-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AuY1emOr6RxizHYkIQfdOZj/oXJEiW6iyqmmzbhFgkTapWx/7be2QTxKeSlbmE1e oy7JEZCOTkIS+pu0+Qo8DQ== 0000950137-03-005867.txt : 20031112 0000950137-03-005867.hdr.sgml : 20031112 20031112163027 ACCESSION NUMBER: 0000950137-03-005867 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030928 FILED AS OF DATE: 20031112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSURANCE AUTO AUCTIONS INC /CA CENTRAL INDEX KEY: 0000880026 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLES & MOTOR VEHICLE PARTS & SUPPLIES [5010] IRS NUMBER: 953790111 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19594 FILM NUMBER: 03994304 BUSINESS ADDRESS: STREET 1: 850 E ALGONQUIN RD STREET 2: STE 100 CITY: SCHAUMGURG STATE: IL ZIP: 60173 BUSINESS PHONE: 8478393939 MAIL ADDRESS: STREET 1: 850 E ALGONQUIN RD STREET 2: STE 100 CITY: SCHAUMGURG STATE: IL ZIP: 60173 10-Q 1 c80784e10vq.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 28, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number: 0-19594 ------- INSURANCE AUTO AUCTIONS, INC. ----------------------------- (Exact name of registrant as specified in its charter) Illinois 95-3790111 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 850 East Algonquin Road, Suite 100, Schaumburg, Illinois 60173-3855 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (847) 839-3939 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 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 whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act.) Yes |_| No [X] APPLICABLE ONLY TO CORPORATE ISSUERS Number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 2003:
Class Outstanding ----- ----------- Common Stock, $0.001 Par Value 11,517,648 shares
INDEX INSURANCE AUTO AUCTIONS, INC.
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION.............................................................. 3 Item 1. Financial Statements (Unaudited)................................................... 3 Condensed Consolidated Statements of Operations.................................... 3 Condensed Consolidated Balance Sheets.............................................. 4 Condensed Consolidated Statements of Cash Flows.................................... 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 11 Overview........................................................................... 11 Results of Operations.............................................................. 11 Financial Condition and Liquidity.................................................. 13 Factors That May Affect Future Results............................................. 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 17 Item 4. Controls and Procedures............................................................ 17 PART II. OTHER INFORMATION.................................................................. 18 Item 1. Legal Proceedings.................................................................. 18 Item 2. Changes in Securities and Use of Proceeds.......................................... 18 Item 3. Defaults upon Senior Securities.................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders................................ 18 Item 5. Other Information.................................................................. 18 Item 6. Exhibits and Reports on Form 8-K................................................... 18 SIGNATURE ............................................................................... 19
INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands except per share amounts)
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED -------------------------------- -------------------------------- SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, 2003 2002 2003 2002 -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) Revenues: Vehicle sales $ 8,847 $ 13,459 $ 32,343 $ 58,269 Fee income 40,280 39,327 126,162 123,487 -------------- -------------- -------------- -------------- 49,127 52,786 158,505 181,756 Cost of sales: Vehicle cost 7,299 12,669 28,495 53,528 Branch cost 33,447 30,609 99,256 94,802 -------------- -------------- -------------- -------------- 40,746 43,278 127,751 148,330 -------------- -------------- -------------- -------------- Gross profit 8,381 9,508 30,754 33,426 Operating expense: Selling, general and administrative 7,738 6,365 22,415 20,481 Business transformation costs 1,157 2,068 2,875 6,254 -------------- -------------- -------------- -------------- Earnings (loss) from operations (514) 1,075 5,464 6,691 Other (income) expense: Interest expense 521 38 1,079 762 Other income (19) (81) (141) (220) -------------- -------------- -------------- -------------- Earnings (loss) before income taxes (1,016) 1,118 4,526 6,149 Provision (benefit) for income taxes (422) 479 1,864 2,642 -------------- -------------- -------------- -------------- Net earnings (loss) $ (594) $ 639 $ 2,662 $ 3,507 ============== ============== ============== ============== Earnings (loss) per share: Basic $ (.05) $ .05 $ .23 $ .29 ============== ============== ============== ============== Diluted $ (.05) $ .05 $ .23 $ .28 ============== ============== ============== ============== Weighted average shares outstanding: Basic 11,516 12,244 11,694 12,223 Effect of dilutive securities -- stock options - 308 77 305 -------------- -------------- -------------- -------------- Diluted 11,516 12,552 11,771 12,528 ============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements. 3 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands except per share amounts)
