-----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, F5PTbJoLXjjU2jK8cgUqlcK4itn5A3CwMOfOAg6F481ZEocAQEedTZ8GdRHqZaEd 7DgBPwty+tcpVARuUO9oHg== 0000912057-96-016537.txt : 19960808 0000912057-96-016537.hdr.sgml : 19960808 ACCESSION NUMBER: 0000912057-96-016537 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960807 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: 1934 Act SEC FILE NUMBER: 000-19594 FILM NUMBER: 96605375 BUSINESS ADDRESS: STREET 1: 1270 WEST NORTHWEST HIGHWAY CITY: PALATINE STATE: IL ZIP: 60067 BUSINESS PHONE: 8477059550 10-Q 1 10-Q 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 June 30, 1996 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) CALIFORNIA 95-3790111 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1270 WEST NORTHWEST HIGHWAY, PALATINE, ILLINOIS 60067 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (847) 705-9550 - ------------------------------------------------------------------------------- (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 June 30, 1996: CLASS OUTSTANDING JUNE 30, 1996 ----- ------------------------- Common Stock, $0.001 Par Value 11,275,874 shares INDEX INSURANCE AUTO AUCTIONS, INC.
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Item 1. Financial Statements (Unaudited). . . . . . . . . . . . . . . . . . . . . . . .3 Condensed Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995. . . . . . . . . . . . . . . . . . . .3 Condensed Consolidated Statements of Earnings for the Three Month Periods ended June 30, 1996 and June 30, 1995 and the Six Month Periods ended June 30, 1996 and June 30, 1995. . . . . . . . .4 Condensed Consolidated Statements of Cash Flows for the Six Month Periods ended June 30, 1996 and June 30, 1995. . . . . . . . . . . . .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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 14 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1996 1995 --------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 11,418,000 $ 362,000 Short-term investments 6,410,000 6,820,000 Accounts receivable, net 27,671,000 30,198,000 Inventories 7,550,000 9,495,000 Other current assets 2,833,000 3,591,000 --------------- --------------- Total current assets 55,882,000 50,466,000 --------------- --------------- Property and equipment, at cost, net 22,347,000 21,144,000 Other assets, principally goodwill, net 138,411,000 139,023,000 --------------- --------------- $ 216,640,000 $ 210,633,000 --------------- --------------- --------------- --------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 2,039,000 $ 4,015,000 Accounts payable 18,797,000 20,531,000 Accrued liabilities 12,653,000 11,306,000 Income taxes 3,905,000 2,427,000 --------------- --------------- Total current liabilities 37,394,000 38,279,000 --------------- --------------- Long-term debt, excluding current installments 33,533,000 28,973,000 --------------- --------------- Total liabilities 70,927,000 67,252,000 --------------- --------------- 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 11,275,874 and 11,270,141 shares as of June 30, 1996 and December 31, 1995, respectively 11,000 11,000 Additional paid-in capital 131,627,000 131,575,000 Retained earnings 14,075,000 11,795,000 --------------- --------------- Total shareholders' equity 145,713,000 143,381,000 --------------- --------------- $ 216,640,000 $ 210,633,000 --------------- --------------- --------------- ---------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Month Periods Six Month Periods Ended June 30, Ended June 30, ------------------------------------ ---------------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Net sales: Vehicle sales $ 55,556,000 $ 48,262,000 $ 108,215,000 $ 90,625,000 Fee income 20,486,000 16,925,000 40,643,000 34,797,000 -------------- -------------- --------------- -------------- 76,042,000 65,187,000 148,858,000 125,422,000 Cost and expenses: Cost of sales 59,678,000 50,188,000 117,627,000 95,408,000 Direct operating expenses 12,235,000 10,604,000 24,190,000 20,078,000 Amortization of acquisition costs 938,000 808,000 1,865,000 1,578,000 -------------- -------------- --------------- -------------- Earnings from operations 3,191,000 3,587,000 5,176,000 8,358,000 Other (income) expense: Interest expense 768,000 576,000 1,576,000 941,000 Interest income (246,000) (324,000) (400,000) (570,000) -------------- -------------- --------------- -------------- Earnings before income taxes 2,669,000 3,335,000 4,000,000 7,987,000 Income taxes 1,148,000 1,417,000 1,720,000 3,394,000 -------------- -------------- --------------- -------------- Net earnings $ 1,521,000 $ 1,918,000 $ 2,280,000 $ 4,593,000 -------------- -------------- --------------- -------------- -------------- -------------- --------------- -------------- Net earnings per common and common equivalent shares outstanding $ .13 $ .17 $ .20 $ .41 -------------- -------------- --------------- -------------- -------------- -------------- --------------- -------------- Weighted average common and common equivalent shares outstanding 11,369,000 11,318,000 11,355,000 11,318,000
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Month Periods Ended June 30, ----------------------------------- 1996 1995 ---- ---- Cash flows from operating activities: Net earnings $ 2,280,000 $ 4,592,000 ------------- ------------- Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,073,000 3,031,000 Change in assets and liabilities (net of effects of acquired companies): (Increase) decrease in: Accounts receivable, net 2,527,000 310,000 Inventories 1,945,000 (3,106,000) Other current assets 758,000 (12,000) Other assets (22,000) (447,000) Increase (decrease) in: Accounts payable (1,808,000) (1,377,000) Accrued liabilities 1,767,000 (27,000) Income taxes 1,478,000 (146,000) ------------- ------------- Total adjustments 10,718,000 (1,774,000) ------------- ------------- Net cash provided by operating activities 12,998,000 2,818,000 ------------- ------------- Cash flows from investing activities: Short-term investments 410,000 (4,739,000) Capital expenditures (3,411,000) (5,246,000) Payments made in connection with acquired companies (1,675,000) (14,657,000) ------------- ------------- Net cash used in investing activities (4,676,000) (24,642,000) ------------- ------------- Cash flows from financing activities: Proceeds from issuance of Senior Notes and notes payable 4,536,000 19,899,000 Proceeds from issuance of common stock 52,000 237,000 Principal payments on long-term debt and notes payable (1,854,000) (819,000) ------------- ------------- Net cash provided by financing activities 2,734,000 19,317,000 ------------- ------------- Net increase (decrease) in cash 11,056,000 (2,507,000) Cash and cash equivalents at beginning of period 362,000 2,529,000 ------------- ------------- Cash and cash equivalents at end of period $ 11,418,000 $ 22,000 ------------- ------------- ------------- ------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,266,000 $ 230,000 Income taxes 260,000 3,463,000 ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 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 management, 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, 1995. 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 management. 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. RECLASSIFICATIONS Certain reclassifications have been made to the 1995 accounts to conform with the 1996 presentation. 5. RECENT DEVELOPMENTS Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement No. 123), issued in October 1995 and effective for fiscal years beginning after December 15, 1995, permits, but does not require, a fair-value based method of accounting for employee stock options or similar equity instruments. Statement No. 123 allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APBO No. 25), but requires pro forma disclosures of net earnings and earnings per share as if the fair-value based method of accounting had been applied. The Company adopted Statement No. 123 on January 1, 1996 and has elected to continue to measure compensation cost under APBO No. 25. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE DISCUSSION IN THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. 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, 1995 AND THIS FORM 10-Q. 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 can and 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 agreement contracts designed to provide some protection to the Company and its customers from certain unexpected, significant changes in the ACV/salvage price relationship. The Company has grown through acquisitions and since June 1995 has acquired five salvage pools strategically located throughout the United States, and has opened a new facility start-up in Kansas City. The largest of these acquisitions, ADB Auctions, Inc. and its related company, ASC Auctions, Inc., occurred June 19, 1995. Of the four remaining smaller acquisitions, three were made in July, August and December 1995 and one was made in January 1996. 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, 1995 and this Form 10-Q for a further discussion of some of the factors that affect or could affect the Company's business, operating results and financial condition. 