-----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, H2Ymq5SGpXjEyKKuPFKc8pNXUwtNC66ybkahmeLAbsNHPbFg8r8oIAqpCWGB+3H1 RZRfacjT50gjQh6timOc3g== 0000950137-99-003071.txt : 19990817 0000950137-99-003071.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950137-99-003071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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-Q SEC ACT: SEC FILE NUMBER: 000-19594 FILM NUMBER: 99692706 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-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to _______________________ Commission File Number: 0-19594 ------- INSURANCE AUTO AUCTIONS, INC. ----------------------------- (Exact name of registrant as specified in its charter) Illinois 95-3790111 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 850 East Algonquin Road, Suite 100, Schaumburg, Illinois 60173-3855 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (847) 839-3939 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No APPLICABLE ONLY TO CORPORATE ISSUERS Number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 1999: Class Outstanding June 30, 1999 ----- ------------------------- Common Stock, $0.001 Par Value 11,466,358 shares 2 INDEX INSURANCE AUTO AUCTIONS, INC.
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION.............................................................. 3 Item 1. Financial Statements (Unaudited)................................................... 3 Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998..................................... 3 Condensed Consolidated Statements of Operations for the Three Month and Six Month Periods ended June 30, 1999 and June 30, 1998....... 4 Condensed Consolidated Statements of Cash Flows for the Six Month Periods ended June 30, 1999 and June 30, 1998....................... 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 6 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 13 PART II. OTHER INFORMATION.................................................................. 13 Item 1. Legal Proceedings.................................................................. 13 Item 2. Changes in Securities.............................................................. 13 Item 3. Defaults upon Senior Securities.................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders................................ 13 Item 5. Other Information.................................................................. 14 Item 6. Exhibits and Reports on Form 8-K................................................... 14 SIGNATURES.................................................................................. 15
2 3 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1999 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 16,342,000 $ 11,682,000 Short-term investments 14,154,000 11,138,000 Accounts receivable, net 34,135,000 37,415,000 Inventories 11,432,000 11,229,000 Other current assets 1,828,000 1,676,000 ------------ ------------ Total current assets 77,891,000 73,140,000 ------------ ------------ Property and equipment, at cost, net 23,727,000 22,312,000 Deferred income taxes 3,504,000 2,976,000 Other assets, principally goodwill, net 127,038,000 128,916,000 ------------ ------------ $232,160,000 $227,344,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 216,000 $ 216,000 Accounts payable 25,305,000 30,939,000 Accrued liabilities 6,367,000 6,097,000 Income taxes 1,715,000 582,000 ------------ ------------ Total current liabilities 33,603,000 37,834,000 ------------ ------------ Long-term debt, excluding current installments 20,053,000 20,116,000 Accumulated postretirement benefits obligation 3,345,000 3,485,000 Deferred income taxes 7,892,000 7,154,000 ------------ ------------ Total liabilities 64,893,000 68,589,000 ------------ ------------ 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 11,466,358 and 11,327,169 shares as of June 30, 1999 and December 31, 1998, respectively 11,000 11,000 Additional paid-in capital 133,571,000 132,171,000 Retained earnings 33,685,000 26,573,000 ------------ ------------ Total shareholders' equity 167,267,000 158,755,000 ------------ ------------ $232,160,000 $227,344,000 ============ ============
See accompanying notes to condensed consolidated financial statements 3 4 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Month Periods Six Month Periods Ended June 30, Ended June 30, -------------- -------------- (Unaudited) (Unaudited) 1999 1998 1999 1998 ---- ---- ---- ---- Net Sales: Vehicle sales $ 54,411,000 $ 51,894,000 $ 105,669,000 $ 99,063,000 Fee income 28,120,000 23,506,000 56,740,000 44,895,000 ------------- ------------- ------------- ------------- 82,531,000 75,400,000 162,409,000 143,958,000 Cost and expenses: Cost of sales 59,836,000 56,375,000 119,777,000 108,466,000 Direct operating expenses 14,199,000 13,132,000 27,823,000 25,129,000 Amortization of acquisition costs 949,000 954,000 1,899,000 1,898,000 Special charges - - - 1,564,000 ------------- ------------- ------------- ------------- Earnings from operations 7,547,000 4,939,000 12,910,000 6,901,000 Other (income)expense: Interest expense 493,000 537,000 987,000 1,064,000 Interest (income) (326,000) (222,000) (551,000) (396,000) ------------- ------------- ------------- ------------- Earnings before income taxes 7,380,000 4,624,000 12,474,000 6,233,000 Income taxes 3,123,000 2,127,000 5,364,000 2,867,000 ------------- ------------- ------------- ------------- Net earnings $ 4,257,000 $ 2,497,000 $ 7,110,000 $ 3,366,000 ============= ============= ============= ============= Earnings per share: Basic $ .37 $ .22 $ .62 $ .30 ============= ============= ============= ============= Diluted $ .37 $ .22 $ .62 $ .30 ============= ============= ============= ============= Weighted average shares outstanding: Basic 11,421,000 11,312,000 11,381,000 11,309,000 Effect of diluted securities - stock options 179,000 147,000 114,000 100,000 ------------- ------------- ------------- ------------- Diluted 11,600,000 11,459,000 11,495,000 11,409,000 ============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements 4 5 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Month Periods Ended June 30, -------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net earnings $ 7,110,000 $ 3,366,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,484,000 4,292,000 (Gain) loss on disposal of fixed assets (47,000) 59,000 Change in assets and liabilities (net of effects of acquired companies): (Increase) decrease in: Short-term investments (3,016,000) (6,856,000) Accounts receivable, net 3,280,000 (2,443,000) Inventories (203,000) (1,753,000) Other current assets (152,000) 413,000 Other assets (21,000) 54,000 Increase (decrease) in: Accounts payable (5,634,000) (3,588,000) Accrued liabilities 270,000 (371,000) Income taxes payable 1,343,000 1,381,000 ------------ ------------ Total adjustments 304,000 (8,812,000) ------------ ------------ Net cash provided by operating activities 7,414,000 (5,446,000) ------------ ------------ Cash flows from investing activities: Capital expenditures (4,021,000) (2,810,000) Proceeds from disposal of fixed assets 70,000 - Payments made in connection with acquired