-----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, Pz19jmIeekAam1HM6aozuEAkBIapX/cI/6ROXOSyQQDeRvGQbZklvQv+IPyhsXER EXRMHx5yF3B33+m7pq0HVA== /in/edgar/work/20000814/0000950137-00-003689/0000950137-00-003689.txt : 20000921 0000950137-00-003689.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950137-00-003689 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSURANCE AUTO AUCTIONS INC /CA CENTRAL INDEX KEY: 0000880026 STANDARD INDUSTRIAL CLASSIFICATION: [5010 ] IRS NUMBER: 953790111 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19594 FILM NUMBER: 698803 BUSINESS ADDRESS: STREET 1: 850 E ALGONQUIN RD STREET 2: STE 100 CITY: SCHAUMGURG STATE: IL ZIP: 60173 BUSINESS PHONE: 8478393939 MAIL ADDRESS: STREET 1: 850 E ALGONQUIN RD STREET 2: STE 100 CITY: SCHAUMGURG STATE: IL ZIP: 60173 10-Q 1 e10-q.txt QUARTERLY REPORT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________to _______________________ Commission File Number: 0-19594 INSURANCE AUTO AUCTIONS, INC. ----------------------------- (Exact name of registrant as specified in its charter) Illinois 95-3790111 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 850 East Algonquin Road, Suite 100, Schaumburg, Illinois 60173-3855 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (847) 839-3939 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS Number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 2000: Class Outstanding June 30, 2000 ----- ------------------------- Common Stock, $0.001 Par Value 11,684,091 shares 2 INDEX INSURANCE AUTO AUCTIONS, INC.
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION.............................................................. 3 Item 1. Financial Statements (Unaudited)................................................... 3 Condensed Consolidated Statements of Operations for the Three Month and Six Month Periods ended June 30, 2000 and June 30, 1999....... 3 Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999..................................... 4 Condensed Consolidated Statements of Cash Flows for the Six Month Periods ended June 30, 2000 and June 30, 1999....................... 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 6 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 12 PART II. OTHER INFORMATION.................................................................. 13 Item 1. Legal Proceedings.................................................................. 13 Item 2. Changes in Securities.............................................................. 13 Item 3. Defaults upon Senior Securities.................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders................................ 13 Item 5. Other Information.................................................................. 13 Item 6. Exhibits and Reports on Form 8-K................................................... 13 SIGNATURES .......................................................................... 14
2 3 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Month Periods Six Month Periods Ended June 30, Ended June 30, -------------- ------------- (Unaudited) (Unaudited) 2000 1999 2000 1999 ---- ---- ---- ---- Net revenues: Vehicle sales $ 50,845,000 $ 54,411,000 $ 105,809,000 $ 105,669,000 Fee income 33,431,000 28,120,000 65,427,000 56,740,000 ------------- ------------- ------------- ------------- 84,276,000 82,531,000 171,236,000 162,409,000 Costs and expenses: Cost of sales 60,089,000 59,836,000 123,944,000 119,777,000 Direct operating expenses 14,409,000 14,199,000 29,427,000 27,823,000 Amortization of acquisition costs 985,000 949,000 1,933,000 1,899,000 ------------- ------------- ------------- ------------- Earnings from operations 8,793,000 7,547,000 15,932,000 12,910,000 Other (income) expense: Interest expense 457,000 493,000 921,000 987,000 Interest income (470,000) (326,000) (881,000) (551,000) ------------- ------------- ------------- ------------- Earnings before income taxes 8,806,000 7,380,000 15,892,000 12,474,000 Income taxes 3,611,000 3,123,000 6,516,000 5,364,000 ------------- ------------- ------------- ------------- Net earnings $ 5,195,000 $ 4,257,000 $ 9,376,000 $ 7,110,000 ============= ============= ============= ============= Earnings per share: Basic $ .45 $ .37 $ .81 $ .62 ============= ============= ============= ============= Diluted $ .44 $ .37 $ .79 $ .62 ============= ============= ============= ============= Weighted average shares outstanding: Basic 11,634,000 11,421,000 11,610,000 11,381,000 Effect of dilutive securities - stock options 252,000 179,000 218,000 114,000 ------------- ------------- ------------- ------------- Diluted 11,886,000 11,600,000 11,828,000 11,495,000 ============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements. 3 4 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 ---------------- ---------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 31,448,000 $ 27,186,000 Short-term investments 8,615,000 6,845,000 Accounts receivable, net 41,580,000 40,188,000 Inventories 11,692,000 11,998,000 Other current assets 2,283,000 1,655,000 ------------ ------------ Total current assets 95,618,000 87,872,000 ------------ ------------ Property and equipment, net 31,403,000 27,458,000 Investments in marketable securities 4,162,000 3,336,000 Deferred income taxes 4,493,000 4,338,000 Other assets, principally goodwill, net 129,536,000 125,128,000 ------------ ------------ $265,212,000 $248,132,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 41,000 $ 135,000 Accounts payable 37,932,000 33,216,000 Accrued liabilities 6,822,000 6,306,000 Income taxes 1,617,000 1,226,000 ------------ ------------ Total current liabilities 46,412,000 40,883,000 ------------ ------------ Long-term debt, excluding current installments 20,160,000 20,180,000 Accumulated postretirement benefits obligation 3,087,000 3,178,000 Deferred income taxes 9,493,000 8,605,000 ------------ ------------ Total liabilities 79,152,000 72,846,000 ------------ ------------ Shareholders' equity: Preferred stock, par value of $.001 per share Authorized 5,000,000 shares; none issued -- -- Common stock, par value of $.001 per share Authorized 20,000,000 shares; issued and outstanding 11,684,091 and 11,575,010 shares as of June 30, 2000 and December 31, 1999, respectively 12,000 12,000 Additional paid-in capital 136,394,000 134,996,000 Retained earnings 49,654,000 40,278,000 ------------ ------------ Total shareholders' equity 186,060,000 175,286,000 ------------ ------------ $265,212,000 $248,132,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 4 5 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Month Periods Ended June 30, ---------------------------- 2000 1999 ---- ---- Cash flows from operating activities: Net earnings $ 9,376,000 $ 7,110,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,790,000 4,484,000 (Gain) loss on disposal of fixed assets (22,000) (47,000) Change in assets and liabilities (net of effects of acquired companies): (Increase) decrease in: Investments, net (2,596,000) (3,016,000) Accounts receivable, net (826,000) 3,280,000 Inventories 306,000 (203,000) Other current assets (628,000) (152,000) Other assets 30,000 (21,000) Increase (decrease) in: Accounts payable 4,274,000 (5,634,000) Accrued liabilities 419,000 270,000 Income taxes payable 1,124,000 1,343,000 ------------ ------------ Total adjustments 6,871,000 304,000 ------------ ------------ Net cash provided by operating activities 16,247,000 7,414,000 ------------ ------------ Cash flows from investing activities: Capital expenditures (6,432,000) (4,021,000) Proceeds from disposal of fixed assets 88,000 70,000 Payments made in connection with acquired companies, net of cash acquired (6,925,000) -- ------------ ------------ Net cash used in investing activities (13,269,000) (3,951,000) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock 1,398,000 1,400,000 Principal payments of long-term debt (114,000) (203,000) ------------ ------------ Net cash provided by financing activities 1,284,000 1,197,000 ------------ ------------ Net increase in cash 4,262,000 4,660,000 Cash and cash equivalents at beginning of period 27,186,000 11,682,000 ------------ ------------ Cash and cash equivalents at end of period $ 31,448,000 $ 16,342,000 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 860,000 $ 860,000 ============ ============ Income taxes $ 5,154,000 $ 4,121,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 5 6 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The unaudited condensed consolidated financial statements of Insurance Auto Auctions, Inc. and its subsidiaries (collectively, the "Company") have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of the Company, reflect all adjustments (consisting of normal recurring adjustments, except as otherwise described in Note 3) 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 is included in the Company's annual consolidated financial statements and notes thereto. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. 2. INCOME TAXES Income taxes were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by the Company. 3. ACQUISITIONS In March 2000, the Company acquired two companies, Wisconsin Auto Auction, L.L.C. of Milwaukee and Valley Auto Pool, Inc. of Appleton, Wisconsin, for $6.0 million cash. In June 2000, the Company acquired Insurance Salvage Services of South Carolina ("ISS") for $925,000 cash. ISS operated two sites in South Carolina located in Greenville and Charleston. These acquisitions were accounted for as purchases, and the results of their operations are included in the Company's consolidated financial statements from the date of acquisition. 