As filed with the Securities and Exchange Commission on September 3,12, 2003

Registration No. 333-107417

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Amendment No. 12
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

LKQ CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Victor M. Casini
Vice President, General Counsel and Secretary
LKQ Corporation
120 North LaSalle Street, Suite 3300
Chicago, Illinois 60602
(312) 280-3700
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)

Copies to:

        Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

        If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. o

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

        If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

CALCULATION OF REGISTRATION FEE

(1)

Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(o).

(2)

$6,067.50 of this fee has previously been paid.

        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

Preliminary Prospectus

Subject to Completion, September 3,12, 2003

6,000,000 Shares of Common Stock

       This is our initial public offering of shares of our common stock. We are selling 4,000,000 shares of our common stock and the selling stockholders listed under "Principal and Selling Stockholders" are selling 2,000,000 shares of our common stock. We will not receive any of the proceeds from the shares sold by the selling stockholders. No public market currently exists for our common stock. The initial offering price of our common stock is expected to be between $$11.00 and $$13.00 per share.

       We have applied to list our common stock on the Nasdaq National Market under the symbol "LKQX."

       This investment involves risks. See "Risk Factors" beginning on page 8.

       The underwriters may also purchase up to 900,000 shares of common stock from usthe selling stockholders at the public offering price, less underwriting discounts and commissions, to cover over-allotments, if any, within 30 days from the date of this prospectus.

       The underwriters are offering the common stock as set forth under "Underwriting." Delivery of the shares of common stock will be made on or about                        , 2003.

       Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

                       , 2003

[MAP/GRAPHICS]

TABLE OF CONTENTS

       You should rely only on the information contained in this prospectus. Neither we, the underwriters nor the selling stockholders have authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, the shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the shares.

       Until                     , 2003 (25 days after the date of this prospectus), all dealers effecting transactions in the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

PROSPECTUS SUMMARY

       The following information is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this prospectus. Except as otherwise specified, all information in this prospectus assumes no exercise of the underwriters' over-allotment option. See "Underwriting."

LKQ Corporation

Introduction

       The repair of automobiles includes the purchase of automotive replacement parts. Buyers of replacement parts have the option to purchase primarily from three sources: new parts produced by original equipment manufacturers, which are commonly known as OEM parts; new parts produced by companies other than the OEMs, sometimes referred to generically as "aftermarket" parts; and recycled parts originally produced by OEMs, which we refer to as recycled OEM products. We sell primarily recycled OEM products.

Our Business

       We believe we are the largest nationwide provider of recycled OEM products and related services, with 38 sales and processing facilities and 12 redistribution centers that reach most major markets in the United States. We procure salvage vehicles, primarily at auctions, using our locally based professionals and centralized procurement systems. Once we have received proper title for the vehicles, we dismantle them for recycled products. We then sell our recycled OEM products to our customers, which include automobile collision and mechanical repair shops and, indirectly, insurance companies and extended warranty companies. We also provide insurance companies a review of vehicle repair order estimates so they may assess the opportunity to increase usage of recycled OEM products in the repair process. We believe we offer our customers a wide selection and availability of high quality and low cost alternatives to new OEM and aftermarket parts. We believe we are well positioned to take advantage of the trends supporting industry growth, including high frequency of collisions, high cost of vehicle repair and the desire of insurance companies to reduce their claims expenses. Our senior management team and our five regional operating managers collectively have over 140 years of experience in the industry.

       The automotive recycling industry is highly fragmented, with very few multi-unit operators. We estimate there are more than 6,000 automotive recyclers in the United States. We believe approximately 93% of automotive recycling businesses have less than $3.0 million of annual revenue and approximately 50% have less than $0.5 million of annual revenue. The automotive products market (including accessories, service, repair and maintenance items) totaled $175.6 billion in 2002 and is estimated at $183.0 billion in 2003. The portions of the automotive products market that automotive recyclers primarily serve are the collision repair market, with approximately $32.4 billion of annual sales in 2002, and the mechanical repair market, with approximately $94.1 billion of annual sales in 2002. Estimates of the aggregate size of the automotive recycling industry in the United States range from $3.7 to $6.5 billion. Industry sources estimate that recycled OEM products account for approximately 12% of insured replacement parts sales and 4.7% of total insured collision repair costs. We believe that recycled OEM products can account for a larger percentage of the replacement parts market based on the

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advantages offered by recycled OEM products and industry dynamics. Like most other automotive recycling companies, we are not in the remanufacturing business.

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       We have developed centralized systems and methodologies that we believe give us competitive advantages in procuring an attractive mix of recycled OEM products from auctions. These systems and methodologies allow us to identify and value the parts on a damaged vehicle at auction that can be recycled and to rapidly determine the maximum price we can pay for the vehicle in order to achieve our target margins on resale of the recycled OEM products. We focus on disciplined purchasing by balancing our regional inventory levels with forecasted demand and limiting our bids to provide profitable targeted margins. We seek to optimize the prices for our products by regularly analyzing such factors as recent demand, inventory quantity and new OEM part prices. Through our nationwide system of regional facilities, we believe we are uniquely positioned to provide a broad and deep range of cost effective products and services to our customers.

       We indirectly rely on insurance companies, which ultimately pay the collision repair shops for the repair of insured vehicles, as a source of business. These insurance companies exert significant influence in the vehicle repair decision and increasingly look to a nationwide source for consistency, quality and availability of replacement parts. Because of their importance to the process, we have formed business relationships with insurance companies such as Allstate Insurance Company, Farmers Insurance Group and Nationwide Insurance Company and with certain extended warranty providers, in order to be their preferred automotive recycling company. These relationships with insurance companies include vehicle repair order estimate review programs, the provision to claims adjusters of a part quote and locator service, and the provision of an outlet to dispose of certain total loss vehicles directly with us. We provide extended warranty companies a single national call desk to service their nationwide needs for mechanical products. In addition, to provide alternative sources of salvage vehicles, we obtain some automobiles directly from insurance companies, automobile manufacturers and other suppliers.

