<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________________
Commission File Number: 0-19594
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INSURANCE AUTO AUCTIONS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Illinois 95-3790111
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
850 East Algonquin Road, Suite 100, Schaumburg, Illinois 60173-3855
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(847) 839-3939
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares outstanding of each of the issuer's classes of common stock, as
of June 30, 1999:
Class Outstanding June 30, 1999
----- -------------------------
Common Stock, $0.001 Par Value 11,466,358 shares
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INDEX
INSURANCE AUTO AUCTIONS, INC.
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. FINANCIAL INFORMATION.............................................................. 3
Item 1. Financial Statements (Unaudited)................................................... 3
Condensed Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998..................................... 3
Condensed Consolidated Statements of Operations for the
Three Month and Six Month Periods ended June 30, 1999 and June 30, 1998....... 4
Condensed Consolidated Statements of Cash Flows for the
Six Month Periods ended June 30, 1999 and June 30, 1998....................... 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 13
PART II. OTHER INFORMATION.................................................................. 13
Item 1. Legal Proceedings.................................................................. 13
Item 2. Changes in Securities.............................................................. 13
Item 3. Defaults upon Senior Securities.................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................................ 13
Item 5. Other Information.................................................................. 14
Item 6. Exhibits and Reports on Form 8-K................................................... 14
SIGNATURES.................................................................................. 15
</TABLE>
2
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,342,000 $ 11,682,000
Short-term investments 14,154,000 11,138,000
Accounts receivable, net 34,135,000 37,415,000
Inventories 11,432,000 11,229,000
Other current assets 1,828,000 1,676,000
------------ ------------
Total current assets 77,891,000 73,140,000
------------ ------------
Property and equipment, at cost, net 23,727,000 22,312,000
Deferred income taxes 3,504,000 2,976,000
Other assets, principally goodwill, net 127,038,000 128,916,000
------------ ------------
$232,160,000 $227,344,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 216,000 $ 216,000
Accounts payable 25,305,000 30,939,000
Accrued liabilities 6,367,000 6,097,000
Income taxes 1,715,000 582,000
------------ ------------
Total current liabilities 33,603,000 37,834,000
------------ ------------
Long-term debt, excluding current installments 20,053,000 20,116,000
Accumulated postretirement benefits obligation 3,345,000 3,485,000
Deferred income taxes 7,892,000 7,154,000
------------ ------------
Total liabilities 64,893,000 68,589,000
------------ ------------
Shareholders' equity:
Preferred stock, par value of $.001 per share
Authorized 5,000,000 shares; none issued - -
Common stock, par value of $.001 per share
Authorized 20,000,000 shares; issued and outstanding
11,466,358 and 11,327,169 shares as of June 30,
1999 and December 31, 1998, respectively 11,000 11,000
Additional paid-in capital 133,571,000 132,171,000
Retained earnings 33,685,000 26,573,000
------------ ------------
Total shareholders' equity 167,267,000 158,755,000
------------ ------------
$232,160,000 $227,344,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------- --------------
(Unaudited) (Unaudited)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales:
Vehicle sales $ 54,411,000 $ 51,894,000 $ 105,669,000 $ 99,063,000
Fee income 28,120,000 23,506,000 56,740,000 44,895,000
------------- ------------- ------------- -------------
82,531,000 75,400,000 162,409,000 143,958,000
Cost and expenses:
Cost of sales 59,836,000 56,375,000 119,777,000 108,466,000
Direct operating expenses 14,199,000 13,132,000 27,823,000 25,129,000
Amortization of acquisition costs 949,000 954,000 1,899,000 1,898,000
Special charges - - - 1,564,000
------------- ------------- ------------- -------------
Earnings from operations 7,547,000 4,939,000 12,910,000 6,901,000
Other (income)expense:
Interest expense 493,000 537,000 987,000 1,064,000
Interest (income) (326,000) (222,000) (551,000) (396,000)
------------- ------------- ------------- -------------
Earnings before income taxes 7,380,000 4,624,000 12,474,000 6,233,000
Income taxes 3,123,000 2,127,000 5,364,000 2,867,000
------------- ------------- ------------- -------------
Net earnings $ 4,257,000 $ 2,497,000 $ 7,110,000 $ 3,366,000
============= ============= ============= =============
Earnings per share:
Basic $ .37 $ .22 $ .62 $ .30
============= ============= ============= =============
Diluted $ .37 $ .22 $ .62 $ .30
============= ============= ============= =============
Weighted average shares outstanding:
Basic 11,421,000 11,312,000 11,381,000 11,309,000
Effect of diluted securities - stock options 179,000 147,000 114,000 100,000
------------- ------------- ------------- -------------
Diluted 11,600,000 11,459,000 11,495,000 11,409,000
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Month Periods
Ended June 30,
--------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 7,110,000 $ 3,366,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 4,484,000 4,292,000
(Gain) loss on disposal of fixed assets (47,000) 59,000
Change in assets and liabilities (net of effects of acquired companies):
(Increase) decrease in:
Short-term investments (3,016,000) (6,856,000)
Accounts receivable, net 3,280,000 (2,443,000)
Inventories (203,000) (1,753,000)
Other current assets (152,000) 413,000
Other assets (21,000) 54,000
Increase (decrease) in:
Accounts payable (5,634,000) (3,588,000)
Accrued liabilities 270,000 (371,000)
Income taxes payable 1,343,000 1,381,000
------------ ------------
Total adjustments 304,000 (8,812,000)
------------ ------------
Net cash provided by operating activities 7,414,000 (5,446,000)
------------ ------------
Cash flows from investing activities:
Capital expenditures (4,021,000) (2,810,000)
Proceeds from disposal of fixed assets 70,000 -
Payments made in connection with acquired companies,
net of cash acquired - (1,806,000)
------------ ------------
Net cash used in investing activities (3,951,000) (4,616,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,400,000 200,000
Principal payments of long-term debt (203,000) (2,064,000)
------------ ------------
Net cash used in financing activities 1,197,000 (1,864,000)
------------ ------------
Net increase (decrease) in cash 4,660,000 (11,926,000)
Cash and cash equivalents at beginning of period 11,682,000 25,972,000
------------ ------------
Cash and cash equivalents at end of period $ 16,342,000 $ 14,046,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 860,000 $ 929,000
============ ============
Income taxes $ 4,121,000 $ 1,487,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The unaudited condensed consolidated financial statements of Insurance
Auto Auctions, Inc. and its subsidiaries (collectively, the "Company")
have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of the Company, reflect all
adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation for each of the periods presented. The results of
operations for interim periods are not necessarily indicative of results
for full fiscal years.
As contemplated by the Securities and Exchange Commission ("SEC") under
Rule 10-01 of Regulation S-X, the accompanying consolidated financial
statements and related notes have been condensed and do not contain
certain information that will be included in the Company's annual
consolidated financial statements and notes thereto. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1998
2. INCOME TAXES
Income taxes were computed using the effective tax rate estimated to be
applicable for the full fiscal year, which is subject to ongoing review
and evaluation by the Company.
