UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		for the quarterly period ended January 31, 2004

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		for the transition period from to

Commission file number: 0-23255

COPART, INC.
(Exact name of registrant as specified in its charter)

California		94-2867490
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification Number)

4665 Business Center Drive, Fairfield, CA 94534
(Address of principal executive offices with zip code)

Registrant’s telephone number, including area code: (707) 639-5000
N/A

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES

Number of shares of Common Stock outstanding as of March 11, 2004: 89,157,810

Copart, Inc. and Subsidiaries

Index to the Quarterly Report

January 31, 2004

Description

PART I – Financial Information

	Item 1 - Financial Information
			Consolidated Balance Sheets
			Consolidated Statements of Income
			Consolidated Statements of Cash Flows
			Notes to the Consolidated Financial Statements

	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
			Overview
			Acquisitions and New Openings
			Critical Accounting Policies and Estimates
			Results of Operations
			Liquidity and Capital Resources
			Factors That May Affect Future Results

	Item 3 – Quantitative and Qualitative Disclosures About Market Risk

	Item 4 – Controls and Procedures
			Evaluation of Disclosure Controls and Procedures
			Changes in Internal Controls

PART II – Other Information

	Item 1 – Legal Proceedings

	Item 4 – Submission of Matters to a Vote of Security Holders

	Item 6 – Exhibits and Reports on Form 8-K
		Signatures

Copart, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	January 31, 2004			July 31, 2003

ASSETS

Current assets:
Cash and cash equivalents	$	105,578,400		$	116,746,400
Accounts receivable, net	94,915,800			71,552,900
Vehicle pooling costs	28,706,400			23,380,500
Income taxes receivable	—			4,017,900
Prepaid expenses and other assets	10,665,400			10,068,500
Equipment held for sale	10,040,300			—
Total current assets	249,906,300			225,766,200
Property and equipment, net	253,830,500			244,361,100
Intangibles and other assets, net	5,927,500			7,859,300
Goodwill	109,749,300			109,113,800
Total assets	$	619,413,600		$	587,100,400

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	6,900		$	91,200
Accounts payable and accrued liabilities	39,941,700			38,309,200
Deferred revenue	11,882,400			9,707,500
Income taxes payable	680,100			—
Deferred income taxes	7,952,000			5,901,600
Other current liabilities	162,600			174,200
Total current liabilities	60,625,700			54,183,700
Deferred income taxes	8,013,900			6,013,900
Long-term debt, less current portion	12,700			16,200
Other liabilities	1,201,900			1,247,100
Total liabilities	69,854,200			61,460,900
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value - 180,000,000 shares authorized; 89,120,110 and 89,883,412 shares issued and outstanding at January 31, 2004 and July 31, 2003, respectively	261,293,200			269,967,700
Accumulated other comprehensive loss	(14,600		)	—
Retained earnings	288,280,800			255,671,800
Total shareholders’ equity	549,559,400			525,639,500
Total liabilities and shareholders’ equity	$	619,413,600		$	587,100,400

See accompanying notes to consolidated financial statements.

Copart, Inc., and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three months ended January 31,						Six months ended January 31,
	2004			2003			2004			2003

Revenues	$	92,634,900		$	82,783,400		$	184,101,500		$	166,278,300

Operating costs and expenses:
Yard and fleet	50,142,200			48,197,600			101,804,100			96,076,400
General and administrative	8,591,100			6,475,800			16,709,100			13,073,900
Depreciation and amortization	8,081,500			6,363,200			15,481,100			11,994,000
Total operating expenses	66,814,800			61,036,600			133,994,300			121,144,300
Operating income	25,820,100			21,746,800			50,107,200			45,134,000

Other income (expense):
Interest expense	(600		)	(6,500		)	(2,100		)	(13,100		)
Interest income	293,100			488,200			588,600			949,900
Gain on sale of fleet equipment	1,948,000			44,500			1,948,000			170,900
Other income	647,100			241,700			1,258,000			581,300
Total other income	2,887,600			767,900			3,792,500			1,689,000
Income before income taxes	28,707,700			22,514,700			53,899,700			46,823,000

Income taxes	11,339,900			8,758,200			21,290,700			18,360,000
Net income	$	17,367,800		$	13,756,500		$	32,609,000		$	28,463,000

Basic net income per share	$	.20		$	.15		$	.37		$	.31
Weighted average shares outstanding	89,023,800			92,365,900			89,258,000			92,307,400

Diluted net income per share	$	.19		$	.15		$	.36		$	.30
Weighted average shares and dilutive potential common shares outstanding	91,484,900			94,154,200			91,322,200			94,135,400

See accompanying notes to consolidated financial statements.

Copart, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended January 31,
	2004			2003
Cash flows from operating activities:
Net income	$	32,609,000		$	28,463,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	15,481,100			11,994,000
Deferred rent	(45,200		)	(26,700		)
Gain on sale of fleet equipment and other property and equipment	(1,822,800		)	(135,700		)
Deferred income taxes	4,050,400			2,518,200
Changes in operating assets and liabilities:
Accounts receivable	(23,257,800		)	(18,993,000		)
Vehicle pooling costs	(5,277,000		)	(3,904,900		)
Prepaid expenses and other current assets	(596,900		)	(3,006,500		)
Accounts payable and accrued liabilities	1,620,900			1,595,600
Deferred revenue	2,174,900			1,784,600
Income taxes	5,477,600			(83,800		)
Net cash provided by operating activities	30,414,200			20,204,800

Cash flows from investing activities:
Purchase of property and equipment	(41,533,300		)	(54,141,200		)
Proceeds from sale of property and equipment	9,197,100			507,500
Purchase of net current assets in connection with acquisitions	(154,000		)	(285,500		)
Purchase of property and equipment in connection with acquisitions	—			(301,100		)
Purchase of goodwill and intangible assets in connection with acquisitions	(685,500		)	(6,168,900		)
Other net intangible asset changes	1,150,000			—
Net cash used in investing activities	(32,025,700		)	(60,389,200		)

Cash flows from financing activities:
Proceeds from the exercise of stock options	570,400			579,100
Proceeds from the issuance of Employee Stock Purchase Plan shares	698,600			1,078,500
Repurchases of common stock	(10,723,100		)	—
Principal payments on notes payable	(87,800		)	(159,400		)
Net cash (used in) provided by financing activities	(9,541,900		)	1,498,200

Effect of foreign currency translation	(14,600		)	—

Net decrease in cash and cash equivalents	(11,168,000		)	(38,686,200		)

Cash and cash equivalents at beginning of period	116,746,400			132,690,000
Cash and cash equivalents at end of period	$	105,578,400		$	94,003,800

Supplemental disclosure of cash flow information:
Interest paid	$	2,100		$	13,100
Income taxes paid	$	11,759,025		$	15,626,500

See accompanying notes to consolidated financial statements.