7 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1995 Net sales of the Company increased to $76,042,000 for the three months ended June 30, 1996, from $65,187,000 for the same three month period in 1995, a 17% increase. Sales were higher due to acquisitions, conversion of consignment sales to purchase agreement sales, same store growth and fee increases. Unit volume increased 26%, as compared to the same period in 1995, with most of the unit growth resulting from the acquired operations, while existing facilities volume increased 6%. Net sales growth from existing facilities increased 10%, as a result of conversion of consignment sales to purchase agreement sales and increased fees. The purchase agreement sales method of processing accounted for 39,000 vehicles, or 35% of total volume, up 17% from the same period in 1995. Cost of sales increased to $59,678,000 for the three months ended June 30, 1996, from $50,188,000 for the same period in 1995, a 19% increase. The increase in cost of sales was substantially a result of increased purchase agreement volume resulting from the conversion of existing consignment agreements, new purchase agreement accounts and volume from acquisitions. Cost of sales growth was higher than net sales growth, and as a percentage of net sales increased from 77% to 78%, mostly as a result of the increase of purchase agreement vehicles, higher prices per car paid due to higher ACVs and lower selling prices as a percent of ACV for some salvage vehicles on the purchase agreement method of sales. Direct operating expenses increased to $12,235,000 for the three months ended June 30, 1996, from $10,604,000 for the same period in 1995, a 15% increase. The increase in direct operating expenses was associated with the acquired operations, as well as the Company's continued investments in personnel, management information systems, facilities expansion and improvements, and related infrastructure to support its national rollout and growth. Direct operating expenses as a percentage of net sales were flat compared to the same period in 1995. Amortization of acquisition costs associated with the acquisitions increased to $938,000 for the three month period ended June 30, 1996 from $808,000 for the comparable period in 1995, as a result of amortization of goodwill for the acquisitions. Interest expense increased to $768,000 for the three months ended June 30, 1996, from $576,000 for the same period in 1995. The change in interest expense was mostly attributable to increases in notes payable to sellers of certain acquisitions and the utilization of a portion of the $15,000,000 Revolving Line of Credit Facility ("the Facility"). Interest income decreased to $246,000 for the three month period ended June 30, 1996, from $324,000 for the comparable period in 1995. The change in interest income was attributable to a decrease in interest-bearing investments liquidated to help consummate the acquisitions. Income taxes decreased to $1,148,000 for the three months ended June 30, 1996, from $1,417,000 for the comparable period in 1995. This decrease was primarily the result of decreased earnings primarily due to lower margins. The Company's net earnings were $1,521,000 for the three months ended June 30, 1996, a 21% decrease from the comparable period in 1995 of $1,918,000. 8 SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995 Net sales of the Company increased to $148,858,000 for the six months ended June 30, 1996, from $125,422,000 for the comparable six-month period in 1995, a 19% increase. Sales were higher due to acquisitions, conversion of consignment to purchase agreement, same store growth and fee increases. Unit volume increased 25% in the six-month period ended June 30, 1996, as compared to the similar period in 1995, with most of the unit growth resulting from the acquired operations, while existing facilities volume increased 3%. Net sales growth from existing facilities increased 10% as a result of same store growth, conversion of consignment to purchase agreement sales and increased fees. The purchase agreement sales method of processing accounted for 80,000 vehicles, or 35% of total volume, up 17% from the same period in 1995. Cost of sales increased to $117,627,000 in the six-month period ended June 30, 1996, from $95,408,000 in the comparable six month period in 1995, a 23% increase. The increase in cost of sales was substantially a result of same store growth, conversions of consignment to purchase agreement and volume from acquisitions. Cost of sales growth was higher than net sales growth, and as a percentage of net sales increased from 76% to 79%, mostly as a result of higher prices per car paid due to higher ACVs and lower selling prices as a percent of ACV for some salvage vehicles on the purchase agreement method of sales. Direct operating expenses increased to $24,190,000 for the six months ended June 30, 1996, from $20,078,000 for the same period in 1995, a 20% increase. The increase in direct operating expenses was associated with the acquired operations, as well as the Company's continued investments in personnel, management information systems, facilities expansion and improvements, and related infrastructure to support its national rollout and growth. Direct operating expenses as a percentage of net sales were flat compared to the same period in 1995. Amortization of acquisition costs associated with the acquisitions increased to $1,865,000 for the six month period ended June 30, 1996 from $1,578,000 for the comparable period in 1995, as a result of amortization of goodwill for the acquisitions. Interest expense increased to $1,576,000 for the six months ended June 30, 1996, from $941,000 for the same period in 1995. The change in interest expense was mostly attributable to increases in notes payable to sellers of certain acquisitions and the utilization of a portion of the Facility. Interest income decreased to $400,000 for the six month period ended June 30, 1996, from $570,000 for the comparable period in 1995. The change in interest income was attributable to a decrease in interest-bearing investments liquidated to help consummate the acquisitions. Income taxes decreased to $1,720,000 for the six month ended June 30, 1996, from $3,394,000 for the comparable period in 1995. This decrease was primarily the result of decreased earnings primarily due to lower margins and increased expenses. The Company's net earnings were $2,280,000 for the six months ended June 30, 1996, a 50% decrease from the comparable period in 1995 of $4,593,000. FINANCIAL CONDITION AND LIQUIDITY At June 30, 1996, the Company had current assets of $55,882,000, including $17,828,000 of cash and cash equivalents and short term investments, current liabilities of $37,394,000 and working capital of $18,488,000. The $6,301,000 increase in working capital from December 31, 1995, was principally related to proceeds from long term borrowings under the Facility and net earnings. On August 1, 1995, the Company entered into the Facility with the bank, permitting borrowings of up to $15,000,000. The Facility, subject to certain terms and conditions, is for 3 years and bears interest at a variable rate. Approximately $4,500,000 in borrowings were outstanding on the Facility at June 30, 1996. 9 At June 30, 1996, 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 $4,330,000, amounts due to the sellers of ADB aggregating $6,193,000 with imputed interest at 7.5%, amounts due to the seller of a smaller acquisition aggregating $500,000 which bears interest at 8.0% and $4,500,000 outstanding on the Facility which bears interest at a variable rate which is approximately 7% at June 30, 1996. Capital expenditures were approximately $3,411,000 for the six months ended June 30, 1996. These capital expenditures included upgrading and expanding management information systems 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 and acquisitions. 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 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement No. 123), issued in October 1995 and effective for fiscal years beginning after December 15, 1995, permits, but does not require, a fair-value based method of accounting for employee stock options or similar equity instruments. Statement No. 123 allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APBO No. 25), but requires pro forma disclosures of net earnings and earnings per share as if the fair-value based method of accounting had been applied. The Company adopted Statement No. 123 on January 1, 1996 and has elected to continue to measure compensation cost under APBO No. 25. 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 of vehicles and weather conditions. 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. Revenues in any quarter are substantially dependent on a number of factors including attendance at salvage auctions and the market value of salvage vehicles. Revenues for any future quarter are not predictable with any significant degree of accuracy; the Company's expense levels, however, 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 quarter the Company's operating results will be below the expectations of public market analysts and investors. 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 1995, vehicles supplied by the Company's three largest suppliers accounted for approximately 51% of the 10 Company's unit sales. The largest suppliers, Allstate Insurance ("Allstate") and State Farm Insurance, each accounted for approximately 21% of the Company's unit sales. A number of other insurance company suppliers have also contributed to the profitability of the Company. 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. 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. 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 is currently attempting 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. 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 buyer 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, 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 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. RECENT MANAGEMENT CHANGES. There has recently been turnover in certain key positions in the Company. Additions of new personnel and departures of existing personnel, particularly in key positions, can be disruptive, which could have a material adverse effect upon the Company's business, operating results and financial condition. 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 11 achieve these objectives is dependent 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 experienced a period of significant expansion that has placed a strain upon its management systems and resources. 