<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
- --------------------------------------------------------------------------------
(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 April 30, 1999:
Class Outstanding April 30, 1999
----- --------------------------
Common Stock, $0.001 Par Value 11,357,358 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 March 31, 1999 and December 31, 1998.................................... 3
Condensed Consolidated Statements of Earnings for the
Three Month Periods ended March 31, 1999 and March 31, 1998................... 4
Condensed Consolidated Statements of Cash Flows for the
Three Month Periods ended March 31, 1999 and March 31, 1998................... 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 13
PART II. OTHER INFORMATION................................................................. 14
Item 1. Legal Proceedings.................................................................. 14
Item 2. Changes in Securities.............................................................. 14
Item 3. Defaults upon Senior Securities.................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................................ 14
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 STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTH PERIODS
ENDED MARCH 31,
---------------
(UNAUDITED)
1999 1998
---- ----
<S> <C> <C>
Net Sales:
Vehicle sales $ 51,258,000 $ 47,169,000
Fee income 28,620,000 21,389,000
------------ ------------
79,878,000 68,558,000
Cost and expenses:
Cost of sales 59,941,000 52,092,000
Direct operating expenses 13,624,000 11,997,000
Amortization of acquisition costs 950,000 942,000
Special charges - 1,564,000
------------ ------------
Earnings from operations 5,363,000 1,963,000
Other (income) expense:
Interest expense 494,000 528,000
Interest income (225,000) (174,000)
------------ ------------
Earnings before income taxes 5,094,000 1,609,000
Income taxes 2,241,000 740,000
------------ ------------
Net earnings $ 2,853,000 $ 869,000
============ ============
Earnings per share:
Basic $ .25 $ .08
============ ============
Diluted $ .25 $ .08
============ ============
Weighted average shares outstanding:
Basic 11,338,000 11,307,000
Effect of dilutive securities - stock options 72,000 73,000
------------ ------------
Diluted 11,410,000 11,380,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,804,000 $ 11,682,000
Short-term investments 8,385,000 11,138,000
Accounts receivable, net 38,802,000 37,415,000
Inventories 12,739,000 11,229,000
Other current assets 1,716,000 1,676,000
------------- -------------
Total current assets 81,446,000 73,140,000
------------- -------------
Property and equipment, at cost, net 22,965,000 22,312,000
Deferred income taxes 3,063,000 2,976,000
Other assets, principally goodwill, net 127,987,000 128,916,000
------------- -------------
$ 235,461,000 $ 227,344,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 216,000 $ 216,000
Accounts payable 34,145,000 30,939,000
Accrued liabilities 5,908,000 6,097,000
Income taxes 2,600,000 582,000
------------- -------------
Total current liabilities 42,869,000 37,834,000
------------- -------------
Long-term debt, excluding current installments 20,085,000 20,116,000
Accumulated postretirement benefits obligation 3,429,000 3,485,000
Deferred income taxes 7,390,000 7,154,000
------------- -------------
Total liabilities 73,773,000 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
11,341,358 and 11,327,169 shares as of March 31,
1999 and December 31, 1998, respectively 11,000 11,000
Additional paid-in capital 132,249,000 132,171,000
Retained earnings 29,428,000 26,573,000
------------- -------------
Total shareholders' equity 161,688,000 158,755,000
------------- -------------
$ 235,461,000 $ 227,344,000
============= =============
</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>
Three Month Periods
Ended March 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings 2,853,000 $ 869,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,223,000 2,152,000
(Gain) loss on disposal of fixed assets (9,000) 4,000
Change in assets and liabilities (net of effects of acquired companies):
(Increase) decrease in:
Short-term investments 2,753,000 (10,683,000)
Accounts receivable, net (1,387,000) (1,635,000)
Inventories (1,510,000) 952,000
Other current assets (40,000) 120,000
Other assets (21,000) (75,000)
Increase (decrease) in:
Accounts payable 3,206,000 3,194,000
Accrued liabilities (189,000) (562,000)
Income taxes payable 2,167,000 366,000
----------- -----------
Total adjustments 7,193,000 (6,167,000)
----------- -----------
Net cash provided by (used in) operating activities 10,046,000 (5,298,000)
----------- -----------
Cash flows from investing activities:
Capital expenditures (1,946,000) (1,414,000)
Proceeds from disposal of fixed assets 31,000 -
Payments made in connection with acquired companies, net of cash acquired - (1,748,000)
----------- -----------
Net cash used in investing activities (1,915,000) (3,162,000)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 78,000 114,000
Principal payments of long-term debt (87,000) (120,000)
----------- -----------
Net cash provided by (used in) financing activities (9,000) (6,000)
----------- -----------
Net increase (decrease) in cash 8,122,000 (8,466,000)
Cash and cash equivalents at beginning of period 11,682,000 25,972,000
----------- -----------
Cash and cash equivalents at end of period $19,804,000 $17,506,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 861,000 $ 889,000
=========== ===========
Income taxes 111,000 375,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The unaudited condensed consolidated financial statements of Insurance
Auto Auctions, Inc. and its subsidiary (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. NET EARNINGS PER SHARE
Net earnings per share represents diluted earnings per share and is based
on the weighted average number of shares of common and potentially
issuable common stock equivalents outstanding.