Copart, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

January 31, 2004

(Unaudited)

NOTE 1 – General:

In the opinion of the management of Copart, Inc. (the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly the financial information included therein. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2003 filed with the Securities and Exchange Commission. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

NOTE 2 – Net Income Per Share:

There were no adjustments to net income in calculating diluted net income per share. The table below reconciles basic weighted shares outstanding to diluted weighted average shares outstanding:

	Three months ended January 31,		Six months ended January 31,
	2004	2003	2004	2003

Basic weighted shares outstanding	89,023,800	92,365,900	89,258,000	92,307,400

Effect of dilutive securities - stock options	2,461,100	1,788,300	2,064,200	1,828,000

Diluted weighted average shares outstanding	91,484,900	94,154,200	91,322,200	94,135,400

Options to purchase 1,531,000 and 1,672,050 shares of common stock at a weighted average price of $17.52 and $15.81 per share were outstanding during the quarters ended January 31, 2004 and 2003, respectively, and 1,978,750 and 1,669,050 shares of common stock at a weighted average price of $16.51 and $15.82 were outstanding during the six months ended January 31, 2004 and 2003, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

NOTE 3 – Goodwill and Intangible Assets

The following table sets forth intangible assets by major asset class as of:

	January 31, 2004			July 31, 2003
Amortized intangibles:
Covenants not to compete	$	11,337,700		$	11,287,700
Accumulated amortization	(7,715,200		)	(6,883,500		)
Net intangibles	$	3,622,500		$	4,404,200

Aggregate amortization expense on intangible assets was approximately $416,400 and $439,800 for the three months and approximately $831,900 and $884,400 for the six months ended January 31, 2004 and 2003, respectively. The average life of the covenants not to compete is approximately five years. Estimated amortization expense for each of the five succeeding fiscal years is as follows:

2004 (six months remaining)	$	819,000
2005	1,242,600
2006	797,700
2007	545,700
2008	145,100
Thereafter	72,400

The change in the carrying amount of goodwill is as follows:

Balance as of August 1, 2002	$	102,920,100
Goodwill acquired during the period	5,784,300
Acquisition adjustment	409,400
Impairment adjustment	—
Balance as of August 1, 2003	$	109,113,800
Goodwill acquired during the period	635,500
Impairment adjustment	—
Balance as of January 31, 2004	$	109,749,300

NOTE 4 – Stock-Based Compensation:

The Company accounts for its stock-based employee compensation plans using the intrinsic-value-based method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) (as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“ SFAS 148”). Accordingly, compensation cost is measured as the excess, if any, of the fair value of the Company’s stock at the date of the grant over the price the employee must pay to acquire the stock. Options granted to consultants and other non-employees are accounted for at fair value.

Pro forma information regarding net income and net income per share is required by SFAS No. 123, and has been determined as if the Company had accounted for options granted under its plans using the fair value method. For these purposes, the fair value of options issued under the Plans was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: no dividend yield, volatility factor of the expected market price of the Company’s stock of 0.41, a forfeiture rate of 0.07, a weighted-average expected life of the options of five years and a risk-free interest rate of 3.1% and 2.9% for fiscal 2004 and 2003, respectively. The weighted average fair value of options granted were $6.69 and $4.42 for the three months and $4.71 and $4.08 for the six months ended January 31, 2004 and 2003, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future results.

For purposes of pro forma disclosures under SFAS 123 and SFAS 148, the estimated compensation expense related to option grants to employees that would have been recognized during the three and six months ended January 31, 2004 and 2003 is deducted from net income. The Company’s pro forma information related to option grants to employees as calculated in accordance with SFAS 123 and SFAS 148 is as follows:

	Three months ended January 31,						Six months ended January 31,
	(Dollars in thousands, except per share data)
	2004			2003			2004			2003

Net income, as reported	$	17,368		$	13,756		$	32,609		$	28,463
Add: Stock-based employee compensation expense included in reported net income, net of related tax benefits	—			—			—			—
Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(689		)	(631		)	(1,379		)	(1,256		)

Pro forma net income	$	16,679		$	13,125		$	31,230		$	27,207

Net income per share:
Basic – as reported	$	0.20		$	0.15		$	0.37		$	0.31

Basic – pro forma	$	0.19		$	0.14		$	0.35		$	0.29

Diluted – as reported	$	0.19		$	0.15		$	0.36		$	0.30

Diluted – pro forma	$	0.18		$	0.14		$	0.34		$	0.29

NOTE 5 – Common Stock Repurchases:

In February 2003, the Company’s Board of Directors authorized the Company to repurchase up to nine million shares of its Common Stock. Repurchases of common stock may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the share repurchase program. The repurchases will be made at such times and in such amounts, as the Company deems appropriate and may be discontinued at any time. Since July 31, 2003, the end of the Company’s last fiscal year, the Company has repurchased a total of 977,100 shares at a weighted average price of approximately $10.97 per share. The total number of shares currently available for repurchase under the plan is 5,327,700. The Company accounted for the repurchase of its Common Stock by charging $10,723,100 to Common Stock.

NOTE 6 – Segment Reporting:

All of the Company’s facilities are aggregated into one reportable segment given the similarities of economic characteristics between the operations represented by the facilities and the common nature of the products, customers and methods of revenue generation.

Geographic revenue information follows:

	Three months ended January 31,				Six months ended January 31,
	(Dollars in thousands)
	2004		2003		2004		2003
Revenues:
United States	$	78,163	$	72,827	$	157,364	$	147,041
Foreign countries	14,472		9,956		26,738		19,237
	$	92,635	$	82,783	$	184,102	$	166,278

Revenue derived from foreign buyers is based in U.S. dollars. The Company’s assets are primarily located in the United States.

