<PAGE>
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, 1996
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
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INSURANCE AUTO AUCTIONS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3790111
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1270 WEST NORTHWEST HIGHWAY, PALATINE, ILLINOIS 60067
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(847) 705-9550
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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, 1996:
CLASS OUTSTANDING JUNE 30, 1996
----- -------------------------
Common Stock, $0.001 Par Value 11,275,874 shares
<PAGE>
INDEX
INSURANCE AUTO AUCTIONS, INC.
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Item 1. Financial Statements (Unaudited). . . . . . . . . . . . . . . . . . . . . . . .3
Condensed Consolidated Balance Sheets
as of June 30, 1996 and December 31, 1995. . . . . . . . . . . . . . . . . . . .3
Condensed Consolidated Statements of Earnings for the
Three Month Periods ended June 30, 1996 and June 30, 1995
and the Six Month Periods ended June 30, 1996 and June 30, 1995. . . . . . . . .4
Condensed Consolidated Statements of Cash Flows for the
Six Month Periods ended June 30, 1996 and June 30, 1995. . . . . . . . . . . . .5
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . . . . . .6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . .7
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 1. Legal Proceedings and Other Matters . . . . . . . . . . . . . . . . . . . . . 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
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,418,000 $ 362,000
Short-term investments 6,410,000 6,820,000
Accounts receivable, net 27,671,000 30,198,000
Inventories 7,550,000 9,495,000
Other current assets 2,833,000 3,591,000
--------------- ---------------
Total current assets 55,882,000 50,466,000
--------------- ---------------
Property and equipment, at cost, net 22,347,000 21,144,000
Other assets, principally goodwill, net 138,411,000 139,023,000
--------------- ---------------
$ 216,640,000 $ 210,633,000
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 2,039,000 $ 4,015,000
Accounts payable 18,797,000 20,531,000
Accrued liabilities 12,653,000 11,306,000
Income taxes 3,905,000 2,427,000
--------------- ---------------
Total current liabilities 37,394,000 38,279,000
--------------- ---------------
Long-term debt, excluding current installments 33,533,000 28,973,000
--------------- ---------------
Total liabilities 70,927,000 67,252,000
--------------- ---------------
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
11,275,874 and 11,270,141 shares as of June 30, 1996
and December 31, 1995, respectively 11,000 11,000
Additional paid-in capital 131,627,000 131,575,000
Retained earnings 14,075,000 11,795,000
--------------- ---------------
Total shareholders' equity 145,713,000 143,381,000
--------------- ---------------
$ 216,640,000 $ 210,633,000
--------------- ---------------
--------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
------------------------------------ ----------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Vehicle sales $ 55,556,000 $ 48,262,000 $ 108,215,000 $ 90,625,000
Fee income 20,486,000 16,925,000 40,643,000 34,797,000
-------------- -------------- --------------- --------------
76,042,000 65,187,000 148,858,000 125,422,000
Cost and expenses:
Cost of sales 59,678,000 50,188,000 117,627,000 95,408,000
Direct operating expenses 12,235,000 10,604,000 24,190,000 20,078,000
Amortization of acquisition costs 938,000 808,000 1,865,000 1,578,000
-------------- -------------- --------------- --------------
Earnings from operations 3,191,000 3,587,000 5,176,000 8,358,000
Other (income) expense:
Interest expense 768,000 576,000 1,576,000 941,000
Interest income (246,000) (324,000) (400,000) (570,000)
-------------- -------------- --------------- --------------
Earnings before income taxes 2,669,000 3,335,000 4,000,000 7,987,000
Income taxes 1,148,000 1,417,000 1,720,000 3,394,000
-------------- -------------- --------------- --------------
Net earnings $ 1,521,000 $ 1,918,000 $ 2,280,000 $ 4,593,000
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Net earnings per common and common
equivalent shares outstanding $ .13 $ .17 $ .20 $ .41
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Weighted average common and common
equivalent shares outstanding 11,369,000 11,318,000 11,355,000 11,318,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Month Periods
Ended June 30,
-----------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,280,000 $ 4,592,000
------------- -------------
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 4,073,000 3,031,000
Change in assets and liabilities (net of effects of
acquired companies):
(Increase) decrease in:
Accounts receivable, net 2,527,000 310,000
Inventories 1,945,000 (3,106,000)
Other current assets 758,000 (12,000)
Other assets (22,000) (447,000)
Increase (decrease) in:
Accounts payable (1,808,000) (1,377,000)
Accrued liabilities 1,767,000 (27,000)
Income taxes 1,478,000 (146,000)
------------- -------------
Total adjustments 10,718,000 (1,774,000)
------------- -------------
Net cash provided by operating activities 12,998,000 2,818,000
------------- -------------
Cash flows from investing activities:
Short-term investments 410,000 (4,739,000)
Capital expenditures (3,411,000) (5,246,000)
Payments made in connection with acquired companies (1,675,000) (14,657,000)
------------- -------------
Net cash used in investing activities (4,676,000) (24,642,000)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Senior Notes and notes payable 4,536,000 19,899,000
Proceeds from issuance of common stock 52,000 237,000
Principal payments on long-term debt and notes payable (1,854,000) (819,000)
------------- -------------
Net cash provided by financing activities 2,734,000 19,317,000
------------- -------------
Net increase (decrease) in cash 11,056,000 (2,507,000)
Cash and cash equivalents at beginning of period 362,000 2,529,000
------------- -------------
Cash and cash equivalents at end of period $ 11,418,000 $ 22,000
------------- -------------
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,266,000 $ 230,000
Income taxes 260,000 3,463,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
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 management, 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 footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1995.
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 management.
3. NET EARNINGS PER SHARE
Net earnings per share is based on the weighted average number of shares of
common and common share equivalents outstanding.
4. RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 accounts to conform
with the 1996 presentation.
5. RECENT DEVELOPMENTS
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
earnings per share as if the fair-value based method of accounting had been
applied. The Company adopted Statement No. 123 on January 1, 1996 and has
elected to continue to measure compensation cost under APBO No. 25.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE DISCUSSION IN THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. 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 THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND
THIS FORM 10-Q.
OVERVIEW
The Company offers insurance companies and other vehicle suppliers
cost-effective salvage processing solutions through a variety of different
methods of sale, including fixed fee consignment, purchase agreement and
percentage of sale consignment. Under the purchase agreement sales method, the
vehicle is owned by the Company and the sales price of the vehicle is recorded
in revenue. Under the fixed fee and percentage of sale consignment sales
methods, the vehicle is not owned by the Company and only the fees associated
with the processing and sale of the vehicle are recorded in net sales. By
assuming some of the risk inherent in owning the salvage vehicle instead of
selling on a consignment basis, the Company is potentially able to increase
profits by improving the value of the salvage vehicle prior to the sale.
Under the purchase agreement method, IAA generally pays the insurance
company a pre-determined percentage of the Actual Cash Value ("ACV") to purchase
the vehicle, pursuant to the purchase agreement. ACVs are the estimated
pre-accident fair value of a vehicle, adjusted for additional equipment, mileage
and other factors. Until the significant rise in used car prices and ACVs
during 1995, the conversion from consignment sales to purchase agreement sales
generally benefited the Company. During 1995, however, used car prices and ACVs
rose significantly. Despite the increase in used car prices and ACVs, prices at
salvage auctions did not increase correspondingly. Because the Company's
purchase price is fixed by contract, the increased ACVs can and has reduced
profitability on the sale of vehicles under the purchase agreement method.
The Company has renegotiated some of its purchase agreement contracts
and is seeking to renegotiate certain others. If the relationship between ACVs
and salvage prices remains at its present level, the Company may continue to
encounter reduced profitability from purchase agreement contracts until they
expire or are renegotiated. The Company continues to offer purchase agreements
to those customers who select it, but generally at a lower percentage of ACV
than previously offered to customers, based on current vehicle values. The
Company has added adjustment and risk-sharing clauses to its new standard
purchase agreement contracts designed to provide some protection to the Company
and its customers from certain unexpected, significant changes in the
ACV/salvage price relationship.
