-----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, AQbfQcEZ7S+FIps1kQMPlcAcp+hQMhvzPePos7NUf6wjrUfAKwQigPzbEj9+qZgw f/fwJa2VYC1Y/AAf4R7/QA== 0000950137-04-002292.txt : 20040329 0000950137-04-002292.hdr.sgml : 20040329 20040329161011 ACCESSION NUMBER: 0000950137-04-002292 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20031228 FILED AS OF DATE: 20040329 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19594 FILM NUMBER: 04696325 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-K 1 c83969e10vk.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 28, 2003 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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of Registrant's voting stock, based on the closing price of the Registrant's Common Stock as of June 29, 2003, was approximately $50,822,000. For purposes of this calculation, the Registrant's directors, executive officers and 5% shareholders have been assumed to be affiliates. As of March 1, 2004, the Registrant had outstanding 11,538,299 shares of common stock, $0.001 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Notice of Annual Meeting and Proxy Statement for the Registrant's Annual Meeting of Shareholders, scheduled to be held on June 16, 2004, are incorporated herein by reference in Part III hereof. ================================================================================ INSURANCE AUTO AUCTIONS, INC. FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I. Item 1. Business................................................................................... 3 Item 2. Properties................................................................................. 12 Item 3. Legal Proceedings.......................................................................... 12 Item 4. Submission of Matters to a Vote of Security Holders........................................ 13 PART II. Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.................................................. 14 Item 6. Selected Financial Data.................................................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 16 Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................. 22 Item 8. Financial Statements and Supplementary Data................................................ 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 23 Item 9A. Controls and Procedures.................................................................... 23 PART III. Item 10. Directors and Executive Officers of the Company............................................ 24 Item 11. Executive Compensation..................................................................... 24 Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 24 Item 13. Certain Relationships and Related Transactions............................................. 24 Item 14. Principal Accountant Fees and Services..................................................... 24 PART IV. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 25
2 PART I ITEM 1. BUSINESS. This Report contains forward-looking statements that are 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 statements. In some cases, you can identify forward looking statements by 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." You should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, the Company undertakes no obligation to publish, update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. OVERVIEW Insurance Auto Auctions, Inc., together with its subsidiaries, provides 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 salvage and theft-recovered vehicles at live or closed bid auctions on a competitive-bid basis at one of the Company's facilities. The Company processes salvage vehicles primarily under three methods: fixed fee consignment, percentage of sale consignment, and purchase agreement. 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 the purchase agreement method, the Company 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 the Company's own account at the Company's auctions. Under all methods of sale, the Company also charges the buyer of each vehicle various buyer-related fees. The Company has grown through the acquisition of additional auto salvage pool operations and opening of new facilities in strategic locations, resulting in a network of 75 sites in 31 states as of March 1, 2004. A majority of the vehicles currently processed by the Company are sold under the fixed fee and percentage of sale consignment arrangements. In 2003, 52% of the vehicles processed by the Company were sold under the fixed fee consignment method, 42% were sold under the percentage of sale consignment method, and 6% were sold under the purchase agreement method. The Company obtains the majority of its supply of vehicles from insurance companies and smaller quantities from non-insurance company suppliers such as rental car companies and non-profit organizations. Historically, a limited number of insurance companies have accounted for a substantial portion of the Company's revenues. In 2003, vehicles supplied by the Company's three largest suppliers accounted for approximately 36% of the Company's unit sales, a 6% decrease from 2002. The largest suppliers, State Farm Insurance, Farmers Insurance, and Allstate Insurance accounted for approximately 16%, 12%, and 8%, respectively, of the Company's 2003 unit sales. 3 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. Its common stock is traded on the Nasdaq National Market(R) under the symbol "IAAI". In 1997, the Company reincorporated in the State of Illinois. FIXED FEE CONSIGNMENT SALE METHOD In 2003 and 2002, the percentage of vehicles processed by the Company that were sold under the fixed fee consignment sale method was approximately 52% and 41%, respectively. Under this sale method, the Company charges fees to the insurance company supplier for specific services. These fees typically include a salvage sales fee plus towing, title processing and storage fees. With this method of sale, the Company acts as an agent for the insurance company, arranges for the salvaged vehicle to be towed to its facility and processes it for sale. Because the Company never takes ownership of the vehicle, the Company's revenues per vehicle from consignment sales are received only from these fixed fees rather than from the revenue from the sale of the vehicle. As a result, exclusive of the buyer fees, revenue recognized per vehicle under the fixed fee consignment method of sale is approximately 5% to 15% of the revenue recognized per vehicle under the purchase agreement method, where the Company's revenue is principally comprised of the sale price of the vehicle. PERCENTAGE OF SALE CONSIGNMENT METHOD In 2003 and 2002, the percentage of vehicles processed by the Company that were sold under the percentage of sale consignment method was approximately 42% and 49%, respectively. Pursuant to this method of sale, the Company acts as an agent for the insurance company and receives a negotiated percentage of the vehicle selling price. As an agent, the Company arranges for the salvaged vehicle to be towed to its facility and processes it for sale for a fee based on a percentage of sale price. The percentage of sale consignment method provides suppliers with a potentially greater upside as the Company's fees are tied to selling prices and, thus, the salvage supplier has a greater incentive to invest in improvements to salvage vehicles in order to maximize sales prices. Because the Company never takes ownership of the vehicle, the Company's revenues per vehicle from percent of sale consignment sales are generated from these sales fees rather than from the revenue from the sale of the vehicle. As a result, exclusive of the buyer fees, revenue recognized per vehicle under the percentage of sales consignment method is approximately 5% to 15% of the revenue recognized per vehicle under the purchase agreement method, where the Company's revenue is principally comprised of the sale price of the vehicle. PURCHASE AGREEMENT METHOD In 2003 and 2002, the percentage of vehicles processed by the Company that were sold under the purchase agreement method of sale was approximately 6% and 10%, 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, or ACV, which is equal to the estimated pre-accident fair value of the vehicle. ACV for any given vehicle depends on the vehicle's age and certain other conditions, including whether the vehicle is a total-loss or a recovered theft vehicle. The Company 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. Because 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. Revenue recorded from the sale of a purchase agreement vehicle represents the actual selling price of the vehicle. The cost of the vehicle under this method is reflected in the vehicle cost line of cost of sales. 4 SERVICES PROVIDED TO ALL SUPPLIERS The process of salvage disposition through the Company's system begins at the first report of loss, or when a stolen vehicle has been subsequently recovered. An insurance company representative consigns 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 tool, vehicle providers have 24-hour access to their total-loss data. The information provided through this system 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 system 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 effectively. CSA Today's daily updates provide current and meaningful data to the Company's vehicle providers. The Company also offers a total-loss appraisal service, FastTrack(R). 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 the Company'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 consignment in a designated service area. When retrieving a vehicle, the FastTow 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 on behalf of the Company 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, or VICs, at many of the Company's facilities. A VIC is a temporary storage and inspection facility located at a Company 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 determines that a vehicle is a total loss, it can easily be moved to one of the Company's vehicle storage areas. If the vehicle is not totaled, it is promptly delivered to the insurer's selected repair facility. The Company 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 the Company. For most vehicles stored at the Company's facilities, no storage charges accrue for a contractually specified period of time. The Company provides 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 5 comply with DMV requirements for these vehicles. This may involve re-registering the vehicle and obtaining a salvage certificate, after which the Company is entitled to sell the vehicle. The Company generally conducts auctions either every week or bi-weekly at each of its locations. These auctions are either live or sealed bid. Auction lists can be viewed online on the Company's 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 Company's Auction Center, at www.iaai-bid.com(SM), is an online, Internet-based bidding forum to preview and bid on salvage vehicles at all of the Company's 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 generally 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 that allows an insurance company supplier to consign all of its salvage vehicles to a call center. This call center enables the Company to distribute vehicle consignments throughout most of the United States, even in markets where the Company 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 the Company'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. The Company 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. The Company 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. The Company'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. Vehicles purchased under BidFast are accounted for under the purchase agreement method of sale. 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; 6 (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 offering 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(R) service in which certain salvage vehicles are driven during the auction to demonstrate to prospective 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. As of March 1, 2004, the Company operated 75 sites in 31 states. The Company intends to continue to pursue acquisitions of strategically located salvage pools. Through such acquisitions, it seeks to enhance geographically broad-based relationships with key insurance company suppliers, in addition to offering its specialized salvage services to new insurance companies and other 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 its existing operations. Among other things, future acquisitions will require continued 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 allows the Company to capitalize 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 existing and prospective customers national and regional supplier agreements. These agreements can provide a more consistent reporting and control function to the Company's customers, who benefit from a reduction in the number of service providers through which they must do business. 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 consignment 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 the Company's system and the insurance company's system. EDI/EFT electronically expedites the total-loss 7 recovery process. Reduced manual intervention combined with faster, more accurate service translates into quicker turnaround on the final settlement. SurePay(R) is the Company'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 customer bank accounts. MARKETING The Company's internal sales force is its primary method of marketing its services to insurance company and non-insurance company salvage suppliers. These individuals solicit prospective vehicle providers at the national, regional and local level. Branch managers also provide support in the form of day-to-day customer service and address customer needs at the local 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, entitled OnTrack, and other local market updates that discuss how the Company addresses 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 its products and services. Using historical data supplied by prospective suppliers, the Company can provide 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 turn-key claims processing services. In addition to providing insurance companies and certain non-insurance company suppliers with a means of disposing salvage vehicles, the Company also offers services intended to increase the net amount of salvage sale proceeds received by suppliers while also reducing the time required to receive net proceeds. The Company seeks to become an integral part of its suppliers' salvage processes, 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 insurance company branch offices 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 company suppliers on a national basis or within an expanded geographic area. The Company sells the majority of its vehicles through live auctions and maintains databases that contain information regarding over 37,500 registered buyers. No single buyer accounted for more than 10% of the Company's revenue in 2003, 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 for purchased vehicles. Vehicles are sold "as is" and "where is." In advance of an auction, sales notices listing the vehicles to be auctioned on a particular day at a particular location are usually available at the auction facility or online on the Company's 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 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 The Company faces intense competition for the supply of salvage vehicles as well as competition from processors of vehicles from other regional salvage pools. The Company may encounter further competition from existing competitors and new market entrants that are significantly larger and have greater financial and marketing resources. Other potential competitors 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 the Company. While most insurance companies have abandoned or reduced efforts to sell salvage vehicles without the use of service providers such as the Company, they may in the future decide to dispose of their 8 salvage directly to end users. The Company may not be able to compete successfully against current or future competitors, which could impair its ability to grow and achieve or sustain profitability. GOVERNMENTAL REGULATION The Company's operations are subject to regulation, supervision and licensing under various federal, state and local agencies statutes and ordinances. 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 the regulation of sales and acquisitions of vehicles, the Company is also subject to various local zoning requirements with regard to the location of its auction and storage facilities. These zoning requirements vary from location to location. Failure to comply with present or future regulations or changes in existing regulations could have a material adverse effect on the Company's operating results and financial condition. See "Factors That May Affect Future Results." ENVIRONMENTAL REGULATION. The Company's operations are subject to federal, state and local environmental laws and regulations. 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. To date, the Company has not incurred significant expenditures for preventive or remedial action with respect to contamination or the use of hazardous materials. Environmental laws and regulations, however, could become more stringent over time and the Company may be subject to significant compliance costs in the future. Future contamination at any one or more of the Company's facilities, or the potential contamination by previous users of certain acquired facilities, create the risk, however, that the Company could incur significant 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. EMPLOYEES At March 1, 2004, the Company employed 979 full-time persons. The Company is not subject to any collective bargaining agreements and believes that its relationship with its employees is good. AVAILABLE INFORMATION The Company files annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a Web site that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company also makes available free of charge on or through its Web-site (http://www.iaai.com) copies of the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as 9 soon as reasonably practicable after the Company electronically files such materials with, or furnishes them to, the SEC. 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. Period Fluctuations. The Company's operating results have in the past and may in the future fluctuate significantly depending on a number of factors. These factors include, but are not limited to, the ACV 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 buyer 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, but are not limited to, driving patterns, 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. Future decreases in the quality and quantity of vehicle inventory, and in particular the availability of newer and less-damaged vehicles, especially for inventory disposed of under the purchase agreement method of sale, would have a material adverse effect on the operating results and financial condition of the Company. 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. Furthermore, revenues for any future quarter are not predictable with any significant degree of accuracy, and the Company's operating results may vary significantly due to its relatively fixed expense levels. Due to all of the foregoing factors, it is likely that in some future quarters the Company's operating results will fall below the expectations of public market analysts and investors. Any failure to meet expectations of securities analysts or the market in general could adversely affect the market price of the Company's common stock. Competition. The Company faces intense competition for the supply of salvage vehicles as well as competition from processors of vehicles from other regional salvage pools. The Company may encounter further competition from existing competitors and new market entrants that are significantly larger and have greater financial and marketing resources. Other potential competitors 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 the Company. While most insurance companies have abandoned or reduced efforts to sell salvage vehicles 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. The Company may not be able to compete successfully against current or future competitors, which could impair its ability to grow and achieve or sustain profitability. 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 2003, vehicles supplied by the Company's three largest suppliers accounted for approximately 36% of the Company's total unit sales. The largest suppliers, State Farm Insurance, Farmers Insurance, and Allstate, accounted for approximately 16%, 12%, and 8%, respectively, of the Company's unit sales. A loss or reduction in the number of vehicles from any of these suppliers, or adverse changes in the agreements that these suppliers have with the Company, could have a material adverse effect on the Company's operating results, financial condition and quantity or quality of inventory. Enterprise-Wide System Redesign Project. The Company developed a new enterprise-wide application to manage its salvage and auction process. The new Web-based system is intended to support and streamline vehicle registration and tracking, financial reporting, transaction settlement, vehicle title transfer, and branch/headquarters communications. Development and testing of the enterprise-wide application began in the third quarter of 2001. The Company began rolling out the new system to its branches during the third quarter of 2002. Though the Company encountered some unanticipated issues during the implementation phase, which delayed completion of the project and caused the Company to incur additional costs beyond the project's original estimates, the Company completed the roll-out of the new system by the end of 2003. However, there remain inherent risks associated with the application and continued enhancements of the new system that could continue to adversely impact the Company's ability to achieve cost savings and increased profitability. 10 Governmental Regulation. The Company's operations are subject to regulation, supervision and licensing under various federal, state and local agencies statutes and ordinances. 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 could result in increased costs, reduced salvage vehicle prices and decreased profitability for the Company. In addition to the regulation of sales and acquisitions of vehicles, the Company is also subject to various local zoning requirements with regard to the location of its auction and storage facilities. These zoning requirements vary from location to location. Failure to comply with present or future regulations or changes in existing regulations could have a material adverse effect on the Company's operating results and financial condition. Provision of Services as a National or Regional Supplier. The provision of services to insurance company suppliers on a national or regional basis requires that the Company 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 these expenses by the insurance company suppliers. The Company may not realize sufficient revenue from these services to cover these expenses, in which case, its results of operations may be materially adversely affected. 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. The Company may not be able to continue to acquire new facilities or add additional facilities on terms economically favorable to the Company, or at all, or 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 the 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. In the future, the Company will also 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, train and manage 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 will 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. Any failure to meet expectations of securities analysts or the market in general could adversely affect the market price of the Company's common stock. Environmental Regulation. The Company's operations are subject to federal, state and local environmental laws and regulations. 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. To date, the Company has not incurred significant expenditures for preventive or remedial action with respect to contamination or the use of hazardous materials. Environmental laws and regulations, however, could become more stringent over time and the Company may be subject to significant compliance costs in the future. Future contamination at any one or more of the Company's facilities, or the potential contamination by previous users of certain acquired facilities, create the risk, however, that 11 the Company could incur significant expenditures for preventive or remedial action, as well as potential liability arising as a consequence of hazardous material contamination, which could have a material adverse effect on the Company's operating results and financial condition. ITEM 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 on September 30, 2004. The Company and its subsidiaries also lease approximately 63 properties in Alabama, Arkansas, Arizona, California, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New York, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Utah, Virginia, Washington and Wisconsin. The Company owns 12 properties located in Illinois, Kansas, Massachusetts, Michigan, New Mexico, New York, Oklahoma, South Carolina and Texas. All 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 on reasonably acceptable terms 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. Emery Air Freight Accident On February 4, 2003, the Company filed a lawsuit in the Superior Court of California, County of Sacramento, against Emery Air Freight, Tennessee Technical Services, and Bob and Corrine Spence. The lawsuit seeks to recover damages caused by the crash of an Emery DC-8 aircraft onto the Company's Rancho Cordova, California facility on February 16, 2000. The aircraft was destroyed, and the three crew members aboard the aircraft were killed. The crash and the resulting release of jet fuel and fire destroyed a significant part of the Company's facility and contaminated it with ash, hydrocarbon, lead and other toxic materials. Emery refused to clean up the contamination, and the Company was required to do so. The Company suffered more than $3.0 million in inventory loss, clean-up and remediation costs, business interruption losses, legal and consulting fees, and other losses, costs, and expenses. In its lawsuit, the Company seeks to recover from Emery and Tennessee Technical Services for negligence, trespass, and negligent maintenance of the aircraft. Alternatively, the Company seeks to recover from the Spences for breach of provisions in the Company's lease requiring the landlord to either pay for or share the cost of remediation of hazardous wastes. The Company maintained insurance policies that covered a significant portion of its losses. The Company's insurer, Reliance Insurance Company, paid almost $1.0 million on the Company's lost inventory claims. However, in October 2001, the Pennsylvania Insurance Commissioner put Reliance into reorganization, a petition in bankruptcy was filed, and it appears unlikely that Reliance will make any further payments to the Company. The Company has filed claims with the California Insurance Guarantee Association, which provides coverage for California property losses insured by an admitted insurer that is unable to pay covered claims. The Association has refused to pay the Company's claims and has taken the position that its liability to the Company is limited to $0.5 million. The Company anticipates that it will incur substantial legal fees and costs in its efforts to recover its losses, and there is no guarantee that the Company will be successful. Proposed Relocation of the Woodinville Branch On September 16, 2003, the Company received notice from the King County Wastewater Treatment Division, Department of Natural Resources, that King County was in the process of building a water treatment facility and that the Company's Woodinville, Washington branch was located within the boundaries of the likely site for placement of this facility. In the notice, the Company was advised that if the site was selected, King County would pursue acquisition of the property from the Company's landlord, Waterman Properties. On October 3, 2003, the Company received further notice from King County that it had extended an offer to purchase the Woodinville site from Waterman Properties and that, if the offer was accepted, the Company would be expected to enter into a lease arrangement with King County until such time as King County directed it to vacate the 12 facility. The notice stated that the Company would be entitled to at least ninety (90) days notice prior to being required to vacate. In an open house meeting on December 1, 2003, King County announced that it expected all property owners and tenants to vacate the proposed water treatment site no later than the end of 2004. To date, the Company has not received formal notice of this timeline from King County; instead, the Company was advised of the timeline from counsel who attended the open house meeting. While the timeline in which the Company would be required to vacate is uncertain, the Company considers it likely to occur by the end of 2004. King County and the Company's landlord remain in negotiations for the sale of the property. The Company has retained counsel and other consultants to assist in its relocation effort, to protect the Company's interests in the value of leasehold improvements made to the premises, and to recover costs resulting from the relocation. Pursuant to applicable law, the Company is entitled to reimbursement of certain costs associated with the relocation of its business from this site to another suitable location. Under the Company's lease with Waterman Properties, it is entitled to the value of its leasehold improvements. There is currently a dispute between the Company and Waterman Properties regarding how to value the improvements made to the Woodinville facility. On March 4, 2004, the Company filed a lawsuit in Snohomish County Superior Court against King County and Waterman Properties, asking the Court to appoint a receiver to manage a portion of the funds (up to $1.5 million) that Waterman Properties might receive from King County and to award the Company a portion of the condemnation award in an amount equal to the value of its leasehold improvements. The outcome of this action is uncertain at this time. 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 28, 2003. 13 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. The Company's Common Stock is traded on The Nasdaq National Market under the symbol IAAI. The following table sets forth the range of high and low sales prices per share for the Company's common stock for the periods indicated. At March 1, 2004, the Company had 392 holders of record of its common stock, approximately 1,380 beneficial owners and 11,538,299 shares outstanding.
FISCAL 2003 FISCAL 2002 ------------------ ----------------- HIGH LOW HIGH LOW ------ ------ ------ ------ First Quarter $17.05 $ 8.64 $17.33 $14.30 Second Quarter 14.85 10.94 22.38 16.53 Third Quarter 14.80 10.70 20.36 14.51 Fourth Quarter 14.85 10.95 18.35 14.63
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 financing agreement limits the Company's ability to pay cash dividends to no more than 25% of the Company's consolidated net income earned over a specified period. The Company records treasury stock purchases using the cost method of accounting. In March 2003, the Company repurchased 757,409 shares of its common stock at an average price of $9.77 per share and a total cost of $7.4 million. During the second quarter of 2003, the Company repurchased an additional 49,800 shares at an average price of $12.27 per share and a total cost of $0.6 million. The Company did not repurchase any shares during the remainder of the year. On a year-to-date basis, the Company has repurchased 807,209 shares at an average price of $9.93 per share and a total cost of $8.0 million.
ISSUER PURCHASES OF EQUITY SECURITIES (c) TOTAL NUMBER OF (d) MAXIMUM (a) TOTAL SHARES PURCHASED AS NUMBER OF SHARES NUMBER OF (b) AVERAGE PART OF PUBLICLY THAT MAY YET BE SHARES PRICE PAID ANNOUNCED PLANS OR PURCHASED UNDER THE PERIOD PURCHASED PER SHARE PROGRAMS(1) PLANS OR PROGRAMS - -------------- ---------- ----------- ------------------- ---------------------- First quarter 757,409 $ 9.77 757,409 742,591 Second Quarter 49,800 12.27 49,800 1,442,791 Third Quarter - - - 1,442,791 Fourth quarter - - - 1,442,791
(1)The Company's Board of Directors authorized the purchase of 1,500,000 shares of the Company's common stock in September 2000 and an additional 750,000 shares in April 2003, for a combined authorization of 2,250,000 shares. Purchases may be made from time to time in the open market or in privately negotiated transactions, subject to the requirements of applicable laws, and will be financed with existing cash and cash equivalents, and cash from operations. As of December 28, 2003, the Company had purchased 807,209 shares pursuant to this authorization at an average price of $9.93 per share. The repurchase plan expires upon the repurchase of all authorized shares. 14 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 2003, 2002 and 2001 and the balance sheet data as of December 28, 2003 and December 29, 2002 below have been derived from the Company's Consolidated Financial Statements included elsewhere herein that have been audited by KPMG LLP, independent certified public accountants, whose report is also included herein. The statement of earnings data for 1999 and 1998 and the balance sheet data for 2000, 1999 and 1998 are derived from audited consolidated financial statements not included herein.
