-----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, KzH/C1eCRg4rTzI2jxDRlsoI14jJsiZR3BJN19Brm1d7w2srDbW9ZW/Q1nOyKc0S yTBsbWMixxMxMqUxkN0KPg== 0000950137-04-006529.txt : 20040810 0000950137-04-006529.hdr.sgml : 20040810 20040810172717 ACCESSION NUMBER: 0000950137-04-006529 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040627 FILED AS OF DATE: 20040810 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19594 FILM NUMBER: 04965285 BUSINESS ADDRESS: STREET 1: 850 E ALGONQUIN RD STREET 2: STE 100 CITY: SCHAUMGURG STATE: IL ZIP: 60173 BUSINESS PHONE: 8478393939 MAIL ADDRESS: STREET 1: 850 E ALGONQUIN RD STREET 2: STE 100 CITY: SCHAUMGURG STATE: IL ZIP: 60173 10-Q 1 c87488e10vq.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 27, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ________________________ Commission File Number:19594 INSURANCE AUTO AUCTIONS, INC. ----------------------------- (Exact name of registrant as specified in its charter) Illinois 95-3790111 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 850 East Algonquin Road, Suite 100, Schaumburg, Illinois 60173-3855 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (847) 839-3939 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act.) Yes [_] No [X] APPLICABLE ONLY TO CORPORATE ISSUERS Number of shares outstanding of each of the issuer's classes of common stock, as of July 31, 2004: Class Outstanding ----- ----------- Common Stock, $0.001 Par Value 11,632,141 shares INDEX INSURANCE AUTO AUCTIONS, INC.
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION.............................................................. 3 Item 1. Financial Statements (Unaudited)................................................... 3 Condensed Consolidated Statements of Operations.................................... 3 Condensed Consolidated Balance Sheets.............................................. 4 Condensed Consolidated Statements of Cash Flows.................................... 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 10 Overview........................................................................... 10 Results of Operations.............................................................. 10 Financial Condition and Liquidity.................................................. 12 Summary Disclosure About Contractual Obligations .................................. 13 Factors That May Affect Future Results............................................. 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 15 Item 4. Controls and Procedures............................................................ 15 PART II. OTHER INFORMATION................................................................. 15 Item 1. Legal Proceedings.................................................................. 15 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities... 15 Item 3. Defaults upon Senior Securities.................................................... 16 Item 4. Submission of Matters to a Vote of Security Holders................................ 16 Item 5. Other Information.................................................................. 17 Item 6. Exhibits and Reports on Form 8-K................................................... 17 SIGNATURES ............................................................................... 18
2 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands except per share amounts)
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED --------------------------- --------------------------- JUNE 27, JUNE 29, JUNE 27, JUNE 29, 2004 2003 2004 2003 --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) Revenues: Vehicle sales $ 8,225 $ 10,192 $ 15,352 $ 23,496 Fee income 51,777 43,146 101,841 85,882 --------- --------- --------- --------- 60,002 53,338 117,193 109,378 Cost of sales: Vehicle cost 7,187 9,425 13,171 21,196 Branch cost 39,598 32,845 77,993 65,809 --------- --------- --------- --------- 46,785 42,270 91,164 87,005 --------- --------- --------- --------- Gross profit 13,217 11,068 26,029 22,373 Operating expense: Selling, general and administrative 8,357 7,509 16,837 14,677 Business transformation costs - 921 - 1,718 --------- --------- --------- --------- Earnings from operations 4,860 2,638 9,192 5,978 Other (income) expense: Interest expense 410 503 887 558 Other income (29) (43) (41) (122) --------- --------- --------- --------- Earnings before income taxes 4,479 2,178 8,346 5,542 Provision for income taxes 1,824 898 3,390 2,286 --------- --------- --------- --------- Net earnings $ 2,655 $ 1,280 $ 4,956 $ 3,256 ========= ========= ========= ========= Net earnings per share: Basic $ .23 $ .11 $ .43 $ .28 ========= ========= ========= ========= Diluted $ .22 $ .11 $ .42 $ .27 ========= ========= ========= ========= Weighted average shares outstanding: Basic 11,545 11,517 11,541 11,784 Effect of dilutive securities 286 60 243 77 --------- --------- --------- --------- Diluted 11,831 11,577 11,784 11,861 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 3 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands except per share amounts)
JUNE 27, DECEMBER 28, 2004 2003 ---------- ----------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 17,628 $ 15,486 Accounts receivable, net 45,440 48,375 Inventories 13,393 13,602 Other current assets 2,961 3,099 --------- --------- Total current assets 79,422 80,562 --------- --------- Property and equipment, net 64,838 60,187 Deferred income taxes 10,205 9,788 Intangible assets, net 1,837 2,101 Goodwill, net 135,812 135,062 Other assets 477 93 --------- --------- $ 292,591 $ 287,793 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 36,288 $ 35,005 Accrued liabilities 13,794 13,195 Obligations under capital leases 2,205 2,822 Income taxes payable 1,410 - Current installments of long-term debt 7,547 7,547 --------- --------- Total current liabilities 61,244 58,569 --------- --------- Deferred income taxes 19,227 17,748 Other liabilities 3,130 3,612 Obligation under capital leases 1,069 1,891 Long-term debt, excluding current installments 13,114 16,887 --------- --------- Total liabilities 97,784 98,707 --------- --------- 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; 12,425,708 shares issued and 11,618,499 outstanding as of June 27, 2004; and 12,325,482 shares issued and 11,518,273 outstanding as of December 28, 2003 12 12 Additional paid-in capital 146,217 145,856 Treasury stock, 807,209 shares (8,012) (8,012) Deferred compensation related to restricted stock (777) (892) Accumulated other comprehensive loss (335) (625) Retained earnings 57,702 52,747 --------- --------- Total shareholders' equity 194,807 189,086 --------- --------- $ 292,591 $ 287,793 ========= =========
