<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
INSURANCE AUTO AUCTIONS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No Fee Required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
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<PAGE> 2
INSURANCE AUTO AUCTIONS, INC.
850 EAST ALGONQUIN ROAD
SUITE 100
SCHAUMBURG, IL 60173
May 9, 1997
Dear Shareholder:
You are cordially invited to attend the 1997 Annual Meeting of Shareholders
of Insurance Auto Auctions, Inc. (the "Company") to be held on June 18, 1997 at
9:30 a.m. at the Radisson Hotel, 1725 East Algonquin Road, Schaumburg, IL 60173.
The formal Notice of Annual Meeting of Shareholders and Proxy Statement
accompanying this letter describe the business to be acted upon.
It is important that your shares be represented and voted at the meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. If you decide to attend the meeting, you may still vote in person even
if you have previously returned a signed proxy.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in the affairs of the Company. We look
forward to seeing you at the Annual Meeting.
Sincerely,
James P. Alampi
President and Chief Executive Officer
<PAGE> 3
INSURANCE AUTO AUCTIONS, INC.
850 EAST ALGONQUIN ROAD
SUITE 100
SCHAUMBURG, ILLINOIS 60173
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 18, 1997
The 1997 Annual Meeting of Shareholders (the "Annual Meeting") of Insurance
Auto Auctions, Inc. (the "Company") will be held on June 18, 1997 at 9:30 a.m.
at the Radisson Hotel, 1725 East Algonquin Road, Schaumburg, IL 60173, for the
following purposes:
1. To elect eight Directors of the Company to serve until the next
annual meeting or until their successors have been elected and qualified;
2. To amend the Employee Stock Purchase Plan to give the Company
discretion to allow employees with less than six months of service to
participate, as more particularly described in Proposal No. 2 herein;
3. To approve changing the Company's state of incorporation from
California to Illinois;
4. To ratify the appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the fiscal year ending December 31, 1997; and
5. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on April 21, 1997 as
the record date for determining shareholders entitled to notice of, and to vote
at, the Annual Meeting and at any adjournment or postponement thereof. A list of
shareholders entitled to vote at the Annual Meeting will be available for
inspection at the Company's headquarters at 850 East Algonquin Road, Suite 100,
Schaumburg, IL 60173, during regular business hours prior to the Annual Meeting.
Please read carefully the following Proxy Statement, which describes the
matters to be voted upon at the Annual Meeting, and then complete, sign and
return your Proxy as promptly as possible. Should you receive more than one
Proxy because your shares are registered in different names and addresses, each
Proxy should be signed and returned to assure that all your shares will be
voted. If you attend the Annual Meeting and vote by ballot, your Proxy will be
revoked automatically and only your vote at the Annual Meeting will be counted.
BY ORDER OF THE BOARD OF DIRECTORS
James P. Alampi
President and Chief Executive Officer
Schaumburg, Illinois
May 9, 1997
YOUR VOTE IS IMPORTANT
SO THAT YOUR COMMON STOCK WILL BE REPRESENTED AT THE ANNUAL MEETING IN THE EVENT
YOU ARE NOT PERSONALLY PRESENT, PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN
THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. EXECUTION OF THE PROXY WILL NOT
AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ARE PRESENT AT THE MEETING.
<PAGE> 4
INSURANCE AUTO AUCTIONS, INC.
850 EAST ALGONQUIN ROAD
SUITE 100
SCHAUMBURG, ILLINOIS 60173
------------------------
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 18, 1997
------------------------
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Insurance Auto Auctions, Inc., a California corporation (the "Company"), for use
at the 1997 Annual Meeting of Shareholders to be held on June 18, 1997 (the
"Annual Meeting"). The Annual Meeting will be held at 9:30 a.m. at the Radisson
Hotel, 1725 East Algonquin Road, Schaumburg, IL 60173. Shareholders of record on
April 21, 1997 will be entitled to notice of and to vote at the Annual Meeting.
This Proxy Statement and accompanying proxy (the "Proxy") and Notice of
Annual Meeting were first mailed to shareholders on or about May 9, 1997.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice of Annual Meeting of
Shareholders. Each proposal is described in more detail in this Proxy Statement.
RECORD DATE, VOTING AND SHARE OWNERSHIP
On April 21, 1997, the record date for determination of shareholders
entitled to vote at the Annual Meeting, there were 11,291,617 shares of Common
Stock outstanding. No shares of the Company's Preferred Stock are outstanding.
Each shareholder is entitled to one vote for each share of Common Stock held by
such shareholder. The eight candidates for election as directors receiving the
highest number of affirmative votes of the shares entitled to vote at the Annual
Meeting will be elected Directors of the Company. Approval of changing the
Company's state of incorporation requires the affirmative vote of a majority of
the outstanding shares of the Company's Common Stock. Abstentions and broker
non-votes are not affirmative votes, and therefore, will have the same effect as
votes against the proposal. The other matters submitted for shareholder approval
at this Annual Meeting will be decided by the affirmative vote of a majority of
the shares present or represented and entitled to vote on each such matter.
Abstentions with respect to any matter are treated as shares present or
represented and entitled to vote on that matter and thus have the same effect as
negative votes. If shares are not voted by the broker who is the record holder
of the shares, or if shares are not voted in other circumstances in which proxy
authority is defective or has been withheld with respect to any matter, these
non-voted shares are not deemed to be present or represented for purposes of
determining whether shareholder approval of that matter has been obtained.
REVOCABILITY OF PROXIES
If you are unable to attend the Annual Meeting, you may vote by Proxy. The
enclosed Proxy is solicited by the Company's Board of Directors and, when
returned properly completed, will be voted as you direct in your Proxy. Unless
otherwise instructed in the Proxy, the proxyholders will vote the Proxies
received by them FOR each of the four proposals described herein.
<PAGE> 5
Any person giving a Proxy has the power to revoke it at any time before its
exercise. It may be revoked by filing with the Vice President, Corporate
Controller of the Company at the Company's headquarters at 850 East Algonquin
Road, Suite 100, Schaumburg, IL 60173, a notice of revocation or another signed
Proxy with a later date. You may also revoke your Proxy by attending the Annual
Meeting and voting in person.
SOLICITATION OF PROXIES
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the Proxy
and any additional soliciting materials furnished to shareholders. Copies of
solicitation materials will be furnished to brokerage houses, fiduciaries and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs in
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by
telephone, telegram or other means by directors, officers, employees or agents
of the Company. No additional compensation will be paid to these individuals for
any such services. Except as described above, the Company does not presently
intend to solicit proxies other than by mail.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company that are intended to be presented
by such shareholders at the Company's 1998 Annual Meeting must be received by
the Company at its principal executive offices no later than January 9, 1998 in
order that they may be included in the proxy statement and form of proxy
relating to that meeting.
MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL NO. 1: ELECTION OF DIRECTORS
One of the purposes of the Annual Meeting is to elect directors to hold
office until the next annual meeting or until their respective successors are
duly elected and qualified. The Board of Directors has nominated the eight
nominees listed below (the "Nominees") for election as directors. As of the date
of this proxy statement, each person nominated for election has agreed to serve
if elected and the Board of Directors has no reason to believe that any Nominee
will be unavailable to serve. Unless otherwise instructed in the Proxy, the
proxy holders will vote the Proxies received by them FOR the Nominees. The eight
Nominees receiving the highest number of affirmative votes of the shares
entitled to vote at the Annual Meeting will be elected Directors of the Company
to serve until the next Annual Meeting or until their successors have been duly
elected and qualified.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ELECTION OF EACH OF THE FOLLOWING NOMINEES TO SERVE AS DIRECTORS OF THE COMPANY
UNTIL THE NEXT ANNUAL MEETING OR UNTIL THEIR SUCCESSORS ARE ELECTED AND
QUALIFIED.
2
<PAGE> 6
NOMINEES
Set forth below is information regarding the Nominees, including
information furnished by them as to principal occupations, certain other
directorships held by them, any arrangements pursuant to which they were or are
selected as Directors and their ages as of March 31, 1997:
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED OR
NOMINEE AGE APPOINTED DIRECTOR
- ------- --- ------------------
<S> <C> <C>
Bradley S. Scott............................................ 48 1990
James P. Alampi............................................. 50 1996
Susan B. Gould(1)(2)........................................ 59 1991
Melvin R. Martin............................................ 66 1992
Thomas J. O'Malia(1)(2)..................................... 53 1993
Christopher G. Knowles...................................... 54 1994
Glen E. Tullman............................................. 37 1994
Maurice A. Cocca............................................ 53 1997
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
BRADLEY S. SCOTT has been Chairman of the Board of the Company since 1993
and was Chief Executive Officer of the Company from 1990 through March 1996.
From January 1990 to July 1993, Mr. Scott served as the President, Chief
Executive Officer and a Director of the Company. Between 1982 and January 1990,
Mr. Scott was Chief Executive Officer and Chairman of the Board of Directors of
the predecessor of the Company and its sole shareholder and founder.
JAMES P. ALAMPI became President and Chief Executive Officer and a Director
of the Company in March 1996. As President and Chief Executive Officer, Mr.
Alampi oversees the Company's overall corporate administration as well as
strategic planning. Prior to joining the Company, Mr. Alampi served as President
of Van Waters & Rogers Inc., a subsidiary of Univar Corporation, a chemical
distribution company ("Univar"), from 1992 to 1995. Prior to that time, Mr.
Alampi served with Univar as Senior Vice President of Administration from 1991
to 1992 and Director of Logistic Systems from 1990 to 1991.
SUSAN B. GOULD has been a Director of the Company since October 1991. Ms.
Gould is the founder, and since 1988 has been President, of Gould & Associates,
a human resources consulting firm specializing in outplacement and
organizational team building. Since 1989, Ms. Gould has also served as a member
of the Board of Advisors of The Zitter Group, a healthcare outcomes information
company.
MELVIN R. MARTIN has been a Director of the Company since January 1992.
From June 1947 to January 1992, Mr. Martin was President and Chief Executive
Officer of M&M Auto Storage Pool, Inc., which he founded and which sold
substantially all of its assets to the Company in January 1992.
THOMAS J. O'MALIA has been a Director of the Company since September 1993.
Since July 1995, Mr. O'Malia has been a Professor of Clinical Entrepreneurship
and Director of the Entrepreneur Program at the University of Southern
California. From April 1994 to July 1995, Mr. O'Malia was General Manager,
Manufacturing Systems Division of Kronos, Incorporated ("Kronos"), a software
company. From 1985 to April 1994, Mr. O'Malia was Chief Executive Officer of
ShopTrac Data Collection Systems, Inc., a software company that he founded and
that was merged into Kronos in April 1994.
CHRISTOPHER G. KNOWLES has been a Director of the Company since June 1994
and was President and Chief Operating Officer of the Company from April 1994 to
March 1996. Mr. Knowles previously served as Senior Vice President, Operations
East of the Company from January 1994 to April 1994. Prior to joining the
Company, Mr. Knowles was Chairman and Chief Executive Officer from 1980 to 1994
of Underwriters Salvage Company, a multi-location salvage operation that the
Company acquired in January 1994. Since August 1991, Mr. Knowles has also served
as a member of the board of directors of Zebra Technologies Corporation, a
publicly-held manufacturer of barcoding printers and label media.
3
<PAGE> 7
GLEN E. TULLMAN has been a Director of the Company since November 1994.
Since October 1994, Mr. Tullman has been Chief Executive Officer of Enterprise
Systems, Inc., a publicly-held provider of healthcare information systems and
software for automating and streamlining key operational areas in healthcare
organizations. From 1990 to September 1994, Mr. Tullman was President and Chief
Operating Officer of CCC Information Services, Inc., a provider of software and
network services to insurance companies. Mr. Tullman has served as a member of
the board of directors of Enterprise Systems, Inc. since March 1993.
MAURICE A. COCCA has been a Director of the Company since February 1997.