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 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. 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 delays in the transfers of title caused by the implementation of the Torres Bill in California had a negative effect on the Company's third and fourth quarter results. 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 material adverse effect of the Company's business, operating results and financial condition. 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. 12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS AND OTHER MATTERS. (a) The Registrant has been named as a defendant in two lawsuits filed by Registrant shareholders in the United States District Court for the Central District of California (in which two of the Registrant's officers, one of whom is a director, one additional director and one former officer and director are also defendants) and the Los Angeles County Superior Court (in which one of the Registrant's officers, who is also a director, one additional director and one former officer and director are also defendants). The lawsuit in federal court alleges violations of the federal securities laws, and purports to seek damages on behalf of a class of shareholders who purchased the Registrant's common stock during the period of July 27, 1994 through August 4, 1995. The lawsuit in the state court alleges violations of California securities laws, and purports to seek damages on behalf of a class of shareholders who purchased the Registrant's common stock during the period of February 21, 1995 through August 4, 1995. The Registrant believes that both lawsuits are without merit and intends to defend against them vigorously. See Note 8 to the Registrant's Consolidated Financial Statements to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. ITEM 2. CHANGES IN SECURITIES. NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Annual Meeting of Shareholders of the Company held June 19, 1996, the shareholders (i) elected eight directors to serve on the Company's Board of Directors, (ii) amended the Company's 1991 Stock Option Plan to effect an increase in the number of shares of Common Stock issuable under the plan by an additional 250,000 shares and (iii) ratified the Company's appointment of KPMG Peat Marwick LLP to serve as the Company's independent auditors for the fiscal year ended December 31, 1996. Shareholders holding 9,390,209 shares of Common Stock, representing 83% of the total number of shares outstanding and entitled to vote at the meeting, were present in person or by proxy at the meeting. The vote for nominated directors was as follows: Director Votes For Votes Withheld -------- --------- -------------- Bradley S. Scott 9,056,837 333,372 James P. Alampi 9,056,653 333,556 Susan B. Gould 9,056,868 333,341 Christopher G. Knowles 9,057,037 333,172 Melvin R. Martin 9,054,183 336,026 Thomas J. O'Malia 9,057,667 332,542 Glen E. Tullman 9,056,767 333,442 Richard A. Rosenthal 9,057,737 332,472 The vote for amending the Company's stock option plan was as follows: For: 5,791,364; Against: 3,478,592; and Votes Withheld: 28,757. The vote for ratifying the appointment of KPMG Peat Marwick LLP was as follows: For: 9,377,846; Against: 6,069 and Votes Withheld: 6,294. ITEM 5. OTHER INFORMATION. NONE 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. 10.146 Revised Salvage Agreement by and between the Registrant and Allstate Insurance Company dated April 29, 1996. 10.147 Employment Agreement by and between the Registrant and James P. Alampi dated March 11, 1996. (b) REPORTS ON FORM 8-K. NONE 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: August 5, 1996 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) 15 EXHIBIT INDEX SEQUENTIALLY EXHIBIT NO. NUMBERED PAGE - ----------- ------------- 10.146 Revised Salvage Agreement by and between the 17 Registrant and Allstate Insurance Company dated April 29, 1996. 10.147 Employment Agreement by and between the Registrant 40 and James P. Alampi dated March 11, 1996. 16 EX-10.146 2 EXHIBIT 10.146 REVISED SALVAGE AGREEMENT This REVISED SALVAGE AGREEMENT is made and entered into this 29th day of April, 1996 by and between ALLSTATE INSURANCE COMPANY, an Illinois insurance corporation ("Allstate") and INSURANCE AUTO AUCTIONS, INC., a California corporation ("IAA"). WITNESSETH: WHEREAS, On December 1, 1993 IAA purchased the reclamation operations with respect to total loss and recovered theft vehicles (and not the claims training, research and appraisal operations) of Tech-Cor, Inc., a wholly-owned subsidiary of Allstate (the "TECH-COR ACQUISITION"); WHEREAS, following the Tech-Cor Acquisition, Allstate and IAA established a master salvage agreement covering salvage and reclamation services to be provided by IAA to Allstate in certain geographic markets on an ongoing basis (the "1993 Salvage Agreement"); and WHEREAS, Allstate and IAA desire to amend and supplement the terms of the Salvage Agreement due to changes in the salvage and reclamation marketplace as well as changes in their respective internal operations. NOW, THEREFORE, in consideration of the foregoing and of the covenants and agreements herein contained, the parties hereto agree as follows: I. DEFINITIONS 1.1. DEFINITIONS. As used in this Revised Salvage Agreement the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): (a) "ACTUAL CASH VALUE" means the appraised value of each Reclamation Vehicle as determined by an accepted industry method such as that used by Certified Collateral Corporation ("CCC") or a mutually agreed upon comparable system without deductible, sales tax, or license fees. (b) "ADVANCE CHARGES" means with respect to any Reclamation Vehicle, the aggregate charges for services customarily provided that are accumulated prior to the time the Reclamation Vehicle processor takes possession of such vehicle, including, but not limited to, advances with respect to impound or similar initial tow charges, storage charges, costs of estimate, tear down fees, lien sale fees, etc., provided that Advance Charges shall not include amounts payable to any State Department of Motor Vehicles (or similar authority) relating to the transfer of title of such Reclamation Vehicle. (c) "APPRAISAL FACILITY" means a facility where suspected total loss or recovered theft vehicles are brought temporarily for damage evaluation or for other claims services. (d) "BUSINESS DAY" means each day on which banks are generally open for business in Illinois. (e) "CATASTROPHE VEHICLES" means in excess of one hundred (100) Total Loss Vehicles damaged by a single event which is determined to be a "catastrophe" by Allstate policy. Common catastrophe events include hurricanes, earthquakes, tornadoes, wind and hail storms, fires and explosions. (f) "CHANGE OF CONTROL" means such time as either (i) any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) engaged directly or indirectly in the insurance business obtains "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of at least 20% of the voting power of the voting capital stock of IAA, or (ii) any other "person" or "group" obtains "beneficial ownership" of at least 50% of the voting power of the voting capital stock of IAA, or (iii) IAA sells, leases or transfers all or substantially all of its assets to any "person" or "group" in one or more transactions. (g) "COMPARABLE IAA CUSTOMER" means for any market, any other insurance company that supplies to IAA reclamation vehicles. (h) "LOSS CATEGORY" means each category of total loss and recovered theft vehicle. (i) "NEW LOCAL AGREEMENT" means any New Local Pool Agreement, New Local Purchase Agreement or Other Local Agreement. (j) "OWNER RETAINED VEHICLE" means any Total Loss Vehicle or Recovered Theft Vehicle of which the insured or claimant wishes to retain ownership for an agreed upon price acceptable to the insured or claimant and Allstate. (k) "POOLING METHOD" means the method of processing total loss and recovered theft vehicles for carriers under which such vehicles are sold on a consignment basis by the processor. (l) "PROCESSED" when used solely with reference to vehicles processed by IAA means vehicles that have been sold by IAA for which revenue has been recognized by IAA in accordance with its accounting policies, regardless of the method under which vehicles were processed (unless the context otherwise requires). 2 (m) "PURCHASE METHOD" means the method of processing total loss and recovered theft vehicles for carriers under which such vehicles are purchased from the carrier by the processor. (n) "RECLAMATION SERVICES" means the processing and sale by IAA of total loss and recovered theft vehicles for carriers, whether provided under the Purchase Method, the Pooling Method or otherwise. (o) "RECLAMATION VEHICLES" means, collectively, Total Loss Vehicles and Recovered Theft Vehicles owned by Allstate included within all Loss Categories, provided that the term Reclamation Vehicles shall not include any Owner Retained Vehicles, any Catastrophe Vehicles, any vehicle parts (as defined in any local market salvage purchase agreement) or any other vehicles not made available to IAA by Allstate. (p) "RECOVERED THEFT VEHICLE" means any vehicle which was stolen and recovered, and the ownership of which has been transferred to Allstate. (q) "SALEABLE TITLE DOCUMENTS" means all forms and documents, without error, omission, lien or other encumbrance, that allow for the immediate initiation and ultimate conclusion of the title transfer process. (r) "TECH-COR FACILITIES" means the vehicle reclamation operations located in Wheeling, Illinois; Markham, Illinois; Romulus, Michigan; Glassboro, New Jersey and Carteret, New Jersey, which were acquired by IAA in the Tech-Cor Acquistion. (s) "TERM" means the period commencing on the date of this Revised Salvage Agreement and ending upon the expiration of the Initial Term and any successive Additional Term or any earlier date on which this Revised Salvage Agreement is terminated pursuant to Article VI. (t) "TOTAL LOSS VEHICLE" means (i) any vehicle which has been wrecked, destroyed, stripped, burned, submerged in water or otherwise damaged to such an extent that Allstate considers it uneconomical to repair the vehicle or (ii) any such vehicle which may be economical to repair but which Allstate designates as a Total Loss Vehicle because in the opinion of Allstate it is not feasible to repair the vehicle. (u) "VIC" means any temporary storage, towing and/or appraisal facility of the type commonly referred to in the insurance industry as a "vehicle inspection center" to which suspected Total Loss Vehicles are brought. 