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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 25, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 033-43247

INSURANCE AUTO AUCTIONS, INC

(Exact name of Registrant as specified in its charter)


Illinois (State or other jurisdiction of incorporation or organization		95-3790111 (I.R.S. Employer Identification Number)

Two Westbrook Corporate Center, Suite 500
Westchester, Illinois 60154
(708) 492-7000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Act.

Large Accelerated Filer o. Accelerated Filer o. Non-Accelerated Filer þ.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

All of the voting and non-voting common equity of the Registrant is held by affiliates. The number of shares of the Registrant’s stock outstanding as of December 25, 2005: 100

EXPLANATORY NOTE

This Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended December 25, 2005 (the “Annual Report”) of Insurance Auto Auctions, Inc. (the “Company”) is being filed to correct typographical errors (i) in the Commission File Number on the cover page, (ii) on the Signature Page to the Annual Report, (iii) in the page numbers in our Financial Statement Schedules, (iv) in the Consolidated Statements of Operations for the period ending December 26, 2004, and (v) in the Consolidated Statements of Cash Flows for the period December 27, 2004 — May 24, 2005. Additionally, revisions have been made to the first sentence of the second paragraph of the Financial Condition and Liquidity portion of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, to reflect corrections relating to the typographical error described in the immediately preceding clause (v).

Except as described above, this Amendment No. 1 does not change any previously reported financial results or otherwise amend the Annual Report as previously filed. Furthermore, except for the matters described above, this Amendment No. 1 does not update or otherwise amend the Annual Report as previously filed for changes in events, estimates or other developments subsequent to March 27, 2006 (the date of the original filing of the Annual Report).

PART II

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Financial Data,” the consolidated financial statements and notes thereto included elsewhere in this Report. This discussion and analysis contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, management. Our actual results could differ materially from those discussed in or implied by forward-looking statements for various reasons including those discussed in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Refer to “Risk Factors” for a further discussion of some of the factors that affect or could affect our business, operating results and financial condition.

Overview

We provide insurance companies and other vehicle suppliers cost-effective salvage processing solutions principally on a consignment basis. The consignment method includes both a percentage of sale and fixed fee basis. Under the percentage of sale and fixed fee consignment methods, the vehicle is not owned by us and only the fees associated with processing the vehicle are recorded as revenue. The percentage of sale consignment method offers potentially increased profits over fixed fee consignment by providing incentives to both ourselves and the salvage provider to invest in vehicle enhancements, thereby maximizing vehicle selling prices. The proceeds from the sale of the vehicle itself are not included in revenue. We also, on a very limited basis, sometimes acquire vehicles via purchase. Under the purchase method, the vehicle is owned by us, and the proceeds from the sale of the vehicle are recorded as revenue. Our operating results are subject to fluctuations, including quarterly fluctuations, that can result from a number of factors, some of which are more significant for sales under the purchase method.

On February 22, 2005, IAAI entered into a merger agreement with Axle Merger and Axle Holdings. On May 25, 2005, Axle Merger merged with and into IAAI, with IAAI continuing as the surviving corporation, and IAAI became a direct wholly owned subsidiary of Axle Holdings, which is owned by the LLC (which is controlled by affiliates of Kelso). The following transactions occurred in connection with the merger:

	•		Approximately 11.8 million shares of IAAI’s outstanding common stock were converted into the right to receive $28.25 per share in cash.

	•		All outstanding options to purchase shares of IAAI’s common stock (other than certain options held by the continuing investors, which were exchanged into stock options of Axle Holdings) were canceled in exchange for payments in cash of $28.25 per underlying share, less the applicable option exercise price.

	•		Affiliates of Kelso, Parthenon and certain of its affiliates, Magnetite, Brian T. Clingen, Dan Simon and the continuing investors contributed approximately $143.6 million in cash to the LLC, which now holds all the outstanding shares of Axle Holdings.

	•		The continuing investors exchanged stock options of IAAI with an aggregate spread value of approximately $3.3 million into stock options of Axle Holdings with an equivalent aggregate spread value.

	•		Axle Merger entered into new senior secured credit facilities, comprised of a $50.0 million revolving credit facility and a $115.0 million term loan and, upon completion of the merger, IAAI assumed Axle Merger’s obligations under such credit facilities and all of IAAI’s domestic subsidiaries guaranteed these credit facilities.

	•		IAAI Finance issued $150.0 million of 11% Senior Notes due April 1, 2013, or the notes and, upon completion of the merger, IAAI assumed IAAI Finance’s obligations under the notes and all of IAAI’s domestic subsidiaries guaranteed the notes on a senior unsecured basis. Upon completion of the merger of Axle Merger with and into IAAI, IAAI Finance merged with and into IAAI, with IAAI continuing as the surviving corporation.

	•		The LLC contributed to Axle Merger, through Axle Holdings, approximately $143.6 million in cash, representing the cash equity contribution by affiliates of Kelso, Parthenon and certain of its affiliates, Magnetite, the continuing investors and certain third party investors.

	•		IAAI used the net proceeds from these contributions and financings to:

	•		fund the cash consideration payable to its shareholders and option holders under the merger agreement;

	•		repay the outstanding principal and accrued interest under its then existing credit facility; and

	•		pay related transaction fees and expenses.

We accounted for the transactions using the purchase method of accounting and, accordingly, our financial data in respect of reporting periods subsequent to May 24, 2005, or successor periods, reflect the purchase method of accounting.

Recent Events

On March 19, 2006, our Grand Prairie, Texas facility was flooded when the local authorities opened flood gates causing the waters of Mountain Creek to spill over into the facility, resulting in water damage to the majority of vehicles on the property as well as to the interior office space. Although it is difficult to estimate the loss at this time, it is possible that the damage could exceed the $1.0 million deductible under our insurance policy which covers this particular property. We are working to resume full operations at this facility as soon as possible.

Significant Items Affecting Comparability

The merger transactions resulted in a new basis of accounting under SFAS 141. This change creates many differences between reporting for IAAI post-merger, as successor, and IAAI pre-merger, as predecessor. The predecessor financial data for periods ending on or prior to May 24, 2005, generally will not be comparable to the successor financial data for periods after that date. The merger resulted in IAAI having an entirely new capital structure, which results in significant differences between predecessor and successor in the equity sections of the financial statements. In addition, the successor incurred debt issuance costs and $265.0 million of debt in connection with the merger. As a result, interest expense and debt will not be comparable between the predecessor and the successor. We have made certain adjustments to increase or decrease the carrying amount of assets and liabilities to their fair values as of the merger date as a result of preliminary estimates and certain assumptions we believe are reasonable, which, in a number of instances, have resulted in changes to amortization and depreciation expense

amounts. The final appraisals are not yet complete, and thus we have not yet completed our allocation of purchase price and may make further adjustments to the preliminary allocations in subsequent periods. The successor and predecessor results during 2005 have been combined for purposes of comparison with prior periods in the “Results of Operations” section of our Management Discussion and Analysis.

Acquisitions and New Operations

Since 1991, we have grown through a series of acquisitions and opening of new sites and as of March 1, 2006, we have a total of 81 sites. In 2005, we acquired branches in Altoona, Pennsylvania and Charleston, South Carolina and opened new operations in Jacksonville, Florida.

Results of Operations

The following table sets forth our results of operations for the year ended December 25, 2005 and the year ended December 26, 2004. The results for the year ended December 25, 2005 set forth the combined successor and predecessor revenues, cost of sales, operating expense, other (income) expense and income taxes for that year.


	Fiscal year ended
	December 25,			December 26,
	2005			2004
	(dollars in thousands)
Revenues:
Fee income	$	240,129		$	208,743
Vehicle sales		40,726			31,436

		280,855			240,179

Cost of sales:
Branch cost		175,229			157,297
Vehicle cost		34,618			26,694

		209,847			183,991

Gross profit		71,008			56,188

Operating expense:
Selling, general and administrative		40,452			34,978
Loss (gain) on sale of property and equipment		(699	)		301
Merger costs		20,762			—

		60,515			35,279
Earnings (loss) from operations	$	10,493		$	20,909

Other (income) expense:
Interest expense		15,588			1,572
Other income		(2,788	)		(67	)


Earnings (loss) before taxes		(2,307	)		19,404

Income taxes		3,567			7,139


Net earnings (loss)	$	(5,874	)	$	12,265

Year Ended December 25, 2005 Compared to the Year Ended December 26, 2004

Revenues increased 17% to $280.9 million for the year ended December 25, 2005, from $240.2 million in 2004. The increase in revenues was primarily due to a higher volume of vehicles sold and a higher average selling price for vehicles sold at auction. Vehicle sales increased 30% to $40.7 million for the year ended December 25, 2005 from $31.4 million in 2004. Vehicles sold under the purchase method accounted for approximately 4% of vehicles sold in each of 2005 and 2004. Fee income for 2005 increased 15% to $240.2 million versus $208.7 million in 2004 due to more favorable pricing and an increase in vehicles sold.

Cost of sales increased 14% to $209.8 million for the year ended December 25, 2005, versus $184.0 million for last year. Vehicle cost of $34.6 million increased $7.9 million in 2005 from $26.7 million in 2004. This increase is primarily related to an increase in the number of vehicles sold under the purchase method. Branch cost of $175.2 million, which includes depreciation, increased $17.9 million in 2005 from $157.3 million in 2004. Branch cost includes tow, office and yard labor, occupancy, depreciation and other costs inherent in operating the branch. New branches opened in 2005 account for approximately $2.6 million of additional branch costs, including those located in Louisiana and Mississippi to support hurricane Katrina efforts. Excluding the impact of new branches, branch costs increased $15.3 million primarily due to increased volumes and increases in towing, occupancy costs, performance-based bonus and auction and yard related expenses.

Gross profit of $71.0 million for the year ended December 25, 2005 increased $14.8 million, or 26%, from $56.2 million for 2004. The increase is primarily related to more favorable pricing and an increase in the number of vehicles sold. Gross profit margins, as a percent of revenue, increased to 25.3% from 23.4% in the prior year.

Selling, general and administrative expense of $40.5 million in 2005 was $5.5 million more than the expense of $35.0 million in 2004. This increase is primarily related to the amortization of intangible assets, such as supplier relationships, trade names and software, arising from the merger. Amortization of intangible assets amounted to $5.2 million in 2005 and $0.6 million in 2004.

Gain on sale of property and equipment increased to $0.7 million in 2005 from a loss of $0.3 million in 2004. The increase is due primarily to the sale of one of our properties in Houston for $0.5 million.

Interest expense of $15.6 million for the year ended December 25, 2005 increased $14.0 million from $1.6 million for 2004. This increase was primarily attributable to interest incurred on the $150.0 million of 11% Senior Notes due 2013 and a new $115.0 million term loan with a seven year maturity. The notes and our new senior credit facilities, including the term loan, are described in “Financial Condition and Liquidity.”

Merger costs in 2005 of $20.8 million are primarily related to $9.0 million in legal and advisory fees, $5.0 million in management fees, $4.1 million in change of control payments, $0.8 million in insurance costs and $1.9 million net interest on bond indebtedness incurred in connection with the merger transaction.

Other income of $2.8 million for the year ended December 25, 2005 increased $2.7 million from $0.1 million in 2004. The increase is primarily related to the $2.4 million settlement we received from TN Tech related to the crash of an Emery DC-8 aircraft onto our Rancho Cordova, California facility on February 16, 2000.

Income tax expense for the year 2005 was $3.6 million, a decrease of $3.5 million from the income tax expense of $7.1 million for 2004. Income tax expense decreased due to lower 2005 earnings. Our effective tax rates for the years 2005 and 2004 were (155)% and 37%, respectively. We expect that our effective tax rate in 2006 will be approximately 38%.

Our net loss for the year 2005 was $5.9 million, a decrease of $18.2 million from our net earnings of $12.3 million for the fiscal year 2004.

Year Ended December 26, 2004 Compared to the Year Ended December 28, 2003

Revenues increased 15% to $240.2 million for the year ended December 26, 2004, from $209.7 million in 2003. The increase in revenues was primarily due to a higher volume of vehicles sold and a higher average selling price for vehicles sold at auction. The $8.5 million or 21% decline in vehicle sales is primarily related to our shift away from vehicles sold under the purchase method. Vehicles sold under the purchase method accounted for less than 4% of the total vehicles sold in 2004, versus approximately 6% in 2003. Fee income for 2004 increased 23% to $208.7 million versus $169.7 million in 2003. Fee income increased primarily due to higher unit volumes.