4. 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.
6
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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 governmental
regulation, weather conditions, market value of salvage, 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 percentage of sale consignment, fixed fee consignment
an, purchase agreement. 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. With purchase agreement sales, significant
increases in used car prices and ACV's generally benefit the Company. 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
significant purchase agreement contracts not conforming to the Company's
standards for this type of agreement, converting customers to either a percent
of sale consignment or fixed fee 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 include 51 locations as of March 31, 1999.
In February of 1998, the Company acquired Auto Disposal Company ("ADC"). 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.
7
<PAGE> 8
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998
Net sales of the Company increased to $79,878,000 for the three
months ended March 31, 1999, from $68,558,000 for the same three month period in
1998, a 17% 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 three months ended March 31, 1999 increased
10%, 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 were the result of an increase in same store sales, 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
28% of total volume, down 2% from the same period in 1998. The percent of sale
agreement sales method of processing accounted for 14% of total volume, up 8%
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 21% to $19,937,000 for the three months
ended March 31, 1999, from $16,466,000 for the same period in 1998. Gross profit
per unit of $158 for the three months ended March 31, 1999 was 10% 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 selling prices
and improve the Company's gross profit per unit. The price 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 $13,624,000 for the three
months ended March 31, 1999, from $11,997,000 for the same period in 1998.
Direct operating expenses per unit increased to $108 for the three months ended
March 31, 1999, as compared to $104 for the same period in 1998. The increase is
the result of higher earned incentives, a full quarter of operating expenses
related to the Alabama acquisition, increased facility related costs and a
general increase in operating expenses.
Amortization of acquisition costs associated with acquisitions
increased to $950,000 for the three months ended March 31, 1999 from $942,000
for the comparable period in 1998. The increase was the result of the
acquisition of the branches in Alabama.
Interest expense decreased to $494,000 for the three months ended
March 31, 1999, from $528,000 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 $225,000 for the three month period
ended March 31, 1999, from $174,000 for the comparable period in 1998. The
increase is the result of an increase in cash and short term investments.
Income taxes increased to $2,241,000 for the three months ended
March 31, 1999, from $740,000 for the comparable period in 1998. This increase
is the result of the increase in earnings. The Company's effective tax rate for
the three months ended March 31, 1999 was 44% 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 $2,853,000 for the three months
ended March 31, 1999, a 66% increase from $1,714,000, before special charges,
for the comparable period in 1998.
8
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FINANCIAL CONDITION AND LIQUIDITY
At March 31, 1999, the Company had current assets of $81,446,000,
including $19,804,000 of cash and cash equivalents and $8,385,000 of short-term
investments. Current liabilities were $42,869,000. The Company had working
capital of $38,577,000 at March 31, 1999, a $3,271,000 increase from December
31, 1998.
At March 31, 1999, the Company's indebtedness consisted of 8.6%
Senior Notes approximating $20,000,000, a post-retirement benefits liability
relating to the Underwriters Salvage Company acquisition of approximately
$3,429,000 and amounts due to the sellers related to certain acquisitions. There
were no borrowings outstanding under the Company's revolving line of credit
facility as of March 31, 1999.
Capital expenditures were approximately $1,946,000 for the three
months ended March 31, 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.
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 Senior Vice President and Chief
Financial 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 currently Year 2000 compliant in all
material respects. 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 conversation by October 1, 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, results of operations or liquidity.
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,
results of operations or liquidity. In addition, the Company relies on state
DMV's to timely process titles to vehicles. Because the Company must generally
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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, results of
operations or liquidity.
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 be completed during the second 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 of 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 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
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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
three 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.
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. The Company has renegotiated
most of its agreements with certain of these suppliers. 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.
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
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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 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.
12
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had approximately $8,385,000 of short-term investments as
of March 31, 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.
13
<PAGE> 14
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. Inapplicable
Item 5. Other Information. Inapplicable
Item 6. Exhibits and Reports On Form 8-K.
(a) Exhibits.