4. RECLASSIFICATION Certain reclassifications have been made to the 1999 financial statements and footnotes to conform with the current year presentation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This report on Form 10-Q contains forward-looking information that is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected, expressed or implied by such forward looking information. In some cases, you can identify forward looking statements by our use of words such as "may, will, should, anticipates, believes, expects, plans, future, intends, could, estimate, predict, potential or contingent," the negative of these terms or other similar expressions. The Company's actual results could differ materially from those discussed or implied herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Factors That May Affect Future Results" below and the Company's annual report on Form 10-K for the fiscal year ended December 31, 1999. Among these risks are legislative acts, changes in the market value of salvage, competition, quality and quantity of inventory available from suppliers, availability of suitable acquisition candidates and dependence on key insurance company suppliers. 6 7 OVERVIEW The Company offers insurance companies and other vehicle suppliers cost-effective salvage processing solutions through a variety of different methods of sale, including percentage of sale consignment ("Percentage Plus"), fixed fee consignment, and purchase agreement. Under the Percentage Plus and fixed fee sales methods, the vehicle is not owned by the Company and only the fees associated with the processing and sale of the vehicle are recorded in net sales. The Percentage Plus method offers potentially increased profits over fixed fee consignment by providing incentive to both the Company and the salvage provider to invest in vehicle enhancements thereby maximizing the vehicle selling prices. Under the purchase agreement sales method, the vehicle is owned by the Company and the sales price of the vehicle is recorded in revenue. By assuming some of the risk inherent in owning the salvage vehicle instead of selling on a consignment basis, the Company is potentially able to increase profits by improving the value of the salvage vehicle prior to the sale. Under the purchase agreement method, IAA generally pays the insurance company a pre-determined percentage of the ACV to purchase the vehicle. ACV's are the estimated pre-accident fair value of a vehicle, adjusted for additional equipment, mileage and other factors. Because the Company's purchase price is fixed by contract, changes in ACV's or in the market or auction prices for salvage vehicles have an impact on the profitability of the sale of vehicles under the purchase agreement method. If increases in used car prices and ACV's are not associated with a corresponding increase in prices at salvage auctions, there can be a negative impact on the profitability of purchase agreement sales. To mitigate these risks, the Company has adjustment and risk-sharing clauses in its standard purchase agreement contracts designed to provide some protection to the Company and its customers from certain unexpected, significant changes in the ACV/salvage price relationship. Since its initial public offering, the Company has grown primarily through a series of acquisitions to now include 54 locations as of June 30, 2000. The Company's operating results are subject to fluctuations, including quarterly fluctuations, that can result from a number of factors, some of which are more significant for sales under the purchase agreement method. See "Factors That May Affect Future Results" below for a further discussion of some of the factors that affect or could affect the Company's business, operating results and financial condition. RESULTS OF OPERATIONS Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30, 1999 Net sales of the Company increased to $84.3 million for the three months ended June 30, 2000, from $82.5 million for the same three month period in 1999, a 2% increase. Auction proceeds increased 4.5% to $176.7 million in the second quarter of 2000 from $163.7 million in the comparable period in 1999. Fee income increased 19% versus last year. This increase reflects the continued emphasis on converting customers to the Percentage Plus method as well as other profit enhancement initiatives and certain price increases. For the second quarter of 2000, 24% of units sold were under the Percentage Plus method versus 15% in 1999. The purchase agreement method of sales accounted for 26% of total units sold, compared to 29% for the same period last year. Gross profit increased 7% to $24.2 million for the three months ended June 30, 2000, from $22.7 million for the same period in 1999. The increase in gross profit is primarily the result of higher volumes and a marginal increase in gross profit per unit compared to the same period of 1999. The increase in gross profit per unit is primarily the result of the continued rollout of several gross profit enhancement initiatives and certain fee increases. The overall increase in gross profit per unit was partially offset by lower per unit profits on purchase agreement vehicles when compared to last years strong gross profit per unit on purchase agreement vehicles. 7 8 Direct operating expenses increased slightly to $14.4 million for the three months ended June 30, 2000, from $14.2 million for the same period in 1999. This increase resulted from acquisitions in Wisconsin and South Carolina which were made in March and June of 2000, respectively and an increased investment in information systems. Interest expense was $457,000 for the three month period ended June 30, 2000 versus $493,000 last year. Interest income increased to $470,000 for the three month period ended June 30, 2000, from $326,000 for the comparable period in 1999. The increased interest income is the result of an increase in cash equivalents and short-term investments. Income taxes increased to $3.6 million for the three months ended June 30, 2000, from $3.1 million for the comparable period in 1999. This increase is the result of the increase in earnings. The Company's effective tax rate for the three months ended June 30, 2000 was 41% versus 42% for the comparable period in 1999. The effective tax rate is subject to ongoing review and evaluation by the Company. The Company's net earnings were $5.2 million for the three months ended June 30, 2000, a 22% increase from $4.3 million for the comparable period in 1999. Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999 Net sales of the Company increased to $171.2 million for the six months ended June 30, 2000, from $162.4 million for the same six month period in 1999, a 5% increase. Auction proceeds increased to $352.4 million for the first six months of 2000 from $329.7 million in the comparable period of 1999. Fee income increased 15% versus last year. This increase reflects the continued emphasis on converting customers to the Percentage Plus method as well as other profit enhancement initiatives and certain price increases. For the first six months of 2000, 21% of the units sold were on the Percentage Plus method versus 15% in 1999. The purchase agreement sales method of processing accounted for 27% of total units sold versus 29% for the same period in 1999. Gross profit increased 11% to $47.3 million for the six months ended June 30, 2000, from $42.6 million for the same period in 1999. The increase in gross profit is the result of higher volumes and increased gross profit per unit compared to the same period of 1999. The increase in gross profit per unit is primarily the result of the continued rollout of several gross profit enhancement initiatives and certain fee increases. Direct operating expenses increased to $29.4 million for the six months ended June 30, 2000, from $27.8 million for the same period in 1999. The increase in expenses reflects the acquisitions in Wisconsin and South Carolina which were made in March and June of 2000, respectively. On a same-store basis, expenses increased approximately 4% versus last year reflecting the increased investment in information systems. Interest expense decreased slightly to $921,000 for the six months ended June 30, 2000, from $1.0 million for the same period in 1999. Interest income increased to $881,000 for the six month period ended June 30, 2000, from $551,000 for the comparable period in 1999. The increase is the result of an increase in cash equivalents and short term investments. Income taxes increased to $6.5 million for the six months ended June 30, 2000, from $5.4 million for the comparable period in 1999. This increase is the result of the increase in earnings. The Company's effective tax rate for the six months ended June 30, 2000 was 41% versus 43% for the comparable period in 1999. The effective tax rate is subject to ongoing review and evaluation by the Company. The Company's net earnings were $9.4 million for the six months ended June 30, 2000, a 32% increase from $7.1 million for the comparable period in 1999. 