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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19594
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INSURANCE AUTO AUCTIONS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3790111
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1270 WEST NORTHWEST HIGHWAY
PALATINE, ILLINOIS 60067
(847) 705-9550
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock (based on the closing price
as reported by the Nasdaq National Market on March 15, 1997) held by
non-affiliates of the Registrant as of March 15, 1997 was approximately
$39,700,000. For purposes of this disclosure, shares of Common Stock known to
be held by persons who own 5% or more of the shares of outstanding common stock
and shares of common stock held by each officer and director have been excluded
in that such persons may be deemed to be "affiliates" as that term is defined
under the Rules and Regulations of the Act. This determination of affiliate
status is not necessarily conclusive. As of March 15, 1997, the Registrant had
outstanding 11,288,617 shares of Common Stock, $0.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Notice of Annual Meeting and Proxy
Statement for the Registrant's Annual Meeting of Shareholders are incorporated
herein by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS.
The discussion in this section contains forward-looking information that is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected. The Company's actual
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Factors That May Affect Future Results" below and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Among these risks are legislative acts, weather conditions,
market value of salvage declining, management changes, outcome of litigation,
competition, quality and quantity of inventory available from suppliers, and
dependence on key insurance company suppliers.
GENERAL
Insurance Auto Auctions, Inc., together with its subsidiaries
(collectively, "IAA" or the "Company"), offers insurance companies and other
vehicle suppliers cost-effective salvage processing solutions. In an accident,
theft or other claims adjustment process, insurance companies typically take
possession of a vehicle because (i) based on economic and customer service
considerations, the vehicle has been classified as a "total loss" and the
insured replacement value has been paid rather than the cost of repair or (ii)
a stolen vehicle is recovered after the insurance company has settled with the
insured. The Company generally sells these vehicles at live or closed bid
auctions on a competitive-bid basis at one of the Company's facilities.
The Company processes salvage vehicles under three methods:
purchase agreement, fixed fee consignment and percentage of sale consignment.
Under the purchase agreement method, IAA generally purchases vehicles from the
insurance companies upon clearance of title, under financial terms determined
by contract with the insurance company supplier and then resells these vehicles
for IAA's own account at IAA auctions. Under the fixed fee consignment and
percentage of sale consignment method, the Company sells vehicles on behalf of
insurance companies, which continue to own the vehicles until they are sold to
buyers at auction. Under these methods, the Company generally conducts either
live or closed bid auctions of the automotive salvage in return for agreed upon
sales fees. In addition to fees, the Company generally charges its fixed fee
consignment and percentage of sale consignment vehicle suppliers for various
services, including towing and storage. Under all methods of sale, the Company
also charges the buyer of each vehicle various buyer-related fees.
Prior to 1992, the Company operated almost exclusively using the
purchase agreement system of salvage disposal. Since 1992, IAA has acquired
additional auto salvage pool operations, resulting in a network of 46 salvage
pools in 19 states. Most of these businesses operate primarily using the fixed
fee consignment method of sale. As a result of these site additions, a
majority of the vehicles currently processed by IAA are now sold under fixed
fee consignment arrangements. In 1996, approximately 67% of the vehicles
processed by IAA were sold under the fixed fee and percentage of sale
consignment methods, 33% were sold under the purchase agreement method.
The Company obtains the majority of its supply of vehicles from a
large number of insurance companies and smaller quantities from non-insurance
company suppliers such as rental car companies and non-profit organizations.
Three of the insurance company suppliers, Allstate Insurance Company, Farmers
Insurance Group and State Farm Insurance Company, collectively, accounted for
approximately 49% and 51%, respectively, of vehicles sold by the Company in
1996 and 1995.
HISTORY
The Company was organized as a California corporation in 1982
under the name Los Angeles Auto Salvage, Inc. ("LAAS"). In January 1990, all
the outstanding capital stock of LAAS was acquired in a leveraged buyout and,
in October 1991, LAAS changed its name to Insurance Auto Auctions, Inc. The
Company completed its initial public offering in November 1991 and its common
stock is traded on the Nasdaq National Market tier of The Nasdaq Stock Market
under the symbol IAAI.
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IAA PURCHASE AGREEMENT METHOD
Under the purchase agreement method of sale, the Company is
required to purchase, and the insurance company and other non-insurance company
suppliers are required to sell to the Company, virtually all total loss and
recovered theft vehicles generated by the supplier in a designated geographic
area. IAA then works to enhance the value of purchased vehicles in the selling
process and assumes the risk of market price variation for vehicles so
processed. Under the purchase agreement, insurance companies may outsource
much of the salvage administration workload and this potentially reduces their
expenses accordingly. The agreements are customized to each supplier's needs,
but typically require the Company to pay a specified percentage of a vehicle's
Actual Cash Value ("ACV"), depending on the vehicle's age, certain other
conditions and whether the vehicle is a total loss or recovered theft vehicle.
In 1996, approximately 33% of the units processed by IAA were processed through
the purchase agreement method of sale, compared with 36% in 1995.
IAA FIXED FEE CONSIGNMENT SALE METHOD
Approximately 63% of the Company's vehicles for the year ended
December 31, 1996 were sold on the fixed fee consignment method of sale,
compared with 61% in 1995. Under this method of sale, the Company typically
acts as an agent for the insurance company rather than as a purchaser of
salvage vehicles. As agent, the Company arranges for the salvage vehicle to be
towed to its facility and processes the car for sale. Under this method of
disposal, the Company charges fees to the insurance company supplier, typically
including a towing fee, a title processing fee and a storage and salvage sales
fee. Since the Company does not own the vehicle, the Company's revenues per
vehicle from consignment sales are received only from these fees rather than
from the revenue from the sale of the vehicle. As a result, revenue recognized
per vehicle under the consignment method of sale is approximately 10% to 20% of
the revenue recognized per vehicle under the purchase agreement method, where
the sale price of the vehicle is also recorded.
IAA PARTNERPLUS(TM) (PERCENTAGE OF SALE CONSIGNMENT) METHOD
The Company offers certain of the services provided to its
purchase agreement suppliers to particular consignment suppliers. In 1993, IAA
introduced the PartnerPlus(TM) service program, combining several of IAA's
purchase agreement services with a percentage of sale consignment arrangement
under which the insurance company receives a negotiated percentage of the
vehicle selling price. As under the fixed fee consignment method, IAA acts as
an agent for the supplier. The PartnerPlus(TM) arrangement provides suppliers
with potentially greater upside since IAA's fees are tied to selling prices and
IAA has, thus, more incentive to invest in improvements to salvage vehicles to
maximize sale prices. Many of these enhancements (starting vehicles to show
that the engines run, for example) are practiced with purchase agreement
vehicles with which the Company has expertise. The PartnerPlus(TM)
arrangement provides to certain suppliers a competitive alternative to
traditional fixed fee consignment services. Approximately 3%, of the Company's
vehicles processed by the Company were sold under the percentage of sale
consignment method in both 1996 and 1995.
SERVICES PROVIDED TO ALL SUPPLIERS
The process of salvage disposition through the IAA system
commences when the insurance company determines that a vehicle has been totaled
or when a stolen vehicle has been recovered. An insurance company
representative assigns the vehicle to the Company, either by phone, facsimile
or, where available, through the Company's on-line DataLink(TM) system.
DataLink(TM) is the Company's proprietary computer order processing system that
enables insurance company suppliers to access their data electronically and to
retrieve information on a vehicle at any time during the claims adjustment and
disposal process.
The Company's FastTow(TM) service also provides towing services
which guarantee that vehicles will be delivered to a Company branch storage
facility, usually within one to two business days of assignment within a
designated service area. In retrieving a vehicle, the FastTow(TM) service will
also advance, on behalf of the supplier,
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any storage and towing charges incurred when the vehicle was initially towed
from the accident scene or recovered theft site to the temporary storage
facility or repair shop. Once these advance towing and storage charges have
been reviewed and verified by the Company, the towing subcontractor generally
will pay the charges at time of vehicle pick up and deliver the vehicle to the
predetermined Company auction and storage facility. The rapid retrieval time
and review of advance charges are also intended to increase the insurance
company's net return on salvage. The FastTow(TM) service is normally provided
to insurance company purchase agreement, percentage of sale and consignment
suppliers.
In order to further minimize vehicle storage charges incurred by
insurance company suppliers at the temporary storage facility or repair shop
(which can be as high as $30 per day per car) and improve service time to the
policyholder, the Company and certain of its insurance company suppliers have
established vehicle inspection centers ("VICs") at many of the Company's
facilities. A VIC is a temporary storage and inspection facility located at an
IAA site that is operated by the insurance company. Suspected total loss
vehicles are brought directly to the VIC from the temporary storage facility or
repair shop. The insurance company typically has appraisers stationed on the
VIC site in order to expedite the appraisal process and minimize storage
charges at outside sites. If the vehicle is totaled by the insurance company,
the vehicle can easily be moved to IAA's vehicle storage area. If the vehicle
is not totaled, it is promptly returned to the insured's selected repair
facility.
After a totaled vehicle is received at a Company facility, it
remains in storage but cannot be auctioned until title has been submitted to
and processed by IAA. For most vehicles stored on its facilities, no storage
charges accrue for a contractually specified period. The document processing
departments at the Company's facilities provide management reports to the
insurance company suppliers, including an aging report of vehicles for which
title documents have not been provided. In addition, at certain of the
Company's facilities, the Company customarily offers the insurance company
staff training for each state's Department of Motor Vehicles ("DMV") document
processing. These services expedite the processing of titles, thereby reducing
the time in which suppliers receive their salvage proceeds and decreasing the
suppliers' administrative costs and expenses. Upon receipt of title documents,
the Company's contractual obligation to pay its insurance company purchase
agreement suppliers commences. For total loss vehicles, the Company then
processes the title documents in order to comply with DMV requirements for such
vehicles. This may involve re-registering the vehicle and obtaining a salvage
certificate, after which the Company is entitled to sell the salvage vehicle.
The Company remits payment to the insurance company suppliers
within a contractual time period or shortly after sale of the vehicle and
collection from the buyer. In addition, most insurance company suppliers
generally receive monthly summary reports of all vehicles processed by the
Company. The reports track the insurance companies' gross return on salvage,
net return on salvage, exact origin and detail of storage charges and other
useful management data. The Company also provides many of its suppliers with
quarterly Comprehensive Salvage Analysis of salvage trends.
OTHER SERVICES
IAA's BidFast(TM) service provides insurers with a binding bid
for a salvage vehicle which historically may have been owner retained. The
return on such vehicles (owner-retained salvage vehicles) is, many times,
measurably improved for the supplier using this service and enables compliance
with many state department of insurance regulations.
IAA also provides certain insurance company suppliers with
anti-theft fraud control programs for vehicle salvage processing. The
Company's CarCrush(TM) services helps insurance companies to crush severely
damaged or stripped "high profile" cars to prevent their vehicle identification
numbers ("VINs") from being used in auto theft. IAA also offers computerized
reporting of vehicle sales to the National Insurance Crime Bureau ("NICB").
This includes detailed buyer information obtained through the Company's
registration process. IAA has also continued its support for consumer
protection laws calling for the nationwide, mandatory use of salvage
certificates for salvage vehicles.
The Company offers a National Salvage Network, based in Dallas,
Texas, that allows insurance company suppliers to call in all their salvage
vehicles to a single location. This network enables IAA to distribute
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vehicle assignments in most of the United States, even in markets where IAA
does not currently have a facility, and is designed to minimize the
administrative workload for insurance companies and provide IAA with broader
geographic coverage. In certain areas where the Company does not have a
facility, such vehicles are distributed to non-IAA salvage pools, known as
ServicePartners(TM), with which IAA has developed affiliate relationships.
The Company also offers, through its Specialty Salvage Division,
salvage services for specialty vehicles, such as trucks, heavy equipment, farm
equipment, boats, recreational vehicles and classic and exotic cars. Marketing
these vehicles nationwide to specialty buyers offers insurance companies the
opportunity for better returns on units that typically do not sell for as much
at local salvage pools as a result of the limited number of local buyers.
GROWTH STRATEGIES
The Company seeks to increase sales on a profitable basis by
offering to insurance company suppliers a variety of methods of sale (including
purchase agreement, fixed fee consignment and percentage of sale consignment)
and service and by (i) increasing market share at existing sites; (ii)
continued market penetration through the acquisition of sellers of automotive
salvage; (iii) new site expansion; and (iv) development of national/regional
supplier agreements.
Increasing Market Share at Existing Sites
The Company's primary strategy for growth in its existing markets
is to contract for additional vehicles by promoting better returns on salvage
vehicles and a broad selection of services to prospective suppliers. The
expansion of the number of vehicles processed at existing sites typically makes
the Company's auctions more attractive and results in more customers attending
auctions.
Continued Market Penetration Through Acquisitions
Since the Company's initial public offering in November 1991, the
Company has acquired additional pool operations across the United States to
offer better, national coverage to its insurance company customers. On
December 31, 1996, the Company operated 46 salvage pools in 19 states. In
1996, the Company acquired a salvage pool in Minnesota and opened a facility in
Kansas. In January 1996, the Company acquired Twin Cities Salvage in St. Paul,
Minnesota.
IAA intends to continue to pursue acquisitions of
strategically-located salvage pools. Through such acquisitions, it seeks to
enhance a geographically broad-based relationship with key insurance company
suppliers, as well as to offer its specialized salvage services to new
insurance companies and certain noninsurance company suppliers. In pursuing
its acquisition strategy and plans, the Company recognizes that there will be
continuing challenges in effectively and efficiently integrating new facilities
into existing IAA operations. This will require continuing investment in
infrastructure. See "Factors That May Affect Future Results."
New Site Expansion
While the Company will continue to pursue growth through
acquisitions, it also will continue to seek growth through the opening of new
sites. The opening of new sites offers advantages in certain markets and
capitalizes on regional and national customer accounts. In 1996, the Company
opened a new site in Kansas serving the Kansas City area.
Development of National/Regional Supplier Agreements
The Company's expanded geographic base of operations, plus its
National Network, facilitates its strategy of offering its customers and
prospective customers national and regional supplier agreements. These can
provide a more consistent reporting and control function to its customers, who
benefit from a reduction in the number of suppliers through which they must do
business.
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SUPPLIER MARKETING
The Company's sales personnel call on insurance company and
non-insurance company suppliers. Based upon historical data supplied by a
prospective supplier, the Company can provide prospective suppliers with a
detailed analysis of their current salvage returns and a proposal setting forth
ways in which the Company can improve salvage returns, reduce administrative
costs and expenses and provide proprietary turnkey services.