3.1 Bylaws of the Registrant, As Amended as of May 1999
27.1 Financial Data Schedule
(b) Reports On Form 8-K. No Reports On Form 8-K Were Filed During
Fiscal Quarter Ending March 31, 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: May 14, 1999 By: /s/ Linda C. Larrabee
------------ ---------------------------------------------------
Name: Linda C. Larrabee
Title: Senior Vice President, Chief Financial Officer
and Secretary
(Duly Authorized Officer and Principal
Financial Officer)
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EXHIBIT INDEX
EXHIBIT NO.
- -----------
3.1 Bylaws of the Registrant, as amended as of May 1999
27.1 Financial Data Schedule
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<PAGE> 1
EXHIBIT 3.1
AS AMENDED 5/99
BY-LAWS
OF
INSURANCE AUTO AUCTIONS (ILLINOIS), INC.
ARTICLE 1
OFFICES; REGISTERED AGENT
ss. 1.1 REGISTERED OFFICE AND AGENT. The corporation shall maintain in
the State of IllinoiS a registered office and a registered agent whose business
office is the registered office.
ss. 1.2 PRINCIPAL BUSINESS OFFICE. The corporation shall have its
principal business office at such location within or without the State of
Illinois as the board of directors may from time to time determine.
ARTICLE 2
SHAREHOLDERS
ss. 2.1 ANNUAL MEETING. The annual meeting of the shareholders shall be
held for the purposE of electing directors and for the transaction of such other
business as may come before the meeting on the third Wednesday of June each
year, or, if this date in any year shall be a legal holiday, then the meeting
shall be held on the next succeeding business day; provided, however, that the
board of directors may, by resolution adopted before notice of the meeting is
given to the shareholders, fix a different date and/or time for holding any
annual meeting.
ss. 2.2 SPECIAL MEETINGS. Special meetings of the shareholders may be
called by the president, by the board of directors or by the holders of not less
than one-fifth of all the outstanding shares of the corporation entitled to vote
on the matter for which the meeting is called.
ss. 2.3 PLACE OF MEETING. The board of directors may designate any
place, either within or without the State of Illinois, as the place for any
annual meeting or for any special meeting called by the board of directors, but
if no designation is made, or if a special meeting be otherwise called, the
place of meeting shall be the principal business office of the corporation;
provided, however, that for any meeting of the shareholders for which a waiver
of
<PAGE> 2
notice designating a place is signed by all of the shareholders, then that shall
be the place for the holding of such meeting.
ss. 2.4 NOTICE OF MEETINGS. Written notice stating the place, date and
hour of the meeting oF the shareholders and, in the case of a special meeting,
the purpose or purposes for which the meeting is called either shall be
delivered personally or mailed to each shareholder of record entitled to vote at
the meeting, not less than 10 nor more than 60 days before the date of the
meeting, or, in the case of a meeting called for the purpose of acting upon a
merger, consolidation, share exchange, dissolution or sale, lease or exchange of
assets, not less than 20 nor more than 60 days before the meeting, by or at the
direction of the president, the secretary, or other persons calling the meeting.
If mailed, such notice shall be deemed to be given when deposited in the United
States mail addressed to the shareholder at his or her address as it appears on
the records of the corporation, with postage thereon prepaid.
ss. 2.5 WAIVER OF NOTICE. A waiver of notice in writing signed by a
shareholder entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to giving notice to such shareholder.
Attendance at any meeting shall constitute waiver of notice thereof unless the
person so attending objects to the holding of the meeting because proper notice
was not given.
ss. 2.6 FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to noticE of or to vote at any meeting of the shareholders
or to receive payment of any dividend or other distribution or allotment of any
rights, or in order to make a determination of shareholders for any other proper
purpose, the board of directors may fix in advance a record date for any such
determination of shareholders, which shall be not more than 60 days and, for a
meeting of shareholders, not less than 10 days, or in the case of a meeting
called for the purpose of acting upon a merger, consolidation, share exchange,
dissolution or sale, lease or exchange of assets, not less than 20 days, before
the date of the event for which the determination is required. If no record date
is fixed as aforesaid, the record date for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders shall be the date
on which notice of the meeting is mailed and the record date for the
determination of shareholders for any other purpose shall be the date on which
the board of directors adopts resolution(s) relating thereto. A determination of
shareholders entitled to vote at any meeting of the shareholders shall apply to
any adjournment of the meeting.