From November 1993 to November 1995, Mr. Cocca was Managing Director of The
Fisons Laboratory Supplies Division of Fisons PLC. This Division is a
distributor of laboratory supplies that was later acquired by Fisher
Scientific. Mr. Cocca also served on the Board of Directors of Fisons PLC
during that period. From November 1993 to November 1995, Mr. Cocca served as
Chairman of Curtin Matheson Scientific, a division of Fisons PLC and a supplier
of diagnostic instruments, tests and related products. From 1977 to November
1995, Mr. Cocca was President of Curtin Matheson Scientific. Mr. Cocca has
served on the Board of Directors of J&W Scientific Holding, a manufacturer of
columns used in analysis in gas chromatographs, since April 1996.
There are no family relationships among executive officers or directors of
the Company, except that Marcia A. McAllister, the Company's Vice President,
Public Affairs, is the wife of Mr. Knowles, and Donald J. Comis, the Company's
Vice President, Central Division, is the brother of Gerald C. Comis, the
Company's Vice President, Customer Service and Industry Relations.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1996, the Board of Directors held
nine meetings. As of December 31, 1996, the Company has a standing Audit
Committee and Compensation Committee.
The Audit Committee is primarily responsible for, among other things,
approving the services performed by the Company's independent auditors,
reviewing financial statements of the Company and reviewing reports of the
Company's auditors regarding the Company's accounting practices and systems of
internal accounting controls. The Audit Committee currently consists of Mr.
O'Malia, its Chairman, and Ms. Gould. The Audit Committee held three meetings
during 1996.
The Compensation Committee is generally responsible for, among other
things, reviewing and approving the Company's compensation policies and setting
the compensation levels for those Company executive officers and employees
reporting directly to the Company's Chairman of the Board or President whose
compensation was not otherwise established pursuant to employment agreements
approved by the Board of Directors. The Compensation Committee is also
responsible for the administration of the Company's stock option plans and
Employee Stock Purchase Plan. The Committee currently consists of Ms. Gould, its
Chairperson, and Mr. O'Malia. The Compensation Committee held five meetings
during 1996.
During 1996, no director attended fewer than 75% of the aggregate number of
(i) the total number of meetings of the Board of Directors and (ii) the total
number of meetings of Committees of the Board of Directors on which he or she
serves that were held during the period for which he or she has been a member.
DIRECTOR COMPENSATION
For 1996, each non-employee Director was entitled to receive an annual
retainer fee of $12,000, together with a $500 fee for each Board meeting
attended, a $250 fee for each Committee meeting attended other than on the date
of a regularly-scheduled Board meeting, and an annual fee of $2,500 if such
non-employee Director served as a chairperson of one of the Committees of the
Board of Directors. Non-employee Directors are also reimbursed for expenses
incurred in attending such meetings.
Each non-employee Director is also eligible to receive periodic option
grants for shares of the Company's Common Stock pursuant to the automatic option
grant program in effect under the Company's 1991 Stock Option Plan. Under this
Automatic Option Grant Program, each individual who becomes a non-employee Board
member will be granted an option to purchase 10,000 shares of Common Stock on
the date such individual joins the Board or on the day he or she becomes an
independent Director of the Company. In addition, each non-employee Director is
also entitled to receive an automatic option to purchase 2,000 shares of Common
Stock on the last business day of the second quarter of each fiscal year during
which such individual continues to serve on the Board. On May 1, 1996, Mr.
Knowles received an option to purchase 10,000 shares of Common Stock at an
exercise price of $11.50 per share. On June 28, 1996, Messrs. Tullman and
O'Malia and Ms. Gould were each granted an option to purchase 2,000 shares at an
exercise price of $10.00 per share. On December 10, 1996, Mr. Scott was granted
an option to purchase 10,000 shares of Common Stock at an exercise price of
$9.50 per share. Each automatic option grant becomes exercisable in
4
<PAGE> 8
four equal quarterly installments at the end of each fiscal quarter commencing
with the last day of the fiscal quarter after the option grant date, provided
the non-employee Director continues to serve on the Board. However, each option
will become immediately exercisable for all of the option shares in the event
the Company is acquired by a merger or sale of substantially all of its assets
or outstanding capital shares.
The Company also has or had certain employment and on-going business
arrangements with Messrs. Scott, Alampi, Martin and Knowles which are described
more fully under the sections "Employment Contracts, Termination of Employment
Agreements and Change-in-Control Arrangements" and "Certain Transactions."
5
<PAGE> 9
EXECUTIVE COMPENSATION
The following Summary Compensation Table provides certain summary
information concerning the compensation earned, for services rendered in all
capacities to the Company and its subsidiaries during each of the last three
fiscal years, by the Company's Chief Executive Officer and each of the Company's
other four most highly compensated executive officers and a former Chief
Executive Officer whose compensation for the 1996 fiscal year was in excess of
$100,000. The individuals whose compensation is disclosed in the following
tables are hereafter referred to as the "Named Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
NAME AND PRINCIPAL ----------------------------- OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($)(1) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
------------------ ---- ------------ -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
James P. Alampi(2).................... 1996 $239,000 $60,000 -- 200,000 --
President and Chief 1995 -- -- -- -- --
Executive Officer 1994 -- -- -- -- --
Bradley S. Scott(3)................... 1996 201,000 600,000 -- 10,000 8,000(4)
Chairman of the Board 1995 402,000 49,000 -- -- 24,000(4)
and formerly Chief 1994 402,000 254,000 -- 75,000 23,000(4)
Executive Officer
Kevin J. Code(5)...................... 1996 163,000 25,000 -- -- 4,000(7)
Vice President, Sales 1995 142,000 15,000 25,000(6) 25,000 --
and Marketing 1994 -- -- -- -- --
Marcia A. McAllister(8)............... 1996 142,000 10,000 -- -- 6,000(7)
Vice President, Public 1995 125,000 15,000 -- 10,000 --
Affairs 1994 29,000 -- -- -- --
Gerald C. Comis(9).................... 1996 142,000 10,000 -- -- 6,000(7)
Vice President, Customer 1995 137,000 15,000 -- 10,000 6,000(7)
Service and Industry 1994 123,000 30,000 -- 12,000 --
Relation
William L. Warburton(10).............. 1996 120,000 15,000 -- -- 6,000(7)
Vice President, 1995 115,000 15,000 -- 10,000 5,000(7)
Corporate Controller 1994 101,000 15,000 -- 5,000 3,000(7)
</TABLE>
- ---------------
(1) Includes salary deferred under the Company's 401(k) Plan and Section 125
Plan, and all amounts are rounded to the nearest thousand.
(2) Mr. Alampi became President and Chief Executive Officer of the Company in
March 1996.
(3) Mr. Scott resigned as Chief Executive Officer in March 1996.
(4) This amount is comprised of (i) $6,000 in 1996, 1995 and 1994 in matching
contributions that the Company made to its 401(k) Plan on behalf of Mr.
Scott and (ii) $2,000 in 1996, 18,000 in 1995 and $17,000 in 1994 in
premiums paid by the Company on insurance policies maintained on the life
of Mr. Scott.
(5) Mr. Code became Vice President, Sales and Marketing of the Company in
January 1995.
(6) Represents $25,000 signing bonus paid when Mr. Code joined the Company.
6
<PAGE> 10
(7) Represents matching contributions that the Company made to its 401(k) Plan
on behalf of the Named Officer.
(8) Ms. McAllister joined the Company as a consultant in March 1994 and became
Vice President, Public Affairs in February 1995.
(9) Mr. Comis joined the Company in January 1994.
(10)Mr. Warburton resigned as Vice President, Corporate Controller on February
14, 1997.
OPTION GRANTS
The following table provides information with respect to the stock option
grants made during the 1996 fiscal year under the Company's stock option plans
to the Named Officers. No stock appreciation rights were granted to any of the
Named Officers during 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES PRICE OPTION TERM
GRANTED IN FISCAL ($/SH) EXPIRATION ------------------------------
NAME (#)(1) YEAR(2) (3) DATE 5%($)(4) 10%($)(4)
---- ---------- ---------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James P. Alampi............. 200,000 71.3% $9.25 03/10/06 $1,163,455 $2,948,424
Bradley S. Scott............ 10,000 3.6 9.50 12/09/06 59,745 151,406
Kevin J. Code............... 0 -- -- -- -- --
Marcia A. McAllister........ 0 -- -- -- -- --
Gerald C. Comis............. 0 -- -- -- -- --
William L. Warburton........ 0 -- -- -- -- --
</TABLE>
- ---------------
(1) Each option was granted under the Company's 1991 Stock Option Plan. Mr.
Alampi's option becomes exercisable for the option shares in a series of
four equal and successive annual installments over his period of continued
service with the Company, with the first such installment to commence
vesting one year after the grant date. Mr. Scott's option becomes
exercisable in four equal quarterly installments at the end of each fiscal
quarter commencing with the last day of the fiscal quarter after the option
grant date. However, each option will become immediately exercisable for all
the option shares in the event the Company is acquired by a merger or sale
of substantially all of its assets or outstanding capital shares. Each
option has a maximum term of 10 years, subject to earlier termination in the
event that the optionee ceases to provide services to the Company.
(2) Based upon options to purchase an aggregate of 280,500 shares granted in
fiscal 1996.
(3) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Company may, at its discretion, also finance the option exercise by loaning
the optionee sufficient funds to pay the exercise price for the purchased
shares and the federal and state income tax liability incurred by the
optionee in connection with such exercise. The Plan Administrator has
discretionary authority to reprice outstanding options under the 1991 Stock
Option Plan through the cancellation of those options and the grant of
replacement options with an exercise price equal to the lower fair market
value of the option shares on the regrant date.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
from the date of grant are mandated by the Securities and Exchange
Commission. The closing price per share of the Company's
7
<PAGE> 11
Common Stock on the Nasdaq National Market on December 31, 1996 was $9.50
per share. There is no assurance provided to any executive officer or any
other holder of the Company's Common Stock that the actual stock price
appreciation over the 10-year option term will be at the assumed 5% or 10%
levels or at any other specific level. No gain will in fact be realized by
the optionees unless the stock price appreciates over the option term, which
will also benefit all shareholders of the Company.
OPTION HOLDINGS
The following table sets forth information concerning the unexercised
options held as of the end of the 1996 fiscal year by the Named Officers. No
stock options were exercised during the 1996 fiscal year. No stock appreciation
rights were outstanding at the end of that year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT FISCAL YEAR-END
FISCAL YEAR-END(#) ($)(1)(2)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James P. Alampi.................. 0 200,000 0 $50,000
Bradley S. Scott................. 165,500 49,500 0 0
Kevin J. Code.................... 0 25,000 $ 6,250 18,750
Marcia A. McAllister............. 2,500 7,500 6,250 18,750
Gerald C. Comis.................. 8,500 13,500 6,250 18,750
William L. Warburton............. 12,500 12,500 12,500 12,500
</TABLE>
- ---------------
(1) "In-the-money" options are options whose exercise price was less than the
market price of the Common Stock on December 31, 1996, the last day of the
1996 fiscal year.
(2) Based upon the market price of $9.50 per share, which was the closing price
per share of the Company's Common Stock on the Nasdaq National Market on
December 31, 1996, less the exercise price payable per share.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors has general
responsibility for establishing the compensation payable to the Company's
executive officers and other key executives and has the sole and exclusive
authority to administer the Company's stock option plans and Employee Stock
Purchase Plan. The compensation payable to the President and Chief Executive
Officer (Mr. James P. Alampi) has been initially established by direct
negotiation between him and the Company. The compensation arrangements for 1996
with the Company's other executive officers were negotiated by the Company and
such individuals and approved by the Compensation Committee.
EXISTING COMPENSATION ARRANGEMENTS. The compensation paid to James P.
Alampi for the 1996 fiscal year was based on the 1996 employment agreement,
which the Company negotiated with Mr. Alampi prior to his commencement of
employment (the "Alampi Agreement"). Under his employment agreement, Mr. Alampi
is entitled to an annual base salary of $310,000, plus a performance incentive
bonus of up to 40% of his annual salary based upon the achievement of
objectively quantifiable and measurable goals and objectives which shall be
determined in advance by the Compensation Committee.
GENERAL COMPENSATION POLICY. The Committee's fundamental policy is to offer
the Company's executive officers competitive compensation opportunities based
upon overall Company performance, their individual contribution to the financial
success of the Company and their personal performance. Accordingly, each
executive officer's compensation package consists of: (i) base salary, (ii)
annual incentive compensation and (iii) long-term stock-based incentive
compensation.