The Company has grown through acquisitions and since June 1995 has
acquired five salvage pools strategically located throughout the United States,
and has opened a new facility start-up in Kansas City. The largest of these
acquisitions, ADB Auctions, Inc. and its related company, ASC Auctions, Inc.,
occurred June 19, 1995. Of the four remaining smaller acquisitions, three were
made in July, August and December 1995 and one was made in January 1996.
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" in the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and this Form 10-Q for a further
discussion of some of the factors that affect or could affect the Company's
business, operating results and financial condition.
7
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1995
Net sales of the Company increased to $76,042,000 for the three months
ended June 30, 1996, from $65,187,000 for the same three month period in 1995, a
17% increase. Sales were higher due to acquisitions, conversion of consignment
sales to purchase agreement sales, same store growth and fee increases. Unit
volume increased 26%, as compared to the same period in 1995, with most of the
unit growth resulting from the acquired operations, while existing facilities
volume increased 6%. Net sales growth from existing facilities increased 10%,
as a result of conversion of consignment sales to purchase agreement sales and
increased fees. The purchase agreement sales method of processing accounted for
39,000 vehicles, or 35% of total volume, up 17% from the same period in 1995.
Cost of sales increased to $59,678,000 for the three months ended June
30, 1996, from $50,188,000 for the same period in 1995, a 19% increase. The
increase in cost of sales was substantially a result of increased purchase
agreement volume resulting from the conversion of existing consignment
agreements, new purchase agreement accounts and volume from acquisitions. Cost
of sales growth was higher than net sales growth, and as a percentage of net
sales increased from 77% to 78%, mostly as a result of the increase of purchase
agreement vehicles, higher prices per car paid due to higher ACVs and lower
selling prices as a percent of ACV for some salvage vehicles on the purchase
agreement method of sales.
Direct operating expenses increased to $12,235,000 for the three
months ended June 30, 1996, from $10,604,000 for the same period in 1995, a 15%
increase. The increase in direct operating expenses was associated with the
acquired operations, as well as the Company's continued investments in
personnel, management information systems, facilities expansion and
improvements, and related infrastructure to support its national rollout and
growth. Direct operating expenses as a percentage of net sales were flat
compared to the same period in 1995. Amortization of acquisition costs
associated with the acquisitions increased to $938,000 for the three month
period ended June 30, 1996 from $808,000 for the comparable period in 1995, as a
result of amortization of goodwill for the acquisitions.
Interest expense increased to $768,000 for the three months ended June
30, 1996, from $576,000 for the same period in 1995. The change in interest
expense was mostly attributable to increases in notes payable to sellers of
certain acquisitions and the utilization of a portion of the $15,000,000
Revolving Line of Credit Facility ("the Facility").
Interest income decreased to $246,000 for the three month period ended
June 30, 1996, from $324,000 for the comparable period in 1995. The change in
interest income was attributable to a decrease in interest-bearing investments
liquidated to help consummate the acquisitions.
Income taxes decreased to $1,148,000 for the three months ended June
30, 1996, from $1,417,000 for the comparable period in 1995. This decrease was
primarily the result of decreased earnings primarily due to lower margins.
The Company's net earnings were $1,521,000 for the three months ended
June 30, 1996, a 21% decrease from the comparable period in 1995 of $1,918,000.
8
<PAGE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Net sales of the Company increased to $148,858,000 for the six months
ended June 30, 1996, from $125,422,000 for the comparable six-month period in
1995, a 19% increase. Sales were higher due to acquisitions, conversion of
consignment to purchase agreement, same store growth and fee increases. Unit
volume increased 25% in the six-month period ended June 30, 1996, as compared to
the similar period in 1995, with most of the unit growth resulting from the
acquired operations, while existing facilities volume increased 3%. Net sales
growth from existing facilities increased 10% as a result of same store growth,
conversion of consignment to purchase agreement sales and increased fees. The
purchase agreement sales method of processing accounted for 80,000 vehicles, or
35% of total volume, up 17% from the same period in 1995.
Cost of sales increased to $117,627,000 in the six-month period ended
June 30, 1996, from $95,408,000 in the comparable six month period in 1995, a
23% increase. The increase in cost of sales was substantially a result of same
store growth, conversions of consignment to purchase agreement and volume from
acquisitions. Cost of sales growth was higher than net sales growth, and as a
percentage of net sales increased from 76% to 79%, mostly as a result of higher
prices per car paid due to higher ACVs and lower selling prices as a percent of
ACV for some salvage vehicles on the purchase agreement method of sales.
Direct operating expenses increased to $24,190,000 for the six months
ended June 30, 1996, from $20,078,000 for the same period in 1995, a 20%
increase. The increase in direct operating expenses was associated with the
acquired operations, as well as the Company's continued investments in
personnel, management information systems, facilities expansion and
improvements, and related infrastructure to support its national rollout and
growth. Direct operating expenses as a percentage of net sales were flat
compared to the same period in 1995. Amortization of acquisition costs
associated with the acquisitions increased to $1,865,000 for the six month
period ended June 30, 1996 from $1,578,000 for the comparable period in 1995, as
a result of amortization of goodwill for the acquisitions.
Interest expense increased to $1,576,000 for the six months ended June
30, 1996, from $941,000 for the same period in 1995. The change in interest
expense was mostly attributable to increases in notes payable to sellers of
certain acquisitions and the utilization of a portion of the Facility.
Interest income decreased to $400,000 for the six month period ended
June 30, 1996, from $570,000 for the comparable period in 1995. The change in
interest income was attributable to a decrease in interest-bearing investments
liquidated to help consummate the acquisitions.
Income taxes decreased to $1,720,000 for the six month ended June 30,
1996, from $3,394,000 for the comparable period in 1995. This decrease was
primarily the result of decreased earnings primarily due to lower margins and
increased expenses.
The Company's net earnings were $2,280,000 for the six months ended
June 30, 1996, a 50% decrease from the comparable period in 1995 of $4,593,000.
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 1996, the Company had current assets of $55,882,000,
including $17,828,000 of cash and cash equivalents and short term investments,
current liabilities of $37,394,000 and working capital of $18,488,000. The
$6,301,000 increase in working capital from December 31, 1995, was principally
related to proceeds from long term borrowings under the Facility and net
earnings. On August 1, 1995, the Company entered into the Facility with the
bank, permitting borrowings of up to $15,000,000. The Facility, subject to
certain terms and conditions, is for 3 years and bears interest at a variable
rate. Approximately $4,500,000 in borrowings were outstanding on the Facility
at June 30, 1996.
9
<PAGE>
At June 30, 1996, 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
$4,330,000, amounts due to the sellers of ADB aggregating $6,193,000 with
imputed interest at 7.5%, amounts due to the seller of a smaller acquisition
aggregating $500,000 which bears interest at 8.0% and $4,500,000 outstanding on
the Facility which bears interest at a variable rate which is approximately 7%
at June 30, 1996.
Capital expenditures were approximately $3,411,000 for the six months
ended June 30, 1996. These capital expenditures included upgrading and
expanding management information systems 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 and
acquisitions. 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.
RECENT DEVELOPMENTS
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 earnings per share as if the
fair-value based method of accounting had been applied. The Company adopted
Statement No. 123 on January 1, 1996 and has elected to continue to measure
compensation cost under APBO No. 25.
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, the
availability of vehicles and weather conditions. 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. Revenues in any quarter are substantially dependent on a number of
factors including attendance at salvage auctions and the market value of salvage
vehicles. Revenues for any future quarter are not predictable with any
significant degree of accuracy; the Company's expense levels, however, 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 quarter the Company's operating results will be below
the expectations of public market analysts and investors.
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 1995, vehicles supplied by the
Company's three largest suppliers accounted for approximately 51% of the
10
<PAGE>
Company's unit sales. The largest suppliers, Allstate Insurance ("Allstate")
and State Farm Insurance, each accounted for approximately 21% of the Company's
unit sales. A number of other insurance company suppliers have also contributed
to the profitability of the Company. A loss or reduction in the number of
vehicles from any of these suppliers, or adverse change in the agreements that
such suppliers have with the Company, could have a material adverse effect on
the Company's business, operating results and financial condition.
PROVISION OF SERVICES AS A NATIONAL OR REGIONAL SUPPLIER. The
provision of services to insurance company suppliers on a national or regional
basis requires that the Company expend resources and dedicate management to a
small number of individual accounts, resulting in a significant amount of fixed
costs. The development of a referral based national network service, in
particular, has required the devotion of financial resources without immediate
reimbursement of such expenses by the insurance company suppliers.