companies, net of cash acquired - (1,806,000) ------------ ------------ Net cash used in investing activities (3,951,000) (4,616,000) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock 1,400,000 200,000 Principal payments of long-term debt (203,000) (2,064,000) ------------ ------------ Net cash used in financing activities 1,197,000 (1,864,000) ------------ ------------ Net increase (decrease) in cash 4,660,000 (11,926,000) Cash and cash equivalents at beginning of period 11,682,000 25,972,000 ------------ ------------ Cash and cash equivalents at end of period $ 16,342,000 $ 14,046,000 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 860,000 $ 929,000 ============ ============ Income taxes $ 4,121,000 $ 1,487,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 5 6 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The unaudited condensed consolidated financial statements of Insurance Auto Auctions, Inc. and its subsidiaries (collectively, the "Company") have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of the Company, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results for full fiscal years. As contemplated by the Securities and Exchange Commission ("SEC") under Rule 10-01 of Regulation S-X, the accompanying consolidated financial statements and related notes have been condensed and do not contain certain information that will be included in the Company's annual consolidated financial statements and notes thereto. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998 2. INCOME TAXES Income taxes were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by the Company. 3. 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 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 the first quarter of 1998. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The discussion in this section contains forward-looking information that is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected, expressed or implied by such forward looking information. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Factors That May Affect Future Results" below. Among these risks are quality and quantity of inventory available from suppliers, competition, dependence on key insurance company suppliers, governmental regulation, weather conditions and market value of salvage. 6 7 OVERVIEW The Company offers insurance companies and other vehicle suppliers cost-effective salvage processing solutions through a variety of different methods of sale, including fixed fee consignment, purchase agreement and percentage of sale consignment. Under the purchase agreement sales method, the vehicle is owned by the Company and the sales price of the vehicle is recorded in revenue. Under the fixed fee and percentage of sale consignment sales methods, the vehicle is not owned by the Company and only the fees associated with the processing and sale of the vehicle are recorded in net sales. By assuming some of the risk inherent in owning the salvage vehicle instead of selling on a consignment basis, the Company is potentially able to increase profits by improving the value of the salvage vehicle prior to the sale. Under the purchase agreement method, IAA generally pays the insurance company a pre-determined percentage of the Actual Cash Value ("ACV") to purchase the vehicle, pursuant to a purchase agreement. ACV's are the estimated pre-accident fair value of a vehicle, adjusted for additional equipment, mileage and other factors. Because the Company's purchase price is fixed by contract, changes in ACV's or in the market or auction prices for salvage vehicles have an impact on the profitability of the sale of vehicles under the purchase agreement method. However, if increases in used car prices and ACV's are not associated with a corresponding increase in prices at salvage auctions, there can be a negative impact on the profitability of purchase agreement sales. The Company has adjustment and risk-sharing clauses in its 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. The Company has renegotiated or terminated all significant purchase agreement contracts not conforming to the Company's standards for this type of agreement, converting customers to either a fixed fee consignment or percent of sale consignment contract whenever possible. However, the Company continues to offer purchase agreements to those customers who select it. Since its initial public offering, the Company has grown primarily through a series of acquisitions to now include 50 locations as of June 30, 1999. In February of 1998, the Company acquired Auto Disposal Company. ADC operated two pools in Alabama. The Company's operating results are subject to fluctuations, including quarterly fluctuations, that can result from a number of factors, some of which are more significant for sales under the purchase agreement method. See "Factors That May Affect Future Results" below for a further discussion of some of the factors that affect or could affect the Company's business, operating results and financial condition. RESULTS OF OPERATIONS Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30, 1998 Net sales of the Company increased to $82,531,000 for the three months ended June 30, 1999, from $75,400,000 for the same three month period in 1998. Unit volume increased 8%, compared to the same period in 1998. The unit volume increase was the result of the Company's increased sales efforts and generally favorable market conditions. Gross profit increased 19% to $22,695,000 for the three months ended June 30, 1999, from $19,025,000 for the same period in 1998. Gross profit per unit of $183 for the three months ended June 30, 1999 was 11% higher than for the comparable period of 1998. The increase in gross profit per unit has been primarily the result of the implementation and faster than expected rollout of the Company's gross profit enhancement initiatives, including the conversion of fixed-fee consignment and purchase agreement contract types to the generally more profitable percent of sale contract type and the Company's focus on increasing the number and variety of vehicle enhancement services. Approximately 15% of vehicles sold in the second quarter of 1999 were sold under the percent of sale method versus 9% for 7 8 the same period last year. The purchase agreement sales method of processing accounted for 29% of total volume, compared with 31% for the same period in 1998. Direct operating expenses increased to $14,199,000 for the three months ended June 30, 1999, from $13,132,000 for the same period in 1998. Direct operating expenses per unit increased to $115 for the three months ended June 30, 1999, as compared to $114 for the same period in 1998. The increase reflects higher earned management incentives due to the improved earnings as well as increased salary and labor costs largely associated with the increased volume. Amortization of acquisition costs decreased to $949,000 for the three months ended June 30, 1999 from $954,000 for the comparable period in 1998. Interest expense decreased to $493,000 for the three months ended June 30, 1999, from $537,000 for the same period in 1998. The change in interest expense was attributable to a decrease in long-term debt as a result of the Company's repayment of several notes payable to sellers related to certain acquisitions. Interest income increased to $326,000 for the three month period ended June 30, 1999, from $222,000 for the comparable period in 1998. Income taxes increased to $3,123,000 for the three months ended June 30, 1999, from $2,127,000 for the comparable period in 1998. This increase is the result of the increase in earnings, offset by a decrease in the Company's effective tax rate from 46% in 1998 to an anticipated 43% for the full fiscal year of 1999. The second quarter income tax provision included a retroactive application of the new lower 1999 effective rate. The effective tax rate is subject to ongoing review and evaluation by the Company. The Company's net earnings were $4,257,000 for the three months ended June 30, 1999, a 70% increase from $2,497,000 for the comparable period in 1998. Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998 Net sales of the Company increased to $162,409,000 for the six months ended June 30, 1999, from $143,958,000 for the same six month period in 1998, a 13% increase. This is the result of an increase in the number of units sold, as compared to the same period in 1998, and increased fee revenues primarily in buyer fees. Unit volume for the six months ended June 30, 1999 increased 9%, as compared to the same period in 1998. The increase was the result of more units being available for sale due to strong vehicle assignments taken in the fourth quarter of 1998 and early in the first quarter of 1999. The vehicle assignments reflect an increase in same store sales due in part to severe winter storms in select areas of the country and an increase in the charity business. The purchase agreement sales method of processing accounted for 29% of total volume, down 2% from the same period in 1998. The percent of sale agreement sales method of processing accounted for 15% of total volume, up 7% from the same period in 1998. The Company continues to focus on converting fixed fee consignment and purchase agreement contract types to the generally more profitable percent of sale contract type. Gross profit increased 20% to $42,632,000 for the six months ended June 30, 1999, from $35,492,000 for the same period in 1998. Gross profit per unit of $171 for the six months ended June 30, 1999 was 11% higher than for the comparable period of 1998. The increase in gross profit per unit is the result of the quicker than anticipated implementation of several gross profit enhancement initiatives and a continued focus on price management. A key emphasis of the gross profit enhancement initiatives has been on increasing the number and variety of vehicle enhancement services which increase fee revenue and the value of auctioned vehicles, both of which improve the Company's gross profit per unit. The price 8 9 management initiative includes an ongoing evaluation of the Company's services and corresponding fee structures to insure the Company's service offerings are properly valued in the market place. Direct operating expenses increased to $27,823,000 for the six months ended June 30, 1999, from $25,129,000 for the same period in 1998. Direct operating expenses per unit increased to $111 for the six months ended June 30, 1999, as compared to $109 for the same period in 1998. The increase is the result of higher earned management incentives, increased facility related costs and a general increase in operating expenses. Amortization of acquisition costs associated with acquisitions increased to $1,899,000 for the six months ended June 30, 1999 from $1,898,000 for the comparable period in 1998. Interest expense decreased to $987,000 for the six months ended June 30, 1999, from $1,064,000 for the same period in 1998. The change in interest expense was attributable to a decrease in long-term debt as a result of the Company's repayment of several notes payable to sellers related to certain acquisitions. Interest income increased to $551,000 for the six month period ended June 30, 1999, from $396,000 for the comparable period in 1998. The increase is the result of an increase in cash and short term investments. Income taxes increased to $5,364,000 for the six months ended June 30, 1999, from $2,867,000 for the comparable period in 1998. This increase is the result of the increase in earnings. The Company's effective tax rate for the six months ended June 30, 1999 was 43% versus 46% for the comparable period in 1998. The effective tax rate is subject to ongoing review and evaluation by the Company. The Company's net earnings were $7,110,000 for the six months ended June 30, 1999, a 69% increase from $4,211,000, before special charges, for the comparable period in 1998. FINANCIAL CONDITION AND LIQUIDITY At June 30, 1999, the Company had current assets of $77,891,000, including $16,342,000 of cash and cash equivalents and $14,154,000 of short-term investments. Current liabilities were $33,603,000. The Company had working capital of $44,288,000 at June 30, 1999, an $8,982,000 increase from December 31, 1998. At June 30, 1999, the Company's indebtedness consisted mostly of 8.6% Senior Notes approximating $20,000,000, a post-retirement benefits liability relating to the Underwriters Salvage Company acquisition of approximately $3,345,000 and amounts due to the sellers related to certain acquisitions. There were no borrowings outstanding on the Revolving Line of Credit Facility at June 30, 1999. Capital expenditures were approximately $4,021,000 for the six months ended June 30, 1999. These capital expenditures primarily included upgrading and expanding the Company's management information system and the Company's facilities. 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. 9 10 RECENT DEVELOPMENTS 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 lead by the Company's Vice President and Chief Information 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 Year 2000 compliant in all material respects. The Company will continue Y2K testing of ESPS during the third quarter - - both alone and in conjunction with EDI trading partners. 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 November, 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 effect on the Company's financial position or results of operations. 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 or results of operations. 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 effect on the Company's financial position or results of operations. 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 continue to be developed during the third 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 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 the 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. 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 10 11 Cash Values ("ACV's") 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; 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 affect 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") 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 including companies which are consolidating the dismantling industry and insurance companies, some of which presently supply auto salvage to IAA. While most insurance companies have abandoned or reduced efforts to sell salvage without the use of service providers such as the Company, they may in the future decide to dispose of their salvage directly to customers. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on its business, operating results and financial condition. Dependence on Key Insurance Company Suppliers. Historically, a limited number of insurance companies has accounted for a substantial portion of the Company's revenues. For example, in 1998, vehicles supplied by the Company's six largest suppliers accounted for approximately 44% of the Company's unit 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. 11 12 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 ACV's, 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. Further increases in ACV's or declines in the market or auction prices for salvage vehicles could have a material adverse effect on the Company's business, operating results and financial condition. The Company has added adjustment and risk-sharing clauses to its new standard purchase agreement contracts designed to provide some protection to the Company and its customers from certain unexpected, significant changes in the ACV's that are not accompanied by a comparable increase in sales price. The Company has renegotiated or terminated all significant purchase agreement contracts not conforming to the Company's standards for this type of agreement. 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. 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 require that the Company expends resources and dedicate management to a small number of individual accounts, resulting in a significant amount of fixed costs. The development of a referral based national network service, in particular, has required the devotion of financial resources without immediate reimbursement of such expenses by the insurance company suppliers. Integration and Expansion of Facilities. The Company seeks to increase sales and profitability through acquisition of other salvage auction facilities, new site expansion and the increase of salvage vehicle volume at existing facilities. There can be no assurance that the Company will continue to acquire new facilities on terms economical to the Company or that the Company will be able to add additional facilities on terms economical to the Company or that the Company will be able to increase revenues at newly acquired facilities above levels realized prior to acquisition. The Company's ability to achieve these objectives is dependent, among other things, on the integration of new facilities, and their information systems, into its existing operations, the identification and lease of suitable premises and the availability of capital. There can be no assurance that this integration will occur, that suitable premises will be identified or that additional capital will be available to fund expansion and integration of the Company's business. Any delays or obstacles in this integration process could have a material adverse effect on the Company's business, operating results and financial condition. Furthermore, the Company has limited sources of additional capital available for acquisitions, expansions and start-ups. The Company's ability to integrate and expand its facilities will depend on its ability to identify and obtain additional sources of capital to finance such integration and expansion. In the future, the Company will be required to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employee work force. The failure to improve these systems on a timely basis and to successfully expand and train the Company's work force could have a material adverse effect on the Company's operating results and financial condition. 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 12 13 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company had approximately $14,154,000 of short-term investments as of June 30, 1999. These investments largely consisted of state government obligations and had either variable rates of interest or stated interest rates ranging from 3% 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 $20,000,000 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. PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. INAPPLICABLE ITEM 2. CHANGES IN SECURITIES. INAPPLICABLE ITEM 3. DEFAULTS UPON SENIOR SECURITIES. INAPPLICABLE ITEM 4. SUBMISSION OF MATTERS TO A VOTE ON SECURITY HOLDERS. At the Annual Meeting of Shareholders of the Company held June 16, 1999, the shareholders (i) elected nine directors to serve on the Company's Board of Directors, and (ii) ratified the Company's appointment of KPMG LLP to serve as the Company's independent auditors for the fiscal year ended December 31, 1999. Shareholders holding 10,342,852 shares of Common Stock, representing 91.0% of the total number of shares outstanding and entitled to vote at the meeting, were present in person or by proxy at the meeting. 13 14 The vote for nominated directors was as follows: Director Votes for Votes Withheld -------- --------- -------------- Thomas J. O'Malia 10,677,591 11,561 Christopher G. Knowles 10,677,100 12,052 Maurice A. Cocca 10,678,841 10,311 Susan B. Gould 10,677,591 11,561 Peter H. Kamin 10,678,841 10,311 Melvin R. Martin 10,677,591 11,561 Joseph F. Mazzella 10,678,841 10,311 Glen E. Tullman 10,678,841 10,311 John K. Wilcox 10,677,591 11,561 The vote for ratifying the appointment of KPMG LLP was as follows: For: 10,683,157; Against: 2,010; and Withheld: 3,985. ITEM 5. OTHER INFORMATION. INAPPLICABLE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. 10.1 Employment Agreement, dated June 3, 1999, by and between Registrant and Christopher G. Knowles. 10.2 First Amendment to the Employment Agreement, effective June 3, 1999 by and between Registrant and Christopher G. Knowles. 10.3 Separation Agreement, dated June 14, 1999, by and between Registrant and Linda C. Larrabee. 27.1 Financial Data Schedule (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during fiscal quarter ending June 30, 1999. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSURANCE AUTO AUCTIONS, INC. Date: August 16, 1999 By: /s/ Stephen L. Green --------------- ------------------------------------------- Name: Stephen L. Green Title: Vice President - Finance, Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 15 16 EXHIBIT INDEX EXHIBIT NO. - ----------- 10.1 Employment Agreement, dated June 3, 1999, by and between Registrant and Christopher G. Knowles. 10.2 First Amendment to the Employment Agreement, effective June 3, 1999 by and between Registrant and Christopher G. Knowles. 10.3 Separation Agreement, dated June 14, 1999, by and between Registrant and Linda C. Larrabee. 