See accompanying notes to condensed consolidated financial statements. 4 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
SIX MONTHS ENDED ------------------------- JUNE 27, JUNE 29, 2004 2003 -------- -------- (UNAUDITED) Cash flows from operating activities: Net earnings $ 4,956 $ 3,256 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,522 4,870 Gain on disposal of fixed assets (19) (31) Loss on change in fair market value of derivative unhedged portion - (307) Deferred compensation related to restricted stock 114 - Changes in assets and liabilities (excluding effects of acquired companies): (Increase) decrease in: Accounts receivable, net 2,935 7,370 Inventories 209 985 Other current assets 137 917 Other assets (1,117) (754) Increase (decrease) in: Accounts payable 1,282 (3,336) Accrued liabilities 407 (684) Income taxes, net 2,470 1,383 -------- -------- Total adjustments 12,940 10,412 -------- -------- Net cash provided by operating activities 17,896 13,669 -------- -------- Cash flows from investing activities: Capital expenditures (11,105) (6,498) Proceeds from disposal of property and equipment 200 44 Payments made in connection with acquisitions, net of cash acquired - (7,863) -------- -------- Net cash used in investing activities (10,905) (14,317) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 361 227 Proceeds from term loan - 30,000 Principal payments on long-term debt (3,772) (1,896) Purchase of treasury stock - (8,012) Principal payments on capital leases (1,438) (1,191) -------- -------- Net cash provided (used) by financing activities (4,849) 19,128 -------- -------- Net increase in cash and cash equivalents 2,142 18,480 Cash and cash equivalents at beginning of period 15,486 10,027 -------- -------- Cash and cash equivalents at end of period $ 17,628 $ 28,507 ======== ======== Supplemental disclosures of cash flow information: Cash paid or refunded during the period for: Interest $ 1,025 $ 647 ======== ======== Income taxes paid $ 2,026 $ 797 ======== ======== Income taxes refunded $ 1,011 $ 1,250 ======== ======== Non-cash financing activities: Property and equipment additions resulting from capital leases $ - $ 3,375 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The unaudited condensed consolidated financial statements of Insurance Auto Auctions, Inc. and its subsidiaries (collectively, the "Company") have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of the Company, reflect all adjustments necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results for full fiscal years. As contemplated by the Securities and Exchange Commission ("SEC") under Rule 10-01 of Regulation S-X, the accompanying consolidated financial statements and related notes have been condensed and do not contain certain information that is included in the Company's annual consolidated financial statements and notes thereto. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 28, 2003. Fiscal year 2003 consisted of 52 weeks and ended December 28, 2003. Fiscal year 2004 will consist of 52 weeks and will end on December 26, 2004. Certain reclassifications have been made to the prior year financial information to conform to the current year presentation. 2. INCOME TAXES Income taxes were computed using the effective tax rates estimated to be applicable for the full fiscal years, which are subject to ongoing review and evaluation by the Company. 3. COMPUTATION OF EARNINGS PER SHARE The computation of basic earnings per share is made using the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the number of additional shares that would have been outstanding if the dilutive common shares had been issued. The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------- ---------------------- JUNE 27, JUNE 29, JUNE 27, JUNE 29, 2004 2003 2004 2003 ------- ------- ------- ------- BASIC EARNINGS PER SHARE: Net income $ 2,655 $ 1,280 $ 4,956 $ 3,256 Average basic shares outstanding 11,545 11,517 11,541 11,784 Basic net income per share $ .23 $ .11 $ .43 $ .28 DILUTED EARNINGS PER SHARE: Net income $ 2,655 $ 1,280 $ 4,956 $ 3,256 Average basic shares outstanding 11,545 11,517 11,541 11,784 Effect of dilutive securities: Stock options 219 60 176 77 Restricted stock 67 - 67 - Average diluted shares outstanding 11,831 11,577 11,784 11,861 Diluted net income per share $ .22 $ .11 $ .42 $ .27
6 4. GOODWILL AND INTANGIBLES The Company performs its annual impairment test during the first quarter of each year. This year's annual impairment test did not indicate any impairment. Goodwill and other intangibles are recorded at cost less accumulated amortization and consist of the following at June 27, 2004 and December 28, 2003:
JUNE 27, DECEMBER 28, ASSIGNED LIFE 2004 2003 ------------- -------- ----------- (dollars in millions) Goodwill Indefinite $ 135.8 $ 135.1 Covenants not to compete 5 to 15 years 1.8 2.1 -------- -------- $ 137.6 $ 137.2 ======== ========
