<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19594
------------------------
INSURANCE AUTO AUCTIONS, INC.
(Exact name of Registrant as specified in its charter)
ILLINOIS
(State or other jurisdiction
of incorporation or organization)
95-3790111
(I.R.S. Employer
Identification Number)
850 EAST ALGONQUIN ROAD, SUITE 100
SCHAUMBURG, ILLINOIS 60173
(847) 839-3939
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock (based on the closing price as
reported by the Nasdaq Stock Market(R) on March 20, 2000) held by non-affiliates
of the Registrant as of March 20, 2000 was approximately $71,565,000. For
purposes of this disclosure, shares of Common Stock known to be held by persons
who own 5% or more of the shares of outstanding common stock and shares of
common stock held by each officer and director have been excluded in that such
persons may be deemed to be "affiliates" as that term is defined under the Rules
and Regulations of the Act. This determination of affiliate status is not
necessarily conclusive. As of March 20, 2000, the Registrant had outstanding
11,586,648 shares of Common Stock, $0.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
ITEM 1. BUSINESS.
The discussion in this section contains forward-looking information that is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected, expressed or implied by such
forward-looking information. In some cases, you can identify forward-looking
statements by our use of words such as "may, will, should, anticipates,
believes, expects, plans, future, intends, could, estimate, predict, potential
or contingent," the negative of these terms or other similar expressions. The
Company's actual results could differ materially from those discussed or implied
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in "Factors That May Affect Future Results"
below and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Among these risks are legislative acts, changes in the
market value of salvage, competition, quality and quantity of inventory
available from suppliers, and dependence on key insurance company suppliers.
GENERAL
Insurance Auto Auctions, Inc., together with its subsidiaries
(collectively, "IAA" or the "Company"), offers insurance companies and other
vehicle suppliers cost-effective salvage processing solutions. In an accident,
theft or other claims adjustment process, insurance companies typically take
possession of a vehicle because (i) based on economic and customer service
considerations, the vehicle has been classified as a "total loss" and the
insured replacement value has been paid rather than the cost of repair or (ii) a
stolen vehicle is recovered after the insurance company has settled with the
insured. The Company generally sells these vehicles at live or closed bid
auctions on a competitive-bid basis at one of the Company's facilities.
The Company processes salvage vehicles under three methods: purchase
agreement, fixed fee consignment and percentage of sale consignment. Under the
purchase agreement method, IAA generally purchases vehicles from the insurance
companies upon clearance of title, under financial terms determined by contract
with the insurance company supplier and then resells these vehicles for IAA's
own account at IAA auctions. Under the fixed fee consignment and percentage of
sale consignment methods, the Company sells vehicles on behalf of insurance
companies, which continue to own the vehicles until they are sold to buyers at
auction. Under these methods, the Company generally conducts either live or
closed bid auctions of the automotive salvage in return for agreed upon sales
fees. In addition to fees, the Company generally charges its fixed fee
consignment and percentage of sale consignment vehicle suppliers for various
services, including towing and storage. Under all methods of sale, the Company
also charges the buyer of each vehicle various buyer-related fees.
Prior to 1992, the Company operated almost exclusively using the purchase
agreement system of salvage disposal. Since 1992, IAA has acquired additional
auto salvage pool operations, resulting in a network of 50 salvage pools in 22
states as of December 31, 1999. Most of these businesses operate primarily using
the fixed fee consignment method of sale. As a result of these site additions, a
majority of the vehicles currently processed by IAA are now sold under fixed fee
and percentage of sale consignment arrangements. In 1999, approximately 56% of
the vehicles processed by IAA were sold under the fixed fee consignment method,
16% were sold under the percentage of sale consignment method, and 28% were sold
under the purchase agreement method.
The Company obtains the majority of its supply of vehicles from a large
number of insurance companies and smaller quantities from non-insurance company
suppliers such as rental car companies and non-profit organizations.
Historically, a limited number of insurance companies have accounted for a
substantial portion of the Company's revenues. In 1999, vehicles supplied by the
Company's three largest suppliers accounted for approximately 43% of the
Company's unit sales. The aggregate number of vehicles supplied in 1999 by the
Company's three largest suppliers increased from 1998. However, due to a
significant increase in vehicles supplied by other customers, the percent of
total units sold for the Company's three largest customers decreased. The
largest suppliers, State Farm Insurance, Farmers Insurance, and Allstate
Insurance ("Allstate"), each accounted for approximately 16%, 14%, and 13%
respectively, of the Company's 1999 unit sales.
2
<PAGE> 3
HISTORY
The Company was organized as a California corporation in 1982 under the
name Los Angeles Auto Salvage, Inc. ("LAAS"). In January 1990, all the
outstanding capital stock of LAAS was acquired in a leveraged buyout and, in
October 1991, LAAS changed its name to Insurance Auto Auctions, Inc. The Company
completed its initial public offering in November 1991 and its common stock is
traded on the Nasdaq Stock Market under the symbol IAAI. In 1997, the Company
reincorporated in the state of Illinois.
IAA PERCENTAGE OF SALE CONSIGNMENT METHOD
Under the Percentage of Sale consignment method, the insurance company
receives a negotiated percentage of the vehicle-selling price. With this method
of sale, the Company acts as an agent for the insurance company. As agent, the
Company arranges for the salvage vehicle to be towed to its facility and
processes the car for sale. The percentage of sale consignment method provides
suppliers with potentially greater upside since IAA's fees are tied to selling
prices and IAA has, thus, more incentive to invest in improvements to salvage
vehicles to maximize sales prices. The Company offers two types of percentage of
sale agreements. The Percentage Plan is a straight percentage of sale agreement
that includes vehicle enhancements as part of the selling price-based fee. The
Percentage-Plus Plan offers a lower percentage of sale fee combined with
discounted pricing for enhancement services. Approximately 16% and 9% of the
vehicles processed by the Company were sold under the percentage of sale
consignment method in 1999 and 1998, respectively. The Company, in 1998,
designated the percentage of sale consignment method its preferred type of
salvage provider agreement. Accordingly, the Company expects the percent of
vehicles sold under this type of contract to total vehicles sold to increase.
IAA PURCHASE AGREEMENT METHOD
Under the purchase agreement method of sale, the Company is required to
purchase, and the insurance company and other non-insurance company suppliers
are required to sell to the Company, virtually all total loss and recovered
theft vehicles generated by the supplier in a designated geographic area. IAA
then works to enhance the value of purchased vehicles in the selling process and
assumes the risk of market price variation for vehicles so processed. Under the
purchase agreement method, insurance companies may outsource much of the salvage
administration workload and this potentially reduces their expenses accordingly.
The agreements are customized to each supplier's needs, but typically require
the Company to pay a specified percentage of a vehicle's Actual Cash Value
("ACV"), depending on the vehicle's age and certain other conditions including
whether the vehicle is a total loss or recovered theft vehicle. The Company's
revenue from the sale of a purchase agreement vehicle is the actual selling
price of the vehicle. The Company has added adjustment and risk-sharing clauses
to its new standard purchase agreement contracts designed to provide some
protection to the Company and its customers from certain unexpected, significant
changes in the ACV/salvage price relationship. In 1999 and 1998 respectively,
approximately 28% and 30% of the units processed by IAA were processed through
the purchase agreement method of sale.
IAA FIXED FEE CONSIGNMENT SALE METHOD
Approximately 56% of the Company's vehicles for the year ended December 31,
1999 were sold on the fixed fee consignment method of sale, compared with 61% in
1998. As under the percentage of sale consignment method, the Company typically
acts as an agent for the insurance company rather than as a purchaser of salvage
vehicles. Under this method of disposal, the Company charges fees to the
insurance company supplier, typically including a towing fee, a title processing
fee and a storage and salvage sales fee. Since the Company does not own the
vehicle, the Company's revenues per vehicle from consignment sales are received
only from these fees rather than from the revenue from the sale of the vehicle.
As a result, revenue recognized per vehicle under the consignment method of sale
is approximately 5% to 15% of the revenue recognized per vehicle under the
purchase agreement method, where the sale price of the vehicle is also recorded.
3
<PAGE> 4
SERVICES PROVIDED TO ALL SUPPLIERS
The process of salvage disposition through the IAA system commences at the
time of loss, or when a stolen vehicle has been subsequently recovered. An
insurance company representative assigns the vehicle to the Company, either by
phone, facsimile or through the Company's on-line electronic DataLink(R) system.
DataLink(R) is the Company's proprietary computer order processing system that
enables insurance company suppliers to access their data electronically and to
retrieve information on a vehicle at any time during the claims adjustment and
disposal process.
The Company's FastTow(R) service also provides towing services which
guarantee that vehicles will be delivered to a Company branch storage facility,
usually within one to two business days of assignment within a designated
service area. In retrieving a vehicle, the FastTow(R) service will also advance,
on behalf of the supplier, any storage and towing charges incurred when the
vehicle was initially towed from the accident scene or recovered theft site to
the temporary storage facility or repair shop. Once these advance towing and
storage charges have been reviewed and verified by the Company, the towing
subcontractor generally will pay the charges at time of vehicle pick up and
deliver the vehicle to the predetermined Company auction and storage facility.
The rapid retrieval time and review of advance charges are also intended to
increase the insurance company's net return on salvage.
In order to further minimize vehicle storage charges incurred by insurance
company suppliers at the temporary storage facility or repair shop (which can be
as high as $50 per day per car) and improve service time to the policyholder,
the Company and certain of its insurance company suppliers have established
vehicle inspection centers ("VICs") at many of the Company's facilities. A VIC
is a temporary storage and inspection facility located at an IAA site that is
operated by the insurance company. Suspected total loss vehicles are brought
directly to the VIC from the temporary storage facility or repair shop. The
insurance company typically has appraisers stationed on the VIC site in order to
expedite the appraisal process and minimize storage charges at outside sites. If
the vehicle is totaled by the insurance company, the vehicle can easily be moved
to IAA's vehicle storage area. If the vehicle is not totaled, it is promptly
delivered to the insurer's selected repair facility. IAA also provides video
imaging as a service to its customers, digitizing pictures of the damaged cars
and electronically displaying them to insurance adjusters in their office.
After a totaled vehicle is received at a Company facility, it remains in
storage but cannot be auctioned until transferable title has been submitted to
and processed by IAA. For most vehicles stored on our facilities, no storage
charges accrue for a contractually specified period. The document processing
departments at the Company's facilities provide management reports to the
insurance company suppliers, including an aging report of vehicles for which
title documents have not been provided. In addition, the Company customarily
offers the insurance companies staff training for each state's Department of
Motor Vehicles ("DMV") document processing. These services expedite the
processing of titles, thereby reducing the time in which suppliers receive their
salvage proceeds and decreasing the suppliers' administrative costs and
expenses. The Company then processes the title documents in order to comply with
DMV requirements for such vehicles. This may involve re-registering the vehicle
and obtaining a salvage certificate, after which the Company is entitled to sell
the salvage vehicle. The Company holds auctions every week or bi-weekly in all
of its locations. The auction is either live or sealed bid. Auction lists can be
viewed on-line on the Company's Internet website where buyers can review all
vehicles at a location or search for specific vehicles.
The Company remits payment to the insurance company suppliers within a
contractual time period or shortly after sale of the vehicle and collection from
the buyer. In addition, most insurance company suppliers generally receive
monthly summary reports of all vehicles processed by the Company. The reports
track the insurance companies' gross return on salvage, net return on salvage,
exact origin and detail of storage charges and other useful management data. The
Company also provides many of its suppliers with quarterly Comprehensive Salvage
Analysis of salvage trends.
OTHER SERVICES
IAA's BidFast(R) service provides insurers with a binding bid for a salvage
vehicle which historically may have been owner-retained. The return on such
vehicles (owner-retained salvage vehicles) is, many times,
4
<PAGE> 5
measurably improved for the supplier using this service and enables compliance
with many state department of insurance regulations.
IAA also provides certain insurance company suppliers with anti-theft fraud
control programs for vehicle salvage processing. The Company's CarCrush(R)
services helps insurance companies by ensuring that severely damaged or stripped
"high profile" cars are crushed to prevent their vehicle identification numbers
("VINs") from being used in auto theft. IAA also provides computerized reporting
of vehicle sales to the National Insurance Crime Bureau ("NICB"). This includes
detailed buyer information obtained through the Company's registration process.
IAA has also continued its support for consumer protection laws calling for the
nationwide mandatory use of salvage certificates for salvage vehicles.
The Company offers a National Salvage Network, based in Dallas, Texas, that
allows insurance company suppliers to call in all their salvage vehicle
assignments to a single location. This call center enables IAA to distribute
vehicle assignments throughout most of the United States, even in markets where
IAA does not currently have a facility, and is designed to minimize the
administrative workload for insurance companies and provide IAA with broader
geographic coverage. In certain areas where the Company does not have a
facility, such vehicles are distributed to IAA selected ServicePartners(TM).
The Company also offers, through its Specialty Salvage Division, salvage
services for specialty vehicles, such as trucks, heavy equipment, farm
equipment, boats, recreational vehicles and classic and exotic cars. Marketing
these vehicles nationwide to specialty buyers offers insurance companies the
opportunity for better returns on units that typically do not sell for as much
at local salvage pools as a result of the limited number of local buyers. These
vehicles can be viewed on-line through the Company's Internet website,
www.iaai.com.
GROWTH STRATEGIES
The Company seeks to increase sales on a profitable basis by offering to
insurance company suppliers a variety of methods of sale (including percentage
of sale consignment, purchase agreement and fixed fee consignment) and various
other services and by (i) increasing market share at existing sites; (ii)
continued market penetration through acquisitions; (iii) new site expansion;
(iv) development of national/regional supplier agreements, and (v) the offering
of new services to insurance companies to assist them in reducing time and cost
in the claims process.
Increasing Market Share and Profitability at Existing Sites
The Company's primary strategy for growth in its existing markets is to
contract for additional vehicles by promoting better returns on salvage vehicles
and a broad selection of services to prospective suppliers. The expansion of the
number of vehicles processed at existing sites typically makes the Company's
auctions more attractive and results in more buyers attending auctions.
The Company's strategies for increasing profitability at existing sites
include efforts to shift more salvage providers to revenue sharing arrangements
such as the percentage of sale consignment method. The Company is also promoting
its Run & Drive(SM) service whereby certain salvage vehicles are driven during
the auction demonstrating to buyers that the major component parts of a vehicle
still operate. These product offerings are designed to maximize returns to both
the Company and the salvage provider.
