-----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, SyP0ymMu6dzEbDzDstPfGxMNDhhtXGemW9eNjRm3Jy/citQBKqjVpYldRZjeUX5K l4ixNMRNuFNVXGulBILNjg== 0000950137-02-001878.txt : 20020415 0000950137-02-001878.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950137-02-001878 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19594 FILM NUMBER: 02595453 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-K405 1 c68377e10-k405.txt ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-19594 ---------------------- INSURANCE AUTO AUCTIONS, INC. (Exact name of Registrant as specified in its charter) ILLINOIS 95-3790111 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 850 EAST ALGONQUIN ROAD, SUITE 100 SCHAUMBURG, ILLINOIS 60173 (847) 839-3939 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ---------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value 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. Yes |X| No | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of voting stock (based on the closing price as reported by the Nasdaq Stock Market(R) on March 25, 2002) held by non-affiliates of the Registrant as of March 25, 2002 was approximately $39,663,000 For purposes of this disclosure, shares of Common Stock known to be held by persons who own 5% or more of the shares of outstanding common stock and shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be "affiliates" as that term is defined under the Rules and Regulations of the Act. This determination of affiliate status is not necessarily conclusive. As of March 25, 2002, the Registrant had outstanding 12,215,728 shares of Common Stock, $0.001 par value. DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ PART I ITEM 1. BUSINESS. Certain statements in this document contain 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, projects, targeting, 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations." Among these risks are: accelerated departure from conducting business pursuant to the purchase agreement method of sale, which departure could adversely affect the Company's client base; fluctuations in the actual cash value of salvage vehicles; the quality and quantity of inventory available from suppliers; the ability to pass through increased towing costs; that vehicle processing time will improve; legislative or regulatory acts; competition; the availability of suitable acquisition candidates and greenfield opportunities; the ability to bring new facilities to expected earnings targets; the dependence on key insurance company contracts; the ability of the Company and its outside consultants to successfully implement standardized key processes throughout the Company's operations as well as the ability to successfully complete the re-design of the Company's information systems, both in a timely manner and according to costs and operational specifications; and the level of energy and labor costs. GENERAL Insurance Auto Auctions, Inc., together with its subsidiaries (collectively, "IAA" or the "Company"), offers insurance companies and other vehicle suppliers cost-effective salvage processing solutions. In an accident, theft or other claims adjustment process, insurance companies typically take possession of a vehicle because (i) based on economic and customer service considerations, the vehicle has been classified as a "total loss" and the insured replacement value has been paid rather than the cost of repair or (ii) a stolen vehicle is recovered after the insurance company has settled with the insured. The Company generally sells these vehicles at live or closed bid auctions on a competitive-bid basis at one of the Company's facilities. The Company processes salvage vehicles under three methods: purchase agreement, fixed fee consignment and percentage of sale consignment. Under the purchase agreement method, IAA generally purchases vehicles from the insurance companies upon clearance of title, under financial terms determined by contract with the insurance company supplier, and then resells these vehicles for IAA's own account at IAA auctions. Under the fixed fee consignment and percentage of sale consignment methods, the Company sells vehicles on behalf of insurance companies, which continue to own the vehicles until they are sold to buyers at auction. Under these methods, the Company generally conducts either live or closed bid auctions of the automotive salvage in return for agreed upon sales fees. In addition to fees, the Company generally charges its fixed fee consignment and percentage of sale consignment vehicle suppliers for various services, including towing and storage. Under all methods of sale, the Company also charges the buyer of each vehicle various buyer-related fees. Prior to 1992, the Company operated almost exclusively using the purchase agreement system of salvage disposal. Since 1992, IAA has acquired additional auto salvage pool operations and opened up greenfields in strategic locations, resulting in a network of 62 sites in 26 states as of December 30, 2001. Most of these businesses operate primarily using the fixed fee consignment method of sale. As a result of these site additions, a majority of the vehicles currently processed by IAA are now sold under fixed fee and percentage of sale consignment arrangements. In 2001, approximately 45% of the vehicles processed by IAA were sold under the fixed fee consignment method, 36% were sold under the percentage of sale consignment method, and 19% were sold under the purchase agreement method. The Company obtains the majority of its supply of vehicles from a large number of insurance companies and smaller quantities from non-insurance company suppliers such as rental car companies and non-profit 2 organizations. Historically, a limited number of insurance companies have accounted for a substantial portion of the Company's revenues. In 2001, vehicles supplied by the Company's three largest suppliers accounted for approximately 39% of the Company's unit sales. The aggregate number of vehicles supplied in 2001 by the Company's three largest suppliers increased from 2000. However, due to a significant increase in vehicles supplied by other customers, the percent of total units sold for the Company's three largest customers decreased. The largest suppliers, State Farm Insurance, Farmers Insurance, and Allstate Insurance ("Allstate"), each accounted for approximately 15%, 15%, and 9%, respectively, of the Company's 2001 unit sales. HISTORY The Company was organized as a California corporation in 1982 under the name Los Angeles Auto Salvage, Inc. ("LAAS"). In January 1990, all the outstanding capital stock of LAAS was acquired in a leveraged buyout and, in October 1991, LAAS changed its name to Insurance Auto Auctions, Inc. The Company completed its initial public offering in November 1991 and its common stock is traded on the Nasdaq Stock Market under the symbol IAAI. In 1997, the Company reincorporated in the state of Illinois. FIXED FEE CONSIGNMENT SALE METHOD In 2001 and 2000, the number of vehicles processed by the Company that were then sold under the fixed fee consignment sale method was approximately 45% and 50%, respectively. Under this sale method, the Company charges fees to the insurance company supplier for specific services. These fees include a salvage sales fee plus towing, title processing and storage fees. In this situation the Company typically acts as an agent for the insurance company rather than as a purchaser of salvage vehicles. Since the Company never takes ownership of the vehicle, the Company's revenues per vehicle from consignment sales are received only from these fees rather than from the revenue from the sale of the vehicle. As a result, revenue recognized per vehicle under the consignment method of sale is approximately 5% to 15% of the revenue recognized per vehicle under the purchase agreement method, where the sale price of the vehicle is also recorded. PERCENTAGE OF SALE CONSIGNMENT METHOD In 2001 and 2000, the number of vehicles processed by the Company that were then sold under the percentage of sale consignment method was approximately 36% and 24%, respectively. Under the percentage of sale consignment method, the insurance company receives a negotiated percentage of the vehicle selling price. With this method of sale, the Company acts as an agent for the insurance company. As an agent, the Company arranges for the salvaged vehicle to be towed to its facility and processes it for sale. The percentage of sale consignment method provides suppliers with a potentially greater upside as IAA's fees are tied to selling prices and, thus, IAA has a greater incentive to invest in improvements to salvage vehicles in order to maximize sales prices. The Company offers two types of percentage of sale agreements. The percentage plan is a straight percentage of sale agreement that includes vehicle enhancements as part of the selling price-based fee. The percentage plus plan offers a lower percentage of sale fee combined with discounted pricing for enhancement services. In 1998 the Company designated the percentage of sale consignment method as its preferred type of salvage provider agreement. Accordingly, the Company expects that the percent of vehicles sold under this type of agreement will increase. PURCHASE AGREEMENT METHOD In 2001 and 2000, the number of vehicles processed by the Company that were then sold under the purchase agreement method of sale was approximately 19% and 26%, respectively. Under the purchase agreement method of sale, the Company is required to purchase, and the insurance company and other non-insurance company suppliers are required to sell to the Company, virtually all total loss and recovered theft vehicles generated by that supplier in a designated geographic area. The agreements are customized to each supplier's needs, but typically require the Company to pay a specified percentage of a vehicle's Actual Cash Value ("ACV" - the estimated pre-accident fair value of the vehicle), depending on the vehicle's age and certain other conditions, including whether the vehicle is a total loss or a recovered theft vehicle. IAA assumes the risk of market price variation for vehicles sold 3 under a purchase agreement, and therefore works to enhance the value of purchased vehicles in the selling process. Due to the fact that the Company's purchase price is fixed by contract, changes in ACVs 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 ACVs 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. Revenue recorded from the sale of a purchase agreement vehicle represents the actual selling price of the vehicle. In 2001, the Company accelerated its exit from purchase agreement contracts due to their weak performance. In 2002, the Company expects that the proportion of total units sold under purchase agreement contracts will be less than 10%. SERVICES PROVIDED TO ALL SUPPLIERS The process of salvage disposition through the IAA system commences at the first report of loss, or when a stolen vehicle has been subsequently recovered. An insurance company representative assigns the vehicle to the Company, either by phone, facsimile or electronically through the Company's online CSA Today(sm) system. CSA Today is the Company's proprietary data management system. The system enables insurance company suppliers to enter vehicle data electronically, and then track and manage the progress of salvage vehicles throughout the disposition process in terms of both time and salvage recovery dollars. With this new, dynamic tool, vehicle providers now have 24-hour access to their total-loss data. Information provided ranges from the details associated with a specific total-loss vehicle, to comprehensive management reports for an entire claims center or geographic region. Additional features of this new utility include inventory management tools and a powerful new Average Salvage Calculator that helps customers determine the approximate salvage value of a potential total-loss vehicle. This tool is helpful to adjusters when evaluating the "repair" vs. "total" decision. The management tools provided by CSA Today enable claims personnel to monitor and manage total-loss salvage better than ever before. CSA Today's daily updates provide the most current and meaningful data available to the Company's vehicle providers. This forward-looking management tool is expected to eventually replace the Company's need to produce and distribute the quarterly CSA report currently provided to customers. In 1999, the Company introduced a new approach to total-loss appraisal by offering the FastTrack(R) Appraisal solution. FastTrack utilizes an early total-loss recognition system to identify, appraise and move probable total-loss vehicles sooner than the conventional claims process. FastTrack cuts through many of the delays typically associated with traditional claims handling by combining a comprehensive appraisal service with IAA's salvage service resources. Completed appraisals, including a condition report and an array of digital images, are electronically transmitted to a secure, password-protected Web site, providing adjusters with same-day access to the information via the Internet. The result is faster completion of total-loss appraisals, significant savings on accrued shop storage and car rental expenses, and exceptional customer satisfaction. The Company's FastTow(R) service provides towing services that guarantee vehicles will be delivered to a Company branch storage facility, usually within one to two business days of assignment in a designated service area. When retrieving a vehicle, the FastTow(R) service will also advance, on behalf of the supplier, any storage and towing charges incurred when towing the vehicle from the accident scene or recovered theft site to the temporary storage facility or repair shop. Once these advance towing and storage charges have been reviewed and verified by the Company, the towing subcontractor generally will pay the charges at time of vehicle pick up and deliver the vehicle to the predetermined Company auction and storage facility. The rapid retrieval time and review of advance charges are also intended to increase the insurance company's net return on salvage. In order to further minimize vehicle storage charges incurred by insurance company suppliers at the temporary storage facility or repair shop, and also to improve service time for the policyholder, the Company and a certain group of its insurance company suppliers have established vehicle inspection centers ("VICs") at many of the Company's facilities. A VIC is a temporary storage and inspection facility located at an IAA site that is operated by the insurance company. Suspected total-loss vehicles are brought directly to the VIC from the temporary storage facility or repair shop. The insurance company typically has appraisers stationed on the VIC site in order to expedite the appraisal process and minimize storage charges at outside sites. If the insurance company totals the vehicle, it can easily be moved to IAA's vehicle storage area. If the vehicle is not totaled, it is promptly delivered to the 4 insurer's selected repair facility. IAA also has the ability to provide digital images as a service to its customers, electronically displaying pictures of the damaged cars to insurance adjusters in their offices. After a totaled vehicle is received at a Company facility, it remains in storage but cannot be auctioned until transferable title has been submitted to and processed by IAA. For most vehicles stored at our facilities, no storage charges accrue for a contractually specified period. The document processing departments at the Company's facilities provide management reports to the insurance company suppliers, including an aging report of vehicles for which title documents have not been provided. In addition, the Company customarily offers the insurance companies' staff training for each state's Department of Motor Vehicles ("DMV") document processing. These services expedite the processing of titles, thereby reducing the time in which suppliers receive their salvage proceeds, in addition to decreasing their administrative costs and expenses. The Company then processes the title documents in order to comply with DMV requirements for such vehicles. This may involve re-registering the vehicle and obtaining a salvage certificate, after which the Company is entitled to sell the salvage vehicle. The Company generally holds auctions either every week or bi-weekly in all of its locations. The auction is either live or sealed bid. Auction lists can be viewed online on the Company's Internet Web site, where buyers can either review all vehicles at a location or search for specific vehicles. Vehicles are marketed at each respective auction site as well as via an online auction list that allows prospective bidders to preview vehicles prior to the actual auction event. The IAA Auction Center, at www.iaai-bid.com(SM), is an online, Internet-based bidding forum to preview and bid on salvage vehicles at all IAA facilities throughout the United States. It provides buyers with an open, competitive bidding environment that reflects the dynamics of the live salvage vehicle auction. The Auction Center includes such services as comprehensive auction lists featuring links to digital images of vehicles available for sale, an "Auto Locator" function that promotes the search for specific vehicles within the auction system, and special "Flood" or other catastrophe auction notifications. Higher returns are driven by broader market exposure and increased competitive bidding. The Company remits payment to the insurance company suppliers within a contractual time period or shortly after sale of the vehicle and collection from the buyer. In addition, most insurance company suppliers receive monthly summary reports of all vehicles processed by the Company. The reports track the insurance companies' gross return on salvage, net return on salvage, exact origin, details of storage charges and other useful management data. The Company also provides many of its suppliers with a quarterly Comprehensive Salvage Analysis of salvage trends. OTHER SERVICES The Company offers its vehicle suppliers a National Salvage Network, based in Dallas, Texas, that allows insurance company suppliers to assign all their salvage vehicles to a call center. This call center enables IAA to distribute vehicle assignments throughout most of the United States, even in markets where IAA does not currently have a facility, and is designed to minimize the administrative workload for insurance companies. In certain areas where the Company does not have a facility, such vehicles are distributed to IAA's selected ServicePartners(TM). The Company also offers, through its Specialty Salvage Division, salvage services for specialty vehicles such as trucks, heavy equipment, farm equipment, boats, recreational vehicles and classic and exotic cars. Marketing these vehicles nationwide to specialty buyers provides insurance companies with the opportunity for better returns on units that typically do not sell for as much at local salvage pools due to a limited number of local buyers. These vehicles can be viewed online through the Company's Internet Web site at www.iaai.com. IAA also provides certain insurance company suppliers with anti-theft fraud control programs for vehicle salvage processing. The Company's CarCrush(R) service helps insurance companies by ensuring that severely damaged or stripped "high profile" cars are crushed to prevent their vehicle identification numbers ("VINs") from being used in auto theft. IAA also provides computerized reporting of vehicle sales to the National Insurance Crime Bureau ("NICB"). This includes detailed buyer information obtained through the Company's registration process. IAA has also continued its support for consumer protection laws, calling for the nationwide mandatory use of salvage certificates for salvage vehicles. 5 IAA's BidFast(R) service provides insurers with binding bids for salvage vehicles that historically may have been owner-retained. The return on such vehicles (owner-retained salvage vehicles) is, many times, measurably improved for the supplier using this service and enables compliance with many states' Department of Insurance Regulations. GROWTH STRATEGIES The Company seeks to increase revenues in a profitable manner by offering to insurance company suppliers a variety of methods of sale (including fixed fee consignment and percentage of sale consignment) in addition to various other services. Management also strives to expand revenue by (i) increasing market share at existing sites; (ii) achieving greater market penetration through acquisitions; (iii) expanding the number of sites; (iv) developing national/regional supplier agreements; and (v) offering new services to insurance companies to help reduce the time and cost associated with the claims process. Increasing Market Share and Profitability at Existing Sites The Company's primary strategy for organic growth in its existing markets is to contract for additional vehicles by promoting better returns on salvage vehicles and a broad selection of services to prospective suppliers. The expansion of the number of vehicles processed at existing sites typically makes the Company's auctions more attractive, resulting in increased buyer participation. The Company's strategies for increasing profitability at existing sites include efforts to shift more salvage providers to revenue sharing arrangements, such as the percentage of sale consignment method. The Company is also promoting its Run & Drive(SM) service in which certain salvage vehicles are driven during the auction to demonstrate to buyers that the major component parts of a vehicle still operate. These product offerings are designed to maximize returns for both the Company and the salvage provider. Continued Market Penetration Through Acquisitions Since the Company's initial public offering in November 1991, the Company has acquired additional salvage pool operations across the United States to offer better national coverage to its insurance company suppliers. The Company currently operates 62 sites in 26 states. IAA intends to continue to pursue acquisitions of strategically located salvage pools. Through such acquisitions, it seeks to enhance a geographically broad-based relationship with key insurance company suppliers, in addition to offering its specialized salvage services to new insurance companies and certain non-insurance company suppliers. In pursuing its acquisition strategy and plans, the Company recognizes that there will be continuing challenges in effectively and efficiently integrating new facilities into existing IAA operations. This will require continuing investment in infrastructure. See "Factors That May Affect Future Results." New Site and Existing Site Expansion While the Company expects to continue pursuing growth through acquisitions, it will also continue to seek growth through the opening of new sites and the expansion of existing sites in markets where it can leverage existing relationships with vehicle providers. The opening of new sites offers advantages in certain markets and capitalizes on regional and national customer accounts. Development of National/Regional Supplier Agreements The Company's expanded geographic base of operations, plus its National Network, facilitates its strategy of offering its existing and prospective customers national and regional supplier agreements. These agreements can provide a more consistent reporting and control function to IAA's customers, who benefit from a reduction in the number of suppliers through which they must do business. 6 Offering of New Services The Company is actively pursuing opportunities for growth through the identification and development of new, non-traditional customer-valued services and business offerings that leverage the Company's current competencies, geographic presence and assets. The primary focus of these new services is to provide to the insurance industry new, innovative options and alternatives for reducing the time and costs associated with processing insurance claims. Electronic Data Interchange and Electronic Funds Transfer (EDI/EFT) facilitate faster, more accurate service from assignment and vehicle pickup through sale and final settlement. EDI helps minimize insurance staff involvement, lowers error rates and diminishes administrative requirements through direct communication between IAA's system and the insurance company's system. EDI/EFT electronically expedites the total-loss recovery process. Reduced manual intervention combined with faster, more accurate service translates into quicker turnaround on the final settlement. SurePay(R) is IAA's electronic funds transfer service that improves the speed and accuracy of the billing and final settlement process by automatically depositing salvage proceeds directly into IAA's customers' bank accounts. MARKETING The Company utilizes an internal sales force as its primary method of marketing its services to insurance company and non-insurance company salvage suppliers. These individuals call upon prospective vehicle providers at the national, regional and local level. Branch Managers also provide support in the form of day-to-day customer contact and addressing customer needs at the local market level. In an effort to generate additional revenues and improve customer satisfaction, direct mail is also used to communicate services and benefits to customers. This initiative includes a national quarterly newsletter (OnTrack) and other local-market updates that discuss how IAA is addressing specific customer needs. In addition, the Company participates in a number of local, regional and national trade show events that further promote the benefits of conducting business with IAA. Using historical data supplied by prospective suppliers, the Company can provide these suppliers with a detailed analysis of their current salvage returns and a proposal detailing ways in which the Company can improve salvage returns, reduce administrative costs, and provide proprietary turnkey claims processing services. In addition to providing insurance companies and certain non-insurance company suppliers with a means for disposing of salvage vehicles, the Company also offers services intended to increase the net amount of salvage sale proceeds received by the suppliers while also reducing the time required to receive net proceeds. The Company seeks to become an integral part of its suppliers' salvage process, and it views such mutually beneficial relationships as an essential component of its effort to attract and retain suppliers. The Company also seeks to expand its supply relationships through recommendations from individual branch offices of an insurance company supplier to other offices of the same insurance company. The Company believes that its existing relationships, and the recommendations of branch offices, play a significant role in its marketing of services to national insurance companies. Indeed, as the Company has expanded its geographic coverage, it has been able to market its services to insurance suppliers offering to handle salvage on a national basis or within a large geographic area. The Company sells the majority of its vehicles through live auctions. IAA maintains databases that currently contain information regarding over 20,000 registered buyers. No single buyer accounted for more than 10% of the Company's revenue in 2001, highlighting the diversity of the Company's buyer base. The Company generally accepts cash, money orders, cashier's checks, wire transfers and pre-approved checks, at the time in which the vehicle is picked up. Vehicles are sold "as is" and "where is." In advance of the auction, sales notices listing the vehicles to be auctioned on a particular day at a particular location are usually mailed or faxed to the Company's buyers. The notices are also available online on the Company's Internet Web site. Such notices list the rules of the auction and details about the vehicle, including its year and make, the nature of the damage, the status of title and the 7 order of the vehicles in the auction. Multiple images of certain vehicles are available for review on the Company's Web site at www.iaai.com. 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 for processing 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 been consolidating, however, and the Company believes its principal publicly-held competitor is Copart, Inc. ("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 for salvage vehicles is intense from Copart and other regional suppliers. The Company attempts to differentiate itself from its competition through the wide range and quality of services it provides to its insurance customers and buyers. It is also possible that the Company may encounter further competition in the future from existing competitors and new market entrants that are significantly larger and have greater financial and marketing resources. One such competitor is ADESA Corporation, a subsidiary of Allete Inc. During 2001, ADESA acquired APC. APC provided vehicle recovery services with auction facilities in the Northeast United States. Other potential competitors could include used car auction companies, providers of claims processing software to insurance companies, certain salvage buyer groups and insurance companies, some of which presently supply auto salvage to IAA. While many insurance companies have abandoned or reduced efforts to sell salvage without the use of service providers such as IAA, they may in the future decide to dispose of their salvage. 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. GOVERNMENT 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 total loss and recovered theft vehicles is regulated by governmental agencies in each of the locations in which the Company operates. In many of these states, regulations require that the title of a salvage vehicle be forever "branded" with a salvage notice in order to notify prospective purchasers of the vehicle's previous salvage status. 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 and operation of its auction and storage facilities. Some state and local regulations also limit who can purchase salvage vehicles, as well as determine whether a salvage vehicle can be sold as rebuildable or must be sold for parts only. Such regulations can reduce the number of potential buyers of vehicles at Company auctions. The Company is also subject to environmental regulations, and it believes that it is in material compliance with all applicable regulatory requirements. The Company will be subject to similar types of regulations by federal, state and local governmental agencies in new markets and to new legislation in existing markets. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws and regulations governing, among other things, the handling, storage, transportation and disposal of waste and other materials. The Company believes that its business, operations and facilities have been and continue to be operated in compliance in all material respects with applicable environmental laws and regulations. The Company believes the overall impact of compliance with laws and regulations protecting the environment will not have a material adverse effect on its operating results and financial condition, although no assurance can be given in this regard. EMPLOYEES At December 30, 2001, the Company employed 970 full-time persons. The Company is not subject to any collective bargaining agreements and believes that its relationship with its employees is good. 8 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: fluctuations in ACVs of salvage vehicles, changes in the market value of salvage vehicles, delays or changes in state title processing, general weather conditions, changes in regulations governing the processing of salvage vehicles, the availability and quality of salvage vehicles and attendance at salvage auctions. 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 that can affect 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, which 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 affect 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 been consolidating, 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 existing competitors and new market entrants that are significantly larger and have greater financial and marketing resources. One such competitor is ADESA Corporation, a subsidiary of Allete Inc. During 2001, ADESA acquired APC. APC provided vehicle recovery services with auction facilities in the Northeast United States. 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 end users. 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 2001, vehicles supplied by the Company's three largest suppliers accounted for approximately 39% of the Company's unit sales. The largest suppliers, State Farm Insurance, Farmers Insurance, and Allstate, each accounted for approximately 15%, 15%, and 9%, respectively, of the Company's unit sales. A loss or reduction in the number of vehicles from any of these 9 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. Under the purchase agreement method of sale, the Company is required to purchase, and the insurance company and other non-insurance company suppliers are required to sell to the Company, virtually all total loss and recovered theft vehicles generated by the supplier in a designated geographic area. The agreements are customized to each supplier's needs, but typically require the Company to pay a specified percentage of a vehicle's Actual Cash Value ("ACV" - the estimated pre-accident fair value of the vehicle), depending on the vehicle's age and certain other conditions, including whether the vehicle is a total loss or a recovered theft vehicle. IAA assumes the risk of market price variation for vehicles sold under a purchase agreement, and therefore works to enhance the value of purchased vehicles in the selling process. Due to the fact that the Company's purchase price is fixed by contract, changes in ACVs 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 ACVs 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. Revenue recorded from the sale of a purchase agreement vehicle is the actual selling price of the vehicle. In 2001 and 2000 respectively, approximately 19% and 26% of the units processed by IAA were processed through the purchase agreement method of sale. The Company expects that approximately 10% of total units sold in 2002 will be sold under the purchase agreement method of sale. Beginning late in the second quarter of 2000 and continuing in 2001, purchase agreement profitability was impaired by a combination of rising ACVs and flat to lower sale prices at auctions in certain areas of the country. 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 included adjustment and risk-sharing clauses in certain of its purchase agreement contracts to provide some protection to the Company and its customers from unexpected, significant changes in ACVs that are not accompanied by a comparable increase in sales prices. In addition, the Company has renegotiated certain purchase agreements, converting them to either the percent of sale or fixed fee consignment method of sale. Business Process Reengineering Project. During the third quarter 2001, the Company retained Synergetics Installations Worldwide, a consulting firm based in New Hampshire, to assist the Company in its process of creating and applying new standards and best practices in an effort to improve operational efficiency, standardize processes, and implement tools to measure performance within critical areas of field operations. At the end of the fourth quarter, the Company completed its best practices model and expects to roll out the procedures into all of its branches in the first half of 2002. The Company expects the total costs of Synergetics' services to be between $2 and 2.5 million. The Company anticipates cost savings of at least $5 million a year resulting from this project. Enterprise-Wide System Redesign Project. Also in 2001, the Company retained the services of SEI Information Technology, to develop a new enterprise-wide application to manage the salvage and auction process. The new Web-based system will support and streamline vehicle registration and tracking, financial reporting, transaction settlement, vehicle title transfer, and branch/headquarters communications. It will speed all aspects of the Company's operations, support growth and expansion plans, provide improved reliability and maintainability, and ultimately, deliver increased profits. The estimated cost of $10 million includes equipment, telecom, training, and implementation along with the application development. The Company projects cost savings from the Business Process Reengineering Project and the Enterprise-Wide System Redesign Project at a minimum of $10 million, and potentially as much as $15 million annually from the two projects combined. Development of the application and testing began in the third quarter of 2001 and is expected to continue through the second quarter 2002. The Company anticipates rolling out the new system to its branches during the third and fourth quarters of 2002. As of the end of 2001, the Company was on target for meeting its objectives with respect to these two projects. There are, however, inherent risks associated with both projects which could adversely impact the Company's expected results with respect to timing, costs and cost savings. 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 law or governmental regulations or interpretations of existing law or regulations can result in increased costs, reduced salvage vehicle prices and decreased profitability for the Company. In addition to 10 the regulation of sales and acquisitions of vehicles, the Company is also subject to various local zoning requirements with regard to the location of its auction and storage facilities. These zoning requirements vary from location to location. Failure to comply with present or future regulations or changes in existing regulations could have a material adverse effect of the Company's operating results and financial condition. Provision of Services as a National or Regional Supplier. The provision of services to insurance company suppliers on a national or regional basis 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. Expansion and Integration of Facilities. The Company seeks to increase sales and profitability through acquisition of other salvage auction facilities, new site expansion and the increase of salvage vehicle volume at existing facilities. There can be no assurance that the Company will continue to acquire new facilities on terms economical to the Company or that the Company will be able to add additional facilities on terms economical to the Company or that the Company will be able to increase revenues at newly acquired facilities above levels realized prior to acquisition. The Company's ability to achieve these objectives is dependent on, among other things, 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 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 non-hazardous 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. 11 ITEM 2. PROPERTIES. The Company's principal administrative, sales, marketing and support functions are located in Schaumburg, Illinois. The lease on the office space in Schaumburg expires June 30, 2004. The Company and its subsidiaries also lease approximately 55 properties in Alabama, Arizona, California, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey, New York, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington and Wisconsin. The Company owns 9 properties located in Illinois, Kansas, Massachusetts, Michigan, New Mexico, Oklahoma and Texas. Most of these properties are used primarily for auction and storage purposes. Management believes that the Company's properties are adequate for its current needs and that suitable additional space will be available as required. ITEM 3. LEGAL PROCEEDINGS. The Company is party to a number of lawsuits arising in the normal course of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial position. The Company incurred expenses as a result of the crash of an Emery Worldwide DC-8 cargo jet in its Rancho Cordova, California facility on February 16, 2000. The Company doubts that these expenses will be recovered from its insurance carrier, Reliance Insurance Company, because of Reliance's liquidation announcement in the fourth quarter of 2001. After the National Transportation Safety Board publishes its report determining liability for the crash, the Company intends to pursue any remedies it might have against potentially responsible parties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter ended December 30, 2001. 12 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol IAAI. The following table sets forth the range of high and low per share sales information, available on Nasdaq OnlineSM for each quarter of 2001 and 2000. At March 25, 2002, the Company had 232 holders of record of its Common Stock, approximately 989 beneficial owners and 12,215,728 shares outstanding.
FISCAL 2001 FISCAL 2000 ----------- ----------- HIGH LOW HIGH LOW ---- --- ---- --- First Quarter $14.25 $ 9.00 $16.88 $13.56 Second Quarter 17.00 11.75 24.63 13.94 Third Quarter 16.55 11.70 23.88 14.13 Fourth Quarter 16.05 10.76 16.14 8.13
The Company has never declared or paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain any future earnings to finance the growth and development of its business. In addition, the Company's new financing agreement limits the Company's ability to pay cash dividends. 13 ITEM 6. SELECTED FINANCIAL DATA. The tables below summarize the selected consolidated financial data of the Company as of and for each of the last five fiscal years. This selected financial information should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. The statement of earnings data for 2001, 2000, and 1999 and the balance sheet data as of December 30, 2001 and December 31, 2000 below have been derived from the Company's Consolidated Financial Statements that have been audited by KPMG LLP, independent certified public accountants, whose report is included herein. The statement of earnings data for 1998 and 1997 and the balance sheet data as of December 31, 1999, 1998 and 1997 are derived from audited consolidated financial statements not included herein.