NOTE 7 – Acquisitions and Openings:

In September 2003, the Company acquired a facility in Eugene, Oregon. The consideration paid for this acquisition consisted of approximately $0.8 million in cash. The acquired net assets consisted of accounts and advance receivables, vehicle costs, goodwill and covenants not to compete. The acquisition was accounted for using the purchase method of accounting and the operating results subsequent to the acquisition date are included in the Company’s consolidated statements of income. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $0.6 million has been recorded as goodwill. The Company estimates that the entire goodwill balance relating to this acquisition will be deductible for tax purposes. In addition, the Company paid approximately $50,000 for covenants not to compete relating to this acquisition, which are being amortized over five years. In conjunction with this acquisition, the Company has entered into a lease with the prior owner for the use of the facility.

Pro forma financial information for this acquisition did not result in a significant change from actual results for the quarter or six months ended January 31, 2004.

In fiscal 2004, the Company has opened new vehicle auction facilities in Toronto, Canada and Helena, Montana.

NOTE 8 – Employees:

As of January 31, 2004, the Company had approximately 2,340 full-time employees, of whom approximately 230 were engaged in general and administrative functions and approximately 2,110 were engaged in yard and fleet operations. The Company is not subject to any collective bargaining agreements; however, driver, clerical and yard employees at the Company’s Detroit, Michigan salvage auction facility and driver employees at the Company’s Waldorf, Maryland salvage auction facility have voted to join the International Brotherhood of Teamsters (“Teamsters”). The Detroit driver election was held during the second quarter of fiscal 2003. The Detroit clerical and yard employee election was held during the fourth quarter of fiscal 2003. The Waldorf driver election was held during the first quarter of fiscal 2004. The Company is currently engaged in collective bargaining with the Teamsters who are representing the driver, yard and clerical employees at the Company’s Detroit, Michigan salvage auction facility, and the driver employees at the Company’s Waldorf, Maryland

salvage auction facility. During the second quarter of fiscal 2004, the Company was served with a petition filed with the National Labor Relations Board (“NLRB”) whereby the Teamsters are seeking to be certified as the representatives of all yard and driver employees at the Company’s Ellwood City, Pennsylvania salvage auction facility. During the second quarter of fiscal 2004, the Company was served with a petition filed with the NLRB whereby the International Union of Operating Engineers (“Operating Engineers”) are seeking to be certified as the representatives of all drivers, mechanics, and yard employees at the Company’s Ellwood City, Pennsylvania salvage auction facility. The Operating Engineers subsequently withdrew this petition, leaving only the Teamsters petition at Ellwood City. No election is currently scheduled at Ellwood City because the processing of the Teamsters petition is stayed by the NLRB’s investigation into Unfair Labor Practice Charges filed by the Teamsters. During the second quarter of fiscal 2004, the Company was served with a petition filed with the NLRB whereby the Teamsters were seeking to be certified as the representatives of all full-time yard employees at the Company’s Hammond, Indiana salvage auction facility. A vote by the Hammond, Indiana yard employees on whether or not to be represented by the Teamsters was scheduled for December 18, 2003. That petition was withdrawn by the Teamsters on December 17, 2003, and no election is currently scheduled at Hammond. During the second quarter of fiscal 2004, the Company was served with a petition filed with the NLRB whereby the Teamsters were seeking to be certified as the representatives of all drivers at the Company’s Bellingham, Massachusetts salvage auction facility. The Teamsters subsequently withdrew this position and as a result no election is currently scheduled. While it is not feasible to determine the outcome of these matters, management believes that any outcome will not have a material effect on our financial position, results of operations or cash flows.

NOTE 9 – Comprehensive Income:

The following table reconciles net income to comprehensive income:

	Three months ended January 31,					Six months ended January 31,
	(Dollars in thousands)
	2004			2003		2004			2003
Net income, as reported	$	17,368		$	13,757	$	32,609		$	28,463
Other comprehensive loss:
Foreign currency translation adjustments, net of tax	(79		)	—		(15		)	—
Total other comprehensive loss	(79		)	—		(15		)	—
Comprehensive income	$	17,289		$	13,757	$	32,594		$	28,463

ITEM 2- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this report involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include those listed under the caption “Factors That May Affect Future Results” beginning on page 18 of this report and those discussed elsewhere in this report. We encourage investors to review these factors carefully.

Although we believe that, based on information currently available to Copart and its management, the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.

Overview

We process salvage vehicles principally on a consignment method, on either the Percentage Incentive Program (“PIP”) or on a fixed fee consignment basis. Using either consignment method, only the fees associated with vehicle processing are recorded in revenue. Our patent pending auction process, which we have implemented at all of our salvage facilities, is Virtual Bidding Second Generation (“VB2”). VB2 is an Internet bidding product that allow buyers to bid real-time against other real-time bidders over the Internet at copart.com. This product opens the Copart auction process to registered buyers anywhere in the world who have Internet access.

For the three months ended January 31, 2004 and 2003, approximately 65% and 68%, respectively, and for the six months ended January 31, 2004 and 2003, approximately 64% and 67%, respectively, of the vehicles we sold were processed under PIP. We attempt to convert vehicle supplier agreements at acquired operations to PIP, which typically results in higher net returns to vehicle suppliers and higher fees to us than standard fixed fee consignment programs.

For the three months ended January 31, 2004 and 2003, approximately 35% and 32%, respectively, and for the six months ended January 31, 2004 and 2003, approximately 36% and 33%, respectively, of the vehicles we sold were processed under fixed fee agreements.

Due to a number of factors, including the timing and size of new acquisitions, market conditions, and acceptance of PIP by vehicle suppliers, the percentage of vehicles processed under these programs in future periods may vary.