Cost of sales increased $13.5 million to $184.0 million for the year ended December 26, 2004, versus $170.5 million for last year. Vehicle cost of $26.7 million decreased $8.6 million in 2004 from $35.3 million in 2003. This decrease is primarily related to our shift away from vehicles sold under the purchase method. Branch cost of $157.3 million increased $22.1 million in 2004 from $135.2 million in 2003. Branch cost includes tow, office and yard labor, occupancy, depreciation and other costs inherent in operating the branch. New branches opened in 2004 account for approximately $1.7 million of additional branch costs. Excluding the impact of new branches, branch costs increased $20.4 million primarily due to increased volumes and increases in towing, performance-based bonus, and insurance expense.

Gross profit of $56.2 million for the year ended December 26, 2004 increased $17.0 million, or 43%, from $39.2 million for 2003.

Selling, general and administrative expense of $35.0 million in 2004 was $4.8 million more than the expense of $30.2 million in 2003. This increase was primarily due to performance-based bonus expense, costs related to compliance with the requirements of the Sarbanes-Oxley Act of 2002, and higher depreciation expense associated with the implementation of our new information technology system. Professional services related to the audit and the compliance with Sarbanes-Oxley was $1.9 million in 2004. Amortization of intangible assets is now included within this category of expense and amounted to $0.6 million in 2004 and $0.5 million in 2003.

Loss on sale of property and equipment increased to $0.3 million in 2004. The loss primarily relates to a $0.8 million loss on the exit of the Woodinville facility which was partially offset by a $0.5 million gain on the sale of South Boston.

There were no business transformation costs for the year ended December 26, 2004, versus $3.9 million for 2003. Business transformation costs included expenses related to data base conversions, training and other activity related to the rollout of our new information technology system.

Interest expense of $1.6 million for the year ended December 26, 2004 increased $0.1 million from $1.5 million for 2003. At December 26, 2004, the outstanding balance related to the term loan with

our lenders was $16.9 million and $6.0 million related to the revolver. At December 26, 2004, the interest rate on the term loan was 5.4%.

Income tax expense for the year 2004 was $7.1 million, an increase of $5.8 million from the income tax expense of $1.3 million for 2003. Our effective tax rates for the years 2004 and 2003 were 37% and 36%, respectively.

Our net earnings for the year 2004 was $12.3 million, an increase of $10.0 million from our net earnings of $2.3 million for the fiscal year 2003.

Financial Condition and Liquidity

Historically, IAAI has relied on cash flows from operations and revolving credit borrowings to finance our working capital requirements and capital expenditures. During the quarter ended June 26, 2005, we funded the payment of the cash consideration payable in connection with the merger to old shareholders and option holders of IAAI, the retirement of pre-merger debt, and the payment of fees and expenses related to the transactions, primarily from (i) borrowings under our new $165.0 million senior credit facilities, (ii) the issuance of the $115.0 million senior notes, and (iii) proceeds of the sale of interests in the LLC that were contributed to IAAI. We funded our capital expenditures for the remainder of 2005 from a combination of cash generated from operations and revolving credit borrowings.

Net cash provided by operating activities during 2005 was $14.0 million, a $17.5 million decrease from the same period last year, primarily as a result of the costs of the merger transactions. Additionally, we received a $5.1 million refund of federal income taxes in September 2005 related to estimated tax payments made for the pre-merger period.

Net cash used in investing activities during 2005 was $372.9 million, consisting primarily of funds used for the payment of the cash consideration payable in connection with the merger to old shareholders and option holders of IAAI, the purchase of the Altoona facility, capital expenditures, and earn out payments made in connection with prior acquisitions. Capital expenditures were approximately $18.2 million for 2005. These capital expenditures consisted of various branch improvements, including upgrades to existing branches, the development of new facilities, and continued enhancements to our new information technology system.

Net cash provided by financing activities during 2005 was $371.5 million compared to $4.5 million used during 2004. This increase resulted primarily from (i) the issuance of the 11% Senior Notes due 2013, (ii) proceeds of the sale of the interests in the LLC that were contributed to IAAI, and (iii) borrowings under the new credit facilities. These increases were partially offset by the repayment of our old senior credit facilities and the incurred issuance costs related to the new debt.

At December 25, 2005, we had current assets of $109.0 million, including $25.9 million in cash and cash equivalents, current liabilities of $57.0 million and working capital of $52.0 million, which represents a $35.1 million increase from December 26, 2004.

Our accounts receivable decreased $3.5 million to $46.9 million as of December 25, 2005, from $50.4 million as of December 26, 2004. Accounts receivable consists of balances due from our salvage providers and buyers. Accounts receivable also includes advance charges paid by us on behalf of salvage providers. These charges typically include storage and tow fees incurred at a temporary storage or repair shop prior to our moving the vehicle to one of our facilities. Inventory increased $5.1 million to $19.6 million as of December 25, 2005, from $14.5 million as of December 26, 2004. Inventory consists of capitalized tow charges on vehicles on hand and the cost of purchased vehicles once title is received.

Inventory increased due to an increase in the number of units in inventory and higher per unit costs due primarily to higher tow charges.

Capital expenditures were approximately $18.2 million for 2005. These capital expenditures consisted of several growth projects and elective spending, including various branch improvements, upgrades to existing branches, the development of new facilities and continued enhancements to our information technology system.

On May 19, 2005, we entered into new senior credit facilities comprised of a $50.0 million revolving credit facility maturing in 2011 and a $115.0 million term loan facility maturing in 2012. The revolver is principally used for working capital purposes, and the term loan was used to finance the merger and related transactions, including the repayment of our old senior credit facilities. For purposes of calculating interest, loans under the senior credit facilities are designated as Eurodollar rate loans or, in certain circumstances, base rate loans, plus applicable borrowing margins. Eurodollar loans bear interest at the rate for deposits in dollars appearing on page 3570 of the Telerate screen as of 11:00 a.m., London time, two business days prior to the beginning of the applicable interest period, plus a borrowing margin as described below. Interest on Eurodollar rate loans is payable (i) as to any Eurodollar loan having an interest period of three months or less, on the last day of such interest period, and (ii) as to any Eurodollar loan having an interest period longer than three months, each day that is three months, or a whole multiple thereof, after the first day of such interest period and the last day of such interest period. Base rate loans bear interest at (a) the greater of (i) the rate most recently announced by the Bank of New York as its “prime rate” in effect at its principal office in New York City and (ii) the Federal Funds Effective Rate (as defined in our senior credit agreement) plus 0.50% per annum, plus (b) a borrowing margin as described below. The margin varies from 2.25% to 2.75% on Eurodollar revolving loans and from 2.50% to 2.75% on Eurodollar term loans. The margin varies from 1.25% to 1.75% on base rate revolving loans and from 1.50% to 1.75% on base rate term loans. The amount of the margin is based on our leverage ratio. As of December 25, 2005, the weighted average annual interest rate applicable to Eurodollar rate loans was 7.14% for the new senior credit facilities. During the successor period May 25, 2005 to December 25, 2005, the weighted average annual interest rate for the new senior credit facilities was 6.45%. A commitment fee of 0.50% on the unused portion of the senior credit facilities is payable on a quarterly basis. As of December 25, 2005, $48.0 million was available for borrowing under the senior credit facilities. As of December 25, 2005, the Company was in compliance with the covenants of its credit facilities.

Our obligations under the senior credit facilities are guaranteed by each existing direct and indirect subsidiary of IAAI. In addition, each future significant domestic subsidiary of IAAI is required to guarantee those obligations. The senior credit facilities are secured by (1) all existing and future property and assets, real and personal, of IAAI and each guarantor, subject to certain exceptions; (2) a pledge of 100% of the stock of each of IAAI’s existing and future direct and indirect domestic subsidiaries; (3) a pledge of 65% of the stock of each of IAAI’s future direct and indirect foreign subsidiaries; (4) all present and future intercompany debt of IAAI and each guarantor; and (5) all proceeds of the assets described in clauses (1), (2), (3) and (4) of this sentence. Under the senior credit facilities, we are required to meet specified restrictive financial covenants, including a maximum consolidated leverage ratio and minimum consolidated interest coverage ratio. The credit facilities also contain various other covenants that limit our ability to, among other things:

	•		incur additional indebtedness, including guarantees;

	•		create, incur, assume or permit to exist liens on property or assets;

	•		engage in sales, transfers and other dispositions of our property or assets;

	•		declare or pay dividends to, make distributions to, or make redemptions and repurchases from, equity holders;

	•		make or commit to make capital expenditures over certain thresholds;

	•		make loans and investments and enter into acquisitions and joint ventures;

	•		prepay, redeem or repurchase our debt, or amend or modify the terms of certain material debt or certain other agreements; and

	•		restrict our ability and the ability of our subsidiaries to pay dividends and make distributions.

We are currently in compliance with our obligations under the senior credit facilities.

The covenants contained within the senior credit agreement are critical to an investor’s understanding of our financial liquidity, as a violation could cause a default and lenders could elect to declare all amounts borrowed due and payable. The coverage ratio covenants are based on consolidated EBITDA. Consolidated EBITDA is defined as net earnings (loss) plus income tax provision (benefit), interest (net), depreciation, and amortization with further adjustments including non-cash items, nonrecurring items, and sponsor advisory fees. While consolidated EBITDA is not a defined term under generally accepted accounting principles in the United States, we believe that the inclusion of consolidated EBITDA is appropriate, as it provides additional information to demonstrate compliance with the financial covenants. Below is a table detailing consolidated EBITDA (in thousands):


	Three Months Ended												Twelve Months Ended
	March 27,			June 26,			September 25,			December 25,			December 25,
	2005			2005			2005			2005			2005
Net earnings (loss)	$	5,021		$	(9,961	)	$	507		$	(1,441	)	$	(5,874	)
Income taxes		3,143			445			(206	)		185			3,567
Interest expense (net)		419			2,790			6,210			5,865			15,284
Depreciation and amortization		3,203			4,120			4,481			5,515			17,319

EBITDA		11,786			(2,606	)		10,992			10,124			30,296
Non-cash charges		695			388			—			—			1,083
Non-recurring expense (income)		(32	)		(3,197	)		351			(171	)		(3,049	)
Merger costs		1,233			19,529			—			—			20,762
Estimated cost savings		1,218			—			—			—			1,218
Allowance per credit agreement (1)		—			1,000			1,000			—			2,000
Advisory service fees		—			49			125			125			299


Consolidated EBITDA	$	14,900		$	15,163		$	12,468		$	10,078		$	52,609


(1)		Per the credit agreement, EBITDA is to be increased by $1.0 million for the three month periods ended, September 25, 2005, and June 26, 2005 for covenant purposes only.

The term loan under the senior credit facilities is amortized quarterly from December 31, 2005 through the date of maturity. The scheduled quarterly amortization payments are $0.3 million per quarter, with a balloon payment of $106.9 million due on May 19, 2012.

With respect to fiscal years beginning 2006 and later, we are required to make a mandatory annual prepayment of the term loan and the revolving loan in an amount equal to 75% of excess cash flow, as defined in the senior credit agreement, when the consolidated leverage ratio is 4.0x or greater, or 50% of excess cash flow when the consolidated leverage ratio is at least 3.0x but less than 4.0x. In addition, we are required to make a mandatory prepayment of the term loans with, among other things:

	•		100% of the net cash proceeds of certain debt issuances, and sales and leasebacks of real property, subject to certain exceptions;

	•		50% of the net cash proceeds from the issuance of additional equity interests; and

	•		100% of the net cash proceeds from any property or asset sale or recovery event in an amount exceeding $2.5 million in any fiscal year, subject to certain exceptions and reinvestment requirements.

Mandatory prepayments will be applied first to the base rate term loans and then to Eurodollar term loans.

As of December 25, 2005, there were no borrowings under the revolving credit facilities, although we did have outstanding letters of credit in the aggregate amount of $2.0 million, and $115.0 million outstanding under the term loan facility. At December 25, 2005, the interest rate on borrowings under the term loan was 7.14%.