8 9 FINANCIAL CONDITION AND LIQUIDITY At June 30, 2000, the Company had current assets of $95.6 million, including $31.4 million of cash and cash equivalents and $8.6 million of short-term investments. Current liabilities were $46.4 million. The Company had working capital of $49.2 million at June 30, 2000, a $2.2 million increase from December 31, 1999. At June 30, 2000, the Company's indebtedness consisted mostly of 8.6% Senior Notes of $20.0 million and amounts due to the sellers related to certain acquisitions. There were no borrowings outstanding on the Revolving Line of Credit Facility at June 30, 2000. Capital expenditures were approximately $6.4 million for the six months ended June 30, 2000. These capital expenditures primarily included upgrading and expanding the Company's management information system and the Company's facilities. The Company currently leases most of its facilities and other properties. In March 2000, the Company acquired two companies, Wisconsin Auto Auction LLC of Milwaukee and Valley Auto Pool, Inc. of Appleton, Wisconsin for $6.0 million cash. In June 2000, the Company acquired Insurance Salvage Services ("ISS") of South Carolina for $925,000 cash. ISS operated two sites in South Carolina located in Greenville and Charleston. The Company believes that cash generated from operations and its borrowing capacity under its $15 million revolving line of credit will be sufficient to fund capital expenditures and provide adequate working capital for operations for the next twelve months. Part of the Company's plan is continued growth possibly through new facility start-ups, acquisitions, and the development of new claims processing services. At some time in the future, the Company may require additional financing. There can be no assurance that additional financing, if required, will be available on favorable terms. The Company's operating results have not historically been materially affected by inflation. OTHER On February 16, 2000, an Emery Worldwide DC-8 cargo jet crashed into the Company's facility in Rancho Cordova, California (the "Rancho Branch"). All three Emery crew members died, but there were no injuries or fatalities on the ground. Approximately 850 vehicles at the Rancho Branch awaiting sale by the Company were destroyed or damaged by the crash and the ensuing fire ("Inventory Damage"). The Emery plane crash and fire caused the release of hazardous substances at the crash site, necessitating certain environmental remediation activities at the site which are ongoing. The Company has made an initial claim with its insurance carrier for the Inventory Damage. In addition, because the Rancho Branch was closed for a brief period after the crash, the Company has made an initial "business interruption" claim with its insurance carrier. The Company believes it has adequate insurance coverage in place to cover these damages. The Company also intends to make a claim with its insurance carrier for property damage at the Rancho Branch, including costs of environmental remediation. Coverage under the Company's insurance policies for environmental remediation may, however, be limited and less than necessary to cover all environmental remediation costs. The Company will also seek recovery of one-half of the cost of environmental remediation from the landlord of the Rancho Branch pursuant to the terms of a lease. Environmental remediation of the site has not yet been completed. 9 10 The Company believes that Emery Worldwide and others potentially responsible for the crash (the "Responsible Parties") will ultimately be held responsible for any and all damages, including environmental costs, incurred by the Company as a result of the crash. Accordingly, the Company has not recognized any liability as of June 30, 2000. The Company intends to vigorously pursue any and all claims under applicable law against the Responsible Parties to recover its damages. In light of the availability of adequate insurance coverage and its claims against the Responsible Parties, whom the Company believes have adequate financial resources, the Company does not believe the crash will have a material adverse effect on its financial position or future operating results, although no assurance can be given in this regard. 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 ACVs of salvage vehicles, changes in regulations governing the processing of salvage vehicles, general weather conditions and the availability and quality of salvage vehicles. The Company is also dependent upon receiving a sufficient number of total loss vehicles as well as recovered theft vehicles to sustain its profit margins. Factors which can effect the number of vehicles received include: reduction of policy writing by insurance providers which would affect the number of claims over a period of time, and changes in direct repair procedures that would reduce the number of newer less damaged total loss vehicles that tend to have the higher salvage values. Additionally in the last few years there has been a declining trend in theft occurrences. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. In addition, revenues for any future quarter are not predictable with any significant degree of accuracy, while the Company's expense levels are relatively fixed. If revenue levels are below expectations, operating results are likely to be adversely affected. Due to all of the foregoing factors, it is likely that in some future quarters the Company's operating results will be below the expectations of public market analysts and investors. Quality and Quantity of Inventory Available from Suppliers. The Company is dependent upon receiving a sufficient number of total loss vehicles as well as recovered theft vehicles to sustain its profit margins. Factors which can effect the number of salvage vehicles received include the reduction of policy writing by insurance providers which would affect the number of claims over a period of time, and changes in direct repair procedures that would reduce the number of newer less-damaged total loss vehicles that tend to have higher salvage values. The decreases in the quality and quantity of inventory, and in particular the availability of newer and less-damaged vehicles, are further aggravated under the purchase agreement method of sale and can have a material adverse effect on the operating results and financial condition of the Company. Competition. Historically, the automotive salvage industry has been highly fragmented. As a result, the Company faces intense competition for the supply of salvage vehicles from vehicle suppliers, as well as competition from processors of vehicles from other regional salvage pools. These regional salvage pools generally process vehicles under the fixed fee consignment method and generally do not offer the full range of services provided by the Company. The salvage industry has recently experienced consolidation, however, and the Company believes its principal publicly-held competitor is Copart. Copart has completed a number of acquisitions of regional salvage pools and competes with IAA in most of IAA's geographic markets. Due to the limited number of vehicle suppliers, competition is intense for salvage vehicles from Copart and regional suppliers. It is also possible that the Company may encounter further competition from 10 11 existing competitors and new market entrants that are significantly larger and have greater financial and marketing resources. Other potential competitors could include used car auction companies, providers of claims software to insurance companies, certain salvage buyer groups and insurance companies, some of which presently supply auto salvage to IAA. While most insurance companies have abandoned or reduced efforts to sell salvage without the use of service providers such as the Company, they may in the future decide to dispose of their salvage directly to 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 operating results and financial condition. Dependence on Key Insurance Company Suppliers. Historically, a limited number of insurance companies has accounted for a substantial portion of the Company's revenues. For example, in 1999, vehicles supplied by the Company's three largest suppliers accounted for approximately 43% of the Company's unit sales. The largest suppliers, State Farm Insurance, Farmers Insurance, and Allstate, each accounted for approximately 16%, 14%, and 13%, respectively, of the Company's unit sales. A loss or reduction in the number of vehicles from any of these suppliers, or adverse change in the agreements that such suppliers have with the Company, could have a material adverse effect on the Company's operating results and financial condition. Purchase Agreement Method of Sale. The Company has entered into a number of purchase agreements, including agreements with its most significant insurance suppliers, that obligate the Company to purchase most salvage vehicles offered to it at a formula percentage of ACV. From 1993 to 1996, increased ACVs on which the Company's costs are based reduced the profitability that the Company realizes on purchase agreement contracts. This could occur again if used car prices increase faster than selling prices of salvage vehicles at auction. Further increases in ACVs or declines in the market or auction prices for salvage vehicles could have a material adverse effect on the Company's operating results and financial condition. The 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 ACV's that are not accompanied by a comparable increase in sales prices. Governmental Regulation. The Company's operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations. The acquisition and sale of totaled and recovered theft vehicles is regulated by state motor vehicle departments in each of the locations in which the Company operates. Changes in governmental regulations or interpretations of existing regulations can result in increased costs, reduced salvage vehicle prices and decreased profitability for the Company. For example, the Company believes legislation currently being considered by Congress could have a negative impact on the number of buyers attending an auction as well as increase some of the costs to those buyers. This legislation could increase governmental regulation of certain operations of the Company. In addition to the regulation of sales and acquisitions of vehicles, the Company is also subject to various local zoning requirements with regard to the location of its auction and storage facilities. These zoning requirements vary from location to location. Failure to comply with present or future regulations or changes in existing regulations could have a material adverse effect on the Company's operating results and financial condition. Provision of Services as a National or Regional Supplier. The provision of services to insurance company suppliers on a national or regional basis requires that the Company expends resources and dedicate management to a small number of individual accounts, resulting in a significant amount of fixed costs. The development of a referral based national network service, in particular, has required the devotion of financial resources without immediate reimbursement of such