2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- (in thousands, except per share amounts) Selected Statement of Earnings Data: Revenue $ 209,650 $ 234,197 $ 292,990 $ 333,176 $ 317,391 Earnings (loss) from operations(1) 5,065 7,426 (5,209) 17,894 23,904 Net earnings (loss) 2,332 4,008 (4,360) 10,489 13,705 Earnings (loss) per share - diluted .20 .32 (.37) .88 1.18 Weighted average common shares - diluted 11,732 12,531 11,940 11,950 11,623
2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (in thousands) Selected Balance Sheet Data: Working capital $ 20,979 $ 23,787 $ 25,286 $ 53,204 $ 46,989 Total assets 287,793 259,650 278,204 265,707 248,132 Long-term debt, excluding current installments 16,887 59 103 20,141 20,180 Total shareholders' equity $189,086 $194,102 $188,994 $187,741 $175,286
(1)Loss from operations for the fiscal year 2001 includes the following restructuring and asset impairment charges: (1) $1.9 million for severance costs; (2) $2.6 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-down of $1.4 million of unamortized leasehold improvements; and (5) a $1.0 million write-off of amounts due from the Company's previous insurance carrier, which was placed in liquidation. Earnings from operations for the fiscal year 2000 includes $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. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The discussion in this section contains forward-looking statements that are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to, management. The Company's actual results could differ materially from those discussed or implied herein. The following discussion and analysis should be read in conjunction with the Selected Financial Data and the consolidated financial statements and notes thereto appearing elsewhere in this Report. OVERVIEW Insurance Auto Auctions, Inc. provides insurance companies and other vehicle suppliers cost-effective salvage processing solutions principally on a consignment or purchase agreement method of sale. The consignment method includes both a 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. 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 75 sites as of March 1, 2004. In 2003, the Company acquired branches in Buffalo and Rochester, New York; Wichita, Kansas; Salt Lake City, Utah; Wilmington, North Carolina and Orlando, Florida and also opened new operations in Dothan, Alabama and Little Rock, Arkansas. In January 2004, the Company opened a new operation in Tucson, Arizona. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 28, 2003 COMPARED TO THE YEAR ENDED DECEMBER 29, 2002 Revenues decreased 10% to $209.7 million for the year ended December 28, 2003, from $234.2 million in 2002. The decline in revenues was primarily due to the Company's continued shift away from vehicles sold under the purchase agreement method. Under the purchase agreement method, the entire purchase price of the vehicle is recorded as revenue compared to only recording the fees collected on the sale of a vehicle under the lower risk consignment fee based arrangements. Vehicles sold under the purchase agreement method accounted for less than 6% of the total vehicles sold in 2003, versus approximately 10% in 2002. Fee income for 2003 increased 4% to $169.7 million versus $162.8 million in 2002. Fee income increased primarily due to higher unit volumes. Cost of sales decreased $20.5 million to $170.5 million for the year ended December 28, 2003, versus $191.0 million for last year. Vehicle cost of $35.3 million in 2003 was $30.2 million less than $65.5 million in 2002. This decrease is primarily related to the Company's shift away from vehicles sold under the purchase agreement method. Branch cost of $135.2 million increased $9.7 million in 2003 from $125.5 million in 2002. New 16 branches opened in 2003 account for approximately $7.0 million of additional branch costs. Excluding the impact of new branches, branch costs increased $2.7 million primarily in tow and depreciation expense. Gross profit of $39.2 million for the year ended December 28, 2003 decreased $4.0 million, or 9%, from $43.2 million for 2002. Selling, general and administrative expense of $30.2 million in 2003 was $2.5 million more than the expense of $27.7 million in 2002. This increase was primarily due to expenses associated with the implementation of the Company's new automated salvage auction processing system. Amortization of intangible assets is now included within this category of expense and amounted to $0.5 million in 2003 and $0.3 million in 2002. See Note 2 of the Notes to Consolidated Financial Statements included herein for further discussion of this change. Business transformation costs for the year ended December 28, 2003 were $3.9 million, versus $8.1 million for last year. Business transformation costs include expenses related to the Company's systems redesign project, the business process re-engineering project, severance costs and accelerated depreciation associated with the Company's former computer infrastructure. The Company began recording business transformation costs during the second quarter of 2001. 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 "Significant Items Affecting Comparability" below. Interest expense of $1.5 million for the year ended December 28, 2003 increased $0.8 million from $0.7 million for 2002. Included in interest expense for 2002 was a non-cash charge of $0.3 million to recognize the ongoing cost of the interest rate swap on the unused portion of the Company's credit facility. In February 2002, the Company used excess cash and proceeds from the sale of investments to repay its $20.0 million of 8.6% senior notes that matured on February 15, 2002 and entered into a new $30.0 million five-year unsecured credit facility. At December 29, 2002, there was no outstanding balance related to this credit facility. The credit facility was a one-year revolver that converted on February 15, 2003 into a four-year term loan. On February 15, 2003, the Company borrowed the entire $30.0 million under the unsecured credit facility. At December 28, 2003, the outstanding balance related to the term loan with its lenders was $24.4 million. On March 19, 2004, the Company entered into a Second Amended and Restated Credit Agreement with its lenders, which is described in "Financial Condition and Liquidity" below. Income tax expense for the year 2003 was $1.3 million, a decrease of $1.7 million from the income tax expense of $3.0 million for 2002. The Company's effective tax rate for the years 2003 and 2002 was 36% and 43%, respectively. The Company expects that its effective tax rate in 2004 will return to the 41% range. The Company's net earnings for the year 2003 was $2.3 million, a decrease of $1.7 million from the Company's net earnings of $4.0 million for the fiscal year 2002. YEAR ENDED DECEMBER 29, 2002 COMPARED TO THE YEAR ENDED DECEMBER 30, 2001 Revenues decreased 20% to $234.2 million for the year ended December 29, 2002, from $293.0 million in 2001. The decline in revenues is primarily due to the Company's continued shift away from vehicles sold under the purchase agreement method. Vehicles sold under the purchase agreement method accounted for less than 10% of the total vehicles sold in 2002, versus approximately 19% in 2001. Fee income for 2002 increased 5% to $162.8 million, versus $154.6 million in 2001. Fee income increased due to both unit volume and price increases during the year. Cost of sales decreased $63.6 million to $191.0 million for the year ended December 29, 2002, versus $254.6 million in 2001. Vehicle cost of $65.5 million in 2002 was $66.2 million less than $131.7 million in 2001. This decrease is primarily related to the Company's shift away from vehicles sold under the purchase agreement method. Branch cost of $125.5 million increased $2.6 million in 2002 from $122.9 million in 2001. New branches opened in 2002 account for approximately $4.0 million of additional branch costs. Excluding the impact of new branches, branch costs decreased $1.4 million from 2001, primarily in tow, auction and yard costs. 17 In 2001, the Company recorded a charge of $1.2 million for losses on vehicles under terminated agreements and still in inventory at the end of the year. This amount was included within cost of sales for fiscal 2001. During 2002, the entire $1.2 million allowance was absorbed to offset losses relating to these vehicles, all of which were sold in 2002. Gross profit of $43.2 million for the year ended December 29, 2002 increased $4.8 million, or 12%, from $38.4 million for 2001. Selling, general and administrative expense of $27.7 million for 2002 was less than the expense of $32.2 million in 2001. This decrease is the result of lower amortization of intangible assets, information services and general overhead expenses. Amortization of intangible assets and goodwill was included within this category of expense and amounted to $0.3 million in 2002 and $4.1 million in 2001. See Note 2 of the Notes to Consolidated Financial Statements included herein for further discussion of this change. Business transformation costs for the year ended December 29, 2002 were $8.1 million, versus $3.5 million for 2001. Business transformation costs include expenses related to the Company's systems redesign project, the business process re-engineering project, severance costs and accelerated depreciation associated with the Company's existing computer infrastructure. The Company began recording business transformation costs during the second quarter of 2001. 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 "Significant Items Affecting Comparability" below. Interest expense was $0.7 million for the year ended December 29, 2002, a decrease of $1.1 million from 2001. Included in interest expense for 2002 was a non-cash charge of $0.3 million to recognize the ongoing cost of the interest rate swap on the unused portion of the Company's credit facility. In February 2002, the Company used excess cash and proceeds from investments to repay its $20.0 million of 8.6% senior notes that matured on February 15, 2002 and entered into a new $30.0 million five-year unsecured credit facility. At December 29, 2002, there was no outstanding balance related to this credit facility. Income tax expense for the year 2002 was $3.0 million, an increase of $4.6 million from the income tax benefit of $1.6 million for 2001. The Company's effective tax rate for the years 2002 and 2001 was 43% and 27%, respectively. The Company's net earnings for the year 2002 was $4.0 million, an increase of $8.4 million from a $4.4 million loss for the fiscal year 2001. SIGNIFICANT ITEMS AFFECTING COMPARABILITY The Company has recorded certain various charges that have affected the comparability of its reported results of operations. In addition, the Company recorded amortization of goodwill in 2001, which ceased in 2002. The charges and amortization impacted earnings from operations and net earnings (loss) as follows (in thousands):
2003 2002 2001 ------- ------- ------- Provision for losses on vehicles purchased under terminated agreements (included in cost of sales)(a) $ - $ - $ 1,248 Business transformation costs (b) 3,902 8,067 3,451 Restructuring and asset impairment charges (c) - - 8,016 Amortization of goodwill (d) - - 3899 ------- ------- ------- Impact on earnings (loss) from operations 3,902 8,067 16,614 Tax benefits relating to above items 1,609 3,469 4,486 ------- ------- ------- Impact on net earnings (loss) $ 2,293 $ 4,598 $12,128 ======= ======= =======
18 (a) The Company successfully transitioned several large purchase agreement customers to consignment-based contracts. At the end of 2001, the Company recorded a provision of $1.2 million for anticipated losses on vehicles remaining to be sold under the prior agreements. (b) Business transformation costs include expenses relating to the Company's systems redesign project, the business process re-engineering project, severance costs and accelerated depreciation pertaining to the Company's prior computer infrastructure. (c) Restructuring and asset impairment charges recorded during 2001 include: (1) $1.9 million for involuntary severance costs; (2) $2.6 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; and (5) a $1.0 million write-off of amounts due from the Company's previous insurance carrier, which was placed in liquidation. (d) Goodwill recorded in connection with business combinations had been amortized in accordance with APB Opinion No. 17. Beginning in 2002, in accordance with FASB Statement No. 142, amortization of goodwill is no longer required, but the carrying value of goodwill is subject to write-down in the event of impairment. FINANCIAL CONDITION AND LIQUIDITY At December 28, 2003, the Company had current assets of $80.6 million, including $15.5 million of cash and cash equivalents, current liabilities of $59.6 million and working capital of $21.0 million, which represents a $2.8 million decrease from December 29, 2002. The Company's accounts receivable increased $2.8 million from $45.6 million in 2002 to $48.4 million in 2003. Accounts receivable consists of balances due from the Company's salvage providers, typically large insurance companies. Accounts receivable include advance charges paid for by the Company on behalf of salvage providers. 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 28, 2003, the Company's inventory balance was $13.6 million, a $2.4 million increase from 2002. 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 component of inventory. In 2003, the increase in inventory was due to both an increase in purchase agreement inventory and an increase in inventoried tow costs associated with the increase in consignment vehicles on hand. On June 25, 2003, the Company entered into an Amended and Restated Credit Facility. This amended facility added a $20.0 million revolving line of credit, carrying a variable rate based on LIBOR, to the existing term loan. This amended and restated facility also modified all existing covenants, except for the rent expense covenant. The amended credit facility also granted the Company latitude to purchase additional shares of its outstanding common stock. At December 28, 2003, the Company had not borrowed any funds against the additional $20.0 million revolving line of credit. At December 28, 2003, the Company's long-term debt, including current installments, consisted of $0.1 million in notes payable, bearing interest at a rate of 8.0%, and $24.4 million borrowed under its term credit facility. The credit facility was a one-year revolver that converted on February 15, 2003 into a four-year term loan carrying a variable interest rate based upon LIBOR. The aggregate principal balance of the loan is required be paid in sixteen consecutive equal quarterly installments commencing on March 31, 2003. At December 28, 2003, the Company was in compliance with its credit agreement covenants. On March 19, 2004, the Company entered into a Second Amended and Restated Credit Agreement relating to its senior credit facility. The agreement amends certain financial covenants, including those applicable as of December 28, 2003 and those applicable during fiscal 2004, provides that advances made under the facility will be subject to a monthly asset coverage test equal to 85% of eligible receivables, and requires the Company to provide collateral for amounts due under the facility in the event it fails to meet certain financial projections for two consecutive quarters. As of March 19, 2004, the Company's senior credit facility consisted of a $20.0 million revolving credit facility and a $22.5 million term credit facility. As of March 19, 2004, 19 the Company has borrowed $9.0 million against the revolving line of credit and $22.5 million under the term credit facility. Other 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 28, 2003 for the post-retirement benefits liability is approximately $2.6 million. In 2002, the Company entered into a capital lease agreement to obtain the use of new computer equipment required as part of the Company's new operating system. The capital lease terms are three years or less depending on the nature of the equipment. In 2003, property and equipment additions of $3.4 million resulted from capital lease transactions entered into during the year. At December 28, 2003, the Company's total future obligation under the capital lease is $4.7 million. Capital expenditures were approximately $16.3 million for the year ended December 28, 2003. These capital expenditures include capitalization of certain development costs related to the Company's new information system, along with various branch improvements including upgrades to existing branches and the addition of capacity in key markets. The capital expenditure amount excludes the $3.4 million of new computer equipment obtained through capital lease agreements entered into during 2003. The Company acquired six salvage pools in fiscal 2003. All of these acquisitions were accounted for using the purchase method of accounting. The results of operations of the acquired businesses are included in the Company's consolidated financial statements from the dates of acquisition. In January 2003, the Company acquired Salvage Management Inc., an operator of two auto salvage facilities in Buffalo and Rochester, New York. In April 2003, the Company acquired Wichita Insurance Pool, Inc., located in Wichita, Kansas. In June 2003, the Company acquired Wilmington Salvage and Disposal Company, Inc. located in Wilmington, North Carolina and the Damaged Vehicle division of Manheim's Orlando Orange County Auto Auction, located in Orlando, Florida. All of these acquisitions leverage the Company's existing regional coverage in those markets. In April 2003, the Company also acquired Mountain States Salvage Pool, which is located in Ogden, Utah. This acquisition represents penetration into a new market. The total cost of adding these six new facilities was less than $7.9 million. The Company's Board of Directors authorized the purchase of 1,500,000 shares of the Company's common stock in September 2000 and an additional 750,000 shares in April 2003, for a combined authorization of 2,250,000 shares. Purchases may be made from time to time in the open market or in privately negotiated transactions, subject to the requirements of applicable laws, and will be financed with existing cash and cash equivalents, and cash from operations. As of December 28, 2003, the Company had purchased 807,209 shares pursuant to this authorization at an average price of $9.93 per share. In 2003, the Company initiated a restricted stock program. Under the Company's restricted stock program, common stock of the Company may be granted at no cost to certain officers and key employees. Plan participants are entitled to cash dividends and to vote their respective shares. Restrictions limit the sale or transfer of these shares during a four year period whereby the restrictions lapse on 25% of the shares each year. Upon issuance of stock under the plan, unearned compensation equivalent to the market value at the date of grant is charged to shareholders' equity and subsequently amortized to expense over the four-year restriction period. In 2003, 66,500 restricted shares were granted. Compensation expense in 2003 was less than $0.1 million. In fiscal 2003, there were no forfeitures of restricted shares. The Company believes that existing cash and cash equivalents, as well as cash generated from operations will be sufficient to fund capital expenditures and provide adequate working capital for operations for the next twelve months. Part of the Company's plan is to pursue continued growth, possibly through new facility start-ups or acquisitions, and the development of new claims processing services. At some time in the future, the Company will likely require additional financing. There can be no assurance that additional financing, if required, will be available on favorable terms. 20 SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS The following table reflects a summary of the Company's cash obligations for each of the next five years and thereafter as of December 28, 2003:
2004 2005 2006 2007 2008 Thereafter Total -------- -------- -------- -------- -------- ---------- -------- (dollars in thousands) Long-term debt: Unsecured term loan $ 7,500 $ 7,500 $ 7,500 $ 1,875 $ - $ - $ 24,375 Notes payable 47 12 - - - - 59 Capital leases(1) 2,824 1,229 331 297 32 - 4,713 Operating leases(2) 21,719 18,391 16,047 13,061 10,898 41,782 121,898 Other long-term obligations: Non-compete agreements 345 325 313 280 240 - 1,503 -------- -------- -------- -------- -------- -------- -------- Total $ 32,435 $ 27,457 $ 24,191 $ 15,513 $ 11,170 $ 41,782 $152,548 ======== ======== ======== ======== ======== ======== ========
(1) Includes related interest expense. (2) Includes amounts due to both unrelated and related parties. CRITICAL ACCOUNTING POLICIES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and 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 As of December 28, 2003 the Company had $135.1 million of net goodwill recorded in its consolidated financial statements. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", the Company assesses 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 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 discounted cash flow. DEFERRED INCOME TAXES As of December 28, 2003, the Company had $2.1 million of deferred tax assets recorded. The deferred tax assets relate to net operating losses incurred in several of the states where the Company operates. The Company has determined that it may not realize the full tax benefit related to certain of the deferred tax assets. As such, a valuation allowance to reduce the carrying value of the deferred tax assets has been recorded. 21 LONG-LIVED ASSETS AND CERTAIN IDENTIFIABLE INTANGIBLES As of December 28, 2003, the Company had $60.2 million of net property and equipment along with net intangible assets of $2.1 million. The Company evaluates long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the asset's carrying amount to the estimated undiscounted future cash flows expected to be generated by the asset. If the estimated undiscounted future cash flows change in the future, the Company may be required to reduce the carrying amount of an asset to its fair value. RECENT ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS No. 133. SFAS 149 requires that contracts with comparable characteristics be accounted for similarly. This statement is effective for both contracts and hedging activities entered into or modified after June 30, 2003. The Company's adoption of this standard did not have a material impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The statement required issuers to classify as liabilities (or assets in some circumstances) certain classes of freestanding financial instruments that embody obligations of the issuer. Generally, the statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of the statement on June 29, 2003. The Company did not have any instruments within the scope of the statement at December 28, 2003. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities," which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", which was issued in January 2003. The Company adopted the provisions of this interpretation in December 2003. The Company did not have any variable interest entities at December 28, 2003. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to interest rate fluctuations on its floating rate credit facility, under which the Company has outstanding a $24.4 million term loan. In 2002, the Company entered into an interest rate swap to mitigate its exposure to interest rate fluctuations, and does not, as a matter of policy, enter into hedging contracts for trading or speculative purposes. At December 28, 2003, the interest rate swap agreement had a notional amount of $24.4 million under which the Company paid a fixed rate of interest of 5.6% and received a LIBOR-based floating rate. The Company recorded a non-cash benefit of $0.3 million in the first quarter of 2003 related to the change in fair value for the ineffective portion of its interest rate swap agreement. In 2003, the Company had $0.1 million of other comprehensive income, net of taxes, related to the change in fair value of the remaining portion of its interest rate swap agreement. At December 28, 2003, the entire swap agreement qualified for hedge accounting. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 15(a) for an index to the Consolidated Financial Statements which are included herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 22 ITEM 9A. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company completed an evaluation as of the end of the period covered by this Report under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in alerting them on a timely basis of material information relating to the Company required to be included in its periodic Securities and Exchange Commission filings. CHANGES IN INTERNAL CONTROLS In 2003, the Company implemented a new enterprise-wide application to manage its salvage and auction process. The new system contains many changes and enhancements to the Company's existing control procedures. 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. DIRECTORS AND EXECUTIVE OFFICERS Information required under this Item 10 is included under the caption "Nominees" in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission and incorporated herein by reference. The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement to be filed with the Securities and Exchange Commission is incorporated herein by reference. CODE OF ETHICS The Company's Board of Directors has adopted a Code of Ethics that applies to all of its directors, officers and employees, including its principal executive officer, principal financial officer, controller and principal accounting officer. The Company's Code of Ethics is available on its Web-site at www.iaai.com. Any amendments to, or waivers from, the Code of Ethics will be disclosed on the Company's Web site within the prescribed time period. ITEM 11. EXECUTIVE COMPENSATION. Information required under this Item regarding executive compensation is included under the captions "Compensation of Directors," "Executive Compensation," "Stock Options," "Employment Contracts and Change-in-Control Arrangements" and "Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required by this Item 12 is included under the caption "Ownership of Securities" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required by this Item 13 is included under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 14 is included under the caption "Proposal No. 3 - Ratification of Independent Auditors" in the Company's Proxy Statement and is incorporated herein by reference. 24 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (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 Annual report on Form 10-K:
Page ---- Independent Auditors' Report.................................................. 30 Consolidated Balance Sheets................................................... 31 Consolidated Statements of Operations......................................... 32 Consolidated Statements of Shareholders' Equity............................... 33 Consolidated Statements of Cash Flows......................................... 34 Notes to Consolidated Financial Statements.................................... 36
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 15(c) below. (b) REPORTS ON FORM 8-K. The Company filed a current report on Form 8-K, dated October 24, 2003, which contained a press release announcing financial results for the quarter ended September 28, 2003. The Company filed a current report on Form 8-K, dated February 27, 2004, which contained a press release announcing financial results for the quarter ended December 28, 2003. (C) EXHIBITS
Exhibit No Description - ------- ----------- 3.1(7) Articles of Incorporation of the Registrant, as filed with the Illinois Secretary of State on August 7, 1997. 3.2(8) Bylaws of the Registrant.
25 3.3(9) Bylaws of the Registrant, as amended as of March 21, 2001. 4.3(1) Specimen Stock Certificate. 4.5(4) Registration Agreement dated December 1, 1993, by and among the Registrant and Tech-Cor. 4.6(10)* 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(10)* Registration Rights Agreement, dated February 15, 2000, among the Company, ValueAct Capital Partners, L.P. and ValueAct Capital Partners II, L.P. 10.36(5)* 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. 10.42(6)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1995 Supplemental Stock Option Plan. 10.43 Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 2003 Stock Incentive Plan replacing the 1991 Stock Option Plan as amended and restated. 10.66(2) Facilities Lease Agreement dated January 17, 1992, by and between Melvin R. Martin and MASP. 10.67 Facilities Lease Agreement dated August 7, 2003, by and between MRM Investments, L.L.P. and Insurance Auto Auctions, Inc. as amended. 10.68 Facilities Lease Agreement dated August 7, 2003, by and between MJB Properties and Insurance Auto Auctions, Inc. as amended. 10.69 Temporary Use License Agreement dated March 1, 2004 by and between MRM Investments Limited Partnership and Insurance Auto Auctions, Inc. 10.126(4) Lease, dated December 1, 1993, by and between Allstate Insurance Company and BCAC. 10.127 Second Amended and Restated Credit Agreement, dated as of March 19, 2004, among the Registrant and the lenders from time to time parties hereto, and LaSalle Bank National Association, as Administrative Agent. 10.149(7)* Form of Change of Control Employment Agreement by and between the Company and certain of its executive officers.
26 10.150(14) Credit Agreement between the Registrant and LaSalle National Bank dated as of February 15, 2002. 10.151(14) Rate Swap Agreement pursuant to the Credit Agreement between the Registrant and LaSalle National Bank dated as of March 13, 2002. 10.152(15) Amended and Restated Credit Agreement between the Company and LaSalle National Bank dated as of June 25, 2003. 10.154(12)* Insurance Auto Auctions, Inc. Employee Stock Purchase Plan, as amended as of June 30, 2001. 10.155(8) Form of Indemnification Agreement dated as of February 24, 1999 by and between the Company and its Directors and Executive Officers. 10.160(13)* Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as amended and restated as of June 19, 2002. 10.161(9)* Executive Severance Plan for Officers dated August 9, 2000, by and between the Company and the Company's executive officers. 10.162(9)* Employment agreement, dated November 17, 2000, by and between the Company and Thomas C. O'Brien. 10.163(11)* Amended and Restated Employment Agreement dated April 2, 2001 by and between the Company and Thomas C. O'Brien. 10.164(11)* Employment Agreement dated April 2, 2001 by and between the Company and David R. Montgomery. 10.165(11)* Employment Agreement dated April 2, 2001 by and between the Company and Scott P. Pettit. 10.166(12)* Employment Agreement dated December 11, 2001 and addendum by and between the Company and Edward N. Fares. 10.175(13)* Insurance Auto Auctions, Inc. 2002 Long Term Incentive Plan 10.176(14)* Employment Agreement dated January 31, 2003 between the Company and Marcia A. McAllister. 10.177* Employment Agreement dated October 23, 2003 by and between the Company and John R. Nordin. 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. 24 Power of Attorney. 31.1 Certification of Thomas C. O'Brien, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Scott P. Pettit, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Thomas C. O'Brien, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
27 32.2 Certification of Scott P. Pettit, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(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 Current Report on Form 8-K (File No. 0-19594) filed with the SEC on December 15, 1993. (5) 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. (6) 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. (7) 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. (8) 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. (9) 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. (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 April 1, 2001. (11) 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. (12) 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 30, 2001. (13) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form S-8 (File No. 0-19594) filed with the SEC on August 5, 2002. (14) 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, 2002. (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 29, 2003. * 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. 28 SIGNATURES Pursuant to the requirements Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") the 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, 2004 POWER OF ATTORNEY 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, 2004. /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/ Peter H. Kamin Chairman of the Board of Directors - ----------------------------- Peter H. Kamin /s/ Todd F. Bourell Director - ----------------------------- Todd F. Bourell /s/ Maurice A. Cocca Director - ----------------------------- Maurice A. Cocca /s/ Philip B. Livingston Director - ----------------------------- Philip B. Livingston /s/ Melvin R. Martin Director - ----------------------------- Melvin R. Martin /s/ John K. Wilcox Director - ----------------------------- John K. Wilcox 29 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 15(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 28, 2003 and December 29, 2002 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 28, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangibles in 2002. KPMG LLP Chicago, Illinois March 25, 2004 30 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (dollars in thousands except per share amounts)
DECEMBER 28, DECEMBER 29, 2003 2002 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 15,486 $ 10,027 Accounts receivable, net 48,375 45,594 Inventories 13,602 11,158 Other current assets 3,099 3,571 --------- --------- Total current assets 80,562 70,350 --------- --------- Property and equipment, net 60,187 49,342 Deferred income taxes 9,788 7,663 Intangible assets, net 2,101 1,710 Goodwill, net 135,062 130,474 Other assets 93 111 --------- --------- $ 287,793 $ 259,650 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 35,005 $ 28,656 Accrued liabilities 14,209 15,312 Obligations under capital leases 2,822 2,552 Current installments of long-term debt 7,547 43 --------- --------- Total current liabilities 59,583 46,563 --------- --------- Deferred income taxes 17,748 14,835 Postretirement benefit obligation 2,598 2,736 Obligation under capital leases 1,891 1,355 Long-term debt, excluding current installments 16,887 59 --------- --------- Total liabilities 98,707 65,548 --------- --------- 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; 12,325,482 shares issued and 11,518,273 outstanding as of December 28, 2003; and 12,292,599 shares issued and outstanding as of December 29, 2002 12 12 Additional paid-in capital 145,856 144,420 Treasury stock, 807,209 shares (8,012) - Deferred compensation related to restricted stock (892) - Accumulated other comprehensive income (loss) (625) (745) Retained earnings 52,747 50,415 --------- --------- Total shareholders' equity 189,086 194,102 --------- --------- $ 287,793 $ 259,650 ========= =========
See accompanying Notes to Consolidated Financial Statements 31 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (dollars in thousands except per share amounts)
2003 2002 2001 --------- --------- --------- Revenues: Vehicle sales $ 39,963 $ 71,352 $ 138,427 Fee income 169,687 162,845 154,563 --------- --------- --------- 209,650 234,197 292,990 Cost of sales: Vehicle cost 35,301 65,463 131,683 Branch cost 135,157 125,530 122,867 --------- --------- --------- 170,458 190,993 254,550 --------- --------- --------- Gross profit 39,192 43,204 38,440 Operating expense: Selling, general and administrative 30,225 27,711 32,182 Business transformation costs 3,902 8,067 3,451 Restructuring and asset impairment charges - - 8,016 --------- --------- --------- Earnings (loss) from operations 5,065 7,426 (5,209) Other (income) expense: Interest expense 1,505 678 1,788 Other income (76) (275) (1,025) --------- --------- --------- Earnings (loss) before income taxes 3,636 7,023 (5,972) Provision (benefit) for income taxes 1,304 3,015 (1,612) --------- --------- --------- Net earnings (loss) $ 2,332 $ 4,008 $ (4,360) ========= ========= ========= Earnings (loss) per share: Basic $ .20 $ .33 $ (.37) ========= ========= ========= Diluted $ .20 $ .32 $ (.37) ========= ========= ========= Weighted average shares outstanding: Basic 11,652 12,235 11,940 Effect of dilutive securities - stock options 80 296 - --------- --------- --------- Diluted 11,732 12,531 11,940 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements 32 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (dollars in thousands)
Common Stock --------------------------- Additional Number Paid-in Treasury of shares Amount Capital Stock ---------- ----------- ----------- ----------- Balance at December 31, 2000 11,715,936 $ 12 $ 136,962 $ -- ========== =========== =========== =========== Net loss -- -- -- -- Stock options exercised 431,305 -- 4,904 -- Tax benefit related to stock options exercised -- -- 539 -- Shares issued for the employee stock purchase plan 15,049 -- 170 -- ---------- ----------- ----------- ----------- Balance at December 30, 2001 12,162,290 $ 12 $ 142,575 $ -- ========== =========== =========== =========== Net earnings -- -- -- -- Other comprehensive loss Change in fair value of interest rate swap contract (net of tax benefit, $467) -- -- -- -- Comprehensive income Stock options exercised 115,555 -- 1,341 -- Tax benefit related to stock options exercised -- -- 247 -- Shares issued for the employee stock purchase plan 14,754 -- 257 -- ---------- ----------- ----------- ----------- Balance at December 29, 2002 12,292,599 $ 12 $ 144,420 $ -- ========== =========== =========== =========== Net earnings -- -- -- -- Other comprehensive income- Change in fair value of interest rate swap contract (net of tax, $78) -- -- -- -- Comprehensive income Stock options exercised 6,920 -- 82 -- Tax benefit related to stock options exercised -- -- 14 -- Shares issued for the employee stock purchase plan 25,963 -- 371 -- Treasury stock purchased (807,209) -- -- (8,012) Deferred compensation -- -- 969 -- ---------- ----------- ----------- ----------- Balance at December 28, 2003 11,518,273 $ 12 $ 145,856 $ (8,012) ========== =========== =========== =========== Deferred Accumulated Compensation Other Total (Restricted Comprehensive Retained Shareholders' Stock) Income (Loss) Earnings Equity ----------- ------------ ----------- ----------- Balance at December 31, 2000 $ -- $ -- $ 50,767 $ 187,741 =========== =========== =========== =========== Net loss -- -- (4,360) (4,360) Stock options exercised -- -- -- 4,904 Tax benefit related to stock options exercised -- -- -- 539 Shares issued for the employee stock purchase plan -- -- -- 170 ----------- ----------- ----------- ----------- Balance at December 30, 2001 $ -- $ -- $ 46,407 $ 188,994 =========== =========== =========== =========== Net earnings -- -- 4,008 4,008 Other comprehensive loss Change in fair value of interest rate swap contract (net of tax benefit, $467) -- (745) -- (745) Comprehensive income 3,263 ----------- Stock options exercised -- -- -- 1,341 Tax benefit related to stock options exercised -- -- -- 247 Shares issued for the employee stock purchase plan -- -- -- 257 ----------- ----------- ----------- ----------- Balance at December 29, 2002 $ -- $ (745) $ 50,415 $ 194,102 =========== =========== =========== =========== Net earnings -- -- 2,332 2,332 Other comprehensive income- Change in fair value of interest rate swap contract (net of tax, $78) -- 120 -- 120 Comprehensive income 2,452 ----------- Stock options exercised -- -- -- 82 Tax benefit related to stock options exercised -- -- -- 14 Shares issued for the employee stock purchase plan -- -- -- 371 Treasury stock purchased -- -- -- (8,012) Deferred compensation (892) -- -- 77 ----------- ----------- ----------- ----------- Balance at December 28, 2003 $ (892) $ (625) $ 52,747 $ 189,086 =========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements 33 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (dollars in thousands)
2003 2002 2001 -------- -------- -------- Cash flows from operating activities: Net earnings (loss) $ 2,332 $ 4,008 $ (4,360) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 10,661 9,901 10,649 Loss (gain) on disposal of fixed assets 54 (104) (439) Loss (gain) on change in fair market value of derivative (307) 307 - Deferred compensation related to restricted stock 29 - - Deferred income taxes - 3,292 (970) Restructuring and asset impairment charges - - 8,016 Changes in assets and liabilities (excluding effects of acquired companies): (Increase) decrease in: Accounts receivable, net (752) 9,180 (6,673) Inventories (2,442) 2,347 (2,917) Other current assets 489 594 (1,053) Other assets (975) (64) 113 Increase (decrease) in: Accounts payable 6,349 (12,795) (3,221) Accrued liabilities (878) 2,289 612 Deferred income taxes 788 (465) - -------- -------- -------- Total adjustments 13,016 14,482 10,559 -------- -------- -------- Net cash provided by operating activities 15,348 18,490 6,199 -------- -------- --------
34 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (dollars in thousands)
2003 2002 2001 -------- -------- -------- Cash flows from investing activities: Capital expenditures $(16,343) $(15,241) $(20,765) Proceeds from sale of investments - 2,643 4,456 Proceeds from disposal of property and equipment 60 187 4,094 Payments made in connection with acquired companies, net of cash acquired (7,872) (1,510) (6,033) -------- -------- -------- Net cash used in investing activities (24,155) (13,921) (18,248) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 515 1,845 5,613 Proceeds from term loan 30,000 - - Principal payments of long-term debt (5,668) (20,041) (35) Purchase of treasury stock (8,012) - - Principal payments - capital leases (2,569) (813) - -------- -------- -------- Net cash provided by (used in) financing activities 14,266 (19,009) 5,578 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 5,459 (14,440) (6,471) Cash and cash equivalents at beginning of year 10,027 24,467 30,938 -------- -------- -------- Cash and cash equivalents at end of year $ 15,486 $ 10,027 $ 24,467 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,639 $ 1,433 $ 1,733 ======== ======== ======== Income taxes paid $ 855 $ 2,492 $ 7 ======== ======== ======== Income taxes refunded $ 1,390 $ 3,860 $ - ======== ======== ======== Non-cash financing activities: Capital leases $ 3,375 $ 4,720 $ - ======== ======== ========
See accompanying Notes to Consolidated Financial Statements 35 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 years 2003, 2002 and 2001 each consisted of 52 weeks and ended on December 28, 2003, December 29, 2002 and December 30, 2001, respectively. REVENUE RECOGNITION Revenues (including vehicle sales and fee income) are generally recognized at the date the vehicles are sold at auction. Revenue not recognized at the date the vehicles are sold at auction includes certain buyer-related fees, which are recognized when payment is received. CASH EQUIVALENTS 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. 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. 36 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents, accounts receivable, short and long-term debt and derivative financial instruments. The fair values of these instruments approximates their carrying values. 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 flows over the remaining amortization period, the carrying value of the asset would be reduced to its estimated fair market value. In 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, the Company completed the transitional impairment test of intangible assets during the second quarter of fiscal 2002. The result of this test did not indicate any impairment. The annual impairment test of intangible assets is performed in the first quarter of each year. The fiscal 2003 annual test did not indicate any impairment. 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 will likely differ from these estimates, but management believes that such differences are not material. 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. 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. The effect of a rate change on deferred tax assets and liabilities is recognized in the period of enactment. CREDIT RISK 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. RESTRICTED STOCK In 2003, the Company initiated a restricted stock program. Under the Company's restricted stock program, common stock of the Company may be granted at no cost to certain officers and key employees. Plan participants are entitled to cash dividends and to vote their respective shares. Restrictions limit the sale or transfer of these shares during a four year period; the restrictions lapse on 25% of the shares each year. Upon issuance of stock under the plan, unearned compensation equivalent to the market value of the shares at the 37 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued date of grant is charged to shareholders' equity and subsequently amortized to expense over the four-year restriction period. In 2003, 66,500 restricted shares were granted. Compensation expense in 2003 was less than $0.1 million. In fiscal 2003, there were no forfeitures of restricted shares. STOCK OPTIONS The Company accounts for its fixed plan stock options under the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant and amortized over the period of service only if the current market value of the underlying stock exceeded the exercise price. No stock-based employee compensation cost related to stock option grants is recognized in net earnings (loss), as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings (loss) if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation relating to stock options and restricted stock, including straight-line recognition of compensation cost over the related vesting periods for fixed awards:
2003 2002 2001 ------- ------- ------- (dollars in thousands) Net earnings (loss) as reported $ 2,332 $ 4,008 $(4,360) Add: Stock-based employee compensation expense included in reported net earnings (loss), net of related tax effects 45 - - Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (1,795) (1,288) (1,339) ------- ------- ------- Pro forma net earnings (loss) $ 582 $ 2,720 $(5,699) ======= ======= ======= Pro forma earnings (loss) per share Basic $ .05 $ .22 $ (.47) ======= ======= ======= Diluted $ .05 $ .22 $ (.47) ======= ======= =======
The per share weighted average fair value of stock options granted during 2003, 2002 and 2001 was $9.65, $10.13 and $9.20, respectively, based upon grant date valuations using the Black-Scholes option pricing model with the following weighted average assumptions in 2003, 2002 and 2001: expected dividend yield of 0.0% in all years; expected volatility of .84%, .83% and .88%, respectively; risk-free interest rate of 3.1%, 2.8% and 4.3%, respectively; and an average expected option life of 5.0, 4.9 and 4.9 years, respectively. 38 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued EARNINGS PER SHARE The Company incurred a net loss for the year ended December 30, 2001; therefore, potential common stock issuances attributable to stock options were excluded from the calculation of diluted earnings per share amounts because the effect would have been anti-dilutive. The number of shares used to calculate diluted per share amounts otherwise would have been increased by 408,000 shares. CAPITALIZED SOFTWARE COSTS The Company capitalizes certain computer software costs, after technological feasibility has been established, which are amortized utilizing the straight-line method over the economic lives of the related products not to exceed five years. DERIVATIVE FINANCIAL INSTRUMENT In 2002, the Company entered into an interest rate swap to mitigate its exposure to interest rate fluctuations, and does not, as a matter of policy, enter into hedging contracts for trading or speculative purposes. The interest rate swap has been accounted for in accordance with the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The swap has been designated as a cash flow hedge. Changes in fair value of the swap are recorded in other comprehensive income to the extent that the swap is effective as a hedge and reclassified to earnings in the same period that earnings are affected by the variability in cash flows of the hedged item. NEW ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS No. 133. SFAS 149 requires that contracts with comparable characteristics be accounted for similarly. This statement is effective for both contracts and hedging activities entered into or modified after June 30, 2003. Adoption of this statement did not have a material impact on the Company's consolidated financial statements. (2) GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles are recorded at cost less accumulated amortization and consist of the following at December 28, 2003 and December 29, 2002:
ASSIGNED LIFE 2003 2002 ------------- ------ ------ (dollars in millions) Goodwill Indefinite $135.1 $130.5 Covenants not to compete 5 to 15 years 2.1 1.7 ------ ------ $137.2 $132.2 ====== ======
Goodwill increased by $4.6 million in fiscal 2003. During the year, the Company acquired six new facilities. The excess of the purchase price over the fair market value of the net identifiable assets acquired of $4.2 39 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued million has been recorded as goodwill. The balance of $0.4 million was due to earnout payments made in 2003 associated with prior year acquisitions. Amortization expense for the years ended December 28, 2003, December 29, 2002 and December 30, 2001 was $0.5 million, $0.3 million and $4.1 million, respectively. These amounts are included within selling, general and administrative expense on the Company's Condensed Consolidated Statements of Operations. Based on existing intangibles, the projected annual amortization expense for each fiscal year 2004, 2005 and 2006 is $0.5 million, $0.4 million for 2007 and $0.2 million for 2008. The following table presents the consolidated results adjusted as though the adoption of SFAS No. 142 occurred at the beginning of fiscal year 2001.