Amortization expense for the six months ended June 27, 2004 and June 29, 2003 was $0.3 million in 2004 and $0.2 million in 2003. This amount is included within selling, general and administration expense on the Company's Condensed Consolidated Statements of Operations. Based upon existing intangibles, the projected annual amortization expense is $0.5 million for each of the years 2004, 2005 and 2006, $0.4 million for 2007 and $0.2 million for 2008. 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 a LIBOR-based floating rate. At June 27, 2004, the entire swap agreement qualified for hedge accounting. 6. COMPREHENSIVE INCOME Comprehensive income consists of net earnings and the change in fair value of the Company's interest rate swap agreement as follows (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- JUNE 27, JUNE 29, JUNE 27, JUNE 29, 2004 2003 2004 2003 ------- ------- ------- ------- Net earnings $ 2,655 $ 1,280 $ 4,956 $ 3,256 Other comprehensive income (loss) Change in fair value of interest rate swap agreement 426 (25) 470 (291) Income tax benefit (expense) (164) 10 (181) 110 ------- ------- ------- ------- Comprehensive income $ 2,917 $ 1,265 $ 5,245 $ 3,075 ======= ======= ======= =======
The changes in fair value of the Company's interest rate swap agreement were due to changes in interest rates. 7 7. STOCK OPTIONS The Company accounts for its fixed plan stock options under the intrinsic value-based method of accounting prescribed by Accounting Principles Board 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, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of 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 the 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 and $0.1 million for the six months ended June 27, 2004. There were no forfeitures of restricted shares in 2003 and 2004. The following table illustrates the effect on net earnings if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," to the measurement of stock-based employee compensation relating to stock options and restricted stock, including straight-line recognition of compensation costs over the related vesting periods for fixed awards:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------- ----------------------------- JUNE 27, JUNE 29, JUNE 27, JUNE 29, 2004 2003 2004 2003 ------------ ------------ ------------ --------- Net earnings as reported $ 2,655 $ 1,280 $ 4,956 $ 3,256 Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects 34 - 68 - ------------ ------------ ------------ --------- Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects 622 433 1,241 864 ------------ ------------ ------------ --------- Pro forma net earnings $ 2,067 $ 847 $ 3,783 $ 2,392 ============ ============ ============ ========= Earnings per share: Basic - as reported $ .23 $ .11 $ .43 $ .28 ============ ============ ============ ========= Basic - pro forma $ .18 $ .07 $ .33 $ .20 ============ ============ ============ ========= Diluted - as reported $ .22 $ .11 $ .42 $ .27 ============ ============ ============ ========= Diluted - pro forma $ .17 $ .07 $ .32 $ .20 ============ ============ ============ =========
8. RELATED PARTY TRANSACTION 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. In the second quarter of 2004 and 2003, the Company incurred $1.1 million and $0.6 million, respectively, of costs to upgrade properties owned by the related party. A portion of the investment to upgrade these facilities has been funded by the related party. The Company agreed to modify its future 8 lease payments to take into consideration the costs to be funded by the related party. The total amount of all future rent payments related to the related party's funding is $2.4 million. The Company also initiated a temporary lease agreement in March to expand the amount of property available at one of the facilities leased. The temporary lease agreement does not have a specified term, can be terminated by either party upon 30 days written notice and has an annual rental of less than $0.1 million. 9. COMMITMENTS AND CONTINGENCIES The Company leases its facilities and certain equipment under operating and capital leases. During the first two quarters of 2004, the Company entered into a number of operating leases, including its principal corporate office. The Company's principal corporate office is currently located in Schaumburg, Illinois and occupies a total of 39,000 square feet of space under an extended lease that expires in September 2004. In April 2004, the Company entered into a new lease agreement for 38,000 square feet of space for future use as its corporate offices in Westchester, Illinois. This lease commences in September 2004 and expires in August 2016. The Company has an allowance totaling $1.9 million from the lessor for the build-out of the office space. The Company does not expect rent expense related to its corporate office to increase as a result of this move. As of June 27, 2004, the Company had not entered into any capital leases in the current year. 10. SUBSEQUENT EVENTS On June 28, 2004, the Company sold its West Bridgewater, Massachusetts facility to Harvey Industries, Inc., a Massachusetts corporation, for $1.1 million in cash. On July 6, 2004, the Company announced the opening of a new greenfield facility in El Paso, Texas. On July 8, 2004, the Company announced the acquisition of Mid-South Salvage LLC located in Jackson, Mississippi. The acquisition is accounted for as a purchase business combination and the results of operations of the acquired business will be included in the Company's future consolidated financial statements from the date of acquisition. In July and August 2004, the Company purchased 55,200 shares pursuant to the authorization at an average price of $16.01 per share, or a total amount of $0.9 million. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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, 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" and in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2003. 