2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (in thousands except per share amounts) Selected Statement of Earnings Data: Revenue $ 292,990 $ 333,176 $ 317,391 $ 287,063 $ 259,325 Earnings (loss) from operations(1) (5,209) 17,894 23,904 14,081 9,756 Net earnings (loss) (4,360) 10,489 13,705 7,181 4,495 Earnings (loss) per common share (2) (.37) .88 1.18 .63 .40 Weighted average common shares outstanding (2) 11,940 11,950 11,623 11,437 11,337
2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (in thousands) Selected Balance Sheet Data: Working capital $ 25,286 $ 53,204 $ 46,989 $ 26,593 $ 25,708 Total assets 278,204 265,707 248,132 227,543 224,777 Long-term debt, excluding current installments 103 20,141 20,180 20,315 20,246 Total shareholders' equity 188,994 187,741 175,286 158,755 151,212
(1) Amount is after special charges of $8.0 million, $4.8 million, $1.6 million and $.8 million in 2001, 2000, 1998 and 1997, respectively. (2) Earnings per share and weighted average common shares outstanding are presented on a diluted basis. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The discussion in this section contains forward-looking information that is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected, 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, projects, targeting, 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" above. Among these risks are: accelerated departure from conducting business pursuant to the purchase agreement method of sale, which departure could adversely affect the Company's client base; fluctuations in the actual cash value of salvage vehicles; the quality and quantity of inventory available from suppliers; the ability to pass through increased towing costs; that vehicle processing time will improve; legislative or regulatory acts; competition; the availability of suitable acquisition candidates and greenfield opportunities; the ability to bring new facilities to expected earnings targets; the dependence on key insurance company contracts; the ability of the Company and its outside consultants to successfully implement standardized key processes throughout the Company's operations as well as the ability to successfully complete the re-design of the Company's information systems, both in a timely manner and according to costs and operational specifications; and the level of energy and labor costs. OVERVIEW Insurance Auto Auctions, Inc. offers insurance companies and other vehicle suppliers cost-effective salvage processing solutions principally on either a consignment or purchase agreement method of sale. The consignment method includes both percentage of sale and fixed fee basis. The percentage of sale consignment method offers potentially increased profits over fixed fee consignment by providing incentives to both the Company and the salvage provider to invest in vehicle enhancements, thereby maximizing vehicle selling prices. Under the percentage of sale and fixed fee consignment methods, the vehicle is not owned by the Company and only the fees associated with processing the vehicle are recorded as revenue. The proceeds from the sale of the vehicle itself are not included in revenue. Under the purchase agreement sales method, the vehicle is owned by the Company and the proceeds from the sale of the vehicle are recorded as revenue. In October 2001, the Company announced that it intended to accelerate its plan to discontinue offering the purchase agreement method of sale. Given the overall economics and risks associated with purchase agreement contracts, their level of performance has been unacceptable. In September 2001, the Company began advising its significant purchase agreement customers of this decision. The Company has successfully converted several significant customers to consignment-based contracts. As a result, in 2002, the vehicle assignments under the purchase agreement method are expected to fall to under 10% of all assignments received. Although the Company has found that these customers have been open to this change, there can be no guarantee that the Company will not lose some of its volume as a result of this effort. 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. Refer to the section "Factors That May Affect Future Results" for a further discussion of some of the factors that affect or could affect the Company's business, operating results and financial condition. ACQUISITIONS AND NEW OPERATIONS Since its initial public offering in 1991, the Company has grown through a series of acquisitions and opening of new sites to include 62 sites as of December 30, 2001. In 2001, the Company announced the acquisition of Pittsburgh Auto Salvage Service in Pittsburgh, Pennsylvania and Austin Salvage Pool in Austin, Texas. Both acquisitions were accounted for using the purchase method of accounting. The Company opened new operations in fiscal 2001 in Philadelphia, Pennsylvania; Albuquerque, New Mexico; Hartford, Connecticut; Longview, Texas and Grand Rapids, Michigan. 15 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 30, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000 Revenues decreased to $293.0 million for the year ended December 30, 2001, from $333.2 million in 2000, a 12% decrease. This decline in revenues is primarily a result of reduced volume under the purchase agreement method of sale. Purchase agreement volume decreased from 26% of the total vehicles sold in 2000 to 19% of the total vehicles sold in 2001. Under the purchase agreement method, proceeds from the sale of the vehicle ("vehicle sales") are recorded as revenue. By comparison, under the lower-risk consignment fee based arrangements, the salvage provider fees are recorded as revenue. Buyer fees are recorded as revenue under both contract types. Revenue from vehicle sales of $138.4 million in fiscal 2001 decreased $62.5 million from $200.9 million in fiscal 2000. This decrease in revenue was partially offset by an increase in revenue related to salvage provider and buyer fees. Total volume increased slightly from 2000, but was down on a same store basis. Combined with unit volume and price increases, the conversion of contracts to consignment arrangements and the resulting change in contract mix contributed to a significant increase in fees for fiscal 2001. Revenue associated with fees increased $22.3 million in 2001 to $154.6 million versus $132.3 million in 2000. Cost of sales decreased $41.2 million, or 17%, from $243.8 million in 2000 to $202.6 million in 2001. Consistent with the discussion above, this decrease is primarily attributed to lower vehicle costs resulting from the Company's shift away from the purchase agreement method of sales. Deterioration in the underlying economics on the purchase agreement contracts continued to have an adverse effect on profitability. The decrease in cost of sales that was attributed to the reduction in the number of purchase agreement vehicles sold was offset, in part, by the costs related to the service provided to support increased volume of consignment units sold. In the fourth quarter 2001, the Company recorded a provision of $1.2 million for anticipated losses on vehicles remaining to be sold under old purchase agreements. Direct operating expenses including corporate selling, general and administrative costs along with certain branch costs increased to $80.1 million for the year ended December 30, 2001, versus $62.8 million in 2000. The increase in operating expenses is primarily due to new facilities, the Houston flood and expenses associated with maintaining the Company's existing computer infrastructure. The 2001 direct operating expenses include a full year impact of six new sites added in 2000 and the addition of seven new sites added during 2001. In 2001, the Company leased additional property and incurred additional expenses in order to process the substantial number of salvage vehicles resulting from the 2001 floods in Houston and surrounding areas. As part of its substantial business transformation, the Company is providing visibility to several significant components of its cost structure. Business transformation costs and other unusual charges are discussed in detail in "Unusual Charges" below. Interest expense for the year ended December 30, 2001, remained unchanged from the $1.8 million in 2000. Interest income decreased to $1.0 million for the year ended December 30, 2001, from $1.7 million in 2000. This reduction in interest income reflects lower levels of amounts invested throughout the year in addition to slightly lower interest rates. Income tax benefit for the year 2001 of $1.6 million decreased $8.9 million from the income tax expense of $7.3 million for 2000. The Company's effective tax rate for the years 2001 and 2000 was 27% and 41%, respectively. The Company's net loss for the year 2001 was $4.4 million, a decrease of $14.9 million from $10.5 million of earnings for the fiscal year 2000. 16 UNUSUAL CHARGES Unusual charges were recorded by the Company in both 2001 and 2000. In addition, the Company recorded amortization of goodwill in both 2001 and 2000; such amortization will cease in 2002. The unusual charges and amortization impacted earnings from operations and net earnings (loss) as follows (in thousands):
2001 2000 -------- -------- Provision for losses on vehicles purchased under terminated agreements (included in cost of sales)(a) $ 1,248 $ -- Business transformation costs (b) 3,451 -- Special charges (c) 8,016 4,772 -------- -------- Unusual charges 12,715 4,772 Amortization of intangible assets (d) 4,055 3,942 -------- -------- Impact on earnings (loss) from operations 16,770 8,714 Tax benefits relating to above items 4,528 3,573 -------- -------- Impact on net earnings (loss) $ 12,242 $ 5,141 ======== ======== Net earnings (loss) as reported $ (4,360) $ 10,489 ======== ======== Net earnings excluding above items $ 7,882 $ 15,630 ======== ========
(a) The Company successfully transitioned several large purchase agreement customers to consignment-based contracts. At year end, the Company recorded a provision of $1.2 million for anticipated losses on vehicles remaining to be sold under the old agreements. (b) Business transformation costs include expenses relating to the systems redesign project, the business process re-engineering project, severance costs and accelerated depreciation pertaining to the Company's existing computer infrastructure. (c) Special charges recorded during the year include: (1) $2.0 million for involuntary severance costs; (2) $2.5 million for abandonment of facilities including cancellation of a planned headquarters expansion; (3) $1.1 million for repositioning the Company's towing operations and other restructuring charges; (4) the write-off of $1.4 million of unamortized leasehold improvements due to changes in the estimated useful lives of specific assets; and (5) a $1.0 million write-off of amounts due from the Company's previous insurance carrier, which was placed in liquidation. Special charges recorded in 2000 included $3.0 million resulting from the abandonment or disposal of computer hardware and software, $1.2 million to cover expenses resulting from a plane crash at a Company facility in California, and other charges of $0.6 million. (d) Intangible assets, primarily goodwill which was recorded in connection with business combinations, has been amortized in accordance with APB Opinion No. 17. Commencing in 2002, in accordance with FASB Statement No. 142, amortization of goodwill will no longer be required, but the carrying value of goodwill will be subject to write-down in the event of their impairment. Substantially all of the 2000 and 2001 amortization was for goodwill. Noncompete agreements and other intangible assets will continue to be amortized in the future. In 2002, the Company expects to record amortization of identifiable intangible assets of $0.3 million. 17 YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 Revenues of the Company increased to $333.2 million for the year ended December 31, 2000, from $317.4 million in 1999, a 5% increase. Vehicle sales revenue reflected a decrease in the average selling price of cars sold under purchase agreements. Purchase agreement volume was flat when compared to 1999. Fee income increased 18% in 2000 versus 1999 reflecting increases in both volume and revenues per unit. Cost of sales increased 4.2% to $243.8 million for the year ended December 31, 2000, compared to $233.9 million in 1999. The increase in cost of sales per unit occurred in the second half of the year and resulted from a combination of factors that include: regional title processing difficulties, a decrease in the profitability of vehicles sold under purchase agreement contracts, a shortfall in profitability associated with the Company's towing initiative, and increased tow charges stemming from higher fuel and labor costs. Approximately 24% of vehicles sold in 2000 were sold under the percentage of sale consignment method versus 16% for the same period in 1999. The purchase agreement sales method of processing accounted for 26% of total volume, compared with 28% for the same period in 1999. Direct operating expenses increased to $62.8 million for the year ended December 31, 2000, versus $55.7 million in 1999. The increase is primarily a result of legal and consulting fees associated with the Company pursuing various strategic alternatives, expenses related to the Company upgrading its computer systems, an increase in variable costs due to the higher 2000 volume and increased facility costs. The Company recorded a special charge of $4.8 million during the fourth quarter of 2000. The $4.8 million charge includes $3.0 million associated with the abandonment or disposal of computer hardware and software, $1.2 million to cover expenses related to the February 2000 plane crash that damaged the Company's facility in Rancho Cordova, California and $0.6 million of other miscellaneous special charges. The after-tax charge of $2.8 million did not require any additional cash outflow. Interest expense decreased to $1.8 million for the year ended December 31, 2000, from $2.0 million in 1999. Interest income increased to $1.7 million for the year ended December 31, 2000, from $1.3 million in 1999, reflecting higher levels of cash equivalents and short-term investments due to continued strong cash flow from operations in 2000. Income taxes decreased to $7.3 million for 2000, from $9.5 million for 1999. This decrease is the result of the decrease in earnings. The Company's effective tax rate for the years 2000 and 1999 was 41%. The Company's net earnings were $10.5 million, after special charges, for the year ended December 31, 2000, a 23% decrease from $13.7 million for the comparable period in 1999. FINANCIAL CONDITION AND LIQUIDITY At December 30, 2001, the Company had current assets of $98.9 million, including $24.5 million of cash and cash equivalents, current liabilities of $73.7 million and working capital of $25.2 million, a $28.0 million decrease from December 31, 2000. Current installments of long-term debt include $20.0 million of 8.6% senior notes that matured on February 15, 2002. These notes were reclassified to current liabilities in 2001, thus accounting for a majority of the decline in working capital compared to 2000. The Company's accounts receivable increased $6.6 million from $48.1 million in 2000 to $54.7 million in 2001. Accounts receivable consists of both billed and unbilled balances due from the Company's salvage providers, typically large insurance companies. Unbilled balances represent various advance charges paid for by the Company on behalf of the salvage provider. These charges typically include storage and tow fees incurred at a temporary storage or repair shop prior to the Company moving the vehicle to one of its facilities. At December 30, 2001, the Company's inventory balance of $13.5 million was $2.9 million more than in 2000. The Company records purchase agreement vehicles at the lower of their cost or estimated realizable value. The Company also capitalizes towing charges related to vehicles sold under the percentage of sale method as a 18 component of inventory. In 2001, the decrease in inventory was due to the exit from purchase agreement sales was offset by the increase in inventoried tow costs associated with the increase in percent of sale vehicles on hand. At December 30, 2001, the Company's indebtedness included 8.6% Senior Notes of $20.0 million that matured on February 15, 2002 and other debt aggregating $143,000, which bears interest at 8.0%. In February 2002, the Company entered into a new five-year $20 million unsecured credit facility that is expandable to $30 million upon syndication. The credit facility is a one-year revolver that converts into a four-year term loan. The Company entered into an arrangement to fix the interest rate at 5.6%. Long-term liabilities include a post-retirement benefits liability that relates to the Company's prior acquisition of Underwriters Salvage Company. The amount recorded at December 30, 2001 for the post-retirement benefits liability is approximately $2.8 million. Capital expenditures were approximately $20.8 million for the year ended December 30, 2001. These capital expenditures were primarily related to the acquisition and upgrading of new and existing facilities. The Company currently leases certain equipment, most of its facilities and other properties. In February 2001, the Company acquired Pittsburgh Auto Salvage Service for $0.1 million in a cash transaction. In October 2001, the Company acquired Austin Salvage Pool for $5.9 million cash. These acquisitions were accounted for as purchases. The results of their operations are included in the Company's consolidated financial statements from the dates of their acquisition. On September 7, 2000, the Company's Board of Directors authorized the purchase of up to 1,500,000 shares of its common stock. Purchases may be made from time to time in the open market, subject to the requirements of applicable laws, and, if made will be financed with existing cash and cash equivalents, marketable securities, and cash from operations. As of December 30, 2001, the Company had not purchased any shares pursuant to this authorization. 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 at least the next twelve months. Part of the Company's plan is continued growth through a combination of 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. CRITICAL ACCOUNTING POLICIES The preparation of the consolidated financial statement in conformity with accounting principals generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, as well as the related disclosures. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. As such, the Company continuously evaluates its estimates. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. GOODWILL The Company has significant goodwill recorded in its consolidated financial statements. The Financial Accounting Standards Board has issued new pronouncements affecting goodwill and intangible assets, which are discussed in the next section. In accordance with the new standards, the Company will assess goodwill for possible impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value of this asset may not be recoverable. Important factors that could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results; significant negative industry or economic trends; significant decline in the Company's stock price for a sustained period; and the Company's market capitalization relative to net book value. If the Company determines that the carrying value of goodwill may 19 not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company would measure any impairment based upon a projected undiscounted cash flow. DEFERRED INCOME TAXES The Company has determined that it may not realize the full tax benefit related to the deferred tax asset. As such a valuation allowance to reduce the carrying value of the deferred tax assets has been recorded. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Intangible Assets". SFAS No. 141 requires identified intangible assets acquired in a business combination to be recognized as an asset apart from goodwill if they meet certain criteria. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting and prohibits the use of the pooling-of-interests method for such transactions. Management has adopted SFAS 141, which had no material impact on its consolidated financial statements for 2001. SFAS No. 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under the new standard, all goodwill, including that acquired before initial application of the standard, should not be amortized but should be tested for impairment at least annually. Identified intangible assets should be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144. Under the pronouncement, goodwill recorded as a result of acquisitions made subsequent to June 30, 2001 should not be amortized. Accordingly, the Company did not record any amortization related to the goodwill resulting from the October, 2001 acquisition of Austin Salvage Pool. Beginning in 2002, the Company will no longer amortize goodwill recorded prior to June 30, 2002 in accordance with SFAS 142. Instead, the Company will test these assets for impairment annually or when certain impairment indicators exist. In fiscal 2001, the Company recorded amortization expense related to intangible assets, primarily goodwill, of $4.1 million. In 2002, the Company expects to record amortization of identifiable intangible assets of $0.3 million. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it retains many of the fundamental provisions of that statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company is in the process of evaluating the impact that adoption of SFAS No. 144 may have on the financial statements; however, such impact, if any, is not known or reasonably estimable at this time. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company had approximately $2.6 million of investments as of December 30, 2001. These investments consisted of state government obligations and had either variable rates of interest or stated interest rates ranging from 1.45% to 7.00%. 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. At December 30, 2001, the Company had senior notes payable of $20.0 million at an interest rate of 8.6%. The terms of the note agreement were such that pre-payment is not advantageous to the Company. 20 In February 2002, the Company entered into a new five-year $20.0 million unsecured credit facility that is expandable to $30.0 million upon syndication. The credit facility is a one-year revolver that converts into a four-year term loan. The Company entered into a swap arrangement to fix the interest rate at 5.6%. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14(a) for an index to the Consolidated Financial Statements which are attached hereto. See Note 9 to the Consolidated Financial Statements for the supplementary financial information. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. DIRECTORS Set forth below is information regarding the Directors of the Company, including information furnished by them as to principal occupations, certain other directorships held by them, any arrangements pursuant to which they were or are selected as Directors and their ages as of March 31, 2002:
YEAR FIRST ELECTED OR DIRECTORS AGE APPOINTED DIRECTOR --------- --- ------------------ Joseph F. Mazzella ......................... 50 1999 Thomas C. O'Brien .......................... 48 2000 Maurice A. Cocca (1)(2)(3) ................ 58 1997 Susan B. Gould (2) ......................... 64 1991 Peter H. Kamin(1) .......................... 40 1999 Melvin R. Martin (3) ....................... 71 1992 Jeffrey W. Ubben (2) ....................... 40 2001 John K. Wilcox (1) ......................... 66 1998
- ---------- (1) Member of Audit Committee (2) Member of Compensation Committee (3) Member of Governance Committee JOSEPH F. MAZZELLA was appointed Chairman in February 2001 and has been a Director of the Company since January 1999. In March 2000, Mr. Mazzella joined Nutter McClennen & Fish, LLC, a law firm in Boston, Massachusetts as a partner. From 1980 until March 2000, Mr. Mazzella was a partner of Lane, Altman & Owens, a law firm in Boston, Massachusetts. He is a director of Alliant Techsystems, Inc. and Data Transmission Network Systems, Inc. THOMAS C. O'BRIEN became President and Chief Executive Officer in November 2000. As President and Chief Executive Officer, Mr. O'Brien oversees the Company's overall corporate administration as well as strategic planning. Prior to joining IAA, Mr. O'Brien served as President of Thomas O'Brien & Associates from 1999 to 2000, Executive Vice President of Safelite Glass Corporation from 1998 to 1999, Executive Vice President of Vistar, Inc. from 1996 to 1997 and President of U.S.A. Glass, Inc. from 1992 to 1996. MAURICE A. COCCA has been a Director of the Company since February 1997. From November 1993 to November 1995, Mr. Cocca was Managing Director of The Fisons Laboratory Supplies Division of Fisons PLC. This Division is a distributor of laboratory supplies that was later acquired by Fisher Scientific. Mr. Cocca served as Vice Chairman of J & W Scientific Holdings from April 1996 through April 2000. SUSAN B. GOULD has been a Director of the Company since October 1991. Ms. Gould is the founder, and since 1988 has been President, of Gould & Associates, a human resources consulting firm specializing in outplacement and organizational team building. PETER H. KAMIN became a Director of the Company in February 2001 and was previously a director from January 1999 through October 2000. Since July 2000, Mr. Kamin has been a partner of ValueAct Capital Partners, L.P. From January 1992 to July 2000, Mr. Kamin was a Partner of Peak Investment, L.P. Mr. Kamin is also a director of TFC Enterprises, Inc. and LeCroy, Inc. Mr. Kamin was appointed to the Board pursuant to the ValueAct Shareholder Agreement described below. 22 MELVIN R. MARTIN has been a Director of the Company since January 1992. Since December 1992, Mr. Martin has been a General Partner of MRM Investments Limited Partnership, owners and operators of rental properties. JEFFREY W. UBBEN became a Director of the Company in February, 2001. Mr. Ubben is the founder and Managing Partner of ValueAct Capital Partners, L.P., an investment partnership focused primarily on making a limited number of investments in small capitalization public companies. From 1995 to 2000, Mr. Ubben was Managing Partner of Blum Capital Partners. Mr. Ubben was appointed to the Board pursuant to the ValueAct Shareholder Agreement described below. Mr. Ubben is a director of Playtex Products, Inc. JOHN K. WILCOX has been a Director of the Company since February 1998. From November 1994 until November 1997, Mr. Wilcox was Group Vice President, personal lines finance and planning of Allstate Insurance Company. On February 15, 2001, the Company entered into a Shareholder Agreement (the "Shareholder Agreement") with ValueAct Capital Partners, L.P., ValueAct Capital Partners II, L.P., VA Partners, LLC, Jeffrey W. Ubben, Peter H. Kamin, and George F. Hamel, Jr. (the "ValueAct Shareholders"). Pursuant to the terms of the Shareholder Agreement, among other things, the ValueAct Shareholders agreed to vote all of their shares in favor of electing Mr. Ubben, Mr. Kamin, Mr. Cocca, Ms. Gould, Mr. Martin, Mr. Mazzella, Mr. O'Brien and Mr. Wilcox to the Board at the Company's June 2001 annual meeting of shareholders. Executive Officers of the Company The following table sets forth the names, ages and offices of all of the executive officers of the Company as of March 31, 2002:
Name Age Office Held - ---- --- ----------- Thomas C. O'Brien 48 President and Chief Executive Officer Peter B. Doder 41 Vice President, Business Development Edward N. Fares 53 Senior Vice President and Chief Information Officer Donald J. Hermanek 53 Senior Vice President, Sales and Marketing Marcia A. McAllister 50 Vice President, Government Affairs David R. Montgomery 45 Senior Vice President and Chief Operating Officer Scott P. Pettit 39 Senior Vice President, Chief Financial Officer and Secretary
THOMAS C. O'BRIEN became President and Chief Executive Officer in November 2000. As President and Chief Executive Officer, Mr. O'Brien oversees the Company's overall corporate administration as well as strategic planning. Prior to joining IAA, Mr. O'Brien served as President of Thomas O'Brien & Associates from 1999 to 2000, Executive Vice President of Safelite Glass Corporation from 1998 to 1999, Executive Vice President of Vistar, Inc. from 1996 to 1997 and President of U.S.A. Glass, Inc. from 1992 to 1996. PETER B. DODER became Vice President of Business Development in March 2001. Mr. Doder is responsible for the Company's acquisitions, start-ups, re-facilitation projects, and strategic growth initiatives. Prior to that, Mr. Doder was Vice President of the Western Division from February 1997 to March 2001. From February 1996 to February 1997, Mr. Doder was Vice President, Financial Planning & Analysis of the Company. From June 1992 through February 1996, Mr. Doder held various positions with the Company, including Regional Sales Manager, Manager of Marketing Support & Analysis and Director of Marketing. EDWARD N. FARES became Senior Vice President and Chief Information Officer in January 2002. Mr. Fares is responsible for information services functions, including software application acquisition and development, computer operations and telecommunications. Prior to joining the Company, Mr. Fares served as Senior Vice President, Chief Technology Officer of eTrak Corporation from July 2000 to January 2002. From 1997 to 2000 he served as Senior Vice President, Chief Information Officer at GE Financial Assurance Partnership Marketing Group and from 1994 to 1997 he served as Senior Vice President, Information Technology at Acxiom Corporation. 23 DONALD J. HERMANEK joined the Company in August 2000 as Senior Vice President of Sales and Marketing. Mr. Hermanek is responsible for the sales and marketing functions, including field sales and the corporate accounts group. Prior to joining IAA, Mr. Hermanek served as Vice President of Business Development for Consolidated Services Corp. from 1997 to 2000. Prior to that he served as Vice President - National Sales for Safelite Glass Corp. from 1992 to 1997. MARCIA A. MCALLISTER has been Vice President, Government Affairs of the Company since February 1995. Ms. McAllister is responsible for monitoring legislation and participating on behalf of the Company with a variety of industry and agency groups. DAVID R. MONTGOMERY joined the Company in April 2001 as Senior Vice President and Chief Operating Officer. Mr. Montgomery is responsible for Company operations including the National Network and specialty salvage business. Prior to joining the Company, Mr. Montgomery served as Chief Executive Officer of Greenleaf Acquisitions, LLC, a subsidiary of Ford Motor Company from 1999 to April 2001. From 1996 to 1999 he served as Area Vice President of Safelite/Vistar Autoglass. From 1988 to 1996 he served in various management capacities at Windshields America, Inc., one of the two entities combined to form Vistar, Inc. SCOTT P. PETTIT joined the Company in April 2001 as Senior Vice President, Chief Financial Officer and Secretary. Mr. Pettit is responsible for financial functions, including legal, real estate and investor relations. Prior to joining the Company, Mr. Pettit served as Senior Vice President and Chief Financial Officer at Corsolutions Medical Inc. from 1998 to April 2001. From 1996 to 1998 he served as Vice President Finance and Chief Financial Officer of Vistar, Inc. From 1994 to 1996 he served as Senior Vice President and Chief Financial Officer with Globe Glass & Mirror Co., one of the two entities combined to form Vistar, Inc. Officers are appointed to serve, at the discretion of the Board of Directors, until their successors are appointed. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's Directors and Executive Officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, Directors and greater than ten percent shareholders are required by Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon a review of the copies of such reports furnished to the Company and written representations from such Officers, Directors and greater than ten percent shareholders, all Section 16(a) filing requirements applicable to the Company's Directors, Executive Officers and greater than ten percent shareholders have been met. 24 ITEM 11. EXECUTIVE COMPENSATION. The following Summary Compensation Table provides certain summary information concerning the compensation earned, for services rendered in all capacities to the Company and its subsidiaries during each of the last three years, by the Company's Chief Executive Officer and each of the Company's other four most highly compensated executive officers in 2001, and two executive officers whose employment with the Company terminated prior to December 30, 2001. The individuals whose compensation is disclosed in the following tables are hereafter referred to as the "Named Officers." SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------ ----------------------------------------- SECURITIES NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER POSITION YEAR ALARY($)(1) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($) ------------------ ---- ----------- -------- --------------- ------------- -------------- Thomas C. O'Brien ........... 2001 343,000(2) -- 18,000(3) -- 4,000(4) President and Chief 2000 4,000(5) -- 2,000(3) 300,000 -- Executive Officer 1999 -- -- -- -- -- Donald J. Hermanek ......... 2001 191,000(2) -- 18,000(3) 40,000 3,000(4) Sr. Vice President - Sales 2000 59,000 35,000 4,000 25,000 -- and Marketing 1999 -- -- -- -- -- David R. Montgomery ......... 2001 156,000 25,000 13,000(3) 100,000(6) 3,000(4) Sr. Vice President and 2000 -- -- -- -- -- Chief Operating Officer 1999 -- -- -- -- -- Marcia A. McAllister ........ 2001 149,000(2) -- 18,000(3) -- 6,000(4) Vice President, 2000 152,000 59,000 18,000(3) -- 6,000(4) Government Affairs 1999 150,000 33,000 18,000(3) 38,000 6,000(4) Scott P. Pettit ............. 2001 135,000 35,000 13,000(3) 100,000(7) 3,000(4) Sr. Vice President, Chief 2000 -- -- -- -- -- Financial Officer & Secretary 1999 -- -- -- -- -- Patrick T. Walsh(8) ......... 2001 56,000 -- 3,000(3) -- 327,000(9) Vice President, 2000 148,000 17,000 17,000(3) -- 6,000(4) Business Development 1999 144,000 72,000 18,000(3) -- 6,000(4) Donald J. Comis(10) ......... 2001 55,000 -- 6,000(3) -- 337,000(11) Vice President, Eastern 2000 140,000 16,000 17,000(3) -- 6,000(4) Division 1999 146,000 87,000 18,000(3) -- 6,000(4)
- ---------- 1. Includes salary deferred under the Company's 401(k) Plan and Section 125 Plan. All amounts are rounded to the nearest thousand. 2. Payroll period changed from pay-to-date to one week in arrears in July 2001, resulting in the loss of one week's worth of compensation in 2001 for personnel who were employed for the full year. This compensation will be made up when the employee leaves the Company. 3. Automobile allowance. 4. Represents matching contributions that the Company made to its 401(k) Plan on behalf of the Named Officer. 5. Mr. O'Brien became an employee on November 28, 2000. The salary paid to Mr. O'Brien for the 2000 fiscal year was based on his employment agreement dated November 17, 2000. 6. Mr. Montgomery received a grant for options to purchase 100,000 shares of common stock at a price of $12.44 per share pursuant to his employment agreement dated April 9, 2001. 7. Mr. Pettit received a grant for options to purchase 100,000 shares of common stock at a price of $12.44 per share pursuant to his employment agreement dated April 9, 2001. 25 8. Mr. Walsh resigned as Vice President, Business Development on April 9, 2001. 9. Represents a payment of $148,000 in salary, $44,000 bonus and $18,000 automobile allowance made to Mr. Walsh in connection with his resignation, $115,000 from the exercise of stock options and $2,000 matching contributions that the Company made to its 401(k) Plan on behalf of Mr. Walsh. 10. Mr. Comis resigned as Vice President, Eastern Division on April 9, 2001. 11. Represents a payment of $145,000 in salary, $43,000 bonus and $18,000 automobile allowance made to Mr. Comis in connection with his resignation, $129,000 from the exercise of stock options and $2,000 matching contributions that the Company made to its 401(k) Plan on behalf of Mr. Comis. 26 STOCK OPTIONS The following table sets forth information with respect to the Named Officers concerning grants of stock options made during 2001. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION INDIVIDUAL GRANTS TERM -------------------------------------------------------------- ----------------------------- NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS GRANTED OPTIONS TO EMPLOYEES IN EXERCISE GRANTED FISCAL PRICE EXPIRATION NAME (#) (1) YEAR (2) ($/SH) (3) DATE 5% ($) (4) 10% ($) (4) - ---- ----------- --------------- ---------- ---------- ---------- ---------- Thomas C. O'Brien -- -- -- -- -- -- Donald J. Hermanek 40,000 6.7 13.938 3/7/2011 350,621 888,543 David R. Montgomery 100,000 16.6 12.438 4/9/2011 782,219 1,982,297 Marcia A. McAllister -- -- -- -- -- -- Scott P. Pettit 100,000 16.6 12.438 4/9/2011 782,219 1,982,297 Patrick T. Walsh -- -- -- -- -- -- Donald J. Comis -- -- -- -- -- --
(1) Each option was granted under the Company's 1991 Stock Option Plan as amended and restated. The option becomes exercisable in four equal annual installments with the first such installment exercisable upon the optionee's completion of one year of service. Each option will become immediately exercisable for all the option shares in the event of a change of control of the Company. Each option has a maximum term of 10 years, subject to earlier termination in the event that the optionee ceases to provide services to the Company. (2) Based upon options to purchase an aggregate of 600,928 shares granted to employees in 2001. (3) The exercise price may be paid in cash, in shares of the Company's Common Stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. The Company may, at its discretion, also loan the optionee sufficient funds to pay the exercise price for the purchased shares and the federal and state income tax liability incurred by the optionee in connection with such exercise. (4) The 5% and 10% assumed annual rates of compounded stock price appreciation from the date of grant are mandated by the Securities and Exchange Commission. There is no assurance provided to any executive officer or any other holder of the Company's Common Stock that the actual stock price appreciation over the option term will be at the assumed 5% or 10% levels or at any other specific level. No gain will in fact be realized by the optionees unless the stock price appreciates over the option term, which will also benefit all shareholders of the Company. 27 The following table sets forth information with respect to unexercised options held as of the end of the 2001 fiscal year by the Named Officers. No stock appreciation rights were outstanding at the end of 2001. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END ($)(1)(2) ----------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Thomas C. O'Brien ...... 75,000 225,000 318,525 955,575 Donald J. Hermanek ..... 6,250 58,750 -- 44,880 David R. Montgomery .... -- 100,000 -- 262,200 Marcia A. McAllister ... 41,875 5,625 200,750 20,375 Scott P. Pettit ........ -- 100,000 -- 262,200 Patrick T. Walsh ....... 10,000(3) -- -- -- Donald J. Comis ........ 4,000(4) -- -- --
- ---------- (1) "In-the-money" options are options whose exercise price was less than the market price of the Common Stock on December 30, 2001, the last day of the 2001 fiscal year. (2) Based upon the market price of $15.06 per share, which was the closing price per share of the Company's Common Stock on the Nasdaq Stock Market(R) on December 28, 2001, less the exercise price payable per share. (3) Per Mr. Walsh's separation agreement, all of his outstanding stock options became 100% vested and exercisable on April 28, 2001. Such vested stock options will continue to be exercisable until the earlier of such stock options' expiration date or July 9, 2002. (4) Per Mr. Comis' separation agreement, all of his outstanding stock options became 100% vested and exercisable on April 28, 2001. Such vested stock options will continue to be exercisable until the earlier of such stock options' expiration date or July 9, 2002. COMPENSATION OF DIRECTORS For 2001, each non-employee director was entitled to receive an annual retainer fee of $18,000, a $1,000 fee for each regularly scheduled Board meeting attended, a $500 fee for each committee meeting attended (other than on the date of a regularly scheduled Board meeting), and an annual fee of $3,000 if such non-employee director served as a Chairperson of a Committee. Non-employee directors are also reimbursed for expenses incurred in attending such meetings. Employee directors are not compensated for their services as directors of the Company. Each non-employee director is also eligible to receive periodic option grants for shares of the Company's Common Stock pursuant to the automatic option grant program in effect under the Company's 1991 Stock Option Plan as amended and restated. Under this automatic option grant program, each individual who becomes a non-employee Board member is granted an option to purchase 10,000 shares of Common Stock on the date such individual joins the Board. In addition, each non-employee director is also entitled to receive an automatic option to purchase 2,000 shares of Common Stock on the last business day of the second quarter of each fiscal year during which such individual continues to serve on the Board. Each automatic option grant becomes exercisable in four successive quarterly installments with the first such installment to become exercisable on the last day of the fiscal quarter immediately following the date of grant, provided the non-employee director continues to serve on the Board. However, each option will become immediately exercisable for all of the option shares in the event of a change of control of the Company. Mr. Martin and the Company are parties to an agreement for services pursuant to which Mr. Martin is compensated on a daily basis for consulting services, primarily in the areas of acquisitions and real estate. In 2001, Mr. Martin received no compensation pursuant to the agreement. 28 EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS The following is a description of the employment or consulting agreements in effect between the Company and certain of its Directors and the Named Officers. The compensation paid to Thomas C. O'Brien, President and Chief Executive Officer of the Company, for the 2001 fiscal year was based on a November 17, 2000 employment agreement (the "O'Brien Agreement"). Under the O'Brien Agreement, Mr. O'Brien is entitled to an annual base salary of $350,000 and a performance incentive bonus of 40% of his annual salary based upon the achievement of target performance goals. Mr. O'Brien will be entitled to receive in excess of 40% of his annual salary as a performance incentive if his performance exceeds the goals and objectives determined by the Board. Also, pursuant to the O'Brien Agreement, the Company granted Mr. O'Brien an option to purchase 300,000 shares of the Company's Common Stock. The option becomes exercisable in four equal annual installments with the first such installment exercisable upon Mr. O'Brien's completion of one year of service. The compensation paid to David R. Montgomery for the 2001 fiscal year was based on an April 2, 2001 employment agreement (the "Montgomery Agreement"). Under the Montgomery Agreement, Mr. Montgomery is entitled to an annual base salary of $225,000 and a performance incentive bonus of 40% of his annual salary based upon the achievement of target performance goals. Pursuant to the Montgomery Agreement, the Company paid Mr. Montgomery a signing bonus of $25,000. Also, pursuant to the Montgomery Agreement, the Company granted Mr. Montgomery an option to purchase 100,000 shares of the Company's Common Stock. The option becomes exercisable in four equal annual installments with the first such installment exercisable upon Mr. Montgomery's completion of one year of service. The compensation paid to Scott P. Pettit for the 2001 fiscal year was based on an April 2, 2001 employment agreement (the "Pettit Agreement"). Under the Pettit Agreement, Mr. Pettit is entitled to an annual base salary of $195,000 and a performance incentive bonus of 40% of his annual salary based upon the achievement of target performance goals. Pursuant to the Pettit Agreement, the Company paid Mr. Pettit a signing bonus of $35,000. Also, pursuant to the Pettit Agreement, the Company granted Mr. Pettit an option to purchase 100,000 shares of the Company's Common Stock. The option becomes exercisable in four equal annual installments with the first such installment exercisable upon Mr. Pettit's completion of one year of service. In connection with his resignation as Vice President, Business Development, Mr. Walsh entered into an agreement dated April 9, 2001. In consideration for Mr. Walsh's resignation from all positions with the Company and its subsidiaries, the Company agreed to pay Mr. Walsh a lump sum payment of $210,000. In addition, the Company accelerated the vesting of 72,500 previously granted stock options and extended the exercisability of all of Mr. Walsh's outstanding vested options until July 9, 2002. Mr. Walsh released the Company from any and all claims arising from or relating to his employment with the Company (except for indemnification claims under any applicable law or the Company's standard form of Indemnification Agreement). In connection with his resignation as Vice President, Eastern Division, Mr. Comis entered into an agreement dated April 9, 2001. In consideration for Mr. Comis' resignation from all positions with the Company and its subsidiaries, the Company agreed to pay Mr. Comis a lump sum payment of $206,000. In addition, the Company accelerated the vesting of 44,000 previously granted stock options and extended the exercisability of all of Mr. Comis' outstanding vested options until July 9, 2002. Mr. Comis released the Company from any and all claims arising from or relating to his employment with the Company (except for indemnification claims under any applicable law or the Company's standard form of Indemnification Agreement). Mr. Comis also entered into a consulting agreement that commenced on April 9, 2001 and will expire on April 8, 2002. Mr. Comis has been paid a monthly consulting fee of $12,000 plus any related out-of-pocket expenses approved by the Company. Effective August 9, 2000, the Company entered into an Executive Severance Plan for Officers with each of the Executive Officers. Below is a general description of certain terms and conditions of the Executive Severance Plan. 29 Unless otherwise increased by the Company in its sole discretion, if the Company terminates the Named Officer's employment for any reason other than for "Cause" or if the "Executive Officer" voluntarily terminates employment with the Company and all of its Affiliates for "Good Reason", the Executive Officer shall receive, in exchange for providing the Company with a duly executed "Waiver and Release Agreement" a benefit, generally representing one-month of severance pay for each year of service with a minimum severance pay of six (6) months and a maximum severance pay of twelve (12) months, in an amount equal to the product of (i) times (ii), where: (i) represents the sum of: (A) the Executive Officer's annualized base salary at the time the Executive Officer's employment is terminated, plus (B) the Executive's average annual bonus received over the eight fiscal quarters of the Company immediately preceding the Company's fiscal quarter during which the Participant's employment is terminated, without exceeding the Executive Officer's target bonus for the Company's fiscal year during which the Executive Officer's employment is terminated, plus (C) the Executive Officer's auto allowance for the Company's fiscal year during which the Executive Officer's employment is terminated; and (ii) represents a fraction the numerator of which is the number of whole completed years of employment with the Company, but not less than six (6) nor more than twelve (12), and the denominator of which is twelve (12); provided, however, that in the event that the Executive Officer's termination of employment occurs within one (1) year following the date on which a new chief executive officer is hired by the Company, the Executive Officer shall receive twelve (12) months of severance pay generally calculated on the basis of the amounts set forth; provided, however, that the amount taken into account as the Executive Officer's bonus shall be equal to the Executive Officer's target bonus for the Company's fiscal year during which the Executive Officer's employment is terminated. An Executive Officer is not entitled to any benefit if the Company terminates such Executive Officer's employment for Cause, if the Executive Officer voluntarily terminates employment with the Company for any reason other than Good Reason, or if the Executive Officer's employment is terminated as a result of death or disability. "Cause" shall mean an Executive Officer's: (A) felony conviction in a court of law under applicable federal or state laws which results in material damage to the Company or impairs the value of the Executive Officer's services to the Company, or (B) engaging in one or more acts, or omitting to act, in a manner so as to violate a significant Company policy or fiduciary duty owed by the Executive Officer to the Company which results in material damage to the Company. "Good Reason" means a (i) significant diminution of the duties and responsibilities assigned to the Executive Officer, (ii) any material diminution in the Executive Officer's compensation or benefits previously provided to the Executive Officer, or (iii) a relocation, without the consent of the Executive Officer, of the Executive Officer's office at the Company or any of its Affiliates more than 75 miles from its current location. The Company has entered into a Change of Control Employment Agreement (the "Employment Agreement") with each of the Executive Officers. Below is a general description of certain terms and conditions of the Employment Agreement. In the event of a "Change of Control" of the Company followed within two years by (1) the termination of the executive's employment for any reason other than death, disability, or "Cause" or (2) the termination of the executive's employment by the executive for "Good Reason", the Employment Agreement provides that the executive shall be paid a lump sum cash amount equal to one and one-half times the executive's annual base salary and "Highest Annual Bonus" as defined in the Employment Agreement. In addition, the executive is entitled to continued employee welfare benefits for 18 months after termination of employment. "Change of Control" means (a) the acquisition by an individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934) of 50% or more of the voting power of the 30 then outstanding voting securities of the Company entitled to vote generally in the election of directors, (b) a change in the majority of the board of directors, (c) a major corporate transaction, such as a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the Company's assets, or (d) a liquidation or dissolution of the Company. "Cause" means the willful and continued failure of the executive to perform substantially the executive's duties or the willful engaging by the executive in illegal conduct or gross misconduct materially injurious to the Company. "Good Reason" means the diminution of responsibilities, assignment to inappropriate duties, failure of the Company to comply with compensation or benefit provisions, transfer to a new work location more than 75 miles from the executive's previous work location, a purported termination of the Employment Agreement by the Company other than in accordance with the Employment Agreement, or failure of the Company to require any successor to the Company to comply with the Employment Agreement. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The current members of the Compensation Committee are Ms. Gould, Mr. Cocca and Mr. Ubben. Neither of these individuals was at any time during the fiscal year ended December 30, 2001 or at any other time an officer or employee of the Company. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity which has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. OWNERSHIP OF SECURITIES The following table sets forth certain information known to the Company regarding the ownership of the Company's Common Stock as of March 25, 2002 for (i) each Director, (ii) all persons who are beneficial owners of five percent or more of the Company's Common Stock, (iii) any other Named Officer and (iv) all officers and Directors of the Company as a group. Unless otherwise indicated, each of the shareholders has sole voting and investment power with respect to the shares beneficially owned, subject to community property laws where applicable.
NUMBER OF PERCENT OF TOTAL NAME AND ADDRESS SHARES SHARES OUTSTANDING(1) ------------------------------------------------ --------- -------------------- ValueAct Capital Partners L.P.(2)(10)(11) ...... 1,889,000 15.5% One Financial Center, Suite 1600 Boston, MA 02111 Wallace R. Weitz & Co. (3) ..................... 1,704,000 14.0% 1125 S. 103rd St., Ste 600 Omaha, NE 68124-6008 Fidelity Management & Research (4) ............. 1,235,260 10.2% 82 Devonshire St., N4A Boston, MA 02109 Sterling Capital Management(5) ................. 927,861 7.6% One First Union Center 301 S. College St Charlotte, NC 28202-6005 Farallon Capital Management, L.L.C.(6) ......... 910,400 7.5% One Maritime Plaza, Suite 1325 San Francisco, CA 94111 Dimensional Fund Advisors (7) .................. 830,000 6.8% 1299 Ocean Ave., 11th Fl Santa Monica, CA 90401 State of Wisconsin Investment Board (8) ........ 790,700 6.5% P.O. Box 7842 Madison, Wisconsin 53707 Liberty Wanger Asset Management, L.P. (9) ...... 619,000 5.1% 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 Peter H. Kamin(3) (10) ......................... 1,935,957 15.8% Jeffrey W. Ubben (3)(11) ....................... 1,877,500 15.4% Thomas C. O'Brien(12) .......................... 75,000 * Peter B. Doder(12) ............................. 61,250 * Marcia A. McAllister (12) ...................... 45,000 * Joseph F. Mazzella (12) ........................ 42,500 * Melvin R. Martin (12) .......................... 38,125 * Maurice A. Cocca (12) .......................... 29,500 * Susan B. Gould (12) ............................ 27,855 * David R. Montgomery(12) ........................ 25,000 * Scott P. Pettit(12) ............................ 25,000 * John K. Wilcox (12) ........................... 18,500 * Donald J. Hermanek(12) ......................... 16,250 * Patrick T. Walsh(12) ........................... 10,000 * Donald J. Comis(12) ............................ 4,000 * All officers (including Named Officers) and Directors as a group (15 persons)(13) ........ 2,365,437 18.7%
- ---------- * Less than 1% (1) Percentage of beneficial ownership is calculated assuming 12,215,728 shares of common stock were outstanding on March 25, 2002. This percentage includes any shares of common stock of which such 32 individual or entity had the right to acquire beneficial ownership within sixty days of March 25, 2002, including but not limited to the exercise of an option; however, such common stock shall not be deemed outstanding for the purpose of computing the percentage owned by any other individual or entity. Such calculation is required by General Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as amended. (2) Such information was based on Schedule 13D filed jointly by ValueAct Capital Partners, L.P. ("ValueAct Partners"), VA Partners, L.L.C. ("VA Partners"), George F. Hamel, Jr., Peter H. Kamin and Jeffrey W. Ubben on February 16, 2001 and reflects stock held as of December 31, 2001. Messrs. Hamel, Kamin and Ubben are each Managing Members, principal owners and controlling persons of VA Partners. Shares beneficially owned by each of ValueAct Partners and ValueAct Partners II, L.P. ("ValueAct Partners II") are reported as beneficially owned by VA Partners, as General Partner of each of such investment partnerships, and by the Managing Members as controlling persons of the General Partner. VA Partners and the Managing Members also, directly or indirectly, may own interests in one or both of such partnerships from time to time. By reason of such relationships ValueAct Partners is reported as having shared power to vote or to direct the vote, and shared power to dispose or direct the disposition of, such shares of common stock with VA Partners and the Managing Members. VA Partners and the Managing Members disclaim beneficial ownership of the shares of common stock held by each of ValueAct Partners and ValueAct Partners II. ValueAct Partners is the beneficial owner of 1,735,310 shares of common stock, representing approximately 14.8% of the Company's outstanding common stock. ValueAct Partners II is the beneficial owner of 130,690 shares of common stock, representing approximately 1.1% of the Company's outstanding common stock. VA Partners and each of the Managing Members may be deemed the beneficial owner of an aggregate of 1,866,000 shares of Company's common stock. Also includes 23,000 stock options to purchase shares of common stock granted under the 1991 Stock Option Plan as amended and restated that are exercisable on March 25, 2002 or will become exercisable within 60 days after that date consisting of (a) 11,500 options granted to Mr. Kamin and (b) 11,500 options granted to Mr. Ubben. These 23,000 stock options were assigned to ValueAct Partners by Messrs. Kamin and Ubben. The options are owned directly by ValueAct Partners and indirectly by VA Partners, as general partner of ValueAct Partners, and indirectly by Messrs. Kamin and Ubben as managing members and controlling persons of VA Partners. In addition to the 1,889,000 shares of common stock of which VA Partners and each of the Managing Members may be deemed to be the beneficial owners, Mr. Kamin owns and has sole voting power to vote and dispose of 58,457 shares of common stock. (3) Such information is based on a Schedule 13G/A filed by Wallace R. Weitz & Co. with the SEC on February 4, 2002 and reflects stock held as of December 31, 2001. According to such Schedule 13G, Wallace R. Weitz & Co. has sole voting and dispositive power for all the shares. (4) Such information is based on a Schedule 13G/A filed by FMR Corp. with the SEC on February 14, 2002 and reflects stock held as of December 31, 2001. Fidelity Management & Research Company ("Fidelity"), a wholly owned subsidiary of FMR Corp., is the beneficial owner of 181,010 shares or 1.492%. Edward C. Johnson 3d, FMR Corp, through its control of Fidelity and the funds, each has sole power to dispose of the 181,010 shares owned by the Funds. Neither FMR Corp. nor Edward C. Johnson 3d has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds' Board of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the Funds' Boards of Trustees. Fidelity Management Trust Company, a wholly-owed subsidiary of FMR Corp., is the beneficial owner of 988,550 shares or 8.147%. Edward C. Johnson 3d and FMR Corp, through its control of Fidelity Management Trust Company, each has sole dispositive and voting power over 988,550 shares. Fidelity International Limited is the beneficial owner of 65,700 shares or 0.541%. Fidelity International Limited is the sole dispositive and voting power over 65,700 shares. (5) Such information is based on a Schedule 13G/A filed by Sterling Management LLC. ("Sterling") with the SEC on February 4, 2002 and reflects stock held as of December 31, 2001. According to such Schedule 13G, Sterling has shared voting and dispositive power over all the shares. (6) Such information is based on a Schedule 13G filed jointly by Farallon Capital Management, L.L.C. with the SEC on February 4, 2002 and reflects stock held as of December 31, 2001. According to such Schedule 13G, the managing members of Farallon Capital Management, L.L.C. and managing members of Farallon Partners, L.L.C., named therein, have shared voting and dispositive power for all the shares. 33 (7) Such information is based on a Schedule 13G/A filed by the Dimensional Fund Advisors, Inc. ("Dimensional") with the SEC on January 30, 2002 and reflects stock held as of December 31, 2001. According to such Schedule 13G, Dimensional has sole voting and dispositive power over all the shares. (8) Such information is based on a Schedule 13G/A filed by State of Wisconsin Investment Board with the SEC on February 15, 2002 and reflects stock held as of December 31, 2001. According to such Schedule 13G, the State of Wisconsin Investment Board retains sole voting and dispositive power for all the shares. (9) Such information is based on a Schedule 13G/A filed by Liberty Wanger Asset Management, L.P., with the SEC on February 12, 2002 and reflects stock held as of December 31, 2001. According to such Schedule 13G, Liberty Wanger Asset Management, L.P. has shared voting and dispositive power for all the shares. (10) Includes 58,457 shares of Common Stock over which Mr. Kamin has sole voting and dispositive power and 1,866,000 shares owned by ValueAct Partners over which Mr. Kamin shares voting and dispositive power. Peter H. Kamin, a director of the Company, has the sole power to vote or dispose of 58,457 shares of Common Stock by reason of his position as Partner and managing member of ValueAct Partners. Such information is based on a Schedule 13D filed with the SEC on February 16, 2001. Also includes 11,500 stock options to purchase shares of common stock granted under the 1991 Stock Option Plan as amended and restated to Mr. Kamin that are exercisable on March 25, 2002 or will become exercisable within 60 days after that date. All 11,500 options were assigned to ValueAct Partners. The options are owned directly by ValueAct Partners and indirectly by VA Partners, as general partner of ValueAct Partners, and indirectly by Mr. Kamin as a managing member and controlling person of VA Partners. Mr. Kamin disclaims beneficial ownership for these options. (11) Includes 1,866,000 shares owned by ValueAct Partners over which Mr. Ubben shares voting and dispositive power. Also includes 11,500 stock options to purchase shares of common stock granted under the 1991 Stock Option Plan as amended and restated to Mr. Ubben that are exercisable on March 25, 2002 or will become exercisable within 60 days after that date. All 11,500 options were assigned to ValueAct Partners. The options are owned directly by ValueAct Partners and indirectly by VA Partners, as general partner of ValueAct Partners, and indirectly by Mr. Ubben as a managing member and controlling person of VA Partners. Mr. Ubben disclaims beneficial ownership for the options. (12) Includes that portion of options to purchase shares of Common Stock granted under the 1991 Stock Option Plan that are exercisable on March 25, 2002 or will become exercisable within 60 days after that date: Mr. O'Brien, 75,000 shares; Mr. Doder 61,250; Ms. McAllister, 45,000 shares; Mr. Mazzella 42,500 shares; Mr. Martin, 38,125 shares; Mr. Cocca, 29,500 shares; Ms. Gould, 27,855 shares; Mr. Montgomery, 25,000 shares; Mr. Pettit, 25,000 shares; Mr. Wilcox, 18,500 shares; Mr. Hermanek, 16,250 shares; Mr. Walsh, 10,000 shares; and Mr. Comis, 4,000 shares. (13) Includes options to purchase shares of Common Stock granted under the 1991 Stock Option Plan that are currently exercisable or will become exercisable within 60 days after March 25, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On February 15, 2001, the Company entered into a Shareholder Agreement (the "Shareholder Agreement") with ValueAct Capital Partners, L.P., ValueAct Capital Partners II, L.P., VA Partners, LLC, Jeffrey W. Ubben, Peter H. Kamin, and George F. Hamel (the "ValueAct Shareholders"). Pursuant to the terms of the Shareholder Agreement, the Board: (i) elected Mr. Kamin and Mr. Ubben as members of the Board, (ii) accepted the resignations of Thomas J. O'Malia and Christopher G. Knowles from the Board, including Mr. O'Malia's resignation as Chairman of the Board, and (iii) elected Joseph Mazzella as Chairman of the Board. Additionally, the ValueAct Shareholders agreed to vote all of their shares in favor of electing Mr. Ubben, Mr. Kamin, Mr. Cocca, Ms. Gould, Mr. Martin, Mr. Mazzella, Mr. O'Brien and Mr. Wilcox to the Board at the Company's June 2001 annual meeting of shareholders. The Shareholder Agreement also places certain restrictions on the ValueAct Shareholders. Without the prior consent of the Board, which must include the affirmative vote of at least two of the following "independent directors": Mr. Cocca, Ms. Gould, Mr. Martin and Mr. Wilcox, the ValueAct Shareholders will not: (i) prior to the second anniversary of the Shareholder Agreement, acquire any of the Company's shares unless after the acquisition the ValueAct Shareholders' own 25% or less of the Company's outstanding shares or the acquisition of shares is by 34 Mr. Kamin or Mr. Ubben pursuant to the Company's 1991 Stock Option Plan; or (ii) prior to the three month anniversary of the Company's June 2001 annual meeting, (A) initiate, propose or otherwise cause a special meeting of the shareholders of the Company to elect directors of the Company; or (B) subject any shares to any arrangement which conflicts with the Shareholder Agreement; or (C) enter into any transaction with the Company unless the terms and conditions are determined by the Board, which includes the affirmative vote of two of the independent directors, to be "fair and reasonable" to the Company; or (D) seek, encourage or support, the election of members to the Board except as provided in the Shareholder Agreement, or seek the removal of any member of the Board other than Mr. Kamin or Mr. Ubben. M & M Acquisition. In January 1992, the Company purchased the auto salvage pool operations of M & M Auto Storage Pool, Inc. ("M & M"), and acquired an option to purchase the original 35 acres of land on which M & M's operation is located. Melvin R. Martin, the founder, chief executive officer and principal shareholder of such auto salvage operation, was elected a Director of the Company in January 1992. The Company is required to pay rent to Mr. Martin during the 10-year term of the lease relating to the real property owned by Mr. Martin. In 2001, the Company paid $359,406 pursuant to the lease. The Company believes the terms of the lease are no less favorable than those available from unaffiliated third party lessors. Mr. Martin and the Company are parties to an agreement for services pursuant to which Mr. Martin is compensated on a daily basis for consulting services, primarily in the areas of acquisitions and real estate. In 2001, Mr. Martin received no compensation pursuant to the agreement. Dallas, Texas Lease. The Company leases certain property located in Dallas, Texas from a partnership in which Mr. Martin is a partner. In 2001, the Company paid $468,000 in rent under this lease. The Company believes the terms of the lease are no less favorable than those available from unaffiliated third party lessors. 35 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Page ---- (a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following Consolidated Financial Statements of Insurance Auto Auctions, Inc. and its subsidiaries are filed as part of this report on Form 10-K: Independent Auditors' Report............................................. 42 Consolidated Balance Sheets - December 30, 2001 and December 31, 2000........................................................ 43 Consolidated Statements of Operations - 2001, 2000 and 1999................................................................. 45 Consolidated Statements of Shareholders' Equity- 2001, 2000 and 1999............................................................ 46 Consolidated Statements of Cash Flows -2001, 2000 and 1999................................................................. 47 Notes to Consolidated Financial Statements............................... 49
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because the matter or conditions are not present or the information required to be set forth therein is included in the Consolidated Financial Statements and related Notes thereto. 3. EXHIBITS See Item 14(c) below. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Company during the three-month period ended December 30, 2001. (c) EXHIBITS
Exhibit No Description -- ----------- 3.1(11) Articles of Incorporation of the Registrant, as filed with the Illinois Secretary of State on August 7, 1997. 3.2(14) Bylaws of the Registrant. 3.3(17) Bylaws of the Registrant, as amended as of March 21, 2001.