Continued Market Penetration Through Acquisitions
Since the Company's initial public offering in November 1991, the Company
has acquired additional pool operations across the United States to offer better
national coverage to its insurance company customers. The Company currently
operates 50 salvage pools in 22 states.
IAA intends to continue to pursue acquisitions of strategically-located
salvage pools. Through such acquisitions, it seeks to enhance a geographically
broad-based relationship with key insurance company suppliers, as well as to
offer its specialized salvage services to new insurance companies and certain
non-insurance company suppliers. In pursuing its acquisition strategy and plans,
the Company recognizes that there will be continuing challenges in effectively
and efficiently integrating new facilities into existing IAA
5
<PAGE> 6
operations. This will require continuing investment in infrastructure. See
"Factors That May Affect Future Results."
New Site Expansion
While the Company will continue to pursue growth through acquisitions, it
also will continue to seek growth through the opening of new sites. The opening
of new sites offers advantages in certain markets and capitalizes on regional
and national customer accounts.
Development of National/Regional Supplier Agreements
The Company's expanded geographic base of operations, plus its National
Network, facilitates its strategy of offering its customers and prospective
customers national and regional supplier agreements. These can provide a more
consistent reporting and control function to our customers, who benefit from a
reduction in the number of suppliers through which they must do business.
Offering of New Services
The Company is actively pursuing opportunities for growth through the
identification and development of new, non-traditional customer-valued services
and business offerings that leverage the Company's current competencies,
geographic presence and assets. The primary focus of these new services is to
provide to the insurance industry new, innovative options and alternatives for
reducing the time and costs associated with processing insurance claims.
In 1999, the Company introduced its new approach to total-loss appraisal in
the FastTrack(R) appraisal solution. FastTrack(R) utilizes an early total-loss
recognition system to identify, move and appraise probable total-loss vehicles
sooner than the conventional claims process. This streamlined system generates
direct cost savings on accrued shop storage and car rental expenses.
Completed appraisals, including a condition report and an array of digital
images, are electronically transmitted to a secure, password-protected Web site,
providing adjusters with same-day access to the information via the Internet.
Electronic Data Interchange and Electronic Funds Transfer, (EDI/EFT)
facilitates faster, more accurate service from assignment and vehicle pickup
through sale and final settlement. EDI helps minimize staff involvement, lowers
error rates and diminishes administrative requirements through direct
communication between IAA's system and your computer system. EDI/EFT
electronically expedites the total-loss recovery process. Less manual
intervention combined with faster, more accurate service quickly translates into
quicker turnaround on the final settlement.
SurePay(R) is IAA's electronic funds transfer service that improves the
speed and accuracy of the billing and final settlement process by automatically
depositing salvage proceeds directly into our customers' bank account.
The IAA Auction Center at www.iaai-bid.com(SM) is an online bidding forum
to preview and bid on salvage vehicles throughout the United States. It provides
buyers with an open, competitive bidding environment that reflects the dynamics
of the live salvage vehicle auction.
The Auction Center includes such services as comprehensive auction lists
featuring links to digital images of vehicles available for sale, an "Auto
Locator" function that promotes the search of specific vehicles within the
auction system, and special "Flood" or other catastrophe auction notification.
Higher returns are driven by broader market exposure and increased competitive
bidding.
MARKETING
The Company markets its services to insurance company and non-insurance
company salvage suppliers. Based upon historical data supplied by a prospective
supplier, the Company can provide prospective suppliers
6
<PAGE> 7
with a detailed analysis of their current salvage returns and a proposal setting
forth ways in which the Company can improve salvage returns, reduce
administrative costs and expenses and provide proprietary turnkey claims
processing services.
In addition to providing insurance companies and certain non-insurance
company suppliers with a means for disposing of salvage vehicles, the Company
provides services that are intended to increase the net amount of salvage sale
proceeds received by the suppliers and reduce the time in which the suppliers
receive net proceeds. The Company seeks to become an integral part of its
suppliers' salvage process. The Company views such mutually beneficial
relationships as an essential component of its effort to retain existing
suppliers and attract new suppliers.
The Company also seeks to expand its supply relationships through
recommendations from individual branch offices of an insurance company supplier
to other offices of the same insurance company. The Company believes that its
existing relationships and the recommendations of branch offices currently play
a significant role in its marketing of services to national insurance companies
from its growing network of salvage locations. Indeed, as the Company has
expanded its geographic coverage, it has been able to market its services to
insurance suppliers offering to handle salvage on a national basis or for a
large geographic area.
The Company sells the majority of its vehicles through live auctions. IAA
maintains databases which currently contain information regarding nearly 20,000
registered buyers. No single buyer accounted for more than 10% of the Company's
net sales in 1999. The Company generally accepts cash, money orders, cashier's
checks, wire transfers, credit cards, and pre-approved checks, at the time the
vehicle is picked up. Vehicles are sold "as is" and "where is." Sales notices
listing the vehicles to be auctioned on a particular day at a particular
location are generally mailed, faxed or available online on the Company's
Internet website to the Company's buyers in advance of the auction. Such notices
list the rules of the auction and details about the vehicle, including the year
and make of the vehicle, the nature of the damage, the status of title and the
order of the vehicles in the auction. Multiple images of certain vehicles are
available for review on the Company's Internet site at www.iaai.com.
COMPETITION
Historically, the automotive salvage industry has been highly fragmented.
As a result, the Company faces intense competition for the supply of salvage
vehicles from vehicle suppliers, as well as competition for processors of
vehicles from other regional salvage pools. These regional salvage pools
generally process vehicles under the fixed fee consignment method and generally
do not offer the full range of services provided by the Company. The salvage
industry went through a period of consolidation, however, and the Company
believes its principal publicly-held competitor is Copart, Inc. ("Copart").
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. The Company attempts to differentiate itself from its
competition through the wide range and quality of services it provides to its
insurance customers and buyers. 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 processing software to insurance companies, certain salvage
buyer groups and insurance companies, some of which presently supply auto
salvage to IAA. While many insurance companies have abandoned or reduced efforts
to sell salvage without the use of service providers such as the Company, they
may in the future decide to dispose of their salvage directly to customers.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not have a material adverse effect on its operating results and
financial condition.
GOVERNMENT REGULATION
The Company's operations are subject to regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations. The acquisition and sale of total loss and recovered theft
7
<PAGE> 8
vehicles is regulated by governmental agencies in each of the locations in which
the Company operates. In many of these states, regulations require that the
title of a salvage vehicle be forever "branded" with a salvage notice in order
to notify prospective purchasers of the vehicle's previous salvage status. In
addition to the regulation of sales and acquisitions of vehicles, the Company is
also subject to various local zoning requirements with regard to the location
and operation of its auction and storage facilities. Some state and local
regulations also limit who can purchase salvage vehicles, as well as determine
whether a salvage vehicle can be sold as rebuildable or must be sold for parts
only. Such regulations can reduce the number of potential buyers of vehicles at
Company auctions. The Company is also subject to environmental regulations. The
Company believes that it is in material compliance with all applicable
regulatory requirements. The Company will be subject to similar types of
regulations by federal, state and local governmental agencies in new markets and
to new legislation in existing markets.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations governing, among other things, the handling, storage, transportation
and disposal of waste and other materials. The Company believes that its
business, operations and facilities have been and are being operated in
compliance in all material respects with applicable environmental laws and
regulations. The Company believes the overall impact of compliance with laws and
regulations protecting the environment will not have a material adverse effect
on its operating results and financial condition, although no assurance can be
given in this regard.
EMPLOYEES
At December 31, 1999, the Company employed 689 full-time persons. The
Company is not subject to any collective bargaining agreements and believes that
its relationship with its employees is good.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a changing environment that involves a number of
risks, some of which are beyond the Company's control. The following discussion
highlights some of these risks.
Quarterly Fluctuations. The Company's operating results have in the past
and may in the future fluctuate significantly depending on a number of factors,
some of which are more significant for sales under the purchase agreement
method. These factors include changes in the market value of salvage vehicles,
attendance at salvage auctions, delays or changes in state title processing,
fluctuations in ACVs of salvage vehicles, changes in regulations governing the
processing of salvage vehicles, general weather conditions and the availability
and quality of salvage vehicles. The Company is also dependent upon receiving a
sufficient number of total loss vehicles as well as recovered theft vehicles to
sustain its profit margins. Factors which can effect the number of vehicles
received include: reduction of policy writing by insurance providers which would
affect the number of claims over a period of time, and changes in direct repair
procedures that would reduce the number of newer less damaged total loss
vehicles that tend to have the higher salvage values. Additionally in the last
few years there has been a declining trend in theft occurrences. 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
8
<PAGE> 9
newer and less-damaged vehicles, are further aggravated under the purchase
agreement method of salvage and can have a material adverse effect 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. 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 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 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 1999, vehicles supplied by the Company's
three largest suppliers accounted for approximately 43% of the Company's unit
sales. The largest suppliers, State Farm Insurance, Farmers Insurance, and
Allstate, each accounted for approximately 16%, 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 ACVs 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 of salvage vehicles at auction. The
Company has renegotiated most of its agreements with certain of these suppliers.
Further increases in ACVs or declines in the market or auction prices for
salvage vehicles could have a material adverse effect on the Company's,
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 ACV's that are not accompanied by a
comparable increase in sales prices.
Governmental Regulation. The Company's operations are subject to
regulation, supervision and licensing under various federal, state and local
statutes, ordinances and regulations. The acquisition and sale of totaled and
recovered theft vehicles is regulated by state motor vehicle departments in each
of the locations in which the Company operates. Changes in governmental
regulations or interpretations of existing regulations can result in increased
costs, reduced salvage vehicle prices and decreased profitability for the
Company. For example, the Company believes legislation currently being
considered by Congress could have a negative impact on the number of buyers
attending an auction as well as increase some of the costs to those buyers. This
legislation could increase governmental regulation of certain operations of 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 on the Company's operating results and financial condition.
9
<PAGE> 10
Provision of Services as a National or Regional Supplier. The provision of
services to insurance company suppliers on a national or regional basis requires
that the Company 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
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 operating results 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 2. PROPERTIES.
The Company's principal administrative, sales, marketing and support
functions are located in Schaumburg, Illinois. The Company moved to Schaumburg
in mid 1997 to a building providing approximately 26,000
10
<PAGE> 11
square feet of available space. The lease on the office space in Schaumburg
expires in May 2004. The Company and its subsidiaries also lease approximately
44 properties in Alabama, Arizona, California, Florida, Georgia, Hawaii,
Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey,
New York, North Carolina, Oregon, Texas, Virginia and Washington. The Company
owns 6 properties located in Kansas, Massachusetts, New York and Texas. Most of
these properties are used primarily for auction and storage purposes. Management
believes that the Company's properties are adequate for its current needs and
that suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1999.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is traded on The Nasdaq Stock Market(R) under
the symbol IAAI. The following table sets forth the range of high and low per
share sales information, available on Nasdaq Online(SM) for each quarter of 1999
and 1998. At March 20, 2000, the Company had 193 holders of record of its Common
Stock, approximately 500 beneficial owners and 11,586,648 shares outstanding.
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter............................................... $13.13 $10.00 $12.75 $ 8.38
Second Quarter.............................................. 16.19 11.94 14.88 10.88
Third Quarter............................................... 19.75 14.06 14.75 10.75
Fourth Quarter.............................................. 16.75 11.75 13.38 10.00
</TABLE>
During the past two fiscal years, the Company did not declare or pay any
cash dividends on its Common Stock. The Registrant currently plans to retain all
of its earnings to support the development and expansion of its business and has
no present intention of paying any dividends on the Common Stock in the
foreseeable future. In addition, the Registrant's credit agreements between the
Registrant and its bank limit the Registrant's ability to pay cash dividends.
The Board of Directors of the Registrant reviews the dividend policy
periodically to determine whether the declaration of dividends is appropriate.
ITEM 6. SELECTED FINANCIAL DATA.
The tables below summarize the Selected Consolidated Financial Data of the
Registrant as of and for each of the last five fiscal years. This selected
financial information should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Report. The selected consolidated financial data presented
below have been derived from the Company's Consolidated Financial Statements
that have been audited by KPMG LLP, independent auditors, whose report is
included herein covering the Consolidated Financial Statements as of December
31, 1999 and 1998 and for each of the years in the three year period ended
December 31, 1999. The statement of earnings for the year ended December 31,
1996 and 1995 and the balance sheet data as of December 31, 1997, 1996 and 1995
are derived from audited Consolidated Financial Statements not included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Selected Statement of Earnings Data:
Net sales................................. $317,391 $287,063 $259,325 $281,893 $257,996
Earnings from operations(1)............... 23,904 14,081 9,756 7,190 6,885
Net Earnings.............................. 13,705 7,181 4,495 3,102 3,136
Earnings per common share(2).............. 1.18 .63 .40 .27 .27
Weighted average common shares
outstanding(2).......................... 11,623 11,437 11,337 11,333 11,421
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Working capital........................... $ 38,689 $ 26,593 $ 25,708 $ 21,665 $ 12,187
Total assets.............................. 248,132 227,543 224,777 226,981 219,030
Long-term debt, excluding current
installments............................ 20,180 20,315 20,246 26,670 28,973
Total shareholders' equity................ 175,286 158,755 151,212 146,589 143,381
</TABLE>
- ---------------
(1) Amount includes special charges of $1,564,000, $750,000, and $1,395,000 in
1998, 1997 and 1996, respectively.
(2) Earnings per share and weighted average common shares outstanding are
presented on a diluted basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion in this section contains forward-looking information that is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected, expressed or implied by such
forward-looking information. In some cases, you can identify forward-looking
statements by our use of words such as "may, will, should, anticipates,
believes, expects, plans, future, intends, could, estimate, predict, potential
or contingent," the negative of these terms or other similar expressions. The
Company's actual results could differ materially from those discussed or implied
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"
above. Among these risks are legislative acts, changes in the 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, and purchase agreement. Under the percentage of sale consignment
and fixed fee 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. The percentage of sale consignment method offers potentially
increased profits over fixed fee consignment by providing incentive to both the
Company and the salvage provider to invest in vehicle enhancements thereby
maximizing the vehicle selling prices. Under the purchase agreement sales
method, the vehicle is owned by the Company and the sales price of the vehicle
is recorded in revenue. 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 ACV to purchase the vehicle. 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. To mitigate these risks, 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 most of its purchase agreement contracts and
seeks to renegotiate certain others. The Company has added adjustment and
risk-sharing clauses to its new standard purchase agreement
13
<PAGE> 14
contracts designed to provide some protection to the Company and its customers
from certain unexpected, significant changes in the ACV/salvage price
relationship.
