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Letter to the Editor

Insurance Auto Auctions Announces Q4 Results

Revenues for the quarter were $51.1 million compared with $52.4 million in the fourth quarter of 2002. The decline in revenues was primarily due to the Company's shift away from vehicles sold under the purchase agreement method and lower volumes on a same-store basis. The purchase agreement method accounted for 4 percent of the total vehicles sold this quarter versus 8 percent for the same quarter one year earlier. 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 fourth quarter increased to $43.5 million versus $39.4 million in the fourth quarter of last year.

"Our fourth quarter results were in-line with our internal expectations," said Tom O'Brien, CEO. "As the quarter progressed, we were also encouraged by signs of a strengthening operating environment, which included higher incoming volumes and higher proceeds for our customers, and positive market share trends. Finally, during the quarter we completed the conversion of our eagerly anticipated IT system throughout the organization, which we expect to drive additional efficiencies and profits for IAA going forward."

The company reported full-year 2003 net earnings of $2.3 million, or $0.20 per diluted share, versus net earnings of $4.0 million, or $0.32 cents per diluted share, for 2002. The primary reasons for the decline included higher-than-expected business transformation costs during the year associated with the new IT system and lower volumes, consistent with industry trends.

Revenues for the year were $209.7 million, a 10 percent decline from revenues of $234.2 million in 2002. Similar to the fourth quarter, the decline in annual revenues was primarily attributable to the change in revenue mix, stemming from the move away from the purchase agreement method of sale. For the year, the purchase agreement method accounted for 6 percent of the total vehicles sold versus 10 percent in 2002.

"The past year, which represented a period of continued transition and overall improvement at IAA, was extremely difficult due to challenges related to rolling out the new system and lower industry volumes," said O'Brien. "While our financial results were clearly below our original expectations, we met our revised full-year guidance estimates and remained profitable throughout a difficult market. We also demonstrated positive market share trends that bode well for the future. We added eight new branches during the year and continued to invest in our existing infrastructure in order to grow the profitability of our core business. Furthermore, we completed the Company's largest infrastructure enhancement ever with the implementation of our new industry-wide IT system, significantly changing the face of IAA for the better. This specific initiative took more than two years to complete and will help drive better products and services for our customers in the quarters ahead."

"The strategic initiatives that we executed on over the past year have put IAA in a much stronger competitive position than it was a year ago," said O'Brien. "Our technology system is already contributing to better visibility for our management team and employees and, as a result, we are now able to better meet the needs of our customers. Furthermore, we continued to show our commitment to cost effectively expanding the business through the addition of new facilities and made the necessary investment to keep our existing operations up-to-date. Each of these achievements makes IAA a more attractive partner for both our insurance company suppliers and our buyers."

Remaining committed to its strategic expansion strategy, IAA announced eight new facilities in 2003, bringing the company's branch total to 74 facilities at year-end. New greenfield facilities were announced in Dothan, Alabama, and Little Rock, Arkansas, each of which cost effectively leverages the Company's existing regional coverage. IAA also announced acquisitions in Buffalo and Rochester, New York, Wilmington, North Carolina, Wichita, Kansas, Orlando, Florida and Salt Lake City, Utah. Most recently, IAA announced a new greenfield facility in Tucson, Arizona.

"In the coming months we will be placing a major focus on fully leveraging the new IT system that we have spent such a considerable amount of time and money developing and rolling out throughout the organization," said O'Brien. "We are already recognizing its benefits from a visibility and customer service standpoint, and the anticipated cost savings are also beginning to present themselves. In addition, we will continue to invest in our existing facilities and will attempt to identify new expansion opportunities that offer our shareholders an acceptable return on their investment."

O'Brien concluded, "Although the past two years have been very challenging due to the massive transformation we underwent as a company, IAA has been strengthened considerably as a result of our efforts. Now that the Company's foundation has been solidified, we are excited about the new opportunities that will arise with our enhanced technology and infrastructure, combined with our unwavering focus on providing excellent customer service. Recent customer wins have demonstrated that our customers are accepting our improved operations and receptive of our enhanced service offerings, and we hope to see that trend continue as we become even stronger. In light of that, we are on track to hit or exceed our 15 cent earnings target for the first quarter. We are very excited about our future and believe IAA is well positioned to compete and generate higher returns for both our customers and our shareholders over the long term."

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