On April 1, 2005, IAAI Finance issued $150.0 million of 11% Senior Notes due 2013. The obligations under the notes were assumed by IAAI on May 25, 2005, as a result of the merger. The notes mature on April 1, 2013, with interest paid semi-annually every April 1 and October 1. Under the indenture governing the notes, subject to exceptions, we must meet a minimum consolidated interest coverage ratio to incur additional indebtedness. Prior to April 1, 2008, on any one or more occasions, the issuer may use the net proceeds of one or more equity offerings to redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 111.00% of the principal amount, plus accrued and unpaid interest. Otherwise, the notes are not redeemable until April 1, 2009. Starting on April 1, 2009, we have the option to redeem all or a portion of the notes at a redemption price equal to a percentage of the principal amount, plus accrued and unpaid interest. In the event of this kind of an optional redemption, the redemption price would be 105.50% for the 12-month period beginning April 1, 2009; 102.75% for the 12-month period beginning April 1, 2010; and 100.00% thereafter. If we experience specific kinds of changes of control, we must offer to purchase the notes at a price of 101% of their principal amount, plus accrued and unpaid interest. The indenture governing the notes contains various covenants which, subject to exceptions, limit our ability, and the ability of our restricted subsidiaries to, among other things:

	•		borrow money;

	•		incur liens;

	•		pay dividends or make certain other restricted payments or investments;

	•		issue disqualified stock;

	•		merge, consolidate or sell all or substantially all of our or their assets;

	•		enter into transactions with affiliates;

	•		create restrictions on dividends or other payments by the restricted subsidiaries;

	•		sell certain assets and use proceeds from asset sales; and

	•		create guarantees of indebtedness by restricted subsidiaries.

On May 25, 2005, we prepaid the outstanding principal amount of approximately $22.1 million on our prior credit facility, together with approximately $0.2 million of accrued interest, thereby paying off our prior credit facility in full.

We have capital leases of approximately $0.7 million of which approximately $0.4 million is classified as short term. Other long-term liabilities included our post-retirement benefits liability that relates to a prior acquisition. The amount recorded at December 25, 2005 for the post-retirement benefits liability was approximately $1.3 million.

We believe that existing cash, as well as cash generated from operations, together with available borrowings under our new senior credit facility, will be sufficient to fund capital expenditures and provide adequate working capital for operations for the next 12 months.

Summary Disclosure about Contractual Obligations

The following table sets forth our long-term contractual cash obligations as of December 25, 2005, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:


	2006		2007		2008		2009		2010		Thereafter		Total
	(dollars in thousands)
Long-term debt:
Term loan	$	1,143	$	1,143	$	1,143	$	1,143	$	1,143	$	108,611	$	114,326
Senior notes		—		—		—		—		—		150,000		150,000
Capital leases(1)		387		316		33		—		—		—		736
Operating leases		25,854		24,614		22,842		20,194		17,620		124,477		235,601
Other long-term obligations:
Non-compete agreements		248		243		183		20		20		—		714

Total	$	27,632	$	26,316	$	24,201	$	21,357	$	18,783	$	383,088	$	501,377


(1)		Includes related interest expense.

Critical Accounting Policies

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosures. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. As such, we continuously evaluate our estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Goodwill

As of December 25, 2005, we had $191.3 million of net goodwill recorded in our consolidated financial statements. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” we assess goodwill for possible impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value of this asset may not be recoverable. Important factors that could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results; significant negative industry or economic trends; significant decline in our stock price for a sustained period; and our market capitalization relative to net book value. If we determine that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we would measure any impairment based on the excess of carrying amount over fair value measured using a projected discounted cash flow model or other valuation techniques.

Deferred Income Taxes

As of December 25, 2005, we had $8.5 million of current net deferred tax assets recorded. The current deferred tax assets relate to temporary differences in inventory, accrued liabilities and a federal net operating loss carryforward.

As of December 25, 2005, we had $37.6 million of net deferred tax liabilities recorded. The net deferred tax liabilities relate primarily to intangible assets related to the merger transactions, depreciation and state net operating losses incurred in several of the states where we operate. We have determined that we may not realize the full tax benefit related to certain deferred tax assets. As such, a valuation allowance to reduce the carrying value of the deferred tax assets has been recorded.

Long-Lived Assets and Certain Identifiable Intangibles

As of December 25, 2005, we had $76.2 million of net property and equipment along with net intangible assets of $126.4 million. We evaluate long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the asset’s carrying amount to the estimated undiscounted future cash flows expected to be generated by the asset. If the estimated undiscounted future cash flows change in the future, we may be required to reduce the carrying amount of an asset to its fair value.

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151 (SFAS 151), “Inventory Costs an amendment of ARB No. 43, Chapter 4.” SFAS 151 discusses the general principles applicable to the pricing of inventory. Paragraph 5 of ARB 43, Chapter 4 provides guidance on allocating certain costs to inventory. This Statement amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. We adopted this new accounting standard at the beginning of our annual reporting period that began after June 15, 2005. We do not anticipate a material impact in 2006.

value method of accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. Under SFAS 123R the Company will adopt the prospective method in accounting for stock-based compensation for grants existing as of December 25, 2005. In 2006, the estimated impact of adopting SFAS123R will be approximately $0.6 million of additional compensation expense.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154), “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 establishes retrospective application as the required method for reporting a change in accounting principle, unless it is impracticable, in which case, in the absence of specific guidance provided for in a new pronouncement issued by an authoritative body, the changes should be applied to the latest practicable date presented for voluntary accounting changes. SFAS 154 also requires that a correction of an error be reported as a prior period adjustment by restating prior period financial statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

SIGNATURES

Pursuant to the requirements 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.
	By:	/s/ Thomas C. O’Brien
		President and Chief Executive Officer
Date: March 27, 2006

POWER OF ATTORNEY

We, the undersigned directors and executive officers of Insurance Auto Auctions, hereby severally constitute Thomas C. O’Brien and Scott P. Pettit, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the annual Report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendment to said Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 27th day of March, 2006.


/s/ Thomas C. O’Brien Thomas C. O’Brien		President and Chief Executive Officer, Director (Principal Executive Officer)

/s/ Scott P. Pettit Scott P. Pettit		Senior Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)

/s/ David J. Ament David J. Ament		Director

/s/ Brian T. Clingen Brian T. Clingen		Director

/s/ Church M. Moore Church M. Moore		Director

/s/ David I. Wahrhaftig David I. Wahrhaftig		Director

PART IV


ITEM 15.		EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

	(a)		1. Index to Consolidated Financial Statements

			The following Consolidated Financial Statements of Insurance Auto Auctions, Inc. and its subsidiaries are filed as part of this Amendment No. 1 to Annual Report on Form 10-K/A:


	Page
Report of Independent Registered Public Accounting Firm		F-1

Consolidated Balance Sheets		F-2

Consolidated Statements of Operations		F-3

Consolidated Statements of Shareholders’ Equity		F-4

Consolidated Statements of Cash Flows		F-6

Notes to Consolidated Financial Statements		F-8

	2.		Consolidated Financial Statement Schedules

			All schedules have been omitted because the matter or conditions are not present or the information required to be set forth therein is included in the Consolidated Financial Statements and related Notes thereto.

	3.		Exhibits

			See Item 15(c) below.

(c)

Exhibits


Exhibit No.		Description
2 (8)		Agreement and Plan of Merger dated February 22, 2005, by and among Insurance Auto Auctions, Inc. (“IAAI”), Axle Holdings, Inc. (“Axle Holdings”) and Axle Merger Sub, Inc. (“Axle Merger”) dated as of February 22, 2005.

3.1(2)		Articles of Incorporation of IAAI, as filed with the Illinois Secretary of State on August 7, 1997.

3.2(7)		Bylaws of IAAI, as amended as of May 25, 2005.

4.1(1)		Specimen Stock Certificate of IAAI.

4.2(7)		Indenture, dated April 1, 2005, among IAAI, as successor to IAAI Finance Corp., Insurance Auto Auctions Corp., the Subsidiary Guarantors (as defined therein) and Wells Fargo Bank, National Association, as Trustee.

4.3(7)		Supplemental Indenture, dated May 25, 2005, among IAAI, Insurance Auto Auctions Corp., IAA Services, Inc., IAA Acquisition Corp and Wells Fargo Bank, National Association, as Trustee.

4.4(7)		Form of 11% Senior Notes due 2013.

4.5(7)		Registration Rights Agreement dated April 1, 2005, among IAAI Finance Corp., Deutsche Bank Securities Inc. and Bear Stearns & Co. Inc., relating to the 11% Senior Notes due 2013 of IAAI, as successor to IAAI Finance Corp.

4.6(7)		Assumption Agreement, dated May 25, 2005, among IAAI, IAAI Finance Corp., Insurance Auto Auctions Corp., IAA Services, Inc., and IAA Acquisition Corp.

10.1(7)*		Stock Incentive Plan of Axle Holdings

10.2(7)*		Form of Nonqualified Stock Option Agreement of Axle Holdings pursuant to the Stock Incentive Plan.

10.3(3)*		Amended and Restated Employment Agreement dated April 2, 2001 by and between IAAI and Thomas C. O’Brien.

10.4(3)*		Employment Agreement dated April 2, 2001 by and between the Company and David R. Montgomery.

10.5(3)*		Employment Agreement dated April 2, 2001 by and between the Company and Scott P. Pettit.



Exhibit No.		Description
10.6(4)*		Employment Agreement dated October 23, 2003 by and between the Company and John R. Nordin.

10.7(7)*		Change of Control and Employment Agreement, dated September 5, 2005 between IAAI and Donald J. Hermanek

10.8(5)*		Employment Agreement dated July 23, 2004 by and between IAAI and John Kett.

10.9(6)*		Employment Agreement dated October 6, 2004 by and between the Company and Sidney L. Kerley.

10.10(7)		Credit Agreement, dated May 19, 2005 (the “Credit Agreement”), among Axle Holdings, Axle Merger and IAAI (as successor to Axle Merger), as borrowers, the several lenders from time to time parties thereto, Bear, Stearns & Co. Inc. and Deutsche Bank Securities Inc. as joint lead arrangers and joint bookrunners, Deutsche Bank Securities Inc. as syndication agent, Bear Stearns Corporate Lending Inc., as administrative agent and GMAC Commercial Finance LLC, ING Capital LLC and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc., as co-documentation agents.

10.11(7)		Guarantee and Collateral Agreement dated May 25, 2005 made by Axle Holdings, Axle Merger and IAAI and certain of its subsidiaries in favor of Bear Stearns Corporate Lending Inc., as administrative agent under the Credit Agreement.

10.12(7)		Form of Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing for Commercial Purposes by IAAI, as mortgagor, to Bear Stearns Corporate Lending Inc., as mortgagee and the administrative agent under the Credit Agreement.

10.13(7)		Intellectual Property Security Agreement dated May 25, 2005 made by IAAI and each of the grantors listed on Schedule I thereto in favor of Bear Stearns Corporate Lending Inc. as administrative agent for the secured parties (as defined in the Credit Agreement.

10.14(7)*		Amended and Restated Limited Liability Company Agreement of Axle Holdings II, LLC, dated May 25, 2005, by and among the individuals or entities listed on Schedule A attached thereto.

10.15(7)*		Shareholders Agreement of Axles Holdings dated May 25, 2005, among Axle Holdings, Axle Holdings II, LLC, and those employees of Axle Holdings or its subsidiaries listed on Schedule I thereto.

10.16(7)*		Amended and Restated Registration Rights Agreement, dated May 25, 2005, among Axle Holdings, Axle Holdings II, LLC, and those employees of Axle Holdings or its subsidiaries that are listed on Schedule I thereto.

10.17(7)*		Form of Conversion Agreement dated May 25, 2005 between Axle Holdings and each of Thomas C. O’Brien, David Montgomery, Scott Pettit, John Nordin, Don Hermanek, John Kett and Sidney Kerley.



Exhibit No.		Description
10.18(7)*		Form of Exchange Stock Option Agreement dated May 25, 2005 between Axle Holdings and each of Thomas C. O’Brien, David Montgomery, Scott Pettit, John Nordin, Don Hermanek, John Kett and Sidney Kerley.

10.19(7)		Financial Advisory and Closing Fee Letter Agreement dated February 22, 2005 from Axle Merger to Kelso & Company, L.P.

10.20(7)		Letter Agreement dated May 25, 2005 from Axle Merger to PCAP, L.P.

10.37(9)*		2006 Incentive Plan – Executive Management.

10.38(7)		Offer to Exchange $150,000,000 11% Notes due 2013 for $150,000,000 Registered Notes due 2013

21(10)		Subsidiaries of the Registrant.

24		Power of Attorney (see signatures page).

31.1		Certification of Thomas C. O’Brien, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Scott P. Pettit, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Thomas C. O’Brien, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Scott P. Pettit, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)		Incorporated by reference from an exhibit filed with the Registrant’s Registration Statement on Form S-1 (File No. 33-43247) declared effective by the Securities and Exchange Commission (“SEC”) on November 20, 1991.