3. SPECIAL CHARGES
During the first quarter of 1998, a settlement agreement was entered into
by the Company resolving all outstanding differences between Insurance
Auto Auctions, Inc. and a former director, who resigned as a director and
Chairman of the Board. In the settlement agreement, various agreements
were terminated (including agreements providing for compensation and
certain benefits through June 30, 1999, and all outstanding stock
options). Per the settlement agreement, the Company made a lump-sum
payment of $700,000 to the former director. This included a bonus payment
for 1997 of $126,000 pursuant to a 1996 agreement between the Company and
the former director. The difference of $574,000 was recorded as a special
charge in first quarter 1998. In addition, McKinsey & Co. had been
retained to assist the Company in identifying and developing additional
customer-valued services, focusing on opportunities to add value to the
insurance industry's automobile claims process and reduce costs for these
organizations. The scope of the work completed also included the
evaluation and development of new business offerings that leverage the
company's current competencies, geographic presence and assets. The cost
of the project of $990,000 was recorded as a special charge in the first
quarter of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion in this section contains forward-looking information that is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected, expressed or implied by such
forward looking information. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Factors
That May Affect Future Results" below. Among these risks are quality and
quantity of inventory available from suppliers, competition, dependence on key
insurance company suppliers, governmental regulation, weather conditions and
market value of salvage.
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OVERVIEW
The Company offers insurance companies and other vehicle suppliers
cost-effective salvage processing solutions through a variety of different
methods of sale, including fixed fee consignment, purchase agreement and
percentage of sale consignment. Under the purchase agreement sales method, the
vehicle is owned by the Company and the sales price of the vehicle is recorded
in revenue. Under the fixed fee and percentage of sale consignment sales
methods, the vehicle is not owned by the Company and only the fees associated
with the processing and sale of the vehicle are recorded in net sales. By
assuming some of the risk inherent in owning the salvage vehicle instead of
selling on a consignment basis, the Company is potentially able to increase
profits by improving the value of the salvage vehicle prior to the sale.
Under the purchase agreement method, IAA generally pays the
insurance company a pre-determined percentage of the Actual Cash Value ("ACV")
to purchase the vehicle, pursuant to a purchase agreement. ACV's are the
estimated pre-accident fair value of a vehicle, adjusted for additional
equipment, mileage and other factors. Because the Company's purchase price is
fixed by contract, changes in ACV's or in the market or auction prices for
salvage vehicles have an impact on the profitability of the sale of vehicles
under the purchase agreement method. However, if increases in used car prices
and ACV's are not associated with a corresponding increase in prices at salvage
auctions, there can be a negative impact on the profitability of purchase
agreement sales.
The Company has adjustment and risk-sharing clauses in its
standard purchase agreement contracts designed to provide some protection to the
Company and its customers from certain unexpected, significant changes in the
ACV/salvage price relationship. The Company has renegotiated or terminated all
significant purchase agreement contracts not conforming to the Company's
standards for this type of agreement, converting customers to either a fixed fee
consignment or percent of sale consignment contract whenever possible. However,
the Company continues to offer purchase agreements to those customers who select
it.
Since its initial public offering, the Company has grown primarily
through a series of acquisitions to now include 50 locations as of June 30,
1999. In February of 1998, the Company acquired Auto Disposal Company. ADC
operated two pools in Alabama.
The Company's operating results are subject to fluctuations,
including quarterly fluctuations, that can result from a number of factors, some
of which are more significant for sales under the purchase agreement method. See
"Factors That May Affect Future Results" below for a further discussion of some
of the factors that affect or could affect the Company's business, operating
results and financial condition.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
Net sales of the Company increased to $82,531,000 for the three
months ended June 30, 1999, from $75,400,000 for the same three month period in
1998. Unit volume increased 8%, compared to the same period in 1998. The unit
volume increase was the result of the Company's increased sales efforts and
generally favorable market conditions. Gross profit increased 19% to $22,695,000
for the three months ended June 30, 1999, from $19,025,000 for the same period
in 1998. Gross profit per unit of $183 for the three months ended June 30, 1999
was 11% higher than for the comparable period of 1998. The increase in gross
profit per unit has been primarily the result of the implementation and faster
than expected rollout of the Company's gross profit enhancement initiatives,
including the conversion of fixed-fee consignment and purchase agreement
contract types to the generally more profitable percent of sale contract type
and the Company's focus on increasing the number and variety of vehicle
enhancement services. Approximately 15% of vehicles sold in the second quarter
of 1999 were sold under the percent of sale method versus 9% for
7
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the same period last year. The purchase agreement sales method of processing
accounted for 29% of total volume, compared with 31% for the same period in
1998.
Direct operating expenses increased to $14,199,000 for the three
months ended June 30, 1999, from $13,132,000 for the same period in 1998. Direct
operating expenses per unit increased to $115 for the three months ended June
30, 1999, as compared to $114 for the same period in 1998. The increase reflects
higher earned management incentives due to the improved earnings as well as
increased salary and labor costs largely associated with the increased volume.
Amortization of acquisition costs decreased to $949,000 for the
three months ended June 30, 1999 from $954,000 for the comparable period in
1998.
Interest expense decreased to $493,000 for the three months ended
June 30, 1999, from $537,000 for the same period in 1998. The change in interest
expense was attributable to a decrease in long-term debt as a result of the
Company's repayment of several notes payable to sellers related to certain
acquisitions. Interest income increased to $326,000 for the three month period
ended June 30, 1999, from $222,000 for the comparable period in 1998.
Income taxes increased to $3,123,000 for the three months ended
June 30, 1999, from $2,127,000 for the comparable period in 1998. This increase
is the result of the increase in earnings, offset by a decrease in the Company's
effective tax rate from 46% in 1998 to an anticipated 43% for the full fiscal
year of 1999. The second quarter income tax provision included a retroactive
application of the new lower 1999 effective rate. The effective tax rate is
subject to ongoing review and evaluation by the Company.
The Company's net earnings were $4,257,000 for the three months
ended June 30, 1999, a 70% increase from $2,497,000 for the comparable period in
1998.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Net sales of the Company increased to $162,409,000 for the six
months ended June 30, 1999, from $143,958,000 for the same six month period in
1998, a 13% increase. This is the result of an increase in the number of units
sold, as compared to the same period in 1998, and increased fee revenues
primarily in buyer fees.
Unit volume for the six months ended June 30, 1999 increased 9%,
as compared to the same period in 1998. The increase was the result of more
units being available for sale due to strong vehicle assignments taken in the
fourth quarter of 1998 and early in the first quarter of 1999. The vehicle
assignments reflect an increase in same store sales due in part to severe winter
storms in select areas of the country and an increase in the charity business.
The purchase agreement sales method of processing accounted for
29% of total volume, down 2% from the same period in 1998. The percent of sale
agreement sales method of processing accounted for 15% of total volume, up 7%
from the same period in 1998. The Company continues to focus on converting fixed
fee consignment and purchase agreement contract types to the generally more
profitable percent of sale contract type.