In addition to providing insurance companies and certain
non-insurance company suppliers with a means for disposing of salvage vehicles,
the Company provides services that are intended to increase the net amount of
salvage sale proceeds received by the suppliers and reduce the time in which
the suppliers receive net proceeds. The Company seeks to become an integral
part of its suppliers' salvage process. The Company views such mutually
beneficial relationships as an essential component of its effort to retain
existing suppliers and attract new suppliers.
The Company also seeks to expand its supply relationships through
recommendations from individual branch offices of an insurance company supplier
to other offices of the same insurance company. The Company believes that its
existing relationships and the recommendations of branch offices currently play
a significant role in its marketing of services to national insurance companies
from its growing network of salvage locations. Indeed, as the Company has
expanded its geographic coverage, it has been able to market its services to
insurance suppliers offering to handle salvage on a national basis or for a
large geographic area.
CUSTOMER MARKETING AND SALES
The Company sells the majority of its vehicles through live
auctions. IAA maintains databases, which currently contain information
regarding nearly 20,000 registered customers. No single customer accounted for
more than 10% of the Company's net sales in 1996. The Company generally
accepts cash, money orders, cashier's checks, wire transfers, and, for selected
credit card customers, pre-approved checks, at the time the vehicle is picked
up. Vehicles are sold "as is" and "where is." Sales notices listing the
vehicles to be auctioned on a particular day at a particular location are
generally mailed, faxed or available online to the Company's customers in
advance of the auction. Such notices list details about the vehicle, including
the year and make of the vehicle, the nature of the damage, the status of
title, the order of the vehicle in the auction and the rules of the auction.
COMPETITION
Historically, the automotive salvage industry has been highly
fragmented. As a result, the Company faces intense competition for the supply
of salvage vehicles from vehicle suppliers, as well as competition for
processors of vehicles from other regional salvage pools. These regional
salvage pools generally process vehicles under the fixed fee consignment method
and generally do not offer the full range of services provided by the Company.
The salvage industry has recently experienced consolidation, however, and the
Company believes its principal publicly-held competitor is Copart, Inc.
Copart, Inc. has effected a number of acquisitions of regional salvage pools
and competes with IAA in most of IAA's geographic markets. Due to the limited
number of vehicle suppliers, competition for salvage vehicles from Copart and
regional suppliers is intense. It is also possible that the Company may
encounter further competition from existing competitors and new market entrants
that are significantly larger and have greater financial and marketing
resources. Other potential competitors could include used car auction
companies, certain salvage buyer groups and insurance companies some of which
presently supply auto salvage to IAA. While many insurance companies have
abandoned or reduced efforts to sell salvage without the use of service
providers such as the Company, they may in the future decide to dispose of
their salvage directly to customers. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on its business, operating results and financial
condition.
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GOVERNMENT REGULATION
The Company's operations are subject to regulation, supervision
and licensing under various federal, state and local statutes, ordinances and
regulations. The acquisition and sale of totaled and recovered theft vehicles
is regulated by governmental agencies in each of the locations in which the
Company operates. In many of these states, regulations require that the title
of a salvage vehicle be forever "branded" with a salvage notice in order to
notify prospective purchasers of the vehicle's previous salvage status. In
addition to the regulation of sales and acquisitions of vehicles, the Company
is also subject to various local zoning requirements with regard to the
location and operation of its auction and storage facilities. Some state and
local regulations also limit who can purchase salvage vehicles, as well as
determine whether a salvage vehicle can be sold as rebuildable or must be sold
for parts only. Such regulations can reduce the number of potential buyers of
vehicles at Company auctions. The Company is also subject to environmental
regulations. The Company believes that it is in compliance with all applicable
material regulatory requirements. The Company will be subject to similar types
of regulations by federal, state and local governmental agencies in new markets
and to continuing legislation in existing markets.
The anticipation of the reimplementation of 1994 California Senate
Bill No. 1833 (the "Torres Bill") has had a negative effect on the Company's
fourth quarter 1996 results. A portion of the bill, which initially went into
effect on July 1, 1995, required rebuilders of salvage automobiles to obtain an
inspection from the California Highway Patrol ("CHP") before they could retitle
the rebuilt vehicles in California. This implementation was later delayed due
to several implementation problems. The Company's salvage auto buyers were
reporting delays of three months or more to secure the required inspection.
The Company believes this delay contributed significantly to lower buyer counts
and lower vehicle gross proceeds throughout California, as salvage buyers put
off buying until inspection waits shortened. Since the purchase agreement
method of sale is used extensively in California, the Company believes that the
impact of the Torres Bill lowered the vehicle margins.
The reintroduction of the Torres Bill in January 1997 has caused
some of the same initial delays experienced in 1995. Although the Company
continues to work with the CHP and others to seek a long-term resolution to the
problems this legislation has caused, there can be no assurance that the
business, operating results and financial condition of the Company will not
continue to be negatively impacted by the re-implementation of the Torres Bill.
The Company has, however, endorsed the legislation which is designed to reduce
auto theft.
The Anti Car Theft Act of 1992, a federal law, mandated the
establishment of a task force to study problems relating to motor vehicle
titling, vehicle registration and controls over motor vehicle salvage. The
task force issued a report in February 1994, that recommended, among other
things, that national uniform definitions of "salvage vehicle" and
"nonrepairable vehicle" be enacted. IAA has advocated such consumer protection
laws, and supports the task force's findings.
ENVIRONMENTAL MATTERS
As part of IAA's December 1993 acquisition of assets from the
Reclamation Division of Tech-Cor, Inc., a wholly-owned subsidiary of Allstate
Insurance Company ("Tech-Cor"), IAA acquired leasehold interests in five
properties located in Illinois, Michigan and New Jersey. Two of these
properties (Wheeling, Illinois and Romulus, Michigan) have ongoing soil
remediation due to petroleum product releases from underground storage tanks on
site. Tech-Cor has retained responsibility for completing all required
remediation of the Wheeling and Romulus sites. Although Tech-Cor agreed to
indemnify IAA for all material losses from environmental and other matters,
subject to a total maximum liability of $6,000,000, the Company does not
believe that it is subject to any liability or claims arising out of such
environmental condition, and has not asserted any claims against Tech-Cor with
respect to any such conditions.
In January 1994, IAA acquired ownership or leasehold interests in
fifteen properties in six states previously occupied by Underwriters Salvage
Company ("Underwriters"). In connection with the acquisition, the former
shareholders of Underwriters agreed to indemnify IAA through December 31, 1997
for all material losses from environmental and other matters, subject to a
total maximum of $11,000,000. The Company does not believe that it will be
subject to any liability or claims arising out of such environmental conditions
and has not asserted any claims against the former shareholders of
Underwriters.
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EMPLOYEES
At December 31, 1996, the Company employed 630 full-time persons.
The Company is not subject to any collective bargaining agreements and believes
that its relationship with its employees is good.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
Quarterly Fluctuations. The Company's operating results have in
the past and may in the future fluctuate significantly depending on a number of
factors, some of which are more significant for sales under the purchase
agreement method. These factors include changes in the market value of salvage
vehicles, attendance at salvage auctions, delays or changes in state title
processing, fluctuations in Actual Cash Values ("ACVs") of salvage vehicles,
changes in regulations governing the processing of salvage vehicles, general
weather conditions and the availability and quality of salvage vehicles. The
Company is also dependent upon receiving a sufficient number of total loss
vehicles as well as recovered theft vehicles to sustain its profit margins.
Factors which can effect the number of vehicles received include: reduction of
policy writing by insurance providers which would affect the number of claims
over a period of time and changes in direct repair procedures that would reduce
the number of newer less damaged total loss vehicles that tend to have the
higher salvage values. These factors are further aggravated in the event the
Company fails to renegotiate purchase agreement contracts that are volume and
mix dependent on availability of these types of sales. As a result, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as any indication
of future performance. In addition, revenues for any future quarter are not
predictable with any significant degree of accuracy; the Company's expense
levels are relatively fixed. If revenue levels are below expectations,
operating results are likely to be adversely affected. Due to all of the
foregoing factors, it is likely that in some future quarters the Company's
operating results will be below the expectations of public market analysts and
investors.
Quality and Quantity of Inventory Available from Suppliers. The
Company is dependent upon receiving a sufficient number of total loss vehicles
as well as recovered theft vehicles to sustain its profit margins. Factors
which can effect the number of salvage vehicles received include, reduction of
policy writing by insurance providers which would affect the number of claims
over a period of time and the changes in direct repair procedures that would
reduce the number of newer less damaged total loss vehicles that tend to have
higher salvage values. The decreases in the quality and quantity of inventory
and in particular the availability to newer and less damaged vehicles are
further aggravated under the purchase agreement method of salvage and can have
a negative impact on the operating results and financial condition of the
Company.
Dependence on Key Insurance Company Suppliers. Historically, a
limited number of insurance companies has accounted for a substantial portion
of the Company's revenues. For example, in 1996, vehicles supplied by the
Company's three largest suppliers accounted for approximately 49% of the
Company's unit sales. The largest suppliers, Allstate Insurance ("Allstate")
and State Farm Insurance, each accounted for approximately 20% of the Company's
unit sales. A number of other insurance company suppliers have also
contributed to the profitability of the Company including 20th Century
Insurance. A loss or reduction in the number of vehicles from any of these
suppliers, or adverse change in the agreements that such suppliers have with
the Company, could have a material adverse effect on the Company's business,
operating results and financial condition.
Purchase Agreement Method of Sale. The Company has entered into a
number of purchase agreements, including agreements with its most significant
insurance suppliers, that obligate the Company to purchase most salvage
vehicles offered to it at a formula percentage of ACV. In recent times,
increased ACVs on which the Company's costs are based have reduced the
profitability that the Company realizes on purchase agreement contracts. The
Company has renegotiated and continues to attempt to renegotiate its agreements
with certain of these suppliers. There can be no assurance, however, that the
Company can renegotiate the terms of these agreements on terms favorable to the
Company. The failure to renegotiate some or all of these agreements could have
a material adverse effect on the Company's operating results and financial
condition. In addition, further
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increases in ACVs or declines in the market or auction prices for salvage
vehicles could have a material adverse effect on the Company's business,
operating results and financial condition.
Governmental Regulation. The Company's operations are subject to
regulation, supervision and licensing under various federal, state and local
statutes, ordinances and regulations. The acquisition and sale of totaled and
recovered theft vehicles is regulated by state motor vehicle departments in
each of the locations in which the Company operates. Changes in governmental
regulations or interpretations of existing regulations can result in increased
costs, reduced salvage vehicle prices and decreased profitability for the
Company. For example, the Company believes the reintroduction of the Torres
Bill on January 1, 1997 in California has had a negative effect on the
Company's fourth quarter 1996 results due to buyer reluctance concerning
inspection and retitling procedures. In addition to the regulation of sales
and acquisitions of vehicles, the Company is also subject to various local
zoning requirements with regard to the location of its auction and storage
facilities. These zoning requirements vary from location to location. Failure
to comply with present or future regulations or changes in existing regulations
could have a material adverse effect of the Company's business, operating
results and financial condition.
Competition. Historically, the automotive salvage industry has
been highly fragmented. As a result, the Company faces intense competition for
the supply of salvage vehicles from vehicle suppliers, as well as competition
from processors of vehicles from other regional salvage pools. These regional
salvage pools generally process vehicles under the fixed fee consignment method
and generally do not offer the full range of services provided by the Company.
The salvage industry has recently experienced consolidation, however, and the
Company believes its principal publicly-held competitor is Copart, Inc.
Copart, Inc. has effected a number of acquisitions of regional salvage pools
and competes with IAA in most of IAA's geographic markets. Due to the limited
number of vehicle suppliers, competition for salvage vehicles from Copart and
regional suppliers is intense. It is also possible that the Company may
encounter further competition from existing competitors and new market entrants
that are significantly larger and have greater financial and marketing
resources. Other potential competitors could include used car auction
companies, certain salvage buyer groups and insurance companies some of which
presently supply auto salvage to IAA. While most insurance companies have
abandoned or reduced efforts to sell salvage without the use of service
providers such as the Company, they may in the future decide to dispose of
their salvage directly to customers. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on its business, operating results and financial
condition.
Provision of Services as a National or Regional Supplier. The
provision of services to insurance company suppliers on a national or regional
basis requires that the Company expend resources and dedicate management to a
small number of individual accounts, resulting in a significant amount of fixed
costs. The development of a referral based national network service, in
particular, has required the devotion of financial resources without immediate
reimbursement of such expenses by the insurance company suppliers.
Recent Management Changes. There has recently been turnover in
certain key positions in the Company. Additions of new personnel and
departures of existing personnel, particularly in key positions, can be
disruptive, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
Integration and Expansion of Facilities. The Company seeks to
increase sales and profitability through acquisition of other salvage auction
facilities, new site expansion and the increase of salvage vehicle volume at
existing facilities. There can be no assurance that the Company will continue
to acquire new facilities on terms economical to the Company or that the
Company will be able to add additional facilities on terms economical to the
Company or that the Company will be able to increase revenues at newly acquired
facilities above levels realized prior to acquisition. The Company's ability to
achieve these objectives is dependent, among other things, on the integration
of new facilities, and their information systems, into its existing operations,
the identification and lease of suitable premises and the availability of
capital. There can be no assurance that this integration will occur, that
suitable premises will be identified or that additional capital will be
available to fund expansion and integration of the Company's business. Any
delays or obstacles in this integration process could have a material adverse
effect on the Company's business, operating results and financial condition.
Furthermore, the Company has limited sources of additional capital available
for acquisitions, expansions and start-ups. The Company's ability to integrate
and expand its facilities will depend on its ability to identify and obtain
additional sources of capital to finance such
9
<PAGE> 10
integration and expansion. Finally, the Company has experienced a period of
significant expansion that has placed a strain upon its management systems and
resources. In the future, the Company will be required to continue to improve
its financial and management controls, reporting systems and procedures on a
timely basis and expand, train and manage its employee work force. The failure
to improve these systems on a timely basis and to successfully expand and train
the Company's work force could have a material adverse effect on the Company's
business, operating results and financial condition.
Volatility of Stock Price. The market price of the Company's
common stock has been and could continue to be subject to significant
fluctuations in response to various factors and events, including variations in
the Company's operating results, the timing and size of acquisitions and
facility openings, the loss of vehicle suppliers or buyers, the announcement of
new vehicle supply agreements by the Company or its competitors, changes in
regulations governing the Company's operations or its vehicle suppliers,
environmental problems or litigation.