Our History

       We believe we were the first recycler of automotive products to achieve a national network and presence. Since our formation in 1998, we have grown through both internal development and acquisitions. Until late 1999, we focused on growth through acquisitions. Since 1999, internal growth has been the principal driver of our revenue and operating results. Our acquisition strategy has been to target companies with strong management teams, a record of environmental compliance, solid growth prospects and a reputation for quality and customer service. We believe it is important for former owners to remain active in our business and have frequently used equity as a significant component of acquisitions. As of June 30, 2003, former owners of acquired companies employed in managerial positions, along with their affiliates, owned approximately 22% of our common stock.

       For the year ended December 31, 2002 and for the six months ended June 30, 2003, we reported revenue of $287.1 million and $160.3 million, respectively, and net income (loss) of ($38.9) million and $8.1 million, respectively. In 2002 we recorded a goodwill impairment, net of tax, of $49.9 million as a cumulative effect of a change in accounting principle related to the adoption of Financial Accounting Standards Board Statement No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). See "Selected Consolidated Historical Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations – Goodwill Impairment."

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Our Strengths

       We believe our competitive strengths include the following:

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We have business relationships with national insurance companies and extended warranty providers and we believe we provide a direct benefit to these companies by lowering the cost of repairs, decreasing the time required to return the repaired vehicle to the customer, and providing a replacement product that is of the same quality as the OEM part replaced;

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We believe our national network would be difficult to replicate and provides us a competitive advantage;

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We benefit from a local presence as well as a national network that we believe allows us to maintain and develop our relationships with local repair shops, while providing nationwide service to insurance companies and national customers;

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We believe we have an effective procurement process and have developed information systems and methodologies that leverage our nationwide presence and use our centralized purchasing personnel to procure vehicles cost-effectively;

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We believe we have a broad and deep inventory of high quality recycled OEM products;

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We have implemented management disciplines that include procurement, operating and financial systems; and

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We have a demonstrated ability to generate internal growth.

Our Strategies

       Our primary growth strategies are as follows:

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Expand our national network through a combination of internal development and acquisitions. We may not, however, be able to successfully acquire new operations or integrate future acquisitions, which could cause our business to suffer. See "Risk Factors." We estimate our current share of the automotive recycling market to be less than 10%.

•

Further develop business relationships with automobile insurance companies, extended warranty providers and other industry participants. If these relationships were to terminate, however, we could lose important sales opportunities. See "Risk Factors."

•

Continue to improve our operating results by applying our business approach to our most recently acquired facilities, further centralizing certain functions, and increasing revenue at our lower volume facilities;

•

Further develop our technology to allow us to better manage and analyze our inventory, to assist our sales people with up-to-date pricing and availability of our products, and to further enhance our procurement process; and

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Raise industry standards in order to help promote the acceptability of the use of recycled OEM products and the growth of the automotive recycling industry. New laws could, however, prohibit or restrict the sale of certain recycled automotive products. See "Risk Factors."

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Risk Factors

       An investment in the common stock offered hereby involves a high degree of risk. See "Risk Factors."

Our Corporate Information

       We were incorporated in Delaware in February 1998. Our principal executive headquarters are located at 120 North LaSalle Street, Suite 3300, Chicago, Illinois 60602. Our telephone number is 312-621-1950. Our website address is www.lkqcorp.com. The information found on our website is not a part of this prospectus.

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The Offering

       The number of shares of common stock to be outstanding after this offering is based on the number of shares of common stock outstanding as of the date of this prospectus and does not include:

•

3,548,250 shares issuable as of June 30, 2003 upon the exercise of outstanding options under our stock option plans, at a weighted average exercise price of $9.61 per share;

•

2,023,700 additional shares authorized and reserved for issuance as of June 30, 2003 upon the exercise of options that may be issued in the future pursuant to our stock option plans;

•

1,948,286 shares issuable as of June 30, 2003 upon the exercise of outstanding warrants issued to some of our stockholders in exchange for providing guaranties of our bank debt, which guaranties are no longer in effect, at an exercise price of $2.00 per share; and

•

263,318 shares issuable as of June 30, 2003 upon the exercise of outstanding warrants issued in connection with acquisitions, at a weighted average price of $19.94 per share; and

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shares that may be purchased by the underwriters to cover over-allotments, if any.share.

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Summary Consolidated Financial and Other Data

       The following table summarizes financial data regarding our business and should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the related notes included elsewhere in this prospectus.

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       The following table contains a summary of our balance sheet as adjusted for the offering:

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(1)

The Company was formed on February 13, 1998. Information for 1998 is from inception through December 31, 1998.

(2)

The Company repurchased 2,000,000 shares of its common stock in February 2003 and repurchased an additional 1,557,498 shares of its common stock in May 2003. Accordingly, the shares used in the per share calculation for basic and diluted earnings per share in the six months ended June 30, 2003 do not fully reflect the impact of these purchases.

(3)

We believe it is appropriate to provide pro forma information indicating what our per share income (loss) would have been had the proceeds of our offering been used for debt repayment in the period as described in "Use of Proceeds" within this prospectus. The amount of proceeds used in these pro forma calculations is the amount required to repay the debt which was outstanding throughout each of the periods. To the extent we assumed proceeds were used for debt repayment, we then adjusted net income by $455,000 and $1,132,000 for the six month period ended June 30, 2003 and the year ended December 31, 2002, respectively, to give effect to the corresponding reduction in interest expense. The shares outstanding used to calculate both basic and diluted earnings per share were adjusted to include the number of shares that we would have issued in order to generate the proceeds for debt repayment assuming a $12.00 share price, which is the mid-point of the initial public offering range set forth on the cover page of this prospectus.

(4)

Includes acquisitions and non-cash property acquisitions.additions.

(4)(5)

EBITDA consists of income (loss) before provision for income taxes and cumulative effects of change in accounting principle plus depreciation and amortization and interest expense, less interest income. We have presented EBITDA information solely as a supplemental disclosure because we believe it provides a helpful analysis of our operating results. EBITDA should not be construed as an alternative to operating income, net income (loss) or net cash provided by (used in) operating activities, as determined in accordance with accounting principles generally accepted in the United States. In addition, not all companies that report EBITDA information calculate EBITDA in the same manner as we do and, accordingly, our calculation is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies.