PURCHASE AGREEMENT METHOD OF SALE. The Company has entered into a
number of purchase agreements, including agreements with its most significant
insurance suppliers, that obligate the Company to purchase most salvage vehicles
offered to it at a formula percentage of ACV. In recent times, increased ACVs
on which the Company's costs are based have reduced the profitability that the
Company realizes on purchase agreement contracts. The Company is currently
attempting to renegotiate its agreements with certain of these suppliers. There
can be no assurance, however, that the Company can renegotiate the terms of
these agreements on terms favorable to the Company. The failure to renegotiate
some or all of these agreements could have a material adverse effect on the
Company's operating results and financial condition. In addition, further
increases in ACVs or declines in the market or auction prices for salvage
vehicles could have a material adverse effect on the Company's business,
operating results and financial condition.
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
buyer of vehicles from other regional salvage pools. These regional salvage
pools generally process vehicles under the fixed fee consignment method and
generally do not offer the full range of services provided by the Company. The
salvage industry has recently experienced consolidation, however, and the
Company believes its principal publicly-held competitor is Copart, Inc. Copart,
Inc. has effected a number of acquisitions of regional salvage pools and
competes with IAA in most of IAA's geographic markets. Due to the limited
number of vehicle suppliers, competition for salvage vehicles from Copart and
regional suppliers is intense. It is also possible that the Company may
encounter further competition from existing competitors and new market entrants
that are significantly larger and have greater financial and marketing
resources. Other potential competitors could include used car auction
companies, certain salvage buyer groups and insurance companies some of which
presently supply auto salvage to IAA. While most insurance companies have
abandoned or reduced efforts to sell salvage without the use of service
providers such as the Company, they may in the future decide to dispose of their
salvage directly to customers. There can be no assurance that the Company will
be able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition.
RECENT MANAGEMENT CHANGES. There has recently been turnover in
certain key positions in the Company. Additions of new personnel and departures
of existing personnel, particularly in key positions, can be disruptive, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
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
11
<PAGE>
achieve these objectives is dependent 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. Finally, the Company has experienced
a period of significant expansion that has placed a strain upon its management
systems and resources. In the future, the Company will be required to continue
to improve its financial and management controls, reporting systems and
procedures on a timely basis and expand, train and manage its employee work
force. The failure to improve these systems on a timely basis and to
successfully expand and train the Company's work force could have a material
adverse effect on the Company's business, operating results and financial
condition.
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.
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 delays in the transfers of title caused by the
implementation of the Torres Bill in California had a negative effect on the
Company's third and fourth quarter results. 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 material adverse effect of the Company's business, operating results
and financial condition.
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 expenditures 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.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS AND OTHER MATTERS.
(a) The Registrant has been named as a defendant in two lawsuits filed by
Registrant shareholders in the United States District Court for the Central
District of California (in which two of the Registrant's officers, one of
whom is a director, one additional director and one former officer and
director are also defendants) and the Los Angeles County Superior Court (in
which one of the Registrant's officers, who is also a director, one
additional director and one former officer and director are also
defendants). The lawsuit in federal court alleges violations of the
federal securities laws, and purports to seek damages on behalf of a class
of shareholders who purchased the Registrant's common stock during the
period of July 27, 1994 through August 4, 1995. The lawsuit in the state
court alleges violations of California securities laws, and purports to
seek damages on behalf of a class of shareholders who purchased the
Registrant's common stock during the period of February 21, 1995 through
August 4, 1995. The Registrant believes that both lawsuits are without
merit and intends to defend against them vigorously. See Note 8 to the
Registrant's Consolidated Financial Statements to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
ITEM 2. CHANGES IN SECURITIES. NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Shareholders of the Company held June 19, 1996, the
shareholders (i) elected eight directors to serve on the Company's Board of
Directors, (ii) amended the Company's 1991 Stock Option Plan to effect an
increase in the number of shares of Common Stock issuable under the plan by an
additional 250,000 shares and (iii) ratified the Company's appointment of KPMG
Peat Marwick LLP to serve as the Company's independent auditors for the fiscal
year ended December 31, 1996. Shareholders holding 9,390,209 shares of Common
Stock, representing 83% of the total number of shares outstanding and entitled
to vote at the meeting, were present in person or by proxy at the meeting.
The vote for nominated directors was as follows:
Director Votes For Votes Withheld
-------- --------- --------------
Bradley S. Scott 9,056,837 333,372
James P. Alampi 9,056,653 333,556
Susan B. Gould 9,056,868 333,341
Christopher G. Knowles 9,057,037 333,172
Melvin R. Martin 9,054,183 336,026
Thomas J. O'Malia 9,057,667 332,542
Glen E. Tullman 9,056,767 333,442
Richard A. Rosenthal 9,057,737 332,472
The vote for amending the Company's stock option plan was as follows: For:
5,791,364; Against: 3,478,592; and Votes Withheld: 28,757.
The vote for ratifying the appointment of KPMG Peat Marwick LLP was as follows:
For: 9,377,846; Against: 6,069 and Votes Withheld: 6,294.
ITEM 5. OTHER INFORMATION. NONE
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.146 Revised Salvage Agreement by and between the Registrant and
Allstate Insurance Company dated April 29, 1996.
10.147 Employment Agreement by and between the Registrant and James
P. Alampi dated March 11, 1996.
(b) REPORTS ON FORM 8-K. NONE
14
<PAGE>
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 5, 1996 By: /s/Linda C. Larrabee
-----------------------------------
Name: Linda C. Larrabee
Title: Senior Vice President, Chief
Financial Officer and Secretary
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
15
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NO. NUMBERED PAGE
- ----------- -------------
10.146 Revised Salvage Agreement by and between the 17
Registrant and Allstate Insurance Company dated
April 29, 1996.
10.147 Employment Agreement by and between the Registrant 40
and James P. Alampi dated March 11, 1996.
16
<PAGE>
REVISED SALVAGE AGREEMENT
This REVISED SALVAGE AGREEMENT is made and entered into this 29th day
of April, 1996 by and between ALLSTATE INSURANCE COMPANY, an Illinois insurance
corporation ("Allstate") and INSURANCE AUTO AUCTIONS, INC., a California
corporation ("IAA").
WITNESSETH:
WHEREAS, On December 1, 1993 IAA purchased the reclamation operations
with respect to total loss and recovered theft vehicles (and not the claims
training, research and appraisal operations) of Tech-Cor, Inc., a wholly-owned
subsidiary of Allstate (the "TECH-COR ACQUISITION");
WHEREAS, following the Tech-Cor Acquisition, Allstate and IAA
established a master salvage agreement covering salvage and reclamation services
to be provided by IAA to Allstate in certain geographic markets on an ongoing
basis (the "1993 Salvage Agreement"); and
WHEREAS, Allstate and IAA desire to amend and supplement the terms of
the Salvage Agreement due to changes in the salvage and reclamation marketplace
as well as changes in their respective internal operations.
NOW, THEREFORE, in consideration of the foregoing and of the covenants
and agreements herein contained, the parties hereto agree as follows:
I. DEFINITIONS
1.1. DEFINITIONS. As used in this Revised Salvage Agreement the following
terms have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
(a) "ACTUAL CASH VALUE" means the appraised value of each Reclamation
Vehicle as determined by an accepted industry method such as that used by
Certified Collateral Corporation ("CCC") or a mutually agreed upon comparable
system without deductible, sales tax, or license fees.
(b) "ADVANCE CHARGES" means with respect to any Reclamation Vehicle,
the aggregate charges for services customarily provided that are accumulated
prior to the time the Reclamation Vehicle processor takes possession of such
vehicle, including, but not limited to, advances with respect to impound or
similar initial tow charges, storage charges, costs of estimate, tear down fees,
lien sale fees, etc., provided that Advance Charges shall not include
<PAGE>
amounts payable to any State Department of Motor Vehicles (or similar authority)
relating to the transfer of title of such Reclamation Vehicle.
(c) "APPRAISAL FACILITY" means a facility where suspected total loss
or recovered theft vehicles are brought temporarily for damage evaluation or for
other claims services.