Since its initial public offering, the Company has grown primarily through
a series of acquisitions to now include 50 locations as of December 31, 1999.
The Company's operating results are subject to fluctuations, including
quarterly fluctuations, that can result from a number of factors, some of which
are more significant for sales under the purchase agreement method. See "Factors
That May Affect Future Results" above for a further discussion of some of the
factors that affect or could affect the Company's business, operating results
and financial condition.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Net sales of the Company increased to $317,391,000 for the year ended
December 31, 1999, from $287,063,000 in 1998, an 11% increase. Vehicle sales
revenue reflected an increase in the average selling price of cars sold under
purchase agreements. Purchase agreement volume was flat when compared to 1998.
Fee income increased 18% in 1999 versus 1998 reflecting increases in both volume
and revenues per unit.
Gross profit increased 19% to $83,442,000 for the year ended December 31,
1999, compared to $70,309,000 in 1998. The increase in gross profit dollars was
largely due to improved gross profit on a per unit basis. The increase in gross
profit per unit has been primarily the result of (i) the implementation and
faster than expected rollout of the Company's gross profit enhancement
initiatives, including the conversion of fixed-fee consignment contracts to the
generally more profitable percent of sale contract type, and (ii) the Company's
focus on increasing the number and variety of vehicle enhancement services.
Approximately 16% of vehicles sold in 1999 were sold under the percent of sale
method versus 8% for the same period last year. The purchase agreement sales
method of processing accounted for 28% of total volume, compared with 30% for
the same period in 1998.
Direct operating expenses increased to $55,741,000 for the year ended
December 31, 1999, versus $50,885,000 in 1998. The increase reflects higher
labor costs associated with the increased number of vehicle enhancement
services, an increase in variable costs due to the higher 1999 volume and
increased facility costs.
Interest expense decreased to $1,970,000 for the year ended December 31,
1999, from $2,055,000 in 1998. Interest income increased to $1,271,000 for the
year ended December 31, 1999, from $797,000 in 1998 reflecting higher levels of
cash equivalents and short-term investments due to strong cash flow from
operations in 1999.
Income taxes increased to $9,500,000 for 1999, from $5,642,000 for 1998.
This increase is the result of the increase in earnings, offset by a decrease in
the Company's effective tax rate from 44% in 1998 to 41% for 1999.
The Company's net earnings were $13,705,000 for the year ended December 31,
1999, a 91% increase from $7,181,000, after special charges, for the comparable
period in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Net sales of the Company increased to $287,063,000 for the year ended
December 31, 1998, from $259,325,000 in 1997, an 11% increase. Unit volume
increased 8% in 1998, compared to 1997.
Gross profit was $70,309,000 for the year ended December 31, 1998, compared
to $59,342,000 in 1997, an 18% increase. Gross profit per unit of $148 for the
year ended December 31, 1998 was 10% higher than for the comparable period of
1997. The increased profitability was due to the implementation of fee
increases, the acquisition of two locations in Alabama and the impact of El Nino
on weather conditions on the West Coast during the first half of 1998, which
resulted in higher-value cars being available for sale.
Direct operating expenses were $50,885,000 for the year ended December 31,
1998, versus $45,046,000 in 1997, a 13% increase. This increase reflects a
general increase in operating expenses and the funding
14
<PAGE> 15
commitment made by the Company to identify, develop and pilot new services that
will streamline the automobile total loss claims process, resulting in reduced
costs for insurance companies. The Alabama acquisition also contributed to the
increase in expense.
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 Bradley Scott, who has 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
September 30, 1999, and all outstanding stock options). Per the settlement
agreement, the Company made a lump-sum payment of $700,000 to Scott. This
included a bonus payment for 1997 of $126,000 pursuant to a 1996 agreement
between the Company and Scott. The difference of $574,000 was recorded as a
special charge in first quarter 1998.
McKinsey & Co. was retained by the Company to assist it 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 $990,000 cost of the
project was recorded as a special charge in first quarter 1998.
Interest expense decreased to $2,055,000 for the year ended December 31,
1998, from $2,253,000 in 1997. The decrease in interest expense was attributable
to the repayment of the proceeds of several notes payable to sellers related to
certain acquisitions. Interest income decreased to $797,000 for the year ended
December 31, 1998, from $821,000 in 1997.
The effective income tax rate of the Company was 44% in 1998 versus 46% in
1997. The decrease in the effective income tax rate was largely due to higher
pre-tax earnings reducing the impact of permanent book versus tax differences.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 1999, the Company had current assets of $79,572,000,
including $18,886,000 of cash and cash equivalents, current liabilities of
$40,883,000 and working capital of $38,689,000, a $12,096,000 increase from
December 31, 1998.
At December 31, 1999, the Company's indebtedness included 8.6% Senior Notes
approximating $20,000,000 that mature in 2002 and amounts due to the sellers
related to an acquisition aggregating $103,000, with imputed interest at 7.5%
and amounts due to the sellers of smaller acquisitions aggregating $212,000,
which bear interest at 8.0%. The Company also has a $15,000,000 revolving credit
facility. At December 31, 1999, there were no outstanding borrowings under the
facility.
Long-term liabilities also include a post-retirement benefits liability
relating to the Underwriters Salvage Company acquisition of approximately
$3,178,000.
Capital expenditures were approximately $10,623,000 for the year ended
December 31, 1999. These capital expenditures included upgrading and expanding
the Company's facilities and management information systems. The Company
currently leases most of its facilities and other properties.
The Company believes that cash generated from operations and its borrowing
capacity will be sufficient to fund capital expenditures and provide adequate
working capital for operations for the next twelve months. Part of the Company's
plan is continued growth possibly through new facility start-ups, 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.
15
<PAGE> 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has approximately $18,481,000 of investments as of December 31,
1999. These investments consisted of state government obligations and had either
variable rates of interest or stated interest rates ranging from 3.75% to 5.3%.
The Company's 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the financial statements which are attached
hereto.
See Footnote 10 to the Financial Statements for the supplementary financial
information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
16
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
DIRECTORS
Set forth below is information regarding the Directors of the Company,
including information furnished by them as to principal occupations, certain
other directorships held by them, any arrangements pursuant to which they were
or are selected as Directors and their ages as of March 31, 2000:
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED OR
DIRECTORS AGE APPOINTED DIRECTOR
- --------- --- ------------------
<S> <C> <C>
Thomas J. O'Malia(1)........................................ 56 1993
Christopher G. Knowles...................................... 57 1994
Maurice A. Cocca(1)(2)(3)................................... 56 1997
Susan B. Gould(2)........................................... 62 1991
Peter H. Kamin.............................................. 38 1999
Melvin R. Martin(3)......................................... 69 1992
Joseph F. Mazzella.......................................... 48 1999
John K. Wilcox(1)........................................... 64 1998
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Governance Committee
THOMAS J. O'MALIA became Chairman of the Board of the Company in December
1998. Mr. O'Malia has been a Director of the Company since September 1993. Since
July 1995, Mr. O'Malia has been a Professor of Clinical Entrepreneurship and
Director of the Entrepreneur Program at the University of Southern California.
From April 1994 to July 1995, Mr. O'Malia was General Manager, Manufacturing
Systems Division of Kronos, Incorporated ("Kronos"), a software company. From
1985 to April 1994, Mr. O'Malia was Chief Executive Officer of ShopTrac Data
Collection Systems, Inc., a software company that he founded and that was merged
into Kronos in April 1994.
CHRISTOPHER G. KNOWLES became Chief Executive Officer of the Company in
December 1998 and was President and Chief Operating Officer of the Company from
April 1994 to March 1996. Mr. Knowles previously served as Senior Vice
President, Operations East of the Company from January 1994 to April 1994. Prior
to joining the Company, Mr. Knowles was Chairman and Chief Executive Officer
from 1980 to 1994 of Underwriters Salvage Company, a multi-location salvage
operation that the Company acquired in January 1994. Mr. Knowles has been a
Director of the Company since June 1994. Mr. Knowles is also a director of Zebra
Technologies Corporation, a manufacturer of bar code printers and supplies.
MAURICE A. COCCA has been a Director of the Company since February 1997.
From November 1993 to November 1995, Mr. Cocca was Managing Director of The
Fisons Laboratory Supplies Division of Fisons PLC. This Division is a
distributor of laboratory supplies that was later acquired by Fisher Scientific.
Mr. Cocca also served on the Board of Directors of Fisons PLC from November 1993
to November 1995. From November 1993 to November 1995, Mr. Cocca served as
Chairman of Curtin Matheson Scientific, a division of Fisons PLC and a supplier
of diagnostic instruments, tests and related products. From 1977 to November
1995, Mr. Cocca was President of Curtin Matheson Scientific.
SUSAN B. GOULD has been a Director of the Company since October 1991. Ms.
Gould is the founder, and since 1988 has been President, of Gould & Associates,
a human resources consulting firm specializing in outplacement and
organizational team building.
17
<PAGE> 18
PETER H. KAMIN has been a Director of the Company since January 1999. Since
January 1992, Mr. Kamin has been a Partner of Peak Investment, L.P. Mr. Kamin is
also a director of Data Transmission Network Systems, Inc. and TFC Enterprises,
Inc.
MELVIN R. MARTIN has been a Director of the Company since January 1992.
From June 1947 to January 1992, Mr. Martin was President and Chief Executive
Officer of M&M Auto Storage Pool, Inc., which he founded and which sold
substantially all of its assets to the Company in January 1992.
JOSEPH F. MAZZELLA has been a Director of the Company since January 1999.
In March 2000, Mr. Mazzella became a partner of Nutter McClennen & Fish, LLC, a
law firm in Boston, Massachusetts. From 1980 until March 2000, Mr. Mazzella was
a partner of Lane, Altman & Owens, a law firm in Boston, Massachusetts. He is a
director of Alliant Techsystems, Inc. and Data Transmission Network Systems,
Inc.
JOHN K. WILCOX has been a Director of the Company since February 1998. From
November 1994 until November 1997, Mr. Wilcox was Group Vice President, personal
lines finance and planning of Allstate Insurance Company. From April 1990 to
October 1994, Mr. Wilcox was Vice President, Finance, of Allstate Insurance
Company. In connection with the Company's acquisition of the Reclamation
Division of Tech-Cor, Inc. ("Tech-Cor"), a wholly-owned subsidiary of Allstate,
in 1993, the Company, Tech-Cor, and certain shareholders of the Company entered
into a stockholder agreement (the "Allstate Stockholder Agreement") pursuant to
which such shareholders agreed to vote their shares of the Company's Common
Stock to elect to the Board of Directors a representative chosen by Tech-Cor.
Mr. Wilcox was appointed as a member of the Board of Directors pursuant to the
Allstate Stockholder Agreement.
Family relationships among executive officers or directors of the Company
are as follows: Marcia A. McAllister, the Company's Vice President, Government
Affairs, is the wife of Mr. Knowles, and Donald J. Comis, the Company's Vice
President, Eastern Division, is the brother of Gerald C. Comis, the Company's
Vice President, Customer Service and Industry Relations.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and offices of all of the
executive officers of the Company as of March 31, 2000:
<TABLE>
<CAPTION>
NAME AGE OFFICE HELD
---- --- -----------
<S> <C> <C>
Christopher G. Knowles............... 57 Chief Executive Officer
Christine J. Atkins.................. 47 Chief Information Officer and Vice President,
Information Technology
Gerald C. Comis...................... 51 Vice President, Customer Service and Industry Relations
Donald J. Comis...................... 41 Vice President, Eastern Division
Peter B. Doder....................... 39 Vice President, Western Division
Stephen L. Green..................... 44 Chief Financial Officer and Vice President, Finance
Marcia A. McAllister................. 48 Vice President, Government Affairs
Gaspare G. Ruggirello................ 42 Vice President, General Counsel and Secretary
Patrick T. Walsh..................... 37 Vice President, Business Development
</TABLE>
CHRISTOPHER G. KNOWLES became Chief Executive Officer of the Company in
December 1998 and has been a Director of the Company since June 1994. As Chief
Executive Officer, Mr. Knowles oversees the Company's overall corporate
administration as well as strategic planning. Mr. Knowles was President and
Chief Operating Officer of the Company from April 1994 to March 1996. Mr.
Knowles previously served as Senior Vice President, Operations East of the
Company from January 1994 to April 1994. Prior to joining the Company, Mr.
Knowles was Chairman and Chief Executive Officer from 1980 to 1994 of
Underwriters Salvage Company, a multi-location salvage operation that the
Company acquired in January 1994.
CHRISTINE J. ATKINS joined the Company as Chief Information Officer and
Vice President of Information Technology in May 1999. She is responsible for all
information services functions, including software
18
<PAGE> 19
application acquisition and development, computer operations and
telecommunications. Prior to joining IAA, Ms. Atkins served as Chief Information
Officer for the Administrative Management Group from 1998 to 1999, and as
Manager of Applications Development for the Copyright Clearance Center from 1993
to 1998.
DONALD J. COMIS became Vice President of the Eastern Division in May 1999.
Mr. Comis is responsible for the sales and operational functions of the Eastern
Division. From October 1996 to May 1999, Mr. Comis was Vice President of the
Central Division. From January 1994 to October 1996, Mr. Comis served as
Regional General Manager of the Company. From 1979 to 1994, Mr. Comis served
Underwriters Salvage Company in many capacities, including Director of
Operations, Asst. Vice President of Operations and Vice President of Operations.
GERALD C. COMIS became Vice President Customer Service and Industry
Relations in February 1997. Mr. Comis is responsible for overseeing operational
procedures and customer service consistencies across all branch operations as
well as the management of the corporate accounts sales group. From October 1996
to February 1997, Mr. Comis served as Vice President, Western Division. From
April 1994 to October 1996, Mr. Comis served as Vice President, Field Operations
of the Company. From January 1994 to April 1994, Mr. Comis served as a Vice
President of Underwriters Salvage Company, a wholly owned subsidiary of the
Company, which was merged into the Company. From 1968 to January 1994, Mr. Comis
held various positions with Underwriters, prior to the January 1994 acquisition
by the Company, including Branch Manager, Vice President and Executive Vice
President.
PETER B. DODER became Vice President of the Western Division in February
1997. Mr. Doder is responsible for the sales and operational functions of the
Western Division. From February 1996 to February 1997, Mr. Doder was Vice
President, Financial Planning & Analysis of the Company. From June 1992 through
February 1996, Mr. Doder held various positions with the Company, including
Regional Sales Manager, Manager of Marketing Support & Analysis and Director of
Marketing.