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<PAGE> 12
BASE SALARY. Each Named Officer (except for Messrs. Scott and Alampi)
received a modest increase in his or her base salary for the 1996 fiscal year,
and any additional salary increases were due to promotions within the Company.
This increase was authorized by the Compensation Committee on the basis of its
evaluation of the personal performance of each such individual and the
Company's objective of maintaining base salary at a level that will enable the
Company to attract and retain the services of the high quality executives
critical to the Company's financial success. The Company also provides its
executive officers with perquisites, such as automobile allowances and
relocation expenses, which are designed to match the fringe benefits provided to
executive officers of similarly-sized or comparable companies with which the
Company competes for executive talent.
ANNUAL INCENTIVE COMPENSATION. As indicated, Mr. Alampi is entitled to an
annual bonus of up to 40% of his annual salary based upon the achievement of
objectively quantifiable and measurable goals and objectives which shall be
determined in advance by the Compensation Committee, in accordance with the
provisions of his existing employment agreement with the Company. Pursuant to
that provision, Mr. Alampi received a bonus equal to $60,000. In addition, the
Company's other executive officers may earn annual bonuses on the basis of
their achievement of individual qualitative and quantitative targets that are
related to the financial performance of the Company. These targets are
generally set by the Compensation Committee at the start of each fiscal year.
LONG-TERM STOCK-BASED INCENTIVE COMPENSATION. Mr. Alampi was granted stock
options during the 1996 fiscal year, pursuant to the terms of the Alampi
Agreement. Option grants in general are designed to align the interests of the
executive officer with those of the shareholders and provide each officer with
a significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. Option grants are typically made at the
initial employment of the executive and reviewed periodically thereafter. The
number of shares underlying the options are based upon the level of the
officer's responsibilities and internal comparability considerations.
Option grants allow the officer to acquire shares of Common Stock at a
fixed price per share (the closing price on the date preceding the grant date)
over a specified period of time (up to 10 years). The options typically vest in
periodic installments over a four-year period, contingent upon the executive
officer's continued service relationship with the Company. Accordingly, the
option will provide a return to the executive officer only if he or she remains
a service provider to the Company, and then only if the market price of the
Company's Common Stock appreciates over the option term.
TAX LIMITATION. Section 162(m) of the Internal Revenue Code, enacted in
1993, generally disallows a tax deduction to publicly-held corporations for
compensation exceeding $1 million paid to certain of the corporation's executive
officers. It is not expected that the cash compensation to be paid to the
Company's executive officers for fiscal 1997 will exceed the $1 million limit
per officer. In addition, the Company's 1991 Stock Option Plan has been amended
to limit the maximum number of shares of common stock for which any one
participant may be granted stock options over the remaining term of that Plan so
that any compensation deemed paid to an executive officer when he or she
exercises an outstanding option under that Plan will qualify as
performance-based compensation which will not be subject to the $1 million
limitation.
CEO COMPENSATION. As indicated above, the base salary payable to the
Company's President and Chief Executive Officer, James P. Alampi, for the 1996
fiscal year was determined solely in accordance with the terms of his existing
employment agreement. The terms of that agreement are summarized in the section
of the Proxy Statement below entitled "Employment Contracts, Termination of
Employment Agreements and Change-in-Control Arrangements." The amount and nature
of the fringe benefits and other perquisites provided to Mr. Alampi during
fiscal 1996, which were of a dollar value less than 10% of his salary for such
fiscal year, were designed to approximate the fringe benefits paid to chief
executive officers of similary-sized companies.
Compensation Committee
Susan B. Gould
Thomas J. O'Malia
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<PAGE> 13
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Ms. Gould and Mr. O'Malia.
Neither of these individuals was at any time during the fiscal year ended
December 31, 1996 or at any other time an officer or employee of the Company. No
executive officer of the Company serves as a member of the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
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<PAGE> 14
PERFORMANCE GRAPH
The graph set forth below compares the cumulative total shareholder return
on the Company's Common Stock with the cumulative total return of (i) the Nasdaq
Stock Market-US Companies Index and (ii) the Nasdaq Stock Market SIC Peer Group
5000-5099 Index (which includes companies listed on Nasdaq that are primarily
engaged in the wholesale distribution of durable goods) for the five-year period
from December 31, 1991 through December 31, 1996. This graph assumes the
investment of $100 on December 31, 1991 in the Company's Common Stock, the
Nasdaq Stock Market Index and the Nasdaq SIC Peer Group index and assumes the
reinvestment of dividends, if any.
The comparisons shown in the graph below are based upon historical data and
the Company cautions that the stock price performance shown in the graph below
is not indicative of, nor intended to forecast, the potential future performance
of the Company's Common Stock.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG NASDAQ STOCK MARKET -- US COMPANIES,
NASDAQ STOCK MARKET SIC PEER GROUP 5000 -- 5099
AND INSURANCE AUTO AUCTIONS, INC.
<TABLE>
<CAPTION>
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
IAA............................. 100 117.9 191.0 156.7 55.1 48.7
Market.......................... 100 116.4 133.6 130.6 184.7 227.2
Peer............................ 100 101.7 132.3 114.4 134.1 137.5
</TABLE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings made by the Company under those statutes, the Compensation Committee
Report on Executive Compensation and Performance Graph are not to be
incorporated by reference into any of those prior or future filings made by the
Company under those statutes.
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<PAGE> 15
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL
ARRANGEMENTS
The following is a description of the employment or service agreements in
effect between the Company and certain of the Named Officers.
In December 1996, the Company and Mr. Scott, the Company's Chairman of the
Board, entered into an agreement (the "Letter Agreement") whereby Mr. Scott
agreed to serve as Chairman of the Board through June 30, 1999 and which
provides for certain payments to Mr. Scott. In the Letter Agreement, Mr. Scott
confirmed that he resigned from all officer and other positions with the Company
and its subsidiaries as of June 30, 1996 (the "Change of Status Date"). The
Letter Agreement provides that Mr. Scott will be paid, from the Change of Status
Date through July 1, 1999, certain benefits and an annual consulting fee of
$100,000, payable semi-annually, for serving as Chairman of the Board. The
Letter Agreement also provided for the payment to Mr. Scott of a lump sum
bonus of $600,000, less applicable deductions and reduced to the extent of
prepayments received as salary from the Change of Status Date. The Letter
Agreement confirmed that Mr. Scott remains eligible for the performance bonus
provided by the terms of an amended employment agreement (the "Scott Agreement")
which the Company had entered into with Mr. Scott in connection with the 1990
acquisition of his business in September 1991 and amended most recently on
August 22, 1994. The Scott Agreement provides for payment of a performance
bonus for each of the seven fiscal years from 1992 through 1998 in an amount
equal to (i) in the case of fiscal years 1994, 1995 and 1996, 1.65% of the
amount by which the Company's annual audited earnings before interest, taxes
and payment of his performance bonus for the relevant year ("Pre-Bonus EBIT")
exceeds $4,000,000 and (ii) in the case of fiscal years 1997 and 1998, 2.0% of
such Pre-Bonus EBIT in excess of $4,000,000. The Letter Agreement also provides
that the options that were outstanding in December 1996 would remain
exercisable for up to ten years from their original grant date provided that Mr.
Scott does not engage in certain specified activities competitive with the
Company's business.
In March 1996, the Company and Mr. Alampi entered into an employment
agreement (the "Alampi Agreement") pursuant to which Mr. Alampi agreed to serve
as President and Chief Executive Officer of the Company and the Company agreed
to nominate Mr. Alampi as a Director of the Company. Under the Alampi Agreement,
Mr. Alampi is entitled to receive an annual base salary of $310,000. Mr. Alampi
is eligible to receive a cash bonus of up to 40% of his annual salary upon the
achievement of certain specified goals and objectives to be determined by the
Compensation Committee. Half of Mr. Alampi's target incentive amount for 1996
was guaranteed without regard to Mr. Alampi's actual achievement of specific
goals. The Company granted Mr. Alampi an option to purchase 200,000 shares of
the Company's Common Stock. The option becomes exercisable in four annual
installments beginning one year after the grant date. In the event of a
termination of Mr. Alampi's employment for any reason (other than his
resignation from the Company, his termination for cause, as such term is defined
in the Alampi Agreement, or his termination in connection with a change in
control), the Company shall provide to Mr. Alampi (i) salary continuation, at
the rate in effect at the time of such termination, for a period of 12 months;
and (ii) continued health coverage for up to one year from the date of
termination. In the event of the termination of Mr. Alampi's employment (other
than for cause and voluntary resignations in certain cases) following a change
in control, the Company shall (i) continue to pay Mr. Alampi an amount equal to
his monthly salary and bonus for a period of twenty-four months; (ii) provide
continued health coverage for up to 18 months from the date of termination; and
(iii) accelerate vesting on all outstanding options to purchase Company Common
Stock.
CERTAIN TRANSACTIONS
Dallas, Texas Lease. The Company leases certain property located in
Dallas, Texas from a partnership in which Melvin R. Martin, a Director of the
Company, is a partner. The Company currently pays $27,444 a month under this
arrangement.
Underwriters Acquisition. The total initial consideration for the
Underwriters Acquisition was $15,000,000 in cash, 56,237 shares of the Company's
Common Stock, and an automobile valued at approximately $90,000, of which
Christopher G. Knowles received $13,577,586 in cash, 50,905 shares of the
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<PAGE> 16
Company's Common Stock and the automobile. In addition, the former shareholders
of Underwriters received an additional 84,363 shares of the Company's Common
Stock in January 1995 pursuant to an earn-out provision. Mr. Knowles received
76,364 of such shares. In connection with the Underwriters Acquisition, the
Company and Mr. Knowles also entered into a two-year employment agreement (the
"Knowles Agreement"), pursuant to which Mr. Knowles became a member of the Board
of Directors. In February 1995, Marcia A. McAllister, the wife of Mr. Knowles,
was named Vice President, Public Affairs of the Company. The Company, Mr.
Knowles and certain other former shareholders of Underwriters entered into a
Registration Rights Agreement pursuant to which the Company is obligated under
certain circumstances to register with the Securities and Exchange Commission
shares of the Company's Common Stock held by Mr. Knowles and such former
Underwriters shareholders.
Tech-Cor Acquisition. In December 1993, the Company purchased certain
assets from and assumed certain specified obligations and liabilities of the
Reclamation Division of Tech-Cor, Inc. ("Tech-Cor") (the "Tech-Cor
Acquisition"). The consideration for the Tech-Cor Acquisition was 1,667,000
shares of the Company's Common Stock, which shares were subsequently transferred
by Tech-Cor to Allstate, the parent company of Tech-Cor. Concurrently, the
Company entered into a five-year lease with respect to certain real property
owned by Allstate located in Wheeling, Illinois. The Company is required to pay
rent of $18,333 per month to Allstate during the term of such lease, which may
also be renewed by the Company for one additional five-year term. The Company,
Tech-Cor and certain shareholders of the Company also entered into a shareholder
agreement pursuant to which such shareholders agreed to vote their shares of the
Company's Common Stock to elect to the Board of Directors a representative
chosen by Tech-Cor and the Company agreed to facilitate such shareholders'
actions. The Company and Tech-Cor also entered into a Registration Agreement
pursuant to which the Company is obligated under certain circumstances to
register with the Securities and Exchange Commission shares of the Company's
Common Stock held by Tech-Cor or Allstate. In addition, Allstate agreed not to
purchase shares of the Company's voting stock that would result in ownership by
Allstate and its affiliates of more than 20%, in the aggregate, of the Company's
voting stock.
Allstate Supply Agreement. Effective December 1, 1993, the Company entered
into a national sales agreement with Allstate to be Allstate's exclusive
provider of automotive salvage services in markets that the Company currently
services or enters in the future. In May 1996, this national sales agreement
was amended to modify certain terms and changed the Company's relationship with
Allstate to that of a preferred provider.