The following table reconciles EBITDA to net income (loss):

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RISK FACTORS

       You should carefully consider each of the risks described below and all of the other information in this prospectus before deciding to invest in our common stock. If any of the following risks actually occur, our business, financial condition or results of operations could be harmed. In such an event, the trading price of our common stock could decline and you may lose all or part of your investment.

Risks Relating to Our Business

We face intense competition from local, national and internet-based automotive products providers, and this competition could negatively affect our business.

       The automotive recycling industry is highly competitive and is served by local owner-operated companies, several large regional companies, internet-based parts providers and Greenleaf LLC, a national automotive products provider founded by Ford Motor Company in 1999, which Ford is reported to have sold. In certain regions of the country where we operate, local automotive recycling companies have formed cooperative efforts to compete in the industry. We could also face additional competition in the future from others entering the market, such as original equipment manufacturers, insurance companies, new parts producers other than original equipment manufacturers, sometimes referred to as "aftermarket" suppliers, and industry consolidators. Some of our current and potential competitors may have more operational expertise and greater financial, technical, manufacturing, distribution and other resources, longer operating histories, lower cost structures and better relationships in the insurance and automotive industries. As a result, they may be able to provide their products at lower costs or to customers unavailable to us.

An adverse change in our relationships with auction companies or our suppliers could increase our expenses and hurt our relationships with our customers.

       Most of our inventory consists of vehicles offered at salvage auctions by several companies that own auction facilities in numerous locations across the United States. We do not have contracts with any auction companies. According to industry analysts, three companies control over 50% of the salvage auction market in the United States. In some localities, the automotive auction business may be even more highly concentrated. If an auction company prohibited us from participating in its auctions, or significantly raised its fees, our business could be adversely affected through higher costs or the resulting potential inability to service our customers. We also acquire some of our inventory directly from insurance companies, original equipment manufacturers and others. To the extent that these suppliers decide to discontinue these arrangements, our business could be adversely affected through higher costs or the resulting potential inability to service our customers.

We may not be able to sell our products due to existing or new laws prohibiting or restricting the sale of recycled automotive products.

       Some jurisdictions have enacted laws prohibiting or severely restricting the sale of certain recycled automotive products that we provide, such as airbags. Additional jurisdictions could enact similar laws or could prohibit additional automotive products we sell. Restrictions on the products we are able to sell could decrease our revenue and have an adverse effect on our business and operations.

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If our business relationships with insurance companies end, we may lose important sales opportunities.

       We rely on business relationships with insurance companies such as Allstate Insurance Company, Farmers Insurance Group and Nationwide Insurance Company. These insurance companies encourage automotive repair facilities to use products we provide. Because we do not have written agreements with these companies, these relationships may terminate at any time. We rely on these relationships for sales to some collision repair shops, and a termination of these relationships may result in a loss of sales, which could adversely affect our results of operations.

We are subject to environmental regulations and incur costs relating to environmental matters.

       We are subject to various federal, state and local environmental protection and health and safety laws and regulations governing, among other things:

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the emission and discharge of hazardous materials into the ground, air, or water;

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the exposure to hazardous materials; and

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the generation, handling, storage, use, treatment, identification, transportation and disposal of industrial by-products, waste water, storm water and hazardous materials.

       We are also required to obtain permits from governmental authorities for certain of our operations. If we violate or fail to obtain or comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. We could also become liable if employees or other third parties are improperly exposed to hazardous materials.

       Under certain environmental laws, we could be held responsible for all of the costs relating to any contamination at, or migrating to or from, our or our predecessors' past or present facilities and at third party waste disposal sites. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances.

       Environmental laws are complex, change frequently and have tended to become more stringent over time. Our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances may adversely affect our business, results of operations or financial condition. See "Business – Regulation."

Governmental agencies may refuse to grant or renew our operating licenses and permits.

       Our operating subsidiaries must receive certain licenses and permits from state and local governments to conduct their operations. When we develop or acquire a new facility, we must seek the approval of state and local units of government. Governmental agencies often resist the establishment of an automotive recycling facility in their communities. There can be no assurance that future approvals or transfers will be granted. In addition, there can be no assurance that we will be able to maintain and renew the licenses and permits our operating subsidiaries currently hold.

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Proposed regulations under the National Stolen Passenger Motor Vehicle Information System could harm our business.

       In 1992, Congress enacted the Anti Car Theft Act to deter trafficking in stolen vehicles. This law included the establishment of the National Stolen Passenger Motor Vehicle Information System to track and monitor stolen automotive parts. In April 2002, the Department of Justice published for comment proposed regulations to implement this system. The proposed regulations require, among other things, that insurance companies, salvagers, dismantlers, recyclers and repairers inspect salvage vehicles for the purpose of collecting the vehicle identification number and the part number for any covered major part that possesses the vehicle identification number. The requirement to collect this information would place substantial burdens and costs on us that otherwise would not normally exist, and could discourage our customers from purchasing our products.

We could be subject to product liability claims.

       If customers of repair shops that purchase our products are injured or suffer property damage, we could be subject to product liability claims. The successful assertion of this type of claim could have an adverse effect on our business or financial condition.

We may lose business if recent litigation involving the use of parts that are not original equipment manufacturer parts results in insurance companies modifying arrangements affecting the use of recycled automotive products in the repair process.

       As a result of litigation against an insurance company for using parts manufactured by companies other than the original equipment manufacturer, some insurance companies have curtailed or eliminated their requirement that repair shops use automotive parts that are not OEM parts. Our products are primarily recycled OEM parts, but litigation or restrictive insurance company repair policies could be extended to limit the use of recycled OEM parts.