Our revenues consist of salvage fees charged to vehicle suppliers and vehicle buyers, transportation revenue and purchased vehicle revenues. Salvage fees from vehicle suppliers include fees under PIP agreements and fixed fee programs where we charge for title processing, special preparation, storage and auctioning. Salvage fees also include fees charged to vehicle buyers for purchasing vehicles, storage and annual registration. Transportation revenue includes charges to suppliers for towing vehicles under fixed fee contracts. Transportation revenue also includes towing charges assessed to buyers for delivering vehicles. Purchased vehicle revenues are comprised of the price that buyers paid at our auctions for vehicles processed that we own.

Costs attributable to yard and fleet expenses consist primarily of operating personnel (which includes yard management, clerical and yard employees), rent, contract vehicle towing, insurance, fuel, fleet maintenance and repair, and acquisition costs of salvage vehicles that we sold under Purchase Programs. Costs associated with

general and administrative expenses consist primarily of executive, accounting and data processing, sales personnel, professional fees and marketing expenses.

The period-to-period comparability of our operating results and financial condition is substantially affected by business acquisitions and new openings made by us during such periods.

Acquisitions and New Openings

Since the beginning of fiscal 2002, we have acquired ten vehicle auction facilities and established twelve new facilities. All of these acquisitions have been accounted for using the purchase method of accounting. Although we anticipate that we will continue to open new facilities and acquire established facilities we expect to do so at a slower rate than experienced in prior periods.

To date in fiscal 2004, we have acquired a new facility located in Eugene, Oregon and opened new facilities in Helena, Montana and Toronto, Canada. In fiscal 2003, we acquired new facilities located in or near Pittsburgh, Pennsylvania; Reno, Nevada and Richmond, Virginia and opened new facilities in Springfield, Missouri; Corpus Christi, Texas; Fort Pierce, Florida; Rancho Cucamonga, California; Richmond, Virginia and Albany, New York. In fiscal 2002, we acquired new facilities located in or near New Castle, Delaware; Savannah, Georgia; Tifton, Georgia; Charleston, West Virginia; Haslet, Texas and Greencastle, Pennsylvania and opened new facilities in or near Lyman, Maine; Tucson, Arizona; Somerville, New Jersey and Amarillo, Texas. We believe that these acquisitions and openings strengthen our coverage.

We seek to increase revenues and profitability by, among other things, (i) acquiring and developing new salvage vehicle auction facilities in key markets, (ii) pursuing national and regional vehicle supply agreements, (iii) expanding our service offerings to suppliers and buyers and (iv) developing and expanding public automobile auction facilities. In addition, we implement our pricing structure and merchandising procedures and attempt to effect cost efficiencies at each of our acquired facilities by implementing our operational procedures, integrating our management information systems and redeploying personnel, when necessary.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to vehicle pooling costs, allowance for doubtful accounts, goodwill, income taxes and long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

We defer, in vehicle pooling costs, certain yard and fleet expenses of vehicles consigned to and received by us but not sold as of the balance sheet date. We quantify the deferred costs using a calculation that includes the number of vehicles at our facilities at the beginning and end of the period, the number of vehicles sold during the period and certain yard and fleet expenses of the period. The primary expenses capitalized are labor, transportation, and vehicle processing. If our allocation factors change then yard and fleet expenses could increase or decrease correspondingly in the future.

We maintain an allowance for doubtful accounts in order to provide for estimated losses resulting from disputed amounts billed to suppliers or buyers and the inability of our suppliers or buyers to make required

payments. If billing disputes exceed expectations and/or if the financial condition of our suppliers or buyers were to deteriorate, additional allowances may be required.

We evaluate the impairment of goodwill annually at a facility level by comparing the fair value of the reporting unit to its carrying value. Under this accounting policy we have not recognized any charges for the impairment of goodwill. Future adverse changes in market conditions or poor operating results of a facility could result in losses or an inability to recover the carrying value of the investment that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

We evaluate the realizability of our deferred tax assets on an ongoing basis. Generally accepted accounting principles require the assessment of the Company’s performance and other relevant factors when determining the need for a valuation allowance with respect to these deferred tax assets. The Company’s ability to realize deferred tax assets is dependent on its ability to generate future taxable income. Based on our historical operating earnings, we believe it is more likely than not that we will realize the benefit of the deferred tax assets recorded and, accordingly, have not established a valuation allowance. Additional timing differences, future earnings trends and/or tax strategies may occur which could warrant a need for a valuation allowance or a reserve.

We are also required to estimate income tax provisions and amounts ultimately payable or recoverable in numerous jurisdictions. Such estimates involve significant interpretations of regulations and are inherently very complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year.

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 carrying amount of an asset to 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 in the future.

Results of Operations

Three Months Ended January 31, 2004 Compared to Three Months Ended January 31, 2003

Revenues were approximately $92.6 million during the three months ended January 31, 2004, an increase of approximately $9.9 million, or 12%, over the three months ended January 31, 2003. The increase in revenues was due primarily to existing facilities, which contributed approximately $8.8 million in revenues. New facilities (identified below), contributed approximately $1.1 million of new revenue.

New facilities in or near Richmond, Virginia; Albany, New York and Eugene, Oregon contributed approximately $1.1 million of new revenue for the three months ended January 31, 2004.

Yard and fleet expenses were approximately $50.1 million during the three months ended January 31, 2004, an increase of approximately $1.9 million, or 4%, over the three month period ended January 31, 2003. The increase in yard and fleet expenses was due principally to the cost of handling increased volume at existing operations and the costs of new facilities. Approximately $1.2 million of yard and fleet expenses was the result of the acquisition and opening of new facilities. Yard and fleet expenses from existing facilities grew by approximately $0.7 million, or 2%, compared to an existing facility revenue increase of approximately $8.8 million, or 11%. Yard and fleet expenses decreased to 54% of revenues during the second quarter of fiscal 2004, as compared to 58% of revenues during the same period of fiscal 2003. The decrease in yard and fleet expenses as a percentage of revenue is primarily due to our shift from a live auction process to an entirely Internet based auction process.

General and administrative expenses were approximately $8.6 million during the three months ended January 31, 2004, an increase of approximately $2.1 million, or 33%, over the comparable period in fiscal 2003. The increase is attributable to an increase of approximately $1.0 million in payroll expense, $0.8 million in lease expense and $0.3 million in various other general and administrative items. These increases are primarily a result of the Company’s VB2 initiative. VB2 requires additional resources in the form of additional computer equipment and employees to support the systems required to conduct Internet only auctions. General and administrative expenses increased to 9% of revenues during the second quarter of fiscal 2004, as compared to 8% of revenues during the same period fiscal 2003.

