-----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, EuCROr4Ta2LHkYFr3+j/epd2lbPpN1nC/n8szrq/BNJY8vqZ/2JJmOjiqhKHFQkd 9XvMhVfzex9ol41i0X15Rg== 0000950137-05-002982.txt : 20050314 0000950137-05-002982.hdr.sgml : 20050314 20050314170855 ACCESSION NUMBER: 0000950137-05-002982 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20041226 FILED AS OF DATE: 20050314 DATE AS OF CHANGE: 20050314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSURANCE AUTO AUCTIONS, INC CENTRAL INDEX KEY: 0000880026 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLES & MOTOR VEHICLE PARTS & SUPPLIES [5010] IRS NUMBER: 953790111 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19594 FILM NUMBER: 05679112 BUSINESS ADDRESS: STREET 1: TWO WESTBROOK CORPORATE CENTER STREET 2: SUITE 500 CITY: WESTCHESTER STATE: IL ZIP: 60154 BUSINESS PHONE: 708-492-7000 MAIL ADDRESS: STREET 1: TWO WESTBROOK CORPORATE CENTER STREET 2: SUITE 500 CITY: WESTCHESTER STATE: IL ZIP: 60154 FORMER COMPANY: FORMER CONFORMED NAME: INSURANCE AUTO AUCTIONS INC /CA DATE OF NAME CHANGE: 19930328 10-K 1 c93072e10vk.txt ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 26, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-19594 ---------------------- INSURANCE AUTO AUCTIONS, INC. (Exact name of Registrant as specified in its charter) ILLINOIS 95-3790111 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) TWO WESTBROOK CORPORATE CENTER, SUITE 500 WESTCHESTER, ILLINOIS 60154 (708) 492-7000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ---------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] The aggregate market value of Registrant's voting stock, based on the closing price of the Registrant's Common Stock as of June 27, 2004, was approximately $83,549,809. For purposes of this calculation, the Registrant's directors, executive officers and 5% shareholders have been assumed to be affiliates. As of March 1, 2005, the Registrant had outstanding 11,853,123 shares of common stock, $0.001 par value. ================================================================================ INSURANCE AUTO AUCTIONS, INC. FORM10-K TABLE OF CONTENTS
PAGE ---- PART I. Item 1. Business............................................................................... 3 Item 2. Properties............................................................................. 13 Item 3. Legal Proceedings...................................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders.................................... 14 PART II. Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.............................................. 15 Item 6. Selected Financial Data................................................................ 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 17 Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................. 22 Item 8. Financial Statements and Supplementary Data............................................ 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 23 Item 9A. Controls and Procedures................................................................ 23 PART III. Item 10. Directors and Executive Officers of the Company........................................ 25 Item 11. Executive Compensation................................................................. 27 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 31 Item 13. Certain Relationships and Related Transactions......................................... 33 Item 14. Principal Accountant Fees and Services................................................. 33 PART IV. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 35
2 PART I ITEM 1. BUSINESS. This Report contains forward-looking statements that are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected, expressed, or implied by such forward-looking statements. In some cases, you can identify forward looking statements by use of words such as "may, will, should, anticipates, believes, expects, plans, future, intends, could, estimate, predict, projects, targeting, potential or contingent," the negative of these terms or other similar expressions. The Company's actual results could differ materially from those discussed or implied herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Factors That May Affect Future Results" below and "Management's Discussion and Analysis of Financial Condition and Results of Operations." You should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, the Company undertakes no obligation to publish, update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. RECENT ANNOUNCEMENT OF MERGER On February 22, 2005, the Company entered into a merger agreement ("Merger Agreement") pursuant to which the company will be merged with an affiliate of Kelso & Company, L.P., a New York-based equity investment firm (the "Merger") that specializes in acquisition transactions ("Kelso"). Pursuant to the Merger Agreement, each outstanding share of company common stock will be exchanged for the right to receive $28.25 in cash, without interest. The acquisition will be subject to a number of conditions, including shareholder approval and approval by regulatory authorities in the United States. The Company's shareholders are expected to vote on the proposed acquisition in June 2005. Pending the satisfaction of the conditions mentioned above and others included in the Merger Agreement, IAAI and Kelso expect the acquisition of the Company to be complete by June 15, 2005, although there are no assurances the Merger will close at that time or at any other time. Information contained in this Annual Report, especially forward looking information, should be read in light of the Merger. OVERVIEW Insurance Auto Auctions, Inc., together with its subsidiaries, provides insurance companies and other vehicle suppliers cost-effective salvage processing solutions. In an accident, theft or other claims adjustment process, insurance companies typically take possession of a vehicle because (i) based on economic and customer service considerations, the vehicle has been classified as a "total loss" and the insured replacement value has been paid rather than the cost of repair or (ii) a stolen vehicle is recovered after the insurance company has settled with the insured. The Company generally sells these salvage and theft-recovered vehicles at live or closed bid auctions on a competitive-bid basis at one of the Company's facilities, or via the internet through proxy or live internet bidding. The Company processes salvage vehicles primarily under two methods: fixed fee or percentage of sale consignment. Under the fixed fee consignment and percentage of sale consignment methods, the Company sells vehicles on behalf of insurance companies, which continue to own the vehicles until they are sold to buyers at auction. Under these methods, the Company generally conducts either live or closed bid auctions of the automotive salvage in return for agreed upon sales fees. In addition to fees, the Company generally charges its fixed fee consignment and percentage of sale consignment vehicle suppliers for various services, including towing and storage. The Company still processes a small percentage of vehicles under the purchase method. Under the purchase method, the Company generally purchases vehicles from the insurance companies upon clearance of title, under financial terms determined by agreement with the insurance company supplier, and then resells these vehicles 3 for the Company's own account at the Company's auctions. Under all methods of sale, the Company also charges the buyer of each vehicle various buyer-related fees. The Company has grown through the acquisition of additional auto salvage pool operations and opening of new facilities in strategic locations, resulting in a network of 78 sites in 32 states as of March 1, 2005. A majority of the vehicles currently processed by the Company are sold under the fixed fee and percentage of sale consignment arrangements. In 2004, 68% of the vehicles processed by the Company were sold under the fixed fee consignment method, 28% were sold under the percentage of sale consignment method, and 4% were sold under the purchase agreement method. The Company obtains the majority of its supply of vehicles from insurance companies and smaller quantities from non-insurance company suppliers such as rental car companies and non-profit organizations. Historically, a limited number of insurance companies have accounted for a substantial portion of the Company's revenues. In 2004, vehicles supplied by the Company's three largest suppliers accounted for approximately 37% of the Company's unit sales. The largest suppliers, State Farm Insurance, Zurich Insurance, and GEICO accounted for approximately 16%, 11%, and 10%, respectively, of the Company's 2004 unit sales. HISTORY The Company was organized as a California corporation in 1982 under the name Los Angeles Auto Salvage, Inc. ("LAAS"). In January 1990, all the outstanding capital stock of LAAS was acquired in a leveraged buyout and, in October 1991, LAAS changed its name to Insurance Auto Auctions, Inc. The Company completed its initial public offering in November 1991. Its common stock is traded on the Nasdaq National Market(R) under the symbol "IAAI". In 1997, the Company reincorporated in the State of Illinois. FIXED FEE CONSIGNMENT SALE METHOD In 2004 and 2003, the percentage of vehicles processed by the Company that were sold under the fixed fee consignment sale method was approximately 68% and 52%, respectively. Under this sale method, the Company charges fees to the insurance company supplier for specific services. These fees typically include a salvage sales fee plus towing, title processing and storage fees. With this method of sale, the Company acts as an agent for the insurance company, arranges for the salvaged vehicle to be towed to its facility and processes it for sale. Because the Company never takes ownership of the vehicle, the Company's revenues per vehicle from consignment sales are received only from these fixed fees rather than from the revenue from the sale of the vehicle. As a result, exclusive of the buyer fees, revenue recognized per vehicle under the fixed fee consignment method of sale is approximately 5% to 15% of the revenue recognized per vehicle under the purchase method, where the Company's revenue is principally comprised of the sale price of the vehicle. PERCENTAGE OF SALE CONSIGNMENT METHOD In 2004 and 2003, the percentage of vehicles processed by the Company that were sold under the percentage of sale consignment method was approximately 28% and 42%, respectively. Pursuant to this method of sale, the Company acts as an agent for the insurance company and receives a negotiated percentage of the vehicle's selling price. As an agent, the Company arranges for the salvaged vehicle to be towed to its facility and processes it for sale for a fee based on a percentage of sales price. The percentage of sale consignment method provides suppliers with a potentially greater upside as the Company's fees are tied to selling prices and, thus, the salvage supplier has a greater incentive to invest in improvements to salvage vehicles in order to maximize sales prices. Because the Company never takes ownership of the vehicle, the Company's revenues per vehicle from percent of sale consignment sales are generated from these sales fees rather than from the revenue from the sale of the vehicle. As a result, exclusive of the buyer fees, revenue recognized per vehicle under the percentage of sales consignment method is approximately 5% to 15% of the revenue recognized per vehicle under the purchase method, where the Company's revenue is principally comprised of the sale price of the vehicle. 4 PURCHASE METHOD In 2004 and 2003, the percentage of vehicles processed by the Company that were sold under the purchase method of sale was approximately 4% and 6%, respectively. Under the purchase method of sale, the Company purchases total-loss and recovered theft vehicles. The purchases are customized, but typically require the Company to pay a fixed price or a specified percentage of a vehicle's actual cash value, or ACV, which is equal to the estimated pre-accident fair value of the vehicle. ACV for any given vehicle depends on the vehicle's age and condition. The Company assumes the risk of market price variation for vehicles sold under a purchase method, and therefore, works to enhance the value of purchased vehicles in the selling process. Because the Company's purchase price is fixed, changes in ACVs or in the market or auction prices for salvage vehicles have an impact on the profitability of the sale of vehicles under the purchase method. Revenue recorded from the sale of a purchase vehicle represents the actual selling price of the vehicle. The cost of the vehicle under this method is reflected in the vehicle cost line of cost of sales. SERVICES PROVIDED TO ALL SUPPLIERS The process of salvage disposition through the Company's system begins at the first report of loss, or when a stolen vehicle has been subsequently recovered. An insurance company representative consigns the vehicle to the Company, either by phone, facsimile or electronically through the Company's online CSA Today(SM) system. CSA Today is the Company's proprietary data management system. The system enables insurance company suppliers to enter vehicle data electronically, and then track and manage the progress of salvage vehicles throughout the disposition process in terms of both time and salvage recovery dollars. With this tool, vehicle providers have 24-hour access to their total-loss data. The information provided through this system ranges from the details associated with a specific total-loss vehicle, to comprehensive management reports for an entire claims center or geographic region. Additional features of this system include inventory management tools and a powerful new "Average Salvage Calculator" that helps customers determine the approximate salvage value of a potential total-loss vehicle. This tool is helpful to adjusters when evaluating the "repair" vs. "total" decision. The management tools provided by CSA Today enable claims personnel to monitor and manage total-loss salvage effectively. CSA Today's daily updates provide current and meaningful data to the Company's vehicle providers. The Company also offers a total-loss appraisal service, FastTrack(R). FastTrack utilizes an early total-loss recognition system to identify, appraise and move probable total-loss vehicles sooner than the conventional claims process. FastTrack cuts through many of the delays typically associated with traditional claims handling by combining a comprehensive appraisal service with the Company's salvage service resources. Completed appraisals, including a condition report and an array of digital images, are electronically transmitted to a secure, password-protected Web site, providing adjusters with same-day access to the information via the Internet. The result is faster completion of total-loss appraisals, significant savings on accrued shop storage and car rental expenses, and exceptional customer satisfaction. The Company's FastTow(R) service provides towing services that guarantee vehicles will be delivered to a Company branch storage facility, usually within one to two business days of consignment in a designated service area. When retrieving a vehicle, the FastTow service will also advance, on behalf of the supplier, any storage and towing charges incurred when towing the vehicle from the accident scene or recovered theft site to the temporary storage facility or repair shop. Once these advance towing and storage charges have been reviewed and verified by the Company, the towing subcontractor generally will pay the charges on behalf of the Company at time of vehicle pick up and deliver the vehicle to the predetermined Company auction and storage facility. The rapid retrieval time and review of advance charges are also intended to increase the insurance company's net return on salvage. In order to further minimize vehicle storage charges incurred by insurance company suppliers at the temporary storage facility or repair shop, and also to improve service time for the policyholder, the Company and a certain group of its insurance company suppliers have established vehicle inspection centers, or VICs, at many of the Company's facilities. A VIC is a temporary storage and inspection facility located at a Company site that is operated by the insurance company. Suspected total-loss vehicles are brought directly to the VIC from the temporary storage facility or repair shop. The insurance company typically has appraisers stationed on the VIC site in order to expedite the appraisal process and minimize storage charges at outside sites. If the insurance company determines that a 5 vehicle is a total loss, it can easily be moved to one of the Company's vehicle storage areas. If the vehicle is not totaled, it is promptly delivered to the insurer's selected repair facility. The Company also has the ability to provide digital images as a service to its customers, electronically displaying pictures of the damaged cars to insurance adjusters in their offices. After a totaled vehicle is received at a Company facility, it remains in storage but cannot be auctioned until transferable title has been submitted to and processed by the Company. For most vehicles stored at the Company's facilities, no storage charges accrue for a contractually specified period of time. The Company provides management reports to the insurance company suppliers, including an aging report of vehicles for which title documents have not been provided. In addition, the Company customarily offers the insurance companies' staff training for each state's Department of Motor Vehicles ("DMV") document processing. These services expedite the processing of titles, thereby reducing the time in which suppliers receive their salvage proceeds, in addition to decreasing their administrative costs and expenses. The Company then processes the title documents in order to comply with DMV requirements for these vehicles. This may involve re-registering the vehicle and obtaining a salvage certificate, after which the Company is entitled to sell the vehicle. I-bid LIVE is the Company's live auction Internet bidding solution that enables buyers to join live auctions through any Internet-enabled computer and bid in real time along with the live local bidders and other Internet bidders. From the Bidders's screen, buyers can view images of vehicles and listen to the live call of the auctioneer -- just as the auction is happening. I-bid LIVE helps buyers use time more efficiently by allowing them to "virtually" attend many auctions over a broad region without having to leave their office. The Company generally conducts auctions either every week or bi-weekly at each of its locations. These auctions are either live or sealed bid. Auction lists can be viewed online on the Company's Web site, where buyers can either review all vehicles at a location or search for specific vehicles. Vehicles are marketed at each respective auction site as well as via an online auction list that allows prospective bidders to preview vehicles prior to the actual auction event. The Company's Auction Center, at www.iaai-bid.com(SM), is an online, Internet-based bidding forum to preview and bid on salvage vehicles at all of the Company's facilities throughout the United States. It provides buyers with an open, competitive bidding environment that reflects the dynamics of the live salvage vehicle auction. The Auction Center includes such services as comprehensive auction lists featuring links to digital images of vehicles available for sale, an "Auto Locator" function that promotes the search for specific vehicles within the auction system, and special "Flood" or other catastrophe auction notifications. Higher returns are generally driven by broader market exposure and increased competitive bidding. The Company remits payment to the insurance company suppliers within a contractual time period or shortly after sale of the vehicle and collection from the buyer. In addition, most insurance company suppliers receive monthly summary reports of all vehicles processed by the Company. The reports track the insurance companies' gross return on salvage, net return on salvage, exact origin, details of storage charges and other useful management data. The Company also provides many of its suppliers with a quarterly Comprehensive Salvage Analysis of salvage trends. OTHER SERVICES The Company offers its vehicle suppliers a National Salvage Network that allows an insurance company supplier to consign all of its salvage vehicles to a call center. This call center enables the Company to distribute vehicle consignments throughout most of the United States, even in markets where the Company does not currently have a facility, and is designed to minimize the administrative workload for insurance companies. In certain areas where the Company does not have a facility, such vehicles are distributed to the Company's selected ServicePartners(TM). The Company also offers, through its Specialty Salvage Division, salvage services for specialty vehicles such as trucks, heavy equipment, farm equipment, boats, recreational vehicles and classic and exotic cars. Marketing these vehicles nationwide to specialty buyers provides insurance companies with the opportunity for better returns on units that typically do not sell for as much at local salvage pools due to a limited number of local buyers. These vehicles can be viewed online through the Company's Internet Web site at www.iaai.com. 6 The Company also provides certain insurance company suppliers with anti-theft fraud control programs for vehicle salvage processing. The Company's CarCrush(R) service helps insurance companies by ensuring that severely damaged or stripped "high profile" cars are crushed to prevent their vehicle identification numbers (VINs) from being used in auto theft. The Company also provides computerized reporting of vehicle sales to the National Insurance Crime Bureau (NICB). This includes detailed buyer information obtained through the Company's registration process. The Company's BidFast(R) service provides insurers with binding bids for salvage vehicles that historically may have been owner-retained. The return on such vehicles (owner-retained salvage vehicles) is, many times, measurably improved for the supplier using this service and enables compliance with many states' Department of Insurance Regulations. Vehicles purchased under BidFast are accounted for under the purchase agreement method of sale. GROWTH STRATEGIES The Company seeks to increase revenues in a profitable manner by offering to insurance company suppliers a variety of methods of sale (including fixed fee consignment and percentage of sale consignment) in addition to various other services. Management also strives to expand revenue by (i) increasing market share at existing sites; (ii) achieving greater market penetration through acquisitions; (iii) expanding the number of sites; (iv) developing national/regional supplier agreements; and (v) offering new services to insurance companies to help reduce the time and cost associated with the claims process. Increasing Market Share and Profitability at Existing Sites The Company's primary strategy for organic growth in its existing markets is to contract for additional vehicles by promoting better returns on salvage vehicles and offering a broad selection of services to prospective suppliers. The expansion of the number of vehicles processed at existing sites typically makes the Company's auctions more attractive, resulting in increased buyer participation. The Company is also promoting its Run & Drive(R) service in which certain salvage vehicles are driven during the auction to demonstrate to prospective buyers that the major component parts of a vehicle still operate. These product offerings are designed to maximize returns for both the Company and the salvage provider. Continued Market Penetration Through Acquisitions Since the Company's initial public offering in November 1991, the Company has acquired additional salvage pool operations across the United States to offer better national coverage to its insurance company suppliers. As of March 1, 2005, the Company operated 78 sites in 32 states. The Company intends to continue to pursue acquisitions of strategically located salvage pools. Through such acquisitions, it seeks to enhance geographically broad-based relationships with key insurance company suppliers, in addition to offering its specialized salvage services to new insurance companies and other suppliers. In pursuing its acquisition strategy and plans, the Company recognizes that there will be continuing challenges in effectively and efficiently integrating new facilities into its existing operations. Among other things, future acquisitions will require continued investment in infrastructure. See "Factors That May Affect Future Results." New Site and Existing Site Expansion While the Company expects to continue pursuing growth through acquisitions, it will also continue to seek growth through the opening of new sites and the expansion of existing sites in markets where it can leverage existing relationships with vehicle providers. The opening of new sites offers advantages in certain markets and allows the Company to capitalize on regional and national customer accounts. 