27.1 Financial Data Schedule 16 EX-10.1 2 EMPLOYMENT AGREEMENT DATED 6/3/99 1 Exhibit 10.1 EMPLOYMENT AGREEMENT This employment agreement (the "Agreement") is effective as of June 3, 1999, between Insurance Auto Auctions, Inc., an Illinois corporation (the "Company"), and Christopher G. Knowles ("Executive"). WHEREAS, the Company desires to employ Executive and Executive desires to be employed by the Company upon the terms and conditions set forth below. NOW, THEREFORE, Company and Executive agree as follows: 1. EMPLOYMENT AS CHIEF EXECUTIVE OFFICER. The Company agrees to employ Executive as its Chief Executive Officer commencing June 3, 1999, and Executive accepts employment by the Company upon the terms and conditions herein set forth. During the term of his employment, Executive shall devote his full time and attention to the business and affairs of the Company. The Company agrees to take all action necessary to continue Executive's position as a director of the Company during the term of his employment. 2. TERM. The term of the Agreement shall commence as of June 3, 1999, and expire on December 31, 2000. 3. COMPENSATION AND BENEFITS. (a) Compensation. The Company shall pay to Executive for services to be performed by Executive during the term of his employment a base salary at an annual rate of $310,000, payable biweekly. (b) Performance Incentive. As additional compensation for performance of the services rendered by Executive during his employment, Executive shall participate in the Company's incentive program for officers of the Company. Executive's "Target" incentive shall be an amount equal to 40% of Executive's annual salary. Executive shall be entitled to receive the Target incentive to the extent Target performance goals are met, and Executive shall be entitled to receive additional incentive amounts to the extent Target performance goals are exceeded, all in accordance with the provisions of the Company's incentive program for officers then in effect. Amounts paid to Executive pursuant to this Paragraph 3(b) are hereinafter referred to as "Incentive Compensation." (c) Benefits. During the term of his employment or for such time as otherwise provided in this Agreement, Executive shall be entitled to participate in such vacation, auto allowance, benefit plans, fringe benefits, life insurance, medical and dental plans, retirement plans and other programs as are offered from time to time by the Company; provided however, that Executive shall not be entitled to participate in, or receive benefits under, the Insurance Auto Auctions, Inc. Severance Plan. Executive shall be entitled to four weeks of paid vacation each calendar year, subject to any limitations on carryover of unused vacation generally applicable to employees. For the term of Executive's employment, the Company will pay for a membership in and reimburse reasonable dues for a golf club membership in a golf club to be mutually agreed upon by the Company and Executive. The club membership shall remain an asset of the 2 Company. Upon termination of Executive's employment, Executive may purchase the club membership from the Company at the then fair market value of the membership. Executive shall be authorized to incur necessary and reasonable travel, entertainment and other business expenses in connection with his duties hereunder. In connection with expenses pursuant to this subparagraph (c), the Company shall reimburse Executive for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. (d) Options. The Company shall grant to Executive an option to purchase 100,000 shares of the Company's common stock at 100% of the fair market value of the common stock on the close of business on the business day before the effective date of this Agreement. Such option shall be granted under the Company's 1991 Stock Option Plan. The option granted pursuant to this subparagraph (d) shall vest in six (6) quarterly installments with the first such installment to become exercisable on the last business day of the third fiscal quarter of 1999, and as to an additional 1/6 of the option on the last business day of each of the next five (5) fiscal quarters thereafter. If Executive's employment hereunder is terminated prior to December 31, 2000, such option shall immediately vest (unless Executive voluntarily terminates Executive's employment for any reason or unless Executive's employment was terminated for Cause, in which case the portion of the option that is not yet vested and exercisable as of such date will expire) and will continue to be exercisable until the expiration of the term of the option. Such option shall be subject to the usual terms and conditions of options issued pursuant to and in accordance with the Company's 1991 Stock Option Plan. (e) Indemnification. The Company shall indemnify Executive in accordance with the terms of the Company's standard form of Indemnification Agreement. (f) Withholding. Compensation and benefits paid to Executive shall be subject to such deductions required by law, government regulation or order, or by agreement with or consent of Executive. 4. TERMINATION. (a) At Will Nature of Employment. This Agreement shall terminate by reason of Executive's death or Disability (as defined in Section 22(e)(3) of the Internal Revenue Code). In addition, Executive's employment with the Company can be terminated by Executive or by the Company at any time for any reason, with or without cause or prior notice. Any contrary representations that may have been made or that may be made to Executive are superseded by this Agreement. (b) Benefits Upon Termination of Employment and Consulting Services. Upon the termination of Executive's employment by the Company, the Company shall pay or provide to Executive (unless Executive voluntarily terminates his employment for any reason or unless Executive's employment was terminated for Cause, in which case the Company shall not be obligated to pay Executive any amount after the date of termination other than to pay his salary earned through the date of termination plus that portion of his Incentive Compensation earned through the date of termination) each of the following: 2 3 (i) An amount equal to sixty percent (60%) of Executive's monthly salary at the rate in effect at the time of such termination through December 31, 2000. From and after the date of Executive's termination of employment through December 31, 2000, the Company may, in its sole discretion, request that Executive perform consulting services on behalf of the Company, and Executive agrees to perform such consulting services as reasonably requested by the Company; provided however, that Executive shall not be required to provide more than twenty-four (24) hours of consulting services per forty (40) hour work week. Executive shall perform all consulting services as an independent contractor of the Company and not as an employee of the Company. (ii) Continued coverage of Executive and Executive's beneficiaries under the Company's health and dental plan through December 31, 2000, provided that Executive will be charged for such coverage in an amount equal to the amount that he would have been charged had he remained employed by the Company. From and after December 31, 2000, Executive may elect to continue such health and dental benefits pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974, as amended ("COBRA"). For such purposes, Executive's termination of employment will be considered the date of the "qualifying event" as such term is defined by COBRA and the cost of continued coverage during the COBRA period will be determined pursuant to COBRA and paid entirely by Executive. For purposes of this Agreement, "Cause" shall mean Executive's unauthorized use or disclosure of the confidential information or trade secrets of the Company, which use causes material harm to the Company, Executive's conviction of a felony under the laws of the United States or any state thereof, Executive's gross negligence or Executive's continued failure to perform assigned duties for 45 days after receiving written notification from the Board. The termination of this Agreement and Executive's employment hereunder for Cause shall not affect the continuing enforceability of Section 6 or Executive's continuing obligations under Sections 6, 7, and 8. 5. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL RIGHTS. (a) Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer after the date of termination, or otherwise. (b) The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amount otherwise payable, or supersede, affect or in any way diminish Executive's existing rights, or rights which accrue in the future, under any applicable law or any pension benefit or welfare benefit plan, or other contract, plan or arrangement, including, without limitation, participation in stock incentive plans and deferred compensation plans. The compensation and benefits set forth in this Agreement shall in no way be construed to limit or prevent Executive from receiving or participating in other additional plans, programs, or benefits which may be made available by the Company in the future, including, without 3 4 limitation, participation in stock incentive plans, retirement plans, deferred compensation plans, etc. 6. NON-COMPETITION. During the term of this Agreement and for one year thereafter, Executive will not, directly or indirectly, whether as a partner, officer, stockholder, advisor, employee or otherwise, promote, participate, become employed by, or engage in any activity or other business similar to the Company's business or any entity engaged in a business competitive with the Company's business. If Executive fails to comply with the provisions of this Paragraph 6, the Company may, in addition to pursuing all other remedies available to the Company under law or in equity as a result of such breach, cease payment of all benefits under Paragraph 4. 7. NON-INTERFERENCE. During the term of this Agreement and for one year thereafter, Executive will not disrupt, damage, impair or interfere with the business of the Company, whether by way of interfering with or soliciting its employees, disrupting its relationships with customers, agents, vendors, distributors or representatives, or otherwise. Furthermore, Executive will not during this period encourage or solicit any employee of the Company to leave the Company for any reason or to devote less than all of any such employee's efforts to the affairs of the Company, provided that the foregoing shall not affect any responsibility Executive has with respect to the bona fide hiring and firing of company personnel. 8. PROTECTION OF CONFIDENTIAL INFORMATION. Executive agrees and acknowledges that the Confidential Information (as defined below) of the Company and its subsidiaries and affiliates is valuable, special and unique to the Company's business, that such business depends on the Confidential Information, that if such Confidential Information was known to competitors or other third parties that substantial damage to the Company's business would likely occur, that the Company in entering into this Agreement is relying upon Executive's agreement not to disclose any Confidential Information and that the Company wishes to protect such Confidential Information by keeping it confidential for the use and benefit of the Company. Accordingly, Executive agrees (1) to keep any and all Confidential Information in trust for the sole use and benefit of the Company, (2) except as required by Executive's duties hereunder, as required by law or as necessary in conjunction with legal proceedings (and in preparation thereof with counsel), he will not at any time during, or for five (5) years following the term of this Agreement, disclose or use, directly or indirectly, any Confidential Information and (3) upon termination of his employment by the Company, he will promptly deliver to or leave with the Company all materials constituting Confidential Information (including all copies thereof) that are in the possession of, under the control of, or accessible to Executive to undertake the following obligations with respect to the Confidential Information. For purposes of this Agreement, "Confidential Information" means any and all information developed by Executive during the term and used by the Company or any of its subsidiaries or affiliates or developed by or for the Company, or any of its subsidiaries or affiliates of which Executive gained knowledge by reason of his employment with the Company that is not readily available in the industry in which the Company is or becomes engaged during the term; provided, however, that "Confidential Information" shall not include information that (i) is in the public domain at the time of disclosure or which thereafter enters the public domain through no improper action or inaction by Executive or any affiliate, agent or employee related thereto, or (ii) was rightfully disclosed to Executive without restriction by a third party. 4 5 9. RESOLUTION OF DISPUTES; ARBITRATION. Should a dispute arise concerning this Agreement, its interpretation or termination, or Executive's employment with the Company, either party may request a conference with the other party to this Agreement and the parties shall meet to attempt to resolve the dispute. Failing such resolution within thirty (30) days of either party's request for a conference, the Company and Executive shall endeavor to select an arbitrator who shall hear the dispute. In the event the parties are unable to agree on an arbitrator, Executive and the Company shall request the American Arbitration Association to submit a list of nine (9) names of persons who could serve as an arbitrator. The Company and Executive shall alternately remove names from this list (beginning with the party which wins a flip of a coin) until one person remains and this person shall serve as the impartial arbitrator. The decision of the arbitrator shall be final and binding on both parties. Each party shall bear equally all costs of the arbitrator. The arbitrator shall only have authority to interpret, apply or determine compliance with the provisions set forth in this Agreement, but shall not have the authority to add to, detract from or otherwise alter the language of this Agreement. 10. NOTICES. Any notice to be given hereunder shall be in writing and effective (i) when delivered personally, or by confirmed telex or facsimile transmission or (ii) when received if sent by overnight express or mailed by certified, registered or regular mail, postage prepaid, addressed to a party at its address stated below, or to such other address as such party may designate by written notice in accordance with the provisions of this Section 10. To the Company: Insurance Auto Auctions, Inc. Attention: General Counsel 850 E. Algonquin Road, Suite 100 Schaumburg, IL 60173-3855 Telephone: (847) 839-3939 Facsimile: (847) 839-3999 To the Executive: Christopher G. Knowles 305 Ridge Road Barrington Hills, IL 60010 Telephone: (847) 381-3755 Facsimile: (847) 381-3799 11. GENERAL. (a) Severability. If any provision herein is held to be invalid or unenforceable for any reason, such provision will, to the extent of such invalidity or unenforceability be of no force or effect, but without in any way affecting the remainder of such provision or any other provision contained herein, all of which will continue in full force and effect. 