ss. 2.7 VOTING LISTS. The officer or agent having charge of the share
transfer books of the corporation shall make, within 20 days after the record
date for a meeting of shareholders or 10 days before such meeting, whichever is
earlier, a complete list of the shareholders entitled to vote at such meeting,
arranged in alphabetical order, showing the address of and the number of shares
held by each, which list shall be kept on file at the registered office of the
corporation and shall be subject to inspection by any shareholder, and to
copying at the shareholder's expense, at any time during usual business hours
for a period of 10 days prior to each meeting of the shareholders. Such list
shall also be produced and kept open at the time and place of the meeting and
shall be subject to inspection by any shareholder during the whole time of the
meeting. The original share ledger or transfer books, or a duplicate thereof
kept in the
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<PAGE> 3
State of Illinois, shall be prima facie evidence as to who are the shareholders
entitled to examine such list or share ledger or transfer books or to vote at
any meeting of the shareholders.
ss. 2.8 QUORUM AND VOTE REQUIRED FOR ACTION. The holders of outstanding
shares having a majority of the total votes which all of the outstanding shares
of the corporation would be entitled to cast on a matter at the meeting, present
in person or by proxy, shall constitute a quorum for consideration of such
matter at any meeting of the shareholders; provided that if a quorum is not
present at said meeting, then the holders who are present in person or by proxy
may by majority vote adjourn the meeting from time to time without further
notice. If a quorum is present at any meeting of the shareholders, the
affirmative vote of the majority of the votes entitled to be cast on a matter by
holders of shares who are present in person or by proxy shall be the act of the
shareholders, unless the Illinois Business Corporation Act of 1983 as amended or
the articles of incorporation of the corporation require a different number of
votes. At any adjourned meeting at which a quorum is present, any business may
be transacted which might have been transacted at the original meeting.
Withdrawal of shareholders from any meeting shall not cause failure of a duly
constituted quorum at that meeting.
ss. 2.9 PROXIES. Each shareholder entitled to vote at a meeting of the
shareholders may appoint a proxy to vote or otherwise act for him or her by
delivering a valid appointment form to the person so appointed or to a proxy
solicitation firm, proxy support service organization or like agent duly
authorized by the person or persons to receive the transmission. A shareholder
may make such an appointment by signing an appointment form, by transmission of
a telegram, cablegram or other electronic transmission (provided that such
transmission either sets forth or is submitted with information from which it
can be determined that the telegram, cablegram or other electronic transmission
was authorized by the shareholder), or any other means permitted under the
Illinois Business Corporation Act of 1983, as amended. No proxy shall be valid
after the expiration of 11 months from the date thereof unless otherwise
provided in the proxy.
ss. 2.10 VOTING OF SHARES. Each outstanding Common Share, regardless of
class and subject to the terms of any series of Preferred Shares, shall be
entitled to one vote upon each matter submitted to a vote of the shareholders.
ss. 2.11 VOTING OF SHARES BY CERTAIN HOLDERS.
(a) Shares registered in the name of another corporation, domestic or
foreign, may be voted by any officer, agent, proxy or other legal representative
authorized to vote such shares under the law of incorporation of such
corporation. The corporation may treat the president or other person holding the
position of chief executive officer of such other corporation as authorized to
vote such shares, together with any other person indicated and any other holder
of an office indicated by the corporate shareholder to the corporation as a
person or an office authorized to vote such shares. Such persons and offices
indicated shall be registered by the corporation on the transfer books for
shares and included in any voting list prepared in accordance with these
by-laws.
3
<PAGE> 4
(b) Shares registered in the name of a deceased person, a minor ward or
a person under legal disability may be voted by his or her administrator,
executor or court appointed guardian, either in person or by proxy without a
transfer of such shares into the name of such administrator, executor or court
appointed guardian. Shares registered in the name of a trustee may be voted by
him or her, either in person or by proxy.
(c) Shares registered in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his or her name if authority so
to do be contained in an appropriate order of the court by which such receiver
was appointed.
(d) A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the shares so transferred.
(e) Shares of the corporation belonging to the corporation shall not be
voted, directly or indirectly, at any meeting and shall not be counted in
determining the total number of outstanding shares entitled to vote at any given
time, but shares of the corporation held by the corporation in a fiduciary
capacity may be voted and shall be counted in determining the total number of
outstanding shares entitled to vote at any given time.
ss. 2.12 INSPECTORS. At any meeting of the shareholders, the presiding
officer may, or upon the request of any shareholder shall, appoint one or more
persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of shares represented at the meeting, based upon their
determination of the validity and effect of proxies; count all votes and report
the results; and do such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the shareholders. Each report of an
inspector shall be in writing and signed by him or her or a majority of them if
there is more than one inspector acting at such meeting. If there is more than
one inspector, the report of a majority shall be the report of the inspectors.
