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Insurance Auto Auctions Announces Second Quarter Results

SCHAUMBURG, Ill., July 26- Insurance Auto Auctions, Inc.,a provider of automotive salvage and claims processing services in the United States, today reported higher net earnings from operations, excluding business transformation costs, for the quarter ended June 30, 2002. The Company recorded net earnings from operations, excluding business transformation costs, of $2.9 million, or $0.23 per diluted share, versus $2.3 million, or $0.19 per diluted share for the same quarter a year ago. Net earnings for the second quarter of 2002, including business transformation costs, were $1.4 million, or $0.11 per diluted share.

Revenues for the quarter decreased 20.8 percent to $59.8 million compared with $75.5 million in the second 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 9.0 percent of the total vehicles sold this quarter versus 20.5 percent for the same quarter a 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 a vehicle are recorded as revenue. Fee income in the second quarter rose 10.6 percent to $42.7 million versus $38.6 million in the second quarter of last year. This change in contract mix, along with increased volumes, contributed to the significant growth in fee income for the quarter. Gross vehicle sales proceeds for the second quarter of 2002 were $196.0 million, up $24.4 million or 14.2 percent from the same quarter last year.

Excluding the impact of business transformation costs and the amortization of goodwill, earnings from operations for the quarter totaled $5.0 million compared to $4.8 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 $1.0 million. Interest expense includes a $0.5 million non-cash charge to recognize the cost of the interest rate swap on the Company's unused credit facility.

Continued Focus on Strategic Initiatives

Tom O'Brien, Chief Executive Officer, said, "We remained focused on executing our stated strategic initiatives during the quarter while maintaining the strong level of service our customers have come to expect. During the quarter, purchase agreement contracts represented less than seven percent of new business and less than ten percent of sales overall. Although our top-line results on a year-over-year basis have declined because of this transition, we firmly believe our revenue stream is less risky and more predictable than it was a year ago."

The new operating procedures developed as part of the business process re- engineering project were implemented in all of the remaining branches during the second quarter. These new "best practices" have been adopted to standardize operations and build operational efficiencies, and have been embraced by IAA's employees. Synergetics will continue to work with the organization during the third quarter to transition the project to IAA's operational audit group and set up an ongoing methodology to ensure that the continuous improvement process becomes a core competency.

O'Brien added, "The new system initiative is still on target. Since the beginning of April, we have conducted comprehensive testing of the new system cooperatively with SEI and our internal training team. It has been tested in a branch environment and is now up and running in our Appleton, Wisconsin branch. We remain extremely excited with the look, feel and capabilities of this new system. Furthermore, data conversion and installation of the second branch is underway, and we are on schedule to have the new system rolled out to the remaining branches during the third and fourth quarters of this year."

"Regarding expansion, we are clearly focused on the business process re- engineering and new system initiatives to provide a solid infrastructure for future growth. We added a branch in Duluth, Minnesota in the second quarter and recently announced an acquisition in Springfield, Missouri. Both branches are consistent with IAA's strategy of leveraging the Company's existing sales and operations expertise to provide better service to both new and existing customers."

O'Brien concluded, "We are pleased to report a second consecutive quarter of solid earnings and cash flow. We are encouraged with our progress to this point, and expect to continue seeing the economic benefits of our efforts regarding these new initiatives over the next two years. The second half of the year is an important time for our business, as we expect to complete both the integration of the new system as well the training and knowledge transfer of the new business processes. Furthermore, we expect the third and fourth quarters to reflect continued improvement relative to the prior year, and we look forward to keeping both our customers and shareholders apprised of our progress in the quarters ahead."

Quarterly Conference Call

The Company previously announced that it will hold its second quarter 2002 results conference call on Friday, July 26 at 11:00 a.m. Eastern Time. To participate by phone, please dial 877-307-4802 and ask to be connected to the Insurance Auto Auctions earnings conference call. Investors may also access the call over the Internet at www.streetevents.com or by visiting IAA's Web site at www.iaai.com . A replay will be available until midnight EST on August 2, 2002. To listen to the replay, please dial 800-642-1687 and enter conference reservation code 4857682 when prompted.

About Insurance Auto Auctions, Inc.

Insurance Auto Auctions, Inc., founded in 1982, a leader in automotive total loss and specialty salvage services in the United States, provides insurance companies with cost-effective, turnkey solutions to process and sell total-loss and recovered-theft vehicles. The Company currently has 65 sites across the United States.

Safe Harbor Statement

This press release 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, projects, targeting, 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 the Company's annual report on Form 10-K for the fiscal year ended December 30, 2001 or subsequent quarterly reports. Among these risks are: accelerated departure from conducting business pursuant to the purchase agreement method of sale, which departure could adversely affect the Company's client base; the ability to successfully renegotiate existing purchase agreement contracts; fluctuations in the actual cash value of salvage vehicles; the quality and quantity of inventory available from suppliers; the ability to pass through increased towing costs; that vehicle processing time will improve; that the Company's towing business will reach forecasted levels of profitability; legislative or regulatory acts; changes in the market value of salvage; competition; the availability of suitable acquisition candidates and greenfield opportunities; the ability to bring new facilities to expected earnings targets; the dependence on key insurance company suppliers; the ability of the Company and its outside consultants to successfully implement standardized key processes throughout the Company's operations as well as the ability to successfully complete the re-design of the Company's information systems, both in a timely manner and according to costs and operational specifications; and the level of energy and labor costs.

Additional information about Insurance Auto Auctions, Inc. is available on the World Wide Web at www.iaai.com .