SEPTEMBER 28, DECEMBER 29, 2003 2002 -------------- -------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 25,261 $ 10,027 Accounts receivable, net 42,575 45,594 Inventories 11,395 11,158 Other current assets 2,774 3,571 -------------- -------------- Total current assets 82,005 70,350 -------------- -------------- Property and equipment, net 58,580 49,342 Deferred income taxes 8,892 7,663 Intangible assets, net 2,233 1,710 Goodwill, net 134,583 130,474 Other assets 82 111 -------------- -------------- $ 286,375 $ 259,650 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 31,756 $ 28,656 Accrued liabilities 13,844 15,312 Obligations under capital leases 2,830 2,552 Current installments of long-term debt 7,546 43 Income taxes 81 - -------------- -------------- Total current liabilities 56,057 46,563 -------------- -------------- Deferred income taxes 17,015 14,835 Other liabilities 2,718 2,736 Obligation under capital leases 2,578 1,355 Long-term debt, excluding current installments 18,774 59 -------------- -------------- Total liabilities 97,142 65,548 -------------- -------------- 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, 12,324,857 shares issued and 11,517,648 outstanding as of September 28, 2003 and 12,292,599 shares issued and outstanding as of 12 12 December 29, 2002 Additional paid-in capital 144,912 144,420 Treasury stock, 807,209 shares (8,012) - Accumulated other comprehensive income (loss) (756) (745) Retained earnings 53,077 50,415 -------------- -------------- Total shareholders' equity 189,233 194,102 -------------- -------------- $ 286,375 $ 259,650 ============== ==============
See accompanying notes to condensed consolidated financial statements. 4 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (dollars in thousands)
NINE MONTHS ENDED ------------------------------- SEPTEMBER 28, SEPTEMBER 29, 2003 2002 -------------- -------------- (Unaudited) (Unaudited) Cash flows from operating activities: Net earnings $ 2,662 $ 3,507 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 7,519 7,041 Loss (gain) on disposal of fixed assets (24) 30 Loss (gain) on change in fair market value of derivative financial instrument (307) 450 Changes in assets and liabilities (excluding effects of acquired companies): (Increase) decrease in: Accounts receivable, net 5,048 9,994 Inventories (235) 4,786 Other current assets 813 2,245 Other assets (466) (61) Increase (decrease) in: Accounts payable 3,100 (9,302) Accrued liabilities (1,254) (369) Income taxes, net 1,032 2,964 -------------- -------------- Total adjustments 15,226 17,778 -------------- -------------- Net cash provided by operating activities 17,888 21,285 -------------- -------------- Cash flows from investing activities: Capital expenditures (11,666) (9,600) Investments, net - 2,643 Proceeds from disposal of property and equipment 60 175 Payments made in connection with acquisitions, net of cash acquired (7,872) (1,510) -------------- -------------- Net cash used in investing activities (19,478) (8,292) -------------- -------------- Cash flows from financing activities: Proceeds from issuance of common stock 492 1,216 Proceeds from term loan 30,000 - Purchase of treasury stock (8,012) - Principal payments on long-term debt (3,782) (20,035) Principal payments -- capital leases (1,874) (406) -------------- -------------- Net cash provided (used) by financing activities 16,824 (19,225) -------------- -------------- Net increase (decrease) in cash and cash equivalents 15,234 (6,232) Cash and cash equivalents at beginning of period 10,027 24,467 -------------- -------------- Cash and cash equivalents at end of period $ 25,261 $ 18,235 ============== ============== Supplemental disclosures of cash flow information: Cash paid or refunded during the period for: Interest $ 1,167 $ 1,160 ============== ============== Income taxes paid $ - $ 2,500 ============== ============== Income taxes refunded $ - $ 3,860 ============== ============== Non-cash financing activities: Property and equipment additions resulting from capital leases $ 3,375 $ 3,606 ============== ==============
See accompanying notes to condensed consolidated financial statements. 5 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The unaudited condensed consolidated financial statements of Insurance Auto Auctions, Inc. and its subsidiaries (collectively, the "Company") have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of the Company, reflect all adjustments necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results for full fiscal years. As contemplated by the Securities and Exchange Commission ("SEC") under Rule 10-01 of Regulation S-X, the accompanying consolidated financial statements and related notes have been condensed and do not contain certain information that is included in the Company's annual consolidated financial statements and notes thereto. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 29, 2002. Fiscal year 2002 consisted of 52 weeks and ended December 29, 2002. Fiscal year 2003 will consist of 52 weeks and will end on December 28, 2003. Certain reclassifications have been made to the prior year financial information to conform to the current year presentation. 2. INCOME TAXES Income taxes were computed using the effective tax rates estimated to be applicable for the full fiscal years, which are subject to ongoing review and evaluation by the Company. 3. EARNINGS PER SHARE The Company incurred a net loss for the three months ended September 28, 2003, therefore, options were excluded from the calculation of diluted earnings per share amounts because the effect would have been anti-dilutive. Had the Company reported income for the period, the Company would have reported an additional 78,000 dilutive shares outstanding in the form of stock options assumed exercised. 4. GOODWILL AND INTANGIBLES In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", which changes the accounting for goodwill and intangibles with an indefinite life from an amortization method to an impairment only approach. In accordance with SFAS No. 142, the Company completed the transitional impairment test of intangible assets during the first quarter of 2002. The results of this test did not indicate any impairment. The Company's annual impairment test is performed in the first quarter of each year. The current year annual impairment test did not indicate any impairment. 6 Goodwill and other intangibles are recorded at cost, less accumulated amortization, and consist of the following at September 28, 2003 and December 29, 2002:
September 28, December 29, Assigned Life 2003 2002 ------------- ------------- ------------- (dollars in millions) Goodwill Indefinite $ 134.6 $ 130.5 Covenants not to compete 5 to 15 years 2.2 1.7 -------- -------- $ 136.8 $ 132.2 ======== ========
Amortization expense for the three months ended September 28, 2003 and September 29, 2002 was $0.1 million in both periods. This amount is included within selling, general and administration expense on the Company's Condensed Consolidated Statements of Operations. Based upon existing intangibles, the projected annual amortization expense for the years 2003, 2004, 2005 and 2006 is $0.4 million and $0.3 million for 2007. 5. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) consists of net earnings (loss) and the change in fair value of the Company's interest rate swap agreement as follows:
Three Months Ended Nine Months Ended ------------------------------ ------------------------------ September 28, September 29, September 28, September 29, 2003 2002 2003 2002 -------------- ------------ ------------ -------------- Net earnings (loss) $ (594) $ 639 $ 2,662 $ 3,507 Other comprehensive loss Change in fair value of interest rate swap agreement 276 (813) (15) (1,004) Income tax benefit (expense) (106) 350 4 432 ------------ ------------ ------------ ------------ Comprehensive income (loss) $ (424) $ 176 $ 2,651 $ 2,935 ============ ============ ============ ============
The change in fair value of the Company's interest rate swap agreement for the nine-month period ended September 28, 2003 was due to a decline in interest rates. 6. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The Company, as a matter of policy, does not enter into derivative contracts for trading or speculative purposes. During the first quarter of 2002, the Company entered into an interest rate swap to mitigate its exposure to interest rate fluctuations and to effectively fix its borrowing rate at 5.6%. Under the interest rate swap agreement, the Company pays a fixed rate of interest of 5.6% and receives a LIBOR-based floating rate. At year-end December 29, 2002, the Company recorded a non-cash charge of $0.3 million related to the change in fair value for the portion of its interest rate swap agreement which did not qualify for hedge accounting. At December 29, 2002, the Company also recorded $0.7 million as a comprehensive loss related to the change in fair market value of the remaining portion of its interest rate swap agreement which qualified for hedge accounting. During the first quarter of 2003, the Company recorded a $0.3 million non-cash benefit related to the change in fair value of the interest rate swap agreement. The Company also recorded $0.2 million in the first quarter and less than $0.1 million in the second quarter, for an accumulated comprehensive loss related to the change in fair market value of the remaining portion of its interest rate swap agreement, net of applicable tax effects. In the third quarter of 2003, the Company recorded a decrease of $0.2 million to the accumulated comprehensive loss related to the change in fair market value of its interest rate swap agreement, net 7 of applicable tax effects. At September 28, 2003, the entire swap agreement qualified for hedge accounting. On February 15, 2003, the Company borrowed all remaining available funds under its $30.0 million credit facility. The credit facility was a one-year revolver that converted on February 15, 2003 into a four-year term loan carrying a variable rate based upon LIBOR. The aggregate principal balance of the loan is required be paid in sixteen consecutive equal quarterly installments commencing on March 31, 2003. As of March 30, 2003, the Company was not in compliance with the fixed charge ratio provision of the term loan. On May 14 , 2003, the Company obtained from its lenders a waiver for this covenant default. At September 28, 2003, the Company was in compliance with its credit facility; however, the Company may not meet the leverage ratio covenant of its credit agreement in the fourth quarter of 2003. The Company anticipates that it will be able to amend the current credit agreement to avoid such a covenant default. If the Company fails to obtain an amendment to the credit agreement, its operations could be adversely affected. On June 25, 2003, the Company entered into an amended and restated credit facility. This facility added a $20.0 million revolving line of credit, carrying a variable rate based on LIBOR, to the existing term loan. This amended and restated facility also modified all existing covenants except for the rent expense covenant. The amended credit facility also granted the Company latitude to purchase additional shares of its outstanding common stock. At September 28, 2003, the Company has not borrowed any funds against the additional $20.0 million revolving line of credit. 7. TREASURY STOCK The Company records treasury stock purchases using the cost method of accounting. In March 2003, the Company repurchased 757,409 shares of its common stock at an average price of $9.77 per share and a total cost of $7.4 million. During the second quarter, the Company repurchased an additional 49,800 shares at an average price of $12.25 per share and a total cost of $0.6 million. The Company did not repurchase any shares during the third quarter. On a year-to-date basis, the Company has repurchased 807,209 shares at an average price of $9.93 per share and a total cost of $8.0 million. 8. STOCK OPTIONS The Company accounts for its fixed plan stock options under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant and amortized over the period of service only if the current market value of the underlying stock exceeded the exercise price. No stock-based employee compensation cost is reflected in net earnings, as each option granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," to the measurement of stock-based employee compensation, including a straight-line recognition of compensation costs over the related vesting periods for fixed awards: 8