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. offers insurance companies and other vehicle suppliers cost-effective salvage processing solutions on either a consignment or purchase agreement method of sale. Consignment method sales are consummated under either a fixed fee or percentage of sale 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 fixed fee and percentage of sale 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 has grown primarily through a series of acquisitions and opening of new sites to now include 77 sites. In January 2004, the Company established a new facility in Tucson, Arizona. In July 2004 the Company acquired Mid-South Salvage LLC located in Jackson, Mississippi and established a new facility in El Paso, Texas. The Company's operating results are subject to fluctuations, including quarterly fluctuations, that can result from a number of factors, some of which are more significant for sales under the purchase agreement method. See "Factors That May Affect Future Results" below for a further discussion of some of the factors that affect or could affect the Company's business, operating results and financial condition. RESULTS OF OPERATIONS Three Months Ended June 27, 2004 Compared to the Three Months Ended June 29, 2003 Revenues were $60.0 million for the three months ended June 27, 2004, up from $53.3 million for the same three month period in 2003. Fee income in the second quarter increased 20% to $51.8 million, versus $43.1 million in the second quarter of last year due to the Company's continued shift away from the purchase agreement method of sale, more favorable pricing and an increase in volumes sold. Vehicles sold under the purchase agreement method accounted for 3% of the total vehicles sold in the second quarter of 2004, versus 6% for the same quarter last year. Cost of sales increased $4.5 million to $46.8 million for the three months ended June 27, 2004, versus $42.3 million for the same period last year. Vehicle cost of $7.2 million was $2.2 million less than the $9.4 million incurred in the second quarter of 2003. This decrease was primarily related to the Company's shift away from vehicles sold under the purchase agreement method. Branch cost of $39.6 million increased $6.8 million from $32.8 million for the same period last year. This increase was primarily the result of higher volumes of vehicles processed for the quarter and higher per unit tow costs, along with the impact of new branches opened in 2003 and 2004. 10 Gross profit increased 19% to $13.2 million for the three months ended June 27, 2004, from $11.1 million for the comparable period in 2003. Selling, general and administrative expense of $8.4 million increased $0.9 million, or 12%, from the $7.5 million of expense incurred during the second quarter of last year. This increase is primarily due to performance-based bonus accruals and higher depreciation on the Company's new information technology system. Excluding the bonus accrual and increase in depreciation, selling, general and administrative expenses decreased in the second quarter of 2004 compared to the same period last year. Amortization of intangible assets is now included within this category of expense and amounted to $0.1 million in the second quarter of 2003 and 2004. There were no business transformation costs for the three months ended June 27, 2004 compared to $0.9 million in the same period last year. Business transformation costs included expenses related to data base conversions, training and other activity related to the roll out of the Company's new information technology system. Interest expense decreased to $0.4 million for the three months ended June 27, 2004, from $0.5 million for the comparable period in 2003. Included in interest expense for the three months ended June 29, 2003 was a non-cash benefit of $0.3 million related to the change in fair value of the Company's interest rate swap agreement. The Company's effective income tax rate was 40.7% and 41.2% in 2004 and 2003, respectively. Six Months Ended June 27, 2004 Compared to the Six Months Ended June 29,2003 Revenues were $117.2 million for the six months ended June 27, 2004, up from $109.4 million for the six month period ended June 29, 2003. Fee income increased to $101.8 million versus $85.9 million for the six month period ended June 29, 2003 due to the Company's continued shift away from the purchase agreement method of sale, more favorable pricing and an increase in volumes sold. Vehicles sold under the purchase agreement method accounted for 3% of the vehicles sold in the first six months of 2004, versus 7% for the same period last year. Cost of sales increased $4.2 million to $91.2 million for the six months ended June 27, 2004, versus $87.0 million for the same period last year. Vehicle cost of $13.2 million was $8.0 million less than last year's amount of $21.2 million. This decrease was primarily related to the Company's shift away from vehicles sold under the purchase agreement method. Branch cost of $78.0 million increased $12.2 million from $65.8 million for the same period last year. This increase was primarily the result of additional operating costs related to new branch facilities. Gross profit increased 16% to $26.0 million for the six months ended June 27, 2004, from $22.4 million for the comparable period in 2003. Selling, general and administration expense of $16.8 million increased 15% from last year's amount of $14.7 million. This increase is primarily due to performance based bonus accruals and depreciation on the Company's new information technology system. Amortization of intangible assets is now included within this category of expense and amounted to $0.3 million in 2004 and $0.2 million in 2003. There were no business transformation costs for the six months ended June 27, 2004 compared to $1.7 million in the same period last year. Business transformation costs included expenses related to data base conversions, training and other activity related to the roll out of the Company's new information technology system. Interest expense of $0.9 million for the six months ended June 27, 2004, increased $0.3 million from $0.6 million for the comparable period in 2003. The Company's effective income tax rate was 40.6% and 41.2% in 2004 and 2003, respectively. 