36 4.1(9) Fifth Amended and Restated Registration Rights Agreement, dated September 23, 1994, by and among the Registrant, William W. Liebeck, Bradley S. Scott, Bob F. Spence, Corinne Spence, Jimmie A. Dougherty, Patricia L. Dougherty and Midwest Auto Pool Corporation. 4.3(1) Specimen Stock Certificate. 4.4(5) Stockholder Agreement dated December 1, 1993, by and among the Registrant, Tech-Cor, Inc., Bradley S. Scott, Bob F. Spence and William L. Liebeck. 4.5(5) Registration Agreement dated December 1, 1993, by and among the Registrant and Tech-Cor. 4.5(8) Note Agreement, dated as of December 1, 1994 among the Registrant and the purchasers listed therein. 4.6(18)* Shareholder Agreement, dated February 15, 2001, among the Company, ValueAct Capital Partners, L.P., ValueAct Capital Partners II, L.P., VA Partners, LLC, Jeffrey W. Ubben, Peter H. Kamin and George F. Hamel, Jr. 4.7(18)* Registration Rights Agreement, dated February 15, 2000, among the Company, ValueAct Capital Partners, L.P. and ValueAct Capital Partners II, L.P. 10.36(6)* Form of Notice of Grant of Stock Option -- employee, officer. 10.37(3)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- employee. 10.38(3)* Form of Stock Option Agreement: Non-Employee Director, Automatic Option Grant, Insurance Auto Auctions, Inc. Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option). 10.39(3)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- employee. 10.40(3)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- officer. 10.41(3)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- officer. 10.66(2) Facilities Lease Agreement dated January 17, 1992, by and between Melvin R. Martin and MASP. 10.122(5) Asset Purchase Agreement dated December 1, 1993, by and between the Registrant, BC Acquisition Corp. (a wholly owned subsidiary of Registrant ("BCAC") and Tech-Cor, Inc. ("Tech-Cor"). 10.125(5) Transition Agreement dated December 1, 1993, by and between BCAC and Tech-Cor. 10.126(5) Lease, dated December 1, 1993, by and between Allstate Insurance Company and BCAC. 10.134(7) Registration Rights Agreement dated January 20, 1994, by and among, the Registrant, Christopher G. Knowles, Gerald C. Comis, F. Peter Haake and Donald J. Comis. 10.149(11)* Form of Change of Control Employment Agreement by and between the Company and certain of its executive officers.
37 10.150 Credit Agreement between the Registrant and LaSalle National Bank dated as of February 15, 2002. 10.151 Rate Swap Agreement pursuant to the Credit Agreement between the Registrant and LaSalle National Bank dated as of March 13, 2002. 10.154(10)* Insurance Auto Auctions, Inc. Employee Stock Purchase Plan, as amended as of June 18, 1997. 10.155(14) Form of Indemnification Agreement dated as of February 24, 1999 by and between the Company and its Directors and Executive Officers. 10.160(16)* Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as amended and restated. 10.161(17)* Executive Severance Plan for Officers dated August 9, 2000, by and between the Company and the Company's executive officers. 10.162(17)* Employment agreement, dated November 17, 2000, by and between the Company and Thomas C. O'Brien. 10.165(18)* Separation Agreement, dated February 15, 2001, by and between the Company and Thomas J. O'Malia. 10.166(18)* Separation Agreement, dated February 15, 2001, by and between the Company and Christopher G. Knowles. 10.167(19)* Amended and Restated Employment Agreement dated April 2, 2001 by and between the Company and Thomas C. O'Brien. 10.168(19)* Employment Agreement dated April 2, 2001 by and between the Company and David R. Montgomery. 10.169(19)* Employment Agreement dated April 2, 2001 by and between the Company and Scott P. Pettit. 10.170(19)* Separation Agreement dated March 31, 2001 by and between the Company and Gaspare G. Ruggirello. 10.171(19)* Separation Agreement dated April 9, 2001 by and between the Company and Donald J. Comis. 10.172(19)* Separation Agreement dated April 9, 2001 by and between the Company and Gerald C. Comis. 10.173(19)* Separation Agreement dated April 9, 2001 by and between the Company and Patrick T. Walsh. 10.174(19)* Separation Agreement dated March 9, 2001 by and between the Company and Stephen L. Green. 10.175(20)* Amended and Restated Employee Stock Purchase Plan. 10.176* Consulting Agreement dated April 12, 2001 by and between the Company and Donald J. Comis. 10.177* Employment Agreement dated December 11, 2001 and addendum by and between the Company and Edward N. Fares. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP. 24.1 Power of Attorney.
38 (1) Incorporated by reference from an exhibit filed with the Registrant's Registration Statement on Form S-1 (File No. 33-43247) declared effective by the Securities and Exchange Commission ("SEC") on November 20, 1991. (2) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. 0-19594) filed with the SEC on January 31, 1992. (3) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1992. (4) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended June 30, 1993. (5) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. 0-19594) filed with the SEC on December 15, 1993. (6) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1993. (7) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. 0-19594) filed with the SEC on February 3, 1994. (8) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. 0-19594) filed with the SEC on February 10, 1995. (9) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1994. (10) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended June 30, 1997. (11) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1997. (12) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended March 31, 1998. (13) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1998. (14) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended March 31, 1999. (15) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended June 30, 1999. (16) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended June 30, 2000. (17) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 2000. (18) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. 0-19594) filed with the SEC on February 16, 2001. 39 (19) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended April 1, 2001. (20) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended July 1, 2001. * This item is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 601(b)(10)(iii) of Regulation S-K. 40 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSURANCE AUTO AUCTIONS, INC. By: /s/ Thomas C. O'Brien ------------------------------------ President and Chief Executive Officer Date: March 29 , 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 29th day of March, 2002. /s/ Thomas C. O'Brien President and Chief Executive Officer, Director - ------------------------------ (Principal Executive Officer) Thomas C. O'Brien /s/ Scott P. Pettit Senior Vice President, Chief Financial Officer - ------------------------------ and Secretary Scott P. Pettit (Principal Financial Officer) /s/ * Chairman of the Board of Directors - ------------------------------ Joseph F. Mazzella /s/ * Director - ------------------------------ Maurice A. Cocca /s/ * Director - ------------------------------ Susan B. Gould /s/ * Director - ------------------------------ Peter H. Kamin /s/ * Director - ------------------------------ Melvin R. Martin /s/ * Director - ------------------------------ Jeffrey W. Ubben /s/ * Director - ------------------------------ John K. Wilcox * As attorney-in-fact. 41 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Insurance Auto Auctions, Inc.: We have audited the consolidated financial statements of Insurance Auto Auctions, Inc. and subsidiaries, as listed in Item 14(a)1. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Insurance Auto Auctions, Inc. and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Chicago, Illinois March 1, 2002 42 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (dollars in thousands except per share amounts)
DECEMBER 30, DECEMBER 31, 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 24,467 $ 30,938 Short-term investments 2,131 4,859 Accounts receivable, net 54,674 48,091 Inventories 13,505 10,588 Other current assets 4,165 3,112 ------------ ------------ Total current assets 98,942 97,588 ------------ ------------ Property and equipment, net: Land and buildings 11,358 7,396 Furniture and fixtures 1,804 1,752 Machinery and equipment 29,305 27,143 Leasehold improvements 29,737 23,232 ------------ ------------ 72,204 59,523 Less accumulated depreciation and amortization 32,549 29,031 ------------ ------------ Net property and equipment 39,655 30,492 ------------ ------------ Investments in marketable securities 512 2,240 Deferred income taxes 7,827 5,123 Intangible assets, principally goodwill, net 131,268 130,264 ------------ ------------ $ 278,204 $ 265,707 ============ ============
43 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (dollars in thousands except per share amounts)
DECEMBER 30, DECEMBER 31, 2001 2000 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 20,040 $ 37 Accounts payable 41,451 38,176 Accrued liabilities 10,920 6,171 Accrued special charges 1,245 -- ------------ ------------ Total current liabilities 73,656 44,384 ------------ ------------ Long-term debt, excluding current installments 103 20,141 Deferred income taxes 12,172 10,440 Other noncurrent liabilities 3,279 3,001 ------------ ------------ Total liabilities 89,210 77,966 ------------ ------------ 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 12,162,290 and 11,715,936 shares as of December 30, 2001 and December 31, 2000, respectively 12 12 Additional paid-in capital 142,575 136,962 Retained earnings 46,407 50,767 ------------ ------------ Total shareholders' equity 188,994 187,741 ------------ ------------ $ 278,204 $ 265,707 ============ ============
See accompanying Notes to Consolidated Financial Statements 44 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (dollars in thousands except per share amounts)
2001 2000 1999 ---------- ---------- ---------- Revenues: Vehicle sales $ 138,427 $ 200,858 $ 204,785 Fee income 154,563 132,318 112,606 ---------- ---------- ---------- 292,990 333,176 317,391 Costs and expenses: Cost of sales: 202,588 243,779 233,949 Direct operating expenses 80,089 62,789 55,741 Amortization of intangible assets 4,055 3,942 3,797 Business transformation costs 3,451 -- -- Special charges 8,016 4,772 -- ---------- ---------- ---------- Earnings (loss) from operations (5,209) 17,894 23,904 Other (income) expense: Interest expense 1,788 1,833 1,970 Interest income (1,025) (1,717) (1,271) ---------- ---------- ---------- Earnings (loss) before income taxes (5,972) 17,778 23,205 Income tax expense (benefit) (1,612) 7,289 9,500 ---------- ---------- ---------- Net earnings (loss) $ (4,360) $ 10,489 $ 13,705 ========== ========== ========== Earnings (loss) per share: Basic $ (.37) $ .90 $ 1.20 ========== ========== ========== Diluted $ (.37) $ .88 $ 1.18 ========== ========== ========== Weighted average shares outstanding: Basic 11,940 11,660 11,467 Effect of dilutive securities - stock options -- 290 156 ---------- ---------- ---------- Diluted 11,940 11,950 11,623 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements 45 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (dollars in thousands)
COMMON STOCK ------------------- ADDITIONAL TOTAL NUMBER PAID-IN RETAINED SHAREHOLDERS' OF SHARES AMOUNT CAPITAL EARNINGS EQUITY ---------- ------ ---------- -------- -------------- Balance at December 31, 1998 11,327,169 $ 11 $ 132,171 $ 26,573 $ 158,755 Stock options exercised 235,289 1 2,159 -- 2,160 Deferred tax related to stock options exercised -- -- 494 -- 494 Issuance of common stock in connection with the employee stock purchase plan 12,552 -- 172 -- 172 Net earnings -- -- -- 13,705 13,705 ---------- ------ ---------- -------- -------------- Balance at December 31, 1999 11,575,010 $ 12 $ 134,996 $ 40,278 $ 175,286 Stock options exercised 131,714 -- 1,406 -- 1,406 Deferred tax related to stock options exercised -- -- 389 -- 389 Issuance of common stock in connection with the employee stock purchase plan 9,212 -- 171 -- 171 Net earnings -- -- -- 10,489 10,489 ---------- ------ ---------- -------- -------------- Balance at December 31, 2000 11,715,936 $ 12 $ 136,962 $ 50,767 $ 187,741 Stock options exercised 431,305 -- 4,904 -- 4,904 Deferred tax related to stock options exercised -- -- 539 -- 539 Issuance of common stock in connection with the employee stock purchase plan 15,049 -- 170 -- 170 Net loss -- -- -- (4,360) (4,360) ---------- ------ ---------- -------- -------------- Balance at December 30, 2001 12,162,290 $ 12 $ 142,575 $ 46,407 $ 188,994 ========== ====== ========== ======== ==============
See accompanying Notes to Consolidated Financial Statements 46 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (dollars in thousands)
2001 2000 1999 -------- -------- -------- Cash flows from operating activities: Net earnings (loss) $ (4,360) $ 10,489 $ 13,705 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 10,649 9,641 9,135 Gain on disposal of property and equipment (439) (98) (24) Special charges 8,016 4,772 -- Changes in assets and liabilities (net of effects of acquired companies): (Increase) decrease in: Accounts receivable, net (6,673) (8,323) (2,773) Inventories (2,917) 1,410 (769) Other current assets (1,053) (1,457) 21 Other assets 113 109 190 Increase (decrease) in: Accounts payable 3,221 4,183 2,277 Accrued liabilities 612 (318) (98) Income taxes (970) (176) 733 -------- -------- -------- Total adjustments 10,559 9,743 8,692 -------- -------- -------- Net cash provided by operating activities 6,199 20,232 22,397 -------- -------- --------
47 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (dollars in thousands)
2001 2000 1999 -------- -------- -------- Cash flows from investing activities: Capital expenditures $(20,765) $(12,246) $(10,623) Investments, net 4,456 3,082 957 Proceeds from disposal of property and equipment 4,094 780 163 Payments made in connection with acquired companies, net of cash acquired (6,033) (9,925) -- -------- -------- -------- Net cash used in investing activities (18,248) (18,309) (9,503) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 5,613 1,966 2,826 Principal payments of long-term debt (35) (137) (216) -------- -------- -------- Net cash provided by financing activities 5,578 1,829 2,610 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (6,471) 3,752 15,504 Cash and cash equivalents at beginning of year 30,938 27,186 11,682 -------- -------- -------- Cash and cash equivalents at end of year $ 24,467 $ 30,938 $ 27,186 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,733 $ 1,738 $ 1,754 Income taxes $ 7 $ 7,972 $ 8,234
See accompanying Notes to Consolidated Financial Statements 48 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES BACKGROUND Insurance Auto Auctions, Inc. (the Company) operates in a single business segment - providing insurance companies and other vehicle suppliers cost-effective salvage processing solutions including selling total loss and recovered theft vehicles. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial information to conform with the current year presentation. FISCAL PERIODS Fiscal year 2001 ended on December 30 and consisted of 52 weeks. The 2000 and 1999 fiscal years ended on December 31. REVENUE RECOGNITION Revenue (including vehicle sales and fee income) is recognized upon payment by the buyer for the auctioned vehicle. Certain fee income, including towing, vehicle enhancements and storage is recognized as earned. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist principally of commercial paper. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company's short-term investment securities are principally instruments of state governments, agencies and municipalities. All short-term investment securities are classified as available-for-sale and are carried at fair value. The difference between the fair value and the amortized cost is immaterial. As a result, any gain or loss associated with recording the investment at fair value is reflected as current income (loss). INVENTORIES Inventories are stated at the lower of cost or estimated realizable value. Cost includes the cost of acquiring ownership of total loss and recovered theft vehicles, charges for towing and, less frequently, reconditioning costs. The costs of inventories are charged to operations based upon the specific-identification method. The Company has agreements to purchase total loss and recovered theft vehicles from insurance companies for a percentage of the vehicle's "actual cash value" (the estimated pre-accident fair value of the vehicle). The Company has acquired the majority of its inventory pursuant to these contracts. 49 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued ASSET IMPAIRMENT As part of an ongoing review of the valuation and amortization of assets, management assesses the carrying value of the Company's assets if facts and circumstances suggest that such assets may be impaired. If this review indicates that an asset will not be recoverable, as determined by an analysis of undiscounted cash flow over the remaining amortization period, the carrying value of the asset would be reduced to its estimated fair market value. USE OF ESTIMATES The Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results likely differ from these estimates. DEPRECIATION AND AMORTIZATION Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to ten years. Leasehold improvements are amortized on a straight-line basis over their estimated economic useful life or the life of the lease, whichever is less. Intangible assets, principally goodwill, are amortized over periods of 15 to 40 years on a straight-line basis. Accumulated amortization at December 30, 2001 and December 31, 2000 was $30.7 million and $26.6 million, respectively. INCOME TAXES The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards. CREDIT RISK The Company sells its vehicles principally to customers throughout the United States under the purchase-agreement method, the fixed-fee-consignment method and the percentage-of-sale-consignment method. Vehicles are sold generally for cash; therefore, very little credit risk is incurred from the selling of vehicles. Receivables arising from advance charges made on behalf of vehicle suppliers, most of which are insurance companies, are generally satisfied from the net proceeds payable to the vehicle suppliers. A small percentage of vehicles sold do not have sufficient net proceeds to satisfy the related receivables, and in these cases, the receivable is due from the vehicle suppliers. Management performs regular evaluations concerning the ability of its customers and suppliers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. The Company's credit losses for the periods presented are insignificant and have not exceeded management's estimates. STOCK COMPENSATION The Company utilizes the intrinsic-value method of accounting for stock options. Accordingly, compensation expense is not recognized in the Consolidated Statement of Operations. The pro forma results related to the impact of applying the fair-value method of accounting for stock options are disclosed in Note 4. 50 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under the new standard, all goodwill, including that acquired before initial application of the standard, should not be amortized but should be tested for impairment at least annually. Identified intangible assets should be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144. Under the pronouncement, goodwill recorded as a result of acquisitions made subsequent to June 30, 2001 should not be amortized. Accordingly, the Company did not record any amortization related to the goodwill resulting from the October, 2001 acquisition of Austin Salvage Pool. Beginning in 2002, the Company will no longer amortize either goodwill recorded prior to June 30, 2001 or any intangible assets with indefinite lives in accordance with SFAS 142. Instead, the Company will test these assets for impairment annually or when certain impairment indicators exist. In fiscal 2001, the Company recorded amortization expense related to intangible assets, primarily goodwill, of $4.1 million. In 2002, the Company expects to record amortization of identifiable intangible assets of $0.3 million. (2) LONG-TERM DEBT Long-term debt is summarized as follows:
2001 2000 -------- -------- (dollars in thousands) Senior notes payable, unsecured, interest payable in semiannual installments through maturity at February 15, 2002, at 8.6%, principal due at maturity $ 20,000 $ 20,000 Notes payable issued in connection with the acquisition of a subsidiary, unsecured, payable in monthly installments, including interest at 8%, with final payment due April 1, 2005 143 178 -------- -------- 20,143 20,178 Less current installments 20,040 37 -------- -------- $ 103 $ 20,141 ======== ========
Total principal repayments required for each of the next five years under all long-term debt agreements are summarized as follows:
(dollars in thousands) 2002 $ 20,040 2003 43 2004 47 2005 13 2006 $ -- --------- $ 20,143 ========
The Senior Notes and line of credit require the Company to comply with certain covenants such as maintenance of net worth and limitations on debt. As of December 30, 2001, the Company was in compliance with these covenants. 51 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued In mid-February 2002, the Company entered into a new five-year $20 million unsecured credit facility with LaSalle Bank, a member of the ABN Amro Group. The credit facility is expandable to $30 million upon syndication. The credit facility is a one-year revolver that converts to a four-year term loan with a fixed interest rate of 5.6%. The one-year revolver carries a variable interest rate. The Company entered into an interest rate swap arrangement to fix the interest rate at 5.6%. (3) INCOME TAXES Income tax expense (benefit) is summarized as follows:
2001 2000 1999 -------- -------- -------- (dollars in thousands) Current: Federal $ (530) $ 5,345 $ 8,088 State (111) 900 1,323 -------- -------- -------- (641) 6,245 9,411 -------- -------- -------- Deferred: Federal (878) 865 42 State (93) 179 47 -------- -------- -------- (971) 1,044 89 -------- -------- -------- $ (1,612) $ 7,289 $ 9,500 ======== ======== ========
Deferred income taxes are comprised of the effects of the components listed below. A valuation allowance has been recorded to reduce the carrying value of deferred tax assets for which the Company believes a tax benefit may not be realized. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 30, 2001 and December 31, 2000 are presented below:
2001 2000 -------- -------- (dollars in thousands) Deferred tax assets attributable to: Depreciation $ 3,216 $ 3,061 State net operating losses carried forward 1,361 1,088 Inventories 896 595 Other 3,501 1,291 Valuation allowance (1,147) (912) -------- -------- Net deferred tax assets 7,827 5,123 Deferred tax liabilities attributable to: Intangible assets (12,172) (10,440) -------- -------- Net deferred tax liabilities $ (4,345) $ (5,317) ======== ========
52 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The actual income tax expense differs from the "expected" tax expense computed by applying the Federal corporate tax rate to earnings before income taxes as follows:
2001 2000 1999 -------- -------- -------- (dollars in thousands) "Expected" income taxes $ (2,030) $ 6,045 $ 7,890 State income taxes, net of Federal effect (135) 697 895 Nondeductible portion of amortization of intangible assets 358 358 358 Other 195 189 357 -------- -------- -------- $ (1,612) $ 7,289 $ 9,500 ======== ======== ========
(4) EMPLOYEE BENEFIT PLANS The Company adopted the Insurance Auto Auctions, Inc. 1991 Stock Option Plan (the 1991 Plan), as amended, presently covering 2,350,000 shares of the Company's common stock. The 1991 Plan provides for the grant of incentive stock options to key employees and nonqualified stock options and stock appreciation rights to key employees, directors, consultants and independent contractors. The 1991 Plan expires September 26, 2006. In general, new non-employee directors will automatically receive grants of nonqualified options to purchase 10,000 shares and subsequent grants to purchase 2,000 shares at specified intervals. During 1995, the Company adopted the Insurance Auto Auctions, Inc. Supplemental Stock Option Plan (the 1995 Plan) covering 200,000 shares of the Company's common stock. The 1995 Plan provides for the grant of nonqualified stock options to employees, other than executive officers, consultants and other independent advisors who provide services to the Company. The 1995 Plan will expire on October 1, 2005. Under the Plans, as of December 30, 2001, options to purchase an aggregate of 1,396,505 shares were outstanding at a weighted average exercise price of $14.48 per share and 244,556 shares remained available for future grant. Activity under the Plans during 2001, 2000, and 1999 is as follows:
Weighted Weighted Weighted Average Average Average 2001 Exercise 2000 Exercise 1999 Exercise Shares Price Shares Price Shares Price ---------- -------- ---------- -------- ---------- -------- Balance at beginning of year 1,261,000 $ 14.20 1,087,000 $ 15.01 1,195,000 $ 14.21 Options granted 605,000 13.09 359,000 11.62 188,000 12.99 Options canceled (38,000) 18.02 (54,000) 22.12 (61,000) 14.52 Options exercised (431,000) 11.38 (131,000) 10.67 (235,000) 9.52 ---------- -------- ---------- -------- ---------- -------- Balance at end of year 1,397,000 $ 14.48 1,261,000 $ 14.20 1,087,000 $ 15.01 ========== ======== ========== ======== ========== ======== Options exercisable at end of year 568,000 775,000 780,000 ========== ========== ==========
53 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Additional information about options outstanding as of December 30, 2001 is presented below:
Options Outstanding Options Exercisable ---------------------------------- --------------------- Weighted Average ---------------------- Remaining Weighted Contractual Average Range of Exercise Number of Life Exercise Number of Exercise Price Options (in years) Price Options Price ----------------- --------- ----------- -------- --------- -------- $7.00 to $10.00 49,000 4.34 8.17 49,000 8.17 10.38 to 13.95 1,046,000 7.51 12.06 269,000 11.48 14.13 to 23.25 158,000 4.79 16.71 107,000 17.34 28.63 to 37.50 143,000 2.07 31.95 143,000 31.95 --------- --------- $7.00 to $37.50 1,396,000 6.54 14.48 568,000 17.44 ========= =========
The Company applies APBO No. 25 in accounting for its plans, and accordingly, no compensation cost has been recognized for any stock options in the accompanying consolidated financial statements. Had the Company determined compensation expense based upon the fair value at the date of grant, as determined under Statement No. 123, the Company's net earnings and net earnings per share would have been reduced to the pro forma amounts as summarized below:
2001 2000 1999 ------------ ------------ ------------ Pro forma earnings (loss) (in thousands) $ (5,699) $ 9,840 $ 12,329 ============ ============ ============ Pro forma earnings (loss) per share Basic $ (0.47) $ .84 $ 1.08 ============ ============ ============ Diluted $ (0.47) $ .82 $ 1.06 ============ ============ ============
The per share weighted average fair value of stock options granted during 2001, 2000 and 1999 was $9.20, $6.73 and $7.82, respectively, based upon grant date valuations using the Black-Scholes option pricing model with the following weighted average assumptions in 2001, 2000 and 1999 expected dividend yield of 0.0%, expected volatility of .88, .64 and .63, respectively; risk-free interest rate of 4.3%, 5.1% and 6.4%, respectively; and an average expected option life of 4.9, 5.1 and 5.4 years, respectively. The pro forma net earnings and earnings per share reflect only those options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under Statement No. 123 is not reflected in the pro forma net earnings and earnings per share presented above because compensation cost is generally recorded over the options' vesting period, generally four years, and compensation cost for options granted prior to January 1, 1995 is not considered. The Company has a 401(k) defined contribution plan covering all full-time employees. Plan participants can elect to contribute up to 15% of their gross payroll. Company contributions are determined at the discretion of the Board of Directors; during the years 1999 to 2001, the Company matched 100% up to 4% of eligible earnings. Company contributions to the plan were $0.7 million in 2001, $0.7 million in 2000, and $0.5 million in 1999. 54 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (5) RELATED PARTY TRANSACTIONS The Company recorded fee income of $2.7 million, $6.4 million and $5.4 million, in 2001, 2000 and 1999, respectively, related to the consignment sale of vehicles insured by Allstate Insurance Company ("Allstate") and recorded sales of $23.2 million, $28.8 million and $35.0 million, respectively, and cost of sales of $21.8 million, $26.7 million and $31.6 million, respectively, related to the purchase of Allstate-insured vehicles under the purchase agreement method. Allstate held 1,667,000 shares of the Company's common stock during the three years ended December 31, 2000; such shares were sold by Allstate in February 2001. See also Note 7 with respect to rentals under leases with other related parties. (6) COMMITMENTS AND CONTINGENCIES The Company leases its facilities and certain equipment under operating leases with related and unrelated parties, which expire in April 2016. Rental expense for the years ended December 30, 2001 and December 31, 2000 and 1999, was $20.3 million, $15.9 million, and $12.2 million, respectively. The Company leases certain properties from a member of its Board of Directors and other properties from Allstate Insurance Company. The Company believes the terms of the leases are no less favorable than those available from unaffiliated third party lessors. Rental payments to related parties were $1.3 million, $1.2 million and $1.1 million for 2001, 2000 and 1999, respectively. Minimum annual rental commitments for the next five years under noncancelable leases at December 30, 2001 are as follows:
UNRELATED RELATED PARTIES PARTIES --------- ------- (dollars in thousands) 2002 $ 17,347 $ 1,022 2003 14,720 731 2004 11,880 731 2005 8,399 369 2006 6,195 369 Thereafter 11,923 -- --------- ------- $ 70,464 $ 3,222 ========= =======
The Company has compensation agreements with certain officers and other key employees. The Company is subject to certain miscellaneous legal claims, which have arisen during the ordinary course of its business. None of these claims are expected to have a material adverse effect on the Company's financial condition or operating results. (7) ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATIONS In connection with the acquisition of the capital stock of Underwriters Salvage Company (USC), the Company assumed the obligation for certain health care and death benefits for retired employees of USC. In accordance with the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," costs related to the benefits are accrued over an employee's service life. The Accumulated Postretirement Benefit Obligation (APBO) is a measure of the plan's liability, equivalent to the Projected Benefit Obligation used in pension accounting. The APBO is a factor in the expense calculation and is 55 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued included in the table presented below. For retirees, it is the present value of all benefits expected to be paid from the plan. A one-percentage point increase or decrease in the assumed health care cost trend rate for each future year would not have a material impact on the APBO. The assumed discount rate used to determine the APBO as of December 30, 2001, December 31, 2000 and 1999 was 7.0%, 7.5% and 7.8%, respectively. The Company recorded net post-retirement income of $63,000, $84,000 and, $169,000 for the years ended December 30, 2001, December 31, 2000 and 1999, respectively. Reconciliation of funded status as of:
2001 2000 1999 -------- -------- -------- (dollars in thousands) Medical $ (854) $ (747) $ (840) Life Insurance (332) (290) (327) -------- -------- -------- Total APBO (1,186) (1,037) (1,167) Plan assets -- -- -- -------- -------- -------- Funded status (1,186) (1,037) (1,167) Unrecognized net loss from past experience (1,652) (1,964) (2,011) -------- -------- -------- Accrued postretirement benefit cost $ (2,838) $ (3,001) $ (3,178) ======== ======== ======== Reconciliation of accumulated postretirement benefit cost: Accrued benefit cost $ (3,064) $ (3,262) $ (3,513) Income 63 84 169 Contributions/premium paid 63 177 166 -------- -------- -------- Accumulated postretirement benefit cost $ (2,838) $ (3,001) $ (3,178) ======== ======== ========
Effective January 20, 1994, the date of acquisition, the Company discontinued future participation for active employees. (8) SPECIAL CHARGES During the first quarter of 2001, the Company announced an organizational realignment and recorded special charges of $6.0 million. As part of this plan, the Company offered involuntary severance packages to approximately 30 staff employees primarily located at its headquarters and recognized $2.4 million in employee termination benefits associated with this workforce reduction. The Company also recorded approximately $1.7 million related to the abandonment of certain facilities including cancellation of a planned expansion at its headquarters building. The remaining balance includes amounts related to repositioning the Company's towing operations and other restructuring charges. 56 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued During the fourth quarter of 2001, the Company reviewed the adequacy of its accruals for special charges. The facilities closing accrual was increased by $0.8 million. The accrual for workforce reduction was decreased by $0.4 million and the accrual for the towing operations and other charges was decreased by $0.8 million. The changes in the accruals for special charges are summarized below.