7 Development of National/Regional Supplier Agreements The Company's expanded geographic base of operations, plus its National Network, facilitates its strategy of offering existing and prospective customers national and regional supplier agreements. These agreements can provide a more consistent reporting and control function to the Company's customers, who benefit from a reduction in the number of service providers through which they must do business. Additional Services The Company is actively pursuing opportunities for growth through the identification and development of new, non-traditional customer-valued services and business offerings that leverage the Company's current competencies, geographic presence and assets. The primary focus of these new services is to provide to the insurance industry new, innovative options and alternatives for reducing the time and costs associated with processing insurance claims. Electronic Data Interchange and Electronic Funds Transfer (EDI/EFT) facilitate faster, more accurate service from consignment and vehicle pickup through sale and final settlement. EDI helps minimize insurance staff involvement, lowers error rates and diminishes administrative requirements through direct communication between the Company's system and the insurance company's system. EDI/EFT electronically expedites the total-loss recovery process. Reduced manual intervention combined with faster, more accurate service translates into quicker turnaround on the final settlement. SurePay(R) is the Company's electronic funds transfer service that improves the speed and accuracy of the billing and final settlement process by automatically depositing salvage proceeds directly into customer bank accounts. MARKETING The Company's internal sales force is its primary method of marketing its services to insurance company and non-insurance company salvage suppliers. These individuals solicit prospective vehicle providers at the national, regional and local level. Branch managers also provide support in the form of day-to-day customer service and address customer needs at the local level. In an effort to generate additional revenues and improve customer satisfaction, direct mail is also used to communicate services and benefits to customers. This initiative includes a national quarterly newsletter, entitled OnTrack, and other local market updates that discuss how the Company addresses specific customer needs. In addition, the Company participates in a number of local, regional and national trade show events that further promote the benefits of its products and services. Using historical data supplied by prospective suppliers, the Company can provide suppliers with a detailed analysis of their current salvage returns and a proposal detailing ways in which the Company can improve salvage returns, reduce administrative costs, and provide proprietary turn-key claims processing services. In addition to providing insurance companies and certain non-insurance company suppliers with a means of disposing of salvage vehicles, the Company also offers services intended to increase the net amount of salvage sale proceeds received by suppliers while also reducing the time required to receive net proceeds. The Company seeks to become an integral part of its suppliers' salvage processes, and it views such mutually beneficial relationships as an essential component of its effort to attract and retain suppliers. The Company also seeks to expand its supply relationships through recommendations from individual insurance company branch offices to other offices of the same insurance company. The Company believes that its existing relationships, and the recommendations of branch offices, play a significant role in its marketing of services to national insurance companies. Indeed, as the Company has expanded its geographic coverage, it has been able to market its services to insurance company suppliers on a national basis or within an expanded geographic area. 8 The Company sells the majority of its vehicles through live auctions and maintains databases that contain information regarding over 38,500 registered buyers. No single buyer accounted for more than 5% of the Company's revenue in 2004, highlighting the diversity of the Company's buyer base. The Company generally accepts cash, money orders, cashier's checks, wire transfers and pre-approved checks for purchased vehicles. Vehicles are sold "as is" and "where is." In advance of an auction, sales notices listing the vehicles to be auctioned on a particular day at a particular location are usually available at the auction facility or online on the Company's Web site. Such notices list the rules of the auction and details about the vehicle, including its year and make, the nature of the damage, the status of title and the order of the vehicles in the auction. Multiple images of certain vehicles are available for review on the Company's Web site at www.iaai.com. COMPETITION The Company faces intense competition for the supply of salvage vehicles as well as competition from processors of vehicles from other national and 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. GOVERNMENTAL REGULATION The Company's operations are subject to regulation, supervision and licensing under various federal, state and local agencies, statutes and ordinances. The acquisition and sale of totaled and recovered theft vehicles is regulated by state motor vehicle departments in each of the locations in which the Company operates. Changes in law or governmental regulations or interpretations of existing law or regulations can result in increased costs, reduced salvage vehicle prices and decreased profitability for the Company. In addition to the regulation of sales and acquisitions of vehicles, the Company is also subject to various local zoning requirements with regard to the location of its auction and storage facilities. These zoning requirements vary from location to location. Failure to comply with present or future regulations or changes in existing regulations could have a material adverse effect on the Company's operating results and financial condition. See "Factors That May Affect Future Results." ENVIRONMENTAL REGULATION. The Company's operations are subject to federal, state and local environmental laws and regulations. In the salvage vehicle auction industry, large numbers of wrecked vehicles are stored at auction facilities for short periods of time. Minor spills of gasoline, motor oils and other fluids may occur from time to time at the Company's facilities and may result in soil, surface water or groundwater contamination. Petroleum products and other hazardous materials are contained in aboveground or underground storage tanks located at certain of the Company's facilities. Waste materials, such as waste solvents or used oils, are generated at some of the Company's facilities and are disposed of as non-hazardous or hazardous wastes. The Company believes that it is in compliance in all material respects with applicable environmental regulations and does not anticipate any material capital expenditure for environmental compliance or remediation. To date, the Company has not incurred significant expenditures for preventive or remedial action with respect to contamination or the use of hazardous materials. Environmental laws and regulations, however, could become more stringent over time and the Company may be subject to significant compliance costs in the future. Future contamination at any one or more of the Company's facilities, or the potential contamination by previous users of certain acquired facilities, create the risk, however, that the Company could incur significant expenditures for preventive or remedial action, as well as potential liability arising as a consequence of hazardous material contamination, which could have a material adverse effect on the Company's operating results and financial condition. 9 EMPLOYEES At March 1, 2005, the Company employed 923 full-time persons. The Company is not subject to any collective bargaining agreements and believes that its relationship with its employees is good. AVAILABLE INFORMATION The Company files annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a Web site that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company also makes available free of charge on or through its Web-site (http://www.iaai.com) copies of the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after the Company electronically files such materials with, or furnishes them to, the SEC. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company operates in a changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks. Period Fluctuations. The Company's operating results have in the past and may in the future fluctuate significantly depending on a number of factors. These factors include, but are not limited to, the ACV of salvage vehicles, changes in the market value of salvage vehicles, delays or changes in state title processing, general weather conditions, changes in regulations governing the processing of salvage vehicles, the availability and quality of salvage vehicles and buyer attendance at salvage auctions. The Company is also dependent upon receiving a sufficient number of total-loss vehicles as well as recovered theft vehicles to sustain its profit margins. Factors that can affect the number of vehicles received include, but are not limited to, driving patterns, reduction of policy writing by insurance providers, which would affect the number of claims over a period of time, and changes in direct repair procedures that would reduce the number of newer, less damaged total-loss vehicles, which tend to have the higher salvage values. Future decreases in the quality and quantity of vehicle inventory, and in particular the availability of newer and less-damaged vehicles would have a material adverse effect on the operating results and financial condition of the Company. Additionally, in the last few years there has been a declining trend in theft occurrences. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. Furthermore, revenues for any future quarter are not predictable with any significant degree of accuracy, and the Company's operating results may vary significantly due to its relatively fixed expense levels. Due to all of the foregoing factors, it is likely that in some future quarters the Company's operating results will fall below the expectations of public market analysts and investors. Any failure to meet expectations of securities analysts or the market in general could adversely affect the market price of the Company's common stock. Competition. The Company faces intense competition for the supply of salvage vehicles as well as competition from processors of vehicles from other national and 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 10 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 2004, vehicles supplied by the Company's three largest suppliers accounted for approximately 37% of the Company's total unit sales. The largest suppliers, State Farm Insurance, Zurich Insurance, and GEICO, accounted for approximately 16%, 11%, and 10%, 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. Dependence on Information and Technology Systems. The Company's ability to provide cost-effective salvage vehicle processing solutions to the Company's customers depends in part on the Company's ability to effectively utilize technology to provide value-added services to the Company's customers. The Company has implemented a new web-based operating system, which allows the Company to offer hybrid internet/live auctions and to provide vehicle tracking systems and real-time status reports for the Company's insurance company customers' benefit. The Company's ability to provide the foregoing services depends on the Company's capacity to store, retrieve and process data, manage significant databases and expand and periodically upgrade our information processing capabilities. As the Company continues to grow, the Company will need to continue to make investments in new and enhanced information and technology systems. Interruption or loss of the Company's information processing capabilities or adverse consequences from implementing new or enhanced systems could have a material adverse effect on the Company's operating results and financial condition. As the Company's information system providers revise and upgrade their hardware, software and equipment technology, the Company may encounter difficulties in integrating these new technologies into the Company's business. Although the Company has experienced no significant breaches of the Company's network security by unauthorized persons, the Company's systems may be subject to infiltration by unauthorized persons. If the Company's systems or facilities were infiltrated and damaged by unauthorized persons, there could be a significant interruption to the Company's ability to provide many of the Company's electronic and web-based services to the Company's customers. If that were to occur, it could have a material adverse effect on the Company's operating results and financial condition. Governmental Regulation. The Company's operations are subject to regulation, supervision and licensing under various federal, state and local agencies statutes and ordinances. The acquisition and sale of totaled and recovered theft vehicles is regulated by state motor vehicle departments in each of the locations in which the Company operates. Changes in law or governmental regulations or interpretations of existing law or regulations could result in increased costs, reduced salvage vehicle prices and decreased profitability for the Company. In addition to the regulation of sales and acquisitions of vehicles, the Company is also subject to various local zoning requirements with regard to the location of its auction and storage facilities. These zoning requirements vary from location to location. Failure to comply with present or future regulations or changes in existing regulations could have a material adverse effect on the Company's operating results and financial condition. Provision of Services as a National or Regional Supplier. The provision of services to insurance company suppliers on a national or regional basis requires that the Company expend resources and dedicate management to a small number of individual accounts, resulting in a significant amount of fixed costs. The development of a referral- based national network service, in particular, has required the devotion of financial resources without immediate reimbursement of these expenses by the insurance company suppliers. The Company may not realize sufficient revenue from these services to cover these expenses, in which case, its results of operations may be materially adversely affected. Expansion and Integration of Facilities. The Company seeks to increase sales and profitability through acquisition of other salvage auction facilities, new site expansion and the increase of salvage vehicle volume at existing facilities. The Company may not be able to continue to acquire new facilities or add additional facilities on terms economically favorable to the Company, or at all, or increase revenues at newly acquired facilities above levels realized prior to acquisition. The Company's ability to achieve these objectives is dependent on, among other things, the integration of new facilities, and their information systems, into its existing operations, the identification and lease of suitable premises, and the availability of capital. There can be no assurance that this integration will occur, that suitable premises will be identified or that additional capital will be available to fund the expansion and integration of the Company's business. Any delays or obstacles in this integration process could have a material 11 adverse effect on the Company's operating results and financial condition. Furthermore, the Company has limited sources of additional capital available for acquisitions, expansions and start-ups. The Company's ability to integrate and expand its facilities will depend on its ability to identify and obtain additional sources of capital. In the future, the Company will also be required to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and to expand, train and manage its employee work force. The failure to improve these systems on a timely basis and to successfully expand, train and manage the Company's work force could have a material adverse effect on the Company's operating results and financial condition. Volatility of Stock Price. The market price of the Company's common stock has been and will continue to be subject to significant fluctuations in response to various factors and events, including variations in the Company's operating results, the timing and size of acquisitions and facility openings, the loss of vehicle suppliers or buyers, the announcement of new vehicle supply agreements by the Company or its competitors, changes in regulations governing the Company's operations or its vehicle suppliers, environmental problems or litigation. Any failure to meet expectations of securities analysts or the market in general could adversely affect the market price of the Company's common stock. Environmental Regulation. The Company's operations are subject to federal, state and local environmental laws and regulations. In the salvage vehicle auction industry, large numbers of wrecked vehicles are stored at auction facilities for short periods of time. Minor spills of gasoline, motor oils and other fluids may occur from time to time at the Company's facilities and may result in soil, surface water or groundwater contamination. Petroleum products and other hazardous materials are contained in aboveground or underground storage tanks located at certain of the Company's facilities. Waste materials, such as waste solvents or used oils, are generated at some of the Company's facilities and are disposed of as non-hazardous or hazardous wastes. The Company believes that it is in compliance in all material respects with applicable environmental regulations and does not anticipate any material capital expenditure for environmental compliance or remediation. To date, the Company has not incurred significant expenditures for preventive or remedial action with respect to contamination or the use of hazardous materials. Environmental laws and regulations, however, could become more stringent over time and the Company may be subject to significant compliance costs in the future. Future contamination at any one or more of the Company's facilities, or the potential contamination by previous users of certain acquired facilities, create the risk, however, that the Company could incur significant expenditures for preventive or remedial action, as well as potential liability arising as a consequence of hazardous material contamination, which could have a material adverse effect on the Company's operating results and financial condition. Sarbanes-Oxley Act Compliance. During the Company' third fiscal quarter 2004, the Company retained the services of Jefferson Wells International to assist the Company in complying with the requirements of Section 404 (c) of the Sarbanes Oxley Act of 2002 ("Section 404 (c)"). Pursuant to Section 404 (c), the Company's management must (i) establish and maintain adequate internal control over its financial reporting; (ii) identify the framework used by management to evaluate the effectiveness of those controls; (iii) assess and attest to the effectiveness of those controls; and (iv) provide an attestation by the Company's independent auditors as to management's assessment of its internal controls over financial reporting. In order to comply with Section 404(c), the Company has to date incurred significant costs and anticipates further significant financial expenditures and strain on managerial resources in its compliance efforts. Though the Company expects to fully comply with the requirements of Section 404 (c), it cannot be certain that it will do so in the prescribed time or that it will be able to do so without further significantly impacting its operations. The failure of the Company to comply with Section 404(c) and complete its assessment of its internal controls in the prescribed time and obtain from its independent auditors an attestation to management's assessment of the effectiveness of its internal controls over financial reporting could have a material adverse affect on the Company's business or stock price. 12 ITEM 2. PROPERTIES. The Company's principal administrative, sales, marketing and support functions are located in Westchester, Illinois. The lease on the office space in Westchester expires on August 31, 2016. The Company and its subsidiaries also lease approximately 67 properties in Alabama, Arkansas, Arizona, California, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New York, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Utah, Virginia, Washington and Wisconsin. The Company owns 11 properties located in Illinois, Kansas, Michigan, New Mexico, New York, Oklahoma, South Carolina and Texas. All of these properties are used primarily for auction and storage purposes consisting on average of approximately 21 acres of land. Management believes that the Company's properties are adequate for its current needs and that suitable additional space will be available on reasonably acceptable terms as required. ITEM 3. LEGAL PROCEEDINGS. The Company is party to a number of lawsuits arising in the normal course of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial position. Emery Air Freight Accident On February 4, 2003, the Company filed a lawsuit in the Superior Court of California, County of Sacramento, against Emery Air Freight, Tennessee Technical Services, and Bob and Corrine Spence. The lawsuit seeks to recover damages caused by the crash of an Emery DC-8 aircraft onto the Company's Rancho Cordova, California facility on February 16, 2000. The aircraft was destroyed, and the three crew members aboard the aircraft were killed. The crash and the resulting release of jet fuel and fire destroyed a significant part of the Company's facility and contaminated it with ash, hydrocarbon, lead and other toxic materials. Emery refused to clean up the contamination, and the Company was required to do so. The Company suffered more than $3.0 million in inventory loss, clean-up and remediation costs, business interruption losses, legal and consulting fees, and other losses, costs, and expenses. The Company maintained insurance policies that covered a significant portion of its losses. The Company's insurer, Reliance Insurance Company, paid almost $1.0 million on the Company's lost inventory claims. However, in October 2001, the Pennsylvania Insurance Commissioner put Reliance into reorganization, a petition in bankruptcy was filed, and it appears unlikely that Reliance will make any further payments to the Company. The Company has filed claims with the California Insurance Guarantee Association, which provides coverage for California property losses insured by an admitted insurer that is unable to pay covered claims. The Association has refused to pay the Company's claims and has taken the position that its liability to the Company is limited to $0.5 million. In its lawsuit, the Company seeks to recover from Emery and Tennessee Technical Services for negligence, trespass, and negligent maintenance of the aircraft. The Company also filed suit against the Spences, alternatively, seeking to recover from the Spences for breach of provisions in the Company's lease requiring that they as landlord either pay for or share the cost of remediation of hazardous wastes. The Spences filed a cross-complaint against the Company alleging breach of contract. On October 6, 2004, the Company entered into a Settlement and Arbitration Agreement with the Spences whereby each dismissed, without prejudice, its claims against the other. The Agreement provides for settlement of several unrelated disputes that the parties had with one another and for the further arbitration of claims related to the crash should the Company be unsuccessful in its on-going suit against Emery and Tennessee Technical Services. The Company has and anticipates that it will continue to incur substantial legal fees and costs in its efforts to recover its losses, and there is no guarantee that the Company will be successful. 13 Relocation of the Woodinville Branch On September 16, 2003, the Company received notice from the King County Wastewater Treatment Division, Department of Natural Resources, that King County was in the process of building a water treatment facility and that the Company's Woodinville, Washington branch was located within the boundaries of the likely site for placement of this facility. In the notice, the Company was advised that if the site was selected, King County would pursue acquisition of the property from the Company's landlord, Waterman Properties. On October 3, 2003, the Company received further notice from King County that it had extended an offer to purchase the Woodinville site from Waterman Properties and that, if the offer was accepted, the Company would be expected to enter into a lease arrangement with King County until such time as King County directed it to vacate the facility. The notice stated that the Company would be entitled to at least ninety (90) days notice prior to being required to vacate. In an open house meeting on December 1, 2003, King County announced that it expected all property owners and tenants to vacate the proposed water treatment site no later than the end of 2004. The Company never received formal notice of this timeline from King County; instead, the Company was advised of the timeline from counsel who attended the open house meeting. The Company has retained counsel and other consultants to assist in its relocation effort, to protect the Company's interests in the value of leasehold improvements made to the premises, and to recover costs resulting from the relocation. Pursuant to applicable law, the Company is entitled to reimbursement of certain costs associated with the relocation of its business from this site to another suitable location. Under the Company's lease with Waterman Properties, the Company is entitled to the value of its leasehold improvements invested in the property. There is currently a dispute between the Company and Waterman Properties regarding how to value the improvements made to the Woodinville facility. On March 4, 2004, the Company filed a lawsuit in Snohomish County Superior Court against King County and Waterman Properties asking the Court to appoint a receiver to manage a portion of the funds (up to $1.5 million) that Waterman Properties might receive from King County and to award the Company a portion of the condemnation award in an amount equal to the value of its leasehold improvements. The outcome of this action is uncertain at this time. Since that date, the Company began searching for an alternate location on which to relocate, believing that in all likelihood it would be required to vacate the Woodinville facility by year's end. On November 16, 2004 the Company entered into a new lease for property located in Tukwila, Washington. Simultaneously, the Company negotiated a settlement with King County whereby the Company terminated its lease with Waterman Properties and dismissed its complaint against King County to permit the sale and purchase of the Woodinville property. The settlement further provided for $900,000 of the purchase price to be placed into escrow for payment of any judgment that might be awarded in the Company's on-going suit against Waterman Properties. The outcome of this action remains uncertain at this time. At year end, the Company exited the Woodinville facility and the Company wrote off its leasehold improvements of approximately $991,000. The Company expects to recover approximately $375,000 of which $200,000, that was recorded in 2004 as a reduction of the loss, is for branch re-establishment and $175,000 is for relocation of inventory. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter ended December 26, 2004. 14 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. The Company's common stock is traded on The Nasdaq National Market under the symbol IAAI. The following table sets forth the range of high and low sales prices per share for the Company's common stock for the periods indicated. At March 1, 2005, the Company had 594 holders of record of its common stock, approximately 1,537 beneficial owners and 11,853,123 shares outstanding.
FISCAL 2004 FISCAL 2003 ----------- ------ ---- HIGH LOW HIGH LOW ------ ------ ------ ------ First Quarter $15.37 $13.05 $17.05 $ 8.64 Second Quarter 16.56 13.64 14.85 10.94 Third Quarter 17.79 15.18 14.80 10.70 Fourth Quarter 22.78 17.00 14.85 10.95
The Company has never declared or paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain any future earnings to finance the growth and development of its business. In addition, the Company's financing agreement limits the Company's ability to pay cash dividends to no more than 25% of the Company's consolidated net income earned over a specified period. The Company records treasury stock purchases using the cost method of accounting. In the first and second quarters of 2004, the Company did not repurchase any shares. During the third quarter of 2004, the Company repurchased 95,800 shares and in the fourth quarter the Company repurchased 3,471 shares. In the last two years, the Company has repurchased 906,480 shares of its common stock at an average price of $10.63 per share and a total cost of $9.6 million. ISSUER PURCHASES OF EQUITY SECURITIES
(c) TOTAL NUMBER OF (d) MAXIMUM (a) TOTAL SHARES PURCHASED AS NUMBER OF NUMBER OF (b) AVERAGE PART OF PUBLICLY SHARES THAT MAY YET BE SHARES PRICE PAID ANNOUNCED PLANS OR PURCHASED UNDER THE PERIOD PURCHASED PER SHARE PROGRAMS(1) PLANS OR PROGRAMS - -------------- --------- ----------- ------------------- ---------------------- First quarter - $ - - 1,442,791 Second Quarter - - - 1,442,791 Third Quarter 95,800 16.17 95,800 1,346,991 Fourth quarter 3,471 21.75 3,471 1,343,520
(1)The Company's Board of Directors authorized the purchase of 1,500,000 shares of the Company's common stock in September 2000 and an additional 750,000 shares in April 2003, for a combined authorization of 2,250,000 shares. Purchases may be made from time to time in the open market or in privately negotiated transactions, subject to the requirements of applicable laws, and will be financed with existing cash and cash equivalents, and cash from operations. As of December 26, 2004, the Company had purchased 906,480 shares pursuant to this authorization at an average price of $10.63 per share. The repurchase authorization expires upon the repurchase of all authorized shares. 15 EQUITY COMPENSATION PLAN INFORMATION YEAR ENDED DECEMBER 26, 2004
NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION PLANS OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) - ------------- ----------------------- -------------------- ------------------------- (a) (b) (c) Equity compensation plans approved by security holders (2003 Stock Incentive Plan) 487,586 $ 14.23 130,323 Equity compensation plans approved by security holders (Amended and Restated 1991 Stock Option Plan) 1,248,266 $ 13.25 - Equity compensation plans not approved by security holders (1995 Supplemental Plan) 9,640 $ 9.64 39,390 Total 1,745,492 $ 13.50 169,713
ITEM 6. SELECTED FINANCIAL DATA. The tables below summarize the selected consolidated financial data of the Company as of and for each of the last five fiscal years. This selected financial information should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Report. The statement of earnings data for 2004, 2003 and 2002 and the balance sheet data as of December 26, 2004 and December 28, 2003 below have been derived from the Company's Consolidated Financial Statements included elsewhere herein that have been audited by KPMG LLP, independent certified public accountants, whose report is also included herein. The income statements data for 2001 and 2000 and balance sheet data for 2002, 2001 and 2000 is derived from audited consolidated financial statements not included herein.