Gross profit increased 20% to $42,632,000 for the six months ended
June 30, 1999, from $35,492,000 for the same period in 1998. Gross profit per
unit of $171 for the six months ended June 30, 1999 was 11% higher than for the
comparable period of 1998. The increase in gross profit per unit is the result
of the quicker than anticipated implementation of several gross profit
enhancement initiatives and a continued focus on price management. A key
emphasis of the gross profit enhancement initiatives has been on increasing the
number and variety of vehicle enhancement services which increase fee revenue
and the value of auctioned vehicles, both of which improve the Company's gross
profit per unit. The price
8
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management initiative includes an ongoing evaluation of the Company's services
and corresponding fee structures to insure the Company's service offerings are
properly valued in the market place.
Direct operating expenses increased to $27,823,000 for the six
months ended June 30, 1999, from $25,129,000 for the same period in 1998. Direct
operating expenses per unit increased to $111 for the six months ended June 30,
1999, as compared to $109 for the same period in 1998. The increase is the
result of higher earned management incentives, increased facility related costs
and a general increase in operating expenses.
Amortization of acquisition costs associated with acquisitions
increased to $1,899,000 for the six months ended June 30, 1999 from $1,898,000
for the comparable period in 1998.
Interest expense decreased to $987,000 for the six months ended
June 30, 1999, from $1,064,000 for the same period in 1998. The change in
interest expense was attributable to a decrease in long-term debt as a result of
the Company's repayment of several notes payable to sellers related to certain
acquisitions. Interest income increased to $551,000 for the six month period
ended June 30, 1999, from $396,000 for the comparable period in 1998. The
increase is the result of an increase in cash and short term investments.
Income taxes increased to $5,364,000 for the six months ended June
30, 1999, from $2,867,000 for the comparable period in 1998. This increase is
the result of the increase in earnings. The Company's effective tax rate for the
six months ended June 30, 1999 was 43% versus 46% for the comparable period in
1998. The effective tax rate is subject to ongoing review and evaluation by the
Company.
The Company's net earnings were $7,110,000 for the six months
ended June 30, 1999, a 69% increase from $4,211,000, before special charges, for
the comparable period in 1998.
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 1999, the Company had current assets of $77,891,000,
including $16,342,000 of cash and cash equivalents and $14,154,000 of short-term
investments. Current liabilities were $33,603,000. The Company had working
capital of $44,288,000 at June 30, 1999, an $8,982,000 increase from December
31, 1998.
At June 30, 1999, the Company's indebtedness consisted mostly of
8.6% Senior Notes approximating $20,000,000, a post-retirement benefits
liability relating to the Underwriters Salvage Company acquisition of
approximately $3,345,000 and amounts due to the sellers related to certain
acquisitions. There were no borrowings outstanding on the Revolving Line of
Credit Facility at June 30, 1999.
Capital expenditures were approximately $4,021,000 for the six
months ended June 30, 1999. These capital expenditures primarily included
upgrading and expanding the Company's management information system and the
Company's facilities. The Company currently leases most of its facilities and
other properties.
The Company believes that cash generated from operations and its
borrowing capacity will be sufficient to fund capital expenditures and provide
adequate working capital for operations for the next twelve months. Part of the
Company's plan is continued growth possibly through new facility start-ups,
acquisitions, and the development of new claims processing services. At some
time in the future, the Company may require additional financing. There can be
no assurance that additional financing, if required, will be available on
favorable terms.
The Company's operating results have not historically been
materially affected by inflation.
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RECENT DEVELOPMENTS
The Company undertook an initiative, ("the Project"), in mid 1997,
the objective of which is to determine and assess the risks of the Year 2000
issue, and plan and institute mitigating actions to minimize those risks. The
Project team is being lead by the Company's Vice President and Chief Information
Officer. The scope of the Project includes both IT based systems and non IT
systems. Modifications required to bring the Company's IT systems into Year 2000
compliance were identified by the Project team. Based on work completed by the
Project team, the Company does not believe its non-IT system Year 2000
compliance issues represent a significant risk to the Company.
The required modifications to the Company's standard transaction
processing system ("ESPS") have been completed. Based on the findings of the
Project team and the successful implementation of these required modifications,
the Company believes this system is Year 2000 compliant in all material
respects. The Company will continue Y2K testing of ESPS during the third quarter
- - both alone and in conjunction with EDI trading partners. However, certain of
the Company's operations have yet to be converted from non-Year 2000 compliant
legacy systems currently in use to ESPS. These operations are scheduled for
conversion by November, 1999, although no assurances can be given the conversion
will be completed on schedule. Failure to convert these operations on a timely
basis could have a material adverse effect on the Company's financial position
or results of operations.
The Company may be impacted by the effect the Year 2000 issue has
on the ability of the Company's Insurance customers to process automobile claims
and state departments of motor vehicles ("DMV's") to process titles on a timely
basis. Any delay in the timely processing of automobile claims that
significantly reduces the number of units the Company has available for sale
would have a material adverse affect on the Company's financial position or
results of operations. In addition, the Company relies on state DMV's to timely
process titles to vehicles. Because the Company must generally obtain title
prior to selling a vehicle, a significant delay in title processing would impact
the Company's ability to sell vehicles from inventory and have a material
adverse effect on the Company's financial position or results of operations.
The Company has been, and will continue to be, in communication
with its principal insurance customers and the DMV's with regard to their Year
2000 readiness. None of the responses received to date suggests there will be
any interruption in their operations which would have a material adverse impact
on the Company although there can be no assurances given in this regard.
Contingency plans will continue to be developed during the third quarter of
1999.
The cost to the Company of dealing with the Year 2000 issue is not
expected to be material. Although a portion of the IT personnel and related
management has been and will be employed in evaluating the problem, taking
corrective actions and preparing contingency plans, the Company does not believe
the IT projects or operations have been or will be adversely affected. Costs of
review, analysis and corrective action are expected to total less than $100,000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
Quarterly Fluctuations. The Company's operating results have in
the past and may in the future fluctuate significantly depending on a number of
factors, some of which are more significant for sales under the purchase
agreement method. These factors include changes in the market value of salvage
vehicles, attendance at salvage auctions, delays or changes in state title
processing, fluctuations in Actual
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Cash Values ("ACV's") of salvage vehicles, changes in regulations governing the
processing of salvage vehicles, general weather conditions and the availability
and quality of salvage vehicles. The Company is also dependent upon receiving a
sufficient number of total loss vehicles as well as recovered theft vehicles to
sustain its profit margins. Factors which can effect the number of vehicles
received include: reduction of policy writing by insurance providers which would
affect the number of claims over a period of time; changes in direct repair
procedures that would reduce the number of newer, less damaged total loss
vehicles that tend to have the higher salvage values. Additionally in the last
few years there has been a declining trend in theft occurrences. These factors
are further aggravated in the event the Company fails to renegotiate purchase
agreement contracts that are volume and mix dependent on availability of these
types of sales. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as any indication of future performance. In addition,
revenues for any future quarter are not predictable with any significant degree
of accuracy while the Company's expense levels are relatively fixed. If revenue
levels are below expectations, operating results are likely to be adversely
affected. Due to all of the foregoing factors, it is likely that in some future
quarters the Company's operating results will be below the expectations of
public market analysts and investors.
