-----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, Dk2EAUyJY5CwY/4W1CthThkQRLtFWQrPfrLoPjU+p+uG6zxpg02Y012DRB6fSwEB WI41KfO5k9gf83YP+3ZwCg== 0000950137-98-001395.txt : 19980402 0000950137-98-001395.hdr.sgml : 19980402 ACCESSION NUMBER: 0000950137-98-001395 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSURANCE AUTO AUCTIONS INC /CA CENTRAL INDEX KEY: 0000880026 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLES & MOTOR VEHICLE PARTS & SUPPLIES [5010] IRS NUMBER: 953790111 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19594 FILM NUMBER: 98584289 BUSINESS ADDRESS: STREET 1: 850 E ALGONQUIN RD STREET 2: STE 100 CITY: SCHAUMGURG STATE: IL ZIP: 60173 BUSINESS PHONE: 847839-3939 MAIL ADDRESS: STREET 1: 1270 WEST NORTHWEST HIGHWAY CITY: PALATINE STATE: IL ZIP: 60067 10-K 1 FORM OF ANNUAL REPORT 1 ================================================================================ 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 31, 1997 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 (I.R.S. Employer of Identification Number) incorporation or organization) 850 EAST ALGONQUIN ROAD, SUITE 100 SCHAUMBURG, ILLINOIS 60173 (847) 839-3939 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ---------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock (based on the closing price as reported by the Nasdaq National Market on March 15, 1998) held by non-affiliates of the Registrant as of March 15, 1998 was approximately $62,900,000. For purposes of this disclosure, shares of Common Stock known to be held by persons who own 5% or more of the shares of outstanding common stock and shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be "affiliates" as that term is defined under the Rules and Regulations of the Act. This determination of affiliate status is not necessarily conclusive. As of March 15, 1998, the Registrant had outstanding 11,307,454 shares of Common Stock, $0.001 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Notice of Annual Meeting and Proxy Statement for the Registrant's Annual Meeting of Shareholders are incorporated herein by reference in Part III hereof. ================================================================================ 2 PART I ITEM 1. BUSINESS. The discussion in this section contains forward-looking information that is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected, expressed or implied by such forward looking information. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Factors That May Affect Future Results" below and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Among these risks are governmental regulation, weather conditions, market value of salvage, competition, quality and quantity of inventory available from suppliers, and dependence on key insurance company suppliers. GENERAL Insurance Auto Auctions, Inc., together with its subsidiaries (collectively, "IAA" or the "Company"), offers insurance companies and other vehicle suppliers cost-effective salvage processing solutions. In an accident, theft or other claims adjustment process, insurance companies typically take possession of a vehicle because (i) based on economic and customer service considerations, the vehicle has been classified as a "total loss" and the insured replacement value has been paid rather than the cost of repair or (ii) a stolen vehicle is recovered after the insurance company has settled with the insured. The Company generally sells these vehicles at live or closed bid auctions on a competitive-bid basis at one of the Company's facilities. The Company processes salvage vehicles under three methods: purchase agreement, fixed fee consignment and percentage of sale consignment. Under the purchase agreement method, IAA generally purchases vehicles from the insurance companies upon clearance of title, under financial terms determined by contract with the insurance company supplier and then resells these vehicles for IAA's own account at IAA auctions. Under the fixed fee consignment and percentage of sale consignment method, the Company sells vehicles on behalf of insurance companies, which continue to own the vehicles until they are sold to buyers at auction. Under these methods, the Company generally conducts either live or closed bid auctions of the automotive salvage in return for agreed upon sales fees. In addition to fees, the Company generally charges its fixed fee consignment and percentage of sale consignment vehicle suppliers for various services, including towing and storage. Under all methods of sale, the Company also charges the buyer of each vehicle various buyer-related fees. Prior to 1992, the Company operated almost exclusively using the purchase agreement system of salvage disposal. Since 1992, IAA has acquired additional auto salvage pool operations, resulting in a network of 46 salvage pools in 19 states as of December 31, 1997. In February of 1998 the Company acquired Auto Disposal Company, Inc. ("ADC"). ADC operated two salvage pools in Alabama. Most of these businesses operate primarily using the fixed fee consignment method of sale. As a result of these site additions, a majority of the vehicles currently processed by IAA are now sold under fixed fee and percentage of sale consignment arrangements. In 1997, approximately 70% of the vehicles processed by IAA were sold under the fixed fee and percentage of sale consignment methods, and 30% were sold under the purchase agreement method. The Company obtains the majority of its supply of vehicles from a large number of insurance companies and smaller quantities from non-insurance company suppliers such as rental car companies and non-profit organizations. Historically, a limited number of insurance companies have accounted for a substantial portion of the Company's revenues. In 1997, vehicles supplied by the Company's three largest suppliers accounted for approximately 46% of the Company's unit sales. The largest suppliers, State Farm Insurance, Allstate Insurance ("Allstate"), and Farmers Insurance, each accounted for approximately 19%, 17% and 10% respectively, of the Company's unit sales. A number of other insurance company suppliers have also contributed to the profitability of the Company, including 20th Century Insurance. 2 3 HISTORY The Company was organized as a California corporation in 1982 under the name Los Angeles Auto Salvage, Inc. ("LAAS"). In January 1990, all the outstanding capital stock of LAAS was acquired in a leveraged buyout and, in October 1991, LAAS changed its name to Insurance Auto Auctions, Inc. The Company completed its initial public offering in November 1991 and its common stock is traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol IAAI. In 1997, the Company reincorporated in the state of Illinois. IAA PURCHASE AGREEMENT METHOD Under the purchase agreement method of sale, the Company is required to purchase, and the insurance company and other non-insurance company suppliers are required to sell to the Company, virtually all total loss and recovered theft vehicles generated by the supplier in a designated geographic area. IAA then works to enhance the value of purchased vehicles in the selling process and assumes the risk of market price variation for vehicles so processed. Under the purchase agreement, insurance companies may outsource much of the salvage administration workload and this potentially reduces their expenses accordingly. The agreements are customized to each supplier's needs, but typically require the Company to pay a specified percentage of a vehicle's Actual Cash Value ("ACV"), depending on the vehicle's age, certain other conditions and whether the vehicle is a total loss or recovered theft vehicle. The Company's revenue from the sale of a purchase agreement vehicle is the actual selling price of vehicle. The Company has added adjustment and risk-sharing clauses to its new standard purchase agreement contracts designed to provide some protection to the Company and its customers from certain unexpected, significant changes in the ACV/salvage price relationship. In 1997, approximately 30% of the units processed by IAA were processed through the purchase agreement method of sale, compared with 33% in 1996. IAA FIXED FEE CONSIGNMENT SALE METHOD Approximately 66% of the Company's vehicles for the year ended December 31, 1997 were sold on the fixed fee consignment method of sale, compared with 64% in 1996. Under this method of sale, the Company typically acts as an agent for the insurance company rather than as a purchaser of salvage vehicles. As agent, the Company arranges for the salvage vehicle to be towed to its facility and processes the car for sale. Under this method of disposal, the Company charges fees to the insurance company supplier, typically including a towing fee, a title processing fee and a storage and salvage sales fee. Since the Company does not own the vehicle, the Company's revenues per vehicle from consignment sales are received only from these fees rather than from the revenue from the sale of the vehicle. As a result, revenue recognized per vehicle under the consignment method of sale is approximately 5% to 15% of the revenue recognized per vehicle under the purchase agreement method, where the sale price of the vehicle is also recorded. IAA PARTNERPLUS(TM) (PERCENTAGE OF SALE CONSIGNMENT) METHOD The Company offers certain of the services provided to its purchase agreement suppliers to particular consignment suppliers. In 1993, IAA introduced the PartnerPlus (TM) service program, combining several of IAA's purchase agreement services with a percentage of sale consignment arrangement under which the insurance company receives a negotiated percentage of the vehicle-selling price. As under the fixed fee consignment method, IAA acts as an agent for the supplier. The PartnerPlus (TM) arrangement provides suppliers with potentially greater upside since IAA's fees are tied to selling prices and IAA has, thus, more incentive to invest in improvements to salvage vehicles to maximize sale prices. Many of these enhancements (detailing the vehicles, for example) are practiced with purchase agreement vehicles with which the Company has expertise. The PartnerPlus (TM) arrangement provides to certain suppliers a competitive alternative to traditional fixed fee consignment services. Approximately 4% and 3%, of the vehicles processed by the Company were sold under the percentage of sale consignment method in 1997 and 1996, respectively. 3 4 SERVICES PROVIDED TO ALL SUPPLIERS The process of salvage disposition through the IAA system commences at the time of loss, or when a stolen vehicle has been subsequently recovered. An insurance company representative assigns the vehicle to the Company, either by phone, facsimile or, through the Company's on-line electronic DataLink (TM) system. DataLink(TM) is the Company's proprietary computer order processing system that enables insurance company suppliers to access their data electronically and to retrieve information on a vehicle at any time during the claims adjustment and disposal process. The Company's FastTow(TM) service also provides towing services which guarantee that vehicles will be delivered to a Company branch storage facility, usually within one to two business days of assignment within a designated service area. In retrieving a vehicle, the FastTow(TM) service will also advance, on behalf of the supplier, any storage and towing charges incurred when the vehicle was initially towed from the accident scene or recovered theft site to the temporary storage facility or repair shop. Once these advance towing and storage charges have been reviewed and verified by the Company, the towing subcontractor generally will pay the charges at time of vehicle pick up and deliver the vehicle to the predetermined Company auction and storage facility. The rapid retrieval time and review of advance charges are also intended to increase the insurance company's net return on salvage. The FastTow(TM) service is normally provided to insurance company purchase agreement, percentage of sale and consignment suppliers. In order to further minimize vehicle storage charges incurred by insurance company suppliers at the temporary storage facility or repair shop (which can be as high as $50 per day per car) and improve service time to the policyholder, the Company and certain of its insurance company suppliers have established vehicle inspection centers ("VICs") at many of the Company's facilities. A VIC is a temporary storage and inspection facility located at an IAA site that is operated by the insurance company. Suspected total loss vehicles are brought directly to the VIC from the temporary storage facility or repair shop. The insurance company typically has appraisers stationed on the VIC site in order to expedite the appraisal process and minimize storage charges at outside sites. If the vehicle is totaled by the insurance company, the vehicle can easily be moved to IAA's vehicle storage area. If the vehicle is not totaled, it is promptly delivered to the insurer's selected repair facility. IAA also provides video imaging as a service to its customers, digitizing pictures of the damaged cars and electronically displaying them to insurance adjusters in their office. After a totaled vehicle is received at a Company facility, it remains in storage but cannot be auctioned until transferable title has been submitted to and processed by IAA. For most vehicles stored on its facilities, no storage charges accrue for a contractually specified period. The document processing departments at the Company's facilities provide management reports to the insurance company suppliers, including an aging report of vehicles for which title documents have not been provided. In addition, the Company customarily offers the insurance company 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 and decreasing the suppliers' administrative costs and expenses. Upon receipt of title documents, the Company's contractual obligation to pay its insurance company purchase agreement suppliers commences. For total loss vehicles, the Company then processes the title documents in order to comply with DMV requirements for such vehicles. This may involve re-registering the vehicle and obtaining a salvage certificate, after which the Company is entitled to sell the salvage vehicle. The company holds auctions every week or bi-weekly in all of its locations. The auction is either live or sealed bid as desired by vehicle providers. Auction lists can be viewed on line on the Company's internet website where buyers can review vehicles at a location or search for specific vehicles. 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 generally 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 and detail of storage charges and other useful management data. The Company also provides many of its suppliers with quarterly Comprehensive Salvage Analysis of salvage trends. 4 5 OTHER SERVICES IAA's BidFast (TM) service provides insurers with a binding bid for a salvage vehicle which 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 state department of insurance regulations. IAA also provides certain insurance company suppliers with anti-theft fraud control programs for vehicle salvage processing. The Company's CarCrush (TM) services helps insurance companies to crush severely damaged or stripped "high profile" cars to prevent their vehicle identification numbers ("VINs") from being used in auto theft. IAA also provides computerized reporting of vehicle sales to the National Insurance Crime Bureau ("NICB"). This includes detailed buyer information obtained through the Company's registration process. IAA has also continued its support for consumer protection laws calling for the nationwide, mandatory use of salvage certificates for salvage vehicles. The Company offers a National Salvage Network, based in Dallas, Texas, that allows insurance company suppliers to call in all their salvage vehicle assignments to a single location. This call center enables IAA to distribute vehicle assignments in most of the United States, even in markets where IAA does not currently have a facility, and is designed to minimize the administrative workload for insurance companies and provide IAA with broader geographic coverage. In certain areas where the Company does not have a facility, such vehicles are distributed to IAA 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 offers insurance companies the opportunity for better returns on units that typically do not sell for as much at local salvage pools as a result of the limited number of local buyers. These vehicles can be viewed on line through the Company's internet website. GROWTH STRATEGIES The Company seeks to increase sales on a profitable basis by offering to insurance company suppliers a variety of methods of sale (including purchase agreement, fixed fee consignment and percentage of sale consignment) and service and by (i) increasing market share at existing sites; (ii) continued market penetration through the acquisition of sellers of automotive salvage; (iii) new site expansion; (iv) development of national/regional supplier agreements, and (v) the offering of new services to insurance companies to assist them in reducing time and cost in the claims process. Increasing Market Share at Existing Sites The Company's primary strategy for growth in its existing markets is to contract for additional vehicles by promoting better returns on salvage vehicles and a broad selection of services to prospective suppliers. The expansion of the number of vehicles processed at existing sites coupled with the Company's introduction of the Auction Club for IAA buyers, offering discounts on goods and equipment used by buyers of the vehicles, typically makes the Company's auctions more attractive and results in more buyers attending auctions. Continued Market Penetration Through Acquisitions Since the Company's initial public offering in November 1991, the Company has acquired additional pool operations across the United States to offer better, national coverage to its insurance company customers. On December 31, 1997, the Company operated 46 salvage pools in 19 states. Subsequent to December 31, 1997, two additional pools were acquired in Alabama. IAA intends to continue to pursue acquisitions of strategically-located salvage pools. Through such acquisitions, it seeks to enhance a geographically broad-based relationship with key insurance company suppliers, as well as to offer its specialized salvage services to new insurance companies and certain noninsurance company suppliers. In pursuing its acquisition strategy and plans, the Company recognizes that there will be continuing 5 6 challenges in effectively and efficiently integrating new facilities into existing IAA operations. This will require continuing investment in infrastructure. See "Factors That May Affect Future Results." New Site Expansion While the Company will continue to pursue growth through acquisitions, it also will continue to seek growth through the opening of new sites. The opening of new sites offers advantages in certain markets and capitalizes on regional and national customer accounts. The last new site was opened in Kansas in the summer of 1996; the new site serves the Kansas City area. Development of National/Regional Supplier Agreements The Company's expanded geographic base of operations, plus its National Network, facilitates its strategy of offering its customers and prospective customers national and regional supplier agreements. These can provide a more consistent reporting and control function to its customers, who benefit from a reduction in the number of suppliers through which they must do business. Offering of New Services The Company is actively pursuing opportunities for growth through the identification and development of new, non traditional customer valued services and business offerings that leverage the Company's current competencies, geographic presence and assets. The primary focus of these new services is to provide to the insurance industry new, innovative options and alternatives for reducing the time and costs associated with processing insurance claims. SUPPLIER MARKETING The Company's sales personnel call on insurance company and non-insurance company suppliers. Based upon historical data supplied by a prospective supplier, the Company can provide prospective suppliers with a detailed analysis of their current salvage returns and a proposal setting forth ways in which the Company can improve salvage returns, reduce administrative costs and expenses and provide proprietary turnkey claims processing services. In addition to providing insurance companies and certain non-insurance company suppliers with a means for disposing of salvage vehicles, the Company provides services that are intended to increase the net amount of salvage sale proceeds received by the suppliers and reduce the time in which the suppliers receive net proceeds. The Company seeks to become an integral part of its suppliers' salvage process. The Company views such mutually beneficial relationships as an essential component of its effort to retain existing suppliers and attract new suppliers. The Company also seeks to expand its supply relationships through recommendations from individual branch offices of an insurance company supplier to other offices of the same insurance company. The Company believes that its existing relationships and the recommendations of branch offices currently play a significant role in its marketing of services to national insurance companies from its growing network of salvage locations. Indeed, as the Company has expanded its geographic coverage, it has been able to market its services to insurance suppliers offering to handle salvage on a national basis or for a large geographic area. CUSTOMER MARKETING AND SALES The Company sells the majority of its vehicles through live auctions. IAA maintains databases, which currently contain information regarding nearly 20,000 registered customers. No single customer accounted for more than 10% of the Company's net sales in 1997. The Company generally accepts cash, money orders, cashier's checks, wire transfers, and, for selected credit card customers, pre-approved checks, at the time the vehicle is picked up. Vehicles are sold "as is" and "where is." Sales notices listing the vehicles to be auctioned on a particular day at a particular location are generally mailed, faxed or available online on the Company's internet website to the Company's customers in advance of the auction. Such notices list details about the vehicle, 6 7 including the year and make of the vehicle, the nature of the damage, the status of title, the order of the vehicle in the auction and the rules of the auction. COMPETITION Historically, the automotive salvage industry has been highly fragmented. As a result, the Company faces intense competition for the supply of salvage vehicles from vehicle suppliers, as well as competition for processors of vehicles from other regional salvage pools. These regional salvage pools generally process vehicles under the fixed fee consignment method and generally do not offer the full range of services provided by the Company. The salvage industry went through a period of consolidation, however, and the Company believes its principal publicly-held competitor is Copart, Inc. Copart, Inc. has effected a number of acquisitions of regional salvage pools and competes with IAA in most of IAA's geographic markets. Due to the limited number of vehicle suppliers, competition for salvage vehicles from Copart and regional suppliers is intense. It is also possible that the Company may encounter further competition from existing competitors and new market entrants that are significantly larger and have greater financial and marketing resources. Other potential competitors could include used car auction companies, providers of claims processing software to insurance companies, certain salvage buyer groups and insurance companies, some of which presently supply auto salvage to IAA. While many insurance companies have abandoned or reduced efforts to sell salvage without the use of service providers such as the Company, they may in the future decide to dispose of their salvage directly to customers. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on its business, operating results and financial condition. GOVERNMENT REGULATION The Company's operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations. The acquisition and sale of totaled and recovered theft vehicles is regulated by governmental agencies in each of the locations in which the Company operates. In many of these states, regulations require that the title of a salvage vehicle be forever "branded" with a salvage notice in order to notify prospective purchasers of the vehicle's previous salvage status. In addition to the regulation of sales and acquisitions of vehicles, the Company is also subject to various local zoning requirements with regard to the location and operation of its auction and storage facilities. Some state and local regulations also limit who can purchase salvage vehicles, as well as determine whether a salvage vehicle can be sold as rebuildable or must be sold for parts only. Such regulations can reduce the number of potential buyers of vehicles at Company auctions. The Company is also subject to environmental regulations. The Company believes that it is in compliance with all applicable material regulatory requirements. The Company will be subject to similar types of regulations by federal, state and local governmental agencies in new markets and to continuing legislation in existing markets. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws and regulations governing, among other things, the handling, storage, transportation and disposal of waste and other materials. The Company believes that its business, operations and facilities have been and are being operated in compliance in all material respects with applicable environmental laws and regulations. The Company believes the overall impact of compliance with laws and regulations protecting the environment will not have a material effect on its business operating results and general condition, although no assurance can be given in this regard. EMPLOYEES At December 31, 1997, the Company employed 670 full-time persons. The Company is not subject to any collective bargaining agreements and believes that its relationship with its employees is good. 7 8 FACTORS THAT MAY AFFECT FUTURE RESULTS The Company operates in a changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks. Quarterly Fluctuations. The Company's operating results have in the past and may in the future fluctuate significantly depending on a number of factors, some of which are more significant for sales under the purchase agreement method. These factors include changes in the market value of salvage vehicles, attendance at salvage auctions, delays or changes in state title processing, fluctuations in Actual Cash Values ("ACVs") of salvage vehicles, changes in regulations governing the processing of salvage vehicles, general weather conditions and the availability and quality of salvage vehicles. The Company is also dependent upon receiving a sufficient number of total loss vehicles as well as recovered theft vehicles to sustain its profit margins. Factors which can effect the number of vehicles received include: reduction of policy writing by insurance providers which would affect the number of claims over a period of time and changes in direct repair procedures that would reduce the number of newer less damaged total loss vehicles that tend to have the higher salvage values. Additionally in the last few years there has been a declining trend in theft occurrences. These factors are further aggravated in the event the Company fails to renegotiate purchase agreement contracts that are volume and mix dependent on availability of these types of sales. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. In addition, revenues for any future quarter are not predictable with any significant degree of accuracy; the Company's expense levels are relatively fixed. If revenue levels are below expectations, operating results are likely to be adversely affected. Due to all of the foregoing factors, it is likely that in some future quarters the Company's operating results will be below the expectations of public market analysts and investors. Quality and Quantity of Inventory Available from Suppliers. The Company is dependent upon receiving a sufficient number of total loss vehicles as well as recovered theft vehicles to sustain its profit margins. Factors which can effect the number of salvage vehicles received include, reduction of policy writing by insurance providers which would affect the number of claims over a period of time and the changes in direct repair procedures that would reduce the number of newer less damaged total loss vehicles that tend to have higher salvage values. The decreases in the quality and quantity of inventory and in particular the availability to newer and less damaged vehicles are further aggravated under the purchase agreement method of salvage and can have a negative impact on the operating results and financial condition of the Company. Competition. Historically, the automotive salvage industry has been highly fragmented. As a result, the Company faces intense competition for the supply of salvage vehicles from vehicle suppliers, as well as competition from processors of vehicles from other regional salvage pools. These regional salvage pools generally process vehicles under the fixed fee consignment method and generally do not offer the full range of services provided by the Company. The salvage industry has recently experienced consolidation, however, and the Company believes its principal publicly-held competitor is Copart, Inc. Copart, Inc. has effected a number of acquisitions of regional salvage pools and competes with IAA in most of IAA's geographic markets. Due to the limited number of vehicle suppliers, competition for salvage vehicles from Copart and regional suppliers is intense. It is also possible that the Company may encounter further competition from existing competitors and new market entrants that are significantly larger and have greater financial and marketing resources. Other potential competitors could include used car auction companies, providers of claims software to insurance companies, certain salvage buyer groups and insurance companies some of which presently supply auto salvage to IAA. While most insurance companies have abandoned or reduced efforts to sell salvage without the use of service providers such as the Company, they may in the future decide to dispose of their salvage directly to customers. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on its business, operating results and financial condition. Dependence on Key Insurance Company Suppliers. Historically, a limited number of insurance companies has accounted for a substantial portion of the Company's revenues. For example, in 1997, vehicles supplied by the Company's three largest suppliers accounted for approximately 46% of the Company's unit sales. The largest suppliers, State Farm Insurance, Allstate Insurance ("Allstate"), and Farmers Insurance, each accounted for approximately 19%, 17%, and 10%, respectively, of the Company's unit sales. A number of other insurance company suppliers have also contributed to the profitability of the Company including 20th Century 8 9 Insurance. A loss or reduction in the number of vehicles from any of these suppliers, or adverse change in the agreements that such suppliers have with the Company, could have a material adverse effect on the Company's business, operating results and financial condition. Purchase Agreement Method of Sale. The Company has entered into a number of purchase agreements, including agreements with its most significant insurance suppliers, that obligate the Company to purchase most salvage vehicles offered to it at a formula percentage of ACV. In recent times, increased ACVs on which the Company's costs are based have reduced the profitability that the Company realizes on purchase agreement contracts. The Company has renegotiated and continues to attempt to renegotiate its agreements with certain of these suppliers. There can be no assurance, however, that the Company can renegotiate the terms of these agreements on terms favorable to the Company. The failure to renegotiate some or all of these agreements could have a material adverse effect on the Company's operating results and financial condition. In addition, further increases in ACVs or declines in the market or auction prices for salvage vehicles could have a material adverse effect on the Company's business, operating results and financial condition. The Company has added adjustment and risk-sharing clauses to its new standard purchase agreement contracts designed to provide some protection to the Company and its customers from certain unexpected, significant changes in the ACV/salvage price relationship. Governmental Regulation. The Company's operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations. The acquisition and sale of totaled and recovered theft vehicles is regulated by state motor vehicle departments in each of the locations in which the Company operates. Changes in governmental regulations or interpretations of existing regulations can result in increased costs, reduced salvage vehicle prices and decreased profitability for the Company. For example, the Company believes legislation currently being considered by Congress could have a negative impact on the number of buyers attending an auction as well as increase some of the costs to those buyers. This legislation could increase governmental regulation of certain operations of the Company. In addition to the regulation of sales and acquisitions of vehicles, the Company is also subject to various local zoning requirements with regard to the location of its auction and storage facilities. These zoning requirements vary from location to location. Failure to comply with present or future regulations or changes in existing regulations could have a material adverse effect of the Company's business, 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 require that the Company expends resources and dedicate management to a small number of individual accounts, resulting in a significant amount of fixed costs. The development of a referral based national network service, in particular, has required the devotion of financial resources without immediate reimbursement of such expenses by the insurance company suppliers. Integration and Expansion of Facilities. The Company seeks to increase sales and profitability through acquisition of other salvage auction facilities, new site expansion and the increase of salvage vehicle volume at existing facilities. There can be no assurance that the Company will continue to acquire new facilities on terms economical to the Company or that the Company will be able to add additional facilities on terms economical to the Company or that the Company will be able to increase revenues at newly acquired facilities above levels realized prior to acquisition. The Company's ability to achieve these objectives is dependent, among other things, on the integration of new facilities, and their information systems, into its existing operations, the identification and lease of suitable premises and the availability of capital. There can be no assurance that this integration will occur, that suitable premises will be identified or that additional capital will be available to fund expansion and integration of the Company's business. Any delays or obstacles in this integration process could have a material adverse effect on the Company's business, operating results and financial condition. Furthermore, the Company has limited sources of additional capital available for acquisitions, expansions and start-ups. The Company's ability to integrate and expand its facilities will depend on its ability to identify and obtain additional sources of capital to finance such integration and expansion. In the future, the Company will be required to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employee work force. The failure to improve these systems on a timely basis and to successfully expand and train the Company's work force could have a material adverse effect on the Company's business, operating results and financial condition. 9 10 Volatility of Stock Price. The market price of the Company's common stock has been and could continue to be subject to significant fluctuations in response to various factors and events, including variations in the Company's operating results, the timing and size of acquisitions and facility openings, the loss of vehicle suppliers or buyers, the announcement of new vehicle supply agreements by the Company or its competitors, changes in regulations governing the Company's operations or its vehicle suppliers, environmental problems or litigation. Environmental Regulation. The Company's operations are subject to federal, state and local laws and regulations regarding the protection of the environment. In the salvage vehicle auction industry, large numbers of wrecked vehicles are stored at auction facilities for short periods of time. Minor spills of gasoline, motor oils and other fluids may occur from time to time at the Company's facilities and may result in soil, surface water or groundwater contamination. Petroleum products and other hazardous materials are contained in aboveground or underground storage tanks located at certain of the Company's facilities. Waste materials such as waste solvents or used oils are generated at some of the Company's facilities and are disposed of as nonhazardous or hazardous wastes. The Company believes that it is in compliance in all-material respects with applicable environmental regulations and does not anticipate any material capital expenditure for environmental compliance or remediation. Environmental laws and regulations, however, could become more stringent over time and there can be no assurance that the Company or its operations will not be subject to significant compliance costs in the future. To date, the Company has not incurred expenditures for preventive or remedial action with respect to contamination or the use of hazardous materials that have had a material adverse effect on the Company's results of operations or financial condition. The contamination that could occur at the Company's facilities and the potential contamination by previous users of certain acquired facilities create the risk, however, that the Company could incur substantial expenditures for preventive or remedial action, as well as potential liability arising as a consequence of hazardous material contamination, which could have a material adverse effect on the Company. ITEM 2. PROPERTIES. The Company's principal administrative, sales, marketing and support functions are located in Schaumburg, Illinois. The Company moved in mid 1997 to a building providing approximately 26,000 square feet of available space in Schaumburg, Illinois. The lease on the office space in Schaumburg expires in May 2004. The Company and its subsidiaries also lease approximately 43 properties in Arizona, California, Florida, Georgia, Hawaii, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey, New York, North Carolina, Oregon, Texas, Virginia and Washington. The Company owns 8 properties located in Illinois, Kansas, Massachusetts and New York. Most of these properties are used primarily for auction and storage purposes. Management believes that the Registrant's properties are adequate for its current needs and that suitable additional space will be available as required. ITEM 3. LEGAL PROCEEDINGS. During the second quarter of 1997, the Company settled a securities class action lawsuit that had been pending against the Company and certain of its present and former officers and directors, in the United States District Court for the Central District of California. The litigation was settled for $3.75 million, the substantial portion of which was paid by the Company's directors' and officers' liability insurance company. The difference of $750,000 was recognized as a special charge to earnings in the second quarter of 1997. In February 1998, the settlement was approved by the court. Bradley Scott, Chairman of the Board of the Company, is a defendant in a lawsuit arising out of his alleged promise to share the proceeds from the sale of his stock in Los Angeles Auto Salvage, Inc., a corporate predecessor of the Company, with a former business associate. In February 1998, the lawsuit was settled by Mr. Scott. Mr. Scott believes he is entitled to indemnification from the company for any amounts he will pay as a result of the settlement of the lawsuit. The Company does not believe that Mr. Scott has any right to indemnification and intends to defend vigorously any claim that may be asserted. 10 11 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 31, 1997. Executive Officers of the Company The following table sets forth the names, ages and offices of all of the executive officers of the Company as of March 31, 1998:
Name Age Office Held ---- --- ----------- James P. Alampi 51 President, Chief Executive Officer and Director Linda C. Larrabee 50 Senior Vice President, Finance, Chief Financial Officer and Secretary Kevin J. Code 37 Vice President, Sales and Marketing Gerald C. Comis 49 Vice President, Customer Service and Industry Relations Donald J. Comis 39 Vice President, Central Division Peter B. Doder 37 Vice President, Western Division Stephen L. Green 42 Vice President, Corporate Controller Ronald W. Hope 53 Vice President, Business Development Marcia A. McAllister 46 Vice President, Public Affairs Charles E. Rice 35 Vice President, Information Systems Gaspare G. Ruggirello 40 Vice President, General Counsel Patrick T. Walsh 35 Vice President, Eastern Division
JAMES P. ALAMPI became President, Chief Executive Officer and a Director of the Company in March 1996. As President and Chief Executive Officer, Mr. Alampi oversees the Company's overall corporate administration as well as strategic planning. Prior to joining the Company, Mr. Alampi served as President of Van Waters & Rogers Inc., a subsidiary of Univar Corporation, a chemical distribution company ("Univar"), from 1992 to 1995. LINDA C. LARRABEE became Senior Vice President, Finance, Chief Financial Officer and Secretary in June 1996. Ms. Larrabee is responsible for cash management and cash control as well as financial accounting, planning and reporting. Prior to joining the Company, Ms. Larrabee served as Vice President, Information Systems of Van Waters & Rogers Inc. from 1992 to 1996. Prior to that time, Ms. Larrabee served as Vice President, Information Systems for Hitachi Data Systems from 1989 to 1992 and as Vice President, Finance for National Advanced Systems from 1982 to 1989. KEVIN J. CODE has been Vice President, Sales and Marketing of the Company since February 1995. Mr. Code is primarily responsible for sales and marketing to vehicle suppliers. From 1983 to 1995, Mr. Code held various positions with CCC Information Services, Inc., including Group Vice President and Vice President - Regional Account Manager. GERALD C. COMIS became Vice President Customer Service and Industry Relations in February 1997. Mr. Comis is responsible for overseeing operational procedures, training, and systems implementation rollout as well as acquisition due diligence and the integration of new businesses. From October 1996 to February 1997 Mr. Comis served as Vice President, Western Division. From April 1994 to October 1996, Mr. Comis served as Vice President, Field Operations of the Company. From January 1994 to April 1994, Mr. Comis served as a Vice President of Underwriters Salvage Company, a wholly owned subsidiary of the Company, which was merged into the Company. From 1968 to January 1994, Mr. Comis held various positions with Underwriters, prior to the January 1994 acquisition by the Company, including Branch Manager, Vice President and Executive Vice President. 11 12 DONALD J. COMIS has been Vice President of the Central Division since October 1996. Mr. Comis is responsible for the sales and operational functions of the Central Division. From January 1994 to October 1996, Mr. Comis served as Regional General Manager of the Company. From 1979-1994, Mr. Comis served Underwriters Salvage Company in many capacities, including Director of Operations, Asst. Vice President of Operations and Vice President of Operations. PETER B. DODER became Vice President of the Western Division in February 1997. Mr. Doder is responsible for the sales and operational functions of the Western Division. From February 1996 to February 1997 Mr. Doder was Vice President, Financial Planning & Analysis of the Company. From June 1992 through February 1996, Mr. Doder held various positions with the Company, including Regional Sales Manager, Manager of Marketing Support & Analysis and Director of Marketing. STEPHEN L. GREEN has been Vice President, Corporate Controller, and Assistant Secretary of the Company since February 1997. Mr. Green is responsible for internal management and external reporting, taxes and risk management. Prior to joining the Company, Mr. Green served as Manager of Operations Accounting of Van Waters & Rogers Inc. from 1989 to February 1997. RONALD W. HOPE became Vice President, Business Development in February 1998. Mr. Hope is responsible for evaluating and establishing new business opportunities for IAA. Prior to joining the Company, Mr. Hope served as Senior Vice President of Operations for ADESA Corporation. Prior to that time he served as Director of Company Services for ADT Automotive Group and as New Vehicle Prep Center General Manager for Chrysler Corporation. MARCIA A. MCALLISTER has been Vice President, Public Affairs of the Company since February 1995. Ms. McAllister is responsible for monitoring legislation and participating on behalf of the Company with a variety of industry and agency groups. From March 1994 to February 1995, Ms. McAllister was a consultant to the Company. From June 1986 to January 1994, Ms. McAllister held a variety of positions with Underwriters including Vice Chairman and General Counsel. CHARLES E. RICE has been Vice President, Information Systems of the Company since September 1996. Mr. Rice is responsible for the implementation and development of the information systems. Prior to joining the Company, Mr. Rice served as Director of Marketing Information Services of Van Waters & Rogers Inc. from 1994 to 1996 and Manager of Distribution Information Services from 1991 to 1994. GASPARE G. RUGGIRELLO has been Vice President and General Counsel of the Company since July 1997. 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. Ruggirello served as Senior Attorney & Assistant Secretary of Borg-Warner Automotive, Inc. from 1993 to 1997. Prior to that time, Mr. Ruggirello served as Senior Attorney for Borg-Warner Corporation from 1989 to 1993. PATRICK T. WALSH has been Vice President, Eastern Division since October 1996. Mr. Walsh is responsible for the sales and operational functions of the Eastern Division. From November 1994 to October 1996, Mr. Walsh was responsible for operational planning. From January 1994 to November 1994, Mr. Walsh served as Vice President, Operations West of the Company and from September 1991 through January 1994, Mr. Walsh served as Vice President, Operations. From April 1988 to September 1991, Mr. Walsh held various positions in the Company, including Branch Operations Manager. Officers are appointed to serve, at the discretion of the Board of Directors, until their successors are appointed. Ms. McAllister is the wife of Mr. Christopher G. Knowles; a member of the Board of Directors, and Donald J. Comis is the brother of Gerald C. Comis. 12 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Registrant's Common Stock is traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol IAAI. The following table sets forth the range of high and low per share bid information, as reported on the Nasdaq National Market for each quarter of fiscal 1997 and 1996. At March 15, 1998, the Registrant had 204 holders of record of its Common Stock, approximately 1,500 beneficial owners and 11,307,454 shares outstanding.
Fiscal 1997 Fiscal 1996 ----------- ----------- High Low High Low ---- --- ---- --- First Quarter $10.63 $6.50 $11.25 $ 8.25 Second Quarter 9.50 6.50 13.37 8.75 Third Quarter 14.25 8.00 10.87 7.75 Fourth Quarter 13.63 10.00 11.12 8.75
During the past two fiscal years, the Registrant did not declare or pay any cash dividends on its Common Stock. The Registrant currently plans to retain all of its earnings to support the development and expansion of its business and has no present intention of paying any dividends on the Common Stock in the foreseeable future. In addition, the Registrant's credit agreements between the Registrant and its bank limit the Registrant's ability to pay cash dividends. The Board of Directors of the Registrant reviews the dividend policy periodically to determine whether the declaration of dividends is appropriate. 13 14 ITEM 6. SELECTED FINANCIAL DATA. The tables below summarize the Selected Consolidated Financial Data of the Registrant 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 selected consolidated financial data presented below have been derived from the Company's Consolidated Financial Statements that have been audited by KPMG Peat Marwick LLP, independent certified public accountants, whose report is included herein covering the Consolidated Financial Statements as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997. The statement of earnings for the year ended December 31, 1994 and 1993 and the balance sheet data as of December 31, 1995, 1994 and 1993 are derived from audited Consolidated Financial Statements not included herein.