(2)		Incorporated by reference from an exhibit included in the Registrant’s Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 31, 1997.

(3)		Incorporated by reference from an exhibit included in the Registrant’s Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended April 1, 2001.

(4)		Incorporated by reference from an exhibit included in the Registrant’s Annual Report on Form 10-K (File No. 0-19594) for the fiscal year ended December 28, 2003.

(5)		Incorporated by reference from an exhibit included in the Registrant’s Quarterly Report on Form 10-Q (File No. 0-19594) for the fiscal quarter ended June 27, 2004.

(6)		Incorporated by reference from an exhibit included in the Registrant’s Annual Report on Form 10-K (File No. 0-19594 for the fiscal year ended December 26, 2004.


(7)		Incorporated by reference from an exhibit included in the Registrant’s Form S-4 (File No. 333-127791) filed with the SEC on August 23, 2005.

(8)		Incorporated by reference from an appendix included in the Registrant’s Definitive Proxy Statement on Schedule 14A (File No. 0-19594) filed with the SEC on April 26, 2005.

(9)		Incorporated by reference from an exhibit included in the Registrant’s Current Report on Form 8-K (File No. 033-43247) filed with the SEC on March 2, 2006.

(10)		Incorporated by reference from an exhibit included in the Registrant’s Annual Report on Form 10-K (File No. 033-43247) filed with the SEC on March 27, 2006.

*		This item is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 601(b)(10)(iii) of Regulation S-K.

SIGNATURES

Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.


	INSURANCE AUTO AUCTIONS, INC.
	By:	/s/ Thomas C. O’Brien
		President and Chief Executive Officer
Date: March 31, 2006

POWER OF ATTORNEY


/s/ Thomas C. O’Brien Thomas C. O’Brien		President and Chief Executive Officer, Director (Principal Executive Officer)

/s/ Scott P. Pettit Scott P. Pettit		Senior Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)

/s/ David J. Ament David J. Ament		Director

/s/ Brian T. Clingen Brian T. Clingen		Director

/s/ Church M. Moore Church M. Moore		Director

/s/ David I. Wahrhaftig David I. Wahrhaftig		Director

Report of Independent Registered Public Accounting Firm

The Board of Directors of Insurance Auto Auctions, Inc.:

We have audited the accompanying consolidated balance sheets of Insurance Auto Auctions, Inc. and subsidiaries (“the Company”) as of December 25, 2005 (Successor) and December 26, 2004 (Predecessor), and the related consolidated statements of operations, shareholders’ equity, and cash flows for the period from May 25, 2005 to December 25, 2005 (Successor), for the period from December 27, 2004 to May 24, 2005 (Predecessor) and for the years ended December 26, 2004 (Predecessor) and December 28, 2003 (Predecessor). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Insurance Auto Auctions, Inc. and subsidiaries as of December 25, 2005 (Successor) and December 26, 2004 (Predecessor), and the related consolidated statements of operations, shareholders’ equity, and cash flows for the period from May 25, 2005 to December 25, 2005 (Successor), for the period from December 27, 2004 to May 24, 2005 (Predecessor) and for the years ended December 26, 2004 (Predecessor) and December 28, 2003 (Predecessor), in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, effective May 25, 2005, Axle Holdings, Inc. acquired all of the outstanding stock of Insurance Auto Auctions, Inc. in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than for the periods before the acquisition and, therefore, is not comparable.

/s/ KPMG LLP

Chicago, Illinois
March 23, 2006

F-1

INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands except per share amounts)


	SUCCESSOR			PREDECESSOR
	December 25,			December 26,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	25,882		$	13,325
Accounts receivable, net		46,920			50,443
Inventories		19,611			14,498
Income taxes receivable		2,732			—
Deferred income taxes		8,511			4,693
Other current assets		5,323			1,613

Total current assets		108,979			84,572

Property and equipment, net		77,231			74,684
Intangible assets, net		126,378			1,747
Goodwill		191,266			137,494
Other assets		11,006			482

	$	514,860		$	298,979


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	38,022		$	38,505
Accrued liabilities		17,445			13,513
Obligations under capital leases		367			1,094
Income taxes payable		—			1,067
Obligations under line of credit		—			6,000
Current installments of long-term debt		1,143			7,512

Total current liabilities		56,977			67,691


Deferred income taxes		37,582			14,248
Other liabilities		12,765			4,353
Obligations under capital leases		329			661
Senior notes		150,000			—
Long-term debt, excluding current installments		113,183			9,375

Total liabilities		370,836			96,328


Shareholders’ equity:
Preferred stock, par value of $.001 per share (predecessor)
Authorized 5,000,000 shares; none issued		—			—
Common stock, par value of $.001 per share (predecessor)
Authorized 20,000,000 shares; 12,709,758 shares issued and 11,569,156 outstanding as of December 26, 2004		—			12
Common stock, par value of $.01 per share (successor)
100 shares authorized, issued and outstanding		—			—
Additional paid-in capital		149,458			151,793
Treasury stock, 906,480 shares at December 26, 2004 (predecessor)		—			(9,637	)
Deferred compensation related to restricted stock		—			(4,343	)
Accumulated other comprehensive loss		—			(186	)
Retained earnings (loss)		(5,434	)		65,012

Total shareholders’ equity		144,024			202,651

	$	514,860		$	298,979

See accompanying Notes to Consolidated Financial Statements

F-2

INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)


	SUCCESSOR			PREDECESSOR
	May 25, 2005 -			December 27,
	December 25,			2004 –May 24,			December 26,			December 28,
	2005			2005			2004			2003
Revenues:
Fee income	$	136,926		$	103,203		$	208,743		$	169,687
Vehicle sales		23,484			17,242			31,436			39,963

		160,410			120,445			240,179			209,650

Cost of Sales
Branch cost		102,675			72,554			157,297			135,157
Vehicle cost		19,978			14,640			26,694			35,301

		122,653			87,194			183,991			170,458

Gross profit		37,757			33,251			56,188			39,192

Operating expense:
Selling, general and administrative		24,630			15,822			34,978			30,225
Loss (gain) on sale of property and equipment		197			(896	)		301			54
Business transformation charges		—			—			—			3,902
Merger costs		5,021			15,741			—			—

		29,848			30,667			35,279			34,181

Earnings from operations		7,909			2,584			20,909			5,011

Other (income) expense
Interest expense		15,021			567			1,572			1,505
Other income		(346	)		(2,442	)		(67	)		(130	)


Earnings (loss) before income taxes		(6,766	)		4,459			19,404			3,636

Income taxes		(1,332	)		4,899			7,139			1,304


Net earnings (loss)	$	(5,434	)	$	(440	)	$	12,265		$	2,332

See accompanying Notes to Consolidated Financial Statements

F-3

INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(dollars in thousands)


	Common Stock
														Accumulated
						Additional					Deferred			Other					Total
	Number of					Paid-in		Treasury			Compensation			Comprehensive			Retained		Shareholders’
	Shares			Amount		Capital		Stock			(Restricted Stock)			Income (Loss)			Earnings		Equity
Balance at December 29, 2002 – Predecessor		12,292,599		$	12	$	144,420	$	—		$	—		$	(745	)	$	50,415	$	194,102


Net earnings		—			—		—		—			—			—			2,332		2,332
Other comprehensive income, net of tax:
Change in fair value of interest rate swap contract (net of tax, $78)		—			—		—		—			—			120			—		120

Comprehensive income																				2,452
Issuance of common stock in connection with exercise of common stock options		6,920			—		127		—			—			—			—		127
Tax benefit related to stock options exercised		—			—		15		—			—			—			—		15
Issuance of common stock in connection with the employee stock purchase plan		25,963			—		373		—			—			—			—		373
Treasury stock purchased		(807,209	)		—		—		(8,012	)		—			—			—		(8,012	)
Deferred compensation relating to restricted stock grants		—			—		921		—			(921	)		—			—		—
Amortization of deferred compensation		—			—		—		—			29			—			—		29


Balance at December 28, 2003 – Predecessor		11,518,273		$	12	$	145,856	$	(8,012	)	$	(892	)	$	(625	)	$	52,747	$	189,086


Net earnings																		12,265		12,265
Other comprehensive income, net of tax:
Change in fair value of interest rate swap contract (net of tax, $273)		—			—		—		—			—			439			—		439

Comprehensive income																				12,704
Issuance of common stock in connection with exercise of common stock options		104,231			—		1,297		—			—			—			—		1,297
Tax benefit related to stock options exercised		—			—		275		—			—			—			—		275
Restricted shares released		16,625			—		—		—			—			—			—		—
Issuance of common stock in connection with the employee stock purchase plan		29,298			—		329		—			—			—			—		329
Treasury stock purchased		(99,271	)		—		—		(1,625	)		—			—			—		(1,625	)
Deferred compensation relating to restricted stock grants		—			—		4,036		—			(4,036	)		—			—		—
Amortization of deferred compensation		—			—		—		—			585			—			—		585


Balance at December 26, 2004 – Predecessor		11,569,156		$	12	$	151,793	$	(9,637	)	$	(4,343	)	$	(186	)	$	65,012	$	202,651

F-4

INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
(dollars in thousands)


	Common Stock
															Accumulated
							Additional						Deferred		Other					Total
	Number of						Paid-in			Treasury			Compensation		Comprehensive		Retained			Shareholders’
	Shares			Amount			Capital			Stock			(Restricted Stock)		Income (Loss)		Earnings			Equity
Net loss		—			—			—			—			—		—		(440	)		(440	)
Other comprehensive income, net of tax:
Change in fair value of interest rate swap contract (net of tax, $87)		—			—			—			—			—		140		—			140

Comprehensive income																					(300	)
Termination of interest rate swap agreement		—			—			—			—			—		46		—			46
Issuance of common stock in connection with exercise of common stock options		46,148			—			586			—			—		—		—			586
Tax benefit related to stock options exercised		—			—			8,490			—			—		—		—			8,490
Restricted shares released		230,875			—			—			—			3,260		—		—			3,260
Issuance of common stock in connection with the employee stock purchase plan		15,847			—			223			—			—		—		—			223
Treasury stock purchased		(82	)		—			—			(1	)		—		—		—			(1	)
Amortization of deferred compensation		—			—			—			—			1,083		—		—			1,083


Balance at May 24, 2005 – Predecessor		11,861,944		$	12		$	161,092		$	(9,638	)	$	—	$	—	$	64,572		$	216,038

Redemption of Predecessor’s outstanding common stock		(11,861,944	)		(12	)		(161,092	)		—			—		—		—			(161,104	)
Cancellation of Predecessor’s stock held in treasury		—			—			—			9,638			—		—		—			9,638
Write-off of Predecessor’s retained earnings associated with the transaction		—			—			—			—			—		—		(64,572	)		(64,572	)
Contributed capital associated with the transaction		—			—			143,600			—			—		—		—			143,600
Contributed capital in the form of exchanged stock options associated with the transaction		—			—			5,653			—			—		—		—			5,653
Net loss		—			—			—			—			—		—		(5,434	)		(5,434	)
Contributed capital		—			—			205			—			—		—		—			205


Balance at December 25, 2005 – Successor		—		$	—		$	149,458		$	—		$	—	$	—	$	(5,434	)	$	144,024

See accompanying Notes to Consolidated Financial Statements

F-5

INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)


	SUCCESSOR			PREDECESSOR
				December			Twelve			Twelve
	May 25, 2005 –			27, 2004 –			Months ended			Months ended
	December 25,			May 24,			December 26,			December 28,
	2005			2005			2004			2003
Cash flows from operating activities:
Net earnings (loss)	$	(5,434	)	$	(440	)	$	12,265		$	2,332
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		11,855			5,464			12,985			10,661
(Gain) loss on disposal of fixed assets		197			(896	)		301			54
Gain on change in fair market value of derivative		—			—			—			(307	)
Deferred compensation related to restricted stock		—			4,343			585			29
Deferred income taxes		(1,874	)		(1,448	)		1,595			788
Tax benefit related to employee stock compensation		—			8,394			275			15
Changes in assets and liabilities
(excluding effects of acquired companies):
(Increase) decrease in:
Accounts receivable, net		9,270			(5,312	)		(1,536	)		(752	)
Income tax receivable		(113	)		(2,618	)		—
Inventories		(4,641	)		(472	)		(896	)		(2,442	)
Other current assets		(3,190	)		(520	)		1,486			489
Other assets		228			(827	)		(1,438	)		(975	)
Increase (decrease) in:
Accounts payable		(7,202	)		6,719			1,612			6,349
Accrued liabilities		(8,732	)		12,279			3,151			(878	)
Income taxes		—			(1,067	)		1,067			—