The report of the inspector or inspectors on the number of shares represented at
the meeting and the results of the voting shall be prima facie evidence thereof.
ss. 2.13 VOTING BY BALLOT. Voting on any question shall be by ballot
when so requested by any shareholder or directed by the presiding officer.
ARTICLE 3
DIRECTORS
ss. 3.1 GENERAL POWERS. The business and affairs of the corporation
shall be managed by or under the direction of the board of directors.
ss. 3.2 NUMBER, TENURE AND QUALIFICATIONS. The number of directors of
the corporation shall range between five and nine. The term of office of each
director shall be until the next annual election of the shareholders or until
his or her successor
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<PAGE> 5
shall have been elected and qualified. Directors need not be residents of the
State of Illinois or shareholders of the corporation.
ss. 3.3 REGULAR MEETINGS. A regular meeting of the board of directors
shall be held, without other notice than this by-law, immediately after, and at
the same place as, the annual meeting of the shareholders. The board of
directors may provide, by resolution, the time and place, either within or
without the State of Illinois, for the holding of additional regular meetings
without other notice than such resolution.
ss. 3.4 SPECIAL MEETINGS. Special meetings of the board of directors
may be called by or at the request of the president or any two directors. The
person or persons authorized to call special meetings of the board of directors
may fix any place, either within or without the State of Illinois, as the place
for holding any special meeting of the board of directors called by them.
ss. 3.5 NOTICE AND WAIVER. Notice of any special meeting shall be given
at least 2 days prioR thereto by written notice to each director at his or her
business address or such other address as he or she may have advised the
secretary of the corporation to use for such purpose. If delivered, such notice
shall be deemed to be given when delivered. If mailed, such notice shall be
deemed to be given two business days after deposit in the United States mail so
addressed, with postage thereon prepaid, and if given by telegraph such notice
shall be deemed to be given the next business day following the day the telegram
is given to the telegraph company. A waiver of notice in writing signed by the
director entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. Attendance at
any meeting shall constitute waiver of notice thereof unless the person attends
the meeting for the express purpose of objecting to the transacting of business
at the meeting because proper notice was not given. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the board
of directors need be specified in the notice or waiver of notice of such
meeting.
ss. 3.6 QUORUM. A majority of the number of directors in office at a
given time shall constitute a quorum for the transaction of business at any
meeting of the board of directors, unless a greater number is specified by the
articles of incorporation of the corporation or these by-laws; provided, that if
a quorum is not present, then a majority of the directors present at said
meeting may adjourn the meeting from time to time without further notice than
announcement at the meeting.
ss. 3.7 MANNER OF ACTING. The act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors unless the act of a greater number is required by the articles of
incorporation of the corporation or these by-laws.
ss. 3.8 ATTENDANCE BY CONFERENCE TELEPHONE. Members of the board of
directors may participatE in and act at any meeting of such board through use of
a conference telephone or other communications equipment by means of which all
persons participating in the meeting can hear each other. Participation in such
meeting by such means
5
<PAGE> 6
shall constitute attendance and presence in person at the meeting of the person
or persons so participating for all purposes including fulfilling the
requirements of sections 3.6 and 3.7.
ss. 3.9 VACANCIES. Any vacancy occurring in the board of directors, and
any directorship to be filled by reason of an increase in the number of
directors, may be filled by election at an annual meeting or at a special
meeting of shareholders called for that purpose; provided, however, that the
board of directors may fill vacancies arising between meetings of shareholders
for any reason, including vacancies due to an increase in the number of
directors.
ss. 3.10 INFORMAL ACTION BY DIRECTORS. Any action required to be taken
at a meeting of the board of directors, or any other action which may be taken
at a meeting of the board of directors, may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the directors. Any consent may be signed in counterparts with the same force and
effect as if all directors had signed the same copy. All signed copies of any
such written consent shall be delivered to the secretary to be filed in the
corporate records. The action taken shall be effective when all the directors
shall have signed the consent unless the consent specifies a different effective
date. Any such consent signed by all of the directors shall have the same effect
as a unanimous vote.
ss. 3.11 COMPENSATION. The board of directors, by the affirmative vote
of a majority of directors then in office, and irrespective of any personal
interest of any of its members, shall have authority to establish reasonable
compensation of all directors for services to the corporation as directors,
officers or otherwise, and to authorize the payment of the directors' expenses,
if any, of attendance at each meeting of the board in addition to such
compensation.