2004 2003 2002 2001 2000 ---------- ---------- --------- --------- -------- (in thousands, except per share amounts) Selected Statement of Earnings Data: Revenues $ 240,179 $ 209,650 $ 234,197 $ 292,990 $333,176 Earnings (loss) from operations 20,909 5,011 7,530 (5,209) 17,894 Net earnings (loss) 12,265 2,332 4,008 (4,360) 10,489 Earnings (loss) per share - diluted 1.04 .20 .32 (.37) .88 Weighted average common shares - diluted 11,814 11,732 12,531 11,940 11,950
2004 2003 2002 2001 2000 ---------- ---------- --------- --------- -------- (in thousands) Selected Balance Sheet Data: Working capital $ 16,881 $ 25,159 $ 27,058 $ 29,683 $ 55,090 Total assets 305,460 287,793 259,650 278,204 265,707 Long-term debt, excluding current installments 9,375 16,887 59 103 20,141 Total shareholders' equity $ 202,651 $ 189,086 $ 194,102 $ 188,994 $187,741
16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW Insurance Auto Auctions, Inc. provides insurance companies and other vehicle suppliers cost-effective salvage processing solutions principally on a consignment or purchase agreement method of sale. The consignment method includes both a percentage of sale and fixed fee basis. The percentage of sale consignment method offers potentially increased profits over fixed fee consignment by providing incentives to both the Company and the salvage provider to invest in vehicle enhancements, thereby maximizing vehicle selling prices. Under the percentage of sale and fixed fee consignment methods, the vehicle is not owned by the Company and only the fees associated with processing the vehicle are recorded as revenue. The proceeds from the sale of the vehicle itself are not included in revenue. Under the purchase agreement sales method, the vehicle is owned by the Company, and the proceeds from the sale of the vehicle are recorded as revenue. The Company's operating results are subject to fluctuations, including quarterly fluctuations, that can result from a number of factors, some of which are more significant for sales under the purchase agreement method. The discussion in this section contains forward-looking statements that are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to, management. The Company's actual results could differ materially from those discussed or implied herein. Refer to the section "Factors That May Affect Future Results" for a further discussion of some of the factors that affect or could affect the Company's business, operating results and financial condition. The following discussion and analysis should be read in conjunction with the Selected Financial Data, the consolidated financial statements and notes thereto and the Factors That May Effect Future Results appearing elsewhere in this Report. ACQUISITIONS AND NEW OPERATIONS Since its initial public offering in 1991, the Company has grown through a series of acquisitions and opening of new sites to include 78 sites as of March 1, 2005. In 2004, the Company acquired a branch in Jackson Mississippi and also opened new operations in Tucson, Arizona; El Paso, Texas; and Lincoln, Illinois RESULTS OF OPERATIONS YEAR ENDED DECEMBER 26, 2004 COMPARED TO THE YEAR ENDED DECEMBER 28, 2003 Revenues increased 15% to $240.2 million for the year ended December 26, 2004, from $209.7 million in 2003. The increase in revenues was primarily due to a higher volume of vehicles sold and a higher average selling price for vehicles sold at auction. The $8.5 million or 21% decline in vehicle sales is primarily related to the Company's shift away from vehicles sold under the purchase method. Vehicles sold under the purchase method accounted for less than 4% of the total vehicles sold in 2004, versus approximately 6% in 2003. Fee income for 2004 increased 23% to $208.7 million versus $169.7 million in 2003. Fee income increased primarily due to higher unit volumes. Cost of sales increased $13.5 million to $184.0 million for the year ended December 26, 2004, versus $170.5 million for last year. Vehicle cost of $26.7 million decreased $8.6 million in 2004 from $35.3 million in 2003. This decrease is primarily related to the Company's shift away from vehicles sold under the purchase method. Branch cost of $157.3 million increased $22.1 million in 2004 from $135.2 million in 2003. Branch cost includes tow, office and yard labor, occupancy, depreciation and other costs inherent in operating the branch. New branches opened in 2004 account for approximately $1.7 million of additional branch costs. Excluding the impact of new branches, branch costs increased $20.4 million primarily due to increased volumes and increases in towing, performance-based bonus, and insurance expense. 17 Gross profit of $56.2 million for the year ended December 26, 2004 increased $17.0 million, or 43%, from $39.2 million for 2003. Selling, general and administrative expense of $35.0 million in 2004 was $4.8 million more than the expense of $30.2 million in 2003. This increase was primarily due to performance-based bonus expense, costs related to compliance with the requirements of the Sarbanes-Oxley Act of 2002, and higher depreciation expense associated with the implementation of the Company's new information technology system. Professional services related to the audit and the compliance with Sarbanes-Oxley was $1.9 million in 2004. Amortization of intangible assets is now included within this category of expense and amounted to $0.6 million in 2004 and $0.5 million in 2003. Loss on sale of property and equipment increased to $0.3 million in 2004. The loss primarily relates to a $0.8 million loss on the exit of the Woodinville facility which was partially offset by a $0.5 million gain on the sale of South Boston. There were no business transformation costs for the year ended December 26, 2004, versus $3.9 million for last year. Business transformation costs included expenses related to data base conversions, training, and other activity related to the rollout of the Company's new information technology system. Interest expense of $1.6 million for the year ended December 26, 2004 increased $0.1 million from $1.5 million for 2003. On March 19, 2004, the Company entered into a Second Amended and Restated Credit Agreement with its lenders, which is described in "Financial Condition and Liquidity" below. At December 26, 2004, the outstanding balance related to the term loan with its lenders was $16.9 million and $6.0 million related to the revolver. At December 26, 2004, the interest rate on the term loan was 5.4%. Income tax expense for the year 2004 was $7.1 million, an increase of $5.8 million from the income tax expense of $1.3 million for 2003. The Company's effective tax rates for the years 2004 and 2003 was 37% and 36%, respectively. The Company expects that its effective tax rate in 2005 will be approximately 36%. The Company's net earnings for the year 2004 was $12.3 million, an increase of $10.0 million from the Company's net earnings of $2.3 million for the fiscal year 2003. YEAR ENDED DECEMBER 28, 2003 COMPARED TO THE YEAR ENDED DECEMBER 29, 2002 Revenues decreased 10% to $209.7 million for the year ended December 28, 2003, from $234.2 million in 2002. The decline in revenues was primarily due to the Company's continued shift away from vehicles sold under the purchase agreement method. Under the purchase agreement method, the entire purchase price of the vehicle is recorded as revenue compared to only recording the fees collected on the sale of a vehicle under the lower risk consignment fee based arrangements. Vehicles sold under the purchase agreement method accounted for less than 6% of the total vehicles sold in 2003, versus approximately 10% in 2002. Fee income for 2003 increased 4% to $169.7 million versus $162.8 million in 2002. Fee income increased primarily due to higher unit volumes. Cost of sales decreased $20.5 million to $170.5 million for the year ended December 28, 2003, versus $191.0 million for last year. Vehicle cost of $35.3 million in 2003 was $30.2 million less than the $65.5 million reported in 2002. This decrease is primarily related to the Company's shift away from vehicles sold under the purchase agreement method. Branch cost of $135.2 million increased $9.7 million in 2003 from $125.5 million in 2002. New branches opened in 2003 account for approximately $7.0 million of additional branch costs. Excluding the impact of new branches, branch costs increased $2.7 million primarily in tow and depreciation expense. Gross profit of $39.2 million for the year ended December 28, 2003 decreased $4.0 million, or 9%, from $43.2 million for 2002. Selling, general and administrative expense of $30.2 million in 2003 was $2.5 million more than the expense of $27.7 million in 2002. This increase was primarily due to expenses associated with the implementation of the Company's new automated salvage auction processing system. Amortization of intangible assets is now included within this category of expense and amounted to $0.5 million in 2003 and $0.3 million in 2002. 18 Business transformation costs for the year ended December 28, 2003 were $3.9 million, versus $8.1 million for 2002. Business transformation costs include expenses related to the Company's systems redesign project, the business process re-engineering project, severance costs and accelerated depreciation associated with the Company's former computer infrastructure. The Company began recording business transformation costs during the second quarter of 2001. As part of its substantial business transformation, the Company is providing visibility to several significant components of its cost structure. Business transformation costs and other unusual charges are discussed in detail in "Significant Items Affecting Comparability" below. Interest expense of $1.5 million for the year ended December 28, 2003 increased $0.8 million from $0.7 million for 2002. Included in interest expense for 2002 was a non-cash charge of $0.3 million to recognize the ongoing cost of the interest rate swap on the unused portion of the Company's credit facility. In February 2002, the Company used excess cash and proceeds from the sale of investments to repay its $20.0 million of 8.6% senior notes that matured on February 15, 2002, and entered into a new $30.0 million five-year unsecured credit facility. At December 29, 2002, there was no outstanding balance related to this credit facility. The credit facility was a one-year revolver that converted on February 15, 2003 into a four-year term loan. On February 15, 2003, the Company borrowed the entire $30.0 million under the unsecured credit facility. At December 28, 2003, the outstanding balance related to the term loan with its lenders was $24.4 million. At December 28, 2003, the interest rate on the term loan was 5.7%. On March 19, 2004, the Company entered into a Second Amended and Restated Credit Agreement with its lenders, which is described in "Financial Condition and Liquidity" below. Income tax expense for the year 2003 was $1.3 million, a decrease of $1.7 million from the income tax expense of $3.0 million for 2002. The Company's effective tax rate for the years 2003 and 2002 was 36% and 43%, respectively. The Company's net earnings for the year 2003 was $2.3 million, a decrease of $1.7 million from the Company's net earnings of $4.0 million for the fiscal year 2002. SIGNIFICANT ITEMS AFFECTING COMPARABILITY The Company has recorded certain charges that have affected the comparability of its reported results of operations. The Company recorded business transformation costs in 2003 of $3.9 million and $8.1 million in 2002. Business transformation costs include expenses relating to the Company's systems redesign project, the business process re-engineering project, severance costs and accelerated depreciation pertaining to the Company's prior computer infrastructure. No business transformation costs were recorded in 2004. FINANCIAL CONDITION AND LIQUIDITY At December 26, 2004, the Company had current assets of $84.6 million, including $13.3 million in cash and current liabilities of $67.7 million and working capital of $16.9 million, which represents an $8.3 million decrease from December 28, 2003. The Company's accounts receivable increased $2.0 million from $48.4 million in 2003 to $50.4 million in 2004. Accounts receivable consists of balances due from the Company's salvage providers, typically large insurance companies. Accounts receivable include advance charges paid for by the Company on behalf of salvage providers. These charges typically include storage and tow fees incurred at a temporary storage or repair shop prior to the Company moving the vehicle to one of its facilities. Inventory increased $0.9 million from $13.6 million in 2003 to $14.5 million in 2004. Inventory consists of capitalized tow charges on vehicles on hand and the cost of purchase vehicles once title is received. Both inventory on receivable balances increased due to a larger inventory of consigned vehicles on hand at year-end 2004. At December 26, 2004, the Company's long-term debt, including current installments, consisted of $16.9 million borrowed under its term credit facility. The credit facility was a one-year revolver that converted on February 15, 2003 into a four-year term loan carrying a variable interest rate based upon LIBOR. The aggregate principal balance of the loan is required to be paid in sixteen consecutive equal quarterly installments which began on March 31, 2003. 19 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. As of March 19, 2004, the Company's senior credit facility consisted of a $20.0 million revolving credit facility and a $22.5 million term credit facility. As of December 26, 2004, the Company has borrowed $6.0 million against the revolving line of credit and $16.9 million under the term credit facility. At December 26, 2004, the Company was in compliance with its credit agreement covenants, except its expenditure basket for which it received a waiver in March 2005. Other long-term liabilities include the fair market value on the Company's interest rate swap along with the Company's post-retirement benefits liability that relates to the Company's prior acquisition. The amount recorded at December 26, 2004 for the post-retirement benefits liability was approximately $2.4 million. In 2002, the Company entered into a capital lease agreement to obtain the use of new computer equipment required as part of the Company's new operating system. The capital lease terms are three years or less depending on the nature of the equipment. In 2003, property and equipment additions of $3.4 million resulted from capital lease transactions entered into during the year. At December 26, 2004, the Company's total future obligation under the capital lease is $1.8 million. Capital expenditures were approximately $28.7 million for the year ended December 26, 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 acquired one salvage pool in fiscal 2004. This acquisition was accounted for using the purchase method of accounting. The results of operations of the acquired business are included in the Company's consolidated financial statements from the date of acquisition. The total cost of adding this new facility was less than $2.0 million. The Company's Board of Directors authorized the purchase of 1,500,000 shares of the Company's common stock in September 2000 and an additional 750,000 shares in April 2003, for a combined authorization of 2,250,000 shares. Purchases may be made from time to time in the open market or in privately negotiated transactions, subject to the requirements of applicable laws, and will be financed with existing cash and cash equivalents, and cash from operations. As of December 26, 2004, the Company had purchased 906,480 shares pursuant to this authorization at an average price of $10.63 per share. In 2003, the Company initiated a restricted stock program. Under the Company's restricted stock grant program, shares of 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 received pursuant to the program. Restrictions limit the sale or transfer of these shares over a four-year period. The sale and transfer restrictions on shares received under the program expire at a rate of 25% per year or earlier, on the achievement of certain performance based goals. Upon issuance of shares of common 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 restriction period. In 2003, 66,500 restricted shares were granted and in 2004, 182,600 restricted shares were granted. Compensation expense of $0.6 million, including $0.3 million recognized due to the anticipated achievement of performance goals in 2005, was recorded in the twelve months ended December 26, 2004. In fiscal 2004 and 2003, there were no forfeitures of restricted shares. The Company believes that existing cash and cash equivalents, as well as cash generated from operations will be sufficient to fund capital expenditures and provide adequate working capital for operations for the next twelve months. Part of the Company's plan is to pursue continued growth, possibly through new facility start-ups or acquisitions, and the development of new claims processing services. At some time in the future, the Company will likely require additional financing. There can be no assurance that additional financing, if required, will be available on favorable terms. 20 SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS The following table reflects a summary of the Company's cash obligations for each of the next five years and thereafter as of December 26, 2004:
2005 2006 2007 2008 2009 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- (dollars in thousands) Long-term debt: Unsecured term loan $ 7,500 $ 7,500 $ 1,875 $ - $ - $ - $ 16,875 Notes payable 12 - - - - - 12 Capital leases(1) 1,203 387 316 33 - - 1,939 Operating leases(2) 21,528 19,731 16,355 14,345 12,178 67,623 151,760 Other long-term obligations: Non-compete agreements 188 253 223 163 - - 827 ------- ------- ------- ------- ------- ---------- -------- Total $30,431 $27,871 $18,769 $14,541 $12,178 $ 67,623 $171,413 ======= ======= ======= ======= ======= ========== ========
(1)Includes related interest expense. (2)Includes amounts due to both unrelated and related parties. CRITICAL ACCOUNTING POLICIES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosures. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. As such, the Company continuously evaluates its estimates. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. GOODWILL As of December 26, 2004 the Company had $137.5 million of net goodwill recorded in its consolidated financial statements. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", the Company assesses goodwill for possible impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value of this asset may not be recoverable. Important factors that could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results; significant negative industry or economic trends; significant decline in the Company's stock price for a sustained period; and the Company's market capitalization relative to net book value. If the Company determines that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company would measure any impairment based on the excess of carrying amount over fair value measured using a projected discounted cash flow model or other valuation techniques. DEFERRED INCOME TAXES As of December 26, 2004, the Company had $11.2 million of deferred tax assets recorded. The deferred tax assets relate to net operating losses incurred in several of the states where the Company operates. The Company has determined that it may not realize the full tax benefit related to certain of the deferred tax assets. As such, a valuation allowance to reduce the carrying value of the deferred tax assets has been recorded. 21 LONG-LIVED ASSETS AND CERTAIN IDENTIFIABLE INTANGIBLES As of December 26, 2004, the Company had $74.7 million of net property and equipment along with net intangible assets of $1.7 million. The Company evaluates long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the asset's carrying amount to the estimated undiscounted future cash flows expected to be generated by the asset. If the estimated undiscounted future cash flows change in the future, the Company may be required to reduce the carrying amount of an asset to its fair value. RECENT ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151 (SFAS 151), "Inventory Costs an amendment of ARB No. 43, Chapter 4." SFAS 151 discusses the general principles applicable to the pricing of inventory. Paragraph 5 of ARB 43, Chapter 4 provides guidance on allocating certain costs to inventory. This Statement amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. As required by SFAS 151, we will adopt this new accounting standard at the beginning of our first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the impact of adoption of SFAS 151 on our financial statements. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (SFAS 153), "Exchanges of Nonmonetary Assets--an amendment of APB Opinion No. 29." SFAS 153 addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 "Accounting for Nonmonetary Transactions" and replaces it with an exception for exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. As required by SFAS 153, we will adopt this new accounting standard at the beginning of our first interim or annual reporting period that begins after June 15, 2005. The adoption of SFAS 153 is not expected to have a material impact on our financial statements. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (SFAS 123R) "Share-Based Payment." SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123R establishes fair value as the measurement method in accounting for share-based payments to employees and eliminates the alternative use of the intrinsic value method of accounting under APB Opinion No. 25, "Accounting for Stock Issued to Employees." This statement is effective for public entities as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the impact of adoption on our financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to interest rate fluctuations on its floating rate credit facility, under which the Company has outstanding a $16.9 million term loan at December 26, 2004. In 2002, the Company entered into an interest rate swap to mitigate its exposure to interest rate fluctuations, and does not, as a matter of policy, enter into hedging contracts for trading or speculative purposes. At December 26, 2004, the interest rate swap agreement had a notional amount of $16.9 million, and provided that the Company paid a fixed rate of interest of 4.4% and received a LIBOR-based floating rate on the notional amount. At December 26, 2004, the interest rate on the term loan was 5.4%. At December 26, 2004, the entire swap agreement qualified for hedge accounting. The Company believes that its exposure to adverse changes in interest rates is not significant. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 15(a) for an index to the Consolidated Financial Statements which are included herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this Form 10-K. The controls evaluation was conducted under the supervision of our Audit Committee, and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, the Company is in the process of conducting an evaluation of its internal control over financial reporting based on the framework in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's evaluation of its internal control over financial reporting has not yet been completed. Pursuant to Securities and Exchange Commission Release No. 34-50754, which, subject to certain conditions, provides up to 45 additional days beyond the due date of this Form 10-K for the filing of management's annual report on internal control over financial reporting required by Item 308(a) of Regulation S-K, and the related attestation report of the independent registered public accounting firm, as required by Item 308(b) of Regulation S-K, management's report on internal control over financial reporting and the associated report on the audit of management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 26, 2004, are not field herein and are expected to be found no later than April 25, 2005. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During 2004, we made numerous changes to our controls and procedures as part of our ongoing monitoring and improvement of our controls. However, none of these changes has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. INHERENT LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control 23 system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. DIRECTORS Set forth below is information regarding the directors of the Company, including information furnished by them as to principal occupations, certain other directorships held by them, any arrangements pursuant to which they were or are selected as directors, and their ages as of March 1, 2005:
YEAR FIRST ELECTED OR DIRECTORS AGE POSITION WITH COMPANY APPOINTED DIRECTOR - --------- --- -------------------------- --------------------- Peter H. Kamin(1)(3) 43 Chairman of the Board 1999 Thomas C. O'Brien 51 President, Chief Executive 2000 Officer and Director Todd F. Bourell(3) 34 Director 2003 Maurice A. Cocca (1)(2)(3) 61 Director 1997 Philip B. Livingston(1)(2)(3) 48 Director 2003 John K. Wilcox (2)(3) 69 Director 1998
- ---------- (1) Member of the Nominating, Governance and Compensation Committee. (2) Member of the Audit Committee. (3) These directors satisfy the independence requirements of the Sarbanes-Oxley Act of 2002 and the corporate governance listing requirements of the NASDAQ National Market. PETER H. KAMIN has been a director of the Company since February 2001. Mr. Kamin had previously served as a director from January 1999 through October 2000. In July 2000, Mr. Kamin joined, as a founding partner, ValueAct Capital Partners, L.P. From January 1992 to July 2000, Mr. Kamin was a partner of Peak Investment, L.P. THOMAS C. O'BRIEN has been the President, Chief Executive Officer and a Director of the Company since November 2000. As President and Chief Executive Officer, Mr. O'Brien oversees the Company's overall corporate administration as well as strategic planning. Prior to joining the Company, Mr. O'Brien served as President of Thomas O'Brien & Associates from 1999 to 2000, Executive Vice President of Safelite Glass Corporation from 1998 to 1999, Executive Vice President of Vistar, Inc. from 1996 to 1997 and President of U.S.A. Glass, Inc. from 1992 to 1996. TODD F. BOURELL has been a director of the Company since October 2003. Mr. Bourell is a partner of ValueAct Capital Partners, L.P. Prior to joining ValueAct, Mr. Bourell worked as an analyst for Wellington Management Company in Boston, Massachusetts. Mr. Bourell is a graduate of the Wharton School of Business. MAURICE A. COCCA has been a director of the Company since February 1997. From November 1993 to November 1995, Mr. Cocca was Managing Director of The Fisons Laboratory Supplies Division of Fisons PLC, a distributor of laboratory supplies that was later acquired by Fisher Scientific. Mr. Cocca served as Vice Chairman of J & W Scientific Holdings from April 1996 through April 2000. PHILIP B. LIVINGSTON has been a director of the Company since March 2003. In January 2005, Mr. Livingston became Vice Chairman of Approva Corp. From March 2003 to 2004, Mr. Livingston served the Chief Financial Officer and a director of World Wrestling Entertainment, Inc. Mr. Livingston served as President and Chief Executive Officer of Financial Executives International from January 1999 to April 2003. Mr. Livingston is also a director of Cott Corporation, a manufacture of private-label beverages. 25 JOHN K. WILCOX has been a director of the Company since February 1998. From November 1994 until November 1997, Mr. Wilcox was Group Vice President, Personal Lines Finance and Planning of Allstate Insurance Company. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the names, ages and offices of all of the executive officers of the Company as of March 1, 2005:
NAME AGE OFFICE HELD ---- --- ----------- Thomas C. O'Brien 51 President and Chief Executive Officer Donald J. Hermanek 56 Senior Vice President, Sales and Marketing Sidney L. Kerley 30 Vice President, General Counsel and Secretary John W. Kett 41 Senior Vice President, Planning and Business Development David R. Montgomery 48 Senior Vice President and Chief Operating Officer John R. Nordin 48 Senior Vice President and Chief Information Officer Scott P. Pettit 42 Senior Vice President and Chief Financial Officer