       In an Illinois lawsuit involving State Farm Mutual Automobile Insurance Company ("Avery v. State Farm"), a jury decided in October 1999 that State Farm breached certain insurance contracts with its policyholders by using non-OEM parts to repair damaged vehicles when use of such parts did not restore the vehicle to its "pre-loss condition." The jury found that State Farm misled its customers by not disclosing the use of non-OEM parts and the alleged inferiority of those parts. The jury assessed damages against State Farm of $456 million, and the judge assessed an additional $730 million of disgorgement and punitive damages for violations of the Illinois Consumer Fraud Act. In April 2001, the Illinois Appellate Court upheld the verdict but reduced the damage award by $130 million because of duplicative damage awards. In October 2002, the Illinois Supreme Court agreed to hear the case, but no decision has yet been rendered. Some insurance companies have reduced or eliminated their use of non-OEM parts as a result of this case. We sell primarily recycled OEM automotive products to repair shops affiliated with insurance companies and these repair shops are an important source of revenue for us. The recycled OEM products we sell were not the subject ofAvery v. State Farm, but our financial results would suffer if insurance companies modified or terminated the arrangements pursuant to which repair shops buy recycled automotive products from us due to a fear of similar claims with respect to recycled products. Alternatively, in the event theAvery v. State Farm case is overturned or other circumstances

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change, the use of non-OEM parts could become more acceptable again, which could adversely affect our business.

We may not be able to successfully acquire new operations or integrate future acquisitions, which could cause our business to suffer.

       We may not be able to successfully complete potential strategic acquisitions if we cannot reach agreement on acceptable terms or for other reasons. Future acquisitions may require us to obtain additional financing, and such additional financing, whether sought through public or private debt or equity financing, may not be available when needed or may not be available on terms acceptable to us, if at all. If we buy a company or a division of a company, we may experience difficulty integrating that company or division's personnel and operations, which could negatively affect our operating results. In addition:

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the key personnel of the acquired company may decide not to work for us;

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we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management and financial reporting;

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we may be held liable for environmental risks and liabilities as a result of our acquisitions, some of which we may not have discovered during our due diligence;

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our ongoing business may be disrupted or receive insufficient management attention; and

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we may not be able to realize the cost savings or other financial benefits we anticipated.

       In connection with future acquisitions, we may assume the liabilities of the companies we acquire. These liabilities, including liabilities for environmental-related costs, could materially and adversely affect our business. We may have to incur debt or issue equity securities to pay for any future acquisition, the issuance of which would involve restrictive covenants or be dilutive to our existing stockholders.

Our existing credit facility imposes certain operating and financial restrictions on us and our subsidiaries and requires us to meet certain financial tests.

       Our credit facility contains certain operating and financial restrictions that limit or prohibit us from engaging in certain transactions, including the following:

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incurring or guarantying additional debt;

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paying dividends or other distributions to our stockholders or redeeming, repurchasing or retiring our capital stock or subordinated obligations;

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making investments and capital expenditures;

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creating liens on our assets;

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selling, transferring, leasing, licensing or otherwise disposing of assets;

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engaging in transactions with stockholders and affiliates;

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engaging in mergers, consolidations or acquisitions;

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engaging in any material line of business substantially different from, or unrelated to, those lines of business currently carried on by us; and

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making changes to our equity capital structure or amending our certificate of incorporation, bylaws, or any stockholder rights agreement.

       The credit facility is collateralized by substantially all of our assets (including the stock of our subsidiaries). The credit facility also requires that we satisfy certain financial tests. The failure to comply with any of these covenants would cause a default under the credit facility. We expect that a default, if not waived, could result in acceleration of our debt, in which case the debt would become immediately due and payable and our lenders would have certain rights to enforce their liens on our assets. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if new financing were available, it may be on terms that are less attractive to us than our existing facility or it may not be on terms that are acceptable to us.

Our future capital needs may require that we seek debt financing or additional equity funding that, if not available, could cause our business to suffer.

       We may need to raise additional funds in the future to, among other things, fund our existing operations, to improve or expand our operations, to respond to competitive pressures or to make acquisitions. From time to time after this offering, we may raise additional funds through public or private financing, strategic alliances or other arrangements. If adequate funds are not available on acceptable terms, we may be unable to meet our business or strategic objectives or compete effectively. If we raise additional funds by issuing equity securities, stockholders may experience dilution of their ownership interests, and the newly issued securities may have rights superior to those of the common stock. If we raise additional funds by issuing debt, we may be subject to further limitations on our operations. If we fail to raise capital when needed, our business will be negatively affected.

Our annual and quarterly performance may fluctuate.

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

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fluctuations in the market value of salvage and used vehicles;

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the availability of salvage vehicles at an attractive price;

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variations in vehicle accident rates;

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changes in state or federal laws or regulations affecting our business;

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our ability to integrate and manage our acquisitions successfully;

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severity of weather and seasonality of weather patterns;

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

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declines in asset values.

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       Due to the foregoing factors, our operating results in one or more future periods can be expected to fluctuate. Accordingly, our results of operations may not be indicative of future performance. These fluctuations in our operating results may cause our results to fall below the expectations of public market analysts and investors, which could cause our stock price to decline.

If we lose our key management personnel, 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 and key employees at the operating level. If we lose the services of one or more of our executive officers or key employees, 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. If we lose the services of any of our key employees at the operating or regional level, we may not be able to replace them with similarly qualified personnel, which could harm our business.

If we experience problems with our fleet of trucks, our business could be harmed.

       We use a fleet of trucks to deliver vehicle parts. We are subject to the risks associated with providing trucking services, including inclement weather, disruptions in the transportation infrastructure, availability and price of fuel, and liabilities arising from accidents to the extent we are not covered by insurance. In addition, our failure to deliver parts in a timely and accurate manner could harm our reputation and brand, which could have a material adverse effect on our business.

Risks Relating to Our Common Stock and this Offering

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

       Our executive officers, directors, their family members and affiliates will, in the aggregate, beneficially own approximately %45% of our common stock after this offering. If they were to act together, these stockholders would have significant influence over most matters requiring approval by stockholders, including the election of directors, any amendments to our certificate of incorporation, and certain significant corporate transactions. These stockholders may take these actions even if they are opposed by our other stockholders. In addition, without the consent of these stockholders, we could be delayed or prevented from entering into transactions that may be viewed as beneficial to us or our other stockholders.

Future sales of our common stock may depress our stock price.