(d) "BUSINESS DAY" means each day on which banks are generally open
for business in Illinois.
(e) "CATASTROPHE VEHICLES" means in excess of one hundred (100) Total
Loss Vehicles damaged by a single event which is determined to be a
"catastrophe" by Allstate policy. Common catastrophe events include hurricanes,
earthquakes, tornadoes, wind and hail storms, fires and explosions.
(f) "CHANGE OF CONTROL" means such time as either (i) any "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended) engaged directly or indirectly in the
insurance business obtains "beneficial ownership" (within the meaning of Rule
13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of at
least 20% of the voting power of the voting capital stock of IAA, or (ii) any
other "person" or "group" obtains "beneficial ownership" of at least 50% of the
voting power of the voting capital stock of IAA, or (iii) IAA sells, leases or
transfers all or substantially all of its assets to any "person" or "group" in
one or more transactions.
(g) "COMPARABLE IAA CUSTOMER" means for any market, any other
insurance company that supplies to IAA reclamation vehicles.
(h) "LOSS CATEGORY" means each category of total loss and recovered
theft vehicle.
(i) "NEW LOCAL AGREEMENT" means any New Local Pool Agreement, New
Local Purchase Agreement or Other Local Agreement.
(j) "OWNER RETAINED VEHICLE" means any Total Loss Vehicle or
Recovered Theft Vehicle of which the insured or claimant wishes to retain
ownership for an agreed upon price acceptable to the insured or claimant and
Allstate.
(k) "POOLING METHOD" means the method of processing total loss and
recovered theft vehicles for carriers under which such vehicles are sold on a
consignment basis by the processor.
(l) "PROCESSED" when used solely with reference to vehicles processed
by IAA means vehicles that have been sold by IAA for which revenue has been
recognized by IAA in accordance with its accounting policies, regardless of the
method under which vehicles were processed (unless the context otherwise
requires).
2
<PAGE>
(m) "PURCHASE METHOD" means the method of processing total loss and
recovered theft vehicles for carriers under which such vehicles are purchased
from the carrier by the processor.
(n) "RECLAMATION SERVICES" means the processing and sale by IAA of
total loss and recovered theft vehicles for carriers, whether provided under the
Purchase Method, the Pooling Method or otherwise.
(o) "RECLAMATION VEHICLES" means, collectively, Total Loss Vehicles
and Recovered Theft Vehicles owned by Allstate included within all Loss
Categories, provided that the term Reclamation Vehicles shall not include any
Owner Retained Vehicles, any Catastrophe Vehicles, any vehicle parts (as defined
in any local market salvage purchase agreement) or any other vehicles not made
available to IAA by Allstate.
(p) "RECOVERED THEFT VEHICLE" means any vehicle which was stolen and
recovered, and the ownership of which has been transferred to Allstate.
(q) "SALEABLE TITLE DOCUMENTS" means all forms and documents, without
error, omission, lien or other encumbrance, that allow for the immediate
initiation and ultimate conclusion of the title transfer process.
(r) "TECH-COR FACILITIES" means the vehicle reclamation operations
located in Wheeling, Illinois; Markham, Illinois; Romulus, Michigan;
Glassboro, New Jersey and Carteret, New Jersey, which were acquired by IAA in
the Tech-Cor Acquistion.
(s) "TERM" means the period commencing on the date of this Revised
Salvage Agreement and ending upon the expiration of the Initial Term and any
successive Additional Term or any earlier date on which this Revised Salvage
Agreement is terminated pursuant to Article VI.
(t) "TOTAL LOSS VEHICLE" means (i) any vehicle which has been
wrecked, destroyed, stripped, burned, submerged in water or otherwise damaged to
such an extent that Allstate considers it uneconomical to repair the vehicle or
(ii) any such vehicle which may be economical to repair but which Allstate
designates as a Total Loss Vehicle because in the opinion of Allstate it is not
feasible to repair the vehicle.
(u) "VIC" means any temporary storage, towing and/or appraisal
facility of the type commonly referred to in the insurance industry as a
"vehicle inspection center" to which suspected Total Loss Vehicles are brought.
3
<PAGE>
II. SCOPE OF SALVAGE ARRANGEMENTS
2.1. IAA SERVICES IN NEW MARKETS.
(a) During the Term, IAA shall be Allstate's preferred provider of
Total Loss and Recovered Theft vehicle Reclamation Services in respect of
Reclamation Vehicles and Castastrophe Vehicles in each market in which IAA
provides Reclamation Services. [*] Allstate agrees to inform its local field
management as to the terms of this Revised Salvage Agreement with IAA,
including without limitation that IAA is Allstate's preferred provider of
reclamation services hereunder, [*]. In addition, Allstate will assist IAA
in setting up meetings/presentations with the appropriate field management
and assist both the local Allstate Management and IAA personnel in helping to
resolve any conflicts or problems that may arise.
(b) During the Term, IAA shall be entitled to bid on all Owner
Retained Vehicles when (i) IAA provides Allstate with Reclamation Services in
the market in which the Owner Retained Vehicle is located and (ii) Allstate's
request of IAA for a bid on the Owner Retained Vehicle does not unreasonably
delay or interfere with Allstate's claim settlement process. Allstate agrees to
discuss with its field offices the operational procedures required to properly
implement this agreement, including the procedures for processing Owner Retained
Vehicles and calculating Actual Cash Values.
2.2. EXPANSION OF RECLAMATION SERVICES.
This Section deleted.
2.3. CONVERSION TO PURCHASE METHOD.
This Section deleted.
2.4. LOCAL AGREEMENTS.
This Section deleted.
2.5. PAYMENT TERMS.
This Section deleted.
*Confidential treatment requested.
4
<PAGE>
2.6. EXISTING LOCAL POOLING AGREEMENTS.
(a) IAA and Allstate are currently parties to certain salvage pool
agreements (collectively, the "EXISTING LOCAL POOL AGREEMENTS," which term shall
include any subsequent amendment thereto).
(b) Notwithstanding Section 6.1 of this Revised Salvage Agreement,
the Existing Local Pool Agreements for the following Tech-Cor Facilities
shall receive the [*] pricing terms provided for in Section 2.8(b)
commencing as of the following dates, and may be terminated by either party
on or after the following dates upon at least [*] advance notice: (i) [*],
and (ii) [*].
(c) Following termination of an Existing Local Pool Agreement,
Allstate may enter into a New Local Agreement with IAA under the terms of
Section 2.8, 2.9 or 2.10 hereof.
2.7. EXISTING LOCAL PURCHASE AGREEMENTS.
(a) IAA and Allstate are currently parties to certain salvage
purchase agreements (collectively, the "EXITING LOCAL PURCHASE AGREEMENTS")
which term shall include any subsequent amendment thereto).
(b) Notwithstanding the terms of Section 6.1 of this Revised Salvage
Agreement or prior agreed upon termination dates, Existing Local Purchase
Agreements in the following markets shall, on the dates referenced below,
receive the favorable pricing terms provided for in Section 2.9(c) and may be
terminated by either party on or after the dates referenced below upon at
least [*] advance notice: (i) [*], however, each such local Allstate
market has the option to extend the Existing Local Purchase Agreement through
[*] if it notifies IAA by [*]; (ii) [*]; (iii) [*]; (iv) [*].
(c) On [*], the price paid for Reclamation Vehicles by IAA will be
increased by [*] in [*] and by [*] in [*].
(d) For a Reclamation Vehicle being sold under a Percentage-of-Sale
basis under an Existing Local Purchase Agreement, IAA shall, once it has
obtained Saleable Title Documents with respect to such vehicle, offer such
vehicle for sale at or before the third auction at the site at which such
vehicle is located.
*Confidential treatment requested.
5
<PAGE>
(e) Following termination, Allstate may enter into a New Local
Agreement with IAA under the terms of Section 2.8, Section 2.9 or Section 2.10
hereof. Any such New Local Agreement shall terminate on such a date as is
agreed to by the parties.