5 6 (b) Amendment. Any provision may be amended or the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only by written consent of (i) as to the Company, only by a member of the Company's Board of Directors, and (ii) as to Executive, only by Executive. Such amendment or waiver shall be binding upon the Company and Executive and their successors and assigns. (c) Assignment. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives. (d) Governing Law. This Agreement and all disputes and suits related thereto will be governed, construed, and interpreted in accordance with the laws of the State of Illinois applicable to contracts entered into and to be performed wholly within that state by residents of that state. (e) No Waiver. No delay or failure by either party to exercise or enforce at any time, any right or provision of this Agreement will be considered a waiver thereof or of such party's right thereafter to exercise or enforce each and every right and provision of this Agreement. Any waiver of any right hereunder in a specific circumstance will not be deemed a waiver of that right in any other circumstances or a waiver of any other right. A waiver to be valid will be in writing but need not be supported by consideration. (f) Entire Agreement. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements, arrangements, and communications, whether oral or written, between the parties, including all prior employment agreements. No amendment to this Agreement may be made except by a writing signed by the Company and Executive. 6 7 (g) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. COMPANY: By: /s/ T. J. O'Malia ------------------------------- Title: Chairman ---------------------------- EXECUTIVE: /s/ C. G. Knowles ---------------------------------- 7 EX-10.2 3 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT 6/3/99 1 EXHIBIT 10.2 FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT EFFECTIVE JUNE 3, 1999 BETWEEN INSURANCE AUTO AUCTIONS, INC. AND CHRISTOPHER G. KNOWLES WHEREAS, Insurance Auto Auctions, Inc. (the "Company") and Christopher G. Knowles (the "Executive") have entered into an Employment Agreement effective as of June 3, 1999 (the "Agreement"); WHEREAS, the Company and Executive desire to amend the Agreement as set forth herein (the "First Amendment"); NOW, THEREFORE, Company and Executive agree as follows: 1. The fourth, fifth and sixth sentences of Section 3(c) of the Agreement are deleted in their entirety and replaced with the following: The Company shall pay up to $42,000 on Executive's behalf for membership in a club as mutually agreed upon by Company and Executive. Such $42,000 payment shall represent the non-equity portion of the club membership initiation fee. Executive shall make all initiation fee payments representing the equity portion of the club membership. Upon termination of Executive's employment, the club membership shall remain an asset of Executive. For the term of Executive's employment, the Company will reimburse Executive for reasonable annual dues related to the club membership. Except as expressly amended hereby, the Agreement shall remain in full force and effect. This First Amendment shall be effective as of the 27th day of July 1999. 2 IN WITNESS WHEREOF, the parties hereto have executed this First Amendment. COMPANY: By /s/ T. J. O'Malia -------------------------------- Title: CHAIRMAN Executive: /s/ C. G. Knowles ---------------------------------- EX-10.3 4 SEPARATION AGREEMENT DATED 6/14/99 1 Exhibit 10.3 SEPARATION AGREEMENT This Separation Agreement ("Agreement") dated as of this 14th day of June, 1999, is entered into by and between Linda C. Larrabee ("Employee") and Insurance Auto Auctions, Inc. (the "Company") to set forth the terms, conditions, and obligations of each party with respect to the termination of the employment relationship between Employee and the Company. Whereas, the parties mutually agree that their joint interest would be furthered by an amicable separation, the parties therefore agree as follows: COVENANTS 1. Termination of the employment relationship between Employee and the Company shall be effective as of May 21, 1999 (the "Termination Date"). Employee resigns from her positions as an officer and employee of the Company, from any and all officer, director or employee positions with any of the Company's subsidiaries, from her position as a member of the Administrative Committee of the 401 (k) Plan, and as a proxy for purposes of voting shares of the Company's Common Stock on behalf of shareholders of the Company at the Company's Annual Meeting of Shareholders scheduled for June 16, 1999, all effective as of the close of business on the Termination Date. 2. As consideration for Employee entering into this Agreement, the Company agrees: (a) Employee shall receive from the Company a lump sum cash payment equal to the sum of (i), (ii), (iii) and (iv) below, payable on the next regular payday following expiration of the rescission period set forth in Paragraph 7 below: (i) Forty-six (46) weeks of pay, computed at Employee's regular weekly base salary in effect on the Termination Date (such gross amount equal to $152,508); (ii) A bonus equal to 35% of Employee's annual base salary in effect on the Termination Date, prorated for 10.5 months (such gross amount equal to $52,798); (iii) An automobile allowance equal to 10.5 times Employee's monthly automobile allowance in effect on the Termination Date (such gross amount equal to $17,220); and (iv) A cash payment of $3,000 to compensate Employee for lost vesting under the Company's 401 (k) Plan. 2 (b) (i) For a period of ten (10) months following the Termination Date, the Company will continue to provide medical, dental, short-term disability, long-term disability and life insurance benefits to Employee and/or Employee's family at the same cost and at least equal to those which would have been provided to them in accordance with the medical, dental, short-term disability, long-term disability and life insurance programs, practices, and policies of the Company (the "Company Welfare Plans") if Employee's employment had not been terminated, provided, however, that such benefits will be continued only to the extent permissible under the terms of such Company Welfare Plans and applicable law. Employee's share of the cost of such benefits for the ten (10) month period beginning on the Termination Date shall be deducted from the amount to be paid to Employee pursuant to subsection 2(a) above; provided, however, that if Employee's coverage is terminated prior to the end of such ten (10) month period, the Company shall reimburse Employee for Employee's