Quality and Quantity of Inventory Available from Suppliers. The
Company is dependent upon receiving a sufficient number of total loss vehicles
as well as recovered theft vehicles to sustain its profit margins. Factors which
can effect the number of salvage vehicles received include the reduction of
policy writing by insurance providers which would affect the number of claims
over a period of time and changes in direct repair procedures that would reduce
the number of newer less damaged total loss vehicles that tend to have higher
salvage values. The decreases in the quality and quantity of inventory, and in
particular the availability of newer and less damaged vehicles, are further
aggravated under the purchase agreement method of salvage and can have a
material adverse affect on the operating results and financial condition of the
Company.
Competition. Historically, the automotive salvage industry has
been highly fragmented. As a result, the Company faces intense competition for
the supply of salvage vehicles from vehicle suppliers, as well as competition
from processors of vehicles from other regional salvage pools. These regional
salvage pools generally process vehicles under the fixed fee consignment method
and generally do not offer the full range of services provided by the Company.
The salvage industry has recently experienced consolidation, however, and the
Company believes its principal publicly-held competitor is Copart, Inc.
("Copart") has completed a number of acquisitions of regional salvage pools and
competes with IAA in most of IAA's geographic markets. Due to the limited number
of vehicle suppliers, competition is intense for salvage vehicles from Copart
and regional suppliers. It is also possible that the Company may encounter
further competition from existing competitors and new market entrants that are
significantly larger and have greater financial and marketing resources. Other
potential competitors could include used car auction companies, providers of
claims software to insurance companies, certain salvage buyer groups including
companies which are consolidating the dismantling industry and insurance
companies, some of which presently supply auto salvage to IAA. While most
insurance companies have abandoned or reduced efforts to sell salvage without
the use of service providers such as the Company, they may in the future decide
to dispose of their salvage directly to customers. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on its business, operating results and financial
condition.
Dependence on Key Insurance Company Suppliers. Historically, a
limited number of insurance companies has accounted for a substantial portion of
the Company's revenues. For example, in 1998, vehicles supplied by the Company's
six largest suppliers accounted for approximately 44% of the Company's unit
sales. The largest suppliers, State Farm Insurance, Allstate Insurance
("Allstate"), and Farmers Insurance, each accounted for approximately 17%, 14%,
and 13%, respectively, of the Company's unit sales. A loss or reduction in the
number of vehicles from any of these suppliers, or adverse change in the
agreements that such suppliers have with the Company, could have a material
adverse effect on the Company's operating results and financial condition.
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<PAGE> 12
Purchase Agreement Method of Sale. The Company has entered into a
number of purchase agreements, including agreements with its most significant
insurance suppliers, that obligate the Company to purchase most salvage vehicles
offered to it at a formula percentage of ACV. From 1993 to 1996, increased
ACV's, on which the Company's costs are based, reduced the profitability that
the Company realizes on purchase agreement contracts. This could occur again if
used car prices increase faster than selling prices. Further increases in ACV's
or declines in the market or auction prices for salvage vehicles could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company has added adjustment and risk-sharing clauses
to its new standard purchase agreement contracts designed to provide some
protection to the Company and its customers from certain unexpected, significant
changes in the ACV's that are not accompanied by a comparable increase in sales
price. The Company has renegotiated or terminated all significant purchase
agreement contracts not conforming to the Company's standards for this type of
agreement.
Governmental Regulation. The Company's operations are subject to
regulation, supervision and licensing under various federal, state and local
statutes, ordinances and regulations. The acquisition and sale of totaled and
recovered theft vehicles is regulated by state motor vehicle departments in each
of the locations in which the Company operates. Changes in governmental
regulations or interpretations of existing regulations can result in increased
costs, reduced salvage vehicle prices and decreased profitability for the
Company. In addition to the regulation of sales and acquisitions of vehicles,
the Company is also subject to various local zoning requirements with regard to
the location of its auction and storage facilities. These zoning requirements
vary from location to location. Failure to comply with present or future
regulations or changes in existing regulations could have a material adverse
effect of the Company's operating results and financial condition.
Provision of Services as a National or Regional Supplier. The
provision of services to insurance company suppliers on a national or regional
basis require that the Company expends resources and dedicate management to a
small number of individual accounts, resulting in a significant amount of fixed
costs. The development of a referral based national network service, in
particular, has required the devotion of financial resources without immediate
reimbursement of such expenses by the insurance company suppliers.
Integration and Expansion of Facilities. The Company seeks to
increase sales and profitability through acquisition of other salvage auction
facilities, new site expansion and the increase of salvage vehicle volume at
existing facilities. There can be no assurance that the Company will continue to
acquire new facilities on terms economical to the Company or that the Company
will be able to add additional facilities on terms economical to the Company or
that the Company will be able to increase revenues at newly acquired facilities
above levels realized prior to acquisition. The Company's ability to achieve
these objectives is dependent, among other things, on the integration of new
facilities, and their information systems, into its existing operations, the
identification and lease of suitable premises and the availability of capital.
There can be no assurance that this integration will occur, that suitable
premises will be identified or that additional capital will be available to fund
expansion and integration of the Company's business. Any delays or obstacles in
this integration process could have a material adverse effect on the Company's
business, operating results and financial condition. Furthermore, the Company
has limited sources of additional capital available for acquisitions, expansions
and start-ups. The Company's ability to integrate and expand its facilities will
depend on its ability to identify and obtain additional sources of capital to
finance such integration and expansion. In the future, the Company will be
required to continue to improve its financial and management controls, reporting
systems and procedures on a timely basis and expand, train and manage its
employee work force. The failure to improve these systems on a timely basis and
to successfully expand and train the Company's work force could have a material
adverse effect on the Company's operating results and financial condition.
Volatility of Stock Price. The market price of the Company's
common stock has been and could continue to be subject to significant
fluctuations in response to various factors and events, including variations in
the Company's operating results, the timing and size of acquisitions and
facility openings, the
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loss of vehicle suppliers or buyers, the announcement of new vehicle supply
agreements by the Company or its competitors, changes in regulations governing
the Company's operations or its vehicle suppliers, environmental problems or
litigation.
Environmental Regulation. The Company's operations are subject to
federal, state and local laws and regulations regarding the protection of the
environment. In the salvage vehicle auction industry, large numbers of wrecked
vehicles are stored at auction facilities for short periods of time. Minor
spills of gasoline, motor oils and other fluids may occur from time to time at
the Company's facilities and may result in soil, surface water or groundwater
contamination. Petroleum products and other hazardous materials are contained in
aboveground or underground storage tanks located at certain of the Company's
facilities. Waste materials such as waste solvents or used oils are generated at
some of the Company's facilities and are disposed of as nonhazardous or
hazardous wastes. The Company believes that it is in compliance in all material
respects with applicable environmental regulations and does not anticipate any
material capital expenditure for environmental compliance or remediation.