Net cash provided (used) by operating activities		(9,636	)		23,599			31,452			15,363

See accompanying Notes to Consolidated Financial Statements

F-6

INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(dollars in thousands)


	SUCCESSOR			PREDECESSOR
							Twelve			Twelve
	May 25, 2005 –			December 27,			Months ended			Months ended
	December 25,			2004 – May 24,			December 26,			December 28,
	2005			2005			2004			2003
Cash flows from investing activities:
Purchase of IAAI, Inc.	$	(356,753	)	$	—		$	—		$	—
Capital expenditures		(9,943	)		(8,221	)		(28,717	)		(16,343	)
Payments made in connection with acquisitions, net of cash acquired		(271	)		(600	)		(1,912	)		(7,872	)
Proceeds from disposal of property and equipment		1,488			1,391			1,520			60


Net cash used in investing activities		(365,479	)		(7,430	)		(29,109	)		(24,155	)

Cash flows from financing activities:
Proceeds from issuance of common stock		—			905			1,626			500
Contributed capital		143,805			—			—			—
Proceeds from short-term borrowings		—			3,000			6,000			30,000
Payment of financing and other fees		(13,586	)		—			—			—
Principal payments of long-term debt		(22,799	)		(3,762	)		(7,547	)		(5,668	)
Purchase of treasury stock		—			(1	)		(1,625	)		(8,012	)
Principal payments on capital leases		(445	)		(614	)		(2,958	)		(2,569	)
Issuance of senior notes		150,000			—			—			—
Issuance of term loan		115,000			—			—			—


Net cash provided by (used in) financing activities		371,975			(472	)		(4,504	)		14,251


Net increase (decrease) in cash and cash equivalents		(3,140	)		15,697			(2,161	)		5,459

Cash and cash equivalents at beginning of period		29,022			13,325			15,486			10,027

Cash and cash equivalents at end of period	$	25,882		$	29,022		$	13,325		$	15,486

Supplemental disclosures of cash flow information:
Cash during the period for:
Interest paid	$	12,220		$	689		$	1,723		$	1,639

Income taxes paid	$	147		$	1,654		$	5,404		$	855

Income taxes refunded	$	5,111		$	26		$	1,011		$	1,390


Non-cash transactions:
Options exchanged in merger transactions	$	5,653		$	—		$	—		$	—


Capital leases	$	—		$	—		$	—		$	3,375

See accompanying Notes to Consolidated Financial Statements.

F-7

INSURANCE AUTO AUCTIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1)		Summary of Business and Significant Accounting Policies

		*Background*

		IAAI operates in a single business segment—providing insurance companies and other vehicle suppliers cost-effective salvage processing solutions, including selling total loss and recovered theft vehicles.

		On May 25, 2005, the Company completed merger transactions, which are described in detail in Note 2. The merger transactions resulted in a new basis of accounting under Statement of Financial Accounting Standards No. 141. This change creates many differences between reporting for IAAI post-merger, as successor, and IAAI pre-merger, as predecessor. The accompanying consolidated financial statements and the notes to the consolidated financial statements reflect separate reporting periods for the predecessor and successor company.

		*Principles of Consolidation*

		The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

		*Reclassification*

		Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

		*Cash and Cash Equivalents*

		Cash equivalents represents an investment in a money market fund. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The balance in money market funds as of December 25, 2005 is $6.1 million and zero as of December 26, 2004.

		*Fiscal Periods*

		Fiscal years 2005, 2004 and 2003 each consisted of 52 weeks and ended on December 25, 2005, December 26, 2004 and December 28, 2003, respectively.

		*Revenue Recognition*

		Revenues (including vehicle sales and fee income) are generally recognized at the date the vehicles are sold at auction. Revenue not recognized at the date the vehicles are sold at auction includes certain buyer-related fees, which are recognized when payment is received.

F-8

		*Inventories*

		Inventories are stated at the lower of cost or estimated realizable value. Cost includes the cost of acquiring ownership of total loss and recovered theft vehicles, charges for towing and, less frequently, reconditioning costs. The costs of inventories sold are charged to operations based upon the specific-identification method.

		*Disclosures About Fair Value of Financial Instruments*

		The Company’s financial instruments include cash and cash equivalents, accounts receivable and long-term debt. The fair values of these instruments approximate their carrying values other than long-term debt. As of December 25, 2005, the fair value of the Company’s 11% Senior Notes due 2013 was $157.7 million and the fair value of the Company’s term loan under its senior credit facilities was $115.6 million.

		*Goodwill Impairment*

		As part of an ongoing review of the valuation and amortization of intangible assets, management assesses the carrying value of the Company’s intangible assets if facts and circumstances suggest that such assets may be impaired. If this review indicates that an asset is impaired as determined by a comparison of the fair value to the carrying amount, including goodwill, the carrying value of the asset would be reduced to its estimated fair market value. The annual impairment test of intangible assets is performed in the first quarter of each year. The fiscal 2005 annual test did not indicate any impairment.

		*Impairment of Long-Lived Assets*

		The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the assets carrying amount to the estimated undiscounted future cash flows expected to be generated by the asset. If the estimated undiscounted future cash flows change in the future, the Company may be required to reduce the carrying amount of an asset to its fair value.

		*Use of Estimates*

		The Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results will likely differ from these estimates, but management believes that such differences are not material.

		*Depreciation and Amortization*

		Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to 40 years. Leasehold improvements are amortized on a straight-line basis over their estimated economic useful life or the lease term, whichever is less.

F-9

		*Income Taxes*

		The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards. The effect of a rate change on deferred tax assets and liabilities is recognized in the period of enactment.

		*Credit Risk*

		Vehicles are sold generally for cash; therefore, very little credit risk is incurred from the selling of vehicles. Receivables arising from advance charges made on behalf of vehicle suppliers, most of which are insurance companies, are generally satisfied from the net proceeds payable to the vehicle suppliers. A small percentage of vehicles sold do not have sufficient net proceeds to satisfy the related receivables, and in these cases, the receivable is due from the vehicle suppliers. Management performs regular evaluations concerning the ability of its customers and suppliers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. The Company’s credit losses for the periods presented are insignificant and have not exceeded management’s estimates.

		*Stock Based Compensation*

		The matters discussed in this Note should be read in conjunction with disclosures made in Note 9. The Company accounts for its stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion 25 (“APB 25”), Accounting for Stock Issued to Employees and related interpretations. As a result of the merger, there were significant changes in the Company’s stock compensation plans.

		The following table illustrates the effect on the net earnings (loss) if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), awards of stock options and restricted stock to employees, including straight-line recognition of compensation cost over the related vesting periods for fixed awards:


	Successor			Predecessor
	May 25, 2005 -			December 27, 2004 –			December 26,			December 28,
	December 25, 2005			May 24, 2005			2004			2003
	(dollars in thousands)
Net earnings (loss)	$	(5,434	)	$	(440	)	$	12,265		$	2,332
Add: Stock-based employee compensation expense included in reported net earnings (loss), net of related tax effects		—			2,672			370			45
Deduct: Stock based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(41	)		(4,473	)		(2,835	)		(1,795	)


Pro Forma net earnings (loss)	$	(5,475	)	$	(2,241	)	$	9,800		$	582

F-10

The fair value of the stock-based compensation in the pro forma disclosure was determined using the Black-Scholes option-pricing model. The weighted average fair value of the stock options granted for the successor period May 25, 2005 to December 25, 2005 was $7.97, and for the predecessor years 2004 and 2003 was $11.98 and $9.65, respectively. For the predecessor period December 27, 2004 to May 24, 2005 there were no stock options granted. The relevant assumptions used to determine the weighted average fair value are presented in the table below.


	Successor			Predecessor
	May 25, 2005 –			December 27, 2004 –			December 26,			December 28,
	December 25, 2005			May 24, 2005			2004			2003
Expected dividend yield	$	—		$	—		$	—		$	—
Expected volatility		0	%		88	%		89	%		84	%
Risk-free interest rate		4.24	%		3.65	%		3.70	%		3.10	%
Expected life		5.0			3.6			5.2			5.0

Under SFAS 123, a privately held company is not required to consider the expected volatility to determine the fair value of its options, commonly referred as the minimum value method. During the successor period, the Company no longer has public traded equity and for purposes of SFAS 123 is considered a privately held company. As such, the volatility assumption used in the successor period is zero. During the predecessor period, the Company had publicly traded equity and as such, the volatility assumption was used in the calculation, as presented in the assumption table.

As the Company applied the minimum value method for pro forma disclosure purposes under SFAS 123, the Company will adopt SFAS 123R prospectively for new awards and for awards modified, repurchased or cancelled on or after December 25, 2005. Had the Company elected to use the fair value method for pro forma disclosure purposes under SFAS 123, it would have been required to recognize more than approximately $0.6 million of compensation expense in the statement of operations under SFAS 123R for periods beginning on or after December 25, 2005.

Capitalized Software Costs

The Company capitalizes certain internal use computer software costs, after management has determined the project will be complete and the software will perform its intended function in accordance with SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalized software costs are amortized utilizing the straight-line method over the economic lives of the related assets not to exceed five years.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (SFAS 123R) “Share-Based Payment.” SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123R establishes fair value as the measurement method in accounting for share-based payments to employees and eliminates the alternative use of the intrinsic value method of accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. In 2006, the estimated impact of adopting SFAS123R will be approximately $0.6 million of additional compensation expense.

F-11

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154), “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS 154 establishes retrospective application as the required method for reporting a change in accounting principle, unless it is impracticable, in which case, in the absence of specific guidance provided for in a new pronouncement issued by an authoritative body, the changes should be applied to the latest practicable data presented for voluntary accounting changes. SFAS 154 also requires that a correction of an error be reported as a prior period adjustment by restating prior period financial statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

F-12

(2)

Merger Transactions

Defined Terms

Unless the context indicates otherwise, the following terms used herein shall have the following meanings:

	•		the term “Axle Holdings” refers to Axle Holdings, Inc., the corporate parent of Axle Merger;

	•		the term “Axle Merger” refers to Axle Merger Sub, Inc., the entity that merged with and into IAAI as part of the transactions;

	•		the term “continuing investors” refers to Thomas C. O’Brien, Scott P. Pettit, David R. Montgomery, Donald J. Hermanek, John W. Kett, John R. Nordin and Sidney L. Kerley;

	•		the terms “IAAI,” “we,” “us,” “our” and other similar terms refer to Insurance Auto Auctions, Inc. and its subsidiaries;

	•		the term “IAAI Finance” refers to IAAI Finance Corp.;

	•		the term “Kelso” refers to Kelso & Company, L.P., a New York based private investment firm;

	•		the term “LLC” refers to Axle Holdings II, LLC, the limited liability company parent of Axle Holdings and an entity controlled by affiliates of Kelso;

	•		the term “Magnetite” refers to Magnetite Asset Investors III, L.L.C.;

	•		the term “merger” refers to the merger of Axle Merger with and into IAAI and the merger of IAAI Finance with and into IAAI on May 25, 2005;

	•		the term “notes” refers to the 11% Senior Notes due 2013 of IAAI;

	•		the term “Parthenon” refers to Parthenon Investors II, L.P.; and

	•		the term “transactions” refers, collectively, to the merger and the following transactions which occurred in connection with the merger;

	•		the equity contributions made by Kelso;

	•		the investment by the continuing investors;

	•		our entry into senior credit facilities;

	•		the offering of the notes and the application of the net proceeds there from; and

	•		the repayment of outstanding principal and accrued interest under our prior credit facility.

On February 22, 2005, Axle Holdings, Axle Merger and IAAI entered into a merger agreement that provided for the merger of Axle Merger with and into IAAI, with IAAI continuing as the surviving corporation. Upon completion of the merger and related transactions, IAAI became a direct, wholly owned subsidiary of Axle Holdings, which is owned by the LLC (which is controlled by affiliates of Kelso).