(f) Notwithstanding the foregoing, if after June 30, 1995 there has
occurred any changes in the laws or regulations or implementation of laws or
regulations applicable to any local market that affect the prices paid for
Reclamation Vehicles, either party may, upon [*] notice, elect to change the
Local Purchase Agreement covering such market into a New Local Agreement, with
the Reclamation Vehicles covered thereby to be processed under (i) the Pooling
Method upon pricing terms and other terms established in accordance with Section
2.8(a) hereof, (ii), if the local Allstate management agrees, under another
mutually-acceptable method of sale pursuant to Section 2.10 hereof, or (iii), if
the local Allstate management agrees, under a mutually-acceptable New Local
Purchase Agreement pursuant to Section 2.9; provided, however, that Allstate
may, upon notice to IAA within such [*] period, elect to have such Local
Purchase Agreement terminate at the end of such [*] period and to not have a
New Local Agreement become effective in its place.
(g) Notwithstanding anything to the contrary in this Agreement, IAA
shall also have the right to terminate the Existing Local Purchase Agreements
covering [*] on or after [*] upon [*] advance written notice (such
termination right of IAA referred to herein as the "Buyout Right"). At the
end of such [*] period following notice of exercise of the Buyout Right, IAA
shall pay to Allstate or one or more affiliates of Allstate designated by
Allstate the Buyout Amount (as defined below). During such [*] period, IAA
and each of the affected Allstate local offices shall discuss whether, upon
mutual agreement, to convert the affected Existing Local Purchase Agreement
into a New Local Agreement in accordance with Sections 2.8, 2.9, or 2.10
hereof, and, failing such mutual agreement, any such Existing Local Purchase
Agreement not so converted shall immediately terminate at the end of such [*]
period. Upon IAA's election to exercise the Buyout Right, Allstate may cease
to characterize IAA as a "Preferred Provider" hereunder and Allstate's
obligations under [*] Section 2.1(a) hereof shall immediately terminate. IAA
may not exercise the Buyout Right with respect to some but not all of the
Existing Local Purchase Agreements listed above. (As used herein, the
"Buyout Amount" shall equal (i) [*] plus (ii), if a New Local Agreement is
not established pursuant to this Section 2.7(f) for one or more of such
Allstate local offices, the Utilization Fee Present Value (as defined below).
The "Utilization Fee Present Value" shall [*].
*Confidential treatment requested.
6
<PAGE>
2.8. NEW LOCAL POOLING AGREEMENTS.
(a) In the event IAA establishes Reclamation Services to Allstate in
a new market which are provided under the Pooling Method, Allstate and IAA shall
enter into a contract relating to the provision of Reclamation Services to
Allstate under the Pooling Method (each, a "NEW LOCAL POOLING AGREEMENT").
(b) The terms of any such New Local Pooling Agreement shall be
negotiated in good faith between IAA and Allstate's local field management, and
such terms shall be based on an objective of providing to Allstate a total cost
for processing Reclamation Vehicles supplied to IAA under such New Local Pooling
Agreement [*]. To assist the parties in determining such terms, IAA
shall provide to such local field management and Tech-Cor Management negotiating
any such new Local Pooling Agreement a schedule of [*].
(c) Allstate and IAA agree to review the payment terms contemplated
by this Section 2.8 upon the implementation of electronic transfer of funds
arrangements between Allstate and IAA. For those Reclamation Vehicles being
sold under Local Pooling Agreements, IAA shall not decline to accept a bid for a
vehicle without Allstate's prior approval. Once IAA has obtained Saleable Title
Documents with respect to a vehicle covered by a Local Pooling Agreement, IAA
shall offer such vehicle for sale at or before the third auction at the site at
which such vehicle is located.
2.9. NEW LOCAL PURCHASE AGREEMENT.
(a) In the event IAA establishes Reclamation Services for Allstate in
a new market which are provided under the Purchase Method, Allstate and IAA
shall enter into a contract relating to the provision of Reclamation Services to
Allstate under the Purchase Method (each, a "NEW LOCAL PURCHASE AGREEMENT").
(b) Allstate and IAA agree to review the payment terms contemplated
by this Section 2.9 upon implementation of electronic transfer of funds
arrangements between Allstate and IAA.
(c) The terms of any such New Local Purchase Agreement shall be
negotiated in good faith between IAA and Allstate's local field management,
[*]
*Confidential treatment requested.
7
<PAGE>
[*] For a Reclamation Vehicle being sold under a Percentage-of-Sale basis
under a New Local Purchase Agreement, IAA shall, once it has obtained
Saleable Title Documents with respect to such vehicle, offer such vehicle for
sale at or before the third auction at the site at which such vehicle is
located.
(d) Notwithstanding the foregoing, if there subsequently occurs any
changes in the laws or regulations or implementation of laws or regulations
applicable to such market that affect the prices paid for Reclamation Vehicles,
either party may, upon [*] notice, elect to change such Purchase Agreement
into a New Local Pooling Agreement, New Local Purchase Agreement, or New Other
Local Agreement in accordance with Section 2.7(e) above.
2.10. OTHER LOCAL AGREEMENTS.
(a) In the event IAA establishes Reclamation Services for Allstate in
a new market which are provided under a method other than the Purchase Method or
the Pooling Method, Allstate and IAA shall enter into a contract (each, an
"OTHER LOCAL AGREEMENT").
(b) The terms of any such Other Local Agreement shall be negotiated
in good faith between IAA and Allstate's local field management, taking into
account the total economic return that IAA provides under such Other Local
Agreements to Comparable IAA Customers in such market. IAA agrees to keep
Tech-Cor Management apprised of such negotiations. Any such New Other Local
Agreement shall provide that IAA must pay to Allstate all required payments with
respect to each vehicle sold under such New Other Local Agreement within [*]
following IAA's receipt of such funds from the purchaser of such vehicle. In
addition, any such New Other Local Agreement shall also provide that (x) IAA
will not decline to accept a bid for a vehicle being sold under such
agreement without Allstate's prior approval, and (y), once IAA has obtained
Saleable Title Documents with respect to a vehicle covered by such agreement,
IAA shall offer such vehicle for sale at or before the third auction at the
site at which such vehicle is located.
2.11. WITHDRAWAL FROM MARKETS. Notwithstanding any provision of this
Agreement, IAA retains the right to withdraw at any time upon [*] notice to
Allstate from one or more of those existing markets identified on Exhibit 2.11
attached hereto in which IAA currently provides Reclamation Services or from any
new markets in which it provides Reclamation Services in the future.
*Confidential treatment requested.
8
<PAGE>
2.12. AMENDMENTS. The terms of any Existing Local Agreement or New Local
Agreement shall be subject to amendment upon the mutual agreement of IAA and the
local field management of Allstate managing such local agreement to better meet
the needs of the local markets. IAA agrees to notify Allstate's National
Salvage Account Manager of any such amendment prior to its effectiveness.
III. PAYMENT TERMS FOR LOCAL AGREEMENTS
3.1. MARKET AREA BASELINE RETURN.
This Section deleted.
3.2. PURCHASE PRICES FOR NEW LOCAL PURCHASE AGREEMENTS.
This Section deleted.
3.3. COMPARISON OF CALCULATED RETURN AND TARGET NET RETURN.
This Section deleted.
3.4. ADJUSTMENTS TO GUARANTEE MULTIPLIER.
This Section deleted.
3.5. PAYMENT TERMS FOR EXISTING MARKET AREAS.
This Section deleted.
3.6. RENEGOTIATION OF PRICING.
This Section deleted.
3.7. VOLUME PRICING ADJUSTMENT. Allstate shall have the option to either:
(a) engage, at Allstate's expense, an independent third party to
verify the compliance by IAA with the provisions of Sections 2.8, 2.9 and 2.10
with regard to its pricing and fees to its other customers, and IAA shall
provide information to, and otherwise cooperate with, such third party as
reasonably requested; provided that such third party (i) may be required by IAA
to execute a confidentiality agreement with IAA in form reasonably acceptable to
IAA and (ii) shall not be permitted to remove any IAA records, or any copies
thereof, from IAA facilities. Allstate shall have no right to conduct such
verifications more frequently than twice during any calendar year; or
9
<PAGE>
(b) request and receive written confirmation from IAA verifying its
compliance with Sections 2.8, 2.9 and 2.10 signed by its President. For
purposes of this Section, contract negotiations are excluded from the definition
of "verification."
3.8. TITLE AND STORAGE CHARGES.
This Section deleted.
3.9. REVIEW OF CALCULATIONS.
IAA shall have the right to reasonably request ACV data which
Allstate uses to calculate IAA payments.