In its normal course of business dealings with Allstate, the Company
purchases vehicles from Allstate and advances funds for intermediary towing and
storage fees (advanced charges) on behalf of Allstate. Additionally, depending
on the type of sales agreement in effect at a Company location, Allstate may owe
the Company for various fees. Upon settlement, the advanced charges and the
related amounts owed to Allstate for the purchase of the vehicle and the amount
owed by Allstate to the Company for various fees are netted. During the years
ended December 31, 1996 and 1995, the Company recorded fee income of $6,000,000
and $4,200,000, respectively, related to the consignment sale of
Allstate-insured vehicles and recorded cost of sales of $63,900,000 and
$62,100,000, respectively, related to the purchase of Allstate-insured vehicles
under the purchase-agreement method.
M & M Acquisition. In January 1992, the Company purchased the auto salvage
pool operations of M & M Auto Storage Pool, Inc., an Arizona corporation ("M &
M"), and acquired a 10-year option to purchase 35 acres of land on which M & M's
operation is located. Melvin R. Martin, the founder, chief executive officer and
principal shareholder of such auto salvage operation, was elected as a Director
of the Company in January 1992. The consideration paid consisted of $2,975,000
in cash and a three-year, secured promissory note in the amount of $1,375,000
issued by the Company. The remaining principal amount of this promissory note
was paid in full. The Company is required to pay rent of $20,000 per month to
Mr. Martin during the ten-year term of the lease relating to the real property
owned by Mr. Martin. In addition, the Company has the option to purchase such
real property at the end of the term of the lease. Commencing in January 1993,
the Company was obligated to pay to certain members of Mr. Martin's family an
aggregate of $50,000 over a five-year period in consideration for their
covenants not-to-compete. Mr. Martin is also subject to a similar covenant. In
connection with the acquisition, the Company entered into a four-year exclusive
towing services agreement with a corporation owned by Mr. Martin and his wife,
pursuant to which such entity provides towing services to the Company. During
1994, the Company paid $315,000 in rent pursuant to the lease and $1,474,000 for
towing services pursuant to such towing arrangement. The Company and Mr. Martin
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<PAGE> 17
modified the property lease increasing the amount of property leased by the
Company at such site and increasing the monthly rent to $27,000. The Company
believes that the towing fees and rent charged to the Company under such
agreement are on terms no less favorable than those available from unaffiliated
third party towing contractors or real property lessors. In connection with the
Company's purchase of M & M's auto salvage pool operations, the Company entered
into a four-year employment agreement with Mr. Martin pursuant to which Mr.
Martin is paid up to $50,000 per annum plus reimbursement of expenses and
generally will be entitled to participate in the Company's benefit plans.
During 1996, Mr. Martin was paid $33,600 in compensation by the Company
pursuant to the terms of the agreement.
Knowles Consulting Agreement. In May 1996, the Company and Mr. Knowles
entered into a consulting agreement pursuant to which Mr. Knowles agreed to
resign as an employee and to provide up to 45 hours of consulting services to
the Company per month and the Company agreed to transfer an automobile and
certain office equipment to Mr. Knowles. Under the agreement, Mr. Knowles is
entitled to receive a gross monthly consulting fee of $5,000 plus reasonable
expenses. The agreement is terminable by either party on 90 days notice.
PROPOSAL NO. 2: APPROVAL OF AMENDMENT TO EMPLOYEE STOCK PURCHASE PLAN
The shareholders are being asked to approve an amendment to the Insurance
Auto Auctions, Inc. Employee Stock Purchase Plan (the "Purchase Plan") to extend
eligibility to individuals with less than six months of employment. The Purchase
Plan was adopted by the Board and approved by the shareholders on March 9, 1993.
The Board approved the amendment to the Purchase Plan on November 6, 1996. The
Purchase Plan, and the right of participants to make purchases thereunder, is
intended to meet the requirements of an "employee stock purchase plan" as
defined in Section 423 of the Internal Revenue Code (the "Code").
The following summary of certain Purchase Plan provisions is qualified, in
its entirety, by reference to the Purchase Plan. Copies of the Purchase Plan
document may be obtained by a shareholder upon written request to the Secretary
of the Company at the executive offices in Schaumburg, Illinois.
PURPOSE. The purpose of the Purchase Plan is to provide employees of the
Company and designated parent or subsidiary corporations (collectively,
"Participating Companies") an opportunity to participate in the ownership of the
Company by purchasing Common Stock of the Company through payroll deductions.
The Company is the only Participating Company in the Purchase Plan.
The Purchase Plan is intended to benefit the Company as well as its
shareholders and employees. The Purchase Plan gives employees an opportunity to
purchase shares of Common Stock at a favorable price. The Company believes that
the shareholders will correspondingly benefit from the increased interest on the
part of participating employees in the profitability of the Company. Finally,
the Company will benefit from the periodic investments of equity capital
provided by participants in the Purchase Plan.
ADMINISTRATION. The Purchase Plan is administered by the Compensation
Committee of the Board (the "Committee"). All costs and expenses incurred in
plan administration will be paid by the Company without charge to participants.
Cash proceeds received by the Company from payroll deductions under the Purchase
Plan generally shall be credited to a non-interest bearing book account.
SHARES AND TERMS. The maximum number of shares of Common Stock that may be
issued in the aggregate under the Purchase Plan is 75,000, adjusted as described
in the "Adjustment" section of this description. Common Stock subject to a
terminated purchase right shall be available for purchase pursuant to purchase
rights subsequently granted.
ADJUSTMENTS. If any change in the Common Stock occurs (through
recapitalization, stock dividend, stock split, combination of shares, exchange
of shares, or other change affecting the outstanding Common Stock as a class
without the Company's receipt of consideration), appropriate adjustments shall
be made by the Company to the class and maximum number of shares subject to the
Purchase Plan, to the class and maximum number of shares purchasable by each
participant on any one purchase date, and the class and
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<PAGE> 18
number of shares and purchase price per share subject to outstanding purchase
rights in order to prevent the dilution or enlargement of benefits thereunder.
ELIGIBILITY. Generally, any individual who is customarily employed by a
Participating Company more than 20 hours per week and for more than five months
per calendar year is eligible to participate in the Purchase Plan and may
commence participation in the Purchase Plan on the first day of any purchase
period. Approximately 508 employees (including 7 officers) were eligible to
participate in the Purchase Plan as of April 15, 1997. Prior to the amendment of
the Purchase Plan which is the subject of this Proposal No. 2, the Purchase Plan
required an employee to have six months of service before he or she was eligible
to participate in the Purchase Plan. The amendment permits the Committee to
specify any eligibility service period or to permit employees to participate in
the Purchase Plan immediately following commencement of employment.
PURCHASE PERIODS. The Purchase Plan is implemented by a series of
successive Purchase Periods which generally have a duration of six months. The
first Purchase Period began on July 1, 1993 and ended on December 31, 1993.
Subsequent purchase periods have begun on the first business day of January and
July each calendar year and ended on the last business day of June and December,
respectively. The Committee in its discretion may vary the beginning date and
ending date of the Purchase Periods prior to their commencement, provided no
Purchase Period shall exceed twentyfour (24) months in length.
Each participant will have a separate purchase right for each Purchase
Period in which he or she participates. The purchase right will be granted on
the first day of the Purchase Period and will be automatically exercised on the
last day of each Purchase Period.
PURCHASE PRICE. The purchase price per share under the Purchase Plan is 85%
of the lower of (i) the fair market value of a share of Common Stock on the
first day of the Purchase Period, or (ii) the fair market value of a share of
Common Stock on the purchase date. Generally, the fair market value of the
Common Stock on a given date is the closing price of the Common Stock, as
reported on the Nasdaq National Market. The market value of the Common Stock as
reported on the Nasdaq National Market as of April 15, 1997, was $6.75 per
share.
LIMITATIONS. The plan imposes certain limitations upon a participant's
rights to acquire Common Stock, including the following:
1. No purchase right shall be granted to any person who immediately
thereafter would own, directly or indirectly, stock or hold outstanding
options or rights to purchase stock possessing five percent (5%) or more of
the total combined voting power or value of all classes of stock of the
Company or any of its parent or subsidiary corporations.
2. In no event shall a participant be permitted to purchase more than
250 shares on any one purchase date.
3. The right to purchase Common Stock under the Purchase Plan (or any
other employee stock purchase plan that the Company or any of its
subsidiaries may establish) in an offering intended to qualify under
Section 423 of the Code may not accrue at a rate that exceeds $25,000 in
fair market value of such Common Stock (determined at the time such
purchase right is granted) for any calendar year in which such purchase
right is outstanding.
The purchase right shall be exercisable only by the participant during the
participant's lifetime and shall not be assignable or transferable by the
participant.
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS. Payment for shares by
participants shall be by accumulation of after-tax payroll deductions during the
purchase period. The deductions may not exceed 15% of a participant's base
salary paid during a purchase period. Base salary for this purpose includes
elective pre-tax contributions under a Code Section 125 or 401(k) plan, but
excludes bonuses, overtime, commissions, profit-sharing distributions and other
incentive-type payments, and contributions to any deferred compensation plan or
welfare benefit program (except a 125 or 401(k) plan).
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<PAGE> 19
The participant will receive a purchase right for each Purchase Period in
which he or she participates to purchase up to the number of shares of Common
Stock determined by dividing such participant's payroll deductions accumulated
prior to the purchase date by the applicable purchase price (subject to the
"Limitations" section). Any payroll deductions accumulated in a participant's
account that are not sufficient to purchase a full share will be retained in the
participant's account for the subsequent purchase period. No interest shall
accrue on the payroll deductions of a participant in the Purchase Plan.
TERMINATION AND CHANGE TO PAYROLL DEDUCTIONS. A purchase right shall
terminate at the end of the Purchase Period or earlier if the participant
terminates employment for any reason, and then any payroll deductions which the
participant may have made with respect to a terminated purchase right will be
refunded. A participant may decrease his or her deductions once during a
purchase period and may increase the rate of his or her deductions up to 15% of
base salary, effective as of the start date of the next purchase period.
AMENDMENT AND TERMINATION. The Purchase Plan shall continue in effect until
the earlier of (i) the last business day in December 31, 2002, (ii) the date on
which all shares available for issuance under the Purchase Plan shall have been
issued or (iii) a Corporate Transaction, unless the Purchase Plan is earlier
terminated by the Board in its discretion.
The Board may at any time alter, amend, suspend or discontinue the Purchase
Plan, provided that, without the approval of the shareholders, no such action
may (i) alter the purchase price formula so as to reduce the purchase price
payable for shares under the Purchase Plan, (ii) materially increase the number
of shares issuable under the Purchase Plan or the maximum number of shares
purchasable per participant, or (iii) materially increase the benefits accruing
to participants under the Purchase Plan or materially modify the eligibility
requirements.
In addition, the Company has specifically reserved the right, exercisable
in the sole discretion of the Board, to terminate the Purchase Plan immediately
following any purchase period. If such right is exercised by the Board, then the
Purchase Plan will terminate in its entirety and no further purchase rights will
be granted or exercised, and no further payroll deductions shall thereafter be
collected under the Purchase Plan.
CORPORATE TRANSACTION. In the event of (i) a merger or other reorganization
in which the Company will not be the surviving corporation, or (ii) a sale of
all or substantially all of the assets of the Company in liquidation or
dissolution of the Company, or (iii) a reverse merger in which the Company is
the surviving corporation but in which securities possessing more than 50% of
the Company's outstanding voting securities are transferred to person or persons
different from those who held such securities immediately prior to the merger,
(a "Corporate Transaction"), each purchase right under the Purchase Plan will
automatically be exercised immediately before consummation of the Corporate
Transaction as if such date were the last purchase date of the Purchase Period.
The purchase price per share shall be equal to eighty-five percent (85%) of the
lower of (i) the fair market value per share of Common Stock on the start date
of the Purchase Period or (ii) the fair market value per share of Common Stock
immediately prior to the effective date of such Corporate Transaction. Any
payroll deductions not applied to such purchase shall be promptly refunded to
the participant.
The grant of purchase rights under the Purchase Plan will in no way affect
the right of the Company to adjust, reclassify, reorganize, or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
PRORATION OF PURCHASE RIGHTS. If the total number of shares of Common Stock
for which purchase rights are to be granted on any date exceeds the number of
shares then remaining available under the Purchase Plan, the Committee shall
make a pro rata allocation of the shares remaining.