Environmental Regulation. The Company's operations are subject to
federal, state and local laws and regulations regarding the protection of the
environment. In the salvage vehicle auction industry, large numbers of wrecked
vehicles are stored at auction facilities for short periods of time. Minor
spills of gasoline, motor oils and other fluids may occur from time to time at
the Company's facilities and may result in soil, surface water or groundwater
contamination. Petroleum products and other hazardous materials are contained
in aboveground or underground storage tanks located at certain of the Company's
facilities. Waste materials such as waste solvents or used oils are generated
at some of the Company's facilities and are disposed of as nonhazardous or
hazardous wastes. The Company believes that it is in compliance in all material
respects with applicable environmental regulations and does not anticipate any
material capital expenditures for environmental compliance or remediation .
Environmental laws and regulations, however, could become more stringent over
time and there can be no assurance that the Company or its operations will not
be subject to significant compliance costs in the future. To date, the Company
has not incurred expenditures for preventive or remedial action with respect to
contamination or the use of hazardous materials that have had a material
adverse effect on the Company's results of operations or financial condition.
The contamination that could occur at the Company's facilities and the
potential contamination by previous users of certain acquired facilities create
the risk, however, that the Company could incur substantial expenditures for
preventive or remedial action, as well as potential liability arising as a
consequence of hazardous material contamination, which could have a material
adverse effect on the Company.
Pending Litigation. In August 1995, the Company was named as a
defendant in a lawsuit filed by Registrant shareholders in the United States
District Court for the Central District of California. The lawsuit alleges
violations of the federal securities laws and purports to seek damages on
behalf of a class of shareholders who purchased the Registrant's common stock
during the period of July 27, 1994 through August 4, 1995. While class
certification was initially denied in August of 1996, a new class
representative was presented to the court and the class was ultimately
certified in January 1997. Discovery is proceeding for this lawsuit which is
currently scheduled for trial in July 1997. Although the Company believes the
lawsuit is without merit and intends to defend against it vigorously, there can
be no assurance that the Company will achieve a successful result in this
litigation. The Company has incurred and expects to continue to incur sizable
legal expenses until this litigation is resolved and the outcome could have a
material adverse effect on the Company's business, operating results and
financial condition.
ITEM 2. PROPERTIES.
The Company's principal administrative, sales, marketing and
support functions is located in Palatine, Illinois. The Company will be moving
in mid 1997 to a building providing approximately 26,000 square feet of
available space in Schaumburg, Illinois. The lease on the office space in
Schaumburg expires in May 2004. The Company and its subsidiaries also lease
approximately 44 properties in Arizona, California, Florida, Georgia, Hawaii,
Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey,
New York, North Carolina, Oregon, Texas, Virginia and Washington, as well as
owning 7 properties located in Illinois, Kansas, Massachusetts, New York and
Texas. Most of these properties are used primarily for auction and storage
purposes. Management believes that the Registrant's properties are adequate
for its current needs and that suitable additional space will be available as
required.
10
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS.
(a) The Registrant has been named as a defendant in a lawsuit filed by
Registrant shareholders in the United States District Court for the Central
District of California (in which two of the Registrant's directors and one
former officer and director are also defendants). The lawsuit alleges
violations of the federal securities laws and purports to seek damages on
behalf of a class of shareholders who purchased the Registrant's common
stock during the period of July 27, 1994 through August 4, 1995. In August
1996, class certification was initially denied. A new class representative
was presented and the class was ultimately certified in January 1997. The
Registrant believes the lawsuit is without merit and intends to defend
against it vigorously. See Note 8 to the Registrant's Consolidated
Financial Statements.
(b) The registrant was named as a defendant in a lawsuit filed by registrant
shareholders in the State of California. Class certification was denied
and the lawsuit dismissed in August, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1996.
Executive Officers of the Company
The following table sets forth the names, ages and offices of all of the
executive officers of the Company as of March 31, 1997:
<TABLE>
<CAPTION>
Name Age Office Held
---- --- -----------
<S> <C> <C>
Bradley S. Scott 48 Chairman of the Board of Directors
James P. Alampi 50 President, Chief Executive Officer and Director
Linda C. Larrabee 49 Senior Vice President, Finance, Chief Financial Officer and Secretary
Kevin J. Code 36 Vice President, Sales and Marketing
Gerald C. Comis 48 Vice President, Customer Service and Industry Relations
Donald J. Comis 38 Vice President, Central Division
Peter B. Doder 36 Vice President, Western Division
Marcia A. McAllister 45 Vice President, Public Affairs
Charles E. Rice 34 Vice President, Information Systems
Patrick T. Walsh 34 Vice President, Eastern Division
Stephen L. Green 41 Vice President, Corporate Controller
</TABLE>
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 President, Chief
Executive Officer and a Director of the Company. Between 1982 and January
1990, Mr. Scott was Chairman of the Board of Directors of the predecessor of
the Company and its sole shareholder.
JAMES P. ALAMPI became President, Chief Executive Officer and a
Director of the Company in March 1996. As President and Chief Executive
Officer, Mr. Alampi oversees the Company's overall corporate administration as
well as strategic planning. Prior to joining the Company, Mr. Alampi served as
President of Van Waters & Rogers Inc., a subsidiary of Univar Corporation, a
chemical distribution company ("Univar"), from 1992 to 1995. 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.
LINDA C. LARRABEE became Senior Vice President, Finance, Chief
Financial Officer and Secretary in June 1996. Ms. Larrabee is responsible for
cash management and control as well as financial accounting, planning and
reporting. Prior to joining the Company, Ms. Larrabee served as Vice
President, Information
11
<PAGE> 12
Systems of Van Waters & Rogers Inc. from 1992 to 1996. Prior to that time, Ms.
Larrabee served as Vice President, Information Systems for Hitachi Data Systems
from 1989 to 1992 and as Vice President, Finance for National Advanced Systems
from 1982 to 1989.
KEVIN J. CODE has been Vice President, Sales and Marketing of the
Company since February 1995. Mr. Code is primarily responsible for sales and
marketing to vehicle suppliers. From 1983 to 1995, Mr. Code held various
positions with CCC Information Services, Inc., including Group Vice President
and Vice President - Regional Account Manager.
GERALD C. COMIS became Vice President Customer Service and Industry
Relations in February 1997. Mr. Comis is responsible for overseeing
operational procedures, training, and systems implementation rollout as well as
acquisition due diligence and the integration of new businesses. From October,
1996 to February 1997 Mr. Comis served as Vice President, Western Division.
From April 1994 to October 1996, Mr. Comis served as Vice President, Field
Operations of the Company. From January 1994 to April 1994, Mr. Comis served
as a Vice President of Underwriters Salvage Company, a wholly-owned subsidiary
of the Company, which was recently merged into the Company. From 1968 to
January 1994, Mr. Comis held various positions with Underwriters, prior to the
January 1994 acquisition by the Company, including Branch Manager, Vice
President and Executive Vice President.
DONALD J. COMIS has been Vice President of the Central Division since
October, 1996. Mr. Comis is responsible for the sales and operational
functions of the Central Division. From January 1994 to October 1996, Mr.
Comis served as Regional General Manager. From 1979-1994, Mr. Comis served
Underwriters Salvage Company in many capacities, including Director of
Operations, Asst. Vice President of Operations and Vice President of
Operations.
PETER B. DODER became Vice President of the Western Division in
February 1997. Mr. Doder is responsible for the sales and operational
functions of the Western Division. From February 1996 to February 1997 Mr.
Doder was Vice President, Financial Planning & Analysis of the Company. From
June 1992 through February 1996, Mr. Doder held various positions with the
Company, including Regional Sales Manager, Manager of Marketing Support &
Analysis and Director of Marketing. Prior to joining the Company, Mr. Doder
held various positions with Parks, Palmer, Turner & Yemenidjian, CPAs,
including Tax Manager.
MARCIA A. MCALLISTER has been Vice President, Public Affairs of the
Company since February 1995. Ms. McAllister is responsible for monitoring
legislation and participating on behalf of the Company with a variety of
industry and agency groups. From March 1994 to February 1995, Ms. McAllister
was a consultant to the Company. From June 1986 to January 1994, Ms.
McAllister held a variety of positions with Underwriters including Vice
Chairman and General Counsel.
CHARLES E. RICE has been Vice President, Information Systems of the
Company since September 1996. Mr. Rice is responsible for the implementation
and development of the information systems. Prior to joining the Company, Mr.
Rice served as Director of Marketing Information Services of Van Waters &
Rogers Inc. from 1994 to 1996 and Manager of Distribution Information Services
from 1991 to 1994.
PATRICK T. WALSH has been Vice President, Eastern Division since
October 1996. Mr. Walsh is responsible for the sales and operational functions
of the Eastern Division. From November 1994 to October 1996, Mr. Walsh was
responsible for operational planning. From January 1994 to November 1994, Mr.
Walsh served as Vice President, Operations West of the Company and from
September 1991 through January 1994, Mr. Walsh served as Vice President,
Operations. From April 1988 to September 1991, Mr. Walsh held various
positions in the Company, including Branch Operations Manager.
STEPHEN L. GREEN has been Vice President, Corporate Controller of the
Company since February 1997. Mr. Green is responsible for internal management
and external reporting, taxes and risk management. Prior to joining the
Company, Mr. Green served as Manager of Operations Accounting of Van Waters &
Rogers Inc. from 1989 to February 1997.
12
<PAGE> 13
Officers are appointed to serve, at the discretion of the Board of
Directors, until their successors are appointed. Ms. McAllister is the wife
of Mr. Christopher G. Knowles, a member of the Board of Directors, and Donald
J. Comis is the brother of Gerald C. Comis.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Registrant's Common Stock is traded on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol IAAI. The following
table sets forth the range of high and low per share bid information, as
reported on the Nasdaq National Market for each quarter of fiscal 1996 and
1995. At March 15, 1997, the Registrant had 222 holders of record of its
Common Stock, approximately 1,700 beneficial owners and 11,288,617 shares
outstanding.
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------- -----------
High Low High Low
---- ---- ---- ---
<S> <C> <C> <C> <C>
First Quarter $11.25 $ 8.25 $36.00 $27.25
Second Quarter 13.37 8.75 35.25 24.75
Third Quarter 10.87 7.75 32.00 8.25
Fourth Quarter 11.12 8.75 11.25 6.50
</TABLE>
During the past two fiscal years, the Registrant did not declare or
pay any cash dividends on its Common Stock. The Registrant currently plans to
retain all of its earnings to support the development and expansion of its
business and has no present intention of paying any dividends on the Common
Stock in the foreseeable future. In addition, the Registrant's credit
agreements between the Registrant and its bank limit the Registrant's ability
to pay cash dividends. The Board of Directors of the Registrant reviews the
dividend policy periodically to determine whether the declaration of dividends
is appropriate.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA.
The tables below summarize the Selected Consolidated Financial Data of
the Registrant as of and for each of the last five fiscal years. This selected
financial information should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Report. The selected consolidated financial data
presented below have been derived from the Company's Consolidated Financial
Statements that have been audited by KPMG Peat Marwick LLP independent
certified public accountants, whose report is included herein covering the
Consolidated Financial Statements as of December 31, 1996 and 1995 and for each
of the three years in the period ended December 31, 1996. The statement of
earnings for the year ended December 31, 1993 and 1992 and the balance sheet
data as of December 31, 1994, 1993 and 1992 are derived from audited
Consolidated Financial Statements not included herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- ---------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected Statement of
Earnings Data
Net sales $281,893 $257,996 $172,125 $104,086 $ 60,535
Earnings from operations 7,561 6,885 19,145 10,624 5,684
Net earnings (1) 3,102(1) 3,136(1) 10,985 6,618 4,379
Net earnings per
common share (2) .27 .27 .98 .74 .61
Weighted average common
shares outstanding 11,333 11,421 11,225 8,968 7,201
-------- -------- -------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
--------- ---------- --------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data
Working capital $ 19,679 $ 12,187 $ 12,055 $ 28,781 $ 19,606
Total assets 211,804 210,633 173,641 143,925 51,898
Long-term debt, excluding
current installments 30,843 28,973 4,409 1,058 917
Total shareholders' equity 146,589 143,381 139,897 123,689 44,447
--------- ---------- --------- ----------- --------
</TABLE>
(1) Amount includes special charges of $1,395,000 and $4,226,000 in 1996 and
1995, respectively, related to the Company's plan to reposition itself to
achieve its strategic growth objectives. See Note 10 to the Consolidated
Financial Statements.
(2) Fully diluted net earnings per share is not presented since the amounts
are antidilutive or do not differ significantly from the primary earnings
per share presented. See Note 1 to the Consolidated Financial
Statements.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The discussion in this section contains forward-looking information that is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected. The Company's actual
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Factors That May Affect Future Results" below and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Among these risks are legislative acts, weather conditions,
market value of salvage declining, management changes, outcome of litigation,
competition, quality and quantity of inventory available from suppliers, and
dependence on key insurance company suppliers.
OVERVIEW
The Company offers insurance companies and other vehicle suppliers
cost-effective salvage processing solutions through a variety of different
methods of sale, including fixed fee consignment, purchase agreement and
percentage of sale consignment. Under the purchase agreement sales method, the
vehicle is owned by the Company and the sales price of the vehicle is recorded
in revenue. Under the fixed fee and percentage of sale consignment sales
methods, the vehicle is not owned by the Company and only the fees associated
with the processing and sale of the vehicle are recorded in net sales. By
assuming some of the risk inherent in owning the salvage vehicle instead of
selling on a consignment basis, the Company is potentially able to increase
profits by improving the value of the salvage vehicle prior to the sale.
Under the purchase agreement method, IAA generally pays the
insurance company a pre-determined percentage of the Actual Cash Value ("ACV")
to purchase the vehicle, pursuant to the purchase agreement. ACVs are the
estimated pre-accident fair value of a vehicle, adjusted for additional
equipment, mileage and other factors. Until the significant rise in used car
prices and ACVs during 1995, the conversion from consignment sales to purchase
agreement sales generally benefited the Company. During 1995, however, used
car prices and ACVs rose significantly. Despite the increase in used car
prices and ACVs, prices at salvage auctions did not increase correspondingly.
Because the Company's purchase price is fixed by contract, the increased ACVs
can and has reduced profitability on the sale of vehicles under the purchase
agreement method.