3.10. PURCHASE PRICE FOR CERTAIN VEHICLES.
This Section deleted.
IV. UTILIZATION FEE
4.1. UTILIZATION FEE.
(a) During calendar years 1996 and 1997, IAA will pay to Allstate (or
its designee) a fee in respect of each Reclamation Vehicle sold by IAA during
each such year. The amount of the per vehicle fee shall be [*] The aggregate
fee payable for each calendar year pursuant to this Section 4.1 (the
"UTILIZATION FEE") shall be an amount equal to the product of (x) the total
number of Reclamation Vehicles sold by IAA during such calendar year and (y)
[*]
(b) Within [*] after the end of each of the first three quarters of
each calendar year, IAA shall pay to Allstate (or its designee) [*] of the
estimated Utilization Fee for such calendar year, based on a reasonable
estimate by IAA of the annual volume of Reclamation Vehicles to be processed
by IAA during such year. Within [*] after the end of each calendar year, the
Utilization Fee for such year shall be calculated and (i) if the aggregate
estimated amounts previously paid to Allstate (or its designee) are less than
the Utilization Fee, the amount of such shortfall shall be paid to Allstate
(or its designee); or (ii) if the aggregate estimated amounts previously paid
by IAA to Allstate (or its designee) exceed the Utilization Fee, the amount
of such excess shall be paid by Allstate (or its designee) to IAA.
(c) No Utilization Fee was or is payable by IAA to Allstate during
the third and fourth quarters of 1995. Utilization Fees paid by IAA in the
first and second quarters of 1995 will not be subject to adjustment and will be
retained by Allstate.
4.2. VOLUME COMPONENT.
This Section deleted.
*Confidential treatment requested.
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4.3. PROFIT COMPONENT.
This Section deleted.
4.4. ROLL-OUT COMPONENT.
This Section deleted.
V. OTHER OPERATING ARRANGEMENTS
5.1. VEHICLE INSPECTION AND APPRAISAL FACILITIES.
(a) At the request of Allstate, IAA shall provide reasonable space to
Allstate at any facility where IAA provides Reclamation Services for use by
Allstate or any of its affiliates as a VIC.
(b) IAA will lease to Allstate the VICs currently located at the
Tech-Cor Facilities at the existing rates applicable to such leases and the VICs
currently located at IAA facilities at the existing rates. For those VICs
located at a new IAA facility, Allstate will pay its pro rata share (based on
square footage) of any rent and other operating costs payable by IAA in respect
of such facility.
(c) If Allstate or any of its affiliates subsequently chooses to
offer appraisal services at a reclamation facility in a market serviced by IAA,
Allstate will offer such services at an Appraisal Facility located at an IAA
facility, if IAA has space available at its facility in such area. Allstate and
its affiliates will have the first right to use any space at an IAA facility
designated by IAA as an Appraisal Facility.
(d) IAA will continue during the Term to make available to Allstate
[*] For Appraisal Facilities located at new IAA facilities, Allstate shall
pay to IAA an amount equal to a proportionate share of IAA's total costs to
maintain such facility or, if less, an amount equal to the fair market rental
for such Appraisal Facility.
(e) Any space provided to Allstate for use as a VIC pursuant to this
Section 5.1 shall be provided on terms substantially similar to those set forth
in the relevant Form of Sublease attached as Exhibit 5.1(e).
5.2. OTHER BUSINESS INTERESTS.
(a) [*]
*Confidential treatment requested.
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5.3. SALVAGE MANAGEMENT SYSTEM.
(a) Allstate may develop, either on its own or with the assistance of
a third party, a salvage management system to meet Allstate's requirements with
regard to functionality, interfaces with existing and future claim systems,
industry, state and federal reporting, vehicle salvage related analysis, and
report generation (the "PROPOSED SALVAGE MANAGEMENT SYSTEM").
(b) IAA shall contribute [*] toward the cost of designing and
developing the Proposed Salvage Management System, which amount shall be payable
on or before December 31, 1996.
(c) Allstate shall be the owner of the Proposed Salvage Management
System and shall determine the location of the hardware and software comprising
the Proposed Salvage
*Confidential treatment requested.
12
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Management System. The licensing of the Proposed Salvage Management System to
any third party will be at Allstate's discretion and any fees generated
therefrom shall be paid to Allstate. The identity of the licensee, the scope of
the license and the amount of this licensing fee will be determined by Allstate
in its sole discretion. Notwithstanding the foregoing, [*]
(d) All communication and transaction costs related to the Salvage
Management System will be the responsibility of the originating party.
VI. TERM; RENEWAL; TERMINATION
6.1. TERM. The term of this Revised Salvage Agreement (the "INITIAL TERM")
shall expire on December 31, 1998, unless terminated earlier pursuant to the
provisions of this Article VI.
6.2. ADDITIONAL TERM.
(a) Allstate has the option to extend the term of this Revised
Salvage Agreement for successive one year periods (each an "ADDITIONAL TERM")
upon [*] written notice to IAA.
(b) Allstate shall have the right to terminate this Revised Salvage
Agreement without cause during any Additional Term upon [*] written notice
to IAA.
6.3. EARLY TERMINATION BY ALLSTATE. Upon [*] written notice to IAA,
Allstate shall have the right to terminate this Revised Salvage Agreement,
any Existing Local Agreement or any New Local Agreement, covering any market
in which IAA commits a breach of the performance standards set forth in the
applicable Agreement.
6.4. EARLY TERMINATION BY EITHER PARTY. Either party shall have the right
to terminate this Revised Salvage Agreement and any Existing Local Agreements or
New Local Agreements at any time:
(a) immediately upon notice to the other party in the event that the
other party is in default of a monetary obligation under this Revised Salvage
Agreement, any Existing Local Agreement or New Local Agreement which remains
uncured for [*] after notice thereof to the defaulting party;
(b) immediately upon notice to the other party in the event that the
other party in the event that the other party is in default of any material
non-monetary obligation under this Revised Salvage Agreement, any Existing Local
Agreement or any New Local Agreement which remains uncured for [*] after notice
thereof to the defaulting party;
(c) In the event that there is a Change of Control of IAA; or
*Confidential treatment requested.
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(d) In the case of any New Local Agreement established after April 1,
1996, upon thirty (30) days notice from one party to the other.
6.5. AMOUNTS OWED AT EXPIRATION OF TERM. The expiration of the Term shall
not affect the payment of any amounts owed hereunder or under any Existing Local
Agreement or New Local Agreement at such expiration or in respect of periods
prior to such expiration.
VII. NONCOMPETITION
7.1. AGREEMENT NOT TO COMPETE.
(a) Allstate shall not, and shall cause each of its Subsidiaries not
to, directly or indirectly, anywhere within any of the market areas serviced by
the Tech-Cor Facilities acquired by IAA engage directly in, permit Allstate's or
any or its Subsidiaries' names to be used by, or otherwise compete directly with
IAA in, the business of providing reclamation services with respect to Total
Loss Vehicles of Recovered Theft Vehicles (the "COMPETITIVE BUSINESS"); PROVIDED
that the Competitive Business shall not include any claims training, research
and appraisal operations or services and that this Section shall not prohibit
Allstate or any of its Subsidiaries from:
(i) acquiring, after the date hereof, any firm, partnership,
trust, corporation, or a division or business unit thereof, or any other entity
engaged directly in the Competitive Business (an "ACQUIRED COMPETITIVE
BUSINESS") if (A) the acquisition of the Acquired Competitive Business is
incidental to the acquisition of a firm, partnership, trust, corporation or
other entity not engaged in the Competitive Business and (B) Allstate shall take
all reasonable steps to dispose, as promptly as practicable after such
acquisition, of such Acquired Competitive Business; or
(ii) the passive ownership, directly or indirectly, of less than
fifty percent (50%) of the ownership interest in any firm, partnership, trust,
corporation, or a division or business unit thereof, or any other entity engaged
in the Competitive Business.