Environmental laws and regulations, however, could become more stringent over
time and there can be no assurance that the Company or its operations will not
be subject to significant compliance costs in the future. To date, the Company
has not incurred expenditures for preventive or remedial action with respect to
contamination or the use of hazardous materials that have had a material adverse
effect on the Company's results of operations or financial condition. The
contamination that could occur at the Company's facilities and the potential
contamination by previous users of certain acquired facilities create the risk,
however, that the Company could incur substantial expenditures for preventive or
remedial action, as well as potential liability arising as a consequence of
hazardous material contamination, which could have a material adverse effect on
the Company's operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company had approximately $14,154,000 of short-term investments as
of June 30, 1999. These investments largely consisted of state government
obligations and had either variable rates of interest or stated interest rates
ranging from 3% to 7%. The Company's short-term investments are exposed to
certain market risks inherent with such assets. This risk is mitigated by the
Company's policy of investing in securities with high credit ratings and
investing through major financial institutions with high credit ratings.
The Company has senior notes payable of $20,000,000 at an interest rate
of 8.6%. The terms of the note agreement are such that pre-payment of such debt
may not be advantageous to the Company in the event that funds may be available
to the Company at a lower rate of interest.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS. INAPPLICABLE
ITEM 2. CHANGES IN SECURITIES. INAPPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. INAPPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE ON SECURITY HOLDERS.
At the Annual Meeting of Shareholders of the Company held June 16,
1999, the shareholders (i) elected nine directors to serve on the Company's
Board of Directors, and (ii) ratified the Company's appointment of KPMG LLP to
serve as the Company's independent auditors for the fiscal year ended December
31, 1999. Shareholders holding 10,342,852 shares of Common Stock, representing
91.0% of the total number of shares outstanding and entitled to vote at the
meeting, were present in person or by proxy at the meeting.
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<PAGE> 14
The vote for nominated directors was as follows:
Director Votes for Votes Withheld
-------- --------- --------------
Thomas J. O'Malia 10,677,591 11,561
Christopher G. Knowles 10,677,100 12,052
Maurice A. Cocca 10,678,841 10,311
Susan B. Gould 10,677,591 11,561
Peter H. Kamin 10,678,841 10,311
Melvin R. Martin 10,677,591 11,561
Joseph F. Mazzella 10,678,841 10,311
Glen E. Tullman 10,678,841 10,311
John K. Wilcox 10,677,591 11,561
The vote for ratifying the appointment of KPMG LLP was as follows:
For: 10,683,157; Against: 2,010; and Withheld: 3,985.
ITEM 5. OTHER INFORMATION. INAPPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.1 Employment Agreement, dated June 3, 1999, by and between
Registrant and Christopher G. Knowles.
10.2 First Amendment to the Employment Agreement, effective June
3, 1999 by and between Registrant and Christopher G.
Knowles.
10.3 Separation Agreement, dated June 14, 1999, by and between
Registrant and Linda C. Larrabee.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during
fiscal quarter ending June 30, 1999.
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INSURANCE AUTO AUCTIONS, INC.
Date: August 16, 1999 By: /s/ Stephen L. Green
--------------- -------------------------------------------
Name: Stephen L. Green
Title: Vice President - Finance,
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
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<PAGE> 16
EXHIBIT INDEX
EXHIBIT NO.
- -----------
10.1 Employment Agreement, dated June 3, 1999, by and between
Registrant and Christopher G. Knowles.
10.2 First Amendment to the Employment Agreement, effective June 3,
1999 by and between Registrant and Christopher G. Knowles.
10.3 Separation Agreement, dated June 14, 1999, by and between
Registrant and Linda C. Larrabee.
27.1 Financial Data Schedule
16
<PAGE> 1
Exhibit 10.1
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") is effective as of
June 3, 1999, between Insurance Auto Auctions, Inc., an Illinois corporation
(the "Company"), and Christopher G. Knowles ("Executive").
WHEREAS, the Company desires to employ Executive and Executive
desires to be employed by the Company upon the terms and conditions set forth
below.
NOW, THEREFORE, Company and Executive agree as follows:
1. EMPLOYMENT AS CHIEF EXECUTIVE OFFICER. The Company agrees
to employ Executive as its Chief Executive Officer commencing June 3, 1999, and
Executive accepts employment by the Company upon the terms and conditions herein
set forth. During the term of his employment, Executive shall devote his full
time and attention to the business and affairs of the Company. The Company
agrees to take all action necessary to continue Executive's position as a
director of the Company during the term of his employment.
2. TERM. The term of the Agreement shall commence as of June
3, 1999, and expire on December 31, 2000.
3. COMPENSATION AND BENEFITS.
(a) Compensation. The Company shall pay to Executive for
services to be performed by Executive during the term of his employment a base
salary at an annual rate of $310,000, payable biweekly.
(b) Performance Incentive. As additional compensation for
performance of the services rendered by Executive during his employment,
Executive shall participate in the Company's incentive program for officers of
the Company. Executive's "Target" incentive shall be an amount equal to 40% of
Executive's annual salary. Executive shall be entitled to receive the Target
incentive to the extent Target performance goals are met, and Executive shall be
entitled to receive additional incentive amounts to the extent Target
performance goals are exceeded, all in accordance with the provisions of the
Company's incentive program for officers then in effect. Amounts paid to
Executive pursuant to this Paragraph 3(b) are hereinafter referred to as
"Incentive Compensation."
(c) Benefits. During the term of his employment or for such
time as otherwise provided in this Agreement, Executive shall be entitled to
participate in such vacation, auto allowance, benefit plans, fringe benefits,
life insurance, medical and dental plans, retirement plans and other programs as
are offered from time to time by the Company; provided however, that Executive
shall not be entitled to participate in, or receive benefits under, the
Insurance Auto Auctions, Inc. Severance Plan. Executive shall be entitled to
four weeks of paid vacation each calendar year, subject to any limitations on
carryover of unused vacation generally applicable to employees. For the term of
Executive's employment, the Company will pay for a membership in and reimburse
reasonable dues for a golf club membership in a golf club to be mutually agreed
upon by the Company and Executive. The club membership shall remain an asset of
the
<PAGE> 2
Company. Upon termination of Executive's employment, Executive may purchase the
club membership from the Company at the then fair market value of the
membership. Executive shall be authorized to incur necessary and reasonable
travel, entertainment and other business expenses in connection with his duties
hereunder. In connection with expenses pursuant to this subparagraph (c), the
Company shall reimburse Executive for such expenses upon presentation of an
itemized account and appropriate supporting documentation, all in accordance
with the Company's generally applicable policies.
(d) Options. The Company shall grant to Executive an option to
purchase 100,000 shares of the Company's common stock at 100% of the fair market
value of the common stock on the close of business on the business day before
the effective date of this Agreement. Such option shall be granted under the
Company's 1991 Stock Option Plan. The option granted pursuant to this
subparagraph (d) shall vest in six (6) quarterly installments with the first
such installment to become exercisable on the last business day of the third
fiscal quarter of 1999, and as to an additional 1/6 of the option on the last
business day of each of the next five (5) fiscal quarters thereafter. If
Executive's employment hereunder is terminated prior to December 31, 2000, such
option shall immediately vest (unless Executive voluntarily terminates
Executive's employment for any reason or unless Executive's employment was
terminated for Cause, in which case the portion of the option that is not yet
vested and exercisable as of such date will expire) and will continue to be
exercisable until the expiration of the term of the option. Such option shall be
subject to the usual terms and conditions of options issued pursuant to and in
accordance with the Company's 1991 Stock Option Plan.