Three Months Ended Nine Months Ended ------------------------------------ ----------------------------------- September 28, September 29, September 28, September 29, 2003 2002 2003 2002 -------------- -------------- -------------- -------------- Net earnings (loss) as reported $ (594) $ 639 $ 2,662 $ 3,507 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (388) (312) (1,252) (937) -------------- -------------- -------------- -------------- Pro forma net earnings (loss) $ (982) $ 327 $ 1,410 $ 2,570 ============== ============== ============== ============== Earnings (loss) per share: Basic -- as reported $ (.05) $ .05 $ .23 $ .29 ============== ============== ============== ============== Basic -- pro forma $ (.09) $ .03 $ .12 $ .21 ============== ============== ============== ============== Diluted -- as reported $ (.05) $ .05 $ .23 $ .28 ============== ============== ============== ============== Diluted -- pro forma $ (.09) $ .03 $ .12 $ .21 ============== ============== ============== ==============
9. ACQUISITIONS The Company acquired six salvage pools in the first half of fiscal 2003. All of these acquisitions were accounted for using the purchase method of accounting. The results of operations of the acquired businesses are included in the Company's condensed consolidated financial statements from the dates of their acquisition. In January 2003, the Company acquired Salvage Management Inc., an operator of two auto salvage facilities in Buffalo and Rochester, New York. In April 2003, the Company acquired Wichita Insurance Pool, Inc., located in Wichita, Kansas. In June 2003, the Company acquired Wilmington Salvage and Disposal Company, Inc. located in Wilmington, North Carolina and the Damaged Vehicle division of Manheim's Orlando Orange County Auto Auction, located in Orlando, Florida. All of these acquisitions leverage the Company's existing regional coverage in those markets. In April 2003, the Company also acquired Mountain States Salvage Pool, which is located in Ogden, Utah. This acquisition represents the penetration of a new market opportunity. The aggregate purchase price of these acquisitions is $7.9 million, of which 52% is related to goodwill. 10. NEW ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS No. 133. SFAS 149 requires that contracts with comparable characteristics be accounted for similarly. This statement is effective for both contracts and hedging activities entered into or modified after June 30, 2003. The Company's adoption of this standard did not have a material impact on the Company's consolidated financial statements. 9 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The statement required issuers to classify as liabilities (or assets in some circumstances) certain classes of freestanding financial instruments that embody obligations of the issuer. Generally, the statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of the statement on June 29, 2003. The Company did not have any instruments within the scope of the statement at September 28, 2003. 10 ITEM 2. 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, projects, targeting, potential or contingent," the negative of these terms or other similar expressions. The Company's actual results, performance, liquidity, financial condition, prospects and opportunities 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 herein under "Factors that May Affect Future Results" and in the Company's annual report on Form 10-K for the fiscal year ended December 29, 2002. Among these risks are: the amount and availability of, and the Company's ability to comply with restrictions and covenants relating to its indebtedness under its credit facility, changes in the actual cash value of salvage; the quality and quantity of inventory available from suppliers; the ability to pass through increased towing costs; that vehicle processing time will improve; legislative or regulatory acts; 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 complete the re-design and implementation 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. You should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, the Company undertakes no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. OVERVIEW Insurance Auto Auctions, Inc. offers insurance companies and other vehicle suppliers cost-effective salvage processing solutions on either a consignment fixed fee, consignment percentage of sale, or purchase agreement basis. Under the consignment fixed fee method of sale, the Company receives a fixed fee per vehicle for its services. Under the consignment percentage of sale method, the Company receives a percentage of a vehicle's selling price as a fee for its services. There are, therefore, potentially greater profits to be realized under the consignment percentage of sale method versus the consignment fixed fee method because the higher the selling price of a vehicle, the greater the return for both the Company and its salvage provider. This increased profit potential encourages both the Company and the salvage provider to invest in vehicle enhancements to maximize vehicle selling prices. Under the percentage of sale and fixed fee consignment methods, the vehicles are not owned by the Company and only the fees associated with processing the vehicle are recorded as revenue. The proceeds from the sale of the vehicle itself are not included in revenue. Under the purchase agreement sales method, the Company purchases vehicles from a salvage provider according to pre-arranged contractual terms. Because those vehicles are then owned by the Company, the total proceeds from the sale of the vehicle are recorded as revenue. Since its initial public offering in 1991, the Company has grown primarily through a series of acquisitions and opening of new sites to now include 74 sites. During the first quarter of 2003, the Company acquired facilities in Rochester and Buffalo, New York, and established new facilities in Dothan, Alabama and Little Rock, Arkansas. In the second quarter of 2003, the Company acquired facilities in Wichita, Kansas, Ogden, Utah, Wilmington, North Carolina, and Orlando, Florida. RESULTS OF OPERATIONS Three Months Ended September 28, 2003 Compared to the Three Months