ss. 3.12 PRESUMPTION OF ASSENT. A director who is present at a meeting
of the board of directors at which action on any corporate matter is taken shall
be conclusively presumed to have assented to the action taken unless his or her
dissent shall be entered in the minutes of the meeting or unless he or she shall
file his or her written dissent to such action with the person acting as the
secretary of the meeting before the adjournment thereof or shall forward such
dissent by registered or certified mail to the secretary of the corporation
immediately after the adjournment of the meeting. Such right to dissent shall
not apply to a director who voted in favor of such action.
ss. 3.13 COMMITTEES. A majority of the directors may create one or more
committees and appoinT members of the board to serve on the committee or
committees. Each committee shall have two or more members, who serve at the
pleasure of the board of directors. Members of any committee of the board of
directors may participate in and act at any meeting of such committee through
the use of a conference telephone or other communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation in such meeting by such means shall constitute attendance and
presence in person at the meeting of the person or persons so participating for
all purposes. Unless in its appointment the board of directors decides
otherwise, a majority of any committee shall constitute a quorum and a majority
of a quorum shall be necessary for committee action. A committee may act by
unanimous consent in writing without a meeting, and shall decide the time and
place of its
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<PAGE> 7
meetings and the notice therefor, unless the board of directors decides
otherwise. To the extent specified by the board of directors, a committee may
exercise the power of the board, subject to such limitations as may be provided
by law.
ARTICLE 4
OFFICERS
ss. 4.1 NUMBER. The officers of the corporation shall be a president, a
treasurer, and a secretary, and such number of vice presidents, assistant
treasurers, assistant secretaries and other officers as may be elected by the
board of directors. Any two or more offices may be held by the same person.
ss. 4.2 ELECTION AND TERM OF OFFICE. The officers of the corporation
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the shareholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as conveniently may be. Vacancies may be filled or new
offices created and filled at any meeting of the board of directors. Each
officer shall hold office until his or her successor shall have been duly
elected and shall have qualified, until his or her death or resignation or until
he or she shall have been removed in the manner hereinafter provided, whichever
first occurs.
ss. 4.3 REMOVAL. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the corporation would be served
thereby, but such removal shall be without prejudice to the contract rights, if
any, of the person so removed. Election of an officer shall not of itself create
contract rights.
ss. 4.4 PRESIDENT. The president shall be the chief executive officer
of the corporation and, subject to the direction and control of the board of
directors, he or she shall be in charge of the business of the corporation. In
general, he or she shall discharge all duties incident to the chief executive
office of the corporation and such other duties as may be prescribed by the
board of directors from time to time. Without limiting the generality of the
foregoing, the president shall see that the resolutions and directions of the
board of directors are carried into effect except in those instances in which
that responsibility is specifically assigned to some other person by the board
of directors; he or she shall preside at all meetings of the shareholders; and,
except in those instances in which the authority to execute is expressly
delegated to another officer or agent of the corporation or a different mode of
execution is expressly prescribed by the board of directors, he or she may
execute for the corporation certificates for its shares (the issue of which
shall have been authorized by the board of directors), and any contracts, deeds,
mortgages, bonds or other instruments which the board of directors has
authorized, and he or she may (without previous authorization by the board of
directors) execute such contracts and other instruments as the conduct of the
corporation's business in its ordinary course requires, and he or she may
accomplish such execution in each case either individually or with the
secretary, any assistant secretary, or any other officer thereunto authorized by
the board of directors, according to the requirements of the form of the
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<PAGE> 8
instrument. Also, the president may vote all securities which the corporation is
entitled to vote except as and to the extent such authority shall be vested in a
different officer or agent of the corporation by the board of directors.
ss. 4.5 THE VICE PRESIDENTS. The vice president (and, in the event that
there is more than one vice president, each of the vice presidents) shall assist
the president in the discharge of his or her duties as the president may direct
and shall perform such other duties as from time to time may be assigned to him
or her by the president or by the board of directors. In the absence of the
president or in the event of his or her inability or refusal to act, the vice
president (or in the event there be more than one vice president, the vice
presidents in the order designated by the board of directors, or by the
president if the board of directors has not made such a designation, or in the
absence of any designation, then in the order of seniority of tenure as vice
president) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. Except in those instances in which the authority to execute is
expressly delegated to another officer or agent of the corporation or a
different mode of execution is expressly prescribed by the board of directors or
these by-laws, the vice president (or each of them if there are more than one)
may execute for the corporation certificates for its shares (the issue of which
shall have been authorized by the board of directors), and any contracts, deeds,
mortgages, bonds or other instruments which the board of directors has
authorized, and he or she may (without previous authorization by the board of
directors) execute such contracts and other instruments as the conduct of the
corporation's business in its ordinary course requires, and he or she may
accomplish such execution in each case either individually or with the
secretary, any assistant secretary or any other officer thereunto authorized by
the board of directors, according to the requirements of the form of the
instrument.
ss. 4.6 THE TREASURER. The treasurer shall be the principal accounting
and financial officer of the corporation and as such shall perform all the
duties incident to the office of treasurer and such other duties as from time to
time may be assigned to him or her by the board of directors or the president.
