-----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, WBNmgs4o6M+3beFcq29cj8aO9HcNpgNP1XyWsymVetfjGF6pmlwq8vsz8FpNaA6Y oeltlcI6lJ9g6nkylZC4cQ== 0000950137-99-000775.txt : 19990402 0000950137-99-000775.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950137-99-000775 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99583129 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 ANNUAL REPORT DATED 12/31/98 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, 1998 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 incorporation or organization) identification Number) 850 EAST ALGONQUIN ROAD, SUITE 100 SCHAUMBURG, ILLINOIS 60173 (847) 839-3939 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock (based on the closing price as reported by the Nasdaq National Market on March 15, 1999) held by non-affiliates of the Registrant as of March 15, 1999 was approximately $46,900,000. 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, 1999, the Registrant had outstanding 11,338,858 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 50 salvage pools in 22 states as of December 31, 1998. 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 1998, approximately 61% of the vehicles processed by IAA were sold under the fixed fee consignment method, 9% were sold under the percentage of sale consignment method, 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 1998, vehicles supplied by the Company's three largest suppliers accounted for approximately 43% of the Company's unit sales. The aggregate number of vehicles supplied in 1998 by the Company's three largest suppliers increased from 1997. However, due to a significant increase in vehicles supplied by other customers, the percent to total units sold for the Company's three largest customers decreased. The largest suppliers, State Farm Insurance, Allstate Insurance ("Allstate"), and Farmers Insurance, each accounted for approximately 17%, 14%, and 13% respectively, of the Company's unit sales. 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 PERCENTAGE OF SALE CONSIGNMENT METHOD Under the Percentage of Sale consignment method, the insurance company receives a negotiated percentage of the vehicle-selling price. With this method of sale, the Company acts as an agent for the insurance company. As agent, the Company arranges for the salvage vehicle to be towed to its facility and processes the car for sale. The percentage of sale consignment method 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 sales prices. The Company offers two types of percentage of sale agreements. The Percentage Plan is a straight percentage of sale agreement that includes vehicle enhancements as part of the selling price-based fee. The Percentage-Plus Plan offers a lower percentage of sale fee combined with discounted pricing for enhancement services. Approximately 9% and 4% of the vehicles processed by the Company were sold under the percentage of sale consignment method in 1998 and 1997, respectively. The Company, in 1998, designated the percentage of sale consignment method its preferred type of salvage provider agreement. Accordingly, the Company expects the percent of vehicles sold under this type of contract to total vehicles sold to increase. 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 method, 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 and certain other conditions including 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 the 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 1998 and 1997, approximately 30% of the units processed by IAA were processed through the purchase agreement method of sale. IAA FIXED FEE CONSIGNMENT SALE METHOD Approximately 61% of the Company's vehicles for the year ended December 31, 1998 were sold on the fixed fee consignment method of sale, compared with 66% in 1997. As under the percentage of sale consignment method, the Company typically acts as an agent for the insurance company rather than as a purchaser of salvage vehicles. 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. 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. 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 our facilities, no storage charges accrue for a contractually specified period. The document processing departments at the Company's facilities provide management reports to the insurance company suppliers, including an aging report of vehicles for which title documents have not been provided. In addition, the Company customarily offers the insurance companies staff training for each state's Department of Motor Vehicles ("DMV") document processing. These services expedite the processing of titles, thereby reducing the time in which suppliers receive their salvage proceeds and decreasing the suppliers' administrative costs and expenses. The Company then processes the title documents in order to comply with DMV requirements for such vehicles. This may involve re-registering the vehicle and obtaining a salvage certificate, after which the Company is entitled to sell the salvage vehicle. The company holds auctions every week or bi-weekly in all of its locations. The auction is either live or sealed bid. Auction lists can be viewed on line on the Company's Internet website where buyers can review all 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. 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, 4 5 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 by ensuring that severely damaged or stripped "high profile" cars are crushed to prevent their vehicle identification numbers ("VINs") from being used in auto theft. IAA also provides computerized reporting of vehicle sales to the National Insurance Crime Bureau ("NICB"). This includes detailed buyer information obtained through the Company's registration process. IAA has also continued its support for consumer protection laws calling for the nationwide mandatory use of salvage certificates for salvage vehicles. 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 throughout most of the United States, even in markets where IAA does not currently have a facility, and is designed to minimize the administrative workload for insurance companies 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, www.iaai.com. 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 percentage of sale consignment, purchase agreement and fixed fee consignment) and various other services and by (i) increasing market share at existing sites; (ii) continued market penetration through acquisitions; (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 and Profitability 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 typically makes the Company's auctions more attractive and results in more buyers attending auctions. The Company's strategies for increasing profitability at existing sites include efforts to shift more salvage providers to revenue sharing arrangements such as the percentage of sale consignment method. The Company is also promoting its "Run & Drive" service whereby certain salvage vehicles are driven during the auction demonstrating to buyers that the major component parts of a vehicle still operate. These product offerings are designed to maximize returns to both the Company and the salvage provider. Continued Market Penetration Through Acquisitions Since the Company's initial public offering in November 1991, the Company has acquired additional pool operations across the United States to offer better national coverage to its insurance company customers. The Company currently operates 50 salvage pools in 22 states. IAA intends to continue to pursue acquisitions of strategically-located salvage pools. Through such acquisitions, it seeks to enhance a geographically broad-based relationship with key insurance company suppliers, as well as to offer its specialized salvage services to new insurance companies and certain non-insurance company suppliers. In pursuing its acquisition strategy and plans, the Company recognizes that there will be continuing challenges in effectively and efficiently integrating new facilities into existing IAA 5 6 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. 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 our 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. MARKETING The Company markets its services to insurance company and non-insurance company salvage 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. The Company sells the majority of its vehicles through live auctions. IAA maintains databases which currently contain information regarding nearly 20,000 registered buyers. No single buyer accounted for more than 10% of the Company's net sales in 1998. The Company generally accepts cash, money orders, cashier's checks, wire transfers, credit cards, and 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 buyers in advance of the auction. Such notices list the rules of the auction and details about the vehicle, including the year and make of the vehicle, the nature of the damage, the status of title and the order of the vehicles in the auction. Multiple images of certain vehicles are available for review on the Company's Internet site at www.iaai.com. 6 7 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 completed a number of acquisitions of regional salvage pools and competes with IAA in most of IAA's geographic markets. Due to the limited number of vehicle suppliers, competition is intense for salvage vehicles from Copart and regional suppliers. The Company attempts to differentiate itself from its competition through the wide range and quality of services it provides to its insurance customers and buyers. It is also possible that the Company may encounter further competition 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 adverse effect on its operating results and financial condition, although no assurance can be given in this regard. EMPLOYEES At December 31, 1998, the Company employed 625 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, while the Company's expense levels are relatively fixed. If revenue levels are below expectations, operating results are likely to be adversely affected. Due to all of the foregoing factors, it is likely that in some future quarters the Company's operating results will be below the expectations of public market analysts and investors. Quality and Quantity of Inventory Available from Suppliers. The Company is dependent upon receiving a sufficient number of total loss vehicles as well as recovered theft vehicles to sustain its profit margins. Factors which can effect the number of salvage vehicles received include the reduction of policy writing by insurance providers which would affect the number of claims over a period of time, and changes in direct repair procedures that would reduce the number of newer less-damaged total loss vehicles that tend to have higher salvage values. The decreases in the quality and quantity of inventory, and in particular the availability of newer and less-damaged vehicles, are further aggravated under the purchase agreement method of salvage and can have a material adverse effect on the operating results and financial condition of the Company. Competition. Historically, the automotive salvage industry has been highly fragmented. As a result, the Company faces intense competition for the supply of salvage vehicles from vehicle suppliers, as well as competition from processors of vehicles from other regional salvage pools. These regional salvage pools generally process vehicles under the fixed fee consignment method and generally do not offer the full range of services provided by the Company. The salvage industry has recently experienced consolidation, however, and the Company believes its principal publicly-held competitor is Copart, Inc. Copart, Inc. has completed a number of acquisitions of regional salvage pools and competes with IAA in most of IAA's geographic markets. Due to the limited number of vehicle suppliers, competition is intense for salvage vehicles from Copart and regional suppliers. It is also possible that the Company may encounter further competition from existing competitors and new market entrants that are significantly larger and have greater financial and marketing resources. 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 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 1998, vehicles supplied by the Company's three largest suppliers accounted for approximately 44% of the Company's unit 8 9 sales. The largest suppliers, State Farm Insurance, Allstate Insurance ("Allstate"), and Farmers Insurance, each accounted for approximately 17%, 14%, and 13%, , respectively, of the Company's unit sales. 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 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. From 1993 to 1996, increased ACVs on which the Company's costs are based reduced the profitability that the Company realizes on purchase agreement contracts. This could occur again if used car prices increase faster than selling prices. The Company has renegotiated most of its agreements with certain of these suppliers. 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 ACV's that are not accompanied by a comparable increase in sales prices. 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 operating results and financial condition. Provision of Services as a National or Regional Supplier. The provision of services to insurance company suppliers on a national or regional basis requires that the Company 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 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's operating results and financial condition. ITEM 2. PROPERTIES. The Company's principal administrative, sales, marketing and support functions are located in Schaumburg, Illinois. The Company moved to Schaumburg in mid 1997 to a building providing approximately 26,000 square feet of available space. The lease on the office space in Schaumburg expires in May 2004. The Company and its subsidiaries also lease approximately 43 properties in Alabama, 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. Not applicable 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, 1998. 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, 1999:
NAME AGE OFFICE HELD ---- --- ----------- Christopher G. Knowles............... 56 Chief Executive Officer Senior Vice President, Chief Financial Officer and Linda C. Larrabee.................... 51 Secretary Gerald C. Comis...................... 50 Vice President, Customer Service and Industry Relations Donald J. Comis...................... 40 Vice President, Central Division Peter B. Doder....................... 38 Vice President, Western Division Stephen L. Green..................... 43 Vice President, Finance Marcia A. McAllister................. 47 Vice President, Government Affairs Gaspare G. Ruggirello................ 41 Vice President, General Counsel Patrick T. Walsh..................... 36 Vice President, Eastern Division
CHRISTOPHER G. KNOWLES became Chief Executive Officer of the Company in December 1998 and. has been a Director of the Company since June 1994. As Chief Executive Officer, Mr. Knowles oversees the Company's overall corporate administration as well as strategic planning. Mr. Knowles was President and Chief Operating Officer of the Company from April 1994 to March 1996. Mr. Knowles previously served as Senior Vice President, Operations East of the Company from January 1994 to April 1994. Prior to joining the Company, Mr. Knowles was Chairman and Chief Executive Officer from 1980 to 1994 of Underwriters Salvage Company, a multi-location salvage operation that the Company acquired in January 1994. LINDA C. LARRABEE became Senior Vice President, New Business Development, Chief Financial Officer and Secretary in January 1999. Prior to that she served as Senior Vice President, Finance, Chief Financial Officer and Secretary since June 1996. Ms. Larrabee is responsible for the implementation and development of information systems and evaluating and establishing new business opportunities for IAA. 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. GERALD C. COMIS became Vice President Customer Service and Industry Relations in February 1997. Mr. Comis is responsible for overseeing operational procedures and customer service consistencies across all branch operations as well as the management of the corporate accounts sales group. 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. 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 11 12 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 became Vice President, Finance in January 1999. Prior to that he served as Vice President, Corporate Controller, and Assistant Secretary of the Company since February 1997. Mr. Green is responsible for cash management and cash control as well as financial accounting, planning and 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. MARCIA A. MCALLISTER has been Vice President, Government Affairs of the Company since February 1995. Ms. McAllister is responsible for monitoring legislation and participating on behalf of the Company with a variety of industry and agency groups. 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. 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; Chief Executive Officer and 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 1998 and 1997. At March 15, 1999, the Registrant had 199 holders of record of its Common Stock, approximately 500 beneficial owners and 11,338,858 shares outstanding.
FISCAL 1998 FISCAL 1997 ---------------- ---------------- HIGH LOW HIGH LOW ---- --- ---- --- First Quarter................................. $12.75 $ 8.38 $10.63 $ 6.50 Second Quarter................................ 14.88 10.88 9.50 6.50 Third Quarter................................. 14.75 10.75 14.25 8.00 Fourth Quarter................................ 12.94 10.00 13.63 10.00
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 LLP, independent auditors, whose report is included herein covering the Consolidated Financial Statements as of December 31, 1998 and 1997 and for each of the years in the three year period ended December 31, 1998. The statement of earnings for the year ended December 31, 1995 and 1994 and the balance sheet data as of December 31, 1996, 1995 and 1994 are derived from audited Consolidated Financial Statements not included herein.
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Selected Statement of Earnings Data Net sales................................. $287,063 $259,325 $281,893 $257,996 $172,125 Earnings from operations(1)............... 14,081 9,756 7,190 6,885 19,145 Earnings.................................. 7,181 4,495 3,102 3,136 10,985 Net earnings per common share(2).......... .63 .40 .27 .27 .98 Weighted average common shares outstanding(2).......................... 11,437 11,337 11,333 11,421 11,225
AS OF DECEMBER 31, -------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Selected Balance Sheet Data Working capital........................... $ 35,306 $ 25,708 $ 21,665 $ 12,187 $ 12,055 Total assets.............................. 227,344 224,777 226,981 219,030 173,641 Long-term debt, excluding current installments............................ 20,116 20,246 26,670 28,973 4,409 Total shareholders' equity................ 158,755 151,212 146,589 143,381 139,897
- ------------------------- (1) Amount includes special charges of $1,564,000, $750,000, and $1,395,000 in 1998, 1997 and 1996, respectively. (2) Earnings per share and weighted average common shares outstanding are presented on a diluted basis. 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" above. 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 percentage of sale consignment, fixed fee consignment and purchase agreement. 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. The percentage of sale consignment method offers potentially increased profits over fixed fee consignment by providing incentive to both the Company and the salvage provider to invest in vehicle enhancements thereby maximizing the vehicle selling prices. 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. ACV's 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 ACV's from 1993 to 1996, the conversion from consignment sales to purchase agreement sales generally benefited the Company. During this period, however, used car prices and ACV's rose significantly. Despite the increase in used car prices and ACV's, prices at salvage auctions did not increase correspondingly. Because the Company's purchase price is fixed by contract, the increased ACV's can and has reduced profitability on the sale of vehicles under the purchase agreement method. The Company has renegotiated most of its purchase agreement contracts and seeks to renegotiate certain others. 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 50 locations as of December 31, 1998. In February of 1998, the Company acquired Auto Disposal Company, Inc. which operated two pools in Alabama. The Company also added a site in Northern California in 1998. 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, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Net sales of the Company increased to $287,063,000 for the year ended December 31, 1998, from $259,325,000 in 1997, an 11% increase. An 8% increase in unit volume to 474,000 units in 1998, versus 15 16 440,000 units in 1997, accounted for a major portion of the increased sales dollars. The number of vehicles processed through purchase agreements represented 30% of all vehicles for both 1998 and 1997. Gross profit was $70,309,000 for the year ended December 31, 1998, compared to $59,342,000 in 1997, an 18% increase. Gross profit per unit of $148 for the year ended December 31, 1998 was 10% higher than for the comparable period of 1997. The increased profitability was due to the implementation of fee increases, the acquisition of two locations in Alabama and the impact of El Nino on weather conditions on the West Coast during the first half of 1998, which resulted in higher-value cars being available for sale. Direct operating expenses were $50,885,000 for the year ended December 31, 1998, versus $45,046,000 in 1997, a 13% increase. This increase reflects a general increase in operating expenses and the funding commitment made by the Company to identify, develop and pilot new services that will streamline the automobile total loss claims process, resulting in reduced costs for insurance companies. The Alabama acquisition also contributed to the increase in expense. Amortization of acquisition costs of $3,779,000 for the year ended December 31, 1998 were flat as compared to 1997. During the first quarter of 1998 a settlement agreement was entered into by the Company resolving all outstanding differences between Insurance Auto Auctions, Inc. and Bradley Scott, who has resigned as a director and Chairman of the Board. In the settlement agreement, various agreements were terminated (including agreements providing for compensation and certain benefits through September 30, 1999, and all outstanding stock options). Per the settlement agreement, the Company made a lump-sum payment of $700,000 to Scott. This included a bonus payment for 1997 of $126,000 pursuant to a 1996 agreement between the Company and Scott. The difference of $574,000 was recorded as a special charge in first quarter 1998. McKinsey & Co. was retained by the Company to assist it in identifying and developing additional customer-valued services, focusing on opportunities to add value to the insurance industry's automobile claims process and reduce costs for these organizations. The scope of the work completed also included the evaluation and development of new business offerings that leverage the Company's current competencies, geographic presence and assets. The cost of the project of $990,000 was recorded as a special charge in first quarter 1998. Interest expense decreased to $2,055,000 for the year ended December 31, 1998, from $2,253,000 in 1997. The decrease in interest expense was attributable to the repayment of the proceeds of several notes payable to sellers related to certain acquisitions. Interest income decreased to $797,000 for the year ended December 31, 1998, from $821,000 in 1997. The effective income tax rate of the Company was 44% in 1998 versus 46% in 1997. The decrease in the effective income tax rate was largely due to higher pre-tax earnings reducing the impact of permanent book versus tax differences. YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Net sales of the Company were $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 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 or 30% of total volume, down 10% from 1996. 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 $45,046,000 for the year ended December 31, 1997, from $46,386,000 in 1996, a 3% decrease. The decrease in direct operating expenses was the result of management's 16 17 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 the court. Interest expense decreased to $2,253,000 for the year ended December 31, 1997, from $2,638,000 in 1996. The decrease in interest expense is mostly attributable to the repayment of several notes payable to sellers of certain acquisitions. 