THOMAS C. O'BRIEN became President and Chief Executive Officer in November 2000. As President and Chief Executive Officer, Mr. O'Brien oversees the Company's overall corporate administration as well as strategic planning. Prior to joining the Company, Mr. O'Brien served as President of Thomas O'Brien & Associates from 1999 to 2000, Executive Vice President of Safelite Glass Corporation from 1998 to 1999, Executive Vice President of Vistar, Inc. from 1996 to 1997 and President of U.S.A. Glass, Inc. from 1992 to 1996. DONALD J. HERMANEK joined the Company in August 2000 as Senior Vice President of Sales and Marketing. Mr. Hermanek is responsible for the sales and marketing functions, including field sales and the corporate accounts group. Prior to joining the Company, Mr. Hermanek served as Vice President of Business Development for Consolidated Services Corp. from 1997 to 2000. He also served as Vice President - National Sales for Safelite Glass Corporation from 1992 to 1997. SIDNEY L. KERLEY joined the Company in April 2001 as Corporate Counsel. Mr. Kerley currently serves as the Company's Vice President, General Counsel and Secretary. He is responsible for the general legal affairs of the Company, including SEC compliance and filings, mergers and acquisitions, corporate finance and litigation. Prior to joining the Company, Mr. Kerley served as an attorney for Fairbank & Vincent. JOHN W. KETT joined the Company in August 2001 as Vice President of Field Support. In June 2004, he was named Senior Vice President of Planning and Business Development. Mr. Kett is responsible for planning, pricing, financial analysis, and has primary responsibility for business development. Prior to joining the Company, Mr. Kett served as Assistant Comptroller for Central Steel and Wire Co. from 1998 to 2001 and Controller of Vistar, Inc. from 1996 to 1998. From 1992 to 1996 Mr. Kett held various positions at Vistar including Regional Operations Manager. DAVID R. MONTGOMERY joined the Company in April 2001 as Senior Vice President and Chief Operating Officer. Mr. Montgomery is responsible for Company operations, including the Company's National Network and specialty salvage business. Prior to joining the Company, Mr. Montgomery served as Chief Executive Officer of Greenleaf Acquisitions, LLC, a subsidiary of Ford Motor Company, from 1999 to April 2001. From 1996 to 1999, he served as Area Vice President of Safelite/Vistar Autoglass. From 1988 to 1996, he served in various management capacities at Windshields America, Inc., one of the two entities combined to form Vistar, Inc. JOHN R. NORDIN joined the Company in November 2003 as Vice President, Chief Information Officer. Mr. Nordin is responsible for information services functions, including software application acquisition and development, computer operations and telecommunications. Prior to joining the Company, Mr. Nordin served as Vice President and Chief Information Officer at A. M. Castle & Co. from 1998 to November 2003. From 1995 to 1998, he served as Vice President and Chief Information Officer at Candle Corporation of America. 26 SCOTT P. PETTIT joined the Company in April 2001 as Senior Vice President, Chief Financial Officer and Secretary. Mr. Pettit is responsible for financial functions, real estate and investor relations. Prior to joining the Company, Mr. Pettit served as Senior Vice President and Chief Financial Officer of Corsolutions Medical Inc. from 1998 to April 2001. From 1996 to 1998, he served as Vice President Finance and Chief Financial Officer of Vistar, Inc. From 1994 to 1996, he served as Senior Vice President and Chief Financial Officer of Globe Glass & Mirror Co., one of the two entities combined to form Vistar, Inc. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon a review of the copies of such reports furnished to the Company and written representations from such officers, directors and greater than ten percent shareholders, all Section 16(a) filing requirements applicable to the Company's directors, executive officers and greater than ten percent shareholders have been met, except that Mr. Kett was late on one occasion in filing his Form 3 "Initial Statement of Beneficial Ownership of Securities" and Form 4 "Statement of Changes in Beneficial Ownership". ITEM 11. EXECUTIVE COMPENSATION. The following table provides certain information concerning the compensation earned, for services rendered in all capacities to the Company and its subsidiaries during each of the last three years, by the Company's Chief Executive Officer and each of the Company's other four most highly compensated executive officers in 2004, collectively the "Named Executive Officers." SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------------------- ---------------------------------------------------- RESTRICTED SECURITIES NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER POSITION YEAR SALARY($)(1) BONUS($) COMPENSATION($) AWARDS($)(2) OPTIONS(#) COMPENSATION($) - ------------------------------ ------- ------------ --------- --------------- ------------ ---------- --------------- Thomas C. O'Brien 2004 $ 400,000 $ - $ 18,000(3) $ 663,000 - $ 13,000(4) President and Chief 2003 400,000 163,000 18,000(3) 207,750 60,000(5) 6,000(4) Executive Officer 2002 350,000 - 18,000(3) - 60,000(6) 8,000(4) David R. Montgomery ......... 2004 257,000 - 18,000(3) 331,500 - 8,000(4) Sr. Vice President and 2003 257,000 87,000 18,000(3) 103,875 30,000(5) 8,000(4) Chief Operating Officer 2002 232,000 - 18,000(3) - 30,000(6) 7,000(4) Scott P. Pettit ............. 2004 230,000 - 18,000(3) 331,500 - 7,000(4) Sr. Vice President and 2003 230,000 76,000 18,000(3) 103,875 30,000(5) 8,000(4) Chief Financial Officer 2002 205,000 - 18,000(3) - 30,000(6) 7,000(4) Donald J. Hermanek ......... 2004 220,000 - 18,000(3) 331,500 - 9,000(4) Sr. Vice President - Sales 2003 220,000 75,000 18,000(3) 103,875 30,000(5) 7,000(4) and Marketing 2002 200,000 - 18,000(3) - 30,000(6) 7,000(4) John R. Nordin .............. 2004 180,000 - 18,000(3) 331,500 - 7,000(4) Sr. Vice President, Chief 2003 21,000(7) - 1,500 103,875 30,000(8) - Informational Officer 2002 - - - - - -
(1) Includes salary deferred under the Company's 401(k) Plan and Internal Revenue Service Section 125 Plan. All amounts are rounded to the nearest thousand. 27 (2) The market value of the Common Stock underlying restricted stock units (RSUs) was determined by using the closing price per share of the Common Stock on the applicable grant date, as reported on the NASDAQ Stock Market, and without recognizing any diminution in value attributable to the restrictions on RSUs. Fiscal 2004 RSUs were granted on November 19, 2004 (the closing price on that date was $22.10) and vest in a series of equal and successive annual installments with the first installment to vest on November 19, 2005. Fiscal 2003 RSUs were granted on November 14, 2003 (the closing price on that date was $13.85) and vest in a series of equal and successive annual installments with the first installment vested on November 14, 2004. The restricted shares will fully vest on an accelerated basis upon the Company's achievement of a predetermined level of earnings per share in any given fiscal year during the four year vesting period. (3) Reflects amounts paid by the Company pursuant to an automobile allowance. (4) Represents matching contributions that the Company made to its 401(k) Plan on behalf of the Named Executive Officer. (5) Includes a grant of options to purchase shares of Common Stock at a price of $13.85 per share pursuant to a resolution adopted by the Board of Directors on September 16, 2003. (6) Includes a grant of options to purchase shares of Common Stock at a price of $15.50 per share pursuant to a resolution adopted by the Board of Directors on December 4, 2002. (7) Mr. Nordin became an employee on November 14, 2003. The salary paid to Mr. Nordin for the 2003 fiscal year was based on his employment agreement dated October 23, 2003. (8) Mr. Nordin received a grant of options to purchase 30,000 shares of Common Stock at a price of $13.85 per share pursuant to his employment agreement dated October 23, 2003. STOCK OPTIONS There were no stock options granted to the Named Executive Officers during 2004. The following table sets forth information with respect to unexercised options held as of the end of the 2004 fiscal year by the Named Executive Officers. No stock appreciation rights were outstanding at the end of 2004. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END ($)(1)(2) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Thomas C. O'Brien............. 345,000 75,000 $ 3,728,550 $ 573,750 David R. Montgomery........... 97,500 62,500 891,375 529,925 Scott P. Pettit............... 97,500 62,500 891,375 529,925 Donald J. Hermanek............ 77,500 47,500 562,885 369,095 John R. Nordin................ 7,500 22,500 62,325 186,975
- ---------- (1) "In-the-money" options are options whose exercise prices were less than the market price of the Common Stock on December 26, 2004, the last day of the 2004 fiscal year. (2) Based upon the market price of $22.16 per share, which was the closing price per share of the Common Stock on the NASDAQ National Market on December 26, 2004, less the exercise price payable per share 28 COMPENSATION OF DIRECTORS Since 2003, non-employee directors are entitled to receive an annual retainer fee of $22,000, a $1,000 fee for each regularly scheduled Board meeting attended in person, a $500 fee for each committee meeting attended in person, a $250 fee for each Board or committee meeting attended by phone, an annual fee of $3,000 if such non-employee director served as the Chairperson of the Governance Committee, and an annual fee of $5,000 if such non-employee director served as the Chairperson of the Audit Committee. Non-employee directors are also reimbursed for expenses incurred in attending Board and committee meetings. Employee directors are not compensated for their services as directors of the Company. Each non-employee director is also eligible to receive periodic option grants for shares of Common Stock pursuant to the automatic option grant program in effect under the Company's 2003 Stock Incentive Plan. Under this automatic option grant program, each individual who becomes a non-employee Board member is granted an option to purchase 10,000 shares of Common Stock on the date such individual joins the Board. In addition, each non-employee director is also entitled to receive an automatic option to purchase 5,000 shares of Common Stock on the last business day of the second quarter of each fiscal year during which such individual continues to serve on the Board. Each automatic option grant becomes exercisable in four successive quarterly installments with the first such installment to become exercisable on the last day of the fiscal quarter immediately following the grant date, provided the non-employee director continues to serve on the Board. However, each option will become immediately exercisable for all of the option shares in the event of a change of control of the Company. Melvin R. Martin served as Director of the Company from 1993 until his retirement in August 2004. Mr. Martin and the Company are parties to an agreement pursuant to which Mr. Martin is compensated on a daily basis for consulting services, primarily in the areas of acquisitions and real estate. Mr. Martin received no compensation pursuant to the agreement in 2004. EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS The following is a description of the employment or consulting agreements in effect between the Company and the Named Executive Officers. The compensation paid to Thomas C. O'Brien, President and Chief Executive Officer of the Company, for the 2004 fiscal year was based on an amended and restated employment agreement (the "O'Brien Agreement") dated April 2, 2001. Under the O'Brien Agreement, Mr. O'Brien is entitled to an annual base salary of $350,000 and a performance incentive bonus of 40% of his annual salary based upon the achievement of target performance goals. Mr. O'Brien will be entitled to receive in excess of 40% of his annual salary as a performance incentive if the Company's performance exceeds the goals and objectives determined by the Board. Also, pursuant to the O'Brien Agreement, the Company granted Mr. O'Brien an option to purchase 300,000 shares of Common Stock in November 2000, which are exercisable in four equal annual installments. The compensation paid to David R. Montgomery, Sr. Vice President and Chief Operating Officer, for the 2004 fiscal year was based on an April 2, 2001 employment agreement (the "Montgomery Agreement"). Under the Montgomery Agreement, Mr. Montgomery is entitled to an annual base salary of $225,000 and a performance incentive bonus of 40% of his annual salary based upon the achievement of target performance goals. Pursuant to the Montgomery Agreement, the Company also paid Mr. Montgomery a signing bonus of $25,000 and granted him an option to purchase 100,000 shares of the Common Stock in April 2001, which are exercisable in four equal annual installments. The compensation paid to Scott P. Pettit, Sr. Vice President and Chief Financial Officer, for the 2004 fiscal year was based on an April 2, 2001 employment agreement (the "Pettit Agreement"). Under the Pettit Agreement, Mr. Pettit is entitled to an annual base salary of $195,000 and a performance incentive bonus of 40% of his annual salary based upon the achievement of target performance goals. Pursuant to the Pettit Agreement, the Company paid Mr. Pettit a signing bonus of $35,000 and granted him an option to purchase 100,000 shares of Common Stock in April 2001, which are exercisable in four equal annual installments. 29 The compensation paid to John R. Nordin, Sr. Vice President and Chief Information Officer, for the 2004 fiscal year was based on an October 23, 2003 employment agreement (the "Nordin Agreement"). Under the Nordin Agreement, Mr. Nordin is entitled to an annual base salary of $180,000 and a performance incentive bonus of 50% of his annual salary based upon the achievement of target performance goals. Pursuant to the Nordin Agreement, the Company granted him an option to purchase 30,000 shares of Common Stock, which are exercisable in four equal annual installments. Additionally, each of the agreements for the above Named Executive Officers has a change of control provision that provides that in the event that the Named Executive Officer's employment with the Company is terminated involuntarily or without cause within two years of the effective date of a change in control (as defined therein), the Named Executive Officer will be entitled to receive 18 months worth of annual base salary, accrued obligations, plus continued coverage under the Company's health benefit plans for up to 18 months, unless the Named Executive Officer first obtains full time employment elsewhere and provided, however, that the Named Officer properly elects coverage pursuant to COBRA. EXECUTIVE SEVERANCE PLAN Effective August 9, 2000, the Company adopted a severance plan for its executive officers (the "Executive Plan"), which provides certain severance benefits to executive officers in the event an executive officer's employment with the Company is terminated under certain circumstances. Unless otherwise increased by the Company in its sole discretion, if the Company terminates the executive officer's employment for any reason other than "for Cause" (as defined therein), or if the executive officer voluntarily terminates employment with the Company and all of its affiliates for "good reason", (as defined therein), the executive officer will receive, in exchange for providing the Company with a duly executed "Waiver and Release Agreement", a benefit, generally representing a one-month severance pay for each year of service with a minimum severance pay of six months and a maximum severance pay of 12 months, in an amount equal to the product of (i) times (ii), where: (i) represents the sum of: (A) the executive officer's annualized base salary at the time the executive officer's employment is terminated, plus (B) the executive officer's average annual bonus received over the eight fiscal quarters of the Company immediately preceding the Company's fiscal quarter during which the executive officer's employment is terminated, without exceeding the executive officer's target bonus for the Company's fiscal year during which the executive officer's employment is terminated, plus (C) the executive officer's auto allowance for the fiscal year during which the executive officer's employment is terminated; and (ii) represents a fraction the numerator of which is the number of whole completed years of employment with the Employer or any of its Affiliates, but not less than six nor more than 12, and the denominator of which is 12; provided, however, that in the event that the executive officer's termination of employment occurs within one year following the date on which a new chief executive officer is hired by the Company, the executive officer shall receive 12 months of severance pay generally calculated on the basis of the amounts set forth; provided, however, that the amount taken into account as the executive officer's bonus shall be equal to the executive officer's target bonus for the fiscal year during which the executive officer's employment is terminated. Under the Executive Plan, an executive officer is not entitled to any benefit if the Company terminates such executive officer's employment for cause, if the executive officer voluntarily terminates employment with the Company for any reason other than good reason, or if the executive officer's employment is terminated as a result of death or disability. 30 Furthermore, to the extent that an executive officer has an employment agreement, he is not entitled to severance benefits under the Executive Plan. Currently, there are no executive officers without an employment agreement. CODE OF ETHICS The Company's Board of Directors has adopted a Code of Ethics that applies to all of its directors, officers and employees, including its principal executive officer, principal financial officer, controller and principal accounting officer. The Company's Code of Ethics is available on its Web-site at www.iaai.com. Any amendments to, or waivers from, the Code of Ethics will be disclosed on the Company's Web site within the prescribed time period. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. OWNERSHIP OF SECURITIES The following table sets forth certain information known to the Company regarding the ownership of Common Stock as of December 26, 2004 (except as otherwise indicated) with respect to the beneficial ownership of shares of the Company's common stock by (1) each director of the Company, (2) each of the Chief Executive Officer and the other four most highly compensated executive officers of the Company for fiscal 2004 (the "Named Executive Officers"), (3) all directors and executive officers of the Company as a group, and (4) each person, who, to the best of the Company's knowledge, beneficially owns more than 5% of the Company's common stock.
NUMBER OF PERCENT OF TOTAL NAME AND ADDRESS SHARES SHARES OUTSTANDING(1) ---------------- --------- --------------------- ValueAct Capital Partners, L.P.(2)(4)(5).. 3,387,400 28.7% One Maritime Plaza, Suite 1400 San Francisco, CA 94111 Dimensional Fund Advisors (3) ............ 970,559 8.2% 1299 Ocean Ave., 11th Fl. Santa Monica, CA 90401 Peter H. Kamin(2)(4) ..................... 3,492,357 29.6% Todd F. Bourell(2)(5) .................... 3,399,900 28.8% Thomas C. O'Brien(6) ..................... 392,442 3.3% Scott P. Pettit(6) ....................... 125,983 1.1% David R. Montgomery(6) ................... 122,541 1.0% Donald J. Hermanek(6) .................... 100,743 * Maurice A. Cocca(6) ...................... 69,500 * John K. Wilcox(6) ........................ 32,500 * John R. Nordin(6) ........................ 29,649 * John W. Kett(6) .......................... 26,211 * Philip B. Livingston(6) .................. 18,200 * Sidney L. Kerley(6) ...................... 11,052 * All officers (including Named Executive Officers) and Directors as a group (12 persons)(7) ................... 4,433,678 37.6%
- ---------- * Less than one percent of the outstanding shares of IAAI common stock. (1) Percentage of beneficial ownership is calculated assuming 11,792,385 shares of Common Stock were outstanding on December 26, 2004. This percentage includes any shares of Common Stock of which such individual or entity had the right to acquire beneficial ownership within sixty days of December 26, 2004, including, but not limited to, the exercise of an option; however, such shares of Common Stock shall not be 31 deemed outstanding for the purpose of computing the percentage beneficially owned by any other individual or entity. (2) This information is based on Schedule 13D filed with the SEC jointly by ValueAct Capital Partners, L.P. ("ValueAct Partners"), ValueAct Capital Partners II, L.P. ("ValueAct Partners II"), ValueAct Capital International, Ltd. ("ValueAct International"), ValueAct Capital Master Fund, L.P., ValueAct Capital Partners Co-Investors, L.P., VA Partners, L.L.C ("VA Partners"), Jeffrey W. Ubben, George F. Hamel, Jr. and Peter H. Kamin on February 28, 2005 and reflects shares of Common Stock held as of February 25, 2005. Messrs. Hamel, Kamin and Ubben are each managing members, principal owners and controlling persons of VA Partners and directors and principal executive officers of ValueAct International. Shares beneficially owned by each of ValueAct Partners, ValueAct Partners II, ValueAct Master Fund and Value Act Co-Investors and ValueAct International, are reported as beneficially owned by VA Partners, as investment manager or general partner of each of such investment partnerships, and by the managing members as controlling persons of the general partner. VA Partners and the managing members also, directly or indirectly, may own interests in one or both of such partnerships from time to time. By reason of such relationships, each of the partnerships is reported as having shared power to vote or to direct the vote, and shared power to dispose or direct the disposition of, such shares of Common Stock with VA Partners and the Managing Members. ValueAct Partners is the beneficial owner of 1,550,310 shares of Common Stock, representing approximately 13.4% of the outstanding shares of Common Stock. ValueAct Partners II is the beneficial owner of 219,692 shares of Common Stock, representing approximately 1.9% of the outstanding shares of Common Stock. ValueAct International is the beneficial owner of 0 shares of Common Stock. ValueAct Master Fund is the beneficial owner of 3,345,261 shares of Common Stock, representing 29.0% of the Issuer's outstanding Common Stock. ValueAct Co-Investors is the beneficial owner of 42,139 shares of Common Stock, representing 0.4% of the Issuer's outstanding Common Stock. VA Partners, Mr. Ubben, Mr. Kamin and Mr. Hamel may be deemed the beneficial owner of an aggregate of 3,387,400 shares of the Common Stock, representing approximately 29.3% of the outstanding shares of Common Stock. In addition to the 3,387,400 shares of Common Stock that Mr. Kamin may be deemed to beneficially own by reason of his being a managing member of VA Partners, Mr. Kamin also personally owns 58,457 shares of Common Stock (or when combined with the 3,387,400 shares of Common Stock he may be deemed to beneficially own by reason of his being a managing member, 29.8% of the outstanding shares of Common Stock). This amount also includes options to purchase 78,000 shares of Common Stock that are exercisable on December 26, 2004 or will become exercisable within 60 days after that date, consisting of (a) 46,500 options granted to Mr. Kamin, (b) 19,000 options granted to Mr. Ubben, and (c) 12,500 granted to Mr. Bourell. These options were assigned to ValueAct Partners by Messrs. Kamin, Ubben and Bourell. The options are owned directly by ValueAct Partners and indirectly by ValueAct Partners II and ValueAct International, as general partners of ValueAct Partners, and indirectly by Messrs. Kamin, Ubben and Bourell as managing members and controlling persons of VA Partners. (3) This information is based on a Schedule 13G filed by the Dimensional Fund Advisors, Inc. ("Dimensional") with the SEC on February 9, 2005 and reflects shares of Common Stock held as of December 31, 2004. According to such Schedule 13G, Dimensional has sole voting and dispositive power with respect to all the shares. (4) This amount includes 58,457 shares of Common Stock over which Mr. Kamin has sole voting and dispositive power and 3,387,400 shares of Common Stock owned by ValueAct Partners over which Mr. Kamin shares voting and dispositive power. This information is based on a Schedule 13D filed by ValueAct Partners with the SEC on May 25, 2004 and reflects shares of Common Stock held as of May 18, 2004. This amount also includes options to purchase 46,500 shares of Common Stock that are exercisable on December 26, 2004 or will become exercisable within 60 days after that date. These options were assigned to ValueAct Partners and Mr. Kamin disclaims beneficial ownership of the underlying shares of Common Stock. (5) Represents 3,387,400 shares owned by ValueAct Partners over which Mr. Bourell shares voting and dispositive power. This amount also includes options to purchase 12,500 shares of Common Stock that are exercisable on December 26, 2004 or will become exercisable within 60 days after that date. These options were assigned to ValueAct Partners and Mr. Bourell disclaims beneficial ownership of the underlying shares of Common Stock. 32 (6) Includes that portion of options to purchase shares of Common Stock granted under the 1991 Stock Option Plan and 2003 Stock Incentive Plan that are exercisable on December 26, 2004 or will become exercisable within 60 days after that date: Mr. O'Brien - 345,000 shares; Mr. Pettit - 97,500 shares; Mr. Montgomery - 97,500 shares; Mr. Hermanek - 77,500 shares; Mr. Cocca - 29,500 shares; Mr. Wilcox - 17,500 shares; Mr. Livingston - 12,500 shares; Mr. Kett - 9,375 shares; Mr. Kerley - 8,125 shares and Mr. Nordin - 7,500 shares. (7) Includes options to purchase shares of Common Stock granted under the 1991 Stock Option Plan and 2003 Stock Incentive Plan that are exercisable on December 26, 2004 or will become exercisable within 60 days after that date. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. M & M Acquisition. In January 1992, the Company purchased the auto salvage pool operations of M & M Auto Storage Pool, Inc. ("M & M"), and acquired an option to purchase the original 35 acres of land on which M & M's operation is located. Melvin R. Martin, the founder, chief executive officer and principal shareholder of the auto salvage operation, was elected a director of the Company in January 1992. Mr. Martin retired from the Board in August 2004. The Company is required to pay rent to Mr. Martin during the 10-year term, or extended term, of the lease relating to the real property owned by Mr. Martin. In 2004, the Company paid $557,000 pursuant to the lease. The Company believes the terms of the lease are no less favorable than those available from unaffiliated third party lessors or licensors. Dallas, Texas Lease. The Company leases certain property located in Dallas, Texas from a partnership in which Mr. Martin is a partner. In 2004, the Company paid $644,000 in rent under this lease. The Company believes the terms of the lease are no less favorable than those available from unaffiliated third party lessors. Temporary Use License Agreement. On March 1, 2004, the Company entered into a Temporary License Agreement with Mr. Martin for the month-to-month rental of additional property adjacent to the Company's Phoenix facility. Pursuant to the Temporary License Agreement, the Company is expected to pay Mr. Martin $3,000 per month in additional rents. In 2004, the Company paid $30,000 pursuant to the temporary license agreement. The Company believes the terms of the Temporary License Agreement are no less favorable than those available from unaffiliated third party lessors or licensors. Mr. Martin and the Company are parties to an agreement pursuant to which Mr. Martin is compensated on a daily basis for consulting services, primarily in the areas of acquisitions and real estate. Mr. Martin received no compensation pursuant to the agreement in 2004. On February 15, 2001, the Company entered into a Shareholder Agreement (the "Shareholder Agreement") with ValueAct Capital Partners, L.P., ValueAct Capital Partners II, L.P., VA Partners, LLC, Jeffrey W. Ubben, Peter H. Kamin, and George F. Hamel. Pursuant to the terms of the Shareholder Agreement, Mr. Kamin and Mr. Ubben were elected as members of the Board in 2001. Mr. Ubben resigned from the Board on September 30, 2003 and was replaced by Todd F. Bourell on October 17, 2003. ITEM 14. PRINCIPAL ACCOUNANT FEES AND SERVICES The Company paid KPMG LLP the following fees for services provided for the fiscal years 2004 and 2003:
2004 2003 -------- -------- Audit Fees $640,000 $355,000 All Other Fees 26,000 17,000 -------- -------- Total $666,000 $372,000 ======== ========
In the above table, "audit fees" include fees billed to the Company for professional services in connection with the audit of the Company's consolidated financial statements and internal controls included in its Annual Report on Form 10-K and 33 review of financial statements included in its Quarterly Reports on Form 10-Q, or for services that are normally provided by KPMG LLP in connection with statutory and regulatory filings or engagements. "All other fees" include fees related to the audit of the Company's defined contribution employee benefit plan. 34 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Page ---- (a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following Consolidated Financial Statements of Insurance Auto Auctions, Inc. and its subsidiaries are filed as part of this Annual report on Form 10-K: Report of Independent Registered Public Accounting Firm............. 41 Consolidated Balance Sheets......................................... 42 Consolidated Income Statements...................................... 43 Consolidated Statements of Shareholders' Equity..................... 44 Consolidated Statements of Cash Flows............................... 45 Notes to Consolidated Financial Statements.......................... 47
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because the matter or conditions are not present or the information required to be set forth therein is included in the Consolidated Financial Statements and related Notes thereto. 3. EXHIBITS See Item 15(c) below. (b) REPORTS ON FORM 8-K. The Company filed a current report on Form 8-K, dated October 22, 2004, which contained a press release announcing financial results for the quarter ended September 26, 2004. The Company filed a current report on Form 8-K, dated February 23, 2005, which contained a press release announcing a Definitive Merger Agreement to be Acquired by Kelso & Company. The Company filed a current report on Form 8-K, dated March 14, 2005, which contained a press release announcing financial results for the quarter ended December 26, 2004. 35 (C) EXHIBITS
Exhibit No Description - ---------- ----------- 2 (19) Agreement and Plan of Merger by and among Insurance Auto Auctions, Inc. Axle Holdings, Inc. and Axle Merger Sub, Inc. dates as of February 22, 2005. 3.1(7) Articles of Incorporation of the Registrant, as filed with the Illinois Secretary of State on August 7, 1997. 3.2(8) Bylaws of the Registrant. 3.3(9) Bylaws of the Registrant, as amended as of March 21, 2001. 4.1(1) Specimen Stock Certificate. 4.2(4) Registration Agreement dated December 1, 1993, by and among the Registrant and Tech-Cor. 4.3(10)* Shareholder Agreement, dated February 15, 2001, among the Company, ValueAct Capital Partners, L.P., ValueAct Capital Partners II, L.P., VA Partners, LLC, Jeffrey W. Ubben, Peter H. Kamin and George F. Hamel, Jr. 4.4(10)* Registration Rights Agreement, dated February 15, 2000, among the Company, ValueAct Capital Partners, L.P. and ValueAct Capital Partners II, L.P. 9(19) Voting Agreement dated as of February 22, 2005 by and among Axle Holdings, Inc., ValueAct Capital Partners, L.P., ValueAct Capital Partners II, L.P., ValueAct Capital Master Fund, L.P. and ValueAct Capital Partners Co-Investors, L.P. and together with Value Act Capital Partners, ValueAct Capital Partners II and ValueAct Master, each a "Shareholder" and collectively, the "Shareholders". 10.1(5)* Form of Notice of Grant of Stock Option -- employee, officer. 10.2(3)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- employee. 10.3(3)* Form of Stock Option Agreement: Non-Employee Director, Automatic Option Grant, Insurance Auto Auctions, Inc. Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option). 10.4(3)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- employee. 10.5(3)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- officer. 10.6(3)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- officer. 10.7(6)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1995 Supplemental Stock Option Plan.