The following transactions occurred in connection with the merger:

•

Approximately 11.8 million shares of IAAI’s outstanding common stock converted into the right to receive $28.25 per share in cash;

F-13

	•		All outstanding options to purchase shares of IAAI’s common stock (other than certain options held by the continuing investors, i.e., Thomas C. O’Brien, Scott P. Pettit, David R. Montgomery, Donald J. Hermanek, John W. Kett, John R. Nordin and Sidney L. Kerley, which were exchanged into stock options of Axle Holdings) were canceled in exchange for payments in cash of $28.25 per underlying share, less the applicable option exercise price;

	•		Affiliates of Kelso, Parthenon and certain of its affiliates, Magnetite, Brian T. Clingen, Dan Simon and the continuing investors contributed approximately $143.6 million in cash to the LLC, which in turn held all the outstanding shares of common stock of Axle Holdings immediately after the closing of the transactions;

	•		The continuing investors exchanged stock options of IAAI with an aggregate intrinsic value of approximately $3.3 million into stock options of Axle Holdings with an equivalent aggregate spread value;

	•		Axle Merger entered into the senior credit facilities, comprised of a $50.0 million revolving credit facility and a $115.0 million term loan and, upon the completion of the merger, IAAI assumed Axle Merger’s obligations under such credit facilities, and all of IAAI’s domestic subsidiaries, Insurance Auto Auctions Corp., IAA Services, Inc. and IAA Acquisition Corp., guaranteed such credit facilities;

	•		The LLC contributed to Axle Merger, through Axle Holdings, approximately $143.6 million in cash, representing the cash equity contribution by affiliates of Kelso, Parthenon and certain of its affiliates, Magnetite, Brian T. Clingen, Dan Simon and the continuing investors;

	•		IAAI Finance issued $150 million of 11% Senior Notes due 2013;

	•		IAAI Finance merged with and into IAAI, with IAAI as the surviving corporation; and

	•		IAAI assumed IAAI Finance’s obligations under the notes and all of IAAI’s domestic subsidiaries unconditionally guaranteed the notes on a senior unsecured basis at the time IAAI Finance merged with and into IAAI.

The Company used the net proceeds from these contributions and financings to: (i) fund the cash consideration payable to the Company’s shareholders and option holders under the merger agreement; (ii) repay any outstanding principal and accrued interest under the Company’s existing credit facility as of the closing of the merger; and (iii) pay related transaction fees and expenses.

The notes mature on April 1, 2013. The notes are non-callable for four years, after which they are callable at a premium declining ratably to par at the end of year six.

The aggregate purchase price paid in the merger transactions for shares and outstanding stock options was approximately $366.4 million, consisting of $356.8 million in outstanding stock and options, $5.7 million representing the “fair value” of the options converted and exchanged, and $3.9 million of transaction expenses and costs related to exit of towing operations. The intrinsic value of the options converted is $3.3 million. The merger was recorded in accordance with Statement of Financial Accounting Standards No. 141 (SFAS 141). The estimates are based on preliminary valuations and information currently available and are derived from management’s estimates and judgment. The Company believes that the preliminary valuations and estimates are a reasonable basis for the allocation of the purchase price. However, the Company’s analysis of the fair value estimates is continuing to be refined in accordance with SFAS 141. As additional information becomes available and as actual results vary from these estimates, the underlying assets or liabilities may need to be adjusted, thereby impacting intangible asset estimates, as well as goodwill. During the quarter ended December 25, 2005, the Company recorded an increase in fixed assets of $5.0 million, an increase in deferred taxes and the income tax receivable of $2.8 million, a decrease of

F-14

$3.3 in intangible assets, a net decrease of $6.7 in other assets and a corresponding increase to goodwill of $2.2 million, resulting from the continued analysis of the fair values of the assets acquired and liabilities assumed at the date of acquisition. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed (in thousands):


Current assets	$	110,253
Property, plant, & equipment		75,383
Deferred income tax asset		15,232
Goodwill		191,117
Income tax receivable		4,477
Intangibles		131,500
Debt issuance cost		9,357
Other		760

Total assets	$	538,079

Current liabilities	$	60,078
Capital lease obligation		1,142
Senior notes		150,000
Credit facilities		115,000
Deferred income tax liability		46,574
Unfavorable leases		3,800
Other		12,232

Total liabilities	$	388,826


Net assets acquired	$	149,253

The preliminary valuations resulted in recognition of $131.5 million of intangibles, which are comprised of $102.5 million in supplier relationships, $0.6 million in non-compete agreements, $14.9 million in trade names, and $13.5 million in proprietary software.

Significant Items Affecting Comparability

The merger transactions resulted in a new basis of accounting under SFAS 141. This change creates many differences between reporting for IAAI post-merger, as successor, and IAAI pre-merger, as predecessor. The predecessor financial data for periods ending on or prior to May 24, 2005, generally will not be comparable to the successor financial data for periods after that date. The merger resulted in IAAI having an entirely new capital structure, which results in significant differences between predecessor and successor in the equity sections of the statements. In addition, the successor incurred debt issuance costs and $265.0 million of debt in connection with the merger. The $22.1 million of debt related to the predecessor’s credit facilities was paid off in connection with the merger. As a result, interest expense, debt and debt issuance costs will not be comparable between the predecessor and the successor. The Company has made certain adjustments to increase or decrease the carrying amount of assets and liabilities as a result of preliminary estimates and certain assumptions the Company believes are reasonable, which, in a number of instances, has resulted in changes to amortization and depreciation expense amounts. The final appraisals are not yet complete, and thus the Company has not yet completed the Company’s allocation of purchase price and may make further adjustments to the preliminary allocations in subsequent periods.

F-15

The following table reflects the unaudited pro forma results as if the acquisition occurred on December 28, 2003 (in thousands):



	Year Ended
	Successor			Predecessor
	December 25,			December 26,
	2005			2004
Revenue	$	280,855		$	240,179
Earnings (loss) before taxes		(12,535	)		(12,425	)
Earnings (loss)		(7,897	)		(7,828	)

The pro forma results reflect the incremental interest related to the new debt, changes in amortization and depreciation expense due to the change in basis and related remaining lives, and the addition of the annual financial advisory service fee for services provided by Kelso.

(3)

Accounts Receivable

Accounts receivable consists of the following as of December 25, 2005 and December 26, 2004:


	Successor			Predecessor
	December 25, 2005			December 26, 2004
Unbilled receivables	$	35,534		$	35,555
Trade accounts receivable		11,458			14,596
Other receivables		412			1,086

		47,404			51,237
Less allowance for doubtful accounts		(484	)		(794	)

	$	46,920		$	50,443

Unbilled receivables represent amounts paid to third parties on behalf of insurance companies for which the Company will be reimbursed when the vehicle is sold. Trade accounts receivable include fees and proceeds to be collected from both insurance companies and buyers.

(4)

Property and Equipment

Property and equipment consists of the following at December 25, 2005 and December 26, 2004:


	Successor			Predecessor
	December 25, 2005			December 26, 2004
Land	$	5,051		$	7,662
Buildings and improvements		6,534			13,722
Equipment		27,295			49,645
Leasehold improvements		44,525			49,485

		83,405			120,514

Less accumulated depreciation and amortization		(6,174	)		(45,830	)

	$	77,231		$	74,684

F-16

As discussed in Note 2, in connection with the merger transactions, the property and equipment of the successor was revalued at the fair value based on preliminary estimates and assumptions, resulting in adjusted basis, and the accumulated depreciation was eliminated. Leasehold improvements include landlord financed projects of $5.5 million.

Depreciation expense was $6.9 million for the successor period of May 25, 2005 through December 25, 2005, $5.2 million for the predecessor period of December 27, 2004 through May 24, 2005, and $12.4 million for the predecessor year 2004 and $10.2 million in 2003.

(5)

Goodwill and Other Intangibles

As of December 25, 2005, the Company had $191.3 million of goodwill recorded in the Company’s consolidated financial statements that was recorded as a result of the merger transactions. The additional balance of $0.3 million was due to the acquisition of Sadisco of Charleston and an earn out payment made in the successor period associated with a prior year acquisition.

Goodwill and other intangibles are recorded at cost less accumulated amortization and consist of the following at December 25, 2005 and December 26, 2004:


	Cost
		December 25,		December 26,
	Assigned Life	2005		2004
	(dollars in millions)
*Predecessor*
Goodwill	Indefinite	$	—	$	167.0
Covenants not to compete	3 to 5 years		—		4.2

*Successor*
Goodwill	Indefinite		191.3		—
Supplier relationships	20 years		102.5		—
Trade names	15 years		14.9		—
Software	6 years		13.5		—
Covenants not to compete	12 to 18 months		0.7		—

		$	322.9	$	171.2


	Accumulated Amortization
		December 25,			December 26,
	Assigned Life	2005			2004
	(dollars in millions)
*Predecessor*
Goodwill	Indefinite	$	—		$	(29.5	)
Covenants not to compete	3 to 5 years		—			(2.5	)

*Successor*
Supplier relationships	20 years		(3.1	)		—
Software	6 years		(1.3	)		—
Trade names	15 years		(0.6	)		—
Covenants not to compete	12 to 18 months		(0.2	)		—

		$	(5.2	)	$	(32.0	)

F-17

Amortization for the predecessor period of December 27, 2004 through May 24, 2005 is $0.2 million. Amortization for the successor period of May 25, 2005 through December 25, 2005 is $5.2 million. This amount is included within selling, general and administrative expense on the Company’s Consolidated Statements of Operations. Based upon existing intangibles, the projected annual amortization expense is $8.1 million for 2006 and $8.0 million for each of the years 2007 through 2010.

(6)

Long-term Debt

Long-term debt is summarized as follows:


	Successor		Predecessor
	2005		2004
	(dollars in thousands)
11% senior notes	$	150,000	$	—
Senior secured credit facilities		114,326		—
Unsecured term loan, interest payable at variable rate based upon LIBOR. Principal repaid in 16 equal installments commencing March 31, 2003		—		16,875
Notes payable issued in connection with the acquisition		—		12

		264,326		16,887
Less current installments		1,143		7,512

	$	263,183	$	9,375

Total principal repayments required for each of the next five fiscal years and thereafter under all long-term debt agreements are summarized as follows:


	(dollars in thousands)
2006	$	1,143
2007		1,143
2008		1,143
2009		1,143
2010		1,143
Thereafter		258,611


	$	264,326

Senior Notes

As part of the merger transactions the Company issued $150.0 million of 11% senior notes due April 1, 2013. The notes are non-callable for four years, after which they are callable at a premium declining ratably to par at the end of year six. The notes contain covenants that among other things, limit the issuance of additional indebtedness, the incurrence of liens, the payment of dividends or other distributions, distributions from certain subsidiaries, the issuance of preferred stock, the sale of assets and subsidiary stock, transactions with affiliates and consolidations, mergers and transfers of assets. All of these limitations and prohibitions, however, are subject to a number of important qualifications set forth in the indenture.

F-18

Credit Facilities

As part of the merger transactions, the Company entered into new senior secured credit facilities, comprised of a $50.0 million revolving credit facility and a $115.0 million term loan. The senior secured credit facilities are secured by a perfected first priority security interest in all present and future tangible and intangible assets of the Company and the guarantors, including the capital stock of the Company and each of its direct and indirect domestic subsidiaries and 65% of the capital stock of its direct and indirect foreign subsidiaries. The seven-year term loan is payable in quarterly installments equal to 0.25% of the initial aggregate principle amount, beginning December 31, 2005, with the balance payable at maturity. The senior secured credit facilities are subject to mandatory prepayments and reduction in an amount equal to (i) the net proceeds of certain debt issuances, asset sales, recovery events, and sales and leasebacks of real property, (ii) 50% of the net proceeds of certain equity offerings or contributions by Axle Holdings and (iii) for any fiscal year ending on or after December 31, 2005, 75% of excess cash flow, as defined in the credit agreement, when the consolidated leverage ratio, as defined in the credit agreement, is 4.0 or greater, or 50% of excess cash flow when the consolidated leverage ratio is at least 3.0 but less than 4.0x.

Under the terms of the credit agreement, interest rates and borrowings are based upon, at the Company’s option, Eurodollar or prime rates. The terms of the agreement include a commitment fee based on unutilized amounts and an annual agency fee. The agreement includes covenants that, among other things, limit or restrict the Company’s and its subsidiaries’ abilities to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness, including the senior notes, pay dividends, create liens, make equity or debt investments, make acquisitions, modify the terms of the indenture, engage in mergers, make capital expenditures and engage in certain affiliate transactions. The agreement also requires the Company to at all times have at least 50% of the aggregate principal amount of the notes and the term loan subject to either a fixed interest rate or interest rate protection for a period of not less than three years. The senior secured credit facilities are subject to the following financial covenants: (i) minimum consolidated interest coverage and (ii) maximum consolidated leverage. The Company is in compliance with these credit agreement covenants as of December 25, 2005.

The revolver was made for working capital and general corporate purposes. There were no borrowings under the revolver at the time of the merger or as of December 25, 2005, although the Company did have outstanding letters of credit in the aggregate amount of $2.0 million as of December 25, 2005.