STEPHEN L. GREEN became Chief Financial Officer in May 1999 in addition to
his role as Vice President, Finance and Assistant Secretary. From January 1999
to May 1999 Mr. Green served as Vice President, Finance. Prior to that he served
as Vice President, Corporate Controller, and Assistant Secretary of the Company
since February 1997. Mr. Green is responsible for cash management and cash
control as well as financial accounting, planning and reporting, taxes and risk
management. Prior to joining the Company, Mr. Green served as Manager of
Operations Accounting of Van Waters & Rogers Inc. from 1989 to February 1997.
MARCIA A. MCALLISTER has been Vice President, Government Affairs of the
Company since February 1995. Ms. McAllister is responsible for monitoring
legislation and participating on behalf of the Company with a variety of
industry and agency groups. From March 1994 to February 1995, Ms. McAllister was
a consultant to the Company. From June 1986 to January 1994, Ms. McAllister held
a variety of positions with Underwriters including Vice Chairman and General
Counsel.
GASPARE G. RUGGIRELLO became Corporate Secretary in May 1999 in addition to
his role as Vice President and General Counsel of the Company which he has held
since July 1997. He is responsible for the general legal affairs of the Company
including SEC compliance and filings, mergers and acquisitions, corporate
finance and litigation. Prior to joining the Company, Mr. Ruggirello served as
Corporate Counsel & Assistant Secretary of Borg-Warner Automotive, Inc. from
1993 to 1997. Prior to that time, Mr. Ruggirello served as Senior Attorney for
Borg-Warner Corporation from 1989 to 1993.
PATRICK T. WALSH became Vice President, Business Development in May 1999.
Mr. Walsh is responsible for our e-commerce, towing, appraisal, BidFast(R) and
title services business throughout our branch network. From October 1996 to May
1999, Mr. Walsh was Vice President, Eastern Division. From November 1994 to
October 1996, Mr. Walsh was responsible for operational planning. From January
1994 to November 1994, Mr. Walsh served as Vice President, Operations West of
the Company and from September 1991 through January 1994, Mr. Walsh served as
Vice President, Operations. From April 1988 to September 1991, Mr. Walsh held
various positions in the Company, including Branch Operations Manager.
19
<PAGE> 20
Officers are appointed to serve, at the discretion of the Board of
Directors, until their successors are appointed. Ms. McAllister is the wife of
Mr. Christopher G. Knowles, Chief Executive Officer and a member of the Board of
Directors, and Donald J. Comis is the brother of Gerald C. Comis.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors and Executive Officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Officers, Directors and greater than ten percent shareholders are
required by Securities and Exchange Commission regulation to furnish the Company
with copies of all Section 16(a) reports they file.
Based solely upon a review of the copies of such reports furnished to the
Company and written representations from such Officers, Directors and greater
than ten percent shareholders, all Section 16(a) filing requirements applicable
to the Company's Directors, Executive Officers and greater than ten percent
shareholders have been met, except Ms. Atkins was late in filing her Form 3
"Initial Statement of Beneficial Ownership of Securities" and Mr. Wilcox was
late on one occasion in filing his Form 4 "Statement of Changes in Beneficial
Ownership".
20
<PAGE> 21
ITEM 11. EXECUTIVE COMPENSATION.
The following Summary Compensation Table provides certain summary
information concerning the compensation earned, for services rendered in all
capacities to the Company and its subsidiaries during each of the last three
years, by the Company's Chief Executive Officer and each of the Company's other
four most highly compensated executive officers. The individuals whose
compensation is disclosed in the following tables are hereafter referred to as
the "Named Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) ($) OPTIONS(#) ($)
- --------------------------- ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Christopher G. Knowles............ 1999 284,000(4) 146,000 10,000(2) 100,000(3) --(6)
Chief Executive Officer 1998 18,000 -- -- 42,000(5) 24,000
1997 -- -- -- 2,000 24,000(6)
Gerald C. Comis................... 1999 155,000 60,000 18,000(2) -- 6,000(7)
Vice President, Customer Service 1998 153,000 33,000 18,000(2) 37,500 6,000(7)
and Industry Relations 1997 152,000 9,000 16,000(2) -- 3,000(7)
Marcia A. McAllister.............. 1999 152,000 59,000 18,000(2) -- 6,000(7)
Vice President, 1998 150,000 33,000 18,000(2) 38,000 6,000(7)
Government Affairs 1997 149,000 9,000 18,000(2) -- 6,000(7)
Patrick T. Walsh.................. 1999 148,000 57,000 18,000(2) -- 6,000(7)
Vice President 1998 143,000 15,000 18,000(2) 38,000 6,000(7)
Business Development 1997 144,000 9,000 9,000(2) -- 6,000(7)
Stephen L. Green.................. 1999 146,000 57,000 18,000(2) -- 6,000(7)
Vice President-Finance and 1998 121,000 27,000 18,000(2) 38,000 5,000(7)
Chief Financial Officer 1997 104,000 6,000 16,000(2) 5,000 --
Linda C. Larrabee................. 1999 80,000(8) 24,000 8,000(2) -- 229,000(9)
Sr. Vice President and 1998 169,000 44,000 20,000(2) 50,000 6,000(7)
Chief Financial Officer 1997 170,000 12,000 38,000(2) -- 6,000(7)
</TABLE>
- ---------------
(1) Includes salary deferred under the Company's 401(k) Plan and Section 125
Plan, and all amounts are rounded to the nearest thousand.
(2) Automobile allowance.
(3) Mr. Knowles received a stock option grant for 100,000 shares pursuant to his
employment agreement dated June 3, 1999.
(4) Mr. Knowles, a Director of the Company since 1994, became Chief Executive
Officer of the Company in December 1998.
(5) Mr. Knowles received a stock option grant for 40,000 shares at the time he
became Chief Executive Officer. In June 1998, Mr. Knowles received an
automatic option grant for 2,000 shares for serving as a Director of the
Company.
(6) Director's fees paid to Mr. Knowles prior to becoming Chief Executive
Officer.
(7) Represents matching contributions that the Company made to its 401(k) Plan
on behalf of the Named Officer.
(8) Ms. Larrabee resigned as Senior Vice President and Chief Financial Officer
effective May 21, 1999.
(9) Represents a payment of $225,500 made to Ms. Larrabee in connection with her
resignation and a $3,000 contribution that the Company made on Ms.
Larrabee's behalf to its 401(k) Plan.
21
<PAGE> 22
STOCK OPTIONS
The following table sets forth information with respect to the Named
Officers concerning grants of stock options made during 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
---------------------------------------------------- --------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE
GRANTED FISCAL YEAR ($/SH) EXPIRATION
NAME (#) (1) (2) (3) DATE 5% ($) (4) 10% ($) (4)
- ---- ---------- --------------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Christopher G. Knowles........ 100,000(5) 74.6 $ 12.75 06/03/06 $519,053 $1,209,614
Gerald C. Comis............... -- -- -- -- -- --
Marcia A. McAllister.......... -- -- -- -- -- --
Patrick T. Walsh.............. -- -- -- -- -- --
Stephen L. Green.............. -- -- -- -- -- --
Linda C. Larrabee............. -- -- -- -- -- --
</TABLE>
- ---------------
(1) Each option was granted under the Company's 1991 Stock Option Plan. Each
option will become immediately exercisable for all the option shares in the
event of a change of control of the Company. Each option has a maximum term
of 7 or 10 years, subject to earlier termination in the event that the
optionee ceases to provide services to the Company.
(2) Based upon options to purchase an aggregate of 133,991 shares granted to
employees in 1999.
(3) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Company may, at its discretion, also loan the optionee sufficient funds to
pay the exercise price for the purchased shares and the federal and state
income tax liability incurred by the optionee in connection with such
exercise.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
from the date of grant are mandated by the Securities and Exchange
Commission. There is no assurance provided to any executive officer or any
other holder of the Company's Common Stock that the actual stock price
appreciation over the option term will be at the assumed 5% or 10% levels or
at any other specific level. No gain will in fact be realized by the
optionees unless the stock price appreciates over the option term, which
will also benefit all shareholders of the Company.
(5) The option becomes exercisable in six successive quarterly installments with
the first such installment exercisable on the last business day of the third
fiscal quarter of 1999. Should Mr. Knowles' service as Chief Executive
Officer be terminated prior to December 31, 2000, the option will become
fully vested and exercisable as of the date of such termination.
22
<PAGE> 23
The following table sets forth information with respect to unexercised
options held as of the end of the 1999 fiscal year by the Named Officers. No
stock options were exercised during the 1999 fiscal year by the Named Officers.
No stock appreciation rights were outstanding at the end of 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END ($)(1)(2)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Christopher G. Knowles................ 117,334 66,666 343,752 199,998
Gerald C. Comis....................... 42,625 16,875 181,131 72,769
Marcia A. McAllister.................. 30,625 16,875 181,131 72,769
Patrick T. Walsh...................... 41,625 16,875 165,881 72,769
Stephen L. Green...................... 23,125 19,375 111,756 90,894
Linda C. Larrabee..................... 80,000 -- 316,555 --
</TABLE>
- ---------------
(1) "In-the-money" options are options whose exercise price was less than the
market price of the Common Stock on December 31, 1999, the last day of the
1999 fiscal year.
(2) Based upon the market price of $15.750 per share, which was the closing
price per share of the Company's Common Stock on the Nasdaq Stock Market on
December 31, 1999, less the exercise price payable per share.
COMPENSATION OF DIRECTORS
For 1999, each non-employee Director (except for Mr. O'Malia) was entitled
to receive an annual retainer fee of $18,000, a $1,000 fee for each regularly
scheduled Board meeting attended, a $500 fee for each committee meeting attended
(other than on the date of a regularly scheduled Board meeting), and an annual
fee of $3,000 if such non-employee Director served as a Chairperson of a
Committee. As substantially more board meetings were held in 1999 than in
previous years, a $5,000 fee was paid to each Board member (other than Mr.
O'Malia or Mr. Knowles) in December 1999. Except for this $5,000 payment, Mr.
Wilcox waived all rights to receive all other Director fees. Non-employee
Directors are also reimbursed for expenses incurred in attending such meetings.
Each non-employee Director (except for Mr. O'Malia) is also eligible to
receive periodic option grants for shares of the Company's Common Stock pursuant
to the automatic option grant program in effect under the Company's 1991 Stock
Option Plan. Under this automatic option grant program, each individual who
becomes a non-employee Board member is granted an option to purchase 10,000
shares of Common Stock on the date such individual joins the Board. In addition,
each non-employee Director is also entitled to receive an automatic option to
purchase 2,000 shares of Common Stock on the last business day of the second
quarter of each fiscal year during which such individual continues to serve on
the Board. Each automatic option grant becomes exercisable in four successive
quarterly installments with the first such installment to become exercisable on
the last day of the fiscal quarter immediately following the date of grant,
provided the non-employee Director continues to serve on the Board. However,
each option will become immediately exercisable for all of the option shares in
the event of a change of control of the Company.
The Company and Mr. O'Malia entered into a Consulting Agreement dated
December 1, 1998 and an Amendment dated November 18, 1999 in connection with Mr.
O'Malia's appointment as Chairman of the Board of Directors. Pursuant to the
Agreement, Mr. O'Malia agreed to perform services on behalf of the Company. In
consideration for such services, the Company paid Mr. O'Malia $75,000 in 1999
and agreed to pay Mr. O'Malia $100,000 per year for each succeeding year,
payable quarterly, in equal installments at the end of each quarter. Such cash
compensation is in lieu of any fees otherwise payable to Mr. O'Malia during the
term of the Consulting Agreement for services as a Director of the Company
(including annual retainer
23
<PAGE> 24
fees, fees for Board meeting attendance, fees for committee meeting attendance
and fees for serving as a chairperson of a Board committee). In addition, in
December 1998, the Company granted to Mr. O'Malia an option to purchase 40,000
shares of the Company's common stock under the Company's 1991 Stock Option Plan
and in 1999 granted Mr. O'Malia an option to purchase 10,000 shares of the
Company's common stock. The options will become vested and exercisable in four
quarterly installments beginning three months after the date of the grant. Such
option grants to Mr. O'Malia will be in lieu of any automatic grants of options
that would otherwise be made to Mr. O'Malia for service as a Director pursuant
to the Company's 1991 Stock Option Plan. The Consulting Agreement may be
terminated by either party by not less than 24 hour's prior written notice.
Mr. Martin and the Company are parties to an agreement for services
pursuant to which Mr. Martin is compensated on a daily basis for consulting
services, primarily in the areas of acquisitions and real estate. In 1999, Mr.
Martin received no compensation pursuant to the agreement.
On November 8, 1999, Mr. Glen Tullman resigned as a director of the
Company.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
The following is a description of the employment or consulting agreements
in effect between the Company and certain of its Directors and the Named
Officers.
The compensation paid to Christopher G. Knowles, Chief Executive Officer of
the Company, for the 1999 fiscal year was based on a June 3, 1999 employment
agreement (the "Knowles Agreement"). Under the Knowles Agreement, Mr. Knowles is
entitled to an annual base salary of $310,000 and a performance incentive bonus
of up to 40% of his annual salary based upon the achievement of target
performance goals. Mr. Knowles 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. The Knowles
Agreement expires on December 31, 2000. Also, pursuant to the Knowles Agreement,
the Company granted Mr. Knowles an option to purchase 100,000 shares of the
Company's Common Stock. The option becomes exercisable in six successive
quarterly installments with the first such installment exercisable on the last
business day of the third fiscal quarter of 1999. Should Mr. Knowles' service as
Chief Executive Officer be terminated prior to December 31, 2000, the option
will become fully vested and exercisable as of the date of such termination. In
the event of a termination of Mr. Knowles' employment for any reason (other than
his resignation from the Company, his termination for cause, as such term is
defined in the Knowles Agreement, or his termination in connection with a change
in control), the Company shall provide Mr. Knowles (i) an amount equal to sixty
percent of his monthly salary at the rate in effect at the time of such
termination through December 31, 2000, and (ii) continued coverage of Mr.
Knowles and his beneficiaries under the Company's health and dental plan through
December 31, 2000, provided that Mr. Knowles 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.