(b) If any court of competent jurisdiction shall finally hold that
the time, territory or any other provision set forth in this Section 7.1
constitutes an unreasonable restriction, such provision shall not be rendered
void, but shall apply as to such time, territory or to such other extent as such
court may determine constitutes a reasonable restriction under the circumstances
involved. Allstate acknowledges that the restrictions contained in this Section
7.1 are reasonable and necessary to protect the legitimate interests of IAA and
that any breach by Allstate of any provision hereof will result in irreparable
injury to IAA. Allstate acknowledges that, in addition to all remedies
available at law, IAA shall be entitled to equitable relief, including
injunctive relief. Without limitation, the parties agree and intend that the
covenants contained in this Section 7.1 shall be deemed to be a series of
separate covenants and agreements, one for each and every county or political
subdivision of each state of the United
14
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States. If, in any judicial proceeding, a court shall refuse to enforce in such
action any of the separate covenants deemed included herein, then at the option
of IAA, wholly-unenforceable covenants or components thereof shall be deemed
eliminated from the provisions hereof for the purpose of such proceeding to the
extent necessary to permit the remaining separate covenants to be enforced in
such a proceeding. The parties intend to have covenants enforceable to the
fullest extent of the law as to scope, time and geography.
(c) Allstate's obligations under this Section 7.1 shall terminate on
the earlier of (i) expiration of the Initial Term or (ii) in the event Allstate
notifies IAA of its election to terminate this Agreement pursuant to Sections
6.3 or 6.4 on the actual termination date of this Agreement.
VIII. MISCELLANEOUS PROVISIONS
8.1. NOTICES. All notices, statements, demands, consents or approvals or
other communications (collectively, "NOTICES") required or permitted to be given
to a party under or pursuant to this Revised Salvage Agreement shall be in
writing and shall be delivered in person or by certified mail, return receipt
requested, or by commercial messenger or courier service, addressed to such
party as provided below:
If to Allstate: Allstate Insurance Company
2775 Sanders Road, Suite A8
Northbrook, Illinois 60062
Attn: Susan L. Lees
Associate Counsel
with copies to: Allstate Insurance Company
2775 Sanders Road, Suite B7
Northbrook, Illinois 60062
Attn: Vice President Property
Claims Service Organization
Allstate Insurance Company
2775 Sanders Road, Suite A6
Northbrook, Illinois 60062
Attn: Auto Claims Director
Tech-Cor, Inc.
100 East Palatine Road
Wheeling, Illinois 60090
Attn: President
15
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If to IAA: Insurance Auto Auctions, Inc.
1270 West Northwest Hwy.
Palantine, IL 60067
Attn: Bradley S. Scott, Chairman
James Alampi, President
William W. Liebeck, Executive
Vice President
with a copy to: Gunderson, Dettmer, Stough,
Villeneuve, Franklin & Hachigian, LLP
600 Hansen Way, Second Floor
Palo Alto, CA 94304
Attn: Scott C. Dettmer, Esq.
Any party may from time to time change its address or the addresses for receipt
of Notices by giving the other parties prior notice of such change in the manner
hereinabove provided. All Notices received on a Business Day before 3:00 p.m.
local time shall be deemed delivered on such day. All Notices received either
(i) after 3:00 p.m. on a Business Day or (ii) on a day that is not a Business
Day shall be deemed delivered on the next Business Day.
8.2. RELATIONSHIP OF PARTIES. Nothing contained herein shall create or be
deemed to create any relationship of agency, partnership, joint venture or
employment among the parties hereto and no party hereto shall have any power to
obligate or to bind the other party hereto in any manner whatsoever.
8.3. SPECIFIC PERFORMANCE. The failure or refusal by a party to comply
with any or all of the provisions of this Revised Salvage Agreement shall
entitle the other parties to specific performance of any or all of the terms,
covenants and conditions of this Revised Salvage Agreement in addition to any
and all other remedies available to the other party at law or in equity.
8.4. ATTORNEY'S FEE. In the event of any litigation between the parties
hereto to enforce or interpret any provision or right hereunder, the
unsuccessful party to such litigation shall pay the successful party all costs
and expenses reasonably incurred, including reasonable attorneys' fees (in the
case of staff counsel determined at a market rate) and disbursements.
8.5. ASSIGNMENT. This Revised Salvage Agreement may not be directly or
indirectly assigned or transferred by either party hereto without the prior
written consent of the other party.
8.6. SUCCESSORS AND ASSIGNS. This Revised Salvage Agreement is for the
sole benefit of Allstate and IAA and their respective nominees, successors and
permitted assigns. This Revised Salvage Agreement shall not confer any rights
or benefits or any person other than Allstate and IAA and their respective
nominees, successors and permitted assigns.
8.7. FURTHER ASSURANCES. Each party shall at any time and from time to
time execute, acknowledge and deliver all such further documents and instruments
and do such further acts and
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things as the other parties may reasonably request to carry out and effectuate
fully the transactions contemplated by this Revised Salvage Agreement.
8.8. HEADINGS. All article and section headings in this Revised Salvage
Agreement are for convenience of reference only. Such titles and captions shall
not be deemed part of this Revised Salvage Agreement and in no way defined,
extend or describe the scope or intent of any provisions hereof.
8.9. GOVERNING LAW. This Revised Salvage Agreement shall be governed by
and construed in accordance with the substantive laws of the State of Illinois,
without regard to the conflicts of law principles thereof.
8.10. COUNTERPARTS. This Revised Salvage Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original. Such
counterparts shall together constitute one and the same Revised Salvage
Agreement even if all the parties shall not have signed the same counterpart.
8.11. ENTIRE REVISED SALVAGE AGREEMENT. This Revised Salvage Agreement
(together with the Exhibits hereto) constitutes the entire agreement of the
parties with respect to the subject matter hereof and supersedes any and all
prior agreements, understandings or proposals with respect to such subject
matter, including without limitation the 1993 Salvage Agreement. No amendment
or modification of this Revised Salvage Agreement shall be binding unless same
shall be in writing and signed by each of Allstate and IAA.
8.12. CONFIDENTIALITY.
(a) Without the prior written consent of the other party, no party
shall disclose to any third party, or make any announcement regarding, any of
the terms of this Revised Salvage Agreement, unless such disclosure is (i)
required by law and the party making such disclosure shall have previously
notified the other party of its legal obligation to make such disclosure or (ii)
made pursuant to reporting obligations under applicable securities laws and
regulations.
(b) The provisions of (a) above shall not apply to the disclosure of
any information (i) to professional advisors of either party (such as lawyers or
accountants) who are advised by the party of the confidential nature of the
information, (ii) which has already come into the public domain other than by
reason of default by the applicable party bound hereby, (iii) rightfully
received from any third party or (iv) necessary to establish either party's
rights hereunder.
(c) Nothing in this Revised Salvage Agreement shall be construed to
provide Allstate any license, rights, or access to any confidential information
of any supplier to IAA.
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IN WITNESS WHEREOF, the parties hereto have caused this Revised
Salvage Agreement to be executed by their duly authorized representatives as of
the date first above written.
ALLSTATE INSURANCE COMPANY
By: /s/ William J. Gruner 4/30/96
---------------------------------------
Its:
INSURANCE AUTO AUCTIONS, INC.
By: /s/ James P. Alampi 5/1/96
---------------------------------------
Its:
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EXHIBIT 1.1(v)
MAPS OF MARKET AREAS
See separately bound document entitled "Tactician Maps Of Allstate
Regions - Market Claim Office Territories By Zip Codes"
19
<PAGE>
EXHIBIT 2.9
ECONOMIC RETURN METHODOLOGY
[*]
*Confidential treatment requested.
20
<PAGE>
EXHIBIT 2.11
WITHDRAWAL FROM MARKETS
[*]
*Confidential treatment requested.
21
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EMPLOYMENT AGREEMENT
This employment agreement is effective as of March 11, 1996 between
Insurance Auto Auctions, Inc., a California corporation (the "Company"), and
James P. Alampi, ("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 AND ELECTION AS A DIRECTOR. The Company agrees to
employ Executive as its President and Chief Executive Officer commencing March
__, 1996 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 nominate and elect Executive
as a director of the Company as soon as possible following his commencement of
employment and to continue his directorship during the term of his employment.
The Statement of Expectations attached hereto as Schedule A represents the
understanding between the Company and Executive regarding the expectation of
Executive's deliverables during 1996.
