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Letter to the Editor

Insurance Auto Auctions Q3 Vehicle Sales Up 8%

Gross vehicle sales proceeds for the third quarter of 2002 were $181.5 million, up $13.6 million or 8.1 percent from the same quarter of last year. Revenues for the quarter decreased 25.6 percent to $52.8 million compared with $71.0 million in the third quarter of 2001. The decline in revenues was primarily due to the Company's continued shift away from vehicles sold under the purchase agreement method. The purchase agreement method accounted for 7.8 percent of the total vehicles sold during the third quarter versus 18.4 percent for the same quarter one year ago. Under the purchase agreement method, the entire purchase price of the vehicle is recorded as revenue, compared to the lower-risk, consignment fee-based arrangements, where only the fees collected on the sale of the vehicle are recorded as revenue. Fee income in the third quarter rose 2.6 percent to $39.3 million versus $38.3 million in the third quarter of last year.

Excluding the impact of business transformation costs and goodwill amortization from both years, earnings from operations for the quarter totaled $3.2 million compared to $1.7 million last year. The Company no longer amortizes goodwill arising from business acquisitions. The effect on the current quarter was a reduction in amortization expense of approximately $0.9 million.

Tom O'Brien, Chief Executive Officer, said, "The strategic initiatives we set in motion over a year ago have really begun to take root, and the positive impact is evident in our financial results for the quarter. The third quarter was yet another period of stable cash flow and earnings, and our third consecutive quarter of profitability even after business transformation costs. In addition, the new business operating procedures are in full swing, the new system installation is well underway and purchase agreements continue to make up a smaller percentage of our revenue stream."

O'Brien added, "Purchase agreement contracts continued to decline as a percentage of overall sales in the quarter, with that method of sale representing less than eight percent of total sales during the quarter. We are confident that vehicles sold under purchase agreements will fall under 10 percent for the year. We also took the final step to exit our remaining purchase agreements and are happy to report that we do not expect any loss of volume associated with the transition away from these agreements."

The third quarter marked the first full quarter in which the new operating procedures, developed as part of the business process re-engineering project, were in place throughout the organization. IAA has adopted these new "best practices" in order to standardize operations and create efficiencies, all in an effort to eliminate unnecessary costs and provide better service to customers. The changes are apparent in the quarterly results which reflect lower branch and operating expenses. During the third quarter, Synergetics also helped transition the project to IAA's own operational audit group to ensure compliance and a mechanism for continuous improvement.

On the systems front, O'Brien said, "This quarter we made significant strides in installing the new system. We have successfully converted 9 of our 28 databases and are live on the new system in those markets. Data conversion has gone better than expected and we are extremely pleased with the system's overall capabilities and the visibility it provides to manage our business and meet our customer needs. The deployment of the system, however, has not proceeded as rapidly as originally scheduled for a number of reasons. We have addressed the relevant issues, continue to enhance the system and ultimately will end up with a better product. As a result, we are anticipating completion of the new system implementation in the first quarter of 2003. It is important to note that our experience with the system rollout to date confirms our original projection of $10 to $15 million in annual savings as a result of our combined operations and system initiatives. We also expect the total cost for the new system to be within our earlier estimate of $10 million."

IAA currently operates 66 auction sites across the U.S. In September, IAA announced the opening of a greenfield facility in Baton Rouge, Louisiana.

O'Brien concluded, "This is an exciting time for our customers and our employees. While we have come a long way toward reaching our goal, we remain focused on the tasks at hand and completion of our key initiatives. We are much better positioned for the future from a competitive standpoint than we were a year ago, and we look forward to reporting our progress in the coming quarters."

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