A portion of the proceeds of the credit facilities and the senior notes facilities were used to eliminate the outstanding debt under the prior credit facility and revolver.

Financial Instruments and Hedging Activities

The predecessor company was exposed to interest rate fluctuations on its floating rate credit facility, under which the Company had outstanding a $13.1 million term loan at the merger date, May 25, 2005. In 2002, the Company entered into an interest rate swap to mitigate the Company’s exposure to interest rate fluctuations. As a matter of policy, the Company does not enter into hedging contracts for trading or speculative purposes. At the merger date, the interest rate swap agreement had a notional amount of $ 13.1 million, and provided that IAAI pay a fixed rate of interest of 4.4% and receive a LIBOR-based floating rate on the notional amount. At the merger date, the entire swap agreement qualified for hedge accounting and all changes in the fair value of the swap were recorded, net of tax, through other comprehensive income (see Note 7). At the merger date, the entire predecessor credit facility was paid off and the swap agreement was terminated. The fair market value of the swap

F-19

was $0.1 million at the merger date, resulting in a gain being recorded in the predecessor period for the termination of the swap.

(7)

Stockholders’ Equity

Merger Transactions

As a result of the merger transactions, except for certain options that were exchanged into stock options of Axle Holdings, all of the outstanding shares of the Company were converted into the right to receive $28.25 per share in cash and all outstanding stock options were cancelled in exchange for payments in cash of $28.25 per underlying share, less the applicable option exercise price.

Treasury Stock

Prior to the merger, the Company had treasury stock. The treasury stock purchases were recorded using the cost method of accounting. The treasury stock was retired as part of the merger transactions. The Company has not repurchased any shares since the merger.

F-20

(8)

Income Taxes

Income tax expense is summarized as follows:


	Successor			Predecessor
	May 25, 2005 –			December 27,
	December 25,			2004 – May 24,			December 26,		December 28,
	2005			2005			2004		2003
	(dollars in thousands)
Current:
Federal	$	—		$	6,674		$	5,028	$	573
State		270			(308	)		790		19

		270			6,366			5,818		592


Deferred:
Federal		(1,792	)		(2,404	)		1,092		509
State		190			937			229		203

		(1,602	)		(1,467	)		1,321		712


	$	(1,332	)	$	4,899		$	7,139	$	1,304

The Company evaluates the realizability of the Company’s deferred tax assets on an ongoing basis. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 25, 2005. The Company has established a valuation allowance when the utilization of the tax asset is uncertain. Additional temporary differences, future earning trends and/or tax strategies may occur which could warrant a need for establishing an additional valuation allowance or a reserve.

Deferred income taxes are composed of the effects of the components listed below. A valuation allowance has been recorded to reduce the carrying value of deferred tax assets for which the Company believes a tax benefit will not be realized.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 25, 2005 and December 26, 2004 are presented below:

F-21


	Successor			Predecessor
	2005			2004
	(dollars in thousands)
Deferred tax assets attributable to:
Inventories	$	2,628		$	2,261
Other current assets		2,967			2,432
Non-current assets		3,717			—
Federal net operating loss		2,916			—
Depreciation		8,797			5,946
State net operating losses carried forward		1,291			1,618

Gross deferred tax assets		22,316			12,257
Valuation allowance		(408	)		(1,083	)

Net deferred tax assets		21,908			11,174

Deferred tax liabilities attributable to:
Intangible assets		(1,913	)		(20,729	)
Intangible assets – successor period		(49,066	)		—


Net deferred tax liabilities	$	(29,071	)	$	(9,555	)

The actual income tax expense differs from the “expected” tax expense computed by applying the Federal corporate tax rate to earnings before income taxes as follows:


	Successor			Predecessor
	May 25, 2005 –			December 27,
	December 25,			2004 – May 24,			December 26,			December 28,
	2005			2005			2004			2003
	(dollars in thousands)
“Expected” income tax expense	$	(2,367	)	$	1,560		$	6,791		$	1,236
State income taxes, net of Federal effect		298			409			662			146
Increase (decrease) in valuation allowance		—			(65	)		(636	)		264
Change to tax accruals		(11	)		4			259			(527	)
Merger related costs		714			2,970			—			—
Other		34			21			63			185

	$	(1,332	)	$	4,899		$	7,139		$	1,304

The Company is obligated to file tax returns and pay federal and state income taxes in numerous jurisdictions. The change in income tax accruals relate to amounts that were no longer required, due primarily to closed tax return audits and closed tax years for a number of jurisdictions or additional amounts needed to cover exposures.

At December 25, 2005, the Company had a federal net operating loss carryforward of $8.3 million. The net operating loss carryforward expires in 2025. The Company expects to fully utilize the federal net operating loss. At December 25, 2005, the Company had state income tax net operating loss carryforwards of approximately $26.8 million. The net operating loss carryforwards expire in the years 2006 through 2025.

F-22

Because net operating losses can be audited well beyond a normal three-year statutory audit period and the inherent uncertainty of estimates of future taxable income, the amount of the net operating losses which may ultimately be utilized to offset future taxable income may vary materially from the Company’s estimates. The Company has established a valuation allowance for net operating loss based on the Company’s estimates of the amount of benefit from these net operating losses that the Company may ultimately be unable to realize due to factors other than estimates of future taxable income. Subsequent revisions to the estimated realizable value of the deferred tax asset or the reserve for tax-related contingencies may cause the Company’s provision for income taxes to vary significantly from period to period, although cash tax payments will remain unaffected until the net operating losses are utilized.

(9)

Employee Benefit Plans

Stock Based Compensation

Predecessor Plan

Prior to the merger transactions, the Company had stock option plans and a restricted stock grant program. Each of these plans contained a provision that would cause the options and grants to immediately vest upon a change of control. As a result of the merger transactions, all outstanding options and restricted stock grants became fully vested on the date of the merger.

Except for certain options that were exchanged and are discussed below, the holders of the options cancelled their options in exchange for the right to receive $28.25 per underlying share, less the applicable option exercise price. In accordance with Accounting Principles Board Opinion No. 25 (APB 25) “Account for Stock Issues to Employees” and related interpretations, there was no compensation expense recognized either in current or prior periods for the options.

The holders of the restricted stock grants cancelled their grants in exchange for the right to receive $28.25 per underlying share. Upon issuance of the restricted stock grants in 2003 and 2004, unearned compensation was recorded at the market value of the shares at the time of the grant. The unearned compensation was then recognized as compensation expense over the anticipated vesting period. At the time of the merger, there was $3.3 million of unearned compensation remaining. The merger triggered the full vesting of the restricted stock grants and as a result, a total of $4.3 million was recognized as compensation expense by the Company in the predecessor period December 27, 2004 through May 24, 2005. The number of shares granted in 2003 and 2004 was 66,500 and 182,600, respectively. In the first quarter of 2005, there were forfeitures of 1,200 shares. In the second quarter of 2005, there were forfeitures of an additional 1,200 shares. There were no additional grants made in 2005.

Axle Holdings Plan

In May, 2005, Axle Holdings, which owns 100% of the outstanding stock of the Company, adopted the Axle Holdings, Inc. Stock Incentive Plan (“Axle Holdings Plan”). The Axle Holdings Plan is intended to provide equity incentive benefits to the Company employees. As such, it is appropriate to account for the plan as direct plans of the Company.

Under the Axle Holdings Plan, there are two types of options: (1) service options, which vest

F-23

in three equal annual installments commencing on the first anniversary of the grant date based upon service with Axle Holdings and its subsidiaries, including the Company, and (2) exit options, which vest upon a change in equity control of the LLC. During 2005, the Company granted 83,587 service options and 167,213 exit option.

Service options are accounted for as fixed awards and, as such, compensation expense is determined and recorded when the fair value of the grant exceeds the exercise price of the options at the date of grant.

Under the exit options, in addition to the change in equity requirement, the number of options is determined by a calculation based on return to Kelso, which is performed at the time of the change in control. Due to the number of options being determined by a future event, the exit options qualify as variable awards. However, as the ultimate excercisability is contingent upon an event (specifically change of control), the compensation expense will not be recognized until the event is consummated.

Certain executives of IAAI exchanged a portion of their fully vested options in the predecessor company into options under the Axle Holdings, Inc. Stock Incentive Plan. In accordance with APB 25 and other applicable pronouncements, the Company is not required to recognize compensation expense on the option exchange as the market price of the underlying shares of the successor options are the same as the predecessor options.

Activity under the Plans during 2005, 2004 and 2003 is as follows:


				Weighted
				Average Exercise		Options
	Shares			Price		Exercisable
Balance at December 29, 2002 - Predecessor		1,518,000		$	14.13		596,000

Options granted		490,000			13.89
Options cancelled		(180,000	)		20.09
Options exercised		(7,000	)		11.61

Balance at December 28, 2003 - Predecessor		1,821,000		$	13.49		824,000

Options granted		75,000			16.72
Options cancelled		(47,000	)		20.60
Options exercised		(104,000	)		12.44

Balance at December 26, 2004 - Predecessor		1,745,000		$	13.50		1,122,000

Options granted		—			—
Options cancelled		(12,000	)		19.18
Options exercised		(1,483,000	)		13.20
Options exchanged		(250,000	)		15.04

Balance at May 24, 2005 - Predecessor		—		$	—		—

Options granted		251,000			25.62
Options cancelled		(1,000	)		25.62
Options exercised		—			—
Options exchanged		276,000			13.63

Balance at December 25, 2005 - Successor		526,000		$	16.41		—

F-24

Additional information about options outstanding as of December 25, 2005 is presented below:

Options Outstanding

Weighted Average

Remaining

Range of

Number

Contractual

Exercise

Life

Exercise

Descriptions

Prices

Options

(in months)

Price

Axle Holdings Plan – Exchange Units

12.56 to 15.87

276,000

93.5

13.63

Axle Holdings Plan – Other

25.62 to 25.62

250,000

118.0

25.62

Total

12.56 to 25.62

526,000

99.2

16.41

There were no options exercisable as of December 25, 2005.

LLC Profit Interests

The LLC owns 100% of the outstanding shares of Axle Holdings. Axle Holdings owns 100% of the outstanding shares of the Company. The LLC’s operating agreement provides for profit interests in the LLC to be held by certain designated employees of the Company. Upon an exit event as defined by the LLC operating agreement, holders of the profit interest will receive a cash distribution from the LLC.

Two types of profit interests were created by the LLC operating agreement: (1) operating units, which vest in twelve equal quarterly installments commencing on the first anniversary of the grant date based upon service, and (2) value units, which vest upon a change in equity control of the LLC. The number of value units ultimately granted will be determined based on the strike price and certain performance hurdles at the time of change in equity control. There were 191,152 operating units awarded and 382,304 value units awarded to employees of the Company during 2005 with a strike price equal to $25.62 for the operating units.

Under the requirements of EITF 00-23 “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44”, both the operating units and the value units are considered liability awards that are remeasured at each reporting period based on the intrinsic value method. The related liability and compensation expense of the LLC, which is for the benefit of Company employees, results in a capital contribution from the LLC to the Company and compensation expense for the Company. However, no compensation expense will be recognized on the value units until a change in equity control is consummated as excercisability and the number of units to be received is contingent upon an event (specifically change in control).

In connection with the operating units, $0.3 million of expense was incurred during the successor period, May 25, 2005 through December 25, 2005.

Postretirement Benefits

In connection with the acquisition of the capital stock of Underwriters Salvage Company (“USC”), the Company assumed the obligation for certain health care and death benefits for

F-25

retired employees of USC. In accordance with the provisions of SFAS No. 106, “Employers Accounting for Postretirement Benefits Other than Pensions,” costs related to the benefits are accrued over an employee’s service life.

As a result of the merger transactions, the fair value of the accrued benefit liability of $2.3 million at December 26, 2004 was reduced by the unrecognized net gain of $1.0 million. The amount recorded at December 25, 2005 for the postretirement benefit liability was $1.3 million.