Ended September 29, 2002 Revenues were $49.1 million for the three months ended September 28, 2003, down from $52.8 million for the same three months period in 2002. The decline in revenues is primarily due to the Company's continued shift away from vehicles sold under the purchase agreement method and lower same-store sales 11 volumes. Under the purchase agreement method, the entire purchase price of the vehicle is recorded as revenue compared to only recording the fees collected on the sale of a vehicle under the lower risk consignment fee based arrangements. Vehicles sold under the purchase agreement method accounted for 5% of the total vehicles sold in the third quarter of 2003, versus 8% for the same quarter last year. Fee income in the third quarter increased 2.5 percent to $40.3 million, versus $39.3 million in the third quarter of last year. Net revenues, defined as gross revenues less vehicle cost, increased to $41.8 million for the three months ended September 28, 2003 from $40.1 million for the same three month period last year. The Company uses this revenue measurement to evaluate its performance by computing all revenues on a consignment equivalent basis. Cost of sales decreased $2.6 million to $40.7 million for the three months ended September 28, 2003, versus $43.3 million for the same period last year. Vehicle cost of $7.3 million is $5.4 million less than last year's amount of $12.7 million. This decrease is primarily related to the Company's shift away from vehicles sold under the purchase agreement method. Branch costs of $33.4 million increased $2.8 million from $30.6 million for the same period last year. This increase is primarily related to the additional operating costs associated with the establishment of new branch facilities. Gross profit decreased 12% to $8.4 million for the three months ended September 28, 2003, from $9.5 million for the comparable period in 2002. The primary reason for the decline in gross profit is the drop in same-store unit volumes along with lower profit margins at recently acquired branches. Selling, general and administration expense of $7.7 million for the three months ended September 28, 2003 increased $1.4 million, or 22%, from the $6.3 million recorded in the same quarter last year. This increase was primarily due to activities associated with the new system implementation. Amortization of intangible assets is now included within this category of expense and amounted to $0.1 million in the quarter for both 2003 and 2002. Business transformation costs currently include direct costs to convert the existing databases, dedicated training resources and severance costs. Direct costs related to the system conversion were $1.2 million in this quarter, which was lower than the $2.1 million recorded in the same quarter last year but higher than expected. In 2002, business transformation costs included the information technology system redesign project, the business process re-engineering project, severance costs and accelerated depreciation associated with the Company's existing computer infrastructure. The Company began recording business transformation costs during the third quarter of 2001. Interest expense of $0.5 million for the three months ended September 28, 2003 is $0.5 million higher than the comparable period in 2002. Included in interest expense for the three months ended September 29, 2002 was a non-cash benefit of $0.1 million related to the change in fair value of the interest rate swap agreement. Other income of less than $0.1 million declined from last year's amount of $0.1 million. The Company's effective income tax rate was 41.2% and 43.0% in 2003 and 2002, respectively. Nine Months Ended September 28, 2003 Compared to the Nine Months Ended September 29, 2002 Revenues were $158.5 million for the nine months ended September 28, 2003, down from $181.8 million for the same nine months period in 2002. The decline in revenues is primarily due to the Company's continued shift away from vehicles sold under the purchase agreement method and lower same-store sales volumes. Vehicles sold under the purchase agreement method accounted for 6% of the total vehicles sold in the first nine months of 2003, versus 10% for the same period last year. Fee income increased to $126.2 million versus $123.5 million for the same nine months period in 2002. Net revenues, defined as gross revenues less vehicle cost, increased to $130.0 million for the nine months ended September 28, 2003 from $128.2 million for the same nine month period last year. The Company uses this revenue measurement to evaluate its performance by computing all revenues on a consignment equivalent basis. 12 Cost of sales decreased $20.5 million to $127.8 million for the nine months ended September 28, 2003, versus $148.3 million for the same period last year. Vehicle cost of $28.5 million is $25.0 million less than last year's amount of $53.5 million. This decrease is primarily related to the Company's shift away from vehicles sold under the purchase agreement method. Branch costs of $99.3 million in 2003 represented an increase of $4.5 million from $94.8 million for the same period last year. This increase is primarily the result of additional operating costs related to the establishment of new branch facilities. Gross profit decreased 8% to $30.8 million for the nine months ended September 28, 2003, from $33.4 million for the comparable period in 2002. This decline in gross profit is a result of lower same-store volumes along with lower profit margins at recently acquired branches. Selling, general and administration expense of $22.4 million increased 9% from last year's amount of $20.5 million. This increase is primarily due to indirect activities related to the new system implementation and branch expansion. Amortization of intangible assets is now included within this category of expense and amounted to $0.3 million in 2003 and $0.2 million in 2002. Business transformation costs for the nine months ended September 28, 2003 were $2.9 million versus $6.3 million in the same period last year. Business transformation costs