Without limiting the generality of the foregoing, he or she shall (a) have
charge of and be responsible for the maintenance of adequate books of account
for the corporation; and (b) have charge and custody of all funds and securities
of the corporation, and be responsible therefor and for the receipt and
disbursement thereof. If required by the board of directors, the treasurer shall
give a bond for the faithful discharge of his or her duties in such sum and with
such surety or sureties as the board of directors may determine.
ss. 4.7 THE SECRETARY. The secretary shall perform all duties incident
to the office of secretary and such other duties as from time to time may be
assigned to him or her by the board of directors or president. Without limiting
the generality of the foregoing, he or she shall (a) record the minutes of the
meetings of the shareholders and the board of directors and will record or keep
the minutes of all committees in one or more books provided for that purpose and
shall include in such books the actions by written consent of the shareholders
and the board of directors; (b) see that all notices are duly given in
accordance with the provisions of these by-laws or as required by law; (c) be
the custodian of the corporate records and the seal of the corporation (if a
seal has been authorized by the board of directors) and certify the by-laws,
resolutions of the shareholders and board of directors and any committees of the
board of
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directors and other documents of the corporation as being true and correct
copies thereof; (d) keep a register of the post-office address of each
shareholder which shall be furnished to the secretary by such shareholder; (e)
sign with the president, or a vice president, or any other officer thereunto
authorized by the board of directors, certificates for shares of the
corporation, the issue of which shall have been authorized by the board of
directors, and any contracts, deeds, mortgages, bonds or other instruments which
the board of directors has authorized, and he or she may (without previous
authorization by the board of directors) sign with such other officers as
aforesaid such contracts and other instruments as the conduct of the
corporation's business in its ordinary course requires, in each case according
to the requirements of the form of the instrument, except when a different mode
of execution is expressly prescribed by the board of directors or these by-laws;
and (f) have general charge of the stock transfer books of the corporation.
ss. 4.8 ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The assistant
treasurers and assistant secretaries shall perform such duties as shall be
assigned to them by the treasurer, in the case of assistant treasurers, or the
secretary, in the case of assistant secretaries, or by the president or the
board of directors in either case. Each assistant secretary may sign with the
president, or a vice president, or any other officer thereunto authorized by the
board of directors, certificates for shares of the corporation, the issue of
which shall have been authorized by the board of directors, and any contracts,
deeds, mortgages, bonds or other instruments which the board of directors has
authorized, and may (without previous authorization by the board of directors)
sign with such other officers as aforesaid such contracts and other instruments
as the conduct of the corporation's business in its ordinary course requires, in
each case according to the requirements of the form of the instrument, except
when a different mode of execution is expressly prescribed by the board of
directors. The assistant treasurers shall, if required by the board of
directors, give bonds for the faithful discharge of their duties in such sums
and with such sureties as the board of directors shall determine.
ss. 4.9 COMPENSATION. The officers' compensation shall be fixed from
time to time by the board of directors, and no officer shall be prevented from
receiving such compensation by reason of the fact that he or she is also a
director of the corporation.
ARTICLE 5
INDEMNIFICATION
ss. 5.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation
shall, to the fullest extent to which it is empowered to do so by the Illinois
Business Corporation Act of 1983, as amended, or any other applicable laws as
ssmay from time to time be in effect, indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director or
officer of the corporation, or is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
9
<PAGE> 10
reasonably incurred by such person in connection with such action, suit or
proceeding, if such person acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
or she is or was an employee or agent of the corporation, or is or was serving
at the request of the corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, if such person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith and in
a manner which he or she reasonably believed to be in or not opposed to the best
interests of the corporation or, with respect to any criminal action or
proceeding, that the person had reasonable cause to believe that his or her
conduct was unlawful.
ss. 5.2 CONTRACT WITH THE CORPORATION. The provisions of this Article 5
shall be deemed to be a contract between the corporation and each director or
officer who serves in any such capacity at any time while this Article is in
effect, and any repeal or modification of this Article 5 shall not affect any
rights or obligations hereunder with respect to any state of facts then or
theretofore existing or any action, suit or proceeding theretofore or thereafter
brought or threatened based in whole or in part upon any such state of facts.