11 FINANCIAL CONDITION AND LIQUIDITY At June 27, 2004, the Company had current assets of $79.4 million, which included $17.6 million of cash and cash equivalents. Current liabilities were $61.2 million. The Company had working capital of $18.2 million at June 27, 2004, a $3.8 million decrease from December 28, 2003. At June 27, 2004, the Company's long-term debt, including current installments, consisted of $20.7 million borrowed under its term credit facility. The term 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 be paid in sixteen consecutive equal quarterly installments commencing on March 31, 2003. 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, 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. At June 27, 2004, the Company was in compliance with its credit agreement covenants. Other long-term liabilities include the fair market on the Company's interest rate swap along with the Company's post-retirement benefits liability that relates to the acquisition of Underwriters Salvage Company in 1994. The amount recorded at June 27, 2004 for the post-retirement benefits liability was approximately $2.6 million. Capital expenditures were $11.1 million for the six months ended June 27, 2004. These capital expenditures consisted of various branch improvements, including upgrades to existing branches, the development of new facilities, and continued enhancements to the Company's new information technology system. 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, marketable securities, and cash from operations. In the first half of 2003, the Company purchased 807,209 shares pursuant to this authorization at an average price of $9.93 per share, or a total amount of $8.0 million. No shares were purchased during the second quarter or first six months of 2004. 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, acquisitions, and the development of new claims processing services. At some time in the future, the Company may require additional financing. There can be no assurance that additional financing, if required, will be available on favorable terms. The 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 believes the critical accounting policies that require significant judgments and estimates are related to goodwill, deferred income taxes, and long-lived assets. For further information regarding these policies, refer to the Company's Form 10-K for the year ended December 28, 2003. 12 SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS With the exception of its lease obligation, the Company's contractual obligations have not changed materially since last reported. The Company's principal corporate office is currently located in Schaumburg, Illinois and occupies a total of 39,000 square feet of space under an extended lease that expires in September 2004. In April 2004, the Company entered into a new lease agreement for 38,000 square feet of space for future use as its corporate offices in Westchester, Illinois. This lease commences in September 2004 and expires in August 2016. The Company has an allowance totaling $1.9 million from the lessor for the build-out of the office space. The Company does not expect rent expense related to its corporate office to increase as a result of this move. The minimum future rent obligation associated with this new lease is as follows:
LEASE OBLIGATION ---------------------- (dollars in thousands) 2004 $ 130 2005 389 2006 528 2007 816 2008 844 Thereafter 7,602 -------- $10,309 =======
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 Actual Cash Value ("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 an indication of future performance. 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 enhancement of the new 13 system that could continue to adversely impact the Company's ability to achieve cost savings and increased 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 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 acquisitions 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. 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. 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 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 14 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 3. 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 $20.7 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 June 27, 2004, the interest rate swap agreement had a notional amount of $20.7 million under which the Company paid a fixed rate of interest of 5.6% and received a LIBOR-based floating rate. At June 27, 2004, the entire swap agreement qualified for hedge accounting. The Company believes that the exposure of its consolidated financial position, results of operations and cash flows to adverse changes in interest rates is not significant. ITEM 4. CONTROLS AND PROCEDURES a. 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, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective to provide them reasonable assurances that the information required to be disclosed in the reports the Company files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in Securities and Exchange Commission rules and forms. Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. b. Changes in Internal Controls Subsequent to the Company's evaluation, there were no significant changes in the internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. While there were no significant changes to the internal controls, the Company completed the implementation of a new enterprise-wide application to manage the salvage and auction process in the fourth quarter of 2003. The Company continues to modify this application, which may affect its internal controls over financial reporting. PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. In addition to the legal proceedings described in its Annual Report for the year ended December 28, 2003, the Company is from time to time subject to claims and suits arising in the ordinary course of business. Although the ultimate disposition of such proceedings is not presently determinable, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company maintains comprehensive general liability insurance that it believes to be adequate for the continued operation of its business. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES. 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 intends to retain any future earnings to finance the growth and development of its business. In addition, the Company's financing 15 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'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. The repurchase plan expires upon the repurchase of all authorized shares. As of June 27, 2004, the Company had purchased 807,209 shares pursuant to this authorization at an average price of $9.93 per share. The maximum number of shares that may yet be purchased under the plan is 1,442,791. The Company did not repurchase any shares during the second quarter 2004. The Company records treasury stock purchases using the cost method of accounting. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Annual Meeting of Shareholders of the Company held June 16, 2004, the shareholders (i) elected seven directors to serve on the Company's Board of Directors, (ii) approved the adoption of an amendment to the Company's Employee Stock Purchase Plan to increase the number of shares of common stock reserved for issuance thereunder by 100,000 shares, and (iii) ratified the Company's appointment of KPMG LLP to serve as the Company's independent auditors for the fiscal year ending December 26, 2004. Shareholders holding 10,849,756 shares of common stock, representing 93% of the total number of shares outstanding and entitled to vote at the meeting, were present in person or by proxy at the meeting. The vote for nominated directors was as follows:
Director Votes FOR Votes Withheld -------- ---------- -------------- Thomas C. O'Brien 10,719,824 129,932 Peter H. Kamin 10,549,093 300,663 Todd F. Bourell 10,714,842 134,914 Maurice A. Cocca 10,554,235 295,521 Philip B. Livingston 10,554,335 295,421 Melvin R. Martin 10,638,164 211,592 John K. Wilcox 10,719,984 129,772
The vote to approve the amendment to the Company's Employee Stock Purchase Plan was as follows: For: 8,621,607; Against: 133,862; Abstain: 3,783; and not voted: 2,090,504. The vote for ratifying the appointment of KPMG LLP as the Company's independent auditors for the fiscal year ending December 26, 2004 was as follows: For: 10,829,392; Against: 18,800; and Abstain: 1,564. 16 ITEM 5. OTHER INFORMATION. Inapplicable. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K. (a) EXHIBITS. 10.1* Employment Agreement dated July 23, 2004 by and between the Company and John Kett. 31.1* Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification by the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32** Certification by the CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith ** Furnished herewith. (b) REPORTS ON FORM 8-K. The Company filed a current report on Form 8-K, dated July 23, 2004, which contained a press release announcing the Company's financial results for the quarter ended June 27, 2004. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSURANCE AUTO AUCTIONS, INC. Date: August 10, 2004 By: /s/ Scott P. Pettit --------------- ------------------------------- Name: Scott P. Pettit Title: Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 18 EXHIBIT INDEX EXHIBIT NO. - ----------- 10.1 Employment Agreement dated July 23, 2004 by and between the Company and John Kett. 31.1 Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification by the CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 19 EX-10.1 2 c87488exv10w1.txt EMPLOYMENT AGREEMENT FOR JOHN KETT Exhibit 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 23rd day of July 2004 (the "Effective Date") by and between JOHN KETT ("Kett") and INSURANCE AUTO AUCTIONS, INC., an Illinois corporation ("Company"). RECITALS WHEREAS, the Company desires to continue its employ of and to promote Kett and Kett desires to continue in the Company's employ and to accept the Company's promotion 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 promotes Kett, and Kett hereby accepts the promotion, as Senior Vice President, Planning & Business Development, whose duties include overseeing the business development aspects of the Company and its affiliated companies. Kett 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"). Kett shall devote all of his business time and services to the business and affairs of the Company. Kett shall also perform such other executive-level duties consistent with his position as Vice President, Business Development 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 Kett 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 Kett's duties. 2. COMPENSATION. As compensation for Kett'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 Kett a base salary at the rate of $175,000 per annum commencing on the date of promotion ("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 Kett 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 Kett during the term of this Agreement, the Company will pay to Kett, in cash, a performance bonus equal to fifty percent (50%) of Kett'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 Kett 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 the grant becomes effective 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. 2.4. BENEFITS. During the term of his employment or for such time as otherwise provided in this Agreement, Kett 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. Kett 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. Kett 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 Kett 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 Kett 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 Kett or the Company at any time for any reason, with or without cause. Any contrary representations that may have been made or that may be made to Kett are superseded by this Agreement. In addition, this Agreement shall terminate by reason of Kett's death or the substantial inability of Kett, 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. 