(e) Indemnification. The Company shall indemnify Executive in
accordance with the terms of the Company's standard form of Indemnification
Agreement.
(f) Withholding. Compensation and benefits paid to Executive
shall be subject to such deductions required by law, government regulation or
order, or by agreement with or consent of Executive.
4. TERMINATION.
(a) At Will Nature of Employment. This Agreement shall
terminate by reason of Executive's death or Disability (as defined in Section
22(e)(3) of the Internal Revenue Code). In addition, Executive's employment with
the Company can be terminated by Executive or by the Company at any time for any
reason, with or without cause or prior notice. Any contrary representations that
may have been made or that may be made to Executive are superseded by this
Agreement.
(b) Benefits Upon Termination of Employment and Consulting
Services. Upon the termination of Executive's employment by the Company, the
Company shall pay or provide to Executive (unless Executive voluntarily
terminates his employment for any reason or unless Executive's employment was
terminated for Cause, in which case the Company shall not be obligated to pay
Executive any amount after the date of termination other than to pay his salary
earned through the date of termination plus that portion of his Incentive
Compensation earned through the date of termination) each of the following:
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<PAGE> 3
(i) An amount equal to sixty percent (60%) of Executive's
monthly salary at the rate in effect at the time of such termination
through December 31, 2000. From and after the date of Executive's
termination of employment through December 31, 2000, the Company may,
in its sole discretion, request that Executive perform consulting
services on behalf of the Company, and Executive agrees to perform such
consulting services as reasonably requested by the Company; provided
however, that Executive shall not be required to provide more than
twenty-four (24) hours of consulting services per forty (40) hour work
week. Executive shall perform all consulting services as an independent
contractor of the Company and not as an employee of the Company.
(ii) Continued coverage of Executive and Executive's
beneficiaries under the Company's health and dental plan through
December 31, 2000, provided that Executive will be charged for such
coverage in an amount equal to the amount that he would have been
charged had he remained employed by the Company. From and after
December 31, 2000, Executive may elect to continue such health and
dental benefits pursuant to Title I, Part 6 of the Employee Retirement
Income Security Act of 1974, as amended ("COBRA"). For such purposes,
Executive's termination of employment will be considered the date of
the "qualifying event" as such term is defined by COBRA and the cost of
continued coverage during the COBRA period will be determined pursuant
to COBRA and paid entirely by Executive.
For purposes of this Agreement, "Cause" shall mean Executive's
unauthorized use or disclosure of the confidential information or trade secrets
of the Company, which use causes material harm to the Company, Executive's
conviction of a felony under the laws of the United States or any state thereof,
Executive's gross negligence or Executive's continued failure to perform
assigned duties for 45 days after receiving written notification from the Board.
The termination of this Agreement and Executive's employment hereunder for Cause
shall not affect the continuing enforceability of Section 6 or Executive's
continuing obligations under Sections 6, 7, and 8.
5. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER
CONTRACTUAL RIGHTS.
(a) Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by Executive as a result of
employment by another employer after the date of termination, or otherwise.
(b) The provisions of this Agreement, and any payment provided
for hereunder, shall not reduce any amount otherwise payable, or supersede,
affect or in any way diminish Executive's existing rights, or rights which
accrue in the future, under any applicable law or any pension benefit or welfare
benefit plan, or other contract, plan or arrangement, including, without
limitation, participation in stock incentive plans and deferred compensation
plans. The compensation and benefits set forth in this Agreement shall in no way
be construed to limit or prevent Executive from receiving or participating in
other additional plans, programs, or benefits which may be made available by the
Company in the future, including, without
3
<PAGE> 4
limitation, participation in stock incentive plans, retirement plans, deferred
compensation plans, etc.
6. NON-COMPETITION. During the term of this Agreement and for
one year thereafter, Executive will not, directly or indirectly, whether as a
partner, officer, stockholder, advisor, employee or otherwise, promote,
participate, become employed by, or engage in any activity or other business
similar to the Company's business or any entity engaged in a business
competitive with the Company's business. If Executive fails to comply with the
provisions of this Paragraph 6, the Company may, in addition to pursuing all
other remedies available to the Company under law or in equity as a result of
such breach, cease payment of all benefits under Paragraph 4.
7. NON-INTERFERENCE. During the term of this Agreement and for
one year thereafter, Executive will not disrupt, damage, impair or interfere
with the business of the Company, whether by way of interfering with or
soliciting its employees, disrupting its relationships with customers, agents,
vendors, distributors or representatives, or otherwise. Furthermore, Executive
will not during this period encourage or solicit any employee of the Company to
leave the Company for any reason or to devote less than all of any such
employee's efforts to the affairs of the Company, provided that the foregoing
shall not affect any responsibility Executive has with respect to the bona fide
hiring and firing of company personnel.
8. PROTECTION OF CONFIDENTIAL INFORMATION. Executive agrees
and acknowledges that the Confidential Information (as defined below) of the
Company and its subsidiaries and affiliates is valuable, special and unique to
the Company's business, that such business depends on the Confidential
Information, that if such Confidential Information was known to competitors or
other third parties that substantial damage to the Company's business would
likely occur, that the Company in entering into this Agreement is relying upon
Executive's agreement not to disclose any Confidential Information and that the
Company wishes to protect such Confidential Information by keeping it
confidential for the use and benefit of the Company. Accordingly, Executive
agrees (1) to keep any and all Confidential Information in trust for the sole
use and benefit of the Company, (2) except as required by Executive's duties
hereunder, as required by law or as necessary in conjunction with legal
proceedings (and in preparation thereof with counsel), he will not at any time
during, or for five (5) years following the term of this Agreement, disclose or
use, directly or indirectly, any Confidential Information and (3) upon
termination of his employment by the Company, he will promptly deliver to or
leave with the Company all materials constituting Confidential Information
(including all copies thereof) that are in the possession of, under the control
of, or accessible to Executive to undertake the following obligations with
respect to the Confidential Information. For purposes of this Agreement,
"Confidential Information" means any and all information developed by Executive
during the term and used by the Company or any of its subsidiaries or affiliates
or developed by or for the Company, or any of its subsidiaries or affiliates of
which Executive gained knowledge by reason of his employment with the Company
that is not readily available in the industry in which the Company is or becomes
engaged during the term; provided, however, that "Confidential Information"
shall not include information that (i) is in the public domain at the time of
disclosure or which thereafter enters the public domain through no improper
action or inaction by Executive or any affiliate, agent or employee related
thereto, or (ii) was rightfully disclosed to Executive without restriction by a
third party.