Depreciation and amortization expense was approximately $8.1 million during the three months ended January 31, 2004, an increase of approximately $1.7 million, or 27%, over the comparable period in fiscal 2003. This increase was due primarily to depreciation and amortization of capital expenditures, covenants not to compete and acquired assets resulting from the acquisition and expansion of auction facilities. Capital spending in fiscal 2004 and prior periods is expected to result in increased depreciation and amortization expense in future periods.

Operating income was approximately $25.8 million during the three months ended January 31, 2004, an increase of approximately $4.1 million, or 19%, over the comparable period in fiscal 2003. New facilities in or near Richmond, Virginia; Albany, New York; Toronto, Canada; Eugene, Oregon and Helena, Montana produced a $0.1 million decrease in operating income. Existing facilities produced a $4.2 million increase in operating income.

Total other income was approximately $2.9 million during the three months ended January 31, 2004, an increase of approximately $2.1 million from the three months ended January 31, 2003. The increase was due primarily to a gain on the disposal of a portion of our fleet of trucks of approximately $1.9 million and an increase in rental income of approximately $0.4 million. The increase was offset by a decrease in interest income of approximately $0.2 million due primarily to lower interest rates.

Our effective combined federal, state and local income tax rate was 39.5% for the three months ended January 31, 2004 and January 31, 2003.

Due to the foregoing factors, we realized net income of approximately $17.4 million for the three months ended January 31, 2004, compared to net income of approximately $13.8 million for the three months ended January 31, 2003.

Six Months Ended January 31, 2004 Compared to Six Months Ended January 31, 2003

Revenues were approximately $184.1 million during the six months ended January 31, 2004, an increase of approximately $17.8 million, or 11%, over the six months ended January 31, 2003. The increase in revenues was due primarily to existing facilities, which contributed approximately $16.0 million in revenues. New facilities (identified below), contributed approximately $1.8 million of new revenue.

New facilities in or near Richmond, Virginia; Albany, New York and Eugene, Oregon contributed approximately $1.8 million of new revenue for the six months ended January 31, 2004.

Yard and fleet expenses were approximately $101.8 million during the six months ended January 31, 2004, an increase of approximately $5.7 million, or 6%, over the six month period ended January 31, 2003. The increase in yard and fleet expenses was due principally to the cost of handling increased volume at existing operations and the costs of new facilities. Approximately $2.0 million of yard and fleet expenses was the result of the acquisition and opening of new facilities. Yard and fleet expenses from existing facilities grew by approximately $3.7 million, or 4%, compared to an existing facility revenue increase of approximately $16.0 million, or 10%. Yard and fleet expenses decreased to 55% of revenues during the first six months of fiscal

2004, as compared to 58% of revenues during the same period of fiscal 2003. The decrease in yard and fleet expenses as a percentage of revenue is due primarily to our shift from a live auction process to an entirely Internet based auction process.

General and administrative expenses were approximately $16.7 million during the six months ended January 31, 2004, an increase of approximately $3.6 million, or 28%, over the comparable period in fiscal 2003. This increase was due primarily to an increase of approximately $1.8 million in payroll expense, $0.3 million in professional services, $1.2 million in lease expense and $0.3 million in various other general and administrative items. These increases are primarily a result of the Company’s VB² initiative. VB² requires additional resources in the form of additional computer equipment and employees to support the systems required to conduct Internet only auctions. General and administrative expenses increased to 9% of revenues during the first six months of fiscal 2004, as compared to 8% of revenues during the same period of fiscal 2003.

Depreciation and amortization expense was approximately $15.5 million during the six months ended January 31, 2004, an increase of approximately $3.5 million, or 29%, over the comparable period in fiscal 2003. This increase was due primarily to depreciation and amortization of capital expenditures, covenants not to compete and acquired assets resulting from the acquisition and expansion of auction facilities. Capital spending in fiscal 2004 and prior periods is expected to result in increased depreciation and amortization expense in future periods.

Operating income was $50.1 million during the six months ended January 31, 2004, an increase of approximately $5.0 million, or 11% over the comparable period in fiscal 2003. New facilities in or near Richmond, Virginia; Albany, New York; Toronto, Canada; Eugene, Oregon and Helena, Montana produced a 0.3 million decrease in operating income. Existing facilities produced a $5.3 million increase in operating income.

Total other income was approximately $3.8 million during the six months ended January 31, 2004, an increase of approximately $2.1 million from the six months ended January 31, 2003. The increase was due primarily to a gain on the disposal of a portion of our fleet of trucks of approximately $1.9 million and an increase in rental income of approximately $0.7 million. The increase was offset by a decrease in interest income of approximately $0.3 million due primarily to lower interest rates and a loss on the disposal of certain fixed assets of $0.2 million.

Our effective combined federal, state and local income tax rate for both of the six months ended January 31, 2004 and 2003 was approximately 39.5%.

Due to the foregoing factors, we realized net income of approximately $32.6 million for the six months ended January 31, 2004, compared to net income of approximately $28.5 million for the six months ended January 31, 2003.

Liquidity and Capital Resources

We have financed our growth through cash generated from operations, public offerings of common stock, the equity issued in conjunction with certain acquisitions and debt financing. Cash and cash equivalents decreased by approximately $11.2 million from July 31, 2003 to January 31, 2004. Our liquidity and capital resources have not been materially affected by inflation. During the winter months, most of our facilities process 10% to 30% more vehicles than at other times of the year. This increased seasonal volume requires the increased use of our cash to pay out advances and handling costs of the additional business.

During the second quarter ended January 31, 2004, we expended approximately $20.5 million to buy out leases on trucks in connection with our decision to move from an owned transport fleet to a contracted service model. During the second quarter, we sold approximately $9.2 million of the fleet of trucks and recognized a

gain of approximately $1.9 million. The disposal of the remaining fleet of trucks is not expected to have an adverse effect on our financial position.