Year Ended December 31, --------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------- --------------- -------------- ----------- ----------- (in thousands except per share amounts) Selected Statement of Earnings Data Net sales $259,325 $281,893 $ 257,996 $ 172,125 $ 104,086 Earnings from operations(1) 10,203 7,561 6,885 19,145 10,624 Earnings 4,495 3,102 3,136 10,985 6,618 Net earnings per common share (2) .40 .27 .27 .98 .74 Weighted average common shares outstanding (2) 11,337 11,333 11,421 11,225 8,968
As of December 31, ---------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------------- -------------- -------------- ---------- ----------- Selected Balance Sheet Data Working capital $ 25,708 $ 21,665 $ 12,187 $ 12,055 $ 28,781 Total assets 207,072 214,026 210,633 173,641 143,925 Long-term debt, excluding current installments 20,246 26,670 28,973 4,409 1,058 Total shareholders' equity 151,212 146,589 143,381 139,897 123,689
(1) Amount includes special charges of $750,000, $1,395,000 and $4,226,000 in 1997, 1996 and 1995, respectively. See Note 9 to the Consolidated Financial Statements. (2) Earnings per share and weighted average common shares outstanding are presented on a diluted basis. See Note 1 and Note 10 to the Consolidated Financial Statements. 14 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The discussion in this section contains forward-looking information that is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected, expressed or implied by such forward looking information. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Factors That May Affect Future Results" below and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Among these risks are legislative acts, weather conditions, changes in the market value of salvage, outcome of litigation, competition, quality and quantity of inventory available from suppliers, and dependence on key insurance company suppliers. OVERVIEW The Company offers insurance companies and other vehicle suppliers cost-effective salvage processing solutions through a variety of different methods of sale, including fixed fee consignment, purchase agreement and percentage of sale consignment. Under the purchase agreement sales method, the vehicle is owned by the Company and the sales price of the vehicle is recorded in revenue. Under the fixed fee and percentage of sale consignment sales methods, the vehicle is not owned by the Company and only the fees associated with the processing and sale of the vehicle are recorded in net sales. By assuming some of the risk inherent in owning the salvage vehicle instead of selling on a consignment basis, the Company is potentially able to increase profits by improving the value of the salvage vehicle prior to the sale. Under the purchase agreement method, IAA generally pays the insurance company a pre-determined percentage of the Actual Cash Value ("ACV") to purchase the vehicle, pursuant to the purchase agreement. ACVs are the estimated pre-accident fair value of a vehicle, adjusted for additional equipment, mileage and other factors. Until the significant rise in used car prices and ACVs during 1995, the conversion from consignment sales to purchase agreement sales generally benefited the Company. During 1995, however, used car prices and ACVs rose significantly. Despite the increase in used car prices and ACVs, prices at salvage auctions did not increase correspondingly. Because the Company's purchase price is fixed by contract, the increased ACVs can and has reduced profitability on the sale of vehicles under the purchase agreement method. The Company has renegotiated some of its purchase agreement contracts and seeks to renegotiate certain others. If the relationship between ACVs and salvage prices remains at its present level, the Company may continue to encounter reduced profitability from purchase agreement contracts until they expire or are renegotiated. The Company continues to offer purchase agreements to those customers who select it, but generally at a lower percentage of ACV than previously offered to customers, based on current vehicle values. The Company has added adjustment and risk-sharing clauses to its new standard purchase agreement contracts designed to provide some protection to the Company and its customers from certain unexpected, significant changes in the ACV/salvage price relationship. Since its initial public offering, the Company has grown primarily through a series of acquisitions to now include 46 locations as of December 31, 1997. In February of 1998, the Company acquired Auto Disposal Company, Inc. ADC operated two pools in Alabama. The Company's operating results are subject to fluctuations, including quarterly fluctuations, that can result from a number of factors, some of which are more significant for sales under the purchase agreement method. See "Factors That May Affect Future Results" above for a further discussion of some of the factors that affect or could affect the Company's business, operating results and financial condition. RESULTS OF OPERATIONS Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996 Net sales of the Company decreased to $259,325,000 for the year ended December 31, 1997, from $281,893,000 in 1996, an 8% decrease. This is largely the result of the change in mix of unit volume from 15 16 purchase agreement to the consignment method due to the company's decision to renegotiate or terminate specific, unprofitable purchase agreements. Unit volume decreased 1%, as compared to the same period in 1996, while existing facilities volume decreased by the same 1%. Net sales and unit volume growth from existing facilities were the same as for the Company overall as there were no significant acquisitions or new facility startups in 1996 or 1997. The purchase agreement sales method of processing accounted for 134,000 vehicles, down 10% from 1996, or 30% of total volume. Gross profit was $59,342,000 for the year ended December 31, 1997, compared to $58,749,000 in 1996, a 1% increase. Gross profit per unit of $135 for the year ended December 31, 1997 was 2% higher than for the comparable period of 1996, largely due to the Company's decision to renegotiate or terminate specific, unprofitable purchase agreements. Direct operating expenses decreased to $44,599,000 for the year ended December 31, 1997, from $46,015,000 in 1996, a 3% decrease. The decrease in direct operating expenses was the result of management's focus on process enhancements and expense control during 1997. Direct operating expenses as a percentage of net sales were 1% higher than for the same period in 1996, due to fewer units sold. Amortization of acquisition costs of $3,790,000 for the year ended December 31, 1997 were flat as compared to $3,778,000 for the comparable period in 1996. During 1997, the Company settled a securities class action lawsuit that had been pending against the Company and certain of its present and former officers and directors, in the United States District Court for the Central District of California. The litigation was settled for $3.75 million, the substantial portion of which was paid by the Company's directors' and officers' liability insurance company. The difference of $750,000 was recognized as a special charge in 1997. In February 1998, the settlement was approved by the court. Interest expense decreased to $2,700,000 for the year ended December 31, 1997, from $3,009,000 in 1996. The decrease in interest expense is mostly attributable to the repayment of borrowings under the Company's $15,000,000 Revolving Line of Credit Facility. Interest income decreased to $821,000 for the year ended December 31, 1997, from $890,000 in 1996. The change in interest income was attributable to a decrease in interest-bearing investments liquidated during 1996 to repay several notes payable to sellers of certain acquisitions and the proceeds from long-term borrowings under the Company's $15,000,000 revolving line of credit facility. Income taxes increased to $3,829,000 for the year ended December 31, 1997, from the $2,340,000 in 1996. The increase of $1,489,000 was the result of a higher tax rate incurred by the Company in 1997 and increased net earnings before taxes. (See Note 4, Notes to the Consolidated Financial Statements). Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995 Net sales of the Company increased to $281,893,000 for the year ended December 31, 1996, from $257,996,000 in 1995, a 9% increase. Sales were higher due to a full year of revenue from acquired operations, same store growth and fee increases. Unit volume increased 16%, as compared to the same period in 1995, with most of the unit growth resulting from acquired operations, while existing facilities volume increased 2%. Net sales growth from existing facilities increased 5%, as a result of same store growth and increased fees. The purchase agreement sales method of processing accounted for 148,000 vehicles, up 8% from 1995, or 33% of total volume. Gross profit increased 3% to $58,749,000 for the year ended December 31, 1996, from $56,805,000 for the same period in 1995. This increase was primarily the result of a full year of revenue from acquired operations. Direct operating expenses increased to $46,015,000 for the year ended December 31, 1996, from $42,308,000 in 1995, a 9% increase. The increase in direct operating expenses was the result of the acquisitions that were made during 1995. Direct operating expenses as a percentage of net sales were flat compared to the same period in 1995. Amortization of acquisition costs increased to $3,778,000 for the year ended December 31, 16 17 1996 from $3,386,000 for the comparable period in 1995, mostly as a result of a full year of amortization of goodwill for the acquisitions. Special charges of $1,395,000 were incurred in the year ended 1996. During 1996, the Company hired a new President and CEO, a new Sr. Vice President and CFO, a new Vice President of Information Services, and restructured its operations such that instead of one Vice President of Operations, there are now three Divisional Vice Presidents. The new management team has spent considerable time in determining its strategic plan. In looking towards implementing its strategic plan, the Company established its corporate headquarters in Illinois and evaluated past contracts still in effect. As a result of this evaluation, the Company decided to recognize, as a special charge, the expense related to the termination of pre-existing agreements that no longer have value to the Company's current strategy. The Company also entered into an agreement with Bradley S. Scott, former Chief Executive Officer that terminates his employment agreement with the Company and provides that he will serve as an outside Director and Chairman of the Board. The Company completed the centralization of the corporate groups at its corporate headquarters in Illinois in the summer of 1997and has negotiated a buyout of a long-term lease for property located in Woodland Hills, California. The net of these items recognized as special charges was $1,395,000. Interest expense increased to $3,009,000 for the year ended December 31, 1996, from $2,345,000 in 1995. The increase in interest expense is mostly attributable to a full year's interest on notes payable to sellers of certain acquisitions completed in 1995 and for a full year's interest on a portion of the $15,000,000 Revolving Line of Credit Facility (the "Facility"). Interest income decreased to $890,000 for the year ended December 31, 1996, from $913,000 in 1995. The change in interest income was attributable to a decrease in interest-bearing investments liquidated during 1995 to consummate acquisitions. Income taxes increased to $2,340,000 for the year ended December 31, 1996, from the $2,317,000 in 1995. This slight increase of $23,000 was primarily the result of a slightly higher tax rate incurred by the Company in 1996. (See Note 4, Notes to the Consolidated Financial Statements). FINANCIAL CONDITION AND LIQUIDITY At December 31, 1997, the Company had current assets of $52,256,000, including $9,634,000 of cash and cash equivalents, current liabilities of $26,548,000 and working capital of $25,708,000. The $4,043,000 increase in working capital from December 31, 1996 was principally related to net earnings and the elimination of contingencies related to specific acquisitions. On April 4, 1997, the Company refinanced its Revolving Line of Credit Facility. This line of credit agreement is on similar terms to the prior one. The $15,000,000 Facility is unsecured, bears interest at the bank's prime rate or LIBOR, as defined, and matures on April 1, 2000. There was no outstanding balance on the line at December 31, 1997. At December 31, 1997, the Company's indebtedness consisted mostly of 8.6% Senior Notes approximating $19,715,000, amounts due to the sellers related to an acquisition aggregating $2,293,000, with imputed interest at 7.5% and amounts due to the sellers of smaller acquisitions aggregating $272,000, which bear interest at 8.0%. Long-term liabilities also include a post-retirement benefits liability relating to the Underwriters Salvage Company acquisition of approximately $3,831,000 Capital expenditures were approximately $4,608,000 for the year ended December 31, 1997. These capital expenditures included upgrading and expanding the Company's facilities and management information systems. The Company currently leases most of its facilities and other properties. The Company believes that cash generated from operations and its borrowing capacity will be sufficient to fund capital expenditures and provide adequate working capital for operations for the next twelve months. Part of the Company's plan is continued growth possibly through new facility start-ups, acquisitions, and the development of new claims processing services. At some time in the future, the Company may require additional financing. There can be no assurance that additional financing, if required, will be available on favorable terms. 17 18 The Company's operating results have not historically been materially affected by inflation. RECENT DEVELOPMENTS Bradley Scott, Chairman of the Board of the Company, is a defendant in a lawsuit arising out of his alleged promise to share the proceeds from the sale of his stock in Los Angeles Auto Salvage, Inc., a corporate predecessor of the Company, with a former business associate. In February 1998, the lawsuit was settled by Mr. Scott. Mr. Scott believes he is entitled to indemnification from the company for any amounts he might pay as a result of the adjudication or settlement of the lawsuit. The Company does not believe that Mr. Scott has any right to indemnification and intends to defend vigorously any claim that may be asserted. McKinsey & Co. has been retained to assist the Company with a recently started project. The project includes a review of the company's current core processes, as well as the identification and development of new customer valued services focusing on opportunities to reduce claims processing costs currently incurred by the insurance industry. The scope of the project also includes the evaluation and development of new business offerings that leverage the company's current competencies, geographic presence and assets. Based on the initial results of the project, the estimated cost of the project is expected to be approximately $1,000,000. McKinsey & Co. is one of the leading providers of consulting services to the insurance industry. Statement of Financial Accounting Standards ("S.F.A.S.") No. 130, "Reporting Comprehensive Income", was issued in June 1997 and is effective for fiscal years beginning after December 15, 1997. S.F.A.S. No. 130 requires that changes in the balances of certain items that are reported directly in a separate component of equity in a statement of financial position also be reported in a separate statement of comprehensive income. The Company believes that S.F.A.S. No. 130 will not materially affect the statements of operations, financial position or cash flows. S.F.A.S. No. 131, "Disclosures about Segments of an Enterprise and Related Information", was issued in June 1997 and is effective for fiscal years beginning after December 15, 1997. S.F.A.S. No. 131 establishes new standards for disclosing information about operating segments. The Company believes that S.F.A.S. No. 131 will not materially affect the statements of operations, financial position or cash flows. The Company has conducted a review of its computer systems to identify the systems that could be affected by the "Year 2000" issue. Based on the results of that review, modifications were made to the Company's systems. Based on the review, the Company believes its computer systems are Year 2000 compliant in all material respects. Total estimated costs incurred in modifying the Company's systems, were not material. ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14(a) for an index to the financial statements and supplementary financial information, which are attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 18 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information with respect to Directors is included under the caption "Nominees" in the Registrant's Proxy Statement (the "Proxy Statement") to be filed with the Securities and Exchange Commission and incorporated herein by reference. The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement to be filed with the Securities and Exchange Commission is incorporated herein by reference. Information with respect to Executive Officers may be found on pages 11 to 12 herein, under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION. Information required by this item is included under the captions "Compensation of Directors," "Executive Compensation," "Stock Options", "Compensation of Directors", and Change-in-Control Arrangements" and "Compensation Committee Interlocks and Insider Participation" in the Registrant's Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required by this item is included under the caption "Ownership of Securities" in the Registrant's Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required by this item is included under the caption "Certain Relationships and Related Transactions in the Registrant's Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by reference. 19 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
PAGE (A) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ---- The following Consolidated Financial Statements of Insurance Auto Auctions, Inc. and its subsidiaries are filed as part of this report on Form 10-K: Independent Auditors' Report.................................................. 26 Consolidated Balance Sheets - December 31, 1997 and December 31, 1996............................................................. 27-28 Consolidated Statements of Earnings - Years ended December 31, 1997, 1996 and 1995 ............................................. 29 Consolidated Statements of Shareholders' Equity- Years ended December 31, 1997, 1996 and 1995.................................. 30 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995.............................................. 31-32 Notes to Consolidated Financial Statements.................................... 33-44
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because the matter or conditions are not present or the information required to be set forth therein is included in the Consolidated Financial Statements and related Notes thereto. 3. EXHIBITS See Item 14(c) below. (B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Company during the three-month period ended December 31, 1997. (C) EXHIBITS
Exhibit No Description 3.1 Articles of Incorporation of the Registrant, as filed with the Illinois Secretary of State on August 7, 1997. 3.2 Bylaws of the Registrant. 4.1(11) Fifth Amended and Restated Registration Rights Agreement, dated September 23, 1994, by and among the Registrant, William W. Liebeck, Bradley S. Scott, Bob F. Spence, Corinne Spence, Jimmie A. Dougherty, Patricia L. Dougherty and Midwest Auto Pool Corporation.
20 21 4.2(1) Warrant, dated January 18, 1990, issued by Registrant to Westinghouse Credit Corporation ("WCC") to purchase 176,056 shares of Series A Common Stock of Registrant ("WCC Warrant"). 4.3(1) Specimen Stock Certificate. 4.4(7) Stockholder Agreement dated December 1, 1993, by and among the Registrant, Tech-Cor, Inc., Bradley S. Scott, Bob F. Spence and William L. Liebeck. 4.5(7) Registration Agreement dated December 1, 1993, by and among the Registrant and Tech-Cor. 4.5(10) Note Agreement, dated as of December 1, 1994 among the Registrant and the purchasers listed therein. 9.2(1) Letter agreement, dated September 29, 1989, between Bradley S. Scott and L.A.A.S. Acquisition Registrant. 10.2(1) Non-Competition and Confidentiality Agreement dated January 17, 1990, by and among the Registrant, L.A.A.S. Acquisition Company, Bradley S. Scott and Jillian Scott. 10.15+(1) Salvage Purchase Agreement by and between Registrant and Allstate Insurance Company (Ventura, Santa Barbara, and San Luis Obispo Counties). 10.19+(1) Salvage Purchase Agreement by and between Registrant and State Farm Insurance Company. 10.29(2)* 1991 Employment Agreement, dated September 30, 1991, between Registrant and Bradley S. Scott together with promissory note and stock pledge agreement. 10.35(5)* Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as amended and restated. 10.36(8)* Form of Notice of Grant of Stock Option -- employee, officer. 10.37(4)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- employee. 10.38(4)* Form of Stock Option Agreement: Non-Employee Director, Automatic Option Grant, Insurance Auto Auctions, Inc. Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option). 10.39(4)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- employee. 10.40(4)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- officer. 10.41(4)* 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. 10.49(1) Common Stock Purchase Agreement dated as of October 29, 1989, by and among L.A.A.S. Acquisition Company, Bradley S. Scott and Jillian Scott. 10.50(1) Stock Exchange Agreement and Plan of Reorganization, dated October 7, 1991, by and between Bradley S. Scott and RMW. 10.52(2) Termination Agreement by and among Registrant, WCC, RMW, Middleton Holdings, Ltd., Robert H. Kenmore, Ayse M. Kenmore, William W. Liebeck and Michael W. Gibbons.