       We and our stockholders may sell additional shares of common stock in subsequent offerings. We may also issue additional shares of common stock in connection with future acquisitions. Certain of our existing stockholders are parties to a registration rights agreement that provides such holders with the right to require us to effect the registration of their shares of common stock in specific circumstances. In addition, if after this offering we propose to register any of our common stock under the Securities Act of 1933, whether for our own account or otherwise, some existing stockholders may be entitled to include their shares of common stock in that registration. A significant number of our shares will also become freely tradable 180 days after completion of this offering. See "Shares Eligible for Future Sale."

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We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the value of our common stock. Sales of substantial amounts of common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the value of our common stock to fall.

Delaware law and our charter documents may impede or discourage a takeover, which could affect the value of our stock.

       The anti-takeover provisions of our certificate of incorporation and bylaws and Delaware law could, together or separately, impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Our certificate of incorporation and bylaws have provisions that could discourage potential takeover attempts and make attempts by stockholders to change management more difficult. Our incorporation under Delaware law and these provisions could also impede a merger, takeover or other business combination involving us or discourage a potential acquiror from making a tender offer for our common stock, which, under certain circumstances, could reduce the value of our common stock. See "Description of Capital Stock – Anti-Takeover Effects of our Certificate of Incorporation and Bylaws."

We have broad discretion on the use of our offering proceeds, and the investment of these proceeds may not yield a favorable return.

       Our management has broad discretion over how the net proceeds from this offering are used, and we could spend most of these proceeds in ways with which our stockholders may not agree. The proceeds may be invested in ways that do not yield favorable returns. See "Use of Proceeds" on page 16 for more information about how we plan to use our proceeds from this offering.

Our securities have no prior market, and our stock price may decline after the offering.

       Before this offering, there has not been a public market for our common stock. An active public market for our common stock may not develop or be sustained after this offering. The initial public offering price will be determined through negotiations between representatives of the underwriters and us. The trading prices of many companies' stocks have experienced significant declines from their initial offering price. The market price of our common stock may decline below our initial public offering price.

As a new investor, you will experience immediate and substantial dilution in the value of our common stock.

       If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in net tangible book value per share of $                        .$6.55. If the holders of outstanding options and warrants exercise those options or warrants, you will incur further dilution. See "Dilution" on page 1618 for an explanation and calculation of the amount of dilution you will incur.

14

SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS

       This prospectus contains forward-looking statements. These statements may be found throughout this prospectus, particularly under the headings "Prospectus Summary," "Risk Factors," "Dividend Policy," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," among others. Forward-looking statements typically are identified by the use of terms such as "may," "will," "plan," "should," "expect," "anticipate," "believe," "if," "estimate," "intend" and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these and similar words carefully because they describe our expectations, plans, strategies, goals and beliefs concerning future business conditions, our results of operations, our financial position, and our business outlook, or state other "forward-looking" information based on currently available information. The factors listed under the heading "Risk Factors" and in the other sections of this prospectus provide examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements.

       The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation, beyond that required by law, to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

USE OF PROCEEDS

       The net proceeds to us from this offering are estimated to be approximately $$43 million, or $     million if the underwriters' over-allotment option is exercised in full, based on the mid-point of the initial public offering price range shown on the cover page of this prospectus and net of underwriting discounts and estimated offering expenses paid by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering. Initially, weWe intend to use the net proceeds to pay down any one of the following or a combination thereof:in the order listed, to the extent proceeds are available:

•

our revolving credit facility, which had an amount outstanding of $25,000,000 and a weighted average interest rate of 3.83% as of June 30, 2003 and matures on June 30, 2005;

•

our term loan, which had an amount outstanding of $16,250,000 and an interest rate of 3.67% as of June 30, 2003 and matures on June 30, 2005; and2003;

•

our second term loan, which had an amount outstanding of $9,000,000 as of June 30, 2003; and

•

our term loan, which had an interest rateamount outstanding of 4.02%$16,250,000 as of June 30, 2003, and matures on February 20, 2004.of which approximately $9,000,000 will be paid down with the proceeds.

       We used our $9,000,000 second term loan to partially fund repurchases of our common stock in February 2003 from our existing stockholders AutoNation, Inc., PMM LKQ Investments Limited Partnership and PMM LKQ Investments Limited Partnership II. The remaining $3,000,000 of this stock repurchase was funded from borrowings under our revolving credit facility. In May 2003, we repurchased additional shares of our common stock from these three entities for a total amount of $10,902,486 which we funded by borrowing an additional $9,000,000 against our revolving credit facility. AutoNation, Inc. and PMM LKQ Investments Limited Partnership each holdheld as of June 30, 2003 over 5% of our common stock and each currently is represented by one designee on our board of directors. See "Certain Relationships and Related Party Transactions – Repurchases from Stockholders."

       ToWe may in the extent not used as described above, the remaining netfuture borrow additional amounts under our revolving credit facility or enter into new or additional borrowing arrangements. Any proceeds of this offeringfrom such new or additional borrowing arrangements will be used for general corporate purposes, including to develop and acquire recycling businesses and redistribution facilities, to expand and improve existing facilities, to purchase property, equipment and inventory, and for working capital. In addition, we may in the future borrow additional amounts under our revolving credit facility or enter into new or additional borrowing arrangements.

       Our management will have broad discretion to allocate our net proceeds from this offering. Pending such uses, the net proceeds to be received by us from this offering will be invested in investment-grade, short-term, interest-bearing investments.

DIVIDEND POLICY

       We have not paid dividends on our common stock, and our board of directors intends to continue a policy of retaining earnings for use in our operations. Our current credit facility prohibits the payment of any cash dividends, and we do not anticipate paying any such dividends in the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources."

16

CAPITALIZATION

       The following table sets forth our cash and equivalents and capitalization as of June 30, 2003:

•

on an actual basis; and

•

on an as adjusted basis to give effect to:

•

the sale of the shares of common stock by us pursuant to this offering at the mid-point of the initial public offering price range shown on the cover page of this prospectus, net of underwriting discounts and estimated offering expenses; and



•

the application of our net proceeds as described under "Use of Proceeds."

       This table should be read in conjunction with our consolidated financial statements and the related notes included in this prospectus.