FEDERAL INCOME TAX CONSEQUENCES. The following is a general description of
certain federal income tax consequences of the Purchase Plan. This description
does not purport to be complete.
The Purchase Plan is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code. Under a plan which so qualifies, no taxable
income will be reportable by a participant, and no deductions will be allowable
to the Company, by reason of the grant or exercise of the purchase rights issued
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<PAGE> 20
thereunder. A participant will, however, recognize taxable income in the year in
which the purchased shares are sold or otherwise made the subject of
disposition.
A sale or other disposition of the purchased shares will be a disqualifying
disposition if made before the later of two years after the start of the
Purchase Period in which such shares were acquired or one year after the shares
are purchased. If the participant makes a disqualifying disposition of the
purchased shares, then the Company will be entitled to an income tax deduction,
for the taxable year in which such disposition occurs, equal to the amount by
which the fair market value of such shares on the date of purchase exceeded the
purchase price, and the participant will be required to satisfy the employment
and income tax withholding requirements applicable to such income. In no other
instance will the Company be allowed a deduction with respect to the
participant's disposition of the purchased shares.
Any additional gain or loss recognized upon the disposition of the shares
will be a capital gain, which will be long-term if the shares have been held for
more than one (1) year following the date of purchase under the Purchase Plan.
The foregoing is only a summary of the federal income taxation consequences
to the participant and the Company with respect to the shares purchased under
the Purchase Plan. In addition, the summary does not discuss the tax
consequences of a participant's death or the income tax laws of any city, state
or foreign country in which the participant may reside.
NEW PURCHASE PLAN BENEFITS. Since purchase rights are subject to
discretion, including an employee's decision not to participate in the Purchase
Plan, awards under the Purchase Plan for the current fiscal year are not
determinable. On June 30, 1996 and December 31, 1996, none of the Named
Officers purchased shares under the Purchase Plan. In addition, each of the
Named Officers has the right to purchase a maximum of 250 shares of Common
Stock at a price that will not exceed $8.075 per share on the June 30, 1997
purchase date.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT TO
THE COMPANY'S PURCHASE PLAN.
PROPOSAL NO. 3:
CHANGE OF THE COMPANY'S STATE OF INCORPORATION
FROM CALIFORNIA TO ILLINOIS.
GENERAL. The Board of Directors of the Company has unanimously approved a
reorganization in which the Company's state of incorporation would be changed
from California to Illinois. This change would be accomplished by merging the
Company into an Illinois corporation named Insurance Auto Auctions
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<PAGE> 21
(Illinois), Inc. ("IAAI Illinois"), which is a wholly owned subsidiary of the
Company that was recently formed for this purpose. Upon completion of that
merger, (i) each outstanding share of Common Stock of the Company will be
automatically converted into one Common Share of IAAI Illinois, (ii) each stock
option outstanding under the Company's 1991 Stock Option Plan will be assumed
by IAAI Illinois and automatically become exercisable on identical terms for
Common Shares of IAAI Illinois, (iii) each outstanding purchase right under the
Company's Employee Stock Purchase Plan will be assumed by IAAI Illinois and
automatically become exercisable on identical terms for Common Shares of
IAAI Illinois, and (iv) IAAI Illinois will change its name to "Insurance Auto
Auctions, Inc." The proposed reorganization would be accomplished pursuant to
the terms of an Agreement and Plan of Merger between the Company and IAAI
Illinois, a copy of which is available from the Company upon request.
IAAI Illinois will be governed by Illinois law and new Articles of
Incorporation and Bylaws, which will result in various changes in the rights of
shareholders. See "Similarities and Differences in Corporate Governance" below.
The reorganization will not result in any change in the business,
management, assets, liabilities or net worth of the Company. Upon completion of
the reorganization, each stock certificate that currently represents shares of
the Company's Common Stock will automatically be deemed to represent the same
number of IAAI Illinois shares. It will not be necessary for shareholders to
exchange their Company stock certificates for IAAI Illinois stock certificates;
indeed, upon completion of the reorganization, the name of IAAI Illinois will
be identical to the name appearing on the Company's stock certificates. IAAI
Illinois' Common Shares will be listed on the Nasdaq National Market tier of
the Nasdaq Stock Market under the trading symbol "IAAI," just as the Company's
shares are now listed.
If the Agreement and Plan of Merger is approved by the shareholders at the
Annual Meeting, the Company expects to complete the reorganization promptly
after approval. The Company reserves the right to abandon the reorganization,
either before or after shareholder approval, if circumstances arise which, in
the opinion of the Board of Directors, make it inadvisable to proceed. The Board
of Directors does not currently envision any such circumstances.
PRINCIPAL REASONS FOR REINCORPORATION
The proposed reorganization to reincorporate under the laws of Illinois is
intended to reduce expenses and simplify the operation of the Company in the
future. The Company has recently relocated its principal executive offices from
California to Illinois, and the Company's management believes that maintaining
the Company as a California corporation entails unnecessary managerial and
legal expense. Moreover, management believes that Illinois corporate law will
provide a more flexible and predictable foundation for the Company's governance
decisions. In approving the reorganization, management also considered
reincorporating in Delaware, which is prominent as the state of incorporation
of many major corporations. However, management concluded that by
reincorporating in Illinois, the Company could obtain the benefits of a modern,
comprehensive and flexible body of corporate law responsive to the legal and
business needs of the Company without incurring the significant additional
annual franchise taxes that would be entailed by incorporation in a state such
as Delaware, where the Company does not have significant operations. The
proposed change in the Company's state of incorporation is not a response to
any takeover threat or attempt to effect a change of control of the Company.
SIMILARITIES AND DIFFERENCES IN CORPORATE GOVERNANCE
The California General Corporation Law and the Illinois Business
Corporation Act differ in certain respects. It is not practical to summarize
all of the differences in this Proxy Statement, but some of the principal
differences which could affect the rights of shareholders are discussed below.
BOARD OF DIRECTORS. The Bylaws of the Company provide for a Board of
Directors consisting of between five and nine directors, with the precise
number to be determined by the Board. That number currently is eight.
The Bylaws of IAAI Illinois contain a provision similar to the Company's, and
the Board of IAAI Illinois has similarly set the number of directors at eight.
In both states, directors serve from the time elected until the next annual
meeting of shareholders, or until their successor is elected, or until their
earlier resignation, removal from office or death.
18
<PAGE> 22
CUMULATIVE VOTING. Under California law, any shareholder may cumulate
his votes for directors upon notice of his intention to do so, provided that a
"listed corporation" (including a corporation with securities traded on The
Nasdaq Stock Market if it has at least 800 holders of its equity securities)
may adopt a provision in its articles of incorporation or bylaws eliminating
cumulative voting. The Company's Bylaws contain such a provision. Under
Illinois law, cumulative voting rights apply in an election of directors
unless the articles of incorporation otherwise provide. The Articles of
Incorporation of IAAI Illinois eliminate cumulative voting rights. Without
cumulative voting, the holders of a majority of the shares present at an
annual meeting will be able to elect all of the directors to be elected at
that meeting, and no person can be elected without the support of a majority of
the shareholders. Thus, a person or persons holding shares or proxies
representing less than a majority of the shares present will not be able to
elect any directors as they might if cumulative voting were applicable. The
elimination of cumulative voting may tend to make a change in control of the
Company more difficult by preventing minority shareholders from electing
directors.
REMOVAL OF DIRECTORS. Under California law, a director may be removed
without cause by a majority of the outstanding shares, except where (i) the
corporation's shareholders are entitled to cumulative voting rights and (ii)
the shares voted against such removal would not be sufficient to elect the
director under cumulative voting. Under Illinois law, directors also may be
removed without cause.
STANDARD OF CARE. Under both California and Illinois law, a director owes a
fiduciary duty to a corporation's shareholders. In California, a corporation is
allowed to include in its articles of incorporation, and the Company has so
included, a provision that limits personal liability of a director for monetary
damages in an action brought by or in the right of the corporation for breach
of a director's duties to the corporation and its shareholders so long as,
among other requirements, the acts in question did not involve intentional
misconduct or a knowing and culpable violation of law, did not involve the
absence of good faith on the part of a director, did not involve a transaction
from which a director derived improper personal benefit, did not involve a
reckless disregard for the director's duty to the corporation or its
shareholders and did not involve an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation or its
shareholders and the director believed the acts were in the best interests of
the corporation or its shareholders. Similarly, Illinois law allows a
corporation to include, and IAAI Illinois' Articles of Incorporation do
include, a provision eliminating the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, provided that liability may not be limited or eliminated
for any breach of the director's duty of loyalty to the corporation or its
shareholders, for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, for any distribution made
in violation of the Illinois Business Corporation Act or for any transaction
from which the director derived an improper personal benefit.
MEETING OF SHAREHOLDERS. Under California law, holders of 10% of the
outstanding shares of Common Stock may call a special meeting of shareholders.
Under Illinois law, unless a corporation's articles of incorporation or bylaws
provide otherwise, the holders of 20% of the outstanding shares entitled to vote
are needed to call a special meeting of shareholders. Under both California
and Illinois law, a special meeting of shareholders may also be called by the
Board of Directors or the President.
ACTION BY WRITTEN CONSENT OF SHAREHOLDERS. Both California and Illinois
law provide that the shareholders of a corporation may take action by written
consent without a meeting unless the corporation's articles of incorporation or
bylaws provide otherwise. The Company's Articles of Incorporation and Bylaws
do not contain any provisions prohibiting action by written consent and,
accordingly, the shareholders of the Company may act by written consent without
a meeting. The Bylaws of IAAI Illinois explicitly prohibit shareholder action
by written consent. As a result, the shareholders of IAAI Illinois may take
action only at a duly called meeting of shareholders which, as discussed above,
may be called only by the Board of Directors, the president or the holders of
20% of the outstanding Common Shares.
AMENDMENT OF BYLAWS. Under California law, the Company's Bylaws may be
amended by a majority vote of the shareholders or the Board of Directors,
provided that the Board may not adopt, amend or repeal a bylaw changing the
authorized number of directors. Under Illinois law, a corporation's bylaws may
be amended by the shareholders or the Board of Directors, unless such power is
reserved for the shareholders in the articles of incorporation. IAAI Illinois'
Articles of Incorporation provide that the Bylaws may be amended by the holders
of a majority of the outstanding shares or the Board of Directors, provided
that no Bylaw adopted by the Shareholders may be altered, amended or repealed
by the Board of Directors.
19
<PAGE> 23
AMENDMENT OF ARTICLES OF INCORPORATION. Under California law, a
corporation's articles of incorporation generally are subject to amendment by
an affirmative vote of a majority of the outstanding shares of common stock
entitled to vote on such amendment. Under Illinois law, unless the articles of
incorporation otherwise provide, an amendment to the articles of incorporation
generally requires the affirmative vote of at least two-thirds of the shares
entitled to vote on the amendment.
MERGER, CONSOLIDATION, SALE OF SUBSTANTIALLY ALL ASSETS. With certain
exceptions, California law requires that a merger, sale of all or substantially
all of a corporation's assets or similar transaction be approved by a majority
vote of each class of shares outstanding that is affected by the transaction.
Under Illinois law, unless the articles of incorporation provide for a different
vote, a merger, sale of all or substantially all of a corporation's assets or
similar transaction must be approved by at least two-thirds of the shares
entitled to vote, and by at least two-thirds of each class of shares that is
entitled to vote as a separate class.
APPRAISAL RIGHTS. Under both California and Illinois law, a shareholder of
a corporation participating in certain major corporate transactions may, under
varying circumstances, be entitled to appraisal rights pursuant to which the
shareholder may receive cash in the amount of the fair value of his or her
shares in lieu of the consideration he or she would otherwise receive in the
transaction. The limitations on the availability of appraisal rights under
California law are different than under Illinois law. Under California law,
shareholders of a publicly-held California corporation such as the Company
generally do not have appraisal rights unless the holders of at least 5% of a
class of outstanding shares claim the right or the corporation or any law
restricts the transfer of such shares. Under California law, appraisal rights
are also unavailable with respect to a reorganization if the persons who were
the shareholders of the corporation immediately before the transaction (and/or
the corporation itself) own, immediately after the transaction, at least
five-sixths of the voting power of the surviving or resulting corporation or its
parent entity. Under Illinois law, appraisal rights are available with respect
to any merger or consolidation that is subject to shareholder approval, any sale
of all or substantially all of a corporation's assets and certain amendments to
a corporation's articles of incorporation that adversely affect a shareholder's
rights.