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. FINANCIAL CONDITION AND LIQUIDITY At December 31, 1998, the Company had current assets of $73,140,000, including $11,682,000 of cash and cash equivalents, current liabilities of $37,834,000 and working capital of $35,306,000. The $9,598,000 increase in working capital from December 31, 1997 primarily consisted of an increase in advance charges on vehicles in inventory reflecting strong vehicle assignments in the fourth quarter of 1998. These advance charges are recorded as receivables when vehicles are picked up and deducted from proceeds from vehicle sales remitted to the salvage providers. At December 31, 1998, the Company's indebtedness included 8.6% Senior Notes approximating $19,801,000 that mature in 2002 and amounts due to the sellers related to an acquisition aggregating $288,000, with imputed interest at 7.5% and amounts due to the sellers of smaller acquisitions aggregating $243,000, which bear interest at 8.0%. The Company also has a $15,000,000 revolving credit facility. At December 31, 1998, there were no outstanding borrowings under the facility. Long-term liabilities also include a post-retirement benefits liability relating to the Underwriters Salvage Company acquisition of approximately $3,485,000. Capital expenditures were approximately $6,607,000 for the year ended December 31, 1998. These capital expenditures included upgrading and expanding the Company's facilities and management information systems. The Company also spent $1,806,000 on acquisitions in 1998. 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. The Company's operating results have not historically been materially affected by inflation. 17 18 RECENT DEVELOPMENTS Effective December 1, 1993, the Company entered into a national sales agreement with Allstate Insurance Company (Allstate) (a shareholder of the Company). The agreement expired as of December 31, 1998. At Allstate's invitation, the Company submitted a proposal to provide automobile salvage services for Allstate locations across the country. Allstate requested this proposal as part of a comprehensive review of Allstate's automobile salvage disposition practices. Several other providers of automobile salvage services are believed to have submitted proposals to Allstate. Allstate recently advised the Company that it had decided to not award all of its salvage business to a single vendor at this time. Allstate further advised the Company that it intends to conduct pilots at selected Allstate locations of a single vendor approach for all of its salvage disposition needs, although it does not know if the pilots will result in the awarding of a single source contract. Although the Company is not currently involved in the pilots, the Company is continuing its efforts to offer Allstate a single source salvage solution. Allstate indicated the pilots would not have a material impact on the volume of vehicles supplied to the Company by Allstate. However, no assurance can be given as to the results of Allstate's pilot of a single source solution or the interim impact on the volumes of vehicles supplied by Allstate to the Company. Under the original agreement, local Allstate management was, as it continues to be in most Allstate locations, ultimately responsible for deciding who will be the provider of automotive salvage services for their geographic area of responsibility. As such, the Company continues to work with local Allstate management and personnel to meet Allstate's customer service level requirements and intends to work aggressively to maintain and increase the amount of business it receives from Allstate, as well as to maintain the profitability of that business. However, no assurance can be given as to the results of these efforts and the Company may receive less, or less profitable business from Allstate than it currently does. Volumes of vehicles received from Allstate has decreased from 90,000 units in 1996 to 64,500 units in 1998, part of which was due to the termination by the Company of unprofitable purchase agreement contracts. Given the above, and the significant decline in the volume of vehicles received from Allstate, the Company is reviewing all aspects of its relationship with Allstate. The Company intent has been and continues to be to maintain a profitable relationship with Allstate. However, no assurances can be given in this matter. A significant reduction in Allstate business could have a material, adverse impact on the Company's financial condition and results of operations. The Company undertook an initiative, ("the Project"), in mid 1997, the objective of which is to determine and assess the risks of the Year 2000 issue, and plan and institute mitigating actions to minimize those risks. The Project team is being led by the Company's Senior Vice President and Chief Financial Officer. The scope of the Project includes both IT based systems and non IT systems. Modifications required to bring the Company's IT systems into Year 2000 compliance were identified by the Project team. Based on work completed by the Project team, the Company does not believe its non-IT system Year 2000 compliance issues represent a significant risk to the Company. The required modifications to the Company's standard transaction processing system ("ESPS") have been completed. Based on the findings of the Project team and the successful implementation of these required modifications, the Company believes this system is currently Year 2000 compliant in all material respects. However, certain of the Company's operations have yet to be converted from non-Year 2000 compliant legacy systems currently in use to ESPS. These operations are scheduled for conversion by October 1, 1999, although no assurances can be given the conversion will be completed on schedule. Failure to convert these operations on a timely basis could have a material adverse impact on the company's financial position, results of operations or liquidity. The Company may be impacted by the effect the Year 2000 issue has on the ability of the Company's Insurance customers to process automobile claims and state departments of motor vehicles ("DMV's") to process titles on a timely basis. Any delay in the timely processing of automobile claims that significantly reduces the number of units the Company has available for sale would have a material adverse affect on the Company's financial position, 18 19 results of operations or liquidity. In addition, the Company relies on state DMV's to timely process titles to vehicles. Because the Company must generally obtain title prior to selling a vehicle, a significant delay in title processing would impact the Company's ability to sell vehicles from inventory and have a material adverse impact on the company's financial position, results of operations or liquidity. The Company has been, and will continue to be, in communication with its principal insurance customers and the DMV's with regard to their Year 2000 readiness. None of the responses received to date suggests there will be any interruption in their operations which would have a material adverse impact on the Company although there can be no assurances given in this regard. Contingency plans will be completed during the second quarter of 1999. The cost to the Company of dealing with the Year 2000 issue is not expected to be material. Although a portion of the time of IT personnel and related management has been and will be employed in evaluating the problem, taking corrective actions and preparing contingency plans, the Company does not believe other IT projects or operations have been or will be adversely affected. Costs of review, analysis and corrective action are expected to total less than $100,000. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company had approximately $11,138,000 of short-term investments as of December 31, 1998. These investments largely consisted of state government obligations and had either variable rates of interest or stated interest rates ranging from 3 1/4% to 7%. The Company's short-term investments are exposed to certain market risks inherent with such assets. This risk is mitigated by the Company's policy of investing in securities with high credit ratings and investing through major financial institutions with high credit ratings. The Company has senior notes payable of $19,801,000 at an interest rate of 8.6%. The terms of the note agreement are such that pre-payment of such debt may not be advantageous to the Company in the event that funds may be available to the Company at a lower rate of interest. 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. 19 20 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," "Employment Contracts 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. 20 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following Consolidated Financial Statements of Insurance Auto Auctions, Inc. and its subsidiaries are filed as part of this report on Form 10-K:
PAGE ---- Independent Auditors' Report................................ 25 Consolidated Balance Sheets -- December 31, 1998 and December 31, 1997......................................... 26 Consolidated Statements of Earnings -- Years ended December 31, 1998, 1997 and 1996................................... 27 Consolidated Statements of Shareholders' Equity -- Years ended December 31, 1998, 1997 and 1996.................... 28 Consolidated Statements of Cash Flows -- Years ended December 31, 1998, 1997 and 1996.......................... 29 Notes to Consolidated Financial Statements.................. 30
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, 1998. (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(9) Fifth Amended and Restated Registration Rights Agreement, dated September 23, 1994, by and among the Registrant, William W. Liebeck, Bradley S. Scott, Bob F. Spence, Corinne Spence, Jimmie A. Dougherty, Patricia L. Dougherty and Midwest Auto Pool Corporation. 4.2(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(5) Stockholder Agreement dated December 1, 1993, by and among the Registrant, Tech-Cor, Inc., Bradley S. Scott, Bob F. Spence and William L. Liebeck. 4.5(5) Registration Agreement dated December 1, 1993, by and among the Registrant and Tech-Cor. 4.5(8) Note Agreement, dated as of December 1, 1994 among the Registrant and the purchasers listed therein. 10.35(4)* Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as amended and restated. 10.36(6)* Form of Notice of Grant of Stock Option -- employee, officer.
21 22
EXHIBIT NO DESCRIPTION ------- ----------- 10.37(3)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option -- employee. 10.38(3)* Form of Stock Option Agreement: Non-Employee Director, Automatic Option Grant, Insurance Auto Auctions, Inc. Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option). 10.39(3)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- employee. 10.40(3)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated including Form of Notice of Grant of Stock Option) -- officer. 10.41(3)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated (including Form of Notice of Grant of Stock Option) -- officer. 10.66(2) Facilities Lease Agreement dated January 17, 1992, by and between Melvin R. Martin and MASP. 10.122(5) Asset Purchase Agreement dated December 1, 1993, by and between the Registrant, BC Acquisition Corp. (a wholly owned subsidiary of Registrant ("BCAC") and Tech-Cor, Inc. ("Tech-Cor"). 10.124(5) License Agreement, dated December 1, 1993, by and between BCAC and Allstate Insurance Company. 10.125(5) Transition Agreement dated December 1, 1993, by and between BCAC and Tech-Cor. 10.126(5) Lease, dated December 1, 1993, by and between Allstate Insurance Company and BCAC. 10.127(5) Guaranty, dated December 1, 1993, by Allstate Insurance Company and delivered to the Registrant and BCAC. 10.134(7) Registration Rights Agreement dated January 20, 1994, by and among, the Registrant, Christopher G. Knowles, Gerald C. Comis, F. Peter Haake and Donald J. Comis. 10.146(10)+ Revised Salvage Agreement by and between the Registrant and Allstate Insurance Company dated April 29, 1996. 10.147(10)* Employment Agreement by and between the Registrant and James P. Alampi dated March 11, 1996. 10.149(12)* Form of Change of Control Employment Agreement by and between the Company and certain of its executive officers. 10.150(11) Revolving Credit Agreement between the Registrant and LaSalle National Bank dated as of April 4, 1997. 10.151(12) Amendment to Revolving Credit Agreement dated as of December 1, 1997. 10.152*(11) Insurance Auto Auctions, Inc. Employee Stock Purchase Plan, as amended as of June 18, 1997. 10.153 Form of Indemnification Agreement dated as of February 24, 1999 by and between the Company and its Directors and Executive Officers.