36 10.8(18)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 2003 Stock Incentive Plan replacing the 1991 Stock Option Plan as amended and restated. 10.9(2) Facilities Lease Agreement dated January 17, 1992, by and between Melvin R. Martin and MASP. 10.10(16) Facilities Lease Agreement dated August 7, 2003, by and between MRM Investments, L.L.P. and Insurance Auto Auctions, Inc. as amended. 10.11(16) Facilities Lease Agreement dated August 7, 2003, by and between MJB Properties and Insurance Auto Auctions, Inc. as amended. 10.12(16) Temporary Use License Agreement dated March 1, 2004 by and between MRM Investments Limited Partnership and Insurance Auto Auctions, Inc. 10.13(4) Lease, dated December 1, 1993, by and between Allstate Insurance Company and BCAC. 10.14(16) Second Amended and Restated Credit Agreement, dated as of March 19, 2004, among the Registrant and the lenders from time to time parties hereto, and LaSalle Bank National Association, as Administrative Agent. 10.15(7)* Form of Change of Control Employment Agreement by and between the Company and certain of its executive officers. 10.16(14) Credit Agreement between the Registrant and LaSalle National Bank dated as of February 15, 2002. 10.17(14) Rate Swap Agreement pursuant to the Credit Agreement between the Registrant and LaSalle National Bank dated as of March 13, 2002. 10.18(15) Amended and Restated Credit Agreement between the Company and LaSalle National Bank dated as of June 25, 2003. 10.19(12)* Insurance Auto Auctions, Inc. Employee Stock Purchase Plan, as amended as of June 30, 2001. 10.20(8) Form of Indemnification Agreement dated as of February 24, 1999 by and between the Company and its Directors and Executive Officers. 10.21(13)* Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as amended and restated as of June 19, 2002. 10.22(9)* Executive Severance Plan for Officers dated August 9, 2000, by and between the Company and the Company's executive officers. 10.23(9)* Employment agreement, dated November 17, 2000, by and between the Company and Thomas C. O'Brien. 10.24(11)* Amended and Restated Employment Agreement dated April 2, 2001 by and between the Company and Thomas C. O'Brien. 10.25(11)* Employment Agreement dated April 2, 2001 by and between the Company and David R. Montgomery. 10.26(11)* Employment Agreement dated April 2, 2001 by and between the Company and Scott P. Pettit. 10.27(13)* Insurance Auto Auctions, Inc. 2002 Long Term Incentive Plan.
37 10.28(16)* Employment Agreement dated October 23, 2003 by and between the Company and John R. Nordin. 10.29(17) Lease Agreement dated April 13, 2004, by and between Westbrook Corporate Center, L.L.C. and Insurance Auto Auctions, Inc. 10.30(18)* Employment Agreement dated July 23, 2004 by and between the Company and John Kett. 10.31(19)* 2005 Shareholder Value Incentive Plan. 10.32* Employment Agreement dated October 6, 2004 by and between the Company and Sidney L. Kerley. 10.33 Waiver dated March 3, 2005 to the Second Amended and Restated Credit Agreement dated as of March 19, 2004 by and among the Company and LaSalle Bank National Association. 10.34 Lease Agreement dated September 20, 2004 by and between the Company and MCI. 10.35 Lease Agreement dated January 23, 2004 by and between the Company and Savin Corporation. 10.36(20) Insurance Auto Auctions, Inc Employee Stock Purchase Plan, as amended as of June 30, 2004. 21 Subsidiaries of the Registrant. 23 Consent of Independent Registered Public Accounting Firm. 24 Power of Attorney (see signatures page). 31.1 Certification of Thomas C. O'Brien, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Scott P. Pettit, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Thomas C. O'Brien, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Scott P. Pettit, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference from an exhibit filed with the Registrant's Registration Statement on Form S-1 (File No. 33-43247) declared effective by the Securities and Exchange Commission ("SEC") on November 20, 1991. (2) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. 0-19594) filed with the SEC on January 31, 1992. (3) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1992. (4) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. 0-19594) filed with the SEC on December 15, 1993. (5) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1993. 38 (6) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended June 30, 1997. (7) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1997. (8) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended March 31, 1999. (9) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 2000. (10) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended April 1, 2001. (11) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended July 1, 2001. (12) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 30, 2001. (13) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form S-8 (File No. 0-19594) filed with the SEC on August 5, 2002. (14) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 29, 2002. (15) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended June 29, 2003. (16) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 28, 2003. (17) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended March 28, 2004. (18) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended June 27, 2004. (19) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. 0-19594) filed with the SEC on February 23, 2005. (20) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form S-8 (File No. 0-19594) filed with the SEC on July 1, 2004. * This item is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 601(b)(10)(iii) of Regulation S-K. 39 SIGNATURES Pursuant to the requirements 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. By: /s/ Thomas C. O'Brien ------------------------------------- President and Chief Executive Officer Date: March 14, 2005 POWER OF ATTORNEY We, the undersigned directors and executive officers of Insurance Auto Auctions, hereby severally constitute Thomas C. O'Brien and Scott P. Pettit, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the annual Report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendment to said Annual Report on Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 14th day of March, 2005. /s/ Thomas C. O'Brien President and Chief Executive Officer, Director - -------------------------- (Principal Executive Officer) Thomas C. O'Brien /s/ Scott P. Pettit Senior Vice President and Chief Financial Officer - -------------------------- (Principal Financial Officer) Scott P. Pettit (Principal Accounting Officer) /s/ Peter H. Kamin Chairman of the Board of Directors - -------------------------- Peter H. Kamin /s/ Todd F. Bourell Director - -------------------------- Todd F. Bourell /s/ Maurice A. Cocca Director - -------------------------- Maurice A. Cocca /s/ Philip B. Livingston Director - -------------------------- Philip B. Livingston /s/ John K. Wilcox Director - -------------------------- John K. Wilcox 40 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Insurance Auto Auctions, Inc.: We have audited the accompanying consolidated balance sheets of Insurance Auto Auctions, Inc. and subsidiaries as of December 26, 2004 and December 28, 2003, and the related consolidated income statements, statements of shareholders' equity, and cash flows for each of the fiscal years in the three-year period ended December 26, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Insurance Auto Auctions, Inc. and subsidiaries as of December 26, 2004 and December 28, 2003, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 26, 2004, in conformity with U.S. generally accepted accounting principles. /s/ KPMG Chicago, Illinois March 11, 2005 41 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (dollars in thousands except per share amounts)
DECEMBER 26, DECEMBER 28, 2004 2003 ------------ ------------ ASSETS Current assets: Cash $ 13,325 $ 15,486 Accounts receivable, net 50,443 48,375 Inventories 14,498 13,602 Deferred income taxes 4,693 4,180 Other current assets 1,613 3,099 --------- --------- Total current assets 84,572 84,742 --------- --------- Property and equipment, net 74,684 60,187 Deferred income taxes 6,481 5,608 Intangible assets, net 1,747 2,101 Goodwill, net 137,494 135,062 Other assets 482 93 --------- --------- $ 305,460 $ 287,793 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 38,505 $ 36,658 Accrued liabilities 13,513 12,556 Obligations under capital leases 1,094 2,822 Income taxes payable 1,067 - Obligation under line of credit 6,000 - Current installments of long-term debt 7,512 7,547 --------- --------- Total current liabilities 67,691 59,583 --------- --------- Deferred income taxes 20,729 17,748 Other liabilities 4,353 2,598 Obligation under capital leases 661 1,891 Long-term debt, excluding current installments 9,375 16,887 --------- --------- Total liabilities 102,809 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; 12,709,758 shares issued and 11,569,156 outstanding as of December 26, 2004; and 12,325,482 shares issued and 11,518,273 outstanding as of December 28, 2003 12 12 Additional paid-in capital 151,793 145,856 Treasury stock, 906,480 shares at December 26, 2004 and 807,209 shares at December 28, 2003 (9,637) (8,012) Deferred compensation related to restricted stock (4,343) (892) Accumulated other comprehensive income (loss) (186) (625) Retained earnings 65,012 52,747 --------- --------- Total shareholders' equity 202,651 189,086 --------- --------- $ 305,460 $ 287,793 ========= =========
See accompanying Notes to Consolidated Financial Statements 42 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Income Statements (dollars in thousands except per share amounts)
2004 2003 2002 --------- --------- --------- Revenues: Fee income $ 208,743 $ 169,687 $ 162,845 Vehicle sales 31,436 39,963 71,352 --------- --------- --------- 240,179 209,650 234,197 Cost of sales: Branch cost 157,297 135,157 125,530 Vehicle cost 26,694 35,301 65,463 --------- --------- --------- 183,991 170,458 190,993 --------- --------- --------- Gross profit 56,188 39,192 43,204 Operating expense: Selling, general and administrative 34,978 30,225 27,711 Loss/(gain) on sale of property and equipment 301 54 (104) Business transformation costs - 3,902 8,067 --------- --------- --------- Earnings from operations 20,909 5,011 7,530 Other (income) expense: Interest expense 1,572 1,505 678 Other income (67) (130) (171) --------- --------- --------- Earnings before income taxes 19,404 3,636 7,023 Income taxes 7,139 1,304 3,015 --------- --------- --------- Net earnings $ 12,265 $ 2,332 $ 4,008 ========= ========= ========= Earnings per share: Basic $ 1.06 $ .20 $ .33 ========= ========= ========= Diluted $ 1.04 $ .20 $ .32 ========= ========= ========= Weighted average shares outstanding (in thousands): Basic 11,526 11,652 12,235 Effect of stock options 288 80 296 --------- --------- --------- Diluted 11,814 11,732 12,531 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements 43 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (dollars in thousands)
Common Stock Deferred Accumulated ------------------- Additional Compensation Other Total Number Paid-in Treasury Restricted Comprehensive Retained Shareholders' of shares Amount Capital Stock Stock) Income (Loss) Earnings Equity ---------- -------- ---------- ---------- ------------ ------------- ---------- ------------- Balance at December 30, 2001 12,162,290 $ 12 $ 142,575 $ -- $ -- $ -- $ 46,407 $ 188,994 ========== ======== ========== ========== ============ ============= ========== ============= Net earnings -- -- -- -- -- -- 4,008 4,008 Other comprehensive loss Change in fair value of interest rate swap contract (net of tax benefit, $467) -- -- -- -- -- (745) -- (745) ------------- Comprehensive income 3,263 Stock options exercised 115,555 -- 1,341 -- -- -- -- 1,341 Tax benefit related to stock options exercised -- -- 247 -- -- -- -- 247 Shares issued for the employee stock purchase plan 14,754 -- 257 -- -- -- -- 257 ---------- -------- ---------- ---------- ------------ ------------- ---------- ------------- Balance at December 29, 2002 12,292,599 $ 12 $ 144,420 $ -- $ -- $ (745) $ 50,415 $ 194,102 ========== ======== ========== ========== ============ ============= ========== ============= Net earnings -- -- -- -- -- -- 2,332 2,332 Other comprehensive income - Change in fair value of interest rate swap contract (net of tax, $78) -- -- -- -- -- 120 -- 120 ------------- Comprehensive income 2,452 Stock options exercised 6,920 -- 127 -- -- -- -- 127 Tax benefit related to stock options exercised -- -- 15 -- -- -- -- 15 Shares issued for the employee stock purchase plan 25,963 -- 373 -- -- -- -- 373 Treasury stock purchased (807,209) -- -- (8,012) -- -- -- (8,012) Deferred compensation relating to restricted stock grants -- -- 921 -- (921) -- -- -- Amortization of deferred compensation -- -- -- -- 29 -- -- 29 ---------- -------- ---------- ---------- ------------ ------------- ---------- ------------- Balance at December 28, 2003 11,518,273 $ 12 $ 145,856 $ (8,012) $ (892) $ (625) $ 52,747 $ 189,086 ========== ======== ========== ========== ============ ============= ========== ============= Net earnings Other comprehensive income - 12,265 12,265 Change in fair value of interest rate swap contract (net of tax, $273) -- -- -- -- -- 439 -- 439 ------------- Comprehensive income 12,704 Stock options exercised 104,231 -- 1,297 -- -- -- -- 1,297 Tax benefit related to stock options exercised -- -- 275 -- -- -- -- 275 Shares issued for the employee stock purchase plan 29,298 -- 329 -- -- -- -- 329 Treasury stock purchased (99,271) -- -- (1,625) -- -- -- (1,625) Deferred compensation relating to restricted stock grants -- -- 4,036 -- (4,036) -- -- -- Amortization of deferred compensation -- -- -- -- 585 -- -- 585 Restricted stock released 16,625 -- -- -- -- -- -- -- ---------- -------- ---------- ---------- ------------ ------------- ---------- ------------- Balance at December 26,2004 11,569,156 $ 12 $ 151,793 $ (9,637) $ (4,343) $ (186) $ 65,012 $ 202,651 ========== ======== ========== ========== ============ ============= ========== =============
See accompanying Notes to Consolidated Financial Statements 44 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (dollars in thousands)
2004 2003 2002 ---------- -------- -------- Cash flows from operating activities: Net earnings $ 12,265 $ 2,332 $ 4,008 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 12,985 10,661 9,901 Loss (gain) on disposal of fixed assets 301 54 (104) Loss (gain) on change in fair market value of derivative - (307) 307 Deferred compensation related to restricted stock 585 29 - Deferred income taxes 1,595 788 2,827 Tax benefit related to employee stock compensation 275 15 247 Changes in assets and liabilities (excluding effects of acquired companies): (Increase) decrease in: Accounts receivable, net (1,536) (752) 9,180 Inventories (896) (2,442) 2,347 Other current assets 1,486 489 594 Other assets (1,438) (975) (64) Increase (decrease) in: Accounts payable 1,612 6,349 (12,795) Accrued liabilities 3,151 (878) 2,289 Income taxes 1,067 0 0 ---------- -------- -------- Total adjustments 19,187 13,031 14,729 ---------- -------- -------- Net cash provided by operating activities 31,452 15,363 18,737 ---------- -------- --------
45 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (dollars in thousands)
2004 2003 2002 -------- -------- -------- Cash flows from investing activities: Capital expenditures $(28,717) $(16,343) $(15,241) Proceeds from sale of investments - - 2,643 Proceeds from disposal of property and equipment 1,520 60 187 Payments made in connection with acquired companies, net of cash acquired (1,912) (7,872) (1,510) -------- -------- -------- Net cash used in investing activities (29,109) (24,155) (13,921) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 1,626 500 1,598 Proceeds from borrowings 6,000 30,000 - Principal payments of long-term debt (7,547) (5,668) (20,041) Purchase of treasury stock (1,625) (8,012) - Principal payments - capital leases (2,958) (2,569) (813) -------- -------- -------- Net cash provided by (used in) financing activities (4,504) 14,251 (19,256) -------- -------- -------- Net increase (decrease) in cash (2,161) 5,459 (14,440) Cash at beginning of year 15,486 10,027 24,467 -------- -------- -------- Cash at end of year $ 13,325 $ 15,486 $ 10,027 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,723 $ 1,639 $ 1,433 ======== ======== ======== Income taxes paid $ 5,404 $ 855 $ 2,492 ======== ======== ======== Income taxes refunded $ 1,011 $ 1,390 $ 3,860 ======== ======== ======== Non-cash financing activities: Capital leases $ - $ 3,375 $ 4,720 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements 46 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES BACKGROUND Insurance Auto Auctions, Inc. (the "Company") operates in a single business segment - providing insurance companies and other vehicle suppliers cost-effective salvage processing solutions including selling total loss and recovered theft vehicles. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial information to conform with the current year presentation. FISCAL PERIODS Fiscal years 2004, 2003 and 2002 each consisted of 52 weeks and ended on December 26, 2004, December 28, 2003 and December 29, 2002, respectively. REVENUE RECOGNITION Revenues (including vehicle sales and fee income) are generally recognized at the date the vehicles are sold at auction. Revenue not recognized at the date the vehicles are sold at auction includes certain buyer-related fees, which are recognized when payment is received. INVENTORIES Inventories are stated at the lower of cost or estimated realizable value. Cost includes the cost of acquiring ownership of total loss and recovered theft vehicles, charges for towing and, less frequently, reconditioning costs. The costs of inventories sold are charged to operations based upon the specific-identification method. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents, accounts receivable, short and long-term debt and derivative financial instruments. The fair values of these instruments approximate their carrying values. GOODWILL IMPAIRMENT As part of an ongoing review of the valuation and amortization of intangible assets, management assesses the carrying value of the Company's intangible assets if facts and circumstances suggest that such assets may be 47 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued impaired. If this review indicates that an asset is impaired as determined by a comparison of the fair value to the carrying amount, including goodwill, the carrying value of the asset would be reduced to its estimated fair market value. The annual impairment test of intangible assets is performed in the first quarter of each year. The fiscal 2004 annual test did not indicate any impairment. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the assets carrying amount to the estimated undiscounted future cash flows expected to be generated by the asset. If the estimated undiscounted future cash flows change in the future, the Company may be required to reduce the carrying amount of an asset to its fair value. USE OF ESTIMATES The Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results will likely differ from these estimates, but management believes that such differences are not material. DEPRECIATION AND AMORTIZATION Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to forty years. Leasehold improvements are amortized on a straight-line basis over their estimated economic useful life or the life of the lease, whichever is less. INCOME TAXES The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards. The effect of a rate change on deferred tax assets and liabilities is recognized in the period of enactment. CREDIT RISK Vehicles are sold generally for cash; therefore, very little credit risk is incurred from the selling of vehicles. Receivables arising from advance charges made on behalf of vehicle suppliers, most of which are insurance companies, are generally satisfied from the net proceeds payable to the vehicle suppliers. A small percentage of vehicles sold do not have sufficient net proceeds to satisfy the related receivables, and in these cases, the receivable is due from the vehicle suppliers. Management performs regular evaluations concerning the ability of its customers and suppliers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. The Company's credit losses for the periods presented are insignificant and have not exceeded management's estimates. RESTRICTED STOCK In 2003, the Company initiated a restricted stock program. Under the Company's restricted stock grant program, shares of common stock of the Company may be granted at no cost to certain officers and key 48 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued employees. Plan participants are entitled to cash dividends and to vote their respective shares received pursuant to the program. Restrictions limit the sale or transfer of these shares over a four-year period. The sale and transfer restrictions on shares received under the program expire at a rate of 25% per year or earlier, on the achievement of certain performance based goals. Upon issuance of shares of common 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 restriction period. In 2003, 66,500 restricted shares were granted. In 2004, 182,600 restricted shares were granted. Compensation expense in 2004 was $0.6 million and in 2003 was less than $0.1 million. Compensation expense was accelerated by $0.3 million in the fiscal year ended December 26, 2004 due to the achievement of certain performance levels. In fiscal 2004 and 2003, there were no forfeitures of restricted shares. STOCK OPTIONS The Company accounts for its fixed plan stock options under the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant and amortized over the period of service only if the current market value of the underlying stock exceeded the exercise price. No stock-based employee compensation cost related to stock option grants is recognized in net earnings, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", awards of stock options and restricted stock to employees, including straight-line recognition of compensation cost over the related vesting periods for fixed awards:
2004 2003 2002 -------- -------- -------- (dollars in thousands) Net earnings as reported $ 12,265 $ 2,332 $ 4,008 Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects 370 45 - Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (2,835) (1,795) (1,288) -------- -------- -------- Pro forma net earnings $ 9,800 $ 582 $ 2,720 ======== ======== ======== Pro forma earnings per share Basic $ .85 $ .05 $ .22 ======== ======== ======== Diluted $ .83 $ .05 $ .22 ======== ======== ========
The per share weighted average fair value of stock options granted during 2004, 2003 and 2002 was $11.98 $9.65 and $10.13, respectively, based upon grant date valuations using the Black-Scholes option pricing model with the following weighted average assumptions in 2004, 2003 and 2002: expected dividend yield of 0.0% in all years; expected volatility of .89%, .84% and .83%, respectively; risk-free interest rate of 3.7%, 3.1% and 2.8%, respectively; and an average expected option life of 5.2, 5.0 and 4.9 years, respectively. 49 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued CAPITALIZED SOFTWARE COSTS The Company capitalizes certain internal use computer software costs, after technological feasibility has been established in accordance with SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". Capitalized software costs are amortized utilizing the straight-line method over the economic lives of the related assets not to exceed five years. DERIVATIVE FINANCIAL INSTRUMENT In 2002, the Company entered into an interest rate swap to mitigate its exposure to interest rate fluctuations, but does not, as a matter of policy, enter into hedging contracts for trading or speculative purposes. The interest rate swap has been accounted for in accordance with the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The swap has been designated as a cash flow hedge. Changes in fair value of the swap are recorded in other comprehensive income to the extent that the swap is effective as a hedge and reclassified to earnings in the same period that earnings are affected by the variability in cash flows of the hedged item. NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151 (SFAS 151), "Inventory Costs an amendment of ARB No. 43, Chapter 4." SFAS 151 discusses the general principles applicable to the pricing of inventory. Paragraph 5 of ARB 43, Chapter 4 provides guidance on allocating certain costs to inventory. This Statement amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. As required by SFAS 151, we will adopt this new accounting standard at the beginning of our first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the impact of adoption on our financial statements. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (SFAS 153), "Exchanges of Nonmonetary Assets--an amendment of APB Opinion No. 29." SFAS 153 addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 "Accounting for Nonmonetary Transactions" and replaces it with an exception for exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. As required by SFAS 153, we will adopt this new accounting standard at the beginning of our first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the impact of adoption on our financial statements. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (SFAS 123R) "Share-Based Payment." SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123R establishes fair value as the measurement method in accounting for share-based payments to employees and eliminates the alternative use of the intrinsic value method of accounting under APB Opinion No. 25, "Accounting for Stock Issued to Employees." This statement is effective for public entities as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the impact of adoption on our financial statements. (2) GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles are recorded at cost less accumulated amortization and consist of the following at December 26, 2004 and December 28, 2003:
COST -------------------------------------- ASSIGNED LIFE 2004 2003 ------------- ------ ------ (dollars in millions) Goodwill Indefinite $167.0 $164.6 Covenants not to compete 3 to 5 years 4.2 4.0 ------ ------ $171.2 $168.6 ====== ======
ACCUMULATED AMORTIZATION -------------------------------------- ASSIGNED LIFE 2004 2003 ------------- ------ ------ (dollars in millions) Goodwill Indefinite $ (29.5) $ (29.5) Covenants not to compete 3 to 5 years (2.5) (1.9) ------- ------- $ (32.0) $ (31.4) ======= =======
50 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Goodwill increased by $2.4 million in fiscal 2004. During the year, the Company acquired one new facility. The excess of the purchase price over the fair market value of the net identifiable assets acquired of $1.4 million has been recorded as goodwill. The balance of $1.0 million was due to earnout payments made in 2004 associated with prior year acquisitions. Amortization expense for the years ended December 26, 2004, December 28, 2003 and December 29, 2002 was $0.6 million, $0.5 million and, $0.3 million, respectively. These amounts are included within selling, general and administrative expense on the Company's Consolidated Income Statements. Based on existing intangibles, the projected annual amortization expense for each fiscal years 2005 and 2006 is $0.6 million, $0.4 million for 2007 and $0.2 million for 2008. The assets will be fully amortized by 2009. (3) COMPREHENSIVE INCOME Comprehensive income consists of net earnings and the change in fair value of the Company's interest rate swap agreement for the years ended December 26, 2004, December 28, 2003 and December 29, 2002 as follows (dollars in thousands):
2004 2003 2002 -------- -------- -------- (dollars in thousands) Net earnings $ 12,265 $ 2,332 $ 4,008 Other comprehensive income (loss) Change in fair value of interest rate swap agreement 712 198 (1,212) Income tax benefit (expense) (273) (78) 467 -------- -------- -------- Comprehensive income $ 12,704 $ 2,452 $ 3,263 ======== ======== ========
The changes in fair value of the Company's interest rate swap agreement were due to changes in interest rates. (4) CREDIT FACILITIES Long-term debt is summarized as follows:
2004 2003 -------- ------- (dollars in thousands) Unsecured term loan, interest payable at variable rate based upon LIBOR. Principal repaid in 16 equal installments commencing March 31, 2003 $ 16,875 $24,375 Notes payable issued in connection with the acquisition of a subsidiary, interest payable at 8% 12 59 -------- ------- 16,887 24,434 Less current installments 7,512 7,547 -------- ------- $ 9,375 $16,887 ======== =======