The Company has renegotiated some of its purchase agreement
contracts and seeks to renegotiate certain others. If the relationship between
ACVs and salvage prices remains at its present level, the Company may continue
to encounter reduced profitability from purchase agreement contracts until they
expire or are renegotiated. The Company continues to offer purchase agreements
to those customers who select it, but generally at a lower percentage of ACV
than previously offered to customers, based on current vehicle values. The
Company has added adjustment and risk-sharing clauses to its new standard
purchase agreement contracts designed to provide some protection to the Company
and its customers from certain unexpected, significant changes in the
ACV/salvage price relationship.
Since its initial public offering, the Company has grown mostly
through acquisitions. Since June 1995, the Company has acquired five salvage
pools (the "Acquisitions") strategically located throughout the United States,
and has opened a new facility start-up in Kansas City. The largest of these
acquisitions, ADB Auctions, Inc. and its related company, ASC Auctions, Inc.,
occurred on June 19, 1995. Of the four remaining smaller acquisitions, three
were made in July, August and December 1995 and one was made in January 1996.
The Company's operating results are subject to fluctuations,
including quarterly fluctuations, that can result from a number of factors,
some of which are more significant for sales under the purchase agreement
method. See "Factors That May Affect Future Results" above for a further
discussion of some of the factors that affect or could affect the Company's
business, operating results and financial condition.
15
<PAGE> 16
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Net sales of the Company increased to $281,893,000 for the year
ended December 31, 1996, from $257,996,000 in 1995, a 9% increase. Sales were
higher due to a full year of revenue from acquired operations, same store
growth and fee increases. Unit volume increased 16%, as compared to the same
period in 1995, with most of the unit growth resulting from acquired
operations, while existing facilities volume increased 2%. Net sales growth
from existing facilities increased 5%, as a result of same store growth and
increased fees. The purchase agreement sales method of processing accounted
for 148,000 vehicles, up 8% from 1995, or 33% of total volume.
Cost of sales increased to $223,144,000 for the year ended December
31, 1996, from $201,191,000 in 1995, an 11% increase. The increase in cost of
sales is mostly attributable to increased units sold under existing purchase
agreements, increased Actual Cash Value's (ACVs) which causes the price that
the Company pays for its inventory to be higher, new purchase agreement
accounts and volume from acquisitions that were made during 1995. The Company
notes that in the latter part of the year, the trend of consignment units
converting to purchase agreement units reversed. Cost of sales, as a
percentage of sales, increased 1% compared to 1995. Cost of sales growth was
higher than sales growth, and as a percentage of revenue increased from 78% to
79%. The 1% increase is a result of an increase in the number of purchase
agreement vehicles sold at lower selling prices as a percent of their ACVs.
Direct operating expenses increased to $46,015,000 for the year
ended December 31, 1996, from $42,308,000 in 1995, a 9% increase. The increase
in direct operating expenses was the result of the acquisitions that were made
during 1995. Direct operating expenses as a percentage of net sales were flat
compared to the same period in 1995. Amortization of acquisition costs
increased to $3,778,000 for the year ended December 31, 1996 from $3,386,000
for the comparable period in 1995, mostly as a result of a full year of
amortization of goodwill for the acquisitions.
Special charges of $1,395,000 were incurred in the year ended 1996.
During 1996, the Company hired a new President and CEO, a new Sr. Vice
President and CFO, a new Vice President of Information Services, and
restructured its operations such that instead of one Vice President of
Operations, there are now three Divisional Vice Presidents. The new management
team has spent considerable time in determining its strategic plan. In looking
towards implementing its strategic plan, the Company established its corporate
headquarters in Illinois and evaluated past contracts still in effect. As a
result of this evaluation, the Company decided to recognize, as a special
charge, the expense related to the termination of pre-existing agreements that
no longer have value to the Company's current strategy. The Company also
entered into an agreement with Bradley S. Scott, former Chief Executive Officer
that terminates his employment agreement with the Company and provides that he
will serve as an outside Director and Chairman of the Board. The Company
expects to complete the centralization of the corporate groups at its
corporate headquarters in Illinois, by mid-summer and has negotiated a buyout
of a long-term lease for property located in Woodland Hills, California. The
net of these items recognized as special charges was $1,395,000.
Interest expense increased to $3,009,000 for the year ended
December 31, 1996, from $2,345,000 in 1995. The increase in interest expense
is mostly attributable to a full year's interest on notes payable to sellers of
certain acquisitions completed in 1995 and for a full year's interest on a
portion of the $15,000,000 Revolving Line of Credit Facility (the "Facility").
Interest income decreased to $890,000 for the year ended December
31, 1996, from $913,000 in 1995. The change in interest income was attributable
to a decrease in interest-bearing investments liquidated during 1995 to
consummate acquisitions.
Income taxes increased to $2,340,000 for the year ended December
31, 1996, from the $2,317,000 in 1995. This slight increase of $23,000 was
primarily the result of a slightly higher tax rate incurred by the Company in
1996. (See Note 5, Notes to the Consolidated Financial Statements).
16
<PAGE> 17
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales of the Company increased to $257,996,000 for the year
ended December 31, 1995, from $172,125,000 in 1994, a 50% increase. Sales were
higher due to converting consignment sales to purchase agreement sales, the
five acquisitions, and fee increases. Unit volume increased 21% in 1995,
with all of the unit growth resulting from the acquired operations, while
existing facilities volume decreased 2%. Net sales growth from existing
facilities increased 30%, as a result of converting consignment sales to
purchase agreement sales and increased fees. The purchase agreement sales
method of processing accounted for 138,000 vehicles, or 36% of total volume, up
60% from 1994.
Cost of sales increased to $201,191,000 in 1995, from $116,470,000
in 1994, a 73% increase. The increase in cost of sales was substantially a
result of increased purchase agreement volume resulting from the conversion of
existing consignment agreements, new purchase agreement accounts and volume
from the five acquisitions. Cost of sales growth was higher than sales growth,
and as a percentage of revenue increased from 68% to 78%, mostly as a result of
the increase of purchase agreement vehicles and the higher price per car paid
due to higher ACVs and lower selling prices as a percent of ACV for some
salvage vehicles on the purchase agreement method of sales.
Cost of sales as a percentage of net sales was also negatively
impacted by the implementation of the 1994 California Senate Bill No. 1833 (the
"Torres Bill"). A portion of the bill, which went into effect July 1, 1995,
required rebuilders of salvage automobiles to obtain an inspection from the
California Highway Patrol (CHP) before they could obtain a new title for the
rebuilt vehicle in California. The Company's salvage auto buyers reported
delays of three months or more to secure the required inspection. This delay
may have caused a significant number of buyers of salvage vehicles to cease
purchasing or bidding for salvage vehicles. The Company believes this
contributed significantly to lower buyer counts and lower gross proceeds
throughout California, as the salvage buyers delayed buying until inspection
waits shortened. Since the Purchase Agreement is used extensively in
California, the Company believes that the impact of the Torres Bill lowered the
vehicle margins.
Direct operating expenses increased to $42,308,000 in 1995, from
$33,592,000 in 1994, a 26% increase. The increase in direct operating expenses
was the result of the operating expenses associated with the five acquired
operations, as well as the Company's continued investments in personnel,
management information systems, facilities expansion and improvements, and
related infrastructure to support its national rollout and its future growth.
Direct operating expenses as a percentage of net sales decreased to 16% for
1995, compared to 20% for 1994. The increased proportion of purchase agreement
sales has contributed to this percentage change. Amortization of acquisition
costs associated with the acquisitions increased to $3,386,000 for 1995 from
$2,918,000 for 1994, as a result of amortization of goodwill for the five
acquisitions and due to a full year of amortization for 1994 acquisitions.
Special charges of $4,226,000 were incurred in the year ended 1995.
The Company responded to changes in its industry and formulated its plans to
reposition itself to achieve its strategic growth objectives. As a result of
this repositioning, the Company determined that certain of its computer
systems, software, and related assets should be written down resulting in a
charge of approximately $2.5 million which is included in special charges. The
Company also decided to not move its North Hollywood, California corporate
administrative staff to a facility it had leased in Woodland Hills, California,
resulting in a $1.1 million special charge. Additionally, the Company recorded
charges related to the repositioning aggregating $600,000, all of which are
included in special charges.
Interest expense increased to $2,345,000 in 1995, from $454,000 in
1994. The change in interest expense was mostly attributable to an increase in
long-term debt as a result of the Company's issuance of 8.6% Senior Notes,
which funded in January and February 1995.
Interest income increased to $913,000 in 1995, from $413,000 in
1994. The change in interest income was attributable to an increase in
interest-bearing investments as a result of the funds received from the
Company's issuance of 8.6% Senior Notes, which funded in January and February
1995.
17
<PAGE> 18
Income taxes decreased to $2,317,000 in 1995, from $8,119,000 in
1994. This decrease is primarily the result of decreased earnings primarily
due to special charges, lower margins, and increased expenses. (See Note 5,
Notes to Consolidated Financial Statements).
The Company's net earnings were $3,136,000 in 1995, a 71% decrease
from the 1994 net earnings, of $10,985,000.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 1996, the Company had current assets of
$54,051,000, including $5,888,000 of cash and cash equivalents, current
liabilities of $34,372,000 and working capital of $19,679,000. The $7,492,000
increase in working capital from December 31, 1995, was principally related to
proceeds from long term borrowings under the Facility and net earnings. On
August 1, 1995, the Company entered into the Facility with the bank, permitting
borrowings of up to $15,000,000. The Facility, subject to certain terms and
conditions, expires in August 1998 and bears interest at a variable rate.
Approximately $4,500,000 in borrowings were outstanding on the Facility at
December 31, 1996. The Company has refinanced this line of credit agreement on
similar terms with a different bank. The $15,000,000 facility is unsecured,
bears interest at the bank's prime rate or LIBOR, as defined and matures on
April 1, 2000.
At December 31, 1996, the Company's indebtedness consisted mostly
of 8.6% Senior Notes approximating $20,000,000, a post-retirement benefits
liability relating to the Underwriters Salvage Company acquisition of
approximately $4,173,000, amounts due to the sellers related to an acquisition
aggregating $4,250,000, with imputed interest at 7.5%, amounts due to the
sellers of smaller acquisitions aggregating $800,000, which bear interest at
8.0% and $4,500,000 outstanding on the facility which bears interest at a
variable rate which is approximately 7% at December 31, 1996.
Capital expenditures were approximately $5,910,000 for the year
ended December 31, 1996. These capital expenditures included upgrading and
expanding the Company's facilities and management information systems. The
Company currently leases most of its facilities and other properties.
The Company believes that cash generated from operations and its
borrowing capacity will be sufficient to fund capital expenditures and provide
adequate working capital for operations for the next twelve months. Part of the
Company's plan is continued growth possibly through new facility start-ups and
acquisitions. At some time in the future, the Company may require additional
financing. There can be no assurance that additional financing, if required,
will be available on favorable terms.
The Company's operating results have not historically been
materially affected by inflation.
RECENT DEVELOPMENTS
The Financial Accounting Standards Board has recently issued
Statement No. 128, "Earnings per Share" (Statement No. 128), issued in March
1997 and effective for fiscal years ending after December 15, 1997. The
Company will adopt Statement No. 128 in 1997. Statement No. 128 introduces and
requires the presentation of "Basic" earnings per share which represents net
earnings divided by the weighted average share outstanding excluding all common
stock equivalents. Dual presentation of "Diluted" earnings per share
reflecting the dilutive effects of all common stock equivalents, will also be
required. The Diluted presentation is similar to the current presentation of
fully diluted earnings per share. Management believes the adoption of
Statement No. 128 will not have a material impact on the Company's financial
position or results of operations.
In August 1995, the Registrant was named as a defendant in two
lawsuits filed by Registrant shareholders. The first suit was filed in the
U.S. District Court for the Central District of California. This suit alleges
violations of the federal securities laws and purports to seek damages on
behalf of a class of shareholders who purchased the Registrant's common stock
during the period of July 27, 1994 through August 4, 1995. In August 1996, the
federal court denied certification of the plaintiff class on the ground that
the named plaintiff was
18
<PAGE> 19
not an adequate class representative. However, on January 6, 1997, the federal
court certified a new plaintiff shareholder to represent the class alleged.
The Registrant believes that this lawsuit is without merit and intends to
continue to defend against it vigorously.
The second suit was filed in the Los Angeles County Superior
Court. This suit alleged violations of California securities laws and purported
to seek damages on behalf of a class of shareholders who purchased the
Registrant's common stock during the period of February 21, 1995 through August
4, 1995. In August 1996, the state court refused to certify this class on the
ground that the named plaintiff was not an adequate class representative. As a
result, the action has been dismissed and judgment has been entered in favor of
the Registrant and its officers and directors without payment of any
consideration.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the financial statements and
supplementary financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
19
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to Directors is included under the caption
"Proposal One - Election of Directors" in the Registrant's Notice of Annual
Meeting of Shareholders and Proxy Statement to be filed with the Securities and
Exchange Commission and incorporated herein by reference. Information with
respect to Executive Officers may be found on pages 11 to 12 herein, under the
caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is included as "Executive
Compensation" and "Plan Benefits Table" under the caption "Proposal One -
Election of Directors" in the Registrant's Notice of Annual Meeting of
Shareholders and Proxy Statement to be filed with the Securities and Exchange
Commission and incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item is included in "Security Ownership
of Certain Beneficial Owners and Management" under the caption "Proposal One -
Election of Directors" in the Registrant's Notice of Annual Meeting of
Shareholders and Proxy Statement to be filed with the Securities and Exchange
Commission and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is included as "Certain
Transactions" under the caption "Proposal One - Election of Directors" in the
Registrant's Notice of Annual Meeting of Shareholders and Proxy Statement to be
filed with the Securities and Exchange Commission and incorporated herein by
reference.
20
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ----
The following Consolidated Financial Statements of Insurance
Auto Auctions, Inc. and its subsidiaries are filed as part of
this report on Form 10-K:
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . 22
Consolidated Balance Sheets - December 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Earnings - Years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Shareholders' Equity-
Years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . 26
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . 27
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 28
</TABLE>
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the matter or
conditions are not present or the information required to be
set forth therein is included in the Consolidated Financial
Statements and related Notes thereto.
3. EXHIBITS
See Item 14(c) below.
(b) REPORTS ON FORM 8-K. None.