expenses by the insurance company suppliers. Integration and Expansion of Facilities. The Company seeks to increase sales and profitability through acquisition of other salvage auction facilities, new site expansion and the increase of salvage vehicle volume at existing facilities. There can be no assurance that the Company will continue to acquire new facilities on terms economical to the Company or that the Company will be able to add additional facilities on terms economical to the Company or that the Company will be able to increase revenues at newly 11 12 acquired facilities above levels realized prior to acquisition. The Company's ability to achieve these objectives is dependent, among other things, on the integration of new facilities, and their information systems, into its existing operations, the identification and lease of suitable premises and the availability of capital. There can be no assurance that this integration will occur, that suitable premises will be identified or that additional capital will be available to fund expansion and integration of the Company's business. Any delays or obstacles in this integration process could have a material adverse effect on the Company's operating results and financial condition. Furthermore, the Company has limited sources of additional capital available for acquisitions, expansions and start-ups. The Company's ability to integrate and expand its facilities will depend on its ability to identify and obtain additional sources of capital to finance such integration and expansion. In the future, the Company will be required to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employee work force. The failure to improve these systems on a timely basis and to successfully expand and train the Company's work force could have a material adverse effect on the Company's operating results and financial condition. Volatility of Stock Price. The market price of the Company's common stock has been and could continue to be subject to significant fluctuations in response to various factors and events, including variations in the Company's operating results, the timing and size of acquisitions and facility openings, the loss of vehicle suppliers or buyers, the announcement of new vehicle supply agreements by the Company or its competitors, changes in regulations governing the Company's operations or its vehicle suppliers, environmental problems or litigation. Environmental Regulation. The Company's operations are subject to federal, state and local laws and regulations regarding the protection of the environment. In the salvage vehicle auction industry, large numbers of wrecked vehicles are stored at auction facilities for short periods of time. Minor spills of gasoline, motor oils and other fluids may occur from time to time at the Company's facilities and may result in soil, surface water or groundwater contamination. Petroleum products and other hazardous materials are contained in above ground 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 expenditure for environmental compliance or remediation. Environmental laws and regulations, however, could become more stringent over time and there can be no assurance that the Company or its operations will not be subject to significant compliance costs in the future. To date, the Company has not incurred expenditures for preventive or remedial action with respect to contamination or the use of hazardous materials that have had a material adverse effect on the Company's operating results or financial condition. The contamination that could occur at the Company's facilities and the potential contamination by previous users of certain acquired facilities create the risk, however, that the Company could incur substantial expenditures for preventive or remedial action, as well as potential liability arising as a consequence of hazardous material contamination, which could have a material adverse effect on the Company's operating results and financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company had approximately $12.8 million of investments as of June 30, 2000. These investments largely consisted of state government obligations and had either variable rates of interest or stated interest rates ranging from 3.55% to 6.55%. The Company's investments are exposed to certain market risks inherent with such assets. This risk is mitigated by the Company's policy of investing in securities with high credit ratings and investing through major financial institutions with high credit ratings. The Company has senior notes payable of $20,000,000 at an interest rate of 8.6%. The terms of the note agreement are such that pre-payment of such debt may not be advantageous to the Company in the event that funds may be available to the Company at a lower rate of interest. 12 13 PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. INAPPLICABLE ITEM 2. CHANGES IN SECURITIES. INAPPLICABLE ITEM 3. DEFAULTS UPON SENIOR SECURITIES. INAPPLICABLE ITEM 4. SUBMISSION OF MATTERS TO A VOTE ON SECURITY HOLDERS. At the Annual Meeting of Shareholders of the Company held June 21, 2000 the shareholders (i) elected eight directors to serve on the Company's Board of Directors, (ii) approved the adoption of an amendment to the Company's 1991 Stock Option Plan increasing the number of shares of common stock reserved for issuance thereunder by 1,000,000 shares, and (iii) ratified the Company's appointment of KPMG LLP to serve as the Company's independent auditors for the fiscal year ending December 31, 2000. Shareholders holding 10,943,686 shares of Common Stock, representing 94.4% 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 -------- ---------- -------------- Thomas J. O'Malia 10,161,135 782,551 Christopher G. Knowles 10,184,115 759,571 Maurice A. Cocca 10,184,135 759,551 Susan B. Gould 10,184,135 759,551 Peter H. Kamin 10,183,566 760,120 Melvin R. Martin 10,184,135 759,551 Joseph F. Mazzella 10,183,792 759,894 John K. Wilcox 10,170,860 772,826 The vote to approve the adoption of an amendment to the Company's 1991 Stock Option Plan was as follows: For: 6,244,319; Against: 2,959,385; Abstain: 478,491; and Broker Non-Vote: 1,261,491. The vote for ratifying the appointment of KPMG LLP was as follows: For: 10,941,530; Against: 756; and Withheld: 1,400. ITEM 5. OTHER INFORMATION. INAPPLICABLE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. 10.1 Amended and Restated 1991 Stock Option Plan (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the fiscal quarter ending June 30, 2000. 13 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSURANCE AUTO AUCTIONS, INC. Date: August 14, 2000 By: /s/ Stephen L. Green --------------- -------------------------------- Name: Stephen L. Green Title: Vice President - Finance, Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 14 15 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.1 Amended and Restated 1991 Stock Option Plan 27.1 Financial Data Schedule *This item is a management contract or compensating plan or arrangement required to be filed as an exhibit to this form pursuant to Item 601(b)(10)(iii) of Regulation S-K. 15 EX-10.1 2 ex10-1.txt AMENDED AND RESTATED 1991 STOCK OPTION PLAN 1 EXHIBIT 10.1 INSURANCE AUTO AUCTIONS, INC. 1991 STOCK OPTION PLAN AS RESTATED AND AMENDED THROUGH APRIL 24, 2000 I. PURPOSE. This Insurance Auto Auctions, Inc. 1991 Stock Option Plan ("Plan") is intended to enable Insurance Auto Auctions, Inc. ("Corporation") to attract and retain the following individuals and to encourage such individuals to acquire a proprietary interest in the Corporation: (a) employees (including officers and directors) of the Corporation and its subsidiaries primarily responsible for the management, growth and financial success of the Corporation and its subsidiaries, (b) non-employee members of the Corporation's Board of Directors and (c) consultants and independent contractors who perform valuable services for the Corporation or its subsidiaries. II. ADMINISTRATION. The Plan will be administered by a committee or committees appointed by the Corporation's Board of Directors ("Board"), and each such committee shall consist of one or more members of the Board. The Board may delegate the responsibility for administration of the Plan with respect to designated classes of optionees to different committees, subject to such limitations as the Board deems appropriate. With respect to any matter, the term "Committee," when used in this Plan, will refer to the committee that has been delegated authority with respect to such matter. Members of a committee will serve for such term as the Board may determine and will be subject to removal by the Board at any time. (a) 16(b). The composition of any committee responsible for administration of the Plan with respect to optionees who are subject to the short-swing profit restrictions of Section 16(b) of the Securities Exchange Act of 1934, as amended ("1934 Act") with respect to their trading in securities of the Corporation will be comprised of two or more non-employee Board members who have not received, at any time during the one-year period preceding the date of their appointment to such committee or (if shorter) during the period between the initial registration of the Corporation's equity securities under Section 12 of the 1934 Act and such appointment, any stock options, stock appreciation rights or stock issuances under this Plan or under any other stock option, stock appreciation, stock bonus, stock purchase or other stock plan of the Corporation or its subsidiaries, except for automatic option grants made pursuant to Section VI of this Plan. (b) AUTHORITY. Any committee appointed by the Board will have full authority to administer the Plan within the scope of its delegated responsibilities, including authority to interpret and construe any relevant provision of the Plan, to adopt such rules and regulations as it may deem necessary, and to determine the terms of the grants made from time to time under the