the nine months ended September 30, 1999 was 13%
higher than for the comparable period of 1998. The increase in gross profit per
unit is the result of the quicker than anticipated implementation of several
gross profit enhancement initiatives and a continued focus on price management.
A key emphasis of the gross profit enhancement initiatives has been on
increasing the number and variety of vehicle enhancement services which increase
fee revenue and the value of auctioned vehicles, both of which improve the
Company's gross profit per unit. The
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price management initiative includes an ongoing evaluation of the Company's
services and corresponding fee structures to ensure the Company's service
offerings are properly valued in the market place.
Direct operating expenses increased to $42,018,000 for the nine
months ended September 30, 1999, from $37,779,000 for the same period in 1998.
Direct operating expenses per unit increased to $114 for the nine months ended
September 30, 1999, as compared to $110 for the same period in 1998. The
increase is the result of higher earned management incentives, increased
facility related costs and a general increase in operating expenses due to
increased vehicle enhancement services.
Interest expense decreased to $1,479,000 for the nine months ended
September 30, 1999, from $1,560,000 for the same period in 1998. The change in
interest expense was attributable to a decrease in long-term debt as a result of
the Company's repayment in 1998 of several notes payable to sellers related to
certain acquisitions. Interest income increased to $916,000 for the nine month
period ended September 30, 1999, from $589,000 for the comparable period in
1998. The increase is the result of an increase in cash equivalents and
short-term investments.
Income taxes increased to $7,456,000 for the nine months ended
September 30, 1999, from $4,198,000 for the comparable period in 1998. This
increase is the result of the increase in earnings. The Company's effective tax
rate for the nine months ended September 30, 1999 was 42% versus 46% for the
comparable period in 1998. The effective tax rate is subject to ongoing review
and evaluation by the Company.
The Company's net earnings were $10,296,000 for the nine months
ended September 30, 1999, a 78% increase from $5,774,000, before special
charges, for the comparable period in 1998.
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1999, the Company had current assets of
$83,640,000, including $13,777,000 of cash and cash equivalents and $19,718,000
of short-term investments. Current liabilities were $34,782,000. The Company had
working capital of $48,858,000 at September 30, 1999, a $13,552,000 increase
from December 31, 1998.
At September 30, 1999, 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 $3,261,000 and amounts due to the sellers related to certain
acquisitions. There were no borrowings outstanding on the Revolving Line of
Credit Facility at September 30, 1999.
Capital expenditures were approximately $5,951,000 for the nine
months ended September 30, 1999. These capital expenditures primarily included
upgrading and expanding the Company's management information system and the
Company's facilities. The Company currently leases most of its facilities and
other properties.
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 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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RECENT DEVELOPMENTS
The Company undertook an initiative, ("the Project"), in mid 1997,
the objective of which is to determine and assess the risks of the Year 2000
issue, and plan and institute mitigating actions to minimize those risks. The
Project team is being lead by the Company's Vice President and Chief Information
Officer. The scope of the Project includes both IT based systems and non IT
systems. Modifications required to bring the Company's IT systems into Year 2000
compliance were identified by the Project team. Based on work completed by the
Project team, the Company does not believe its non-IT system Year 2000
compliance issues represent a significant risk to the Company.
The required modifications to the Company's standard transaction
processing system ("ESPS") have been completed. Based on the findings of the
Project team and the successful implementation of these required modifications,
the Company believes this system is Year 2000 compliant in all material
respects. In addition, the required Year 2000 modifications to the only
remaining legacy transaction processing system have been completed. The changes
will be implemented in the fourth quarter of 1999. Failure to implement the
required changes to the legacy system on a timely basis could have a material
adverse effect on the Company's financial position or results of operations.
The Company may be impacted by the effect the Year 2000 issue has
on the ability of the Company's Insurance customers to process automobile claims
and state departments of motor vehicles ("DMV's") to process titles on a timely
basis. Any delay in the timely processing of automobile claims that
significantly reduces the number of units the Company has available for sale
would have a material adverse affect on the Company's financial position or
results of operations. In addition, the Company relies on state DMV's to timely
process titles to vehicles. Because the Company must generally obtain title
prior to selling a vehicle, a significant delay in title processing would impact
the Company's ability to sell vehicles from inventory and have a material
adverse effect on the Company's financial position or results of operations.
The Company has been, and will continue to be, in communication
with its principal insurance customers and the DMV's with regard to their Year
2000 readiness. None of the responses received to date suggests there will be
any interruption in their operations which would have a material adverse impact
on the Company, although there can be no assurances given in this regard.
Contingency plans will continue to be developed during the fourth quarter of
1999.
The cost to the Company of dealing with the Year 2000 issue is not
expected to be material. Although a portion of the IT personnel and related
management has been and will be employed in evaluating the problem, taking
corrective actions and preparing contingency plans, the Company does not believe
the IT projects or operations have been or will be adversely affected. Costs of
review, analysis and corrective action are expected to total less than $250,000.
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 ("ACV's") of salvage vehicles,
changes in regulations governing the processing of salvage vehicles, general
weather conditions and the availability and quality of salvage vehicles. The
Company is also dependent upon receiving a sufficient number of total loss
vehicles as well as recovered theft vehicles to sustain its profit margins.