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No Description
-- -----------
<S> <C>
3.1(1) Restated Articles of Incorporation of the Registrant, as filed with the California Secretary of State on January
12, 1990.
3.2(1) Certificate of Amendment of Articles of Incorporation of Registrant, as filed with the California Secretary of
State on October 3, 1991.
3.3(1) Amended Articles of Incorporation of Registrant.
3.4(2) Certificate of Amendment of Articles of Incorporation of Registrant, as filed with the California Secretary of
State on November 13, 1991.
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
3.5(1) Amended and Restated Bylaws of Registrant.
4.1 Fifth Amended and Restated Registration Rights Agreement, dated September 23, 1994, by and among the Registrant,
William W. Liebeck, Bradley S. Scott, Bob F. Spence, Corinne Spence, Jimmie A. Dougherty, Patricia L. Dougherty and
Midwest Auto Pool Corporation.
4.2(1) Warrant, dated January 18, 1990, issued by Registrant to Westinghouse Credit Corporation ("WCC") to purchase
176,056 shares of Series A Common Stock of Registrant ("WCC Warrant").
4.3 Specimen Stock Certificate.
4.4(7) Stockholder Agreement, dated December 1, 1993, by and among the Registrant, Tech-Cor, Inc., Bradley S. Scott, Bob
F. Spence and William L. Liebeck.
4.5(7) Registration Agreement, dated December 1, 1993, by and among the Registrant and Tech-Cor.
4.5(10) Note Agreement, dated as of December 1, 1994 among the Registrant and the purchasers listed therein.
9.2(1) Letter agreement, dated September 29, 1989, between Bradley S. Scott and L.A.A.S. Acquisition Registrant.
10.2(1) Non-Competition and Confidentiality Agreement, dated January 17, 1990, by and among the Registrant, L.A.A.S.
Acquisition Company, Bradley S. Scott and Jillian Scott.
10.15+(1) Salvage Purchase Agreement by and between Registrant and Allstate Insurance Company (Ventura, Santa Barbara, and
San Luis Obispo Counties).
10.16+(1) Exclusive Salvage Purchase Agreement by and between Registrant and Allstate Insurance (Los Angeles Metro Region).
10.17+(1) Exclusive Salvage Purchase Agreement by and between Registrant and Allstate Insurance Company (Colton, San Diego,
and Rancho Bernardo), as amended.
10.19+(1) Salvage Purchase Agreement by and between Registrant and State Farm Insurance Company.
10.29(2) 1991 Employment Agreement, dated September 30, 1991, between Registrant and Bradley S. Scott together with
promissory note and stock pledge agreement.
10.35(5)* Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as amended and restated.
10.36(8)* Form of Notice of Grant of Stock Option -- employee, officer.
10.37(4)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated
(including Form of Notice of Grant of Stock Option) -- employee.
10.38(4)* Form of Stock Option Agreement: Non-Employee Director, Automatic Option Grant, Insurance Auto Auctions, Inc. Stock
Option Plan, as restated (including Form of Notice of Grant of Stock Option).
10.39(4)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated
(including Form of Notice of Grant of Stock Option) -- employee.
10.40(4)* Form of Non-Statutory Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated
(including Form of Notice of Grant of Stock Option) -- officer.
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
10.41(4)* Form of Incentive Stock Option Agreement, Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as restated
(including Form of Notice of Grant of Stock Option) -- officer.
10.49(1) Common Stock Purchase Agreement, dated as of October 29, 1989, by and among L.A.A.S. Acquisition Company, Bradley
S. Scott and Jillian Scott.
10.50(1) Stock Exchange Agreement and Plan of Reorganization, dated October 7, 1991, by and between Bradley S. Scott and
RMW.
10.52(2) Termination Agreement by and among Registrant, WCC, RMW, Middleton Holdings, Ltd., Robert H. Kenmore, Ayse M.
Kenmore, William W. Liebeck and Michael W. Gibbons.
10.53(2) Stock Pledge Agreement, dated October 31, 1991, by and among WCC, Registrant and William W. Liebeck.
10.61(3) Asset Purchase Agreement, dated as of January 17, 1992, by and among Registrant, MASP Acquisition Corp. ("MASP"),
the Registrant's wholly owned subsidiary, M&M Auto Storage Pool, Inc. ("M&M") and Melvin R. and Marian Martin.
10.62(3) Promissory Note, dated January 30, 1992, issued by MASP.
10.63(3) Guarantee issued by Registrant, dated January 30, 1992.
10.64(3) Security Agreement, dated January 30, 1992, by and between MASP and M&M .
10.65(3) Exclusive Towing Services Agreement, dated January 30, 1992, by and between MASP and M&M .
10.66(3) Facilities Lease Agreement, dated January 17, 1992, by and between Melvin R. Martin and MASP.
10.81(3) Indemnification Agreement, dated January 30, 1992, by and between Registrant and Melvin R. Martin.
10.83(4) Indemnification Agreement, dated August 24, 1992, by and between Registrant and William L. Overell.
10.85(8) Employment Agreement, dated August 24, 1992, by and between Registrant and William L. Overell.
10.118(5)* Insurance Auto Auctions, Inc. Employee Stock Purchase Plan.
10.119(5) Indemnification Agreement, dated June 1, 1993, by and between the Registrant and Bob F. Spence. Identical
Indemnification Agreements were entered into by and between the Registrant and each of Susan B. Gould, William W.
Liebeck, William L. Overell, Bradley S. Scott, Thomas J. O'Malia, Christopher G. Knowles and Richard Rosenthal.
10.120(6) Separation and Consulting Agreement, dated July 18, 1993, by and between the Registrant, Equivest Partners, Inc.
and Robert H. Kenmore, as amended.
10.122(7) Asset Purchase Agreement, dated December 1, 1993, by and between the Registrant, BC Acquisition Corp. (a
wholly-owned subsidiary of Registrant ("BCAC") and Tech-Cor, Inc. ("Tech-Cor").
10.123(7)+ Salvage Agreement by and between the Registrant and Allstate Insurance Company.
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
10.124(7) License Agreement, dated December 1, 1993, by and between BCAC and Allstate Insurance Company.
10.125(7) Transition Agreement, dated December 1, 1993, by and between BCAC and Tech-Cor.
10.126(7) Lease, dated December 1, 1993, by and between Allstate Insurance Company and BCAC.
10.127(7) Guaranty, dated December 1, 1993, by Allstate Insurance Company and delivered to the Registrant and BCAC.
10.128+ Salvage Purchase Agreement by and between the Registrant and 20th Century Insurance Company.
10.129(8)* Addendum dated October 1, 1993 to the Employment Agreement, dated August 24, 1992, by and between the Registrant
and William L. Overell.
10.130(9) Agreement and Plan of Reorganization, dated January 20, 1994, among the Registrant, USC Acquisition Corp.,
Underwriters Salvage Company and the shareholders of Underwriters Salvage Company.
10.131(9) Agreement of Merger, dated January 20, 1994, by and among Underwriters Salvage Company, USC Acquisition Corp. and
the Registrant.
10.132(9) Escrow Agreement, dated January 20, 1994, by and among the Registrant, William W. Liebeck, USC Acquisition Corp.
and all of the shareholders of Underwriters Salvage Company.
10.133(9)* Employment Agreement, dated January 20, 1994, by and between the Registrant and Christopher G. Knowles.
10.134(9) Registration Rights Agreement, dated January 20, 1994, by and among, the Registrant, Christopher G. Knowles, Gerald
C. Comis, F. Peter Haake and Donald J. Comis.
10.135(11) Indemnification Agreement, dated January 20, 1994, between the Registrant and Christopher G. Knowles.
10.136(11)* Letter Agreement, dated August 22, 1994, between the Registrant and Bradley S. Scott.
10.137(11) Indemnification Agreement, dated November 15, 1994, between the Registrant and Glen E. Tullman.
10.138(11)* Consulting Agreement, dated November 15, 1994, between the Registrant and Glen E. Tullman.
10.139(11) Indemnification Agreement, dated February 22, 1995, between the Registrant and Richard A. Rosenthal. Identical
Indemnification Agreements were entered into by and between the Registrant and Kevin J. Code, Gerald C. Comis,
Marcia A. McAllister, Patrick T. Walsh and William L. Warburton.
10.140(12) Stock Purchase Agreement by and among Registrant and ADB Auctions Systems, Inc., ADBCO Acquisition Corp. and the
shareholders of ADB Auction Systems, Inc. dated June 16, 1995.
10.141(12) Stock Purchase Agreement by and among Registrant and ASC Auctions, Inc., ADBCO Acquisition Corp. and the
shareholders of ASC Auctions, Inc. dated June 16, 1995.
10.142(12) Form of Promissory Notes dated June 16, 1995.
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
10.143(13) Revolving Credit Agreement between the Registrant and Nationsbank of Texas, N.A., dated August 1, 1995
10.144(14)* Letter Agreement, dated December 21, 1995, between the Registrant and William L. Overell, as
amended.
10.145(14)* Letter Agreement, dated April 3, 1996, between the Registrant and William W. Liebeck.
10.146(15)+ Revised Salvage Agreement by and between the Registrant and Allstate Insurance Company dated April 29, 1996.
10.147(15)* Employment Agreement by and between the Registrant and James P. Alampi dated March 11,
1996.
10.148* Letter Agreement by and between the Registrant and Bradley S. Scott dated December 5, 1996.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney incorporated by reference to page 29 of this Form 10-K.
27.1 Financial Data Schedule
</TABLE>
- ---------------
25
<PAGE> 26
<TABLE>
<S> <C>
(1) Incorporated by reference from an exhibit filed with the Registrant's Registration Statement on Form S-1 (File No.
33-43247) declared effective by the Securities and Exchange Commission ("SEC") on November 20, 1991.
(2) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. O-19594) for
the fiscal year ended December 31, 1991.
(3) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed
with the SEC on January 31, 1992.
(4) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. O-19594) for
the fiscal year ended December 31, 1992.
(5) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. O-19594) for
the fiscal quarter ended June 30, 1993.
(6) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. O-19594) for
the fiscal quarter ended September 30, 1993.
(7) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed
with the SEC on December 15, 1993.
(8) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. O-19594) for
the fiscal year ended December 31, 1993.
(9) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed
with the SEC on February 3, 1994.
(10) Incorporated by reference from an exhibit included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed
with the SEC on February 10, 1995.
(11) Incorporated by reference from an exhibit included in the Registrant's Annual Report on Form 10-K (File No. O-19594) filed
with the SEC on March 31, 1995.
(12) Incorporated by reference from exhibits included in the Registrant's Current Report on Form 8-K (File No. O-19594) filed
with the SEC on June 16, 1995, as amended.
(13) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. O-19594)
for the fiscal quarter ended September 30, 1995.
(14) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. O-19594)
filed with the SEC on May 2, 1996 as amended.
(15) Incorporated by reference from an exhibit included in the Registrant's Quarterly Report on Form 10-Q (File No. O-19594)
filed with the SEC on August 5, 1996 as amended.
+ Certain portions of this document were granted confidential treatment pursuant to an order from the SEC.
* This item is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this
form pursuant to Item 601(b)(10)(iii) of Regulation S-K. </TABLE>
[/TABLE]
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INSURANCE AUTO AUCTIONS, INC.
Date: March 28, 1997 By: /s/ Linda C. Larrabee
----------------------------------
Name: Linda C. Larrabee
Title: Vice President and Chief
Financial Officer
27
<PAGE> 28
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints James P. Alampi and Linda C.