Plan (which need not be identical). Decisions of a committee made within the discretion 2 delegated to it by the Board will be final and binding on all persons who have an interest in the Plan. III. ELIGIBILITY FOR AWARDS. (a) DISCRETIONARY AWARDS. The Committee may, in its discretion, select individuals from among the following categories to receive options under the Plan: (1) KEY EMPLOYEES. The Committee may select key employees of the Corporation or its subsidiaries (including officers, whether or not they are also members of the Board). (2) CONSULTANTS AND INDEPENDENT CONTRACTORS. The Committee may select consultants and independent contractors whose services tend to contribute materially to the success of the Corporation or its subsidiaries or whose services may reasonably be anticipated to so contribute. Prior to November 20, 1991 ("IPO Date"), discretionary grants could be made to members of the Board who were not employees of the Corporation or its subsidiaries. (b) AUTOMATIC GRANTS. On and after the IPO Date, members of the Board who are not employees of the Corporation or its subsidiaries will receive options in accordance with, and only in accordance with, the Automatic Option Grant provisions of Section VI. IV. STOCK SUBJECT TO THE PLAN. (a) CLASS. The stock subject to options granted under the Plan is the Corporation's authorized but unissued or reacquired shares of Common Stock ("Common Stock"). In connection with the issuance of shares under the Plan, the Corporation may repurchase shares in the open market or otherwise. (b) AGGREGATE AMOUNT. (1) SHARES. Subject to adjustment under Section IV(c), the maximum number of shares of Common Stock issuable under the Plan is 2,350,000 shares(1). However, not more than 2,266,319 shares may be issued from and after March 31, 1996, subject to periodic adjustment under Section IV(c). (2) PARTICIPANT LIMITATION. No individual participating in the Plan may be granted stock options and separately exercisable stock appreciation rights for more than 500,000 shares of Common Stock over the remaining term of the Plan, subject to periodic adjustment under Section IV(c). For purposes of such limitation, no stock options or stock appreciation rights granted prior to January 1, 1994 shall be taken into account. - -------------------- (1) Includes the 1,000,000-share increases authorized by the Board on April 24, 2000, subject to shareholder approval at the 2000 Annual Meeting. 2 3 (3) REUSE OF SHARES. If any outstanding option under this Plan expires or terminates for any reason (including cancellation pursuant to Section IX of the Plan) before being exercised for the full number of shares to which it applies, the shares allocable to the unexercised portion of such option will not be charged against the limitation of Section IV(b)(1) and will become available for subsequent grants under the Plan. Shares subject to any option (or portion thereof) surrendered or cancelled in accordance with the "Surrender or Cancellation of Options for Cash or Stock" provisions of this Plan and all stock issuances under the Plan, whether or not the shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under this Plan. Should the exercise price of an outstanding option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an outstanding option under the Plan, the number of shares of Common Stock issuable under the Plan shall be reduced by the gross number of shares for which the option is exercised, and not by the net number of shares of Common Stock actually issued to the option holder. (c) ADJUSTMENTS. In the event any change is made to the Common Stock subject to the Plan or subject to any outstanding option granted under the Plan (whether by reason of merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination of shares, exchange of shares, or other change in corporate or capital structure of the Corporation effected without the Corporation's receipt of consideration) then, unless such change results in the termination of all outstanding options, the Committee shall make appropriate adjustments to (i) the maximum number and/or class of securities available for issuance under the Plan, (ii) the maximum number and/or class of securities for which any one individual may be granted stock options and separately-exercisable stock appreciation rights under the Plan after December 31, 1993, (iii) the number and/or class of securities and the price per share in effect under each outstanding option under the Plan (including the automatic option grants) and (iv) the number and/or class of securities per non-employee Board member for which automatic option grants are subsequently to be made under the Automatic Option Grant provisions of the Plan. The adjustments made by the Committee will be final, binding and conclusive and will be designed to prevent the dilution or enlargement of rights and benefits under the Plan. V. TERMS OF OPTIONS. Stock options granted under the Plan may, in the Committee's discretion, be either incentive stock options ("Incentive Options") qualifying under Section 422 of the Internal Revenue Code of 1986, as amended ("Internal Revenue Code"), or nonstatutory options. Individuals who are not employees of the Corporation or its subsidiaries may only be granted nonstatutory options. Options will be evidenced by instruments in such form as the Committee may from time to time approve. These instruments will conform to the following terms and, in the discretion of the Committee, may contain such other terms and restrictions as are not inconsistent with the following: 3 4 (a) OPTION PRICE. The option price per share will be fixed by the Committee; provided, however, that in no event will the option price per share of an Incentive Option be less than one hundred percent (100%), or with respect to nonstatutory options, eighty-five percent (85%), of the Fair Market Value of a share of Common Stock on the date of the option grant. (b) NUMBER OF SHARES, TERM AND EXERCISE. (1) TERM AND NUMBER. Each option granted under the Plan will be exercisable on such date or dates, during such period, and for such number of shares of Common Stock as the Committee determines and sets forth in the instrument evidencing the option. No option granted under the Plan will be exercisable after the expiration of ten (10) years from the date the option was granted. (2) EXERCISE. After any option granted under the Plan becomes exercisable, it may be exercised by notice to the Corporation at any time prior to the termination of such option. Except as authorized by the Committee in accordance with Section VII, the option price for the number of shares for which the option is exercised will become immediately due and payable upon exercise. (3) PAYMENT. The option price will be payable in full in cash (including cash equivalents); provided, however, that the Committee may, either at the time the option is granted or at the time the option is exercised and subject to such limitations as the Committee may determine, authorize payment of all or a portion of the option price in one or a combination of the following alternative forms: (i) a promissory note authorized pursuant to Section VII; or (ii) delivery of a properly-executed exercise notice, together with irrevocable instructions to a Corporation-designated broker to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the option price for the purchased shares; or (iii) full payment in shares of Common Stock valued at Fair Market Value on the exercise date and held for the requisite period to avoid a charge to the Corporation's earnings. (c) TERMINATION OF EMPLOYMENT. The Committee will have complete discretion to determine and set forth in each option agreement whether the option will continue to be exercisable, and the terms of such exercise, on and after the date that an optionee ceases to be employed by, or to provide services to, the Corporation or its subsidiaries. Included within such discretion shall be the authority of the Committee, exercisable either at the time the option is granted or at any time while the option remains outstanding, to permit one or more options held by the optionee to be exercised, during the limited period of exercisability following the optionee's cessation of employment or service, not only with respect to the number of shares in which the optionee is at that time vested but also with respect to one or more subsequent installments of purchasable shares in which the optionee would otherwise have vested had the 4 5 optionee continued in employment or service. The Committee will also have complete discretion, exercisable at any time while the option remains outstanding, to extend the period for which that option is to remain exercisable following the optionee's cessation of employment or service, but in no event may such period be extended beyond the specified expiration date of the option term. (d) INCENTIVE OPTIONS. Options granted under the Plan that are intended to be Incentive Options will be subject to the following additional terms: (1) DOLLAR LIMITATION. To the extent that the aggregate Fair Market Value (determined as of the respective date or dates of grant) of shares with respect to which options that would otherwise be Incentive Options become exercisable for the first time by any individual during any calendar year under the Plan (or any other plan of the Corporation, a parent or subsidiary corporation or predecessor thereof) exceeds the sum of $100,000 (or such greater amount as may be permitted under the Internal Revenue Code), whether by reason of acceleration or otherwise, such options will not be treated as Incentive Options. In making such determination, options will be taken into account in the order in which they were granted. To the extent the $100,000 limitation on the initial exercisability of Incentive Options would otherwise be exceeded in any calendar year, the option or options shall nevertheless become exercisable in that calendar year for the excess number of shares as nonstatutory options. (2) 10% SHAREHOLDER. If any employee to whom an Incentive Option is to be granted pursuant to the provisions of the Plan is, on the date of grant, the owner of stock (determined with application of the ownership attribution rules of Section 424(d) of the Internal Revenue Code) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of his or her employer corporation or of its parent or subsidiary corporation ("10% Shareholder"), then the following special provisions will apply to the option granted to such individual: (i) The option price per share of the stock subject to such Incentive Option will not be less than one hundred ten percent (110%) of the Fair Market Value of the option shares on the date of grant; and (ii) The option will not have a term in excess of five (5) years from the date of grant. (3) PARENT AND SUBSIDIARY. For purposes of this Section V(d) "parent corporation" and "subsidiary corporation" will have the meaning attributed to those terms as they are used in Section 424 of the Internal Revenue Code. (e) WITHHOLDING. (1) OBLIGATION. The Corporation's obligation to deliver stock certificates upon the exercise of an option will be subject to the option holder's satisfaction of all applicable federal, state and local income and employment tax withholding requirements. 