In connection with her resignation as Senior Vice President and Chief
Financial Officer, Ms. Larrabee entered into an Agreement dated as of June 14,
1999. In consideration for Ms. Larrabee's resignation from all positions with
the Company and its subsidiaries, the Company agreed to pay Ms. Larrabee a lump
sum payment of $225,500. In addition, the Company accelerated the vesting of
80,000 previously granted options and extended the exercisability of all of Ms.
Larrabee's outstanding vested options until May 31, 2000. Ms. Larrabee released
the Company from any and all claims arising from or relating to her employment
with the Company (except for indemnification claims under any applicable law or
the Company's standard form of Indemnification Agreement).
The Company has entered into a Change of Control Employment Agreement (the
"Employment Agreement") with each of the Named Officers, except for Mr. Knowles.
Below is a general description of certain terms and conditions of the Employment
Agreement.
In the event of a "Change of Control" of the Company followed within two
years by (1) the termination of the executive's employment for any reason other
than death, disability, or "Cause" or (2) the termination
24
<PAGE> 25
of the executive's employment by the executive for "Good Reason", the Employment
Agreement provides that the executive shall be paid a lump sum cash amount equal
to one and one-half times the executive's annual base salary and "Highest Annual
Bonus" as defined in the Employment Agreement. In addition, the executive is
entitled to continued employee welfare benefits for 18 months after termination
of employment.
"Change of Control" means (a) the acquisition by an individual, entity or
group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities
Exchange Act of 1934) of 50% or more of the voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors, (b) a change in the majority of the board of directors, (c) a major
corporate transaction, such as a reorganization, merger or consolidation, or
sale or other disposition of all or substantially all of the Company's assets,
or (d) a liquidation or dissolution of the Company.
"Cause" means the willful and continued failure of the executive to perform
substantially the executive's duties or the willful engaging by the executive in
illegal conduct or gross misconduct materially injurious to the Company.
"Good Reason" means the diminution of responsibilities, assignment to
inappropriate duties, failure of the Company to comply with compensation or
benefit provisions, transfer to a new work location more than 75 miles from the
executive's previous work location, a purported termination of the Employment
Agreement by the Company other than in accordance with the Employment Agreement,
or failure of the Company to require any successor to the Company to comply with
the Employment Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Ms. Gould and Mr.
Cocca. Neither of these individuals was at any time during the fiscal year ended
December 31, 1999 or at any other time an officer or employee of the Company. No
executive officer of the Company serves as a member of the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
25
<PAGE> 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF SECURITIES
The following table sets forth certain information known to the Company
regarding the ownership of the Company's Common Stock as of March 20, 2000 for
(i) each Director, (ii) all persons who are beneficial owners of five percent or
more of the Company's Common Stock, (iii) any other Named Officer and (iv) all
officers and Directors of the Company as a group. Unless otherwise indicated,
each of the shareholders has sole voting and investment power with respect to
the shares beneficially owned, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
NAME AND ADDRESS SHARES SHARES OUTSTANDING(1)
- ---------------- --------- ---------------------
<S> <C> <C>
Wallace R. Weitz & Co.(2)................................... 2,142,700 18.5%
1125 S. 103rd St., Ste 600
Omaha, NE 68124-6008
Allstate Insurance Company(3)............................... 1,667,000 14.4%
3075 Sanders Road, Suite G4B
Northbrook, Illinois 60062
Wanger Asset Management, L.P.(4)............................ 994,500 8.6%
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
State of Wisconsin Investment Board(5)...................... 975,000 8.43%
P.O. Box 7842
Madison, Wisconsin 53707
Peter H. Kamin(6)(10)....................................... 683,100 5.8%
Peak Investment Limited Partnership(7)......................
Peak Management, Inc.(8)....................................
One Financial Center, Suite 1600
Boston, MA 02111
Dimensional Fund Advisors(9)................................ 666,800 5.76%
1299 Ocean Ave., 11th Fl
Santa Monica, CA 90401
Peter H. Kamin(6)(7)(8)(10)................................. 683,100 5.8%
Christopher G. Knowles(10).................................. 229,454 2.0
Linda C. Larrabee(10)....................................... 80,000 *
Thomas J. O'Malia(10)....................................... 71,500 *
Gerald C. Comis(10)......................................... 51,810 *
Patrick T. Walsh(10)........................................ 44,887 *
Melvin R. Martin(10)........................................ 34,125 *
Marcia A. McAllister (10)................................... 33,750 *
Stephen L. Green(10)........................................ 28,247 *
Maurice A. Cocca(10)........................................ 25,500 *
Susan B. Gould(10).......................................... 24,085 *
John K. Wilcox(11).......................................... 14,500 *
Joseph F. Mazzella(10)...................................... 12,500 *
All officers (including Named Officers) and
Directors as a group (17 persons)(12)..................... 1,444,160 12.5%
</TABLE>
- ---------------
* Less than 1%
(1) Percentage of beneficial ownership is calculated assuming 11,586,648 shares
of common stock were outstanding on March 20, 2000. This percentage
includes any shares of common stock of which such individual or entity had
the right to acquire beneficial ownership within sixty days of March 20,
2000,
26
<PAGE> 27
including but not limited to the exercise of an option; however, such common
stock shall not be deemed outstanding for the purpose of computing the
percentage owned by any other individual or entity. Such calculation is required
by General Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as
amended.
(2) Such information is based on a Schedule 13G/A filed by Wallace R. Weitz &
Co. with the SEC on February 4, 2000 and reflects stock held as of December
31, 1999. According to such Schedule 13G/A, Wallace R. Weitz & Co. has sole
voting and dispositive power for all the shares.
(3) Such information is based on a Schedule 13G filed by Allstate with the SEC
reflecting stock ownership as of December 31, 1995 and on subsequent
representations by Allstate to the Company. According to such Schedule 13G
and representations, Allstate has sole voting and investment power over all
the shares.
(4) Such information is based on a Schedule 13G/A filed by Wanger Asset
Management, L.P., with the SEC on February 11, 2000 and reflects stock held
as of December 31, 1999. According to such Schedule 13G/A, Wanger Asset
Management, L.P. has shared voting and dispositive power for all the
shares.
(5) Such information is based on a Schedule 13G/A filed by State of Wisconsin
Investment Board with the SEC on February 10, 2000 and reflects stock held
as of December 31, 1999. According to such Schedule 13G/A, the State of
Wisconsin Investment Board retains sole voting and dispositive power for
all the shares.
(6) Peter H. Kamin, a director of the Company, has the sole power to vote or
dispose of 190,900 shares of Common Stock, including 35,000 shares for the
benefit of his children. In addition, Mr. Kamin has sole voting and
dispositive power with respect to an aggregate of 155,000 shares of Common
Stock held in managed brokerage accounts pursuant to the terms of
investment advisory agreements. In addition, by reason of his position as
the sole director, officer and stockholder of Peak Management, Inc., which
is the sole General Partner of Peak Limited Partnership, Peter H. Kamin may
be deemed to have shared voting and dispositive power over the 481,200
shares of Common Stock beneficially owned by such partnership. Accordingly,
Peter H. Kamin may be deemed the beneficial owner of an aggregate 672,100
shares of Common Stock. Such information is based on a Schedule 13G/A filed
with the SEC on January 26, 2000
(7) Peak Investment Limited Partnership ("Peak L.P.") is the beneficial owner
of 481,200 shares of Common Stock. Peak L.P. has the sole power to vote or
to dispose of or to direct the voting or to direct the disposition of the
Common Stock beneficially owned by it. Such voting and dispositive power
may be exercised on behalf of Peak L.P. by its General Partner, Peak
Management, Inc., of which Peter H. Kamin is the sole officer, director and
stockholder. Accordingly, Peter H. Kamin may be deemed to have shared
voting and dispositive power over the 481,200 shares of the Common Stock
beneficially owned by Peak L.P. Such information is based on a Schedule
13G/A filed with the SEC on January 26, 2000.
(8) By reason of its interest as General Partner of Peak L.P., Peak Management,
Inc. may be deemed to have shared voting and dispositive power over the
481,200 shares of Common Stock beneficially owned by such partnership. Such
information is based on a Schedule 13G/A filed with the SEC on January 26,
2000.
(9) Such information is based on a Schedule 13G filed by the Dimensional Fund
Advisors ("Dimensional") with the SEC on February 4, 2000 and reflects
stock held as of December 31, 1999. According to such Schedule 13G,
Dimensional has sole voting and dispositive power over all the shares.
(10) Includes that portion of options to purchase shares of Common Stock granted
under the 1991 Stock Option Plan that are exercisable on March 20, 2000 or
will become exercisable within 60 days after that date: Mr. Kamin, 11,500
shares; Mr. Knowles, 134,001 shares; Ms. Larrabee, 80,000 shares, Mr.
O'Malia, 64,500 shares; Mr. Gerald C. Comis 45,750 shares, Mr. Walsh,
44,750, Mr. Martin, 33,500 shares; Ms. McAllister, 33,750 shares; Mr.
Green, 27,500 shares, Mr. Cocca, 15,500 shares, Ms. Gould, 18,700 shares;
Mr. Wilcox, 13,500 shares and Mr. Mazzella, 11,500 shares.
27
<PAGE> 28
(11) Mr. Wilcox was appointed a member of the Board of Directors pursuant to the
Allstate Stockholder Agreement. Mr. Wilcox disclaims beneficial interest in
any shares owned by Allstate Insurance Company.
(12) Includes options to purchase 560,951 shares of Common Stock granted under
the 1991 Stock Option Plan that are currently exercisable or will become
exercisable within 60 days after March 20, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Tech-Cor Acquisition. In December 1993, the Company purchased certain
assets from and assumed certain specified obligations and liabilities of the
Reclamation Division of Tech-Cor, Inc. ("Tech-Cor"), a subsidiary of Allstate,
(the "Tech-Cor Acquisition"). The consideration for the Tech-Cor Acquisition was
1,667,000 shares of the Company's Common Stock, which shares were subsequently
transferred by Tech-Cor to Allstate. The Company also entered into a lease with
respect to certain real property owned by Allstate located in Wheeling,
Illinois. The Company is required to pay rent of $18,333 per month to Allstate
during the term of such lease, which expires in December 2003. The Company,
Tech-Cor and certain shareholders of the Company also entered into a stockholder
agreement pursuant to which such shareholders agreed to vote their shares of the
Company's Common Stock to elect to the Board of Directors a representative
chosen by Tech-Cor and the Company agreed to facilitate such shareholders'
actions. The Company and Tech-Cor also entered into a Registration Agreement
pursuant to which the Company is obligated under certain circumstances to
register with the Securities and Exchange Commission shares of the Company's
Common Stock held by Tech-Cor or Allstate. In addition, Allstate agreed not to
purchase shares of the Company's voting stock that would result in ownership by
Allstate and its affiliates of more than 20%, in the aggregate, of the Company's
voting stock.
Allstate Business. In its normal course of business, the Company purchases
vehicles from Allstate and advances funds for intermediary towing and storage
fees ("Advanced Charges") on behalf of Allstate. Additionally, depending on the
type of sales agreement in effect at a Company location, Allstate may owe the
Company for various fees. Upon settlement, the Advanced Charges and the related
amounts owed to Allstate for the purchase of the vehicle and the amount owed by
Allstate to the Company for various fees are netted. During the years ended
December 31, 1999 and 1998, the Company recorded fee income of $5,438,000 and
$4,700,000, respectively, related to the consignment sale of Allstate-insured
vehicles, and recorded sales of $35,053,000 and $35,700,000, respectively, and
cost of sales of $31,643,000 and $32,500,000, respectively, related to the
purchase of Allstate-insured vehicles under the purchase-agreement method.
M & M Acquisition. In January 1992, the Company purchased the auto salvage
pool operations of M & M Auto Storage Pool, Inc. ("M & M"), and acquired a
10-year option to purchase 35 acres of land on which M & M's operation is
located. Melvin R. Martin, the founder, chief executive officer and principal
shareholder of such auto salvage operation, was elected a Director of the
Company in January 1992. The Company is required to pay rent to Mr. Martin
during the ten-year term of the lease relating to the real property owned by Mr.
Martin. In 1999, the Company paid $406,718 pursuant to the lease. The Company
believes the terms of the lease are no less favorable than those available from
unaffiliated third party lessors.
Mr. Martin and the Company are parties to an agreement for services
pursuant to which Mr. Martin is compensated on a daily basis for consulting
services, primarily in the areas of acquisitions and real estate. In 1999, Mr.
Martin received no compensation pursuant to the agreement.
Dallas, Texas Lease. The Company leases certain property located in
Dallas, Texas from a partnership in which Mr. Martin is a partner. In 1999, the
Company paid $453,676 in rent under this lease.
28
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Insurance Auto Auctions,
Inc. and its subsidiaries are filed as part of this report on Form 10-K:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 33
Consolidated Balance Sheets -- December 31, 1999 and
December 31, 1998......................................... 34
Consolidated Statements of Earnings -- Years ended
December 31, 1999, 1998 and 1997.......................... 35
Consolidated Statements of Shareholders' Equity-
Years ended December 31, 1999, 1998 and 1997................ 36
Consolidated Statements of Cash Flows -- Years ended
December 31, 1999, 1998 and 1997.......................... 37
Notes to Consolidated Financial Statements.................. 38
</TABLE>
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the matter or conditions are not
present or the information required to be set forth therein is included in the
Consolidated Financial Statements and related Notes thereto.
3. EXHIBITS
See Item 14(c) below.
(B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Company
during the three-month period ended December 31, 1999.
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
------- -----------
<C> <S>
3.1(11) Articles of Incorporation of the Registrant, as filed with
the Illinois Secretary of State on August 7, 1997.
3.2(14) Bylaws of the Registrant.
4.1(9) Fifth Amended and Restated Registration Rights Agreement,
dated September 23, 1994, by and among the Registrant,
William W. Liebeck, Bradley S. Scott, Bob F. Spence, Corinne
Spence, Jimmie A. Dougherty, Patricia L. Dougherty and
Midwest Auto Pool Corporation.
4.3(1) Specimen Stock Certificate.
4.4(5) Stockholder Agreement dated December 1, 1993, by and among
the Registrant, Tech-Cor, Inc., Bradley S. Scott, Bob F.
Spence and William L. Liebeck.
4.5(5) Registration Agreement dated December 1, 1993, by and among
the Registrant and Tech-Cor.
4.5(8) Note Agreement, dated as of December 1, 1994 among the
Registrant and the purchasers listed therein.
10.35(4)* Insurance Auto Auctions, Inc. 1991 Stock Option Plan, as
amended and restated.
10.36(6)* Form of Notice of Grant of Stock Option -- employee,
officer.