As of January 31, 2004, we had working capital of approximately $189.3 million, including cash and cash equivalents of approximately $105.6 million. Our primary source of cash is from the collection of sellers’ fees and reimbursable advances from the proceeds of auctioned salvage vehicles and from buyers’ fees. We believe that we are able to process, market, sell and receive payment for processed vehicles quickly.

We believe that our currently available cash, cash generated from operations and borrowing availability under our bank credit facilities and equipment leasing lines will be sufficient to satisfy our operating and working capital requirements for at least the next 12 months. However, if we experience significant growth in the future, we may be required to raise additional cash through the issuance of new debt or additional equity.

Operating Activities

Net cash provided by operating activities increased by $10.2 million from the six months ended January 31, 2003 to $30.4 million for the six months ended January 31, 2004, reflecting our increased profitability, adjusted for depreciation and amortization and timing of routine changes in working capital items.

Investing Activities

Capital expenditures (excluding those associated with fixed assets attributable to acquisitions) were approximately $41.5 million and $54.1 million for the six months ended January 31, 2004, and 2003, respectively. Our capital expenditures have related primarily to opening and improving facilities and acquiring yard equipment.

During fiscal 2004, we used cash for the acquisition of an operation in Eugene, Oregon, which had an aggregate cash cost of approximately $0.8 million.

Also during fiscal 2004, we wrote off approximately $1.2 million of lease purchase options and we sold approximately $9.2 million of fleet equipment.

Financing Activities

Net cash used in financing activities increased by approximately $11.0 million from the six months ended January 31, 2003, due primarily to the repurchase of approximately $10.7 million of common stock in the first quarter of fiscal 2004.

Lease, Purchase and Other Contractual Obligations

The following table summarizes our significant contractual obligations and commercial commitments as of January 31, 2004:

Payments Due By Period


Contractual Obligations (1)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Capital Leases	$	19,600	$	6,900	$	12,700	—		—
Operating Leases	$	108,600,000	$	21,779,400	$	33,260,800	$	20,439,300	$	33,120,500

Amount of Commitment Expiration Per Period

Commercial Commitments (2)	Total		Less than 1 year		1-3 years	3-5 years	More than 5 years

Letters of Credit	$	10,959,900	$	10,959,900	—	—	—

(1) Contractual obligations consists of long-term debt and future minimum lease payments under capital and operating leases, including off-balance sheet leases, used in the normal course of business.

(2) Commercial commitments include primarily letters of credit provided for insurance programs and certain business transactions.

Credit Facilities

On February 23, 2001, we entered into a credit facility with our existing banking syndicate. The facility provided by Wells Fargo Bank, Fleet National Bank and U.S. Bank National Association consists of an unsecured revolving reducing line of credit in the amount of $85 million that matures in 2006. As of January 31, 2004, the Company had available $74.0 million under this facility, after taking into account $11.0 million of outstanding letters of credit. We are subject to customary covenants, including the following financial covenants: 1) ratio of funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA); 2) profitable operation; 3) leverage ratio and 4) interest coverage ratio. The Company is in compliance with all covenants.

Share Repurchase Program

In February 2003, the Company’s Board of Directors authorized us to repurchase up to nine million shares of its Common Stock. Repurchases of common stock may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the share repurchase program. The repurchases will be made at such times and in such amounts as we deem appropriate and may be discontinued at any time. During the six months ended January 31, 2004, we repurchased a total of 977,100 shares at a weighted average price of approximately $10.97 per share. The total number of shares currently available for repurchase under the plan as of that date was 5,327,700. We accounted for the repurchase of Common Stock by charging $10,723,100 to Common Stock.

Factors That May Affect Future Results

We depend on a limited number of major suppliers of salvage vehicles. The loss of one or more of these major suppliers could adversely affect our results of operations and financial condition, and an inability to increase our sources of vehicle supply could adversely affect our growth rates.

Historically, a limited number of vehicle suppliers have accounted for a substantial portion of our revenues. In the second quarter of fiscal 2004, vehicles supplied by our two largest suppliers accounted for approximately 12% and 8% of our revenues, respectively. Supplier arrangements are either written or oral agreements typically subject to cancellation by either party upon 30 to 90 days notice. Vehicle suppliers have terminated agreements with us in the past in particular markets, which has affected the pricing for auction services in those markets. There can be no assurance that our existing agreements will not be cancelled. Furthermore, there can be no assurance that we will be able to enter into future agreements with vehicle suppliers or that we will be able to retain our existing supply of salvage vehicles. A reduction in vehicles from a significant vehicle supplier or any material changes in the terms of an arrangement with a substantial vehicle supplier could have a material adverse effect on our results of operations and financial condition. In addition, a failure to increase our sources of vehicle supply could adversely affect our earnings and revenue growth rates.

Factors such as mild weather conditions in the United States can have an adverse affect on our revenues and operating results as well as our revenue and earnings growth rates.

Mild weather conditions in the United States tend to result in a decrease in the available supply of salvage vehicles because traffic accidents decrease and fewer automobiles are damaged as a result of mild weather-related conditions. Accordingly, mild weather can have an adverse effect on our salvage vehicle inventories, which would be expected to have an adverse effect on our revenue and earnings and related growth rates and could have an adverse effect on our operating results. Conversely, our inventories will tend to increase in poor weather such as a harsh winter or as a result of adverse weather-related conditions such as flooding. During periods of mild weather conditions, our ability to increase our revenues and improve our operating results and related growth will be increasingly dependent on our ability to obtain additional vehicle suppliers and to compete more effectively in the market, each of which is subject to the other risks and uncertainties described in these sections.

The salvage vehicle auction industry is highly competitive and we may not be able to compete successfully.

We face significant competition for the supply of salvage vehicles and for the buyers of those vehicles. We believe our principal competitors include other vehicle auction companies with whom we compete directly in obtaining vehicles from insurance companies and other suppliers, and large vehicle dismantlers, who may buy salvage vehicles directly from insurance companies, bypassing the salvage auction process. Many of the insurance companies have established relationships with competitive auction companies and large dismantlers. Many of our competitors may have greater financial resources than us. Due to the limited number of vehicle suppliers, the absence of long-term contractual commitments between us and our suppliers and the increasingly competitive market environment, there can be no assurance that our competitors will not gain market share at our expense.

