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Letter to the Editor

Insurance Auto Auctions Q4 Revenues Down 16%

SCHAUMBURG, Ill. -- Insurance Auto Auctions, Inc., a provider of automotive salvage and claims processing services in the United States, has reported financial results for the fourth quarter. For the quarter ended December 30, 2001, the company recorded a $0.6 million operating profit before unusual charges and amortization of intangible assets. Including these items, the company reported a net loss for the quarter of $4.7 million, or $(0.39) per share, compared to a net loss of $1.2 million, or $(0.11) per share, in the fourth quarter of 2000. The unusual charges include a $1.2 million provision for losses on inventories acquired under terminated purchase agreement contracts, $2.7 million of business transformation costs, and a $2.0 million special charge primarily comprised of the write-off of certain assets.

Revenues for the quarter decreased 16 percent to $68.7 million compared with $81.8 million in the fourth quarter of 2000. The company explained that the decline in net revenues is primarily due to a change in the revenue mix as the company continues to transition away from the purchase agreement method of sale. Under the purchase agreement method of sale, the entire sales price of the vehicle is recorded as revenue, while under the consignment-fee based arrangements, only the net fees collected on the sale of a vehicle are recorded in net revenue. The reduction in purchase agreement revenue was somewhat offset by an increase in fee revenue during the fourth quarter. Revenues from fees in the fourth quarter increased 17.5 percent to $40.0 million compared to $34.1 million in the fourth quarter of last year as the result of both increased volume and favorable pricing.

Lower operating profits for the quarter, excluding unusual charges and amortization were primarily the result of lower margins realized on the sale of purchase agreement vehicles, and increased operating expenses due in large part to new facilities.

Tom O'Brien, Chief Executive Officer, said, "As we had indicated in our November conference call, we expected to finish the quarter at breakeven at best, before unusual charges. We expect to return to solid profitability in the first quarter with operating profits near last year's level of 16 cents per share, before business transformation costs. We remain committed to further realigning our cost structure and streamlining our operations to become a more efficient organization throughout. So far we are very pleased with the developments in our process redesign and technology initiatives and will continue focusing our efforts in these key areas going forward."

The company's earnings from operations for the year, excluding the impact of unusual charges and amortization, totaled $11.6 million. Net earnings for the year decreased from $10.5 million, or $0.88 per diluted share in 2000, to a net loss of $4.4 million, or $(0.37) per share in 2001.

Revenues for the year were $293.0 million, compared with $333.2 million in 2000, a 12.1 percent decline.

"During the fourth quarter we took some major steps toward exiting the purchase agreement method of sale," said O'Brien. "We exited several major purchase agreement contracts, successfully transitioning these accounts to the consignment-based fee method. These conversions have helped reduce the percentage of purchase agreement assignments in January to 6.3 percent of all vehicles, which is significantly better than our stated goal of 8.0 percent. Compared to total vehicles sold, the percentage of purchase agreement vehicles sold in 2001 and 2000 was 18.8 percent and 26.5 percent, respectively. Although we cannot guarantee we'll retain all unit volume related to these conversions, we are pleased that our revenues are becoming more predictable and, ultimately, should produce higher margins in the future."

In October, Insurance Auto Auctions announced the retention of Synergetics Installations Worldwide to help create standard operating procedures throughout the company, focusing on "best practices" within the auto salvage market. In the fourth quarter, the company completed the development of a new standard operating procedure model with the assistance of Synergetics. This model revolves around eight core industry best practices. The company expects to have this initiative successfully implemented enterprise-wide by the end of the second quarter. As part of this implementation, on-going reviews are planned to ensure compliance with the branch model.

Insurance Auto Auctions is on schedule regarding both timing and cost associated with the enterprise-wide systems redesign project under development. With the hiring of CIO Ed Fares in January 2002, the company has taken steps to align more closely internal resources to support the implementation of the developed application.

In 2001, the company announced the acquisition of Pittsburgh Auto Salvage Services in Pittsburgh, Pennsylvania and Austin Salvage Pool in Austin, Texas. New operations were opened during the year in Philadelphia, Pennsylvania; Albuquerque, New Mexico; Hartford, Connecticut; Longview, Texas and Grand Rapids, Michigan. Each of these new facilities leverages the Company's existing regional coverage.

O'Brien concluded, "2001 marked a year of transition for the company as we diligently focused on executing the strategic initiatives we put in place during the year, including the exit of purchase agreement contracts, the implementation of standard operating procedures, the development of our enterprise-wide system redesign and the continued growth in regional coverage."

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