(1)

On January 1, 2003, in connection with a business acquisition, we issued 50,000 shares of our common stock, along with a put option with a single exercise date of January 1, 2007 at a price of $15.00 per share. In addition, we obtained a call option on those shares with a single exercise date of January 1, 2007 at a price of $22.50 per share. We recorded the issuance of this stock at a present value on January 1, 2003 of $617,027.

17

DILUTION

       Our net tangible book value as of June 30, 2003 was $55.8 million, or $3.95 per share of common stock. Net tangible book value per share represents the amount of our total assets excluding goodwill and other intangibles, less our total liabilities excluding redeemable common stock, divided by the number of shares of common stock outstanding. Purchasers of shares in this offering will experience dilution in net tangible book value per share equal to the difference between the amount per share paid by those purchasers in this offering and the net tangible book value per share of our common stock immediately after this offering. After giving effect to our sale of 4,000,000 shares of common stock in this offering, based upon an offering price of $$12.00 per share, the mid-point of the initial public offering price range set forth on the cover page of this prospectus, our net tangible book value as of June 30, 2003 would have been approximately $$98.8 million, or $$5.45 per share of common stock, after deducting underwriting discounts and estimated offering expenses payable by us. This represents an immediate increase in net tangible book value to existing stockholders of $$1.50 per share and an immediate dilution to new investors in this offering of $$6.55 per share.

       The following table illustrates the per share dilution in net tangible book value to new investors:

       The following table summarizes as of June 30, 2003, the differences between the number of shares of common stock purchased from us, the aggregate cash consideration paid to us and the average price per share paid by existing stockholders since our inception and by new investors purchasing shares of common stock in this offering. The calculation below is based on an offering price of $$12.00 per share, the mid-point of the initial public offering price range set forth on the cover page of this prospectus, before deducting underwriting discounts and estimated offering expenses payable by us:

       The sale of shares by selling stockholders in this offering will have the following effects:

•

it will reduce the shares held by existing stockholders to 12,119,887 shares, or %66.9% of the total shares outstanding after this offering; and

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•

it will increase the shares held by new investors to ,6,000,000, or %33.1% of the total shares outstanding after this offering.

The exercise of the underwriters' over-allotment option in full would have the following effects:

•

it will reduce the shares held by existing stockholders to 11,219,887 shares, or %61.9% of the total shares outstanding after this offering; and

•

it will increase the shares held by new investors to ,6,900,000, or %38.1% of the total shares outstanding after this offering.

       The above discussion and the table do not include:

•

3,548,250 shares of common stock issuable as of June 30, 2003 pursuant to the exercise of stock options under our stock option plans, at a weighted average exercise price of $9.61 per share;

•

2,023,700 additional shares authorized and reserved for issuance as of June 30, 2003 upon the exercise of options that may be issued in the future pursuant to our stock option plans;

•

1,948,286 shares issuable upon the exercise of warrants issued to some of our stockholders in exchange for providing guaranties of our bank debt, which guaranties are no longer in effect, at an exercise price of $2.00 per share; and

•

263,318 shares issuable upon the exercise of warrants issued by us in connection with acquisitions, at a weighted average exercise price of $19.94 per share; and

•

shares that may be purchased by the underwriters to cover over-allotments, if any.share.

       To the extent that outstanding options or warrants are exercised in the future, there will be further dilution to investors. For more information about our capitalization and stock option plans, refer to "Capitalization" and "Management – Employee Benefit Plans." For more information about our outstanding warrants, refer to "Certain Relationships and Related Party Transactions – Fee Warrants" and "Description of Capital Stock – Warrants."

SELECTED CONSOLIDATED HISTORICAL
FINANCIAL DATA

       The following table summarizes financial data regarding our business and should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the related notes included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2001 and 2002 and the selected consolidated statements of operations data for each of the three years in the period ended December 31, 2002 have been derived from our audited consolidated financial statements that have been audited by Deloitte & Touche LLP, independent auditors, whose report is included elsewhere herein. The selected consolidated balance sheet data as of December 31, 1998, 1999 and 2000 and the selected consolidated statements of operations for the years ended December 31, 1998 and 1999 have been derived from our audited consolidated financial statements not included with this prospectus. The selected consolidated statements of operations data for the six months ended June 30, 2002 and 2003 are derived from our unaudited interim consolidated financial statements for the six months ended June 30, 2002 and 2003 that are included elsewhere in this prospectus, and the selected consolidated balance sheet and other data as of June 30, 2002 and 2003 are derived from our unaudited interim consolidated financial statements. Such interim financial statements, in the opinion of management, include all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial results for such periods. Interim results are not necessarily indicative of the results that may be expected for any other interim period or for a full year.

20

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(a)

The Company was formed on February 13, 1998. Information for 1998 is from inception through December 31, 1998.

(b)

Expense classification is not available for 1998, other than depreciation and amortization.

(c)

The Company repurchased 2,000,000 shares of its common stock in February 2003 and repurchased an additional 1,557,498 shares of its common stock in May 2003. Accordingly, the shares used in the per share calculation for basic and diluted earnings per share in the six months ended June 30, 2003 do not fully reflect the impact of these purchases.

(d)

We believe it is appropriate to provide pro forma information indicating what our per share income (loss) would have been had the proceeds of our offering been used for debt repayment in the period as described in "Use of Proceeds" within this prospectus. The amount of proceeds used in these pro forma calculations is the amount required to repay the debt which was outstanding throughout each of the periods. To the extent we assumed proceeds were used for debt repayment, we then adjusted net income by $455,000 and $1,132,000 for the six month period ended June 30, 2003 and the year ended December 31, 2002, respectively, to give effect to the corresponding reduction in interest expense. The shares outstanding used to calculate both basic and diluted earnings per share were adjusted to include the number of shares that we would have issued in order to generate the proceeds for debt repayment assuming a $12.00 share price, which is the mid-point of the initial public offering range set forth on the cover page of this prospectus.

(e)

Includes acquisitions and non-cash property additions.