We may also encounter significant competition for local, regional and national supply agreements with vehicle suppliers. There can be no assurance that the existence of other local, regional or national contracts entered into by our competitors will not have a material adverse effect on our business or our expansion plans. Furthermore, we are likely to face competition from major competitors in the acquisition of salvage vehicle auction facilities, which could significantly increase the cost of such acquisitions and thereby materially impede our expansion objectives or have a material adverse effect on our results of operations. These potential new competitors may include consolidators of automobile dismantling businesses, organized salvage vehicle buying groups, automobile

manufacturers, automobile auctioneers and software companies. While most vehicle suppliers have abandoned or reduced efforts to sell salvage vehicles directly without the use of service providers such as us, there can be no assurance that this trend will continue, which could adversely affect our market share, results of operations and financial condition. Additionally, existing or new competitors may be significantly larger and have greater financial and marketing resources than us; therefore, there can be no assurance that we will be able to compete successfully in the future.

Because the growth of our business has been due in large part to acquisitions and development of new salvage vehicle auction facilities, the rate of growth of our business and revenues may decline if we are not able to successfully complete acquisitions and development of new facilities.

We seek to increase our sales and profitability through the acquisition of other salvage vehicle auction facilities and the development of new salvage vehicle auction facilities. There can be no assurance that we will be able to:

• continue to acquire additional facilities on favorable terms;

• increase revenues and profitability at acquired and new facilities;

• maintain the historical revenue and earnings growth rates we have been able to obtain through facility openings and strategic acquisitions; or

• create new salvage vehicle auction facilities that meet the Company’s current revenue and profitability requirements.

As we continue to expand our operations, our failure to manage growth could harm our business and adversely affect our results of operations and financial condition.

Our ability to manage growth is not only dependent on our ability to successfully integrate new facilities, but also on our ability to:

• hire, train and manage additional qualified personnel;

• establish new relationships or expand existing relationships with vehicle suppliers;

• identify and acquire or lease suitable premises on competitive terms;

• secure adequate capital;

• maintain the supply of vehicles from vehicle suppliers; and

• compete successfully in the public automobile auction sector.

Our inability to control or manage these growth factors effectively could have a material adverse effect on our results of operations and financial condition.

We have limited experience in the public automobile auction business and may not be successful in our efforts to compete in this market, which may adversely affect our current growth strategy.

We have historically focused on the operation, acquisition and development of salvage vehicle auction facilities and only have limited experience in operating public automobile auction facilities. The public automobile auction market differs from the salvage vehicle auction market in that used vehicles in general working order are sold to the public. We intend to expand our public automobile auction facilities through the acquisition of public auction sites and cannot know whether our existing salvage auction business model will translate successfully into the public automobile auction market. To the extent that we cannot successfully compete in the public automobile auction market, our growth strategy could be harmed.

Our annual and quarterly performance may fluctuate, causing the price of our stock to decline.

Our revenues and operating results have fluctuated in the past and can be expected to continue to fluctuate in the future on a quarterly and annual basis as a result of a number of factors, many of which are beyond our control. Factors that may affect our operating results include, but are not limited to, the following:

• fluctuations in the market value of salvage and used vehicles;

• the availability of salvage vehicles;

• variations in vehicle accident rates;

• buyer participation in vehicle auctions;

• delays or changes in state title processing;

• changes in state or federal laws or regulations affecting salvage vehicles;

• our ability to integrate and manage our acquisitions successfully;

• the timing and size of our new facility openings;

• the announcement of new vehicle supply agreements by us or our competitors;

• severity of weather and seasonality of weather patterns;

• the amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our business, operations and infrastructure;

• the availability and cost of general business insurance;

• labor costs and collective bargaining; and

• availability of subhaulers at competitive rates.

In addition, as we increasingly rely on Internet-based auctions, we have become more dependent on our information technology systems. If our systems fail or otherwise prove unreliable or if we experience system problems that we cannot readily remedy, it could result in increased expenditures for information technology systems and maintenance and could impair our relations with our buyers.

Due to the foregoing factors, our operating results in one or more future periods can be expected to fluctuate. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. In the event such fluctuations result in our financial performance being below the expectations of public market analysts and investors, the price of our common stock could decline substantially.

Government regulation of the salvage vehicle auction industry may impair our operations, increase our costs of doing business and create potential liability.

Participants in the salvage vehicle auction industry are subject to, and may be required to expend funds to ensure compliance with a variety of U.S. or Canadian, federal, state, provincial and local governmental, regulatory and administrative rules, regulations, licensure requirements and procedures, including those governing vehicle registration, the environment, zoning and land use. Failure to comply with present or future regulations or changes in interpretations of existing regulations may result in impairment of our operations and the imposition of penalties and other liabilities. In addition, new regulatory requirements or changes in existing requirements may delay or increase the cost of opening new facilities, may limit our base of salvage vehicle buyers and may decrease demand for our vehicles.

The operation of our auction facilities poses certain environmental risks, which could adversely affect our results of operations and financial condition.

Our operations are subject to federal, state, provincial and local laws and regulations regarding the protection of the environment. In the salvage vehicle auction industry, large numbers of wrecked vehicles are stored at auction facilities and, during that time, spills of fuel, motor oil and other fluids may occur, resulting in soil, surface water or groundwater contamination. Environmental issues resulting from fuel spills, oil spillage, or similar problems are also present at our public auction facilities. In addition, certain of our facilities generate and/or store petroleum products and other hazardous materials, including waste solvents and used oil. We could incur substantial expenditures for preventative, investigative or remedial action and could be exposed to liability arising from our operations, contamination by previous users of certain of our acquired facilities, or the disposal of our waste at off-site locations. Environmental laws and regulations could become more stringent over time and there can be no assurance that we or our operations will not be subject to significant costs in the future. Although we have obtained indemnification for pre-existing environmental liabilities from many of the persons and entities from whom we have acquired facilities, there can be no assurance that such indemnifications will be adequate. Any such expenditures or liabilities could have a material adverse effect on our results of operations and financial condition.

Our executive officers, directors and their affiliates hold a large percentage of our stock and their interests may differ from other shareholders.