WORKFORCE FACILITY TOWING REDUCTION CLOSINGS AND OTHER TOTAL --------- -------- --------- ----- (dollars in thousands) Special charges recorded in first quarter of 2001 . $ 2,376 $ 1,739 $ 1,932 $ 6,047 Utilization of accrual ............................ (1,878) (1,016) (1,067) (3,961) Adjustments recorded in fourth quarter of 2001 ... (423) 838 (815) (400) --------- --------- --------- --------- Total accrued special charges at December 30, 2001 $ 75 $ 1,561 $ 50 $ 1,686 ========= ========= ========= =========
As of December 30, 2001, $1.2 million of accrued special charges were classified as current liabilities, and $0.5 million was classified as a component of other noncurrent liabilities. The Company recorded special charges of $2.4 million in the fourth quarter of 2001, including the write-off of $1.4 million of unamortized leasehold improvements due to changes in the estimated useful lives of the assets. Also included was a $1.0 million write-off of amounts due from the Company's previous insurance carrier, which was placed into liquidation. During the fourth quarter of 2000, the Company recorded special charges of $4.8 million, including $3.0 million associated with the abandonment or disposal of computer hardware and software, $1.2 million to cover expenses related to the February 2000 plane crash that damaged the Company's facility in Rancho Cordova, California, and $.06 million of other special charges. (9) QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized unaudited financial data for 2001 and 2000 are as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- 2001 (dollars in thousands except per share amounts) Revenue ......................... $ 77,844 $ 75,514 $ 70,966 $ 68,666 Earnings (loss) from operations . (2,701) 3,837 25 (6,370) Net earnings .................... (1,645) 2,171 (206) (4,680) Basic earnings (loss) per share . $ (0.14) $ 0.18 $ (0.02) $ (0.39) Diluted earnings (loss) per share $ (0.14) $ 0.18 $ (0.02) $ (0.39) ======== ======== ======== ======== 2000 Revenue ......................... $ 86,960 $ 84,276 $ 80,132 $ 81,808 Earnings (loss)from operations .. 7,139 8,793 4,017 (2,055) Net (loss) earnings ............. 4,181 5,195 2,359 (1,246) Basic earnings (loss) per share . $ 0.36 $ 0.45 $ 0.20 $ (0.11) Diluted earnings (loss) per share $ 0.35 $ 0.44 $ 0.20 $ (0.11) ======== ======== ======== ========
The sum of earnings per share for the quarters may not equal the full year amount due to rounding and the impact of changes in the average shares outstanding. 57 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES INDEX TO EXHIBITS
Exhibit No. - ---------- 10.150 Credit Agreement between the Registrant and LaSalle National Bank dated as of February 15, 2002. 10.151 Rate Swap Agreement pursuant to the Credit Agreement between the Registrant and LaSalle National Bank dated as of February 15, 2002. 10.176 Consulting Agreement Dated April 12, 2001 by and between the Company and Donald J. Comis. 10.177 Employment Agreement , dated December 11, 2001 by and between the Company and Edward N. Fares. 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 24.1 Power of Attorney
58 EX-10.150 3 c68377ex10-150.txt CREDIT AGREEMENT EXHIBIT 10.150 CREDIT AGREEMENT DATED AS OF FEBRUARY 15, 2002 AMONG INSURANCE AUTO AUCTIONS, INC., AS THE BORROWER THE LENDERS FROM TIME TO TIME PARTIES HERETO, AND LASALLE BANK NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS......................................................................... 1 1.1. Certain Defined Terms......................................................... 1 1.2. References.................................................................... 17 1.3. Supplemental Disclosure....................................................... 17 ARTICLE II THE CREDITS......................................................................... 18 2.1. Description of Facility; Commitment........................................... 18 2.2. Required Payments; Termination Date........................................... 18 2.2.1. Required Payments......................................................... 18 2.2.2. Termination Date.......................................................... 18 2.2.3. Conversion to Term Loan................................................... 18 2.3. Ratable Loans................................................................. 19 2.4. Types of Advances............................................................. 19 2.5. Commitment Fee; Reductions in Aggregate Commitment........................... 19 2.5.1. Commitment Fee............................................................ 19 2.5.2. Reductions in Aggregate Commitment........................................ 19 2.5.3. Increase of Aggregate Commitment.......................................... 19 2.6. Minimum Amount of Each Advance................................................ 20 2.7. Optional Principal Payments; Mandatory Principal Prepayments.................. 20 2.7.1. Optional Principal Payments............................................... 20 2.7.2. Mandatory Principal Prepayments........................................... 20 2.8. Method of Selecting Types and Interest Periods for New Advances............... 20 2.9. Conversion and Continuation of Outstanding Advances........................... 21 2.10. Interest Rates................................................................ 21 2.11. Rates Applicable After Default................................................ 22 2.12. Method of Payment............................................................. 22 2.13. Noteless Agreement; Evidence of Indebtedness.................................. 22 2.14. Telephonic Notices............................................................ 23 2.15. Interest Payment Dates; Interest and Fee Basis................................ 23 2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions; Availability of Loans............................................. 24 2.17. Lending Offices............................................................... 24 2.18. Non-Receipt of Funds by the Administrative Agent.............................. 24 2.19. Replacement of Lender......................................................... 25 ARTICLE III YIELD PROTECTION; TAXES............................................................. 25 3.1. Yield Protection.............................................................. 25 3.2. Changes in Capital Adequacy Regulations....................................... 26 3.3. Availability of Types of Advances............................................. 27 3.4. Funding Indemnification....................................................... 27
SIDLEY AUSTIN BROWN & WOOD i 3.5. Taxes......................................................................... 27 3.6. Lender Statements; Survival of Indemnity...................................... 29 ARTICLE IV CONDITIONS PRECEDENT................................................................ 29 4.1. Initial Advance............................................................... 29 4.2. Each Advance.................................................................. 30 ARTICLE V REPRESENTATIONS AND WARRANTIES...................................................... 31 5.1. Existence and Standing........................................................ 31 5.2. Authorization and Validity.................................................... 31 5.3. No Conflict; Government Consent............................................... 31 5.4. Financial Statements.......................................................... 32 5.5. Material Adverse Change; No Default........................................... 32 5.6. Taxes......................................................................... 32 5.7. Litigation and Contingent Obligations......................................... 32 5.8. Subsidiaries.................................................................. 33 5.9. Accuracy of Information....................................................... 33 5.10. Regulation U.................................................................. 33 5.11. Material Agreements........................................................... 33 5.12. Compliance With Laws.......................................................... 33 5.13. Ownership of Properties....................................................... 34 5.14. ERISA; Foreign Pension Matters................................................ 34 5.15. Plan Assets; Prohibited Transactions.......................................... 34 5.16. Environmental Matters......................................................... 34 5.17. Investment Company Act: Other Regulation...................................... 34 5.18. Indebtedness.................................................................. 35 5.19. Insurance..................................................................... 35 5.20. Solvency...................................................................... 35 5.21. Permits; Intellectual Property................................................ 35 5.22. Labor Matters................................................................. 35 ARTICLE VI COVENANTS........................................................................... 35 6.1. Financial Reporting........................................................... 35 6.2. Use of Proceeds............................................................... 37 6.3. Notice of Default............................................................. 38 6.4. Conduct of Business; Charter Amendments; Accounting Changes................... 38 6.4.1. Conduct of Business....................................................... 38 6.4.2. Charter Amendments........................................................ 38 6.4.3. Accounting Changes........................................................ 38 6.5. Taxes; Claims, Judgments, Etc................................................. 38 6.6. Insurance..................................................................... 39 6.7. Compliance with Laws.......................................................... 39 6.8. Maintenance of Properties..................................................... 39 6.9. Further Assurances............................................................ 40 6.10. Restricted Payments........................................................... 40
SIDLEY AUSTIN BROWN & WOOD ii 6.11. Indebtedness.................................................................. 40 6.12. Merger........................................................................ 41 6.13. Sale of Assets................................................................ 41 6.14. Investments and Acquisitions.................................................. 41 6.15. Liens......................................................................... 42 6.16. Consolidated Rentals.......................................................... 43 6.17. Affiliates.................................................................... 43 6.18. ERISA......................................................................... 43 6.19. Financial Covenants........................................................... 43 6.19.1. Fixed Charge Coverage Ratio............................................... 43 6.19.2. Leverage Ratio............................................................ 44 6.19.3. Minimum Net Worth......................................................... 45 6.19.4. 2002 Capital Expenditures................................................. 45 6.19.5. Liquidity................................................................. 45 6.20. Addition of Guaranty; Guarantors.............................................. 45 6.21. Sale and Leaseback Transactions and other Off-Balance Sheet Liabilities....... 45 ARTICLE VII DEFAULTS............................................................................ 45 7.1. Breach of Representations or Warranties....................................... 45 7.2. Failure to Make Payments When Due............................................. 46 7.3. Breach of Covenants........................................................... 46 7.4. Other Breaches................................................................ 46 7.5. Default as to Other Indebtedness.............................................. 46 7.6. Voluntary Bankruptcy; Appointment of Receiver; Etc............................ 46 7.7. Involuntary Bankruptcy; Appointment of Receiver; Etc.......................... 47 7.8. Custody or Control of Property................................................ 47 7.9. Judgments..................................................................... 47 7.10. Unfunded Liabilities.......................................................... 47 7.11. Other ERISA Liabilities....................................................... 47 7.12. Environmental Matters......................................................... 48 7.13. Change in Control............................................................. 48 7.14. Other Default................................................................. 48 7.15. Rate Management Obligation.................................................... 48 7.16. Loss of Licenses.............................................................. 48 7.17. Material Adverse Change. The Borrower or its Subsidiaries have a Material Adverse Change..................................................... 48 7.18. Guaranty...................................................................... 48 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES...................................... 48 8.1. Acceleration.................................................................. 48 8.2. Amendments.................................................................... 49 8.3. Preservation of Rights........................................................ 50 ARTICLE IX GENERAL PROVISIONS.................................................................. 50 9.1. Survival of Representations................................................... 50
SIDLEY AUSTIN BROWN & WOOD iii 9.2. Governmental Regulation....................................................... 50 9.3. Headings...................................................................... 50 9.4. Entire Agreement.............................................................. 50 9.5. Several Obligations; Benefits of this Agreement............................... 50 9.6. Expenses; Indemnification..................................................... 51 9.7. Numbers of Documents.......................................................... 51 9.8. Accounting.................................................................... 52 9.9. Severability of Provisions.................................................... 52 9.10. Nonliability of Lenders....................................................... 52 9.11. Confidentiality............................................................... 52 9.12. Lenders Not Utilizing Plan Assets............................................. 53 9.13. Nonreliance................................................................... 53 9.14. Disclosure.................................................................... 53 9.15. Subordination of Intercompany Indebtedness.................................... 53 ARTICLE X THE AGENT........................................................................... 54 10.1. Appointment; Nature of Relationship........................................... 54 10.2. Powers........................................................................ 54 10.3. General Immunity.............................................................. 55 10.4. No Responsibility for Loans, Recitals, etc.................................... 55 10.5. Action on Instructions of Lenders............................................. 55 10.6. Employment of the Administrative Agent and Counsel............................ 55 10.7. Reliance on Documents; Counsel................................................ 56 10.8. Administrative Agent's Reimbursement and Indemnification...................... 56 10.9. Notice of Default............................................................. 56 10.10. Rights as a Lender............................................................ 56 10.11. Lender Credit Decision........................................................ 57 10.12. Successor Administrative Agent................................................ 57 10.13. Agent and Arranger Fees....................................................... 58 10.14. Delegation to Affiliates...................................................... 58 ARTICLE XI SETOFF; RATABLE PAYMENTS............................................................ 58 11.1. Setoff........................................................................ 58 11.2. Ratable Payments.............................................................. 58 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS................................... 58 12.1. Successors and Assigns........................................................ 59 12.1.1. Successors and Assigns.................................................... 59 12.2. Participations................................................................ 59 12.2.1. Permitted Participants; Effect............................................ 59 12.2.2. Voting Rights............................................................. 59 12.2.3. Benefit of Setoff......................................................... 60 12.3. Assignments................................................................... 60 12.3.1. Permitted Assignments..................................................... 60 12.3.2. Effect; Effective Date.................................................... 60
SIDLEY AUSTIN BROWN & WOOD iv 12.3.3. The Register.............................................................. 61 12.4. Dissemination of Information.................................................. 61 12.5. Tax Treatment................................................................. 61 ARTICLE XIII NOTICES............................................................................. 61 13.1. Notices....................................................................... 61 13.2. Change of Address............................................................. 62 ARTICLE XIV COUNTERPARTS........................................................................ 62 ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL........................ 62 15.1. CHOICE OF LAW................................................................. 62 15.2. CONSENT TO JURISDICTION....................................................... 62 15.3. WAIVER OF JURY TRIAL.......................................................... 63
SIDLEY AUSTIN BROWN & WOOD v EXHIBITS Exhibit A - Form of Borrower's Counsel's Opinion Exhibit B - Form of Compliance Certificate Exhibit C - Form of Assignment Agreement Exhibit D - Form of Promissory Note (if requested) Exhibit E - Form of Guaranty Exhibit F - List of Closing Documents SCHEDULES Pricing Schedule Commitment Schedule Schedule 1- Investments Schedule 2- Indebtedness Schedule 3- Liens Schedule 4- Subsidiaries SIDLEY AUSTIN BROWN & WOOD vi CREDIT AGREEMENT This Agreement, dated as of February 15, 2002, is among INSURANCE AUTO AUCTIONS, INC., an Illinois corporation, the institutions from time to time parties hereto as Lenders (whether by execution of this Agreement or an assignment pursuant to Section 12.3), and LASALLE BANK NATIONAL ASSOCIATION, a national banking association, as Administrative Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1. Certain Defined Terms. As used in this Agreement: "ACCOUNTING CHANGES" is defined in Section 9.8 hereof. "ACQUISITION" means any transaction, or any series of related transactions, consummated on or after the Closing Date, by which the Borrower or any of its Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or limited liability company, or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage of voting power) of the outstanding ownership interests of a partnership or limited liability company. "ADMINISTRATIVE AGENT" means LaSalle Bank in its capacity as contractual representative of the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Administrative Agent appointed pursuant to Article X. "ADVANCE" means a borrowing hereunder consisting of the aggregate amount of several Revolving Loans (i) made by the Lenders on the same Borrowing Date, or (ii) converted or continued by the Lenders on the same date of conversion or continuation, consisting, in either case, of the aggregate amount of the several Revolving Loans of the same Type and, in the case of LIBOR Loans, for the same Interest Period. "AFFECTED LENDER" is defined in Section 2.19. "AFFILIATE" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person is the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of ten percent (10%) or more of any class of voting securities (or other voting interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of voting securities, by contract or otherwise. SIDLEY AUSTIN BROWN & WOOD "AGGREGATE COMMITMENT" means the aggregate of the Commitments of all the Lenders, as may be adjusted from time to time pursuant to the terms hereof. The initial Aggregate Commitment is Twenty Million and 00/100 Dollars ($20,000,000). "AGGREGATE OUTSTANDING CREDIT EXPOSURE" means, at any time, the aggregate of the Outstanding Credit Exposure of all the Lenders. "AGREEMENT" means this Credit Agreement, as it may be amended, restated, supplemented or otherwise modified and as in effect from time to time. "AGREEMENT ACCOUNTING PRINCIPLES" means generally accepted accounting principles as in effect in the United States from time to time, applied in a manner consistent with that used in preparing the financial statements of the Borrower referred to in Section 5.4; provided, however, that except as provided in Section 9.8, with respect to the calculation of financial ratios and other financial tests required by this Agreement, "Agreement Accounting Principles" means generally accepted accounting principles as in effect in the United States as of the date of this Agreement, applied in a manner consistent with that used in preparing the financial statements of the Borrower referred to in Section 5.4 hereof. "ALTERNATE BASE RATE" means, for any day, a fluctuating rate of interest per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of (a) the Federal Funds Effective Rate for such day and (b) one-half of one percent (0.5%) per annum. "APPLICABLE COMMITMENT FEE RATE" means, at any time, the percentage rate per annum at which Commitment Fees are accruing on the unused portion of the Aggregate Commitment at such time as set forth in the Pricing Schedule. "APPLICABLE MARGIN" means, with respect to Advances of any Type at any time, the percentage rate per annum which is applicable at such time with respect to Advances of such Type as set forth in the Pricing Schedule. "ARRANGER" means LaSalle Bank. "ARTICLE" means an article of this Agreement unless another document is specifically referenced. "ASSET SALE" is defined in Section 6.13. "ASSIGNMENT AGREEMENT" is defined in Section 12.3.1. "AUTHORIZED OFFICER" means any of the chief executive officer, president, chief operating officer, chief financial officer, chief accounting officer or treasurer of the Borrower, acting singly. "AVAILABLE AGGREGATE COMMITMENT" means, at any time, the Aggregate Commitment then in effect minus the Aggregate Outstanding Credit Exposure at such time. SIDLEY AUSTIN BROWN & WOOD 2 "BORROWER" means Insurance Auto Auctions, Inc., an Illinois corporation, and its permitted successors and assigns (including, without limitation, a debtor-in-possession on its behalf). "BORROWING DATE" means a date on which an Advance is made hereunder. "BORROWING NOTICE" is defined in Section 2.8. "BUSINESS DAY" means (i) with respect to any borrowing, payment or rate selection of LIBOR Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago, Illinois for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in Dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago, Illinois for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system. "CAPITAL EXPENDITURES" means, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities and including Capitalized Leases and purchase money Indebtedness) by the Borrower and its consolidated Subsidiaries during that period that, in conformity with Agreement Accounting Principles, are required to be included in or reflected by the property, plant, equipment or similar fixed asset accounts reflected in the consolidated balance sheet of the Borrower and its Subsidiaries. "CAPITALIZED LEASE" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "CAPITALIZED LEASE OBLIGATIONS" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "CASH EQUIVALENT INVESTMENTS" means, as to any Person, (i) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than one year from the date of acquisition, (ii) time deposits and certificates of deposit of any investment grade commercial bank having, or which is the principal banking subsidiary of an investment grade bank holding company organized under the laws of the United States, any State thereof, the District of Columbia or any foreign jurisdiction having capital, surplus and undivided profits aggregating in excess of $500,000,000, with maturities of not more than one year from the date of acquisition by such Person, (iii) repurchase obligations with a term of not more than ninety (90) days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (ii) above, provided that such repurchase obligations are secured by a first priority security interest in such underlying securities which have, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations, (iv) commercial paper issued by any Person incorporated in the United States rated at least A-1 by S&P or P-1 by Moody's and in SIDLEY AUSTIN BROWN & WOOD 3 each case maturing not more than one year after the date of acquisition by such Person, (v) investments in money market funds substantially all of the assets of which are comprised of securities of the types described in clauses (i) through (iv) above, (vi) investment in variable rate demand obligations rated at least A by S&P or A2 by Moody's and (vii) demand deposit accounts maintained in the ordinary course of business. "CHANGE" is defined in Section 3.2. "CHANGE IN CONTROL" means (i) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of thirty percent (30%) or more (provided, however, that ValueAct Capital Partners, L.P., shall be permitted to, directly or indirectly, acquire a beneficial ownership of not more than thirty-nine percent (39%) in the aggregate) of the outstanding shares of voting stock of the Borrower; or (ii) the majority of the Board of Directors of the Borrower fails to consist of Continuing Directors; or (iii) except as expressly permitted under the terms of this Agreement, the Borrower consolidates with or merges into another Person or conveys, transfers or leases all or substantially all of its property to any Person, or any Person consolidates with or merges into the Borrower, in either event pursuant to a transaction in which the outstanding capital stock of the Borrower is reclassified or changed into or exchanged for cash, securities or other property; or (iv) except as otherwise expressly permitted under the terms of this Agreement, the Borrower shall cease to own and control, directly or indirectly, free and clear of all Liens and other encumbrances all of the economic and voting rights associated with all of the outstanding capital stock of each of the Borrower's Subsidiaries or shall cease to have the power, directly or indirectly, to elect all of the members of the board of directors of each of the Borrower's Subsidiaries. "CLOSING DATE" means February 15, 2002. "CODE" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time, and any rule or regulation issued thereunder. "COMMITMENT" means, for each Lender, the obligation of such Lender to make Loans not exceeding the amount set forth on the Commitment Schedule or in an Assignment Agreement executed pursuant to Section 12.3, as it may be modified as a result of any assignment that has become effective pursuant to Section 12.3.2 or as otherwise modified from time to time pursuant to the terms hereof. "COMMITMENT FEE" is defined in Section 2.5.1. "COMMITMENT SCHEDULE" means the Schedule identifying each Lender's Commitment as of the Closing Date, or as amended pursuant to Section 2.5.3, attached hereto and identified as such. "COMMITMENT TERMINATION DATE" means the earlier to occur of (a) the Conversion Date, and (b) the date the Aggregate Commitments are reduced to zero or otherwise terminated pursuant to the terms hereof, including, without limitation, pursuant to Section 2.2 and 2.5 and Article VIII hereof. SIDLEY AUSTIN BROWN & WOOD 4 "CONSOLIDATED" refers to the consolidation of accounts in accordance with Agreement Accounting Principles. "CONSOLIDATED EBITDA" means Consolidated Net Income plus, to the extent deducted from revenues in determining Consolidated Net Income, (i) Consolidated Interest Expense, (ii) expense for taxes paid or accrued, (iii) depreciation, (iv) amortization and (v) extraordinary non-cash losses incurred other than in the ordinary course of business, minus, to the extent included in Consolidated Net Income, extraordinary gains realized other than in the ordinary course of business, all calculated for the Borrower and its Subsidiaries on a consolidated basis. "CONSOLIDATED INDEBTEDNESS" means, at any time, the Indebtedness of the Borrower and its Subsidiaries (exclusive of Off-Balance Sheet Liabilities) calculated on a consolidated basis as of such time. "CONSOLIDATED INTEREST EXPENSE" means, with reference to any period, the interest expense of the Borrower and its Subsidiaries calculated on a consolidated basis for such period. "CONSOLIDATED NET INCOME" means, with reference to any period, the net after-tax income (or loss) of the Borrower and its Subsidiaries calculated on a consolidated basis for such period. "CONSOLIDATED NET WORTH" means at any time the consolidated stockholders' equity of the Borrower and its Subsidiaries calculated on a consolidated basis as of such time in accordance with Agreement Accounting Principles. "CONSOLIDATED RENTALS" means, with reference to any period, the Rentals of the Borrower and its Subsidiaries calculated on a consolidated basis for such period. "CONTINGENT OBLIGATIONS" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or the obligations of any such Person as general partner of a partnership with respect to the liabilities of the partnership. "CONTINUING DIRECTOR" means, with respect to any Person as of any date of determination, any member of the board of directors of such Person who (a) was a member of such board of directors on the Closing Date, or (b) was nominated for election or elected to such board of directors with the approval of the required majority of the Continuing Directors who were members of such board at the time of such nomination or election; provided that any individual who is so elected or nominated in connection with a merger, consolidation, acquisition or similar transaction shall not be a Continuing Director unless such individual was a Continuing Director prior thereto. "CONTRACTUAL OBLIGATION", as applied to any Person, means any provision of any indenture, mortgage, deed of trust, contract, undertaking, document or other agreement, SIDLEY AUSTIN BROWN & WOOD 5 instrument or securities to which that Person is a party or by which it or any of its properties is bound, or to which it or any of its properties is subject. "CONTROLLED GROUP" means all members of a controlled group of corporations or other business entities and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "CONVERSION DATE" means February 15, 2003. "CONVERSION/CONTINUATION NOTICE" is defined in Section 2.9. "CONVERTED LOAN TERMINATION DATE" means the date from and after the Conversion Date that is the earlier of (a) December 31, 2006 and (b) the date on which all of the Obligations shall become due and payable pursuant to the terms hereof, including, without limitation, pursuant to Article VIII hereof. "DEFAULT" means an event described in Article VII. "DOLLAR" and "$" means the lawful currency of the United States of America. "ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to (i) the protection of the environment, (ii) the effect of the environment on human health, (iii) emissions, discharges or releases of pollutants, contaminants, hazardous substances or wastes into surface water, ground water or land, or (iv) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, hazardous substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "EXCLUDED TAXES" means, in the case of each Lender or applicable Lending Office and the Administrative Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (i) the jurisdiction under the laws of which such Lender or Agent is incorporated or organized or any political combination or subdivision or taxing authority thereof or (ii) the jurisdiction in which the Administrative Agent's or Lender's principal executive office or such Lender's applicable Lending Office is located or in which, other than as a result of the transaction evidenced by this Agreement, the Administrative Agent or Lender otherwise is, or at any time was, engaged in business. "EXHIBIT" refers to an exhibit to this Agreement, unless another document is specifically referenced. "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the SIDLEY AUSTIN BROWN & WOOD 6 Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent in its sole discretion. "FISCAL QUARTER" means any quarter of a Fiscal Year of the Borrower. "FISCAL YEAR" means the annual fiscal reporting period of the Borrower and its Subsidiaries consisting of a period of 12 consecutive months ending on the last Sunday in December in any calendar year. "FLOATING RATE" means, for any day, a rate per annum equal to the Alternate Base Rate for such day, changing when and as the Alternate Base Rate changes. "FLOATING RATE ADVANCE" means an Advance which, except as otherwise provided in Section 2.11, bears interest at the Floating Rate. "FLOATING RATE LOAN" means a Loan, or portion thereof, which, except as otherwise provided in Section 2.11, bears interest at the Floating Rate. "FOREIGN PENSION PLAN" means any employee benefit plan as described in Section 3(3) of ERISA for which the Borrower or any member of its Controlled Group is a sponsor or administrator and which (i) is maintained or contributed to for the benefit of employees of the Borrower, any of its respective Subsidiaries or any member of its Controlled Group, (ii) is not covered by ERISA pursuant to Section 4(b)(4) of ERISA, and (iii) under applicable local law, is required to be funded through a trust or other funding vehicle. "GUARANTOR" means each Material Subsidiary of the Borrower. "GUARANTY" means each Guaranty Agreement (and any and all supplements thereto) executed from time to time by each Guarantor, in favor of the Administrative Agent for the benefit of itself and the Lenders, in substantially the form of Exhibit E attached hereto, as amended, restated, supplemented or otherwise modified from time to time. "INDEBTEDNESS" of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services, including without limitation, earn-outs and other similar forms of contingent purchase prices (except accounts payable arising in the ordinary course of business but only if and so long as the same are payable on customary terms in trade and in any event no later than one year after the incurrence thereof), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to possession or sale of such property), (e) all obligations of such Person constituting Capitalized Lease Obligations, (f) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (g) SIDLEY AUSTIN BROWN & WOOD 7 all obligations of such Person to purchase or redeem Redeemable Preferred Stock valued at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all obligations of such Person in respect of Rate Management Agreements (valued in an amount equal to the highest termination payment, if any, that would be payable upon termination for any reason on the date of determination), (i) all Contingent Obligations of such Person, (j) all Off-Balance Sheet Liabilities of such Person and (k) all Indebtedness referred to in clauses (a) through (h) above secured by (or for which the holder of such Indebtedness has existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; but in each case excluding obligations under operating leases and obligations under employment contracts entered into in the ordinary course of business. The amount of Indebtedness with respect to earn-outs and other similar forms of contingent purchase prices shall be equal to the present value of the obligation, in the case of known recurring obligations, and, in all other cases, the maximum reasonably anticipated liability in respect of the obligation assuming such Person is required to perform thereunder. "INTEREST PERIOD" means, with respect to a LIBOR Advance, a period of one, two, three or six months or such other period agreed to by the Lenders and the Borrower, commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Interest Period shall end on but exclude the day which corresponds numerically to such date one, two, three or six months or such other agreed upon period thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month or such other succeeding period, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month or such other succeeding period. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day. "INVESTMENT" of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade, or stock, securities, membership interests or other similar property received from an account obligor in full or partial settlement of a delinquent account receivable, only so long as such stock, securities, membership interests or other similar property shall be held for a period of one (1) year or less) or contribution of capital by such Person; stocks, bonds, mutual funds, partnership interests, notes, debentures or other securities owned by such Person; any deposit accounts and certificate of deposit owned by such Person; and structured notes, derivative financial instruments and other similar instruments or contracts owned by such Person, any other direct or indirect purchase or acquisition by such Person of any assets other than assets used in the ordinary course of business; and any non-arms length transaction by such Person with another Person or any other transfer of assets by such Person in another Person, with the amount of such Investment being an amount equal to the net benefit derived by such other Person resulting from any such transactions. "LASALLE BANK" means LaSalle Bank National Association, a national banking association, in its individual capacity, and its successors. SIDLEY AUSTIN BROWN & WOOD 8 "LENDERS" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "LENDING OFFICE" means, with respect to a Lender or the Administrative Agent, the office, branch, subsidiary or affiliate of such Lender or Agent listed on the signature pages hereof, or on the administrative information sheets provided to the Administrative Agent in connection herewith, or otherwise selected by such Lender or Agent pursuant to Section 2.17. "LEVERAGE RATIO" is defined in Section 6.19.2. "LIBOR ADVANCE" means an Advance which, except as otherwise provided in Section 2.11, bears interest at the applicable LIBOR Rate. "LIBOR BASE RATE" means, with respect to a LIBOR Rate Loan for the relevant Interest Period, the APPLICABLE London interbank offered rate for deposits in Dollars appearing on Dow Jones Markets (Telerate) Page 3750 as of 11:00 a.m. (London time) two (2) Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period, provided that, if the Dow Jones Markets (Telerate) rate is not available for any reason, the applicable LIBOR Base Rate for the relevant Interest Period shall instead be the applicable British Bankers' Association Interest Settlement Rate for deposits in Dollars appearing on Reuters Screen FRBD as of 11:00 a.m. (London time) two (2) Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period. Any LIBOR Base Rate determined on the basis of the rate displayed on Dow Jones Markets (Telerate) in accordance with the foregoing provisions of this subparagraph shall be subject to corrections, if any, made in such rate and displayed by the Dow Jones Markets (Telerate) within one hour of the time when such rate is first displayed by such service. "LIBOR LOAN" means a Loan which, except as otherwise provided in Section 2.11, bears interest at the applicable LIBOR Rate requested by the Borrower pursuant to Sections 2.8 and 2.9. "LIBOR RATE" means, with respect to a LIBOR Advance for the relevant Interest Period, the sum of (i) the quotient of (a) the LIBOR Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the then Applicable Margin, changing as and when the Applicable Margin changes. The LIBOR Rate shall be rounded to the next higher multiple of 1/16th of 1% if the rate is not such a multiple. "LIEN" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement, and, in the case of stock, stockholders agreements, voting trust agreements and all similar agreements). "LOAN" means, with respect to a Lender, such Lender's loan made pursuant to Article II (or any conversion or continuation thereof). SIDLEY AUSTIN BROWN & WOOD 9 "LOAN DOCUMENTS" means this Agreement, the Guaranty and all other documents (including any other guaranties (or supplements thereto) executed pursuant to Section 6.20), instruments, notes (including any Notes issued pursuant to Section 2.13 (if requested)) and agreements executed in connection herewith or therewith or contemplated hereby or thereby, as the same may be amended, restated or otherwise modified and in effect from time to time. "MATERIAL ADVERSE CHANGE" means a material adverse change in the business, properties, condition (financial or otherwise), performance, results of operations or prospects of the Borrower or its Subsidiaries, or any event or circumstance or series of events or circumstances, which has had a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the business, Property, condition (financial or otherwise), operations, performance, results of operations or prospects of the Borrower, or the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents, or (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Administrative Agent or the Lenders thereunder. "MATERIAL INDEBTEDNESS" is defined in Section 7.5(i). "MATERIAL SUBSIDIARY" means any direct or indirect Subsidiary of the Borrower that at any time has (i) assets with a total book value equal to or greater than one percent (1%) of the aggregate book value of the Consolidated total assets of the Borrower and its Subsidiaries or (ii) Consolidated Net Worth that is equal to or greater than one percent (1%) of the Consolidated Net Worth of the Borrower and its Subsidiaries, or (iii) assets that contributed one percent (1%) or more of the Borrower's Consolidated Net Income, in each case as reported in the most recent financial statements delivered to the Lenders pursuant to Section 6.1. "MOODY'S" means Moody's Investors Service, Inc. and any successor thereto. "MULTIEMPLOYER PLAN" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "NET CASH PROCEEDS" means, with respect to any Asset Sale by any Person, (a) cash or Cash Equivalent Investments (freely convertible into Dollars) received by such Person or any Subsidiary of such Person from such Asset Sale (including cash received as consideration for the assumption or incurrence of liabilities incurred in connection with or in anticipation of such Asset Sale), after (i) provision for all income or other taxes measured by or resulting from such Asset Sale, (ii) payment of all brokerage commissions and other fees and expenses and commissions related to such Asset Sale, and (iii) all amounts used to repay Indebtedness (and any premium or penalty thereon) secured by a Lien on any asset disposed of in such Asset Sale or which is or may be required (by the express terms of the instrument governing such Indebtedness or by applicable law) to be repaid in connection with such Asset Sale (including payments made to obtain or avoid the need for the consent of any holder of such Indebtedness); and (b) cash or Cash Equivalent Investments payments in respect of any other consideration SIDLEY AUSTIN BROWN & WOOD 10 received by such Person or any Subsidiary of such Person from such Asset Sale upon receipt of such cash payments by such Person or such Subsidiary. "NON-U.S. LENDER" is defined in Section 3.5(iv). "NOTE" is defined in Section 2.13. "OBLIGATIONS" means all Loans, advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to any of the Administrative Agent, any Lender, the Arranger, any affiliate of the Administrative Agent or any Lender, the Arranger, or any indemnitee under the provisions of Section 9.6 or any other provisions of the Loan Documents, in each case of any kind or nature, present or future, arising under this Agreement or any other Loan Document, whether or not evidenced by any note, guaranty or other instrument, whether or not for the payment of money, whether arising by reason of an extension of credit, loan, foreign exchange risk, guaranty, indemnification, or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and disbursements, paralegals' fees, and any other sum chargeable to the Borrower or any of its Subsidiaries under this Agreement or any other Loan Document. "OFF-BALANCE SHEET LIABILITY" of a Person means (i) any repurchase obligation or liability of such Person or any of its Subsidiaries with respect to accounts or notes receivable sold by such Person or any of its Subsidiaries (calculated to include the unrecovered investment of purchasers or transferees of accounts or any other obligation of the Borrower or such transferor to purchasers/transferees of interests in accounts or notes receivable or the agent for such purchasers/transferees), (ii) any liability under any sale and leaseback transaction which is not a Capitalized Lease, (iii) any liability under any financing lease or so-called "synthetic lease" or "tax ownership operating lease" transaction entered into by such Person, or (iv) any obligation arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the consolidated balance sheets of such Person, but excluding from this clause (iv) Operating Leases. "OPERATING LEASE" of a Person means any lease of Property (other than a Capitalized Lease) by such Person as lessee which has an original term (including any required renewals and any renewals effective at the option of the lessor) of one year or more. "OPERATING LEASE OBLIGATIONS" means, as at any date of determination, the amount obtained by aggregating the present values, determined in the case of each particular Operating Lease by applying a discount rate (which discount rate shall equal the discount rate which would be applied under Agreement Accounting Principles if such Operating Lease were a Capitalized Lease) from the date on which each fixed lease payment is due under such Operating Lease to such date of determination, of all fixed lease payments due under all Operating Leases of the Borrower and its Subsidiaries. "OTHER TAXES" is defined in Section 3.5(ii). SIDLEY AUSTIN BROWN & WOOD 11 "OUTSTANDING CREDIT EXPOSURE" means, as to any Lender at any time, the aggregate principal amount of its Loans outstanding at such time. "PARTICIPANTS" is defined in Section 12.2.1. "PAYMENT DATE" means the last day of each March, June, September and December, and the Converted Loan Termination Date. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "PERMITTED ACQUISITION" means any Acquisition that satisfies the following requirements: (i) no Default or Unmatured Default shall have occurred and be continuing or would result from such Acquisition or the incurrence of any Indebtedness in connection therewith; (ii) in the case of an Acquisition of the capital stock of an entity, the Acquisition shall be of at least eighty percent (80%) of such capital stock of such entity, and such acquired entity shall be (x) merged with and into the Borrower or any wholly-owned Subsidiary of the Borrower immediately following such Acquisition, with the Borrower or such wholly-owned Subsidiary being the surviving corporation following such merger or (y) the results of operations of such entity shall be reported on a consolidated basis with the Borrower and its consolidated Subsidiaries; (iii) the purchase is consummated pursuant to a negotiated acquisition agreement on a non-hostile basis and approved by the target company's board of directors (and shareholders, if necessary) prior to the consummation of the Acquisition; (iv) the businesses being acquired shall be substantially similar, related or incidental to the businesses or activities engaged in by the Borrower and its Subsidiaries on the Closing Date; (v) effective as of the date of each such Acquisition (taking into account the effect of such purchase and any Indebtedness incurred in connection therewith), the Borrower shall deliver to the Administrative Agent a certificate executed by an Authorized Officer, which certificate shall demonstrate that sum of (a) all cash and Cash Equivalent Investments as of such date plus (b) the Available Aggregate Commitment as of such date shall not be less than $10,000,000; (vi) prior to such Acquisition, the Borrower shall deliver to the Administrative Agent and the Lenders a certificate from one of the Authorized Officers, demonstrating to the satisfaction of the Administrative Agent that after giving effect to such Acquisition and the incurrence of any Indebtedness permitted by Section 6.12 in connection therewith, on a pro forma basis using historical audited (if any) or reviewed unaudited financial statements obtained from the seller(s) in respect of each such Acquisition as if the Acquisition and such incurrence of Indebtedness had occurred on the first day of the twelve-month period ending on the last day of the Borrower's most recently completed fiscal quarter, the Borrower would have been in compliance with the financial covenants in Section 6.21 and not otherwise in Default, provided, SIDLEY AUSTIN BROWN & WOOD 12 however, no such certificate demonstrating the foregoing shall be required for Permitted Acquisitions for which the purchase price paid (taking into account any Indebtedness incurred in connection therewith) is equal to or less than $1,000,000; and (vii) after giving effect to all Indebtedness consisting of seller financing incurred in connection with such Acquisition, the Borrower and its Subsidiaries shall be in compliance with Section 6.11. "PERMITTED INVESTMENTS" means Investments existing on the Closing Date and described on Schedule 1 hereto and other Investments consisting of: (i) loans or advances in the ordinary course of business to suppliers, officers, directors and employees incidental to carrying on the business of the Borrower or any Subsidiary (including employee relocation loans); (ii) receivables arising from the sale of goods and services in the ordinary course of business of the Borrower and its Subsidiaries; (iii) loans to Subsidiaries and loans by a Subsidiary to the Borrower or another Subsidiary to the extent permitted under Section 6.11, in each case in the ordinary course of business and (iv) Permitted Acquisitions. "PERMITTED PURCHASE MONEY INDEBTEDNESS" means, with respect to any Person, any Indebtedness, whether secured or unsecured, including Capitalized Leases, incurred by such Person to finance the acquisition of fixed assets, so long as (1) at the time of such incurrence, no Default or Unmatured Default has occurred and is continuing or would result from such incurrence, (2) such Indebtedness has a scheduled maturity and is not due on demand and (3) such Indebtedness does not exceed the lower of the fair market value or the cost of the applicable fixed assets on the date acquired. "PERMITTED SALE AND LEASEBACK TRANSACTIONS", means any Sale and Leaseback Transaction, (i) that is a Sale and Leaseback Transaction of computers and loaders of the Borrower or its Subsidiaries consummated pursuant to documentation reasonably acceptable to the Administrative Agent, (ii) that is consummated not later than December 31, 2002, (iii) in respect of which the value of the assets for all Permitted Sale and Leaseback Transactions does not exceed $1,000,000 in the aggregate at any time and (iv) in respect of which no Default or Unmatured Default shall have occurred and be continuing or would result from such transaction or the incurrence of any Indebtedness in connection therewith. "PERSON" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. "PLAN" means an employee benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have liability. "PRICING SCHEDULE" means the Schedule identifying the Applicable Margin and Applicable Commitment Fee Rate attached hereto and identified as such. "PRIME RATE" means a rate per annum equal to the prime rate of interest announced from time to time by LaSalle Bank or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes. SIDLEY AUSTIN BROWN & WOOD 13 "PROPERTY" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "PRO RATA SHARE" means, with respect to a Lender, a portion equal to a fraction the numerator of which is such Lender's Commitment at such time (in each case, as adjusted from time to time in accordance with the provisions of this Agreement) and the denominator of which is the Aggregate Commitment at such time, or, if the Aggregate Commitment has been terminated, a fraction the numerator of which is such Lender's Outstanding Credit Exposure at such time and the denominator of which is the sum of the aggregate outstanding amount of all Loans at such time. "PURCHASERS" is defined in Section 12.3.1. "PREFERRED STOCK" means, with respect to any corporation, capital stock issued by such corporation that is entitled to a preference or priority over any other capital stock issued by such corporation upon any distribution of such corporation's assets, whether by dividend or upon liquidation. "RATE MANAGEMENT OBLIGATIONS" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all Rate Management Transactions, and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any Rate Management Transactions. "RATE MANAGEMENT TRANSACTION" means any transaction (including an agreement with respect thereto) now existing or hereafter entered into between the Borrower and any Lender or Affiliate thereof which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. "REDEEMABLE" means, with respect to any capital stock, Indebtedness or other right or obligation, any such capital stock, Indebtedness or other right or obligation that (a) the issuer has undertaken to redeem at a fixed or determinable date or dates, whether by operation of a sinking fund or otherwise, or upon the occurrence of a condition not solely within the control of the issuer, or (b) is redeemable at the option of the holder. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks, non-banks and non-broker lenders for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. SIDLEY AUSTIN BROWN & WOOD 14 "REGULATION X" means Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by foreign lenders for the purpose of purchasing or carrying margin stock (as defined therein). "RENTALS" of a Person means the aggregate fixed amounts payable by such Person under any Operating Lease. "REPORTABLE EVENT" means a reportable event, as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC has by regulation or otherwise waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) days of the occurrence of such event, provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "REQUIRED LENDERS" means Lenders in the aggregate having equal to or greater than sixty-seven percent (67%) of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding equal to or greater than sixty-seven percent (67%) of the Aggregate Outstanding Credit Exposure. "RESERVE REQUIREMENT" means the maximum aggregate reserve requirement (including all basic supplemental, marginal and other reserves), stated as a decimal, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) with respect to "Eurocurrency liabilities" or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on LIBOR Rate Loans is determined or category of extensions of credit or other assets which includes loans by a non-United States office of any Lender to United States residents. "RESTRICTED PAYMENTS" has the meaning set forth in Section 6.10. "REVOLVING LOAN" means, with respect to a Lender, such Lender's loan made pursuant to Article II (and any conversion or continuation thereof). "RISK BASED CAPITAL GUIDELINES" is defined in Section 3.2. "SALE AND LEASEBACK TRANSACTION" means any sale or other transfer of Property by any Person with the intent to lease such Property as lessee. "S&P" means Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. and any successor thereto. "SCHEDULE" refers to a specific schedule to this Agreement, unless another document is specifically referenced. "SECTION" means a numbered section of this Agreement, unless another document is specifically referenced. SIDLEY AUSTIN BROWN & WOOD 15 "SENIOR NOTES" means the 8.60% Senior Notes due February 15, 2002 issued by the Borrower pursuant to the Senior Note Agreement, including any notes issued in substitution thereof or exchange therefor pursuant to the Senior Note Agreement, as such notes may be amended, supplemented or otherwise modified from time to time. "SENIOR NOTE DOCUMENTS" means the Senior Note Agreement and the Senior Notes. "SENIOR NOTE AGREEMENT" means the Note Agreement dated as of December 1, 1994 among the Borrower and the Purchasers named in Schedule I thereto, as such agreement may be amended, supplemented or otherwise modified from time to time. "SINGLE EMPLOYER PLAN" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "SOLVENT" means, when used with respect to any Person, that at the time of determination: (i) the fair value of its assets (both at fair valuation and at present fair saleable value) is equal to or in excess of the total amount of its liabilities, including, without limitation, contingent liabilities; (ii) it is then able and expects to be able to pay its debts as they mature; and (iii) it has capital sufficient to carry on its business as conducted or as proposed to be conducted. With respect to contingent liabilities (such as litigation, guarantees and pension plan liabilities), such liabilities shall be computed at the amount which, in light of all the facts and circumstances existing at the time, represent the amount which can be reasonably be expected to become an actual or matured liability. "SUBSIDIARY" of a Person means (i) any corporation more than fifty percent (50%) of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, joint venture or similar business organization more than fifty percent (50%) of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. "SUBSTANTIAL PORTION" means, with respect to the Property of the Borrower and its Subsidiaries, Property which (i) represents more than ten percent (10%) of the consolidated tangible assets of the Borrower and its Subsidiaries as would be shown in the consolidated financial statements of the Borrower and its Subsidiaries as at the end of the four fiscal quarter period ending with the fiscal quarter immediately prior to the fiscal quarter in which such determination is made, or (ii) is responsible for more than ten percent (10%) of the Consolidated Net Income of the Borrower and its Subsidiaries as reflected in the financial statements referred to in clause (i) above. SIDLEY AUSTIN BROWN & WOOD 16 "TAXES" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes. "TRANSFEREE" is defined in Section 12.4. "TYPE" means, with respect to any Advance, its nature as a Floating Rate Advance or a LIBOR Advance. "UNFUNDED LIABILITIES" means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans using PBGC actuarial assumptions for single employer plan terminations. "UNMATURED DEFAULT" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default. "WHOLLY-OWNED SUBSIDIARY" of a Person means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, limited liability company, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given them in accordance with Agreement Accounting Principles. 1.2. References. Any references to the Borrower's Subsidiaries shall not in any way be construed as consent by the Administrative Agent or any Lender to the establishment, maintenance or acquisition of and Subsidiary, except as may otherwise be permitted hereunder. 1.3. Supplemental Disclosure. At any time at the request of the Administrative Agent and at such additional times as the Borrower determines, the Borrower shall supplement each schedule or representation herein or in the other Loan Documents with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth as an exception to such representation or which is necessary to correct any information in such representation which has been rendered inaccurate thereby. Notwithstanding that any such supplement to such representation may disclose the existence or occurrence of events, facts or circumstances which are either prohibited by the terms of this Agreement or any other Loan Documents or which result in the breach of any representation or warranty, such supplement to such representation shall not be deemed either an amendment thereof or a waiver of such breach unless expressly consented to in writing by Administrative Agent and the requisite number of Lenders under Section 8.2, and no such amendments, except SIDLEY AUSTIN BROWN & WOOD 17 as the same may be consented to in a writing which expressly includes a waiver, shall be or be deemed a waiver by the Administrative Agent or any Lender of any Default disclosed therein. Any items disclosed in any such supplemental disclosures shall be included in the calculation of any limits, baskets or similar restrictions contained in this Agreement or any of the other Loan Documents. ARTICLE II THE CREDITS 2.1. Description of Facility; Commitment. From and including the date of this Agreement and prior to the Commitment Termination Date, upon the satisfaction of the conditions precedent set forth in Section 4.1 and 4.2, as applicable, each Lender severally and not jointly agrees, on the terms and conditions set forth in this Agreement, to make Loans to the Borrower from time to time in Dollars in amounts not to exceed in the aggregate at any one time outstanding of its Pro Rata Share of the Available Aggregate Commitment; provided that at no time shall the Aggregate Outstanding Credit Exposure hereunder exceed the Aggregate Commitment. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow Revolving Loans at any time prior to the Commitment Termination Date. The Commitments to lend hereunder shall expire automatically on the Commitment Termination Date. Principal payments made after the Commitment Termination Date may not be reborrowed. 2.2. Required Payments; Termination Date. 2.2.1. Required Payments. This Agreement shall be effective until the Commitment Termination Date or, if the Advances hereunder are converted to a term loan pursuant to Section 2.2.3, until the Converted Loan Termination Date. Any outstanding Advances and all other unpaid Obligations shall be paid in full by the Borrower on the Commitment Termination Date, or, if the Advances hereunder shall have been converted to a term loan pursuant to Section 2.2.3, in accordance with the terms of Section 2.2.3. 2.2.2. Termination Date. Notwithstanding the termination of this Agreement on the Commitment Termination Date or the Converted Loan Termination Date, until all of the Obligations (other than contingent indemnity obligations) shall have been fully paid and satisfied and all financing arrangements among the Borrower and the Lenders hereunder and under the other Loan Documents shall have been terminated, all of the rights and remedies under this Agreement and the other Loan Documents shall survive. 2.2.3. Conversion to Term Loan. On the Conversion Date, the then outstanding aggregate principal amount of the Advances hereunder shall convert to a term loan. Upon such conversion, (i) the Borrower's option to borrow and reborrow Revolving Loans hereunder shall terminate, (ii) the Aggregate Commitment shall be reduced to zero and (iii) the aggregate principal balance of all Loans hereunder shall be repaid in sixteen (16) consecutive equal installments, payable on each Payment Date after the Conversion Date, commencing on March 31, 2003 and continuing thereafter until the Converted Loan Termination Date, in an amount equal to the Aggregate Outstanding Credit Exposure on the Conversion Date divided by sixteen (16). SIDLEY AUSTIN BROWN & WOOD 18 2.3. Ratable Loans. Each Advance hereunder shall consist of Loans made from the several Lenders ratably in proportion to the ratio that their respective Commitments bear to the Aggregate Commitment. 2.4. Types of Advances. The Advances may be Loans consisting of Floating Rate Loans or LIBOR Loans, or a combination thereof, selected by the Borrower in accordance with Sections 2.8 and 2.9. 2.5. Commitment Fee; Reductions in Aggregate Commitment. 2.5.1. Commitment Fee. The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee (the "COMMITMENT FEE") at a per annum rate equal to the Applicable Commitment Fee Rate on the daily unused portion of such Lender's Commitment from and including the Closing Date to and including the Commitment Termination Date, payable quarterly in arrears on each Payment Date hereafter and until all Obligations hereunder have been paid in full. 2.5.2. Reductions in Aggregate Commitment. Prior to the Conversion Date, the Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders in a minimum amount of $500,000 (and in multiples of $500,000 if in excess thereof), upon at least three (3) Business Days' prior written notice to the Administrative Agent of such reduction, which notice shall specify the amount of any such reduction; provided, however, that the amount of the Aggregate Commitment may not be reduced below the Aggregate Outstanding Credit Exposure. All accrued Commitment Fees shall be payable on the effective date of any termination of all or any part of the obligations of the Lenders to make Revolving Loans hereunder. 2.5.3. Increase of Aggregate Commitment. At any time prior to the Commitment Termination Date, the Borrower may, on the terms set forth below, request that the Aggregate Commitment hereunder be increased to an amount not to exceed $30,000,000; provided, however, that (i) an increase in the Aggregate Commitment hereunder may only be made at a time when no Default or Unmatured Default shall have occurred and be continuing, (ii) each Lender shall be offered a pro rata share of any requested increase prior to the Borrower and the Administrative Agent inviting any additional financial institutions to become a Lender hereunder, and (iii) no Lender's Commitment shall be increased under this Section 2.5.3 without its consent. In the event of such a requested increase in the Aggregate Commitment, any financial institution which the Borrower and the Administrative Agent invite to become a Lender or to increase its Commitment may set the amount of its Commitment at a level agreed to by the Borrower and the Administrative Agent. In the event that the Borrower and one or more of the Lenders (or other financial institutions) shall agree upon such an increase in the Aggregate Commitment (i) the Borrower, the Administrative Agent and each Lender or other financial institution increasing its Commitment or extending a new Commitment shall enter into an amendment to this Agreement setting forth the amounts of the Commitments, as so increased, providing that the financial institutions extending new Commitments shall be Lenders for all purposes under this Agreement, and setting forth such additional provisions as the Administrative Agent shall consider reasonably appropriate and (ii) the Borrower shall furnish, if requested, a new Note to each financial institution that is extending a new Commitment or SIDLEY AUSTIN BROWN & WOOD 19 increasing its Commitment. No such amendment shall require the approval or consent of any Lender whose Commitment is not being increased. Upon the execution and delivery of such amendment as provided above, and upon satisfaction of such other conditions as the Administrative Agent may reasonably specify upon the request of the financial institutions that are extending new Commitments (including, without limitation, the Administrative Agent administering the reallocation of any outstanding Loans ratably among the Lenders after giving effect to each such increase in the Aggregate Commitment, and the delivery of certificates, evidence of corporate authority and legal opinions on behalf of the Borrower), this Agreement shall be deemed to be amended accordingly. 2.6. Minimum Amount of Each Advance. Each LIBOR Advance shall be in the minimum amount of $500,000 (and in multiples of $500,000 if in excess thereof), and each Floating Rate Advance shall be in the minimum amount of $500,000 (and in multiples of $500,000 if in excess thereof), provided, however, that any Floating Rate Advance may be in the amount of the Available Aggregate Commitment. The Borrower shall not request a LIBOR Advance if, after giving effect to the requested LIBOR Advance, more than three (3) Interest Periods would be in effect (unless such limit has been waived by the Administrative Agent in its sole discretion). 2.7. Optional Principal Payments; Mandatory Principal Prepayments. 2.7.1. Optional Principal Payments. The Borrower may from time to time pay, without penalty or premium, all outstanding Floating Rate Advances, or, in a minimum aggregate amount of $500,000 or any integral multiple of $100,000 in excess thereof, any portion of the outstanding Floating Rate Advances, upon not less than two Business Days' prior notice to the Administrative Agent. The Borrower may from time to time pay, subject to the payment of any funding indemnification amounts required by Section 3.4 but without penalty or premium, all outstanding LIBOR Advances, or, in a minimum aggregate amount of $500,000 or any integral multiple of $500,000 in excess thereof, any portion of the outstanding LIBOR Advances upon three Business Days' prior notice to the Agent Principal payments made after the Commitment Termination Date shall be applied to the principal installments payable under Section 2.2 in the inverse order of maturity. 2.7.2. Mandatory Principal Prepayments. If at any time the Borrower shall, or it shall permit any Subsidiary to, consummate any Asset Sale (other than Asset Sales permitted under Sections 6.13(a)), the Borrower shall immediately make a mandatory prepayment of the Obligations in an amount equal to the Net Cash Proceeds, provided, however, that the Borrower shall be permitted to retain (i) the first $1,000,000 of Net Cash Proceeds it receives from all such Assets Sales which occur prior to the Converted Loan Termination Date and (ii) $1,000,000 of Net Cash Proceeds it receives from all Permitted Sale and Leaseback Transactions. 2.8. Method of Selecting Types and Interest Periods for New Advances. The Borrower shall select the Type of Advance and, in the case of each LIBOR Advance, the Interest Period applicable thereto from time to time. The Borrower shall give the Administrative Agent irrevocable notice (a "BORROWING NOTICE") not later than 12:00 noon (Chicago time) at least one (1) Business Day before the Borrowing Date of each Floating Rate Advance and three (3) SIDLEY AUSTIN BROWN & WOOD 20 Business Days before the Borrowing Date for each LIBOR Advance. A Borrowing Notice shall specify: (a) the Borrowing Date, which shall be a Business Day, of such Advance, (b) the aggregate amount of such Advance, (c) the Type of Advance selected, and (d) in the case of each LIBOR Advance, the Interest Period applicable thereto. 2.9. Conversion and Continuation of Outstanding Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into LIBOR Advances pursuant to this Section 2.9 or are repaid in accordance with Section 2.7. Each LIBOR Advance shall continue as a LIBOR Advance until the end of the then applicable Interest Period therefor, at which time such LIBOR Advance shall be automatically converted into a Floating Rate Advance unless (x) such LIBOR Advance is or was repaid in accordance with Section 2.7, (y) the Borrower shall have given the Administrative Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, such LIBOR Advance continue as a LIBOR Advance for the same or another Interest Period or (z) upon the occurrence and during the continuance of any Default, each LIBOR Advance, may, at the Required Lender's direction, on the last day of the then existing Interest Period therefor, convert into a Floating Rate Advance and the obligations of the Lenders to make, or to convert Floating Rate Advances into LIBOR Rate Advances shall be suspended. Subject to the terms of Section 2.6, the Borrower may elect from time to time to convert all or any part of a Floating Rate Advance into a LIBOR Advance. Notwithstanding anything to the contrary contained in this Section 2.9, no Advance may be converted or continued as a LIBOR Advance (except with the consent of the Required Lenders) when any Default or Unmatured Default has occurred and in continuing. The Borrower shall give the Administrative Agent irrevocable notice (a "CONVERSION/CONTINUATION NOTICE") of each conversion of a Floating Rate Advance into a LIBOR Advance or continuation of a LIBOR Advance not later than 10:00 a.m. (Chicago time) at least three (3) Business Days prior to the date of the requested conversion or continuation, specifying: (a) the requested date, which shall be a Business Day, of such conversion or continuation, (b) the aggregate amount and Type of the Advance which is to be converted or continued, and (c) the amount of such Advance which is to be converted into or continued as a LIBOR Advance and the duration of the Interest Period applicable thereto. 2.10. Interest Rates. Each Floating Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is automatically converted from a LIBOR Advance into a Floating Rate Advance pursuant to Section 2.9, to but excluding the date it is paid or is converted into a LIBOR Advance pursuant SIDLEY AUSTIN BROWN & WOOD 21 to Section 2.9 hereof, at a rate per annum equal to the Floating Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. Each LIBOR Advance shall bear interest on the outstanding principal amount thereof from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the LIBOR Rate for such Interest Period. With respect to each LIBOR Advance made prior to the Commitment Termination Date, the Interest Period applicable thereto shall expire on or prior to the Commitment Termination Date. On or after the Commitment Termination Date, the Borrower shall have the right and option to convert each outstanding Floating Rate Advance to a LIBOR Advance in accordance with Section 2.9. No Interest Period may end after the Converted Loan Termination Date. 2.11. Rates Applicable After Default. Notwithstanding anything to the contrary contained in Section 2.8 or 2.9, during the continuance of a Default or Unmatured Default the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that no Advance may be made as, converted into or continued as a LIBOR Advance. During the continuance of a Default the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that (i) each LIBOR Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (ii) each Floating Rate Advance and all fees and other Obligations hereunder shall bear interest at a rate per annum equal to the Floating Rate in effect from time to time plus 2% per annum, provided that, during the continuance of a Default under Section 7.6 or 7.7, the interest rates set forth in clauses (i) and (ii) above shall be applicable to all Advances and on any accrued but unpaid fees and other Obligations without any election or action on the part of the Administrative Agent or any Lender. 2.12. Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Administrative Agent at the Administrative Agent's address specified pursuant to Article XIII, or at any other Lending Office of the Administrative Agent specified in writing by the Administrative Agent to the Borrower, by 12:00 noon (Chicago time) on the date when due and shall be applied ratably by the Administrative Agent among the Lenders entitled thereto. Each payment delivered to the Administrative Agent for the account of any Lender shall be delivered promptly by the Administrative Agent to such Lender in the same type of funds that the Administrative Agent received at such Lender's address specified pursuant to Article XIII or at any Lending Office specified in a notice received by the Administrative Agent from such Lender. The Administrative Agent is hereby authorized to charge the account of the Borrower maintained with LaSalle Bank or any of its Affiliates for each payment of principal, interest and fees as it becomes due hereunder. 2.13. Noteless Agreement; Evidence of Indebtedness. (i) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan SIDLEY AUSTIN BROWN & WOOD 22 made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (ii) The Administrative Agent shall also maintain accounts in which it will record (a) the date and the amount of each Loan made hereunder, the Type thereof and the Interest Period, if any, applicable thereto, (b) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder, (c) the effective date and amount of each Assignment Agreement delivered to and accepted by it and the parties thereto pursuant to Section 12.3, (d) the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof, and (e) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all fees, charges, expenses and interest. (iii) The entries maintained in the accounts maintained pursuant to clauses (i) and (ii) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided, however, that the failure of the Administrative Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Obligations in accordance with their terms. (iv) Any Lender may request that the Loans made or to be made by it be evidenced by a promissory note in substantially the form of Exhibit D (each, a "Note"). In such event, the Borrower shall prepare, execute and deliver to such Lender such Note or Notes payable to the order of such Lender. Thereafter, the Loans evidenced by each such Note and interest thereon shall at all times (including after any assignment pursuant to Section 12.3) be represented by one or more Notes payable to the order of the payee named therein or any assignee pursuant to Section 12.3, except to the extent that any such Lender or assignee subsequently returns any such Note for cancellation and requests that such Loans once again be evidenced as described in clauses (i) and (ii) above. 2.14. Telephonic Notices. The Borrower hereby authorizes the Lenders and the Administrative Agent to extend, convert or continue Advances, effect selections of Types of Advances and transfer funds based on telephonic notices made by any person or persons the Administrative Agent or any Lender in good faith believes to be acting on behalf of the Borrower, it being understood that the foregoing authorization is specifically intended to allow Borrowing Notices and Conversion/Continuation Notices to be given telephonically. The Borrower agrees to deliver promptly to the Administrative Agent a written confirmation, signed by an Authorized Officer, of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Administrative Agent and the Lenders, the records of the Administrative Agent and the Lenders shall govern absent manifest error. 2.15. Interest Payment Dates; Interest and Fee Basis. Interest accrued on each Floating Rate Advance shall be payable in arrears on each Payment Date, commencing with the first such date to occur after the date hereof, on any date on which the Floating Rate Advance is prepaid, whether due to acceleration or otherwise, and at maturity. Interest accrued on that portion of the outstanding principal amount of any Floating Rate Advance converted into a LIBOR Advance on a day other than a Payment Date shall be payable on the next succeeding Payment Date. Interest SIDLEY AUSTIN BROWN & WOOD 23 accrued on each LIBOR Advance shall be payable on the last day of its applicable Interest Period, on any date on which the LIBOR Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each LIBOR Advance having an Interest Period longer than three (3) months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on all Advances and fees shall be calculated for actual days elapsed on the basis of a 360-day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 2:00 p.m. (Chicago time) at the place of payment. If any payment of principal of or interest on an Advance, any fees or any other amounts payable to the Administrative Agent or any Lender hereunder shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest, fees and commissions in connection with such payment. 2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions; Availability of Loans. Promptly after receipt thereof, the Administrative Agent will notify each Lender of the contents of each Aggregate Commitment reduction notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. The Administrative Agent will notify each Lender of the interest rate applicable to each LIBOR Advance promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate. Not later than 12:00 noon (Chicago time) on each Borrowing Date, each Lender shall make available its Loans in funds immediately available in Chicago to the Administrative Agent at its address specified pursuant to Article XIII. Unless the Administrative Agent determines that any applicable condition specified in Article IV has not been satisfied, the Administrative Agent will make the funds so received from the Lenders available to the Borrower at the Administrative Agent's aforesaid address. 2.17. Lending Offices. Each Lender may book its Loans at any Lending Office selected by such Lender and may change its Lending Office from time to time. All terms of this Agreement shall apply to any such Lending Office and the Loans and any Notes issued hereunder shall be deemed held by each Lender for the benefit of any such Lending Office. Each Lender may, by written notice to the Administrative Agent and the Borrower in accordance with Article XIII, designate replacement or additional Lending Offices through which Loans will be made by it and for whose account Loan payments are to be made. 2.18. Non-Receipt of Funds by the Administrative Agent. Unless the Borrower or a Lender, as the case may be, notifies the Administrative Agent prior to the time on which it is scheduled to make payment to the Administrative Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Administrative Agent for the account of the Lenders, that it does not intend to make such payment, the Administrative Agent may assume that such payment has been made. The Administrative Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Administrative Agent, the recipient of such payment shall, on demand by the Administrative Agent, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the SIDLEY AUSTIN BROWN & WOOD 24 Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to (x) in the case of payment by a Lender, the Federal Funds Effective Rate for such day for the first three (3) days and, thereafter, the interest rate applicable to the relevant Loan or (y) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan, including the interest rate applicable pursuant to Section 2.11. 2.19. Replacement of Lender. The Borrower shall have the right, in its sole discretion, at any time and from time to time to terminate or replace the Commitment of any Lender (an "AFFECTED LENDER"), in whole, upon at least thirty (30) days' prior notice to the Administrative Agent and such Lender, (a) if such Lender has failed or refused to make available the full amount of any Loan as required by its Commitment hereunder, (b) if such Lender has been merged or consolidated with, or transferred all or substantially all of its assets to, or otherwise been acquired by any other Person, or (c) if such Lender has demanded that the Borrower make any additional payment to any Lender pursuant to Section 3.1, 3.2 or 3.5, or if such Lender's obligation to make or continue, or convert Floating Rate Advances into, LIBOR Advances has been suspended pursuant to Section 3.3, provided, however that no such Commitment reduction shall reduce the Aggregate Commitment by more than fifteen percent (15%) thereof; provided further, that no Default or Unmatured Default shall have occurred and be continuing at the time of such termination or replacement, and that, concurrently with such termination or replacement, (i) if the Affected Lender is being replaced, another bank or other entity which is reasonably satisfactory to the Borrower and the Administrative Agent shall agree, as of such date, to purchase for cash the Advances and other Obligations due to the Affected Lender pursuant to an Assignment Agreement substantially in the form of Exhibit C and to become a Lender for all purposes under this Agreement and to assume all obligations of the Affected Lender to be terminated as of such date and to comply with the requirements of Section 12.3 applicable to assignments, and (ii) the Borrower shall pay to such Affected Lender in immediately available funds on the day of such replacement (A) all interest, fees and other amounts then accrued but unpaid to such Affected Lender by the Borrower hereunder to and including the date of termination, including without limitation payments due to such Affected Lender under Sections 3.1, 3.2 and 3.5, to the extent applicable, and (B) an amount, if any, equal to the payment which would have been due to such Lender on the day of such replacement under Section 3.4 had the Loans of such Affected Lender been prepaid on such date rather than sold to the replacement Lender and (iii) if the Affected Lender is being terminated, the Borrower shall pay to such Affected Lender all of Obligation due to such Affected Lender (including amounts described in the immediately preceding clauses (i) and (ii) plus the outstanding principal balance of such Lender's Loans). ARTICLE III YIELD PROTECTION; TAXES 3.1. Yield Protection. If, on or after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in any such law, rule, regulation, policy, guideline or directive or in the interpretation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender or applicable Lending Office with any SIDLEY AUSTIN BROWN & WOOD 25 request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) subjects any Lender or any applicable Lending Office to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to any Lender in respect of its LIBOR Loans, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Office (other than reserves and assessments taken into account in determining the interest rate applicable to LIBOR Advances), or (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Office of making, funding or maintaining its Commitment or LIBOR Loans or reduces any amount receivable by any Lender or any applicable Lending Office in connection with its Commitment or LIBOR Loans, or requires any Lender or any applicable Lending Office to make any payment calculated by reference to the amount of Commitment or LIBOR Loans held or interest received by it, by an amount deemed material by such Lender, and the result of any of the foregoing is to increase the cost to such Lender or applicable Lending Office of making or maintaining its LIBOR Loans or Commitment or to reduce the return received by such Lender or applicable Lending Office in connection with such LIBOR Loans or Commitment, then, within fifteen (15) days of demand by such Lender, the Borrower shall pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction in amount received, provided however, such Lender shall only be entitled to receive compensation from the Borrower for such increased costs for a period of 90 days prior to the date such Lender made a demand for payment of such increased costs plus such increased costs that accrue after the date of such demand by such Lender, except that with respect to any retroactive change in any law, rule, regulation, policy, guideline or directive giving rise to increased costs to any such Lender, the Borrower shall pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction in amount received for the period from and including the effective date of such retroactive change. 3.2. Changes in Capital Adequacy Regulations. If a Lender determines the amount of capital required or expected to be maintained by such Lender, any Lending Office of such Lender or any corporation controlling such Lender is increased as a result of a Change, then, within fifteen (15) days of demand by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender determines is attributable to this Agreement, its Loans or its Commitment to make Loans hereunder (after taking into account such Lender's policies as to capital adequacy) provided however, such Lender shall only be entitled to receive compensation from the Borrower for such shortfall for a period of 90 days prior to the date such Lender made a demand for payment of such shortfall plus such additional shortfalls that accrue after the date of such demand by such Lender, provided that if such Change has a retroactive effect, then the SIDLEY AUSTIN BROWN & WOOD 26 Lender shall be entitled to receive compensation from the Borrower for such shortfall for the period from and including the effective date of such retroactive Change. "CHANGE" means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of, change in, or change in the interpretation or administration of any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender or any Lending Office or any corporation controlling any Lender. "RISK-BASED CAPITAL GUIDELINES" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. 3.3. Availability of Types of Advances. If (x) any Lender determines that maintenance of its LIBOR Loans at a suitable Lending Office would violate any applicable law, rule, regulation or directive, whether or not having the force of law, or if (y) the Required Lenders determine that (i) deposits of a type and maturity appropriate to match fund LIBOR Advances are not available or (ii) the interest rate applicable to LIBOR Advances does not accurately reflect the cost of making or maintaining LIBOR Advances, then the Administrative Agent shall suspend the availability of LIBOR Advances and require any affected LIBOR Advances to be repaid or converted to Floating Rate Advances, subject to the payment of any funding indemnification amounts required by Section 3.4. 3.4. Funding Indemnification. If any payment of a LIBOR Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a LIBOR Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, or a LIBOR Advance is not prepaid on the date specified by the Borrower for any reason, the Borrower will indemnify each Lender for any actual and verifiable loss or cost incurred by it resulting therefrom, including, without limitation, any actual and verifiable loss or cost in liquidating or employing deposits acquired to fund or maintain such LIBOR Advance. 3.5. Taxes. (i) All payments by the Borrower to or for the account of any Lender or Administrative Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all Taxes. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender or Administrative Agent, (a) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.5) such Lender or Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (b) the Borrower shall make such deductions, (c) the Borrower shall pay the full amount deducted to the relevant authority in accordance with applicable law and (d) the Borrower shall furnish to the Administrative Agent the original copy of a receipt evidencing payment thereof within thirty (30) days after such payment is made. SIDLEY AUSTIN BROWN & WOOD 27 (ii) In addition, the Borrower hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note other than any of the foregoing which constitute Excluded Taxes ("OTHER TAXES"). (iii) The Borrower hereby agrees to indemnify the Administrative Agent and each Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed on amounts payable under this Section 3.5) paid by the Administrative Agent or such Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this indemnification shall be made within thirty (30) days of the date the Administrative Agent or such Lender makes demand therefor pursuant to Section 3.6. (iv) Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "NON-U.S. LENDER") agrees that it will, not more than ten (10) Business Days after the date on which it becomes a party to this Agreement, (i) deliver to each of the Borrower and the Administrative Agent two (2) duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) deliver to each of the Borrower and the Administrative Agent a United States Internal Revenue Form W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Lender further undertakes to deliver to each of the Borrower and the Administrative Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Borrower or the Administrative Agent. All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Borrower and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. (v) For any period during which a Non-U.S. Lender has failed to provide the Borrower with an appropriate form pursuant to clause (iv), above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this Section 3.5 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (iv), above, the Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes. SIDLEY AUSTIN BROWN & WOOD 28 (vi) Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. (vii) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Administrative Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Administrative Agent under this subsection, together with all costs and expenses related thereto (including attorneys' fees and time charges of attorneys for the Administrative Agent, which attorneys may be employees of the Administrative Agent). The obligations of the Lenders under this Section 3.5(vii) shall survive the payment of the Obligations and termination of this Agreement. 3.6. Lender Statements; Survival of Indemnity. To the extent reasonably possible, each Lender shall designate an alternate Lending Office with respect to its Loans to reduce any liability of the Borrower to such Lender under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of LIBOR Advances under Section 3.3, so long as such designation is not, in the judgment of such Lender, materially disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Administrative Agent) as to the amount due, if any, under Section 3.1, 3.2, 3.4 or 3.5. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined the actual amount of its loss or additional cost, and such calculation shall be final, conclusive and binding on the Borrower in the absence of manifest error. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of such written statement. The obligations of the Borrower under Sections 3.1, 3.2, 3.4 and 3.5 shall survive payment of the Obligations and termination of this Agreement. ARTICLE IV CONDITIONS PRECEDENT 4.1. Initial Advance. The Lenders shall not be required to make the initial Advance hereunder unless (a) the representations and warranties contained in Article V are true and correct as of such date and (b) the Borrower or the applicable Guarantor has furnished to the Administrative Agent with sufficient copies for the Lenders: (i) Copies of the articles or certificate of incorporation of the Borrower and each of the initial Guarantors, together with all amendments thereto, and a certificate of SIDLEY AUSTIN BROWN & WOOD 29 good standing, each certified by the appropriate governmental officer in its jurisdiction of incorporation. (ii) Copies, certified by the Secretary or Assistant Secretary of the Borrower and each of the initial Guarantors, of their respective articles of incorporation, together with all amendments thereto, their respective by-laws and of their respective Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Loan Documents to which it is a party. (iii) Incumbency certificates, executed by the Secretary or Assistant Secretary of the Borrower and each of the initial Guarantors, which shall identify by name and title and bear the signatures of the Authorized Officers and any other officers or employees of the Borrower and each of the initial Guarantors, respectively, authorized to sign the Loan Documents to which it is a party and, with respect to the Borrower, to request Loans hereunder, upon which certificates the Administrative Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower or the applicable Guarantor. (iv) An opening compliance certificate in substantially the form of Exhibit B, signed by the chief financial officer or treasurer of the Borrower, showing the calculations necessary to determine compliance with this Agreement on the Closing Date and stating that on the Closing Date (a) no Default or Unmatured Default has occurred and is continuing, (b) all of the representations and warranties in Article V shall be true and correct as of such date, and (c) no material adverse change in the business, financial condition, operations or prospects of the Borrower has occurred since December 31, 2000. (v) A written opinion of the Borrower's counsel, in form and substance satisfactory to the Administrative Agent and addressed to the Lenders, in substantially the form of Exhibit A. (vi) Any Notes requested by a Lender pursuant to Section 2.13 payable to the order of each such requesting Lender. (vii) Such other documents as any Lender or its counsel may have reasonably requested including, without limitation, each other document identified on the list of closing documents attached hereto as Exhibit F. 4.2. Each Advance. The Lenders shall not be required to make any Advance unless on the applicable Borrowing Date: (i) There exists no Default or Unmatured Default. (ii) The representations and warranties contained in Article V are true and correct as of such Borrowing Date except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date. SIDLEY AUSTIN BROWN & WOOD 30 (iii) All legal matters incident to the making of such Advance shall be satisfactory to the Lenders and their counsel. Each Borrowing Notice with respect to each such Advance shall constitute a representation and warranty by the Borrower that the conditions contained in Section 4.2(i) and (ii) have been satisfied. Any Lender may require a duly completed compliance certificate in substantially the form of Exhibit B as a condition to making an Advance. ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants as follows to each Lender and the Administrative Agent as of the Closing Date, on the date of the initial Revolving Loans hereunder (if different from the Closing Date) and thereafter on each date as required by Section 4.2: 5.1. Existence and Standing. The Borrower and each of its Subsidiaries is a corporation, partnership or limited liability company duly and properly incorporated or organized, as the case may be, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization and is properly qualified and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted, except to the extent that the failure to have such authority could not reasonably be expected to have a Material Adverse Effect. 5.2. Authorization and Validity. The Borrower has the power and authority and legal right to execute and deliver the Loan Documents and to perform its obligations thereunder. The execution and delivery by the Borrower of the Loan Documents and the consummation of the transactions contemplated thereby and the performance of its obligations thereunder have been duly authorized by the Board of Directors or similar corporate proceedings and no other corporate proceedings are necessary to consummate such transactions, and the Loan Documents to which the Borrower is a party constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. 5.3. No Conflict; Government Consent. Neither the execution, delivery and performance by the Borrower of the Loan Documents, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries or (ii) the Borrower's or any Subsidiary's articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating agreement or other management agreement, as the case may be, or (iii) the provisions of any material Contractual Obligations, to which the Borrower or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with, or constitute a default under, or result in, or require, the creation or imposition of any Lien in, of or on the Property of the Borrower or a Subsidiary pursuant to the terms of, any material Contractual Obligation. The execution, delivery and performance of the Loan Documents and the SIDLEY AUSTIN BROWN & WOOD 31 consummation of the transactions contemplated thereby do not and will not require any approval of shareholders or any approval or consent of any Person under Contractual Obligations. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by the Borrower or any of its Subsidiaries, is required to be obtained by the Borrower or any of its Subsidiaries in connection with the execution and delivery of the Loan Documents, the borrowings under this Agreement, the payment and performance by the Borrower of the Obligations or the legality, validity, binding effect or enforceability of any of the Loan Documents. 5.4. Financial Statements. The December 31, 2000 consolidated financial statements of the Borrower and its Subsidiaries heretofore delivered to the Administrative Agent and the Lenders, copies of which are included in the Borrower's 2000 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, as filed with the Securities and Exchange Commission, were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present, the consolidated financial condition and operations of the Borrower and its Subsidiaries at such date and the consolidated results of their operations and cash flows for the fiscal year then ended. 5.5. Material Adverse Change; No Default. Since December 31, 2000 there has been no Material Adverse Change. Neither the Borrower nor any Subsidiary is a party to, or is otherwise subject to, any Contractual Obligation or other restriction contained in there respective charters, bylaws or similar governing documents, which has had a Material Adverse Effect. There exists no Default or Unmatured Default. 5.6. Taxes. The Borrower and its Subsidiaries have filed all United States federal tax returns and all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles. The United States income tax returns of the Borrower and its Subsidiaries have been audited by the Internal Revenue Service through the fiscal year ended December 31, 1997. No tax liens have been filed and no claims are being asserted with respect to any such taxes. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of any taxes or other governmental charges are adequate. 5.7. Litigation and Contingent Obligations. There is no litigation, arbitration, governmental investigation, proceeding or inquiry pending, at law or in equity, or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect or which seeks to prevent, enjoin or delay the making of any Loans or otherwise question the validity of any Loan Document. Neither the Borrower nor any of its Subsidiaries is subject to or in default with respect to any final judgement, writ, order, injunction, decree, rule or regulation of any court or Governmental Authority which has had or is reasonably likely to have a Material Adverse Effect. Other than any liability incident to any litigation, arbitration or proceeding which could not reasonably be expected to have a Material Adverse Effect, neither the Borrower SIDLEY AUSTIN BROWN & WOOD 32 nor any of its Subsidiaries have any contingent obligations not provided for or disclosed in the financial statements referred to in Section 5.4. 5.8. Subsidiaries. Schedule 4 (as supplemented from time to time by the Borrower promptly after the formation or acquisition of any new Subsidiary, except as permitted under this Agreement) contains a complete and accurate list of all Subsidiaries of the Borrower as of the date of this Agreement, setting forth their correct legal name and respective jurisdictions of organization and the number of issued and authorized shares of each class of capital stock of each such Subsidiary and the identity of the holders of all shares of each class of capital stock of each Subsidiary and the percentage ownership interests owned by each such holder. All of the issued and outstanding shares of capital stock or other ownership interests of such Subsidiaries have been duly authorized and issued and are fully paid and non-assessable. No Person other than the Borrower or a Subsidiary holds or otherwise possesses any warrant, right or option to purchase or otherwise acquire stock or other securities convertible into capital stock of any Subsidiary. None of the direct or indirect Subsidiaries of the Borrower (other than any Subsidiary that shall have become a guarantor of the Obligations in accordance with Section 6.20), individually or taken as a whole, constitute a Material Subsidiary. 5.9. Accuracy of Information. None of the schedules, certificates and other written statements and materials and information furnished by or on behalf of the Borrower or any of its Subsidiaries to the Administrative Agent or the Lenders (in each case, unless corrected in writing in this Agreement or in a written statement delivered to the Administrative Agent and the Lenders prior to the date of the execution hereof by the Borrower) contain any material misstatement of fact or omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made and taken as a whole, not misleading. There is no fact relating to the Borrower or any of its Subsidiaries which the Borrower has not disclosed to the Administrative Agent and the Lenders in writing which has had or is reasonably likely to have a Material Adverse Effect. 5.10. Regulation U. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate of buying or carrying margin stock (within the meaning of Regulation U or Regulation X); and after applying the proceeds of each Advance, margin stock (as defined in Regulation U) constitutes less than twenty-five (25%) of the value of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale or pledge, or any other restriction hereunder. 5.11. Material Agreements. Neither the Borrower nor any Subsidiary is in default and no conditions exist which, with the giving of notice or lapse of time, or both, would constitute a default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect. 5.12. Compliance With Laws. The Borrower and its Subsidiaries have complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property. SIDLEY AUSTIN BROWN & WOOD 33 5.13. Ownership of Properties. On the date of this Agreement, the Borrower and its Subsidiaries have good and marketable title, free of all Liens other than those permitted by Section 6.16, to all of the Property and assets reflected in the Borrower's most recent consolidated financial statements provided to the Administrative Agent and the Lenders as owned by the Borrower and its Subsidiaries, other than Property and assets sold or otherwise disposed of in the ordinary course of business. 5.14. ERISA; Foreign Pension Matters. The sum of (a) the Unfunded Liabilities of all Plans and (b) the present value of the aggregate unfunded liabilities to provide the accrued benefits under all Foreign Pension Plans do not in the aggregate exceed an amount equal to the sum of (i) ten percent (10%) of the value (as of any date of determination) of all Plan assets allocable to Plan benefits guaranteed by ERISA and (ii) ten percent (10%) of the fair market value of the assets held in trust or other funding vehicles for accrued benefits under all Foreign Pension Plans. Each Plan and each Foreign Pension Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Plan, neither the Borrower nor any other member of the Controlled Group has withdrawn from any Multiemployer Plan or initiated steps to do so, and no steps have been taken to terminate any Plan. 5.15. Plan Assets; Prohibited Transactions. The Borrower is not an entity deemed to hold "plan assets" within the meaning of 29 C.F.R. Section 2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA or any plan (within the meaning of Section 4975 of the Code), and, to the knowledge of the Borrower, neither the execution of this Agreement nor the making of Loans hereunder gives rise to a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. 