Larrabee and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<S> <C>
Date: March 28, 1997 By: /s/ Bradley S. Scott
Name: ---------------------------------------------------------
Title: Bradley S. Scott
Chairman of the Board of Directors
Date: March 28, 1997 By: /s/ James P. Alampi
Name: ---------------------------------------------------------
Title: James P. Alampi
President and Chief Executive Officer, Director
Date: March 28, 1997 By: /s/ Linda C. Larrabee
Name: ---------------------------------------------------------
Title: Linda C. Larrabee
Senior Vice President, Finance, Chief Financial Officer and
Secretary
Date: March 28, 1997 By: /s/ Maurice A. Cocca
Name: ---------------------------------------------------------
Title: Maurice A. Cocca
Director
Date: March 28, 1997 By: /s/ Susan B. Gould
Name: ---------------------------------------------------------
Title: Susan B. Gould
Director
Date: March 28, 1997 By: /s/ Christopher G. Knowles
Name: ---------------------------------------------------------
Title: Christopher G. Knowles
Director
Date: March 28, 1997 By: /s/ Melvin R. Martin
Name: ---------------------------------------------------------
Title: Melvin R. Martin
Director
Date: March 28, 1997 By: /s/ Thomas J. O'Malia
Name: ---------------------------------------------------------
Title: Thomas J. O'Malia
Director
Date: March 28, 1997 By: /s/ Glen E. Tullman
Name: ---------------------------------------------------------
Title: Glen E. Tullman
Director
</TABLE>
28
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Insurance Auto Auctions, Inc.:
We have audited the Consolidated Financial Statements of Insurance Auto
Auctions, Inc. and subsidiaries, as listed in the accompanying index. These
Consolidated Financial Statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these Consolidated
Financial Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the Consolidated Financial Statements referred to above present
fairly, in all material respects, the financial position of Insurance Auto
Auctions, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
February 12, 1997
29
<PAGE> 30
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,888,000 7,182,000
Accounts receivable, net 34,371,000 30,198,000
Inventories 10,162,000 9,495,000
Other current assets 3,630,000 3,591,000
------------ -----------
Total current assets 54,051,000 50,466,000
------------ -----------
Property and equipment, at cost:
Land and buildings 5,652,000 4,790,000
Furniture and fixtures 1,149,000 1,049,000
Machinery and equipment 15,434,000 13,527,000
Leasehold improvements 12,042,000 9,832,000
------------ -----------
34,277,000 29,198,000
Less accumulated depreciation and amortization 12,681,000 8,054,000
------------ -----------
Net property and equipment 21,596,000 21,144,000
Other assets, principally goodwill, net (Note 2) 136,157,000 139,023,000
------------ -----------
$211,804,000 210,633,000
============ ===========
</TABLE>
30
<PAGE> 31
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
<S> <C> <C>
Current liabilities:
Current installments of long-term debt (Note 3) $ 2,571,000 4,015,000
Accounts payable 18,014,000 20,531,000
Accrued liabilities 11,801,000 11,306,000
Income taxes (Note 5) 1,986,000 2,427,000
------------ -----------
Total current liabilities 34,372,000 38,279,000
Long-term debt, excluding current installments (Note 3) 26,670,000 24,619,000
Accumulated postretirement benefits obligation (Note 9) 4,173,000 4,354,000
------------ -----------
Total liabilities 65,215,000 67,252,000
------------ -----------
Shareholders' equity (Notes 2, 4 and 6):
Preferred stock, par value of $.001 per share. Authorized 5,000,000
shares; none issued -- --
Common stock, par value of $.001 per share. Authorized 20,000,000 shares;
issued and outstanding 11,282,838 and 11,270,141 shares in 1996 and 1995,
respectively 11,000 11,000
Additional paid-in capital 131,681,000 131,575,000
Retained earnings 14,897,000 11,795,000
------------ -----------
Total shareholders' equity 146,589,000 143,381,000
Commitments and contingencies (Note 8) ------------ -----------
$211,804,000 210,633,000
============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
31
<PAGE> 32
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
For the years ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Net sales:
Vehicle sales $201,104,000 188,222,000 114,748,000
Fee income 80,789,000 69,774,000 57,377,000
------------ ----------- -----------
281,893,000 257,996,000 172,125,000
Costs and expenses (Note 7):
Cost of sales 223,144,000 201,191,000 116,470,000
Direct operating expenses 46,015,000 42,308,000 33,592,000
Amortization of acquisition costs 3,778,000 3,386,000 2,918,000
Special charges (Note 10) 1,395,000 4,226,000 --
------------ ----------- -----------
Earnings from operations 7,561,000 6,885,000 19,145,000
Other (income) expense:
Interest expense 3,009,000 2,345,000 454,000
Interest income (890,000) (913,000) (413,000)
------------ ----------- -----------
Earnings before income taxes 5,442,000 5,453,000 19,104,000
Income taxes (Note 5) 2,340,000 2,317,000 8,119,000
------------ ----------- -----------
Net earnings $ 3,102,000 3,136,000 10,985,000
============ =========== ===========
Net earnings per common and common equivalent shares $ .27 .27 .98
============ =========== ===========
Weighted average common and common equivalent shares
outstanding 11,333,000 11,421,000 11,225,000
============ =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
32
<PAGE> 33
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Notes 4 and 6)
For the years ended December 31
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 11,060,576 $ 11,000 126,004,000 (2,326,000) 123,689,000
Issuance of common stock in connection
with Underwriters Salvage
Company acquisition 140,601 -- 4,306,000 -- 4,306,000
Issuance of common stock in connection
with other acquisitions 4,242 -- 127,000 -- 127,000
Issuance of common stock in connection
with exercise of common stock
options 40,150 -- 648,000 -- 648,000
Issuance of common stock in connection
with the employee stock purchase
plan 5,336 -- 142,000 -- 142,000
Net earnings -- -- -- 10,985,000 10,985,000
------------ ------------- ------------- ------------ -------------
Balance at December 31, 1994 11,250,905 11,000 131,227,000 8,659,000 139,897,000
Issuance of common stock in connection
with exercise of common stock
options 10,800 -- 143,000 -- 143,000
Issuance of common stock in connection
with the employee stock purchase
plan 8,436 -- 205,000 -- 205,000
Net earnings -- -- -- 3,136,000 3,136,000
------------ ------------- ------------- ------------ -------------
Balance at December 31, 1995 11,270,141 11,000 131,575,000 11,795,000 143,381,000
Issuance of common stock in connection
with exercise of common stock
options 2,000 -- 13,000 -- 13,000
Issuance of common stock in connection
with the employee stock purchase
plan 10,697 -- 93,000 -- 93,000
Net earnings -- -- -- 3,102,000 3,102,000
------------ ------------- ------------- ------------ -------------
Balance at December 31, 1996 11,282,838 $ 11,000 131,681,000 14,897,000 146,589,000
============ ============= ============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 34
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,102,000 3,136,000 10,985,000
-------------- ------------ ------------
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 8,579,000 6,605,000 5,475,000
Noncash special charges 465,000 2,512,000 --
Change in assets and liabilities (net of effects of acquired companies):
(Increase) decrease in:
Accounts receivable, net (3,998,000) (4,395,000) (3,949,000)
Inventories (667,000) (2,781,000) (1,978,000)
Other current assets (39,000) (2,040,000) 55,000
Other assets 287,000 (42,000) (245,000)
Increase (decrease) in:
Accounts payable (2,591,000) 1,267,000 1,688,000
Accrued liabilities 403,000 2,894,000 964,000
Income taxes (441,000) 131,000 667,000
-------------- ------------ ------------
Total adjustments 1,998,000 4,151,000 2,677,000
-------------- ------------ ------------
Net cash provided by operating activities 5,100,000 7,287,000 13,662,000
-------------- ------------ ------------
Cash flows from investing activities:
Payments made in connection with acquisitions (net of cash acquired) (1,969,000) (19,823,000) (25,700,000)
Sale of short-term investments -- 7,849,000 16,042,000
Capital expenditures (5,910,000) (11,000,000) (5,502,000)
Proceeds from disposition of property and equipment 698,000 1,240,000 --
-------------- ------------ ------------
Net cash used in investing activities (7,181,000) (21,734,000) (15,160,000)
-------------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of Senior Notes -- 19,589,000 --
Proceeds from line of credit 4,589,000 -- --
Proceeds from issuance of common stock 107,000 367,000 789,000
Principal payments of long-term debt (3,909,000) (856,000) (3,261,000)
-------------- ------------ ------------
Net cash provided by (used in) financing activities 787,000 19,100,000 (2,472,000)
-------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,294,000) 4,653,000 (3,970,000)
Cash and cash equivalents at beginning of year 7,182,000 2,529,000 6,499,000
-------------- ------------ ------------
Cash and cash equivalents at end of year $ 5,888,000 7,182,000 2,529,000
============== ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,793,000 1,511,000 316,000
Income taxes 3,570,000 4,059,000 6,772,000
============== ============ ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During the year ended December 31, 1994, in connection with certain
acquisitions, the Company issued 144,843 shares of common stock with an
estimated fair value of $4,433,000.
See accompanying notes to Consolidated Financial Statements.
34
<PAGE> 35
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BACKGROUND
Insurance Auto Auctions, Inc. (the Company) provides insurance
companies and other vehicle suppliers cost-effective salvage
processing solutions including selling total loss and recovered theft
vehicles.
PRINCIPLES OF CONSOLIDATION
The accompanying Consolidated Financial Statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated in consolidation.
REVENUE
Sales of vehicles are recognized upon transfer of ownership of the
related vehicle. Fee income, including consignment and buyer fees,
storage and other, is recognized as earned.
CASH EQUIVALENTS
Cash equivalents consist principally of commercial paper. For
purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or estimated realizable
value. Cost includes the cost of acquiring ownership of total loss
and recovered theft vehicles, charges for towing and, less frequently,
reconditioning costs. The costs of inventories are charged to
operations based upon the specific-identification method.
The Company has agreements to purchase total loss and recovered theft
vehicles from insurance companies for a percentage of the vehicle's
actual cash value. The Company has acquired the majority of its
inventory pursuant to these contracts.
ASSET IMPAIRMENT
The Company adopted the Provisions of Statement of Financial
Accounting Standards Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
(Statement No. 121), on January 1, 1996. Statement No. 121
establishes accounting standards for the recognition and measurement
of impairment of long-lived assets, certain identifiable intangibles
and goodwill either to be held or disposed of. Adoption of Statement
No. 121 did not have a material impact on the Company's financial
position, results of operations or liquidity. As part of an ongoing
review of the valuation and amortization of intangible assets,
management assesses the carrying value of the Company's intangible
assets if facts and circumstances suggest that it may be impaired. If
this review indicates that the intangibles will not be recoverable, as
determined by an undiscounted cash flow analysis over the remaining
35
<PAGE> 36
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
amortization period, the carrying value of the Company's intangibles
would be reduced to its estimated fair market value.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
Consolidated Financial Statements in conformity with generally
accepted accounting principles. Actual results could differ from
these estimates.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the related
assets ranging from three to ten years. Leasehold improvements are
amortized on a straight-line basis over their estimated economic
useful life or the life of the lease, whichever is less.
Intangible assets, principally goodwill, are amortized over periods of
15 to 40 years. Accumulated amortization at December 31, 1996 and
1995 was $10,902,000 and $7,521,000, respectively.
EARNINGS PER SHARE
Net earnings per share is based on the weighted average number of
shares of common and common stock equivalents outstanding. Common
stock equivalents represent the number of shares which would be issued
assuming the exercise of common stock options reduced by the number of
shares which could be purchased with the proceeds from the exercise of
those options.
Fully diluted net earnings per share is not presented since the
amounts are antidilutive or do not differ significantly from the
primary earnings per share presented.
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method of Statement No. 109, whereby deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
CREDIT RISK
The Company sells its vehicles principally to customers throughout the
United States under the purchase-agreement method, the
fixed-fee-consignment method and the percentage-of-sale-consignment
method. Actual sales of vehicles are sold generally for cash;
therefore, very little credit risk is incurred from the selling of
vehicles. Receivables arising from advance charges made on behalf of
the vehicle supplier, most of which are insurance companies, are
generally satisfied from the net proceeds payable to the insurance
company. A small percentage of vehicles sold do not have sufficient
net proceeds to satisfy the related receivables, and in these cases,
the receivable is due from the insurance company. Management performs
regular evaluations concerning the ability of its customers and
suppliers to satisfy their obligations and records a provision for
doubtful accounts based upon these evaluations. The Company's credit
losses for the periods presented are insignificant and have not
exceeded management's estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate fair value
as of December 31, 1996 and 1995. The carrying amounts related to
cash and cash equivalents, accounts receivable, other current assets
and accounts payable approximate fair value due to the relatively
short maturity of such instruments. The fair
36
<PAGE> 37
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
value of long-term debt is estimated by discounting the future cash
flows of each instrument at rates currently available to the Company
for similar debt instruments of comparable maturities by the Company's
bankers.
STOCK COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (Statement No. 123), issued in October 1995
and effective for fiscal years beginning after December 15, 1995,
permits, but does not require, a fair-value based method of accounting
for employee stock options or similar equity instruments. Statement
No. 123 allows an entity to elect to continue to measure compensation
cost under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APBO No. 25), but requires pro forma
disclosures of net earnings and net earnings per share as if the
fair-value based method of accounting had been applied. Effective
January 1, 1996, the Company elected to continue to measure
compensation cost under APBO No. 25 and comply with the pro forma
disclosure requirements. Accordingly, the adoption of Statement No.
123 had no material impact on the Company's consolidated financial
position or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 accounts to
conform with the 1996 presentation.
(2) RECENT ACQUISITIONS
1996 TRANSACTIONS
In 1996, the Company completed the acquisition of one business which
is not material to the accompanying Consolidated Financial Statements.
1995 TRANSACTIONS
On June 15, 1995, the Company completed an acquisition of ADB Auctions
Systems, Inc. and ASC Auctions, Inc. (ADB) for cash consideration of
approximately $11,443,000, excluding out-of-pocket costs, and notes
payable to the sellers of $6,145,000. Additional cash consideration
may be paid subject to the outcome of an earnout agreement.
This acquisition was accounted for as a purchase, and the results of
ADB's operations are included in the Company's Consolidated Financial
Statements from the date of acquisition. The excess of purchase price
over the estimated fair values of the net assets acquired aggregating
$17,134,000 has been recorded as goodwill and is being amortized over
40 years.
In 1995, the Company also acquired four businesses which are not
material to the accompanying Consolidated Financial Statements.
37
<PAGE> 38
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The operating results of the ADB acquisition are included in the
Company's consolidated results of operations from the date of
acquisition. The following pro forma financial information assumes
the acquisition occurred at the beginning of 1995. These results have
been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisition been made
at the beginning of 1995 or of the results which may occur in the
future. Certain of the Company's aforementioned smaller acquisitions,
including the 1996 transaction, have been excluded from the pro forma
information below as their impact is immaterial. The Company's 1996
transaction was immaterial and, therefore, had no material impact upon
the consolidated results of operations. Accordingly, the 1996 pro
forma information has not been presented. Further, the information
gathered from some acquired companies for pro forma purposes is
estimated since some acquirees did not maintain information on a
period comparable with the Company's fiscal year-end:
<TABLE>
<CAPTION>
1995
-----------------
(Unaudited)
<S> <C>
Net sales $ 268,484,000
Net earnings 3,275,000
Net earnings per common and common
equivalent share .29
=================
</TABLE>
(3) Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt is summarized as follows:
1996 1995
-------------------- ------------------
<S> <C> <C>
Senior notes payable, net of related loan fees, unsecured, interest
payable in semiannual installments commencing August 15, 1995
through maturity at February 15, 2002, at 8.60%, principal due at
maturity $ 19,735,000 19,682,000
Notes payable issued in connection with the acquisition of a
certain subsidiary, secured by capital stock purchased in the
acquisition, interest payable quarterly at 7.5%, principal payable
in three annual installments beginning June 30, 1996
3,632,000 5,500,000
Notes payable issued in connection with a consulting agreement
related to the acquisition of a certain subsidiary, unsecured,
payable in monthly installments of $16,666, including interest at
7.5% 618,000 669,000
Notes payable issued in connection with the acquisition of a
certain subsidiary, unsecured, payable in monthly installments,
including interest at 8% 299,000 324,000
</TABLE>
38
<PAGE> 39
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1996 1995
----------------- ---------------
<S> <C> <C>
Notes payable of $1,800,000 and $500,000 issued in connection with
the acquisition of a certain subsidiary. Payment of $1,800,000 made
in January 1996. Note of $500,000, unsecured, interest payable in
monthly installments beginning March 31, 1996, principal due
December 14, 1997
$ 500,000 2,300,000
Advances under unsecured $15,000,000 long-term line of credit, net
of related loan fees. The outstanding borrowings at December 31,
1996 were $4,500,000 and bear interest at the bank's prime rate or
LIBOR, as defined. No borrowings were outstanding at
December 31, 1995 4,402,000 (135,000)
Capital lease obligations 55,000 294,000
----------------- ---------------
29,241,000 28,634,000
Less current installments 2,571,000 4,015,000
----------------- ---------------
$ 26,670,000 24,619,000
================= ===============
</TABLE>
Total principal repayments required under all long-term debt agreements are
summarized as follows:
<TABLE>
<S> <C>
1997 $ 2,571,000
1998 6,401,000
1999 216,000
2000 138,000
2001 37,000
Thereafter 19,878,000
--------------------
$ 29,241,000
====================
</TABLE>
The Senior Notes and line of credit require the Company to comply with
certain covenants such as maintenance of net worth and limitations on
debt. As of December 31, 1996, the Company was in compliance with
these covenants.