A reconciliation of the funded status of this program as of December 25, 2005 and December 26, 2004 follows:


	Successor			Predecessor
	2005			2004
Benefit Obligations and Funded Status	(dollars in thousands)
Change in accumulated postretirement benefit obligation
Accumulated postretirement benefit obligation at the beginning of the year	$	744		$	1,432
Interest cost		75			47
Actuarial (gain) or loss		592			(678	)
Benefits paid		(103	)		(57	)

Accumulated postretirement benefit obligation at the end of the year		1,308			744
Accumulated postretirement benefit obligation at the beginning of the year
Change in plan assets
Benefits paid		(103	)		(56	)
Employer contributions		103			56

Fair value of assets at the end of the year		—			—

Net amount recognized
Funded status		(1,308	)		(744	)
Unrecognized net (gain) or loss		—			(1,620	)

Net amount recognized	$	(1,308	)	$	(2,364	)

Funded status
Amounts recognized in the statement of financial position
Accrued benefit liability	$	(1,308	)	$	(2,364	)


Weighted average assumptions at the end of the year
Discount rate		5.50	%		5.75	%

Benefit obligation trends
Assumed health care cost trend rates
Health care cost trend rate assumed for next year		8.00	%		10.00	%
Ultimate rate		5.00	%		5.00	%
Year that the ultimate rate is reached		2009			2009

Net Periodic Pension Trends
Assumed health care cost trend rates
Health care cost trend rate assumed for next year		9.00	%		8.50	%
Ultimate rate		5.00	%		5.00	%
Year that the ultimate rate is reached		2009			2010

F-26

Net periodic benefit cost (income) is summarized as follows for the fiscal years 2005, 2004, and 2003:


	2005			2004			2003
Net Periodic Benefit Cost (Income)	(dollars in thousands)
Interest cost	$	75		$	47		$	95
Amortization of net (gain) or loss		(111	)		(224	)		(133	)

Total net periodic benefit cost (income)	$	(36	)	$	(177	)	$	(38	)

Estimated future benefit payments for the next five years as of December 25, 2005 are as follows:


	(dollars in thousands)
2006	$	171
2007		169
2008		165
2009		159
2010		150
Thereafter		581

	$	1,395

Effective January 20, 1994, the date of acquisition, the Company discontinued future participation for active employees. Contribution for 2006 is expected to be $0.2 million.

401(k) Plan

The Company has a 401(k) defined contribution plan covering all full-time employees. Plan participants can elect to contribute up to 15% of their gross payroll. Company contributions are determined at the discretion of the Board of Directors; during the years 2003 to 2005, the Company matched 100% of employee contributions up to 4% of eligible earnings. Company contributions to the plans for the successor period ending December 25, 2005 were $0.4 million. Company contributions to the plan for predecessor periods ended May 24, 2005, December 26, 2004, and December 28, 2003 were $0.5 million, $0.8 million and $0.8 million, respectively.

(10)

Commitments and Contingencies

Leases

The Company leases the Company’s facilities and certain equipment under operating leases with related and unrelated parties, which expire through August 2021. Rental expense for the successor period ended December 25, 2005 was $15.9 million. Rental expense for the predecessor periods ended May 24, 2005, December 26, 2004, and December 28, 2003 was $10.7 million, $24.1 million and $22.5 million, respectively.

F-27

Minimum annual rental commitments for the next five years under noncancelable operating and capital leases at December 25, 2005 are as

follows:


	Operating		Capital
	Leases		Leases
	(dollars in thousands)
2006	$	25,854	$	387
2007		24,614		316
2008		22,842		33
2009		20,194		—
2010		17,620		—
Thereafter		124,477		—

	$	235,601	$	736

Less amount representing interest expense				40

Future capital lease obligation			$	696

Assets as of December 25, 2005 and December 26, 2004 recorded under capital leases are included in property and equipment, net as

follows:


	2005			2004
	(dollars in thousands)
Computer equipment	$	400		$	5,221
Security fencing		1,053			1,441

		1,453			6,662
Accumulated amortization		(362	)		(4,819	)

	$	1,091		$	1,843

Emery Air Freight Accident

On February 4, 2003, the Company filed a lawsuit in the Superior Court of California, County of Sacramento, against, among others, Emery Air Freight Corporation, or “Emery”, and Tennessee Technical Services, or “TN Tech”, the aircraft maintenance provider. The lawsuit sought to recover damages caused by the crash of an Emery DC-8 aircraft onto the Company’s Rancho Cordova, California facility on February 16, 2000. The aircraft was destroyed, and the three crew members aboard the aircraft were killed. The crash and the resulting release of jet fuel and fire destroyed a significant part of the Company’s facility and contaminated it with ash, hydrocarbon, lead and other toxic materials. Emery refused to clean up the contamination, and the Company was required to do so. The Company suffered more than $3.0 million in inventory loss, clean-up and remediation costs, business interruption losses, legal and consulting fees, and other losses, costs, and expenses. The Company’s property insurance carrier, Reliance, paid a large portion of the Company’s inventory losses. On October 6, 2004, the Company entered into a settlement agreement whereby the Company dismissed the Company’s claims against third parties other than Emery and TN Tech, and those other third parties dismissed their claims against us. On April 12, 2005, the Company engaged in mediation with TN Tech. The mediation resulted in a settlement of the dispute whereby TN Tech agreed to pay $2.35 million to us for the Company’s unrecovered losses resulting from the crash. In exchange, the Company agreed to release TN Tech and Emery from all of the Company’s claims arising from the crash. On June 8, 2005, the Company received payment of the settlement amount and recorded it as other income in the predecessor period.

F-28

Relocation of the Woodinville Branch

In 2003, the Company received notice from the King County Wastewater Treatment Division, Department of Natural Resources, that King County was in the process of building a water treatment facility and that the Company’s Woodinville, Washington branch was located within the boundaries of the likely site for placement of this facility. The Company received further notice from King County that it had extended an offer to purchase the Woodinville site from the Company’s landlord Waterman Properties and that, if the offer was accepted, the Company would be expected to enter into a lease arrangement with King County until such time as King County directed us to vacate the facility. In the event no sale was accomplished, King County would initiate condemnation proceedings. Under this threat of condemnation, the Company retained counsel and other consultants to assist in the Company’s relocation effort, protect the Company’s interests in the value of leasehold improvements made to the premises and recover costs resulting from the relocation. Pursuant to applicable law, the Company is entitled to reimbursement of certain costs associated with the relocation of the Company’s business from this site to another suitable location.

The Company contends that under the Company’s lease with Waterman Properties the Company is entitled to the value of the Company’s leasehold improvements invested in the property, to the extent the Company is not reimbursed by King County. There is currently a dispute between us and Waterman Properties regarding the Company’s entitlement to such compensation and how to value the improvements made to the Woodinville facility. On March 4, 2004, the Company filed a lawsuit in Snohomish County Superior Court against King County and Waterman Properties asking the court to appoint a receiver to manage a portion of the funds (up to $1.5 million) that Waterman Properties might receive from King County and to award us a portion of the condemnation award in an amount equal to the value of the Company’s leasehold improvements.

On November 16, 2004, the Company entered into a new lease for property located in Tukwila, Washington. Simultaneously, the Company negotiated a partial settlement with Waterman Properties and King County, whereby the Company terminated the Company’s lease with Waterman Properties and dismissed the Company’s complaint against King County to permit the sale and purchase of the Woodinville property. In exchange, Waterman Properties agreed to place $0.9 million of the purchase price from King County into escrow to serve as security for payment of any judgment that might be awarded in the Company’s ongoing suit against Waterman, and King County was dismissed from the suit. The outcome of this action remains uncertain at this time. At end of 2004, the Company exited the Woodinville facility and the Company wrote off leasehold improvements of approximately $1.0 million.

By the end of 2005, the Company had received reimbursement for approximately $0.3 million in relocation expenses from King County. However, on December 19, 2005, the Company received notice from King County that it was rejecting the Company’s remaining claims for $1.0 million in additional relocation expenses. Pursuant to Washington law, the Company was provided 60 days from the date of this notice in which to file an appeal of King County’s decision. The Company has initiated the administrative appeal process to attempt to obtain additional recovery from King County. The suit against Waterman Properties is in abeyance until the Company knows the outcome of the Company’s appeal of King County’s decision. At that time the Company will determine whether the Company needs to pursue further recovery from Waterman Properties, and the amount to be claimed.

F-29

The Company is subject to certain miscellaneous legal claims, which have arisen during the ordinary course of the Company’s business. None of these claims are expected to have a material adverse effect on the Company’s financial condition or operating results.

Compensation Agreements

The Company has compensation agreements with certain officers and other key employees. In addition to base salary and bonus information, certain agreements have change in control provisions that address compensation due to the executive in the event of termination following a change of control.

(11)		Related Party Transactions

		Kelso owns the controlling interest in IAAI. Under the terms of a financial advisory agreement between Kelso and Axle Merger, upon completion of the merger, IAAI (1) paid to Kelso a fee of $4.5 million and (2) commenced paying an annual financial advisory fee of $0.5 million, payable quarterly in advance to Kelso (with the first such fee, prorated for the remainder of the then-current quarter, was paid at the closing of the merger), for services to be provided by Kelso to IAAI. The financial advisory agreement provides that IAAI indemnify Kelso, Axle Holdings and Kelso’s officers, directors, affiliates, and their respective partners, employees, agents and control persons (as such term is used in the Securities Act of 1933, as amended, and the rules and regulations thereunder) in connection with the merger and the transactions contemplated by the merger agreement (including the financing of the merger), Kelso’ s investment in IAAI, Kelso’ s control of Axle Merger (and, following the merger, IAAI as the surviving corporation) or any of its subsidiaries, and the services rendered to IAAI under the financial advisory agreement. It also requires that IAAI reimburse Kelso’s expenses incurred in connection with the merger and with respect to services to be provided to IAAI on a going-forward basis. The financial advisory agreement also provides for the payment of certain fees, as may be determined by the board of directors of IAAI and Kelso, by IAAI to Kelso in connection with future investment banking services and for the reimbursement by IAAI of expenses incurred by Kelso in connection with such services.

		Parthenon and certain of its affiliates own approximately 10.4% of IAAI. Under the terms of a letter agreement between PCAP, L.P., an affiliate of Parthenon, and Axle Merger, upon completion of the merger IAAI paid to PCAP, L.P. a fee of $0.5 million.

(12)		Acquisitions and Divestitures

		In the second quarter of 2005, the Company acquired Insurance Recovery Center, Inc. located just outside Altoona, Pennsylvania. The acquisition leverages the Company’s existing regional coverage in this market. The results of operations of this acquisition are included in the Company’s consolidated financial statements from the date of acquisition. The aggregate purchase price of this acquisition was $0.8 million.

		In the second quarter of 2005, the Company sold one of the Company’s Houston properties for $1.2 million in cash. The Company recorded a gain on the sale of this facility of $0.5 million, net of taxes in the predecessor period.

		In the third quarter of 2005, the Company acquired Sadisco of Charleston, located just outside of Charleston, South Carolina, in Ravenel, South Carolina. The acquisition leverages the Company’s existing regional coverage in this market. The results of operations of this acquisition are included in the Company’s consolidated financial statements from the date of acquisition. The aggregate purchase price of this acquisition was $0.3 million.

F-30

(13)		Subsequent Events (Unaudited)

		In the first quarter of 2006, the Company acquired NW Penn Auction Sales/Warren County Salvage located in Erie, Pennsylvania. The acquisition leverages the Company’s existing regional coverage in this market. The acquisition is accounted for as a purchase business combination and the results of operations of the acquired business will be included in our future consolidated financial statements from the date of acquisition. The aggregate purchase price of this acquisition is $2.4 million

		On March 19, 2006, our Grand Prairie, Texas facility was flooded when the local authorities opened flood gates causing the waters of Mountain Creek to spill over into the facility, resulting in water damage to the majority of vehicles on the property as well as to the interior office space. Although it is difficult to estimate the loss at this time, it is possible that the damage could exceed the $1.0 million deductible under our insurance policy which covers this particular property. We are working to resume full operations at this facility as soon as possible.

(14)		Quarterly Financial Data (Unaudited)

		Summarized unaudited financial data for 2005 and 2004 are as follows:


	Fourth			Third		Second			Second			First
	Quarter			Quarter		Quarter			Quarter			Quarter
	Successor			Successor		Successor			Predecessor			Predecessor
	(dollars in thousands)
2005
Revenues	$	69,906		$	68,143	$	22,361		$	49,502		$	70,943
Earnings (loss) from operations		4,609			6,511		(3,210	)		(5,968	)		8,551
Net earnings (loss)		(1,441	)		507		(4,500	)		(5,461	)		5,021


	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter
	Predecessor		Predecessor		Predecessor		Predecessor
	(dollars in thousands)
2004
Revenues	$	62,234	$	60,752	$	60,002	$	57,191
Earnings from operations		5,964		5,734		4,877		4,334
Net earnings		3,955		3,354		2,655		2,301

F-31