5.16. Environmental Matters. In the ordinary course of its business, the officers of the Borrower consider the effect of Environmental Laws on the business of the Borrower and its Subsidiaries, in the course of which they identify and evaluate potential risks and liabilities accruing to the Borrower and its Subsidiaries due to Environmental Laws. On the basis of this consideration, the Borrower has concluded that Environmental Laws cannot reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary has received any notice to the effect that its operations are not in compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect. 5.17. Investment Company Act: Other Regulation. Neither the Borrower nor any Subsidiary is (i) an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended or (ii) subject to regulation under any other federal or state regulatory scheme such that its ability to incur Indebtedness is limited or its ability to consummate the transactions contemplated hereby is impaired. SIDLEY AUSTIN BROWN & WOOD 34 5.18. Indebtedness. Set forth on Schedule 2 hereto is a complete and accurate list of all Indebtedness existing as of the Closing Date, showing as of the date hereof the principal amount outstanding thereunder. 5.19. Insurance. The Property of the Borrower and its Subsidiaries is insured with financially sound and reputable insurance companies not Affiliates of the Borrower, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar business and owning similar properties. 5.20. Solvency. After giving effect to the Advances to be made on the Closing Date, or such other Advances requested hereunder are made, the Borrower and its Subsidiaries taken as a whole are Solvent. 5.21. Permits; Intellectual Property. The Borrower and each of its Subsidiaries own, are licensed or otherwise have the lawful right to use, or have all permits and other governmental approvals, patents, trademarks, trade names, copyrights, technology, know-how and processes used in or necessary for the conduct of their businesses as currently conducted which are material to their condition (financial or otherwise), operations, performance and prospects, taken as a whole. The use of such permits and other governmental approvals, patents, trademarks, trade names, copyrights, technology, know-how and processes by the Borrower and each of its Subsidiaries does not infringe on the rights of any Person, subject to such claims and infringements as do not, in the aggregate, give rise to any liability on the part of the Borrower or any of its Subsidiaries which has or is reasonably likely to have a Material Adverse Effect. 5.22. Labor Matters. There are no collective bargaining agreements or other labor agreements covering any of the employees of the Borrower or any of its Subsidiaries. No attempt to organize the employees of the Borrower, and no labor disputes, strikes or walkouts affecting the operations of the Borrower or any of its Subsidiaries, is pending, or, to the Borrower's knowledge, threatened, planned or contemplated. ARTICLE VI COVENANTS During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing: 6.1. Financial Reporting. The Borrower will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Administrative Agent and the Lenders: (a) Annual Financials. As soon as available and in any event within 90 days after the close of each Fiscal Year of the Borrower, copies of (i) Consolidated balance sheets of the Borrower and its Subsidiaries as of the close of such Fiscal Year, and (ii) Consolidated statements of operations, shareholders' equity and cash flows of the Borrower and its Subsidiaries for such Fiscal Year, in each case setting forth the comparative form the Consolidated figures for the preceding Fiscal Year. Such Consolidated financial statements shall be accompanied by an audit report, and unqualified opinion, thereon of KPMG Peat Marwick SIDLEY AUSTIN BROWN & WOOD 35 LLP or other firm of independent auditors of recognized national standing selected by the Borrower to the effect that such consolidated financial statements present fairly, in all material respects, the Consolidated financial position of the Borrower and its Subsidiaries as of the end of the Fiscal Year being reported on and the Consolidated results of the operations, shareholders' equity and cash flows for said year in conformity with Agreement Accounting Principles and that the examination of such auditors in connection with such financial statements has been conducted in accordance with generally accepted auditing standards and included such tests of the accounting records and such other auditing procedures as said auditors deemed necessary in the circumstances. Such audit reports shall be accompanied by a reliance letter from the independent auditors permitting the Administrative Agent and the Lenders to rely on the contents thereof as if prepared specifically for use by the Administrative Agent and the Lenders. (b) Quarterly Financials. As soon as available and in any event within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year, copies of (i) unaudited condensed Consolidated balance sheets of the Borrower and its Subsidiaries as of the close of such Fiscal Quarter, setting forth in comparative form the consolidated figures as of the close of the Fiscal Year then most recently ended, and (ii) unaudited condensed Consolidated statements of operations, shareholders' equity and cash flow of the Borrower and its Subsidiaries for such Fiscal Quarter and for the portion of the Fiscal Year ending with such Fiscal Quarter, in each case setting forth in comparative form the unaudited condensed Consolidated figures for the corresponding periods of the preceding Fiscal Year, in each case certified by an authorized financial officer of the Borrower as presenting fairly the financial position of the Borrower and its Subsidiaries as of such date and the results of their operations and changes in their cash flows for such period. (c) Compliance Certificate. Together with the financial statements required under Sections 6.1(a) and (b), a compliance certificate in substantially the form of Exhibit B signed by its chief financial officer showing the calculations necessary to determine compliance with this Agreement as of the applicable date of determination for such covenant, as the case may be, and stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof and whether any Subsidiary has been formed or acquired during the Fiscal Quarter ending as of the date of such financial statements. (d) Budgets; Business Plans; Financial Projections. As soon as practicable and in any event not later than thirty (30) days after the beginning of each fiscal year commencing with the fiscal year beginning January 1, 2003, a copy of the plan and forecast (including a projected balance sheet, income statement and a statement of cash flow) of the Borrower and its Subsidiaries for the upcoming three (3) fiscal years prepared in such detail as shall be reasonably satisfactory to the Administrative Agent. (e) Plan Statements. Within 270 days after the close of each plan year, a statement of the Unfunded Liabilities of each Plan, certified as correct by an actuary enrolled under ERISA. (f) Reportable Events. As soon as possible and in any event within 10 days after the Borrower knows that any Reportable Event has occurred with respect to any Plan or any material unfunded liability has arisen with respect to a Foreign Pension Plan, a statement, signed by the SIDLEY AUSTIN BROWN & WOOD 36 chief financial officer of the Borrower, describing said Reportable Event or material unfunded liability and the action which the Borrower proposes to take with respect thereto. (g) Environmental Notices. As soon as possible and in any event within 10 days after receipt by the Borrower, a copy of (a) any notice or claim to the effect that the Borrower or any of its Subsidiaries is or may be liable to any Person as a result of the release by the Borrower, any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by the Borrower or any of its Subsidiaries. (h) SEC and Other Reports. Promptly upon their becoming available, one copy of each (i) financial statements, report, notice or proxy statement sent by the Borrower to its stockholders generally, and each press release made available generally by the Borrower to the public concerning material developments in the business of the Borrower, and each notification on Schedule 13-D received by the Borrower pursuant to the Securities Exchange Act and the rules promulgated thereunder evidencing an increase in ownership of the Borrower's capital stock of 5% or more, and (ii) regular or periodic report and any registration statement or prospectus filed by the Borrower or any Subsidiary with any securities exchange or the Securities and Exchange Commission or any successor agency. (i) Management Letters. Promptly upon receipt thereof, one copy of each management letter to the Audit Committee of its Board of Directors from its independent auditors. (j) Auditors' Certificates. Within the period provided in Section 6.1(a), a certificate of the auditors who render an opinion with respect to such financial statements, which certificate shall be addressed to the Borrower, the Administrative Agent and the Lenders, stating that they have reviewed this Agreement; stating whether, in making their audit, such auditors have become aware of any Default or Event or Default under any of the terms or provisions of this Agreement insofar as any such terms or provisions pertain to or involve accounting matters or determinations, and if any such condition or event then exists, specifying the nature and period of existence thereof. (k) Creditor Reports. Promptly after the furnishing thereof, copies of any notice or any other material statement or report furnished to any holder of the securities of the Borrower or of any of its Subsidiaries pursuant to the terms of any indenture, loan or credit or similar agreement relating to Indebtedness in excess of $1,000,000 and not otherwise required to be furnished to the Administrative Agent and the Lenders pursuant to any other clause of this Section 6.1. (l) Other Information. Such other information (including non-financial information) as the Administrative Agent or any Lender may from time to time reasonably request. 6.2. Use of Proceeds. The Borrower will, and will cause each Subsidiary to, use the proceeds of the Advances for working capital requirements, general corporate purposes and refinancing the Senior Notes. The Borrower will not, nor will it permit any Subsidiary to, use SIDLEY AUSTIN BROWN & WOOD 37 any of the proceeds of the Advances to purchase or carry any "margin stock" (as defined in Regulation U) or to make any other acquisition, except Permitted Acquisitions. 6.3. Notice of Default. The Borrower will, and will cause each Subsidiary to, give prompt notice in writing to the Lenders of the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, which could reasonably be expected to have a Material Adverse Effect and specifying what action the Borrower has taken, is taking or proposes to take with respect thereto. 6.4. Conduct of Business; Charter Amendments; Accounting Changes. 6.4.1. Conduct of Business. The Borrower will, and will cause each Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted (which business is the acquisition, repair, dismantling or disposition of motor vehicles (or parts thereof), whether on behalf of itself or others, or the provision of services or information to others with respect to the acquisition, repair, dismantling or disposition of motor vehicles (or parts thereof)) and do all things necessary to remain duly incorporated or organized, validly existing and in good standing as a domestic corporation in its jurisdiction of incorporation or organization, as the case may be, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted and preserve and keep in full force and effect all licenses, permits, rights and franchise materials to conduct its business as currently conducted, the failure of which to obtain or maintain, would have a Material Adverse Effect. 6.4.2. Charter Amendments. The Borrower will not adopt and will not permit any Subsidiary to adopt, any amendment to the certificate of incorporation or bylaws of the Borrower or any of its Subsidiaries, other than any amendment which could not impair the rights or interests of the Administrative Agent and the Lenders. 6.4.3. Accounting Changes. The Borrower will not make or permit, or permit any of its Subsidiaries to make or permit, any change in accounting policies or reporting practices, except as required or permitted by Agreement Accounting Principles subject to Section 9.8 hereof. 6.5. Taxes; Claims, Judgments, Etc. The Borrower will, and will cause each of its Subsidiaries to file on timely basis complete and correct United States federal and applicable foreign, state and local tax returns required by law. The Borrower will promptly pay and discharge, and will cause each of its Subsidiaries promptly to pay and discharge, all lawful taxes, assessments and governmental charges or levies imposed upon the Borrower or such Subsidiary, respectively, or upon or in respect of all or any part of the property or business of the Borrower or such Subsidiary, all trade accounts payable in accordance with usual and customary business terms, and all judgments and claims which if unpaid might become a Lien upon any property of the Borrower or such Subsidiary; provided that neither the Borrower nor any such Subsidiary shall be required to pay any such tax, assessment, charge, levy or account payable, judgment or claim if (i) the validity, applicability or amount thereof is being contested in good faith by appropriate actions or proceedings promptly instituted and diligently conducted which will prevent the forfeiture or sale of any property of the Borrower or such Subsidiary or any material interference with the use thereof by the Borrower or such Subsidiary in either case, for the SIDLEY AUSTIN BROWN & WOOD 38 duration of such action or proceeding, and (ii) the Borrower or such Subsidiary shall set aside on its books reserves in conformity with Agreement Accounting Principles deemed by it to be adequate with respect thereto. 6.6. Insurance. The Borrower will, and will cause each Subsidiary to, maintain with financially sound and reputable insurance companies insurance on all their Property in such amounts and covering such risks as is consistent with sound business practice, and the Borrower will furnish to any Administrative Agent and the Lenders upon request full information as to the insurance carried. Upon the request of the Administrative Agent, the Borrower shall deliver to the Administrative Agent and the Lenders, at reasonable intervals (but no more frequently than once in any twelve-month period with respect to any particular coverage), a certificate signed by a Authorized Officer of the Borrower setting forth the nature and extent of all insurance maintained by the Borrower and each Subsidiary in accordance with this Section 6.6 and attaching thereto a certificate of insurance with respect to all such insurance. 6.7. Compliance with Laws. Promptly comply and cause each of its Subsidiaries to comply, with all laws, ordinances or governmental rules and regulations, orders, writs, judgments, injunctions, decrees and awards to which it is subject including, without limitation, ERISA and all Environmental Laws in all applicable jurisdictions, the violation of which could reasonably be expected to materially adversely affect the properties, business or condition (financial or otherwise), operations or prospects of the Borrower or any Subsidiary, or could reasonably be expected to result in the creation of any Lien on any property of the Borrower or any Subsidiary; provided that neither the Borrower nor any such Subsidiary shall be required to comply with any such law, ordinance, rule or regulation, the applicability of which is being contested in good faith by appropriate actions or proceedings promptly instituted and diligently conducted which will prevent the forfeiture or sale of any property of the Borrower or such Subsidiary or any material interference with the use thereof by the Borrower or such Subsidiary in either case, for the duration of such action or proceeding. 6.8. Maintenance of Properties. The Borrower will, and will cause each Subsidiary to, keep and cause each of its Subsidiaries to keep proper books of record and account in which full and correct entries will be made of all dealings or transactions of, or in relation to, the business and affairs of the Borrower or such Subsidiary, in accordance with Agreement Accounting Principles consistently applied (except for changes disclosed in the financial statements furnished pursuant to this Agreement and concurred in by the independent auditors referred to in Section 6.1(j) hereof), and permit the Administrative Agent and any Lender, or their respective representatives and agents, to visit and inspect, under the Borrower's guidance, any of the properties of the Borrower or any of its Subsidiaries, to examine all of their books of account, records, reports and other papers, to make copies and extracts therefrom and to discuss their respective affairs, finances and accounts with their respective officers, employees, and, if there shall have occurred and be continuing a Default, independent auditors (and by this provision the Borrower authorizes said auditors to discuss the finances and finances and affairs of the Borrower and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested; provided that no such inspection or examination shall unreasonably interfere with the business of the Borrower. Following the occurrence and continuance of any Default, the Borrower shall bear the expense of any such inspection or examination. SIDLEY AUSTIN BROWN & WOOD 39 6.9. Further Assurances. At any time and from time to time, the Borrower agrees that the Borrower will cooperate with the Administrative Agent and the Lenders and will execute and deliver, or cause to be executed and delivered, all such further instruments and documents, and will take all such further actions, as the Administrative Agent or any Lender may reasonably request in order to carry out the provisions and purposes of this Agreement or any other Loan Document. 6.10. Restricted Payments. The Borrower will not, nor will it permit any Subsidiary to, declare or pay any dividends or make any distributions on its capital stock (other than dividends payable in its own capital stock) or redeem, repurchase or otherwise acquire or retire any of its capital stock at any time outstanding (each a "RESTRICTED PAYMENT"), except that (i) any Subsidiary may declare and pay dividends or make distributions to the Borrower or to a Wholly-Owned Subsidiary, and (ii) the Borrower may declare or pay dividends or make distributions or redeem, repurchase or otherwise acquire or retire any of its capital stock at any time outstanding in an amount in the aggregate, not to exceed twenty-five percent (25%) of Consolidated Net Income (if positive) earned in each fiscal quarter beginning with the fiscal quarter ending June 30, 2002 through the last day of the fiscal quarter immediately preceding the date such Restricted Payment is made; provided however that before and after giving effect to such Restricted Payment, the Borrower and its Subsidiaries shall be in compliance with the financial covenants contained in Section 6.19, provided, further, however, that for the purposes of determining compliance with this Section 6.10, the Consolidated Fixed Charge Coverage Ratio shall not be less than 1.45 to 1.0 at any time (calculated as of the last day of the fiscal quarter immediately preceding such Restricted Payment as if such Restricted Payment had been made on such prior date) and no Default or Unmatured Default shall have occurred and be continuing or would result from such Restricted Payment. 6.11. Indebtedness. The Borrower will not, nor will it permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except: (a) The Loans. (b) Indebtedness existing on the date hereof and described in Schedule 2, and any refinancing, refundings, renewals or extensions thereof, provided that the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension. (c) Indebtedness evidenced by the Senior Notes in a principal amount outstanding not to exceed $20,000,000 (provided, such Indebtedness shall be repaid in full within two (2) Business Days of the Closing Date). (d) Indebtedness arising from intercompany loans from the Borrower to any guarantor of the Obligations or from any guarantor of the Obligations to the Borrower; provided, that in each case such Indebtedness is unsecured and is subordinated upon terms satisfactory to the Administrative Agent to the obligations of the Borrower and its Subsidiaries with respect to the Obligations. (e) Indebtedness (including all Permitted Purchase Money Indebtedness) secured by Liens, in a principal amount outstanding not to exceed $1,000,000 in the aggregate at any time. SIDLEY AUSTIN BROWN & WOOD 40 (f) Indebtedness not otherwise permitted under this Section 6.11 in a principal amount outstanding not to exceed $2,000,000 in the aggregate at any time. (g) Indebtedness under all Permitted Sale and Leaseback Transactions. (h) Indebtedness with respect to all earn-outs and other similar forms of contingent purchase prices in an amount not to exceed $1,000,000 at any time. 6.12. Merger. The Borrower will not, nor will it permit any Subsidiary to, merge or consolidate with or into any other Person, except (i) a Subsidiary may merge into the Borrower or a Wholly-Owned Subsidiary and (ii) in connection with a Permitted Acquisition, provided however in any such case, the Borrower or the applicable Wholly-Owned Subsidiary must be the surviving entity and after giving effect thereto no Default or Unmatured Default shall exist. 6.13. Sale of Assets. The Borrower will not, nor will it permit any Subsidiary to, lease, sell, transfer, assign or otherwise dispose of its Property to any other Person (each an "ASSET SALE"), except: (a) Sales of inventory in the ordinary course of business. (b) Subject to the mandatory prepayment obligations pursuant to Section 2.7.2 and the proviso below, leases, sales or other dispositions of its Property that, together with all other Property of the Borrower and its Subsidiaries previously leased, sold or disposed of (other than inventory in the ordinary course of business) as permitted by this Section during the twelve-month period ending with the month in which any such lease, sale or other disposition occurs, do not constitute a Substantial Portion of the Property of the Borrower and its Subsidiaries. (c) Subject to the mandatory prepayment obligation pursuant to Section 2.7.2 and the proviso below, the Borrower or any Subsidiary may dispose of any redundant or duplicative assets (determined by management) acquired directly or indirectly in a Permitted Acquisition if such disposition is made pursuant to a plan of disposition consented to by the Administrative Agent within twelve (12) months after the consummating of such Permitted Acquisition. (d) Subject to the mandatory prepayment obligation pursuant to Section 2.7.2, Permitted Sale and Leaseback Transactions. Provided, however, with respect to Sections 6.13(b) and (c), the Net Cash Proceeds of Asset Sales with respect to which the Borrower shall have given the Administrative Agent written notice within thirty (30) days after such Asset Sale of (i) its intention to replace the assets or use such Net Cash Proceeds to acquire other like-kind assets within twelve (12) months following such Asset Sale or (ii) its acquisition of other like-kind assets during the nine-month period preceding such Asset Sale (up to an amount equal to the cash purchase price of such like-kind asset) shall not be subject to the provisions of Section 2.7.2 unless and to the extent that such applicable period shall have expired without such replacement having been made. 6.14. Investments and Acquisitions. The Borrower will not, nor will it permit any Subsidiary to, make or suffer to exist any Investments (including without limitation, loans and SIDLEY AUSTIN BROWN & WOOD 41 advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Acquisition of any Person, except: (a) Cash Equivalent Investments. (b) Existing Investments in Subsidiaries and other Investments in existence on the date hereof and described in Schedule 1. (c) Permitted Investments. 6.15. Liens. The Borrower will not, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the Property of the Borrower or any of its Subsidiaries, except: (a) Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with Agreement Accounting Principles shall have been set aside on its books. (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books. (c) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation. (d) Utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Borrower or its Subsidiaries. (e) Liens existing on the date hereof and described in Schedule 3. (f) Non-consensual Liens arising in connection with court proceedings if (i) such Liens secure monetary or non-monetary judgments or orders not otherwise constituting an Event of Default under Section 7.9 or (ii) the execution or other enforcement of any such Lien is effectively stayed and the claims secured thereby are being contested in good faith in such manner that the property subject to any such lien is not subject to forfeiture, and further provided that adequate reserves are established and maintained by the Borrower in accordance with Agreement Accounting Principles. (g) Liens existing on property at the time of a Permitted Acquisition by the Borrower or its Subsidiaries of such property (or of the entity owning such property) provided that such Lien was not created in anticipation of such acquisition and that any such Lien does not extend to any other property of the Borrower or its Subsidiaries. SIDLEY AUSTIN BROWN & WOOD 42 (h) Liens securing Indebtedness permitted under Section 6.11(e). 6.16. Consolidated Rentals. The Borrower will not, nor will it permit any Subsidiary, to, create, incur or suffer to exist obligations for Consolidated Rentals in excess of (i) $26,000,000 during the fiscal year ending December 31, 2002, (ii) $26,500,000 during the fiscal year ending December 31, 2003 and (iii) $27,800,000 during the fiscal year ending December 31, 2004 and each fiscal year thereafter. 6.17. Affiliates. The Borrower will not, and will not permit any Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate except in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arms-length transaction. 6.18. ERISA. Except to the extent that such act, or failure to act would not result singly, or in the aggregate, after taking into account all other such acts or failures to act, in a liability which might be reasonably expected materially to adversely affect the ability of the Company and the members of the Controlled Group, taken as a whole, to carry on business substantially as now being or heretofore conducted, or to materially adversely affect the financial condition of the company and the members of the Controlled Group taken as a whole, (i) engage, or permit any Controlled Group member to engage, in any prohibited transaction described in Sections 406 of ERISA or 4975 of the Code for which a statutory or class exemption is not available or a private exemption has not been previously obtain from the DOL, (ii) permit to exist any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the Code); (iii) fail, or permit any member of its Controlled Group to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency of any Plan; (iv) terminate, or permit any member of its Controlled Group to terminate, any Plan which would result in any liability of the Company or any member of its Controlled Group under Title IV of ERISA; (v) fail to make any contribution or payment to any Multiemployer Plan which the Company or any member of its Controlled Group may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto; (vi) fail, or permit any member of its controlled Group to fail, to pay any required installment or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment, (vii) amend, or permit any member of its controlled Group to amend, a Plan resulting in an increase in current liability for the plan year such that the Company or any member of its Controlled Group is required to provide security to such Plan under Section 401(a)(29) of the Code. 6.19. Financial Covenants. 6.19.1. Fixed Charge Coverage Ratio. The Borrower will not permit the ratio (the "CONSOLIDATED FIXED CHARGE COVERAGE RATIO") of (i) Consolidated EBITDA plus Consolidated Rentals minus Consolidated Capital Expenditures (the deduction of Consolidated Capital Expenditures beginning on April 1, 2003, but excluding from such deduction Permitted Acquisitions consummated on or after April 1, 2003) to (ii) Consolidated Interest Expense, plus Restricted Payments, plus Consolidated Rentals, plus current maturities of principal SIDLEY AUSTIN BROWN & WOOD 43 Indebtedness, plus expense for taxes paid or accrued, all calculated for the Borrower and its Subsidiaries on a consolidated basis, as of the last day of any fiscal quarter as set forth in the table below. The Consolidated Fixed Charge Coverage Ratio shall be determined as of the last day of each fiscal quarter for the four fiscal quarter period ending on such day, calculated, with respect to Permitted Acquisitions, on a pro forma basis using historical audited and reviewed unaudited financial statements obtained from the seller(s) in such Permitted Acquisition (adjusted for non-recurring seller expenses and other add-backs to Consolidated EBITDA, in each case, agreed upon by the Borrower and the Administrative Agent) and reasonably acceptable to the Administrative Agent, broken down by fiscal quarter in the Borrower's reasonable judgment and satisfactory to the Administrative Agent; provided, however, to the extent such seller does not provide historical audited financial statements, such financial information (excluding Indebtedness incurred with respect to such Permitted Acquisitions) shall not be included in such calculations; provided, further, that for purposes of calculating Consolidated Capital Expenditures for the last three fiscal quarters of 2003, (a) Consolidated Capital Expenditures as of the end of the fiscal quarter ending June 30, 2003 shall be equal to Consolidated Capital Expenditures for the period beginning on April 1, 2003 through and including June 30, 2003 multiplied by four (4), (b) Consolidated Capital Expenditures as of the end of the fiscal quarter ending September 30, 2003 shall be equal to Consolidated Capital Expenditures for the period beginning on April 1, 2003 through and including September 30, 2003 multiplied by two (2), and (c) Consolidated Capital Expenditures as of the end of the fiscal quarter ending December 31, 2003 shall be equal to Consolidated Capital Expenditures for the period beginning on April 1, 2003 through and including December 31, 2003 multiplied by four-thirds (4/3).
Fiscal Quarter Ending Fixed Charge Coverage Ratio --------------------- --------------------------- March 31, 2002 1.30 to 1.0 June 30, 2002 1.23 to 1.0 September 30, 2002 1.25 to 1.0 December 31, 2002 1.35 to 1.0 March 31, 2003 1.10 to 1.0 June 30, 2003 and each fiscal quarter 1.0 to 1.0 ending thereafter.
6.19.2. Leverage Ratio. The Borrower will not permit the ratio (the "LEVERAGE RATIO") of (i) Consolidated Indebtedness minus cash on the balance sheet of the Borrower and its Subsidiaries, on a Consolidated basis, in excess of $5,000,000 to (ii) Consolidated EBITDA as of the end of each fiscal quarter to be greater than 1.5 to 1.0. The Leverage Ratio shall be calculated, in each case, as of the last day of each fiscal quarter based upon (a) for Consolidated Indebtedness, Consolidated Indebtedness as of the last day of each such fiscal quarter; and (b) for Consolidated EBITDA, the actual amount for the four-quarter period ending on such day, calculated, with respect to Permitted Acquisitions, on a pro forma basis using historical audited and reviewed unaudited financial statements obtained from the seller(s) in such Permitted SIDLEY AUSTIN BROWN & WOOD 44 Acquisition (adjusted for non-recurring seller expenses and other add-backs to Consolidated EBITDA, in each case, agreed upon by the Borrower and the Administrative Agent) and reasonably acceptable to the Administrative Agent, broken down by fiscal quarter in the Borrower's reasonable judgment and satisfactory to the Administrative Agent; provided, however, to the extent such seller does not provide historical audited financial statements, such financial information (excluding Indebtedness incurred with respect to such Permitted Acquisitions) shall not be included in such calculations. 6.19.3. Minimum Net Worth. The Borrower will at all times maintain Consolidated Net Worth of not less than the sum of (i) $180,000,000 plus (ii) 50% of Consolidated Net Income (if positive) earned in each fiscal quarter beginning with the fiscal quarter ending March 31, 2002. 6.19.4. 2002 Capital Expenditures. The Borrower will not, nor will it permit any Subsidiary to, expend, or be committed to expend, amounts for Capital Expenditures (other than the purchase price of any Permitted Acquisition and any Indebtedness incurred in connection therewith), (i) in excess of $23,000,000 during the period commencing on January 1, 2002 through December 31, 2002, in the aggregate, for the Borrower and its Subsidiaries and (ii) in excess of $1,500,000 plus an amount equal to (A) $23,000,000 minus (B) actual Capital Expenditures (other than the purchase price of any Permitted Acquisition and any Indebtedness incurred in connection therewith) for the period commencing on January 1, 2002 through December 31, 2002 of the Borrower and its Subsidiaries in the aggregate) for the fiscal quarter ending March 31, 2003 in the aggregate for the Borrower and its Subsidiaries. 6.19.5. Liquidity. The Borrower and its Subsidiaries, on a consolidated basis, will not permit, as of last day of any fiscal quarter, the sum of (a) all cash and Cash Equivalent Investments as of such date plus (b) the Aggregate Available Commitment as of such date, to be less than $10,000,000. 6.20. Addition of Guaranty; Guarantors. Promptly but in any event within fifteen (15) days after any domestic Subsidiary becomes a Material Subsidiary of the Borrower, the Borrower shall cause each such Material Subsidiary to execute and deliver to the Administrative Agent a Guaranty. 6.21. Sale and Leaseback Transactions and other Off-Balance Sheet Liabilities. The Borrower will not, nor will it permit any Subsidiary to, enter into or suffer to exist any (i) Sale and Leaseback Transaction or (ii) any other transaction pursuant to which it incurs or has incurred Off-Balance Sheet Liabilities, except for Permitted Sale and Leaseback Transactions. ARTICLE VII DEFAULTS The occurrence of any one or more of the following events shall constitute a Default: 7.1. Breach of Representations or Warranties. Any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries to the Lenders or the Administrative Agent under or in connection with this Agreement, any Loan, or any certificate or SIDLEY AUSTIN BROWN & WOOD 45 information delivered in connection with this Agreement or any other Loan Document shall be false in any material respect on the date as of which made. 7.2. Failure to Make Payments When Due. Nonpayment of (i) principal of any Loan when due, or (ii) interest upon any Loan or any Commitment Fee or other Obligations under any of the Loan Documents within five (5) Business Days after such interest, fee or other Obligation becomes due and payable. 7.3. Breach of Covenants. The breach by the Borrower of any of the terms or provisions of Section 6.3 or Sections 6.10 through 6.21. 7.4. Other Breaches. The breach by the Borrower (other than a breach which constitutes a Default under another Section of this Article VII) of any of the terms or provisions of this Agreement or any other Loan Document which is not remedied within thirty (30) days after the earlier of (i) the date the Borrower or any Subsidiary shall have knowledge of the occurrence thereof and (ii) written notice thereof shall have been given to the Borrower. 7.5. Default as to Other Indebtedness. (i) Failure of the Borrower or any of its Subsidiaries to pay when due and payable (whether at stated maturity, by acceleration or otherwise) any Indebtedness which, individually or in the aggregate exceeds $2,000,000 or the equivalent thereof in currencies other than Dollars) (the indebtedness described in this clause (i) being referred to as "MATERIAL INDEBTEDNESS") and such default continues after the applicable grace period applicable thereto; or (ii) Any Material Indebtedness of the Borrower or any of its Subsidiaries shall be declared to be due and payable or required to be prepaid or repurchased (other than by a regularly scheduled payment) prior to the stated maturity thereof; or (iii) The Borrower or any of its Subsidiaries shall fail to pay, or shall admit in writing its inability to pay, its debts generally as they become due; or (iv) The default by the Borrower or any of its Subsidiaries in the performance (beyond the applicable grace period with respect thereto, if any) of any term, provision or condition contained in any agreement under which any such Material Indebtedness was created or is governed, or any other event shall occur or condition exist, the effect of which default or event is to cause, or to permit the holder or holders (or trustee on behalf of any such holder) of such Material Indebtedness to cause such Material Indebtedness to become due prior to its stated maturity. 7.6. Voluntary Bankruptcy; Appointment of Receiver; Etc. The Borrower or any of its Subsidiaries shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of SIDLEY AUSTIN BROWN & WOOD 46 it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate or partnership action to authorize or effect any of the foregoing actions set forth in this Section 7.6, or (vi) fail to contest in good faith any appointment or proceeding described in Section 7.7. 7.7. Involuntary Bankruptcy; Appointment of Receiver; Etc. Without the application, approval or consent of the Borrower or any of its Subsidiaries, a receiver, trustee, custodian, examiner, liquidator or similar official shall be appointed for the Borrower or any of its Subsidiaries or any Substantial Portion of its Property, or a proceeding described in Section 7.6(iv) shall be instituted against the Borrower or any of its Subsidiaries and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of sixty (60) consecutive days. 7.8. Custody or Control of Property. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of, all or any portion of the Property of the Borrower and its Subsidiaries which, when taken together with all other Property of the Borrower and its Subsidiaries so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such action occurs, constitutes a Substantial Portion. 7.9. Judgments. The Borrower or any of its Subsidiaries shall fail within thirty (30) days of the later of the date of entry or the due date, to pay, bond or otherwise discharge one or more (i) judgments or orders for the payment of money (except to the extent covered by independent third party insurance as to which the insurer has not disclaimed coverage) in excess of $2,000,000 (or the equivalent thereof in currencies other than Dollars) in the aggregate, or (ii) nonmonetary judgments or orders which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, which judgment(s), in any such case, is/are not stayed on appeal or otherwise being appropriately contested in good faith. 7.10. Unfunded Liabilities. The sum of (a) the Unfunded Liabilities of all Plans and (b) the present value of the aggregate unfunded liabilities to provide the accrued benefits under all Foreign Pension Plans exceeds in the aggregate an amount equal to the sum of (i) ten percent (10%) of the value (as of any date of determination) of all Plan assets allocable to Plan benefits guaranteed by ERISA and (ii) ten percent (10%) of the fair market value of the assets held in trust or other funding vehicles for accrued benefits under all Foreign Pension Plans, or any Reportable Event shall occur in connection with any Plan, which could reasonably be expected to result in liability of the Borrower or any of its Subsidiaries, individually or in the aggregate, in excess of $3,000,000. 7.11. Other ERISA Liabilities. The Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that it has incurred withdrawal liability or become obligated to make contributions to a Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Borrower or any other member of the Controlled Group as withdrawal liability (determined as of the date of such notification), exceeds $2,000,000 or requires payments exceeding $2,000,000 per annum. SIDLEY AUSTIN BROWN & WOOD 47 7.12. Environmental Matters. The Borrower or any of its Subsidiaries shall (i) be the subject of any proceeding or investigation pertaining to the release by the Borrower, any of its Subsidiaries or any other Person of any toxic or hazardous waste or substance into the environment, or (ii) violate any Environmental Law, which, in the case of an event described in clause (i) or clause (ii), could reasonably be expected to have a Material Adverse Effect. 7.13. Change in Control. Any Change in Control shall occur. 7.14. Other Default. The occurrence of any "default", as defined in any Loan Document (other than this Agreement) or the breach of any of the terms or provisions of any Loan Document (other than this Agreement), which default or breach continues beyond any period of grace therein provided. Any material provision of any Loan Document after delivery thereof pursuant to the terms hereof or of any other Loan Document shall for any reason cease to be valid and binding on or enforceable against the Borrower or the Borrower shall so state in writing. 7.15. Rate Management Obligation. Nonpayment by the Borrower or any Subsidiary of any Rate Management Obligation when due or the breach by the Borrower or any Subsidiary of any term, provision or condition contained in any Rate Management Transaction, and such default continues after the applicable grace period applicable thereto. 7.16. Loss of Licenses. Any governmental authority revokes or fails to renew any material license, permit or franchise of the Borrower or any Subsidiary, or the Borrower or any Subsidiary for any reason loses any material license, permit or franchise, or the Borrower or any Subsidiary suffers the imposition of any restraining order, escrow, suspension or impound of funds in connection with any proceeding (judicial or administrative) with respect to any material license, permit or franchise, which could reasonably be expected to result in (i) a reduction of Consolidated Net Income attributable thereto in excess of $2,000,000 or (ii) losses or liability of the Borrower or any of its Subsidiaries, individually or in the aggregate, in excess of $2,000,000. 7.17. Material Adverse Change. The Borrower or its Subsidiaries have a Material Adverse Change. 7.18. Guaranty. Any guaranty shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or unenforceability of any guaranty, or any Material Subsidiary, which pursuant to Section 6.20 becomes a guarantor, shall fail to comply with any of the terms or provisions of any such Guaranty to which it is a party, or any Guarantor shall deny that it has any further liability under any Guaranty to which it is a party, or shall give notice to such effect. ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 8.1. Acceleration. If any Default described in Section 7.6 or 7.7 occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Administrative Agent or any Lender. If any other Default occurs or any SIDLEY AUSTIN BROWN & WOOD 48 material adverse change in the business, operations, prospects or financial condition of the Borrower which, if uncorrected, would in the reasonable good faith judgment of the Required Lenders result in any other Default, the Required Lenders (or the Administrative Agent with the consent of the Required Lenders) may terminate or suspend the obligations of the Lenders to make Loans hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives. If, within thirty (30) days after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make Loans hereunder as a result of any Default (other than any Default as described in Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Administrative Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. 8.2. Amendments. Subject to the provisions of this Article VIII, the Required Lenders (or the Administrative Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or thereunder or waiving any Default hereunder or thereunder; provided, however, that no such supplemental agreement shall, without the consent of each Lender affected thereby: (i) Extend the final maturity of any Loan or forgive all or any portion of the principal amount thereof, or reduce the rate or extend the time of payment of interest or fees thereon (other than a waiver of the application of the default rate of interest pursuant to Section 2.11 hereof). (ii) Reduce the percentage specified in the definition of Required Lenders or any other percentage of Lenders specified to be the applicable percentage in this Agreement to act on specified matters or amend the definitions of "Required Lenders" or "Pro Rata Share". (iii) Extend the Converted Loan Termination Date or the Commitment Termination Date or increase the amount or otherwise extend the term of the Commitment of any Lender hereunder. (iv) Permit the Borrower to assign its rights or obligations under this Agreement. (v) Except in accordance with the terms of the Loan Documents, release any guarantor of the Obligations or all or substantially all of the collateral, if any, securing the Obligations. (vi) Amend this Section 8.2. No amendment of any provision of this Agreement relating to the Administrative Agent shall be effective without the written consent of the Administrative Agent. The Administrative Agent SIDLEY AUSTIN BROWN & WOOD 49 may waive payment of the fee required under Section 12.3.2 without obtaining the consent of any other party to this Agreement. 8.3. Preservation of Rights. No delay or omission of the Lenders or the Administrative Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Loan notwithstanding the existence of a Default or Unmatured Default or the inability of the Borrower to satisfy the conditions precedent to such Loan shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by, or by the Administrative Agent with the consent of, the requisite number of Lenders required pursuant to Section 8.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Administrative Agent and the Lenders until all of the Obligations have been paid in full. ARTICLE IX GENERAL PROVISIONS 9.1. Survival of Representations. All representations and warranties of the Borrower contained in this Agreement shall survive the making of the Loans herein contemplated. 9.2. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. 9.3. Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 9.4. Entire Agreement. The Loan Documents embody the entire agreement and understanding among the Borrower, the Administrative Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the Administrative Agent and the Lenders relating to the subject matter thereof other than the fee letter described in Section 10.13. 9.5. Several Obligations; Benefits of this Agreement. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Administrative Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns, provided, however, that the parties hereto expressly agree that the Arranger shall enjoy the benefits of the provisions of Sections 9.6, 9.10, 10.11, and 10.13 to the extent specifically set forth therein and shall have the right to enforce such provisions on its own behalf and in its own name to the same extent as if it were a party to this Agreement. SIDLEY AUSTIN BROWN & WOOD 50 9.6. Expenses; Indemnification. (i) The Borrower shall reimburse the Administrative Agent and the Arranger for any costs, internal charges and out-of-pocket expenses (including reasonable attorneys' and paralegals' fees, time charges and expenses of attorneys and paralegals for the Administrative Agent and Arrangers, which attorneys and paralegals may or may not be employees of the Administrative Agent or the Arranger, and expenses of and fees for other advisors and professionals engaged by the Administrative Agent or the Arranger) paid or incurred by the Administrative Agent or the Arranger in connection with the investigation, preparation, negotiation, documentation, execution, delivery, syndication, distribution (including, without limitation, via the internet), review, amendment, modification, administration and collection of the Loan Documents. The Borrower also agrees to reimburse the Administrative Agent, the Arranger and the Lenders for any costs, internal charges and out-of-pocket expenses (including attorneys' and paralegals' fees, time charges and expenses of attorneys and paralegals for the Administrative Agent, the Arranger and the Lenders, which attorneys and paralegals may be employees of the Administrative Agent, the Arranger or the Lenders) paid or incurred by the Administrative Agent, the Arranger or any Lender in connection with the collection and enforcement of the Loan Documents. Expenses being reimbursed by the Borrower under this Section 9.6 include, without limitation, costs and expenses incurred in connection with the Reports described in the following sentence. The Borrower acknowledges that from time to time LaSalle Bank may prepare and may distribute to the Lenders (but shall have no obligation or duty to prepare or to distribute to the Lenders) certain audit reports (the "REPORTS") pertaining to the Borrower's assets for internal use by LaSalle Bank from information furnished to it by or on behalf of the Borrower, after LaSalle Bank has exercised its rights of inspection pursuant to this Agreement. (ii) The Borrower hereby further agrees to indemnify the Administrative Agent, the Arranger, each Lender, their respective affiliates, and each of their directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all reasonable expenses of litigation or preparation therefor whether or not the Administrative Agent, the Arranger, any Lender or any affiliate is a party thereto, and all reasonable attorneys' and paralegals' fees, time charges and expenses of attorneys and paralegals of the party seeking indemnification, which attorneys and paralegals may or may not be employees of such party seeking indemnification) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Loan hereunder, except to the extent that the same arose or resulted solely from the gross negligence or willful misconduct of the party seeking indemnification. The obligations of the Borrower under this Section 9.6 shall survive the termination of this Agreement. 9.7. Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to the Administrative Agent with sufficient counterparts so that the Administrative Agent may furnish one to each of the Lenders, to the extent that the Administrative Agent deems necessary. SIDLEY AUSTIN BROWN & WOOD 51 9.8. Accounting. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with Agreement Accounting Principles. If any changes in generally accepted accounting principles are hereafter required or permitted and are adopted by the Borrower or any of its Subsidiaries with the agreement of its independent certified public accountants and such changes result in a change in the method of calculation of any of the financial covenants, tests, restrictions or standards herein or in the related definitions or terms used therein ("ACCOUNTING CHANGES"), the parties hereto agree, at the Borrower's request, to enter into negotiations, in good faith, in order to amend such provisions in a credit neutral manner so as to reflect equitably such changes with the desired result that the criteria for evaluating the Borrower's and its Subsidiaries' financial condition shall be the same after such changes as if such changes had not been made; provided, however, until such provisions are amended in a manner reasonably satisfactory to the Administrative Agent and the Required Lenders, no Accounting Change shall be given effect in such calculations and all financial statements and reports required to be delivered hereunder shall be prepared in accordance with Agreement Accounting Principles without taking into account such Accounting Changes. In the event such amendment is entered into, all references in this Agreement to Agreement Accounting Principles shall mean generally accepted accounting principles as of the date of such amendment. 9.9. Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 9.10. Nonliability of Lenders. The relationship between the Borrower on the one hand and the Lenders and the Administrative Agent on the other hand shall be solely that of borrower and lender. None of the Administrative Agent, the Arranger or any Lender shall have any fiduciary responsibilities to the Borrower. None of the Administrative Agent, the Arranger or any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. The Borrower agrees that none of the Administrative Agent, the Arranger or any Lender shall have liability to the Borrower (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined that such losses resulted solely from the gross negligence or willful misconduct of the party from which recovery is sought. None of the Administrative Agent, the Arranger or any Lender shall have any liability with respect to, and the Borrower hereby waives, releases and agrees not to sue for, any special, indirect, consequential or punitive damages suffered by the Borrower in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby. 9.11. Confidentiality. Each Lender agrees to hold any confidential information which it may receive from the Borrower pursuant to this Agreement in confidence, except for disclosure (i) to its Affiliates and to other Lenders and their respective Affiliates, (ii) to legal counsel, accountants, and other professional advisors to such Lender or to a Transferee or prospective Transferee, (iii) to regulatory officials, (iv) to any Person as requested pursuant to or as required SIDLEY AUSTIN BROWN & WOOD 52 by law, regulation, or legal process, (v) to any Person in connection with any legal proceeding to which such Lender is a party, (vi) to such Lender's direct or indirect contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties, and (vii) permitted by Section 12.4. 