22 23
EXHIBIT NO DESCRIPTION ------- ----------- 10.154* Consulting Agreement dated as of December 1, 1998 by and between the Company and Thomas J. O'Malia 10.155* Agreement dated December 16, 1998 by and between the Company and James P. Alampi. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP. 24.1 Power of Attorney. 27.1 Financial Data Schedule.
- ------------------------- (1) Incorporated by reference from an exhibit filed with the Registrant's Registration Statement on Form S-1 (File No. 33-43247) declared effective by the Securities and Exchange Commission ("SEC") on November 20, 1991. (2) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed with the SEC on January 31, 1992. (3) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. O-19594) for the fiscal year ended December 31, 1992. (4) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. O-19594) for the fiscal quarter ended June 30, 1993. (5) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed with the SEC on December 15, 1993. (6) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. O-19594) for the fiscal year ended December 31, 1993. (7) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed with the SEC on February 3, 1994. (8) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed with the SEC on February 10, 1995. (9) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1994. (10) (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. (11) 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, 1997. (12) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10K (File No. O-19594) for the fiscal year ended December 31, 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. 23 24 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/ CHRISTOPHER G. KNOWLES ------------------------------------ Date: March 31, 1999 Chief Executive Officer 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, 1999 /s/ CHRISTOPHER G. KNOWLES Chief Executive Officer, Director - ----------------------------------------------------- (Principal Executive Officer) Christopher G. Knowles /s/ LINDA C. LARRABEE Senior Vice President, Business Development, - ----------------------------------------------------- Chief Financial Officer and Secretary Linda C. Larrabee (Principal Financial Officer) /s/ STEPHEN L. GREEN Vice President, Finance and Assistant - ----------------------------------------------------- Secretary (Principal Accounting Officer) Stephen L. Green * Chairman of the Board of Directors - ----------------------------------------------------- Thomas J. O'Malia * Director - ----------------------------------------------------- Maurice A. Cocca * Director - ----------------------------------------------------- Susan B. Gould * Director - ----------------------------------------------------- Peter H. Kamin * Director - ----------------------------------------------------- Melvin R. Martin * Director - ----------------------------------------------------- Joseph F. Mazzella * Director - ----------------------------------------------------- Glen E. Tullman * Director - ----------------------------------------------------- John K. Wilcox * As attorney-in-fact.
24 25 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, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois February 15, 1999 25 26 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents................................. $ 11,682,000 $ 25,972,000 Short-term investments.................................... 11,138,000 1,367,000 Accounts receivable, net.................................. 37,415,000 28,992,000 Inventories............................................... 11,229,000 11,762,000 Other current assets...................................... 1,676,000 1,868,000 ------------ ------------ Total current assets................................. 73,140,000 69,961,000 ------------ ------------ Property and equipment, at cost: Land and buildings........................................ 6,266,000 6,128,000 Furniture and fixtures.................................... 1,578,000 1,481,000 Machinery and equipment................................... 19,126,000 16,830,000 Leasehold improvements.................................... 14,007,000 13,268,000 ------------ ------------ 40,977,000 37,707,000 Less accumulated depreciation and amortization............ 18,665,000 16,929,000 ------------ ------------ Net property and equipment........................... 22,312,000 20,778,000 Deferred income taxes....................................... 2,976,000 2,603,000 Intangible assets, principally goodwill, net................ 128,916,000 131,435,000 ------------ ------------ $227,344,000 $224,777,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt.................... $ 216,000 $ 2,034,000 Accounts payable.......................................... 30,939,000 34,024,000 Accrued liabilities....................................... 6,097,000 7,698,000 Income taxes.............................................. 582,000 497,000 ------------ ------------ Total current liabilities............................ 37,834,000 44,253,000 ------------ ------------ Long-term debt, excluding current installments.............. 20,116,000 20,246,000 Accumulated postretirement benefits obligation.............. 3,485,000 3,831,000 Deferred income taxes....................................... 7,154,000 5,235,000 ------------ ------------ Total liabilities.................................... 68,589,000 73,565,000 ------------ ------------ 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 11,327,169 and 11,299,561 shares as of December 31, 1998 and December 31, 1997, respectively............... 11,000 11,000 Additional paid-in capital.................................. 132,171,000 131,809,000 Retained earnings........................................... 26,573,000 19,392,000 ------------ ------------ Total shareholders' equity............................. 158,755,000 151,212,000 ------------ ------------ $227,344,000 $224,777,000 ============ ============
See accompanying Notes to Consolidated Financial Statements. 26 27 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996 ---- ---- ---- Net sales: Vehicle sales.................................... $191,312,000 $175,733,000 $201,104,000 Fee income....................................... 95,751,000 83,592,000 80,789,000 ------------ ------------ ------------ 287,063,000 259,325,000 281,893,000 Costs and expenses: Cost of sales.................................... 216,754,000 199,983,000 223,144,000 Direct operating expenses........................ 50,885,000 45,046,000 46,386,000 Amortization of acquisition costs................ 3,779,000 3,790,000 3,778,000 Special charges.................................. 1,564,000 750,000 1,395,000 ------------ ------------ ------------ Earnings from operations...................... 14,081,000 9,756,000 7,190,000 Other (income) expense: Interest expense................................. 2,055,000 2,253,000 2,638,000 Interest income.................................. (797,000) (821,000) (890,000) ------------ ------------ ------------ Earnings before income taxes.................. 12,823,000 8,324,000 5,442,000 Income taxes....................................... 5,642,000 3,829,000 2,340,000 ------------ ------------ ------------ Net earnings.................................. $ 7,181,000 $ 4,495,000 $ 3,102,000 ============ ============ ============ Earnings per share Basic............................................ $ .63 $ .40 $ 28 ============ ============ ============ Diluted.......................................... $ .63 $ .40 $ .27 ============ ============ ============ Weighted average shares outstanding: Basic............................................ 11,316,000 11,294,000 11,279,000 ============ ============ ============ Diluted.......................................... 11,437,000 11,337,000 11,333,000 ============ ============ ============
See accompanying Notes to Consolidated Financial Statements 27 28 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, 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 -- 79,000 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 Issuance of common stock in connection with exercise of common stock options.......... 16,400 -- 198,000 -- 198,000 Issuance of common stock in connection with the employee stock purchase plan........... 11,208 -- 164,000 -- 164,000 Net earnings.................... -- -- -- 7,181,000 7,181,000 ---------- ------- ------------ ----------- ------------ Balance at December 31, 1998.... 11,327,169 $11,000 $132,171,000 $26,573,000 $158,755,000 ========== ======= ============ =========== ============
See accompanying notes to Consolidated Financial Statements 28 29 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net earnings....................................... $ 7,181,000 $ 4,495,000 $ 3,102,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................... 8,765,000 8,671,000 8,579,000 Loss (gain) on disposal of fixed assets......... 136,000 (151,000) -- Noncash special charges......................... -- 465,000 Changes in assets and liabilities (net of effects of acquired companies): (Increase) decrease in: Short-term investments..................... (9,771,000) 337,000 (1,443,000) Accounts receivable, net................... (7,985,000) 5,379,000 (3,998,000) Inventories................................ 533,000 (1,600,000) (667,000) Other current assets....................... 192,000 1,762,000 (39,000) Other assets............................... 60,000 932,000 287,000 Increase (decrease) in: Accounts payable........................... (3,085,000) 3,055,000 1,967,000 Accrued liabilities........................ (1,753,000) (3,792,000) 403,000 Income taxes............................... 1,631,000 1,143,000 (441,000) ------------ ----------- ----------- Total adjustments........................ (11,277,000) 15,736,000 5,113,000 ------------ ----------- ----------- Net cash provided by operating activities....... (4,096,000) 20,231,000 8,215,000 ------------ ----------- ----------- Cash flows from investing activities: Proceeds from disposition of property and equipment....................................... 151,000 696,000 698,000 Capital expenditures............................... (6,607,000) (4,608,000) (5,910,000) Payments made in connection with acquisitions (net of cash acquired)............................... (1,806,000) (311,000) (1,969,000) ------------ ----------- ----------- Net cash used in investing activities......... (8,262,000) (4,223,000) (7,181,000) ------------ ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock............. 362,000 128,000 107,000 Principal payments of long-term debt............... (2,294,000) (7,303,000) (3,909,000) Proceeds from line of credit....................... -- -- 4,589,000 ------------ ----------- ----------- Net cash provided by (used in) financing activities................................. (1,932,000) (7,175,000) 787,000 ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents................................ (14,290,000) 8,833,000 1,821,000 Cash and cash equivalents at beginning of year....... 25,972,000 17,139,000 15,318,000 ------------ ----------- ----------- Cash and cash equivalents at end of year............. $ 11,682,000 $25,972,000 $17,139,000 ============ =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest........................................ $ 1,836,000 $ 4,411,000 $ 2,793,000 Income taxes.................................... $ 4,028,000 $ 2,364,000 $ 3,570,000