currently include direct costs to convert the existing databases to the new system, dedicated training resources and severance costs related to back office downsizing. In 2002, business transformation costs included the information technology system redesign project, the business process re-engineering project, severance costs and accelerated depreciation associated with the Company's existing computer infrastructure. The Company began recording business transformation costs during the third quarter of 2001. Interest expense of $1.1 million for the nine months ended September 28, 2003, increased $0.3 million from $0.8 million for the comparable period in 2002. Included in interest expense for the nine months ended September 29, 2002 was a non-cash charge of $0.4 million related to the change in fair value of the interest rate swap agreement. Other income of $0.1 million declined by $0.1 million from last year's amount. The Company's effective income tax rate was 41.2% and 43.0% in 2003 and 2002, respectively. FINANCIAL CONDITION AND LIQUIDITY At September 28, 2003, the Company had current assets of $82.0 million, which includes $25.3 million of cash and cash equivalents. Current liabilities were $56.1 million. The Company had working capital of $25.9 million at September 28, 2003, a $2.1 million increase from December 29, 2002. At September 28, 2003, the Company's long-term debt, including current installments, consisted of $0.1 million in notes payable, bearing interest at a rate of 8.0%, and $26.2 million borrowed under its credit facility. The credit facility was a one-year revolver that converted on February 15, 2003, into a four-year term loan carrying a variable interest rate based upon LIBOR. The aggregate principal balance of the loan is required be paid in sixteen consecutive equal quarterly installments commencing on March 31, 2003. As of March 30, 2003, the Company was not in compliance with the fixed charge ratio provision of the term loan. . On May 14 , 2003, the Company obtained from its lenders a waiver for this covenant default. At September 28, 2003, the Company was in compliance with its credit facility; however, the Company may not meet the leverage ratio covenant of its credit agreement in the fourth quarter of 2003. The Company anticipates that it will be able to amend the current credit agreement to avoid such a covenant default. If the Company fails to obtain an amendment to the credit agreement, its operations could be adversely affected. (See Note 6 of Notes to Condensed Consolidated Financial Statements -- Financial Instruments and Hedging Activities.) Other long-term liabilities include a post-retirement benefits liability that relates to the acquisition in 1994 of Underwriters Salvage Company. The amount recorded at September 28, 2003 for the post-retirement benefits liability is approximately $2.7 million. Capital expenditures were $11.7 million for the nine months ended September 28, 2003. These capital expenditures include capitalization of certain development costs related to the Company's new information technology system along with various branch improvements, including upgrades to existing branches and the addition of capacity in key markets. In addition to the cash capital expenditures, property 13 and equipment additions of $3.4 million resulted from capital lease transactions entered into during the year. At September 28, 2003, the Company's total future obligation under all capital leases was $5.4 million. The Company has acquired six salvage pools since the beginning of fiscal 2003. All of these acquisitions were accounted for using the purchase method of accounting. The results of operations of the acquired businesses are included in the Company's condensed consolidated financial statements from their date of acquisition. In January 2003, the Company acquired Salvage Management Inc., an operator of two auto salvage facilities in Buffalo and Rochester, New York. In April 2003, the Company acquired Wichita Insurance Pool, Inc., located in Wichita, Kansas. In June 2003, the Company acquired Wilmington Salvage and Disposal Company, Inc. located in Wilmington, North Carolina and the Damaged Vehicle division of Manheim's Orlando Orange County Auto Auction, located in Orlando, Florida. All of these acquisitions leverage the Company's existing regional coverage in those markets. In April 2003, the Company also acquired Mountain States Salvage Pool, which is located in Ogden, Utah. This acquisition represents penetration into a new market. The total cost of adding these six new facilities was less than $7.9 million. The Company's Board of Directors authorized the purchase of 1,500,000 shares of the Company's common stock in September 2000 and an additional 750,000 shares in April 2003, for a combined authorization of 2,250,000 shares. Purchases may be made from time to time in the open market or in privately negotiated transactions, subject to the requirements of applicable laws, and will be financed with existing cash and cash equivalents, and cash from operations. As of September 28, 2003, the Company had purchased 807,209 shares pursuant to this authorization at an average price of $9.93 per share. The Company believes that existing cash and cash equivalents, as well as cash generated from operations 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 to pursue 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. 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 those risks. Period 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, but are not limited to, fluctuations in Actual Cash Value ("ACV" -- the estimated pre-accident fair value of the vehicle) of salvage vehicles, changes in the market value of salvage vehicles, delays or changes in state title processing, general weather conditions, changes in regulations governing the processing of salvage vehicles, the availability and quality of salvage vehicles and buyer attendance at salvage auctions. 