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(e)(f)

EBITDA consists of income (loss) before provision for income taxes and cumulative effects of change in accounting principle plus depreciation and amortization and interest expense, less interest income. We have presented EBITDA information solely as a supplemental disclosure because we believe it provides a helpful analysis of our operating results. EBITDA should not be construed as an alternative to operating income, net income (loss) or net cash provided by (used in) operating activities, as determined in accordance with accounting principles generally accepted in the United States. In addition, not all companies that report EBITDA information calculate EBITDA in the same manner as we do and, accordingly, our calculation is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies.

The following table reconciles EBITDA to net income (loss):

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

       The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this prospectus. It contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the heading "Risk Factors."

Overview

       Since our formation in 1998, we have grown through both internal development and acquisitions. For the first 18 months of our existence, we focused on growth through acquisitions. Our acquisition strategy has been to target companies with strong management teams, a record of environmental compliance, solid growth prospects and a reputation for quality and customer service. We believe it is important for former owners to remain active in our business and have frequently used equity as a significant component of acquisitions.

       Internal growth is an important driver of our revenue and operating results. Since 1999, we have focused primarily on growing our sales and operating results within our existing organization. We have done so by developing our regional distribution networks and by creating overnight product transfers between our facilities to better leverage our inventory investment and to increase our ability to fill customer demand. We acquire salvage vehicles for dismantling from several sources, including salvage auctions, insurance companies and OEMs. We acquire the majority of our salvage vehicles from salvage auctions. A critical component of our operations is our ability to identify and value the recyclable parts on a damaged vehicle and rapidly determine the maximum price that we can pay for the salvage vehicle at auction in order to obtain our target margins on the resale of the recycled OEM products. Our ability to correctly assess the quality and ultimate sales prices for products when we purchase a salvage vehicle, as well as our ability to obtain the vehicle at a cost we determine to be reasonable in light of that assessment, directly impacts our profit margins in the periods subsequent to acquisition of the vehicles.

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

•

fluctuations in the market value of salvage and used vehicles;

•

the availability and cost of salvage vehicles;

•

variations in vehicle accident rates;

•

changes in state or federal laws or regulations affecting our business;

•

our ability to integrate and manage our acquisitions successfully;

•

severity of weather and seasonality of weather patterns;

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•

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

•

declines in asset values.

       Due to the foregoing factors, our operating results in one or more future periods can be expected to fluctuate. Accordingly, our results of operations may not be indicative of future performance.

Sources of Revenue

       Since 2000 our revenue from the sale of recycled OEM products and related services has ranged between 88% and 91% of our total revenue. We sell the majority of our recycled OEM products to collision repair shops and mechanical repair shops. Our recycled OEM products include, for example, engines, transmissions, front-ends, doors and trunk lids. The demand for our products and services is influenced by several factors, including the number of vehicles in operation, the number of miles being driven, the frequency and severity of vehicle accidents, availability and pricing of new and aftermarket parts, seasonal weather patterns and local weather conditions. Additionally, automobile insurance companies exert significant influence over collision repair shops as to how an insured vehicle is repaired and the cost level of the products used in the repair process. Accordingly, we consider automobile insurance companies to be key demand drivers for our products. We provide insurance companies services that include the review of vehicle repair order estimates, as well as direct quotation services to their adjusters. There is no standard price for recycled OEM products, but rather a pricing structure that varies from day to day based upon such factors as product availability, quality, demand, new product prices and the age of the vehicle being repaired.

       When we obtain a mechanical product from a dismantled vehicle and determine it is damaged or when we have a surplus of a certain mechanical product types, we sell them in bulk to mechanical remanufacturers. Since 2000 these sales have ranged from 4.8% to 7.1% of our total revenue. The majority of these products are transferred to two of our facilities in Houston, Texas where a sorting by product and model type takes place. Examples of such products are engine blocks and heads, transmissions, starters, alternators, and air conditioner compressors. After we have recovered all the products we intend to resell, the remaining materials are crushed and sold to scrap processors. Our revenue from the sale of scrap accounts for less than 1.7% of our total revenue.

       We also sell extended warranty contracts for certain mechanical products. These contracts cover the cost of parts and labor and are sold for periods of six months, one year or two years. We defer the revenue from such contracts and recognize it ratably over the term of the contracts. These contracts account for approximately 1% of our total revenue.

Cost of Goods Sold

       Our cost of goods sold includes the price we pay for the salvage vehicle, as well as auction fees and towing, where applicable. Our cost of goods sold also includes labor and other costs we incur to acquire and dismantle such vehicles. Our labor costs related to buying and dismantling account for approximately 10% of our cost of goods sold. The acquisition and dismantling of salvage vehicles is a manual process and, as a result, energy costs are not material.

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       Our revenue from products that we obtain from third party recyclers to sell to our customers, which we refer to as brokered product sales, generally ranges from 8.9% to 9.6% of our total revenue. We purchase these products when we do not have them available in our own inventory. The gross margin on brokered product sales as a percentage of revenue is generally less than half of what we achieve from sales of our own inventory because we must pay higher prices for these products.

       Some of our mechanical products are sold with a standard six month warranty against defects. We record the estimated warranty costs at the time of sale using historical warranty claim information to project future warranty claims activity and related expenses. Our warranty expense is less than 1% of our total cost of goods sold. Our warranty reserve is as follows:

       We also sell separately priced extended warranty contracts for certain mechanical products. The expense related to extended warranty claims is recognized when the claim is made.

Expenses

       Our facility and warehouse expenses primarily include our costs to operate our processing and redistribution facilities. These costs include labor for both plant management and facility and warehouse personnel, facility rent, property and liability insurance, utilities and other occupancy costs.

       Our distribution expenses primarily include our costs to deliver our products to our customers. Included in our distribution expense category are labor costs for drivers, local delivery and transfer truck rental costs, vehicle repairs and maintenance, insurance and fuel.

       Our selling and marketing expenses primarily include our advertising, promotion and marketing costs, salary and commission expenses for sales personnel, sales training, telephone and other communication expenses and bad debt expense. Personnel costs account for approximately 80% of our selling and marketing expenses. Most of our sales personnel are paid primarily on a commission basis. The number and quality of our sales force is critical to our ability to respond to our customers' needs and increase our sales volume. We are continually evaluating our sales force, developing and implementing training programs and utilizing appropriate measurements to assess our selling effectiveness.