5 6 (2) PAYMENT. The Committee may, in its discretion and upon such terms and conditions as it may deem appropriate (including the applicable safe-harbor provisions of SEC Rule 16b-3 or any successor rule or regulation) provide any or all holders of outstanding option grants under the Plan with the election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such options, a portion of such shares with an aggregate Fair Market Value equal to the designated percentage (up to 100% as specified by the option holder) of the federal and state income and employment taxes ("Taxes") incurred in connection with the acquisition of such shares. In lieu of such direct withholding, one or more optionees may also be granted the right to deliver previously-acquired shares of Common Stock to the Corporation in satisfaction of such Taxes. The withheld or delivered shares shall be valued at the Fair Market Value on the applicable determination date for such Taxes or such other date required by the applicable safe-harbor provisions of SEC Rule 16b-3. (f) REPURCHASE RIGHTS. The Committee may, in its discretion, establish as a term of one or more options that the Corporation (or its assigns) will have the right, exercisable upon the optionee's termination of employment with, or cessation of service to, the Corporation and its subsidiaries, to repurchase at the original option price any or all of the shares of Common Stock acquired by such optionee upon exercise of the option. Any such repurchase right will be exercisable by the Corporation (or its assigns) upon such terms (including provisions for the expiration of such right in one or more installments) as the Committee may specify in the instrument evidencing such right. (g) SHAREHOLDER RIGHTS. An option holder shall have no shareholder rights with respect to any shares covered by the option until such individual shall have exercised the option, paid the option price and satisfied all other conditions precedent to the issuance of the stock certificates for the purchased shares. VI. AUTOMATIC OPTION GRANTS TO DIRECTORS. (a) GRANTS. Each non-employee member of the Board shall automatically be granted nonstatutory options ("Automatic Option Grants") to purchase the number of shares of Common Stock indicated below (subject to adjustment under Section IV(c) of this Plan) on the dates and pursuant to the terms and conditions set forth below. Such terms and conditions have been revised effective February 22, 1994, but such revisions shall not affect any outstanding options granted under this Section VI prior to such date. However, all option grants made pursuant to the revised provisions of this Section VI as effective February 22, 1994 shall not become exercisable in whole or in part unless those revisions are approved by the Corporation's shareholders at the 1994 Annual Meeting. If such shareholder approval is not obtained, then the provisions of this Section VI as last approved by the shareholders shall automatically be reinstated and continue to govern all subsequent Automatic Option Grants made under the Plan. (1) INITIAL IPO GRANTS. Each individual who was a non-employee Board member on the IPO Date received at that time an Automatic Option Grant to purchase 5,000 shares of Common Stock. 6 7 (2) OCTOBER 28, 1992 GRANTS. Each individual who was serving as a non-employee Board member on October 28, 1992 was on that date granted an Automatic Option Grant to purchase an additional 1,000 shares of Common Stock. (3) NEW DIRECTORS PRIOR TO FEBRUARY 22, 1994. Each person who was first elected or appointed as a non-employee member of the Board after October 28, 1992 but prior to February 22, 1994 received, on the effective date of such initial election or appointment, an Automatic Option Grant to purchase 5,000 shares of Common Stock. (4) NEW DIRECTORS AFTER FEBRUARY 21, 1994. Each person who is first elected or appointed as a non-employee member of the Board on or after February 22, 1994 shall receive, on the effective date of such initial election or appointment, an Automatic Option Grant to purchase 10,000 shares of Common Stock. (5) SPECIAL GRANT. Each individual who is re-elected as a non-employee Board member at the 1994 Annual Shareholders Meeting shall receive at that time an Automatic Option Grant to purchase an additional 5,000 shares of Common Stock, provided the February 22, 1994 amendment to the Plan is approved by the shareholders at the 1994 Annual Meeting. (6) CONTINUING DIRECTORS. On the last business day of the second quarter (the "Automatic Grant Date") of each fiscal year of the Corporation beginning after October 28, 1992, each individual who is at that time serving as a non-employee member of the Board will receive an Automatic Option Grant to purchase an additional 2,000 shares(2) of Common Stock. However, an individual who is first elected or appointed as a non-employee Board member after October 28, 1992 shall not receive his or her first Automatic Option Grant for 2,000 shares under this subparagraph (6) until the last business day of the second quarter of the fiscal year immediately following the fiscal year of his or her initial election or appointment to the Board. (b) TERMS. The terms applicable to each Automatic Option Grant shall be as follows: (1) PRICE. The option price per share will be equal to one hundred percent (100%) of the Fair Market Value of one share of Common Stock on the date of grant. (2) TERM. Each Automatic Option Grant shall have a maximum term of ten (10) years, measured from the date of grant. (3) VESTING. Subject to paragraphs (4) and (5) below, each Automatic Option Grant shall become exercisable as to twenty-five percent (25%) of the option shares on the last business day of the fiscal quarter immediately following the date of grant and as to an additional twenty-five percent (25%) of the option shares on the last business day of each of the next three (3) fiscal quarters thereafter, provided the optionee continues to serve as a Board member. - -------------------- (2) Prior to October 28, 1992 amendment to Section VI, each periodic option grant was for 1,000 shares of Common Stock. 7 8 (4) CESSATION. The option will terminate three (3) months (twelve (12) months in the case of cessation by reason of disability or death) after the optionee ceases to serve as a Board member unless the option would terminate sooner under paragraph (2) above. In the case of death, the option may be exercised within the applicable period by the estate or heirs of the optionee. (5) ACCELERATION. The options will be subject to the acceleration provisions contained in Section X(a) of this Plan. (6) PAYMENT. Upon exercise of the option, the option price for the purchased shares will become payable immediately in cash, in shares of Common Stock of the Corporation that the optionee has held for at least six (6) months, or by delivery of a properly-executed exercise notice, together with irrevocable instructions to a Corporation-designated broker to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the option price for the purchased shares. VII. LOANS AND INSTALLMENT PAYMENTS. In order to assist an optionee (including an employee who is an officer or member of the Board) in the acquisition of shares pursuant to an option granted under the Plan (other than pursuant to the Automatic Option Grant provisions of this Plan), the Committee may authorize, at either the time of the grant of an option or the time of the acquisition of shares under the option, (i) the extension of a loan to the optionee by the Corporation, (ii) the payment by the optionee of the option price for the purchased option shares in installments, or (iii) the guarantee by the Corporation of a loan obtained by the optionee from a third party. The terms of any loans, guarantees or installment payments, including the interest rate and terms of repayment, will be subject to the discretion of the Committee. Loans, installment payments and guarantees may be granted without security, but the maximum credit available to the optionee shall be limited to the option price of the purchased option shares (less the par value of such shares) plus the maximum federal and state income and employment tax liability that may be incurred in connection with the acquisition. VIII. ASSIGNABILITY. No option or stock appreciation right granted under the Plan is assignable or transferable by the optionee other than by will or by the laws of descent and distribution, and during the lifetime of the optionee the granted option or stock appreciation right may be exercised only by the optionee. IX. CANCELLATION AND NEW GRANT OF OPTIONS. The Committee will