2003 2002 2001 --------- --------- --------- (in thousands except per share amounts) Net earnings (loss): As reported $ 2,332 $ 4,008 $ (4,360) Goodwill amortization, net of tax effect - - 2,847 --------- --------- --------- Adjusted net earnings (loss) $ 2,332 $ 4,008 $ (1,513) ========= ========= ========= Basic earnings (loss) per share: As reported $ .20 $ .33 $ (.37) Goodwill amortization, net of tax effect - - .24 --------- --------- --------- Adjusted basic earnings (loss) per share $ .20 $ .33 $ (.13) ========= ========= ========= Diluted earnings (loss) per share: As reported $ .20 $ .32 $ (.37) Goodwill amortization, net of tax effect - - .24 --------- --------- --------- Adjusted diluted earnings (loss) per share $ .20 $ .32 $ (.13) ========= ========= =========
(3) COMPREHENSIVE INCOME Comprehensive income consists of net earnings and the change in fair value of the Company's interest rate swap agreement for the years ended December 28, 2003 and December 29, 2002 as follows (dollars in thousands):
2003 2002 ------- ------- Net earnings $ 2,332 $ 4,008 Other comprehensive income (loss) Change in fair value of interest rate swap agreement 198 (1,212) Income tax benefit (expense) (78) 467 ------- ------- Comprehensive income $ 2,452 $ 3,263 ======= =======
The changes in fair value of the Company's interest rate swap agreement were due to changes in interest rates. 40 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (4) CREDIT FACILITIES Long-term debt is summarized as follows:
2003 2002 ------- ------- (dollars in thousands) Unsecured term loan, interest payable at variable rate based upon LIBOR. Principal repaid in 16 equal installments commencing March 31, 2003 $24,375 $ - Notes payable issued in connection with the acquisition of a subsidiary, interest payable at 8% 59 102 ------- ------- 24,434 102 Less current installments 7,547 43 ------- ------- $16,887 $ 59 ======= =======
Total principal repayments required for each of the next four fiscal years under all long-term debt agreements are summarized as follows:
(dollars in thousands) 2004 $ 7,547 2005 7,512 2006 7,500 2007 1,875 ------- $24,434 =======
In February 2002, the Company's $20.0 million Senior Notes matured. This debt was repaid with available cash, cash equivalents, and proceeds from the sale of investments. The Company also entered into a new five-year $20.0 million unsecured credit facility that was expanded to $30.0 million in the second quarter of 2002. The credit facility was a one-year revolver that converted into a four-year term loan carrying a variable interest rate based on LIBOR. During the first quarter of 2002, the Company entered into an interest rate swap to mitigate its exposure to interest rate fluctuations (see Note 5). On February 15, 2003, the Company borrowed all remaining available funds under its $30.0 million credit facility. The credit facility was a one-year revolver that converted on February 15, 2003 into a four-year term loan carrying a variable rate based upon LIBOR. The aggregate principal balance of the loan is required to be paid in sixteen consecutive equal quarterly installments commencing on March 31, 2003. On June 25, 2003, the Company entered into an amended and restated credit facility. This facility added a $20.0 million revolving line of credit, carrying a variable rate based on LIBOR, to the existing term loan. This amended and restated facility also modified all existing covenants except for the rent expense covenant. The amended credit facility also granted the Company latitude to purchase additional shares of its outstanding common stock. At December 28, 2003, the Company has not borrowed any funds against the additional $20.0 million revolving line of credit. 41 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued On March 19, 2004, the Company entered into the Second Amended and Restated Credit Agreement relating to its senior credit facility. The agreement amends certain financial covenants, including those applicable as of December 28, 2003 and those applicable for fiscal 2004, provides that advances made under the facility will be subject to a monthly asset coverage test equal to 85% of eligible receivables, and requires the Company to provide collateral for amounts due under the facility in the event it fails to meet certain financial projections for two consecutive quarters. The Company's financing agreement limits potential future dividend payments to no more than 25% of the Company consolidated net income earned over a specified period. Effective as of December 28, 2003, the Company was in compliance with the financial covenants of the Second Amended and Restated Credit Agreement. (5) FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The Company, as a matter of policy, does not enter into derivative contracts for trading or speculative purposes. During the first quarter of 2002, the Company entered into an interest rate swap to mitigate its exposure to interest rate fluctuations and to effectively fix its borrowing rate at 5.6%. Under the interest rate swap agreement, the Company pays a fixed rate of interest of 5.6% and receives LIBOR-based floating rate payments. During the year ended December 29, 2002, the Company recorded a non-cash charge of $0.3 million related to the change in fair value for the portion of its interest rate swap agreement which did not qualify for hedge accounting. At December 29, 2002, the Company also recorded $0.7 million (net of tax) as a comprehensive loss related to the change in fair market value of the portion of its interest rate swap agreement which qualified for hedge accounting. In 2003, the Company recorded a $0.3 million non-cash benefit related to the change in fair value of the interest rate swap agreement. At December 28, 2003, the Company also recorded $0.1 million (net of tax) as comprehensive income related to the change in fair market value of its interest rate swap agreement. At December 28, 2003, the entire swap agreement qualified for hedge accounting. (6) INCOME TAXES Income tax expense (benefit) is summarized as follows:
2003 2002 2001 ------- ------- ------- (dollars in thousands) Current: Federal $ 573 $ (161) $ (530) State 19 (116) (111) ------- ------- ------- 592 (277) (641) ------- ------- ------- Deferred: Federal 509 2,756 (878) State 203 536 (93) ------- ------- ------- 712 3,292 (971) ------- ------- ------- $ 1,304 $ 3,015 $(1,612) ======= ======= =======
42 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Deferred income taxes are composed 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 it is more likely than not that a tax benefit will 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 28, 2003 and December 29, 2002 are presented below:
2003 2002 -------- -------- (dollars in thousands) Deferred tax assets attributable to: Depreciation $ 5,219 $ 4,017 State net operating losses carried forward 2,108 1,830 Inventories 1,931 736 Change in fair value of interest rate swap contract 389 465 Other 1,860 2,070 Valuation allowance (1,719) (1,455) -------- -------- Net deferred tax assets 9,788 7,663 Deferred tax liabilities attributable to: Intangible assets (17,748) (14,835) -------- -------- Net deferred tax liabilities $ (7,960) $ (7,172) ======== ========
The actual income tax expense (benefit) differs from the "expected" tax expense (benefit) computed by applying the Federal corporate tax rate to earnings (loss) before income taxes as follows:
2003 2002 2001 ------- ------- ------- (dollars in thousands) "Expected" income tax expense (benefit) $ 1,236 $ 2,388 $(2,030) State income taxes, net of Federal effect 146 277 (135) Nondeductible portion of amortization of intangible assets - - 358 Increase in valuation allowance 264 308 235 Reduction of tax accruals (527) (291) (105) Other 185 333 65 ------- ------- ------- $ 1,304 $ 3,015 $(1,612) ======= ======= =======
The Company is obligated to file tax returns and pay Federal and state income taxes in numerous jurisdictions. The reductions in income tax accruals relate to amounts that were no longer required, due primarily to closed tax return audits and closed tax years for a number of jurisdictions. (7) EMPLOYEE BENEFIT PLANS The Company adopted the Insurance Auto Auctions, Inc. 2003 Stock Incentive Plan (the 2003 Plan) in June 2003 to replace the Insurance Auto Auctions, Inc. 1991 Stock Option Plan (the 1991 Plan), as amended and restated, covering 3,100,000 shares of the Company's common stock. The 2003 Plan provides for the grant of incentive stock options and restricted stock to key employees and nonqualified stock options and stock appreciation rights to key employees, directors, consultants and independent contractors. The 2003 Plan expires June 18, 2013. In general, new non-employee directors will automatically receive grants of nonqualified options to purchase 10,000 shares and subsequent grants to purchase 5,000 shares at specified intervals. 43 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 28, 2003, options to purchase an aggregate of 1,817,076 shares were outstanding at a weighted average exercise price of $13.49 per share and 384,960 shares remained available for future grant. In 2003, the Company initiated a restricted stock program. Under the Company's restricted stock program, common stock of the Company may be granted at no cost to certain officers and key employees. Plan participants are entitled to cash dividends and to vote their respective shares. Restrictions limit the sale or transfer of these shares during a four year period whereby the restrictions lapse on 25% of the shares each year. Upon issuance of stock under the plan, unearned compensation equivalent to the market value of the shares at the date of grant is charged to shareholders' equity and subsequently amortized to expense over the four-year restriction period. In 2003, 66,500 restricted shares were granted. Compensation expense in 2003 was less than $0.1 million. In fiscal 2003, there were no forfeitures of restricted shares. Activity under the Plans during 2003, 2002 and 2001 is as follows:
Weighted Weighted Weighted Average Average Average 2003 Exercise 2002 Exercise 2001 Exercise Shares Price Shares Price Shares Price ---------- --------- --------- --------- --------- -------- Balance at beginning of year 1,518,000 $ 14.13 1,397,000 $ 14.48 1,261,000 $ 14.20 Options granted 490,000 13.89 377,000 15.75 605,000 13.09 Options canceled (184,000) 19.94 (140,000) 24.13 (38,000) 18.02 Options exercised (7,000) 11.61 (116,000) 11.62 (431,000) 11.38 ---------- --------- --------- --------- --------- -------- Balance at end of year 1,817,000 $ 13.49 1,518,000 $ 14.13 1,397,000 $ 14.48 ========== ========= ========= ========= ========= ======== Options exercisable at end of year 820,000 596,000 568,000 ========== ========= =========
Additional information about options outstanding as of December 28, 2003 is presented below:
Options Outstanding Options Exercisable ---------------------------------------------- -------------------------- Weighted Average --------------------------- Remaining Weighted Contractual Average Range of Exercise Number of Life Exercise Number of Exercise Prices Options (in years) Price Options Price - ----------------- --------- ----------- -------- --------- --------- $7.00 to $10.00 45,000 4.04 $ 8.92 42,000 $ 8.86 10.38 to 13.95 1,291,000 6.94 12.55 601,000 11.89 14.25 to 22.75 461,000 8.15 15.81 157,000 16.26 28.63 to 32.50 20,000 0.77 30.80 20,000 30.80 --------- ------- $7.00 to $32.50 1,817,000 7.11 13.49 820,000 13.03 ========= =======
44 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 2001 to 2003, the Company matched 100% of employee contributions up to 4% of eligible earnings. Company contributions to the plan were $0.8 million in 2003, $0.8 million in 2002 and $0.7 million in 2001. (8) RELATED PARTY TRANSACTIONS The Company recorded fee income of $2.7 million in 2001, related to the consignment sale of vehicles insured by Allstate Insurance Company ("Allstate") and recorded vehicle sales of $23.2 million and cost of sales of $21.8 million, related to the purchase of Allstate-insured vehicles under the purchase agreement method. Allstate sold all of its shares of the Company's common stock in February 2001. See Note 9 for information about leases involving a member of the Company's Board of Directors. (9) COMMITMENTS AND CONTINGENCIES The Company leases its facilities and certain equipment under operating leases with related and unrelated parties, which expire through August 2021. Rental expense for the years ended December 28, 2003, December 29, 2002 and December 30, 2001, was $22.4 million, $22.1 million and $20.3 million, respectively. The Company leases certain properties from a member of its Board of Directors. The Company believes the terms of the leases are no less favorable than those available from unaffiliated third party lessors. Rental payments to the related party were $0.8 million in each of the years 2003, 2002 and 2001. In 2003, the Company incurred $2.7 million of costs to upgrade properties owned by the related party. A portion of the investment to upgrade these facilities will ultimately be funded by the related party. The Company agreed to modify its future lease payments to take into consideration the costs to be funded by the related party; the effect on monthly lease payments has not yet been determined. In 2002, the Company began leasing certain equipment under capital leases. Equipment leased under these leases amounted to $3.4 million in 2003 and $4.7 million in 2002. Minimum annual rental commitments for the next five years under noncancelable operating and capital leases at December 28, 2003 are as follows:
OPERATING LEASES ----------------------- UNRELATED RELATED CAPITAL PARTIES PARTIES LEASES --------- ------- ------ (dollars in thousands) 2004 $ 20,882 $ 837 $3,058 2005 17,554 837 1,336 2006 15,210 837 363 2007 12,224 837 315 2008 10,061 837 33 Thereafter 36,072 5,710 - --------- ------ ------ $112,003 $9,895 $5,105 ======== ====== ====== Less amount representing interest expense 392 ------ Future capital lease obligation $4,713 ======
45 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Assets as of December 28, 2003 and December 29, 2002 recorded under capital leases are included in property and equipment, net as follows:
2003 2002 ------- ------- (dollars in thousands) Computer equipment $ 6,654 $ 4,720 Security fencing 1,441 - ------- ------- 8,095 4,720 Accumulated amortization (3,378) (713) ------- ------- $ 4,717 $ 4,007 ======= =======
The Company has compensation agreements with certain officers and other key employees. The Company currently leases property in Woodville, Washington (near Seattle) for one of its branches. In 2003, the owner/lessor of the property was notified by King County, Washington that the branch was located within the boundaries of the likely site for a new wastewater treatment facility. The Company believes that it is likely that it will be required to vacate its facility before the end of 2004. The Company has made various upgrades to this facility that have been recorded as leasehold improvements, which have a net book value of $1.1 million at December 28, 2003. Under Washington State law, provisions exist for financial assistance to the Company related to relocation expenses and other costs related to the property. The Company has taken various steps intended to ensure that it recovers the value of its investment in the property and that it is reimbursed for its relocation costs. Under its lease, the Company is entitled to recovery of the value of its leasehold improvements. Although there is a possibility that the Company will not fully recover its investment in the branch assets, the Company has not recorded any provisions for loss or for costs that may be incurred, due to uncertainties relating to the amounts that may be recovered pursuant to the terms of the lease of the provisions of Washington State law. 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. (10) TREASURY STOCK The Company records treasury stock purchases using the cost method of accounting. In March 2003, the Company repurchased 757,409 shares of its common stock at an average price of $9.77 per share and a total cost of $7.4 million. During the second quarter of 2003, the Company repurchased an additional 49,800 shares at an average price of $12.25 per share and a total cost of $0.6 million. The Company did not repurchase any shares during the remainder of the year. On a full year basis, the Company has repurchased 807,209 shares at an average price of $9.93 per share and a total cost of $8.0 million. 46 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (11) ACCOUNTS RECEIVABLE Accounts receivable consists of the following as of December 28, 2003 and December 29, 2002:
2003 2002 -------- -------- (dollars in thousands) Unbilled receivables $ 35,188 $ 33,028 Trade accounts receivable 12,787 12,772 Other receivables 1,213 490 -------- -------- 49,188 46,290 Less allowance for doubtful accounts (813) (696) -------- -------- $ 48,375 $ 45,594 ======== ========
Unbilled receivables represent amounts paid to third parties on behalf of insurance companies for which the Company will be reimbursed when the vehicle is sold. Trade accounts receivable include fees and proceeds to be collected from both insurance companies and buyers. (12) PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 28, 2003 and December 29, 2002:
2003 2002 -------- -------- (dollars in thousands) Land $ 7,582 $ 6,996 Buildings and improvements 11,506 10,787 Equipment 39,302 25,911 Leasehold improvements 38,304 32,939 -------- -------- 96,694 76,633 Less accumulated depreciation and amortization (36,507) (27,291) -------- -------- $ 60,187 $ 49,342 ======== ========
(13) ACCOUNTS PAYABLE Accounts payable consists of the following at December 28, 2003 and December 29, 2002:
2003 2002 ------- ------- (dollars in thousands) Accounts payable to salvage providers $32,341 $26,369 Trade accounts payable 3,424 1,820 Other payables 240 467 ------- ------- $35,005 $28,656 ======= =======
47 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (14) EARNINGS PER SHARE There were no adjustments to net income to calculate diluted earnings per share. The table below reconciles basic weighted shares outstanding to diluted weighted average shares outstanding for the years ended December 28, 2003, December 29, 2002 and December 30, 2001.
2003 2002 2001 ------ ------ ------ (in thousands) Basic weighted average shares outstanding 11,652 12,235 11,940 Effect of dilutive securities - stock options 80 296 - ------ ------ ------ Diluted weighted average shares outstanding 11,732 12,531 11,940 ====== ====== ======
Options to purchase 1.1 million and 0.1 million shares of common stock at an average price of $14.81 and $28.90 per share were outstanding during the fiscal years ended December 28, 2003 and December 29, 2002, respectively, but were not included in the Company's diluted earnings per share because the options' exercise prices were greater than the average market price of the Company's shares. The Company incurred a net loss for the year ended December 30, 2001; therefore, potential common stock issuances attributable to stock options were excluded from the calculation of diluted earnings per share amounts because the effect would have been anti-dilutive. The number of shares used to calculate diluted per share amounts otherwise would have been increased by 408,000 shares. (15) ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION 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 SFAS 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 post retirement benefit obligation was determined using a discount rate of 6.75% at December 28, 2003, and December 29, 2002 and 7.0% at December 30, 2001 and an average health care cost trend rate of approximately 8.5%, progressively decreasing to approximately 5.0% in the year 2010 and thereafter. A one percentage point change in the assumed health care cost trend rate would not have a material effect on the postretirement benefit obligation or on the aggregate service cost and interest cost components. 48 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued A reconciliation of funded status as of December 28, 2003 and December 29, 2002 follows: BENEFIT OBLIGATIONS AND FUNDED STATUS
2003 2002 ------- ------- (dollars in thousands) Change in accumulated postretirement benefit obligation Accumulated postretirement benefit obligation at the beginning of the year $ 1,506 $ 1,562 Interest cost 95 103 Actuarial (gain) or loss (69) (85) Benefits paid (100) (74) ------- ------- Accumulated postretirement benefit obligation at the end of the year 1,432 1,506 Change in plan assets Benefits paid (100) (74) Employer contributions 100 74 ------- ------- Fair value of assets at the end of the year - - Net amount recognized Funded status (1,432) (1,506) Unrecognized net (gain) or loss (1,166) (1,230) ------- ------- Net amount recognized (2,598) (2,736) Amounts recognized in the statement of financial position Accrued benefit liability (2,598) (2,736) Weighted average assumptions at the end of the year Discount rate 6.25% 6.75% Rate of compensation increase - - Assumed health care cost trend rates Health care cost trend rate assumed for next year 8.50% 9.00% Ultimate rate 5.00% 5.00% Year that the ultimate rate is reached 2010 2010
49 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Net periodic pension cost is summarized as follows for the fiscal years 2003, 2002, and 2001: NET PERIODIC PENSION COST
2003 2002 2001 ----- ----- ----- (dollars in thousands) Interest cost $ 95 $ 103 $ 75 Amortization of net (gain) or loss (133) (130) (175) ----- ----- ----- Total net periodic benefit cost $ (38) $ (27) $(100) ===== ===== =====
Effective January 20, 1994, the date of acquisition, the Company discontinued future participation for active employees. (16) ACQUISITIONS The Company acquired six salvage pools in fiscal 2003. All of these acquisitions were accounted for using the purchase method of accounting. The results of operations of the acquired businesses are included in the Company's condensed consolidated financial statements from the dates of acquisition. In January 2003, the Company acquired Salvage Management Inc., an operator of two auto salvage facilities in Buffalo and Rochester, New York. In April 2003, the Company acquired Wichita Insurance Pool, Inc., located in Wichita, Kansas. In June 2003, the Company acquired Wilmington Salvage and Disposal Company, Inc. located in Wilmington, North Carolina and the Damaged Vehicle division of Manheim's Orlando Orange County Auto Auction, located in Orlando, Florida. All of these acquisitions leverage the Company's existing regional coverage in those markets. In April 2003, the Company also acquired Mountain States Salvage Pool, which is located in Ogden, Utah. This acquisition represents penetration into a new market. The total cost of adding these six new facilities was $7.9 million. The acquired net assets consisted of accounts receivable, inventory, fixed assets, land, buildings, goodwill and covenants not to compete. These new facilities contributed $6.4 million of revenues during fiscal 2003. The excess of the purchase price over the fair market value of the net identifiable assets acquired of $4.2 million has been recorded as goodwill. The entire goodwill balance relating to these acquisitions will be deductible for tax purposes. In addition, the Company recorded $0.9 million for covenants not to compete relating to these acquisitions which will be amortized over a period of five to seven years, based upon the agreements. As part of these acquisitions, the Company entered into leases for the use of certain facilities. Future earnout payments related to these acquisitions of $3.2 million may be paid out by the Company through 2006 depending upon meeting certain performance targets. Any future earnout payments made related to these acquisitions will be accounted for as additional goodwill. (17) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES During 2001, the Company announced an organizational realignment and recorded restructuring charges of $5.6 million. As part of this plan, the Company recognized $2.0 million in employee termination benefits associated with a reduction in workforce along with $2.6 million related to the abandonment of certain facilities. The $1.1 million balance includes amounts related to repositioning the Company's towing operations and other restructuring charges. The Company also recorded asset impairment charges of $2.4 million in 2001. This included the write-down of $1.4 million of unamortized leasehold improvements. Also included was a $1.0 million write-off of amounts due from the Company's now bankrupt insurance carrier for damages sustained as a result of an airplane crash at the Company's Sacramento, California facility. 50 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Changes in accrued liabilities related to the organizational realignment are summarized below.