10.37(3)* Form of Non-Statutory Stock Option Agreement, Insurance Auto
Auctions, Inc. 1991 Stock Option Plan, as restated
(including Form of Notice of Grant of Stock
Option) -- employee.
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
------- -----------
<C> <S>
10.38(3)* Form of Stock Option Agreement: Non-Employee Director,
Automatic Option Grant, Insurance Auto Auctions, Inc. Stock
Option Plan, as restated (including Form of Notice of Grant
of Stock Option).
10.39(3)* Form of Incentive Stock Option Agreement, Insurance Auto
Auctions, Inc. 1991 Stock Option Plan, as restated
(including Form of Notice of Grant of Stock
Option) -- employee.
10.40(3)* Form of Non-Statutory Stock Option Agreement, Insurance Auto
Auctions, Inc. 1991 Stock Option Plan, as restated
(including Form of Notice of Grant of Stock
Option) -- officer.
10.41(3)* Form of Incentive Stock Option Agreement, Insurance Auto
Auctions, Inc. 1991 Stock Option Plan, as restated
(including Form of Notice of Grant of Stock
Option) -- officer.
10.66(2) Facilities Lease Agreement dated January 17, 1992, by and
between Melvin R. Martin and MASP.
10.122(5) Asset Purchase Agreement dated December 1, 1993, by and
between the Registrant, BC Acquisition Corp. (a wholly owned
subsidiary of Registrant ("BCAC") and Tech-Cor, Inc.
("Tech-Cor").
10.125(5) Transition Agreement dated December 1, 1993, by and between
BCAC and Tech-Cor.
10.126(5) Lease, dated December 1, 1993, by and between Allstate
Insurance Company and BCAC.
10.127(5) Guaranty, dated December 1, 1993, by Allstate Insurance
Company and delivered to the Registrant and BCAC.
10.134(7) Registration Rights Agreement dated January 20, 1994, by and
among, the Registrant, Christopher G. Knowles, Gerald C.
Comis, F. Peter Haake and Donald J. Comis.
10.149(11)* Form of Change of Control Employment Agreement by and
between the Company and certain of its executive officers.
10.150(10) Revolving Credit Agreement between the Registrant and
LaSalle National Bank dated as of April 4, 1997.
10.151(11) Amendment to Revolving Credit Agreement dated as of December
1, 1997.
10.152(12) Second amendment to Revolving Credit Agreement dated as of
April 6, 1998.
10.153 Third amendment to Revolving Credit Agreement dated as of
March 16, 2000.
10.154(10)* Insurance Auto Auctions, Inc. Employee Stock Purchase Plan,
as amended as of June 18, 1997.
10.155(14) Form of Indemnification Agreement dated as of February 24,
1999 by and between the Company and its Directors and
Executive Officers.
10.156(14)* Consulting Agreement dated as of December 1, 1998 by and
between the Company and Thomas J. O'Malia.
10.157* Amendment dated as of November 18, 1999 to the Consulting
Agreement between the Company and Thomas J. O'Malia.
10.158(15)* Employment agreement, dated June 3, 1999, by and between the
Company and Christopher G. Knowles.
10.159(15)* First Amendment to the Employment Agreement, effective June
3, 1999 by and between the Company and Christopher G.
Knowles.
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
------- -----------
<C> <S>
10.160(15)* Separation Agreement, dated June 14, 1999, by and between
Registrant and Linda C. Larrabee.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
(1) Incorporated by reference from an exhibit filed with the Registrant's
Registration Statement on Form S-1 (File No. 33-43247) declared effective
by the Securities and Exchange Commission ("SEC") on November 20, 1991.
(2) Incorporated by reference from an exhibit included in the Registrant's
Current Report on Form 8-K (File No. O-19594) filed with the SEC on January
31, 1992.
(3) Incorporated by reference from an exhibit included in the Registrant's
Annual Report on Form 10-K (File No. O-19594) for the fiscal year ended
December 31, 1992.
(4) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10-Q (File No. O-19594) for the fiscal quarter
ended June 30, 1993.
(5) Incorporated by reference from an exhibit included in the Registrant's
Current Report on Form 8-K (File No. O-19594) filed with the SEC on
December 15, 1993.
(6) Incorporated by reference from an exhibit included in the Registrant's
Annual Report on Form 10-K (File No. O-19594) for the fiscal year ended
December 31, 1993.
(7) Incorporated by reference from an exhibit included in the Registrant's
Current Report on Form 8-K (File No. O-19594) filed with the SEC on
February 3, 1994.
(8) Incorporated by reference from an exhibit included in the Registrant's
Current Report on Form 8-K (File No. O-19594) filed with the SEC on
February 10, 1995.
(9) Incorporated by reference from an exhibit included in the Registrant's
Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended
December 31, 1994.
(10) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10-Q (File No. O-19594) for the fiscal quarter
ended June 30, 1997.
(11) Incorporated by reference from an exhibit included in the Registrant's
Annual Report on Form 10K (File No. O-19594) for the fiscal year ended
December 31, 1997.
(12) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10Q (File No. O-19594) for the fiscal quarter
ended March 31, 1998.
(13) Incorporated by reference from an exhibit included in the Registrant's
Annual Report on Form 10K (File No. O-19594) for the fiscal year ended
December 31, 1998.
(14) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10Q (File No. O-19594) for the fiscal quarter
ended March 31, 1999.
(15) Incorporated by reference from an exhibit included in the Registrant's
Quarterly Report on Form 10Q (File No. O-19594) for the fiscal quarter
ended June 30, 1999.
* This item is a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to Item
601(b)(10)(iii) of Regulation S-K.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INSURANCE AUTO AUCTIONS, INC.
By: /s/ CHRISTOPHER G. KNOWLES
------------------------------------
Chief Executive Officer
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on this 30th day of March, 2000.
<TABLE>
<C> <S>
/s/ CHRISTOPHER G. KNOWLES Chief Executive Officer, Director
- ----------------------------------------------------- (Principal Executive Officer)
Christopher G. Knowles
/s/ STEPHEN L. GREEN Chief Financial Officer, Vice President,
- ----------------------------------------------------- Finance and Assistant Secretary (Principal
Stephen L. Green Financial and Accounting Officer)
/s/ * Chairman of the Board of Directors
- -----------------------------------------------------
Thomas J. O'Malia
/s/ * Director
- -----------------------------------------------------
Maurice A. Cocca
/s/ * Director
- -----------------------------------------------------
Susan B. Gould
/s/ * Director
- -----------------------------------------------------
Peter H. Kamin
/s/ * Director
- -----------------------------------------------------
Melvin R. Martin
/s/ * Director
- -----------------------------------------------------
Joseph F. Mazzella
/s/ * Director
- -----------------------------------------------------
John K. Wilcox
------------------------
* As attorney-in-fact.
</TABLE>
32
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Insurance Auto Auctions, Inc.:
We have audited the consolidated financial statements of Insurance Auto
Auctions, Inc. and subsidiaries, as listed in Item 14(a)1. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Insurance
Auto Auctions, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Chicago, Illinois
February 15, 2000
33
<PAGE> 34
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,886,000 $ 11,682,000
Short-term investments.................................... 6,845,000 2,425,000
Accounts receivable, net.................................. 40,188,000 37,415,000
Inventories............................................... 11,998,000 11,229,000
Other current assets...................................... 1,655,000 1,676,000
------------ ------------
Total current assets................................. 79,572,000 64,427,000
------------ ------------
Property and equipment, at cost:
Land and buildings........................................ 6,502,000 6,266,000
Furniture and fixtures.................................... 1,644,000 1,578,000
Machinery and equipment................................... 24,865,000 19,126,000
Leasehold improvements.................................... 17,972,000 14,007,000
------------ ------------
50,983,000 40,977,000
Less accumulated depreciation and amortization............ 23,525,000 18,665,000
------------ ------------
Net property and equipment........................... 27,458,000 22,312,000
Other investments........................................... 11,636,000 8,713,000
Deferred income taxes....................................... 4,338,000 2,976,000
Intangible assets, principally goodwill, net................ 125,128,000 129,115,000
------------ ------------
$248,132,000 $227,543,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 135,000 $ 216,000
Accounts payable.......................................... 33,216,000 30,939,000
Accrued liabilities....................................... 6,306,000 6,097,000
Income taxes.............................................. 1,226,000 582,000
------------ ------------
Total current liabilities............................ 40,883,000 37,834,000
------------ ------------
Long-term debt, excluding current installments.............. 20,180,000 20,315,000
Accumulated postretirement benefits obligation.............. 3,178,000 3,485,000
Deferred income taxes....................................... 8,605,000 7,154,000
------------ ------------
Total liabilities.................................... 72,846,000 68,788,000
------------ ------------
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
11,575,010 and 11,327,169 shares as of December 31,
1999 and December 31, 1998, respectively............... 12,000 11,000
Additional paid-in capital................................ 134,996,000 132,171,000
Retained earnings......................................... 40,278,000 26,573,000
------------ ------------
Total shareholders' equity........................... 175,286,000 158,755,000
------------ ------------
$248,132,000 $227,543,000
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE> 35
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
Vehicle sales.................................... $204,785,000 $191,312,000 $175,733,000
Fee income....................................... 112,606,000 95,751,000 83,592,000
------------ ------------ ------------
317,391,000 287,063,000 259,325,000
Costs and expenses:
Cost of sales.................................... 233,949,000 216,754,000 199,983,000
Direct operating expenses........................ 55,741,000 50,885,000 45,046,000
Amortization of intangible assets................ 3,797,000 3,779,000 3,790,000
Special charges.................................. -- 1,564,000 750,000
------------ ------------ ------------
Earnings from operations...................... 23,904,000 14,081,000 9,756,000
Other (income) expense:
Interest expense................................. 1,970,000 2,055,000 2,253,000
Interest income.................................. (1,271,000) (797,000) (821,000)
------------ ------------ ------------
Earnings before income taxes.................. 23,205,000 12,823,000 8,324,000
Income taxes....................................... 9,500,000 5,642,000 3,829,000
------------ ------------ ------------
Net earnings.................................. $ 13,705,000 $ 7,181,000 $ 4,495,000
============ ============ ============
Earnings per share Basic........................... $ 1.20 $ .63 $ .40
============ ============ ============
Diluted....................................... $ 1.18 $ .63 $ .40
============ ============ ============
Weighted average shares outstanding:
Basic......................................... 11,467,000 11,316,000 11,294,000
Effect of dilutive securities -- stock
options..................................... 156,000 121,000 43,000
------------ ------------ ------------
Diluted....................................... 11,623,000 11,437,000 11,337,000
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
35
<PAGE> 36
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996.... 11,282,838 $11,000 $131,681,000 $14,897,000 $146,589,000
Issuance of common stock in
connection with exercise of
common stock options.......... 8,600 -- 49,000 -- 49,000
Issuance of common stock in
connection with the employee
stock purchase plan........... 8,123 -- 79,000 -- 79,000
Net earnings.................... -- -- -- 4,495,000 4,495,000
---------- ------- ------------ ----------- ------------
Balance at December 31, 1997.... 11,299,561 11,000 131,809,000 19,392,000 151,212,000
Issuance of common stock in
connection with exercise of
common stock options.......... 16,400 -- 198,000 -- 198,000
Issuance of common stock in
connection with the employee
stock purchase plan........... 11,208 -- 164,000 -- 164,000
Net earnings.................... -- -- -- 7,181,000 7,181,000
---------- ------- ------------ ----------- ------------
Balance at December 31, 1998.... 11,327,169 11,000 132,171,000 26,573,000 158,755,000
Issuance of common stock in
connection with exercise of
common stock options.......... 235,289 1,000 2,653,000 -- 2,654,000
Issuance of common stock in
connection with the employee
stock purchase plan........... 12,552 -- 172,000 -- 172,000
Net earnings.................... -- -- -- 13,705,000 13,705,000
---------- ------- ------------ ----------- ------------
Balance at December 31, 1999.... 11,575,010 $12,000 $134,996,000 $40,278,000 $175,286,000
========== ======= ============ =========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
36
<PAGE> 37
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings....................................... $ 13,705,000 $ 7,181,000 $ 4,495,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization................... 9,135,000 8,765,000 8,671,000
Loss (gain) on disposal of property and
equipment..................................... (24,000) 136,000 (151,000)
Changes in assets and liabilities
(net of effects of acquired companies):
(Increase) decrease in:
Investments, net........................... (7,343,000) (9,771,000) 337,000
Accounts receivable, net................... (2,773,000) (7,985,000) 5,379,000
Inventories................................ (769,000) 533,000 (1,600,000)
Other current assets....................... 21,000 192,000 1,762,000
Other assets............................... 190,000 345,000 1,197,000
Increase (decrease) in:
Accounts payable........................... 2,277,000 (3,085,000) 3,055,000
Accrued liabilities........................ (98,000) (1,753,000) (3,792,000)
Income taxes............................... 733,000 1,631,000 1,143,000
------------ ----------- -----------
Total adjustments........................ 1,349,000 (10,992,000) 16,001,000
------------ ----------- -----------
Net cash provided by (used in) operating
activities.................................... 15,054,000 (3,811,000) 20,496,000
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from disposition of property and
equipment....................................... 163,000 151,000 696,000
Capital expenditures............................... (10,623,000) (6,607,000) (4,608,000)
Payments made in connection with acquisitions, net
of cash acquired................................ -- (1,806,000) (311,000)
------------ ----------- -----------
Net cash used in investing activities......... (10,460,000) (8,262,000) (4,223,000)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock............. 2,826,000 362,000 128,000
Principal payments of long-term debt............... (216,000) (2,579,000) (7,568,000)
------------ ----------- -----------
Net cash provided by (used in) financing
activities................................. 2,610,000 (2,217,000) (7,440,000)
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................ 7,204,000 (14,290,000) 8,833,000
Cash and cash equivalents at beginning of year....... 11,682,000 25,972,000 17,139,000
------------ ----------- -----------
Cash and cash equivalents at end of year............. $ 18,886,000 $11,682,000 $25,972,000
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................ $ 1,754,000 $ 1,836,000 $ 4,411,000
Income taxes.................................... $ 8,234,000 $ 4,028,000 $ 2,364,000
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE> 38
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BACKGROUND
Insurance Auto Auctions, Inc. (the Company) provides insurance companies
and other vehicle suppliers cost-effective salvage processing solutions
including selling total loss and recovered theft vehicles. The Company operates
in a single business segment.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue (including vehicle sales and fee income) is recognized upon payment
by the buyer for the auctioned vehicle. Certain fee income, including towing,
vehicle enhancements and storage is recognized as earned.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist principally of commercial paper. The Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
The Company's short-term investment securities are principally instruments
of state governments, agencies and municipalities. All short-term investment
securities are classified as trading securities and are carried at fair value.