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 that can affect the number of vehicles received include, but are not limited to, 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, which tend to have the higher salvage values. Future decreases in the quality and quantity of inventory, and in particular the availability of newer and less-damaged vehicles, especially for inventory disposed of under the purchase agreement method of sale would have a material adverse effect on the operating results and financial condition of the Company. 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. Furthermore, revenues for any future quarter are not predictable with any significant degree of accuracy, and its operating results may vary significantly due to its relatively fixed expense levels.. 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. Any failure to meet expectations of securities analysts or the market in general could adversely affect the market price of the Company's common stock. 14 Competition. The Company faces intense competition for the supply of salvage vehicles as well as competition from processors of vehicles from other regional salvage pools. It is 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 the Company. 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 end users. The Company may not be able to compete successfully against current or future competitors, which could impair its ability to grow and achieve or sustain profitability. 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 2002, vehicles supplied by the Company's three largest suppliers accounted for approximately 39% of the Company's total unit sales. The largest suppliers, State Farm Insurance, Farmers Insurance, and Allstate, each accounted for approximately 16%, 14%, and 9%, respectively, of the Company's unit sales. A loss or reduction in the number of vehicles from any of these suppliers, or adverse changes in the agreements that these suppliers have with the Company, could have a material adverse effect on the Company's operating results, financial condition and quantity or quality of inventory. 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. 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 a recovered theft vehicle. Because the Company's purchase price is fixed by contract, higher ACVs and lower market or auction prices for salvage vehicles have an impact on the profitability of the sale of vehicles under the purchase agreement method. Beginning late in the second quarter of 2000 and continuing through 2002, purchase agreement profitability was impaired by a combination of rising ACVs and flat to lower sale prices at auctions in certain areas of the country. 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. To mitigate this risk, the Company began shifting away from the sale of vehicles under the purchase agreement method. In 2002 and 2001, respectively, approximately 10% and 19% of the units processed by the Company were processed through the purchase agreement method of sale. Vehicles sold under the purchase agreement method accounted for 5% of the total vehicles sold in the third quarter of 2003, versus 8% for the same period last year. The Company expects the purchase agreement method of units sold in future years to remain at or below 5%. Enterprise-Wide System Redesign Project. The Company retained the services of SEI Information Technology to develop a new enterprise-wide application to manage the salvage and auction process. The new Web-based system will support and streamline vehicle registration and tracking, financial reporting, transaction settlement, vehicle title transfer, and branch/headquarters communications. It will speed all aspects of the Company's operations, support growth and expansion plans, provide improved reliability and maintainability, and ultimately, deliver increased profits. As a result of its investment in developing and implementing key standardized business processes throughout the Company and the Enterprise-Wide System Redesign Project, the Company expects to reduce its annual pre-tax operating costs by a minimum of $10 million, and potentially as much as $15 million from the two projects combined. Development and testing of the enterprise-wide application began in the third quarter of 2001. The Company began rolling out the new system to its branches during the third quarter of 2002. As of October 31, 2003, the Company had converted most of its original databases to the new system. The Company encountered some unanticipated issues during the implementation phase which delayed completion of the project and caused the Company to incur additional costs beyond the project's original estimates . The Company expects to complete the roll-out of the new system by the end of 2003. However, there remains inherent risks associated with the application and implementation of the new system that could continue to adversely impact the Company's results with respect to timing, costs and cost savings. 15 Governmental Regulation. The Company's operations are subject to regulation, supervision and licensing under various federal, state and local agencies statutes and ordinances. 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 law or governmental regulations or interpretations of existing law or regulations can result in increased costs, reduced salvage vehicle prices and decreased profitability for 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. 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 expend 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 these expenses by the insurance company suppliers. The Company may not realize sufficient revenue from these services to cover these expenses, in which case, its results of operations may be materially adversely affected. Expansion and Integration 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. The Company may not be able to continue to acquire new facilities or add additional facilities on terms economically favorable to the Company or increase revenues at newly-acquired facilities above levels realized prior to acquisition. The Company's ability to achieve these objectives is dependent on, among other things, 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 will 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. Any failure to meet expectations of securities analysts or the market in general could adversely affect the market price of the Company's common stock. 