21 22 10.53(2) Stock Pledge Agreement, dated October 31, 1991, by and among WCC, Registrant and William W. Liebeck. 10.61(3) Asset Purchase Agreement, dated as of January 17, 1992, by and among Registrant, MASP Acquisition Corp. ("MASP"), the Registrant's wholly owned subsidiary, M&M Auto Storage Pool, Inc. ("M&M") and Melvin R. and Marian Martin. 10.65(3) Exclusive Towing Services Agreement dated January 30, 1992, by and between MASP and M&M. 10.66(3) Facilities Lease Agreement dated January 17, 1992, by and between Melvin R. Martin and MASP. 10.81(3) Indemnification Agreement dated January 30, 1992, by and between Registrant and Melvin R. Martin. 10.118(5)* Insurance Auto Auctions, Inc. Employee Stock Purchase Plan. 10.119(5) Indemnification Agreement dated June 1, 1993, by and between the Registrant and Bob F. Spence. Identical Indemnification Agreements were entered into by and between the Registrant and each of Susan B. Gould, William W. Liebeck, William L. Overell, Bradley S. Scott, Thomas J. O'Malia, Christopher G. Knowles and Richard Rosenthal. 10.122(7) Asset Purchase Agreement dated December 1, 1993, by and between the Registrant, BC Acquisition Corp. (a wholly owned subsidiary of Registrant ("BCAC") and Tech-Cor, Inc. ("Tech-Cor"). 10.123(7)+ Salvage Agreement by and between the Registrant and Allstate Insurance Company. 10.124(7) License Agreement, dated December 1, 1993, by and between BCAC and Allstate Insurance Company. 10.125(7) Transition Agreement dated December 1, 1993, by and between BCAC and Tech-Cor. 10.126(7) Lease, dated December 1, 1993, by and between Allstate Insurance Company and BCAC. 10.127(7) Guaranty, dated December 1, 1993, by Allstate Insurance Company and delivered to the Registrant and BCAC. 10.130(9) Agreement and Plan of Reorganization, dated January 20, 1994, among the Registrant, USC Acquisition Corp., Underwriters Salvage Company and the shareholders of Underwriters Salvage Company. 10.131(9) Agreement of Merger, dated January 20, 1994, by and among Underwriters Salvage Company, USC Acquisition Corp. and the Registrant. 10.132(9) Escrow Agreement, dated January 20, 1994, by and among the Registrant, William W. Liebeck, USC Acquisition Corp. and all of the shareholders of Underwriters Salvage Company. 10.134(9) Registration Rights Agreement dated January 20, 1994, by and among, the Registrant, Christopher G. Knowles, Gerald C. Comis, F. Peter Haake and Donald J. Comis. 10.135(12) Indemnification Agreement dated January 20, 1994, between the Registrant and Christopher G. Knowles. 10.136(12)* Letter Agreement, dated August 22, 1994, between the Registrant and Bradley S. Scott.
22 23 10.137(12) Indemnification Agreement dated November 15, 1994, between the Registrant and Glen E. Tullman. 10.138(12)* Consulting Agreement dated November 15, 1994, between the Registrant and Glen E. Tullman. 10.139(12) Indemnification Agreement dated February 22, 1995, between the Registrant and Richard A. Rosenthal. Identical Indemnification Agreements were entered into by and between the Registrant and Kevin J. Code, Gerald C. Comis, Marcia A. McAllister, Patrick T. Walsh and William L. Warburton. 10.140(13) Stock Purchase Agreement by and among Registrant and ADB Auctions Systems, Inc., ADBCO Acquisition Corp. and the shareholders of ADB Auction Systems, Inc. dated June 16, 1995. 10.141(13) Stock Purchase Agreement by and among Registrant and ASC Auctions, Inc., ADBCO Acquisition Corp. and the shareholders of ASC Auctions, Inc. dated June 16, 1995. 10.142(13) Form of Promissory Notes dated June 16, 1995. 10.146(15)+ Revised Salvage Agreement by and between the Registrant and Allstate Insurance Company dated April 29, 1996. (10.147(15)* Employment Agreement by and between the Registrant and James P. Alampi dated March 11, 1996. 10.148(16) Letter Agreement by and between the Registrant and Bradley S. Scott dated December 5, 1996. 10.149* Form of Change of Control Employment Agreement by and between the Company and certain of its executive officers. 10.150(17) Revolving Credit Agreement between the Registrant and LaSalle National Bank dated as of April 4, 1997. 10.151 Amendment to Revolving Credit Agreement dated as of December 1, 1997. 10.152(17) Insurance Auto Auctions, Inc. Employee Stock Purchase Plan, as amended as of June 18, 1997. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP. 24.1 Power of Attorney. 27.1 Financial Data Schedule.
- --------------------- 23 24 (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 Annual Report on Form 10-K (File No. O-19594) for the fiscal year ended December 31, 1991. (3) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed with the SEC on January 31, 1992. (4) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. O-19594) for the fiscal year ended December 31, 1992. (5) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. O-19594) for the fiscal quarter ended June 30, 1993. (6) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. O-19594) for the fiscal quarter ended September 30, 1993. (7) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed with the SEC on December 15, 1993. (8) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. O-19594) for the fiscal year ended December 31, 1993. (9) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed with the SEC on February 3, 1994. (10) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed with the SEC on February 10, 1995. (11) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1994. (12) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. O-19594) filed with the SEC on March 31, 1995. (13) Incorporated by reference from exhibits included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed with the SEC on June 16, 1995, as amended. (14) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. O-19594) filed with the SEC on May 2, 1996 as amended. (15) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. O-19594) filed with the SEC on August 5, 1996 as amended. (16) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-1594) for the fiscal year ended December 31, 1996. (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 June 30, 1997. + Certain portions of this document were granted confidential treatment pursuant to an order from the SEC. * 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.
24 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSURANCE AUTO AUCTIONS, INC. By: /s/ James P. Alampi James P. Alampi President and Chief Executive Officer, Date: March 31, 1998 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 31st day of March, 1998 /s/ James P. Alampi President and Chief Executive Officer, Director - ------------------------------- (Principal Executive Officer) James P. Alampi /s/ Linda C. Larrabee Senior Vice President, Finance, Chief Financial - ------------------------------- Officer and Secretary (Principal Financial Officer) Linda C. Larrabee /s/ Stephen L. Green Vice President, Corporate Controller and - ------------------------------- Assistant Secretary (Principal Accounting Officer) Stephen L. Green /s/ Bradley S. Scott Chairman of the Board of Directors - ------------------------------- Bradley S. Scott /s/ Maurice A. Cocca Director - ------------------------------- Maurice A. Cocca /s/ Susan B. Gould Director - ------------------------------- Susan B. Gould /s/ Christopher G. Knowles Director - ------------------------------- Christopher G. Knowles /s/ Melvin R. Martin Director - ------------------------------- Melvin R. Martin /s/ Thomas J. O'Malia Director - ------------------------------- Thomas J. O'Malia /s/ Glen E. Tullman Director - ------------------------------- Glen E. Tullman /s/ John K. Wilcox Director - ------------------------------- John K. Wilcox
25 26 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Insurance Auto Auctions, Inc.: We have audited the Consolidated Financial Statements of Insurance Auto Auctions, Inc. and subsidiaries, as listed in the accompanying index. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of Insurance Auto Auctions, Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Chicago, Illinois February 10, 1998 26 27 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of December 31
1997 1996 --------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 9,634,000 $ 5,888,000 Accounts receivable, net 28,992,000 34,371,000 Inventories 11,762,000 10,162,000 Income taxes - 1,391,000 Other current assets 1,868,000 2,239,000 --------------- --------------- Total current assets 52,256,000 54,051,000 -------------- -------------- Property and equipment, at cost: Land and buildings 6,128,000 5,652,000 Furniture and fixtures 1,481,000 1,149,000 Machinery and equipment 16,830,000 15,434,000 Leasehold improvements 13,268,000 12,042,000 -------------- -------------- 37,707,000 34,277,000 Less accumulated depreciation and amortization 16,929,000 12,681,000 -------------- -------------- Net property and equipment 20,778,000 21,596,000 Deferred income taxes 2,603,000 2,222,000 Intangible assets, principally goodwill, net 131,435,000 136,157,000 ------------- ------------- $207,072,000 $214,026,000 ============= =============
27 28 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of December 31
1997 1996 ---------------- ---------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 2,034,000 $ 2,571,000 Accounts payable 16,319,000 18,014,000 Accrued liabilities 7,698,000 11,801,000 Income taxes 497,000 -- ------------ ------------ Total current liabilities 26,548,000 32,386,000 ------------ ------------ Long-term debt, excluding current installments (Note 2) 20,246,000 26,670,000 Accumulated postretirement benefits obligation (Note 8) 3,831,000 4,173,000 Deferred income taxes 5,235,000 4,208,000 ------------ ------------ Total liabilities 55,860,000 67,437,000 ------------ ------------ Shareholders' equity: Preferred stock, par value of $.001 per share Authorized 5,000,000 shares; none issued -- -- Common stock, par value of $.001 per share Authorized 20,000,000 shares; issued and outstanding 11,299,561 and 11,282,838 shares as of December 31, 1997 and December 31, 1996, respectively 11,000 11,000 Additional paid-in capital 131,809,000 131,681,000 Retained earnings 19,392,000 14,897,000 ------------ ------------ Total shareholders' equity 151,212,000 146,589,000 ------------ ------------ $207,072,000 $214,026,000 ============ ============
See accompanying Notes to Consolidated Financial Statements. 28 29 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings For the years ended December 31
1997 1996 1995 ------------- ------------- ------------- Net sales: Vehicle sales $ 175,733,000 $ 201,104,000 $ 188,222,000 Fee income 83,592,000 80,789,000 69,774,000 ------------- ------------- ------------- 259,325,000 281,893,000 257,996,000 Costs and expenses (Note 6): Cost of sales 199,983,000 223,144,000 201,191,000 Direct operating expenses 44,599,000 46,015,000 42,308,000 Amortization of acquisition costs 3,790,000 3,778,000 3,386,000 Special charges (Note 9) 750,000 1,395,000 4,226,000 ------------- ------------- ------------- Earnings from operations 10,203,000 7,561,000 6,885,000 Other (income) expense: Interest expense 2,700,000 3,009,000 2,345,000 Interest income (821,000) (890,000) (913,000) ------------- ------------- ------------- Earnings before income taxes 8,324,000 5,442,000 5,453,000 Income taxes (Note 4) 3,829,000 2,340,000 2,317,000 ------------- ------------- ------------- Net earnings $ 4,495,000 $ 3,102,000 $ 3,136,000 ============= ============= ============= Earnings per share (Note 10) Basic $ .40 $ .28 $ .28 ============= ============= ============= Diluted $ .40 $ .27 $ .27 ============= ============= ============= Weighted average shares outstanding (Note 10): Basic 11,294,000 11,279,000 11,265,000 ============= ============= ============= Diluted 11,337,000 11,333,000 11,421,000 ============= ============= =============
See accompanying Notes to Consolidated Financial Statements 29 30 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity
COMMON STOCK ADDITIONAl TOTAL ---------------------------------- NUMBER PAID-IN RETAINED SHAREHOLDERS' OF SHARES AMOUNT CAPITAL EARNINGS EQUITY ----------------- ------------- ---------------- --------------- ---------------- Balance at December 31, 1994 11,250,905 $ 11,000 $131,227,000 $ 8,659,000 $139,897,000 Issuance of common stock in connection with exercise of common stock options 10,800 -- 143,000 -- 143,000 Issuance of common stock in connection with the employee -- stock purchase plan 8,436 -- 205,000 205,000 Net earnings -- -- -- 3,136,000 3,136,000 ----------------- ------------- ---------------- --------------- ---------------- Balance at December 31, 1995 11,270,141 11,000 131,575,000 11,795,000 143,381,000 Issuance of common stock in connection with exercise of common stock options 2,000 -- 13,000 -- 13,000 Issuance of common stock in connection with the employee -- stock purchase plan 10,697 -- 93,000 93,000 Net earnings -- -- -- 3,102,000 3,102,000 ----------------- ------------- ---------------- --------------- ---------------- Balance at December 31, 1996 11,282,838 11,000 131,681,000 14,897,000 146,589,000 Issuance of common stock in connection with exercise of common stock options 8,600 -- 49,000 -- 49,000 Issuance of common stock in connection with the employee -- stock purchase plan 8,123 -- 79,000 77,000 Net earnings -- -- -- 4,495,000 4,495,000 ----------------- ------------- ---------------- --------------- ---------------- Balance at December 31, 1997 11,299,561 $ 11,000 $131,809,000 $19,392,000 $151,212,000 ================= ============= ================ =============== ================
See accompanying notes to Consolidated Financial Statements -30- 31 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended December 31
1997 1996 1995 -------------- --------------- -------------- Cash flows from operating activities: Net earnings $ 4,495,000 $ 3,102,000 $ 3,136,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 8,671,000 8,579,000 6,605,000 Loss on disposal of fixed assets (151,000) - - Noncash special charges 465,000 2,512,000 - Changes in assets and liabilities (net of effects of acquired companies): (Increase) decrease in: Accounts receivable, net 5,379,000 (3,998,000) (4,395,000) Inventories (1,600,000) (667,000) (2,781,000) Other currents assets 1,762,000 (2,040,000) (39,000) Other assets 932,000 287,000 (42,000) Increase (decrease) in: Accounts payable (1,695,000) (2,591,000) 1,267,000 Accrued liabilities (3,792,000) 403,000 2,894,000 Income taxes 1,143,000 (441,000) 131,000 ------------ ------------- ------------- Total adjustments 10,649,000 1,998,000 4,151,000 ----------- ------------ ------------ Net cash provided by operating activities 15,144,000 5,100,000 7,287,000 ---------- ------------ ------------
-31- 32 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) For the years ended December 31
1997 1996 1995 -------------- --------------- --------------- Cash flows from investing activities: Proceeds from disposition of property and equipment 696,000 698,000 1,240,000 Capital expenditures (4,608,000) (5,910,000) (11,000,000) Payments made in connection with acquisitions (net of cash acquired) (1,969,000) (19,823,000) (311,000) Sale of short-term investments - - 7,849,000 -------------- --------------- --------------- Net cash used in investing activities (4,223,000) (7,181,000) (21,734,000) Cash flows from financing activities: Proceeds from issuance of common stock 128,000 107,000 367,000 Principal payments of long-term debt (7,303,000) (3,909,000) (856,000) Proceeds from line of credit - 4,589,000 - Proceeds from issuance of Senior Notes - - 19,589,000 -------------- --------------- --------------- Net cash provided by (used in) financing activities (7,175,000) 787,000 19,100,000 -------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents 3,746,000 (1,294,000) 4,653,000 Cash and cash equivalents at beginning of year 5,888,000 7,182,000 2,529,000 -------------- --------------- --------------- Cash and cash equivalents at end of year $ 9,634,000 $ 5,888,000 $ 7,182,000 ============== =============== =============== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest 4,411,000 2,793,000 1,511,000 Income taxes $2,364,000 $3,570,000 $4,059,000
See accompanying notes to consolidated financial statements. -32- 33 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997 and 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES BACKGROUND Insurance Auto Auctions, Inc. (the Company) provides 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. SALES Sales (including vehicle sales and fee income) are recognized upon payment by the buyer for the auctioned vehicle. CASH EQUIVALENTS Cash equivalents consist principally of commercial paper. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or estimated realizable value. Cost includes the cost of acquiring ownership of total loss and recovered theft vehicles, charges for towing and, less frequently, reconditioning costs. The costs of inventories are charged to operations based upon the specific-identification method. The Company has agreements to purchase total loss and recovered theft vehicles from insurance companies for a percentage of the vehicle's actual cash value. The Company has acquired the majority of its inventory pursuant to these contracts. ASSET 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 impaired. If this review indicates that the intangible assets will not be recoverable, as determined by an undiscounted cash flow analysis over the remaining amortization period, the carrying value of the Company's intangible assets would be reduced to their estimated fair market value. -33- 34 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 assets and liabilities to prepare these Consolidated Financial Statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. DEPRECIATION AND AMORTIZATION Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to ten years. Leasehold improvements are amortized on a straight-line basis over their estimated economic useful life or the life of the lease, whichever is less. Intangible assets, principally goodwill, are amortized over periods of 15 to 40 years on a straight-line basis. Accumulated amortization at December 31, 1997 and 1996 was $15,075,000 and $10,902,000, respectively. INCOME TAXES The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards. CREDIT RISK The Company sells its vehicles principally to customers throughout the United States under the purchase-agreement method, the fixed-fee-consignment method and the percentage-of-sale-consignment method. Actual sales of 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 the vehicle supplier, most of which are insurance companies, are generally satisfied from the net proceeds payable to the insurance company. 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 insurance company. 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. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments approximate fair value as of December 31, 1997 and 1996. The carrying amounts related to cash and cash equivalents, accounts receivable, other current assets and accounts payable approximate fair value due to the relatively short maturity of such instruments. The fair value of long-term debt is estimated by discounting the future cash flows of each instrument at rates currently available to the Company for similar debt instruments of comparable maturities by the Company's bankers. STOCK COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement No. 123), issued in October 1995 and effective for fiscal years beginning after December 15, 1995, permits, but does not require, a fair-value based method of accounting for employee stock options or -34- 35 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements similar equity instruments. Statement No. 123 allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APBO No. 25), but requires pro forma disclosures of net earnings and net earnings per share as if the fair-value based method of accounting had been applied. Effective January 1, 1996, the Company elected to continue to measure compensation cost under APBO No. 25 and comply with the pro forma disclosure requirements. Accordingly, the adoption of Statement No. 123 had no material impact on the Company's consolidated financial position or results of operations. EARNINGS PER SHARE Statement of Financial Accounting Standards ("S.F.A.S.") No. 128, "Earnings per Share", issued in March 1997 and effective for fiscal years ending after December 15, 1997, requires the presentation of "Basic" earnings per share, which represents net earnings divided by the weighted average number of shares outstanding. Presentation of "Diluted" earnings per share, which reflects the dilutive effects of potentially issuable common stock equivalents as determined by the treasury stock method, is also required. The Diluted presentation is similar to the historical presentation of fully diluted earnings per share. The Company has adopted Statement No. 128, effective January 1, 1997. Adoption of the Statement had no material impact on the Company's consolidated financial position or results of operations. RECLASSIFICATIONS Certain reclassifications have been made to the 1996 accounts to conform with the 1997 presentation. -35- 36 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (2) LONG-TERM DEBT Long-term debt is summarized as follows:
1997 1996 --------------- ---------------- Senior notes payable, net of related loan fees, unsecured, interest payable in semiannual installments commencing August 15, 1995 through maturity at February 15, 2002, at 8.60%, principal due at maturity $ 19,715,000 $ 19,735,000 Notes payable issued in connection with the acquisition of a subsidiary, secured by capital stock purchased in the acquisition, interest payable quarterly at 7.5%, principal payable in three annual installments beginning June 30, 1996 1,833,000 3,632,000 Notes payable issued in connection with a consulting agreement related to the acquisition of a subsidiary, unsecured, payable in monthly installments of $16,666, including interest at 7.5%, with final payment due June 30, 2000 460,000 618,000 Notes payable issued in connection with the acquisition of a certain subsidiary, unsecured, payable in monthly installments, including interest at 8%, with final payment due April 1, 2005 272,000 299,000 Notes payable issued in connection with the acquisition of a certain subsidiary. -- 500,000 Advances under unsecured $15,000,000 long-term line of credit, net of related loan fees. No borrowings were outstanding at December 31, 1997. The outstanding borrowings at December 31, 1996 were $4,500,000 and bear interest at the bank's prime rate or LIBOR, as defined -- 4,402,000 Capital lease obligations -- 55,000 --------------- ---------------- 22,280,000 29,241,000 Less current installments 2,034,000 2,571,000 --------------- ---------------- $ 20,246,000 $ 26,670,000 =============== ================
-36- 37 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Total principal repayments required for each of the next five years under all long-term debt agreements are summarized as follows: 1998 $ 2,034,000 1999 216,000 2000 138,000 2001 40,000 2002 19,754,000 Thereafter 98,000 --------------- $ 22,280,000 ===============
The Senior Notes and line of credit require the Company to comply with certain covenants such as maintenance of net worth and limitations on debt. As of December 31, 1997, the Company was in compliance with these covenants. In 1997, the Company refinanced its line of credit agreement with a similar facility with virtually identical terms with a different bank. The $15,000,000 facility is unsecured, bears interest at the bank's prime rate or LIBOR, as defined, and expires on April 1, 2000. (3) EMPLOYEE STOCK PURCHASE PLAN During the years ended December 31, 1997, 1996 and 1995, the Company issued 8,123, 10,697 and 8,436 shares of common stock for aggregate consideration of $79,000, $93,000 and $205,000, respectively, in connection with the employee stock purchase plan. (4) INCOME TAXES Income taxes are summarized as follows:
1997 1996 1995 --------------- ---------------- ---------------- Current: Federal $ 2,853,000 $ 794,000 $ 1,627,000 State 329,000 187,000 472,000 --------------- ---------------- ---------------- 3,182,000 981,000 2,099,000 --------------- ---------------- ---------------- Deferred: Federal 427,000 1,788,000 163,000 State 220,000 (429,000) 55,000 --------------- ---------------- ---------------- 647,000 1,359,000 218,000 --------------- ---------------- ---------------- $ 3,829,000 $ 2,340,000 $ 2,317,000 =============== ================ ================
Deferred income taxes are comprised of the effects of the components listed below. A valuation allowance has been recorded to reduce deferred tax assets for which the Company believes a tax benefit will not be realized. -37- 38 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
1997 1996 ----------------- ----------------- Deferred tax assets attributable to: Inventories $ 385,000 $ 457,000 State income taxes 61,000 539,000 Depreciation 1,609,000 887,000 Special charges 248,000 227,000 Other 215,000 29,000 State Net Operating Loss 690,000 530,000 Valuation Allowance (605,000) (447,000) ----------------- ----------------- Net deferred tax assets 2,603,000 2,222,000 Deferred tax liabilities attributable to: Intangible assets (5,235,000) (4,208,000) ----------------- ----------------- Net deferred tax liabilities $ (2,632,000) $ (1,986,000) ================= =================
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:
1997 1996 1995 --------------- --------------- --------------- "Expected" income taxes $ 2,830,000 $ 1,850,000 $ 1,854,000 State income taxes, net of Federal 254,000 288,000 324,000 benefit Amortization of intangible assets 353,000 406,000 383,000 Other 392,000 (204,000) (244,000) --------------- --------------- --------------- $ 3,829,000 $ 2,340,000 $ 2,317,000 =============== =============== ===============
(5) EMPLOYEE BENEFIT PLANS The Company adopted the Insurance Auto Auctions, Inc. 1991 Stock Option Plan (the 1991 Plan), as amended, presently covering 1,350,000 shares of the Company's common stock. The 1991 Plan provides for the grant of incentive stock options to key employees and nonqualified stock options and stock appreciation rights to key employees, directors, consultants and independent contractors. The 1991 Plan expires September 26, 2001. In general, new nonemployee directors will automatically receive grants of nonqualified options to purchase 10,000 shares and subsequent grants to purchase 2,000 shares at specified intervals. During 1995, the Company adopted the Insurance Auto Auctions, Inc. Supplemental Stock Option Plan (the 1995 Plan) covering 200,000 shares of the Company's common stock. The 1995 Plan provides for the grant of nonqualified stock options to employees, other than executive officers, and consultants and other independent advisors who provide services to the Company. The 1995 Plan will expire on October 1, 2005. -38- 39 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Under both plans, as of December 31, 1997, options to purchase an aggregate of 1,086,000 shares were outstanding at a weighted average exercise price of $21.60 per share and 370,000 shares remained available for future grant. Activity under the plans for the years ended December 31, 1997 and 1996 is as follows:
1997 1996 1995 -------------- --------------- ------------- Balance at beginning of year 1,082,000 1,061,000 967,000 Options granted 43,000 270,000 216,000 Options canceled (30,000) (247,000) (111,000) Options exercised (9,000) (2,000) (11,000) -------------- --------------- ------------- Balance at end of year 1,086,000 1,082,000 1,061,000 ============== =============== ============= Options exercisable at end of year 770,000 588,000 561,000 ============== =============== ============= Price range of options outstanding at end of year 7.00-37.50 7.00-37.50 7.00-38.50 ============== =============== ============= Price range of options granted during the year 8.25-9.44 9.25-12.63 7.00-32.25 ============== =============== =============
The Company adopted the Insurance Auto Auctions, Inc., Employee Stock Purchase Plan (the Stock Purchase Plan) effective July 1, 1993. The Stock Purchase Plan provides for the purchase of up to 75,000 shares of common stock of the Company by employees pursuant to the terms of the Plan, as defined. During the years ended December 31, 1997 and 1996, the Company issued 8,123 and 10,697 shares, respectively, of its common stock under the Plan. The Company has a 401(k) defined contribution plan covering all full-time employees. Plan participants can elect to contribute up to 20% of their gross payroll. Company contributions are determined at the discretion of the Board of Directors and during the years ended December 31, 1997, 1996 and 1995, were matched 100% up to 4% of eligible earnings. Company contributions to the plan during the years ended December 31, 1997, 1996 and 1995 were approximately $381,000, $482,000 and $403,000, respectively. -39- 40 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company applies APB Opinion No. 25 in accounting for its plans, and accordingly, no compensation cost has been recognized for any stock options in the accompanying Consolidated Financial Statements. Had the Company determined compensation expense based upon the fair value at the date of grant, as determined under Statement No. 123, the Company's net earnings and net earnings per share would have been reduced to the pro forma amounts as summarized below:
1997 1996 1995 --------------- ---------------- -------------- Earnings $ 4,170,000 $ 2,829,000 $ 3,085,000 $ =============== ================ ============== Earnings per share Basic $ .37 $ .25 $ .27 =============== ================ ============== Diluted $ .37 $ .25 $ .27 =============== ================ ==============
The per share weighted average fair value of stock options granted during 1997, 1996 and 1995 was $4.60, $5.25 and $3.80, respectively, based upon a grant date valuation using the Black-Scholes option pricing model with the following weighted average assumptions in 1997, 1996 and 1995 - expected dividend yield of 0.0%, expected volatility of .64%, .61% and .61%, respectively; risk-free interest rate of 5.7%, 6.2% and 6.2%, respectively; and an average expected option life of 4.5, 4 and 4 years, respectively. The pro forma net earnings and earnings per share reflect only those options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under Statement No. 123 is not reflected in the pro forma net earnings and earnings per share presented above because compensation cost is generally recorded over the options' vesting period, generally four years, and compensation cost for options granted prior to January 1, 1995 is not considered. (6) RELATED PARTIES TRANSACTIONS Effective December 1, 1993, the Company entered into a national sales agreement with Allstate Insurance Company (Allstate) (a shareholder of the Company). The agreement contains automatic annual renewal provisions through the December 31, 1998 expiration date of the agreement. Local Allstate management is ultimately responsible for deciding who will be the provider of automotive salvage services for their geographic area of responsibility. The agreement provides specific guidelines as to the general terms and structure to which any local agreement must conform. In its normal course of business dealings with Allstate, the Company purchases vehicles from Allstate and advances funds for intermediary towing and storage fees (advanced charges) on behalf of Allstate. Additionally, depending on the type of sales agreement in effect at a Company location, Allstate may owe the Company for various fees. Upon settlement, the advanced charges and the related amounts owed to Allstate for the purchase of the vehicle and the amount owed by Allstate to the Company for various fees are netted. During the years ended December 31, 1997 and 1996, the Company recorded fee income of $7,000,000 and $6,000,000, respectively, related to the consignment sale of Allstate-insured vehicles and recorded sales of $34,700,000 and $66,000,000, respectively, and cost of sales -40- 41 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements of $32,800,000 and $63,900,000, respectively, related to the purchase of Allstate-insured vehicles under the purchase-agreement method. During 1997, 1996 and 1995, the Company paid fees aggregating $1,753,000, $1,523,000 and $1,474,000, respectively, to certain towing companies whose owners are either officers and/or directors/shareholders of the Company. (7) COMMITMENTS AND CONTINGENCIES The Company leases its facilities and certain equipment under operating leases with related and nonrelated parties, which expire through August 2007. Rental expense for the years ended December 31, 1997, 1996 and 1995 aggregated $10,035,000, $8,681,000 and $8,944,000 (of which $966,000, $884,000 and $1,389,000 pertained to leases with related parties in 1997, 1996 and 1995, respectively), respectively. Minimum annual rental commitments for the next five years under noncancelable leases at December 31, 1996 are as follows:
UNRELATED RELATED PARTY PARTY ---------------- --------------- Year ending December 31: 1998 $ 9,474,000 $ 973,000 1999 7,841,000 973,000 2000 7,439,000 973,000 2001 6,285,000 973,000 2002 5,112,000 664,000 Thereafter 11,191,000 -- ---------------- --------------- $47,342,000 $ 4,556,000 ================ ===============
In addition to the Allstate agreement, the Company has purchase agreements with certain insurance company suppliers, which expire at various intervals over the next two years. The Company's largest supplier accounted for 19% of the Company's supply of vehicles sold in both 1997 and 1996 and 21% in 1995. The second largest supplier accounted for 17%, 20% and 21% of the Company's supply of vehicles sold in 1997, 1996 and 1995, respectively. A third supplier accounted for 10% of the Company's supply of vehicles sold in 1997. The Company has compensation agreements with certain officers and other key employees. The Company is subject to certain other miscellaneous legal claims, which have arisen during the ordinary course of its business. None of these claims are expected to have material adverse effect on the Company's financial condition or operating results. (8) ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATIONS In connection with the acquisition of the capital stock of Underwriters Salvage Corporation (USC), the Company assumed the obligation for certain health care and death benefits for retired employees of USC. In accordance with the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," costs related to the benefits are accrued over an employee's service life. The assumed discount rate used to determine the Accumulated Postretirement Benefit Obligation (APBO) as of December 31, 1997 and 1996 was 7%. -41- 42 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Included in the footnote disclosure is the Accumulated Postretirement Benefit Obligation (APBO) for the plan. The APBO is a measure of the plan's liability, equivalent to the Projected Benefit Obligation used in pension accounting. The APBO is a factor in the expense calculation and is included in the footnote disclosure. For retirees, it is the present value of all benefits expected to be paid from the plan. Reconciliation of funded status as of December 31,
1997 1996 --------------- ---------------- Medical $ (972,000) $ (1,010,000) Life Insurance (385,000) (400,000) --------------- ---------------- Total APBO (1,357,000) (1,410,000) Plan assets -- -- --------------- ---------------- Funded status (1,357,000) (1,410,000) Unrecognized net loss from past experience (2,474,000) (2,763,000) --------------- ---------------- Accrued postretirement benefit cost $ (3,831,000) $ (4,173,000) =============== ================ Reconciliation of accumulated postretirement benefit cost: Accrued benefit cost, $ (4,173,000) $ (4,354,000) Income (expense) 162,000 (9,000) Contributions/premium paid 180,000 190,000 --------------- ---------------- Accumulated postretirement benefit cost, December 31, $ (3,831,000) $ (4,173,000) =============== ================
Effective January 20, 1994, the date of acquisition, the Company discontinued future participation for active employees. (9) SPECIAL CHARGES During the second quarter of 1997, the Company settled a securities class action lawsuit that had been pending against the Company and certain of its present and former officers and directors, in the United States District Court for the Central District of California. The litigation was settled for $3.75 million, the substantial portion of which was paid by the Company's directors' and officers' liability insurance company. The difference of $750,000 was recognized as a special charge to earnings in the second quarter of 1997. In February 1998, the settlement was approved by the court. During 1996, the Company recorded special charges aggregating $1,395,000 as a result of further repositioning to achieve its strategic plans. In implementing these strategic plans, the Company decided to establish its corporate headquarters in Illinois resulting in severance costs of $210,000 related to corporate employees not relocating to the Illinois corporate headquarters. Additionally, the Company incurred costs amounting to $670,000 to terminate an employment agreement with the Company's former Chairman of the Board and Chief Executive Officer. After evaluating past contracts entered into, the Company incurred a charge of $880,000 for agreements determined to no longer have value to the current -42- 43 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements corporate strategy. Additionally, the Company recorded an offsetting gain of $365,000 related to the negotiation of a buyout of a long-term lease. During 1995, the Company recorded special charges aggregating $4,226,000. The Company responded to changes in its industry and formulated its plans to reposition itself to achieve its strategic growth objectives. As a result of this repositioning, the Company determined that certain of its computer systems, software and related assets should be written down resulting in a charge of approximately $2.5 million, which is included in special charges. The Company also decided to not move its North Hollywood, California corporate administrative staff to a facility it had leased in Woodland Hills, California, resulting in a $1.1 million special charge. Additionally, the Company recorded charges related to the repositioning aggregating $600,000, all of which are included in special charges. (10) EARNINGS PER SHARE Reconciliations of the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, 1997, 1996 and 1995 are as follows:
1997 --------------------------------------------------------- Per Share Earnings Shares Amount ------------- -------------- ------------- Basic Earnings per Share Net earnings $ 4,495,000 11,294,000 $ 0.40 ============= Effect of Dilutive Securities - Stock Options -- 43,000 ------------- -------------- Diluted Earnings per Share $ 4,495,000 11,337,000 $ $0.40 ============= ============== ============= 1996 --------------------------------------------------------- Per Share Earnings Shares Amount ------------- -------------- ------------- Basic Earnings per Share Net earnings $ 3,102,000 11,279,000 $ 0.28 ============= Effect of Dilutive Securities - Stock Options -- 54,000 ------------- -------------- Diluted Earnings per Share $ 3,102,000 11,333,000 $ $0.27 ============= ============== ============= 1995 --------------------------------------------------------- Per Share Earnings Shares Amount ------------- -------------- ------------- Basic Earnings per Share Net earnings $ 3,136,000 11,265,000 $ 0.28 ============= Effect of Dilutive Securities Stock Options -- 156,000 ------------- -------------- Diluted Earnings per Share $ 3,136,000 11,421,000 $ $0.27 ============= ============== =============
-43- 44 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (11) QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized unaudited financial data for 1997 and 1996 are as follows:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------------- --------------- ---------------- ----------------- 1997: Net sales $ 67,885,000 $ 65,978,000 $ 61,403,000 $ 64,059,000 Gross profit 13,832,000 16,295,000 14,289,000 14,926,000 Earnings from operations 1,508,000 3,095,000 2,457,000 3,143,000 Net earnings 530,000 1,520,000 971,000 1,474,000 Diluted earnings per share(1) $ .05 $ .13 $ .09 $ .13 ================ =============== ================ ================= 1996: Net sales $ 72,816,000 $ 76,042,000 $ 68,680,000 $ 64,355,000 Gross profit 14,867,000 16,364,000 13,739,000 13,779,000 Earnings from operations 1,985,000 3,191,000 1,798,000 587,000 Net earnings 759,000 1,521,000 751,000 71,000 Diluted earnings per share(1) $ .07 $ .13 $ .07 $ .01 ================ =============== ================ =================
(1) Basic earnings per share is not presented separately as it is the same as diluted earnings per share for each quarter of 1996 and 1997. -44- 45 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements INDEX TO EXHIBITS
Sequentially Numbered Exhibit No. Page - ----------- ---- 3.1 Articles of Incorporation 3.2 By-Laws 10.149 Form of Change of Control 10.151 Amendment to Revolving Credit 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Auditors. 24.1 Power of Attorney 27.1 Financial Data Schedule
EX-3.1 2 ARTICLES OF INCORPORATION 1 FILE NUMBER 5953-635-4 EXHIBIT 3.1 STATE OF ILLINOIS OFFICE OF THE SECRETARY OF STATE WHEREAS, ARTICLES OF INCORPORATION OF INSURANCE AUTO AUCTIONS (ILLINOIS), INC. INCORPORATED UNDER THE LAWS OF THE STATE OF ILLINOIS HAVE BEEN FILED IN THE OFFICE OF THE SECRETARY OF STATE AS PROVIDED BY THE BUSINESS CORPORATION ACT OF ILLINOIS, IN FORCE JULY 1, A.D. 1984. NOW THEREFORE, I, GEORGE H. RYAN, SECRETARY OF STATE OF THE STATE OF ILLINOIS, BY VIRTUE OF THE POWERS VESTED IN ME BY LAW, DO HEREBY ISSUE THIS CERTIFICATE AND ATTACH HERETO A COPY OF THE APPLICATION OF THE AFORESAID CORPORATION. IN TESTIMONY WHEREOF, I HERETO SET MY HAND AND CAUSE TO BE AFFIXED THE GREAT SEAL OF THE STATE OF ILLINOIS, AT THE CITY OF SPRINGFIELD, THIS 7TH DAY OF AUGUST A.D. 1997 AND OF THE INDEPENDENCE OF THE UNITED STATES THE TWO HUNDRED AND 22ND. [SEAL OF THE STATE OF ILLINOIS] C-212.2 George H. Ryan Secretary of State RETURN TO BOX 408 ATTN: JM ------------ 2
Form BCA-2.10 ARTICLES OF INCORPORATION - ------------------------------------------------------------------------------------------ (Rev. Jan. 1995) THIS SPACE FOR USE BY SECRETARY OF STATE SUBMIT IN DUPLICATE! GEORGE H. RYAN ----------------------- SECRETARY OF STATE F I L E D THIS SPACE FOR USE BY Department of Business Services Secretary of State Springfield, IL 62756 AUG 7 1997 - ---------------------- Date 8-7-97 Payment must be made by GEORGE H. RYAN Franchise Tax $ 25.00 certified check, cashier's SECRETARY OF STATE Filing Fee $ 75.00 check, Illinois attorney's ------- check, Illinois C.P.A.'s Approved: ??? $100.00 check or money order, payable to "Secretary of State." ========================================================================================== 1. CORPORATE NAME: Insurance Auto Auctions (Illinois), Inc. --------------------------------------------------------------------- -------------------------------------------------------------------------------------- (The corporate name must contain the word "corporation", "company," "incorporated," "limited" or an abbreviation thereof.) ========================================================================================== 2. Initial Registered Agent: Gaspare Ruggirello ----------------------------------------------------------- First Name Middle Initial Last Name Initial Registered Office: 850 East Algonquin Road ----------------------------------------------------------- Number Street Suite # Schaumburg IL 60173 Cook ----------------------------------------------------------- City Zip Code County ========================================================================================== 3. Purpose or purposes for which the corporation is organized: (If not sufficient space to cover this point, add one or more sheets of this size.) The transaction of any or all lawful businesses for which corporations may be incorporated under the Illinois Business Corporation Act. ========================================================================================== 4. Paragraph 1: Authorized Shares, Issued Shares and Consideration Received: Par Value Number of Shares Number of Shares Consideration to be Class per Share Authorized Proposed to be Issued Received Therefor -------------------------------------------------------------------------------------- Common $ NPV 20,000,000 1,000 $1 -------------------------------------------------------------------------------------- Preferred NPV 5,000,000 0 0 -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- TOTAL: $1 Paragraph 2: The preferences, qualifications, limitations, restrictions and special or relative rights in respect of the shares of each class are: (If not sufficient space to cover this point, add one or more sheets of this size.) See attachment. (over) RETURN TO BOX 408 EXPEDITED ATTN: JM AUG 07 1997 ------------ SECRETARY OF STATE