2 (a) NO OBLIGATIONS OTHER THAN AS REQUIRED BY LAW FOR VOLUNTARY TERMINATION OR CAUSE. The Company shall have no obligations to pay Kett any severance payments or continue to cover Kett 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. Kett voluntarily terminates this Agreement; or (ii) CAUSE. The Company terminates Kett'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 Kett 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 Kett by the Board which specifically identifies the manner in which the Board believes that Kett has not substantially performed his duties; or (B) the willful engaging by Kett 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 Kett (or his legal representatives as the case may be) the specific obligations as set forth below: (i) DEATH. Kett's employment shall terminate automatically upon Kett's death. If Kett's employment under this Agreement is terminated by reason of his death, the Company's sole obligation to Kett'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 Kett 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 Kett's Accrued Obligations (as hereinafter defined). Any amounts payable under this Section 3.2(b)(i) shall be exclusive of and in addition to any payments or benefits which Kett'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 Kett occurs, the Company may give to Kett written notice in accordance with Section 6.1 of this Agreement of its intention to terminate Kett's employment. In such event, Kett's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Kett 3 (the "Disability Effective Date"), unless within the 30-day period after such receipt, Kett returns to full-time performance of his duties. The Company's sole obligation to Kett 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 Kett's employment hereunder apart from a Change of Control, the Company shall pay to Kett an amount equal to the sum of (i) Kett's annual base salary at the time Kett's employment is terminated; plus (ii) Kett's average annual bonus received over the eight (8) fiscal quarters of the Company immediately preceding Company's fiscal quarter during which Kett's employment is terminated, without exceeding Kett's target bonus for Company's fiscal year during which Kett's employment is terminated, provided, however, that Kett shall receive his target bonus if he is terminated within his first eight (8) fiscal quarters after the Effective Date with the Company; plus (iii) Kett's auto allowance for the Company's fiscal year during which Kett's employment is terminated. In addition, the Company shall provide, at Company's expense, continued coverage for Kett and his beneficiaries for a period extending through the earlier of the date Kett begins any subsequent full-time employment for pay and the date that is one (1) year after Kett's termination of employment, under the Company's health plan covering Kett and Kett's beneficiaries, provided that Kett properly elects coverage pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974, as amended ("COBRA"). 3.3. COMPANY'S OBLIGATIONS ON TERMINATION DUE TO A CHANGE OF CONTROL. (a) DEFINITIONS. (i) For purposes of this Agreement, a "Change of Control" shall mean: (A) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (for the purposes of this Section 3.3, a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company shall not constitute a Change of Control; or (B) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority 4 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. (iii) For purposes of this Agreement, "Involuntary Termination" shall mean Kett's voluntary termination following (A) a change in Kett's position with the Company which materially reduces Kett's level of responsibility, (B) a reduction in Kett's Base Salary, or (C) a change in Kett's place of employment, which is more than seventy-five (75) miles from Kett's place of employment prior to the change, provided and only if such change or reduction is effected without Kett's written concurrence. (iv) For purposes of this Agreement, "Date of Termination" shall mean (A) if Kett's employment is terminated by the Company for Cause, or by Kett, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (B) if Kett's employment is terminated by the Company for other than for Cause or Disability, the date on which the Company notifies Kett of such 5 termination and (C) if Kett's employment is terminated by reason of death or Disability, the date of death of Kett or the Disability Effective Date, as the case may be. (v) For purposes of this Agreement, "Accrued Obligations" shall mean the sum of (A) Kett'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 Kett for the fiscal year preceding the fiscal year in which Kett's Date of Termination occurs (annualized in the event that Kett 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 Kett 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 Kett (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 Kett 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 Kett's employment with the Company terminates by reason of Kett'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, Kett shall be entitled to receive the following: (i) Company must pay Kett an amount equal to 150% of the sum of (A) Kett's Base Salary and (B) his Highest Annual Bonus; (ii) Company shall also pay Kett any Accrued Obligations; and (iii) Company shall provide, at its expense, continued coverage of Kett and Kett's beneficiaries for eighteen (18) months after the Date of Termination or until Kett commences any full-time employment, whichever comes first, under the Company's health plan covering Kett and Kett's beneficiaries, provided, however, that Kett properly elects coverage pursuant to COBRA. (c) SEVERANCE BENEFITS FOR TERMINATION AFTER THE SECOND YEAR FOLLOWING A CHANGE OF Control. If Kett 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 Kett'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 Kett when payments of compensation payable to 6 Kett 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 Kett 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 Kett in such amount as is