share of the cost of the unused benefits. (ii) If any of the Company's Welfare Plans do not permit continued participation by Employee and Employee's family after termination of employment, the Company will reimburse the Employee for the cost of obtaining comparable coverage from a third-party insurer. (iii) If Employee is receiving medical and/or dental benefits under the Company's Welfare Plans, then upon termination of such benefits on or before the end of the ten (10) month period described above (the "Benefit Continuation Period"), the Company will continue to provide such medical and/or dental benefits to Employee and/or Employee's family pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974, as amended ("COBRA"). For such purpose, the termination of the Benefit Continuation Period will be considered the date of the "qualifying event" as such term is defined by COBRA and the cost of continued coverage during the COBRA period will be determined pursuant to COBRA and paid entirely by Employee. (c) The Employee's active participation in all other employee benefits plans and programs maintained by the Company, including the Insurance Auto Auctions, Inc. 401 (k) Plan (the "401 (k) Plan") and the Insurance Auto Auctions, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan"), shall terminate as of the Termination Date, and no contributions to such plans or programs will be made on behalf of the Employee for any period of time after the Termination Date. Employee's entitlement to accrued benefits under the 401 (k) Plan and Stock Purchase Plan shall be governed by the terms of 3 the corresponding plan documents, based on an ending service date that shall be the same as the Termination Date. (d) All outstanding stock options granted to Employee as set forth on Attachment A hereto shall become 100% vested and exercisable on the day after the expiration of the rescission period described in Paragraph 7 below. Such vested stock options will continue to be exercisable until May 31, 2000. Stock options not exercised by May 31, 2000, shall expire and be of no further force or effect. The options shall continue to be governed by the terms and conditions of their respective Notices of Grant of Stock Option and Stock Option Agreements, as amended by this subsection 2(d). (e) Employee shall receive accrued but unused vacation pay through the Termination Date, to be paid on or before the Company's next regularly scheduled pay date following the Termination Date. (f) Amounts paid to Employee pursuant to this Section 2 shall be subject to applicable withholding taxes as may be required pursuant to federal, state or local law, or by agreement with or consent of Employee. 3. Employee shall remain bound by all terms and conditions of the Confidentiality Agreement dated as of February 23, 1998 and attached hereto as Attachment B. 4. Employee shall immediately deliver all Company property not previously delivered to the Company. 5. The Change in Control and Employment Agreement between the Company and Employee dated February 23, 1998 shall be terminated, and shall have no force and effect, as of the Termination Date. 6. As consideration for the obligations undertaken by the Company pursuant to this Agreement, Employee, for herself, her successors, administrators, heirs and assigns, hereby fully releases, waives and fully discharges the Company, its subsidiaries and affiliates, their predecessors, successors, assigns and their respective officers, directors, agents and employees, whether past, present or future (the "Released Parties") from any and all claims, causes of action, suits, demands, damages, judgments or liabilities, of any nature, including attorneys' fees and costs, known or unknown, absolute or contingent, arising from or relating to Employee's employment and separation from employment. This release includes, without limitation, any and all claims for breach of contract, wrongful discharge or impairment of economic opportunity, any claims under common law or at equity, claims of defamation or intentional infliction of emotional harm, any tort, claims for reimbursements or commissions, and any and all rights and discrimination claims Employee may have arising under the Federal Age Discrimination and Employment Act of 1967 (29 USC ss.ss.621, et seq.), Title VII of the Civil Rights Act of 1964, as amended, (42 USC ss.ss. 4 2000c, et seq.), the Americans with Disabilities Act or the Illinois Human Rights Act, and any and all other federal, state or local laws or regulations. Employee agrees not to sue or to file any actions against the Released Parties with respect to claims covered by this release. This waiver and release shall not apply to claims arising after Employee's execution of this Agreement. Notwithstanding the above, this waiver and release shall not apply to claims for indemnification pursuant to Article 7 of the Company's Articles of Incorporation, Article 5 of the Company's Bylaws and the Indemnification Agreement by and between the Company and Employee dated as of February 24, 1999. 7. Employee specifically agrees as follows: (a) Employee is knowingly and voluntarily entering into this Agreement. (b) Employee acknowledges that the Company is providing benefits in the form of payments and compensation, to which Employee would not otherwise be entitled, as part of the consideration for Employee's entering into this Agreement. (c) Employee is hereby advised to consult with an attorney prior to executing this Agreement. (d) Employee understands that she has a period of twenty-one (21) days from the date a copy of this Agreement is provided to her in which to consider and sign the Agreement (during which the offer will remain open) and that Employee has an additional seven (7) days after signing this Agreement within which to revoke acceptance of the Agreement. (e) If during the seven (7)-day revocation period Employee should revoke an acceptance of the Agreement, then this Agreement shall be void. 8. This Agreement does not constitute an admission of wrongdoing or liability for any purpose by the Company or Employee. 5 9. This Agreement sets forth the full understanding and agreement of the parties and supersedes any and all other understandings or agreements, written or oral. This Agreement shall be interpreted pursuant to Illinois law. INSURANCE AUTO AUCTIONS, INC. EMPLOYEE By: /s/ Stephen L. Green /s/ Linda C. Larrabee -------------------------------- ---------------------------- (Employee) Its: VP Dated: 6-14-99 -------------------------------- ---------------------- Dated: 6-14-99 ------------------------------- EX-27 5 FINANCIAL DATA SCHEDULE
5 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 APR-01-1999 JAN-01-1999 JUN-30-1999 JUN-30-1999 16,342,000 0 14,154,000 0 34,135,000 0 0 0 11,432,000 0 77,891,000 0 44,592,000 0 (20,865,000) 0 232,160,000 0 33,603,000 0 20,053,000 0 0 0 0 0 11,000 0 133,571,000 0 232,160,000 0 82,531,000 162,409,000 82,531,000 162,409,000 59,836,000 119,777,000 59,836,000 119,777,000 15,148,000 29,722,000 0 0 493,000 987,000 7,380,000 12,474,000 3,123,000 5,364,000 4,257,000 7,110,000 0 0 0 0 0 0 4,257,000 7,110,000 0.37 0.62 0.37 0.62
-----END PRIVACY-ENHANCED MESSAGE-----