51 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Total principal repayments required for each of the next three fiscal years under all long-term debt agreements are summarized as follows:
(dollars in thousands) 2005 $ 7,512 2006 7,500 2007 1,875 -------- $ 16,887 ========
On February 15, 2003, the Company borrowed all remaining available funds under its $30.0 million credit facility. The credit facility was a one-year revolver that converted on February 15, 2003 into a four-year term loan carrying a variable rate based upon LIBOR. The aggregate principal balance of the loan was required to be paid in sixteen consecutive equal quarterly installments commencing on March 31, 2003. On June 25, 2003, the Company entered into an amended and restated credit facility. This facility added a $20.0 million revolving line of credit, carrying a variable rate based on LIBOR, to the existing term loan. This amended and restated facility also modified all existing covenants except for the rent expense covenant. The amended credit facility also granted the Company latitude to purchase additional shares of its outstanding common stock. On March 19, 2004, the Company entered into the Second Amended and Restated Credit Agreement relating to its senior credit facility. The agreement amends certain financial covenants, including those applicable as of December 28, 2003 and those applicable for fiscal 2004, provides that advances made under the facility will be subject to a monthly asset coverage test equal to 85% of eligible receivables, and requires the Company to provide collateral for amounts due under the facility in the event it fails to meet certain financial projections for two consecutive quarters. The Company's financing agreement limits potential future dividend payments to no more than 25% of the Company consolidated net income earned over a specified period. As of December 26, 2004, the Company has borrowed $6.0 million against the revolving line of credit and $16.9 million under the term credit facility. At December 26, 2004, the Company was in compliance with its credit agreement covenants, except its expenditure basket covenant for which it received a waiver in March 2005. (5) FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The Company, as a matter of policy, does not enter into derivative contracts for trading or speculative purposes. During the first quarter of 2002, the Company entered into an interest rate swap to mitigate its exposure to interest rate fluctuations and to effectively fix its borrowing rate at 5.6%. Under the interest rate swap agreement, the Company pays a fixed rate of interest of 5.6% and receives LIBOR-based floating rate payments. During the year ended December 29, 2002, the Company recorded a non-cash charge of $0.3 million related to the change in fair value for the portion of its interest rate swap agreement which did not qualify for hedge accounting. At December 29, 2002, the Company also recorded $0.7 million (net of tax) as a comprehensive loss related to the change in fair market value of the portion of its interest rate swap agreement which qualified for hedge accounting. In 2003, the Company recorded a $0.3 million non-cash benefit related to the change in fair value of the interest rate swap agreement. At December 28, 2003, the Company also recorded $0.1 million (net of tax) as 52 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued comprehensive income related to the change in fair market value of its interest rate swap agreement. At December 26, 2004, the entire swap agreement qualified for hedge accounting and all charges in the fair value of the swap were recorded, net of tax, through other comprehensive income (see Note 3. 53 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (6) INCOME TAXES Income tax expense is summarized as follows:
2004 2003 2002 -------- --------- ---------- (dollars in thousands) Current: Federal $ 5,028 $ 573 $ (161) State 790 19 (116) -------- --------- --------- 5,818 592 (277) -------- --------- --------- Deferred: Federal 1,092 509 2,756 State 229 203 536 -------- --------- --------- 1,321 712 3,292 -------- --------- --------- $ 7,139 $ 1,304 $ 3,015 ======== ========= =========
The Company evaluates the realizability of its deferred tax assets on an ongoing basis. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 26, 2004. The Company has established a valuation allowance when the utilization of the tax asset is uncertain. Additional timing differences, future earning trends and/or tax strategies may occur which could warrant a need for establishing an additional valuation allowance or a reserve. Deferred income taxes are composed of the effects of the components listed below. A valuation allowance has been recorded to reduce the carrying value of deferred tax assets for which the Company believes a tax benefit will not be realized. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 26, 2004 and December 28, 2003 are presented below:
2004 2003 ------------ ---------- (dollars in thousands) Deferred tax assets attributable to: Inventories $ 2,261 $ 1,931 Other 2,432 2,249 Depreciation 5,946 5,219 State net operating losses carried forward 1,618 2,108 ----------- --------- Gross Deferred Tax Assets 12,257 11,507 Valuation allowance (1,083) (1,719) ----------- --------- Net deferred tax assets 11,174 9,788 Deferred tax liabilities attributable to: Intangible assets (20,729) (17,748) ----------- --------- Net deferred tax liabilities $ (9,555) $ (7,960) =========== =========
54 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The actual income tax expense differs from the "expected" tax expense computed by applying the Federal corporate tax rate to earnings before income taxes as follows:
2004 2003 2002 -------- -------- -------- (dollars in thousands) "Expected" income tax expense $ 6,791 $ 1,236 $ 2,388 State income taxes, net of Federal effect 662 146 277 Increase (decrease) in valuation allowance (636) 264 308 Reduction of tax accruals - (527) (291) Other 322 185 333 -------- -------- -------- $ 7,139 $ 1,304 $ 3,015 ======== ======== ========
The Company is obligated to file tax returns and pay Federal and state income taxes in numerous jurisdictions. The reductions in income tax accruals relate to amounts that were no longer required, due primarily to closed tax return audits and closed tax years for a number of jurisdictions. At December 26, 2004, the Company had state income tax net operating loss carryforwards of approximately $34.4 million. The net operating loss carryforwards expire in the years 2005 through 2024. Due to the fact that NOLs can be audited well beyond a normal three-year statutory audit period and the inherent uncertainty of estimates of future taxable income, the amount of the NOLs which may ultimately be utilized to offset future taxable income may vary materially from the Company's estimates. The Company has established a reserve for NOL-related contingencies based on its estimates of the amount of benefit from these NOLs that it may ultimately be unable to realize due to factors other than estimates of future taxable income. Subsequent revisions to the estimated realizable value of the deferred tax asset or the reserve for tax-related contingencies may cause the Company's provision for income taxes to vary significantly from period to period, although cash tax payments will remain unaffected until the NOLs are utilized. (7) EMPLOYEE BENEFIT PLANS The Company adopted the Insurance Auto Auctions, Inc. 2003 Stock Incentive Plan (the 2003 Plan) in June 2003 to replace the Insurance Auto Auctions, Inc. 1991 Stock Option Plan (the 1991 Plan), as amended and restated, covering 3,100,000 shares of the Company's common stock. The 2003 Plan provides for the grant of incentive stock options and restricted stock to key employees and nonqualified stock options and stock appreciation rights to key employees, directors, consultants and independent contractors. The 2003 Plan expires June 18, 2013. In general, new non-employee directors will automatically receive grants of nonqualified options to purchase 10,000 shares and subsequent grants to purchase 5,000 shares at specified intervals. During 1995, the Company adopted the Insurance Auto Auctions, Inc. Supplemental Stock Option Plan (the 1995 Plan) covering 200,000 shares of the Company's common stock. The 1995 Plan provides for the grant of nonqualified stock options to employees, other than executive officers, consultants and other independent advisors who provide services to the Company. The 1995 Plan will expire on October 1, 2005. Under the Plans, as of December 26, 2004, options to purchase an aggregate of 1,745,492 shares were outstanding at a weighted average exercise price of $13.50 per share and 169,713 shares remained available for future grant. In 2003, the Company initiated a restricted stock program. Under the Company's restricted stock program, common stock of the Company may be granted at no cost to certain officers and key employees. Plan participants are entitled to cash dividends and to vote their respective shares. Restrictions limit the sale or transfer of these shares over a four year period. The sale and transfer restrictions on shares received under the program expire at a rate of 25% per year or earlier, based on the achievement of certain performance based goals. Upon issuance of stock under the plan, unearned compensation equivalent to the market value of the shares at the date of grant is charged to shareholders' equity and subsequently amortized to expense over the restriction period. In 2004, 182,600 restricted shares were granted and in 2003, 66,500 restricted shares were granted. Compensation expense in 2004 was $0.6 and less than $0.1 million in 2003. Compensation expense was accelerated by $0.2 million in the fiscal year ended December 26, 2004 due to anticipated achievement of performance goals in 2005. In fiscal 2004, there were no forfeitures of restricted shares. 55 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Activity under the Plans during 2004, 2003 and 2002 is as follows:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE 2004 EXERCISE 2003 EXERCISE 2002 EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- ---------- -------- Balance at beginning of year 1,821,000 $ 13.49 1,518,000 $ 14.13 1,397,000 $ 14.48 Options granted 75,000 16.72 490,000 13.89 377,000 15.75 Options canceled (47,000) 20.60 (180,000) 20.09 (140,000) 24.13 Options exercised (104,000) 12.44 (7,000) 11.61 (116,000) 11.62 --------- -------- --------- -------- --------- -------- Balance at end of year 1,745,000 $ 13.50 1,821,000 $ 13.49 1,518,000 $ 14.13 ========= ======== ========= ======== ========= ======== Options exercisable at end of year 1,122,000 824,000 596,000 ========= ========= =========
Additional information about options outstanding as of December 26, 2004 is presented below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------- -------------------- WEIGHTED AVERAGE ---------------------- REMAINING WEIGHTED CONTRACTUAL AVERAGE RANGE OF EXERCISE NUMBER OF LIFE EXERCISE NUMBER OF EXERCISE PRICES OPTIONS (IN YEARS) PRICE OPTIONS PRICE - ------------------ --------- ----------- -------- --------- -------- $ 7.00 to $ 10.00 34,000 3.59 $ 9.21 34,000 $ 9.21 10.38 to 13.95 1,198,000 6.06 12.54 833,000 12.11 14.11 to 22.75 509,000 7.56 15.93 251,000 15.95 28.63 to 32.50 4,000 .41 28.63 4,000 28.63 --------- --------- $ 7.00 to $ 32.50 1,745,000 6.44 13.50 1,122,000 12.94 ========= =========
The Company has a 401(k) defined contribution plan covering all full-time employees. Plan participants can elect to contribute up to 15% of their gross payroll. Company contributions are determined at the discretion of the Board of Directors; during the years 2002 to 2004, the Company matched 100% of employee contributions up to 4% of eligible earnings. Company contributions to the plan were $0.8 million in 2004, $0.8 million in 2003 and $0.8 million in 2002. (8) RELATED PARTY TRANSACTIONS The Company leases certain properties from a recently retired member of its Board of Directors. The Company believes the terms of the leases are no less favorable than those available from unaffiliated third party lessors. Rental payments to the Related Party were $1.2 million in 2004, and $0.8 million in 2003 and 2002. In 2004 and 2003, the Company incurred $3.9 million and $2.7 million, respectively, in costs to upgrade properties owned by the Related Party. A portion of the investment to upgrade these facilities was funded by the Related Party. The Company agreed to modify its future lease payments to take into consideration the costs funded by the Related Party. The total of all future 56 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued rent payments related to the Related Party's funding is $2.8 million. The Company also initiated a temporary license agreement in March 2004 to expand the amount of property available at one of the leased facilities. 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 $0.2 million. (9) COMMITMENTS AND CONTINGENCIES The Company leases its facilities and certain equipment under operating leases with related and unrelated parties, which expire through August 2021. Rental expense for the years ended December 26, 2004, December 28, 2003 and December 29, 2002, was $24.1 million, $22.5 million and $22.1 million, respectively. In 2004, the Company entered into a new lease agreement for 38,000 square feet of space for use as its corporate offices in Westchester, Illinois. This lease commenced in September 2004 and expires in August 2016. The total future rent obligation associated with this new lease is $10.3 million. The Company used an allowance totaling $1.9 million from the lessor to build-out the office space. In 2002, the Company began leasing certain equipment under capital leases. Equipment leased under these leases amounted to $1.8 in 2004, $3.4 million in 2003 and $4.7 million in 2002. Minimum annual rental commitments for the next five years under noncancelable operating and capital leases at December 26, 2004 are as follows:
OPERATING CAPITAL LEASES LEASES --------- -------- (dollars in thousands) 2005 $ 21,528 $ 1,203 2006 19,731 387 2007 16,355 316 2008 14,345 33 2009 12,178 - Thereafter 67,623 - --------- -------- $ 151,760 $ 1,939 ========= Less amount representing interest expense 184 -------- Future capital lease obligation $ 1,755 ========
Assets as of December 26, 2004 and December 28, 2003 recorded under capital leases are included in property and equipment, net as follows:
2004 2003 ---- ---- (dollars in thousands) Computer equipment $ 5,221 $ 6,654 Security fencing 1,441 1,441 -------- -------- 6,662 8,095 Accumulated amortization (4,819) (3,378) -------- -------- $ 1,843 $ 4,717 ======== ========
The Company has compensation agreements with certain officers and other key employees. In addition to base salary and bonus information, certain agreements have change in control provisions that address compensation due to the executive in the event of termination following a change of control. 57 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued On September 16, 2003, the Company received notice from the King County Wastewater Treatment Division, Department of Natural Resources, that King County was in the process of building a water treatment facility and that the Company's Woodinville, Washington branch was located within the boundaries of the likely site for placement of this facility. On October 3, 2003, the Company received further notice from King County that it had extended an offer to purchase the Woodinville site from Waterman Properties and that, if the offer was accepted, the Company would be expected to enter into a lease arrangement with King County until such time as King County directed it to vacate the facility. In an open house meeting on December 1, 2003, King County announced that it expected all property owners and tenants to vacate the proposed water treatment site no later than the end of 2004. On March 4, 2004, the Company filed a lawsuit in Snohomish County Superior Court against King County and Waterman Properties asking the Court to appoint a receiver to manage a portion of the funds (up to $1.5 million) that Waterman Properties might receive from King County and to award the Company a portion of the condemnation award in an amount equal to the value of its leasehold improvements. In 2004, the Company negotiated a settlement with King County whereby the Company terminated its lease with Waterman Properties and dismissed its complaint against King County to permit the sale and purchase of the Woodinville property. The settlement further provided for $900,000 of the purchase price to be placed into escrow for payment of any judgment that might be awarded in the Company's on-going suit against Waterman Properties. The outcome of this action remains uncertain at this time. At year end, the Company exited the Woodinville facility wrote off its leasehold improvements of approximately $991,000. The Company expects to recover approximately $375,000 of which $200,000, that was recorded in 2004 as a reduction of the loss, is for branch re-establishment and $175,000 is for relocation of inventory. The Company is subject to certain miscellaneous legal claims, which have arisen during the ordinary course of its business. None of these claims are expected to have a material adverse effect on the Company's financial condition or operating results. (10) TREASURY STOCK The Company records treasury stock purchases using the cost method of accounting. In the third quarter of 2004, the Company repurchased 95,800 shares at an average price of $16.17 and in the fourth quarter the Company repurchased 3,471 shares at an average price of $21.75. The Company did not repurchase any shares during the first and second quarters of 2004. On a full year basis, the Company has repurchased 99,271 shares at an average price of $16.37 per share and a total cost of $1.6 million. (11) ACCOUNTS RECEIVABLE Accounts receivable consists of the following as of December 26, 2004 and December 28, 2003:
2004 2003 ---- ---- (dollars in thousands) Unbilled receivables $ 35,555 $ 35,188 Trade accounts receivable 14,596 12,787 Other receivables 1,086 1,213 -------- -------- 51,237 49,188 Less allowance for doubtful accounts (794) (813) -------- -------- $ 50,443 $ 48,375 ======== ========
58 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Unbilled receivables represent amounts paid to third parties on behalf of insurance companies for which the Company will be reimbursed when the vehicle is sold. Trade accounts receivable include fees and proceeds to be collected from both insurance companies and buyers. 59 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12) PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 26, 2004 and December 28, 2003:
2004 2003 ---- ---- (dollars in thousands) Land $ 7,662 $ 7,582 Buildings and improvements 13,722 11,506 Equipment 49,645 39,302 Leasehold improvements 49,485 38,304 --------- --------- 120,514 96,694 Less accumulated depreciation and amortization (45,830) (36,507) --------- --------- $ 74,684 $ 60,187 ========= =========
Depreciation expense was $12.4 million in 2004 and $10.2 million in 2003. Amortization of intangibles was $0.6 million in 2004 and $0.5 million in 2003. (13) EARNINGS PER SHARE There were no adjustments to net income to calculate diluted earnings per share. The table below reconciles basic weighted shares outstanding to diluted weighted average shares outstanding for the years ended December 26, 2004, December 28, 2003 and December 29, 2002.
2004 2003 2002 ------ ------ ------- (in thousands) Basic weighted average shares outstanding 11,526 11,652 12,235 Effect of dilutive securities - stock options 288 80 296 ------ ------ ------- Diluted weighted average shares outstanding 11,814 11,732 12,531 ====== ====== =======
Options to purchase 0.1 million, 1.1 million and 0.1 million shares of common stock at an average price of $18.61, $14.81 and $28.90 per share were outstanding during the fiscal years ended 2004, 2003 and 2002, respectively, but were not included in the Company's diluted earnings per share calculations because the options' exercise prices were greater than the average market price of the Company's shares for the period. (14) ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION In connection with the acquisition of the capital stock of Underwriters Salvage Company ("USC"), the Company assumed the obligation for certain health care and death benefits for retired employees of USC. In accordance with the provisions of SFAS No. 106, "Employers Accounting for Postretirement Benefits Other than Pensions," costs related to the benefits are accrued over an employee's service life. The accumulated post retirement benefit obligation was determined using a discount rate of 5.75% at December 26, 2004, 6.25% at December 28, 2003 and 6.75% at December 29, 2002 and an average health care cost trend rate of approximately 10.0%, progressively decreasing to approximately 5.0% in the year 2009 and thereafter. A one percentage point change in the assumed health care cost trend rate would not have a material effect on the postretirement benefit obligation or on the aggregate service cost and interest cost components. 60 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued A reconciliation of the funded status of this program as of December 26, 2004 and December 28, 2003 follows:
2004 2003 ----- ----- (dollars in thousands) Benefit Obligations and Funded Status Change in accumulated postretirement benefit obligation Accumulated postretirement benefit obligation at the beginning of the year $ 1,432 $ 1,506 Interest cost 47 95 Actuarial (gain) or loss (678) (69) Benefits paid (57) (100) -------- ----------- Accumulated postretirement benefit obligation at the end of the year 744 1,432 Change in plan assets Benefits paid (56) (100) Employer contributions 56 100 -------- ----------- Fair value of assets at the end of the year - - Net amount recognized Funded status (744) (1,432) Unrecognized net (gain) or loss (1,620) (1,166) -------- ----------- Net amount recognized $ (2,364) $ (2,598) ======== =========== Amounts recognized in the statement of financial position Accrued benefit liability $ (2,364) $ (2,598) ======== =========== Weighted average assumptions at the end of the year Discount rate 5.75% 6.25% Assumed health care cost trend rates Health care cost trend rate assumed for next year 10.00% 8.50% Ultimate rate 5.00% 5.00% Year that the ultimate rate is reached 2009 2010
61 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Net periodic benefit cost (income) is summarized as follows for the fiscal years 2004, 2003, and 2002:
2004 2003 2002 ---- ---- ---- NET PERIODIC BENEFIT COST (INCOME) (dollars in thousands) Interest cost $ 47 $ 95 $ 103 Amortization of net (gain) or loss (224) (133) (130) ------ ------- ------- Total net periodic benefit cost (income) $ (177) $ (38) $ (27) ====== ======= =======
Estimated future benefit payments for the next five years as of December 26, 2004 are as follows:
(dollars in thousands) 2005 $ 126 2006 117 2007 118 2008 108 2009 97 Thereafter 259 ------- $ 825 =======
Effective January 20, 1994, the date of acquisition, the Company discontinued future participation for active employees. (15) ACQUISITIONS AND DIVESTITURES In fiscal 2004, the Company acquired Mid-South Salvage LLC located in Jackson, Mississippi. The acquisition leverages the Company's existing regional coverage in this market. The acquisition was accounted for using the purchase method of accounting. The results of operations of this acquisition are included in the Company's consolidated financial statements from the date of acquisition. The aggregate purchase price of this acquisition was $1.9 million. In fiscal 2004, the Company sold its West Bridgewater, Massachusetts facility to Harvey Industries, Inc., a Massachusetts corporation, for $1.1 million. The Company recorded a gain on the sale of the West Bridgewater facility of $0.3 million, net of taxes. (16) SUBSEQUENT EVENT (UNAUDITED) In January 2005, the Company announced the opening of a new greenfield facility in Lincoln, Illinois. This new 15-acre facility will provide needed coverage in the central part of the state. The new facility will also improve the Company's regional coverage, complementing other existing locations. In February 2005, the Company entered into a definitive merger agreement to be acquired by affiliates of Kelso & Company ("Kelso"), a New York based private equity investment firm. The closing of the transaction is subject to certain terms and conditions customary for transactions of this type, including shareholder approval and the completion of financing. 62 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (17) QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized unaudited financial data for 2004 and 2003 are as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- ---------- --------- (dollars in thousands except per share amounts) 2004 Revenues $ 57,191 $ 60,002 $ 60,752 $ 62,234 Earnings from operations 4,334 4,877 5,734 5,964 Net earnings 2,301 2,655 3,354 3,955 Basic earnings per share .20 .23 .29 .34 Diluted earnings per share .20 .22 .28 .33 2003 Revenues $ 56,040 $ 53,338 $ 49,127 $ 51,145 Earnings (loss) from operations 3,382 2,627 (520) (478) Net earnings 1,976 1,280 (594) (330) Basic earnings (loss) per share .16 .11 (.05) (.03) Diluted earnings (loss) per share .16 .11 (.05) (.03)