The Company has refinanced its line of credit agreement with a similar
facility with virtually identical terms with a different bank. The
$15,000,000 facility is unsecured, bears interest at the bank's prime
rate or LIBOR, as defined, and matures on April 1, 2000.
(4) SHAREHOLDERS' EQUITY
In 1994, the Company issued 140,601 shares of common stock as
consideration for the acquisition of USC which, for financial
reporting purposes, have an estimated fair value of $4,306,000. In
connection with other acquisitions completed during 1994, the Company
issued 4,242 shares of common stock which, for financial reporting
purposes, have an estimated fair value of $127,000.
During the years ended December 31, 1996, 1995 and 1994, the Company
issued 10,697, 8,436 and 5,336 shares of common stock for aggregate
consideration of $93,000, $205,000 and $142,000, respectively, in
connection with the employee stock purchase plan.
39
<PAGE> 40
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) INCOME TAXES
Income taxes are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Current:
Federal $ 794,000 1,627,000 5,438,000
State 187,000 472,000 1,466,000
------------ ------------ -------------
981,000 2,099,000 6,904,000
------------ ------------ -------------
Deferred:
Federal 1,788,000 163,000 910,000
State (429,000) 55,000 305,000
------------ ------------ -------------
1,359,000 218,000 1,215,000
------------ ------------ -------------
$ 2,340,000 2,317,000 8,119,000
============ ============ =============
</TABLE>
Deferred income taxes are comprised of the effects of the components
listed below and decreases in the beginning of the year balance of the
valuation allowance of $250,000 in 1994.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
------------------ -------------
<S> <C> <C>
Deferred tax assets:
Inventories $ 457,000 491,000
State income taxes 539,000 181,000
Depreciation 887,000 924,000
Special charges 227,000 516,000
Other 112,000 359,000
------------------ -------------
Total gross deferred tax assets 2,222,000 2,471,000
Deferred tax liabilities -- intangible assets (4,208,000) (3,100,000)
------------------ -------------
Net deferred tax liabilities $ (1,986,000) (629,000)
================== =============
</TABLE>
40
<PAGE> 41
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The actual income tax expense differs from the "expected" tax expense
computed by applying the Federal corporate tax rate to earnings before
income taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ------------ -----------
<S> <C> <C> <C>
"Expected" income taxes $ 1,850,000 1,854,000 6,586,000
State income taxes, net of Federal 288,000 324,000 1,168,000
benefit
Amortization of intangible assets 406,000 383,000 360,000
Change in beginning of the year
valuation allowance -- -- (250,000)
Other (204,000) (244,000) 255,000
--------------- ------------ -----------
$ 2,340,000 2,317,000 8,119,000
=============== ============ ===========
</TABLE>
During the year ended December 31, 1996, the Company reached a
settlement with the Internal Revenue Service for additional taxes
relating to tax years 1991 through 1994. The settlement, inclusive of
related interest, did not have a material impact on the Company's
results of operations for 1996, 1995 or 1994 as it had been previously
provided for in the Consolidated Financial Statements.
(6) EMPLOYEE BENEFIT PLANS
The Company adopted the Insurance Auto Auctions, Inc. 1991 Stock
Option Plan (the 1991 Plan), as amended, presently covering 1,350,000
shares of the Company's common stock. The 1991 Plan provides for the
grant of incentive stock options to key employees and nonqualified
stock options and stock appreciation rights to key employees,
directors, consultants and independent contractors. The 1991 Plan
expires September 26, 2001. In general, new nonemployee directors
will automatically receive grants of nonqualified options to purchase
10,000 shares and subsequent grants to purchase 2,000 shares at
specified intervals.
During 1995, the Company adopted the Insurance Auto Auctions, Inc.
Supplemental Stock Option Plan (the 1995 Plan) covering 200,000 shares
of the Company's common stock. The 1995 Plan provides for the grant
of nonqualified stock options to employees, other than executive
officers, and consultants and other independent advisors who provide
services to the Company. The 1995 Plan will expire on October 1,
2005.
Under both plans, as of December 31, 1996, options to purchase an
aggregate of 1,082,000 shares were outstanding at a weighted average
exercise price of $21.91 per share and 383,000 shares remained
available for future grant.
41
<PAGE> 42
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Activity under the plans for the years ended December 31, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Balance at beginning of year 1,061,000 967,000
Options granted 270,000 216,000
Options canceled (247,000) (111,000)
Options exercised (2,000) (11,000)
-------------- -------------
Balance at end of year 1,082,000 1,061,000
============== =============
Options exercisable at end of year 588,000 561,000
============== =============
Price range of options outstanding at end of year $ 7.00-37.50 7.00-38.50
============== =============
Price range of options granted during the year $ 9.25-12.63 7.00-32.25
============== =============
</TABLE>
The Company adopted the Insurance Auto Auctions, Inc. Employee Stock
Purchase Plan (the Stock Purchase Plan) effective July 1, 1993. The
Stock Purchase Plan provides for the purchase of up to 75,000 shares
of common stock of the Company by employees pursuant to the terms of
the Plan, as defined. During the years ended December 31, 1996 and
1995, the Company issued 10,697 and 8,436 shares, respectively, of its
common stock under the Plan.
The Company has a 401(k) defined contribution plan covering all
full-time employees. Plan participants can elect to contribute up to
20% of their gross payroll. Company contributions are determined at
the discretion of the Board of Directors and during the years ended
December 31, 1996, 1995 and 1994, were matched 100% up to 4% of
eligible earnings. Company contributions to the plan during the years
ended December 31, 1996, 1995 and 1994 were approximately $482,000,
$403,000 and $173,000, respectively.
The Company applies APB Opinion No. 25 in accounting for its plans,
and accordingly, no compensation cost has been recognized for any
stock options in the accompanying Consolidated Financial Statements.
Had the Company determined compensation expense based upon the fair
value at the date of grant, as determined under Statement No. 123, the
Company's net earnings and net earnings per share would have been
reduced to the pro forma amounts as summarized below:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Net earnings $ 2,619,000 $ 3,047,000
------------- ------------
Net earnings per share $ .23 $ .27
============= ============
</TABLE>
42
<PAGE> 43
The per share weighted average fair value of stock options granted
during 1996 and 1995 was $5.25 and $3.80, respectively, based upon a
grant date valuation using the Black-Scholes option pricing model with
the following weighted average assumptions in 1996 and 1995 --
expected dividend yield of 0.0%, risk-free interest rate of 6.2% and
an average expected option life of four years.
The pro forma net earnings and net earnings per share reflect only
those options granted since January 1, 1995. Therefore, the full
impact of calculating compensation cost for stock options under
Statement No. 123 is not reflected in the pro forma net earnings and
net earnings per share presented above because compensation cost is
generally recorded over the options' vesting period, generally four
years, and compensation cost for options granted prior to January 1,
1995 is not considered.
(7) RELATED PARTY TRANSACTIONS
Effective December 1, 1993, the Company entered into a national sales
agreement with Allstate Insurance Company (Allstate) (a shareholder of
the Company) to be Allstate's exclusive provider of automotive salvage
services in markets that the Company currently services or enters in
the future. The agreement, as defined, contains automatic renewal
provisions.
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.
During 1996, 1995 and 1994, the Company paid fees aggregating
$1,523,000, $1,474,000 and $4,088,000, respectively, to certain towing
companies whose owners are either officers and/or
directors/shareholders of the Company.
(8) COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under
operating leases with related and nonrelated parties which expire
through August 2006. Rental expense for the years ended December 31,
1996, 1995 and 1994 aggregated $8,681,000 $8,944,000 and $7,700,000
(of which $884,000, $1,389,000 and $884,000 pertained to leases with
related parties in 1996, 1995 and 1994, respectively), respectively.
43
<PAGE> 44
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Minimum annual rental commitments for the next five years under
noncancelable leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NONRELATED RELATED
PARTY PARTY
---------------- --------------
<S> <C> <C>
Year ending December 31:
1997 $ 7,342,000 886,000
1998 6,107,000 911,000
1999 5,756,000 873,000
2000 5,662,000 650,000
2001 5,239,000 680,000
Thereafter 7,958,000 --
---------------- --------------
$ 38,064,000 4,000,000
================ ==============
</TABLE>
In addition to the Allstate agreement, the Company has purchase
agreements with certain insurance company suppliers which expire at
various intervals over the next two years. During fiscal 1996 and
1995, the two largest suppliers accounted for 21% and 19%, and 21% and
21%, respectively, of the Company's supply of vehicles.
The Company has compensation agreements with certain officers and
other key employees. These agreements expire through December 1998.
On August 2, 1995, a shareholder of the Company filed a class action
lawsuit in the United States District Court for the Central District
of California against the Company and certain of its current and
former officers and directors. The complaint alleges that the
defendants made false and misleading statements of material fact and
omitted to state material facts in its quarterly and annual reports,
periodic press releases and communications with analysts. The
complaint is a purported class action on behalf of all persons who
purchased or otherwise acquired the Company's common stock during the
period July 27, 1994 through August 4, 1995 and seeks unspecified
damages.
In August 1996, class certification was denied. A new class
representative was presented and the class was certified in January
1997.
Although the Company cannot predict the likely outcome of the lawsuit
at this time, the Company believes that the lawsuit is without merit
and intends to defend against it vigorously.
The Company is subject to other certain miscellaneous legal claims
which have arisen during the ordinary course of its business.
(9) ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATIONS
In connection with the acquisition of capital stock of Underwriters
Salvage Corporation (USC), the Company assumed the obligation for
certain health care and death benefits for retired employees of USC.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions," costs related to the benefits are accrued over
an employee's service life. The assumed discount rate used to
determine the Accumulated Postretirement Benefit Obligation (APBO) as
of December 31, 1996 was 7%.
44
<PAGE> 45
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Included in the APBO at December 31, 1996 is an unrecognized gain from
past experience of $2,763,000, which will be amortized over the
estimated actuarial period. The 1996 expense related to the APBO was
$9,000.
Shown below is the Accumulated Postretirement Benefit Obligation
(APBO) for the plan. The APBO is a measure of the plan's liability,
equivalent to the Projected Benefit Obligation used in pension
accounting. The APBO is a factor in the expense calculation and is
included in the footnote disclosure. For retirees, it is the present
value of all benefits expected to be paid from the plan.
<TABLE>
<S> <C>
Medical $ (1,010,000)
Life Insurance (400,000)
-------------------
Total APBO (1,410,000)
Plan assets --
-------------------
Funded status (1,410,000)
Unrecognized net gain from past experience (2,763,000)
-------------------
Accrued postretirement benefit cost $ (4,173,000)
===================
Reconciliation of accrued postretirement benefit cost:
Accrued benefit cost, December 31, 1995 $ (4,354,000)
1996 expense (9,000)
1996 contributions/premium paid 190,000
-------------------
Accrued postretirement benefit cost, December 31, 1996 $ (4,173,000)
===================
</TABLE>
Effective January 20, 1994, the date of acquisition, the Company
discontinued future participation for active employees.
(10) SPECIAL CHARGES
During 1996, the Company recorded special charges aggregating
$1,395,000 as a result of further repositioning to achieve its
strategic plans. In implementing these strategic plans, the Company
decided to establish its corporate headquarters in Illinois resulting
in severance costs of $210,000 related to corporate employees not
relocating to the Illinois corporate headquarters. Additionally, the
Company incurred costs amounting to $670,000 to terminate an
employment agreement with the Company's former Chairman of the Board
and Chief Executive Officer. After evaluating past contracts entered
into, the Company incurred a charge of $880,000 for agreements
determined to no longer have value to the current corporate strategy.
Additionally, the Company recorded an offsetting gain of $365,000
related to the negotiation of a buyout of a long-term lease.
45
<PAGE> 46
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During 1995, the Company recorded special charges aggregating
$4,226,000. The Company responded to changes in its industry and
formulated its plans to reposition itself to achieve its strategic
growth objectives. As a result of this repositioning, the Company
determined that certain of its computer systems, software and related
assets should be written down resulting in a charge of approximately
$2.5 million which is included in special charges. The Company also
decided to not move its North Hollywood, California corporate
administrative staff to a facility it had leased in Woodland Hills,
California, resulting in a $1.1 million special charge. Additionally,
the Company recorded charges related to the repositioning aggregating
$600,000, all of which are included in special charges.
(11) QUARTERLY FINANCIAL DATA (Unaudited)
Summarized unaudited financial data for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
1996:
Net sales $ 72,816,000 76,042,000 68,680,000 64,355,000
Earnings from
operations 1,985,000 3,191,000 1,798,000 587,000
Net earnings 759,000 1,521,000 751,000 71,000
Net earnings per share .07 .13 .07 .01
================== ========== ============ ===========
1995:
Net sales $ 60,235,000 65,187,000 64,982,000 67,592,000
Earnings (loss) from
operations 4,770,000 3,588,000 (3,372,000) 1,899,000
Net earnings (loss) 2,675,000 1,918,000 (2,247,000) 790,000
Net earnings (loss) per
share .24 .17 (.20) .07
================== ========== ============ ===========
</TABLE>
46
<PAGE> 47
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Page
- ---------- -------------
<S> <C>
10.148 Letter Agreement by and between the Registrant and Bradley S. Scott
dated December 5, 1996.
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors.
24.1 Power of Attorney incorporated by reference to page 28 of the Form 10-K.
27.1 Financial Data Schedule
</TABLE>
47
<PAGE> 1
Exhibit 10.148
Insurance Auto Auctions, Inc.
December 5, 1996
Confidential
Mr. Bradley S. Scott
1270 West N.W. Highway
Insurance Auto Auctions
Palatine, IL 60067
Dear Brad:
This letter is to confirm the agreement between you and Insurance Auto
Auctions, Inc., a California corporation (the "Company") regarding your
continuing role as Chairman of the Board of the Company.
1. You agree to continue to serve through June
30, 1999 as Chairman of the Board, and
confirm that you have resigned from all other
officer and other positions with the Company
and any of the Company's subsidiaries
effective at the close of business on June
30, 1996 (such date shall be referred to as
the "Change of Status Date"). Nothing in
this Agreement shall be construed so as to
impair the right of the Company or the
stockholders to remove you from the Board at
any time in accordance with the provisions of
applicable law.