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<PAGE> 5
9. RESOLUTION OF DISPUTES; ARBITRATION. Should a dispute arise
concerning this Agreement, its interpretation or termination, or Executive's
employment with the Company, either party may request a conference with the
other party to this Agreement and the parties shall meet to attempt to resolve
the dispute. Failing such resolution within thirty (30) days of either party's
request for a conference, the Company and Executive shall endeavor to select an
arbitrator who shall hear the dispute. In the event the parties are unable to
agree on an arbitrator, Executive and the Company shall request the American
Arbitration Association to submit a list of nine (9) names of persons who could
serve as an arbitrator. The Company and Executive shall alternately remove names
from this list (beginning with the party which wins a flip of a coin) until one
person remains and this person shall serve as the impartial arbitrator. The
decision of the arbitrator shall be final and binding on both parties.
Each party shall bear equally all costs of the arbitrator.
The arbitrator shall only have authority to interpret, apply
or determine compliance with the provisions set forth in this Agreement, but
shall not have the authority to add to, detract from or otherwise alter the
language of this Agreement.
10. NOTICES. Any notice to be given hereunder shall be in
writing and effective (i) when delivered personally, or by confirmed telex or
facsimile transmission or (ii) when received if sent by overnight express or
mailed by certified, registered or regular mail, postage prepaid, addressed to a
party at its address stated below, or to such other address as such party may
designate by written notice in accordance with the provisions of this Section
10.
To the Company:
Insurance Auto Auctions, Inc.
Attention: General Counsel
850 E. Algonquin Road, Suite 100
Schaumburg, IL 60173-3855
Telephone: (847) 839-3939
Facsimile: (847) 839-3999
To the Executive:
Christopher G. Knowles
305 Ridge Road
Barrington Hills, IL 60010
Telephone: (847) 381-3755
Facsimile: (847) 381-3799
11. GENERAL.
(a) Severability. If any provision herein is held to be
invalid or unenforceable for any reason, such provision will, to the extent of
such invalidity or unenforceability be of no force or effect, but without in any
way affecting the remainder of such provision or any other provision contained
herein, all of which will continue in full force and effect.
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<PAGE> 6
(b) Amendment. Any provision may be amended or the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively) only by written consent of (i) as to the
Company, only by a member of the Company's Board of Directors, and (ii) as to
Executive, only by Executive. Such amendment or waiver shall be binding upon the
Company and Executive and their successors and assigns.
(c) Assignment. This Agreement and the rights and obligations
of the parties hereunder shall inure to the benefit of, and be binding upon,
their respective successors, assigns and legal representatives.
(d) Governing Law. This Agreement and all disputes and suits
related thereto will be governed, construed, and interpreted in accordance with
the laws of the State of Illinois applicable to contracts entered into and to be
performed wholly within that state by residents of that state.
(e) No Waiver. No delay or failure by either party to exercise
or enforce at any time, any right or provision of this Agreement will be
considered a waiver thereof or of such party's right thereafter to exercise or
enforce each and every right and provision of this Agreement. Any waiver of any
right hereunder in a specific circumstance will not be deemed a waiver of that
right in any other circumstances or a waiver of any other right. A waiver to be
valid will be in writing but need not be supported by consideration.
(f) Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements, arrangements,
and communications, whether oral or written, between the parties, including all
prior employment agreements. No amendment to this Agreement may be made except
by a writing signed by the Company and Executive.
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<PAGE> 7
(g) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first set forth above.
COMPANY:
By: /s/ T. J. O'Malia
-------------------------------
Title: Chairman
----------------------------
EXECUTIVE:
/s/ C. G. Knowles
----------------------------------
7
<PAGE> 1
EXHIBIT 10.2
FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT EFFECTIVE
JUNE 3, 1999 BETWEEN INSURANCE AUTO AUCTIONS, INC. AND
CHRISTOPHER G. KNOWLES
WHEREAS, Insurance Auto Auctions, Inc. (the "Company") and Christopher
G. Knowles (the "Executive") have entered into an Employment Agreement effective
as of June 3, 1999 (the "Agreement");
WHEREAS, the Company and Executive desire to amend the Agreement as set
forth herein (the "First Amendment");
NOW, THEREFORE, Company and Executive agree as follows:
1. The fourth, fifth and sixth sentences of Section 3(c) of the Agreement
are deleted in their entirety and replaced with the following:
The Company shall pay up to $42,000 on Executive's behalf for
membership in a club as mutually agreed upon by Company and Executive.
Such $42,000 payment shall represent the non-equity portion of the club
membership initiation fee. Executive shall make all initiation fee
payments representing the equity portion of the club membership. Upon
termination of Executive's employment, the club membership shall remain
an asset of Executive. For the term of Executive's employment, the
Company will reimburse Executive for reasonable annual dues related to
the club membership.
Except as expressly amended hereby, the Agreement shall remain in full force and
effect.
This First Amendment shall be effective as of the 27th day of July 1999.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment.
COMPANY:
By /s/ T. J. O'Malia
--------------------------------
Title: CHAIRMAN
Executive:
/s/ C. G. Knowles
----------------------------------
<PAGE> 1
Exhibit 10.3
SEPARATION AGREEMENT
This Separation Agreement ("Agreement") dated as of this 14th day of June, 1999,
is entered into by and between Linda C. Larrabee ("Employee") and Insurance Auto
Auctions, Inc. (the "Company") to set forth the terms, conditions, and
obligations of each party with respect to the termination of the employment
relationship between Employee and the Company. Whereas, the parties mutually
agree that their joint interest would be furthered by an amicable separation,
the parties therefore agree as follows:
COVENANTS
1. Termination of the employment relationship between Employee and the
Company shall be effective as of May 21, 1999 (the "Termination Date").
Employee resigns from her positions as an officer and employee of the
Company, from any and all officer, director or employee positions with
any of the Company's subsidiaries, from her position as a member of the
Administrative Committee of the 401 (k) Plan, and as a proxy for
purposes of voting shares of the Company's Common Stock on behalf of
shareholders of the Company at the Company's Annual Meeting of
Shareholders scheduled for June 16, 1999, all effective as of the close
of business on the Termination Date.
2. As consideration for Employee entering into this Agreement, the Company
agrees:
(a) Employee shall receive from the Company a lump sum cash
payment equal to the sum of (i), (ii), (iii) and (iv) below,
payable on the next regular payday following expiration of the
rescission period set forth in Paragraph 7 below:
(i) Forty-six (46) weeks of pay, computed at Employee's
regular weekly base salary in effect on the
Termination Date (such gross amount equal to
$152,508);
(ii) A bonus equal to 35% of Employee's annual base salary
in effect on the Termination Date, prorated for 10.5
months (such gross amount equal to $52,798);
(iii) An automobile allowance equal to 10.5 times
Employee's monthly automobile allowance in effect on
the Termination Date (such gross amount equal to
$17,220); and
(iv) A cash payment of $3,000 to compensate Employee for
lost vesting under the Company's 401 (k) Plan.
<PAGE> 2
(b) (i) For a period of ten (10) months following the
Termination Date, the Company will continue to
provide medical, dental, short-term disability,
long-term disability and life insurance benefits to
Employee and/or Employee's family at the same cost
and at least equal to those which would have been
provided to them in accordance with the medical,
dental, short-term disability, long-term disability
and life insurance programs, practices, and policies
of the Company (the "Company Welfare Plans") if
Employee's employment had not been terminated,
provided, however, that such benefits will be
continued only to the extent permissible under the
terms of such Company Welfare Plans and applicable
law. Employee's share of the cost of such benefits
for the ten (10) month period beginning on the
Termination Date shall be deducted from the amount to
be paid to Employee pursuant to subsection 2(a)
above; provided, however, that if Employee's coverage
is terminated prior to the end of such ten (10) month
period, the Company shall reimburse Employee for
Employee's share of the cost of the unused benefits.