LOANS TO DIRECTORS. Under California law, a loan to or for the benefit of a
director or officer of the corporation or any of its subsidiaries, other than
loans pursuant to employee benefit plans approved by shareholders, must be
approved by the holders of a majority vote of the shares (excluding shares held
by the director or officer receiving the loan). However, the shareholders of a
corporation may approve a bylaw provision authorizing a disinterested majority
of the Board of Directors to approve loans to officers without shareholder
approval if the Board determines that such loans may reasonably be expected to
benefit the corporation. Under Illinois law, if a loan is fair to the
corporation at the time it is authorized, ratified or approved, the fact that a
director of the corporation is directly or indirectly a party to the loan is
not grounds for invalidating the loan.
INDEMNIFICATION. The California and Illinois corporation laws have similar
provisions and limitations regarding indemnification by a corporation of its
officers, directors and employees. Under California law, a corporation may
validly provide for indemnification in addition to the statutory indemnification
provisions, but only if authorized in the articles of incorporation. The
Company's Articles of Incorporation include such an authorization. The Illinois
law states expressly that the indemnification it provides shall not be deemed
exclusive of any other indemnification rights. The Company does not believe that
differences between California and Illinois law will affect any indemnification
rights to which two directors and one former officer and director of the Company
may be entitled in connection with a pending lawsuit which the Company has
previously reported.
TRANSACTIONS WITH INTERESTED SHAREHOLDERS. In recent years, a number of
states (but not California) have adopted laws designed to make certain kinds of
"unfriendly" corporate takeovers, or other transactions involving a corporation
and one or more of its significant shareholders, more difficult. Section 11.75
of the Illinois Business Corporation Act applies to any Illinois corporation
that has a class of voting stock listed on a national securities exchange or
The Nasdaq Stock Market, has a class of voting stock held of record by more
than 2,000 shareholders, or adopts an amendment to its articles of
incorporation specifically electing to be governed by Section 11.75. Section
11.75 prohibits a corporation from engaging in a "business combination" with an
"interested shareholder" for a period of three years from the date that such
shareholder became an interested shareholder unless (i) prior to the date that
the shareholder became an interested shareholder, the board of directors
approved either the business combination or the transaction which resulted in
the shareholder becoming an interested shareholder, (ii) the interested
shareholder acquired at least 85% of the voting stock of the corporation in the
transaction in which it became
20
<PAGE> 24
an interested shareholder or (iii) on or subsequent to the date on which the
shareholder became an interested shareholder, the business combination is
approved by the board of directors and authorized by the holders of two-thirds
of the outstanding voting shares of the corporation (excluding any shares held
by the interested shareholder). For purposes of Section 11.75, "interested
shareholder" is defined as (a) the owner of 15% or more of the corporation's
outstanding voting stock, (b) any affiliate or associate of the corporation
which owned 15% or more of the corporation's outstanding voting stock at any
time during the three-year period immediately prior to the date on which the
determination is to be made as to whether or not such affiliate or associate
constitutes an interested shareholder or (c) an affiliate or associate of an
interested shareholder. An "associate" of a person is defined in turn as (1)
any corporation or organization of which such person is a director, officer,
partner or the owner of 20% or more of the voting stock, (2) any trust or
estate for which such person serves as trustee or in which such person has a
20% or greater beneficial interest and (3) any relative or spouse of such
person, or any relative of such spouse, who has the same residence as such
person. A "business combination" is defined to include (w) any merger or
consolidation of the corporation or its subsidiary with the interested
shareholder, (x) any sale, lease, exchange, mortgage, pledge, transfer or
disposition of 10% or more of the consolidated assets of the corporation to the
interested shareholder, (y) any transaction which results in the issuance or
transfer of the stock of the corporation or its subsidiary which has the effect
of increasing the interested shareholder's proportionate share of the stock of
the subsidiary or the corporation or (z) any receipt by the interested
shareholder of the benefit of any loans, advances, guarantees or other
financial benefits provided by or through the corporation or any of its
subsidiaries.
Section 11.75 effectively requires a party that acquires more than 15% but
less than 85% of the Common Shares of IAAI Illinois (i) to obtain the approval
of the Board of Directors of the stock acquisition or the proposed business
combination before such party acquires such stock or (ii) to have the business
combination approved by the Board and the holders of two-thirds of the voting
stock of IAAI Illinois (excluding shares held by the interested shareholder) on
or after the date the party first acquires the stock.
Also, Section 7.85 of the Illinois Business Corporation Act contains
certain "fair price" provisions which are applicable to any corporation which
either has a class of equity securities registered under the Securities
Exchange Act of 1934 or specifically adopts an amendment to its articles
of incorporation opting in to coverage under Section 7.85. Section 7.85 applies
whenever an "interested shareholder" (defined for purposes of Section 7.85 as
any person, firm, corporation or other entity which owns, directly or
indirectly, or, in the case of an affiliate or associate of the corporation,
which has owned within the preceding two years, 10% or more of the
combined voting power of the then outstanding voting securities of the
corporation) is a party to a "business combination" with the corporation
(defined as a merger, consolidation, sale of 10% or more of the assets of the
corporation or the adoption of certain plans or proposals to liquidate the
corporation). Section 7.85 requires that, in addition to any vote required by
law or the corporation's articles of incorporation or bylaws, any business
combination involving an interested shareholder must be approved by (i) 80%
of the outstanding shares of all classes and series entitled to vote
and (ii) by a majority of the voting shares held by persons other than the
interested shareholder or any of its affiliates or associates. However, such
enhanced voting requirements are not applicable if the transaction is approved
by two-thirds of the disinterested directors of the corporation or if the
consideration to be received by the shareholders in connection with the
transaction constitutes a "fair price" within the meaning of Section 7.85 and
meets certain requirements.
FEDERAL INCOME TAX CONSEQUENCES
The transaction provided for in the Agreement and Plan of Merger is
intended to be a tax-free reorganization under the Internal Revenue Code.
Accordingly, a holder of shares of the Company's Common Stock will not recognize
any gain or loss as a result of consummation of the reorganization, and no gain
or loss will be recognized by the Company or IAAI Illinois. Following the
reorganization, each shareholder will have the same basis in the IAAI
Illinois Common Shares into which his or her shares of the Company's Common
Stock are automatically converted as he or she had in those shares immediately
before consummation of the reorganization, and each shareholder's holding
period with respect to IAAI Illinois Common Shares will include the period
during which the corresponding shares of Company Common Stock were held,
provided that they were held as capital assets at the time of the consummation
of the reorganization.
NO APPRAISAL RIGHTS FOR THE REORGANIZATION
Under California law, shareholders of the Company have no appraisal rights
with respect to the reorganization.
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<PAGE> 25
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AGREEMENT AND
PLAN OF MERGER AND THE REORGANIZATION.
PROPOSAL NO. 4: RATIFICATION OF INDEPENDENT AUDITORS
The Company is asking the shareholders to ratify the selection of KPMG Peat
Marwick LLP as the Company's independent auditors for the fiscal year ending
December 31, 1997. The affirmative vote of the holders of a majority of the
Common Stock present or represented at the Annual Meeting will be required to
ratify the selection of KPMG Peat Marwick LLP.
In the event the shareholders fail to ratify the appointment, the Board of
Directors will reconsider its selection. Even if the selection is ratified, the
Board in its discretion may direct the appointment of a different independent
accounting firm at any time during the year if the Board feels that such a
change would be in the best interests of the Company and its shareholders.
KPMG Peat Marwick LLP were auditors for the years ended December 31, 1993,
1994, 1995 and 1996 and have been recommended to the shareholders for
ratification as auditors for the year ending December 31, 1997. A representative
of KPMG Peat Marwick LLP is expected to be present at the Annual Meeting, will
have the opportunity to make a statement if he or she desires to do so and
will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE SELECTION OF KPMG PEAT MARWICK LLP TO SERVE AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
22
<PAGE> 26
OWNERSHIP OF SECURITIES
The following table sets forth certain information known to the Company
regarding the ownership of the Company's Common Stock as of March 31, 1997 for
(i) each Director and Nominee, (ii) all persons who are beneficial owners of
five percent or more of the Company's Common Stock, (iii) any other Named
Officer and (iv) all officers and Directors of the Company as a group. Unless
otherwise indicated, each of the shareholders has sole voting and investment
power with respect to the shares beneficially owned, subject to community
property laws where applicable.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
NAME AND ADDRESS SHARES SHARES OUTSTANDING(1)
---------------- --------- ---------------------
<S> <C> <C>
Allstate(2)................................................. 1,667,000 14.76%
3075 Sanders Road, Suite G4B
Northbrook, Illinois 60062
State of Wisconsin Investment Board(3)...................... 950,000 8.41%
P.O. Box 7842
Madison, Wisconsin 53707
President and Fellows of Harvard College(4)................. 698,800 6.19%
c/o Harvard Management Company
600 Atlantic Avenue
Boston, MA 02210
Goldman, Sachs & Co.(5)..................................... 680,000 6.02%
85 Broad Street
New York, New York 10004
James P. Alampi(6).......................................... 50,000 *
Marcia A. McAllister(6)..................................... 2,500 *
Kevin J. Code(6)............................................ 10,000 *
Gerald C. Comis(6).......................................... 8,500 *
Bradley S. Scott(6)......................................... 918,000 8.01%
Thomas J. O'Malia(6)........................................ 22,500 *
Melvin R. Martin(6)......................................... 19,125 *
Glen E. Tullman(6).......................................... 13,500 *
Susan B. Gould(6)........................................... 15,700 *
Christopher G. Knowles(6)................................... 152,269 1.35%
Maurice A. Cocca(6)......................................... 0 *
All officers (including Named Officers) and Directors as a 1,230,930 10.58%
group (17 persons)(7).....................................
</TABLE>
- ---------------
* Less than 1%
(1) Percentage of beneficial ownership is calculated assuming 11,291,617 shares
of common stock were outstanding on March 31, 1997. This percentage may
include common stock of which such individual or entity has the right to
acquire beneficial ownership within sixty days of March 31, 1997, including
but not limited to the exercise of an option; however, such common stock
shall not be deemed outstanding for the purpose of computing the percentage
owned by any other individual or entity. Such calculation is required by
General Rule 13d-3(d)(1)(i) under the Securities Exchange Act of 1934, as
amended.
(2) Such information is based on a Schedule 13G filed by Allstate with the SEC
reflecting stock ownership as of December 31, 1995 and on subsequent
representations by Allstate to the Company. According to such Schedule 13G
and representations, Allstate has sole voting and investment power over all
the shares.
(3) Such information is based on a Schedule 13G filed by State of Wisconsin
Investment Board with the SEC on January 21, 1997 and reflects stock held as
of December 31, 1996. According to such Schedule 13G, the State of Wisconsin
Investment Board retains sole voting and dispositive power for all the
shares.
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<PAGE> 27
(4) Such information is based on a Schedule 13G filed by the President and
Fellows of Harvard College ("Harvard") with the SEC on February 12, 1997 and
reflects stock held as of December 31, 1996. According to such Schedule 13G,
Harvard has sole voting and dispositive power over all the shares.
(5) Such information is based on a Schedule 13G filed by Goldman, Sachs & Co.
("Goldman") with the SEC on February 14, 1997 and reflects stock held as of
December 31, 1996. According to such Schedule 13G, Goldman has sole voting
and dispositive power over all the shares.
(6) Includes that portion of options to purchase shares of Common Stock granted
under the 1991 Stock Option Plan that are currently exercisable or will
become exercisable within 60 days after March 31, 1997: Mr. Alampi, 50,000
shares; Ms. McAllister, 2,500 shares; Mr. Code, 10,000 shares; Mr. Gerald C.