3 ARTICLE 4, PARAGRAPH 2: a. NUMBER OF AUTHORIZED SHARES. The Corporation shall have authority to issue a total of twenty-five million (25,000,000) shares of capital stock, divided into classes as follows: (1) Twenty million (20,000,000) shares of capital stock shall constitute a separate and single class designated "Common Shares," which shall have no par value and $.001 stated value. (2) Five million (5,000,000) shares of capital stock shall constitute a separate and single class designated "Preferred Shares," which shall have no par value and $.001 stated value and may be issued in series, with all Preferred Shares of the same series having identical rights, preferences and limitations. b. COMMON SHARES. (1) Dividend Rights. Subject to the rights of any class of shares (or series thereof) of the Corporation ranking, as to dividends, senior to Common Shares, the holders of Common Shares shall be entitled to receive such dividends, if any, as may be declared by the Board of Directors of the Corporation from time to time and paid on Common Shares out of any assets of the Corporation at the time legally available for the payment of dividends. (2) Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the Common Shares shall be entitled to share ratably in the assets of the Corporation remaining after all distributions or payments shall have been made to the holders of any class of shares (or series thereof) of the Corporation ranking senior, as to liquidation rights, to Common Shares. The merger or share exchange of the Corporation with any other corporation, or a sale, lease or conveyance of all or substantially all of its assets, shall not be regarded as a liquidation, dissolution or winding up of the Corporation within the meaning of this section. (3) Voting. Subject to the rights of any outstanding Preferred Shares or as may be required by law, all voting power shall rest exclusively in the holders of Common Shares. Each Common Share shall be entitled to one vote on each matter submitted to a vote of the shareholders of the Corporation. c. PREFERRED SHARES. Preferred Shares may be issued from time to time in one or more series, in such amounts and for such consideration as the Board of Directors may determine and with such 1 4 preferences, limitations and relative rights as shall be determined and stated by the Board of Directors. The Board of Directors is hereby granted further authority to determine such preferences, limitations and relative rights for each such series of Preferred Shares by resolution prior to the issuance of each such series. Without limiting the generality of the authority granted to the Board of Directors herein, the Board of Directors shall have the power, right and authority to determine the following preferences, limitations and relative rights: (1) Designation. The designation of each series, which designation shall be by distinguishing letter, number, title or combination thereof. (2) Number. The number of shares of any series to be issued. (3) Dividend Source, Rate and Dates. The source, rate and dates of any dividends payable with respect to shares of any series; provided, however, that no dividends shall be payable upon the Preferred Shares to the extent that (A) the Corporation would not be able to pay its debts as they become due in the usual course of business; or (B) the Corporation's total assets would be less than the sum of its total liabilities plus (unless otherwise provided herein) the amount that would be needed, if the Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the shareholders whose preferential rights are superior to those receiving the distribution. (4) Dividend Accumulations. Whether any dividends which may be payable with respect to shares of any series shall be cumulative; and, if they shall be cumulative, then the dates from which such dividends shall start to cumulate. (5) Dividend Preferences. The preference or preferences, if any, to be accorded dividends payable with respect to shares of any series. (6) Redemption. The redemption rights and prices, if any, with respect to shares of any series. (7) Sinking Fund. The terms and amount of any sinking fund provided for the redemption of shares of any series. (8) Rights of Purchase. The rights, if any, of the Corporation to purchase for retirement, other than by way of redemption, shares of any series, and the terms and conditions of any such purchase rights. (9) Conversion. Whether or not the shares of any series shall be convertible into Common Shares or into shares of any other series or number of series or into any other security; and, if so, the conversion price or prices, any adjustments thereof and/or any other terms and conditions upon which such conversion may be effected. 2 5 (10) Liquidation. The preference or preferences, if any, with respect to shares of any series entitled to receive the net assets of the Corporation upon liquidation, dissolution or winding up of the Corporation (11) Voting. The voting rights, if any, to which the holders of any series of Preferred Shares may be entitled. d. DISTRIBUTIONS TO SHAREHOLDERS. The Board of Directors may authorize, and the Corporation may make, distributions to its shareholders if, after giving the distribution effect, (1) the Corporation would be able to pay its debts as they become due in the usual course of business and (2) the Corporation's total assets would be greater than its total liabilities, without regard to any amount that would be needed, if the Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. ARTICLE 7: A. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS. The Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he or she is or was a director or officer of the Corporation, or who is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The Corporation may indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he or she is or was an employee or agent of the Corporation, or who is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, 3 6 create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal action or proceeding, that the person had reasonable cause to believe that his or her conduct was unlawful. B. LIMITATION OF LIABILITY OF DIRECTORS. The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under Illinois law. C. NO CUMULATIVE VOTING. In all elections for directors, cumulative voting by the shareholders is hereby denied under all circumstances. D. NO INFORMAL ACTION BY SHAREHOLDERS. Any action which may or must be taken by the shareholders must be taken at any annual or special meeting of the shareholders and may not be taken by any consent in writing of the shareholders. 4 EX-3.2 3 BY LAWS 1 EXHIBIT 3.2 BY-LAWS OF INSURANCE AUTO AUCTIONS (ILLINOIS), INC. ARTICLE 1 OFFICES; REGISTERED AGENT Section 1.1 REGISTERED OFFICE AND AGENT. The corporation shall maintain in the State of Illinois a registered office and a registered agent whose business office is the registered office. Section 1.2 PRINCIPAL BUSINESS OFFICE. The corporation shall have its principal business office at such location within or without the State of Illinois as the board of directors may from time to time determine. ARTICLE 2 SHAREHOLDERS Section 2.1 ANNUAL MEETING. The annual meeting of the shareholders shall be held for the purpose of electing directors and for the transaction of such other business as may come before the meeting on the third Wednesday of June each year, or, if this date in any year shall be a legal holiday, then the meeting shall be held on the next succeeding business day; provided, however, that the board of directors may, by resolution adopted before notice of the meeting is given to the shareholders, fix a different date and/or time for holding any annual meeting. Section 2.2 SPECIAL MEETINGS. Special meetings of the shareholders may be called by the president, by the board of directors or by the holders of not less than one-fifth of all the outstanding shares of the corporation entitled to vote on the matter for which the meeting is called. Section 2.3 PLACE OF MEETING. The board of directors may designate any place, either within or without the State of Illinois, as the place for any annual meeting or for any special meeting called by the board of directors, but if no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal business office of the corporation; provided, however, that for any meeting of the shareholders for which a waiver of notice designating a place is signed by all of the shareholders, then that shall be the place for the holding of such meeting. Section 2.4 NOTICE OF MEETINGS. Written notice stating the place, date and hour of the meeting of the shareholders and, in the case of a special meeting, the purpose or purposes for 2 which the meeting is called either shall be delivered personally or mailed to each shareholder of record entitled to vote at the meeting, not less than 10 nor more than 60 days before the date of the meeting, or, in the case of a meeting called for the purpose of acting upon a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than 20 nor more than 60 days before the meeting, by or at the direction of the president, the secretary, or other persons calling the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the shareholder at his or her address as it appears on the records of the corporation, with postage thereon prepaid. Section 2.5 WAIVER OF NOTICE. A waiver of notice in writing signed by a shareholder entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to giving notice to such shareholder. Attendance at any meeting shall constitute waiver of notice thereof unless the person so attending objects to the holding of the meeting because proper notice was not given. Section 2.6 FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of the shareholders or to receive payment of any dividend or other distribution or allotment of any rights, or in order to make a determination of shareholders for any other proper purpose, the board of directors may fix in advance a record date for any such determination of shareholders, which shall be not more than 60 days and, for a meeting of shareholders, not less than 10 days, or in the case of a meeting called for the purpose of acting upon a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than 20 days, before the date of the event for which the determination is required. If no record date is fixed as aforesaid, the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be the date on which notice of the meeting is mailed and the record date for the determination of shareholders for any other purpose shall be the date on which the board of directors adopts resolution(s) relating thereto. A determination of shareholders entitled to vote at any meeting of the shareholders shall apply to any adjournment of the meeting. Section 2.7 VOTING LISTS. The officer or agent having charge of the share transfer books of the corporation shall make, within 20 days after the record date for a meeting of shareholders or 10 days before such meeting, whichever is earlier, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order, showing the address of and the number of shares held by each, which list shall be kept on file at the registered office of the corporation and shall be subject to inspection by any shareholder, and to copying at the shareholder's expense, at any time during usual business hours for a period of 10 days prior to each meeting of the shareholders. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder during the whole time of the meeting. The original share ledger or transfer books, or a duplicate thereof kept in the State of Illinois, shall be prima facie evidence as to who are the shareholders entitled to examine such list or share ledger or transfer books or to vote at any meeting of the shareholders. 2 3 Section 2.8 QUORUM AND VOTE REQUIRED FOR ACTION. The holders of outstanding shares having a majority of the total votes which all of the outstanding shares of the corporation would be entitled to cast on a matter at the meeting, present in person or by proxy, shall constitute a quorum for consideration of such matter at any meeting of the shareholders; provided that if a quorum is not present at said meeting, then the holders who are present in person or by proxy may by majority vote adjourn the meeting from time to time without further notice. If a quorum is present at any meeting of the shareholders, the affirmative vote of the majority of the votes entitled to be cast on a matter by holders of shares who are present in person or by proxy shall be the act of the shareholders, unless the Illinois Business Corporation Act of 1983 as amended or the articles of incorporation of the corporation require a different number of votes. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the original meeting. Withdrawal of shareholders from any meeting shall not cause failure of a duly constituted quorum at that meeting. Section 2.9 PROXIES. Each shareholder entitled to vote at a meeting of the shareholders may authorize another person or persons to act for him or her by proxy, but no proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Such proxy shall be in writing delivered to the person so appointed and shall be filed with the secretary of the corporation before or at the time of the meeting. Section 2.10 VOTING OF SHARES. Each outstanding Common Share, regardless of class and subject to the terms of any series of Preferred Shares, shall be entitled to one vote upon each matter submitted to a vote of the shareholders. Section 2.11 VOTING OF SHARES BY CERTAIN HOLDERS. (a) Shares registered in the name of another corporation, domestic or foreign, may be voted by any officer, agent, proxy or other legal representative authorized to vote such shares under the law of incorporation of such corporation. The corporation may treat the president or other person holding the position of chief executive officer of such other corporation as authorized to vote such shares, together with any other person indicated and any other holder of an office indicated by the corporate shareholder to the corporation as a person or an office authorized to vote such shares. Such persons and offices indicated shall be registered by the corporation on the transfer books for shares and included in any voting list prepared in accordance with these by-laws. (b) Shares registered in the name of a deceased person, a minor ward or a person under legal disability may be voted by his or her administrator, executor or court appointed guardian, either in person or by proxy without a transfer of such shares into the name of such administrator, executor or court appointed guardian. Shares registered in the name of a trustee may be voted by him or her, either in person or by proxy. (c) Shares registered in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer 3 4 thereof into his or her name if authority so to do be contained in an appropriate order of the court by which such receiver was appointed. (d) A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. (e) Shares of the corporation belonging to the corporation shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding shares entitled to vote at any given time, but shares of the corporation held by the corporation in a fiduciary capacity may be voted and shall be counted in determining the total number of outstanding shares entitled to vote at any given time. Section 2.12 INSPECTORS. At any meeting of the shareholders, the presiding officer may, or upon the request of any shareholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting, based upon their determination of the validity and effect of proxies; count all votes and report the results; and do such other acts as are proper to conduct the election and voting with impartiality and fairness to all the shareholders. Each report of an inspector shall be in writing and signed by him or her or a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. Section 2.13 VOTING BY BALLOT. Voting on any question shall be by ballot when so requested by any shareholder or directed by the presiding officer. ARTICLE 3 DIRECTORS Section 3.1 GENERAL POWERS. The business and affairs of the corporation shall be managed by or under the direction of the board of directors. Section 3.2 NUMBER, TENURE AND QUALIFICATIONS. The number of directors of the corporation shall range between five and nine. The term of office of each director shall be until the next annual election of the shareholders or until his or her successor shall have been elected and qualified. Directors need not be residents of the State of Illinois or shareholders of the corporation. Section 3.3 REGULAR MEETINGS. A regular meeting of the board of directors shall be held, without other notice than this by-law, immediately after, and at the same place as, the annual 4 5 meeting of the shareholders. The board of directors may provide, by resolution, the time and place, either within or without the State of Illinois, for the holding of additional regular meetings without other notice than such resolution. Section 3.4 SPECIAL MEETINGS. Special meetings of the board of directors may be called by or at the request of the president or any two directors. The person or persons authorized to call special meetings of the board of directors may fix any place, either within or without the State of Illinois, as the place for holding any special meeting of the board of directors called by them. Section 3.5 NOTICE AND WAIVER. Notice of any special meeting shall be given at least 2 days prior thereto by written notice to each director at his or her business address or such other address as he or she may have advised the secretary of the corporation to use for such purpose. If delivered, such notice shall be deemed to be given when delivered. If mailed, such notice shall be deemed to be given two business days after deposit in the United States mail so addressed, with postage thereon prepaid, and if given by telegraph such notice shall be deemed to be given the next business day following the day the telegram is given to the telegraph company. A waiver of notice in writing signed by the director entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance at any meeting shall constitute waiver of notice thereof unless the person attends the meeting for the express purpose of objecting to the transacting of business at the meeting because proper notice was not given. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 3.6 QUORUM. A majority of the number of directors in office at a given time shall constitute a quorum for the transaction of business at any meeting of the board of directors, unless a greater number is specified by the articles of incorporation of the corporation or these by-laws; provided, that if a quorum is not present, then a majority of the directors present at said meeting may adjourn the meeting from time to time without further notice than announcement at the meeting. Section 3.7 MANNER OF ACTING. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the act of a greater number is required by the articles of incorporation of the corporation or these by-laws. Section 3.8 ATTENDANCE BY CONFERENCE TELEPHONE. Members of the board of directors may participate in and act at any meeting of such board through use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such meeting by such means shall constitute attendance and presence in person at the meeting of the person or persons so participating for all purposes including fulfilling the requirements of sections 3.6 and 3.7. Section 3.9 VACANCIES. Any vacancy occurring in the board of directors, and any directorship to be filled by reason of an increase in the number of directors, may be filled by election 5 6 at an annual meeting or at a special meeting of shareholders called for that purpose; provided, however, that the board of directors may fill vacancies arising between meetings of shareholders for any reason, including vacancies due to an increase in the number of directors. Section 3.10 INFORMAL ACTION BY DIRECTORS. Any action required to be taken at a meeting of the board of directors, or any other action which may be taken at a meeting of the board of directors, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. Any consent may be signed in counterparts with the same force and effect as if all directors had signed the same copy. All signed copies of any such written consent shall be delivered to the secretary to be filed in the corporate records. The action taken shall be effective when all the directors shall have signed the consent unless the consent specifies a different effective date. Any such consent signed by all of the directors shall have the same effect as a unanimous vote. Section 3.11 COMPENSATION. The board of directors, by the affirmative vote of a majority of directors then in office, and irrespective of any personal interest of any of its members, shall have authority to establish reasonable compensation of all directors for services to the corporation as directors, officers or otherwise, and to authorize the payment of the directors' expenses, if any, of attendance at each meeting of the board in addition to such compensation. Section 3.12 PRESUMPTION OF ASSENT. A director who is present at a meeting of the board of directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of the meeting or unless he or she shall file his or her written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered or certified mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. Section 3.13 COMMITTEES. A majority of the directors may create one or more committees and appoint members of the board to serve on the committee or committees. Each committee shall have two or more members, who serve at the pleasure of the board of directors. Members of any committee of the board of directors may participate in and act at any meeting of such committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such meeting by such means shall constitute attendance and presence in person at the meeting of the person or persons so participating for all purposes. Unless in its appointment the board of directors decides otherwise, a majority of any committee shall constitute a quorum and a majority of a quorum shall be necessary for committee action. A committee may act by unanimous consent in writing without a meeting, and shall decide the time and place of its meetings and the notice therefor, unless the board of directors decides otherwise. To the extent specified by the board of directors, a committee may exercise the power of the board, subject to such limitations as may be provided by law. 6 7 ARTICLE 4 OFFICERS Section 4.1 NUMBER. The officers of the corporation shall be a president, a treasurer, and a secretary, and such number of vice presidents, assistant treasurers, assistant secretaries and other officers as may be elected by the board of directors. Any two or more offices may be held by the same person. Section 4.2 ELECTION AND TERM OF OFFICE. The officers of the corporation shall be elected annually by the board of directors at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Vacancies may be filled or new offices created and filled at any meeting of the board of directors. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified, until his or her death or resignation or until he or she shall have been removed in the manner hereinafter provided, whichever first occurs. Section 4.3 REMOVAL. Any officer may be removed by the board of directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election of an officer shall not of itself create contract rights. Section 4.4 PRESIDENT. The president shall be the chief executive officer of the corporation and, subject to the direction and control of the board of directors, he or she shall be in charge of the business of the corporation. In general, he or she shall discharge all duties incident to the chief executive office of the corporation and such other duties as may be prescribed by the board of directors from time to time. Without limiting the generality of the foregoing, the president shall see that the resolutions and directions of the board of directors are carried into effect except in those instances in which that responsibility is specifically assigned to some other person by the board of directors; he or she shall preside at all meetings of the shareholders; and, except in those instances in which the authority to execute is expressly delegated to another officer or agent of the corporation or a different mode of execution is expressly prescribed by the board of directors, he or she may execute for the corporation certificates for its shares (the issue of which shall have been authorized by the board of directors), and any contracts, deeds, mortgages, bonds or other instruments which the board of directors has authorized, and he or she may (without previous authorization by the board of directors) execute such contracts and other instruments as the conduct of the corporation's business in its ordinary course requires, and he or she may accomplish such execution in each case either individually or with the secretary, any assistant secretary, or any other officer thereunto authorized by the board of directors, according to the requirements of the form of the instrument. Also, the president may vote all securities which the corporation is entitled to vote except as and to the extent such authority shall be vested in a different officer or agent of the corporation by the board of directors. 