WORKFORCE FACILITY TOWING REDUCTION CLOSINGS AND OTHER TOTAL --------- -------- --------- ------- (dollars in thousands) Charges recorded in 2001 $ 2,000 $ 2,577 $ 1,117 $ 5,647 Utilization in 2001 (1,878) (1,016) (1,067) (3,961) ------- ------- ------- ------- Accrued liabilities at December 30, 2001 $ 75 $ 1,561 $ 50 $ 1,686 Utilization in 2002 (75) (919) (7) (1,001) Other - - 21 21 ------- ------- ------- ------- Accrued liabilities at December 29, 2002 - $ 642 $ 64 $ 706 Utilization in 2003 - (540) - (540) Other - - 36 36 ------- ------- ------- ------- Accrued liabilities at December 28, 2003 - $ 102 $ 100 $ 202 ======= ======= ======= =======
(18) SUBSEQUENT EVENT (UNAUDITED) In January 2004, the Company announced the opening of a new greenfield facility in Tucson, Arizona. This new 16-acre facility will provide needed coverage in the southern part of the state and will leverage the Company's existing location in Phoenix. The new facility will also improve the Company's regional coverage, complementing other existing locations in southern California and New Mexico. (19) QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized unaudited financial data for 2003 and 2002 are as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (dollars in thousands except per share amounts) 2003 Revenues $ 56,040 $ 53,338 $ 49,127 $ 51,145 Earnings (loss) from operations 3,340 2,638 (514) (399) Net earnings 1,976 1,280 (594) (330) Basic earnings (loss) per share .16 .11 (.05) (.03) Diluted earnings (loss) per share .16 .11 (.05) (.03) 2002 Revenues $ 69,220 $ 59,750 $ 52,786 $ 52,441 Earnings from operations 2,843 2,773 1,075 735 Net earnings 1,512 1,356 639 501 Basic earnings per share .12 .11 .05 .04 Diluted earnings per share .12 .11 .05 .04
The sum of earnings per share for the four quarters of 2003 and 2002 does not equal the full year amount due to rounding and the impact of changes in the average shares outstanding. 51 INDEX TO EXHIBITS
Exhibit No. - ---------- 10.43 Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 2003 Stock Incentive Plan replacing the 1991 Stock Option Plan, as amended and restated. 10.67 Facilities Lease Agreement dated August 7, 2003, by and between MRM Investments, L.L.P. and Insurance Auto Auctions, Inc., as amended. 10.68 Facilities Lease Agreement dated August 7, 2003, by and between MJB Properties and Insurance Auto Auctions, Inc., as amended. 10.69 Temporary Use License Agreement dated March 1, 2004 by and between MRM Investments Limited Partnership and Insurance Auto Auctions, Inc. 10.127 Second Amended and Restated Credit Agreement, dated as of March 19, 2004, among the Registrant and the lenders from time to time parties hereto, and LaSalle Bank National Association, as Administrative Agent. 10.177 Employment Agreement dated October 23, 2003 between the Company and John R. Nordin. 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. 24 Power of Attorney. 31.1 Certification of Thomas C. O'Brien, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Scott P. Pettit, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Thomas C. O'Brien, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Scott P. Pettit, Chief Financial Officer, pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
EX-10.43 3 c83969exv10w43.txt FORM OF NON-STATUTORY STOCK OPTION AGREEMENT Exhibit 10.43 INSURANCE AUTO AUCTIONS, INC. 2003 STOCK INCENTIVE PLAN 1. ESTABLISHMENT AND PURPOSE. The Insurance Auto Auctions, Inc. 2003 Stock Incentive Plan (the "Plan") is established by Insurance Auto Auctions, Inc. (the "Company") to attract and retain persons eligible to participate in the Plan; motivate Participants to achieve long-term Company goals; and further align Participants' interests with those of the Company's other stockholders. The Plan is adopted as of June 18, 2003, subject to approval by the Company's stockholders within 12 months after such adoption date. Unless the Plan is discontinued earlier by the Board as provided herein, no Award shall be granted hereunder on or after the date 10 years after the Effective date. Certain terms used herein are defined as set forth in SECTION 10. 2. ADMINISTRATION; ELIGIBILITY. The Plan shall be administered by a Committee appointed by the Board; provided, however, that, if at any time no Committee has been appointed, the Plan shall be administered by the Board. The Plan may be administered by different Committees with respect to different groups of Eligible Individuals. As used herein, the term "Administrator" means the Board or any of its Committees as shall be administering the Plan. The Administrator shall have plenary authority to grant Awards pursuant to the terms of the Plan to Eligible Individuals. Participation shall be limited to such persons as are selected by the Administrator. Awards may be granted as alternatives to, in exchange or substitution for, or replacement of, awards outstanding under the Plan or any other plan or arrangement of the Company or a Subsidiary (including a plan or arrangement of a business or entity, all or a portion of which is acquired by the Company or a Subsidiary). The provisions of Awards need not be the same with respect to each Participant. Among other things, the Administrator shall have the authority, subject to the terms of the Plan: (a) to select the Eligible Individuals to whom Awards may from time to time be granted; (b) to determine whether and to what extent Stock Options, Stock Appreciation Rights, Stock Awards or any combination thereof are to be granted hereunder; (c) to determine the number of shares of Stock to be covered by each Award granted hereunder; (d) to approve forms of agreement for use under the Plan; 1 (e) to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Award granted hereunder (including, but not limited to, the option price, any vesting restriction or limitation, any vesting acceleration or forfeiture waiver and any right of repurchase, right of first refusal or other transfer restriction regarding any Award and the shares of Stock relating thereto, based on such factors or criteria as the Administrator shall determine); (f) subject to SECTION 8(A), to modify, amend or adjust the terms and conditions of any Award, at any time or from time to time, including, but not limited to, with respect to (i) performance goals and targets applicable to performance-based Awards pursuant to the terms of the Plan and (ii) extension of the post-termination exercisability period of Stock Options; (g) to determine to what extent and under what circumstances Stock and other amounts payable with respect to an Award shall be deferred; (h) to determine the Fair Market Value; and (i) to determine the type and amount of consideration to be received by the Company for any Stock Award issued under SECTION 6. The Administrator shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreement relating thereto) and to otherwise supervise the administration of the Plan. Except to the extent prohibited by applicable law, the Administrator may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any portion of its responsibilities and powers to any other person or persons selected by it. Any such allocation or delegation may be revoked by the Administrator at any time. The Administrator may authorize any one or more of its members or any officer of the Company to execute and deliver documents on behalf of the Administrator. Any determination made by the Administrator or pursuant to delegated authority pursuant to the provisions of the Plan with respect to any Award shall be made in the sole discretion of the Administrator or such delegate at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Administrator or any appropriately delegated officer pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Participants. No member of the Administrator, and no officer of the Company, shall be liable for any action taken or omitted to be taken by such individual or by any other member of the Administrator or officer of the Company in connection with the performance of duties under this Plan, except for such individual's own willful misconduct or as expressly provided by law. 2 3. STOCK SUBJECT TO PLAN. Subject to adjustment as provided in this SECTION 3, the number of shares of Stock that may be delivered under the Plan shall not exceed 2,191,256 shares of Stock, which equals the number of shares of Stock that are and may become available under the 1991 Plan. Of these 2,191,256 shares of Stock, however, only 683,241 are immediately available for Awards under the Plan. If and when any of the outstanding awards relating to the shares of Stock under the 1991 Plan terminate, expire, lapse or are otherwise canceled, those authorized shares of Stock will then become available for Awards under the Plan. To the extent any shares of Stock covered by an Award are not delivered to a Participant or beneficiary thereof because the Award expires, is forfeited, canceled or otherwise terminated, or the shares of Stock are not delivered because the Award is settled in cash or used to satisfy the applicable tax withholding obligation, such shares shall not be deemed to have been delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan. Subject to adjustment as provided in this SECTION 3, the maximum number of shares that may be covered by Stock Options, Stock Appreciation Rights and Stock Awards, in the aggregate, granted to any one Participant during any calendar year shall be 500,000 shares. In the event of any Company stock dividend, stock split, combination or exchange of shares, recapitalization or other change in the capital structure of the Company, corporate separation or division of the Company (including, but not limited to, a split-up, spin-off, split-off or distribution to Company stockholders other than a normal cash dividend), sale by the Company of all or a substantial portion of its assets (measured on either a stand-alone or consolidated basis), reorganization, rights offering, partial or complete liquidation, or any other corporate transaction, Company share offering or other event involving the Company and having an effect similar to any of the foregoing, the Administrator may make such substitution or adjustments in the (A) number and kind of shares that may be delivered under the Plan, (B) additional maximums imposed in the immediately preceding paragraph, (C) number and kind of shares subject to outstanding Awards, (D) exercise price of outstanding Stock Options and Stock Appreciation Rights and (E) other characteristics or terms of the Awards as it may determine appropriate in its sole discretion to equitably reflect such corporate transaction, share offering or other event; provided, however, that the number of shares subject to any Award shall always be a whole number. 4. STOCK OPTIONS. Stock Options may be granted alone or in addition to other Awards granted under the Plan and may be of two types: Incentive Stock Options and Non-Qualified Stock Options. Any Stock Option granted under the Plan shall be in such form as the Administrator may from time to time approve. The Administrator shall have the authority to grant any Participant Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights). Incentive Stock Options may be granted only to employees of the 3 Company and its subsidiaries (within the meaning of Section 424(f) of the Code). To the extent that any Stock Option is not designated as an Incentive Stock Option or, even if so designated, does not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. Incentive Stock Options may be granted only within 10 years from the date the Plan is adopted, or the date the Plan is approved by the Company's stockholders, whichever is earlier. Stock Options shall be evidenced by option agreements, each in a form approved by the Administrator. An option agreement shall indicate on its face whether it is intended to be an agreement for an Incentive Stock Option or a Non-Qualified Stock Option. The grant of a Stock Option shall occur as of the date the Administrator determines. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Optionee affected, to disqualify any Incentive Stock Option under Section 422 of the Code. To the extent that the aggregate Fair Market Value of Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under all plans of the Company) exceeds $100,000, such Stock Options shall be treated as Non-Qualified Stock Options. Stock Options granted under this SECTION 4 shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Administrator shall deem desirable: (a) Exercise Price. The exercise price per share of Stock purchasable under a Stock Option shall be determined by the Administrator. If the Stock Option is intended to qualify as an Incentive Stock Option, the exercise price per share shall be not less than the Fair Market Value per share on the date the Stock Option is granted, or if granted to an individual who is a Ten Percent Holder, not less than 110% of such Fair Market Value per share. (b) Option Term. The term of each Stock Option shall be fixed by the Administrator, but no Incentive Stock Option shall be exercisable more than 10 years (or five years in the case of an individual who is a Ten Percent Holder) after the date the Incentive Stock Option is granted. (c) Exercisability. Except as otherwise provided herein, Stock Options shall be exercisable at such time or times, and subject to such terms and conditions, as shall be determined by the Administrator. If the Administrator provides that any Stock Option is exercisable only in installments, the Administrator may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Administrator may determine. In addition, the Administrator may at any time, in whole or in part, accelerate the exercisability of any Stock Option. 4 (d) Method of Exercise. Subject to the provisions of this SECTION 4, Stock Options may be exercised, in whole or in part, at any time during the option term by giving written notice of exercise to the Company specifying the number of shares of Stock subject to the Stock Option to be purchased. The option price of any Stock Option shall be paid in full in cash (by certified or bank check or such other instrument as the Company may accept) or, unless otherwise provided in the applicable option agreement, by one or more of the following: (i) in the form of unrestricted Stock already owned by the Optionee (or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock subject to a Stock Award hereunder) based in any such instance on the Fair Market Value of the Stock on the date the Stock Option is exercised; (ii) by certifying ownership of shares of Stock owned by the Optionee to the satisfaction of the Administrator for later delivery to the Company as specified by the Company; (iii) unless otherwise prohibited by law for either the Company or the Optionee, by irrevocably authorizing a third party to sell shares of Stock (or a sufficient portion of the shares) acquired upon exercise of the Stock Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire exercise price and any tax withholding resulting from such exercise; or (iv) by any combination of cash and/or any one or more of the methods specified in clauses (i), (ii) and (iii). Notwithstanding the foregoing, a form of payment shall not be permitted to the extent it would cause the Company to recognize a compensation expense (or additional compensation expense) with respect to the Stock Option for financial reporting purposes. If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock, the number of shares of Stock to be received upon such exercise equal to the number of shares of Restricted Stock used for payment of the option exercise price shall be subject to the same forfeiture restrictions to which such Restricted Stock was subject, unless otherwise determined by the Administrator. No shares of Stock shall be issued upon exercise of a Stock Option until full payment therefore has been made. Upon exercise of a Stock Option (or a portion thereof), the Company shall have a reasonable time to issue the Stock for which the Stock Option has been exercised, and the Optionee shall not be treated as a stockholder for any purposes whatsoever prior to such issuance. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date such Stock is recorded as issued and transferred in the Company's official stockholder records, except as otherwise provided herein or in the applicable option agreement. (e) Transferability of Stock Options. Except as otherwise provided in the applicable option agreement, a Non-Qualified Stock Option (i) shall be transferable by the Optionee to a Family Member of the Optionee, provided that (A) any such transfer shall be by gift with no consideration and (B) no subsequent transfer of 5 such Stock Option shall be permitted other than by will or the laws of descent and distribution, and (ii) shall not otherwise be transferable except by will or the laws of descent and distribution. An Incentive Stock Option shall not be transferable except by will or the laws of descent and distribution. A Stock Option shall be exercisable, during the Optionee's lifetime, only by the Optionee or by the guardian or legal representative of the Optionee, it being understood that the terms "holder" and "Optionee" include the guardian and legal representative of the Optionee named in the applicable option agreement and any person to whom the Stock Option is transferred (X) pursuant to the first sentence of this SECTION 4(E) or pursuant to the applicable option agreement or (Y) by will or the laws of descent and distribution. Notwithstanding the foregoing, references herein to the termination of an Optionee's employment or provision of services shall mean the termination of employment or provision of services of the person to whom the Stock Option was originally granted. (f) Termination by Death. Unless otherwise provided in the applicable option agreement, if an Optionee's employment or provision of services terminates by reason of death, any Stock Option held by such Optionee may thereafter be exercised, to the extent then exercisable, or on such accelerated basis as the Administrator may determine, for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment or provision of services due to death, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (g) Termination by Reason of Disability. Unless otherwise provided in the applicable option agreement, if an Optionee's employment or provision of services terminates by reason of Disability, any Stock Option held by such Optionee may thereafter be exercised by the Optionee, to the extent it was exercisable at the time of termination, or on such accelerated basis as the Administrator may determine, for a period of one year from the date of such termination of employment or provision of services or until the expiration of the stated term of such Stock Option, whichever period is shorter; provided, however, that if the Optionee dies within such period, an unexercised Stock Option held by such Optionee shall, notwithstanding the expiration of such period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment or provision of services by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. Unless otherwise provided in the applicable option agreement, if an Optionee's employment or provision of 6 services terminates by reason of Retirement, any Stock Option held by such Optionee may thereafter be exercised by the Optionee, to the extent it was exercisable at the time of such Retirement, or on such accelerated basis as the Administrator may determine, for a period of one year from the date of such termination of employment or provision of services or until the expiration of the stated term of such Stock Option, whichever period is shorter; provided, however, that if the Optionee dies within such period, any unexercised Stock Option held by such Optionee shall, notwithstanding the expiration of such period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment or provision of services by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. Unless otherwise provided in the applicable option agreement, if an Optionee's employment or provision of services terminates for any reason other than death, Disability or Retirement, any Stock Option held by such Optionee shall thereupon terminate; provided, however, that, if such termination of employment or provision of services is involuntary on the part of the Optionee and without Cause, such Stock Option, to the extent then exercisable, or on such accelerated basis as the Administrator may determine, may be exercised for the lesser of 90 days from the date of such termination of employment or provision of services or the remainder of such Stock Option's term, and provided, further, that if the Optionee dies within such period, any unexercised Stock Option held by such Optionee shall, notwithstanding the expiration of such period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment or provision of services for any reason other than death, Disability or Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (j) Exception to Termination. Notwithstanding anything in this Plan to the contrary, if an Optionee's employment by, or provision of services to, the Company or an Affiliate ceases as a result of a transfer of such Optionee from the Company to an Affiliate, or from an Affiliate to the Company, such transfer will not be a termination of employment or provision of services for purposes of this Plan, unless expressly determined otherwise by the Administrator. A termination of employment or provision of services shall occur for an Optionee who is employed by, or provides services to, an Affiliate of the Company if the Affiliate shall cease to be an Affiliate and the Optionee shall not immediately thereafter be employed by, or provide services to, the Company or an Affiliate. 7 (k) Participant Loans. Unless otherwise prohibited by law for either the Company or the Optionee, the Administrator may in its discretion authorize the Company to: (i) lend to an Optionee an amount equal to such portion of the exercise price of a Stock Option as the Administrator may determine; or (ii) guarantee a loan obtained by an Optionee from a third-party for the purpose of tendering such exercise price. The terms and conditions of any loan or guarantee, including the term, interest rate, whether the loan is with recourse against the Optionee and any security interest thereunder, shall be determined by the Administrator, except that no extension of credit or guarantee shall obligate the Company for an amount to exceed the lesser of (i) the aggregate Fair Market Value on the date of exercise, less the par value, of the shares of Stock to be purchased upon the exercise of the Stock Option, and (ii) the amount permitted under applicable laws or the regulations and rules of the Federal Reserve Board and any other governmental agency having jurisdiction. (l) Automatic Grants To Directors. Notwithstanding anything in this Plan to the contrary, each non-employee Director shall automatically be granted nonstatutory options ("Automatic Option Grants") to purchase the following number of shares of Stock (subject to adjustment hereunder) on the dates and pursuant to the terms and conditions set forth below: (i) each person who is first elected or appointed as a non-employee Director shall receive, on the effective date of such initial election or appointment, an Automatic Option Grant to purchase 10,000 shares of Stock, and (ii) on the last business day of the second quarter (the "Automatic Grant Date") of each fiscal year of the Company, each individual who is at that time serving as a non-employee Director shall receive an Automatic Option Grant to purchase an additional 5,000 shares of Stock, or any other number not to exceed 10,000 shares as may be set by the Administrator from time to time; provided, however, that an individual who is first elected or appointed as a non-employee Director shall not receive his or her first Automatic Option Grant for 5,000 shares under this subparagraph (l)(ii) until the last business day of the second quarter of the fiscal year immediately following the fiscal year of his or her initial election or appointment to the Board. Notwithstanding anything in this Plan to the contrary, the terms applicable to each Automatic Option Grant shall be as follows: (i) The exercise price per share of Stock shall be equal to 100% of the Fair Market Value of one share of Stock on the date of grant; (ii) Each Automatic Option Grant shall have a maximum term of ten (10) years, measured from the date of grant; 8 (iii) Unless otherwise provided herein, each Automatic Option Grant shall become exercisable as to twenty-five percent (25%) of the option shares on the last business day of the fiscal quarter immediately following the date of grant and as to an additional twenty-five percent (25%) of the option shares on the last business day of each of the next three (3) fiscal quarters thereafter, provided the Optionee continues to serve as a Director; (iv) The Stock Option shall terminate three (3) months (twelve (12) months in the case of cessation by reason of Disability or death) after the Optionee ceases to serve as a Director unless the Stock Option would terminate sooner hereunder. In the case of death, the Stock Option may be exercised within the applicable period by the estate or heirs of the Optionee; and (v) The exercisability of the Stock Option shall be subject to the acceleration provisions contained in this Plan. 5. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted either on a stand-alone basis or in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right shall terminate and no longer be exercisable as determined by the Administrator, or, if granted in conjunction with all or part of any Stock Option, upon the termination or exercise of the related Stock Option. A Stock Appreciation Right may be exercised by a Participant as determined by the Administrator in accordance with this SECTION 5, and, if granted in conjunction with all or part of any Stock Option, by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Administrator. Upon such exercise and surrender, the Participant shall be entitled to receive an amount determined in the manner prescribed in this SECTION 5. Stock Options which have been so surrendered, if any, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Administrator, including the following: (i) Stock Appreciation Rights granted on a stand-alone basis shall be exercisable only at such time or times and to such extent as determined by the Administrator. Stock Appreciation Rights granted in conjunction with all or part of any Stock Option shall be exercisable only at the time or times and to the extent that the Stock Options to which they relate are exercisable in accordance with the provisions of SECTION 4 and this SECTION 5. 9 (ii) Upon the exercise of a Stock Appreciation Right, a Participant shall be entitled to receive an amount in cash, shares of Stock or both, which in the aggregate are equal in value to the excess of the Fair Market Value of one share of Stock over (i) such value per share of Stock as shall be determined by the Administrator at the time of grant (if the Stock Appreciation Right is granted on a stand-alone basis), or (ii) the exercise price per share specified in the related Stock Option (if the Stock Appreciation Right is granted in conjunction with all or part of any Stock Option), multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Administrator having the right to determine the form of payment. (iii) A Stock Appreciation Right shall be transferable only to, and shall be exercisable only by, such persons permitted in accordance with SECTION 4(E). 6. STOCK AWARDS OTHER THAN OPTIONS. Stock Awards may be directly issued under the Plan (without any intervening options), subject to such terms, conditions, performance requirements, restrictions, forfeiture provisions, contingencies and limitations as the Administrator shall determine. Stock Awards may be issued which are fully and immediately vested upon issuance or which vest in one or more installments over the Participant's period of employment or other service to the Company or upon the attainment of specified performance objectives, or the Company may issue Stock Awards which entitle the Participant to receive a specified number of vested shares of Stock upon the attainment of one or more performance goals or service requirements established by the Administrator. Shares representing a Stock Award shall be evidenced in such manner as the Administrator may deem appropriate, including book-entry registration or issuance of one or more certificates (which may bear appropriate legends referring to the terms, conditions and restrictions applicable to such Award). The Administrator may require that any such certificates be held in custody by the Company until any restrictions thereon shall have lapsed and that the Participant deliver a stock power, endorsed in blank, relating to the Stock covered by such Award. A Stock Award may be issued in exchange for any consideration which the Administrator may deem appropriate in each individual instance, including, without limitation: (i) cash or cash equivalents; (ii) past services rendered to the Company or any Affiliate; or (iii) future services to be rendered to the Company or any Affiliate (provided that, in such case, the par value of the stock subject to such Stock Award shall be paid in cash or cash equivalents, unless the Administrator provides otherwise). 10 A Stock Award that is subject to restrictions on transfer and/or forfeiture provisions may be referred to as an award of "Restricted Stock" or "Restricted Stock Units." 7. CHANGE IN CONTROL PROVISIONS. (a) Impact of Event. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control: (i) Any Stock Options and Stock Appreciation Rights outstanding as of the date such Change in Control is determined to have occurred and not then exercisable and vested shall become fully exercisable and vested to the full extent of the original grant; (ii) The restrictions applicable to any outstanding Stock Award shall lapse, and the Stock relating to such Award shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant; (iii) All outstanding repurchase rights of the Company with respect to any outstanding Awards shall terminate; and (iv) Outstanding Awards shall be subject to any agreement of merger or reorganization that effects such Change in Control, which agreement shall provide for: (A) The continuation of the outstanding Awards by the Company, if the Company is a surviving corporation; (B) The assumption of the outstanding awards by the surviving corporation or its parent or subsidiary; (C) The substitution by the surviving corporation or its parent or subsidiary of equivalent awards for the outstanding Awards; or (D) Settlement of each share of Stock subject to an outstanding Award for the Change in Control Price (less, to the extent applicable, the per share exercise price), or, if the per share exercise price equals or exceeds the Change in Control Price, the outstanding Award shall terminate and be canceled. (v) In the absence of any agreement of merger or reorganization effecting such Change in Control, each share of Stock subject to an outstanding Award shall be settled for the Change in Control Price (less, to the extent applicable, the per share exercise price), or, if the per share exercise price equals or exceeds the Change in Control Price, the outstanding Award shall terminate and be canceled. 11 (b) Definition of Change in Control. For purposes of the Plan, a "Change in Control" shall mean the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (2) the combined 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"); excluding, however, the following: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company; (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (4) any acquisition by any Person pursuant to a transaction which complies with clauses (1), (2) and (3) of subsection (iii) of this SECTION 7(B); or (ii) Within any period of 24 consecutive months, a change in the composition of the Board such that the individuals who, immediately prior to such period, constituted the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this SECTION 7(B), that any individual who becomes a member of the Board during such period, whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this provision) shall be considered as though such individual were a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or (iii) The approval by the stockholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Corporate Transaction"); excluding, however, such a Corporate Transaction pursuant to which (1) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and 12 Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined 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 Corporate Transaction (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 Corporate Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (other than the Company; any employee benefit plan (or related trust) sponsored or maintained by the Company, by any corporation controlled by the Company, or by such corporation resulting from such Corporate Transaction) will beneficially own, directly or indirectly, more than 30% of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors, except to the extent that such ownership existed with respect to the Company prior to the Corporate Transaction, and (3) individuals who were members of the Board immediately prior to the approval by the stockholders of the Corporation of such Corporate Transaction will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or (iv) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company, other than to a corporation pursuant to a transaction which would comply with clauses (1), (2) and (3) of subsection (iii) of this SECTION 7(B), assuming for this purpose that such transaction were a Corporate Transaction. (c) Change in Control Price. For purposes of the Plan, "Change in Control Price" means the highest of (i) the highest reported sales price, regular way, of a share of Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national securities exchange on which such shares are listed or on Nasdaq, as applicable, during the 60-day period prior to and including the date of a Change in Control, (ii) if the Change in Control is the result of a tender or exchange offer or a Corporate Transaction, the highest price per share of Stock paid in such tender or exchange offer or Corporate Transaction, and (iii) the Fair Market Value of a share of Stock upon the Change in Control. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other non-cash consideration, the value of such securities or other non-cash consideration shall be determined in the sole discretion of the Board. 13 8. MISCELLANEOUS. (a) Amendment. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would adversely affect the rights of a Participant under an Award theretofore granted without the Participant's consent, except such an amendment (i) made to avoid an expense charge to the Company or an Affiliate, or (ii) made to permit the Company or an Affiliate a deduction under the Code. No such amendment shall be made without the approval of the Company's stockholders to the extent such approval is required by law, agreement or the rules of any stock exchange or market on which the Stock is listed. The Administrator may amend the terms of any Stock Option or other Award theretofore granted, prospectively or retroactively, but no such amendment shall adversely affect the rights of the holder thereof without the holder's consent. (b) Unfunded Status of Plan. It is intended that this Plan be an "unfunded" plan for incentive and deferred compensation. The Administrator may authorize the creation of trusts or other arrangements to meet the obligations created under this Plan to deliver Stock or make payments, provided that, unless the Administrator otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of this Plan. (c) General Provisions. (i) The Administrator may require each person purchasing or receiving shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof. The certificates for such shares may include any legend which the Administrator deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations and other requirements of the Commission, any stock exchange or market on which the Stock is then listed and any applicable Federal or state securities law, and the Administrator may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (ii) Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting other or additional compensation arrangements for its employees. (iii) The adoption of the Plan shall not confer upon any employee, director, consultant or advisor any right to continued employment, directorship or 14 service, nor shall it interfere in any way with the right of the Company or any Subsidiary or Affiliate to terminate the employment or service of any employee, consultant or advisor at any time. (iv) No later than the date as of which an amount first becomes includible in the gross income of the Participant for Federal income tax purposes with respect to any Award under the Plan, the Participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Administrator, withholding obligations may be settled with Stock, including Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company, its Subsidiaries and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant. The Administrator may establish such procedures as it deems appropriate for the settlement of withholding obligations with Stock. (v) The Administrator shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid. (vi) Any amounts owed to the Company or an Affiliate by the Participant of whatever nature may be offset by the Company from the value of any shares of Stock, cash or other thing of value under this Plan or an agreement to be transferred to the Participant, and no shares of Stock, cash or other thing of value under this Plan or an agreement shall be transferred unless and until all disputes between the Company and the Participant have been fully and finally resolved and the Participant has waived all claims to such against the Company or an Affiliate. (vii) The grant of an Award shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. (viii) If any payment or right accruing to a Participant under this Plan (without the application of this SECTION (8)(C)(VIII)), either alone or together with other payments or rights accruing to the Participant from the Company or an Affiliate ("Total Payments") would constitute a "parachute payment" (as defined in Section 280G of the Code and regulations thereunder), such payment or right shall be reduced to the largest amount or greatest right that will result in no portion of the amount payable or right accruing under this Plan being subject to an excise tax under Section 4999 of the Code or 15 being disallowed as a deduction under Section 280G of the Code; provided, however, that the foregoing shall not apply to the extent provided otherwise in an Award or in the event the Participant is party to an agreement with the Company or an Affiliate that explicitly provides for an alternate treatment of payments or rights that would constitute "parachute payments." The determination of whether any reduction in the rights or payments under this Plan is to apply shall be made by the Administrator in good faith after consultation with the Participant, and such determination shall be conclusive and binding on the Participant. The Participant shall cooperate in good faith with the Administrator in making such determination and providing the necessary information for this purpose. The foregoing provisions of this SECTION 8(C)(VIII) shall apply with respect to any person only if, after reduction for any applicable Federal excise tax imposed by Section 4999 of the Code and Federal income tax imposed by the Code, the Total Payments accruing to such person would be less than the amount of the Total Payments as reduced, if applicable, under the foregoing provisions of this Plan and after reduction for only Federal income taxes. (ix) To the extent that the Administrator determines that the restrictions imposed by the Plan preclude the achievement of the material purposes of the Awards in jurisdictions outside the United States, the Administrator in its discretion may modify those restrictions as it determines to be necessary or appropriate to conform to applicable requirements or practices of jurisdictions outside of the United States. (x) The headings contained in this Plan are for reference purposes only and shall not affect the meaning or interpretation of this Plan. (xi) If any provision of this Plan shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not effect any other provision hereby, and this Plan shall be construed as if such invalid or unenforceable provision were omitted. (xii) This Plan shall inure to the benefit of and be binding upon each successor and assign of the Company. All obligations imposed upon a Participant, and all rights granted to the Company hereunder, shall be binding upon the Participant's heirs, legal representatives and successors. (xiii) This Plan and each agreement granting an Award constitute the entire agreement with respect to the subject matter hereof and thereof, provided that in the event of any inconsistency between this Plan and such agreement, the terms and conditions of the Plan shall control. (xiv) In the event there is an effective registration statement under the Securities Act pursuant to which shares of Stock shall be offered for sale in an 16 underwritten offering, a Participant shall not, during the period requested by the underwriters managing the registered public offering, effect any public sale or distribution of shares of Stock received, directly or indirectly, as an Award or pursuant to the exercise or settlement of an Award. (xv) None of the Company, an Affiliate or the Administrator shall have any duty or obligation to disclose affirmatively to a record or beneficial holder of Stock or an Award, and such holder shall have no right to be advised of, any material information regarding the Company or any Affiliate at any time prior to, upon or in connection with receipt or the exercise of an Award or the Company's purchase of Stock or an Award from such holder in accordance with the terms hereof. (xvi) This Plan, and all Awards, agreements and actions hereunder, shall be governed by, and construed in accordance with, the laws of the state of Illinois (other than its law respecting choice of law). 9. DEFERRAL OF AWARDS. The Administrator (in its sole discretion) may permit a Participant to: (a) have cash that otherwise would be paid to such Participant as a result of the exercise of a Stock Appreciation Right or the settlement of a Stock Award credited to a deferred compensation account established for such Participant by the Administrator as an entry on the Company's books; (b) have Stock that otherwise would be delivered to such Participant as a result of the exercise of a Stock Option or a Stock Appreciation Right converted into an equal number of Stock units; or (c) have Stock that otherwise would be delivered to such Participant as a result of the exercise of a Stock Option or Stock Appreciation Right or the settlement of a Stock Award converted into amounts credited to a deferred compensation account established for such Participant by the Administrator as an entry on the Company's books. Such amounts shall be determined by reference to the Fair Market Value of the Stock as of the date on which they otherwise would have been delivered to such Participant. A deferred compensation account established under this SECTION 9 may be credited with interest or other forms of investment return, as determined by the Administrator. A Participant for whom such an account is established shall have no rights other than those of a general creditor of the Company. Such an account shall represent an unfunded and unsecured obligation of the Company and shall be subject to the terms and conditions of the applicable agreement between such Participant and the Company. If the deferral or conversion of awards is permitted or required, the Administrator (in its sole discretion) may establish rules, procedures and forms 17 pertaining to such awards, including (without limitation) the settlement of deferred compensation accounts established under this SECTION 9. 