INVENTORIES
Inventories are stated at the lower of cost or estimated realizable value.
Cost includes the cost of acquiring ownership of total loss and recovered theft
vehicles, charges for towing and, less frequently, reconditioning costs. The
costs of inventories are charged to operations based upon the
specific-identification method.
The Company has agreements to purchase total loss and recovered theft
vehicles from insurance companies for a percentage of the vehicle's actual cash
value. The Company has acquired the majority of its inventory pursuant to these
contracts.
ASSET IMPAIRMENT
As part of an ongoing review of the valuation and amortization of assets,
management assesses the carrying value of the Company's assets if facts and
circumstances suggest that such assets may be impaired. If this review indicates
that the assets will not be recoverable, as determined by an undiscounted cash
flow analysis over the remaining amortization period, the carrying value of the
Company's assets would be reduced to their estimated fair market value.
USE OF ESTIMATES
The Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial
38
<PAGE> 39
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
statements in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the related assets ranging from three
to ten years. Leasehold improvements are amortized on a straight-line basis over
their estimated economic useful life or the life of the lease, whichever is
less.
Intangible assets, principally goodwill, are amortized over periods of 15
to 40 years on a straight-line basis. Accumulated amortization at December 31,
1999 and 1998 was $22,651,000 and $18,854,000, respectively.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss and tax credit carry forwards.
CREDIT RISK
The Company sells its vehicles principally to customers throughout the
United States under the purchase-agreement method, the fixed-fee-consignment
method and the percentage-of-sale-consignment method. Vehicles are sold
generally for cash; therefore, very little credit risk is incurred from the
selling of vehicles. Receivables arising from advance charges made on behalf of
vehicle suppliers, most of which are insurance companies, are generally
satisfied from the net proceeds payable to the vehicle suppliers. A small
percentage of vehicles sold do not have sufficient net proceeds to satisfy the
related receivables, and in these cases, the receivable is due from the vehicle
suppliers. Management performs regular evaluations concerning the ability of its
customers and suppliers to satisfy their obligations and records a provision for
doubtful accounts based upon these evaluations. The Company's credit losses for
the periods presented are insignificant and have not exceeded management's
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate fair value as of
December 31, 1999 and 1998. The carrying amounts related to cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to the relatively short maturity of such instruments. The fair value of
long-term debt is estimated by discounting the future cash flows of each
instrument at rates currently available to the Company for similar debt
instruments of comparable maturities by the Company's bankers. Investments are
classified as trading securities and are carried at fair value based on quoted
market prices.
STOCK COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (Statement No. 123) permits, but does not require, a
fair-value based method of accounting for employee stock options or similar
equity instruments. Statement No. 123 allows an entity to elect to continue to
measure compensation cost under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APBO No. 25), but requires pro forma
disclosures of net earnings and net earnings per share as if the fair-value
based method of accounting had been applied. The Company measures compensation
cost under APBO No. 25 and complies with the pro forma disclosure requirements.
39
<PAGE> 40
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
statements and notes to consolidated financial statements to conform with the
current year presentation.
(2) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Senior notes payable, unsecured, interest payable in
semiannual installments commencing August 15, 1995 through
maturity at February 15, 2002, at 8.6%, principal due at
maturity.................................................. $20,000,000 $20,000,000
Notes payable issued in connection with a consulting
agreement related to the acquisition of a subsidiary,
unsecured, payable in monthly installments of $16,666,
including interest at 7.5%, with final payment due June
30, 2000.................................................. 103,000 288,000
Notes payable issued in connection with the acquisition of a
subsidiary, unsecured, payable in monthly installments,
including interest at 8%, with final payment due April 1,
2005...................................................... 212,000 243,000
----------- -----------
20,315,000 20,531,000
Less current installments................................... 135,000 216,000
----------- -----------
$20,180,000 $20,315,000
=========== ===========
</TABLE>
Total principal repayments required for each of the next five years under
all long-term debt agreements are summarized as follows:
<TABLE>
<S> <C>
2000........................................................ $ 135,000
2001........................................................ 37,000
2002........................................................ 20,040,000
2003........................................................ 43,000
2004........................................................ 47,000
Thereafter.................................................. 13,000
-----------
$20,315,000
===========
</TABLE>
The Senior Notes and line of credit require the Company to comply with
certain covenants such as maintenance of net worth and limitations on debt. As
of December 31, 1999, the Company was in compliance with these covenants.
The Company has a revolving line of credit facility with LaSalle National
Bank. The $15,000,000 facility is unsecured, bears interest at the bank's prime
rate or LIBOR, as defined, and expires on April 1, 2001.
40
<PAGE> 41
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) INVESTMENTS
At December 31, 1999 and 1998, the Company has classified all investment
securities as trading securities. The investments are carried at fair value
which is not materially different from amortized cost.
Maturities of investment securities classified as trading securities were
as follows:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
STATE GOVERNMENT OBLIGATIONS:
Due within one year.................................. $6,845,000 $ 1,173,000
Due after one year through ten years................. 5,736,000 1,562,000
Due after ten years.................................. 5,900,000 4,451,000
---------- -----------
Total................................................ $18,481,000 $ 7,186,000
---------- -----------
OTHER:
Due within one year.................................. $ -- $ 1,252,000
Due after one year through ten years................. -- --
Due after ten years.................................. -- 2,700,000
---------- -----------
Total................................................ $ -- $ 3,952,000
---------- -----------
Total Investments.................................... $18,481,000 $11,138,000
========== ===========
</TABLE>
(4) INCOME TAXES
Income taxes are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................. $8,088,000 $3,528,000 $2,853,000
State.................................... 1,323,000 569,000 329,000
---------- ---------- ----------
9,411,000 4,097,000 3,182,000
---------- ---------- ----------
Deferred:
Federal.................................. 42,000 1,318,000 427,000
State.................................... 47,000 227,000 220,000
---------- ---------- ----------
89,000 1,545,000 647,000
---------- ---------- ----------
$9,500,000 $5,642,000 $3,829,000
========== ========== ==========
</TABLE>
Deferred income taxes are comprised of the effects of the components listed
below. A valuation allowance has been recorded to reduce deferred tax assets for
which the Company believes a tax benefit will not be realized.
41
<PAGE> 42
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets attributable to:
Depreciation...................................... $ 2,637,000 $ 1,778,000
State net operating loss.......................... 915,000 866,000
Inventories....................................... 548,000 447,000
Other............................................. 999,000 603,000
Valuation allowance............................... (761,000) (718,000)
----------- -----------
Net deferred tax assets........................... 4,338,000 2,976,000
Deferred tax liabilities attributable to:
Intangible assets................................. (8,605,000) (7,154,000)
----------- -----------
Net deferred tax liabilities...................... $(4,267,000) $(4,178,000)
=========== ===========
</TABLE>
The actual income tax expense differs from the "expected" tax expense
computed by applying the Federal corporate tax rate to earnings before income
taxes as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
"Expected" income taxes.................... $$7,890,000 $4,360,000 $2,830,000
State income taxes, net of Federal
benefit.................................. 895,000 484,000 254,000
Amortization of intangible assets.......... 358,000 354,000 353,000
Other...................................... 357,000 444,000 392,000
---------- ---------- ----------
$$9,500,000 $5,642,000 $3,829,000
========== ========== ==========
</TABLE>
(5) EMPLOYEE BENEFIT PLANS
The Company adopted the Insurance Auto Auctions, Inc. 1991 Stock Option
Plan (the 1991 Plan), as amended, presently covering 1,350,000 shares of the
Company's common stock. The 1991 Plan provides for the grant of incentive stock
options to key employees and nonqualified stock options and stock appreciation
rights to key employees, directors, consultants and independent contractors. The
1991 Plan expires September 26, 2001. In general, new nonemployee directors will
automatically receive grants of nonqualified options to purchase 10,000 shares
and subsequent grants to purchase 2,000 shares at specified intervals.
During 1995, the Company adopted the Insurance Auto Auctions, Inc.
Supplemental Stock Option Plan (the 1995 Plan) covering 200,000 shares of the
Company's common stock. The 1995 Plan provides for the grant of nonqualified
stock options to employees, other than executive officers, and consultants and
other independent advisors who provide services to the Company. The 1995 Plan
will expire on October 1, 2005.
Under both plans, as of December 31, 1999, options to purchase an aggregate
of 1,087,183 shares were outstanding at a weighted average exercise price of
$15.009 per share and 116,897 shares remained available for future grant.
42
<PAGE> 43
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Activity under the plans for the years ended December 31, 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
1999 EXERCISE 1998 EXERCISE 1997 EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year....................... 1,195,000 $ 14.21 1,086,000 $21.59 1,082,000 $21.85
Options granted............ 188,000 12.99 586,000 11.43 43,000 8.93
Options canceled........... (61,000) 14.52 (461,000) 28.13 (30,000) 21.92
Options exercised.......... (235,000) 9.52 (16,000) 7.00 (9,000) 7.00
--------- --------- --------- ------ --------- ------
Balance at end of year....... 1,087,000 $ 15.01 1,195,000 $14.21 1,086,000 $21.59
========= ========= ========= ====== ========= ======
Options exercisable at end of
year....................... 780,000 572,000 770,000
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ----------------------------
WEIGHTED AVERAGE
---------------------------
REMAINING
RANGE OF NUMBER OF CONTRACTUAL LIFE EXERCISE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS (IN YEARS) PRICE OPTIONS EXERCISE PRICE
-------------- --------- ---------------- -------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 7.00 to
$10.00........ 120,000 6.16 $ 7.91 112,000 $ 7.81
10.38 to
13.50........ 686,000 5.12 11.62 409,000 11.41
14.13 to
23.25........ 115,000 4.20 18.09 93,000 18.75
28.63 to
37.50........ 166,000 166,000
--------- 4.34 31.98 ------- 31.98
$ 7.00 to
$37.50........ 1,087,000 780,000
========= 5.02 $15.01 ======= $16.15
</TABLE>
The Company applies APBO No. 25 in accounting for its plans, and
accordingly, no compensation cost has been recognized for any stock options in
the accompanying Consolidated Financial Statements. Had the Company determined
compensation expense based upon the fair value at the date of grant, as
determined under Statement No. 123, the Company's net earnings and net earnings
per share would have been reduced to the pro forma amounts as summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Pro forma earnings........................ $12,329,000 $$6,554,000 $4,170,000
=========== ========== ==========
Pro forma earnings per share.............. $ .
Basic................................... $ 1.08 $ $.58 $ .37
=========== ========== ==========
Diluted................................. $ 1.06 $ $.57 $ .37
=========== ========== ==========
</TABLE>
The per share weighted average fair value of stock options granted during
1999, 1998 and 1997 was $7.82, $5.86 and $4.60, respectively, based upon a grant
date valuation using the Black-Scholes option pricing model with the following
weighted average assumptions in 1999, 1998 and 1997 expected dividend yield of
0.0%, expected volatility of .63, .61 and .64, respectively; risk-free interest
rate of 6.4%, 5.5% and 5.7%, respectively; and an average expected option life
of 5.4, 5.7 and 4.5 years, respectively.
The pro forma net earnings and earnings per share reflect only those
options granted since January 1, 1995. Therefore, the full impact of calculating
compensation cost for stock options under Statement No. 123 is not reflected in
the pro forma net earnings and earnings per share presented above because
compensation cost
43
<PAGE> 44
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
is generally recorded over the options' vesting period, generally four years,
and compensation cost for options granted prior to January 1, 1995 is not
considered.
The Company has a 401(k) defined contribution plan covering all full-time
employees. Plan participants can elect to contribute up to 15% of their gross
payroll. Company contributions are determined at the discretion of the Board of
Directors and during the years ended December 31, 1999, 1998 and 1997, were
matched 100% up to 4% of eligible earnings. Company contributions to the plan
during the years ended December 31, 1999, 1998 and 1997 were approximately
$464,000, $479,000 and $381,000, respectively.
(6) RELATED PARTY TRANSACTIONS
During the years ended December 31, 1999 and 1998, the Company recorded fee
income of $5,437,000 and $4,700,000, respectively, related to the consignment
sale of vehicles insured by Allstate and recorded sales of $35,044,000 and
$35,700,000, respectively, and cost of sales of $31,643,000 and $32,500,000,
respectively, related to the purchase of Allstate-insured vehicles under the
purchase-agreement method.
(7) COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating
leases with related and nonrelated parties, which expire through December 2009.
Rental expense for the years ended December 31, 1999, 1998 and 1997,
respectively, aggregated $12,177,000, $9,935,000 and $10,035,000, respectively,
(of which $1,110,000, $1,031,000 and $966,000 pertained to leases with related
parties in 1999, 1998 and 1997, respectively).
Minimum annual rental commitments for the next five years under
noncancelable leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
UNRELATED RELATED
PARTY PARTY
--------- -------
<S> <C> <C>
Year ending December 31:
2000............................................... $ 9,096,000 $ 971,000
2001............................................... 7,903,000 971,000
2002............................................... 7,420,000 526,000
2003............................................... 5,875,000 248,000
2004............................................... 3,764,000 248,000
Thereafter......................................... 3,444,000 207,000
----------- ----------
$37,502,000 $3,171,000
=========== ==========
</TABLE>
The Company has purchase agreements with certain insurance company
suppliers, which expire at various intervals over the next two years. The
Company's largest supplier accounted for 16% of the Company's supply of vehicles
sold in 1999, 17% in 1998 and 19% in 1997. The second largest supplier accounted
for 14%, 13% and 10% of the Company's supply of vehicles sold in 1999, 1998 and
1997, respectively. A third supplier accounted for 13%, 14% and 17% of the
Company's supply of vehicles sold in 1999, 1998 and 1997, respectively.
The Company has compensation agreements with certain officers and other key
employees.
The Company is subject to certain other miscellaneous legal claims, which
have arisen during the ordinary course of its business. None of these claims are
expected to have material adverse effect on the Company's financial condition or
operating results.
44
<PAGE> 45
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(8) ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATIONS
In connection with the acquisition of the capital stock of Underwriters
Salvage Company (USC), the Company assumed the obligation for certain health
care and death benefits for retired employees of USC. In accordance with the
provisions of Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," costs related to
the benefits are accrued over an employee's service life.