Factors which can effect the number of vehicles received include: reduction of
policy writing by insurance providers which would affect the number of claims
over a period of time; 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.
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As a result, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as any indication of future performance. In addition, revenues for any
future quarter are not predictable with any significant degree of accuracy while
the Company's expense levels are relatively fixed. If revenue levels are below
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 affect on the operating results and financial condition of the
Company.
Competition. Historically, the automotive salvage industry has
been highly fragmented. As a result, the Company faces intense competition for
the supply of salvage vehicles from vehicle suppliers, as well as competition
from processors of vehicles from other regional salvage pools. These regional
salvage pools generally process vehicles under the fixed fee consignment method
and generally do not offer the full range of services provided by the Company.
The salvage industry has recently experienced consolidation, however, and the
Company believes its principal publicly-held competitor is Copart, Inc.
("Copart") 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 including
companies which are consolidating the dismantling industry and insurance
companies, some of which presently supply auto salvage to IAA. While most
insurance companies have abandoned or reduced efforts to sell salvage without
the use of service providers such as the Company, they may in the future decide
to dispose of their salvage directly to customers. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on its business, 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 1998, vehicles supplied by the Company's
three largest suppliers accounted for approximately 44% of the Company's unit
sales. The largest suppliers, State Farm Insurance, Allstate Insurance
("Allstate"), and Farmers Insurance, each accounted for approximately 17%, 14%,
and 13%, respectively, of the Company's unit sales. A loss or reduction in the
number of vehicles from any of these suppliers, or adverse change in the
agreements that such suppliers have with the Company, could have a material
adverse effect on the Company's operating results and financial condition.
Purchase Agreement Method of Sale. The Company has entered into a
number of purchase agreements, including agreements with its most significant
insurance suppliers, that obligate the Company to purchase most salvage vehicles
offered to it at a formula percentage of ACV. From 1993 to 1996, increased
ACV's, on which the Company's costs are based, reduced the profitability that
the Company realizes on purchase agreement contracts. This could occur again if
used car prices increase faster than selling prices. Further increases in ACV's
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. To mitigate these risks, 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
11
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the ACV's that are not accompanied by a comparable increase in sales price.
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. 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 require that the Company expends 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. 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
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materials such as waste solvents or used oils are generated at some of the
Company's facilities and are disposed of as nonhazardous or hazardous wastes.
The Company believes that it is in compliance in all material respects with
applicable environmental regulations and does not anticipate any material
capital expenditure for environmental compliance or remediation. Environmental
laws and regulations, however, could become more stringent over time and there
can be no assurance that the Company or its operations will not be subject to
significant compliance costs in the future. To date, the Company has not
incurred expenditures for preventive or remedial action with respect to
contamination or the use of hazardous materials that have had a material adverse
effect on the Company's 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 operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company had approximately $19,718,000 of short-term investments as
of September 30, 1999. These investments largely consisted of state government
obligations and had either variable rates of interest or stated interest rates
ranging from 3.3% to 5.5%. The Company's short-term 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 $20,000,000 at an interest rate
of 8.6%. The terms of the note agreement are such that pre-payment of such debt
may not be advantageous to the Company in the event that funds may be available
to the Company at a lower rate of interest.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS. INAPPLICABLE
ITEM 2. CHANGES IN SECURITIES. INAPPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. INAPPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE ON SECURITY HOLDERS. INAPPLICABLE
ITEM 5. OTHER INFORMATION. INAPPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
fiscal quarter ending September 30, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INSURANCE AUTO AUCTIONS, INC.
Date: November 15, 1999 By: /s/ Stephen L. Green
----------------- ---------------------------------
Name: Stephen L. Green
Title: Vice President - Finance,
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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<PAGE> 15
EXHIBIT INDEX
EXHIBIT NO.
- -----------
27.1 Financial Data Schedule
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 13,777,000 0
<SECURITIES> 19,718,000 0
<RECEIVABLES> 35,619,000 0
<ALLOWANCES> 0 0
<INVENTORY> 12,263,000 0
<CURRENT-ASSETS> 83,640,000 0
<PP&E> 46,446,000 0
<DEPRECIATION> (22,154,000) 0
<TOTAL-ASSETS> 237,643,000 0
<CURRENT-LIABILITIES> 34,782,000 0
<BONDS> 20,020,000 0
0 0
0 0
<COMMON> 12,000 0
<OTHER-SE> 134,439,000 0
<TOTAL-LIABILITY-AND-EQUITY> 237,643,000 0
<SALES> 77,014,000 239,423,000
<TOTAL-REVENUES> 77,014,000 239,423,000
<CGS> 56,465,000 176,242,000
<TOTAL-COSTS> 56,465,000 176,242,000
<OTHER-EXPENSES> 15,144,000 44,866,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 492,000 1,479,000
<INCOME-PRETAX> 5,278,000 17,752,000
<INCOME-TAX> 2,092,000 7,456,000
<INCOME-CONTINUING> 3,186,000 10,296,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,186,000 10,296,000
<EPS-BASIC> 0.28 0.90
<EPS-DILUTED> 0.27 0.89
</TABLE>