ss. 5.3 INDEMNIFICATION OF EMPLOYEES AND AGENTS. Persons who are not
covered by the foregoing provisions of this Article 5 and who are or were
employees or agents of the corporation, or who are or were serving at the
request of the corporation as employees or agents of another corporation,
partnership, joint venture, trust or other enterprise, may be indemnified to the
extent authorized at any time or from time to time by the board of directors;
provided, however, that to the extent that such employee or agent has been
successful, on the merits or otherwise, in the defense of any action, suit or
proceeding to which he or she was made a party by reason of the fact that he or
she is or was an employee or agent acting in the above-described capacity, or in
defense of any claim, issue or matter therein, the corporation shall indemnify
such employee or agent against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith.
ss. 5.4 ADVANCEMENT OF EXPENSES. The corporation shall pay expenses
incurred by any officer or director, and may pay expenses incurred by any
employee or agent, in defending a civil or criminal action, suit or proceeding
in advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the director, officer, employee or
agent to repay such amount if it shall ultimately be determined that he or she
is not entitled to be indemnified by the corporation as authorized by these
by-laws or by the Illinois Business Corporation Act of 1983 as amended.
10
<PAGE> 11
ss. 5.5 OTHER RIGHTS OF INDEMNIFICATION. The indemnification or
advancement of expenses provided or permitted by this Article 5 shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
by law or otherwise, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person.
ARTICLE 6
CONTRACTS, LOANS, CHECKS AND DEPOSITS
ss. 6.1 CONTRACTS. The board of directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances; provided, however, that this
Section 6.1 shall not be a limitation on the powers of office granted under
Article 4 of these by-laws.
ss. 6.2 LOANS. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name unless
authorized by the board of directors or a duly authorized committee thereof.
Such authority may be general or confined to specific instances.
ss. 6.3 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation shall be signed by such officer or officers, agent or agents of
the corporation and in such manner as shall from time to time be determined by
the board of directors or by an officer or officers of the corporation
designated by the board of directors to make such determination.
11
<PAGE> 12
ss. 6.4 DEPOSITS. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositaries as the board of directors or such
officer or officers designated by the board of directors may select.
ARTICLE 7
CERTIFICATES FOR SHARES AND THEIR TRANSFER
ss. 7.1 CERTIFICATES FOR SHARES. Certificates representing shares of
the corporation shall be signed by the president or a vice president and by the
treasurer or an assistant treasurer or the secretary or an assistant secretary
and, if the corporation has a corporate seal, may be sealed with such seal or a
facsimile thereof. All certificates for shares shall be consecutively numbered
or otherwise identified and shall state the name of the person to whom the
shares represented thereby are issued, the number and class of shares, with
designation of series, if any, the date of issue, the fact that the corporation
is organized under Illinois law, and such other information or statement as may
be required by law. The name and address of each shareholder, the number of
shares held and the date on which the certificates for the shares were issued
shall be entered on the stock transfer books of the corporation. The person in
whose name shares are registered on the books of the corporation shall be deemed
the owner thereof for all purposes as regards the corporation.
ss. 7.2 TRANSFERS OF SHARES; LOST CERTIFICATES. Upon surrender to the
corporation or the transfer agent of the corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment, or
other authority to transfer, it shall be the duty of the corporation to issue a
new certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books, provided that the corporation or a
transfer agent of the corporation shall not have received a notification of
adverse interest and that the requirements of the new reference system of the
Illinois Revised Statutes has been met. No new certificate shall be issued until
the former certificate for a like number of shares shall have been surrendered
and canceled, except that in case of a lost or destroyed certificate, or one so
mutilated that it cannot be identified, a new one may be issued therefor upon
such terms and indemnity to the corporation as the board of directors may
prescribe.
ARTICLE 8
FISCAL YEAR
The fiscal year of the corporation shall be as fixed from time to time
by resolution of the board of directors.
12
<PAGE> 13
ARTICLE 9
DIVIDENDS
The board of directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and the articles of incorporation of
the corporation.
ARTICLE 10
SEAL
The board of directors may provide a corporate seal which shall be in
the form of a circle and shall have inscribed thereon the name of the
corporation and the words "Corporate Seal, Illinois." The corporate seal may be
used by causing it or a facsimile thereof to be impressed, affixed or in any
manner reproduced.
ARTICLE 11
AMENDMENTS
These by-laws may be altered, amended or repealed and new by-laws may
be adopted by the board of directors of the corporation or by the shareholders
of the corporation entitled to vote thereon, provided that no by-law adopted by
the shareholders may be altered, amended or repealed by the board of directors.
13
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