Comis, 8,500 shares; Mr. Scott, 168,000 shares; Mr. O'Malia, 17,500 shares;
Mr. Martin, 18,500 shares; Mr. Tullman, 13,500 shares; Ms. Gould, 12,700
shares; and Mr. Knowles, 25,000 shares.
(7) Includes options to purchase 338,325 shares of Common Stock granted under
the 1991 Stock Option Plan that are currently exercisable or will become
exercisable within 60 days after March 31, 1997.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers, and persons who own more than ten percent
of a registered class of the Company's equity securities to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten percent shareholders are required by
Securities and Exchange Commission regulation to furnish the Company with copies
of all Section 16(a) reports they file.
Based solely upon a review of the copies of such reports furnished to the
Company and written representations from such officers, directors and greater
than ten percent shareholders that no other reports were required to be made,
the Company believes that there was full compliance for the fiscal year ended
December 31, 1996 with all Section 16(a) filing requirements applicable to the
Company's officers, directors and greater than ten percent shareholders, except
for a late filing of one report by Bradley S. Scott covering one transaction.
ANNUAL REPORT
A copy of the Annual Report of the Company for the fiscal year ended
December 31, 1996 has been mailed concurrently with this Proxy Statement to all
shareholders entitled to notice of and to vote at the Annual Meeting. The Annual
Report is not incorporated into this Proxy Statement and is not considered proxy
soliciting material.
ADDITIONAL INFORMATION AVAILABLE
The Company files an Annual Report on Form 10-K with the SEC. Shareholders
may obtain a separate copy of this report, without charge, by writing to the
Secretary of the Company at 850 East Algonquin Road, Suite 100, Schaumburg, IL
60173.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of Proxy to vote the shares they represent as
the Board of Directors may recommend. Discretionary authority with respect to
such other matters is granted by the execution of the enclosed Proxy.
THE BOARD OF DIRECTORS OF
INSURANCE AUTO AUCTIONS, INC.
Dated: May 9, 1997
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<PAGE> 28
DIRECTIONS TO THE RADISSON HOTEL
Site of the 1997 Annual Meeting of Shareholders
RADISSON HOTEL
1725 East Algonquin Road
Schaumburg, IL 60173
Phone: (847) 397-1500
Fax: (847) 397-0665
FROM O'HARE AIRPORT
The Radisson Hotel Schaumburg provides complimentary transportation from O'Hare
International Airport every hour on the one-half hour at door No. 3 of the Bus
Shuttle Center. Please use the courtesy phones in the Bus Shuttle Center to
request transportation.
If driving, take 90 West to 53 North. Stay in the right hand lane and exit at
Algonquin Road. Turn right onto Algonquin Road. The Radisson Hotel is on the
left, three blocks.
FROM DOWNTOWN CHICAGO
Take 90 West to 53 North. Stay in the right hand lane and exit at Algonquin
Road. Turn right onto Algonquin Road. The Radisson Hotel is on the left, three
blocks.
FROM THE WEST
Take 355 East to 290 West to 53 North. Stay in the right hand lane and exit at
Algonquin Road. Turn right onto Algonquin Road. The Radisson Hotel is on the
left, three blocks.
FROM THE NORTH
Take 294 South to Willow Road. Exit right (West) (Road turns into Palatine
Road). Follow to 53 South to Algonquin Road. Turn right onto Algonquin Road. The
Radisson Hotel is on the left, three blocks.
FROM THE SOUTH
Take 294 North to 290 West to 53 North. Stay in the right hand lane and exit at
Algonquin Road. Turn right onto Algonquin Road. The Radisson Hotel is on the
left, three blocks.
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<PAGE> 29
INSURANCE AUTO AUCTIONS, INC.
P
ANNUAL MEETING OF STOCKHOLDERS, JUNE 18, 1997
R
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
O INSURANCE AUTO AUCTIONS, INC.
X
Y The undersigned revokes all previous proxies, acknowledges receipt of the
the Notice of the Annual Meeting of Stockholders to be held on June 18, 1997 and
the Proxy Statement and appoints Bradley S. Scott, James P. Alampi and Linda C.
Larrabee, and each of them, the Proxy of the undersigned, with full power of
substitution, to vote all shares of Common Stock of Insurance Auto Auctions,
Inc. (the "Company") which the undersigned is entitled to vote, either on his or
her own behalf or on behalf of any entity or entities, at the Annual Meeting of
Stockholders to be held at the Radisson Hotel, 1725 East Algonquin Road,
Schaumburg, IL 60173, on Wednesday, June 18, 1997, at 9:30 a.m. local time and
at any adjournment or postponement thereof (the "Annual Meeting"), with the same
force and effect as the undersigned might or could do if personally present
thereat. The shares represented by this Proxy shall be voted in the manner set
forth on the reverse side.
SEE REVERSE
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES LISTED BELOW
AND A VOTE FOR THE OTHER PROPOSALS. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE
VOTED AS SPECIFIED BELOW. THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE
NOMINEES LISTED BELOW AND FOR THE OTHER PROPOSALS IF NO SPECIFICATION IS MADE.
1. To elect the following directors to serve for a term ending upon the 1998
Annual Meeting of Stockholders or until their successors are elected and
qualified.
Nominees: James P. Alampi, Maurice A. Cocca, Susan B. Gould, Christopher G.
Knowles, Melvin R. Martin, Thomas J. O'Malia, Bradley S. Scott, Glen E. Tullman.
FOR WITHHOLD
ALL [ ] [ ] AUTHORITY
NOMINEES TO VOTE FOR
ALL NOMINEES.
[ ] ____________________________
For all nominees, except for any nominee(s) whose name is written in the space
provided above.
2. To amend the Employee Stock FOR AGAINST ABSTAIN
Purchase Plan to give the Company [ ] [ ] [ ]
discretion to allow employees with
less than six months of
service to participate.
3. To approve changing the Company's FOR AGAINST ABSTAIN
state of incorporation from [ ] [ ] [ ]
California to Illinois.
4. To ratify the appointment of KPMG FOR AGAINST ABSTAIN
Peat Marwick LLP as the [ ] [ ] [ ]
Company's independent auditors for
the fiscal year ending December 31,
1997.
5. To transact such other business as may properly come before the Annual
Meeting and at any adjournment or postponement thereof.
MARK HERE
FOR ADDRESS [ ]
CHANGE AND
NOTE AT LEFT
Please sign your name.
Signature: _______________________________________________Date:____________
Signature: _______________________________________________Date:____________
<PAGE> 30
INSURANCE AUTO AUCTIONS, INC.
EMPLOYEE STOCK PURCHASE PLAN
(Amended and Restated as of November 6, 1996)
I. PURPOSE
The Insurance Auto Auctions, Inc. Employee Stock Purchase Plan (the
"Plan") is intended to provide employees of the Company and one or more of its
Corporate Affiliates with the opportunity to acquire a proprietary interest in
the Company through participation in a plan designed to qualify as an employee
stock purchase plan under Section 423 of the Code.
II. DEFINITIONS
For purposes of administration of the Plan, the following terms shall have
the meanings indicated:
Base Salary means the regular basic earnings paid to a Participant by one
or more Participating Companies during such individual's period of
participation in the Plan, plus any pre-tax contributions made by the
Participant to any Code Section 401(k) salary deferral plan or any Code Section
125 cafeteria benefit program now or hereafter established by the Company or
any Corporate Affiliate. There shall be excluded from the calculation of Base
Salary (I) all overtime payments, bonuses, commissions, profit-sharing
distributions and other incentive-type payments and (II) all contributions
(other than Code Section 401(k) or Code Section 125 contributions) made on the
Participant's behalf by the Company or one or more Corporate Affiliates under
any employee benefit or welfare plan now or hereafter established.
Board means the Board of Directors of the Company.
Code means the Internal Revenue Code of 1986, as amended from time to
time.
Common Stock means shares of the Company's common stock.
Company means Insurance Auto Auctions, Inc., a California corporation, and
any corporate successor to all or substantially all of the assets or voting
stock of Insurance Auto Auctions, Inc. which shall by appropriate action adopt
the Plan.
Corporate Affiliate means any parent or subsidiary corporation of the
Company (as determined in accordance with Code Section 424), including any
parent or subsidiary corporation which becomes such after the Effective Date.
Effective Date means the first day of the initial purchase period under
the Plan, which is scheduled to commence upon the later of (i) July 1, 1993 or
(ii) the effective date of the S-8 Registration Statement covering the shares
of Common Stock issuable under the Plan. However, for any Corporate Affiliate
which becomes a Participating Company in the Plan after
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the first day of such initial purchase period, a subsequent Effective Date
shall be designated with respect to participation by its Eligible Employees.
Eligible Employee means any person who is engaged, on a regularly
scheduled basis of more than twenty (20) hours per week for more than five (5)
months per calendar year, in the rendition of personal services to the Company
or any other Participating Company for earnings considered wages under Section
3121(a) of the Code.
Participant means any Eligible Employee of a Participating Company who is
actively participating in the Plan.
Participating Company means the Company and any Corporate Affiliate or
Affiliates now existing or at any time hereafter created or acquired.
Service means the period during which an individual is in the employ of
the Company or any Corporate Affiliate and shall be measured from the later of
(i) his or her hire date or (ii) the date of the Company's acquisition of that
Corporate Affiliate.
III. ADMINISTRATION
The Plan shall be administered by a committee (the "Plan Administrator")
comprised of two or more non-employee Board members appointed from time to time
by the Board. The Plan Administrator shall have full authority to administer
the Plan, including authority to interpret and construe any provision of the
Plan and to adopt such rules and regulations for administering the Plan as it
may deem necessary in order to comply with the requirements of Section 423 of
the Code. Decisions of the Plan Administrator shall be final and binding on
all parties who have an interest in the Plan.
IV. PURCHASE PERIODS
A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of successive purchase periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated in
accordance with Article IX.
B. The Plan shall be implemented in a series of successive purchase
periods, each of a duration of six (6) months. The initial purchase period
will begin upon the later of (i) July 1, 1993 or (ii) the effective date of the
S-8 Registration Statement covering the shares of Common Stock issuable under
the Plan and will end on the last business day in December 1993. Subsequent
purchase periods shall run from the first business day in January to the last
business day in June and from the first business day in July to the last
business day in December each year.
C. Under no circumstances shall any purchase period commence under the
Plan, nor shall any shares of Common Stock be issued hereunder, until such time
as (i) the Plan shall have been approved by the Company's Shareholders and (ii)
the Company shall have complied with all applicable requirements of the
Securities Act of 1933 (as amended), all
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applicable listing requirements of any securities exchange on which shares of
the Common Stock are listed and all other applicable statutory and regulatory
requirements.
D. The Participant shall be granted a separate purchase right for each
purchase period in which he or she participates. The purchase right shall be
granted on the start date of the purchase period and shall be automatically
exercised on the last business day of that period.
E. The acquisition of Common Stock through plan participation during any
purchase period shall neither limit nor require the acquisition of Common Stock
by the Participant in any subsequent purchase period.
V. ELIGIBILITY AND PARTICIPATION
A. Each Eligible Employee of a Participating Company shall be eligible
to participate in the Plan on the start date of any purchase period beginning on
or after his or her completion of the number of months of Service specified
from time to time by the Plan Administrator. Unless otherwise specified by the
Plan Administrator, there shall be no minimum eligibility requirements for
participation in the Plan. The Plan Administrator may increase or decrease the
eligibility period to be effective at the start of the next purchase period.
B. To participate for a particular purchase period, the Employee must
complete the enrollment forms prescribed by the Plan Administrator (including a
purchase agreement and a payroll deduction authorization) and file such forms
with the Plan Administrator (or its designate) on or before the start date of
that purchase period.
C. The payroll deduction authorized by the Participant for purposes of
acquiring shares of Common Stock under the Plan may be any multiple of one
percent (1%) of the Base Salary paid to the Participant during the purchase
period, up to a maximum of fifteen percent (15%). The deduction rate so
authorized shall continue in effect for the entire purchase period and for each
successive purchase period under the Plan, except to the extent such rate is
changed in accordance with the following guidelines:
- The Participant may, at any time during the purchase
period, reduce his or her rate of payroll deduction. Such
reduction shall become effective as soon as possible following the
filing of the requisite reduction form with the Plan Administrator
(or its designate), but the Participant may not effect more than
one such reduction per purchase period.