                        INSURANCE AUTO AUCTIONS, INC.
                               AND SUBSIDIARIES
               Condensed Consolidated Statements of Operations
               (dollars in thousands except per share amounts)

                                  Three Month Periods     Six Month Periods
                                         Ended                   Ended
                                   June 30,  July 1,      June 30,  July 1,
                                    2002       2001         2002      2001
                                      (Unaudited)            (Unaudited)

    Revenues:
      Vehicle sales                $17,059   $36,942      $44,810   $77,159
      Fee income                    42,691    38,572       84,160    76,199
                                    59,750    75,514      128,970   153,358
    Cost of sales:
      Vehicle cost                  14,802    34,727       40,859    71,919
      Branch cost                   33,001    28,896       64,193    58,040
                                    47,803    63,623      105,052   129,959
        Gross profit                11,947    11,891       23,918    23,399

    Operating expense:
      Selling, general and
       administration                6,870     6,965       13,982    14,121
      Amortization of intangible
       assets                           67     1,005          134     2,011
      Business transformation costs  2,237        84        4,186        84
      Special charges                    -         -            -     6,047

      Earnings from operations       2,773     3,837        5,616     1,136

    Other (income) expense:
      Interest expense                 476       456          724       912
      Interest income                  (82)     (315)        (139)     (683)

      Earnings before income taxes   2,379     3,696        5,031       907

    Provision for income taxes       1,023     1,525        2,163       381

        Net earnings                $1,356    $2,171       $2,868      $526

    Earnings per share:
      Basic                          $ .11     $ .18        $ .23     $ .04
      Diluted                        $ .11     $ .18        $ .23     $ .04

    Weighted average shares
     outstanding:
    Basic                           12,226    11,792       12,212    11,761
    Effect of dilutive securities
     - stock options                   357       148          305       208
    Diluted                         12,583    11,940       12,517    11,969

    Other data
    Gross proceeds                $196,016  $171,632     $391,152  $343,454


                        INSURANCE AUTO AUCTIONS, INC.
                               AND SUBSIDIARIES

                    Condensed Consolidated Balance Sheets
               (dollars in thousands except per share amounts)

                                                    June 30,     December 30,
                                                      2002           2001
    ASSETS                                         (Unaudited)

    Current assets:
      Cash and cash equivalents                      $18,649        $24,467
      Accounts receivable, net                        43,319         54,674
      Inventories                                      9,129         13,505
      Short-term investments                               -          2,131
      Other current assets                             3,302          4,165
        Total current assets                          74,399         98,942

    Property and equipment, net                       43,614         39,240
    Deferred income taxes                              7,686          7,827
    Investments in marketable securities                   -            512
    Intangible assets, net                             1,483          1,617
    Goodwill, net                                    129,603        129,522
    Other assets                                         135            544

                                                    $256,920       $278,204

    LIABILITIES AND SHAREHOLDERS' EQUITY

    Current liabilities:
      Accounts payable                               $33,039        $41,451
      Accrued liabilities                             10,922         10,920
      Accrued special charges                          1,025          1,245
      Obligations under capital leases                   782              -
      Current installments of long-term debt              42         20,040
        Total current liabilities                     45,810         73,656

    Deferred income taxes                             13,436         12,172
    Other liabilities                                  3,484          3,279
    Obligation under capital leases                    1,455              -
    Long-term debt, excluding current installments        81            103
        Total liabilities                             64,266         89,210

    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 12,232,459 and 12,162,290 shares
     as of June 30, 2002 and December 30, 2001,
     respectively                                         12             12
    Additional paid-in capital                       143,476        142,575
    Accumulated other comprehensive income (loss)       (109)             -
    Retained earnings                                 49,275         46,407
        Total shareholders' equity                   192,654        188,994

                                                    $256,920       $278,204


                        INSURANCE AUTO AUCTIONS, INC.
                               AND SUBSIDIARIES
               Condensed Consolidated Statements of Cash Flows
                            (dollars in thousands)

                                                        Six Months Ended
                                                      June 30,       July 1,
                                                       2002           2001
                                                           (Unaudited)
    Cash flows from operating activities:
    Net earnings (loss)                               $2,868           $526
    Adjustments to reconcile net earnings
    (loss) to net cash provided by operating
     activities:
      Depreciation and amortization                    4,275          4,975
      Loss (gain) on disposal of fixed assets             34           (388)
      Loss on change in fair market value
       of derivative                                     472              -
      Special charges                                      -          6,047
      Changes in assets and liabilities
       (net of effects of acquired companies):
      (Increase) decrease in:
         Accounts receivable, net                     11,355          2,756
         Inventories                                   4,376         (4,525)
         Other current assets                            863         (1,387)
         Other assets                                    438             52
      Increase (decrease) in:
         Accounts payable                             (8,412)           952
         Accrued liabilities                            (588)        (3,006)
         Deferred income taxes, net                    1,405            549
            Total adjustments                         14,218          6,025

      Net cash provided by operating activities       17,086          6,551

    Cash flows from investing activities:
      Capital expenditures                            (6,601)        (9,025)
      Investments, net                                 2,643          3,188
      Proceeds from disposal of fixed assets             175          1,416
      Payments made in connection with acquired
       companies, net of cash acquired                     -           (105)

    Net cash used in investing activities             (3,783)        (4,526)

    Cash flows from financing activities:
      Proceeds from issuance of common stock             901          2,931
      Principal payments on long-term debt           (20,022)           (19)

    Net cash (used) provided by financing
     activities                                      (19,121)         2,912

    Net decrease in cash and cash equivalents         (5,818)         4,937

    Cash and cash equivalents at
     beginning of period                              24,467         30,938

    Cash and cash equivalents at end of period      $ 18,649       $ 35,875

    Supplemental disclosures of cash
     flow information:
      Cash paid or refund during the period for:
        Interest                                      $1,077           $860
        Income taxes paid                              1,735             $7
        Income taxes refunded                         $2,250             $-