10. DEFINITIONS. For purposes of this Plan, the following terms are defined as set forth below: (a) "Affiliate" means a corporation or other entity controlled by the Company and designated by the Administrator as such. (b) "Award" means a Stock Appreciation Right, Stock Option or Stock Award. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) the conviction of the Participant for committing a felony under Federal law or the law of the state in which such action occurred, (ii) dishonesty in the course of fulfilling the Participant's duties as an employee or director of, or consultant or advisor to, the Company or (iii) willful and deliberate failure on the part of the Participant to perform such duties in any material respect. Notwithstanding the foregoing, if the Participant and the Company or the Affiliate have entered into an employment or services agreement which defines the term "Cause" (or a similar term), such definition shall govern for purposes of determining whether such Participant has been terminated for Cause for purposes of this Plan. The determination of Cause shall be made by the Administrator, in its sole discretion. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (f) "Commission" means the Securities and Exchange Commission or any successor agency. (g) "Committee" means a committee of Directors appointed by the Board to administer this Plan. Insofar as the Committee is responsible for granting Awards to Participants hereunder, it shall consist solely of two or more directors, each of whom is a "non-employee director" within the meaning of Rule 16b-3, an "outside director" under Section 162(m) of the Code and an "independent director" as defined by the Sarbanes-Oxley Act of 2002 and the NASDAQ Rules. (h) "Company" means Insurance Auto Auctions, Inc., an Illinois corporation. (i) "Director" means a member of the Company's Board of Directors. (j) "Disability" means mental or physical illness that entitles the Participant to receive benefits under the long-term disability plan of the Company or an Affiliate, or if the Participant is not covered by such a plan or the Participant is not an employee of the Company or an Affiliate, a mental or physical illness that 18 renders a Participant totally and permanently incapable of performing the Participant's duties for the Company or an Affiliate; provided, however, that a Disability shall not qualify under this Plan if it is the result of (i) a willfully self-inflicted injury or willfully self-induced sickness; or (ii) an injury or disease contracted, suffered or incurred while participating in a criminal offense. Notwithstanding the foregoing, if the Participant and the Company or an Affiliate have entered into an employment or services agreement which defines the term "Disability" (or a similar term), such definition shall govern for purposes of determining whether such Participant suffers a Disability for purposes of this Plan. The determination of Disability shall be made by the Administrator, in its sole discretion. The determination of Disability for purposes of this Plan shall not be construed to be an admission of disability for any other purpose. (k) "Effective Date" means June 18, 2003. (l) "Eligible Individual" means any officer, employee or director of the Company or a Subsidiary or Affiliate, or any consultant or advisor providing services to the Company or a Subsidiary or Affiliate. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. (n) "Fair Market Value" means, as of any given date, the fair market value of the Stock as determined by the Administrator or under procedures established by the Administrator. Unless otherwise determined by the Administrator, the Fair Market Value per share shall be the closing sales price per share of the Stock on Nasdaq (or the principal stock exchange or market on which the Stock is then traded) on the date as of which such value is being determined or the last previous day on which a sale was reported. (o) "Family Member" means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law of a Participant (including adoptive relationships); any person sharing the Participant's household (other than a tenant or employee); any trust in which the Participant and any of these persons have all of the beneficial interest; any foundation in which the Participant and any of these persons control the management of the assets; any corporation, partnership, limited liability company or other entity in which the Participant and any of these other persons are the direct and beneficial owners of all of the equity interests (provided the Participant and these other persons agree in writing to remain the direct and beneficial owners of all such equity interests); and any personal representative of the Participant upon the Participant's death for purposes of administration of the Participant's estate or upon the Participant's incompetency for purposes of the protection and management of the assets of the Participant. 19 (p) "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. (q) "Nasdaq" means The Nasdaq Stock Market, including the Nasdaq National Market and the Nasdaq SmallCap Market. (r) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (s) "Optionee" means a person who holds a Stock Option. (t) "Participant" means a person granted an Award. (u) "Representative" means (i) the person or entity acting as the executor or administrator of a Participant's estate pursuant to the last will and testament of a Participant or pursuant to the laws of the jurisdiction in which the Participant had his or her primary residence at the date of the Participant's death; (ii) the person or entity acting as the guardian or temporary guardian of a Participant; (iii) the person or entity which is the beneficiary of the Participant upon or following the Participant's death; or (iv) any person to whom an Option has been transferred with the permission of the Administrator or by operation of law; provided that only one of the foregoing shall be the Representative at any point in time as determined under applicable law and recognized by the Administrator. (v) "Retirement" means retirement from active employment under a pension plan of the Company or any subsidiary or Affiliate, or under an employment contract with any of them, or termination of employment or provision of services at or after age 55 under circumstances which the Administrator, in its sole discretion, deems equivalent to retirement. (w) "Stock" means the common stock, par value $0.001 per share, of the Company. (x) "Stock Appreciation Right" means a right granted under SECTION 5. (y) "Stock Award" means an Award, other than a Stock Option or Stock Appreciation Right, made in Stock or denominated in shares of Stock. (z) "Stock Option" means an option granted under SECTION 4. (aa) "Subsidiary" means any company during any period in which it is a "subsidiary corporation" (as such term is defined in Section 424(f) of the Code) with respect to the Company. (bb) "Ten Percent Holder" means an individual who owns, or is deemed to own, stock possessing more than 10% of the total combined voting power of all classes of 20 stock of the Company or of any parent or subsidiary corporation of the Company, determined pursuant to the rules applicable to Section 422(b)(6) of the Code. (cc) "1991 Plan" means the Insurance Auto Auctions, Inc. 1991 Stock Option Plan as restated and amended through June 19, 2002. In addition, certain other terms used herein have the definitions given to them in the first places in which they are used. 21 EX-10.67 4 c83969exv10w67.txt FACILITIES LEASE AGREEMENT Exhibit 10.67 THIRD AMENDMENT TO LEASE Third Amendment dated as of this 7th day of August, 2003, by and between MRM INVESTMENTS, --- L.L.P., an Arizona limited liability partnership ("Lessor"), and INSURANCE AUTO AUCTIONS, INC., an Illinois corporation ("Lessee"). RECITALS: A. WHEREAS, Melvin R. Martin and MASP Acquisition Corp. previously entered into a certain Lease of Commercial Space dated January 17, 1992, an Amendment of Lease Agreement dated August 1994, and a Second Amendment to Lease dated August 1, 2000 (collectively "Lease"), concerning the premises commonly known as 2299 West Broadway Road, Phoenix, Arizona 85066 ("Premises"). B. WHEREAS, Lessor is the successor or assignee of Melvin R. Martin and Lessee is the successor or assignee of MASP Acquisition Corp. C. WHEREAS, the parties desire to amend said Lease as described below. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. RECITALS. The recitals set forth above are incorporated herein and made a part hereof. 2. CONFLICT. In the event of any conflict between the terms of this Third Amendment and the terms of the Lease, the terms of this Third Amendment shall control. 3. DEFINED TERMS. All defined terms contained in this Third Amendment shall have the meanings and definitions as set forth in the Lease. 4. PROJECT. The architectural firm of Blunk Demattei & Associates has designed certain improvements for the Premises as set forth in the revised architectural plans dated April 7, 2003, together with certain landscape plans and civil engineering drawings and plans (the improvements and work depicted in said plans and drawings and other related plans and drawings, as revised from time to time, are hereinafter referred to as the "Project"). Lessee shall submit to Lessor any revisions and modifications to the Project's architectural drawings and plans, for Lessor's reasonable approval, which approval shall not be unreasonably withheld, conditioned or delayed. Lessee shall be solely responsible for causing the Project to be constructed and Lessor shall have no responsibility for same, except for the payment responsibilities described below. 5. PAYMENT FOR PROJECT. Lessor agrees to pay up to $2,000,000 to pay for the cost of the Project (excluding the cost of asphalt, which cost Lessee shall pay). Lessor's payments for the cost of the Project shall be paid by Lessor into a construction escrow, no more frequently than once a month, during the course of construction as and when payments are due to the architects, engineers, consultants, contractors, subcontractors, suppliers and others working on the Project. In the event that the cost of the Project exceeds $2,000,000, then Lessee shall be responsible for the payment of any and all such excess costs. The total amount paid by Lessor during each calendar quarter during the course of the Project is hereinafter referred to as the "Total Quarterly Project Payments." 6. AMORTIZED PAYMENTS. As of the end of each calendar quarter during the Project, the rent shall be increased as follows. The Total Quarterly Project Payments for each calendar quarter, together with interest at the rate of 10% per annum, amortized over the period of time from the end of the subject calendar quarter through December 31, 2013, results in a certain monthly amortized payment of principal and interest, hereinafter called the "Amortized Payment." The current monthly base rent of $30,000 shall be increased by the amount of each Amortized Payment effective on the first day of the month following each calendar quarter. The foregoing calculation shall be made as of the end of each calendar quarter, and the Amortized Payment resulting from such calculation shall be added to the monthly base rent and shall be payable as additional rent for the entire amortization period through December 31, 2013. Accordingly, all Amortized Payments for the Project shall be paid in full as of December 31, 2013. Lessee may prepay and pay off the remaining principal balance for any or all Amortized Payments, at any time, without any prepayment penalty. Notwithstanding anything to the contrary contained in the Lease, there shall be no rental escalations (as described in paragraph 8 below) in the portion of the rent that constitutes the Amortized Payments. 7. TERM AND RENEWAL OPTIONS. The Term of the Lease currently ends on January 31, 2007. The Term of the Lease is hereby extended so that it runs for an additional period of ten (10) years through and including January 31, 2017. Furthermore, Lessee shall have the option to renew the Lease for three (3) successive periods of five (5) years upon the same terms and conditions of the Lease with the exception of the base rent, which shall be subject to the increases described below. 8. BASE RENT INCREASES. The amount of the current monthly base rent of $30,000 shall remain fixed through January 31, 2007. Effective as of the following "Adjustment Dates," February 1, 2007, and February 1 of each year thereafter during the Term and during any renewal Term, the base rent shall be increased as follows. The base rent for the next twelve (12) months of the Term or renewal Term, as the case may be, shall be determined by multiplying the base rent for the lease year ending on January 31 immediately prior to the Adjustment Date, by a fraction, the numerator of which shall be the Consumer Price Index, All Urban Consumers, West Region, as published by the U.S. Department of Labor, Bureau of Labor Statistics ("CPI Index"), for the month of November immediately prior to the Adjustment Date, and the denominator of which will be the CPI Index for the month of November which is one (1) year prior to the Adjustment Date. Notwithstanding the foregoing, the base rent on each Adjustment Date shall increase at a rate no greater than a maximum of five percent (5%) per year. 9. RIGHT OF FIRST REFUSAL. If Lessor enters into a written contract to sell the leased premises, or any part thereof, or to sell any partnership interest in Lessor, then Lessor shall notify Lessee in writing, enclosing a copy of the fully executed contract ("Third-Party Contract"), and Lessee shall have a right of first refusal to match the Third-Party Contract and enter into a written contract with Lessor containing all of the same terms and conditions of the Third-Party Contract. - 2 - If Lessee fails to deliver its written offer containing all of the same terms and conditions as the Third-Party Contract within thirty (30) days after Lessee's receipt of Lessor's written notification of the Third-Party Contract, then this right of first refusal shall expire and Lessor may proceed to sell the leased premises or partnership interest, subject to this Lease, pursuant to said Third-Party Contract. If Lessor does not consummate the foregoing sale pursuant to said Third-Party Contract, then the right of first refusal described above shall again apply to any subsequent contracts entered into by Lessor concerning same. Notwithstanding the foregoing, it is acknowledged and agreed that transfers of partnership interest in Lessor between existing partners, or to family members of existing partners, or to trusts, estates or other entities under which such family members or existing partners are the sole beneficiaries or owners thereof, shall not trigger the foregoing right of first refusal, provided, however, that the right of first refusal shall continue and remain in full force and effect as to any other sales or transfers of the leased premises or partnership interest. 10. PURCHASE OPTION. The Purchase Option contained in paragraph 6.6, in the Addendum A to the Lease dated January 17, 1992, shall remain and continue in full force and effect, except that the purchase price described therein shall be increased by the sum of any unpaid Amortized Payments remaining at the time Lessee exercises the subject Purchase Option. Lessor and Lessee acknowledge that the Purchase Option provisions contained in the January 17, 1992 Lease pertain only to the original leased premises consisting of approximately 35 acres. 11. IMPROVEMENTS REMAIN. Upon the termination of this Lease, Lessee shall not be obligated to remove any of the improvements which comprise the Project, but Lessee may elect, in Lessee's sole discretion, to remove any of Lessee's trade fixtures and personal property. 12. TITLE INSURANCE. Lessee, at its own cost, may purchase leasehold title insurance, and Lessor shall cooperate with same, including, but not limited to, the execution of a Memorandum of Lease for recording. 13. LEASE CONTINUES. Except as modified by this Third Amendment, all terms and conditions set forth in the Lease shall remain and continue in full force and effect. 14. CONDITION. This Third Amendment is subject to the condition that Lessee is able to obtain all necessary governmental approvals to proceed with the Project as desired by Lessee. Lessee may elect to waive this condition. IN WITNESS WHEREOF, this Third Amendment was executed as of the date first above written. LESSOR: LESSEE: MRM INVESTMENTS, L.L.P. INSURANCE AUTO AUCTIONS, INC. By: /s/ Melvin R. Martin By: /s/ Scott P. Pettit ----------------------------------- ------------------------------- Melvin R. Martin, General Partner Scott P. Pettit Chief Financial Officer - 3 - EX-10.68 5 c83969exv10w68.txt FACILITIES LEASE AGREEMENT EXHIBIT 10.68 THIRD AMENDMENT TO LEASE Third Amendment dated as of this 7th day of August, 2003, by and between MJB PROPERTIES, an Arizona general partnership ("Lessor"), and INSURANCE AUTO AUCTIONS CORP., a Delaware corporation ("Lessee"). RECITALS: A. WHEREAS, Lessor and Lessee previously entered into a certain Standard Industrial/Commercial Single-Tenant Lease dated November 1, 1994, an Amendment of Lease Agreement dated June 1, 1995, and an Extension to Lease dated March 5, 1999 (collectively "Lease"), concerning the premises commonly known as 4226 East Main Street, Grand Prairie, Texas ("Premises"). B. WHEREAS, the parties desire to amend said Lease as described below. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. RECITALS. The recitals set forth above are incorporated herein and made a part hereof. 2. CONFLICT. In the event of any conflict between the terms of this Amendment and the terms of the Lease, the terms of this Amendment shall control. 3. DEFINED TERMS. All defined terms contained in this Amendment shall have the meanings and definitions as set forth in the Lease. 4. PROJECT. The architectural firm of CivCon Services, Inc., has designed certain improvements for the Premises as set forth in its revised architectural plans together with certain landscape plans and civil engineering drawings and plans (the improvements and work depicted in said plans and drawings and other related plans and drawings, as revised from time to time, are hereinafter referred to as the "Project"). Lessee shall submit to Lessor any revisions and modifications to the Project's architectural drawings and plans, for Lessor's reasonable approval, which approval shall not be unreasonably withheld, conditioned or delayed. Lessee shall be solely responsible for causing the Project to be constructed and Lessor shall have no responsibility for same, except for the payment responsibilities described below. 5. PAYMENT FOR PROJECT. Lessor agrees to pay up to $ 1,000,000 to pay for the cost of the Project (excluding the cost of asphalt, which cost Lessee shall pay). Lessor's payments for the cost of the Project shall be paid by Lessor into a construction escrow, no more frequently than once a month, during the course of construction as and when payments are due to the architects, engineers, consultants, contractors, subcontractors, suppliers and others working on the Project. In the event that the cost of the Project exceeds $1,000,000, then Lessee shall be responsible for) the payment of any and all such excess costs. The total amount paid by Lessor during each calendar quarter during the course of the Project is hereinafter referred to as the "Total Quarterly Project Payments." 6. AMORTIZED PAYMENTS. As of the end of each calendar quarter during the Project, the rent shall be increased as follows. The Total Quarterly Project Payments for each calendar quarter, together with interest at the rate of 10% per annum, amortized over the period of time from the end of the subject calendar quarter through December 31, 2013, results in a certain monthly amortized payment of principal and interest, hereinafter called the "Amortized Payment." The current monthly base rent of $39,000 shall be increased by the amount of each Amortized Payment effective on the first day of the month following each calendar quarter. The foregoing calculation shall be made as of the end of each calendar quarter, and the Amortized Payment resulting from such calculation shall be added to the monthly base rent and shall be payable as additional rent for the entire amortization period through December 31, 2013. Accordingly, all Amortized Payments for the Project shall be paid in full as of December 31, 2013. Lessee may prepay and pay off the remaining principal balance for any or all Amortized Payments, at any time, without any prepayment penalty. Notwithstanding anything to the contrary contained in the Lease, there shall be no rental escalations (as described in paragraph 8 below) in the portion of the rent that constitutes the Amortized Payments. 7. TERM AND RENEWAL OPTIONS. The Term of the Lease currently ends on October 31, 2004. The Term of the Lease is hereby extended so that it runs for an additional period often (10) years through and including October 31, 2014. Furthermore, Lessee shall have the option to renew the Lease for three (3) successive periods of five (5) years upon the same terms and conditions of the Lease with the exception of the base rent, which shall be subject to the increases described below. 8. BASE RENT INCREASES. The amount of the current monthly base rent of $39,000 shall remain fixed through October 31, 2004. Effective as of the following "Adjustment Dates," November 1, 2004, and November 1 of each year thereafter during the Term and during any renewal Term, the base rent shall be increased as follows. The base rent for the next twelve (12) months of the Term or renewal Term, as the case may be, shall be determined by multiplying the base rent for the lease year ending on October 31 immediately prior to the Adjustment Date, by a fraction, the numerator of which shall be the Consumer Price Index, All Urban Consumers, South Region, as published by the U.S. Department of Labor, Bureau of Labor Statistics ("CPI Index"), for the month of August immediately prior to the Adjustment Date, and the denominator of which will be the CPI Index for the month of August which is one (1) year prior to the Adjustment Date. Notwithstanding the foregoing, the base rent on each Adjustment Date shall increase at a rate no greater than a maximum of five percent (5%) per year. 9. RIGHT OF FIRST REFUSAL. If Lessor enters into a written contract to sell the leased premises, or any part thereof, or to sell any partnership interest in Lessor, then Lessor shall notify Lessee in writing, enclosing a copy of the fully executed contract ("Third-Party Contract"), and Lessee shall have a right of first refusal to match the Third-Party Contract and enter into a written contract with Lessor containing all of the same terms and conditions of the Third-Party Contract. If Lessee fails to deliver its written offer containing all of the same terms and conditions as the Third-Party Contract within thirty (30) days after Lessee's receipt of Lessor's written notification of the Third-Party Contract, then this right of first refusal shall expire and Lessor may proceed to - 2 - sell the leased premises or partnership interest, subject to this Lease, pursuant to said Third-Party Contract. If Lessor does not consummate the foregoing sale pursuant to said Third-Party Contract, then the right of first refusal described above shall again apply to any subsequent contracts entered into by Lessor concerning same. Notwithstanding the foregoing, it is acknowledged and agreed that transfers of partnership interest in Lessor between existing partners, or to family members of existing partners, or to trusts, estates or other entities under which such family members or existing partners are the sole beneficiaries or owners thereof, shall not trigger the foregoing right of first refusal, provided, however, that the right of first refusal shall continue and remain in full force and effect as to any other sales or transfers of the leased premises or partnership interest. 10. IMPROVEMENTS REMAIN. Upon the termination of this Lease, Lessee shall not be obligated to remove any of the improvements which comprise the Project, but Lessee may elect, in Lessee's sole discretion, to remove any of Lessee's trade fixtures and personal property. 11. TITLE INSURANCE. IAA, at its own cost, may purchase leasehold title insurance, and Lessor shall cooperate with same, including, but not limited to, the execution of a Memorandum of Lease for recording. 12. USE RESTRICTION. The use restriction set forth in paragraph 49.1 in the Addendum to Lease dated November 1, 1994, is hereby deleted and the following is substituted in place thereof: Lessee acknowledges that the following deed restriction affects the use of the Premises, but that said restriction terminates on August 9,2009, being 15 years after the date of such deed: "Grantor, as a condition and covenant in this conveyance and by express reservation and exception in this deed, hereby restricts the Property (subject to the provisions hereafter set forth) against any use of the Property for the conduct of any enterprise, business or activity involving, directly or indirectly, the sale of any automobile, truck, off-road vehicle, bus, motorcycle, motorbike or any other vehicle (collectively the "Vehicles") save and except those classified on the certificate of title as scrap, junk, salvage, theft recovery or other comparable classification. Notwithstanding the foregoing, the Grantee may sell up to, but not in excess of one hundred (100) Vehicles the certificate of title to which are not branded as any of the aforesaid classification during any calendar week. The restriction in this deed shall be deemed a covenant running with the land and shall continue for a period of fifteen (15) years from the date hereof at which time restrictions may be enforced by the Grantor and its successors and assigns at their election by injunction, suit for damages or any other remedy at law or in equity and in the event of such enforcement by the Grantor, its successors or assigns, the same shall be entitled to recover reasonable attorney's fees, all court costs and expenses." - 3 - 13. LEASE CONTINUES. Except as modified by this Third Amendment, all terms and conditions set forth in the Lease shall remain and continue in full force and effect. 14. CONDITION. This Third Amendment is subject to the condition that Lessee is able to obtain all necessary governmental approvals to proceed with the Project as desired by Lessee. IN WITNESS WHEREOF, this Third Amendment was executed as of the date first above written. LESSOR: LESSEE: MJB PROPERTIES INSURANCE AUTO AUCTIONS CORP. By: /s/ Melvin R. Martin By: /s/ Scott P. Pettit ------------------------------------ ---------------------------- Melvin R. Martin, General Partner Scott P. Pettit Chief Financial Officer - 4 - EX-10.69 6 c83969exv10w69.txt TEMPORARY USE LICENSE AGREEMENT Exhibit 10.69 TEMPORARY USE LICENSE AGREEMENT This TEMPORARY USE LICENSE AGREEMENT ("License") is made this 1st day of March, 2004, by and between MRM INVESTMENTS LIMITED PARTNERSHIP, an Arizona limited liability limited partnership ("Licensor"), and INSURANCE AUTO AUCTIONS, INC., an Illinois corporation ("Licensee"). WITNESSETH: WHEREAS, Licensor is the owner/occupant of property located at 2299 W. Broadway Road, Southernmost 8.9 +/- acres, Phoenix, AZ 85041 (hereinafter, the "Property"); and WHEREAS, Licensee wishes to use the Property for storing salvage motor vehicles ("Use") and Licensor is agreeable to such Use but only upon the terms and conditions set forth in this License. NOW, THEREFORE, in consideration of the mutual terms and covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, Licensor and Licensee agree as follows; 1. LICENSE. Subject to the terms and conditions set forth below, Licensor hereby grants Licensee, and Licensee hereby accepts from Licensor, a temporary license for use of the Property for the Use. Licensee shall not use the Property for any other purpose or use except the Use, nor permit the Property to be used for any other use or purpose other than as set forth herein. Licensee will not permit the Use of the Property to create a nuisance or disturb Licensor. The Property is provided to Licensee without any alteration or warranty, "AS IS, WHERE IS." Licensee shall make no permanent or structural alteration to the Property without the prior consent of Licensor. Upon the termination of this License, Licensee shall remove all such alterations and personalty, and return the Property to Licensor in its previous condition, except for ordinary wear and tear and damage by casualty. 2. LICENSE FEES. Licensee agrees to pay Licensor in advance for the License granted herein the sum of Thirty Six Thousand Dollars ($36,000.00) per annum, payable in equal monthly installments of Three Thousand Dollars ($3,000.00). 3. TERM OF LICENSE. The License granted herein shall commence on the date first written above, and license is not for a specific term or duration. It may be terminated at any time by either the Licensor or Licensee upon 30 days prior written notice to either party by the other. 4. LICENSOR'S APPROVAL. Licensee shall not use any furnishing, equipment, displays, Page 1 stands, decorations or signs in the conduct of its business at the Property without, in each instance, first obtaining Licensor's prior written consent, which consent may not be unreasonably withheld. 5. LICENSEE'S COVENANTS. Licensee shall: (i) conduct its business at the Property at all times in a dignified manner; (ii) keep all furnishings, merchandise, equipment, displays, stands, decorations and signs used at the Property in a neat, clean and safe condition, and in good operating order and repair; (iii) neither solicit business nor distribute advertising matter in any of the common areas outside of the Property; (iv) conduct its business at the Property at all times in compliance with all federal, state and local laws, ordinances, rules, regulations and codes, including the Americans with Disabilities Act, all environmental laws and any zoning codes; (v) receive or make all deliveries or shipments of any kind to and from the Property only as designated by Licensor, and only at such times as designated by Licensor; (vi) properly store and dispose of all garbage and refuse at the Property and the area immediately adjoining thereto; (vii) intentionally deleted; (viii) not place, suffer or permit any obstructions or merchandise in any areas except the Property, and not in any way interfere with or cause disturbance to the use and quiet enjoyment of Licensor. Licensee shall procure all necessary licenses or other governmental approvals or permits, and shall be solely responsible for paying all governmental charges or taxes relating to its business conducted at the Property. Licensee shall make all necessary repairs to areas damaged as a result of its Use of the Property. 6. UTILITIES. REPAIR AND MAINTENANCE. Licensee shall be solely responsible for: (i) making arrangements for any utility services Licensee requires at the Property; (ii) paying all charges or bills incurred for utility service at the Property or used in connection with Licensee's business conducted thereon. Licensee shall be responsible for all repairs and maintenance to the Property (including alterations to the Property required by governmental action), unless caused by the negligence or willful misconduct of Licensor, its employees, contractors or agents, in which case, Licensor shall reimburse Licensee for the reasonable costs incurred by Licensor in repairing such damage. 7. INDEMNITY. Licensor assumes no liability or responsibility whatsoever with respect to the Use and operation of Licensee's business in the Property, nor shall Licensor be liable for any accident, loss, damage, injury, fine, fee, cost, expense (including attorney fees), or claim therefore, to any persons or property in or about the Property except those caused directly by the negligence or willful misconduct of Licensor, its employees, contractors or agents. Licensee assumes full liability for all such accidents, losses, damages, injuries, fines, fees, costs, expenses (including attorney fees), or claims therefore, and shall protect, defend and hold Licensor and Licensor's officers, directors, partners, trustees, shareholders, agents, affiliates, successors, assigns, contractors, agents and employees, harmless therefrom which arise from or in connection with the Use of or the operation of the business at the Property during the term of the License by Licensee, or by any of Licensee's officers, directors, agents, contractors, employees, licensees or invitees, or arising from any condition of the Property resulting from any Page 2 default by Licensee in observing or performing any of the covenants contained in this License, or from any fault or neglect of Licensee or any of its officers, directors, agents, contractors, employees, licensees or invitees. 8. LIABILITY INSURANCE. Licensor and Licensee shall each obtain and keep in effect throughout the term of this License, liability insurance insuring their respective liabilities hereunder in amounts and under policies that are commercially reasonable, and from insurers licensed to do business in the State in which the Building is located. All such insurance policies shall not be canceled, materially altered or non-renewed except upon thirty (30) days prior written notice to the other party, and shall waive all of the insurer's rights of subrogation. A certificate of such insurance shall be delivered by either party to the other upon the request of such other party. Upon occupancy Licensee shall provide a certificate of insurance to Licensor indicating that Licensor and Lessor/Owner are named as additional insureds on the policy with respect to Licensee's activities on the property. 9. PROPERTY DAMAGE AND INSURANCE. Licensee shall bear all risk of loss, damage, theft, misappropriation or other casualty to all or any portion of Licensee's personal property located at or about the Property, and for the interruption of Licensee's business, irrespective of the cause. Licensee shall, at its own discretion, procure property/casualty and/or business interruption insurance in amounts, with deductibles and from insurers as Licensee deems appropriate. In no event shall Licensor be liable for interruption to Licensee's business, or for damage to, or replacement or repair of, Licensee's personal property. Licensor shall procure appropriate property/casualty insurance for the Property, and shall be liable for all damage thereto except as otherwise set forth herein. 10. CASUALTY/CONDEMNATION. Except as otherwise set forth herein, Licensor shall have no obligation at any time during the term of this Agreement to make any changes, repairs or improvements to the Property. If the Property shall be damaged or destroyed by fire or other casualty, or shall be subject to full or partial condemnation, Licensor shall have no obligation to repair or restore the same unless it shall so elect in its sole and absolute discretion. If Licensor shall not elect to repair or restore the Property, this License shall terminate as of the date of the casualty or date of taking, without further liability of either party to the other except for obligations previously accrued, but unpaid or unperformed as provided herein. If no material portion of the Property shall be damaged or condemned, this License shall continue until its expiration or earlier termination as provided herein. 11. NO ASSIGNMENT. Licensee shall not assign this License without the prior written consent of Licensor, which consent Licensor may withhold in its sole and absolute discretion. The consent by Licensor to any assignment shall not constitute a waiver of the necessity for such consent to any subsequent assignment. This prohibition against assigning shall be construed to include a prohibition against any assignment by operation of law. Notwithstanding any assignment, Licensee shall remain fully liable and shall not be released from any obligations under this License. The prohibition Page 3 against assignment herein shall not prevent assignment by Licensee to any successor in interest or any affiliate. 12. IMMEDIATE TERMINATION. If Licensee should fail to perform any covenant or obligation arising hereunder, Licensor may, at Licensor's sole discretion and upon prior 30 days written notice to Licensee, immediately terminate all of Licensee's rights and privileges granted herein, and thereafter, this License shall be of no further force or effect. 13. NOT A LEASE. It is hereby declared by and between the parties that it is not the intention of either Licensor or Licensee to create between them the relationship of Landlord and Tenant. Rather, this Agreement is intended solely to create a bare privilege on the part of the Licensee, personal to Licensee, to operate its business in the Property in the manner described herein. 14. NO BROKERS. Each party hereto warrants to the other that no broker was used in connection with the negotiation of this License, and that no broker's fee is owed by any party. 15. NOTICES. Any notice required or permitted herein shall be made in writing, and shall be sent (i) by registered or certified U.S. mail, return receipt requested; (ii) by reliable overnight courier service; (iii) or by hand delivery; to the addresses for the respective party set forth below, or any other address provided to the other party in writing from time to time: If to Licensee: Insurance Auto Auctions, Inc. 850 E. Algonquin Road, Suite 100 Schaumburg, IL 60173 ATTN: Scott P. Pettit, Chief Financial Officer With a copy to: Insurance Auto Auctions, Inc. 850 E. Algonquin Road, Suite 100 Schaumburg, IL 60173 ATTN: Michael J. Madden, Vice President Real Estate If to Licensor: Melvin R. Martin 4639 North 14th Drive Phoenix, AZ 85023-5194 Written notice to any party shall be deemed to have been given upon being mailed to the proper address provided above, with proper postage prepaid, or upon actual delivery if hand delivered or sent by overnight courier. Page 4 16. LICENSE FEE PAYMENT. License fee payments shall be made directly to Licensor at Melvin R. Martin, 14639 North 14th Drive, Phoenix, AZ 85023-5194. 17. ENVIRONMENTAL PROVISIONS. Licensor recognizes that Licensee in the normal and ordinary course of their business may use and utilize certain hazardous materials. "Hazardous Materials" shall mean petroleum, including crude oil, or any other product thereof, asbestos, polychlorinated biphenyls, any material, defined as hazardous in the Comprehensive Environmental Response Compensation Liability Act of 1980, as amended, 42 U.S.C. ss.9601-9657, the Hazardous Materials Transportation Act of 1975, 49 U.S.C. ss.1801-1812; the Resource Conservation Recovery Act of 1976, 42 U.S.C. ss.6901-6987; or any substance defined as a hazardous substance or hazardous waste in any federal, state or local statute, law, ordinance, code, regulation, order or decree regulating or relating to, or imposing liability on standards of conduct concerning hazardous waste, materials, or substances, now or at any time hereafter in effect. Licensee agrees, and agrees to require each sublicensee, to comply with all legal requirements applicable to the use, utilization, handling, storage and transportation of any Hazardous Materials. Licensee covenants and agrees to indemnify and defend Licensor from any and all claims, losses, liabilities, penalties, costs or expenses of any kind or nature whatsoever, including without limitation, attorney and expert fees which may at any time during Licensee's occupancy, be asserted or imposed against Licensor and which arise out of and are caused by the presence or use of hazardous materials on the Property by Licensee including without limitation: (i) the cost to remove the hazardous materials, or otherwise remediate the Property because of the Hazardous Materials; and (ii) costs incurred to comply with any laws, orders, judgments, or regulations with respect to the presence of hazardous materials. Licensor shall fully cooperate with Licensee in responding to any claim, order or other legal action. Licensee, at its sole cost, expense and option, may cause Phase I and Phase II environmental assessments to be conducted on the Premises. Licensee will share the written results of this assessment with Licensor. It is stipulated and agreed by and between Licensor and Licensee that this environmental assessment shall provide the "baseline" for Licensee's environmental responsibility and potential liability. That is, Licensee shall absolutely and without qualification neither be responsible nor liable for any pre-existing environmental concerns or issues revealed as a result of its Phase I and Phase II environmental assessments. 18. MISCELLANEOUS. All provisions herein shall be binding upon and shall inure to the benefit of the parties hereto, and to their respective legal representatives, successors and permitted assigns. Each provision to be performed by Licensee shall be construed to be both a covenant and a condition, and if there shall be more than one Licensee, they shall all be bound, jointly and severally. The provisions of this License shall be severable, and shall be construed pursuant to the laws of the State in which the Building is located. Time is of the essence. This License, and any exhibits and/or addendum attached hereto, set forth the entire agreement between the parties hereto Page 5 relating to the subject matter hereof. Any prior conversation or writing are merged herein and extinguished. No subsequent amendment to this Agreement shall be binding upon Licensor or Licensee unless reduced to writing and signed by both parties hereto, except as otherwise provided herein. This License shall have no binding effect on either party unless and until executed by both Licensor and Licensee. 18. TRUE LICENSE. Notwithstanding any term or provision herein to the contrary, this document is merely granting Licensee a bare license to use and occupy the Licensed Premises; and does not in any way imply any affiliation of Licensor with Licensee, or establish or memorialize any partnership, joint venture or other such relationship between Licensor and Licensee. Page 6 IN WITNESS WHEREOF, Licensor and Licensee have caused this License to be executed and delivered, being first fully authorized so to do, on the date first above written. LICENSOR: MRM INVESTMENTS LIMITED PARTNERSHIP an Arizona limited liability limited partnership By: /s/ Mel Martin ------------------------------- Name: Mel Martin ----------------------------- Title: Principal & Owner ----------------------------- LICENSEE: INSURANCE AUTO AUCTIONS, INC. AN ILLINOIS CORPORATION By: /s/ Scott P. Pettit ------------------------------- Name: Scott P. Pettit ----------------------------- Title: Chief Financial Officer ----------------------------- Page 7 EX-10.127 7 c83969exv10w127.txt SECOND AMENDED AND RESTATED CREDIT AGREEMENT Exhibit 10.127 EXECUTION COPY SECOND AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF MARCH 19, 2004 AMONG INSURANCE AUTO AUCTIONS, INC., AS THE BORROWER THE LENDERS FROM TIME TO TIME PARTIES HERETO, AND LASALLE BANK NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT Exhibit 10.127 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS ........................................................................................... 1 1.1. Certain Defined Terms.......................................................................... 1 1.2. References..................................................................................... 23 1.3. Supplemental Disclosure........................................................................ 23 ARTICLE II THE CREDITS........................................................................................... 23 2.1. Description of Facilities...................................................................... 23 2.1.1. Revolving Loans; Commitment....................................................... 23 2.1.2. Term Loans........................................................................ 24 2.1.3. Departing Lender.................................................................. 24 2.2. Required Payments; Termination Date............................................................ 24 2.2.1. Required Payments................................................................. 24 2.2.2. Termination Date.................................................................. 24 2.3. Ratable Loans.................................................................................. 25 2.4. Types of Advances.............................................................................. 25 2.5. Commitment Fee; Reductions in Aggregate Commitment............................................ 25 2.5.1. Commitment Fee.................................................................... 25 2.5.2. Reductions in Aggregate Commitment. ............................................. 25 2.6. Minimum Amount of Each Advance................................................................. 25 2.7. Optional Principal Payments; Mandatory Principal Prepayments................................... 25 2.7.1. Optional Principal Payments....................................................... 25 2.7.2. Mandatory Principal Prepayments................................................... 26 2.8. Method of Selecting Types and Interest Periods for New Advances................................ 26 2.9. Conversion and Continuation of Outstanding Advances............................................ 27 2.10. Interest Rates................................................................................. 27 2.11. Rates Applicable After Default................................................................. 28 2.12. Method of Payment.............................................................................. 28 2.13. Noteless Agreement; Evidence of Indebtedness................................................... 28 2.14. Telephonic Notices............................................................................. 29 2.15. Interest Payment Dates; Interest and Fee Basis................................................. 29 2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions; Availability of Credit Extensions.............................................................. 30 2.17. Lending Offices................................................................................ 30 2.18. Non-Receipt of Funds by the Administrative Agent............................................... 30 2.19. Facility LC's.................................................................................. 31 2.19.1. Issuance.......................................................................... 31 2.19.2. Participations.................................................................... 31 2.19.3. Notice............................................................................ 31 2.19.4. LC Fees........................................................................... 32 2.19.5. Administration; Reimbursement by Lenders.......................................... 32