7 8 Section 4.5 THE VICE PRESIDENTS. The vice president (and, in the event that there is more than one vice president, each of the vice presidents) shall assist the president in the discharge of his or her duties as the president may direct and shall perform such other duties as from time to time may be assigned to him or her by the president or by the board of directors. In the absence of the president or in the event of his or her inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated by the board of directors, or by the president if the board of directors has not made such a designation, or in the absence of any designation, then in the order of seniority of tenure as vice president) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the corporation or a different mode of execution is expressly prescribed by the board of directors or these by-laws, the vice president (or each of them if there are more than one) may execute for the corporation certificates for its shares (the issue of which shall have been authorized by the board of directors), and any contracts, deeds, mortgages, bonds or other instruments which the board of directors has authorized, and he or she may (without previous authorization by the board of directors) execute such contracts and other instruments as the conduct of the corporation's business in its ordinary course requires, and he or she may accomplish such execution in each case either individually or with the secretary, any assistant secretary or any other officer thereunto authorized by the board of directors, according to the requirements of the form of the instrument. Section 4.6 THE TREASURER. The treasurer shall be the principal accounting and financial officer of the corporation and as such shall perform all the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him or her by the board of directors or the president. Without limiting the generality of the foregoing, he or she shall (a) have charge of and be responsible for the maintenance of adequate books of account for the corporation; and (b) have charge and custody of all funds and securities of the corporation, and be responsible therefor and for the receipt and disbursement thereof. If required by the board of directors, the treasurer shall give a bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the board of directors may determine. Section 4.7 THE SECRETARY. The secretary shall perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him or her by the board of directors or president. Without limiting the generality of the foregoing, he or she shall (a) record the minutes of the meetings of the shareholders and the board of directors and will record or keep the minutes of all committees in one or more books provided for that purpose and shall include in such books the actions by written consent of the shareholders and the board of directors; (b) see that all notices are duly given in accordance with the provisions of these by-laws or as required by law; (c) be the custodian of the corporate records and the seal of the corporation (if a seal has been authorized by the board of directors) and certify the by-laws, resolutions of the shareholders and board of directors and any committees of the board of directors and other documents of the corporation as being true and correct copies thereof; (d) keep a register of the post-office address of each shareholder which shall be furnished to the secretary by such shareholder; (e) sign with the 8 9 president, or a vice president, or any other officer thereunto authorized by the board of directors, certificates for shares of the corporation, the issue of which shall have been authorized by the board of directors, and any contracts, deeds, mortgages, bonds or other instruments which the board of directors has authorized, and he or she may (without previous authorization by the board of directors) sign with such other officers as aforesaid such contracts and other instruments as the conduct of the corporation's business in its ordinary course requires, in each case according to the requirements of the form of the instrument, except when a different mode of execution is expressly prescribed by the board of directors or these by-laws; and (f) have general charge of the stock transfer books of the corporation. Section 4.8 ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The assistant treasurers and assistant secretaries shall perform such duties as shall be assigned to them by the treasurer, in the case of assistant treasurers, or the secretary, in the case of assistant secretaries, or by the president or the board of directors in either case. Each assistant secretary may sign with the president, or a vice president, or any other officer thereunto authorized by the board of directors, certificates for shares of the corporation, the issue of which shall have been authorized by the board of directors, and any contracts, deeds, mortgages, bonds or other instruments which the board of directors has authorized, and may (without previous authorization by the board of directors) sign with such other officers as aforesaid such contracts and other instruments as the conduct of the corporation's business in its ordinary course requires, in each case according to the requirements of the form of the instrument, except when a different mode of execution is expressly prescribed by the board of directors. The assistant treasurers shall, if required by the board of directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the board of directors shall determine. Section 4.9 COMPENSATION. The officers' compensation shall be fixed from time to time by the board of directors, and no officer shall be prevented from receiving such compensation by reason of the fact that he or she is also a director of the corporation. ARTICLE 5 INDEMNIFICATION Section 5.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation shall, to the fullest extent to which it is empowered to do so by the Illinois Business Corporation Act of 1983, as amended, or any other applicable laws as may from time to time be in effect, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with 9 10 such action, suit or proceeding, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was an employee or agent of the corporation, or is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation or, with respect to any criminal action or proceeding, that the person had reasonable cause to believe that his or her conduct was unlawful. Section 5.2 CONTRACT WITH THE CORPORATION. The provisions of this Article 5 shall be deemed to be a contract between the corporation and each director or officer who serves in any such capacity at any time while this Article is in effect, and any repeal or modification of this Article 5 shall not affect any rights or obligations hereunder with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. Section 5.3 INDEMNIFICATION OF EMPLOYEES AND AGENTS. Persons who are not covered by the foregoing provisions of this Article 5 and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the board of directors; provided, however, that to the extent that such employee or agent has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding to which he or she was made a party by reason of the fact that he or she is or was an employee or agent acting in the above-described capacity, or in defense of any claim, issue or matter therein, the corporation shall indemnify such employee or agent against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. Section 5.4 ADVANCEMENT OF EXPENSES. The corporation shall pay expenses incurred by any officer or director, and may pay expenses incurred by any employee or agent, in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he or she is not 10 11 entitled to be indemnified by the corporation as authorized by these by-laws or by the Illinois Business Corporation Act of 1983 as amended. Section 5.5 OTHER RIGHTS OF INDEMNIFICATION. The indemnification or advancement of expenses provided or permitted by this Article 5 shall not be deemed exclusive of any other rights to which those indemnified may be entitled by law or otherwise, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. ARTICLE 6 CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 6.1 CONTRACTS. The board of directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; provided, however, that this Section 6.1 shall not be a limitation on the powers of office granted under Article 4 of these by-laws. Section 6.2 LOANS. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by the board of directors or a duly authorized committee thereof. Such authority may be general or confined to specific instances. Section 6.3 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by the board of directors or by an officer or officers of the corporation designated by the board of directors to make such determination. Section 6.4 DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as the board of directors or such officer or officers designated by the board of directors may select. ARTICLE 7 CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 7.1 CERTIFICATES FOR SHARES. Certificates representing shares of the corporation shall be signed by the president or a vice president and by the treasurer or an assistant treasurer or the secretary or an assistant secretary and, if the corporation has a corporate seal, may be sealed with such seal or a facsimile thereof. All certificates for shares shall be consecutively 11 12 numbered or otherwise identified and shall state the name of the person to whom the shares represented thereby are issued, the number and class of shares, with designation of series, if any, the date of issue, the fact that the corporation is organized under Illinois law, and such other information or statement as may be required by law. The name and address of each shareholder, the number of shares held and the date on which the certificates for the shares were issued shall be entered on the stock transfer books of the corporation. The person in whose name shares are registered on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation. Section 7.2 TRANSFERS OF SHARES; LOST CERTIFICATES. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or other authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books, provided that the corporation or a transfer agent of the corporation shall not have received a notification of adverse interest and that the requirements of the new reference system of the Illinois Revised Statutes has been met. No new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost or destroyed certificate, or one so mutilated that it cannot be identified, a new one may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe. ARTICLE 8 FISCAL YEAR The fiscal year of the corporation shall be as fixed from time to time by resolution of the board of directors. ARTICLE 9 DIVIDENDS The board of directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and the articles of incorporation of the corporation. 12 13 ARTICLE 10 SEAL The board of directors may provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Illinois." The corporate seal may be used by causing it or a facsimile thereof to be impressed, affixed or in any manner reproduced. ARTICLE 11 AMENDMENTS These by-laws may be altered, amended or repealed and new by-laws may be adopted by the board of directors of the corporation or by the shareholders of the corporation entitled to vote thereon, provided that no by-law adopted by the shareholders may be altered, amended or repealed by the board of directors. 13 EX-10.149 4 FORM OF CHANGE OF CONTROL 1 EXHIBIT 10.149 CHANGE OF CONTROL AND EMPLOYMENT AGREEMENT AGREEMENT ("Agreement") by and between Insurance Auto Auctions, Inc., an Illinois corporation (the "Company") and ___________________ (the "Executive"), dated as of February 23 , 1998. The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) Subject to the next sentence, the "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. However, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that on the date one year after the date hereof, and on each annual anniversary of such date (such date, and each annual anniversary thereof, a "Renewal Date"), unless this Agreement shall have been terminated pursuant to Section 12(b)(ii), the Change of Control Period shall be automatically extended by an additional year (so as to terminate two years from such Renewal Date), unless at least 60 days prior to such Renewal Date the Company gives notice to the Executive that the Change of Control Period shall not be so extended, in which event the Change of Control Period shall terminate one year after such Renewal Date. 2 2. Change of Control. For the purpose 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")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company shall not constitute a Change of Control; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual (other than an individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other 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 by the Company's shareholders 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. 2 3 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 75 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed not later than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Based on such review, the Board, in its discretion, can increase the Annual Base Salary. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Neither the initial Annual Base Salary nor any increase to the Annual Base Salary shall be reduced. The term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. 3 4 (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to greater of (A) the Executive's target bonus payable under the Company's Officer Incentive Plan or Management Incentive Plan, as the case may be, or any comparable bonus under any predecessor or successor plan, for the fiscal year in which the Effective Date occurs (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) and (B) the average of the Executive's annual bonuses actually paid under the Company's Officer Incentive Plan or Management Incentive Plan, as the case may be, for the three fiscal years immediately preceding the fiscal year in which the Effective Date occurs (annualized in the event that the Executive was not employed by the Company for the whole of any such fiscal years). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. Furthermore, the Executive shall pay the same amounts for all such benefits as other peer executives of the Company and its affiliated companies. 4 5 (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including use of an automobile and payment of related expenses, or an automobile allowance, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Disability of the Executive occurs during the Employment Period, the Company may give to the Executive written notice in accordance with Section 12(c) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), unless within the 30-day period after such receipt, the Executive returns to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time 5 6 basis for 180 consecutive business days as a result of incapacity due to mental or physical illness, which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), 30 days after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties; or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, upon the Company giving the Executive written notice thereof, in each case as determined in the good faith opinion of the Board and set forth in a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board) specifying the particulars thereof in detail. For purposes of this provision, no act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done or omitted to be done by the Executive in good faith and in the best interests of the Company. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; 6 7 (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) of this Agreement or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(c) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be. 7 8 6. Obligations of the Company upon Termination. (a) Good Reason; Other than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause, Death or Disability, or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the greater of (I) the Annual Bonus payable for the fiscal year in which the Executive's Date of Termination occurs (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) and (II) the average of the Executive's Annual Bonuses actually paid for the three fiscal years immediately preceding the fiscal year in which the Executive's Date of Termination occurs (annualized in the event that the Executive was not employed by the Company for the whole of any such fiscal years), including in each case any bonus or portion thereof which has been earned but deferred, if any (such higher amount being referred to as the "Highest Annual Bonus") 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 (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. an amount equal to the product of (1) one and one- half and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; (ii) for 18 months after the Executive's Date of Termination, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement (the "Company Welfare Plans") if the Executive's employment had not been terminated, provided, however, that such benefits shall be continued only to the extent permissible under the terms of such Company Welfare Plans and applicable law. If any of the Company's Welfare Plans do not permit continued participation by the Executive and his family after the Executive's Date of Termination, the Company shall reimburse the Executive for the cost of obtaining comparable coverage from a third-party insurer. If during the 18 month period described herein the Executive is reemployed by another employer, the rights of the Executive and his family to receive benefits under any Company Welfare Plan shall terminate on the date he and his family become eligible to receive comparable benefits from such employer. If, at the end of the 18-month period described herein, the Executive is receiving medical benefits under the Company's medical plan and is not employed by another employer, the 8 9 Company shall continue to provide medical benefits to the Executive and/or the Executive's family pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974, as amended ("COBRA"), and for such purpose, the end of such 18-month period shall be considered the date of the "qualifying event" as such term is defined by COBRA, provided, however, that if the Executive is receiving medical benefits from a third-party insurer pursuant to this clause (ii), and is not then employed by another employer, the Company shall reimburse the Executive for the portion of the cost of such medical benefits equal to excess of the cost charged by the third-party insurer over the amount that would have been paid by the Executive under COBRA for continued coverage under the Company's medical plan during the COBRA period; (iii) for 18 months after the Executive's Date of Termination, the Company shall continue the Executive's participation as an active employee in any excess or supplemental pension or retirement plan maintained by the Company in which the Executive participated as of such Date of Termination; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). The payments made and benefits provided pursuant to this Section 6(a) will be in lieu of any other severance benefits offered by the Company pursuant to any plan, program, policy or practice that may be in effect. (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. The "Other Benefits" to be provided shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely 9 10 payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. The "Other Benefits" to be provided shall include, without limitation, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(b)(iii), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or policy until the Date of Termination shall be payable in accordance with the practice or program of, or any contract or agreement with, the Company or any of its affiliated companies at or subsequent to such plan, policy, practice or program or contract or agreement, except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee 10 11 of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Excise Tax. (a) Gross-Up Payment. In the event a Change of Control shall occur, and a determination is made by legislation, regulation, ruling directed to the Executive or the Company, or court decision that the aggregate amount of any payment made to the Executive hereunder, or pursuant to any plan, program or policy of the Company in connection with, on account of, or as a result of, such Change of Control (the "Total Payments") will be subject to the excise tax provisions of Section 4999 of the Code, or any successor section thereof, the Executive shall be entitled to receive from the Company, in addition to any other amounts payable thereunder, a lump sum payment (the "Gross-Up Payment"), sufficient to cover the full cost of such excise taxes and the Executive's federal, state and local income and employment taxes on this additional payment so that the net amount retained by the Executive, after the payment of all such excise taxes on the Total Payments, and all federal, state and local income and employment taxes and excise taxes on the Gross-Up Payment, shall be equal to the Total Payments. The Total Payments, however, shall be subject to any federal, state and local income and employment taxes thereon. For this purpose, the Executive shall be deemed to be in the highest marginal rate of federal, state and local taxes. Such amount shall be payable to the Executive as soon as may be reasonably practicable after such final determination is made. (b) Determination. The Executive and the Company shall mutually and reasonably determine whether or not such determination has occurred, whether any appeal to such determination should be made and the amount of the Gross-Up Payment to be made to the Executive. Prior to the making of any such Gross-Up Payment, either party may request a determination as to the amount of such Gross-Up Payment. If such a determination is requested, it shall be made promptly, at the Company's expense, by independent tax counsel selected by the Executive and approved by the Company (which approval shall not unreasonably be withheld), and such determination shall be conclusive and binding on the parties. The Company shall provide such information as such counsel may reasonably request, and such counsel may engage accountants or other experts at the Company's expense to the extent that they deem necessary or advisable to enable them to reach a determination. The term "independent tax counsel" as used herein shall mean a law firm of recognized expertise in federal income tax matters that has not previously advised or represented either party. 10. Confidentiality. At all times, the Executive agrees to be bound by the provisions of the Restrictions on Use of Trade Secrets and Records and Assignments of Inventions Agreement (the "Confidentiality Agreement") between Executive and the Company, as in effect from time to time, the provisions of which are incorporated by reference in this Agreement. In no 11 12 event shall an asserted violation of the provisions of this Section 10 (or such Confidentiality Agreement) constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Assignment; Binding Effect; Successors. (a) Assignment. This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) Binding Effect. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) Governing Law; Headings. (i) This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without reference to the principles of conflict of laws thereof. (ii) The headings in this Agreement are not part of the provisions hereof and shall have no force or effect. (b) Amendment; Termination; Employment. (i) Except as otherwise expressly provided herein, this Agreement may be amended or modified only by written agreement duly executed and delivered by the parties hereto or their respective successors or legal representatives. (ii) This Agreement may be terminated at any time prior to the Effective Date by the Company or the Executive, in which case the Executive shall have no further rights under this Agreement. No such termination shall affect the parties' rights and obligations 12 13 under the Confidentiality and Non-Solicitation Agreement referred to in Section 10 or any other agreement between the Executive and the Company. (iii) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will." From and after the Effective Date, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. (c) Notices. All notices and other communications given hereunder shall be in writing and shall be given by hand delivery (including overnight courier or messenger) or electronic facsimile transmission to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: If to the Company: Insurance Auto Auctions, Inc. 850 East Algonquin Road, Suite 100 Schaumburg, Illinois 60173 Facsimile: (847) 839-3678 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective on the date on which delivered if by hand delivery, the date of confirmation of transmission if by electronic facsimile transmission, the next business day if by nationally-recognized overnight delivery service or the first to occur of either the date of actual receipt or the fifth business day following deposit in the U.S. mail if by mail. (d) Invalidity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. 13 14 (f) Waiver. The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or of any other provision or right of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written. EXECUTIVE __________________________________________ INSURANCE AUTO AUCTIONS, INC. By: _______________________________________ Its: ______________________________________ 14 EX-10.151 5 AMENDMENT TO REVOLVING CREDIT 1 EXHIBIT 10.151 AMENDMENT TO REVOLVING CREDIT AGREEMENT THIS AMENDMENT TO REVOLVING CREDIT AGREEMENT (the "Amendment"), dated as of December 1, 1997, is entered into by and between LASALLE NATIONAL BANK, a national banking association ("Lender"), and INSURANCE AUTO AUCTIONS, INC., a California corporation ("Borrower). WHEREAS, Lender has previously made available to Borrower a credit facility pursuant to the terms and conditions of that certain Revolving Credit Agreement, dated as of April 4, 1997, by and between Lender and Borrower, which, together with all exhibits and schedules thereto and amendments and modifications thereof made in accordance with the terms thereof, if any, is hereinafter referred to as the "Loan Agreement"; and WHEREAS, pursuant to the Loan Agreement, Lender has extended certain loans and credit extensions to Borrower; and WHEREAS, Borrower has requested that Lender amend the Loan Agreement to provide for the issuance of letters of credit by Lender for the account of Borrower pursuant to the terms and conditions of this Amendment as set forth herein; and WHEREAS, Lender is willing to amend the Loan Agreement but only on the terms and conditions set forth in this Amendment; and WHEREAS, capitalized terms used but not defined herein have the meanings assigned to such terms in the Loan Agreement. NOW, THEREFORE, in consideration of the premises, to induce Lender to enter into this Amendment, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed by each party hereto as follows: Section 1. Amendment of the Loan Agreement. It is hereby agreed and understood that, subject to the complete fulfillment and performance of the conditions precedent set forth in Section 2 of this Amendment, the Loan Agreement is hereby amended as follows: (a) Section 1.1. The definition of "Unused Revolving Commitment" contained in Section 1.01 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "Unused Revolving Commitment" means, at any time, the Revolving Commitment at such time, minus the aggregate principal amount of all outstanding Revolving Advances outstanding at such time, minus the aggregate stated amount of all outstanding LCs, and minus the aggregate amount of all outstanding Reimbursement Obligations. 2 (b) Section 1.2. The following is hereby added to the Loan Agreement as Section 2.13: Section 2.13. Letters of Credit. (a) LC Commitment. On the terms and subject to the conditions of this Agreement, the Lender agrees, from time to time to issue for the account of Borrower commercial and/or standby letters of credit (herein collectively called "LCs" and individually called an "LC") during the period commencing on the date hereof and continuing through the Revolving Commitment Termination Date of such stated amounts as Borrower may from time to time request and the Lender in its sole discretion shall agree to issue, but not exceeding, in the aggregate, an amount for LCs outstanding at any one time equal to the lesser of the Unused Revolving Commitment and $500,000; provided, however, that no LC may have an expiration date occurring after the Revolving Commitment Termination Date except as otherwise permitted by Lender in its sole and absolute discretion. The Lender shall not issue any LC unless Borrower would be in compliance with the limits and sublimits contained in this Agreement immediately after the issuance thereof. The foregoing commitment of the Lender is herein called the "LC Commitment". (b) LC Documentation. Each of Borrower's requests for an LC must be received by the Lender at least three Business Days prior to the requested issue date of such LC, and shall be accompanied by a duly completed application therefor executed by a Responsible Officer (each such application herein called an "LC Application") and such other documents, including contracts, in support thereof as the Lender may require, and all of such applications, documents and contracts shall be in form and substance satisfactory to the Lender. In addition, such LC shall be in form and substance satisfactory to the Lender. (c) Agreement to Repay LC Drawings. (i) Borrower hereby agrees to reimburse the Lender immediately upon demand for each payment or disbursement made by the Lender under any LC honoring any demand for payment made by the beneficiary thereunder, together with interest on the amount so paid or disbursed by the Lender from the date a demand for payment was made by the Lender to but not including the date the Lender is reimbursed therefor, at a rate per annum equal to the Base Rate from time to time in effect (but not less than the Base Rate in effect on the date of such payment or disbursement). Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Borrower's obligations to reimburse the Lender set forth in this Section 2.13(c) are collectively called the "Reimbursement Obligation." Lender at any time may make a Revolving Advance to Borrower to effect payment of a Reimbursement Obligation. (ii) The obligations of Borrower to reimburse the Lender for payments and disbursements made by the Lender under any LC honoring a demand for payment made by the beneficiary thereunder shall be absolute and unconditional under any and all 2 3 circumstances and irrespective of any setoff, counterclaim or defense to payment which Borrower may have or have had against the Lender or such beneficiary, including, without limitation, any defense based on the failure of such demand for payment to conform to the terms of such LC or any nonapplication or misapplication by such beneficiary of the proceeds of such demand for payment or the legality, validity, regularity or enforceability of such LC or any document or contract related to or required to be presented under the terms of such LC; provided, however, that Borrower shall not be obligated to reimburse the Lender for any wrongful payment or disbursement made by the Lender under such LC as a result of acts or omissions constituting gross negligence or willful misconduct on the part of the Lender or any of its officers, employees or agents. (d) Mandatory Payment of LC Liability. Borrower agrees that, upon the occurrence and continuation of an Event of Default or the occurrence of the Revolving Commitment Termination Date, it will immediately, without notice or demand, at Borrower's option, (i) pay to the Lender an amount equal to the amount of the then aggregate stated amount (the stated amount of any LC issued pursuant to this Agreement shall equal the (a) initial face amount of the LC less (b) the aggregate amount of funds disbursed pursuant to the LC) of all LCs issued and outstanding hereunder or (ii) within five Business Days of such Event of Default or the Revolving Commitment Termination Date, replace each LC issued and outstanding hereunder with substitute letters of credit or similar instruments, thereby extinguishing all liability of the Lender, whether fixed or contingent, under or with respect to all such LCs. Any amounts so received by the Lender pursuant to the provisions of the foregoing sentence shall be retained by the Lender as collateral security for the Obligations of Borrower to Lender or applied by the Lender to such Obligations in such order as it may elect. (e) Obligations of Borrower Under The Loan Documents The Lender shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment by the beneficiary under any LC issued by the Lender to ascertain that the same appear on their fact to be in conformity with the terms and conditions of such LC. If, after examination, the Lender shall have determined that a demand for payment under such LC does not conform to the terms and conditions of such LC, then the Lender shall, as soon as reasonably practicable, give notice to the beneficiary to the effect that negotiation was not in accordance with the terms and conditions of such LC, stating the reasons therefor and that the relevant document is being held at the disposal of such beneficiary or is being returned to such beneficiary, as the Lender may elect. The beneficiary may attempt to correct any such nonconforming demand for payment under such LC is, and to the extent that, such beneficiary is entitled (without regard to the provisions of this sentence) and able to do so. If the Lender determines that a demand for payment under such LC conforms to the terms and conditions of such LC, then the Lender shall provide prompt notice to Borrower of receipt of all demands for payment under any LC. The Lender shall have the right to require the beneficiary to surrender such LC to the Lender on the stated expiration date of such LC. 3 4 (f) Conditions. Notwithstanding any other provision of this Agreement, no LC shall be required to be issued hereunder unless the Lender in its sole discretion agrees to issue such LC and in addition thereto all of the conditions precedent to the issuing of such LC specified in Section 3.02 have been satisfied. (g) LC Fees. Borrower shall from time to time pay to the Lender such standard fees, charges and other amounts as the Lender may from time to time require with respect to commercial and/or standby letters of credit issued pursuant to this Section 2.13. In the case of standby letters of credit, Borrower shall, in addition to the amounts referred to in the first sentence of this Section 2.2(g), pay to the Lender an LC commitment fee as agreed to by Borrower and the Lender. Section 2. Conditions Precedent. The effectiveness of this Amendment and the obligations of Lender hereunder are subject to the satisfaction, or waiver by Lender, of the following conditions precedent on or before the date hereof in addition to the conditions precedent specified in Section 3.02 of the Loan Agreement: A. Borrower shall have paid and/or reimbursed all fees, costs and expenses relating to this Amendment and owed to Lender pursuant to the Loan Agreement, if so requested by Lender; and B. Borrower shall have delivered, or caused to be delivered, original fully completed, dated and executed originals of this Amendment to Lender. C. The following statements shall be true and correct and Borrower, by executing and delivering this Amendment to Lender, hereby certifies that the following statements are true and correct as of the date hereof: i. Other than as expressly contemplated by this Amendment, since the date of the most recent financial statements furnished by Borrower to Lender (which financial statements were true and correct in all material respects and otherwise conformed to the requirements set forth in the Loan Agreement for such financial statements), there shall have been no change which has had or will have a material adverse effect on the business, operations, properties, condition (financial or otherwise) or prospects of Borrower; ii. The representations and warranties of Borrower set forth in the Loan Agreement and of Borrower set forth in this Amendment are true and correct in all material respects on and as of the date of this Amendment with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date; iii. After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing; and 4 5 iv. No consents, licences or approvals are required in connection with the execution, delivery and performance by Borrower of this Amendment or the validity or enforceability against Borrower of this Amendment which have not been obtained and delivered to Lender. Section 3. Miscellaneous. A. Except as expressly amended and modified by this Amendment, the Loan Agreement and the Loan Documents are and shall continue to be in full force and effect in accordance with the terms thereof. B. This Amendment may be executed by the parties hereto in counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument. C. This Amendment shall be construed in accordance with and governed by the internal laws, and not the laws of conflict, of the State of Illinois. D. The headings contained in this Amendment are for ease of reference only and shall not be considered in construing this Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to Loan and Security Agreement to be duly executed as of the date first above written. INSURANCE AUTO AUCTIONS, INC. By: /s/ Linda C. Larrabee -------------------------------------- Title: Senior Vice President and Chief Financial Officer ------------------------------- LASALLE NATIONAL BANK By: /s/ Meg Marion -------------------------------------- Title: Senior Vice President ------------------------------- 5 EX-21.1 6 SUBSIDIARIES 1 EXHIBIT 21.1 SUBSIDIARIES OF INSURANCE AUTO AUCTIONS, INC.
Jurisdiction Name of Incorporation ---- ---------------- Insurance Auto Auctions Corp. (wholly owned) Delaware
EX-23.1 7 CONSENT OF KPMG 1 EXHIBIT 23.1 Consent of KPMG Peat Marwick LLP March 26, 1998 Board of Directors Insurance Auto Auctions We consent to incorporation by reference in the registration statement No. 33-48805 on Form S-8 of Insurance Auto Auctions, Inc. of our report dated February 10, 1998 relating to the consolidated balance sheets of Insurance Auto Auctions, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of earnings, shareholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Insurance Auto Auctions, Inc. Very truly yours, /s/ KPMG Peat Marwick LLP Chicago, Illinois February 10, 1998 EX-24.1 8 POWER OF ATTORNEYS 1 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- /s/ BRADLEY S. SCOTT Director and Chairman - ----------------------------- Bradley S. Scott Director, President and - ----------------------------- Chief Executive Officer James P. Alampi Senior Vice President and - ----------------------------- Chief Financial Officer Linda C. Larrabee Director - ----------------------------- Maurice A. Cocca Director - ----------------------------- Susan B. Gould Director - ----------------------------- Christopher G. Knowles Director - ----------------------------- Melvin A. Martin Director - ----------------------------- Thomas J. O'Malia Director - ----------------------------- Glen E. Tullman Director - ----------------------------- John Wilcox 2 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- Director and Chairman - ----------------------------- Bradley S. Scott /s/ JAMES P. ALAMPI Director, President and - ----------------------------- Chief Executive Officer James P. Alampi Senior Vice President and - ----------------------------- Chief Financial Officer Linda C. Larrabee Director - ----------------------------- Maurice A. Cocca Director - ----------------------------- Susan B. Gould Director - ----------------------------- Christopher G. Knowles Director - ----------------------------- Melvin A. Martin Director - ----------------------------- Thomas J. O'Malia Director - ----------------------------- Glen E. Tullman Director - ----------------------------- John Wilcox 3 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- Director and Chairman - ----------------------------- Bradley S. Scott Director, President and - ----------------------------- Chief Executive Officer James P. Alampi /s/ LINDA C. LARRABEE Senior Vice President and - ----------------------------- Chief Financial Officer Linda C. Larrabee Director - ----------------------------- Maurice A. Cocca Director - ----------------------------- Susan B. Gould Director - ----------------------------- Christopher G. Knowles Director - ----------------------------- Melvin A. Martin Director - ----------------------------- Thomas J. O'Malia Director - ----------------------------- Glen E. Tullman Director - ----------------------------- John Wilcox 4 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- Director and Chairman - ----------------------------- Bradley S. Scott Director, President and - ----------------------------- Chief Executive Officer James P. Alampi Senior Vice President and - ----------------------------- Chief Financial Officer Linda C. Larrabee /s/ MAURICE A. COCCA Director - ----------------------------- Maurice A. Cocca Director - ----------------------------- Susan B. Gould Director - ----------------------------- Christopher G. Knowles Director - ----------------------------- Melvin A. Martin Director - ----------------------------- Thomas J. O'Malia Director - ----------------------------- Glen E. Tullman Director - ----------------------------- John Wilcox 5 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- Director and Chairman - ----------------------------- Bradley S. Scott Director, President and - ----------------------------- Chief Executive Officer James P. Alampi Senior Vice President and - ----------------------------- Chief Financial Officer Linda C. Larrabee Director - ----------------------------- Maurice A. Cocca /s/ SUSAN B. GOULD Director - ----------------------------- Susan B. Gould Director - ----------------------------- Christopher G. Knowles Director - ----------------------------- Melvin A. Martin Director - ----------------------------- Thomas J. O'Malia Director - ----------------------------- Glen E. Tullman Director - ----------------------------- John Wilcox 6 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- Director and Chairman - ----------------------------- Bradley S. Scott Director, President and - ----------------------------- Chief Executive Officer James P. Alampi Senior Vice President and - ----------------------------- Chief Financial Officer Linda C. Larrabee Director - ----------------------------- Maurice A. Cocca Director - ----------------------------- Susan B. Gould /s/ CHRISTOPHER G. KNOWLES Director - ----------------------------- Christopher G. Knowles Director - ----------------------------- Melvin A. Martin Director - ----------------------------- Thomas J. O'Malia Director - ----------------------------- Glen E. Tullman Director - ----------------------------- John Wilcox 7 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- Director and Chairman - ----------------------------- Bradley S. Scott Director, President and - ----------------------------- Chief Executive Officer James P. Alampi Senior Vice President and - ----------------------------- Chief Financial Officer Linda C. Larrabee Director - ----------------------------- Maurice A. Cocca Director - ----------------------------- Susan B. Gould Director - ----------------------------- Christopher G. Knowles /s/ MELVIN A. MARTIN Director - ----------------------------- Melvin A. Martin Director - ----------------------------- Thomas J. O'Malia Director - ----------------------------- Glen E. Tullman Director - ----------------------------- John Wilcox 8 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- Director and Chairman - ----------------------------- Bradley S. Scott Director, President and - ----------------------------- Chief Executive Officer James P. Alampi Senior Vice President and - ----------------------------- Chief Financial Officer Linda C. Larrabee Director - ----------------------------- Maurice A. Cocca Director - ----------------------------- Susan B. Gould Director - ----------------------------- Christopher G. Knowles Director - ----------------------------- Melvin A. Martin /s/ THOMAS J. O'MALIA Director - ----------------------------- Thomas J. O'Malia Director - ----------------------------- Glen E. Tullman Director - ----------------------------- John Wilcox 9 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- Director and Chairman - ----------------------------- Bradley S. Scott Director, President and - ----------------------------- Chief Executive Officer James P. Alampi Senior Vice President and - ----------------------------- Chief Financial Officer Linda C. Larrabee Director - ----------------------------- Maurice A. Cocca Director - ----------------------------- Susan B. Gould Director - ----------------------------- Christopher G. Knowles Director - ----------------------------- Melvin A. Martin Director - ----------------------------- Thomas J. O'Malia /s/ GLEN E. TULLMAN Director - ----------------------------- Glen E. Tullman Director - ----------------------------- John Wilcox 10 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- Director and Chairman - ----------------------------- Bradley S. Scott Director, President and - ----------------------------- Chief Executive Officer James P. Alampi Senior Vice President and - ----------------------------- Chief Financial Officer Linda C. Larrabee Director - ----------------------------- Maurice A. Cocca Director - ----------------------------- Susan B. Gould Director - ----------------------------- Christopher G. Knowles Director - ----------------------------- Melvin A. Martin Director - ----------------------------- Thomas J. O'Malia Director - ----------------------------- Glen E. Tullman /s/ JOHN WILCOX Director - ----------------------------- John Wilcox 11 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of INSURANCE AUTO AUCTIONS, An Illinois corporation (the "Company"), does hereby constitute and appoint JAMES P. ALAMPI AND GASPARE G. RUGGIRELLO, each with full power to act, as the true and lawful attorney and agent of the undersigned, with full power of substitution and resubstitution of each said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name in the name and on behalf of the Company, as indicated below opposite his signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and the undersigned does hereby fully ratify and confirm all that said attorney and agent or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 9th day of March, 1998. NAME TITLE ---- ----- STEPHEN L. GREEN Vice President, Corporate Controller - ----------------------------- Stephen L. Green EX-27.1 9 FINANCIAL DATA SCHEDULE
5 3-MOS 12-MOS DEC-31-1997 DEC-31-1997 JUL-01-1997 JAN-01-1997 DEC-31-1997 DEC-31-1997 9,634,000 0 0 0 28,992,000 0 0 0 11,762,000 0 52,256,000 0 37,707,000 0 (16,929,000) 0 207,072,000 0 26,548,000 0 20,246,000 0 0 0 0 0 11,000 0 131,809,000 0 207,072,000 0 64,059,000 259,325,000 64,059,000 259,325,000 49,133,000 199,983,000 49,133,000 199,983,000 11,783,000 49,139,000 0 0 627,000 2,700,000 2,728,000 8,324,000 1,254,000 3,829,000 1,474,000 4,495,000 0 0 0 0 0 0 1,474,000 4,495,000 0 0 0 0
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