necessary to ensure that the net amount retained by Kett, 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, Kett 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. Kett 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 Kett, 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 Kett does hereby assign and transfer to the Company his entire right, title and interest in the Inventions. Kett 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 Kett 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. Kett hereby acknowledges and agrees that the Company actively engages in its business throughout all of North America. Accordingly, Kett 7 agrees that during the Non-Competition Period (as defined below), Kett 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 Kett 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 Kett's employment hereunder or Kett's submission of his resignation, or removal of Kett as Senior Vice President, Planning & Business Development 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, Kett 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 Kett 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. Kett acknowledges and agrees that he is in possession of and will be exposed to during the course of, and incident to, his employment by and affiliations with the Company, Confidential Information (as defined herein) relating to the Company and its affiliated companies. For purposes hereof, "Confidential Information" shall mean all proprietary or confidential information concerning the business, finances, financial statements, properties and operations of the Company and its affiliated companies, including, without limitation, all customer and prospective customer and supplier lists, know-how, trade secrets, business and marketing plans, techniques, forecasts, projections, budgets, unpublished financial statements, price lists, costs, computer programs, source and object codes, algorithms, data, and other original works of authorship, along with all information received from third parties and held in confidence by the Company and its affiliated companies (including, without limitation, personnel files and employee records). During the Non-Competition Period and at all times thereafter, Kett 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 Kett 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 8 to maintain the Confidential Information shall not apply to any Confidential Information, which is or, without any action by Kett, becomes generally available to the public. Upon termination of any employment or consulting relationship between the Company and Kett, Kett 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 Kett. 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 Kett. 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 Kett 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 Kett's employment and the termination of this Agreement. 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 Kett 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 9 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 Kett: John Kett 442 Hawthorne Elmhurst, Illinois 60126 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. 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 Kett'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 Kett shall endeavor to select an arbitrator who shall hear the dispute. In the event the parties are unable to agree on an arbitrator, Kett and Company shall request the American Arbitration Association ("AAA") to submit a list of nine (9) names of persons 10 who could serve as an arbitrator. The Company and Kett 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 KETT. Kett 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 Kett is subject as a result of any prior employment, any investment or otherwise. Kett 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. 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 Kett. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. INSURANCE AUTO AUCTIONS, INC. By: /s/ Thomas C. O'Brien ------------------------------------- Name: Thomas C. O'Brien Title: President and Chief Executive Officer 11 /s/ John Kett ------------------------------------- JOHN KETT EX-31.1 3 c87488exv31w1.txt SECTION 302 CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATIONS I, Thomas C. O'Brien, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Insurance Auto Auctions, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 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 most recent fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 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 control over financial reporting. Date: August 10, 2004 /s/ Thomas C. O'Brien ------------------------------- Thomas C. O'Brien Chief Executive Officer EX-31.2 4 c87488exv31w2.txt SECTION 302 CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATIONS I, Scott P. Pettit, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Insurance Auto Auctions, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 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 most recent fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 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 control over financial reporting. Date: August 10, 2004 /s/ Scott P. Pettit ---------------------------------- Scott P. Pettit Chief Financial Officer EX-32 5 c87488exv32.txt SECTION 906 CERTIFICATION OF CEO AND CFO EXHIBIT 32 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Insurance Auto Auctions, Inc. (the "Company") for the quarterly period ended June 27, 2004 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: August 10, 2004 /s/ Thomas C. O'Brien ------------------------------------------- Thomas C. O'Brien, Chief Executive Officer In connection with the Quarterly Report on Form 10-Q of Insurance Auto Auctions, Inc. (the "Company") for the quarterly period ended June 27, 2004 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: August 10, 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-----