See accompanying notes to consolidated financial statements. 29 30 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (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. The Company operates as a single operating segment. 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. REVENUE RECOGNITION Revenue (including vehicle sales and fee income) are recognized upon payment by the buyer for the auctioned vehicle. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 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. The Company's short-term investment securities are principally instruments of state governments, agencies and municipalities. All short-term investment securities are classified as trading securities and are carried at fair value. 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 assets, management assesses the carrying value of the Company's assets if facts and circumstances suggest that such assets may be impaired. If this review indicates that the 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 assets would be reduced to their estimated fair market value. USE OF ESTIMATES The Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these Consolidated Financial 30 31 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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, 1998 and 1997 was $18,854,000 and 15,075,000, 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, 1998 and 1997. 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. Short-term investments are classified as trading securities and are carried at fair value based on quoted market prices. 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 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 31 32 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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 1997 and 1996 financial statements and footnotes to conform with the current year presentation. (2) LONG-TERM DEBT Long-term debt is summarized as follows:
1998 1997 ---- ---- 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.......................... $19,801,000 $19,715,000 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 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.................................................. 288,000 460,000 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......................................... 243,000 272,000 ----------- ----------- 20,332,000 22,280,000 Less current installments................................... 216,000 2,034,000 ----------- ----------- $20,116,000 $20,246,000 =========== ===========
32 33 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Total principal repayments required for each of the next five years under all long-term debt agreements are summarized as follows: 1999........................................................ $ 216,000 2000........................................................ 138,000 2001........................................................ 37,000 2002........................................................ 19,841,000 2003........................................................ 44,000 Thereafter.................................................. 56,000 ----------- $20,332,000 ===========
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, 1998, the Company was in compliance with these covenants. The Company has a revolving line of credit facility with LaSalle National 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) SHORT-TERM INVESTMENTS At December 31, 1998 and 1997, the Company has classified all investment securities as trading securities. The investments are carried at fair value which is not materially different from amortized cost. Maturities of investment securities classified as trading securities were as follows:
1998 1997 ---- ---- STATE GOVERNMENT OBLIGATIONS: Due within one year........................................ $ 1,173 -- Due after one year through ten years....................... 1,562 $ 410 Due after ten years........................................ 4,451 957 ------- ------- Total...................................................... 7,186 1,367 ------- ------- OTHER: Due within one year........................................ 1,252 -- Due after one year through ten years....................... -- -- Due after ten years........................................ 2,700 -- ------- ------- Total...................................................... 3,952 -- ------- ------- Total Investments.......................................... $11,138 $ 1,367 ======= =======
33 34 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (4) INCOME TAXES Income taxes are summarized as follows:
1998 1997 1996 ---- ---- ---- Current: Federal.................................. $3,528,000 $2,853,000 $ 794,000 State.................................... 569,000 329,000 187,000 ---------- ---------- ---------- 4,097,000 3,182,000 981,000 ---------- ---------- ---------- Deferred: Federal.................................. 1,318,000 427,000 1,788,000 State.................................... 227,000 220,000 (429,000) ---------- ---------- ---------- 1,545,000 647,000 1,359,000 ---------- ---------- ---------- $5,642,000 $3,829,000 $2,340,000 ========== ========== ==========
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. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below:
1998 1997 ---- ---- Deferred tax assets attributable to: Depreciation........................................ $ 1,778,000 $ 1,609,000 State Net Operating Loss............................ 866,000 690,000 Inventories......................................... 447,000 385,000 Special charges..................................... 152,000 248,000 State income taxes.................................. -- 61,000 Other............................................... 451,000 215,000 Valuation Allowance................................. (718,000) (605,000) ----------- ----------- Net deferred tax assets............................. 2,976,000 2,603,000 Deferred tax liabilities attributable to: Intangible assets................................... (7,154,000) (5,235,000) ----------- ----------- Net deferred tax liabilities........................ $(4,178,000) $(2,632,000) =========== ===========
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:
1998 1997 1996 ---- ---- ---- "Expected" income taxes.................... $4,360,000 $2,830,000 $1,850,000 State income taxes, net of Federal benefit.................................. 484,000 254,000 288,000 Amortization of intangible assets.......... 354,000 353,000 406,000 Other...................................... 444,000 392,000 (204,000) ---------- ---------- ---------- $5,642,000 $3,829,000 $2,340,000 ========== ========== ==========
34 35 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (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. Under both plans, as of December 31, 1998, options to purchase an aggregate of 1,129,000 shares were outstanding at a weighted average exercise price of $14.35 per share and 311,000 shares remained available for future grant. Activity under the plans for the years ended December 31, 1998 and 1997 is as follows:
1998 1997 1996 ---- ---- ---- Balance at beginning of year............ 1,086,000 1,082,000 1,061,000 Options granted....................... 546,000 43,000 270,000 Options canceled...................... (487,000) (30,000) (247,000) Options exercised..................... (16,000) (9,000) (2,000) ------------ ----------- ----------- Balance at end of year.................. 1,129,000 1,086,000 1,082,000 ============ =========== =========== Options exercisable at end of year...... 572,000 770,000 588,000 ============ =========== =========== Price range of options outstanding at end of year........................... $ 7.00-37.50 $7.00-37.50 $7.00-37.50 ============ =========== =========== Price range of options granted during the year.............................. $10.50-14.25 $8.25- 9.44 $9.25-12.63 ============ =========== ===========
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:
1998 1997 1996 ---- ---- ---- Pro forma Earnings......................... $6,554,000 $4,170,000 $2,829,000 ========== ========== ========== Pro forma Earnings per share Basic.................................... $ .58 $ .37 $ .25 ========== ========== ========== Diluted.................................. $ .57 $ .37 $ .25 ========== ========== ==========
The per share weighted average fair value of stock options granted during 1998, 1997 and 1996 was $5.86, $4.60 and $5.25, respectively, based upon a grant date valuation using the Black-Scholes option pricing model with the following weighted average assumptions in 1998, 1997 and 1996 -- expected dividend yield of 0.0%, expected volatility of .61, .64, and .61, respectively; risk-free interest rate of 5.5%, 5.7% and 6.2%, respectively; and an average expected option life of 5.7, 4.5 and 4 years, respectively. 35 36 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The pro forma net earnings and earnings per share reflect only those options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under Statement No. 123 is not reflected in the pro forma net earnings and earnings per share presented above because compensation cost is generally recorded over the options' vesting period, generally four years, and compensation cost for options granted prior to January 1, 1995 is not considered. The Company has a 401(k) defined contribution plan covering all full-time employees. Plan participants can elect to contribute up to 15% of their gross payroll. Company contributions are determined at the discretion of the Board of Directors and during the years ended December 31, 1998, 1997 and 1996, were matched 100% up to 4% of eligible earnings. Company contributions to the plan during the years ended December 31, 1998, 1997 and 1996 were approximately $479,000, $381,000, and $482,000, respectively. (6) RELATED PARTY 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 expired as of December 31, 1998. At Allstate's invitation, the Company submitted a proposal to provide automobile salvage services for Allstate locations across the country. Allstate requested this proposal as part of a comprehensive review of Allstate's automobile salvage disposition practices. Several other providers of automobile salvage services are believed to have submitted proposals to Allstate. Allstate recently advised the Company that it had decided to not award all of its salvage business to a single vendor at this time. Allstate further advised the Company that it intends to conduct pilots at selected Allstate locations of a single vendor approach for all of its salvage disposition needs, although it does not know if the pilots will result in the awarding of a single source contract. Although the Company is not currently involved in the pilots, the Company is continuing its efforts to offer Allstate a single source salvage solution. Allstate indicated the pilots would not have a material impact on the volume of vehicles supplied to the Company by Allstate. However, no assurance can be given as to the results of Allstate's pilot of a single source solution or the interim impact on the volumes of vehicles supplied by Allstate to the Company. Under the original agreement, local Allstate management was, as it continues to be in most Allstate locations, ultimately responsible for deciding who will be the provider of automotive salvage services for their geographic area of responsibility. As such, the Company continues to work with local Allstate management and personnel to meet Allstate's customer service level requirements and intends to work aggressively to maintain and increase the amount of business it receives from Allstate, as well as to maintain the profitability of that business. However, no assurance can be given as to the results of these efforts and the Company may receive less, or less profitable business from Allstate than it currently does. Volumes of vehicles received from Allstate has decreased from 90,000 units in 1996 to 64,500 units in 1998, part of which was due to the termination by the Company of unprofitable purchase agreement contracts. Given the above, and the significant decline in the volume of vehicles received from Allstate, the Company is reviewing all aspects of its relationship with Allstate. The Company intent has been and continues to be to maintain a profitable relationship with Allstate. However, no assurances can be given in this matter. A significant reduction in Allstate business could have a material, adverse impact on the Company's financial condition and results of operations. During the years ended December 31, 1998 and 1997, the Company recorded fee income of $4,700,000 and $7,000,000, respectively, related to the consignment sale of Allstate-insured vehicles and recorded sales of $35,700,000 and $34,700,000, respectively, and cost of sales of $32,500,000 and $32,800,000, respectively, related to the purchase of Allstate-insured vehicles under the purchase-agreement method. 36 37 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (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, 1998, 1997 and 1996 aggregated $9,935,000, $10,035,000 and $8,681,000 (of which $954,000, $966,000 and $884,000 pertained to leases with related parties in 1998, 1997 and 1996, respectively), respectively. Minimum annual rental commitments for the next five years under noncancelable leases at December 31, 1998 are as follows:
UNRELATED RELATED PARTY PARTY --------- ------- Year ending December 31: 1999............................................... $ 8,014,000 $1,047,000 2000............................................... 7,803,000 702,000 2001............................................... 6,541,000 702,000 2002............................................... 7,007,000 264,000 2003............................................... 4,966,000 -- Thereafter......................................... 4,842,000 -- ----------- ---------- $39,173,000 $2,715,000 =========== ==========
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 17% of the Company's supply of vehicles sold in 1998 and 19% in 1997 and 1996. The second largest supplier accounted for 14%, 17% and 20% of the Company's supply of vehicles sold in 1998, 1997 and 1996, respectively. A third supplier accounted for 13% and 10% of the Company's supply of vehicles sold in 1998 and 1997, respectively. 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 Company (USC), the Company assumed the obligation for certain health care and death benefits for retired employees of USC. In accordance with the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," costs related to the benefits are accrued over an employee's service life. A one-percentage point increase or decrease in the assumed health care cost trend rate for each future year would not have a material impact on the Accumulated Postretirement Benefit Obligation or the income recognized relative to the Plan in 1998. The assumed discount rate used to determine the Accumulated Postretirement Benefit Obligation (APBO) as of December 31, 1998 and 1997 was 6.5% and 7%, respectively. The Accumulated Postretirement Benefit Obligation (APBO) is a measure of the plan's liability, equivalent to the Projected Benefit Obligation used in pension accounting. The APBO is a factor in the expense calculation and is included in the footnote disclosure. For retirees, it is the present value of all benefits expected to be paid from the plan. 37 38 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Reconciliation of funded status as of December 31,
1998 1997 ---- ---- Medical............................................. $ (927,000) $ (972,000) Life Insurance...................................... (361,000 (385,000) ----------- ----------- Total APBO.......................................... (1,288,000) (1,357,000) Plan assets......................................... -- -- ----------- ----------- Funded status....................................... (1,288,000) (1,357,000) Unrecognized net loss from past experience.......... (2,197,000) (2,474,000) ----------- ----------- Accrued postretirement benefit cost................. $(3,485,000) $(3,831,000) =========== =========== Reconciliation of accumulated postretirement benefit cost: Accrued benefit cost.............................. $(3,831,000) $(4,173,000) Income............................................ 168,000 162,000 Contributions/premium paid........................ 178,000 180,000 ----------- ----------- Accumulated postretirement benefit cost, December 31,............................................ $(3,485,000) $(3,831,000) =========== ===========
Effective January 20, 1994, the date of acquisition, the Company discontinued future participation for active employees. (9) SPECIAL CHARGES During the first quarter of 1998, a settlement agreement was entered into by the Company resolving all outstanding differences between Insurance Auto Auctions, Inc. and a former director, who resigned as a director and Chairman of the Board. In the settlement agreement, various agreements were terminated (including agreements providing for compensation and certain benefits through June 30, 1999, and all outstanding stock options). Per the settlement agreement, the Company made a lump-sum payment of $700,000 to the former director. This included a bonus payment for 1997 of $126,000 pursuant to a 1996 agreement between the Company and the former director. The difference of $574,000 was recorded as a special charge in first quarter 1998. In addition, McKinsey & Co. had been retained to assist the Company in identifying and developing additional customer-valued services, focusing on opportunities to add value to the insurance industry's automobile claims process and reduce costs for these organizations. The scope of the work completed also included current competencies, geographic presence and assets. The cost of the project of $990,000 was recorded as a special charge in first quarter 1998. 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 38 39 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED charge of $880,000 for agreements determined to no longer have value to the current corporate strategy. Additionally, the Company recorded an offsetting gain of $365,000 related to the negotiation of a buyout of a long-term lease. (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, 1998, 1997 and 1996 are as follows:
1998 ------------------------------------- PER SHARE EARNINGS SHARES AMOUNT -------- ------ --------- Basic Earnings per Share Net earnings............................... $7,181,000 11,316,000 $.63 ---- Effect of Dilutive Securities -- Stock Options.................................... -- 121,000 ---------- ---------- Diluted Earnings per Share $7,181,000 11,437,000 $.63 ========== ========== ====
1997 ------------------------------------- PER SHARE EARNINGS SHARES AMOUNT -------- ------ --------- Basic Earnings per Share Net earnings............................... $4,495,000 11,294,000 $.40 ---- Effect of Dilutive Securities -- Stock Options.................................... -- 43,000 ---------- ---------- Diluted Earnings per Share................... $4,495,000 11,337,000 $.40 ========== ========== ====
1996 ------------------------------------- PER SHARE EARNINGS SHARES AMOUNT -------- ------ --------- Basic Earnings per Share Net earnings............................... $3,102,000 11,279,000 $.28 ---- Effect of Dilutive Securities -- Stock Options.................................... -- 54,000 ---------- ---------- Diluted Earnings per Share................... $3,102,000 11,333,000 $.27 ========== ========== ====
39 40 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (11) QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized unaudited financial data for 1998 and 1997 are as follows:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1998: Net sales............................... $68,558,000 $75,400,000 $70,047,000 $73,058,000 Gross profit............................ 16,466,000 19,026,000 16,782,000 18,035,000 Earnings from operations................ 1,963,000 4,938,000 3,197,000 3,983,000 Net earnings............................ 869,000 2,497,000 1,563,000 2,252,000 Diluted earnings per share(1)........... $ .08 $ .22 $ .14 $ .20 =========== =========== =========== =========== 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................ 1,426,000 2,993,000 2,322,000 3,015,000 Net earnings............................ 530,000 1,520,000 971,000 1,474,000 Diluted earnings per share(1)........... $ .05 $ .13 $ .09 $ .13 =========== =========== =========== ===========
- ------------------------- (1) Basic earnings per share is not presented separately as it is the same as diluted earnings per share for each quarter of 1997 and 1998. 40 41 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NO. PAGE - ------- ------------ 10.153 Form of Indemnification Agreement dated as of February 24, 1999 by and between the Company and its Directors and Executive Officers. 10.154* Consulting Agreement dated as of December 1, 1998 by and between the Company and Thomas J. O'Malia. 10.155* Agreement dated December 16, 1988 by and between the Company and James P. Alampi. 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Auditors. 24.1 Power of Attorney 27.1 Financial Data Schedule
41 EX-10.153 2 EX-10.153 1 EXHIBIT 10.153 INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is made as of this 24th day of February, 1999 by and between INSURANCE AUTO AUCTIONS, INC., an Illinois corporation (the "Company"), and ___________________ ("Indemnitee"). WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and/or directors of the Company and to indemnify its officers and/or directors so as to provide them with the maximum protection permitted by law; NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. Indemnification. (a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was 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 Company), by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, 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 (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good 2 faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Company or, with respect to any criminal action or proceeding, had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, judgments, fines and amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in, or not opposed to, the best interest of the Company, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification and then only to the extent that the court shall determine. (c) Mandatory Payment of Expenses. To the extent that Indemnitee has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to in Subsections (a) and (b) of this Section 1 or in defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. 2. Agreement to Serve. Indemnitee agrees to continue to serve in his capacity as a director, officer, employee or agent of the Company (or at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint 2 3 venture, trust or other enterprise), at the will of the Company (or under separate agreement, if such exists) so long as Indemnitee is duly designated, appointed or elected and in accordance with the applicable provisions of the Company (or such other enterprise) or until Indemnitee tenders his resignation in writing. Nothing in this Agreement is intended to create in Indemnitee any right to continue to act as an agent of the Company, to serve as an officer and/or director of the Company or to be employed by the Company. 