A one-percentage point increase or decrease in the assumed health care cost
trend rate for each future year would not have a material impact on the
Accumulated Postretirement Benefit Obligation or the income recognized relative
to the Plan in 1999. The assumed discount rate used to determine the Accumulated
Postretirement Benefit Obligation (APBO) as of December 31, 1999 and 1998 was
7.8% and 6.5%, respectively. The Company recorded income of approximately
$169,000, $168,000 and $162,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
The Accumulated Postretirement Benefit Obligation (APBO) is a measure of
the plan's liability, equivalent to the Projected Benefit Obligation used in
pension accounting. The APBO is a factor in the expense calculation and is
included in the footnote disclosure. For retirees, it is the present value of
all benefits expected to be paid from the plan.
Reconciliation of funded status as of December 31,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Medical............................................. $ (840,000) $ (927,000)
Life Insurance...................................... (327,000) (361,000)
----------- -----------
Total APBO.......................................... (1,167,000) (1,288,000)
Plan assets......................................... -- --
----------- -----------
Funded status....................................... (1,167,000) (1,288,000)
Unrecognized net loss from past experience.......... (2,011,000) (2,197,000)
----------- -----------
Accrued postretirement benefit cost................. $(3,178,000) $(3,485,000)
=========== ===========
Reconciliation of accumulated postretirement benefit
cost:
Accrued benefit cost.............................. $(3,513,000) $(3,831,000)
Income............................................ 169,000 168,000
Contributions/premium paid........................ 166,000 178,000
----------- -----------
Accumulated postretirement benefit cost, December
31,............................................ $(3,178,000) $(3,485,000)
=========== ===========
</TABLE>
Effective January 20, 1994, the date of acquisition, the Company
discontinued future participation for active employees.
(9) 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.
45
<PAGE> 46
INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 current competencies, geographic presence and assets. The $990,000 cost
of the project was recorded as a special charge in first quarter 1998.
During the second quarter of 1997, the Company settled a securities class
action lawsuit that had been pending against the Company and certain of its
present and former officers and directors, in the United States District Court
for the Central District of California. The litigation was settled for $3.75
million, the substantial portion of which was paid by the Company's directors
and officers liability insurance company. The difference of $750,000 was
recognized as a special charge to earnings in the second quarter of 1997. In
February 1998, the settlement was approved by the court.
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited financial data for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
1999:
Net sales............................... $79,878,000 $82,531,000 $77,014,000 $77,968,000
Gross profit............................ 19,937,000 22,695,000 20,549,000 20,261,000
Earnings from operations................ 5,363,000 7,547,000 5,405,000 5,589,000
Net earnings............................ 2,853,000 4,257,000 3,186,000 3,409,000
Basic earnings per share................ $ .25 $ .37 $ .28 $ .29
Diluted earnings per share.............. $ .25 $ .37 $ .27 $ 29
=========== =========== =========== ===========
1998:
Net sales............................... $68,558,000 $75,400,000 $70,047,000 $73,058,000
Gross profit............................ 16,466,000 19,026,000 16,782,000 18,035,000
Earnings from operations................ 1,963,000 4,938,000 3,197,000 3,983,000
Net earnings............................ 869,000 2,497,000 1,563,000 2,252,000
Diluted earnings per share(1)........... $ .08 $ .22 $ .14 $ .20
=========== =========== =========== ===========
</TABLE>
- ---------------
(1) Basic earnings per share is not presented separately as it is the same as
diluted earnings per share for each quarter of 1998.
46
<PAGE> 47
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. PAGE
- ------- ------------
<C> <S> <C>
Third amendment to Revolving Credit Agreement dated as of
10.153 March 16, 2000
Amendment dated as of November 18, 1999 to the Consulting
10.157 Agreement between
the Company and Thomas J. O'Malia
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
24.1 Power of Attorney
27.1 Financial Data Schedule
</TABLE>
47
<PAGE> 1
EXHIBIT 10.153
THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT
THIS THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT (the "Amendment"),
dated as of March 16, 2000, is entered into by and between LASALLE BANK
NATIONAL ASSOCIATION, a national banking association ("Lender"), successor by
merger to LaSalle National Bank, a national banking association ("Old LaSalle")
and INSURANCE AUTO AUCTIONS, INC., an Illinois corporation ("Borrower"),
successor by merger to Insurance Auto Auctions, Inc., a California corporation
("Old Borrower").
WHEREAS, Old LaSalle and Lender have previously made available to Borrower
and Old Borrower a credit facility pursuant to the terms and conditions of that
certain Revolving Credit Agreement, dated as of April 4, 1997, by and between
Old LaSalle and Old Borrower, as amended by an Amendment To Revolving Credit
Agreement dated as of December 1, 1997, and the Second Amendment to Revolving
Credit Agreement dated as of April 6, 1998, which, together with all exhibits
and schedules thereto and amendments and modifications thereof made in
accordance with the terms thereof, if any, is hereinafter referred to as the
"Loan Agreement"; and
WHEREAS, pursuant to the Loan Agreement, Old LaSalle and Lender have
extended certain loans and credit extensions to Old Borrower and Borrower; and
WHEREAS, Borrower has requested that Lender amend the Loan Agreement
extend the Revolving Commitment Termination Date; and
WHEREAS, Lender is willing to amend the Loan Agreement but only on the
terms and conditions set forth in this Amendment; and
WHEREAS, capitalized terms used but not defined herein have the meanings
assigned to such terms in the Loan Agreement.
NOW, THEREFORE, in consideration of the premises, to induce Lender to
enter into this Amendment, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, it is hereby agreed
by each party hereto as follows:
Section 1. Amendment of the Loan Agreement. It is hereby agreed and
understood that, subject to the complete fulfillment and performance of the
conditions precedent set forth in Section 4 of this Amendment, the Loan
Agreement is hereby amended to extend the Revolving Commitment Termination
Date from April 1, 2000, to April 1, 2001. Without limitation of the
generality of the foregoing, the date "April 1, 2000" in the defined term
"Revolving Commitment Termination Date" contained in Section 1.01 of the Loan
Agreement is hereby replaced with the date "April 1, 2001".
<PAGE> 2
Section 2. Merger of Old LaSalle into Lender. Borrower acknowledges that
Old LaSalle was merged into Lender effective as of May 1, 1999, and that by
virtue of such merger, Lender is the successor by merger to all of the rights
and obligations of Old LaSalle under the Loan Agreement and the other Loan
Documents.
Section 3. Merger of Old Borrower into Borrower. Lender and Borrower
acknowledge that Old Borrower was merged into Borrower effective as of August
20, 1997, and that by virtue of such merger, Borrower is the successor by
merger to all of the rights and obligations of Old Borrower under the Loan
Agreement and the other Loan Documents.
Section 4. Conditions Precedent. The effectiveness of this Amendment and
the obligations of Lender hereunder are subject to the satisfaction, or waiver
by Lender, of the following conditions precedent on or before the date hereof
in addition to the conditions precedent specified in Section 3.02 of the Loan
Agreement:
A. Borrower shall have paid and/or reimbursed all fees, costs and expenses
relating to this Amendment and owed to Lender pursuant to the Loan Agreement,
if so requested by Lender; and
B. Borrower shall have delivered, or caused to be delivered, original
fully completed, dated and executed originals of this Amendment to Lender.
C. The following statements shall be true and correct and Borrower, by
executing and delivering this Amendment to Lender, hereby certifies that the
following statements are true and correct as of the date hereof:
i. Other than as expressly contemplated by this Amendment,
since the date of the most recent financial statements furnished by
Borrower to Lender (which financial statements were true and
correct in all material respects and otherwise conformed to the
requirements set forth in the Loan Agreement for such financial
statements), there shall have been no change which has had or will
have a material adverse effect on the business, operations,
properties, condition (financial or otherwise) or prospects of
Borrower;
ii. The representations and warranties of Borrower set forth
in the Loan Agreement and of Borrower set forth in this Amendment
are true and correct in all material respects on and as of the date
of this Amendment with the same effect as though made on and as of
such date, except to the extent such representations and warranties
expressly relate to an earlier date;
iii. After giving effect to this Amendment, no Default or
Event of Default has occurred and is continuing; and
2
<PAGE> 3
iv. No consents, licenses or approvals are required in
connection with the execution, delivery and performance by Borrower
of this Amendment or the validity or enforceability against
Borrower of this Amendment which have not been obtained and
delivered to Lender.
Section 5. Miscellaneous.
A. Except as expressly amended and modified by this Amendment, the Loan
Agreement and the Loan Documents are and shall continue to be in full force and
effect in accordance with the terms thereof.
B. This Amendment may be executed by the parties hereto in counterparts,
and all of such counterparts taken together shall be deemed to constitute one
and the same instrument.
C. This Amendment shall be construed in accordance with and governed by
the internal laws, and not the laws of conflict, of the State of Illinois.
D. The headings contained in this Amendment are for ease of reference only
and shall not be considered in construing this Amendment.
[SIGNATURE PAGE(S) AND EXHIBITS, IF ANY,
FOLLOW THIS PAGE]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
Revolving Credit Agreement to be duly executed as of the date first above
written.
INSURANCE AUTO AUCTIONS, INC.
By: /s/ Stephen L. Green
---------------------------------
Title: Vice President, Finance & CFO
-----------------------------
LASALLE BANK NATIONAL ASSOCIATION
By: /s/ Kate H. Hammond
---------------------------------
Title: Assistant Vice President
-----------------------------
4
<PAGE> 1
Exhibit 10.157
FIRST AMENDMENT TO CONSULTING AGREEMENT BETWEEN
INSURANCE AUTO AUCTIONS, INC., AND THOMAS J. O'MALIA
EFFECTIVE AS OF DECEMBER 1, 1998
This First Amendment dated as of November 18, 1999 (the "Amendment") to the
Consulting Agreement between Insurance Auto Auctions, Inc. (the "Company"), and
Thomas J. O'Malia (the "Consultant") effective December 1, 1998 (the
"Agreement").
WHEREAS, Consultant is currently serving as Chairman of the Board of Directors
of the Company; and
WHEREAS, the Company and Consultant desire to amend the Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements set forth
herein and in the Agreement, the sufficiency of which is hereby acknowledged,
the parties amend the Agreement as follows:
1. Section 4(a)(ii) of the Agreement is amended by deleting that section in
its entirety and replacing it with the following:
4(a)(ii) For each succeeding year of the
term of the Agreement, the Company will pay
Consultant for his services performed under
this Agreement at the rate of $100,000 per
year, payable quarterly, in equal
installments at the end of each quarter.
Except as expressly amended and modified by this Amendment, the Agreement shall
continue to be in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
day and year first above written.
INSURANCE AUTO AUCTIONS, INC.
By: /s/ C. G. Knowles
------------------------
Its: CEO
-----------------------
CONSULTANT
/s/ T. J. O'Malia
-----------------------------
<PAGE> 1
Exhibit 21.1
Subsidiaries of Insurance Auto Auctions, Inc.
<TABLE>
<CAPTION>
Jurisdiction
Name of Incorporation
-------------------------------------------- ----------------
<S> <C>
Insurance Auto Auctions Corp. (wholly owned) Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
Consent of KPMG LLP
Board of Directors
Insurance Auto Auctions
We consent to incorporation by reference in the registration statement
No. 33-48805 on Form S-8 of Insurance Auto Auctions, Inc. of our report dated
February 15, 2000 relating to the consolidated balance sheets of Insurance Auto
Auctions, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of earnings, shareholder's equity, and cash
flows for each of the years in the three-year period ended December 31, 1999,
which report appears in the December 31, 1999 annual report on Form 10-K of
Insurance Auto Auctions, Inc.
/s/ KPMG LLP
Chicago, Illinois
March 28, 2000
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
The undersigned directors of Insurance Auto Auctions, Inc. (the
"Corporation"), hereby appoint Christopher G. Knowles and Gaspare G. Ruggirello
as their true and lawful attorney-in-fact, with full power for and on their
behalf to execute, in their names and capacities as directors of the
Corporation, and to file with the Securities and Exchange Commission on behalf
of the Corporation under the Securities Exchange Act of 1934, as amended, the
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
This Power of Attorney shall automatically terminate at the close of
business on March 31, 2000.
In witness whereof, the undersigned has executed this Power of Attorney on
this 1st day of March, 2000.
<TABLE>
<CAPTION>
NAME TITLE
- -------------------------- -----
<S> <C>
/s/ Thomas J. O'Malia Chairman of the Board
- --------------------------
Thomas J. O'Malia
/s/ Christopher G. Knowles Director and CEO
- --------------------------
Christopher G. Knowles
/s/ Maurice A. Cocca Director
- --------------------------
Maurice A. Cocca
/s/ Susan B. Gould Director
- --------------------------
Susan B. Gould
/s/Peter H. Kamin Director
- --------------------------
Peter H. Kamin
/s/ Melvin R. Martin Director
- --------------------------
Melvin R. Martin
/s/Joseph F. Mazzella Director
- --------------------------
Joseph F. Mazzella
/s/ John K. Wilcox Director
- --------------------------
John K. Wilcox
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> OCT-01-1999 JAN-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 18,886,000 18,886,000
<SECURITIES> 18,481,000 18,481,000
<RECEIVABLES> 40,188,000 40,188,000
<ALLOWANCES> 0 0
<INVENTORY> 11,998,000 11,998,000
<CURRENT-ASSETS> 91,208,000 91,208,000
<PP&E> 50,983,000 50,983,000
<DEPRECIATION> 23,525,000 23,525,000
<TOTAL-ASSETS> 248,132,000 248,132,000
<CURRENT-LIABILITIES> 40,883,000 40,883,000
<BONDS> 20,180,000 20,180,000
0 0
0 0
<COMMON> 12,000 12,000
<OTHER-SE> 134,996,000 134,996,000
<TOTAL-LIABILITY-AND-EQUITY> 248,132,000 248,132,000
<SALES> 77,968,000 317,391,000
<TOTAL-REVENUES> 77,968,000 317,391,000
<CGS> 57,707,000 233,949,000
<TOTAL-COSTS> 57,707,000 233,949,000
<OTHER-EXPENSES> 14,672,000 59,538,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 491,000 1,970,000
<INCOME-PRETAX> 5,435,000 23,205,000
<INCOME-TAX> 2,044,000 9,500,000
<INCOME-CONTINUING> 3,409,000 13,705,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,409,000 13,705,000
<EPS-BASIC> 0.29 1.20
<EPS-DILUTED> 0.29 1.18
</TABLE>