3 II. SCOPE OF SALVAGE ARRANGEMENTS 2.1. IAA SERVICES IN NEW MARKETS. (a) During the Term, IAA shall be Allstate's preferred provider of Total Loss and Recovered Theft vehicle Reclamation Services in respect of Reclamation Vehicles and Castastrophe Vehicles in each market in which IAA provides Reclamation Services. [*] Allstate agrees to inform its local field management as to the terms of this Revised Salvage Agreement with IAA, including without limitation that IAA is Allstate's preferred provider of reclamation services hereunder, [*]. In addition, Allstate will assist IAA in setting up meetings/presentations with the appropriate field management and assist both the local Allstate Management and IAA personnel in helping to resolve any conflicts or problems that may arise. (b) During the Term, IAA shall be entitled to bid on all Owner Retained Vehicles when (i) IAA provides Allstate with Reclamation Services in the market in which the Owner Retained Vehicle is located and (ii) Allstate's request of IAA for a bid on the Owner Retained Vehicle does not unreasonably delay or interfere with Allstate's claim settlement process. Allstate agrees to discuss with its field offices the operational procedures required to properly implement this agreement, including the procedures for processing Owner Retained Vehicles and calculating Actual Cash Values. 2.2. EXPANSION OF RECLAMATION SERVICES. This Section deleted. 2.3. CONVERSION TO PURCHASE METHOD. This Section deleted. 2.4. LOCAL AGREEMENTS. This Section deleted. 2.5. PAYMENT TERMS. This Section deleted. *Confidential treatment requested. 4 2.6. EXISTING LOCAL POOLING AGREEMENTS. (a) IAA and Allstate are currently parties to certain salvage pool agreements (collectively, the "EXISTING LOCAL POOL AGREEMENTS," which term shall include any subsequent amendment thereto). (b) Notwithstanding Section 6.1 of this Revised Salvage Agreement, the Existing Local Pool Agreements for the following Tech-Cor Facilities shall receive the [*] pricing terms provided for in Section 2.8(b) commencing as of the following dates, and may be terminated by either party on or after the following dates upon at least [*] advance notice: (i) [*], and (ii) [*]. (c) Following termination of an Existing Local Pool Agreement, Allstate may enter into a New Local Agreement with IAA under the terms of Section 2.8, 2.9 or 2.10 hereof. 2.7. EXISTING LOCAL PURCHASE AGREEMENTS. (a) IAA and Allstate are currently parties to certain salvage purchase agreements (collectively, the "EXITING LOCAL PURCHASE AGREEMENTS") which term shall include any subsequent amendment thereto). (b) Notwithstanding the terms of Section 6.1 of this Revised Salvage Agreement or prior agreed upon termination dates, Existing Local Purchase Agreements in the following markets shall, on the dates referenced below, receive the favorable pricing terms provided for in Section 2.9(c) and may be terminated by either party on or after the dates referenced below upon at least [*] advance notice: (i) [*], however, each such local Allstate market has the option to extend the Existing Local Purchase Agreement through [*] if it notifies IAA by [*]; (ii) [*]; (iii) [*]; (iv) [*]. (c) On [*], the price paid for Reclamation Vehicles by IAA will be increased by [*] in [*] and by [*] in [*]. (d) For a Reclamation Vehicle being sold under a Percentage-of-Sale basis under an Existing Local Purchase Agreement, IAA shall, once it has obtained Saleable Title Documents with respect to such vehicle, offer such vehicle for sale at or before the third auction at the site at which such vehicle is located. *Confidential treatment requested. 5 (e) Following termination, Allstate may enter into a New Local Agreement with IAA under the terms of Section 2.8, Section 2.9 or Section 2.10 hereof. Any such New Local Agreement shall terminate on such a date as is agreed to by the parties. (f) Notwithstanding the foregoing, if after June 30, 1995 there has occurred any changes in the laws or regulations or implementation of laws or regulations applicable to any local market that affect the prices paid for Reclamation Vehicles, either party may, upon [*] notice, elect to change the Local Purchase Agreement covering such market into a New Local Agreement, with the Reclamation Vehicles covered thereby to be processed under (i) the Pooling Method upon pricing terms and other terms established in accordance with Section 2.8(a) hereof, (ii), if the local Allstate management agrees, under another mutually-acceptable method of sale pursuant to Section 2.10 hereof, or (iii), if the local Allstate management agrees, under a mutually-acceptable New Local Purchase Agreement pursuant to Section 2.9; provided, however, that Allstate may, upon notice to IAA within such [*] period, elect to have such Local Purchase Agreement terminate at the end of such [*] period and to not have a New Local Agreement become effective in its place. (g) Notwithstanding anything to the contrary in this Agreement, IAA shall also have the right to terminate the Existing Local Purchase Agreements covering [*] on or after [*] upon [*] advance written notice (such termination right of IAA referred to herein as the "Buyout Right"). At the end of such [*] period following notice of exercise of the Buyout Right, IAA shall pay to Allstate or one or more affiliates of Allstate designated by Allstate the Buyout Amount (as defined below). During such [*] period, IAA and each of the affected Allstate local offices shall discuss whether, upon mutual agreement, to convert the affected Existing Local Purchase Agreement into a New Local Agreement in accordance with Sections 2.8, 2.9, or 2.10 hereof, and, failing such mutual agreement, any such Existing Local Purchase Agreement not so converted shall immediately terminate at the end of such [*] period. Upon IAA's election to exercise the Buyout Right, Allstate may cease to characterize IAA as a "Preferred Provider" hereunder and Allstate's obligations under [*] Section 2.1(a) hereof shall immediately terminate. IAA may not exercise the Buyout Right with respect to some but not all of the Existing Local Purchase Agreements listed above. (As used herein, the "Buyout Amount" shall equal (i) [*] plus (ii), if a New Local Agreement is not established pursuant to this Section 2.7(f) for one or more of such Allstate local offices, the Utilization Fee Present Value (as defined below). The "Utilization Fee Present Value" shall [*]. *Confidential treatment requested. 6 2.8. NEW LOCAL POOLING AGREEMENTS. (a) In the event IAA establishes Reclamation Services to Allstate in a new market which are provided under the Pooling Method, Allstate and IAA shall enter into a contract relating to the provision of Reclamation Services to Allstate under the Pooling Method (each, a "NEW LOCAL POOLING AGREEMENT"). (b) The terms of any such New Local Pooling Agreement shall be negotiated in good faith between IAA and Allstate's local field management, and such terms shall be based on an objective of providing to Allstate a total cost for processing Reclamation Vehicles supplied to IAA under such New Local Pooling Agreement [*]. To assist the parties in determining such terms, IAA shall provide to such local field management and Tech-Cor Management negotiating any such new Local Pooling Agreement a schedule of [*]. (c) Allstate and IAA agree to review the payment terms contemplated by this Section 2.8 upon the implementation of electronic transfer of funds arrangements between Allstate and IAA. For those Reclamation Vehicles being sold under Local Pooling Agreements, IAA shall not decline to accept a bid for a vehicle without Allstate's prior approval. Once IAA has obtained Saleable Title Documents with respect to a vehicle covered by a Local Pooling Agreement, IAA shall offer such vehicle for sale at or before the third auction at the site at which such vehicle is located. 2.9. NEW LOCAL PURCHASE AGREEMENT. (a) In the event IAA establishes Reclamation Services for Allstate in a new market which are provided under the Purchase Method, Allstate and IAA shall enter into a contract relating to the provision of Reclamation Services to Allstate under the Purchase Method (each, a "NEW LOCAL PURCHASE AGREEMENT"). (b) Allstate and IAA agree to review the payment terms contemplated by this Section 2.9 upon implementation of electronic transfer of funds arrangements between Allstate and IAA. (c) The terms of any such New Local Purchase Agreement shall be negotiated in good faith between IAA and Allstate's local field management, [*] *Confidential treatment requested. 7 [*] For a Reclamation Vehicle being sold under a Percentage-of-Sale basis under a New Local Purchase Agreement, IAA shall, once it has obtained Saleable Title Documents with respect to such vehicle, offer such vehicle for sale at or before the third auction at the site at which such vehicle is located. (d) Notwithstanding the foregoing, if there subsequently occurs any changes in the laws or regulations or implementation of laws or regulations applicable to such market that affect the prices paid for Reclamation Vehicles, either party may, upon [*] notice, elect to change such Purchase Agreement into a New Local Pooling Agreement, New Local Purchase Agreement, or New Other Local Agreement in accordance with Section 2.7(e) above. 