3. Expenses; Indemnification Procedure. (a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in defending any civil or criminal action, suit or proceeding referenced in Section 1(a) or (b) hereof (including expenses incurred in investigating or appealing any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized under Illinois law. The advances to be made hereunder shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a proper written request therefor by Indemnitee to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the President of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received five business days after the date postmarked if sent by domestic certified or registered mail properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. 3 4 (c) Procedure. Any indemnification provided for in Section 1 shall be made no later than forty-five (45) days after receipt by the Company of a proper written request therefor from Indemnitee; provided, however, that no such indemnification (unless ordered by a court) shall be made unless and until authorized in each specific case, upon a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct set forth in Section 1 hereof. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding in connection with which indemnification is sought, or (ii) if such quorum is not obtainable or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or (iii) by the shareholders. If a claim under this Agreement, under any statute, or under any provision of the Company's Articles of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a proper written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 13 of this Agreement, Indemnitee shall also be entitled to be paid for the reasonable expenses (including attorneys' fees) of bringing such action. In any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition), the Company shall have the burden of proving that Indemnitee has not met the standards of conduct which make it permissible for the Company to indemnify Indemnitee for the amount claimed. Notwithstanding the absence of a determination that indemnification is proper in the circumstances, Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 3(a) unless and until it may be finally adjudicated by court order or judgment, from which no further right of appeal exists, that Indemnitee has not met the standards of conduct which make it permissible for the Company to indemnify the Indemnitee for the amount claimed. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall 4 5 be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers. If, at the time of the occurrence of a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, whose approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fee of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that Indemnitee shall have the right to employ his own counsel in any such proceeding at Indemnitee's expense; however, if (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) Indemnitee and the Company shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the 5 6 conduct of any such defense, or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 4. Additional Indemnification Rights; Nonexclusivity. (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law. In the event of any change in any applicable law, statute or rule which expands the right of an Illinois corporation to indemnify a member of its board of directors, an officer, employee or agent, such changes shall be incorporated into and applied to this Agreement and to the parties' rights and obligations hereunder notwithstanding that such expanded indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Articles of Incorporation or the Company's Bylaws. In the event of any change in any applicable law, statute or rule which narrows the right of an Illinois corporation to indemnify a member of its board of directors, an officer, employee or agent, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, its Bylaws, any agreement, any majority-in-interest vote of shareholders or disinterested Directors, the Illinois Business Corporation Act of 1983, as amended, or otherwise, both as to action in Indemnitee's official capacity or position and as to action in another capacity or position while holding such office or other position. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding. 5. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, 6 7 judgments, fines or penalties actually or reasonably incurred by Indemnitee in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. Officer and Director Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's employees or agents, if Indemnitee is not an officer or director but is an employee or agent. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance. 8. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this 7 8 Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit. (b) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous. (c) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes, penalties and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company. (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of 8 9 securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 10. Construction of Certain Phrases. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the Company, any merging corporation (including any corporation having merged with a merging corporation) absorbed in a merger which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee was a director, officer, employee or agent of such merging corporation, or was serving at the request of such merging corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the surviving corporation as Indemnitee would have with respect to such merging corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interest of the Company" as referred to in this Agreement. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 9 10 12. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. 13. Attorneys' Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the fifth business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Illinois for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Illinois located in Cook County. 10 11 16. Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of Illinois, as applied to contracts between Illinois residents entered into and to be performed entirely within Illinois. 17. Modification. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. All prior negotiations, agreements and understandings between the parties with respect thereto are superseded hereby. This Agreement may not be modified or amended except by mutual agreement in an instrument in writing signed by or on behalf of each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. INSURANCE AUTO AUCTIONS, INC. By: -------------------------------------- Name: ------------------------------- Title: ------------------------------- Address: Insurance Auto Auctions, Inc. 850 East Algonquin Road, Suite 100 Schaumburg, IL 60173 AGREED TO AND ACCEPTED: INDEMNITEE: - ------------------------------------- Address: 850 East Algonquin Road Suite 100 Schaumburg, IL 60173 11 EX-10.154 3 EX-10.154 1 EXHIBIT 10.154 CONSULTING AGREEMENT This Consulting Agreement ("Agreement") between Insurance Auto Auctions, Inc., an Illinois corporation (the "Company"), and Thomas J. O'Malia ("Consultant") is entered into and effective as of December 1, 1998. WHEREAS, Consultant is currently serving as Chairman of the Board of Directors of the Company ("Chairman"); and WHEREAS, the Company desires that Consultant provide and perform extensive services on behalf of the Company, including but not limited to assisting the Company in recruiting a new Chief Executive Officer of the Company, exploring strategic planning alternatives for the Company and assisting with investor relations, which services are in addition to duties normally associated with the position of Chairman; and WHEREAS, Consultant desires to perform such additional services on behalf of the Company; NOW, THEREFORE, in consideration of the covenants and agreements set forth herein and of the mutual benefits accruing to the Company and to Consultant from the consulting relationship to be established between the parties by the terms of this Agreement, the Company and Consultant agree as follows: 1. CONSULTING RELATIONSHIP. The Company hereby retains Consultant, and Consultant hereby agrees to be retained by the Company, as an independent consultant, and not as an employee. 2. TERM. The term of this Agreement will begin on the effective date set forth above and will continue until terminated in accordance with the provisions set forth below. (a) This Agreement may be terminated by either party by not less than 24 hour's prior written notice. (b) The Company may terminate this Agreement at any time without notice if (i) Consultant breaches any provision of this Agreement or (ii) Consultant engages in conduct which, in the judgment of the Board of Directors of the Company, is injurious to the Company. (c) In the event of Consultant's death or total disability this Agreement will terminate as of the date of death or disability. (d) This Agreement will automatically terminate at the time Consultant no longer serves as Chairman. 2 3. CONSULTING SERVICES. Consultant agrees that during the term of this Agreement: (a) Consultant will devote his best efforts to perform services and execute the policies of the Company as determined by its Board of Directors, including upon such request, the services described above. (b) Consultant will exercise a reasonable degree of skill and care in performing the services referred to in subsection (a) above. (c) Consultant will be available for service hereunder upon execution of this Agreement by both parties. 4. COMPENSATION. (a) Cash Compensation. (i) For the first year of the term of this Agreement, the Company will pay Consultant for his services performed under this Agreement at the rate of $75,000 per year, payable quarterly, in equal installments at the end of each quarter. (ii) For each succeding year of the term of this Agreement, the Company will pay Consultant for his services performed under this Agreement at the rate of $50,000 per year, payable quarterly, in equal installments at the end of each quarter. (iii) Consultant will be entitled to reimbursement for necessary and reasonable business expenses incurred by Consultant in the performance of his duties hereunder. (iv) The cash compensation described in (i) and (ii) above will be in lieu of any and all other fees otherwise payable to Consultant during the term of this Agreement for services as a director of the Company (including annual retainer fees, fees for Board meeting attendance, fees for committee meeting attendance and fees for serving as Chairperson of a Board Committee). (v) Upon termination of the Agreement, Consultant will be paid a pro rata portion of the cash compensation earned by him during the quarter in which termination occurs. (b) Stock Options. (i) The Company will grant options to Consultant as follows: (A) On December 15, 1998, the Company will grant Consultant an option to purchase 40,000 shares of the Company's Common Stock. 