The sum of earnings per share for the four quarters of 2004 and 2003 does not equal the full year amount due to rounding and the impact of changes in the average shares outstanding. 63 INDEX TO EXHIBITS Exhibit No. 10.32 Employment Agreement dated October 6, 2004 by and between the Company and Sidney L. Kerley. 10.33 Waiver dated March 3, 2005 to the Second Amended and Restated Credit Agreement dated as of March 19, 2004 by and among the Company and LaSalle Bank National Association. 10.34 Lease Agreement dated September 20, 2004 by and between the Company and MCI. 10.35 Lease Agreement dated January 23, 2004 by and between the Company and Savin Corporation. 21 Subsidiaries of the Registrant. 23 Consent Independent Registered Public Accounting Firm. 24 Power of Attorney (See signatures page). 31.1 Certification of Thomas C. O'Brien, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Scott P. Pettit, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Thomas C. O'Brien, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Scott P. Pettit, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-10.32 2 c93072exv10w32.txt EMPLOYMENT AGREEMENT Exhibit 10.32 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 6th day of October 2004 by and between SIDNEY L. KERLEY ("Kerley") and INSURANCE AUTO AUCTIONS, INC., an Illinois corporation ("Company"). RECITALS WHEREAS, the Company desires to maintain the employ of Kerley and Kerley desires to maintain employment with the Company upon the terms and conditions set forth below. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed that: 1. EMPLOYMENT. The Company hereby employs Kerley, and Kerley hereby accepts employment with the Company, as Vice President, General Counsel and Secretary, whose duties include overseeing all general legal matters of the Company and its affiliated companies. Kerley shall be an executive officer 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"). Kerley shall devote all of his business time and services to the business and affairs of the Company. Kerley shall also perform such other executive-level duties consistent with his position as Vice President, General Counsel and Secretary 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 Kerley 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 Kerley's duties. 2. COMPENSATION. As compensation for Kerley'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 Kerley a base salary at the rate of $120,000 per annum commencing on the date hereof ("Base Salary"). The Base Salary shall be subject to annual review by the Board and any committee thereof ("Committee") or the Compensation Committee and may be increased by the Board in their sole and absolute discretion but may not be decreased. Such salary shall be payable to Kerley 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 Kerley during the term of this Agreement, the Company will pay to Kerley, in cash, a performance bonus equal to fifty percent (35%) of Kerley'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 Kerley an option to purchase 15,000 shares of the Company's common stock (the "Option") in addition to the options already granted Kerley. The Option shall be granted under the Company's 2003 Stock Incentive Plan, as may be amended from time to time (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, Kerley 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. Kerley 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. Kerley 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 Kerley 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 Kerley 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 Kerley 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 Kerley are superseded by this Agreement. In addition, this Agreement shall terminate by reason of Kerley's death or the substantial inability of Kerley, 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"). 2 3.2. COMPANY'S OBLIGATIONS ON TERMINATION APART FROM A CHANGE OF CONTROL. (a) NO OBLIGATIONS OTHER THAN AS REQUIRED BY LAW FOR VOLUNTARY TERMINATION OR CAUSE. The Company shall have no obligations to pay Kerley any severance payments or continue to cover Kerley 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. Kerley voluntarily terminates this Agreement; or (ii) CAUSE. The Company terminates Kerley'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 Kerley 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 Kerley by the Board which specifically identifies the manner in which the Board believes that Kerley has not substantially performed his duties; or (B) the willful engaging by Kerley 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 Kerley (or his legal representatives as the case may be) the specific obligations as set forth below: (i) DEATH. Kerley's employment shall terminate automatically upon Kerley's death. If Kerley's employment under this Agreement is terminated by reason of his death, the Company's sole obligation to Kerley'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 Kerley 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 Kerley'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 Kerley'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. 3 (ii) DISABILITY. If the Disability of Kerley occurs, the Company may give to Kerley written notice in accordance with Section 6.1 of this Agreement of its intention to terminate Kerley's employment. In such event, Kerley's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Kerley (the "Disability Effective Date"), unless within the 30-day period after such receipt, Kerley returns to full-time performance of his duties. The Company's sole obligation to Kerley 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 Kerley's employment hereunder apart from a Change of Control, the Company shall pay to Kerley an amount equal to the sum of (i) Kerley's annual base salary at the time Kerley's employment is terminated; plus (ii) Kerley's average annual bonus received over the eight (8) fiscal quarters of the Company immediately preceding Company's fiscal quarter during which Kerley's employment is terminated, without exceeding Kerley's target bonus for Company's fiscal year during which Kerley's employment is terminated, provided, however, that Kerley shall receive his target bonus if he is terminated within his first eight (8) fiscal quarters with the Company; plus (iii) Kerley's auto allowance for the Company's fiscal year during which Kerley's employment is terminated. In addition, the Company shall provide, at Company's expense, continued coverage for Kerley and his beneficiaries for a period extending through the earlier of the date Kerley begins any subsequent full-time employment for pay and the date that is one (1) year after Kerley's termination of employment, under the Company's health plan covering Kerley and Kerley's beneficiaries, provided that Kerley 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 4 trust) sponsored or maintained by the Company or any corporation controlled by the Company shall not constitute a Change of Control; or (B) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual (other than an individual whose initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board) who becomes a director subsequent to the date hereof whose election or nomination for election was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (C) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination") unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities and (ii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (D) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (ii) For purposes of this Agreement, "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (iii) For purposes of this Agreement, "Involuntary Termination" shall mean Kerley's voluntary termination following (A) a change in Kerley's position with the Company which materially reduces Kerley's level of responsibility, (B) a reduction in Kerley's Base Salary, or (C) a change in Kerley's place of 5 employment, which is more than seventy-five (75) miles from Kerley's place of employment prior to the change, provided and only if such change or reduction is effected without Kerley's written concurrence. (iv) For purposes of this Agreement, "Date of Termination" shall mean (A) if Kerley's employment is terminated by the Company for Cause, or by Kerley, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (B) if Kerley's employment is terminated by the Company for other than for Cause or Disability, the date on which the Company notifies Kerley of such termination and (C) if Kerley's employment is terminated by reason of death or Disability, the date of death of Kerley or the Disability Effective Date, as the case may be. (v) For purposes of this Agreement, "Accrued Obligations" shall mean the sum of (A) Kerley'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 Kerley for the fiscal year preceding the fiscal year in which Kerley's Date of Termination occurs (annualized in the event that Kerley 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 Kerley 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 Kerley (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 Kerley 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 Kerley's employment with the Company terminates by reason of Kerley'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, Kerley shall be entitled to receive the following: (i) Company shall continue to pay Kerley an amount equal to 150% of the sum of (A) Kerley's Base Salary and (B) his Highest Annual Bonus; (ii) Company shall pay Kerley any Accrued Obligations; and (iii) Company shall also provide, at its expense, continued coverage of Kerley and Kerley's beneficiaries for eighteen (18) months after the Date of Termination or until Kerley commences any full-time employment, whichever comes first, under the Company's health plan covering Kerley and Kerley's beneficiaries, provided, however, that Kerley properly elects coverage pursuant to COBRA. 6 (c) SEVERANCE BENEFITS FOR TERMINATION AFTER THE SECOND YEAR FOLLOWING A CHANGE OF Control. If Kerley 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 Kerley'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 Kerley when payments of compensation payable to Kerley 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 Kerley 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 Kerley in such amount as is necessary to ensure that the net amount retained by Kerley, 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, Kerley 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. Kerley 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 Kerley, 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 Kerley does hereby assign and transfer to the Company his entire right, title and interest in the Inventions. Kerley 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 7 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 Kerley 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. Kerley hereby acknowledges and agrees that the Company actively engages in its business throughout all of North America. Accordingly, Kerley agrees that during the Non-Competition Period (as defined below), Kerley 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 Kerley 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 Kerley's employment hereunder or Kerley's submission of his resignation, or removal of Kerley as Vice President, Corporate Counsel and Assistant Secretary 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, Kerley 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 Kerley 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. Kerley 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, 8 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, Kerley 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 Kerley shall, to the extent practicable, give the Company prior written notice of any such disclosure and shall cooperate with the Company in obtaining a protective order or such similar protection as the Company may deem appropriate to preserve the confidential nature of such information. The foregoing obligations to maintain the Confidential Information shall not apply to any Confidential Information which is or, without any action by Kerley, becomes generally available to the public. Upon termination of any employment or consulting relationship between the Company and Kerley, Kerley 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 Kerley. 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 Kerley. 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 Kerley 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 Kerley's employment and the termination of this Agreement. 9 6. GENERAL PROVISIONS. 6.1. NOTICES. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable express courier service (charges prepaid), sent by facsimile (with 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 Kerley at the addresses indicated below: If to the Company: Insurance Auto Auctions, Inc. Two Westchester Center Suite 500 Westchester, Illinois 60154 Phone: 708-492-7000 Fax: 708-492-7078 Attention: President & CEO With copies to: Katten Muchin Zavis 525 West Monroe Street, Suite 1600 Chicago, Illinois 60661 Phone: 312-902-5267 Fax: 312-577-8885 Attention: Herbert Wander, Esq. If to Kerley: Sidney L. Kerley 30 East Huron Street Unit 4507 Chicago, Illinois 60611 Phone: 312-643-5755 Fax: 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 10 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 Kerley'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 Kerley shall endeavor to select an arbitrator who shall hear the dispute. In the event the parties are unable to agree on an arbitrator, Kerley and Company shall request the American Arbitration Association ("AAA") to submit a list of nine (9) names of persons who could serve as an arbitrator. The Company and Kerley 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 KERLEY. Kerley 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 Kerley is subject as a result of any prior employment, any investment or otherwise. Kerley is not subject to any agreement, contract or understanding which in any way restricts or limits his ability to accept employment with the Company or perform the services contemplated herein. 6.7. DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 6.8. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 11 6.9. AMENDMENTS AND WAIVERS. No modification, amendment or waiver of any provisions of this Agreement shall be effective unless approved in writing by each of the parties hereto. The Company's failure at any time to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and will not affect the right of the Company to enforce each and every provision hereof in accordance with its terms. 6.10. NON-ASSIGNMENT. This Agreement shall not be assigned by Kerley. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. INSURANCE AUTO AUCTIONS, INC. By: /s/ Thomas C. O'Brien ------------------------------------------ Name: Thomas C. O'Brien Title: President and Chief Executive Officer /s/Sidney L. Kerley --------------------------------------- SIDNEY L. KERLEY 12 EX-10.33 3 c93072exv10w33.txt WAIVER Exhibit 10.33 March 3, 2005 Insurance Auto Auctions, Inc. 850 E. Algonquin Road, Suite 100 Schaumburg, IL 60173 Attention: Scott P. Pettit Dear Scott: Reference is hereby made to that certain Second Amended and Restated Credit Agreement dated as of March 19, 2004 by and among the Insurance Auto Auctions, Inc. (the "Borrower"), the financial institutions party from time to time thereto as Lenders (the "Lenders"), the financial institutions party from time to time thereto as LC Issuers (the "LC Issuers") and LaSalle Bank National Association, as administrative agent (the "Administrative Agent") (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"). Terms used herein and not otherwise defined herein shall have the meanings set forth in the Credit Agreement. The Borrower has informed the Administrative Agent and the Lenders that a Default has occurred or is expected to occur as a result of the Borrower's noncompliance with the Capital Expenditures, Acquisitions and Stock Repurchases financial covenant set forth in Section 6.19.4 of the Credit Agreement for Fiscal Year 2004 (the "Specified Default"). In accordance with the provisions of Section 8.2 of the Credit Agreement, the Borrower has requested that the Lenders waive the Specified Default. The Lenders hereby agree to such waiver. Very truly yours, LASALLE BANK NATIONAL ASSOCIATION, as Administrative Agent, as an LC Issuer and as a Lender By: /s/ John C. Thurston --------------------------------------- Name: John C. Thurston Title: Senior Vice President BANK OF AMERICA, N.A., as an LC Issuer and as a Lender By: /s/ Craig W. McGuire --------------------------------------- Name: Craig W. McGuire Title: Senior Vice President NATIONAL CITY BANK OF THE MIDWEST, as an LC Issuer and as a Lender By: /s/ Michael L. Monniger --------------------------------------- Name: Michael L. Monniger Title: Vice President WAIVER LETTER DATED AS OF MARCH 2005 EX-10.34 4 c93072exv10w34.txt LEASE AGREEMENT Exhibit 10.34 MCI MCI(R) SERVICE AGREEMENT MCI WORLDCOM COMMUNICATIONS, INC. 2001 LOUDOUN COUNTY PARKWAY ASHBURN, VA 20147 BY: /s/ Nancy B. Gofus ----------------------------------- Name: Nancy B. Gofus Title: SVP, Product Management Date: 9/10/04 INSURANCE AUTO AUCTIONS INC. TWO WESTBROOK CORPORATE CENTER, SUITE 500 WESTCHESTER, IL 60154 BY: /s/John R. Nordin ------------------------------------- Name: John R. Nordin Title: V. P. And CIO Date: 9/2/04 BY ACCEPTANCE DEADLINE. This Agreement is binding upon execution by both parties. Acceptance of this Agreement by MCI is subject to Customer meeting MCl's standard credit terms and conditions, which may be based on commercially available credit reviews and to which Customer hereby consents. Customer's failure to sign and return this Agreement on or before SEPTEMBER 3, 2004 may result in its non-acceptance by MCI. This Agreement for MCI Services, together with any Attachments and Schedules made part hereof ("Agreement"), is made by and between MCI WORLDCOM COMMUNICATIONS, INC. ("MCI"), on behalf of itself and its Affiliates and successors and INSURANCE AUTO AUCTIONS, INC. ("Customer"). MCI or its providing Affiliate will provide to Customer and its Authorized Users (as that term is defined herein) the Services as set forth herein provided that MCI WORLDCOM Communications, Inc, shall be responsible for its providing Affiliate's performance under the Agreement. The rates, discounts, charges and credits set forth herein shall be effective the first day of the second full billing cycle following execution and delivery of this Agreement by Customer to MCI ("Effective Date"). TERMS AND CONDITIONS 1. SERVICES. MCI will provide to Customer and its Authorized Users the international, interstate, intrastate and local telecommunications services ("Services") identified in Attachment A to this Agreement. As used herein, the term "Authorized Users" shall mean Customer and any Affiliate taking use of the Services under this Agreement. "Affiliate" means any existing or future entity (i) that Customer directly or indirectly owns more than 50% of that entity's outstanding ownership interest or (ii) that owns more than 50% of Customer's outstanding ownership interest; or (iii) in which a parent of Customer directly or indirectly owns more than 50% of that entity's outstanding ownership interest Authorized Users may use the Services provided to Customer herein, and this usage will contribute to the "Annual Volume Commitment" as defined in Section 6. Customer will be financially responsible to MCI for all Authorized User charges and all other obligations hereunder. 2. TERM. The 'Term" shall begin on the Effective Date and end upon the completion of 36 months. Upon written notice to MCI thirty (30) days prior to the expiration of the Term, Customer may extend the Term for up to three (3) additional thirty (30) day periods, during which time Customer will receive the rates, discounts, charges and credits set forth herein and in each month of the extension, Customer will be required to meet or exceed 1/12*1 of the AVC which is in effect at the termination or expiration of the Agreement. 3. TARIFF AND GUIDE. MCl's provision of Services to Customer will be governed by MCl's international, interstate and state tariffs (Tariff(s)(H) and this Agreement as supplemented by MCl's "Service Publication and Price Guide" ("Guide"). This Agreement incorporates by reference the terms of each applicable Tariff and the Guide. The Guide is available to Customer on MCl's Internet website (www.mci.com) ("Website"). MCI may modify the Guide from time to time, and any modification will be binding upon Customer. Except for new services, service features, service options or service promotions, which will become effective immediately upon their posting in the Guide on the Website, any modification made to the Guide will become effective beginning on the first day of the next calendar month following its posting on the Website or, thereafter, on the first day of the next service billing cycle whenever adjustments are made to rates or charges, provided that no modification shall become effective and binding on Customer until it has been posted in the Guide for at least fifteen (15) calendar days. The contractual relationship between MCI and Customer shall be governed by the following order of precedence: (i) the Tariffs to the extent applicable, (ii) the provisions of this Agreement; and (iii) the Guide. MCI shall include in its Tariffs any necessary terms and conditions of this Agreement that under applicable law must be included therein for this Agreement to be fully enforceable according to its terms, including but not limited to pricing and terms of Services provided to Customer under this Agreement. 4. CHANGES TO THE GUIDE. If MCI makes any changes to the Guide that affect Customer in a material and adverse manner, Customer, as its sole remedy, may discontinue the affected Service without liability by providing MCI with written notice of discontinuance within sixty (60) days of the date of Customer's actual or constructive knowledge of such change, provided that constructive knowledge shall not be deemed to include the mere posting of the change to an MCI website. Customer shall pay all charges incurred up to the time of Service discontinuance. MCI may avoid Service discontinuance if, within sixty (60) days of receipt of Customer's written notice, it agrees to amend this Agreement to eliminate the applicability of the material and adverse change. If a Service is discontinued EVG/IAA MSA/9/1/2004 MCI CONFIDENTIAL Exhibit 10.34 MCI hereunder, Customer's AVC will be reduced, as appropriate, to accommodate the discontinuance. A "material and adverse change" shall not include, nor be interpreted to include, (i) the introduction of a new service or any new service feature associated with an existing service, including all terms, conditions and prices relating thereto (provided that Customer is not required to obtain the new service or new feature), or (ii) the imposition of or changes to Governmental Charges (defined below). 5. RATES and Charges. Customer agrees to pay the rates and charges specified in this Agreement. In the event (i) Customer orders and receives any services that are not the subject of rates, charges and discounts expressly set forth in this Agreement, or (ii) Customer purchases any services after the expiration of the Term, Customer shall pay MCl's standard rates for those services, as set forth in the Guide (or Tariffs, if applicable). As used in this Agreement in connection with rates and charges, "standard" refers to rates and charges for MCI Business Services I ("MBSI") where applicable. Except where explicitly stated otherwise for a particular service, (a) all rates and charges which are designated as fixed in this Agreement are fixed for the Term and all other rates are subject to change; (b) all discount percentages set forth in this Agreement are fixed for the Term, (c) Customer will not be eligible to receive any other additional discounts, promotions and/or credits (Tariffed or otherwise) unless the parties agree otherwise via a written amendment to this Agreement, and (c) the rates and charges set forth in this Agreement do not include (without limitation) charges for all possible non-recurring charges, access service, local exchange service, access/egress (or related) charges imposed by a third party other than MCI or an MCI affiliate, on-site installation, Governmental Charges (defined below), network application fees, customer premises equipment or extended wiring to or at Customer premises. 6. Minimum Annual Volume Commitment ("AVC"). Customer agrees to pay MCI no less than the following amounts in Total Service Charges (as hereinafter defined) during each Contract Year (each, the "AVC"): Contract Year 1: $1,500,000 Contract Year 2: $1,600,000 Contract Year 3: $1,700,000 A "Contract Year" shall mean each consecutive twelve-month period of the Term commencing on the Effective Date. "Total Service Charges" shall mean all charges, after application of all discounts and credits, incurred by Customer for Services provided under this Agreement, specifically excluding: (a) Taxes, as that term is defined in section 9 below; (b) charges for equipment rental or equipment purchase; (c) charges incurred for third party goods or services where MCI or MCI affiliate acts as agent for Customer in its acquisition of goods or services from third parties and such acquisition is approved by Customer prior to acquisition taking place; (d) non-recurring charges; (e) Governmental Charges (defined below); and (f) international pass-through access charges (i.e., Type 3/PTT) and charges for international access provided by MCI (i.e., Type 1); and (g) other charges expressly excluded by this Agreement or any subsequent amendment hereto which is mutually agreed to by the parties. Any early termination charge paid by Customer for early termination of a Service shall contribute to the AVC. 7. Underutilization Charges. If, in any Contract Year during the Term, Customer's Total Service Charges do not meet or exceed the AVC, then Customer shall pay: (a) all accrued but unpaid charges incurred under this Agreement (which shall count toward the Customer's Total Service Charges); and (b) an "Underutilization Charge" in an amount equal to the difference between the AVC and Customer's Total Service Charges during such Contract Year. If in any monthly billing period of the optional 3 month extension after the expiration of the Term Customer's total Service Charges do not meet or exceed 1/12* of the AVC for Contract Year 3, Customer shall pay all accrued but unpaid charges incurred under this Agreement (which shall count toward the Customer's Total Service Charges); and (b) an "Underutilization Charge" in an amount equal to the difference between 1/12*1 of the AVC for Contract Year 3 and Customer's Total Service Charges during such monthly billing period. 8. Governmental Charges. MCI may adjust its rates and charges or impose additional rates and charges in order to recover amounts it is required or permitted by governmental or quasi-governmental authorities to collect from or pay to others in support of statutory or regulatory programs provided that all such adjustments or additional rates and charges are imposed on Customer in a non-discriminatory manner, consistent with MCl's application of such charges across MCl's commercial customer base ("Governmental Charges"). Examples of such Governmental Charges include, but are not limited to Universal Service funding and compensation payable to payphone service providers for use of their payphones to access MCl's service. 9. Taxes. All Tax-related provisions of the Guide are specifically incorporated by reference herein. In accordance with the Guide, all charges are exclusive of applicable Taxes (as the term is defined in the Guide), which Customer shall pay. However, if applicable, MCI will exempt Customer in accordance with law, effective on the date MCI receives a valid exemption certificate for Customer. If Customer is required by the laws of any foreign tax jurisdiction to withhold income or profit taxes from a payment. Customer will, within ninety (90) days of the date of the withholding, provide MC! with .official tax certificates documenting remittance of the taxes to the relevant tax authorities. The tax certificates must be in a form sufficient to document qualification of the income or profit tax for the foreign tax credit allowable against MCl's U.S. corporation income tax, and accompanied by an English translation. Upon receipt of the tax certificate, MCI will issue Customer a billing credit for the amounts represented thereby. 10. Early Termination Charges. If: (a) Customer terminates this Agreement during the Term for reasons other than Cause or other than to take service under another arrangement with MCI having equal or greater term and volume requirements; or (b) MCI terminates this Agreement for Cause pursuant to the Sections entitled "Termination for Cause" or "Termination by MCI," then Customer will pay, within 30 days after such termination: (i) all accrued but unpaid charges incurred through the date of such termination, plus (ii) an amount equal to the AVC for each Contract Year (and a pro rata portion thereof for any partial Contract Year) remaining in the unexpired portion of the Term on the date of such termination, plus (iii) a pro rata portion of any and all credits received by Customer. 11. Payment Customer agrees to pay MCI for all Services within 30 days of invoice date. Payments must be made at the EVO/IAA MSA/9/1/2004 MCI CONFIDENTIAL Exhibit 10.34 MCI address designated on the invoice or other such place as MCI may designate in writing to Customer. Amounts not paid on or before 30 days from invoice date shall be considered past due, and Customer agrees to pay a late payment charge equal to the lesser oft (a) one and one-half percent (1.5%) per month, compounded, or (b) the maximum amount allowed by applicable law, as applied against the past due amounts. Customer must give MCI written notice of a dispute with respect to the application of Taxes within six (6) months of the date of the invoice, or with respect to MCI charges within 12 months of the date of invoice or such invoice shall be deemed to be correct and binding on Customer. MCI must give Customer written notice of its intent to seek payment for undercharges within twelve (12) months of the date of the erroneous invoice. Except in cases involving fraud by Customer, or where MCI lacks essential billing information due to circumstances beyond its reasonable control (e.g. MCI has been unable to obtain necessary information from a third party), MCI will invoice previously unbilled (i.e., never billed) charges for service no later than one hundred and eighty (180) days from the end of the monthly billing period in which the charges occurred. In cases involving Customer's fraud, MCI will invoice previously unbilled charges if the invoice date is no later than eighteen (18) months from the end of the monthly billing period in which the charges occurred. MCI will waive any right to invoice Customer for previously unbilled charges beyond the 180 day period described above, subject to the exceptions noted above. Customer shall be liable for the payment of all fees and expenses, including attorney's fees, reasonably incurred by MCI in collecting, or attempting to collect, any charges owed hereunder. 12. Termination for Cause. Either party may terminate this Agreement for Cause. As to payment of invoices, "Cause" shall mean Customer's failure to pay any undisputed portion of an invoice within 15 days after Customer's receipt of notice from MCI that any payment is past due. For all other matters, "Cause" shall mean a breach by the other party of any material provision of this Agreement, provided that written notice of the breach has been given to the breaching party, and the breach has not been cured within 30 days after delivery of such notice. 