2.10. OTHER LOCAL AGREEMENTS. (a) In the event IAA establishes Reclamation Services for Allstate in a new market which are provided under a method other than the Purchase Method or the Pooling Method, Allstate and IAA shall enter into a contract (each, an "OTHER LOCAL AGREEMENT"). (b) The terms of any such Other Local Agreement shall be negotiated in good faith between IAA and Allstate's local field management, taking into account the total economic return that IAA provides under such Other Local Agreements to Comparable IAA Customers in such market. IAA agrees to keep Tech-Cor Management apprised of such negotiations. Any such New Other Local Agreement shall provide that IAA must pay to Allstate all required payments with respect to each vehicle sold under such New Other Local Agreement within [*] following IAA's receipt of such funds from the purchaser of such vehicle. In addition, any such New Other Local Agreement shall also provide that (x) IAA will not decline to accept a bid for a vehicle being sold under such agreement without Allstate's prior approval, and (y), once IAA has obtained Saleable Title Documents with respect to a vehicle covered by such agreement, IAA shall offer such vehicle for sale at or before the third auction at the site at which such vehicle is located. 2.11. WITHDRAWAL FROM MARKETS. Notwithstanding any provision of this Agreement, IAA retains the right to withdraw at any time upon [*] notice to Allstate from one or more of those existing markets identified on Exhibit 2.11 attached hereto in which IAA currently provides Reclamation Services or from any new markets in which it provides Reclamation Services in the future. *Confidential treatment requested. 8 2.12. AMENDMENTS. The terms of any Existing Local Agreement or New Local Agreement shall be subject to amendment upon the mutual agreement of IAA and the local field management of Allstate managing such local agreement to better meet the needs of the local markets. IAA agrees to notify Allstate's National Salvage Account Manager of any such amendment prior to its effectiveness. III. PAYMENT TERMS FOR LOCAL AGREEMENTS 3.1. MARKET AREA BASELINE RETURN. This Section deleted. 3.2. PURCHASE PRICES FOR NEW LOCAL PURCHASE AGREEMENTS. This Section deleted. 3.3. COMPARISON OF CALCULATED RETURN AND TARGET NET RETURN. This Section deleted. 3.4. ADJUSTMENTS TO GUARANTEE MULTIPLIER. This Section deleted. 3.5. PAYMENT TERMS FOR EXISTING MARKET AREAS. This Section deleted. 3.6. RENEGOTIATION OF PRICING. This Section deleted. 3.7. VOLUME PRICING ADJUSTMENT. Allstate shall have the option to either: (a) engage, at Allstate's expense, an independent third party to verify the compliance by IAA with the provisions of Sections 2.8, 2.9 and 2.10 with regard to its pricing and fees to its other customers, and IAA shall provide information to, and otherwise cooperate with, such third party as reasonably requested; provided that such third party (i) may be required by IAA to execute a confidentiality agreement with IAA in form reasonably acceptable to IAA and (ii) shall not be permitted to remove any IAA records, or any copies thereof, from IAA facilities. Allstate shall have no right to conduct such verifications more frequently than twice during any calendar year; or 9 (b) request and receive written confirmation from IAA verifying its compliance with Sections 2.8, 2.9 and 2.10 signed by its President. For purposes of this Section, contract negotiations are excluded from the definition of "verification." 3.8. TITLE AND STORAGE CHARGES. This Section deleted. 3.9. REVIEW OF CALCULATIONS. IAA shall have the right to reasonably request ACV data which Allstate uses to calculate IAA payments. 3.10. PURCHASE PRICE FOR CERTAIN VEHICLES. This Section deleted. IV. UTILIZATION FEE 4.1. UTILIZATION FEE. (a) During calendar years 1996 and 1997, IAA will pay to Allstate (or its designee) a fee in respect of each Reclamation Vehicle sold by IAA during each such year. The amount of the per vehicle fee shall be [*] The aggregate fee payable for each calendar year pursuant to this Section 4.1 (the "UTILIZATION FEE") shall be an amount equal to the product of (x) the total number of Reclamation Vehicles sold by IAA during such calendar year and (y) [*] (b) Within [*] after the end of each of the first three quarters of each calendar year, IAA shall pay to Allstate (or its designee) [*] of the estimated Utilization Fee for such calendar year, based on a reasonable estimate by IAA of the annual volume of Reclamation Vehicles to be processed by IAA during such year. Within [*] after the end of each calendar year, the Utilization Fee for such year shall be calculated and (i) if the aggregate estimated amounts previously paid to Allstate (or its designee) are less than the Utilization Fee, the amount of such shortfall shall be paid to Allstate (or its designee); or (ii) if the aggregate estimated amounts previously paid by IAA to Allstate (or its designee) exceed the Utilization Fee, the amount of such excess shall be paid by Allstate (or its designee) to IAA. (c) No Utilization Fee was or is payable by IAA to Allstate during the third and fourth quarters of 1995. Utilization Fees paid by IAA in the first and second quarters of 1995 will not be subject to adjustment and will be retained by Allstate. 4.2. VOLUME COMPONENT. This Section deleted. *Confidential treatment requested. 10 4.3. PROFIT COMPONENT. This Section deleted. 4.4. ROLL-OUT COMPONENT. This Section deleted. V. OTHER OPERATING ARRANGEMENTS 5.1. VEHICLE INSPECTION AND APPRAISAL FACILITIES. (a) At the request of Allstate, IAA shall provide reasonable space to Allstate at any facility where IAA provides Reclamation Services for use by Allstate or any of its affiliates as a VIC. (b) IAA will lease to Allstate the VICs currently located at the Tech-Cor Facilities at the existing rates applicable to such leases and the VICs currently located at IAA facilities at the existing rates. For those VICs located at a new IAA facility, Allstate will pay its pro rata share (based on square footage) of any rent and other operating costs payable by IAA in respect of such facility. (c) If Allstate or any of its affiliates subsequently chooses to offer appraisal services at a reclamation facility in a market serviced by IAA, Allstate will offer such services at an Appraisal Facility located at an IAA facility, if IAA has space available at its facility in such area. Allstate and its affiliates will have the first right to use any space at an IAA facility designated by IAA as an Appraisal Facility. (d) IAA will continue during the Term to make available to Allstate [*] For Appraisal Facilities located at new IAA facilities, Allstate shall pay to IAA an amount equal to a proportionate share of IAA's total costs to maintain such facility or, if less, an amount equal to the fair market rental for such Appraisal Facility. (e) Any space provided to Allstate for use as a VIC pursuant to this Section 5.1 shall be provided on terms substantially similar to those set forth in the relevant Form of Sublease attached as Exhibit 5.1(e). 5.2. OTHER BUSINESS INTERESTS. (a) [*] *Confidential treatment requested. 11 5.3. SALVAGE MANAGEMENT SYSTEM. (a) Allstate may develop, either on its own or with the assistance of a third party, a salvage management system to meet Allstate's requirements with regard to functionality, interfaces with existing and future claim systems, industry, state and federal reporting, vehicle salvage related analysis, and report generation (the "PROPOSED SALVAGE MANAGEMENT SYSTEM"). (b) IAA shall contribute [*] toward the cost of designing and developing the Proposed Salvage Management System, which amount shall be payable on or before December 31, 1996. (c) Allstate shall be the owner of the Proposed Salvage Management System and shall determine the location of the hardware and software comprising the Proposed Salvage *Confidential treatment requested. 12 Management System. The licensing of the Proposed Salvage Management System to any third party will be at Allstate's discretion and any fees generated therefrom shall be paid to Allstate. The identity of the licensee, the scope of the license and the amount of this licensing fee will be determined by Allstate in its sole discretion. Notwithstanding the foregoing, [*] (d) All communication and transaction costs related to the Salvage Management System will be the responsibility of the originating party. VI. TERM; RENEWAL; TERMINATION 6.1. TERM. The term of this Revised Salvage Agreement (the "INITIAL TERM") shall expire on December 31, 1998, unless terminated earlier pursuant to the provisions of this Article VI. 6.2. ADDITIONAL TERM. (a) Allstate has the option to extend the term of this Revised Salvage Agreement for successive one year periods (each an "ADDITIONAL TERM") upon [*] written notice to IAA. (b) Allstate shall have the right to terminate this Revised Salvage Agreement without cause during any Additional Term upon [*] written notice to IAA. 6.3. EARLY TERMINATION BY ALLSTATE. Upon [*] written notice to IAA, Allstate shall have the right to terminate this Revised Salvage Agreement, any Existing Local Agreement or any New Local Agreement, covering any market in which IAA commits a breach of the performance standards set forth in the applicable Agreement. 6.4. EARLY TERMINATION BY EITHER PARTY. Either party shall have the right to terminate this Revised Salvage Agreement and any Existing Local Agreements or New Local Agreements at any time: (a) immediately upon notice to the other party in the event that the other party is in default of a monetary obligation under this Revised Salvage Agreement, any Existing Local Agreement or New Local Agreement which remains uncured for [*] after notice thereof to the defaulting party; (b) immediately upon notice to the other party in the event that the other party in the event that the other party is in default of any material non-monetary obligation under this Revised Salvage Agreement, any Existing Local Agreement or any New Local Agreement which remains uncured for [*] after notice thereof to the defaulting party; (c) In the event that there is a Change of Control of IAA; or *Confidential treatment requested. 