SIDLEY AUSTIN BROWN & WOOD LLP i Exhibit 10.127 2.19.6. Reimbursement by Borrower......................................................... 32 2.19.7. Obligations Absolute.............................................................. 33 2.19.8. Actions of LC Issuer.............................................................. 33 2.19.9. Indemnification................................................................... 34 2.19.10. Lenders' Indemnification.......................................................... 34 2.19.11. Facility LC Collateral Account.................................................... 34 2.19.12. Rights as a Lender................................................................ 35 2.20. Replacement of Lender.......................................................................... 35 ARTICLE III...................................................................................................... 35 YIELD PROTECTION; TAXES.......................................................................................... 36 3.1. Yield Protection............................................................................... 36 3.2. Changes in Capital Adequacy Regulations........................................................ 37 3.3. Availability of Types of Advances.............................................................. 37 3.4. Funding Indemnification........................................................................ 37 3.5. Taxes.......................................................................................... 38 3.6. Lender Statements; Survival of Indemnity....................................................... 39 ARTICLE IV CONDITIONS PRECEDENT.................................................................................. 40 4.1. Effectiveness of this Agreement................................................................ 40 4.2. Each Credit Extension.......................................................................... 41 ARTICLE V REPRESENTATIONS AND WARRANTIES......................................................................... 41 5.1. Existence and Standing......................................................................... 41 5.2. Authorization and Validity..................................................................... 42 5.3. No Conflict; Government Consent................................................................ 42 5.4. Financial Statements........................................................................... 42 5.5. Material Adverse Change; No Default............................................................ 43 5.6. Taxes.......................................................................................... 43 5.7. Litigation and Contingent Obligations.......................................................... 43 5.8. Subsidiaries................................................................................... 43 5.9. Accuracy of Information........................................................................ 43 5.10. Regulation U................................................................................... 44 5.11. Material Agreements............................................................................ 44 5.12. Compliance With Laws........................................................................... 44 5.13. Ownership of Properties........................................................................ 44 5.14. ERISA; Foreign Pension Matters................................................................. 44 5.15. Plan Assets; Prohibited Transactions........................................................... 45 5.16. Environmental Matters.......................................................................... 45 5.17. Investment Company Act: Other Regulation....................................................... 45 5.18. Indebtedness................................................................................... 45 5.19. Insurance...................................................................................... 45 5.20. Solvency....................................................................................... 45
SIDLEY AUSTIN BROWN & WOOD LLP ii Exhibit 10.127 5.21. Permits; Intellectual Property................................................................. 45 5.22. Labor Matters.................................................................................. 46 5.23. Collateral Documents........................................................................... 46 ARTICLE VI COVENANTS............................................................................................. 46 6.1. Financial Reporting............................................................................ 46 6.2. Use of Proceeds................................................................................ 48 6.3. Notice of Default.............................................................................. 48 6.4. Conduct of Business; Charter Amendments; Accounting Changes.................................... 48 6.4.1. Conduct of Business............................................................... 49 6.4.2. Charter Amendments................................................................ 49 6.4.3. Accounting Changes................................................................ 49 6.5. Taxes; Claims, Judgments, Etc.................................................................. 49 6.6. Insurance...................................................................................... 49 6.7. Compliance with Laws........................................................................... 50 6.8. Maintenance of Properties...................................................................... 50 6.9. Further Assurances............................................................................. 50 6.10. Restricted Payments............................................................................ 50 6.11. Indebtedness................................................................................... 51 6.12. Merger......................................................................................... 52 6.13. Sale of Assets................................................................................. 52 6.14. Investments and Acquisitions................................................................... 52 6.15. Liens.......................................................................................... 53 6.16. Consolidated Rentals. ........................................................................ 54 6.17. Affiliates..................................................................................... 54 6.18. ERISA.......................................................................................... 54 6.19. Financial Covenants............................................................................ 55 6.19.1. Minimum Consolidated EBITDA....................................................... 55 6.19.2. Leverage Ratio.................................................................... 55 6.19.3. Minimum Net Worth................................................................. 56 6.19.4. Capital Expenditures, Acquisitions and Stock Repurchases.......................... 56 6.19.5. Liquidity......................................................................... 56 6.20. Addition of Guaranty; Guarantors............................................................... 56 6.21. Sale and Leaseback Transactions and other Off-Balance Sheet Liabilities........................ 56 6.22. Reduction of Revolving Loans................................................................... 57 6.23. Collateral Documents........................................................................... 57 ARTICLE VII DEFAULTS............................................................................................. 58 7.1. Breach of Representations or Warranties........................................................ 58 7.2. Failure to Make Payments When Due.............................................................. 58 7.3. Breach of Covenants............................................................................ 58 7.4. Other Breaches................................................................................. 58 7.5. Default as to Other Indebtedness............................................................... 58 7.6. Voluntary Bankruptcy; Appointment of Receiver; Etc............................................. 59 7.7. Involuntary Bankruptcy; Appointment of Receiver; Etc........................................... 59
SIDLEY AUSTIN BROWN & WOOD LLP iii Exhibit 10.127 7.8. Custody or Control of Property................................................................. 59 7.9. Judgments...................................................................................... 60 7.10. Unfunded Liabilities........................................................................... 60 7.11. Other ERISA Liabilities........................................................................ 60 7.12. Environmental Matters.......................................................................... 60 7.13. Change in Control.............................................................................. 60 7.14. Other Default.................................................................................. 60 7.15. Rate Management Obligation..................................................................... 61 7.16. Loss of Licenses............................................................................... 61 7.17. Material Adverse Change........................................................................ 61 7.18. Guaranty....................................................................................... 61 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES...................................................... 61 8.1. Acceleration; Facility LC Collateral Account................................................... 61 8.2. Amendments..................................................................................... 62 8.3. Preservation of Rights......................................................................... 63 ARTICLE IX GENERAL PROVISIONS.................................................................................... 63 9.1. Survival of Representations.................................................................... 63 9.2. Governmental Regulation........................................................................ 63 9.3. Headings....................................................................................... 63 9.4. Entire Agreement............................................................................... 63 9.5. Several Obligations; Benefits of this Agreement................................................ 63 9.6. Expenses; Indemnification...................................................................... 64 9.7. Numbers of Documents........................................................................... 64 9.8. Accounting..................................................................................... 65 9.9. Severability of Provisions..................................................................... 65 9.10. Nonliability of Lenders........................................................................ 65 9.11. Confidentiality................................................................................ 65 9.12. Lenders Not Utilizing Plan Assets.............................................................. 66 9.13. Nonreliance.................................................................................... 66 9.14. Disclosure..................................................................................... 66 9.15. Subordination of Intercompany Indebtedness..................................................... 66 ARTICLE X THE ADMINISTRATIVE AGENT............................................................................... 67 10.1. Appointment; Nature of Relationship............................................................ 67 10.2. Powers......................................................................................... 67 10.3. General Immunity............................................................................... 68 10.4. No Responsibility for Credit Extensions, Recitals, etc......................................... 68 10.5. Action on Instructions of Lenders.............................................................. 68 10.6. Employment of the Administrative Agent and Counsel............................................. 68 10.7. Reliance on Documents; Counsel................................................................. 69 10.8. Administrative Agent's Reimbursement and Indemnification....................................... 69 10.9. Notice of Default.............................................................................. 69 10.10. Rights as a Lender............................................................................. 69
SIDLEY AUSTIN BROWN & WOOD LLP iv Exhibit 10.127 10.11. Lender Credit Decision......................................................................... 70 10.12. Successor Administrative Agent................................................................. 70 10.13. Agent and Arranger Fees........................................................................ 71 10.14. Delegation to Affiliates....................................................................... 71 10.15. Collateral Documents........................................................................... 71 ARTICLE XI SETOFF; RATABLE PAYMENTS.............................................................................. 72 11.1. Setoff......................................................................................... 72 11.2. Ratable Payments............................................................................... 72 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS.................................................... 72 12.1. Successors and Assigns......................................................................... 73 12.1.1. Successors and Assigns............................................................ 73 12.2. Participations................................................................................. 73 12.2.1. Permitted Participants; Effect.................................................... 73 12.2.2. Voting Rights..................................................................... 73 12.2.3. Benefit of Setoff................................................................. 74 12.3. Assignments.................................................................................... 74 12.3.1. Permitted Assignments............................................................. 74 12.3.2. Effect; Effective Date............................................................ 74 12.3.3. The Register...................................................................... 75 12.4. Dissemination of Information................................................................... 75 12.5. Tax Treatment.................................................................................. 75 ARTICLE XIII NOTICES............................................................................................. 76 13.1. Notices........................................................................................ 76 13.2. Change of Address.............................................................................. 76 ARTICLE XIV COUNTERPARTS......................................................................................... 76 ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL.......................................... 76 15.1. CHOICE OF LAW.................................................................................. 76 15.2. CONSENT TO JURISDICTION........................................................................ 77 15.3. WAIVER OF JURY TRIAL........................................................................... 77 ARTICLE XVI NO NOVATION; REFERENCES TO THIS AGREEMENT IN LOAN DOCUMENTS.......................................... 77 16.1. No Novation.................................................................................... 77 16.2. References to This Agreement In Loan Documents................................................. 77
SIDLEY AUSTIN BROWN & WOOD LLP v Exhibit 10.127 EXHIBITS Exhibit A - Form of Compliance Certificate Exhibit B - Form of Assignment Agreement Exhibit C - Form of Promissory Note (if requested) Exhibit D - Form of Guaranty Exhibit E - List of Closing Documents Delivered Under the Existing Credit Agreement Exhibit F - Form of Borrowing Base Certificate SCHEDULES Pricing Schedule Commitment Schedule Schedule 1- Investments Schedule 2- Indebtedness Schedule 3- Liens Schedule 4- Subsidiaries ATTACHMENTS Attachment A - Reaffirmation SIDLEY AUSTIN BROWN & WOOD LLP vi SECOND AMENDED AND RESTATED CREDIT AGREEMENT This Second Amended and Restated Credit Agreement, dated as of March 19, 2004, is entered into by and 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), the institutions from time to time parties hereto as LC Issuers, and LASALLE BANK NATIONAL ASSOCIATION, a national banking association, as Administrative Agent, to amend and restate the Existing Credit Agreement (as defined below), and from and after the Effective Date the Existing Credit Agreement is hereby amended and restated in its entirety. The Borrower, the Lenders, and the Agent have agreed that, following the execution and delivery of this Agreement, the Departing Lender shall cease to be a party to the Existing Credit Agreement, as evidenced by its execution and delivery of its Departing Lender Signature Page. The parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1. Certain Defined Terms. As used in this Agreement: "ACCOUNT DEBTOR" means the account debtor or obligor with respect to any of the Receivables. "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 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 Loans of the same Type and, in the case of LIBOR Loans, for the same Interest Period. "AFFECTED LENDER" is defined in Section 2.20. SIDLEY AUSTIN BROWN & WOOD LLP "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. "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 Amended and Restated 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 Closing Date, 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 LC 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 consisting of Revolving Loans or Term Loans, as applicable, as set forth in the Pricing Schedule. "ARRANGER" means LaSalle Bank. "ARTICLE" means an article of this Agreement unless another document is specifically referenced. SIDLEY AUSTIN BROWN & WOOD LLP 2 "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 (exclusive of the portion thereof constituting Term Loans) at such time. "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 BASE" means, as of any date of calculation, an amount, as set forth on the most current Borrowing Base Certificate delivered to the Administrative Agent, equal to (i) eighty-five percent (85%) of the Gross Amount of Eligible Receivables, minus (ii) such reserves as the Administrative Agent deems appropriate in the exercise of its reasonable credit judgment, as adjusted by Borrowing Base Adjustments. "BORROWING BASE ADJUSTMENTS" means, (i) the reduction of the advance rates and/or the establishment of reserves in respect of the Borrowing Base, as determined by the Administrative Agent in its reasonable business discretion after consultation with the Borrower, and/or (ii) the revision of the standards of eligibility in respect of Eligible Receivables by the Administrative Agent in its reasonable credit judgment after consultation with the Borrower; provided that, no Borrowing Base Adjustments shall be made except (a) when a Default or Event of Default shall have occurred and is continuing, (b) a Material Adverse Change has occurred, (c) by mutual agreement between the Agent and the Borrower or (d) upon recommendation from the auditors performing a field exam on the books, records and assets of the Borrower on behalf of the Administrative Agent. "BORROWING BASE CERTIFICATE" means a certificate, in substantially the form of Exhibit F attached hereto and made a part hereof, setting forth the Borrowing Base and the component calculations thereof. "BORROWING DATE" means a date on which a Credit Extension is made hereunder. "BORROWING NOTICE" is defined in Section 2.8. "BUSINESS ACTIVITY REPORT" means (i) a Notice of Business Activities Report from the State of Minnesota, Department of Revenue or (ii) any similar report required by any other State relating to the ability of the Borrower or any Guarantor to enforce their accounts receivable claims against Account Debtors located in any such state. "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 SIDLEY AUSTIN BROWN & WOOD LLP 3 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 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 SIDLEY AUSTIN BROWN & WOOD LLP 4 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, which date was the date of the initial extensions of credit under the Existing Credit Agreement. "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. "COLLATERAL DOCUMENTS" means all agreements, instruments and documents executed in connection with this Agreement that are intended to create or evidence Liens to secure the Obligations and the Rate Management Obligations, including, without limitation, all security agreements, mortgages, deeds of trust, loan agreements, notes, guarantees, subordination agreements, pledges, powers of attorney, consents, assignments, contracts, fee letters, notices, leases, financing statements and all other written matter whether heretofore, now, or hereafter executed by or on behalf of the Borrower or any of its Subsidiaries and delivered to the Administrative Agent or any of the Lenders, together with all agreements and documents referred to therein or contemplated thereby. "COLLATERALIZATION DATE" is defined in Section 6.23. "COLLATERAL SHORTFALL AMOUNT" is defined in Section 8.1. "COMMITMENT" means, for each Lender, the obligation of such Lender to make Revolving Loans to, and participate in Facility LC's issued upon the application of, the Borrower 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 Effective Date and the principal amount of Term Loans held by each Lender, if any, as of the Effective Date, as attached hereto and identified as such. SIDLEY AUSTIN BROWN & WOOD LLP 5 "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. "CONSTITUENT DOCUMENTS" means, as applied to any Person, the certificate of incorporation, articles of incorporation or certificate of formation, by-laws or operating agreement and any other applicable organizational document of such Person. "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 SIDLEY AUSTIN BROWN & WOOD LLP 6 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, 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/CONTINUATION NOTICE" is defined in Section 2.9. "CREDIT EXTENSION" means the making of an Advance or the issuance of a Facility LC hereunder. "DEFAULT" means an event described in Article VII. "DEPARTING LENDER" means Fleet National Bank. "DEPARTING LENDER SIGNATURE PAGE" means each signature page to this Agreement on which it indicated that the Departing Lender executing the same shall cease to be a party to the Existing Credit Agreement upon this Agreement becoming effective. "DOLLAR" and "$" means the lawful currency of the United States of America. "EFFECTIVE DATE" means March 19, 2004. "ELIGIBLE RECEIVABLES" means Receivables created by the Borrower or any Guarantor in the ordinary course of its business arising out of the sale of goods or rendition of services by such Person, which Receivables are and at all times shall continue to meet standards of eligibility hereunder as adjusted from time to time by Borrowing Base Adjustments (it being understood that any Receivable (or portion thereof) that fails to meet the standards of eligibility below shall qualify as an Eligible Receivable if it later satisfies all such standards of eligibility). The following Receivables shall not qualify as Eligible Receivables: (i) any Receivable which remains unpaid ninety (90) days after the date of the original applicable invoice; (ii) Receivables owing by any Account Debtor who, individually or collectively with a group of other Account Debtors of which it is an Affiliate, is obligated in respect of then-existing Receivables owing to the Borrower and the Guarantors which exceed in face amount twenty-five percent (25%) of the total Eligible Receivables; provided, that this requirement shall only exclude the amount of Receivables in excess of such concentration limit; SIDLEY AUSTIN BROWN & WOOD LLP 7 (iii) any Receivable which is due more than thirty (30) days after the date of the original applicable invoice; (iv) any Receivable with respect to which the Account Debtor is a director, officer, employee, Subsidiary or Affiliate of the Borrower or any Subsidiary of the Borrower; (v) any Receivable with respect to which the Account Debtor is any federal Governmental Authority, the United States of America, or, in each case, any department, agency or instrumentality thereof, unless with respect to any such Receivable, the Borrower has complied to the Administrative Agent's satisfaction with the provisions of the Federal Assignment of Claims Act or other applicable statutes, including executing and delivering to the Administrative Agent all statements of assignment and/or notification which are in form and substance acceptable to the Administrative Agent and which are deemed necessary by the Administrative Agent to effectuate the assignment of such Receivables to the Administrative Agent; (vi) any Receivable not denominated in Dollars; (vii) any Receivable with respect to which the Account Debtor either (a) does not maintain its residence or chief executive office in the United States (which shall not be deemed to include any territories of the United States) or (b) is not organized under the laws of the United States of America or any state or political subdivision thereof; (viii) any Receivable that is subject to any dispute, contra-account, defense, offset or counterclaim, volume rebate or advertising or other allowance provided that if any portion of any such Receivable is not subject to any dispute, contra-account, defense, offset, counterclaim, volume rebate or advertising or other allowance and the payment of such portion is not being withheld or delayed or otherwise affected in any manner due to the portion that is subject to such dispute, contra-account, defense, offset, counterclaim, volume rebate or advertising or other allowance, then such portion which is not subject to any dispute, contra-account, defense, offset, counterclaim, volume rebate or advertising or other allowance shall not be excluded from Eligible Receivables because of this clause (viii); (ix) from and after the Collateralization Date, any Receivable with respect to which the Administrative Agent does not have a first and valid fully perfected and enforceable security interest; (x) any Receivable with respect to which the Account Debtor is the subject of a bankruptcy or similar insolvency proceeding or has made an assignment for the benefit of creditors or whose assets have been conveyed to a receiver, trustee or assignee for the benefit of creditors; (xi) any Receivable with respect to which the Account Debtor is located in Minnesota or New Jersey (or any other jurisdiction which adopts a statute or other SIDLEY AUSTIN BROWN & WOOD LLP 8 requirement with respect to which any Person that obtains business from within such jurisdiction is required to file a Business Activity Report or make any other required filings in a timely manner in order to enforce its claims in such jurisdiction's courts or arising under such jurisdiction's laws); provided, however, such Receivables shall nonetheless be eligible if (i) the Borrower or the applicable Guarantor has filed a Business Activity Report (or other applicable report) with the applicable state office or is qualified to do business in such jurisdiction and, at the time the Receivable was created, was qualified to do business in such jurisdiction or had on file with the applicable state office a current Business Activity Report (or other applicable report) or (ii) the Borrower has reasonably determined that the filing of a Business Activity Report or qualifying in the applicable state is not necessary for the Borrower or the applicable Guarantor to enforce its claims with respect thereto in such jurisdiction's courts or arising under such jurisdiction's laws, and the related jurisdiction has not, pursuant to a final, non-appealable order, ruled otherwise; (xii) any Receivable with respect to which the Account Debtor's obligation does not constitute its legal, valid and binding obligation, enforceable against it in accordance with its terms; (xiii) any Receivable with respect to which the Borrower or the applicable Guarantor has not yet performed the applicable service; provided only that portion of the Receivable not due and payable because of such non-performance shall be deemed ineligible; (xiv) any Receivable which is not in conformity with the representations and warranties made by the Borrower or the applicable Guarantor to the Administrative Agent with respect thereto whether contained in this Agreement or any Collateral Document, as applicable; (xv) any Receivable in connection with which Borrower or the applicable Guarantor has not complied with all material requirements contained in the Constituent Documents of the Borrower or such Guarantor, as applicable, and any law, rule or regulation, or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon the Borrower or such Guarantor, as applicable, or any of its property or to which the Borrower or such Guarantor or any of its property is subject, including all laws, rules, regulations and orders of any Governmental Authority or judicial authority relating to truth in lending, billing practices, fair credit reporting, equal credit opportunity, debt collection practices and consumer debtor protection, applicable to such Receivable (or any related contracts) directly affecting the collectibility of such Receivable; (xvi) any Receivable in connection with which the Borrower or the applicable Guarantor (or any other party to such Receivable) is in default in the performance or observance of any of the terms thereof (other than payment of such Receivable) in any material respect; provided that if any portion of any such Receivable is not SIDLEY AUSTIN BROWN & WOOD LLP 9 subject to any dispute, contra-account, defense, offset, counterclaim, volume rebate or advertising or other allowance and the payment of such portion is not being withheld or delayed or otherwise affected in any manner due to the portion that is subject to such dispute, contra-account, defense, offset, counterclaim, volume rebate or advertising or other allowance, then such portion which is not subject to any dispute, contra-account, defense, offset, counterclaim, volume rebate or advertising or other allowance shall not be excluded from Eligible Receivables because of this clause (xvi); (xvii) any Receivable that is not the bona fide existing obligation created by the rendition of services or the sale of goods to a customer of the Borrower or the applicable Guarantor in the ordinary course of business; (xviii) any Receivables subject to any Lien (except a Lien in favor of the Administrative Agent under the Loan Documents or any Lien described in Section 6.15(a), (f), or (h)); (xix) any Receivable that has been classified by the applicable Guarantor or the Borrower as doubtful or that have otherwise failed to meet established or customary credit standards of the Borrower, to the extent of such write-down; (xx) any Receivable evidenced by a promissory note or other similar instrument; and (xxi) any Receivable that is consigned or otherwise assigned to any Person for collection or otherwise. "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. SIDLEY AUSTIN BROWN & WOOD LLP 10 "EXHIBIT" refers to an exhibit to this Agreement, unless another document is specifically referenced. "EXISTING CREDIT AGREEMENT" means that certain Amended and Restated Credit Agreement, dated as of June 25, 2003, by and among the Borrower, the Lenders from time to time parties thereto, and LaSalle Bank National Association, as Administrative Agent, as amended or modified from time to time prior to the effective date. "FACILITY LC" is defined in Section 2.19.1. "FACILITY LC APPLICATION" is defined in Section 2.19.3. "FACILITY LC COLLATERAL ACCOUNT" is defined in Section 2.19.11. "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 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. "GOVERNMENTAL AUTHORITY" means any nation or government, any federal, state, local or other political subdivision thereof and any entity exercising executive, legislative, judicial, SIDLEY AUSTIN BROWN & WOOD LLP 11 regulatory or administrative authority or functions of or pertaining to government, including any authority or other quasi-governmental entity established to perform any of such functions. "GROSS AMOUNT OF ELIGIBLE RECEIVABLES" means the outstanding face amount of Eligible Receivables of the Borrower and the Guarantors, determined in accordance with Agreement Accounting Principles, consistently applied, less (i) all finance charges, late fees and other fees that are unearned and (ii) the value of any accrual which has been recorded by the applicable Guarantor or the Borrower with respect to downward price adjustments. "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 D 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) 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 SIDLEY AUSTIN BROWN & WOOD LLP 12 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. "LC FEE" is defined in Section 2.19.4. "LC ISSUER" means LaSalle Bank (or any subsidiary or affiliate of LaSalle Bank designated by LaSalle Bank) or any of the other Lenders, as applicable, in its respective capacity as issuer of Facility LC's hereunder. "LC OBLIGATIONS" means, at any time, the sum, without duplication, of (i) the aggregate undrawn stated amount under all Facility LC's outstanding at such time plus (ii) the aggregate unpaid amount at such time of all Reimbursement Obligations. "LC PAYMENT DATE" is defined in Section 2.19.5. "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. SIDLEY AUSTIN BROWN & WOOD LLP 13 "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 as displayed in the Bloomberg Financial Markets System 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 Bloomberg Financial Markets System 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 Bloomberg Financial Markets System in accordance with the foregoing provisions of this subparagraph shall be subject to corrections, if any, made in such rate and displayed by the Bloomberg Financial Markets System 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), including, without limitation, Revolving Loans and Term Loans. "LOAN DOCUMENTS" means this Agreement, the Facility LC Applications (including the LBNA Master Letter of Credit Agreement entered into with LaSalle Bank in its capacity as LC Issuer), the Collateral Documents, if any, 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 SIDLEY AUSTIN BROWN & WOOD LLP 14 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, the LC Issuers 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. "MODIFY" and "MODIFICATION" are defined in Section 2.19.1. "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 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. SIDLEY AUSTIN BROWN & WOOD LLP 15 "NON-U.S. LENDER" is defined in Section 3.5(iv). "NOTE" is defined in Section 2.13. "OBLIGATIONS" means all Revolving Loans, all Term 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, any LC Issuer, 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). "OUTSTANDING CREDIT EXPOSURE" means, as to any Lender at any time, (i) the aggregate principal amount of its Loans outstanding at such time, plus (ii) an amount equal to its Revolving Loan Pro Rata Share of the LC Obligations at such time. SIDLEY AUSTIN BROWN & WOOD LLP 16 "PARTICIPANTS" is defined in Section 12.2.1. "PAYMENT DATE" means the last day of each March, June, September and December, the Revolving Facility Termination Date and the Term Loan Maturity 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, and, from and after the Collateralization Date, the Borrower shall have delivered all such Collateral Documents necessary or required under Section 6.23 for the perfection of a first priority security interest (subject to Liens permitted under Section 6.15) in substantially all of the assets to be acquired or all of the equity interests and substantially all of the assets of the entity to be acquired, together with opinions of counsel, if requested by the Administrative Agent, in each case in form and substance reasonably acceptable to the Administrative Agent; provided that, as set forth in Section 6.23, if any pledge of capital stock of any foreign subsidiary shall result in materially adverse tax consequences to the Borrower, 65% of such foreign subsidiary's capital stock and not 100% shall be pledged; (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 SIDLEY AUSTIN BROWN & WOOD LLP 17 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 6.19 and not otherwise in Default, provided, 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 $3,000,000; 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. "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, the Applicable LC Fee Rate 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 LLP 18 "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 the sum of such Lender's Commitment and the aggregate outstanding principal amount of such Lender's Term Loans 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 sum of the Aggregate Commitment at such time and the aggregate outstanding principal amount of all of the Term Loans 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 Credit Exposure 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. "RECEIVABLE(S)" means and includes, with respect to any Person, all of such Person's presently existing and hereafter arising or acquired accounts, accounts receivable, and all present and future rights of such Person to payment for goods sold or leased or for services rendered (except those evidenced by instruments or chattel paper), whether or not they have been earned by performance, and all rights in any merchandise or goods which any of the same may represent, and all rights, title, security and guaranties with respect to each of the foregoing, including, without limitation, any right of stoppage in transit. "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 SIDLEY AUSTIN BROWN & WOOD LLP 19 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. "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). "REIMBURSEMENT OBLIGATIONS" means, at any time, the aggregate of all obligations of the Borrower then outstanding under Section 2.19 to reimburse any LC Issuer for amounts paid by such LC Issuer in respect of any one or more drawings under Facility LC's. "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. "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 CREDIT OBLIGATIONS" means, at any particular time, the sum of (i) the outstanding principal amount of the Revolving Loans at such time, plus (ii) the outstanding LC Obligations at such time. "REVOLVING FACILITY TERMINATION DATE" means the earlier of (a) December 31, 2006 and (b) the date the Aggregate Commitments are reduced to zero or otherwise terminated pursuant to the terms hereof, including, without limitation, pursuant to Sections 2.2 and 2.5 and Article VIII hereof. SIDLEY AUSTIN BROWN & WOOD LLP 20 "REVOLVING LOAN" means, with respect to a Lender, such Lender's loan made pursuant to its commitment to lend set forth in Section 2.1 (and any conversion or continuation thereof). "REVOLVING LOAN 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 and the denominator of which is the Aggregate Commitment at such time; provided, however, that if the Commitments have been terminated pursuant to the terms of this Agreement, "Revolving Loan Pro Rata Share" means a portion equal to a fraction the numerator of which is such Lender's Outstanding Credit Exposure (exclusive of Term Loans) at such time and the denominator of which is the Aggregate Outstanding Credit Exposure (exclusive of Term Loans) outstanding at such time. "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. "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 SIDLEY AUSTIN BROWN & WOOD LLP 21 (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 periods 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. "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. "TERM LOAN" means, with respect to a Lender, such Lender's term loan made under the Existing Credit Agreement and re-evidenced hereunder pursuant to Section 2.1.2. "TERM LOAN MATURITY DATE" means 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. "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. SIDLEY AUSTIN BROWN & WOOD LLP 22 "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 Closing Date, 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 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 Facilities. 