3 (B) On each succeeding year of the term of this Agreement, the Company will grant Consultant an option to purchase 10,000 shares of the Company's Common Stock. (ii) The options granted in accordance with (i) above will become vested and exercisable in four quarterly installments beginning three months after the date of the grant of each such option; provided however, that (A) if Consultant's service as Chairman is terminated by the Company prior to the end of the first year of the term of this Agreement, then the option described in (i)(A) will become fully vested and exercisable as of the date of such termination of service; and (B) if Consultant's service as Chairman is terminated by the Company prior to the end of any succeeding year of the term of this Agreement, then the option described in (i)(B) that was granted for such year will become fully vested and exercisable as of the date of such termination of service. If Consultant terminates his service as Chairman, then the portion of any option described in (i)(A) or (B) that is not yet vested and exercisable as of such date will expire. Once vested, such options will continue to be exercisable until the earlier of the expiration of the term of the options or the 90th day following the last day of the calendar year in which Consultant's service as a director of the Company terminates. (iii) The options granted in accordance with (i) above will be granted under the Company's 1991 Stock Option Plan at an exercise price equal to 100% of the fair market value of the Company's Common Stock on the close of business on the day preceding the grant date. (iv) The options granted in accordance with (i) above will be in lieu of any automatic grants of options that would otherwise be made to Consultant pursuant to Section VI of the Company's 1991 Stock Option Plan. Such options will be subject to the usual terms and conditions of options granted to consultants and employees pursuant to and in accordance with the Company's 1991 Stock Option Plan. (c) Other Benefit Plans. Consultant will not be entitled to participate in or receive benefits under any Company programs maintained for its employees, including, without limitation, life, medical and disability benefits, pension, profit sharing or other retirement plans or other fringe benefits. 5. THE COMPLETE AGREEMENT. This Agreement represents the complete Agreement between the Company and Consultant concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral. No attempted modification or waiver of any of the provisions hereof will be binding on either party unless in writing and signed by both Consultant and the Company. 6. NOTICES. Any notice required or permitted to be given hereunder will be in writing and will be effective three business days after it is received via registered or certified mail, overnight delivery or by confirmed facsimile transmission. Notices will be directed to the following addresses: 4 To the Company: Insurance Auto Auctions, Inc. 850 East Algonquin Road, Suite 100 Schaumburg, Illinois 60173 Attn: General Counsel Telephone: (847) 839-4193 Facsimile: (847) 839-3999 To Consultant: Thomas J. O'Malia 22708 Brandywine Drive Calabasas, California 91302 Telephone: (818) 591-1997 Facsimile: (818) 591-1996 7. ASSIGNABILITY. This Agreement may not be assigned by either party without the prior written consent of the other party, except that no consent is necessary for the Company to assign this Agreement to a corporation succeeding to substantially all the assets or business of the Company whether by merger, consolidation, acquisition or otherwise. This Agreement will be binding upon Consultant, his heirs and permitted assigns and the Company, its successors and permitted assigns. 8. SEVERABILITY. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render nonenforceable any other section contained herein. If any section or provision in a section is found invalid or unenforceable, it is the intent of the parties that a court of competent jurisdiction will reform the section or provisions to produce its nearest enforceable economic equivalent. 9. APPLICABLE LAW. It is the intention of the parties hereto that all questions with respect to the construction and performance of this Agreement and the rights and liabilities of the parties hereto will be determined in accordance with the laws of the State of Illinois. The parties hereto submit to the jurisdiction of the courts of Illinois in respect of any matter or thing arising out of this Agreement or pursuant thereto. 10. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and the year first above written. INSURANCE AUTO AUCTIONS, INC. By: /s/ Christopher G. Knowles ------------------------------ Title: Chief Executive Officer ------------------------------ CONSULTANT /s/ Thomas J. O'Malia -------------------------------------- EX-10.155 4 EX-10.155 1 EXHIBIT 10.155 AGREEMENT This Agreement dated as of December 16, 1998 is between Insurance Auto Auctions, Inc. (the "Company") and James P. Alampi ("Executive"). WHEREAS, Executive has announced his resignation as President and Chief Executive Officer of the Company. NOW THEREFORE, for due consideration, the sufficiency of which is hereby acknowledged by the Company and Executive, the Company and Executive hereby agree as follows: 1. Salary. Executive will be paid his base salary through December 31, 1998. 2. Payment. Executive will be paid a cash lump sum payment of $100,000, such payment representing (a) the bonus earned by Executive under the Officer Incentive Plan for the fiscal year ending December 31, 1998; and (b) consideration for resigning as a director of the Company and as a director of any and all subsidiaries of the Company, effective as of December 16, 1998. Execution of this Agreement by Executive and the Company will constitute Executive's written notice of such resignation and the Company's acceptance of such resignation. 3. Resignation of Position. Executive will resign as President and Chief Executive Officer of the Company, and from any and all positions held with any subsidiary of the Company, effective as of the date Executive receives his final paycheck from the Company representing his salary earned through December 31, 1998. Execution of this Agreement by Executive and the Company will constitute Executive's written notice of such resignation and the Company's acceptance of such resignation. 4. Stock Options. Effective as of December 15, 1998, Executive became vested in (a) an additional 25% of the Stock Options granted to him on March 11, 1996; and (b) 100% of the Stock Options granted to him on January 2, 1998. As a result, Executive will be vested in the Stock Options previously granted to him as follows:
Shares Shares Vested Shares Shares Date of Grant Subject to Option Prior to 12/15/98 Vesting 12/15/98 Forfeited - ------------- ----------------- ----------------- ---------------- --------- March 11, 1996 156,800 78,400 39,200 39,200 March 11, 1996 43,200 21,600 10,800 10,800 January 2, 1998 20,000 0 20,000 0
The portion of the Options that are not vested as of the date hereof will be forfeited as of such date and Executive will not become further vested in any portion of the Options after such date. Executive may exercise the portion of the vested Options until the date that is 90 days after the 1999 annual meeting of shareholders of the Company to be held on June 16, 1999, or September 14, 1999. Any portion of the Options not exercised as of September 14, 1999 will terminate on September 15, 1999. This Section 4 hereby amends the Notices of Grant of Stock Option and the Stock Option Agreements previously entered into by the Company and the Executive with respect to the above-described Options. 2 5. Release. In consideration of the agreement of the foregoing, Executive does hereby fully, finally and unconditionally release and forever discharge the Company and its parent, subsidiaries and affiliated corporations and all their former and present officers, directors, employees and agents, and all their respective predecessors, successors and assigns (collectively, "Released Parties"), in their corporate, personal and representative capacities, from any and all obligations, charges, rights, claims, damages, costs, attorneys' fees, suits and demands, of any and every kind, nature and character, known or unknown, liquidated or unliquidated, absolute or contingent, in law and in equity, enforceable under any local, state or federal common law, constitution, statue or ordinance, which arise from or relate to the Executive's past employment with the Company or the termination thereof or any past actions or omissions of the Company or any of the Released Parties, including without limitation, rights and claims arising under Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act of 1990, as amended, the Age Discrimination in Employment Act of 1967, as amended, and any other employment-related laws, and Executive agrees not to sue or to file any actions against the Company or any of the Released Parties with respect to claims covered by this release; provided, however, that this release does not release any rights Executive may have for indemnification under any applicable law or the Company's standard form of Indemnification Agreement. Executive has been advised to consult an attorney prior to executing this Agreement. Executive has twenty-one (21) days from the date of this Agreement to accept the terms of this Agreement and may accept and execute this Agreement within those 21 days. Once Executive executes this Agreement, he has seven (7) days in which to revoke such acceptance and any attempt to revoke this Agreement after such 7 day period will be ineffective. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. INSURANCE AUTO AUCTIONS, INC. By: /s/ Gaspare G. Ruggirello -------------------------- Title: Vice President ------------------------- EXECUTIVE /s/ James P. Alampi ------------------- 2 EX-21.1 5 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 6 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 Consent of KPMG LLP Board of Directors Insurance Auto Auctions We consent to incorporation by reference in the registration statement on Form S-8 (No. 33-48805) of Insurance Auto Auctions, Inc. of our report dated February 15, 1999 relating to the consolidated balance sheets of Insurance Auto Auctions, Inc. and subsidiaries as of December 31, 1998 and 1997 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, 1998 which report appears in the December 31, 1998 annual report on Form 10-K of Insurance Auto Auctions, Inc. /s/ KPMG LLP Chicago, Illinois March 29, 1999 EX-24.1 7 POWER OF ATTORNEY 1 EXHIBIT 24.1 POWER OF ATTORNEY The undersigned directors of Insurance Auto Auctions, Inc. (the "Corporation"), hereby appoint Christopher G. Knowles and Gaspare G. Ruggirello as their true and lawful attorney-in-fact, with full power for and on their behalf to execute, in their names and capacities as directors of the Corporation, and to file with the Securities and Exchange Commission on behalf of the Corporation under the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 1998. This Power of Attorney shall automatically terminate at the close of business on March 31, 1999. In witness whereof, the undersigned has executed this Power of Attorney on this 9th day of March, 1999. NAME TITLE ---- ----- /s/ Thomas J. O'Malia Chairman of the Board - ----------------------------------------- Thomas J. O'Malia /s/ Christopher G. Knowles Director and CEO - ----------------------------------------- Christopher G. Knowles /s/ Maurice A. Cocca Director - ----------------------------------------- Maurice A. Cocca /s/ Susan B. Gould Director - ----------------------------------------- Susan B. Gould /s/ Peter H. Kamin Director - ----------------------------------------- Peter H. Kamin /s/ Melvin R. Martin Director - ----------------------------------------- Melvin R. Martin /s/ Joseph F. Mazzella Director - ----------------------------------------- Joseph F. Mazzella /s/ Glen E. Tullman Director - ----------------------------------------- Glen E. Tullman /s/ John K. Wilcox Director - ----------------------------------------- John K. Wilcox EX-27.1 8 FDS
5 3-MOS 12-MOS DEC-31-1998 DEC-31-1998 OCT-01-1998 JAN-01-1998 DEC-31-1998 DEC-31-1998 11682000 0 11138000 0 37415000 0 0 0 11229000 0 73140000 0 40977000 0 (18665000) 0 227344000 0 37834000 0 20116000 0 0 0 0 0 11000 0 132171000 0 227344000 0 73058000 287063000 73058000 287063000 55023000 216754000 55023000 216754000 14052000 56228000 0 0 495000 2055000 3696000 12823000 1444000 5642000 2252000 7181000 0 0 0 0 0 0 2252000 7181000 0.20 0.63 0.20 0.63
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