13 (d) In the case of any New Local Agreement established after April 1, 1996, upon thirty (30) days notice from one party to the other. 6.5. AMOUNTS OWED AT EXPIRATION OF TERM. The expiration of the Term shall not affect the payment of any amounts owed hereunder or under any Existing Local Agreement or New Local Agreement at such expiration or in respect of periods prior to such expiration. VII. NONCOMPETITION 7.1. AGREEMENT NOT TO COMPETE. (a) Allstate shall not, and shall cause each of its Subsidiaries not to, directly or indirectly, anywhere within any of the market areas serviced by the Tech-Cor Facilities acquired by IAA engage directly in, permit Allstate's or any or its Subsidiaries' names to be used by, or otherwise compete directly with IAA in, the business of providing reclamation services with respect to Total Loss Vehicles of Recovered Theft Vehicles (the "COMPETITIVE BUSINESS"); PROVIDED that the Competitive Business shall not include any claims training, research and appraisal operations or services and that this Section shall not prohibit Allstate or any of its Subsidiaries from: (i) acquiring, after the date hereof, any firm, partnership, trust, corporation, or a division or business unit thereof, or any other entity engaged directly in the Competitive Business (an "ACQUIRED COMPETITIVE BUSINESS") if (A) the acquisition of the Acquired Competitive Business is incidental to the acquisition of a firm, partnership, trust, corporation or other entity not engaged in the Competitive Business and (B) Allstate shall take all reasonable steps to dispose, as promptly as practicable after such acquisition, of such Acquired Competitive Business; or (ii) the passive ownership, directly or indirectly, of less than fifty percent (50%) of the ownership interest in any firm, partnership, trust, corporation, or a division or business unit thereof, or any other entity engaged in the Competitive Business. (b) If any court of competent jurisdiction shall finally hold that the time, territory or any other provision set forth in this Section 7.1 constitutes an unreasonable restriction, such provision shall not be rendered void, but shall apply as to such time, territory or to such other extent as such court may determine constitutes a reasonable restriction under the circumstances involved. Allstate acknowledges that the restrictions contained in this Section 7.1 are reasonable and necessary to protect the legitimate interests of IAA and that any breach by Allstate of any provision hereof will result in irreparable injury to IAA. Allstate acknowledges that, in addition to all remedies available at law, IAA shall be entitled to equitable relief, including injunctive relief. Without limitation, the parties agree and intend that the covenants contained in this Section 7.1 shall be deemed to be a series of separate covenants and agreements, one for each and every county or political subdivision of each state of the United 14 States. If, in any judicial proceeding, a court shall refuse to enforce in such action any of the separate covenants deemed included herein, then at the option of IAA, wholly-unenforceable covenants or components thereof shall be deemed eliminated from the provisions hereof for the purpose of such proceeding to the extent necessary to permit the remaining separate covenants to be enforced in such a proceeding. The parties intend to have covenants enforceable to the fullest extent of the law as to scope, time and geography. (c) Allstate's obligations under this Section 7.1 shall terminate on the earlier of (i) expiration of the Initial Term or (ii) in the event Allstate notifies IAA of its election to terminate this Agreement pursuant to Sections 6.3 or 6.4 on the actual termination date of this Agreement. VIII. MISCELLANEOUS PROVISIONS 8.1. NOTICES. All notices, statements, demands, consents or approvals or other communications (collectively, "NOTICES") required or permitted to be given to a party under or pursuant to this Revised Salvage Agreement shall be in writing and shall be delivered in person or by certified mail, return receipt requested, or by commercial messenger or courier service, addressed to such party as provided below: If to Allstate: Allstate Insurance Company 2775 Sanders Road, Suite A8 Northbrook, Illinois 60062 Attn: Susan L. Lees Associate Counsel with copies to: Allstate Insurance Company 2775 Sanders Road, Suite B7 Northbrook, Illinois 60062 Attn: Vice President Property Claims Service Organization Allstate Insurance Company 2775 Sanders Road, Suite A6 Northbrook, Illinois 60062 Attn: Auto Claims Director Tech-Cor, Inc. 100 East Palatine Road Wheeling, Illinois 60090 Attn: President 15 If to IAA: Insurance Auto Auctions, Inc. 1270 West Northwest Hwy. Palantine, IL 60067 Attn: Bradley S. Scott, Chairman James Alampi, President William W. Liebeck, Executive Vice President with a copy to: Gunderson, Dettmer, Stough, Villeneuve, Franklin & Hachigian, LLP 600 Hansen Way, Second Floor Palo Alto, CA 94304 Attn: Scott C. Dettmer, Esq. Any party may from time to time change its address or the addresses for receipt of Notices by giving the other parties prior notice of such change in the manner hereinabove provided. All Notices received on a Business Day before 3:00 p.m. local time shall be deemed delivered on such day. All Notices received either (i) after 3:00 p.m. on a Business Day or (ii) on a day that is not a Business Day shall be deemed delivered on the next Business Day. 8.2. RELATIONSHIP OF PARTIES. Nothing contained herein shall create or be deemed to create any relationship of agency, partnership, joint venture or employment among the parties hereto and no party hereto shall have any power to obligate or to bind the other party hereto in any manner whatsoever. 8.3. SPECIFIC PERFORMANCE. The failure or refusal by a party to comply with any or all of the provisions of this Revised Salvage Agreement shall entitle the other parties to specific performance of any or all of the terms, covenants and conditions of this Revised Salvage Agreement in addition to any and all other remedies available to the other party at law or in equity. 8.4. ATTORNEY'S FEE. In the event of any litigation between the parties hereto to enforce or interpret any provision or right hereunder, the unsuccessful party to such litigation shall pay the successful party all costs and expenses reasonably incurred, including reasonable attorneys' fees (in the case of staff counsel determined at a market rate) and disbursements. 8.5. ASSIGNMENT. This Revised Salvage Agreement may not be directly or indirectly assigned or transferred by either party hereto without the prior written consent of the other party. 8.6. SUCCESSORS AND ASSIGNS. This Revised Salvage Agreement is for the sole benefit of Allstate and IAA and their respective nominees, successors and permitted assigns. This Revised Salvage Agreement shall not confer any rights or benefits or any person other than Allstate and IAA and their respective nominees, successors and permitted assigns. 8.7. FURTHER ASSURANCES. Each party shall at any time and from time to time execute, acknowledge and deliver all such further documents and instruments and do such further acts and 16 things as the other parties may reasonably request to carry out and effectuate fully the transactions contemplated by this Revised Salvage Agreement. 8.8. HEADINGS. All article and section headings in this Revised Salvage Agreement are for convenience of reference only. Such titles and captions shall not be deemed part of this Revised Salvage Agreement and in no way defined, extend or describe the scope or intent of any provisions hereof. 8.9. GOVERNING LAW. This Revised Salvage Agreement shall be governed by and construed in accordance with the substantive laws of the State of Illinois, without regard to the conflicts of law principles thereof. 8.10. COUNTERPARTS. This Revised Salvage Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original. Such counterparts shall together constitute one and the same Revised Salvage Agreement even if all the parties shall not have signed the same counterpart. 8.11. ENTIRE REVISED SALVAGE AGREEMENT. This Revised Salvage Agreement (together with the Exhibits hereto) constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes any and all prior agreements, understandings or proposals with respect to such subject matter, including without limitation the 1993 Salvage Agreement. No amendment or modification of this Revised Salvage Agreement shall be binding unless same shall be in writing and signed by each of Allstate and IAA. 8.12. CONFIDENTIALITY. (a) Without the prior written consent of the other party, no party shall disclose to any third party, or make any announcement regarding, any of the terms of this Revised Salvage Agreement, unless such disclosure is (i) required by law and the party making such disclosure shall have previously notified the other party of its legal obligation to make such disclosure or (ii) made pursuant to reporting obligations under applicable securities laws and regulations. (b) The provisions of (a) above shall not apply to the disclosure of any information (i) to professional advisors of either party (such as lawyers or accountants) who are advised by the party of the confidential nature of the information, (ii) which has already come into the public domain other than by reason of default by the applicable party bound hereby, (iii) rightfully received from any third party or (iv) necessary to establish either party's rights hereunder. (c) Nothing in this Revised Salvage Agreement shall be construed to provide Allstate any license, rights, or access to any confidential information of any supplier to IAA. 17 IN WITNESS WHEREOF, the parties hereto have caused this Revised Salvage Agreement to be executed by their duly authorized representatives as of the date first above written. ALLSTATE INSURANCE COMPANY By: /s/ William J. Gruner 4/30/96 --------------------------------------- Its: INSURANCE AUTO AUCTIONS, INC. By: /s/ James P. Alampi 5/1/96 --------------------------------------- Its: 18 EXHIBIT 1.1(v) MAPS OF MARKET AREAS See separately bound document entitled "Tactician Maps Of Allstate Regions - Market Claim Office Territories By Zip Codes" 19 EXHIBIT 2.9 ECONOMIC RETURN METHODOLOGY [*] *Confidential treatment requested. 