13. Termination by MCI. MCI may discontinue service and/or terminate this Agreement immediately upon notice to Customer (a) if Customer fails, after MCl's request, to provide a bond or security deposit; or (b) if Customer provides false information to MCI regarding Customer's identity, creditworthiness, or its planned use of the Services. MCI may discontinue service immediately, without notice, if interruption of service is necessary to prevent or protect against fraud or otherwise protect against physical injury to MCl's personnel, or protect MCl's facilities or services from harm. Any bond or security deposit shall be an amount equal to, but not to exceed, three (3) months of estimated usage, and will be based on Customer's actual usage and estimated future usage of services, Customer's payment history and financial solvency. 14. Disconnection of Service. Customer shall provide prior written notice for the disconnection of service, as follows. For service provided exclusively within the United States, Customer must provide 30 days written notice. For all other service, Customer must provide written notice either (a) of sixty (60) days or (b) equal to the cancellation period required by third parties (such as PTTs) for the non-U.S. Mainland portion of the service Customer is canceling, whichever is longer. Disconnection notices must be labeled conspicuously "Disconnect Request." For a service disconnect notice to be effective, Customer must receive a confirmation from MCl's Customer Service organization stating that the disconnect notice was received and accepted. Customer should contact its account representative or Customer Service if it does not receive such confirmation within five (5) business days. Notwithstanding any such termination, Customer will remain liable for any applicable early termination charges set forth in this Agreement. 15. Confidential Information. Commencing on the date Customer executes this Agreement and continuing for a period of five (5) years from the termination of this Agreement, each party shall protect as confidential, and shall not disclose to any third party, any Confidential Information received from the disclosing party or otherwise discovered by the receiving party during the Term, including, but not limited to, the pricing and terms of this Agreement, and any information relating to the disclosing party's technology, business affairs, and marketing or sales plans (collectively the "Confidential Information"). The parties shall use Confidential Information only for the purpose of this Agreement. The foregoing restrictions on use and disclosure of Confidential Information do not apply to information that (a) is in the possession of the receiving party at the time of its disclosure and is not otherwise subject to obligations of confidentiality; (b) is or becomes publicly known, through no wrongful act or omission of the receiving party; (c) is received without restriction from a third party free to disclose it without obligation to the disclosing party; (d) is developed independently by the receiving party without reference to the Confidential Information, or (e) is required to be disclosed by law, regulation, or court or governmental order or applicable law 16. Further Responsibilities of the Parties. The parties represent and warrant that they are now in compliance with, and covenant that they shall for the duration of this Agreement comply with, all applicable laws and regulations which are applicable to the obligations hereunder. MCI further warrants that the Services shall be performed in a profession?! manner. 17. Disclaimer of Warranties. EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT, THE ATTACHMENTS, SCHEDULES OR TARIFFS, MCI MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY MCI SERVICES, RELATED PRODUCTS, EQUIPMENT, SOFTWARE OR DOCUMENTATION. MCI SPECIFICALLY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR TITLE OR NONINFRINGEMENT OF THIRD PARTY RIGHTS. 18. Disclaimer of Certain Damages. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, CONSEQUENTIAL, EXEMPLARY, SPECIAL, INCIDENTAL OR PUNITIVE DAMAGES, INCLUDING WITHOUT LIMITATION LOSS OF USE OR LOST BUSINESS, REVENUE, PROFITS, OR GOODWILL, ARISING IN CONNECTION WITH THIS AGREEMENT, UNDER ANY THEORY OF TORT, CONTRACT, INDEMNITY, WARRANTY, STRICT LIABILITY OR NEGLIGENCE, EVEN IF THE PARTY KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES. EVG/ IAA MSA/9/1/2004 MCI CONFIDENTIAL 3 Exhibit 10.34 MCI 19. LIMITATION OF LIABILITY THE TOTAL LIABILITY OF MCI TO CUSTOMER IN CONNECTION WITH THIS AGREEMENT, FOR ANY AND ALL CAUSES OF ACTIONS AND CLAIMS, INCLUDING, WITHOUT LIMITATION, BREACH OF CONTRACT, BREACH OF WARRANTY, NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATION AND OTHER TORTS, SHALL BE LIMITED TO THE LESSER OF: (A) DIRECT DAMAGES PROVEN BY CUSTOMER; OR (B) THE AMOUNT PAID BY CUSTOMER TO MCI UNDER THIS AGREEMENT FOR THE TWO (2) MONTH PERIOD PRIOR TO ACCRUAL OF THE MOST RECENT CAUSE OF ACTION. NOTHING IN THIS SECTION SHALL LIMIT MCl'S LIABILITY: (A) IN TORT FOR ITS WILLFUL OR INTENTIONAL MISCONDUCT; OR (B) FOR BODILY INJURY OR DEATH PROXIMATELY CAUSED BY MCl'S NEGLIGENCE; OR (C) LOSS OR DAMAGE TO REAL PROPERTY OR TANGIBLE PERSONAL PROPERTY PROXIMATELY CAUSED BY MCl'S NEGLIGENCE. THE LIMITATION IN THIS SECTION 19 DOES NOT APPLY TO MCl'S OBLIGATIONS FOR INTELLECTUAL PROPERTY INFRINGEMENT, WHICH ARE SET FORTH IN SECTION 26. NOTHING SET FORTH IN THIS PROVISION SHALL LIMIT THE AMOUNTS CUSTOMER IS OTHERWISE ENTITLED TO UNDER APPLICABLE SERVICE LEVEL GUARANTEES. 20. Assignment. Either party may assign this Agreement or any of its rights hereunder to an Affiliate or successor without the prior written consent of the other party, provided that if Customer assigns this Agreement to an Affiliate or successor, then such affiliate or successor must meet MCl's creditworthiness standards. Any attempted transfer or assignment of this Agreement by either party not in accordance with the terms of this Section shall be null and void. 21. Service Marks. Trademarks and Name. Neither MCI nor Customer shall: (a) use any service mark or trademark of the other party; or (b) refer to the other party in connection with any advertising, promotion, press release or publication unless it obtains the other party's prior written approval. 22. Governing Law. This Agreement shall be governed by the laws of the State of New York without regard to its choice of law principles. Non-U.S. Services shall be subject to applicable local laws and regulations in any countries where such Services originate or terminate, including applicable locally filed Tariffs. 23. Notice. All notices requests, or other communications (excluding invoices) hereunder shall be in writing and either transmitted via overnight courier, electronic mail, hand delivery or certified or registered mail, postage prepaid and return receipt requested to the parties at the following addresses. Except as otherwise provided, notices will be deemed to have been given when received. Customer's notice address is provided on Page 1 of this Agreement unless otherwise noted. TO MCI: WITH A COPY TO: MCI MCI 3300 E. Renner Road 205 N. Michigan Ave. Richardson, TX 75081 Suite 700 Attn: Customer Service Chicago, IL 60601 Email: notice@mci.com Attn: Legal Director Business Transactions LPP 24. Acceptable Use. Use of MCl's Internet Service(s) and related equipment and facilities must comply with the then- current version of the MCI Acceptable Use Policy ("Policy") for the countries from which Customer uses them (see www.mci.com/terms). MCI reserves the right to suspend or terminate Internet Service effective upon notice for a violation of the Policy. Customer will indemnify and hold harmless MCI from any losses, damages, costs or expenses resulting from any third-party claim or allegation that if true, would constitute a violation of the Policy. Each party will promptly notify the other of any such claim. 25. Domain Names. Customer will indemnify MCI for cost or liability arising from Customer's use of any domain name registered or administered on Customer's behalf that violates the service mark, trademark or other intellectual property rights of any third party. Customer irrevocably waives any claims against MCI that may arise from the acts or omissions of domain name registries, registrars or other authorities. Any violation of this Section is deemed a material breach establishing Cause for termination. 26. Intellectual Property Indemnification. MCI shall at its expense defend Customer through final judgment or settlement of any claim, suit or other demand asserted against Customer by any third party alleging that any Service as delivered by MCI infringes a third party's rights under any United States patent, copyright trademark, or trade secret, and shall indemnify Customer in the amount of any final judgment or settlement of such claim, suit or other demand. MCI shall be under no obligation to defend or indemnify Customer to the extent that such third party claim, suit, or other demand arises out of or relates to: (i) MCl's compliance with Customer's specifications; (ii) a combination of the Service with products or services not provided by MCI or intended by MCI for use with the Service; (iii) a modification of the Service by anyone other than MCI or its authorized agents; (iv) a use of the Service that is inconsistent with the Guide or MCl's written instructions; or (v) information, data, or other content not provided by MCI. To the extent that a third party claim, suit or other demand arising out of one or more conditions stated in (i) through (v) is asserted against MCI, Customer shall at its own expense defend MCI and indemnify MCI in the amount of any final judgment or settlement. With respect to any pending or threatened claim, suit or other demand as to which MCI is the indemnifying party, MCI may in its discretion and at its c-.vr: expense obtain foe Customer the right to continue using the Service or alternatively replace or modify the Service so that it is functionally equivalent but non-infringing. If achievement of the foregoing is not commercially reasonable, MCI may terminate this Agreement, without liability, except for Customer's obligation to pay for Services delivered prior to termination upon 90 days written notice, or, in cases where MCI is enjoined from providing the Services, prior notice if practicable. The indemnifying party shall be excused from its obligations under this Section if the indemnified party fails to (i) provide prompt written notice of the third party claim, suit or other demand to the indemnifying party; (ii) cooperate with all reasonable requests of the indemnifying party, at the Indemnifying party's expense; and/or (iii) surrender exclusive control to the indemnifying party of the defense and/or settlement of such claim, suit or other demand. This Section provides the sole and exclusive obligations and remedies of the parties in connection with any third party claim, suit or other demand described in this Section or which otherwise asserts a violation of a third party's intellectual property rights. 27. Entire Agreement. This Agreement (and any Attachments and other documents incorporated herein by EVG/IAA MSA/9/1/2004 MCI CONFIDENTIAL 4 Exhibit 10.34 MCI reference) constitutes the entire agreement between the parties with respect to the Services ordered under this Agreement and supersedes all other representations, understandings or agreements that are not expressed herein, whether oral or written including, without limitation, the following agreements between the parties and any amendments thereto:
Contract Description Contract ID - -------------------- ----------- Metro Private Lines 446903-00 Frame Relay 444113-01 Internet Colocation 375010-01 IP VPN Total Access 366674 IPVPN Remote Access 367046-02
This Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties and their permitted successors and assigns. Except as otherwise set forth herein, no amendment to this Agreement shall be valid unless in writing and signed by both parties. Any requirement for a signature in this Agreement or any Amendment may be satisfied by facsimile transmission of an original signature. 28. MCI has implemented and will continue to maintain a commercially-reasonable written information security program intended to (a) prevent, respond to, or otherwise address threats to MCl's network including without limitation unauthorized access to or use of MCl's network devices, and (b) protect the confidentiality and integrity of confidential information that resides on MCl's internal business systems. MCI will cooperate with Customer and provide Customer such non-proprietary information as is reasonably necessary for Customer to assess the security of the Services for purposes of Customer's legal compliance. 29. Insurance Throughout the Term, MCI will maintain, and will require any of its providing Affiliates or subcontractors to maintain, the following insurance coverages: (a) Commercial General Liability Insurance covering liability for injury to or death of persons and damage to property at a minimum of One Million dollars $1,000,000) per occurrence and Two Million dollars ($2,000,000) aggregate. The policy will cover (i) contractual liability defined by ISO (bodily injury, property damage) which is assumed under this Agreement (ii) liability which may arise from the use of independent contractors (iii) explosion liability and damages to underground utilities and damage caused by collapse, if the appropriate exposure exists (involving blasting, underpinning, and structural alterations, etc.) (iv) broad form property damage; (v) personal injury liability and (vi) an amendment to pollution exclusion to include damage from heat, smoke and fumes from hostile fire. (b) Automobile Liability covering bodily injury and property damage with combined single limit of One Million ($1,000,000) (c) Umbrella and/or Excess Liability Insurance of no less than Two Million dollars ($2,000,000) over and in addition to the coverage applying to (a) and (b), above. (d) Workers Compensation Insurance not less than statutory limits and Employers Liability Insurance at a minimum of One Million dollars ($1,000,000) per occupational injury or illness. (e) All-Risk Property Insurance in an amount not less than replacement cost of MCl's property. All insurance policies will be issued by carriers with A.M. Best solvency ratings of at least A-VIII. Customer will be named as an additional insured with respect to all coverages except (d) and e) above. MCl's insurance will be primary and non-contributory to any other policies with respect to their operations. The Commercial General liability insurance will contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat smoke or fumes from a hostile fire. 30. Permitted Termination. In the event of a permitted termination under any provision, Attachment or Schedule to this Agreement for which MCI agrees to waive Underutilization charges, the following procedure shall apply. MCI agrees during the remainder of the Term of the Agreement, to waive (i) Early Termination Charges, if incurred by Customer, in an amount equal to the product of the average monthly charges for the terminated service (calculated by averaging Customer's actual charges for the terminated service in the 6 months immediately preceding termination) ("Average Monthly Charges") multiplied by the number of months remaining in the unexpired portion of the Term at the time of Early Termination, of the Agreement and (ii) Underutilization Charges,-if incurred by Customer in the Contract Year in which the termination occurred, in an amount up to the product of the Average Monthly Charges multiplied by the number of months remaining in the Contract Year at the time of termination of the Service and (iii) Underutilization Charges, if incurred by Customer in a subsequent Contract Year, in an amount up to the product of the Average Monthly Charges multiplied by 12. EVG/IAA MSA/9/1/2004 MCI CONFIDENTIAL EX-10.35 5 c93072exv10w35.txt LEASE AGREEMENT EXHIBIT 10.35 SAVIN [SAVIN LOGO] MASTER LEASE AGREEMENT ADMINISTRATION CENTER, 333 LUDLOW ST. STAMFORD, CT 06904 001-0001009-001 MASTER LEASE AGREEMENT NO. Dear Customer: This Master Lease Agreement ("Lease") is written in simple and easy-to-read language. Please read this Lease thoroughly and feel free to ask any questions you may have about it. The words YOU and YOUR mean the Lessee. The words WE, US and OUR refer to the Lessor. CUSTOMER INFORMATION BILLING CONTACT Lessee Name Insurance Auto Auctions, Inc. Contact Person Dena Strand Billing Address 850 E. Algonquin Rd., Ste. 100, PHONE NO. (847) 839-3939 Schaumburg. IL 60173 Address City State Zip Equipment Location See Exhibit A Address City County State Zip MASTER AGREEMENT The terms of this Agreement are master terms which may be incorporated into, and constitute a part of one or more Schedules between us and you. Each Schedule will constitute a separate, assignable Lease Agreement which incorporates the terms of this Agreement. When the term "Lease" is used in this Master Agreement, it will mean each Schedule individually, together with the terms of this Master Agreement. This Master Lease and each Schedule is a complete and exclusive statement of our Agreement concerning the Schedule. TERMS/CONDITIONS IMPORTANT: NEITHER THE SUPPLIER NOR ANY SALESPERSON ARE THE LESSOR'S AGENT. THEIR STATEMENTS WILL NOT AFFECT THE RIGHTS OR OBLIGATIONS PROVIDED IN THIS LEASE. 1 LEASE AGREEMENT; PAYMENTS: We agree to Lease to you and you agree to lease from us the Equipment ("Equipment") listed on any Schedule entered into by both of us. You promise to pay us the Lease payments shown on any Schedule according to the terms of the Schedule. 2 GENERAL TERMS; EFFECTIVENESS: You agree to all the terms and conditions of this Master Lease and each Schedule. The Equipment will not be used for personal, family or household purposes. You acknowledge receipt of a copy of this Master Lease and each Schedule and acknowledge that you have selected the Equipment covered by each Schedule. THIS MASTER LEASE AND EACH SCHEDULE WILL NOT COMMENCE AND WILL NOT BE BINDING ON US UNTIL ACCEPTED IN OUR OAKLAND COUNTY. Ml OFFICES. You appoint us as your attorney-in-fact to execute, deliver and record financing statements on your behalf to show our Interest in the Equipment. You agree that we are authorized without notice to you to supply missing information or correct obvious errors in this Master Lease and any Schedule. Any security deposit you have given us may be used by us to cover any costs or losses we may suffer due to your default of any Lease. 3 LATE CHARGES; OTHER CHARGES: If any payment is not made when due. you agree to pay a late charge at the rate of fifteen percent (15%) of such late payment or twenty-five dollars ($25.00), whichever is greater, and each month thereafter a finance charge of one and three-quarter percent (1.75%) on any unpaid delinquent balance. You also agree to pay twenty-five dollars ($25.00) for each collection call made by us and pay twenty-five dollars ($25.00) for each returned check. You also agree to pay a documentation fee of forty-nine dollars ($49.00). 4 RENEWAL: After the original term of a Schedule expires, the Schedule will automatically renew for successive one (1) month terms unless you send us written notice that you do not want it to renew at least sixty (60) days before the end of any term. 5 EQUIPMENT OWNERSHIP: We are and shall remain the sole owner of the Equipment. You agree to keep the Equipment free from liens and encumbrances. 6 NO WARRANTIES: WE ARE LEASING THE EQUIPMENT TO YOU "AS IS", WITH NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES Of MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. We assign to you for the term of this Master Lease and each Schedule any transferable manufacturer or supplier warranties. We are not liable to you for any breach of those warranties. You agree that upon your acceptance of the equipment, you will have no set-offs or counter claims against us. 7 MAINTENANCE: USE; INSTALLATION: You are responsible for installation and maintenance of, and for any damage to, the Equipment. You must maintain and use the Equipment in compliance with all laws and regulations. If the Equipment malfunctions, is damaged, lost or stolen, you agree to continue to make all payments due under this Master Lease and each Schedule. 8 EQUIPMENT LOCATION: You will keep the Equipment only at the address shown on the Schedule and you will not move it from that address unless you get our prior written consent. 9 INSURANCE: Until a Schedule is paid in full and the Equipment has been returned to us. you will: (a) keep the Equipment insured for its full replacement value against all types of loss. Including theft, and name us as loss payee; and, (b) provide and maintain an acceptable general public liability insurance policy. If you do not provide us with acceptable evidence of insurance, we may, but will have no obligation to, obtain insurance for you and add a charge to your monthly payment which will include the premium coat and related costs. 10 LIABILITY: WE ARE NOT RESPONSIBLE FOR ANY LOSSES OR INJURIES TO YOU OR ANY THIRD PARTIES CAUSED BY THE EQUIPMENT OR ITS USE. You agree reimburse us for, and to defend us against, any claims or losses or injuries caused by the Equipment and any costs or attorney fees relative to those claims. 11 TAXES: PERSONAL PROPERTY TAX FEES: You agree to show the Equipment as "leased Property" on all personal property tax returns. You agree to pay us all personal property tax assessed against the Equipment or at our sole election we may opt to charge you a liquidated monthly personal property tax fee. We will advise you in writing of your personal property tax fee. You agree to reimburse us for applicable sales and/or use tax and all other taxes, fees, fines and penalties which may be imposed, levied or assessed by any federal, state or local government or agency, which relate to this Lease, the Equipment or its use. 12 ASSIGNMENT: YOU MAY NOT SELL, PLEDGE, TRANSFER, ASSIGN OR SUBLEASE THE EQUIPMENT OR THIS MASTER LEASE OR ANY SCHEDULE. We may sell assign or transfer all or any part of this Master lease, any Schedule and/or the Equipment. The new owner will have the same rights that we have, but you agree you will not assert against the new owner any claims, defenses or set-offs that you may have against us or any supplier. 13 DEFAULT; DAMAGES: If you fail to make any Lease payment when due or otherwise default on this Lease, we may accelerate the remaining balance due on this Master Lease or any Schedule , and demand the immediate return of the Equipment to us, if you do not return the Equipment to us with ten (10) days of our notice of your default, you will also pay a liquidated Equipment charge equal to the anticipated Lease-end residual value of the Equipment, We may also use any remedies available to us under the Uniform Commercial Code or any other applicable law. You agree to pay our attorney's fees at twenty-five percent (25%) of the amount you owe, plus all actual costs, including all costs of any Equipment repossession. You agree that we have no duty to mitigale any damages to us caused by your default. You waive any notice of our repossession or disposition of the Equipment. By repossessing any Equipment, we do not waive our right to collect the balance due on any Lease. We will not be responsible to you for any consequential or incidental damages. Our delay or failure to enforce our rights under this Master Lease and each Scedule will not prevent us from doing so at a later time. 14 CHOICE OF LAW; JURISDICTION; VENUE; NON-JURY TRIAL: You agree that this Master Lease and each Schedule will be deemed fully executed and performed in the State of Michigan and will be governed by Michigan law. YOU AND ANY GUARANTOR EXPRESSLY AGREE TO: (a) BE SUBJECT TO PERSONAL JURISDICTION OF THE STATE OF MICHIGAN; (b) ACCEPT VENUE IN ANY FEDERAL OR STATE COURT IN MICHIGAN, AND (c) WAIVE ANY RIGHT TO A TRIAL BY JURY. Any Master Lease charge and each Schedule charge which exceeds the amount allowed by law shall be reduced to the maximum allowed. 15 FINANCE LEASE; AMENDMENTS: THIS MASTER LEASE AND EACH SCHEDULE IS A "FINANCE LEASE" UNDER THE UNIFORM COMMERCIAL CODE AS ADOPTED IN MICHIGAN ("UCC"). THIS MASTER LEASE AND EACH SCHEDULE MAY NOT BE AMENDED EXCEPT BY A WRITING WHICH WE HAVE SIGNED. YOU WAIVE ANY AND ALL RIGHTS AND REMEDIES YOU MAY HAVE UNDER UCC 2A-508) THROUGH 2A-522. INCLUDING ANY RIGHT TO (a) CANCEL THIS MASTER LEASE AND EACH SCHEDULE; (b) REJECT TENDER OF THE EQUIPMENT; (c) REVOKE ACCEPTANCE OF THE EQUIPMENT; (d) RECOVER DAMAGES FOR ANY BREACH OF WARRANTY; AND (e) MAKE DEDUCTIONS OR SETOFFS, FOR ANY REASON. FROM AMOUNTS DUE US UNDER THIS MASTER LEASE AND EACH SCHEDULE. IF ANY PART OF THIS MASTER LEASE AND EACH SCHEDULE IS INCONSISTENT WITH UCC 2A. THE TERMS Of THIS MASTER LEASE AND EACH SCHEDULE WILL GOVERN. 16 EQUIPMENT RETURN: At the and of any Schedule term, you will immediately crate, ship and insure the Equipment, in good working condition, to us by means we designate, with all expenses to be prepaid by you. If you fall to return the Equipment to us as agreed, you shall pay to us one and one-half (1.5) times the regular Lease payment until the Equipment is returned. You will be responsible for any damage to the Equipment during shipping. 17 SAVINGS: If any provision of the Master Lease or any Schedule is unenforceable, invalid or illegal, the remaining provisions will continue to be effective. CUSTOMER ACCEPTANCE THIS LEASE MAY NOT BE CANCELED Company Legal Name Insurance Auto Auctions, Inc. Signed By /s/ Scott P. Pettit -------------------------------------------------- Acceptance Date 1-23-04 Print Name Scott P. Pettit Title SVP & CFO Indicate Corporate Officer, Partner, Proprietor, etc.
Accept By: Savin Corporation, Oakland County. MI, Lessor Signed By: X ____________________________ Commencement Date:___________________ EX-21 6 c93072exv21.txt SUBSIDIARIES Exhibit 21 Subsidiaries of Insurance Auto Auctions, Inc. Jurisdiction Name of Incorporation ---- ---------------- Insurance Auto Auctions Corp. (wholly owned) Delaware EX-23 7 c93072exv23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23 Consent of Independent Registered Public Accounting Firm The Board of Directors Insurance Auto Auctions, Inc.: We consent to incorporation by reference in the registration statement (No. 333-117076) on Form S-8 of Insurance Auto Auctions, Inc. and subsidiaries of our report dated March 11, 2005, relating to the consolidated balance sheets of Insurance Auto Auctions, Inc. and subsidiaries as of December 26, 2004 and December 28, 2003 and the related consolidated income statements, statements of shareholders' equity, and cash flows for each of the years in the three-year period ended December 26, 2004, which report appears in the December 26, 2004 fiscal annual report on Form 10-K of Insurance Auto Auctions, Inc. /s/ KPMG LLP - -------------------- Chicago, Illinois March 11, 2005 EX-31.1 8 c93072exv31w1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) I, Thomas C. O'Brien, certify that: 1. I have reviewed this report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 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: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 14, 2005 /s/ Thomas C. O'Brien ------------------------------------------ Thomas C. O'Brien, Chief Executive Officer EX-31.2 9 c93072exv31w2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) I, Scott P. Pettit, certify that: 1. I have reviewed this report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 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: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 14, 2005 /s/ Scott P. Pettit ------------------------------------------ Scott P. Pettit, Chief Financial Officer EX-32.1 10 c93072exv32w1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Insurance Auto Auctions, Inc. (the "Company") for the annual period ended December 26, 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: March 14, 2005 /s/ Thomas C. O'Brien ---------------------------------------------- Thomas C. O'Brien, Chief Executive Officer This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 11 c93072exv32w2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Insurance Auto Auctions, Inc. (the "Company") for the annual period ended December 26, 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: March 14, 2005 /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-----