2. After the Change of Status Date and
continuing in all events until July 1, 1999,
you will be paid an annual consulting fee for
serving as Chairman of the Board of $100,000
per annum, payable semi-annually each January
1 and July 1, with the first installment
payable on January 1, 1997. If you continue
to serve as Chairman of the Board or as a
director after June 30, 1999, you will be
paid compensation to be negotiated between
you and the Board of Directors. You may be
eligible to continue your health insurance
coverage at your own expense pursuant to
COBRA. If you elect COBRA coverage following
the date of signing this Letter Agreement,
the Company will pay the monthly premium for
the duration of the COBRA period. Upon
cessation of your eligibility for COBRA, the
Company will reimburse you for the cost of a
private health insurance policy providing
medical insurance for you and your eligible
dependents that is comparable to the medical
insurance then provided by the Company to its
employees, up to a maximum monthly premium of
$753, through June 30, 1999, regardless
whether you continue in service.
3. The parties acknowledge that through fiscal
year 1998, you will remain eligible for the
performance bonus provided for in the August
22, 1994
<PAGE> 2
amendment to your Employment Agreement dated
September 30, 1991 in the same manner as if
you had remained as an officer, director and
employee of the Company ("Bonus"). You
acknowledge that you were paid for all of
your accrued vacation by receipt of two weeks
paid vacation after the Change of Status
Date. Effective on the Change of Status Date
you will not accrue any further vacation.
You agree that prior to your execution of
this letter you were not entitled to receive
any further monetary payments from the
Company except for the Bonus and amounts due
pursuant to pending expense reimbursement
requests, and that the only payments,
bonuses, benefits, stock rights or
compensation of any kind that you are
entitled to receive from the Company in the
future are those specified in this letter.
4. On the eighth day following your signing of
this Letter Agreement and assuming that you
have not revoked it, you shall be paid a lump
sum bonus equal to $600,000, less applicable
deductions and reduced to the extent of
prepayments received as salary from the
Change of Status Date through such payment
date, a sum to which you agree you are not
otherwise entitled.
5. Upon your Change of Status Date and
continuing until June 30, 1999, the Company
will provide all of the following:
(a) in order to provide you with secretarial
services, the Company will pay up to the
following amounts of salary, plus benefits of
a kind and amount normally provided by the
Company for an individual in such position:
<TABLE>
<CAPTION>
Period Salary
------ ------
<S> <C>
Calendar Year 1997 $35,000
Calendar Year 1998 $30,000
1/1/99 to 6/30/99 $10,000
</TABLE>
(b) pay normal travel and entertainment
expenses, and the normal expenses of
reference material, periodicals and other
items necessary to the proper functioning of
a business office, all in accordance with the
Company's generally applicable policy for
business expense reimbursements, (c) 1994
600-series Mercedes, provided that the
Company shall continue to make lease payments
and transfer the title to the auto free and
clear to you following the conclusion of the
lease on February 28, 1997, (d) pay or
reimburse expenses of attending conferences,
providing that your attendance is approved in
advance by the Company's Chief Executive
Officer, (e) pay or reimburse up to $7,500 of
expenses to attend the annual Fortune and YPO
conferences, to maintain USC Entrepreneurial
Board membership, (f) pay or reimburse
expenses to maintain YPO membership for as
long as you are eligible up to June 30, 1999.
The Company will continue to pay the same
amount for rental of
<PAGE> 3
office space as it currently pays for the
Agoura Road lease plus the annual cost of
living increases specified by the lessor of
the Agoura Oaks Commerce Center in a letter
dated September 28, 1995 until you cease to
serve as Chairman of the Board. The Company
agrees to transfer the furnishings of the
Agoura Hills office to you when you cease to
serve as Chairman of the Board. In addition
to office rent, the Company agrees to pay for
all normal office expenses in an amount equal
to the amount it paid in the fiscal year
ending June 30, 1996, plus an additional
amount to reflect annual cost of living
increases to such expenses at the same time
and in the same percentage as under the
Agoura Hills lease.
6. As of November 7, 1996, you hold the
following options to purchase the Company's
common stock granted on the dates indicated
(collectively, the "Options"):
<TABLE>
<CAPTION>
NUMBER OF SHARES GRANT DATE
--------------------------------------------
<S> <C>
60,000 9/14/93
80,000 9/14/93
12,696 6/21/94
62,304 6/21/94
</TABLE>
The Company acknowledges and confirms that
your Options will continue to vest while you
continue to serve as Chairman of the Board.
You acknowledge that you will continue to be
bound by all of the terms, conditions and
limitations of the agreements evidencing the
Options. You will remain eligible for
additional option grants pursuant to the
automatic grant program for outside directors
under the 1991 Stock Option Plan, which
provides for the grant of an option to
purchase 10,000 shares at the time you
initially become a non-employee director and
additional options to purchase 2,000 shares
each year thereafter on June 30, and for any
other grants for which you are selected or
may become eligible. The Options, by their
terms, expire three months after you cease
service with the Company; however, the
Company hereby agrees that each of the
Options will expire at the earlier of (A) the
expiration of the original ten-year term of
the Option or (B) the date that you first
engage in Competitive Activities (as defined
in paragraph 10 below), provided that none of
the Options shall expire earlier than the end
of the three month period beginning on your
cessation of service.
You acknowledge that you have no other
options in the Company, or other rights to
receive or purchase equity shares of the
Company (or any parent or subsidiary), other
than those rights specifically enumerated in
this paragraph. (Nothing in this paragraph,
however, shall affect your rights to acquire
shares of Company common stock or to receive
a refund of your accumulated payroll
deductions pursuant to the terms of the
Company's Employee Stock Purchase Plan.)
<PAGE> 4
7. In consideration for receiving the payments
and benefits described above, you waive,
release and promise never to assert any
claims or causes of action, whether or not
now known, against the Company, or its
predecessors, successors, subsidiaries,
officers, directors, agents, employees and
assigns, with respect to any matter arising
out of or connected with your employment with
the Company or the change in that employment,
including without limitation, claims of
wrongful discharge, emotional distress,
defamation, breach of contract, breach of the
convenant of good faith and fair dealing, any
claims of discrimination based on sex, age,
race, national origin, or on any other basis,
under Title VII of the Civil Rights Act of
1964, as amended, the California Fair
Employment and Housing Act, the Age
Discrimination in Employment Act of 1967,
Illinois Human Rights Act, and all other laws
and regulations relating to employment. The
parties agree that nothing in this letter
agreement shall impact your rights (1) under
the Company's 401(k) plan, (2) to benefits
provided or referenced under this Agreement,
including but not limited to the performance
bonuses, (3) to coverage under the Company's
director and officer insurance policy, and
(4) to be indemnified pursuant to the
existing provisions of the Company's Bylaws,
the Indemnification Agreement between you and
the Company dated September 27, 1991 or any
applicable statute for any acts or failures
to act during the periods when you are or
were an officer of the Company, a director or
other service provider to the Company. The
Company acknowledges that nothing in this
Letter Agreement shall in any way affect your
rights to indemnification pursuant to the
foregoing Indemnification Agreement
including, without limitation, pursuant to
those matters identified on Schedule A.
8. In consideration for the covenants and
releases made by you in this letter
agreement, the Company waives, releases and
promises never to assert any claims or causes
of action, whether or not now known, against
you or your heirs with respect to any matter
arising out of or connected with your
employment with the Company or the change in
that employment, or with your position as an
officer, director or other service provider
to the Company provided that the foregoing
shall not prevent actions by the Company
arising from your commission of a felony.
9. You and the Company expressly waive and
release any and all rights and benefits under
Section 1542 of the Civil Code of the State
of California, or any analogous law of any
other state, which reads as follows:
"A general release does not extend to
claims which the creditor does not know
or suspect to exist in his favor at the
time of executing the release, which,
if known by him, must have materially
affected his settlement with the
debtor."
<PAGE> 5
10. During the term of your service as Chairman
of the Board and continuing for five years
after the termination of such service, you
will remain bound by the proprietary
information and confidentiality provisions in
paragraph 7 of your Employment Agreement
dated September 30, 1991 ("Employment
Agreement"). You agree that you will not
engage in Competitive Activities. You will
be deemed to engage in Competitive Activities
if you (i) directly or indirectly own,
manage, operate, join or are employed by,
(ii) are a director, member, agent,
shareholder, owner or general partner of,
(iii) act as a consultant or advisor to, or
(iv) control or participate in the ownership
or operation of any entity, including but not
limited to any corporation, partnership,
limited liability company, sole
proprietorship or unincorporated business
(whether or not for profit), in the course of
which you engage in or assist such entity
with respect to the processing and selling of
total loss and recovered theft vehicles.
Whether services are considered "Competitive
Activities" shall be determined (i) at the
time you first engage in an activity, if you
first engage in that activity while
performing services for the Company, or (ii)
at the time you cease to perform services for
the Company if you first engage in that
activity after you cease to perform services
for the Company. Notwithstanding the
foregoing, nothing in the preceding sentence
shall be deemed to diminish in any way your
fiduciary obligations as a director of the
Company or your obligations under the
proprietary information and confidentiality
provisions in paragraph 7 of your Employment
Agreement. Nothing herein shall prevent the
purchase or ownership by you of an interest
in an entity that constitutes less than 1% of
the outstanding equity securities of such
entity.
11. This Agreement shall be governed by Illinois
law, without regard to its conflict of law
rules. Any dispute involving the
construction or application of this
agreement, or any claims arising out of this
agreement or the breach thereof will be
submitted to and settled by final and binding
arbitration in Chicago, Illinois, in
accordance with the rules of the American
Arbitration Association then in effect. If
the arbitration is in Illinois, the Company
agrees to pay the ordinary and reasonable
travel expenses that you and your primary
legal counsel incur to travel to Illinois as
necessary in connection with arbitration
proceedings, provided that the terms of such
reimbursement shall be consistent with the
Company's standard travel reimbursement
policy in effect at that time. Should any
arbitration proceedings be instituted by a
party to this letter agreement to enforce any
of the terms and provisions contained herein
or to obtain relief for any breach hereof,
the prevailing party in such action or
proceeding shall be entitled to reasonable
attorneys' fees, costs and expenses incurred
in such action or proceeding, in addition to
any other relief to which such party may be
entitled, other than the travel expenses you
incur by having the arbitration in Chicago.
<PAGE> 6
12. You agree that except as expressly provided
in this letter, this letter renders null and
void any and all prior oral and written
agreements between you and the Company. No
terms hereof may be modified or waived except
in a writing signed by the Company's
President and Chief Executive Officer.
13. This Agreement shall be binding on, and shall
inure to the benefit of, the parties hereto
and their respective heirs, legal
representatives, successors and assigns;
provided, however, that you may not assign,
transfer or delegate your rights or
obligations hereunder and any attempt to do
so shall be void. The Company's rights
hereunder shall be assigned in connection
with a merger of the Company or a sale of all
or substantially all of the Company's assets.
14. You acknowledge and understand the following:
a) You have at least twenty-one (21) days
after receipt of this Agreement within
which you may review and consider,
discuss with an attorney of your own
choosing, and decide to execute or not
execute this Agreement.
b) You have seven (7) days after the
execution of this Agreement within which
to revoke this Agreement.
c) In order to revoke this Agreement, you
must deliver to James P. Alampi, on or
before seven (7) days after the execution
of this Agreement, a letter stating that
you are revoking this Agreement.
d) This Agreement shall not become effective
or enforceable until after the expiration
of seven (7) days following the date that
this Agreement is executed.
15. All parties have read and understand this
Agreement, and they affix their signatures
hereto voluntarily and without coercion. You
further acknowledge that you have been given
at least twenty-one (21) days within which to
consider this Agreement, that you were
advised by the Company to consult with an
attorney of your own choosing concerning the
waivers you have made; and the terms you have
agreed to herein are knowing, conscious and
with full appreciation that you are forever
foreclosed from pursuing any of the rights so
waived.
<PAGE> 7
Please indicate your agreement with the above terms by signing below.
Sincerely,
/s/ Susan B. Gould
------------------
Susan B. Gould
Chair, Compensation Committee
My agreement with the above terms is signified by my signature below.
Furthermore, I acknowledge that I have read and understand the foregoing letter
and that I sign this release of all claims voluntarily, with full appreciation
that I am forever foreclosed from pursuing any of the rights I have waived.
Signed: /s/ Bradley S. Scott Dated: December 5, 1996
-----------------------------
Bradley S. Scott
<PAGE> 8
Schedule A
Pending Litigation
Estate of Fiumani, et al. vs. Bradley S. Scott, et al.
Alan Richeimer v Insurance Auto Auctions, Inc.
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Registrant
Insurance Auto Auctions Corp., - a Delaware Corporation
ADBCO Acquisition Corp., - a Delaware Corporation
<PAGE> 1
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Insurance Auto Auctions, Inc.
We consent to incorporation by reference in the registration statement No.
33-48805 on Form S-8 of Insurance Auto Auctions, Inc. of our report dated
February 12, 1997, relating to the consolidated balance sheets of Insurance
Auto Auctions, Inc. and subsidiaries as of December 31, 1996, and 1995, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996,
which report appears in the December 31, 1996 annual report on Form 10-K of
Insurance Auto Auctions, Inc.
KPMG Peat Marwick LLP
Los Angeles, California
March 25, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,888,000
<SECURITIES> 0
<RECEIVABLES> 34,371,000
<ALLOWANCES> 0
<INVENTORY> 10,162,000
<CURRENT-ASSETS> 54,051,000
<PP&E> 34,277,000
<DEPRECIATION> 12,681,000
<TOTAL-ASSETS> 211,681,000
<CURRENT-LIABILITIES> 34,372,000
<BONDS> 33,414,000
0
0
<COMMON> 11,000
<OTHER-SE> 146,578,000
<TOTAL-LIABILITY-AND-EQUITY> 211,804,000
<SALES> 0
<TOTAL-REVENUES> 281,893,000
<CGS> 0
<TOTAL-COSTS> 223,144,000
<OTHER-EXPENSES> 51,188,000
<OTHER-CURRENT-ASSETS> 3,630,000
<INTANGIBLE-ASSETS> 136,157,000
<ACCOUNTS-PAYABLE> 29,815,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,119,000
<INCOME-PRETAX> 5,442,000
<INCOME-TAX> 2,340,000
<INCOME-CONTINUING> 2,340,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,100,000
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