have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Plan (other than options granted under the Automatic Option Grant provisions of this Plan) and to grant in substitution therefor new options under the Plan covering the same or different numbers of shares, but with an option price per share not less than eighty-five percent 8 9 (85%) of the Fair Market Value of the option shares on the new grant date or, in the case of an Incentive Option, one hundred percent (100%) of such Fair Market Value on the new grant date (or, in the case of an Incentive Option granted to a 10% Shareholder, one hundred ten percent (110%) of such Fair Market Value). The Committee shall not effect a cancellation and substitution grant as described in the foregoing sentence without the prior approval of the shareholders of the Corporation. X. ACCELERATION AND TERMINATION OF OPTIONS. (a) ACCELERATION. In the event of one or more of the following shareholder-approved transactions ("Corporate Transactions"): (1) a merger or acquisition in which the Corporation is not the surviving entity, except for a transaction the principal purpose of which is to change the State of the Corporation's incorporation, (2) the sale, transfer or other disposition of all or substantially all of the assets or outstanding capital stock of the Corporation, or (3) any reverse merger in which the Corporation is the surviving entity but in which all of the Corporation's outstanding voting stock is transferred to the acquiring entity or its wholly-owned subsidiary, then each option outstanding under the Plan will become exercisable, immediately prior to the consummation of such Corporate Transaction, with respect to the full number of shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares. Immediately following the consummation of the Corporate Transaction, all outstanding options will terminate and cease to be exercisable, except to the extent assumed by the successor corporation or parent thereof. (b) ADJUSTMENTS TO SHARES. Each outstanding option which is assumed in connection with the Corporate Transaction or is otherwise to continue in effect will be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issuable, in consummation of such Corporate Transaction, to an actual holder of the same number of shares of Common Stock subject to such option immediately prior to such Corporate Transaction. Appropriate adjustments will also be made to the option price payable per share, provided the aggregate option price payable for such securities will remain the same. In addition, the class and number of securities available for issuance under the Plan on both an aggregate and per participant basis following the consummation of the Corporate Transaction will be appropriately adjusted. (c) CORPORATE STRUCTURE. The grant of options under this Plan will in no way affect the right of the Corporation to adjust, reclassify, reorganize, or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 9 10 XI. FAIR MARKET VALUE. For all valuation purposes under the Plan, the Fair Market Value of a share of Common Stock (rounded upwards to the nearest whole cent) on any relevant date will be determined in accordance with the following provisions: (a) If the Common Stock is not at the time listed or admitted to trading on any national securities exchange, but is traded on the Nasdaq National Market, the Fair Market Value will be the closing selling price per share of Common Stock on the trading day immediately preceding the date in question, as such price is reported by the National Association of Securities Dealers, Inc. through the Nasdaq National Market or any successor system. (b) If the Common Stock is at the time listed or admitted to trading on any national securities exchange, then the Fair Market Value will be the closing selling price per share of Common Stock on the trading day immediately preceding the date in question on the securities exchange that serves as the primary market for the Common Stock, as such price is officially quoted on such exchange. (c) If the Common Stock is at the time neither listed nor admitted to trading on any national securities exchange nor traded on the Nasdaq National Market, then the Fair Market Value will be determined by the Committee after taking into account such factors as the Committee deems appropriate. XII. SURRENDER OR CANCELLATION OF OPTIONS FOR CASH OR STOCK. (a) If and only if the Committee, in its discretion, elects to implement an option surrender program under the Plan, one or more option holders may, upon such terms as the Committee may establish at the time of the option grant or at any time thereafter, be granted the right to surrender all or part of an unexercised option in exchange for a distribution equal in amount to the excess of (i) the Fair Market Value (on the option surrender date) of the shares for which the surrendered option or portion thereof is at the time exercisable over (ii) the aggregate option price payable for such shares. The distribution to which an option holder becomes entitled under this Section XII may be made in shares of Common Stock, valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Committee, in its sole discretion, deems appropriate. The option surrender provisions of this Section XII will not apply to options granted pursuant to the Automatic Option Grant provisions of this Plan. (b) One or more officers of the Corporation subject to the short-swing profit restrictions of the Federal securities laws may, in the Plan Administrator's sole discretion, be granted limited stock appreciation rights in tandem with their outstanding options under the Plan. Upon the occurrence of a Hostile Take-Over effected at any time when the Corporation's outstanding Common Stock is registered under Section 12(g) of the 1934 Act, each outstanding option with such a limited stock appreciation right in effect for at least six (6) months shall automatically be cancelled, and the officer shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the cancelled option (whether or not the option is otherwise 10 11 at the time exercisable for such shares) over (ii) the aggregate option price payable for such shares. The cash distribution payable upon such cancellation shall be made within five (5) days following the consummation of the Hostile Take-Over. Neither the approval of the Committee nor the consent of the Board shall be required in connection with such option cancellation and cash distribution. (c) For purposes of subparagraph (b) above, the following definitions shall be in effect: A Hostile Take-Over shall be deemed to occur in the event (i) any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's shareholders which the Board does not recommend such shareholders to accept and (ii) more than fifty percent (50%) of the securities so acquired in such tender or exchange offer are accepted from holders other than the Corporation's officers and directors subject to Section 16(b) of the 1934 Act. The Take-Over Price per share shall be deemed to be equal to the greater of (a) the Fair Market Value per share of Common Stock on the date of the option cancellation or (b) the highest reported price per share of Common Stock paid in effecting such Hostile Take-Over. However, if the cancelled option is an Incentive Option, the Take-Over Price shall not exceed the clause (a) price per share. (d) The shares of Common Stock subject to any option surrendered or cancelled for an appreciation distribution pursuant to this Section XII shall not be available for subsequent issuance under the Plan. XIII. EFFECTIVE DATE AND TERM. (a) EFFECTIVE DATE. The Plan was originally adopted by the Board effective on September 27, 1991 and approved by the shareholders on September 30, 1991. The Plan was restated on March 13, 1992 to increase the number of shares issuable thereunder by 50,000 shares and to revise the Corporate Transaction provisions, and such restated Plan was approved by the Corporation's shareholders on May 27, 1992. The Board again amended the Plan, effective October 27, 1992, to revise the Automatic Option Grant program for non-employee Board members so as to increase the number of shares subject to the periodic option grants made to continuing Board members and to effect the changes indicated in subparagraph (b) below, and the Board adopted a restatement of the Plan on March 9, 1993 to increase the number of shares of Common Stock issuable thereunder by 350,000 shares. Both the October 27, 1992 amendment and the March 9, 1993 restatement were approved by the shareholders on June 8, 1993. The Board again amended the Plan on September 14, 1993 to increase the number of shares issuable thereunder by 200,000 shares. On February 22, 1994, the Board restated the Plan to (i) increase 11 12 the number of shares of Common Stock issuable under the Plan by an additional 300,000 shares, (ii) impose a 500,000-share limit on the maximum number of shares of Common Stock for which any one participant may be granted stock options and separately exercisable stock appreciation rights under the Plan after December 31, 1993 and (iii) revise the Automatic Option Grant provisions of Section VI in the manner indicated therein. The September 14, 1993 amendment and the February 22, 1994 restatement were approved by the shareholders at the 1994 Annual Meeting. On March 11, 1996, the Board adopted another amendment of the Plan which increased the number of shares of Common Stock issuable thereunder by an additional 250,000 shares. The 1996 amendment was approved by the shareholders at the 1996 Annual Meeting. On April 24, 2000, the Board adopted another amendment of the Plan which increased the number of shares of Common Stock issuable thereunder by an additional 1,000,000 shares. The 2000 amendment was approved by the Shareholders at the 2000 Annual Meeting held on June 21, 2000. (b) RULE 16B-3 AMENDMENTS. On October 27, 1992, the Board amended the March 13, 1992 restatement of the Plan in order to bring its provisions into