9.12. Lenders Not Utilizing Plan Assets. None of the consideration used by any of the Lenders to make its Loans constitutes for any purpose of ERISA or Section 4975 of the Code assets of any "plan" as defined in Section 3(3) of ERISA or Section 4975 of the Code and the rights and interests of each of the Lenders in and under the Loan Documents shall not constitute such "plan assets" under ERISA. 9.13. Nonreliance. Each Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for herein. 9.14. Disclosure. The Borrower and each Lender hereby acknowledge and agree that LaSalle Bank and/or its respective Affiliates and certain of the other Lenders and/or their respective Affiliates from time to time may hold investments in, make other loans to or have other relationships with the Borrower and its Affiliates. 9.15. Subordination of Intercompany Indebtedness. The Borrower agrees that any and all claims of the Borrower with respect to any "Intercompany Indebtedness" (as hereinafter defined) against any of its Subsidiaries that is a guarantor of the Obligations, any endorser, obligor or any other guarantor of all or any part of the Obligations (each a "GUARANTOR"), or against any of its properties shall be subordinate and subject in right of payment to the prior payment, in full and in cash, of all Obligations; provided that, and not in contravention of the foregoing, so long as no Default has occurred and is continuing the Borrower may make loans to and receive payments in the ordinary course with respect to such Intercompany Indebtedness from each such Guarantor to the extent not prohibited by the terms of this Agreement and the other Loan Documents. Notwithstanding any right of the Borrower to ask, demand, sue for, take or receive any payment from any Guarantor, all rights, liens and security interests of the Borrower, whether now or hereafter arising and howsoever existing, in any assets of any Guarantor shall be and are subordinated to the rights of the holders of the Obligations and the Administrative Agent in those assets. The Borrower shall have no right to possession of any such asset or to foreclose upon any such asset, whether by judicial action or otherwise, unless and until all of the Obligations (other than contingent indemnity obligations) shall have been fully paid and satisfied (in cash) and all financing arrangements pursuant to any Loan Document have been terminated. If all or any part of the assets of any Guarantor, or the proceeds thereof, are subject to any distribution, division or application to the creditors of such Guarantor, whether partial or complete, voluntary or involuntary, and whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors or any other action or proceeding, or if the business of any such Guarantor is dissolved or if substantially all of the assets of any such Guarantor are sold, then, and in any such event (such events being herein referred to as an "Insolvency Event"), any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable upon or with respect to any indebtedness of any Guarantor to the Borrower ("INTERCOMPANY INDEBTEDNESS") shall be paid or delivered directly to the Administrative Agent for application on any of the SIDLEY AUSTIN BROWN & WOOD 53 Obligations, due or to become due, until such Obligations (other than contingent indemnity obligations) shall have first been fully paid and satisfied (in cash). Should any payment, distribution, security or instrument or proceeds thereof be received by the Borrower upon or with respect to the Intercompany Indebtedness after an Insolvency Event prior to the satisfaction of all of the Obligations (other than contingent indemnity obligations) and the termination of all financing arrangements pursuant to any Loan Document, the Borrower shall receive and hold the same in trust, as trustee, for the benefit of the holders of the Obligations and shall forthwith deliver the same to the Administrative Agent, for the benefit of such Persons, in precisely the form received (except for the endorsement or assignment of the Borrower where necessary), for application to any of the Obligations, due or not due, and, until so delivered, the same shall be held in trust by the Borrower as the property of the holders of the Obligations. If the Borrower fails to make any such endorsement or assignment to the Administrative Agent, the Administrative Agent or any of its officers or employees are irrevocably authorized to make the same. The Borrower agrees that until the Obligations (other than the contingent indemnity obligations) have been paid in full (in cash) and satisfied and all financing arrangements pursuant to any Loan Document have been terminated, the Borrower will not assign or transfer to any Person (other than the Administrative Agent) any claim the Borrower has or may have against any Guarantor. ARTICLE X THE AGENT 10.1. Appointment; Nature of Relationship. LaSalle Bank is hereby appointed by each of the Lenders as the Administrative Agent hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Administrative Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. The Administrative Agent agrees to act as such contractual representative upon the express conditions contained in this Article X. Notwithstanding the use of the defined term "ADMINISTRATIVE AGENT", it is expressly understood and agreed that the Administrative Agent shall not have any fiduciary responsibilities to any Lender by reason of this Agreement or any other Loan Document and that the Administrative Agent is merely acting as the contractual representative of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders' contractual representative, the Administrative Agent (i) does not hereby assume any fiduciary duties to any of the Lenders, (ii) is a "representative" of the Lenders within the meaning of Section 9-105 of the Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders hereby agrees to assert no claim against the Administrative Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender hereby waives. 10.2. Powers. The Administrative Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Administrative Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Administrative Agent shall have no implied duties or fiduciary duties to the Lenders or any SIDLEY AUSTIN BROWN & WOOD 54 obligation to the Lenders to take any action thereunder, except any action specifically provided by the Loan Documents to be taken by the Administrative Agent. 10.3. General Immunity. Neither the Administrative Agent or any of its directors, officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final, non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person. 10.4. No Responsibility for Loans, Recitals, etc. Neither the Administrative Agent or any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered solely to the Administrative Agent; (d) the existence or possible existence of any Default or Unmatured Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any collateral security; or (g) the financial condition of the Borrower or any guarantor of any of the Obligations or of any of the Borrower's or any such guarantor's respective Subsidiaries. The Administrative Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Administrative Agent at such time, but is voluntarily furnished by the Borrower to the Administrative Agent (either in its capacity as an Agent or in its individual capacity). 10.5. Action on Instructions of Lenders. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders (or all of the Lenders in the event that and to the extent that this Agreement expressly requires such), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless they shall be requested in writing to do so by the Required Lenders (or all of the Lenders in the event that and to the extent that this Agreement expressly requires such). The Administrative Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 10.6. Employment of the Administrative Agent and Counsel. The Administrative Agent may execute any of its respective duties as the Administrative Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with SIDLEY AUSTIN BROWN & WOOD 55 reasonable care. The Administrative Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Administrative Agent and the Lenders and all matters pertaining to the Administrative Agent's duties hereunder and under any other Loan Document. 10.7. Reliance on Documents; Counsel. The Administrative Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Administrative Agent, which counsel may be employees of the Administrative Agent. 10.8. Administrative Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Administrative Agent ratably in proportion to the Lenders' Pro Rata Shares of the Aggregate Commitment (or, after the Commitment Termination Date, of the Aggregate Outstanding Credit Exposure) (i) for any amounts not reimbursed by the Borrower for which the Administrative Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by the Administrative Agent on behalf of the Lenders in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, but not limited to, for any expenses incurred by the Administrative Agent in connection with any dispute between the Administrative Agent and any Lender or between two or more of the Lenders) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against the Administrative Agent in connection with any dispute between the Administrative Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, provided that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final, non-appealable judgment in a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Administrative Agent and (ii) any indemnification required pursuant to Section 3.5(vii) shall, notwithstanding the provisions of this Section 10.8, be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this Section 10.8 shall survive payment of the Obligations and termination of this Agreement. 10.9. Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless the Administrative Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. 10.10. Rights as a Lender. In the event the Administrative Agent is a Lender, the Administrative Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment and its Loans as any Lender and may exercise the same as though it were not the Administrative Agent, and the term "Lender" or "Lenders" shall, at any time when the Administrative Agent is a Lender, unless the context otherwise indicates, SIDLEY AUSTIN BROWN & WOOD 56 include the Administrative Agent in its individual capacity. The Administrative Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. 10.11. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Arranger or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Arranger or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 10.12. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Administrative Agent or, if no successor Administrative Agent has been appointed, forty-five (45) days after the Administrative Agent gives notice of its intention to resign. The Administrative Agent may be removed at any time with or without cause by written notice received by the Administrative Agent from the Required Lenders, such removal to be effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders within thirty (30) days after the resigning Administrative Agent's giving notice of its intention to resign, then the resigning Administrative Agent may appoint, on behalf of the Borrower and the Lenders, a successor Administrative Agent. Notwithstanding the previous sentence, the Administrative Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates which is a commercial bank as its successor Administrative Agent hereunder. If an Administrative Agent has resigned or been removed and no successor Administrative Agent has been appointed, the Lenders may perform all the duties of the Administrative Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Administrative Agent shall be deemed to be appointed hereunder until such successor Administrative Agent has accepted the appointment. Any such successor Administrative Agent shall be a commercial bank having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as the Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Administrative Agent. Upon the effectiveness of the resignation or removal of the Administrative Agent, the resigning or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of the Administrative Agent, the provisions of this Article X shall continue in effect for the benefit of the Administrative Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent hereunder and under the other Loan Documents. In the event SIDLEY AUSTIN BROWN & WOOD 57 that there is a successor to the Administrative Agent by merger, or the Administrative Agent assigns its duties and obligations to an Affiliate pursuant to this Section 10.12, then (a) the term "Prime Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Administrative Agent and (b) the references to "LaSalle Bank" in the definitions of "LIBOR Base Rate" and "Prime Rate" and in the last sentence of Section 2.12 shall be deemed to be a reference to such successor Administrative Agent in its individual capacity. 10.13. Agent and Arranger Fees. The Borrower agrees to pay to the Administrative Agent and the Arranger, for their respective accounts, the fees agreed to by the Borrower, the Administrative Agent and the Arranger pursuant to that certain letter agreement dated February 11, 2002, or as otherwise agreed from time to time. 10.14. Delegation to Affiliates. The Borrower and the Lenders agree that the Administrative Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Administrative Agent is entitled under Articles IX and X. ARTICLE XI SETOFF; RATABLE PAYMENTS 11.1. Setoff. In addition to, and without limitation of, any rights of the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender or any Affiliate of any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part thereof, shall then be due. 11.2. Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon its Loans then due and payable (other than payments received pursuant to Section 3.1, 3.2, 3.4 or 3.5) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a participation in the Aggregate Outstanding Credit Exposure held by the other Lenders so that after such purchase each Lender will hold its Pro Rata Share of the Aggregate Outstanding Credit Exposure. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their respective Pro Rata Shares of the Aggregate Outstanding Credit Exposure . In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS SIDLEY AUSTIN BROWN & WOOD 58 12.1. Successors and Assigns. 12.1.1. Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and the Lenders and their respective successors and assigns, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents without the consent of all of the Lenders, and any such assignment in violation of this Section 12.1.1 shall be null and void, and (ii) any assignment by any Lender must be made in compliance with Section 12.3. The parties to this Agreement acknowledge that clause (ii) of this Section 12.1.1 relates only to absolute assignments and does not prohibit assignments creating security interests, including, without limitation, (x) any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank or (y) in the case of a Lender which is a fund, any pledge or assignment of all or any portion of its rights under this Agreement and any Note to its trustee in support of its obligations to its trustee; provided, however, that no such pledge or assignment creating a security interest shall release the transferor Lender from its obligations hereunder unless and until the parties thereto have complied with the provisions of Section 12.3. The Administrative Agent may treat the Person which made any Loan or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with Section 12.3; provided, however, that the Administrative Agent may in its discretion (but shall not be required to) follow instructions from the Person which made any Loan or which holds any Note to direct payments relating to such Loan or Note to another Person. Any assignee of the rights to any Loan or any Note agrees by acceptance of such assignment to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Loan (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder or assignee of the rights to such Loan. 12.2. Participations. 12.2.1. Permitted Participants; Effect. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("PARTICIPANTS") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of its Loans and the holder of any Note issued to it in evidence thereof for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. 12.2.2. Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Loan or SIDLEY AUSTIN BROWN & WOOD 59 Commitment in which such Participant has an interest which (i) extends the final maturity of any Loan or forgives all or a portion of the principal amount thereof or interest or fees thereon, or reduces the rate or extends the time of payment of interest or fees on any such Loan or the related Commitment or (ii) extends the Commitment Termination Date, or (ii) releases any guarantor of the Obligations or all or substantially all of the collateral, if any, securing the Obligations. 12.2.3. Benefit of Setoff. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.1 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.1, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.2 as if each Participant were a Lender. 12.3. Assignments. 12.3.1. Permitted Assignments. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities ("PURCHASERS") all or any part of its rights and obligations under the Loan Documents. Such assignment shall be evidenced by an agreement substantially in the form of Exhibit C or in such other form as may be agreed to by the parties thereto (each such agreement, an "ASSIGNMENT AGREEMENT"). The consent of the Borrower and the Administrative Agent shall be required prior to an Assignment Agreement becoming effective with respect to a Purchaser which is not a Lender, an Affiliate thereof, provided, however, that if a Default has occurred and is continuing, the consent of the Borrower shall not be required. Such consent shall not be unreasonably withheld or delayed. Each such assignment with respect to a Purchaser which is not a Lender, an Affiliate thereof shall (unless each of the Borrower and the Administrative Agent otherwise consents) be in an amount not less than the lesser of (i) $5,000,000 and integral multiples of $1,000,000 in excess thereof or (ii) the remaining amount of the assigning Lender's Commitment (calculated as at the date of such assignment), or, if the Commitment Termination Date has occurred, the remaining amount of the assigning Lender's Outstanding Credit Exposure. 12.3.2. Effect; Effective Date. Upon (i) delivery to the Administrative Agent of an Assignment Agreement, together with any consents required by Section 12.3.1, and (ii) payment by the assigning Lender of a $3,500 fee to the Administrative Agent for processing such assignment (unless such fee is waived by the Administrative Agent), such assignment shall become effective on the effective date specified in such assignment. The Assignment Agreement shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Loans under the applicable Assignment Agreement constitutes "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by or on behalf of the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same SIDLEY AUSTIN BROWN & WOOD 60 extent as if it were an original party hereto, and no further consent or action by the Borrower, the Lenders or the Administrative Agent shall be required to release the transferor Lender with respect to the percentage of the Aggregate Commitment and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3.2, the transferor Lender, the Administrative Agent and the Borrower shall, if the transferor Lender or the Purchaser desires that its Loans be evidenced by Notes, make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments (or, if the Commitment Termination Date has occurred, their respective Outstanding Credit Exposure), as adjusted pursuant to such assignment. 12.3.3. The Register. Notwithstanding anything to the contrary in this Agreement, the Borrower hereby designates the Administrative Agent, and the Administrative Agent, hereby accepts such designation, to serve as the Borrower's contractual representative solely for purposes of this Section 12.3.3. In this connection, the Administrative Agent shall maintain at its address referred to in Section 13.1 a copy of each Assignment Agreement delivered to and accepted by it pursuant to this Section 12.3.3 and a register (the "REGISTER") for the recordation of the names and addresses of the Lenders and the Commitment of, principal amount of and interest on the Loans owing to, each Lender from time to time and whether such Lender is an original Lender or the assignee of another Lender pursuant to an assignment under this Section 12.3. The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower and each of its Subsidiaries, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. 12.4. Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "TRANSFEREE") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries, including without limitation any information contained in any reports or other information delivered by the Borrower pursuant to Section 6.1; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.11 of this Agreement. 12.5. Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 3.5(iv). ARTICLE XIII NOTICES 13.1. Notices. Except as otherwise permitted by Section 2.14 with respect to borrowing notices, all notices, requests and other communications to any party hereunder shall be in writing (including electronic transmission, facsimile transmission or similar writing) and shall be given SIDLEY AUSTIN BROWN & WOOD 61 to such party: (x) in the case of the Borrower, the Administrative Agent or any Lender party hereto as of the Closing Date, at its respective address or facsimile number set forth on the signature pages hereof, (y) in the case of any Lender that becomes a party hereto pursuant to Section 12.3, at its address or facsimile number set forth in the applicable Assignment Agreement or, if none is provided therein, in its administrative questionnaire or (z) in the case of any party, at such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower in accordance with the provisions of this Section 13.1. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered (or, in the case of electronic transmission, received) at the address specified in this Section; provided that notices to the Administrative Agent under Article II shall not be effective until received. 13.2. Change of Address. The Borrower, the Administrative Agent and any Lender may each change the address for service of notice upon it by a notice in writing to the other parties hereto. ARTICLE XIV COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Borrower, the Administrative Agent and the Lenders and each party has notified the Administrative Agent by facsimile transmission or telephone that it has taken such action. ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL 15.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING SECTION 735 ILCS 105/5-1 ET SEQ. BUT OTHERWISE WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 15.2. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN COOK COUNTY, ILLINOIS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES SIDLEY AUSTIN BROWN & WOOD 62 ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE ADMINISTRATIVE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN COOK COUNTY, ILLINOIS. 15.3. WAIVER OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. [Signature Pages Follow] SIDLEY AUSTIN BROWN & WOOD 63 IN WITNESS WHEREOF, the Borrower, the Lenders and the Administrative Agent have executed this Agreement as of the date first above written. INSURANCE AUTO AUCTIONS, INC., as the Borrower By: /s/ Scott P. Pettit ----------------------------------------- Name: Scott P. Pettit Title: Sr. Vice President - Finance, Chief Financial Officer and Secretary Address: 850 E. Algonquin Road, Suite 100 Schaumburg, Illinois 60173 Attention: Scott P. Pettit --------------------------------- Phone: (847) 839-4040 --------------------------------- Fax: (847) 839-3678 --------------------------------- E-mail: spettit@iaai.com --------------------------------- SIGNATURE PAGE TO CREDIT AGREEMENT 64 LASALLE BANK NATIONAL ASSOCIATION, as the Administrative Agent and as a Lender By: /s/ Kate Hammond ---------------------------- Name: Kate Hammond Title: Vice President 135 South LaSalle Street Chicago, IL 60603 Attention: Kate Hammond Phone: (312) 904-7018 Fax: (312) 904-6225 E-mail: kate.hammond@abn.amro.com SIGNATURE PAGE TO CREDIT AGREEMENT 65 PRICING SCHEDULE
- ----------------------------------------------------------------------------------------------------------------- LEVERAGE RATIO APPLICABLE MARGIN APPLICABLE MARGIN (FLOATING APPLICABLE COMMITMENT FEE (LIBOR ADVANCE) RATE ADVANCE) RATE - ----------------------------------------------------------------------------------------------------------------- Greater than 1.0 to 1.0x 1.375% 0.0% 0.375% - ----------------------------------------------------------------------------------------------------------------- Greater than 0.50 to 1.0, 1.25% 0.0% 0.30% but less than or equal to 1.0 to 1.0 - ----------------------------------------------------------------------------------------------------------------- Less than or equal to 0.50 1.00% 0.0% 0.25% to 1.0 - -----------------------------------------------------------------------------------------------------------------
The Applicable Margin and the Applicable Commitment Fee Rate shall be determined in accordance with the foregoing table based on the Borrower's Leverage Ratio as calculated based upon the Borrower's most recent annual or quarterly financial statements delivered pursuant to Section 6.1(i) or 6.1(ii) (the "Financials"). Adjustments, if any, to the Applicable Margin or the Applicable Commitment Fee Rate shall be effective as of the tenth (10th) Business Day following the date the Administrative Agent has received the applicable Financials. If the Borrower fails to deliver the Financials to the Administrative Agent at the time required pursuant to Section 6.1(i) or 6.1(ii), as applicable, then the Applicable Margin and the Applicable Commitment Fee Rate shall be the highest Applicable Margin and Applicable Commitment Fee Rate set forth in the foregoing table until the tenth (10th) Business Day following the date such Financials are so delivered. Notwithstanding anything herein to the contrary, from the Closing Date to but not including the tenth (10th) Business Day following receipt of the Borrower's financial statements delivered pursuant to Section 6.1(b) for the fiscal quarter ending June 30, 2002, the Applicable Margins and Applicable Commitment Fee Rate shall be determined based upon a Leverage Ratio greater than 0.50 to 1.00 but less than or equal to 1.00 to 1.0; provided, that on the tenth (10th) Business Day following receipt of the Borrower's financial statements delivered pursuant to Section 6.1(b) for the period ending on March 31, 2002, the Applicable Margins and Applicable Commitment Fee Rate shall be increased (but not reduced), as applicable, as determined based on such financial statements and officer's certificate delivered therewith. SIDLEY AUSTIN BROWN & WOOD COMMITMENT SCHEDULE
LENDER COMMITMENT - -------------------------------------------------------------------------------- LaSalle Bank National Association $20,000,000 =========== AGGREGATE COMMITMENT $20,000,000
SIDLEY AUSTIN BROWN & WOOD SCHEDULE 1 INVESTMENTS SIDLEY AUSTIN BROWN & WOOD SCHEDULE 2 INDEBTEDNESS SIDLEY AUSTIN BROWN & WOOD SCHEDULE 3 LIENS SIDLEY AUSTIN BROWN & WOOD SCHEDULE 4 SUBSIDIARIES SIDLEY AUSTIN BROWN & WOOD EX-10.151 4 c68377ex10-151.txt RATE SWAP AGREEMENT EXHIBIT 10.151 ISDA(R) International Swap Dealers Association, Inc. MASTER AGREEMENT DATED AS OF MARCH 13, 2002 LASALLE BANK NATIONAL ASSOCIATION AND INSURANCE AUTO AUCTIONS INC. have entered and/or anticipate entering into the one or more transactions (each a "Transaction") that are or will be governed by this Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties confirming those Transactions. Accordingly, the parties agree as follows: - 1. INTERPRETATION (a) DEFINITIONS. The terms defined in Section 12 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. (b) INCONSISTENCY. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction. (c) SINGLE AGREEMENT. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. OBLIGATIONS (a) GENERAL CONDITIONS. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement. 1 (b) CHANGE OF ACCOUNT. Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) NETTING. If on any date amounts would otherwise be payable:-- (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (in which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of branches or offices through which the parties make and receive payments or deliveries. (d) DEFAULT INTEREST; OTHER AMOUNTS. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement. 3. REPRESENTATIONS Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into) that:-- (a) BASIC REPRESENTATIONS . (i) STATUS. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing; (ii) POWERS. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance; (iii) NO VIOLATION OR CONFLICT. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; 2 (iv) CONSENTS. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (iv) OBLIGATIONS BINDING. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). (b) ABSENCE OF CERTAIN EVENTS. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) ABSENCE OF LITIGATION. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) ACCURACY OF SPECIFIED INFORMATION. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. 4. AGREEMENTS Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party:-- (a) FURNISH SPECIFIED INFORMATION. It will deliver to the other party any forms, documents or certificates specified in the Schedule or any Confirmation by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) MAINTAIN AUTHORISATIONS. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) COMPLY WITH LAWS. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party. 5. EVENTS OF DEFAULT AND TERMINATION EVENTS (a) EVENTS OF DEFAULT. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party:-- (i) FAILURE TO PAY OR DELIVER. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i)or 2(d)required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party; (ii) BREACH OF AGREEMENT. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i)or 2(d)or to give notice of a Termination Event)to be complied with or performed 3 by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party; (iii) CREDIT SUPPORT DEFAULT. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms)prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document; (iv) MISREPRESENTATION. A representation made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; (v) DEFAULT UNDER SPECIFIED TRANSACTION . The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period)or (3) disaffirms, disclaims, repudiates or rejects, in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (vi) CROSS DEFAULT. If "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule)which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); (vii) BANKRUPTCY. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:-- (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its 4 winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1)to (7)(inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or (viii) MERGER WITHOUT ASSUMPTION. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer: -- (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) TERMINATION EVENTS. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (I below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to (ii) below or an Additional Termination Event if the event is specified pursuant to (iii) below:-- (i) ILLEGALITY. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b))for such party (which will be the Affected Party):-- (1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or (2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider)has under any Credit Support Document relating to such Transaction; (ii) CREDIT EVENT UPON MERGER. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, such party (" X"), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or 5 (iii) ADDITIONAL TERMINATION EVENT. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) EVENT OF DEFAULT AND ILLEGALITY. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute an Event of Default. 6. EARLY TERMINATION (a) RIGHT TO TERMINATE FOLLOWING EVENT OF DEFAULT. If at any time an Event of Default with respect to a party (the "Defaulting Party")has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) RIGHT TO TERMINATE FOLLOWING TERMINATION EVENT . (i) NOTICE. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) TWO AFFECTED PARTIES. If an Illegality under Section 5(b)(i)(1) occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i)on action to avoid that Termination Event. (iii) RIGHT TO TERMINATE. If:-- (1) an agreement under Section 6(b)(ii)has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or (2) an Illegality other than that referred to in Section 6(b)(ii), a Credit Event Upon Merger or an Additional Termination Event occurs, either party in the case of an Illegality, any Affected Party in the case of an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions . (c) EFFECT OF DESIGNATION. (i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. 6 (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(d) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) CALCULATIONS. (i) STATEMENT. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) PAYMENT DATE. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment), from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (e) PAYMENTS ON EARLY TERMINATION. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) EVENTS OF DEFAULT . If the Early Termination Date results from an Event of Default:-- (1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party)in respect of the Terminated Transactions and the Unpaid Amounts owing to the Non-defaulting Party over (B)the Unpaid Amounts owing to the Defaulting Party. (2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement. (3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Unpaid Amounts owing to the Non-defaulting Party less (B) the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting (4) Second Method and Loss. If the Second method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. 7 (ii) TERMINATION EVENTS. If the Early Termination Date results from a Termination Event:-- (1) One Affected Party. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and, if Loss applies and fewer than all the Transactions are being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) Two Affected Parties. If there are two Affected Parties:-- (A)if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (I) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount (" X" and the Settlement Amount of the party with the lower Settlement Amount ("Y") and (b) the Unpaid Amounts owing to X less (II) the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions)and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss ("X") and the Loss of the party with the lower Loss ("Y"). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. (iii) ADJUSTMENT FOR BANKRUPTCY. In circumstances where an Early Termination Date occurs because "Automatic Early Termination" applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) PRE-ESTIMATE. The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses. 7. TRANSFER Neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise)by either party without the prior written consent of the other party, except that:-- (a) a party may make such a transfer of this Agreement pursuant to a consolidation amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(e). Any purported transfer that is not in compliance with this Section will be void. 8 8. MISCELLANEOUS (a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. (b) AMENDMENTS. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (c) SURVIVAL OF OBLIGATIONS. Without prejudice to Section 2(a)(iii) and 6(c)(ii), the obligations of the parties under this agreement will survive the termination of any Transaction. (d) REMEDIES CUMULATIVE. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) COUNTERPARTS AND CONFIRMATIONS. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation. (f) NO WAIVER OF RIGHTS. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. (g) HEADINGS. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 9. EXPENSES A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 10. NOTICES (a) EFFECTIVENESS. Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system)to the address or number or in accordance with the electronic messaging system details provided (see the Schedule)and will be deemed effective as indicated: - (i) if in writing and delivered in person or by courier, on the date it is delivered; 9 (ii) if sent by telex, on the date the recipient 's answerback is received; (iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine); (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or (v) if sent by electronic messaging system, on the date that electronic message is received, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted)or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day. (b) CHANGE OF ADDRESSES. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it. 11. GOVERNING LAW AND JURISDICTION (a) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) JURISDICTION. With respect to any suit, action or proceedings relating to this Agreement (" Proceedings"), each party irrevocably: -- (i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and (ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3)of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force)nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. (c) WAIVER OF IMMUNITIES. Each party irrevocably waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. 12. DEFINITIONS As used in this Agreement:-- "ADDITIONAL TERMINATION EVENT" has the meaning specified in Section 5(b). "AFFECTED PARTY" has the meaning specified in Section 5(b). 10 "AFFECTED TRANSACTIONS " means (a) with respect to any Termination Event consisting of an Illegality, all Transactions affected by the occurrence of such Termination Event and (b)with respect to any other Termination Event, all Transactions. "AFFILIATE " means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person. "APPLICABLE RATE " means:-- (a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate; (b) in respect of an obligation to pay an amount under Section 6(e)of either party from and after the date (determined in accordance with Section 6(d)(ii))on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii))by a Non-defaulting Party, the Non-default Rate; and (d) in all other cases, the Termination Rate. "CONSENT" includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent. "CREDIT EVENT UPON MERGER" has the meaning specified in Section 5(b). "CREDIT SUPPORT DOCUMENT" means any agreement or instrument that is specified as such in this Agreement. "CREDIT SUPPORT PROVIDER" has the meaning specified in the Schedule. "DEFAULT RATE" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it)if it were to fund or of funding the relevant amount plus 1%per annum. "DEFAULTING PARTY" has the meaning specified in Section 6(a). "EARLY TERMINATION DATE" means the date determined in accordance with Section 6(a) or 6(b)(iii). "EVENT OF DEFAULT" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "ILLEGALITY" has the meaning specified in Section 5(b). "LAW" includes any treaty, law, rule or regulation and "LAWFUL" and "UNLAWFUL " will be construed accordingly. "LOCAL BUSINESS DAY" means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits)(a) in relation to any obligation under Section 2(a)(i), in the place(s)specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction. "LOSS" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain 11 resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section 9. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. "MARKET QUOTATION" means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party)and the quoting Reference Market-maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i)in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement Transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined. "NON-DEFAULT RATE" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount. "NON-DEFAULTING PARTY" has the meaning specified in Section 6(a). "POTENTIAL EVENT OF DEFAULT" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "REFERENCE MARKET-MAKERS" means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a)from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b)to the extent practicable, from among such dealers having an office in the sane city. "SCHEDULED PAYMENT DATE" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "SET-OFF" means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under this Agreement, another contract, applicable law or otherwise)that is exercised by, or imposed on, such payer. 12 "SETTLEMENT AMOUNT" means, with respect to a party and any Early Termination Date, the sum of:-- (a) the Market Quotations (whether positive or negative)for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result. "SPECIFIED ENTITY" has the meaning specified in the Schedule. "SPECIFIED INDEBTEDNESS" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise)in respect of borrowed money. "SPECIFIED TRANSACTION" means, subject to the Schedule, (a)any transaction (including an agreement with respect thereto)now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party)and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party)which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b)any combination of these transactions and (c)any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. "TERMINATED TRANSACTIONS" means with respect to any Early Termination Date (a)if resulting from a Termination Event, all Affected Transactions and (b)if resulting from an Event of Default, all Transactions (in either case)in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if "Automatic Early Termination" applies, immediately before that Early Termination Date). "TERMINATION EVENT" means an Illegality or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. "TERMINATION RATE" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence o f any actual cost)to each party (as certified by such party)if it were to fund or of funding such amounts. "UNPAID AMOUNTS" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law)interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined 13 by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the fair market values reasonably determined by both parties. IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. LASALLE BANK NATIONAL ASSOCIATION INSURANCE AUTO AUCTIONS, INC. By: /s/ Frederick P. Engler By: /s/ Scott P. Pettit ---------------------------------- ------------------------------- Name: Frederick P. Engler Name: Scott Pettit Title: Group Vice President Title: Sr. VP & CFO Date: Date: 3/14/02 14 SCHEDULE TO THE MASTER AGREEMENT DATED AS OF MARCH 13, 2002 BETWEEN LASALLE BANK NATIONAL ASSOCIATION (" PARTY A") AND INSURANCE AUTO AUCTIONS, INC. (" PARTY B") PART 1 TERMINATION PROVISIONS In this Agreement:- (a) "SPECIFIED ENTITY" means in relation to Party A for the purpose of:-- Section 5(a)(v), Not applicable Section 5(a)(vi), Not applicable Section 5(a)(vii), Not applicable Section 5(b)(ii), Not applicable in relation to Party B for the purpose of:-- Section 5(a)(v), All Affiliates Section 5(a)(vi), All Affiliates Section 5(a)(vii), All Affiliates Section 5(b)(ii), All Affiliates (b) "SPECIFIED TRANSACTION" will have the meaning specified in Section 12 of this Agreement (c) The "CROSS DEFAULT" provisions of Section 5(a)(vi) will not apply to Party A and will apply to Party B, provided, however, that it shall not constitute an Event of Default under this Section 5(a)(vi) if (i) such event, condition or failure arises in the ordinary course of business by mistake, oversight or transfer difficulties in the payment of money, (ii) such event, condition or failure is remedied on or before the third Business Day after the occurrence or existence of such event, condition or failure, (iii) no Specified Indebtedness in an aggregate amount equal to or in excess of the Threshold Amount is accelerated as a result of such event, condition or failure and (iv) with respect to the Specified Indebtedness referred to in clause (iii) of the definition thereof, the event, condition or failure is other than a Default under the Credit Agreement due to Party B's failure to make timely payment in accordance with the terms of the Credit Agreement or a breach of a financial covenant therein. "SPECIFIED INDEBTEDNESS" shall mean any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) (i) in respect of borrowed money (which, for the avoidance of doubt, shall include, without limitation, bonds, notes, commercial paper or similar instruments issued or guaranteed by the relevant party; and 15 shall exclude deposits received), (ii) any amount due and payable in respect of any Specified Transaction (except that, for this purpose only, the words "and any other entity" shall be substituted for the words "and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party)" where they appear in the definition of Specified Transaction), any repo transaction, any reverse repo transaction and any stock loan transaction and (iii) with respect to Party B shall include, without limitation, and without regard to the Threshold Amount the obligations of Party B, as Borrower, under that certain Credit Agreement dated as of February 15, 2002 between the Lenders from time to time parties thereto, including Party A, as the same may be amended, modified or supplemented from time to time (the "Credit Agreement"). Section 5(a)(vi) is amended by the insertion of the following words after the words "due and payable" on line 8: "or, in the case of Specified Indebtedness in respect of any Specified Transaction, any repo transaction, any reverse repo transaction and any stock loan transaction, which has resulted in such Specified Indebtedness becoming due and payable as a result of the early termination of the relevant Specified Transaction, repo transaction, reverse repo transaction or stock lending transaction, as the case may be ". "THRESHOLD AMOUNT" means, in relation to Party A, not applicable, and in relation to Party B, $2,000,000.00 or its equivalent in any other currency. (d) The "CREDIT EVENT UPON MERGER " provisions of Section 5(b)(ii) will not apply to Party A and will apply to Party B. (e) The "AUTOMATIC EARLY TERMINATION" provision of Section 6(a) will not apply to either party. (f) PAYMENTS ON EARLY TERMINATION. For the purpose of Section 6(e) of this Agreement:- (i) Market Quotation will apply. (ii) The Second Method will apply. (g) ADDITIONAL TERMINATION EVENT will apply. The following shall constitute an Additional termination Event: If (i) the Credit Agreement shall be paid or prepaid in full, expire, terminate, or otherwise cease to be in full force and effect, other than because of an Event of Default (as defined in the Credit Agreement) with respect to Party B, or (ii) Party A shall cease (a) to be a party to, or (b) to have any commitments under the Credit Agreement, Party A or Party B shall have the right, at its sole discretion to terminate any Transaction under this Agreement. For purposes hereof, each such terminated Transaction shall constitute an Affected Transaction under the Agreement. For the purpose of the foregoing Termination Event, the Affected Parties shall be Party A and Party B. 16 PART 2 DOCUMENTS TO BE DELIVERED For the purpose of Section 4(a): Documents to be delivered are: (i) Each party shall promptly deliver to the other party, certified evidence of the authority, incumbency and specimen signature of each authorized person executing any document on its behalf in connection with this Agreement upon execution of each document by any person. Covered by Section 3(d) representation. (ii) Each party upon request shall promptly deliver to the other party, a copy of its most recent Annual Report containing consolidated financial statements, prepared in accordance with accounting principles that are generally accepted for institutions of its type in the jurisdiction of its organization and certified by independent public accountants. Covered by Section 3(d) representation. (iii) Each party upon request shall promptly deliver to the other party, a copy of its most recent unaudited interim consolidated financial statements prepared in accordance with accounting principles that are generally accepted for institutions of its type in the jurisdiction of its organization in each case consistently applied. Covered by Section 3(d) representation. (iv) Party B shall promptly deliver to Party A a Board Resolutions satisfactory to Party A . Not covered by Section 3(d) representation. (v) Party B shall promptly deliver to Party A such other information with respect to its condition, or operations, financial or otherwise, as Party A may reasonably request from time to time. Covered by Section 3(d) representation. PART 3 MISCELLANEOUS (a) ADDRESSES FOR NOTICES. For the purpose of Section 10(a): - Address for notices or communications to Party A: Address: LaSalle Bank National Association 208 South LaSalle Street Suite 200 Chicago, Illinois 60604-I 003 Attention: Treasury Operations Facsimile No.: 312-855-5852 Telephone No.: 312-855-5815 Electronic Messaging System Details: ABN AUS 33a XXX Address for notices or communications to Party B: - Address: 850 East Algonquin Schaumburg, IL 60173 Attention: Eric Zurawski Facsimile No.: 847-839-3678 Telephone No.: 847-839-4197 17 (b) CALCULATION AGENT. The Calculation Agent shall be Party A. (c) CREDIT SUPPORT DOCUMENT. Details of any Credit Support Document: Credit Support Document means, in relation to Party B, Not Applicable. in each case as such document shall be amended, modified or supplemented from time (d) CREDIT SUPPORT PROVIDER. Credit Support Provider means, in relation to Party B, Not Applicable. (e) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of New York without reference to choice of law doctrine. (f) NETTING OF PAYMENTS. Subparagraph (ii) of Section 2(c) of this Agreement will not apply to any Transactions. (g) "AFFILIATE" will have the meaning specified in Section 12. PART 4 OTHER PROVISIONS (a) ISDA DEFINITIONS. The 1991 ISDA Definitions, as a mended by the 1998 Supplement to the 1991 ISDA Definitions (the "Definitions "), as published by the International Swaps and Derivatives Association, Inc., shall be deemed a part of this Agreement as if fully set forth herein. The Definitions and the provisions of Section 12 of this Agreement shall be part of each Confirmation as if set forth in full therein. (b) INTERPRETATION. In the event of any inconsistency between the provisions of this Schedule and the Definitions, this Schedule will prevail. In the event of any inconsistency between the provisions of this Schedule and the printed Agreement of which it forms a Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Schedule, such Confirmation will prevail for the purpose of the relevant Transaction. (c) FINANCIAL CONDITION. Party B represents and warrants to Party A (which representation will be deemed to be repeated on each date on which a Transaction is entered into) that there has been no material adverse change in its financial condition since the last day of the one year period covered by its most recently prepared year end financial statement that is likely to its ability to perform its obligations under this Agreement. (d) AFFECTED PARTIES. For the purposes of Section 6(e) (Payments on Early Termination), both parties shall be deemed to be Affected Parties in connection with the Termination described in Section 5(b)(I), so that payments on early termination shall be calculated as provided in Section 6(e)(ii). (e) ADDITIONAL REPRESENTATIONS. Each party represents and warrants to the other that (i) it is entering into this Agreement, any Credit Support Document to which it is a party, each Transaction, and any other documentation relating to this Agreement that it is required by the Agreement to deliver as principal (and not as agent or in any other capacity, fiduciary or otherwise) and (ii) it is an "eligible contract participant" under, and as defined in, Section 1a of the Commodity Exchange Act (7 USC 1a), amended from time to time. 18 (f) CONSENT TO RECORDING. Each party (i) consents to the recording of the telephone conversations of trading, marketing and other relevant personnel of the parties in connection with this Agreement or any potential Transaction and (ii) agrees that such recording may be submitted in evidence to any court or in any proceedings with respect to this Agreement or any Transaction thereunder. (9) TRANSFER. Each party agrees that with regard to the transfer provisions set forth in Section 7, consent to any such transfer shall not be unreasonably withheld. (h) WAIVER OF JURY TRIAL. Each Party irrevocably waives any and all right to trial by jury in any legal proceeding instituted in connection with this Agreement or any Transaction to the fullest extent permitted by law. As to any matter for which a jury trial cannot be waived, each party agrees not to assert any such matter as a cross claim or counterclaim in, nor move to consolidate the same with, any legal proceeding in which a jury trial is waived. (i) SETOFF. Each party agrees that the following provision shall be added as Section 6(f) of this Agreement: "(f) SETOFF. Any amount (the "Early Termination Amount") payable to one party (the "Payee") by the other party (the "Payer") under Section 6(e) of this Agreement, in circumstances where there is a Defaulting Party or one Affected Party in the case where a Termination Event under this Agreement has occurred, will, at the option of the party ("X")other than the Defaulting Party or the Affected Party (and without prior notice to the Defaulting Party or the Affected Party), be reduced by its setoff against any amount(s) (the "Other Agreement Amount") payable (whether at such time or in the future or upon the occurrence of a contingency) by the Payee to the Payer (irrespective of the currency, place of payment or booking office of the obligation) under any other agreement(s)between the Payee and the Payer or instrument(s) or undertaking(s) issued or executed by one party to, or in favor of, the other party (and the Other Agreement Amount will be discharged promptly and in all respects to the extent it is so setoff). X will give notice to the other party of any setoff effected under this Section 6(f). For this purpose, either the Early Termination Amount or the Other Agreement Amount (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, acting in a reasonable manner and in good faith, to purchase the relevant amount of such currency. The term "rate of exchange" includes, without limitation, any premiums and costs of exchange payable in connection with the purchase of or conversion into the relevant currency. If an obligation is unascertained, X may in good faith estimate that obligation and setoff in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained. Nothing in Section 6(f) shall be effective to create a charge or other security interest. This Section shall be without prejudice and in addition to any right of setoff, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise)." (j) NEGATIVE PLEDGE/EQUALLY RATABLE. So long as any of the obligations under this Agreement remain outstanding, Party B will not create any mortgage, pledge, lien or other security interest (each a "Security Interest ") on any of its assets unless (i) a Security Interest 19 arises by operation of law, or (ii) Party A agrees to the creation of a Security Interest. If Party A agrees to the creation of a Security Interest, Party A shall be entitled equally and ratably to the benefits of an equivalent Security Interest to secure performance of all obligations of Patty B under this Agreement. (k) RELATIONSHIP BETWEEN THE PARTIES. This Agreement is hereby amended by the addition of a new Section 13 as follows: "13. RELATIONSHIP BETWEEN THE PARTIES. Each party will be deemed to represent to the other party on the date on which it enters into a Transaction (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for that Transaction): (a) NON RELIANCE. It is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisors as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction; it being understood that information and explanations related to the terms and conditions of a Transaction shall not be considered investment advice or a recommendation to enter into that Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of that Transaction. (b) ASSESSMENT AND UNDERSTANDING. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of that Transaction. (c) STATUS OF PARTIES. The other party is not acting as a fiduciary for or an advisor to it in respect of that Transaction." (l) INCORPORATION BY REFERENCE OF COVENANTS. Party B covenants and agrees that, from and after the date hereof and thereafter until all obligations of Party B hereunder are paid in full and this Agreement is terminated, it shall duly keep, perform and observe each and every covenant set forth in the Credit Agreement. All of such covenants, together with related definitions and ancillary provisions, are hereby incorporated into this Agreement by reference, mutatis mutandis, as if such terms were set forth in this Agreement in full, without regard to any termination of such Credit Agreement, without regard to any expiration of any commitment thereunder and without regard to the final payment in full of any obligations of Party B or any other person or entity thereunder, provided, that no such covenant set forth above shall be incorporated herein by reference if such incorporation, by itself, would be a breach of the Credit Agreement. If an event is the subject of both a covenant incorporated herein by reference and another covenant set forth in this Agreement, Party B shall comply with the covenant that imposes on it the stricter requirement. To the extent that any covenant incorporated herein by reference is inconsistent with the other terms of this Agreement, Party A shall not be deemed to have waived any rights hereunder by virtue of such inconsistency. If the Credit Agreement terminates, any commitment thereunder expires or any obligations of Party B thereunder are paid in full and any covenant incorporated herein by reference requires Party B to obtain the consent of any agent, lender or lenders, then, for the purpose of this Agreement, Party B shall be required to obtain the consent of Party A. 20 IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized officers as of the date hereof. LASALLE BANK NATIONAL ASSOCIATION INSURANCE AUTO AUCTIONS, INC. By: /s/ Frederick P. Engler By: /s/ Scott P. Pettit ------------------------------------- ------------------------------- Name: Frederick P. Engler Name: Scott Pettit -------------------- Title: Sr. VP & CFO Title: Group Vice President 21 I, Scott P. Pettit, do hereby certify that I am the duly elected and qualified Secretary and the keeper of the records and corporate seal of Insurance Auto Auctions, Inc., a corporation organized and existing under the laws of the State of Illinois (the "Corporation"), and that the following is a true and correct copy of certain resolutions duly adopted by the Board of Directors thereof, and that such resolutions are now in full force and effect, unamended, unaltered, and unrepealed: WHEREAS, there has been presented to the Board of Directors a form of ISDA Master Agreement with Schedule thereto, between this Corporation and LaSalle Bank National Association (the "Bank") governing interest rate, currency exchange, commodity price and equity index transactions this Corporation may from time to time enter into with such Bank; NOW, THEREFORE, BE IT RESOLVED, that each of the President, Chief Financial Officer and Secretary of this Corporation be and each such officer hereby is authorized, to execute, in the name and on behalf of this Corporation, and deliver an ISDA Master Agreement (with Schedule) substantially in the form presented to the Board of Directors, except for such changes, additions and deletions as to any or all of the terms and provisions thereof as the officer(s) executing such ISDA Master Agreement on behalf of this Corporation shall deem proper, such execution by such officer(s) of an ISDA Master Agreement to be conclusive evidence that such officer(s) deem(s) all of the terms and provisions thereof to be proper; FURTHER RESOLVED, that each of the President, Chief Financial Officer and Secretary of this Corporation be and each such officer hereby is authorized to enter into interest rate, currency exchange, commodity price and equity index transactions on behalf of this Corporation from time to time under the terms of the ISDA Master Agreement executed by this Corporation pursuant to these resolutions, to issue instructions by telephone or other means of communication to said Bank in connection with any of the foregoing and to execute, in the name and on behalf of this Corporation, and deliver written confirmations of any such transactions and instructions, and to execute, in the name and on behalf of this Corporation, and deliver schedules of officers and employees of this Corporation authorized to enter into interest rate, currency exchange, commodity price and equity index transactions on behalf of this Corporation from time to time under such ISDA Master Agreement; FURTHER RESOLVED, that each and every officer of this Corporation be and each and every officer hereby is authorized to take such action from time to time on behalf of this Corporation as he or she may deem necessary, advisable or proper in order to carry out and perform the obligations of this Corporation under the ISDA Master Agreement executed by this Corporation pursuant to these resolutions and under any other confirmations, agreements and documents executed and delivered by this Corporation pursuant to or in connection with such ISDA Master Agreement; FURTHER RESOLVED, that all authority conferred by these resolutions shall be deemed retroactive and any and all acts authorized hereunder performed prior to the adoption of this resolution are hereby ratified, affirmed and approved; FURTHER RESOLVED, that the Secretary or any other officer of this Corporation be and each such officer hereby is authorized to certify to said Bank a copy of these resolutions and the names and signatures of this Corporation's officers or employees hereby authorized to act in the premises, and said Bank is hereby authorized to rely upon such certificate until formally advised by a like certificate of any change therein, and is hereby authorized to rely on any such additional certificates. 22 I FURTHER CERTIFY THAT the following persons have been appointed or elected and are now acting as officers or employees of said Corporation in the capacity set forth their respective names and that the signatures set after their respective names are their genuine signatures:
TITLE NAME SIGNATURE Chief Financial Officer and Secretary Scott Pettit /s/ Scott Pettit ------------------------- President and Chief Executive Officer Thomas C. O'Brien /s/ Thomas C. O'Brien -------------------------
IN WITHESS WHEREOF, I have subscribed my name as Secretary and have caused the corporate seal of said Corporation to be hereunto affixed this 8th day of March, 2002. /s/ Scott Pettit -------------------------------------------- Scott Pettit Chief Financial Officer and Secretary I, Thomas C. O'Brien, do hereby certify that I am the duly elected and acting President and Chief Executive Officer of the Corporation, that Scott Pettit is the duly elected and acting Chief Financial Officer and Secretary of the Corporation, and the true signature is set forth above. /s/ Thomas C. O'Brien ----------------------------------- Thomas C. O'Brien President and Chief Executive Officer of the Corporation 23 CONFIRMATION - -------------------------------------------------------------------------------- Date: January 23, 2002 To: INSURANCE AUTO AUCTIONS, INC.("Party B") 850 East Algonquin Schaumburg, IL 60173 Attn: Eric Zurawski Telephone: 847-839-4197 Fax: 847-839-3678 From: LASALLE BANK NATIONAL ASSOCIATION ("Party A") 208 S. LaSalle Chicago, IL 60604 Re: Swap Transaction [No.INF 14332/18718] - -------------------------------------------------------------------------------- Ladies/Gentlemen: The purpose of this letter agreement is to set forth the terms and conditions of the Swap Transaction entered into between us on the Trade Date specified below (the "Swap Transaction"). This letter agreement constitutes a "Confirmation" as referred to in the ISDA Master Agreement specified below. The definitions and provisions contained in the 1991 ISDA Definitions, as supplement by the 1998 Supplement(as published by the International Swaps and Derivatives Association, Inc. ("ISDA")), without regard to subsequent amendments or revisions thereto, are incorporated into this Confirmation. In the event of any inconsistency between those definitions and provisions of this Confirmation, this Confirmation will govern. Each party represents and warrants to the other that (i) it is duly authorized to enter into this Swap Transaction and to perform its obligations hereunder and (ii) the person executing this Confirmation is duly authorized to execute and deliver it. 1. This Confirmation supplements, forms a part of, and is subject to, the ISDA Master Agreement in the form published by ISDA (the "Agreement") as if you and we had executed that agreement (but without any Schedule thereto) and the Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to choice of law doctrine. In addition, you and we agree to use our best efforts to promptly negotiate, execute, and deliver an ISDA Master Agreement (as published by ISDA). Upon execution and delivery by you and us of that agreement (i) this letter agreement shall constitute a "Confirmation" as referred to in that agreement and shall supplement, form part of, and be subject to that agreement and (ii) all provisions contained or incorporated by reference in that agreement shall govern this Confirmation as expressly modified below. 24 2. The terms of the particular Swap Transaction to which this Confirmation relates are as follows: Notional Amount: See schedule attached hereto Trade Date: January 22, 2002 Effective Date: January 31, 2002 Termination Date: January 31, 2007 FIXED AMOUNTS: Fixed Rate Payer: Party B Fixed Rate: 4.36% Fixed Rate Payer Payment Dates: The last day of the each March, June, September, and December, commencing on March 31, 2002, to and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention Fixed Rate Day Count Fraction: Actual/360 FLOATING AMOUNTS: Floating Rate Payer: Party A Floating Rate Payer Payment Dates: The last day of the each March, June, September, and December, commencing on March 31, 2002, to and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention Floating Rate Option: USD-LIBOR-BBA; provided, however, the rate for each Calculation Period shall be determined 2 London and New York Business Days prior to each Reset Date. Initial Floating Rate: To be determined Designated Maturity: 3 Months Spread: None Floating Rate Day Count Fraction: Actual/360 Reset Dates: The first day each Calculation Period 25 Method of Averaging: Inapplicable Compounding: Inapplicable Business Days: New York and London Calculation Agent: Party A 3. Offices: (a) The Office of the Fixed Rate Payer for this Swap Transaction is Schaumburg, IL. (b) The Office of the Floating Rate Payer for this Swap Transaction is Chicago, IL. 4. Account Details Payments to Party A: LaSalle Bank National Association, ABA #0710-0050-5, A/C 2090102, Attn: Treasury Division/Derivatives Payments to Party B: Please Advise 5. Other Provisions: Assignment: This Swap Transaction may be assigned only with prior written consent Netting: The parties hereto hereby agree that subparagraph (ii) of Part 2(c) of the Agreement shall not apply to any Swap Transaction 26 Please confirm that the foregoing correctly sets forth the terms and conditions of our agreement by responding within ten (10) Business Days by either (i) returning via telecopier an executed copy of this Confirmation to the attention Keli Greenwood(fax number: (312) 855-5847/5852; telephone number: (312) 855-5844), or sending a telex to Keli Greenwood(telex no.:62734, answerback: ABN UW) substantially to the following effect: "We acknowledge receipt of your fax dated January 23, 2002 with respect to a Swap Transaction between Insurance Auto Auctions, Inc. and LaSalle Bank National Association with an Effective Date of January 31, 2002 and a Termination Date of January 31, 2007 and confirm that such fax correctly sets forth the terms of our agreement relating to the Swap Transaction described therein. Very truly yours, Scott P. Pettit, Sr. VP Finance, CFO & Secretary, by (specify name and title of authorized officer).". Failure to respond within such period shall not affect the validity or enforceability of this Swap Transaction, and shall be deemed to be an affirmation of the terms and conditions contained herein, absent manifest error. Yours sincerely, LASALLE BANK NATIONAL ASSOCIATION By: /s/ Steven Butters By: /s/Jennifer Bonifazi -------------------------------- ------------------------------------- Name: Steven Butters Name: JENNIFER BONIFAZI ------------------------------- ----------------------------------- Title: Treasury Officer Title: Assistant Vice President ------------------------------ ---------------------------------- Confirmed as of the date first written: INSURANCE AUTO AUCTIONS, INC. By: /s/ Scott P. Pettit ------------------------------------- Name: Scott P. Pettit ------------------------------------ Title: Sr. VP - Finance CFO & Secretary ----------------------------------- 27 EX-10.176 5 c68377ex10-176.txt CONSULTING AGREEMENT Exhibit 10.176 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT ("Agreement") is made as of the 12th day of April, 2001, by and between Insurance Auto Auctions, Inc., an Illinois corporation (the "Company" or "IAA") and Donald J. Comis ("Consultant"). WHEREAS, Consultant has unique experience and knowledge of the operations of the Company; WHEREAS, IAA desires to obtain the benefits of Consultant's experience and know-how in connection with the operations of the Company, and accordingly, IAA has offered to engage Consultant to render consulting and advisory services to IAA on the terms and conditions hereinafter set forth; WHEREAS, Consultant desires to accept such engagement upon such terms and conditions hereinafter set forth; and NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, IAA and Consultant agree as follows: SECTION 1. CONSULTING TERMS AND DUTIES. Upon the terms and conditions set forth herein, IAA hereby retains and engages Consultant as an independent contractor, and Consultant hereby accepts such retention and engagement as an independent contractor and agrees, to render such advisory and consulting services to IAA with respect to matters pertaining to the Company's operations as shall be specified from time to time by IAA's executive officers having principal responsibility for the operations and any other matters in which Consultant's experience and knowledge could prove beneficial to the Company. SECTION 2. TERM. The term of Consultant's retention and engagement by Company under this Agreement shall commence on April 9, 2001 and shall continue through and expire on April 8, 2002 (the "Term"). SECTION 3. COMPENSATION. (a) Availability and Fees. During the Term, Consultant agrees to be available for consulting up to the maximum number of hours as set forth below. In consideration for the availability of Consultant hereunder and the services rendered pursuant to the Agreement, IAA will pay Consultant the amount listed in the table below in such equal periodic payments as the Company generally pays its employees, but in no event less frequently than monthly.
Consulting Monthly Period Hours Per Month Consulting Fee 04/09/01 - 04/08/02 ten (10) $12,083.33
(b) Reimbursement of Expenses. Company shall reimburse Consultant for those reasonable and necessary out-of-pocket expenses which have been approved by IAA prior to their incurrence and which have been incurred by Consultant in connection with the rendering of services hereunder. Any reimbursement to be made by IAA pursuant to this Section 3(b) shall be made following submission to IAA by Consultant of reasonable documentation of the expenses incurred. SECTION 4. RESTRICTIVE COVENANTS. 4.1 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Consultant recognizes and acknowledges that certain knowledge and information which it has acquired or developed relating to the Company including, but not limited to (i) any information pertaining to the finances, business, planning, operations, services, potential services, products, potential products, technical information and/or know-how, computer software, formulas, production, purchasing, marketing, sales, personnel, customers, brokers, suppliers, or other information of IAA; (ii) any papers, data, records processes, methods, techniques, systems, models, samples, devices, equipment, compilations, invoices, customer lists, or documents of IAA; (iii) any confidential information or trade secrets of any third party provided to IAA in confidence or subject to other use or disclosure restrictions or limitations; and (iv) any other information, written, oral, or electronic, whether existing now or at some time in the future, whether pertaining to current or future developments, and whether previously accessed during your tenure with IAA or to be accessed during your future employment with IAA, which pertains to IAA's affairs or interests or with whom or how IAA does business (hereinafter collectively referred to as "Confidential Information") are the valuable property of Company and shall be held by Consultant in confidence and trust for the sole benefit of Company. (b) Consultant agrees not to use, disclose, divulge or publish, without the prior written consent of IAA, at any time during the term hereof or thereafter, any Confidential Information. Provided, however, that Confidential Information shall not include (a) information which is known to the public or is generally known within the industry of businesses comparable to the Company (other than as a result of Consultant's violation of this covenant) or (b) information which Consultant is required to disclose pursuant to law or order of a court having jurisdiction over Consultant (provided that Consultant offers IAA an opportunity to obtain an appropriate protective order or administrative relief against disclosure of such Confidential Information). 2 (c) All memoranda, notes, lists, records and other documents or papers (and all copies thereof), including such items stored in computer memories, or microfiche or by any other means, made or compiled by or on behalf of Consultant in connection with the rendering by Consultant of consulting services hereunder, or made available by Purchaser to Consultant relating to the Company, are and shall be IAA's property and shall be delivered to IAA promptly on the request of IAA. 4.2 NON-COMPETITION. (a) Except for the Permitted Activity (defined below), for a period commencing on the date hereof and terminating at the end of the Term of this Agreement (the "Restricted Period"), the Consultant, unless acting in accordance with the Company's prior written consent (which consent may be given by any duly authorized officer of the Company) shall not, anywhere in the United States ("Restricted Territory") directly or indirectly, own, manage, operate, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, principal, agent, representative, consultant, investor, owner, partner, manager, joint venturer or similar affiliation with, any business or enterprise engaged in the Business; provided, however, the Consultant may own, directly or indirectly, securities of any person having a class of securities (a) registered under the Securities Exchange Act of 1934 and (b) publicly traded, if the Consultant is not a controlling person of, or a member of a group which controls, such person and the Consultant does not, directly or indirectly own more than two percent (2%) of any class of securities of such person (the "Permitted Activity"). "Business" shall mean the business of towing, processing, appraising, auctioning and selling, and processing claims with respect to damaged, abandoned, repossessed, total loss and recovered theft automobiles, trucks, motorcycles, boats, trailers, motor houses and other types of vehicles. (b) Employees. During the Restricted Period, Consultant shall not, directly or indirectly, (i) solicit for employment and/or hire or offer employment to any individual who is or was an employee of the Company and who becomes an employee of the Company or its subsidiaries at any time during the Restricted Period, or (ii) encourage any such individual to terminate his or her relationship with the Company or its subsidiaries. (c) Customers. During the Restricted Period, the Consultant shall not solicit any person who is or was a customer or client of the Company, or its subsidiaries and who becomes a customer or client of the Company or its subsidiaries at any time during the Restricted Period, for the purpose of (i) engaging in, or assisting any person or entity in engaging in, the Business, or (ii) soliciting or encouraging any customer, client of the Company, or its subsidiaries to terminate or otherwise alter his, hers or its relationship or prospective relationship with the Company or its subsidiaries. 4.3 RIGHTS AND REMEDIES UPON BREACH. If Consultant breaches, or threatens to commit a breach of, any of the provisions of Section 4.1 or 4.2 (the "Restrictive Covenants"), IAA shall have the right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the 3 Restrictive Covenants would cause irreparable injury to IAA and that money damages would not provide an adequate remedy to IAA. IAA shall also have any other rights and remedies available to it under law or in equity. 4.4 SEVERABILITY OF COVENANTS. Consultant acknowledges and agrees that the Restrictive Covenants are reasonable and valid in scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Nondisclosure Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. SECTION 5. MISCELLANEOUS. (a) Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission (with a copy also sent by another means herein provided for), sent by certified, registered or express mail, postage prepaid or sent by reputable air courier. Any such notice shall be deemed given when so delivered personally or sent by facsimile transmission (with issuance by the transmitting machine of a confirmation of successful transmission) and delivery by another permitted means or, if mailed, five days after the date of deposit in the United States mail or, if sent by courier, two days after the date of deposit with such courier, addressed as follows: if to Company, to: Insurance Auto Auctions, Inc. 850 E. Algonquin Road Schaumburg, IL 60173 Attention: General Counsel Telecopy: (847) 839-3939 with a copy to: Katten Muchin & Zavis 525 W. Monroe Street, Suite 1600 Chicago, Illinois 60661 Attention: David J. Kaufman Telecopy: (312) 902-1061 4 if to Consultant, to: _____________________________________________ _____________________________________________ _____________________________________________ Telecopy: ___________________________________ with a copy to: _____________________________________________ _____________________________________________ _____________________________________________ Attention: __________________________________ Telecopy: ___________________________________ Any party may change its address for notice hereunder by notice to the other party hereto given in accordance herewith. (b) Assignability. This Agreement shall not be assignable by either party hereto without the prior written consent of the other party. (c) Governing Law. The parties agree that this Agreement shall be construed and governed in accordance with the internal laws of the State of Illinois, without giving effect to principles of conflicts of laws. (d) Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, executors, administrators, successors and permitted assigns. (e) Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (f) Entire Agreement. This Agreement represents the entire agreement and understanding of the parties hereto with respect to the matters set forth herein. This Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements between parties, written or oral, relating to the subject matter of this Agreement. This Agreement may be amended, superseded, cancelled, renewed, or extended and the terms hereof may be waived, only by a written instrument signed by the parties hereto or, in the case of a waiver, by the party waiving compliance. (g) Waivers. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. Nor shall any waiver on the part of any party of any such right, power or privilege hereunder, nor any single or partial exercise of any 5 right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. (h) Headings. The headings in this Agreement are inserted for convenience only and are not to be considered in the interpretation or construction of the provisions hereof. (i) Definitions of "Person". As used herein, the term "Person" shall mean any individual, corporation, partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization, governmental or regulatory body or any political subdivision thereof. 6 IN WITNESS WHEREOF, IAA and Consultant have signed this Agreement as of the day and year written above. INSURANCE AUTO AUCTIONS, INC.: /s/ Thomas C. O'Brien ------------------------------ By: Thomas C. O'Brien Its: President and CEO /s/ Donald J. Comis ------------------------------ Donald J. Comis 7 EX-10.177 6 c68377ex10-177.txt EMPLOYMENT AGREEMENT, DATED 12/11/01 Exhibit 10.177 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 11th day of December 2001 by and between EDWARD FARES ("Fares") and INSURANCE AUTO AUCTIONS, INC., an Illinois corporation ("Company"). RECITALS WHEREAS, the Company desires to employ Fares and Fares desires to be employed by the Company upon the terms and conditions set forth below. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed that: 1. EMPLOYMENT. The Company hereby employs Fares, and Fares hereby accepts employment with the Company, as Chief Information Officer, whose duties include overseeing the information technology aspects of the Company and its affiliated companies. Fares shall be an executive of the Company and shall be subject to the direction and control of the President and Chief Executive Officer of the Company and the Board of Directors of the Company (the "Board"). Fares shall devote all of his business time and services to the business and affairs of the Company. Fares shall also perform such other executive-level duties consistent with his position as Chief Information Officer as may be assigned to him from time to time by the Chief Executive Officer, including serving as an officer and/or director of the Company's operating subsidiaries. The duties and services to be performed by Fares hereunder shall be substantially rendered at the Company's principal offices as determined by the Board, except for reasonable travel on the Company's business incident to the performance of Fares' duties. 2. COMPENSATION. As compensation for Fares' services provided hereunder, the Company agrees to provide the following compensation: 2.1. BASE SALARY. While this Agreement is in effect, the Company agrees to pay to Fares a base salary at the rate of $170,000 per annum commencing on the date hereof ("Base Salary"). The Base Salary shall be subject to annual review by the Board and any committee thereof ("Committee") or the Compensation Committee and may be increased by the Board in their sole and absolute discretion but may not be decreased. Such salary shall be payable to Fares in such equal periodic payments as the Company generally pays its employees, but in no event less frequently than monthly. 2.2. INCENTIVES. As additional compensation for performance of the services rendered by Fares during the term of this Agreement, the Company will pay to Fares, in cash, a performance bonus equal to thirty percent (30%) of Fares' 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 with respect to each fiscal year of the Company. This amount is hereinafter referred to as "Incentive Compensation." 2.3. OPTIONS. The Company shall cause the Committee delegated by the Board to administer the Option Plan (as defined below) to grant to Fares an option to purchase 30,000 shares of the Company's common stock (the "Option"). The Option shall be granted under the Company's 1991 Stock Option Plan, as amended (the "Option Plan"). The exercise price of the Option granted pursuant to this Section 2.3 shall be equal to 100% of the fair market value of the common stock on the close of business on the day before the day that Fares becomes employed by the Company subject to the vesting and termination provisions as describe below. The Option shall become exercisable in four equal annual installments beginning on the first anniversary of the grant date, and, except as provided below, shall be subject to the usual terms and conditions of options issued pursuant to and in accordance with the Option Plan. 2.4. BENEFITS. During the term of his employment or for such time as otherwise provided in this Agreement, Fares shall be entitled to participate in such vacation, auto allowance, benefit plans, fringe benefits, life insurance, medical and dental plans (beginning on the first of the month following 30 days of employment), retirement plans and other programs as offered from time to time by the Company and are described in the Company's employee benefit handbooks. Fares 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. Fares 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 Section 2.4, the Company shall reimburse Fares for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies 2.5. INDEMNIFICATION. The Company shall indemnify Fares in accordance with the terms of the Company's standard form of Indemnification Agreement. 3. TERMINATION. 3.1. AT WILL NATURE OF EMPLOYMENT. Employment with the Company is not for a specific term and can be terminated by Fares or the Company at any time for any reason, with or without cause. Any contrary representations that may have been made or that may be made to Fares are superseded by this Agreement. In addition, this Agreement shall terminate by reason of Fares' death or the substantial inability by Fares, by reason of physical or mental illness or accident, to perform his regular responsibilities hereunder indefinitely or for a period of one hundred eighty (180) days (a "Disability"). 3.2. COMPANY'S OBLIGATIONS ON TERMINATION APART FROM A CHANGE OF CONTROL. (a) NO OBLIGATIONS OTHER THAN AS REQUIRED BY LAW FOR VOLUNTARY TERMINATION OR CAUSE. The Company shall have no obligations to pay Fares any severance payments or continue to cover Fares and/or his beneficiaries under the Company's health plan (other than as required by law) if this Agreement is terminated for any of the following reasons: 2 (i) VOLUNTARY TERMINATION. Fares voluntarily terminates this Agreement; or (ii) CAUSE. The Company terminates Fares' employment at any time during the term of this Agreement for Cause. For purposes of this Agreement, "Cause" shall mean: (A) the willful and continued failure of Fares to perform substantially his duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to medically documented illness or injury), 30 days after a written demand for substantial performance is delivered to Fares by the Board which specifically identifies the manner in which the Board believes that Fares has not substantially performed his duties; or (B) the willful engaging by Fares in illegal conduct or misconduct, which is injurious to the Company, in each case as determined in the good faith opinion of the Board. (b) DEATH AND DISABILITY OBLIGATIONS. If this Agreement is terminated due to death or disability, the Company shall pay to Fares (or his legal representatives as the case may be) the specific obligations as set forth below: (i) DEATH. Fares' employment shall terminate automatically upon Fares' death. If Fares' employment under this Agreement is terminated by reason of his death, the Company's sole obligation to Fares' legal representatives shall be to pay or cause to be paid, within thirty (30) days of the Date of Termination (as hereinafter defined), to such person or persons as Fares shall have designated for that purpose in a notice filed with the Company, or, if no such person shall have been so designated, to his estate, the amount of Fares' Accrued Obligations (as hereinafter defined). Any amounts payable under this Section 3.2(b)(i) shall be exclusive of and in addition to any payments or benefits which Fares' widow, beneficiaries or estate may be entitled to receive pursuant to any pension plan, profit sharing plan, any employee benefit plan, equity incentive plan or life insurance policy maintained by the Company. (ii) DISABILITY. If the Disability of Fares occurs, the Company may give to Fares written notice in accordance with Section 6.1 of this Agreement of its intention to terminate Fares' employment. In such event, Fares' employment with the Company shall terminate effective on the 30th day after receipt of such notice by Fares (the "Disability Effective Date"), unless within the 30-day period after such receipt, Fares returns to full-time performance of his duties. The Company's sole obligation to Fares shall be payment of Accrued Obligations (as hereinafter defined) and the timely payment or provision of other benefits, including disability and other benefits provided by the Company to disabled executives and/or their families in accordance with such Company plans, programs, practices and policies relating to disability, if any. (c) OBLIGATIONS FOR ALL OTHER TERMINATION REASONS. For any other reason, upon the termination of this Agreement and Fares' employment hereunder apart from a Change of Control, the Company shall pay to Fares an amount equal to the sum of (i) Fares' annual base salary at the 3 time Fares' employment is terminated; plus (ii) Fares' average annual bonus received over the eight (8) fiscal quarters of the Company immediately preceding Company's fiscal quarter during which Fares' employment is terminated, without exceeding Fares' target bonus for Company's fiscal year during which Fares' employment is terminated, provided, however, that Fares shall receive his target bonus if he is terminated within his first eight (8) fiscal quarters with the Company; plus (iii) Fares' auto allowance for the Company's fiscal year during which Fares' employment is terminated. In addition, the Company shall provide, at Company's expense, continued coverage for Fares and his beneficiaries for a period extending through the earlier of the date Fares begins any subsequent full-time employment for pay and the date that is one (1) year after Fares' termination of employment, under the Company's health plan covering Fares and Fares' beneficiaries, provided that Fares properly elects coverage pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974, as amended ("COBRA"). 3.3. COMPANY'S OBLIGATIONS ON TERMINATION DUE TO A CHANGE OF CONTROL. (a) DEFINITIONS. (i) For purposes of this Agreement, a "Change of Control" shall mean: (A) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (for the purposes of this Section 3.3, a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company shall not constitute a Change of Control; or (B) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual (other than an individual whose initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board) who becomes a director subsequent to the date hereof whose election or nomination for election was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (C) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination") unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities 4 immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities and (ii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (D) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (ii) For purposes of this Agreement, "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (iii) For purposes of this Agreement, "Involuntary Termination" shall mean Fares' voluntary termination following (A) a change in Fares' position with the Company which materially reduces Fares' level of responsibility, (B) a reduction in Fares' Base Salary, or (C) a change in Fares' place of employment, which is more than seventy-five (75) miles from Fares' place of employment prior to the change, provided and only if such change or reduction is effected without Fares' written concurrence. (iv) For purposes of this Agreement, "Date of Termination" shall mean (A) if Fares' employment is terminated by the Company for Cause, or by Fares, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (B) if Fares' employment is terminated by the Company for other than for Cause or Disability, the date on which the Company notifies Fares of such termination and (C) if Fares' employment is terminated by reason of death or disability, the date of death of Fares or the Disability Effective Date, as the case may be. (v) For purposes of this Agreement, "Accrued Obligations" shall mean the sum of (A) Fares' Base Salary through the Date of Termination to the extent not theretofore paid, (B) the greater of (I) the product of (x) any Incentive Compensation paid to or deferred by Fares for the fiscal year preceding the fiscal year in which Fares' Date of Termination occurs (annualized in the event that Fares was not employed by the Company for the whole of such fiscal year) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (II) the average of the past three (3) years' annual bonuses, provided, however, that Fares shall receive his target bonus if he is terminated within his first eight (8) fiscal quarters with the Company (such greater amount being the "Highest Annual Bonus") and (C) any compensation previously deferred by Fares (together with any accrued interest or earnings thereon) 5 and any accrued vacation pay, in each case to the extent not theretofore paid. Notwithstanding the foregoing, in no event will Fares be entitled to a duplication of any Incentive Compensation payments. (b) SEVERANCE BENEFITS FOR TERMINATION WITHIN TWO (2) YEARS OF A CHANGE OF CONTROL. If Fares' employment with the Company terminates by reason of Fares' Involuntary Termination (as defined in Section 3.3(a)(iii) above) or termination by the Company without Cause (as defined in Section 3.2(a)(ii)) above) within two (2) years of the effective date of the Change of Control, Fares shall be entitled to receive the following: (i) Company must pay Fares an amount equal to 150% of the sum of (A) Fares' Base Salary and (B) his Highest Annual Bonus; (ii) Company shall also pay Fares any Accrued Obligations; and (iii) Company shall provide, at its expense, continued coverage of Fares and Fares' beneficiaries for eighteen (18) months after the Date of Termination or until Fares commences any full-time employment, whichever comes first, under the Company's health plan covering Fares and Fares' beneficiaries, provided, however, that Fares properly elects coverage pursuant to COBRA. (c) SEVERANCE BENEFITS FOR TERMINATION AFTER THE SECOND YEAR FOLLOWING A CHANGE OF CONTROL. If Fares is terminated after the second year following a Change of Control, the Company's obligations are as set forth in Section 3.2 of this Agreement. (d) STOCK OPTIONS AFTER A CHANGE OF CONTROL. Subject to Section 2.3 of this Agreement, all Fares' outstanding stock options to purchase Company common stock shall accelerate and become fully exercisable. 3.4. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY; EXCISE TAX GROSS-UP. A "Gross-Up Payment" (as defined below) shall be made to Fares when payments of compensation payable to Fares on termination of employment in connection with a Change of Control, including, without limitation, the vesting of an option or other non-cash benefit or property, whether pursuant to the terms of any applicable plan, arrangement or agreement with the Company or any of its affiliated companies (the "Total Payments") would trigger a tax imposed on Fares under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Excise Tax"). For purposes hereof, the Gross-Up Payment shall mean a payment to Fares in such amount as is necessary to ensure that the net amount retained by Fares, after reduction for any Excise Tax (including any penalties or interest thereon) on the Total Payments and any federal, state and local income or employment tax and Excise Tax on the Gross-Up Payment provided for by this Section 3.4, but before reduction for any federal, state or local income or employment tax on the Total Payments, shall be equal to the Total Payments. 3.5. EXCLUSIVE BENEFITS. If more than one benefit due to termination becomes payable under Sections 3.2 or Section 3.3, the greatest of such benefits shall become payable to the exclusion of all other such benefits and shall be in lieu of any other severance or similar benefits 6 that would otherwise be payable under any other agreement, plan, program or policy of the Company. Notwithstanding anything in the prior sentence to the contrary, Fares shall be entitled to benefits and incentives under all benefit plans and equity incentive plans, policies and programs (except as expressly excluded herein, including, without limitation, Section 2.3 of this Agreement) according to the terms of such benefit plans and equity incentive plans, policies and programs as in effect from time to time, including any acceleration of vesting provisions in the Company's option plans, including any benefits under the Executive Severance Plan for Officers. 4. INVENTIONS AND CREATIONS. Fares agrees that all inventions, discoveries, improvements, ideas and other contributions (collectively "Inventions") whether or not copyrighted or copyrightable, patented or patentable, or otherwise protectable in law, which are conceived, made, developed or acquired by Fares, either individually or jointly, during his employment with the Company or any of its subsidiaries, and which relate in any manner to the business of the Company or any of its subsidiaries, shall belong to the Company and Fares does hereby assign and transfer to the Company his entire right, title and interest in the Inventions. Fares agrees to promptly and fully disclose the Inventions to the Company, in writing if requested by the Company, and to execute and deliver any and all lawful application, assignment and other documents which the Company requests for protecting the Inventions in the United States or any other country. The Company shall have the full and sole power to prosecute such applications and to take all other action concerning the Inventions, and Fares will cooperate fully within a lawful manner, at the expense of the Company, in the preparation and prosecution of all such applications and in any legal actions and proceedings concerning the Inventions. The provisions of this Section 4 shall survive the termination of this Agreement. 5. NON-COMPETITION; NON-SOLICITATION; CONFIDENTIAL INFORMATION. 5.1. NON-COMPETITION AGREEMENT. Fares hereby acknowledges and agrees that the Company actively engages in its business throughout all of North America. Accordingly, Fares agrees that during the Non-Competition Period (as defined below), Fares will not, directly or indirectly, whether as a partner, officer, shareholder, 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 in any state within the United States as well as in Canada or Mexico. If Fares fails to comply with the provisions of this Section 5.1, 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 Section 3. For purposes hereof, "Non-Competition Period" shall mean the period commencing on the date hereof and ending eighteen (18) months after the later of the termination of Fares' employment hereunder or Fares' submission of his resignation, or removal of Fares as Chief Information Officer of the Company and the Company's payment and provision of Change of Control severance benefits pursuant to Section 3.3. 5.2. NON-SOLICITATION AGREEMENT. During the term of this Agreement and for a period of eighteen (18) months thereafter, Fares shall not, directly or indirectly, individually or on behalf of any Person (as defined below) solicit, aid or induce (a) any then current employee of the Company to leave the Company in order to accept employment with or render services for Fares or such Person or (b) any customer, client, vendor, lender, supplier or sales representative of the Company 7 or similar persons engaged in business with the Company to discontinue the relationship or reduce the amount of business done with the Company. "Person" means any individual, a partnership, a corporation, an association, a limited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization, a governmental entity, or any department, agency or political subdivision thereof, or an accrediting body. 5.3. CONFIDENTIAL INFORMATION. Fares acknowledges and agrees that he is in possession of and will be exposed to during the course of, and incident to, his employment by and affiliations with the Company, Confidential Information (as defined herein) relating to the Company and its affiliated companies. For purposes hereof, "Confidential Information" shall mean all proprietary or confidential information concerning the business, finances, financial statements, properties and operations of the Company and its affiliated companies, including, without limitation, all customer and prospective customer and supplier lists, know-how, trade secrets, business and marketing plans, techniques, forecasts, projections, budgets, unpublished financial statements, price lists, costs, computer programs, source and object codes, algorithms, data, and other original works of authorship, along with all information received from third parties and held in confidence by the Company and its affiliated companies (including, without limitation, personnel files and employee records). During the Non-Competition Period and at all times thereafter, Fares will hold the Confidential Information in the strictest confidence and will not disclose or make use of (directly or indirectly) the Confidential Information or any portion thereof to or on behalf of himself or any third party except (a) as required in the performance of his duties as an employee, director or shareholder of the Company, (b) as required by the order of any court or similar tribunal or any other governmental body or agency of appropriate jurisdiction; provided, that Fares shall, to the extent practicable, give the Company prior written notice of any such disclosure and shall cooperate with the Company in obtaining a protective order or such similar protection as the Company may deem appropriate to preserve the confidential nature of such information. The foregoing obligations to maintain the Confidential Information shall not apply to any Confidential Information, which is, or, without any action by Fares, becomes generally available to the public. Upon termination of any employment or consulting relationship between the Company and Fares, Fares shall promptly return to the Company all physical embodiments of the Confidential Information (regardless of form or medium) in the possession of or under the control of Fares. 5.4. SCOPE OF RESTRICTION. The parties have attempted to limit the scope of the covenants set forth in Section 5 to the extent necessary. The parties recognize, however, that reasonable people may differ in making such determination. Consequently, the parties hereby agree that if the scope and duration of such covenants would, but for this provision, be deemed by a court of competent authority to be unreasonable or otherwise unenforceable, such court may modify such covenants to the extent that such court determines to be necessary in order to grant enforcement thereof as so modified. 5.5. REMEDIES. The parties hereto recognize that the Company will suffer irreparable injury in the event of a breach of the terms of Section 5 by Fares. In the event of a breach of the terms of Section,5, the Company shall be entitled, in ADDITION to any other remedies and damages available and without proof of monetary or immediate damage, to a temporary and/or permanent injunction, without the necessity of posting a bond, to restrain the violation of Section 5. by Fares 8 or any Persons acting for or in concert with him. Such remedy, however, shall be cumulative and nonexclusive and shall be in addition to any other remedy, which the parties may have. 5.6. COMMON LAW OF TORTS OR TRADE SECRETS. The parties agree that nothing in this Agreement shall be construed to limit or negate the common law of torts or trade secrets where it provides the Company with broader protection than that provided herein. 5.7. SURVIVAL OF SECTION 5. The provisions of Section 5 shall survive the termination of Fares' employment and the termination of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. INSURANCE AUTO AUCTIONS, INC. By: /s/ Thomas C. O'Brien --------------------------------------- Name: Thomas C. O'Brien Title: President and Chief Executive Officer /s/ Edward Fares --------------------------------- Edward Fares 9 EX-21.1 7 c68377ex21-1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 Subsidiaries of Insurance Auto Auctions, Inc.
Jurisdiction Name of Incorporation ---- ---------------- Insurance Auto Auctions Corp. (wholly owned) Delaware IAA Services, Inc. (wholly owned) Illinois IAA Acquisition Corp. (wholly owned) Delaware
EX-23.1 8 c68377ex23-1.txt CONSENT OF KPMG LLP EXHIBIT 23.1 Consent of KPMG LLP Board of Directors Insurance Auto Auctions We consent to incorporation by reference in the registration statement No. 33-48805 on Form S-8 of Insurance Auto Auctions, Inc. of our report dated March 1, 2002 relating to the consolidated balance sheets of Insurance Auto Auctions, Inc. and subsidiaries as of the end of fiscal years 2001 and 2000 and the related consolidated statements of operations, shareholder's equity, and cash flows for each of the years 2001, 2000 and 1999 which report appears in the December 30, 2001 annual report on Form 10-K of Insurance Auto Auctions, Inc. /s/ KPMG LLP Chicago, Illinois March 29, 2002 EX-24.1 9 c68377ex24-1.txt POWER OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY The undersigned directors of Insurance Auto Auctions, Inc. (the "Corporation"), hereby appoint Thomas C. O'Brien and Scott P. Pettit as their true and lawful attorneys-in-fact, with full power for and on their behalf to execute, in their names and capacities as directors of the Corporation, and to file with the Securities and Exchange Commission on behalf of the Corporation under the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 30, 2001. This Power of Attorney shall automatically terminate at the close of business on March 31, 2002. In witness whereof, the undersigned has executed this Power of Attorney on this 20th day of March, 2002. NAME TITLE ---- ----- /s/ Joseph F. Mazzella Chairman of the Board - ------------------------------------- Joseph F. Mazzella /s/ Thomas C. O'Brien Director and CEO - ------------------------------------- Thomas C. O'Brien /s/ Maurice A. Cocca Director - ------------------------------------- Maurice A. Cocca /s/ Susan B. Gould Director - ------------------------------------- Susan B. Gould /s/ Peter H. Kamin Director - ------------------------------------- Peter H. Kamin /s/ Melvin R. Martin Director - ------------------------------------- Melvin R. Martin /s/ Jeffrey W. Ubben Director - ------------------------------------- Jeffrey W. Ubben /s/ John K. Wilcox Director - ------------------------------------- John K. Wilcox -----END PRIVACY-ENHANCED MESSAGE-----