2. COMPENSATION AND BENEFITS.
(a) COMPENSATION. The Company shall pay to Executive for all
services to be performed by Executive during the term of this Agreement a salary
at the rate of $310,000 per annum, as reduced by required withholding taxes.
(b) PERFORMANCE INCENTIVE. As additional compensation for
performance of the services rendered by Executive during the term of this
Agreement, the Company will pay to Executive, in cash, a performance incentive
amount equal to 40% of Executive's annual salary based upon the achievement of
objectively quantifiable and measurable goals and objectives which shall be
determined, in advance, by the Compensation Committee of the Board of Directors
with respect to each fiscal year of the Company. In the 1996 Fiscal Year, half
of Executive's target incentive amount shall be guaranteed without regard to
Executive's actual achievement of goals. Amounts paid to Executive pursuant to
this Paragraph 2(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 (beginning on the first day of employment),
retirement plans and other programs as are offered from time to time by the
Company and are described in the Company's employee benefit handbooks.
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. The Company
<PAGE>
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 Company. 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 200,000 shares of the Company's common stock. Such option shall be
granted under the Company's 1991 Stock Option Plan and will be contingent upon
shareholder approval of an amendment increasing the share reserve by a number
sufficient to cover this grant. The option granted pursuant to this
subparagraph (d) shall be exercisable at 100% of the fair market value of the
common stock on the close of business on the day before the day that Executive
becomes employed by the Company. 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. The option shall become exercisable in four
annual installments beginning one year after the grant date.
(e) INDEMNIFICATION. The Company shall indemnify Executive in
accordance with the terms of the Company's standard form of Indemnification
Agreement.
3. 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, employment with the Company is not for a
specific term and 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) SEVERANCE BENEFITS APART FROM A CHANGE IN CONTROL. Upon the
termination of this Agreement and Executive's employment hereunder, Company
shall pay to Executive (UNLESS Executive voluntarily terminates Executive's
employment 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:
(i) Company shall continue to pay Executive an amount equal to
his monthly salary at the rate in effect at the time of such
termination for a period of twelve (12) months thereafter.
(ii) Company shall provide, at its expense, continued coverage of
Executive and Executive's beneficiaries for a period extending through
the earlier of the date Executive commences any subsequent full-time
employment for pay
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and the date that is one (1) year after Executive's termination of
employment, under the Company's health plan covering Executive and
Executive's beneficiaries, provided that Executive properly elects coverage
pursuant to COBRA.
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 5 or Executive's
continuing obligations under Sections 5, 6, and 7.
(c) SEVERANCE BENEFITS FOR TERMINATION FOLLOWING A CHANGE IN CONTROL.
If Executive's employment with the Company terminates by reason of Executive's
Involuntary Termination (as defined below) or termination by the Company without
Cause (as defined above)), Executive shall be entitled to receive each of the
following:
(i) Company shall continue to pay Executive an amount equal to
his Current Compensation for a period of twenty-four (24) months
thereafter.
(ii) Company shall provide, at its expense, continued coverage of
Executive and Executive's beneficiaries for a period extending through
the earlier of the date Executive commences any subsequent full-time
employment for pay and the date that is eighteen (18) months after
Executive's termination of employment, under the Company's health plan
covering Executive and Executive's beneficiaries, provided that
Executive properly elects coverage pursuant to COBRA.
(iii) All of Executive's outstanding stock options to purchase
Company common stock shall accelerate and become fully exercisable.
(d) DEFINITIONS.
(i) CHANGE IN CONTROL. "Change in Control" shall mean the
occurrence of any of the following events:
(A) OWNERSHIP. Any "person" (as such term is used in Section
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under said
act), directly or indirectly, of securities of the Company
representing at least fifty (50%) of the total voting power
represented by the Company's then outstanding voting securities.
3
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(B) MERGER/SALE OF ASSETS. The stockholders of the Company
approve a merger of the Company with any other Company, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities
of the Company or such surviving entity outstanding immediately after
such a merger or consolidation, or the stockholders of the Company
approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all
of the Company's assets.
(C) CHANGE IN COMPOSITION OF BOARD OF DIRECTORS. A change in
the composition of the Board over a period of twelve (12) consecutive
months or less such that a majority of the Board members ceases, by
reason of one or more contested elections for Board membership, to be
comprised of individuals who either (A) have been Board members
continuously since the beginning of such period or (B) have been
elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A)
who were still in office at the time the Board approved such election
or nomination.
(ii) CURRENT COMPENSATION. "Current Compensation" shall
mean an amount equal to the greater of (A) the average of Executive's
annual base salary and bonus earned in each year during which
Executive was employed by the Company (up to a maximum of three years)
which precedes the year in which the termination occurs, or (B)
Executive's annual base salary for, and any bonus earned at any time
during, the year in which the termination occurs.
(iii) INVOLUNTARY TERMINATION. "Involuntary Termination"
means Executive's voluntary termination following (I) a change in
Executive's position with the Company which materially reduces
Executive's level of responsibility, (II) a reduction in Executive's
level of compensation (including base salary and bonuses) or (III) a
change in Executive's place of employment, which is more than 50 miles
from Executive's place of employment prior to the change, PROVIDED AND
ONLY IF such change or reduction is effected without Executive's
written concurrence.
4. 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
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<PAGE>
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 limitation, participation in stock
incentive plans, retirement plans, deferred compensation plans, etc.
5. 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 5, the Company may, in addition to pursuing all
other remedies available to the Company under law or in equity as a result of
such breach, cease payment of all severance benefits under Paragraphs 3(b) and
(c).
6. 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.
7. 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 Employment 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
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<PAGE>
preparation thereof with counsel), he will not at any time during, or for five
(5) years after the termination of his employment, 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 Employment Agreement,
"Confidential Information" means any and all information developed by Executive
during the Employment 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 Employment 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.
8. 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.
9. 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 8.
6
<PAGE>
To the Company:
Insurance Auto Auctions, Inc.
Attn:
Telephone: (818) __________
Facsimile: (818) __________
To the Executive:
James A. Alampi
Telephone: ( )
Facsimile: ( )
10. LIMITATION ON PAYMENTS. In the event that the severance and
other benefits provided for in this Agreement or otherwise payable to Executive
(i) constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), and (ii) but for this
Section 10, would be subject to the excise tax imposed by Section 4999 of the
Code or any similar or successor provision, then Executive's severance benefits
hereunder shall be either
(a) delivered in full, or
(b) delivered as to such lesser extent which would result in
no portion of such severance benefits being subject to excise tax
under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local, income taxes and the excise tax imposed by Section 4999,
results in the receipt by Executive on an after-tax basis, of the greatest
amount of severance benefits, notwithstanding that all or some portion of such
severance benefits may be taxable under Section 4999 of the Code. Unless the
Company and Executive otherwise agree in writing, any determination required
under this Section 9 shall be made in writing by the Company's independent
public accountants (the "Accountants") prior to a Change in Control, whose
determination shall be conclusive and binding upon Executive and the Company for
all purposes. For purposes of making the calculations required by this Section
9, the Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of Section 280G and 4999 of the Code. The Company
and Executive shall furnish to the Accountants such information and documents as
the Accountants may reasonably request in order to make a determination under
this Section. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this Section.
7
<PAGE>
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.
(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.
(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.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first set forth above.
COMPANY:
By: /s/ Bradley S. Scott
---------------------------------
Title: Chairman of the Board
------------------------------
Address:
----------------------------
EXECUTIVE:
/s/ James P. Alampi
-------------------------------------
Address:
----------------------------
----------------------------
9
<PAGE>
Schedule A
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 11,418,000
<SECURITIES> 6,410,000
<RECEIVABLES> 27,671,000
<ALLOWANCES> 0
<INVENTORY> 7,550,000
<CURRENT-ASSETS> 55,882,000
<PP&E> 22,347,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 216,640,000
<CURRENT-LIABILITIES> 37,394,000
<BONDS> 33,533,000
0
0
<COMMON> 11,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 216,640,000
<SALES> 108,215,000
<TOTAL-REVENUES> 148,858,000
<CGS> 117,627,000
<TOTAL-COSTS> 24,190,000
<OTHER-EXPENSES> 1,865,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,576,000
<INCOME-PRETAX> 4,000,000
<INCOME-TAX> 1,720,000
<INCOME-CONTINUING> 2,280,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,280,000
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