2.1.1. Revolving Loans; Commitment. From and including the Effective Date and prior to the Revolving Facility 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, (i) to make Revolving Loans to the Borrower SIDLEY AUSTIN BROWN & WOOD LLP 23 from time to time in Dollars in amounts not to exceed in the aggregate at any one time outstanding of its Revolving Loan Pro Rata Share of the Available Aggregate Commitment and (ii) participate in Facility LC's issued upon the request of the Borrower; provided that at no time shall the Aggregate Outstanding Credit Exposure (exclusive of the portion thereof constituting Term Loans) hereunder exceed the Aggregate Commitment, provided, further that at no time shall the Aggregate Outstanding Credit Exposure hereunder exceed the Borrowing Base. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow Revolving Loans at any time prior to the Revolving Facility Termination Date. The Commitments to lend hereunder shall expire automatically on the Revolving Facility Termination Date. The LC Issuers will issue Facility LC's hereunder on the terms and conditions set forth in Section 2.19. 2.1.2. Term Loans. The Borrower, the Lenders and the Administrative Agent agree that term loans in an aggregate principal amount of $22,500,000.00 were outstanding to the Borrower under the Existing Credit Agreement immediately prior to the Effective Date. The Borrower, the Administrative Agent, and the Lenders agree that such term loans shall be re-evidenced as and shall constitute Term Loans under this Agreement. Each Lender holding a Term Loan on the Effective Date is identified, together with the principal amount of its Term Loan, on the Commitment Schedule to this Agreement. In accordance with Section 2.1.3 below, on the Effective Date, Bank of America, N.A. shall make Term Loans hereunder in the amount of the aggregate outstanding principal amount of the Departing Lender's "Term Loans" under (and as defined in) the Existing Credit Agreement. 2.1.3. Departing Lender. The "Commitments", outstanding "Revolving Loans" and outstanding "Term Loans" of the Departing Lender under the Existing Credit Agreement shall be repaid in full and terminated and the Departing Lender shall not be a Lender under this Agreement. The proceeds of the Revolving Loans and Term Loans made by Bank of America, N.A. on the Effective Date hereof shall be applied first to repay in full all of the aggregate outstanding principal amount of the Departing Lender's "Revolving Loans" and "Term Loans" under and as defined in the Existing Credit Agreement. Notwithstanding the foregoing, the Departing Lender shall continue to retain the protections due to Lenders and LC Issuers under Section 2.19.9, Section 3.6 and Section 9.6 hereof. 2.2. Required Payments; Termination Date. 2.2.1. Required Payments. Any outstanding Revolving Loans and all other unpaid Obligations (other than the Term Loans and amounts owing under or in connection with Term Loans) shall be paid in full by the Borrower on the Revolving Facility Termination Date, and outstanding Term Loans and amounts owing under or in connection with Term Loans shall be paid in full by the Borrower on the Term Loan Maturity Date. The aggregate unpaid principal balance of all Term Loans hereunder shall be repaid in twelve (12) consecutive equal installments, payable on each Payment Date (other than the Revolving Facility Termination Date) commencing on March 31, 2004, and continuing thereafter until the Term Loan Maturity Date, in an amount equal to $1,875,000. 2.2.2. Termination Date. Notwithstanding the termination of the Commitments under this Agreement on the Revolving Facility Termination Date, until all of the Obligations (other than contingent indemnity obligations) shall have been fully paid and satisfied and all financing SIDLEY AUSTIN BROWN & WOOD LLP 24 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. 2.3. Ratable Loans. Each Advance (other than the Term Loans outstanding on the Effective Date) hereunder shall consist of Revolving 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 with a Commitment 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 Effective Date to and including the Revolving Facility Termination Date, payable quarterly in arrears on each Payment Date (other than the Term Loan Maturity Date) hereafter and until all Obligations hereunder (other than amounts owing under or in connection with Term Loans) have been paid in full; provided, that such Lender's Pro Rata Share of the LC Obligations shall be deemed to constitute usage of such Lender's Commitment for purposes of calculating the Commitment Fee due hereunder. 2.5.2. Reductions in Aggregate Commitment. 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 (other than amounts owing under or in connection with Term Loans). 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. 2.6. 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 SIDLEY AUSTIN BROWN & WOOD LLP 25 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 Administrative Agent. Principal payments made with respect to the Term Loans pursuant to this Section 2.7.1 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, (i) the Borrower shall, or it shall permit any Subsidiary to, consummate any Asset Sale or Sale and Leaseback Transaction (other than Asset Sales permitted under Section 6.13(a)), (ii) the Borrower, or any of its Subsidiaries, shall incur any Indebtedness under Section 6.11(f), or (iii) the Aggregate Outstanding Credit Exposure shall exceed the Borrowing Base, the Borrower shall immediately make a mandatory prepayment of the Obligations (to be applied (a) in the case of clauses (i) and (ii) above, first to outstanding principal amount of Term Loans and, thereafter, to outstanding Revolving Loans (without any reduction to the Commitment), and (b) in the case of clause (iii) above, first to outstanding principal amount of Revolving Loans (without any reduction to the Commitment) and, thereafter, to outstanding Term Loans, in each case with Term Loan payments to be made in inverse order of maturity)(1) in an amount equal to the Net Cash Proceeds, provided, that the Borrower shall be permitted to retain (i) the first $1,000,000 of Net Cash Proceeds it receives in the aggregate for any Asset Sales made under Sections 6.13 (b) and (c), and (ii) the first $3,000,000 of Net Cash Proceeds it receives in the aggregate for any Asset Sales made under Section 6.13(d), Sale and Leaseback Transactions or Indebtedness under Section 6.11(f). 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 11:00 a.m. (Chicago time) at least one (1) Business Day before the Borrowing Date of each Floating Rate Advance and two (2) 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. - --------------------- (1) LaSalle to confirm. SIDLEY AUSTIN BROWN & WOOD LLP 26 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 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 all of the Lenders) when any Default or Unmatured Default has occurred and is 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 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. No Interest Period may end after the Revolving Facility Termination Date with respect to Revolving Loans, or the Term Loan Maturity Date with respect to Term Loans. SIDLEY AUSTIN BROWN & WOOD LLP 27 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 Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the 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 Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the 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, (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, and (iii) the LC Fee shall be increased by 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 and the increase in the LC Fee set forth in clause (iii) above shall be applicable to all Credit Extensions 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 (except in the case of Reimbursement Obligations for which the LC Issuers have not been fully indemnified by the Lenders, or as otherwise specifically required hereunder) 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. Each reference to the Administrative Agent in this Section 2.12 shall also be deemed to refer, and shall apply equally, to the LC Issuers, in the case of payments required to be made to by the Borrower to the LC Issuers pursuant to Section 2.19.6. 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 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 original stated SIDLEY AUSTIN BROWN & WOOD LLP 28 amount of each Facility LC and the amount of LC Obligations outstanding at any time, (d) the effective date and amount of each Assignment Agreement delivered to and accepted by it and the parties thereto pursuant to Section 12.3, (e) the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof, and (f) 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 C (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 Effective Date, 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 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 (including LC Fees) shall be calculated for actual days elapsed on the basis of a 360-day year. Interest shall be SIDLEY AUSTIN BROWN & WOOD LLP 29 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 Credit Extensions. 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. Promptly after notice from any LC Issuer, the Administrative Agent will notify each Lender of the contents of each request for issuance of a Facility LC 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 Credit Extensions 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 and its participation in any LC Obligations and any LC Issuer may book the Facility LC's at any Lending Office selected by such Lender or such LC Issuer, as the case may be, 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, Facility LC's and any Notes issued hereunder shall be deemed held by each Lender or each LC Issuer, as the case may be, for the benefit of any such Lending Office. Each Lender and each LC Issuer 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 or Facility LC's will be issued by it and for whose account Loan payments or payments with respect to Facility LC's 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 Administrative Agent until the date the Administrative Agent recovers such amount at a rate per SIDLEY AUSTIN BROWN & WOOD LLP 30 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. Facility LC's. 2.19.1. Issuance. The LC Issuers hereby agree, on the terms and conditions set forth in this Agreement, to issue standby letters of credit (each, a "FACILITY LC") and to renew, extend, increase, decrease or otherwise modify each Facility LC ("MODIFY," and each such action a "MODIFICATION"), from time to time from and including the date of this Agreement and prior to the Revolving Facility Termination Date upon the request of the Borrower; provided that immediately after each such Facility LC is issued or Modified, (i) the aggregate amount of the outstanding LC Obligations shall not exceed $5,000,000 and (ii) the Aggregate Outstanding Credit Exposure (excluding Term Loans) shall not exceed the Aggregate Commitment, provided, further, that at no time shall the Aggregate Outstanding Credit Exposure exceed the Borrowing Base. No Facility LC shall have an expiry date later than the earlier of (x) the fifth Business Day prior to the Revolving Facility Termination Date and (y) eighteen months after its issuance; provided that any Facility LC with an eighteen-month tenor may provide for the renewal thereof for additional one-year periods (which, subject to the next succeeding proviso, may extend beyond the date referred to in clause (x) above); provided, however, that, subject to the terms of Section 2.19.11, on or before the 10th day prior to the Revolving Facility Termination Date the Borrower may request and the LC Issuers hereby agree to issue Facility LC's with (or to Modify Facility LC's to have) an expiry date on or after the Revolving Facility Termination Date but not later than the twelve-month anniversary of the Revolving Facility Termination Date. 2.19.2. Participations. Upon the issuance or Modification by any LC Issuer of a Facility LC in accordance with this Section 2.19, such LC Issuer shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably sold to each Lender, and each Lender shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably purchased from such LC Issuer, a participation in such Facility LC (and each Modification thereof) and the related LC Obligations in proportion to its Revolving Loan Pro Rata Share. 2.19.3. Notice. Subject to Section 2.19.1, the Borrower shall give the applicable LC Issuer notice prior to 10:00 a.m. (Chicago time) at least three Business Days prior to the proposed date of issuance or Modification of each Facility LC, specifying the beneficiary, the proposed date of issuance (or Modification) and the expiry date of such Facility LC, and describing the proposed terms of such Facility LC and the nature of the transactions proposed to be supported thereby. Upon receipt of such notice, the applicable LC Issuer shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify each Lender, of the contents thereof and of the amount of such Lender's participation in such proposed Facility LC. The issuance or Modification by the applicable LC Issuer of any Facility LC shall, in addition to the conditions precedent set forth in Article IV (the satisfaction of which the applicable LC Issuer shall have no duty to ascertain), be subject to the conditions precedent that such Facility LC shall be satisfactory to the applicable LC Issuer and that the Borrower shall have executed and delivered such application agreement and/or such other instruments and SIDLEY AUSTIN BROWN & WOOD LLP 31 agreements relating to such Facility LC as the applicable LC Issuer shall have reasonably requested (including, with respect to any Facility LC issued by LaSalle Bank, in its capacity as LC Issuer, the LBNA Master Letter of Credit Agreement) (each, a "FACILITY LC APPLICATION"). In the event of any conflict between the terms of this Agreement and the terms of any Facility LC Application, the terms of this Agreement shall control. 2.19.4. LC Fees. The Borrower shall pay to the Administrative Agent, for the account of the Lenders ratably in accordance with their respective Revolving Loan Pro Rata Shares, with respect to each standby Facility LC, a letter of credit fee at a per annum rate equal to the Applicable LC Fee Rate in effect from time to time on the average daily undrawn stated amount under such standby Facility LC, such fee to be payable in arrears on each Payment Date (the "LC FEE"). The Borrower shall also pay to each LC Issuer for its own account (x) at the time of issuance of each Facility LC, a fronting fee in an amount to be agreed upon between such LC Issuer and the Borrower, and (y) documentary and processing charges in connection with the issuance or Modification of and draws under Facility LC's in accordance with such LC Issuer's standard schedule for such charges as in effect from time to time. 2.19.5. Administration; Reimbursement by Lenders. Upon receipt from the beneficiary of any Facility LC of any demand for payment under such Facility LC, each LC Issuer shall notify the Administrative Agent and the Administrative Agent shall promptly notify the Borrower and each other Lender as to the amount to be paid by such LC Issuer as a result of such demand and the proposed payment date (the "LC PAYMENT DATE"). The responsibility of such LC Issuer to the Borrower and each Lender shall be only to determine that the documents (including each demand for payment) delivered under each Facility LC in connection with such presentment shall be in conformity in all material respects with such Facility LC. The LC Issuer shall endeavor to exercise the same care in the issuance and administration of the Facility LC's as it does with respect to letters of credit in which no participations are granted, it being understood that in the absence of any gross negligence or willful misconduct by such LC Issuer, each Lender shall be unconditionally and irrevocably liable without regard to the occurrence of any Default or any condition precedent whatsoever, to reimburse such LC Issuer on demand for (i) such Lender's Revolving Loan Pro Rata Share of the amount of each payment made by such LC Issuer under each Facility LC to the extent such amount is not reimbursed by the Borrower pursuant to Section 2.19.6 below, plus (ii) interest on the foregoing amount to be reimbursed by such Lender, for each day from the date of such LC Issuer's demand for such reimbursement (or, if such demand is made after 11:00 a.m. (Chicago time) on such date, from the next succeeding Business Day) to the date on which such Lender pays the amount to be reimbursed by it, at a rate of interest per annum equal to the Federal Funds Effective Rate for the first three days and, thereafter, at a rate of interest equal to the rate applicable to Floating Rate Advances. 2.19.6. Reimbursement by Borrower. The Borrower shall be irrevocably and unconditionally obligated to reimburse each LC Issuer on or before the applicable LC Payment Date for any amounts to be paid by such LC Issuer upon any drawing under any Facility LC, without presentment, demand, protest or other formalities of any kind; provided that neither the Borrower nor any Lender shall hereby be precluded from asserting any claim for direct (but not consequential) damages suffered by the Borrower or such Lender to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of such LC Issuer in determining whether a request presented under any Facility LC issued by it complied with the terms of such SIDLEY AUSTIN BROWN & WOOD LLP 32 Facility LC or (ii) such LC Issuer's failure to pay under any Facility LC issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. All such amounts paid by such LC Issuer and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to (x) the rate applicable to Floating Rate Advances for such day if such day falls on or before the applicable LC Payment Date and (y) the sum of 2% plus the rate applicable to Floating Rate Advances for such day if such day falls after such LC Payment Date. The LC Issuer will pay to each Lender ratably in accordance with its Revolving Loan Pro Rata Share all amounts received by it from the Borrower for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Facility LC issued by such LC Issuer, but only to the extent such Lender has made payment to such LC Issuer in respect of such Facility LC pursuant to Section 2.19.5. Subject to the terms and conditions of this Agreement (including without limitation the submission of a Borrowing Notice in compliance with Section 2.8 and the satisfaction of the applicable conditions precedent set forth in Article IV), the Borrower may request an Advance hereunder for the purpose of satisfying any Reimbursement Obligation. 2.19.7. Obligations Absolute. The Borrower's obligations under this Section 2.19 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against any LC Issuer, any Lender or any beneficiary of a Facility LC. The Borrower further agrees with the LC Issuers and the Lenders that the LC Issuers and the Lenders shall not be responsible for, and the Borrower's Reimbursement Obligation in respect of any Facility LC shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrower, any of its Affiliates, the beneficiary of any Facility LC or any financing institution or other party to whom any Facility LC may be transferred or any claims or defenses whatsoever of the Borrower or of any of its Affiliates against the beneficiary of any Facility LC or any such transferee. The LC Issuer shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Facility LC. The Borrower agrees that any action taken or omitted by the LC Issuers or any Lender under or in connection with each Facility LC and the related drafts and documents, if done without gross negligence or willful misconduct, shall be binding upon the Borrower and shall not put the LC Issuers or any Lender under any liability to the Borrower. Nothing in this Section 2.19.7 is intended to limit the right of the Borrower to make a claim against the LC Issuers for damages as contemplated by the proviso to the first sentence of Section 2.19.6. 2.19.8. Actions of LC Issuer. The LC Issuer shall be entitled to rely, and shall be fully protected in relying, upon any Facility LC, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the LC Issuers. The LC Issuer shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first have received such advice or concurrence of the Lenders as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. SIDLEY AUSTIN BROWN & WOOD LLP 33 Notwithstanding any other provision of this Section 2.19, the LC Issuers shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Lenders and any future holders of a participation in any Facility LC. 2.19.9. Indemnification. The Borrower hereby agrees to indemnify and hold harmless each Lender, the LC Issuers and the Administrative Agent, and their respective directors, officers, agents and employees from and against any and all claims and damages, losses, liabilities, costs or expenses which such Lender, the LC Issuers or the Administrative Agent may incur (or which may be claimed against such Lender, the LC Issuers or the Administrative Agent by any Person whatsoever) by reason of or in connection with the issuance, execution and delivery or transfer of or payment or failure to pay under any Facility LC or any actual or proposed use of any Facility LC, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the LC Issuers may incur by reason of or in connection with (i) the failure of any other Lender to fulfill or comply with its obligations to the LC Issuers hereunder (but nothing herein contained shall affect any rights the Borrower may have against any defaulting Lender) or (ii) by reason of or on account of any LC Issuer issuing any Facility LC which specifies that the term "Beneficiary" included therein includes any successor by operation of law of the named Beneficiary, but which Facility LC does not require that any drawing by any such successor Beneficiary be accompanied by a copy of a legal document, satisfactory to such LC Issuer, evidencing the appointment of such successor Beneficiary; provided that the Borrower shall not be required to indemnify any Lender, such LC Issuer or the Administrative Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of such LC Issuer in determining whether a request presented under any Facility LC complied with the terms of such Facility LC or (y) such LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. Nothing in this Section 2.19.9 is intended to limit the obligations of the Borrower under any other provision of this Agreement. 2.19.10. Lenders' Indemnification. Each Lender shall, ratably in accordance with its Revolving Loan Pro Rata Share, indemnify each LC Issuer, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct or any LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of the Facility LC) that such indemnitees may suffer or incur in connection with this Section 2.19 or any action taken or omitted by such indemnitees hereunder. 2.19.11. Facility LC Collateral Account. The Borrower agrees that it will, upon the request of the Administrative Agent or the Lenders and until the final expiration date of any Facility LC and thereafter as long as any amount is payable to any LC Issuer or the Lenders in respect of any Facility LC, maintain a special collateral account pursuant to arrangements satisfactory to the Administrative Agent (the "FACILITY LC COLLATERAL ACCOUNT") at the Administrative Agent's office at the address specified pursuant to Article XIII, in the name of such Borrower but under the sole dominion and control of the Administrative Agent, for the SIDLEY AUSTIN BROWN & WOOD LLP 34 benefit of the Lenders and in which such Borrower shall have no interest other than as set forth in Section 8.1. The Borrower hereby pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Lenders and the LC Issuers, a security interest in all of the Borrower's right, title and interest in and to all funds which may from time to time be on deposit in the Facility LC Collateral Account to secure the prompt and complete payment and performance of the Obligations. The Administrative Agent will invest any funds on deposit from time to time in the Facility LC Collateral Account in certificates of deposit of LaSalle Bank having a maturity not exceeding 30 days. Nothing in this Section 2.19.11 shall either obligate the Administrative Agent to require the Borrower to deposit any funds in the Facility LC Collateral Account or limit the right of the Administrative Agent to release any funds held in the Facility LC Collateral Account in each case other than as required by Section 8.1. 2.19.12. Rights as a Lender. In its capacity as a Lender, each LC Issuer shall have the same rights and obligations as any other Lender. 2.20. 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 Credit Extension 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 B 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 LIBOR Advance 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 the Obligations 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 Credit Extensions). ARTICLE III SIDLEY AUSTIN BROWN & WOOD LLP 35 YIELD PROTECTION; TAXES 3.1. Yield Protection. If, on or after the Closing Date, 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 or any LC Issuer with any 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 or any LC Issuer to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to any Lender or any LC Issuer in respect of its LIBOR Loans, Facility LC's or participations therein, 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 or any LC Issuer (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 or any LC Issuer of making, funding or maintaining its Commitment or LIBOR Loans, or of issuing or participating in Facility LC's, or reduces any amount receivable by any Lender or any applicable Lending Office or any LC Issuer in connection with its Commitment or LIBOR Loans, Facility LC's or participations therein, or requires any Lender or any applicable Lending Office or any LC Issuer to make any payment calculated by reference to the amount of Commitment or LIBOR Loans, Facility LC's or participations therein held or interest received by it, by an amount deemed material by such Lender or any LC Issuer, as the case may be, and the result of any of the foregoing is to increase the cost to such Lender or applicable Lending Office or such LC Issuer of making or maintaining its LIBOR Loans or Commitment or issuing or participating in Facility LC's or to reduce the return received by such Lender or applicable Lending Office or such LC Issuer, as the case may be, in connection with such LIBOR Loans or Commitment, then, within fifteen (15) days of demand by such Lender or such LC Issuer, the Borrower shall pay such Lender or such LC Issuer, as the case may be, such additional amount or amounts as will compensate such Lender or LC Issuer, as the case may be, for such increased cost or reduction in amount received, provided however, such Lender or LC Issuer 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 or LC Issuer made a demand for payment of such increased costs plus such increased costs that accrue after the date of such demand by such Lender or LC Issuer, 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 or LC Issuer, the Borrower shall pay such Lender or LC Issuer, as the case may be, such additional amount or SIDLEY AUSTIN BROWN & WOOD LLP 36 amounts as will compensate such Lender or LC Issuer 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 or an LC Issuer determines the amount of capital required or expected to be maintained by such Lender or such LC Issuer, any Lending Office of such Lender or such LC Issuer or any corporation controlling such Lender or such LC Issuer is increased as a result of a Change, then, within fifteen (15) days of demand by such Lender or such LC Issuer, the Borrower shall pay such Lender or such LC Issuer the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender or such LC Issuer determines is attributable to this Agreement, its Outstanding Credit Exposure or its Commitment to make Loans and issue or participate in Facility LC's, as the case may be, hereunder (after taking into account such Lender's or such LC Issuer's policies as to capital adequacy) provided however, such Lender or LC Issuer 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 or LC Issuer made a demand for payment of such shortfall plus such additional shortfalls that accrue after the date of such demand by such Lender or LC Issuer, provided that if such Change has a retroactive effect, then the Lender or the LC Issuer 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 Closing Date 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 Closing Date which affects the amount of capital required or expected to be maintained by any Lender or any LC Issuer or any Lending Office or any corporation controlling any Lender or any LC Issuer. "RISK-BASED CAPITAL GUIDELINES" means (i) the risk-based capital guidelines in effect in the United States on the Closing Date, 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 Closing Date. 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 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 SIDLEY AUSTIN BROWN & WOOD LLP 37 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, any LC Issuer 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, any LC Issuer 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, such LC Issuer 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. (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 Facility LC Application or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note or Facility LC Application other than any of the foregoing which constitute Excluded Taxes ("OTHER TAXES"). (iii) The Borrower hereby agrees to indemnify the Administrative Agent, each LC Issuer 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, such LC Issuer 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, such LC Issuer 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 SIDLEY AUSTIN BROWN & WOOD LLP 38 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. (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 and each LC Issuer shall designate an alternate Lending Office with respect to its Credit Extensions to reduce any liability of the Borrower to such Lender or LC Issuer 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 or LC Issuer, materially disadvantageous to such Lender or LC Issuer. Each Lender and each LC Issuer shall deliver a SIDLEY AUSTIN BROWN & WOOD LLP 39 written statement of such Lender or LC Issuer 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 or LC Issuer 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. Effectiveness of this Agreement. The Lenders' Commitments shall not be effective hereunder and the terms loans extended under the Existing Credit Agreement described in Article XVI hereof shall not constitute Term Loans hereunder unless (a) the representations and warranties contained in Article V are true and correct as of such date and (b) the following conditions precedent have been satisfied: (x) the Borrower or the applicable Guarantor has furnished to the Administrative Agent with sufficient copies for the Lenders: (i) Copies of a certificate of good standing of the Borrower and each of the initial Guarantors, 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 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 Credit Extensions 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) A certificate signed by the chief financial officer or treasurer of the Borrower, stating that on the Effective 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, 2002. SIDLEY AUSTIN BROWN & WOOD LLP 40 (v) Any Notes requested by a Lender pursuant to Section 2.13 payable to the order of each such requesting Lender. (vi) Duly executed originals of (a) this Agreement from each of the Borrower, the Administrative Agent and the Lender and (b) a Reaffirmation in the form of Attachment A hereto. (vii) If the initial Credit Extension will be the issuance of a Facility LC, a properly completed Facility LC Application. (viii) An initial executed Borrowing Base Certificate dated as of the Effective Date, reflecting the calculation of the Borrowing Base as of January 31, 2004. (ix) Such other documents as any Lender or its counsel may have reasonably requested. and (y) the Borrower shall pay to the Administrative Agent, for the account of each Lender, an up-front fee equal to 0.20% multiplied by each Lender's Outstanding Credit Exposure as of the Effective Date (after giving effect to all payments made by Borrower thereunder on such date). 4.2. Each Credit Extension. The Lenders shall not be required to make any Credit Extension 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. (iii) All legal matters incident to the making of such Credit Extension shall be satisfactory to the Lenders and their counsel. Each Borrowing Notice with respect to each such Credit Extension 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 A as a condition to making an Credit Extension. ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants as follows to each Lender and the Administrative Agent as of the Effective Date, on the date of the initial Revolving Loans hereunder (if different from the Effective 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 SIDLEY AUSTIN BROWN & WOOD LLP 41 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 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. SIDLEY AUSTIN BROWN & WOOD LLP 42 5.5. Material Adverse Change; No Default. Since December 31, 2002 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 their 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 Credit Extensions 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 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 Effective Date, 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 SIDLEY AUSTIN BROWN & WOOD LLP 43 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 Credit Extension, 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. 5.13. Ownership of Properties. On the Effective Date, 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. SIDLEY AUSTIN BROWN & WOOD LLP 44 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 Credit Extensions 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. 5.18. Indebtedness. Set forth on Schedule 2 hereto is a complete and accurate list of all Indebtedness existing as of the Effective Date, showing as of the Effective Date 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 Credit Extensions to be made on the Closing Date, or such other Credit Extensions 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 SIDLEY AUSTIN BROWN & WOOD LLP 45 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. 5.23. Collateral Documents. The Collateral Documents, if any, create, as security for the obligations purported to be secured thereby, a valid and enforceable interest in and Lien on all of the Properties covered thereby in favor of the Administrative Agent, and upon the filing of any financing statements, notices or mortgages contemplated thereby in the offices specified therein, such Liens shall be superior to and prior to the right of all third Persons and subject to no other Liens (other than Liens permitted under Section 6.15). ARTICLE VI COVENANTS During the term of this Agreement, unless the 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 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. (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 SIDLEY AUSTIN BROWN & WOOD LLP 46 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 A 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, 2004, 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 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 SIDLEY AUSTIN BROWN & WOOD LLP 47 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) Borrowing Base Certificate. (i) As soon as practicable, and in any event within fifteen (15) days after the close of each calendar month (and more often if reasonably requested by the Administrative Agent), the Borrower shall provide the Administrative Agent with a Borrowing Base Certificate, together with such supporting documents as the Administrative Agent reasonably deems desirable, setting forth the Borrowing Base as of the close of such calendar month, all certified as being true and correct by an Authorized Officer of the Borrower. (ii) The Borrower may update the Borrowing Base Certificate and supporting documents more frequently than required under this clause (j) and the most recently delivered Borrowing Base Certificate shall be the applicable Borrowing Base Certificate for purposes of determining the Borrowing Base at any time. (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 Credit Extensions for working capital requirements, general corporate purposes and, with respect to the Credit Extensions under the Existing Credit Agreement, refinancing the Senior Notes. The Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Credit Extensions 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. SIDLEY AUSTIN BROWN & WOOD LLP 48 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 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 SIDLEY AUSTIN BROWN & WOOD LLP 49 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. 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 SIDLEY AUSTIN BROWN & WOOD LLP 50 Subsidiary may declare and pay dividends or make distributions to the Borrower or to a Wholly-Owned Subsidiary, (ii) the Borrower may declare or pay dividends or make distributions 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, and (iii) the Borrower may redeem, repurchase or otherwise acquire or retire any of its capital stock to the extent otherwise permitted under Section 6.19.4; provided, however, that before and after giving effect to such Restricted Payments described in clauses (ii) and (iii) above, the Borrower and its Subsidiaries shall be in compliance with the financial covenants contained in Section 6.19 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, without the prior approval of the Lenders, except: (a) The Obligations. (b) Indebtedness existing on the Effective Date 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. (f) Subject to the mandatory prepayment provisions of Section 2.7.2, Indebtedness not otherwise permitted under this Section 6.11; provided that at no time shall the aggregate outstanding principal amount of all Indebtedness incurred pursuant to this clause (f) plus the aggregate amount of all Asset Sales during the immediately preceding twelve-month period and permitted under Section 6.13(d) plus the aggregate amount of all Sale and Leaseback Transactions during the immediately preceding twelve-month period, without duplication, exceed $15,000,000 in the aggregate. (g) Indebtedness with respect to all earn-outs and other similar forms of contingent purchase prices in an amount not to exceed (a) $5,500,000 at any time during the period from January 1, 2003 through and including December 31, 2004, and (b) $2,750,000 at any time thereafter. SIDLEY AUSTIN BROWN & WOOD LLP 51 (h) Indebtedness consisting of reimbursement obligations owing to LaSalle Bank National Association in connection with a $455,000 stand-by letter of credit, issued by LaSalle Bank National Association for the benefit of Travelers Indemnity Company. 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, additional Asset Sales; provided that at no time shall the aggregate outstanding principal amount of all Indebtedness incurred pursuant to Section 6.11(f) plus the aggregate amount of all Asset Sales under this clause (d) during the immediately preceding twelve-month period plus the aggregate amount of all Sale and Leaseback Transactions during the immediately preceding twelve-month period, without duplication, exceed $15,000,000 in the aggregate. 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 LLP 52 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 Effective Date 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 Effective Date 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 LLP 53 (h) Liens securing Indebtedness permitted under Section 6.11(e). In addition, neither the Borrower nor any of its Subsidiaries shall become a party to any agreement, note, indenture, or other instrument, or take any other action, which would prohibit the creation of a Lien on any of its Properties or any other assets in favor of the Administrative Agent for the benefit of the Lenders and the other holders of Rate Management Obligations as collateral for the Obligations and the Rate Management Obligations; provided, that any agreement, note, indenture or other instrument in connection with Permitted Purchase Money Indebtedness (including Capitalized Leases) may prohibit the creation of such a Lien in favor of the Administrative Agent on the items of property obtained with the proceeds of such Permitted Purchase Money Indebtedness. 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) $26,500,000 during the fiscal year ending December 31, 2003 and (ii) $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. SIDLEY AUSTIN BROWN & WOOD LLP 54 6.19. Financial Covenants. 6.19.1. Minimum Consolidated EBITDA. The Borrower will not permit Consolidated EBITDA to be less than the amounts set forth below for the fiscal periods ending on the dates set forth below:
Fiscal Quarter(s) Ending on or About the Dates Set Forth Below: Minimum Consolidated EBITDA - -------------------------- --------------------------- March 31, 2004 $15,500,000 June 30, 2004 $16,800,000 September 30, 2004 $19,000,000 December 31, 2004 $22,000,000 March 31, 2005 $24,000,000 June 30, 2005 and each Fiscal Quarter thereafter $26,000,000
