-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QRJmnn1zAbxsOrTSounXFhY8WXLCpJYUKPWxHEjOZN6ezsfi3twy8KIf2k8EwZCg 9DYovW2VIuwnbnkhNORJxw== 0000950137-97-003812.txt : 19971117 0000950137-97-003812.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950137-97-003812 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSURANCE AUTO AUCTIONS INC /CA CENTRAL INDEX KEY: 0000880026 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLES & MOTOR VEHICLE PARTS & SUPPLIES [5010] IRS NUMBER: 953790111 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19594 FILM NUMBER: 97720159 BUSINESS ADDRESS: STREET 1: 1270 WEST NORTHWEST HIGHWAY CITY: PALATINE STATE: IL ZIP: 60067 BUSINESS PHONE: 8477059550 MAIL ADDRESS: STREET 1: 1270 WEST NORTHWEST HIGHWAY CITY: PALATINE STATE: IL ZIP: 60067 10-Q 1 10-Q DTD 9-30-97 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 ------- 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 2 INDEX INSURANCE AUTO AUCTIONS, INC.
PAGE NUMBER ----------- 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
2 3 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 ------------- ------------ 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 ============ ============
3 4 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Month Periods Nine Month Periods Ended September 30, Ended September 30, ----------------------- ----------------------- 1997 1996 1997 1996 ---- ---- ---- ---- 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
4 5 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Month Periods Ended September 30, ------------------------ 1997 1996 ---- ---- 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 ========== ============
See accompanying notes to condensed consolidated financial statements. 5 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 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 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 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 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 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 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 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 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 15 EXHIBIT INDEX 27.1 Financial Data Schedule 15 EX-27 2 FDS
5 3-MOS 9-MOS DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 SEP-30-1997 SEP-30-1997 8,982,000 0 0 0 30,362,000 0 0 0 11,021,000 0 52,645,000 0 36,778,000 0 15,771,000 0 207,157,000 0 33,254,000 0 24,199,000 0 0 0 0 0 11,000 0 139,693,000 0 207,157,000 0 0 0 61,403,000 195,266,000 0 0 47,113,000 150,850,000 11,832,000 37,356,000 0 0 668,000 2,073,000 1,999,000 5,596,000 1,028,000 2,575,000 971,000 3,021,000 0 0 0 0 0 0 971,000 3,021,000 .09 .27 .09 .27
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