Our executive officers, directors and their affiliates beneficially own, in the aggregate, approximately 26% of our common stock as of January 31, 2004. If they were to act together, these shareholders would have significant influence over most matters requiring approval by shareholders, including the election of directors, any amendments to our articles of incorporation and certain significant corporate transactions, including potential merger or acquisition transactions. In addition, without the consent of these shareholders, we could be delayed or prevented from entering into transactions that could be beneficial to us or our other investors. These shareholders may take these actions even if they are opposed by our other investors.

We recently adopted a shareholder rights plan, or poison pill, which could affect the price of our common stock and make it more difficult for a potential acquirer to purchase a large portion of our securities, to initiate a tender offer or a proxy contest, or to acquire us.

In March 2003, our Board of Directors adopted a shareholder rights plan, commonly known as a poison pill. The poison pill may discourage, delay, or prevent a third party from acquiring a large portion of our securities, initiating a tender offer or proxy contest, or acquiring us through an acquisition, merger, or similar transaction. Such an acquirer could be prevented from consummating one of these transactions even if our shareholders might receive a premium for their shares over then-current market prices.

If we lose key management or are unable to attract and retain the talent required for our business, we may not be able to successfully manage our business or achieve our objectives.

Our future success depends in large part upon the leadership and performance of our executive management team, all of whom are employed on an at-will basis and none of whom are subject to any agreements not to compete. If we lose the service of one or more of our executive officers or key employees, in particular Willis J. Johnson, our Chief Executive Officer, and A. Jayson Adair, our President, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our principal exposures to financial market risk are interest rate risk and foreign currency risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio of marketable securities. Our exposure to foreign currency risks relates to our operations in Canada, which has not been significant. We do not use derivative financial instruments for speculative or trading purposes. We invest primarily in corporate securities, bank certificates, U.S. Treasury and Agency Obligations, asset-backed securities, repurchase agreements, auction rate debt instruments and money market mutual funds and generally hold them to maturity. Consequently, we do not expect any material loss with respect to our investment portfolio.

We do not use derivative financial instruments in our investment portfolio to manage interest rate risk. We do, however, limit our exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for our fixed income portfolios. At the present time, the maximum duration of all portfolios is 90 days or less. Our guidelines also establish credit quality standards, limits on exposure to any one issue as well the type of instruments. Due to the limited duration and credit risk criteria in our guidelines, we do not expect that our exposure to market and credit risk will be material.

ITEM 4 - CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

Our management evaluated, with participation of our Chief Executive Officer and our Acting Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Acting Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in Internal Controls.

There were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

We are involved in litigation and damage claims arising in the ordinary course of business, such as actions related to injuries, property damage or handling or disposal of vehicles. Among this litigation is a lawsuit filed in Massachusetts against us which purports to be a class action on behalf of persons whose vehicles were disposed of by us as abandoned vehicles, which the claimant contends were disposed of without complying with State laws. Lawsuits filed in California against us and rental car company vehicle suppliers, which purported to be class actions on behalf of California residents who owned previously damaged rental car vehicles that were sold through our auctions on clean titles, have been dismissed without prejudice, and the individual claims have been settled and we have received, or anticipate receipt of, dismissals with prejudice of all individual claims.

We are also involved in various governmental and administrative proceedings primarily relating to licensing and operation of our business. We provide for costs relating to these matters when a loss is probable and the amount may be reasonably estimated. The effect of the outcome of these matters on our future results of operations cannot be predicted because any such effect depends on future results of operations, the amount and timing of the resolution of such matters. While it is not feasible to determine the outcome of these matters, management believes that any ultimate liability will not have a material effect on our financial position, results of operations or cash flows.

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)		The Annual Meeting of Shareholders of the Company was held on December 8, 2003 (the “Meeting”).

(b)		The following directors were elected at the Meeting:

		Willis J. Johnson
		Marvin L. Schmidt
		A. Jayson Adair
		James Grosfeld
		James E. Meeks
		Jonathan Vannini
		Harold Blumenstein

(c)		The results of the vote on the matters voted upon at the meeting are:

(i)	Election of Directors	For	Withheld

	Willis J. Johnson	72,141,621	2,189,445
	Marvin L. Schmidt	72,142,918	2,188,148
	A. Jayson Adair	72,131,548	2,199,518
	James Grosfeld	71,890,442	2,440,624
	James E. Meeks	72,140,668	2,190,398
	Jonathan Vannini	71,891,085	2,439,981
	Harold Blumenstein	71,891,576	2,439,490

(ii) Approval of the amended and restated 1994 Employee Stock Purchase Plan:

For	Against	Abstained	No Vote

61,323,978	1,528,645	559,630	10,918,813

(iii) Ratification of KPMG LLP as independent auditors for the Company for fiscal year 2004:

For	Against	Abstained	No Vote

73,162,147	4,108,764	28,136	-0-

The foregoing matters are described in more detail in the Company’s definitive proxy statement dated October 29,2003 relating to the Meeting.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibits

	31.1	Certification of Willis J. Johnson, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Simon E. Rote, Acting Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1	Certification of Willis J. Johnson, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	32.2	Certification of Simon E. Rote, Acting Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)	Reports on Form 8-K.

	1.	The Company filed a current report on Form 8-K on September 16, 2003, to announce a press release and conference call regarding its financial results for the fiscal year ended July 31, 2003.

	2.	The Company filed a current report on Form 8-K on December 2, 2003, to announce a press release and conference call regarding its financial results for the quarter ended October 31, 2003.

SIGNATURES

Pursuant to the requirements 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.

							COPART, INC.

							/s/ Simon E. Rote
							Simon E. Rote, Vice President of Finance and Acting Chief Financial Officer (duly authorized officer and principal financial and accounting officer)

Date: March 11, 2004

FORM 10-Q

Index to the Quarterly Report

PART I – Financial Information

Three Months Ended January 31, 2004 Compared to Three Months Ended January 31, 2003

Six Months Ended January 31, 2004 Compared to Six Months Ended January 31, 2003

Lease, Purchase and Other Contractual Obligations

Credit Facilities

ITEM 4 - CONTROLS AND PROCEDURES

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K