Consolidated EBITDA shall be determined as of the last day of each Fiscal Quarter for the four Fiscal Quarter periods 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. 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: (a) 2.50 to 1.00 as of the end of the Fiscal Quarter ending on or about March 31, 2004; (b) 2.15 to 1.00 as of the end of the Fiscal Quarter ending on or about June 30, 2004; (c) 1.90 to 1.00 as of the end of the Fiscal Quarter ending on or about September 30, 2004; (d) 1.60 to 1.00 as of the end of the Fiscal Quarter ending on or about December 31, 2004; and (e) 1.50 to 1.00 as of the end of each Fiscal Quarter thereafter. SIDLEY AUSTIN BROWN & WOOD LLP 55 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 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) $160,000,000 plus (ii) 50% of Consolidated Net Income (if positive) earned in each Fiscal Quarter beginning with the Fiscal Quarter ending December 31, 2003. 6.19.4. Capital Expenditures, Acquisitions and Stock Repurchases. The Borrower will not, nor will it permit any Subsidiary to, expend, or be committed to expend, on Capital Expenditures, Acquisitions or redemptions, repurchases or other acquisitions or retirements of the Borrower's capital stock, or any combination thereof (such events being each an "IDENTIFIED EXPENDITURE"), amounts exceeding $20,000,000 in the aggregate in any given fiscal year. The Borrower will not, nor will it permit any Subsidiary to, expend, or be committed to expend, any amounts on any Identified Expenditure, if, after giving effect to any such Identified Expenditure, (i) any Default or Unmatured Default shall have occurred and is continuing or would result therefrom; provided, however, that the Borrower and its Subsidiaries may expend Capital Expenditures pursuant to contractual obligations existing prior to the occurrence of such Default or Unmatured Default or (ii) in the case of any Identified Expenditure constituting a redemption, repurchase or other acquisition or retirement of the Borrower's capital stock, such Identified Expenditure exceeds $1,000,000, unless otherwise consented to in writing by the Lenders. 6.19.5. Liquidity. The Borrower and its Subsidiaries, on a consolidated basis, will not permit, as of the last day of any Fiscal Quarter, the sum of (a) all cash and Cash Equivalent Investments as of such date plus (b) the excess of the Borrowing Base over the Aggregate Outstanding Credit Exposure 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 if the aggregate outstanding principal amount of all Indebtedness incurred pursuant to Section 6.11(f) plus the aggregate amount of all Asset Sales during the immediately preceding twelve-month period permitted under Section 6.13(d) plus the aggregate SIDLEY AUSTIN BROWN & WOOD LLP 56 amount of all Sale and Leaseback Transactions during the immediately preceding twelve-month period, without duplication, does not exceed $15,000,000 in the aggregate, or (ii) any other transaction pursuant to which it incurs or has incurred Off-Balance Sheet Liabilities. 6.22. Reduction of Revolving Loans. Beginning January 1, 2005, the Borrower shall reduce the aggregate outstanding principal amount of the Revolving Loans to $0 for not less than thirty (30) consecutive days during each calendar year. 6.23. Collateral Documents. The Borrower and each Subsidiary shall execute or shall cause to be executed: (a) as of the thirtieth day following the delivery of a compliance certificate pursuant to Section 6.1(c) reflecting that Consolidated EBITDA shall have been less than the Consolidated EBITDA set forth on the Borrower's most recent projections delivered pursuant to Section 6.1(d) for each of the two most recently completed Fiscal Quarters (such date of delivery being the "COLLATERALIZATION DATE"), the Borrower shall deliver or cause to be delivered all such Collateral Documents as shall be necessary (and reasonably requested by the Administrative Agent) such that the Obligations and all Rate Management Obligations shall be secured by (i) a pledge of, and a first perfected security interest in, in all of the capital stock of the Borrower's domestic Subsidiaries and all of the capital stock of each foreign Subsidiary owned directly or indirectly by the Borrower; provided that if such pledge of such capital stock of such foreign Subsidiary results in any materially adverse tax consequences to the Borrower, 65% of such foreign Subsidiary and not 100% shall be pledged; and (ii) a first perfected security interest in substantially all of the assets of the Borrower and its domestic Subsidiaries, whether consisting of real, personal, tangible or intangible property, subject, in the case of this clause (ii) to exceptions to be reasonably acceptable to the Administrative Agent; and (b) from and after the Collateralization Date, on the date any Person becomes a Subsidiary of the Borrower, (i) if such Subsidiary is a domestic Subsidiary, such additional Collateral Documents (or supplements thereto) in favor of the Administrative Agent with respect to all of the equity interests of such Person owned by the Borrower and its domestic Subsidiaries and substantially all of the assets of such Person, whether constituting real, personal, tangible or intangible Property; and (ii) if such Subsidiary is a foreign Subsidiary, a pledge agreement or share mortgage in favor of the Administrative Agent with respect to 65% of all of the outstanding equity interests of such foreign Subsidiary; provided, however, in the event that any such foreign Subsidiary is a Wholly-Owned Subsidiary of a Guarantor in connection with which all of the requirements of clause (a) above have been satisfied, and the activities of such Guarantor are limited to owning the equity interests of its Subsidiaries, then, the Administrative Agent, at its option, may waive the requirement for the pledge of any of the equities of such foreign Subsidiary under this clause (b); provided, further, that if at any time any foreign Subsidiary issues or causes to be issued equity interests, such that the aggregate amount of the equity interests of foreign Subsidiary pledged to the Administrative Agent is less than 65% of all of the outstanding equity interests of such Person, the Borrower shall (x) promptly notify the Administrative Agent of such deficiency and (y) deliver or cause to be delivered any agreements, instruments, certificates and other documents as the Administrative Agent may reasonably request all in form and substance reasonably satisfactory to the Administrative Agent in order to cause all of the equities of such foreign Subsidiary owned by the Borrower and its Subsidiaries SIDLEY AUSTIN BROWN & WOOD LLP 57 (but not in excess of 65% of all of the outstanding equities thereof) to be pledged to the Administrative Agent; and (c) in either such case the Borrower shall deliver or cause to be delivered to the Administrative Agent all such pledge agreements, guarantees, security agreements and other Collateral Documents, together with appropriate corporate resolutions and other documentation (including opinions, if reasonably requested by the Administrative Agent, UCC financing statements (and the Borrower hereby authorize the preparation and filing of all necessary UCC financing statements), real estate title insurance policies, environmental reports, the stock certificates representing the equities subject to such pledge, stock powers with respect thereto executed in blank, and such other documents as shall be reasonably requested to perfect the Lien of such pledge) in each case in form and substance reasonably satisfactory to the Administrative Agent, and the Administrative Agent shall be reasonably satisfied that it has a first priority perfected pledge of or charge over the collateral related thereto. 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 Credit Extension, or any certificate or 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, (ii) nonpayment of any Reimbursement Obligation within one Business Day after the same becomes due, or (iii) interest upon any Credit Extension or any Commitment Fee, LC 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 6.23. 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 permitted under Section 6.11(i) or any other Indebtedness which, individually or in the aggregate exceeds $2,000,000 (or the equivalent thereof in currencies other than Dollars) (the indebtedness SIDLEY AUSTIN BROWN & WOOD LLP 58 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 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. SIDLEY AUSTIN BROWN & WOOD LLP 59 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. 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. The Liens created by the Collateral Documents, if any, shall at any time not constitute a valid and perfected Lien on the collateral intended to be covered thereby (to the extent perfection by filing, registration, recordation, or possession is required herein or therein) in favor of the Administrative Agent, having the priority contemplated by the Collateral Documents (except to the extent such Liens have been released in accordance with this Agreement or such other Loan Document). SIDLEY AUSTIN BROWN & WOOD LLP 60 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; Facility LC Collateral Account. (i) 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 and the obligation and power of each LC Issuer to issue Facility LC's shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Administrative Agent, any LC Issuer or any Lender and the Borrower will be and become thereby unconditionally obligated, without any further notice, act or demand, to pay to the Administrative Agent an amount in immediately available funds, which funds shall be held in the Facility LC Collateral Account, equal to the difference of (x) the amount of LC Obligations at such time, less (y) the amount on deposit in the Facility LC Collateral Account at such time which is free and clear of all rights and claims of third parties and has not been applied against the Obligations (such difference, the "COLLATERAL SHORTFALL AMOUNT"). If any other Default occurs or any 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 Lenders result in any other Default, the Lenders (or the Administrative Agent with the consent of the Lenders) may (a) terminate or suspend the obligations of the Lenders to make Loans hereunder and the obligation and power of each LC Issuer to issue Facility LC's, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without SIDLEY AUSTIN BROWN & WOOD LLP 61 presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives and (b) upon notice to the Borrower and in addition to the continuing right to demand payment of all amounts payable under this Agreement, make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Administrative Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. (ii) If at any time while any Default is continuing, the Administrative Agent determines that the Collateral Shortfall Amount at such time is greater than zero, the Administrative Agent may make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Administrative Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. (iii) The Administrative Agent may at any time or from time to time after funds are deposited in the Facility LC Collateral Account, apply such funds to the payment of the Obligations as same become due and payable and to the payment of any other amounts as shall from time to time have become due and payable by the Borrower to the Lenders or the LC Issuers under the Loan Documents. (iv) At any time while any Default is continuing, neither the Borrower nor any Person claiming on behalf of or through the Borrower shall have any right to withdraw any of the funds held in the Facility LC Collateral Account. On the earlier of the date on which (a) no Default shall be continuing and (b) all of the Obligations have been indefeasibly paid in full and the Aggregate Commitment has been terminated, any funds remaining in the Facility LC Collateral Account shall be returned by the Administrative Agent to the Borrower or paid to whomever may be legally entitled thereto at such time. (v) 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 or the obligation and power of the LC Issuers to issue Facility LC's 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 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. The Lenders (or the Administrative Agent with the consent in writing of the 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. No amendment of any provision of this Agreement relating to the Administrative Agent shall be effective without the written consent of the Administrative Agent, and no amendment of any provision relating to the LC Issuers shall be effective without the written consent of the LC Issuers. The Administrative Agent may waive payment of the fee required under Section 12.3.2 without obtaining the consent of any other party to this Agreement. SIDLEY AUSTIN BROWN & WOOD LLP 62 8.3. Preservation of Rights. No delay or omission of the Lenders, the LC Issuers 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 Credit Extension notwithstanding the existence of a Default or Unmatured Default or the inability of the Borrower to satisfy the conditions precedent to such Credit Extension 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, the LC Issuers 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 Credit Extensions herein contemplated. 9.2. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, neither any LC Issuer nor any 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, the LC Issuers and the Lenders and supersede all prior agreements and understandings among the Borrower, the Administrative Agent, the LC Issuers 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 LLP 63 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, the LC Issuers 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, the LC Issuers and the Lenders, which attorneys and paralegals may be employees of the Administrative Agent, the Arranger, the LC Issuers or the Lenders) paid or incurred by the Administrative Agent, the Arranger, any LC Issuer 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 LC Issuer and 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 LC Issuer, 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 Credit Extension 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 LLP 64 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 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, the LC Issuers and the Administrative Agent on the other hand shall be solely that of borrower and lender. None of the Administrative Agent, the Arranger, any LC Issuer or any Lender shall have any fiduciary responsibilities to the Borrower. None of the Administrative Agent, the Arranger, any LC Issuer 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, any LC Issuer 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, any LC Issuer 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 SIDLEY AUSTIN BROWN & WOOD LLP 65 Transferee, (iii) to regulatory officials, (iv) to any Person as requested pursuant to or as required 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 Credit Extensions 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") SIDLEY AUSTIN BROWN & WOOD LLP 66 shall be paid or delivered directly to the Administrative Agent for application on any of the 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 ADMINISTRATIVE 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 LLP 67 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 Credit Extensions, 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 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 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 LLP 68 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 Term Loans and the Aggregate Commitment (or, if the Aggregate Commitment has been terminated, 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 Credit Extensions as any Lender and may exercise the same as though it were not the Administrative Agent, and the term "Lender" or SIDLEY AUSTIN BROWN & WOOD LLP 69 "Lenders" shall, at any time when the Administrative Agent is a Lender, unless the context otherwise indicates, 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 Lenders, such removal to be effective on the date specified by the Lenders. Upon any such resignation or removal, the 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 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 SIDLEY AUSTIN BROWN & WOOD LLP 70 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 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. 10.15. Collateral Documents. (a) Each Lender authorizes the Administrative Agent to enter into each of the Collateral Documents to which it is a party and to take all action contemplated by such documents. Each Lender agrees that no Lender (other than the Administrative Agent) shall have the right individually to seek to realize upon the security granted by any Collateral Document, it being understood and agreed that such rights and remedies may be exercised solely by the Administrative Agent for the benefit of the Lenders and the other holders of Rate Management Obligations upon the terms of the Collateral Documents. (b) In the event that any collateral is hereafter pledged by any Person as collateral security for the Obligations, the Administrative Agent is hereby authorized to execute and deliver on behalf of the Lenders any Loan Documents necessary or appropriate to grant and perfect a Lien on such collateral in favor of the Administrative Agent on behalf of the Lenders and the other holders of Rate Management Obligations. (c) The Lenders hereby authorize the Administrative Agent, at its option and in its discretion, to release any Lien granted to or held by the Administrative Agent upon any Collateral (i) upon termination of the Commitments and payment and satisfaction of all of the Obligations (other than contingent indemnity obligations and Rate Management Obligations) at any time arising under or in respect of this Agreement or the Loan Documents or the transactions contemplated hereby or thereby; (ii) as permitted by, but only in accordance with, the terms of the applicable Loan Document; or (iii) if approved, authorized or ratified in writing by the Lenders, unless such release is required to be approved by all of the Lenders hereunder. Upon request by the Administrative Agent at any time, the Lenders will confirm in writing the SIDLEY AUSTIN BROWN & WOOD LLP 71 Administrative Agent's authority to release particular types or items of collateral pursuant to this Section 10.15. (d) Upon any sale or transfer of assets constituting collateral which is permitted pursuant to the terms of any Loan Document, or consented to in writing by the Lenders or all of the Lenders, as applicable, and upon at least three (3) Business Days' prior written request by the Borrower to the Administrative Agent, the Administrative Agent shall (and is hereby irrevocably authorized by the Lenders to) execute such documents as may be necessary to evidence the release of the Liens granted to the Administrative Agent herein or pursuant hereto upon the collateral that was sold or transferred; provided, however, that (i) the Administrative Agent shall not be required to execute any such document on terms which, in the Administrative Agent's opinion, would expose the Administrative Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (ii) such release shall not in any manner discharge, affect or impair the Obligations or any Liens upon (or obligations of the Borrower or any Guarantor) all interests retained by the Borrower or any Guarantor, including (without limitation) the proceeds of the sale, all of which shall continue to constitute part of the collateral. 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 Outstanding Credit Exposure 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 LLP 72 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 Credit Extension 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 Credit Extension or which holds any Note to direct payments relating to such Credit Extension or Note to another Person. Any assignee of the rights to any Credit Extension 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 Credit Extension (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 Credit Extension. 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 Outstanding Credit Exposure 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 Outstanding Credit Exposure 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 Credit SIDLEY AUSTIN BROWN & WOOD LLP 73 Extension or Commitment in which such Participant has an interest which (i) extends the final maturity of any Credit Extension 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 Credit Extension or the related Commitment or (ii) extends the Revolving Facility Termination Date or the Term Loan Maturity 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 B 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, the LC Issuers and the Administrative Agent shall be required prior to an Assignment Agreement becoming effective with respect to a Purchaser which is not a Lender or 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 and Term Loans (calculated as at the date of such assignment), or, if the Revolving Facility Termination Date has occurred, the remaining amount of the assigning Lender's Outstanding Credit Exposure. Notwithstanding the foregoing, no Commitment may be assigned without also assigning to the same assignee a portion of such Lender's Pro Rata Share of the LC Obligations, which portion shall correspond pro rata to the portion of such Lender's Commitment being assigned. 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 Outstanding Credit Exposure under the applicable Assignment Agreement constitutes "plan assets" as defined under ERISA and that the rights and SIDLEY AUSTIN BROWN & WOOD LLP 74 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 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 Outstanding Credit Exposure 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 and Term Loans, as applicable (or, if the Revolving Facility 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 Credit Extensions 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). SIDLEY AUSTIN BROWN & WOOD LLP 75 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 to such party: (x) in the case of the Borrower, the Administrative Agent, any LC Issuer or any Lender party hereto as of the Effective 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, any LC Issuer 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, the LC Issuers 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. SIDLEY AUSTIN BROWN & WOOD LLP 76 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 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, THE LC ISSUER 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, THE LC ISSUER OR ANY LENDER OR ANY AFFILIATE OF THE ADMINISTRATIVE AGENT, THE LC ISSUER 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, THE LC ISSUER 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. ARTICLE XVI NO NOVATION; REFERENCES TO THIS AGREEMENT IN LOAN DOCUMENTS 16.1. No Novation. It is the express intent of the parties hereto that this Agreement (i) shall re-evidence, in part, the Borrower's indebtedness under the Existing Credit Agreement, (ii) is entered into in substitution for, and not in payment of, the obligations of the Borrower under the Existing Credit Agreement, and (iii) is in no way intended to constitute a novation of any of the Borrower's indebtedness which was evidenced by the Existing Credit Agreement or any of the other Loan Documents. 16.2. References to This Agreement In Loan Documents. Upon the effectiveness of this Agreement, on and after the Effective Date, each reference in any other Loan Document (including any reference therein to "the Credit Agreement," "thereunder," "thereof," "therein" or words of like import referring thereto) shall mean and be a reference to this Agreement. [Signature Pages Follow] SIDLEY AUSTIN BROWN & WOOD LLP 77 IN WITNESS WHEREOF, the Borrower, the Lenders, the LC Issuers 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. V. P. Finance, CFO and Secretary Address: 850 E. Algonquin Road, Suite 100 Schaumburg, Illinois 60173 Attention: ___________ Phone: _______________ Fax: _______________ E-mail: ____________ SIGNATURE PAGE TO CREDIT AGREEMENT LASALLE BANK NATIONAL ASSOCIATION, as the Administrative Agent, as an LC Issuer and as a Lender By: /s/ Thomas Myhre --------------------------------- Name: Thomas Myhre Title: Vice President 135 South LaSalle Street Chicago, IL 60603 Attention: Thomas Myhre Phone: (312) 904-7018 Fax: (312) 904-6225 E-mail: thomas.myhre@abnamro.com SIGNATURE PAGE TO CREDIT AGREEMENT BANK OF AMERICA, N.A., as an LC Issuer and as a Lender By: /s/ Craig W. McGuire --------------------------------- Name: Craig W. McGuire Title: Vice President 231 South LaSalle Street, IL1-231-06-11 Chicago, IL 60697 Attention: Craig W. McGuire Phone: (312) 828-1320 Fax: (312) 828-1974 E-mail: craig.w.mcguire@bankofamerica.com SIGNATURE PAGE TO CREDIT AGREEMENT The undersigned Departing Lender hereby acknowledges and agrees that, from and after the Effective Date, it is no longer a party to the Existing Credit Agreement: FLEET NATIONAL BANK, as a Departing Lender By: /s/ Matthew S. Latham ------------------------------------ Name: Matthew S. Latham Title: Senior Vice President SIGNATURE PAGE TO CREDIT AGREEMENT SIDLEY AUSTIN BROWN & WOOD LLP EX-10.177 8 c83969exv10w177.txt EMPLOYMENT AGREEMENT FOR JOHN R. NORDIN Exhibit 10.177 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 23rd day of October 2003 by and between JOHN NORDIN ("Nordin") and INSURANCE AUTO AUCTIONS, INC., an Illinois corporation ("Company"). RECITALS WHEREAS, the Company desires to employ Nordin and Nordin 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 Nordin, and Nordin 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. Nordin 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"). Nordin shall devote all of his business time and services to the business and affairs of the Company. Nordin 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 Nordin 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 Nordin's duties. 2. COMPENSATION. As compensation for Nordin's 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 Nordin a base salary at the rate of $180,000 per annum commencing on the date of hire ("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 Nordin 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 Nordin during the term of this Agreement, the Company will pay to Nordin, in cash, a performance bonus equal to fifty percent (50%) of Nordin's annual salary based upon the achievement of objectively quantifiable and measurable goals and objectives which shall be determined, in advance, by the Compensation Committee of the Board 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 Nordin an option to purchase 30,000 shares of the Company's common stock (the "Option"). The Option shall be granted under the Company's 2003 Stock Incentive Plan, as amended (the "Stock Incentive 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 that Nordin becomes employed by the Company subject to the vesting and termination provisions as described 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. In addition, Nordin shall be granted 7,500 restricted shares of the Company's common stock (the "Restricted Shares"). The Restricted Shares 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 that Nordin becomes employed by the Company subject to the vesting and termination provisions contained in the agreements evidencing the grant of the Restricted Shares. 2.4. BENEFITS. During the term of his employment or for such time as otherwise provided in this Agreement, Nordin shall be entitled to participate in such vacation, auto allowance, benefit plans, fringe benefits, life insurance, medical and dental plans (beginning on the first day of employment), retirement plans and other programs as are offered from time to time by the Company and are described in the Company's employee benefit handbooks. Nordin 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. Nordin 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 Nordin 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 Nordin 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 Nordin or the Company at any time for any reason, with or 2 without cause. Any contrary representations that may have been made or that may be made to Nordin are superseded by this Agreement. In addition, this Agreement shall terminate by reason of Nordin's death or the substantial inability of Nordin, 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 Nordin any severance payments or continue to cover Nordin 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: (i) VOLUNTARY TERMINATION. Nordin voluntarily terminates this Agreement; or (ii) CAUSE. The Company terminates Nordin's 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 Nordin 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 Nordin by the Board which specifically identifies the manner in which the Board believes that Nordin has not substantially performed his duties; or (B) the willful engaging by Nordin 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 Nordin (or his legal representatives as the case may be) the specific obligations as set forth below: (i) DEATH. Nordin's employment shall terminate automatically upon Nordin's death. If Nordin's employment under this Agreement is terminated by reason of his death, the Company's sole obligation to Nordin's 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 Nordin 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 Nordin's Accrued Obligations (as 3 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 Nordin's 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 Nordin occurs, the Company may give to Nordin written notice in accordance with Section 6.1 of this Agreement of its intention to terminate Nordin's employment. In such event, Nordin's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Nordin (the "Disability Effective Date"), unless within the 30-day period after such receipt, Nordin returns to full-time performance of his duties. The Company's sole obligation to Nordin 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 Nordin's employment hereunder apart from a Change of Control, the Company shall pay to Nordin an amount equal to the sum of (i) Nordin's annual base salary at the time Nordin's employment is terminated; plus (ii) Nordin's average annual bonus received over the eight (8) fiscal quarters of the Company immediately preceding Company's fiscal quarter during which Nordin's employment is terminated, without exceeding Nordin's target bonus for Company's fiscal year during which Nordin's employment is terminated, provided, however, that Nordin shall receive his target bonus if he is terminated within his first eight (8) fiscal quarters with the Company; plus (iii) Nordin's auto allowance for the Company's fiscal year during which Nordin's employment is terminated. In addition, the Company shall provide, at Company's expense, continued coverage for Nordin and his beneficiaries for a period extending through the earlier of the date Nordin begins any subsequent full-time employment for pay and the date that is one (1) year after Nordin's termination of employment, under the Company's health plan covering Nordin and Nordin's beneficiaries, provided that Nordin 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 4 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 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. 5 (iii) For purposes of this Agreement, "Involuntary Termination" shall mean Nordin's voluntary termination following (A) a change in Nordin's position with the Company which materially reduces Nordin's level of responsibility, (B) a reduction in Nordin's Base Salary, or (C) a change in Nordin's place of employment, which is more than seventy-five (75) miles from Nordin's place of employment prior to the change, provided and only if such change or reduction is effected without Nordin's written concurrence. (iv) For purposes of this Agreement, "Date of Termination" shall mean (A) if Nordin's employment is terminated by the Company for Cause, or by Nordin, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (B) if Nordin's employment is terminated by the Company for other than for Cause or Disability, the date on which the Company notifies Nordin of such termination and (C) if Nordin's employment is terminated by reason of death or Disability, the date of death of Nordin or the Disability Effective Date, as the case may be. (v) For purposes of this Agreement, "Accrued Obligations" shall mean the sum of (A) Nordin's 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 Nordin for the fiscal year preceding the fiscal year in which Nordin's Date of Termination occurs (annualized in the event that Nordin 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 Nordin 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 Nordin (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid. Notwithstanding the foregoing, in no event will Nordin 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 Nordin's employment with the Company terminates by reason of Nordin's 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, Nordin shall be entitled to receive the following: (i) Company must pay Nordin an amount equal to 150% of the sum of (A) Nordin's Base Salary and (B) his Highest Annual Bonus; (ii) Company shall also pay Nordin any Accrued Obligations; and (iii) Company shall provide, at its expense, continued coverage of Nordin and Nordin's beneficiaries for eighteen (18) months after the Date of Termination or until Nordin commences any full-time employment, whichever comes first, under the 6 Company's health plan covering Nordin and Nordin's beneficiaries, provided, however, that Nordin properly elects coverage pursuant to COBRA. (c) SEVERANCE BENEFITS FOR TERMINATION AFTER THE SECOND YEAR FOLLOWING A CHANGE OF Control. If Nordin 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 Nordin's 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 Nordin when payments of compensation payable to Nordin 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 Nordin 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 Nordin in such amount as is necessary to ensure that the net amount retained by Nordin, 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 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 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, Nordin 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. Nordin 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 Nordin, 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 Nordin does hereby assign and 7 transfer to the Company his entire right, title and interest in the Inventions. Nordin 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 Nordin 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. Nordin hereby acknowledges and agrees that the Company actively engages in its business throughout all of North America. Accordingly, Nordin agrees that during the Non-Competition Period (as defined below), Nordin 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 Nordin 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 Nordin's employment hereunder or Nordin's submission of his resignation, or removal of Nordin as Chief Financial 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, Nordin 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 Nordin or such Person or (b) any customer, client, vendor, lender, supplier or sales representative of the Company 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. Nordin 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 8 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, Nordin 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 Nordin 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 Nordin, becomes generally available to the public. Upon termination of any employment or consulting relationship between the Company and Nordin, Nordin 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 Nordin. 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 Nordin. 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 Nordin 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 Nordin's employment and the termination of this Agreement. 9 6. GENERAL PROVISIONS. 6.1. NOTICES. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable express courier service (charges prepaid), sent by facsimile (with a copy sent via another method approved herein), or mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to the Company and to Nordin at the addresses indicated below: If to the Company: Insurance Auto Auctions, Inc. 850 East Algonquin Road, Suite 100 Schaumburg, Illinois 60173 Phone: 847-839-3939 Fax: 847-839-3999 Attention: General Counsel With copies to: Katten Muchin Zavis 525 West Monroe Street, Suite 1600 Chicago, Illinois 60661 Phone: 312-902-5564 Fax: 312-577-8648 Attention: Herb Wander, Esq. If to Nordin: John Nordin 937 Bartlett Terrace Libertyville, Illinois 60048 With copies to: -------------------------------- -------------------------------- -------------------------------- -------------------------------- or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. 6.2. ENTIRE AGREEMENT. Except as otherwise expressly set forth herein, this Agreement embodies the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 10 6.3. SUCCESSORS AND ASSIGNS. All covenants and agreements contained in this Agreement by or on behalf of either party hereto shall bind such party and its heirs, legal representatives, successors and assigns and inure to the benefit of the other party hereto and their heirs, legal representatives, successors and assigns. 6.4. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Agreement shall be governed by the laws of the State of Illinois without giving effect to the provisions thereof regarding conflict of laws. 6.5. RESOLUTION OF DISPUTES; ARBITRATION. Should a dispute arise concerning this Agreement, its interpretation or termination, or Nordin's employment with the Company, either party may request a conference with the other party to this Agreement and the parties shall meet to attempt to resolve the dispute. Failing such resolution within thirty (30) days of ether party's request for a conference, the Company and Nordin shall endeavor to select an arbitrator who shall hear the dispute. In the event the parties are unable to agree on an arbitrator, Nordin and Company shall request the American Arbitration Association ("AAA") to submit a list of nine (9) names of persons who could serve as an arbitrator. The Company and Nordin shall alternately remove names from this list (beginning with the party which wins a flip of a coin) until one person remains and this person shall serve as the impartial arbitrator. The arbitration shall be conducted in accordance with the National Rules for the Resolution of Employment Disputes as promulgated by the AAA. The decision of the arbitrator shall be final and binding on both parties. Each party shall bear equally all costs of the arbitrator. The arbitrator shall only have authority to interpret, apply or determine compliance with the provisions set forth in this Agreement, but shall not have the authority to add to, detract from or otherwise alter the language of this Agreement. 6.6. REPRESENTATIONS OF NORDIN. Nordin hereby represents and warrants to the Company that his execution, delivery and performance of this agreement will not violate or result in any breach of any agreement, contract, understanding or written policy to which Nordin is subject as a result of any prior employment, any investment or otherwise. Nordin is not subject to any agreement, contract or understanding which in any way restricts or limits his ability to accept employment with the Company or perform the services contemplated herein. 6.7. DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 6.8. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 11 6.9. AMENDMENTS AND WAIVERS. No modification, amendment or waiver of any provisions of this Agreement shall be effective unless approved in writing by each of the parties hereto. The Company's failure at any time to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and will not affect the right of the Company to enforce each and every provision hereof in accordance with its terms. 6.10. NON-ASSIGNMENT. This Agreement shall not be assigned by Nordin. SIGNATURE PAGE FOLLOWS. 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. INSURANCE AUTO AUCTIONS, INC. By: /s/ Thomas O'Brien --------------------------- Name: Thomas C. O'Brien Title: President and Chief Executive Officer /s/ John R. Nordin --------------------------- JOHN NORDIN 13 EX-21 9 c83969exv21.txt SUBSIDIARIES OF THE REGISTRANT . . . Exhibit 21 Subsidiaries of Insurance Auto Auctions, Inc.
Jurisdiction Name of Incorporation ---- ---------------- Insurance Auto Auctions Corp. (wholly owned) Delaware
EX-23 10 c83969exv23.txt CONSENT OF KPMG LLP EXHIBIT 23 Consent of KPMG LLP Board of Directors Insurance Auto Auctions, Inc. 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 25, 2004, relating to the consolidated balance sheets of Insurance Auto Auctions, Inc. and subsidiaries as of December 28, 2003 and December 29, 2002 and the related consolidated statements of operations, shareholder's equity, and cash flows for each of the years in the three-year period ended December 28, 2003, which report appears in the December 28, 2003 annual report on Form 10-K of Insurance Auto Auctions, Inc. Our report refers to a change in the accounting for goodwill due to the adoption of the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ KPMG LLP Chicago, Illinois March 25, 2004 EX-24 11 c83969exv24.txt POWER OF ATTORNEY Exhibit 24 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 28, 2003. This Power of Attorney shall automatically terminate at the close of business on March 31, 2004. In witness whereof, the undersigned has executed this Power of Attorney on this 24th day of March, 2004. NAME TITLE ---- ----- /s/ Peter H. Kamin Chairman of the Board - --------------------------------------- Peter H. Kamin /s/ Thomas C. O'Brien Director and CEO - --------------------------------------- Thomas C. O'Brien /s/ Todd F. Bourell Director - --------------------------------------- Todd F. Bourell /s/ Maurice A. Cocca Director - --------------------------------------- Maurice A. Cocca /s/ Philip B. Livingston Director - --------------------------------------- Philip B. Livingston /s/ Melvin R. Martin Director - --------------------------------------- Melvin R. Martin /s/ John K. Wilcox Director - --------------------------------------- John K. Wilcox EX-31.1 12 c83969exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) I, Thomas C. O'Brien, certify that: 1. I have reviewed this annual report on Form 10-K of Insurance Auto Auctions, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 29, 2004 /s/ Thomas C. O'Brien ---------------------------------------------- Thomas C. O'Brien, Chief Executive Officer EX-31.2 13 c83969exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) I, Scott P. Pettit, certify that: 1. I have reviewed this annual report on Form 10-K of Insurance Auto Auctions, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date March 29, 2004 /s/ Scott P. Pettit --------------------------------------------- Scott P. Pettit, Chief Financial Officer EX-32.1 14 c83969exv32w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Insurance Auto Auctions, Inc. (the "Company") for the annual period ended December 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas C. O'Brien, Chief Executive Officer of the Company, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 29, 2004 /s/ Thomas C. O'Brien ------------------------------------------------ Thomas C. O'Brien, Chief Executive Officer This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 15 c83969exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Insurance Auto Auctions, Inc. (the "Company") for the annual period ended December 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott P. Pettit, Chief Financial Officer of the Company, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 29, 2004 /s/ Scott P. Pettit ------------------------------------------------ Scott P. Pettit, Chief Financial Officer This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----