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 non-hazardous 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 16 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. On February 15, 2003, the Company borrowed available funds related to its $30.0 million credit facility. The credit facility was a one-year revolver that converted on February 15, 2003, into a four-year term loan carrying a variable rate based upon LIBOR. The aggregate principal balance of the loan will be paid in sixteen consecutive equal quarterly installments commencing on March 31, 2003. (See Note 6 of Condensed Consolidated Financial Statements -- Financial Instruments and Hedging Activities and the Financial Condition and Liquidity section for discussion of bank covenants.) The Company is exposed to interest rate fluctuations on its floating rate credit facility, under which the Company has outstanding a $26.2 million term loan. In 2002, the Company entered into an interest rate swap to mitigate its exposure to interest rate fluctuations, and does not, as a matter of policy, enter into hedging contracts for trading or speculative purposes. At September 28, 2003, the interest rate swap agreement has a notional amount of $26.2 million under which the Company pays a fixed rate of interest of 5.6% and receives a LIBOR-based floating rate. The Company recorded a non-cash benefit of $0.3 million in the first quarter related to the change in fair value for a portion of its interest rate swap agreement. For the nine month period ended September 28, 2003, the Company has recorded less than $0.1 million of an accumulated comprehensive loss, net of taxes, related to the change in fair value of the remaining portion of its interest rate swap agreement. At September 28, 2003, the entire swap agreement qualified for hedge accounting. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic reports is recorded, processed, summarized and reported on a timely and accurate basis, and that such information is accumulated and communicated to the Company's management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management's control objectives. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its President and Chief Executive Officer along with its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule I3a-l4. Based upon the foregoing, the Company's President and Chief Executive Officer, along with its Chief Financial Officer, concluded that its disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in its Exchange Act reports. The Company is in the process of rolling out a new enterprise-wide application to manage the salvage and auction process. The new system contains many changes and enhancements to the existing control procedures. The Company expects to complete the rollout of the new system in 2003. 17 PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. Inapplicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Inapplicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable ITEM 5. OTHER INFORMATION. Inapplicable ITEM 6. EXHIBITS AND REPORT ON FORM 8-K. (a) EXHIBITS. 31.1* Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification by the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32** Certification by the CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith ** Furnished herewith. (b) REPORTS ON FORM 8-K. The Company filed a current report on Form 8-K, dated September 26, 2003, which contained a press release to report preliminary third quarter results for the quarter ended September 28, 2003. The Company filed a current report on Form 8-K, dated October 24, 2003, which contained a press release announcing financial results for the quarter ended September 28, 2003. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSURANCE AUTO AUCTIONS, INC. Date: November 12, 2003 By: /s/ Scott P. Pettit ----------------- --------------------------------- Name: Scott P. Pettit Title: Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 19 EXHIBIT INDEX EXHIBIT NO. 31.1* Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification by the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32** Certification by the CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith ** Furnished herewith. 20 EX-31.1 3 c80784exv31w1.txt SECTION 302 CERTIFICATION BY THE CEO EXHIBIT 31.1 CERTIFICATIONS I, Thomas C. O'Brien, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Insurance Auto Auctions, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2003 /s/ Thomas C. O'Brien --------------------------------- Thomas C. O'Brien Chief Executive Officer EX-31.2 4 c80784exv31w2.txt SECTION 302 CERTIFICATION BY THE CFO EXHIBIT 31.2 CERTIFICATIONS I, Scott P. Pettit, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Insurance Auto Auctions, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2003 /s/ Scott P. Pettit ----------------------------- Scott P. Pettit Chief Financial Officer 21 EX-32 5 c80784exv32.txt SECTION 906 CERTIFICATION BY CEO AND CFO EXHIBIT 32 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Insurance Auto Auctions, Inc. (the "Company") for the quarterly period ended September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas C. O'Brien, Chief Executive Officer of the Company, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 12, 2003 /s/ Thomas C. O'Brien -------------------------------------------- Thomas C. O'Brien, Chief Executive Officer In connection with the Quarterly Report on Form 10-Q of Insurance Auto Auctions, Inc. (the "Company") for the quarterly period ended September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott P. Pettit, Chief Financial Officer of the Company, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 12, 2003 /s/ Scott P. Pettit ---------------------------------------- Scott P. Pettit, Chief Financial Officer This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----