(ii) If any of the Company's Welfare Plans do not permit
continued participation by Employee and Employee's
family after termination of employment, the Company
will reimburse the Employee for the cost of obtaining
comparable coverage from a third-party insurer.
(iii) If Employee is receiving medical and/or dental
benefits under the Company's Welfare Plans, then upon
termination of such benefits on or before the end of
the ten (10) month period described above (the
"Benefit Continuation Period"), the Company will
continue to provide such medical and/or dental
benefits to Employee and/or Employee's family
pursuant to Title I, Part 6 of the Employee
Retirement Income Security Act of 1974, as amended
("COBRA"). For such purpose, the termination of the
Benefit Continuation Period will be considered the
date of the "qualifying event" as such term is
defined by COBRA and the cost of continued coverage
during the COBRA period will be determined pursuant
to COBRA and paid entirely by Employee.
(c) The Employee's active participation in all other employee
benefits plans and programs maintained by the Company,
including the Insurance Auto Auctions, Inc. 401 (k) Plan (the
"401 (k) Plan") and the Insurance Auto Auctions, Inc. Employee
Stock Purchase Plan (the "Stock Purchase Plan"), shall
terminate as of the Termination Date, and no contributions to
such plans or programs will be made on behalf of the Employee
for any period of time after the Termination Date. Employee's
entitlement to accrued benefits under the 401 (k) Plan and
Stock Purchase Plan shall be governed by the terms of
<PAGE> 3
the corresponding plan documents, based on an ending service
date that shall be the same as the Termination Date.
(d) All outstanding stock options granted to Employee as set forth
on Attachment A hereto shall become 100% vested and
exercisable on the day after the expiration of the rescission
period described in Paragraph 7 below. Such vested stock
options will continue to be exercisable until May 31, 2000.
Stock options not exercised by May 31, 2000, shall expire and
be of no further force or effect. The options shall continue
to be governed by the terms and conditions of their respective
Notices of Grant of Stock Option and Stock Option Agreements,
as amended by this subsection 2(d).
(e) Employee shall receive accrued but unused vacation pay through
the Termination Date, to be paid on or before the Company's
next regularly scheduled pay date following the Termination
Date.
(f) Amounts paid to Employee pursuant to this Section 2 shall be
subject to applicable withholding taxes as may be required
pursuant to federal, state or local law, or by agreement with
or consent of Employee.
3. Employee shall remain bound by all terms and conditions of the
Confidentiality Agreement dated as of February 23, 1998 and attached
hereto as Attachment B.
4. Employee shall immediately deliver all Company property not previously
delivered to the Company.
5. The Change in Control and Employment Agreement between the Company and
Employee dated February 23, 1998 shall be terminated, and shall have no
force and effect, as of the Termination Date.
6. As consideration for the obligations undertaken by the Company pursuant
to this Agreement, Employee, for herself, her successors,
administrators, heirs and assigns, hereby fully releases, waives and
fully discharges the Company, its subsidiaries and affiliates, their
predecessors, successors, assigns and their respective officers,
directors, agents and employees, whether past, present or future (the
"Released Parties") from any and all claims, causes of action, suits,
demands, damages, judgments or liabilities, of any nature, including
attorneys' fees and costs, known or unknown, absolute or contingent,
arising from or relating to Employee's employment and separation from
employment. This release includes, without limitation, any and all
claims for breach of contract, wrongful discharge or impairment of
economic opportunity, any claims under common law or at equity, claims
of defamation or intentional infliction of emotional harm, any tort,
claims for reimbursements or commissions, and any and all rights and
discrimination claims Employee may have arising under the Federal Age
Discrimination and Employment Act of 1967 (29 USC ss.ss.621, et seq.),
Title VII of the Civil Rights Act of 1964, as amended, (42 USC
ss.ss.
<PAGE> 4
2000c, et seq.), the Americans with Disabilities Act or the Illinois
Human Rights Act, and any and all other federal, state or local laws or
regulations. Employee agrees not to sue or to file any actions against
the Released Parties with respect to claims covered by this release.
This waiver and release shall not apply to claims arising after
Employee's execution of this Agreement. Notwithstanding the above, this
waiver and release shall not apply to claims for indemnification
pursuant to Article 7 of the Company's Articles of Incorporation,
Article 5 of the Company's Bylaws and the Indemnification Agreement by
and between the Company and Employee dated as of February 24, 1999.
7. Employee specifically agrees as follows:
(a) Employee is knowingly and voluntarily entering into this
Agreement.
(b) Employee acknowledges that the Company is providing benefits
in the form of payments and compensation, to which Employee
would not otherwise be entitled, as part of the consideration
for Employee's entering into this Agreement.
(c) Employee is hereby advised to consult with an attorney prior
to executing this Agreement.
(d) Employee understands that she has a period of twenty-one (21)
days from the date a copy of this Agreement is provided to her
in which to consider and sign the Agreement (during which the
offer will remain open) and that Employee has an additional
seven (7) days after signing this Agreement within which to
revoke acceptance of the Agreement.
(e) If during the seven (7)-day revocation period Employee should
revoke an acceptance of the Agreement, then this Agreement
shall be void.
8. This Agreement does not constitute an admission of wrongdoing or
liability for any purpose by the Company or Employee.
<PAGE> 5
9. This Agreement sets forth the full understanding and agreement of the
parties and supersedes any and all other understandings or agreements,
written or oral. This Agreement shall be interpreted pursuant to
Illinois law.
INSURANCE AUTO AUCTIONS, INC. EMPLOYEE
By: /s/ Stephen L. Green /s/ Linda C. Larrabee
-------------------------------- ----------------------------
(Employee)
Its: VP Dated: 6-14-99
-------------------------------- ----------------------
Dated: 6-14-99
-------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 16,342,000 0
<SECURITIES> 14,154,000 0
<RECEIVABLES> 34,135,000 0
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<INVENTORY> 11,432,000 0
<CURRENT-ASSETS> 77,891,000 0
<PP&E> 44,592,000 0
<DEPRECIATION> (20,865,000) 0
<TOTAL-ASSETS> 232,160,000 0
<CURRENT-LIABILITIES> 33,603,000 0
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0 0
0 0
<COMMON> 11,000 0
<OTHER-SE> 133,571,000 0
<TOTAL-LIABILITY-AND-EQUITY> 232,160,000 0
<SALES> 82,531,000 162,409,000
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<CGS> 59,836,000 119,777,000
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<OTHER-EXPENSES> 15,148,000 29,722,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 493,000 987,000
<INCOME-PRETAX> 7,380,000 12,474,000
<INCOME-TAX> 3,123,000 5,364,000
<INCOME-CONTINUING> 4,257,000 7,110,000
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<NET-INCOME> 4,257,000 7,110,000
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