20 EXHIBIT 2.11 WITHDRAWAL FROM MARKETS [*] *Confidential treatment requested. 21 EX-10.147 3 EXHIBIT 10.147 EMPLOYMENT AGREEMENT This employment agreement is effective as of March 11, 1996 between Insurance Auto Auctions, Inc., a California corporation (the "Company"), and James P. Alampi, ("Executive.") WHEREAS, the Company desires to employ Executive and Executive desires to be employed by the Company upon the terms and conditions set forth below. NOW, THEREFORE, Company and Executive agree as follows: 1. EMPLOYMENT AND ELECTION AS A DIRECTOR. The Company agrees to employ Executive as its President and Chief Executive Officer commencing March __, 1996 and Executive accepts employment by the Company upon the terms and conditions herein set forth. During the term of his employment, Executive shall devote his full time and attention to the business and affairs of the Company. The Company agrees to take all action necessary to nominate and elect Executive as a director of the Company as soon as possible following his commencement of employment and to continue his directorship during the term of his employment. The Statement of Expectations attached hereto as Schedule A represents the understanding between the Company and Executive regarding the expectation of Executive's deliverables during 1996. 2. COMPENSATION AND BENEFITS. (a) COMPENSATION. The Company shall pay to Executive for all services to be performed by Executive during the term of this Agreement a salary at the rate of $310,000 per annum, as reduced by required withholding taxes. (b) PERFORMANCE INCENTIVE. As additional compensation for performance of the services rendered by Executive during the term of this Agreement, the Company will pay to Executive, in cash, a performance incentive amount equal to 40% of Executive's annual salary based upon the achievement of objectively quantifiable and measurable goals and objectives which shall be determined, in advance, by the Compensation Committee of the Board of Directors with respect to each fiscal year of the Company. In the 1996 Fiscal Year, half of Executive's target incentive amount shall be guaranteed without regard to Executive's actual achievement of goals. Amounts paid to Executive pursuant to this Paragraph 2(b) are hereinafter referred to as "Incentive Compensation." (c) BENEFITS. During the term of his employment or for such time as otherwise provided in this Agreement, Executive shall be entitled to participate in such vacation, auto allowance, benefit plans, fringe benefits, life insurance, medical and dental plans (beginning on the first day of employment), retirement plans and other programs as are offered from time to time by the Company and are described in the Company's employee benefit handbooks. Executive shall be entitled to four weeks of paid vacation each calendar year, subject to any limitations on carryover of unused vacation generally applicable to employees. The Company will pay for a membership in and reimburse reasonable dues for a golf club membership in a golf club to be mutually agreed upon by the Company and Executive. The club membership shall remain an asset of the Company. Executive shall be authorized to incur necessary and reasonable travel, entertainment and other business expenses in connection with his duties hereunder. In connection with expenses pursuant to this subparagraph (c), the Company shall reimburse Executive for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. (d) OPTIONS. The Company shall grant to Executive an option to purchase 200,000 shares of the Company's common stock. Such option shall be granted under the Company's 1991 Stock Option Plan and will be contingent upon shareholder approval of an amendment increasing the share reserve by a number sufficient to cover this grant. The option granted pursuant to this subparagraph (d) shall be exercisable at 100% of the fair market value of the common stock on the close of business on the day before the day that Executive becomes employed by the Company. Such option shall be subject to the usual terms and conditions of options issued pursuant to and in accordance with the Company's 1991 Stock Option Plan. The option shall become exercisable in four annual installments beginning one year after the grant date. (e) INDEMNIFICATION. The Company shall indemnify Executive in accordance with the terms of the Company's standard form of Indemnification Agreement. 3. TERMINATION. (a) AT WILL NATURE OF EMPLOYMENT. This Agreement shall terminate by reason of Executive's death or Disability (as defined in Section 22(e)(3) of the Internal Revenue Code). In addition, employment with the Company is not for a specific term and can be terminated by Executive or by the Company at any time for any reason, with or without cause or prior notice. Any contrary representations that may have been made or that may be made to Executive are superseded by this Agreement. (b) SEVERANCE BENEFITS APART FROM A CHANGE IN CONTROL. Upon the termination of this Agreement and Executive's employment hereunder, Company shall pay to Executive (UNLESS Executive voluntarily terminates Executive's employment or unless Executive's employment was terminated for Cause, in which case the Company shall not be obligated to pay Executive any amount after the date of termination other than to pay his salary earned through the date of termination plus that portion of his Incentive Compensation earned through the date of termination) each of the following: (i) Company shall continue to pay Executive an amount equal to his monthly salary at the rate in effect at the time of such termination for a period of twelve (12) months thereafter. (ii) Company shall provide, at its expense, continued coverage of Executive and Executive's beneficiaries for a period extending through the earlier of the date Executive commences any subsequent full-time employment for pay 2 and the date that is one (1) year after Executive's termination of employment, under the Company's health plan covering Executive and Executive's beneficiaries, provided that Executive properly elects coverage pursuant to COBRA. For purposes of this Agreement, "Cause" shall mean Executive's unauthorized use or disclosure of the confidential information or trade secrets of the Company, which use causes material harm to the Company, Executive's conviction of a felony under the laws of the United States or any state thereof, Executive's gross negligence or Executive's continued failure to perform assigned duties for 45 days after receiving written notification from the Board. The termination of this Agreement and Executive's employment hereunder for Cause shall not affect the continuing enforceability of Section 5 or Executive's continuing obligations under Sections 5, 6, and 7. (c) SEVERANCE BENEFITS FOR TERMINATION FOLLOWING A CHANGE IN CONTROL. If Executive's employment with the Company terminates by reason of Executive's Involuntary Termination (as defined below) or termination by the Company without Cause (as defined above)), Executive shall be entitled to receive each of the following: (i) Company shall continue to pay Executive an amount equal to his Current Compensation for a period of twenty-four (24) months thereafter. (ii) Company shall provide, at its expense, continued coverage of Executive and Executive's beneficiaries for a period extending through the earlier of the date Executive commences any subsequent full-time employment for pay and the date that is eighteen (18) months after Executive's termination of employment, under the Company's health plan covering Executive and Executive's beneficiaries, provided that Executive properly elects coverage pursuant to COBRA. (iii) All of Executive's outstanding stock options to purchase Company common stock shall accelerate and become fully exercisable. (d) DEFINITIONS. (i) CHANGE IN CONTROL. "Change in Control" shall mean the occurrence of any of the following events: (A) OWNERSHIP. Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said act), directly or indirectly, of securities of the Company representing at least fifty (50%) of the total voting power represented by the Company's then outstanding voting securities. 3 (B) MERGER/SALE OF ASSETS. The stockholders of the Company approve a merger of the Company with any other Company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such a merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (C) CHANGE IN COMPOSITION OF BOARD OF DIRECTORS. A change in the composition of the Board over a period of twelve (12) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. (ii) CURRENT COMPENSATION. "Current Compensation" shall mean an amount equal to the greater of (A) the average of Executive's annual base salary and bonus earned in each year during which Executive was employed by the Company (up to a maximum of three years) which precedes the year in which the termination occurs, or (B) Executive's annual base salary for, and any bonus earned at any time during, the year in which the termination occurs. (iii) INVOLUNTARY TERMINATION. "Involuntary Termination" means Executive's voluntary termination following (I) a change in Executive's position with the Company which materially reduces Executive's level of responsibility, (II) a reduction in Executive's level of compensation (including base salary and bonuses) or (III) a change in Executive's place of employment, which is more than 50 miles from Executive's place of employment prior to the change, PROVIDED AND ONLY IF such change or reduction is effected without Executive's written concurrence. 4. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL RIGHTS. (a) Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall 4 the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer after the date of termination, or otherwise. (b) The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amount otherwise payable, or supersede, affect or in any way diminish Executive's existing rights, or rights which accrue in the future, under any applicable law or any pension benefit or welfare benefit plan, or other contract, plan or arrangement, including, without limitation, participation in stock incentive plans and deferred compensation plans. The compensation and benefits set forth in this Agreement shall in no way be construed to limit or prevent Executive from receiving or participating in other additional plans, programs, or benefits which may be made available by the Company in the future, including, without limitation, participation in stock incentive plans, retirement plans, deferred compensation plans, etc. 5. NON-COMPETITION. During the term of this Agreement and for one year thereafter, Executive will not, directly or indirectly, whether as a partner, officer, stockholder, advisor, employee or otherwise, promote, participate, become employed by, or engage in any activity or other business similar to the Company's business or any entity engaged in a business competitive with the Company's business. If Executive fails to comply with the provisions of this Paragraph 5, the Company may, in addition to pursuing all other remedies available to the Company under law or in equity as a result of such breach, cease payment of all severance benefits under Paragraphs 3(b) and (c). 6. NON-INTERFERENCE. During the term of this Agreement and for one year thereafter, Executive will not disrupt, damage, impair or interfere with the business of the Company, whether by way of interfering with or soliciting its employees, disrupting its relationships with customers, agents, vendors, distributors or representatives, or otherwise. Furthermore, Executive will not during this period encourage or solicit any employee of the Company to leave the Company for any reason or to devote less than all of any such employee's efforts to the affairs of the Company, provided that the foregoing shall not affect any responsibility Executive has with respect to the bona fide hiring and firing of Company personnel. 7. PROTECTION OF CONFIDENTIAL INFORMATION. Executive agrees and acknowledges that the Confidential Information (as defined below) of the Company and its subsidiaries and affiliates is valuable, special and unique to the Company's business, that such business depends on the Confidential Information, that if such Confidential Information was known to competitors or other third parties that substantial damage to the Company's business would likely occur, that the Company in entering into this Employment Agreement is relying upon Executive's agreement not to disclose any Confidential Information and that the Company wishes to protect such Confidential Information by keeping it confidential for the use and benefit of the Company. Accordingly, Executive agrees (1) to keep any and all Confidential Information in trust for the sole use and benefit of the Company, (2) except as required by Executive's duties hereunder, as required by law or as necessary in conjunction with legal proceedings (and in 5 preparation thereof with counsel), he will not at any time during, or for five (5) years after the termination of his employment, disclose or use, directly or indirectly, any Confidential Information and (3) upon termination of his employment by the Company, he will promptly deliver to or leave with the Company all materials constituting Confidential Information (including all copies thereof) that are in the possession of, under the control of, or accessible to Executive to undertake the following obligations with respect to the Confidential Information. For purposes of this Employment Agreement, "Confidential Information" means any and all information developed by Executive during the Employment Term and used by the Company or any of its subsidiaries or affiliates or developed by or for the Company, or any of its subsidiaries or affiliates of which Executive gained knowledge by reason of his employment with the Company that is not readily available in the industry in which the Company is or becomes engaged during the Employment Term; provided, however, that "Confidential Information" shall not include information that (i) is in the public domain at the time of disclosure or which thereafter enters the public domain through no improper action or inaction by Executive or any affiliate, agent or employee related thereto, or (ii) was rightfully disclosed to Executive without restriction by a third party. 8. RESOLUTION OF DISPUTES; ARBITRATION. Should a dispute arise concerning this Agreement, its interpretation or termination, or Executive's employment with the Company, either party may request a conference with the other party to this Agreement and the parties shall meet to attempt to resolve the dispute. Failing such resolution within thirty (30) days of either party's request for a conference, the Company and Executive shall endeavor to select an arbitrator who shall hear the dispute. In the event the parties are unable to agree on an arbitrator, Executive and the Company shall request the American Arbitration Association to submit a list of nine (9) names of persons who could serve as an arbitrator. The Company and Executive shall alternately remove names from this list (beginning with the party which wins a flip of a coin) until one person remains and this person shall serve as the impartial arbitrator. The decision of the arbitrator shall be final and binding on both parties. Each party shall bear equally all costs of the arbitrator. The arbitrator shall only have authority to interpret, apply or determine compliance with the provisions set forth in this Agreement, but shall not have the authority to add to, detract from or otherwise alter the language of this Agreement. 9. NOTICES. Any notice to be given hereunder shall be in writing and effective (i) when delivered personally, or by confirmed telex or facsimile transmission or (ii) when received if sent by overnight express or mailed by certified, registered or regular mail, postage prepaid, addressed to a party at its address stated below, or to such other address as such party may designate by written notice in accordance with the provisions of this Section 8. 6 To the Company: Insurance Auto Auctions, Inc. Attn: Telephone: (818) __________ Facsimile: (818) __________ To the Executive: James A. Alampi Telephone: ( ) Facsimile: ( ) 10. LIMITATION ON PAYMENTS. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) but for this Section 10, would be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision, then Executive's severance benefits hereunder shall be either (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local, income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 9 shall be made in writing by the Company's independent public accountants (the "Accountants") prior to a Change in Control, whose determination shall be conclusive and binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section 9, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section. 7 11. GENERAL. (a) SEVERABILITY. If any provision herein is held to be invalid or unenforceable for any reason, such provision will, to the extent of such invalidity or unenforceability, be of no force or effect, but without in any way affecting the remainder of such provision or any other provision contained herein, all of which will continue in full force and effect. (b) AMENDMENT. Any provision may be amended or the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only by written consent of (i) as to the Company, only by a member of the Company's Board of Directors, and (ii) as to Executive, only by Executive. Such amendment or waiver shall be binding upon the Company and Executive and their successors and assigns. (c) ASSIGNMENT. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives. (d) GOVERNING LAW. This Agreement and all disputes and suits related thereto will be governed, construed, and interpreted in accordance with the laws of the State of Illinois applicable to contracts entered into and to be performed wholly within that state by residents of that state. (e) NO WAIVER. No delay or failure by either party to exercise or enforce at any time, any right or provision of this Agreement will be considered a waiver thereof or of such party's right thereafter to exercise or enforce each and every right and provision of this Agreement. Any waiver of any right hereunder in a specific circumstance will not be deemed a waiver of that right in any other circumstances or a waiver of any other right. A waiver to be valid will be in writing but need not be supported by consideration. (f) ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements, arrangements, and communications, whether oral or written, between the parties, including all prior employment agreements. No amendment to this Agreement may be made except by a writing signed by the Company and Executive. (g) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. COMPANY: By: /s/ Bradley S. Scott --------------------------------- Title: Chairman of the Board ------------------------------ Address: ---------------------------- EXECUTIVE: /s/ James P. Alampi ------------------------------------- Address: ---------------------------- ---------------------------- 9 Schedule A 10 EX-27 4 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 11,418,000 6,410,000 27,671,000 0 7,550,000 55,882,000 22,347,000 0 216,640,000 37,394,000 33,533,000 0 0 11,000 0 216,640,000 108,215,000 148,858,000 117,627,000 24,190,000 1,865,000 0 1,576,000 4,000,000 1,720,000 2,280,000 0 0 0 2,280,000 .20 .20
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