conformity with the revisions to Rule 16(b)-3 of the Securities and Exchange Commission governing the treatment, for the purposes of the short-swing liability provisions of the Federal securities laws, of certain transactions effected under employee stock plans such as the Plan, and the Plan shall accordingly become subject to such Rule 16b-3 revisions effective as of October 27, 1992. (c) RESTATEMENTS. Each option issued and outstanding under the Plan at the time of the adoption of the March 13, 1992 restatement was automatically amended to incorporate the terms of the revised provisions of Section X of the Plan applicable to Corporate Transactions. Except as so modified, nothing in the March 13, 1992 restatement shall be deemed to affect or otherwise modify the rights or obligations of the holders of such options with respect to their acquisition of shares of Common Stock thereunder. The revisions to the Plan effected by the October 27, 1992 restatement shall apply only to stock options and stock appreciation rights granted under the Plan from and after the October 27, 1992 effective date. All stock options and stock appreciation rights which were issued and outstanding under the Plan immediately prior to such effective date shall continue to be governed by the terms and conditions of the Plan (and the instrument evidencing each such option or stock appreciation right) as in effect on the date each such option or stock appreciation right was previously granted, and none of the October 27, 1992 revisions to the Plan shall affect or otherwise modify the rights or obligations of the holders of such options or stock appreciation rights with respect to the acquisition of shares of Common Stock under those options or the exercise of their stock appreciation rights. The revisions to the Plan effected by the February 22, 1994 amendment shall apply only to stock options and stock appreciation rights granted under the Plan from and after the February 22, 1994 effective date. All stock options and stock appreciation rights which were issued and outstanding under the Plan immediately prior to such effective date shall continue to be governed by the terms and conditions of the Plan (and the instrument evidencing each such option or stock appreciation right) as in effect on the date each such option or stock appreciation right was previously granted, and none of the February 22, 1994 revisions to the Plan shall affect or otherwise modify the rights or obligations of the holders of such options or stock appreciation rights with respect to the acquisition of shares of Common Stock under those options or the exercise of their stock 12 13 appreciation rights. The revisions to the Plan effected by the March 11, 1996 amendment shall apply only to stock options and stock appreciation rights granted under the Plan from and after the March 11, 1996 effective date. All stock options and stock appreciation rights which were issued and outstanding under the Plan immediately prior to such effective date shall continue to be governed by the terms and conditions of the Plan (and the instrument evidencing each such option or stock appreciation right) as in effect on the date each such option or stock appreciation right was previously granted, and none of the March 11, 1996 revisions to the Plan shall affect or otherwise modify the rights or obligations of the holders of such options or stock appreciation rights with respect to the acquisition of shares of Common Stock under those options or the exercise of their stock appreciation rights. The revisions to the Plan effected by the April 24, 2000 amendment shall apply only to stock options and stock appreciation rights granted under the Plan from and after the April 24, 2000 effective date. All stock options and stock appreciation rights which were issued and outstanding under the Plan immediately prior to such effective date shall continue to be governed by the terms and conditions of the Plan (and the instrument evidencing each such option or stock appreciation right) as in effect on the date each such option or stock appreciation right was previously granted, and none of the April 24, 2000 revisions to the Plan shall affect or otherwise modify the rights or obligations of the holders of such options or stock appreciation rights with respect to the acquisition of shares of Common Stock under those options or the exercise of their stock appreciation rights. (d) TERM. Unless sooner terminated in accordance with Section X(a) of the Plan, the Plan will terminate upon the earlier of (i) September 26, 2006 or (ii) the date on which all shares available for issuance under the Plan shall have been issued or cancelled pursuant to the exercise, surrender or cash-out of options granted under the Plan. If the date of termination is determined under clause (i) above, then options outstanding on such date will thereafter continue to have force and effect in accordance with the provisions of the instruments evidencing such options. (e) EXCESS GRANTS. Options may be granted under this Plan to purchase shares of Common Stock in excess of the number of shares then available for issuance under the Plan, provided (i) an amendment to increase the maximum number of shares issuable under the Plan is adopted by the Board prior to the initial grant of any such option and within one year thereafter such amendment is approved by the shareholders of the Corporation and (ii) each option so granted is not to become exercisable, in whole or in part, at any time prior to the obtaining of such shareholder approval. XIV. AMENDMENT OR DISCONTINUANCE. (a) BOARD. The Board may amend, suspend or discontinue the Plan in whole or in part at any time; provided, however, that (a) except to the extent necessary to qualify as Incentive Options any or all options granted under the Plan that are intended to so qualify, such action may not adversely affect rights and obligations with respect to options outstanding under the Plan; (b) the provisions of the Plan concerning the eligibility of non-employee members of the Board for awards and the amount, price and timing of Automatic Option Grants under this Plan may not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code or the rules or regulations thereunder; and (c) the Board may not, without the 13 14 approval of the Corporation's shareholders, (1) materially increase the number of shares of Common Stock issuable under the Plan or increase the maximum number of shares for which any one participant may be granted stock options and separately exercisable stock appreciation rights after December 31, 1993 (unless necessary to effect the adjustments required under Section IV(c)), (2) materially modify the eligibility requirements for awards under the Plan, (3) materially increase the benefits accruing to participants in the Plan or (4) make any other change with respect to which the Board determines that shareholder approval is required by applicable law or regulatory standards. (b) COMMITTEE. The Committee will have full power and authority to modify or waive any or all of the terms or restrictions applicable to any outstanding option, to the extent not inconsistent with the Plan, including (without limitation) the authority to accelerate the exercisability of one or more outstanding options under the Plan upon such terms and conditions as the Committee deems appropriate. XV. NO EMPLOYMENT OBLIGATION. Nothing contained in the Plan (or in any option granted under this Plan) shall confer upon any employee, director, consultant or independent contractor any right to continue in the employ of, or to provide services to, the Corporation or any affiliate or constitute a contract or agreement of employment or for the provision of services, or interfere in any way with the right of the Corporation or an affiliate to reduce such employee's, consultant's or independent contractor's compensation from the rate in existence at the time of the granting of an option or to terminate such employee's, consultant's or independent contractor's employment or services at any time, with or without cause; but nothing contained in the Plan or in any option granted under this Plan shall affect any contractual rights of an employee pursuant to a written employment agreement. XVI. USE OF PROCEEDS. The cash proceeds received by the Corporation from the issuance of shares pursuant to options under the Plan will be used for general corporate purposes. XVII. COMPLIANCE. No option may be exercised, and the Corporation will not be obligated to issue stock under any option unless, in the opinion of counsel for the Corporation, such exercise and issuance is in compliance with all applicable federal and state securities laws. As a condition to the grant of any option, or to the issuance of stock under any option, the Committee may require that the option holder agree to comply with such provisions of federal and state securities laws as may be applicable to such grant, or to the sale of stock acquired pursuant to the Plan, and that the option holder deliver to the Corporation a written agreement, in form and substance satisfactory to the Corporation and its counsel, implementing such agreement. 14 15 XVIII. GOVERNING LAW. To the extent not otherwise governed by federal law, the Plan and its implementation will be governed by and construed in accordance with the laws of the State of California. 15 EX-27.1 3 ex27-1.txt FDS
5 3-MOS 6-MOS DEC-31-2000 DEC-31-2000 APR-01-2000 JAN-01-2000 JUN-30-2000 JUN-30-2000 31,448,000 0 8,615,000 0 41,580,000 0 0 0 11,692,000 0 95,618,000 0 57,785,000 0 (26,382,000) 0 265,212,000 0 46,412,000 0 20,160,000 0 0 0 0 0 12,000 0 136,394,000 0 265,212,000 0 84,276,000 171,236,000 84,276,000 171,236,000 60,089,000 123,944,000 60,089,000 123,944,000 15,394,000 31,360,000 0 0 457,000 921,000 8,806,000 15,892,000 3,611,000 6,516,000 5,195,000 9,376,000 0 0 0 0 0 0 5,195,000 9,376,000 0.45 0.81 0.44 0.79
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