- The Participant may, prior to the commencement of any new
purchase period, increase or decrease the rate of his or her
payroll deduction by filing the appropriate form with the Plan
Administrator (or its designate). The new rate (which may not
exceed the fifteen percent (15%) maximum) shall become effective
as of the start date of the new purchase period.
Payroll deductions will automatically cease upon the termination of the
Participant's purchase right in accordance with the applicable provisions of
Section VII below.
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VI. STOCK SUBJECT TO PLAN
A. The Common Stock purchasable under the Plan shall, solely in the
discretion of the Plan Administrator, be made available from either authorized
but unissued shares of Common Stock or from shares of Common Stock reacquired
by the Company, including shares of Common Stock purchased on the open market.
The total number of shares which may be issued under the Plan shall not exceed
75,000 shares (subject to adjustment under Section VI. B below).
B. In the event any change is made to the outstanding Common Stock by
reason of any stock dividend, stock split, combination of shares or other
change affecting such Common Stock as a class without the Company's receipt of
consideration, appropriate adjustments shall be made by the Plan Administrator
to (i) the class and maximum number of securities issuable over the term of the
Plan, (ii) the class and maximum number of securities purchasable per
Participant during any one purchase period and (iii) the class and number of
securities and the price per share in effect under each purchase right at the
time outstanding under the Plan. Such adjustments shall be designed to
preclude the dilution or enlargement of rights and benefits under the Plan.
VII. PURCHASE RIGHTS
An Eligible Employee who participates in the Plan for a particular
purchase period shall have the right to purchase shares of Common Stock upon
the terms and conditions set forth below and shall execute a purchase agreement
embodying such terms and conditions and such other provisions (not inconsistent
with the Plan) as the Plan Administrator may deem advisable.
Purchase Price. Common Stock shall be issuable at the end of each
purchase period at a purchase price equal to eighty-five percent (85%) of the
lower of (i) the fair market value per share on the start date of the purchase
period or (ii) the fair market value per share on the purchase date at the end
of that purchase period.
Valuation. For purposes of the Plan, the fair market value per share of
Common Stock on any relevant date shall be the closing selling price per share
on that date, as officially quoted on the Nasdaq National Market. If there is
no quoted selling price for such date, then the closing selling price per share
of Common Stock on the next preceding day for which there does exist such a
quotation shall be determinative of fair market value.
Number of Purchasable Shares. The number of shares purchasable per
Participant during the purchase period shall be the number of whole shares
obtained by dividing the amount collected from the Participant through payroll
deductions during that period by the purchase price in effect for such period.
However, no Participant may, during any one purchase period, purchase in the
aggregate more than two hundred fifty (250) shares of Common Stock, subject to
periodic adjustment under Section VI. B.
In addition, the following limitations shall be in effect for the initial
purchase period beginning July 1, 1993 and ending December 31, 1993: (i)
Participants subject to the
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<PAGE> 34
short-swing profit rules of the Federal securities laws may not purchase more
than One Thousand Seven Hundred Fifty (1,750) shares of Common Stock in the
aggregate and (ii) all Participants as a group may not purchase more than
Forty-Three Thousand Five Hundred (43,500) shares of Common Stock.
Under no circumstances shall purchase rights be granted under the Plan to
any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Company or
any Corporate Affiliate.
Payment. Payment for the Common Stock purchased under the Plan shall be
effected by means of the Participant's authorized payroll deductions. Such
deductions shall begin on the first pay day coincident with or immediately
following the start date of the purchase period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of the purchase period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from a Participant may be commingled with
the general assets of the Company and may be used for general corporate
purposes.
Termination of Purchase Right. The following provisions shall govern the
termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the last five (5) business
days of the purchase period, terminate his or her outstanding purchase right
under the Plan by filing the prescribed notification form with the Plan
Administrator (or its designate). No further payroll deductions shall be
collected from the Participant with respect to the terminated purchase right,
and any payroll deductions collected to date during the purchase period shall,
at the Participant's election, be immediately refunded or held for the purchase
of shares at the end of the purchase period. If no such election is made, then
the collected deductions shall be refunded as soon as possible after the end of
the purchase period.
(ii) The termination of such purchase right shall be irrevocable, and the
Participant may not subsequently rejoin the purchase period for which the
terminated purchase right was granted. In order to resume participation in any
subsequent purchase period, such individual must re-enroll in the Plan (by
making a timely filing of a new purchase agreement and payroll deduction
authorization) on or before the start date of the new purchase period.
(iii) If the Participant ceases to remain an Eligible Employee while his
or her purchase right remains outstanding, then such purchase right shall
immediately terminate, and the Participant (or the personal representative of
the Participant's estate in the event of his or her death) shall have the
following election, exercisable up until the end of the purchase period in
which such cessation of Eligible Employee status occurs:
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<PAGE> 35
- to withdraw all of the Participant's payroll deductions
for that purchase period, or
- to have such funds held for the purchase of shares at the
end of that purchase period.
If no such election is made, then the collected deductions shall be
refunded as soon as possible after the end of the purchase period. In no
event, however, may any additional payroll deductions be made on the
Participant's behalf following his or her cessation of Employee status.
Stock Purchase. On the last day of the purchase period, shares of Common
Stock shall automatically be purchased on behalf of each Participant (other
than Participants whose payroll deductions have previously been refunded in
accordance with the Termination of Purchase Right provisions above). The
purchase shall be effected by applying each Participant's payroll deductions
for the purchase period to the purchase of whole shares of Common Stock
(subject to the foregoing limitations on both the maximum and aggregate number
of purchasable shares) at the purchase price in effect for that purchase
period. Any payroll deductions not applied to such purchase because they are
not sufficient to purchase a whole share shall be held for the purchase of
Common Stock in the next purchase period. However, any payroll deductions not
applied to the purchase of Common Stock by reason of (i) the limitation on the
maximum number of shares purchasable by the Participant during the purchase
period or (ii) the maximum number of shares purchasable in the aggregate during
the initial purchase period shall be promptly refunded to the Participant.
Proration of Purchase Rights. Should the total number of shares of Common
Stock which are to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan (including the limitation on issuances for the initial purchase
period), the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded to such Participant.
Rights as Shareholder. A Participant shall have no shareholder rights
with respect to the shares subject to his or her outstanding purchase right
until the shares are actually purchased on the Participant's behalf in
accordance with the applicable provisions of the Plan. No adjustments shall be
made for dividends, distributions or other rights for which the record date is
prior to the date of such purchase.
A Participant shall be entitled to receive, as soon as practicable after
the end of the purchase period, a stock certificate for the number of shares
purchased on the Participant's behalf. Such certificate may, upon the
Participant's request, be issued in the names of the Participant and his or her
spouse as community property or as joint tenants with right of survivorship.
Assignability. No purchase right granted under the Plan shall be
assignable or transferable by the Participant other than by will or by the laws
of descent and distribution
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<PAGE> 36
following the Participant's death, and during the Participant's lifetime the
purchase right shall be exercisable only by the Participant.
Chance in Ownership. Should any of the following shareholder-approved
transactions (a "Corporate Transaction") occur:
(i) a merger or other reorganization in which the Company will not be
the surviving corporation (other than a reorganization effected primarily to
change the State in which the Company is incorporated), or
(ii) a sale of all or substantially all of the Company's assets in
liquidation or dissolution of the Company, or
(iii) a reverse merger in which the Company is the surviving
corporation but in which securities possessing more than fifty (50%) of the
Company's outstanding voting securities are transferred to person or persons
different from those who held such securities immediately prior to the merger,
then all outstanding purchase rights shall automatically be exercised
immediately prior to the effective date of such Corporate Transaction by
applying the payroll deductions of each Participant for the purchase period in
which such Corporate Transaction occurs to the purchase of whole shares of
Common Stock at eighty-five percent (85%) of the lower of (i) the fair market
value of the Common Stock on the start date of that purchase period or (ii) the
fair market value of the Common Stock immediately prior to the effective date
of such Corporate Transaction. However, the applicable share limitations of
Articles VII and VIII shall continue to apply to any such purchase.
The Company shall use its best efforts to provide at least ten (10)-days
advance written notice of the occurrence of a Corporate Transaction, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights in accordance with the applicable
provisions of this Article VII.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire Common
Stock pursuant to any purchase right outstanding under this Plan if and to the
extent such accrual, when aggregated with (I) rights to purchase Common Stock
accrued under any other purchase right outstanding under this Plan and (II)
similar rights accrued under other employee stock purchase plans (within the
meaning of Section 423 of the Code) of the Company or its Corporate Affiliates,
would otherwise permit such Participant to purchase more than $25,000 worth of
stock of the Company or any Corporate Affiliate (determined on the basis of the
fair market value of such stock on the date or dates such rights are granted
the Participant) for each calendar year such rights are at any time
outstanding.
B. For purposes of applying such accrual limitations, the right to
acquire Common Stock pursuant to each purchase right outstanding under the Plan
shall accrue as follows:
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<PAGE> 37
(i) The right to acquire Common Stock under each such purchase right
shall accrue as and when the purchase right first becomes exercisable on the
last business day of the purchase period for which such right is granted.
(ii) No right to acquire Common Stock under any outstanding purchase
right shall accrue to the extent the Participant has already accrued in the same
calendar year the right to acquire $25,000 worth of Common Stock (determined on
the basis of the fair market value on the date or dates of grant) pursuant to
one or more purchase rights held by the Participant during such calendar year.
(iii) If by reason of such accrual limitations, any purchase right of
a Participant does not accrue on the last business day of a particular purchase
period, then the payroll deductions which the Participant made during that
purchase period shall be promptly refunded.
C. In the event there is any conflict between the provisions of this
Article VIII and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article VIII shall be controlling.
IX. AMENDMENT AND TERMINATION
A. The Board may alter or amend the Plan following the close of any
purchase period. However, the Board may not, without the approval of the
Company's shareholders:
(i) materially increase the number of shares issuable under the Plan
or the maximum number of shares purchasable per Participant during any one
purchase period, except that the Plan Administrator shall have the authority,
exercisable without such shareholder approval, to effect adjustments to the
extent necessary to reflect changes in the Company's capital structure pursuant
to Section VI. B;
(ii) alter the purchase price formula so as to reduce the purchase
price payable for the shares issuable under the Plan; or
(iii) materially increase the benefits accruing to Participants under
the Plan or materially modify the requirements for eligibility to participate in
the Plan.
B. The Company shall have the right, exercisable in the sole discretion
of the Plan Administrator, to terminate the Plan immediately following the close
of any purchase period. Should the Company elect to exercise such right, then
the Plan shall terminate in its entirety. No further purchase rights shall
thereafter be granted, and no further payroll deductions shall thereafter be
collected, under the Plan.
C. The Plan shall terminate upon the earlier of (i) December 31, 2002 or
(ii) the date on which all shares available for issuance under the Plan shall
have been sold pursuant to purchase rights exercised under the Plan.
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X. GENERAL PROVISIONS
A. The Plan shall become effective on the designated Effective Date,
provided that no purchase period shall commence, and no shares of Common Stock
shall be issued hereunder, until (i) the Plan shall have been approved by the
shareholders and (ii) the Company shall have complied with all applicable
requirements of the Securities Act of 1933 (as amended), all applicable listing
requirements of any securities exchange on which shares of the Common Stock are
listed and all other applicable requirements established by law or regulation.
In the event such shareholder approval is not obtained, or such Company
compliance is not effected, within twelve (12) months after the date on which
the Plan is adopted by the Board, the Plan shall terminate and have no further
force or effect.
B. All costs and expenses incurred in the administration of the Plan shall
be paid by the Company.
C. Neither the action of the Company in establishing the Plan, nor any
action taken under the Plan by the Board or the Plan Administrator, nor any
provision of the Plan itself shall be construed so as to grant any person the
right to remain in the employ of the Company or any of its Corporate Affiliates
for any period of specific duration, and such person's employment may be
terminated at any time, with or without cause.
D. The provisions of the Plan shall be governed by the laws of the State
of California without resort to that State's conflict-of-laws rules.
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