       Our general and administrative expenses include primarily the costs of our corporate office and three regional offices that provide corporate and field management, treasury, accounting, legal, payroll, human resources and information systems functions.

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Seasonality

       Our operating results are subject to quarterly variations based on a variety of factors, influenced primarily by seasonal changes in weather patterns. During the winter months, we tend to have higher demand for our products. In addition, the cost of salvage vehicles tends to be lower as more weather related accidents occur generating a larger supply of total loss vehicles.

Critical Accounting Policies and Estimates

       Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition, warranty costs, inventory valuation, allowance for doubtful accounts, goodwill impairments, self-insurance programs, contingencies, asset impairments and taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities and our recognition of revenue that is not readily apparent from other sources. Actual results may differ from these estimates.

Revenue Recognition

       We recognize and report revenue from the sale of recycled automotive products when they are shipped and title has transferred, subject to a reserve for returns, discounts and allowances that management estimates based upon historical information. A collision repair product would ordinarily be returned within a few days of shipment, while a mechanical repair product may take longer to be returned. Discounts may be earned based upon sales volumes, or sales volumes coupled with prompt payment. Allowances are normally given within a few days following product shipment.

       We also sell separately priced extended warranty contracts for certain mechanical products. Revenue from these contracts is deferred and recognized ratably over the term of the contracts.

Warranty Reserves

       We issue a standard six-month warranty against defects on some of our mechanical products. We record an accrual for standard warranty claims at the time of sale using historical warranty claim information to project future warranty claims activity and related expenses. We analyze historical warranty claim activity by referencing the claims made and aging them from the original product sale date. We use this information to project future warranty claims on actual products sold that are still under warranty at the end of an accounting period. A 10% change in our historical annual warranty claims would result in a change in the estimated warranty reserve of approximately $120,000.

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Inventory Accounting

       Inventory is recorded at the lower of cost or market. Our inventory cost is established based on the price we pay for a vehicle, and includes buying, dismantling and, where applicable, auction fees and towing. Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility's inventory at expected selling prices. The average cost percentage is derived from each facility's historical vehicle sales, together with the costs for salvage vehicles purchased at auction or at contracted rates for salvage vehicles acquired under direct procurement arrangements. Our inventory carrying value is adjusted regularly to reflect the age and current and anticipated demand for our products. If actual demand differs from our estimates, an adjustment to our inventory carrying value would be necessary in the period such determination is made.

Allowance for Doubtful Accounts

       We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts, the aging of the accounts receivable and our historical experience. Our allowance for doubtful accounts at June 30, 2003 was approximately $1.5 million, which represents 6.8% of gross receivables. If actual defaults are higher than our historical experience, our allowance for doubtful accounts may be insufficient to cover the uncollectible receivables, which would have an adverse impact on our operating results in the period of occurrence. A 10% change in the annual write-off rate would result in a change in the estimated allowance for doubtful accounts of approximately $82,000. Our exposure to uncollectible accounts receivable is limited because we have a large number of smaller customers that are generally geographically dispersed. We control credit risk through credit approvals, credit limits and monitoring policies. We also have customers that pay for product at the time of shipment.

Goodwill Impairment

       We recorded goodwill as a result of our acquisitions. On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which we refer to as SFAS 142, that requires us to analyze our goodwill for impairment at least annually. The determination of the value of goodwill requires us to make estimates and assumptions that affect our consolidated financial statements. In assessing the recoverability of our goodwill, we must make assumptions regarding estimated future cash flows and other factors to determine fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. We perform goodwill impairment tests on an annual basis and between annual tests whenever events may indicate that an impairment exists. In response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of or otherwise exiting businesses, which could result in an impairment of goodwill.

       As a part of our adoption of SFAS 142, we utilize outside professionals in the valuation industry to validate the assumptions and overall methodology used to determine the fair value estimates. Valuations for some of our acquisitions have declined significantly since we made them due to a number of factors, including lower earnings multiples applied in the valuations of comparable companies. This resulted in

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the carrying values of certain reporting units exceeding the fair value of those reporting units as of January 1, 2002. As a result of adopting SFAS 142, we recorded a goodwill impairment of $49.9 million, net of tax of $16.1 million, as a cumulative effect of a change in accounting principle at January 1, 2002. As of June 30, 2003, we had $50.8 million in goodwill that will be subject to future impairment tests. If we were required to recognize goodwill impairments in future periods, we would report those impairment losses as part of our operating results and not as a change in accounting principle. We determined that no additional adjustments were necessary when we performed our annual impairment testing in the fourth quarter of 2002. A 10% decrease in the fair value estimates used in the fourth quarter of 2002 impairment test would not have changed this determination.

Impairment of Long-Lived Assets

       We review long-lived assets for possible impairment whenever events or circumstances indicate that the carrying value of such assets may not be recoverable. If our review indicates that the carrying value of long-lived assets is not recoverable, we reduce the carrying amount of the assets to fair value. We have had no adjustments to the carrying value of long-lived assets in 2001, 2002 or 2003. We had an impairment loss in 2000 relating to certain application software licenses that we abandoned in 1999. These licenses were partially written down using market estimates in our December 31, 1999 balance sheet. We were unable to subsequently sell the licenses and we recorded an impairment loss of $0.5 million ($0.3 million after tax) in 2000. We also closed two satellite facilities during 2000, and recorded an impairment loss of $0.1 million in connection with these closures.

Self-Insurance Programs

       We self-insure a portion of employee medical benefits under the terms of our employee health insurance program. We purchase individual stop-loss insurance coverage that limits our exposure on specific claims as well as aggregate stop-loss insurance coverage that limits our total exposure to employee medical claims. We also self-insure for a portion of automobile, general liability and workers' compensation claims. We have purchased stop-loss insurance coverage that limits our exposure to both individual claims as well as our overall claims. The cost of the stop-loss insurance is expensed over the contract periods.

       We record an accrual for the claims expense related to our employee medical benefits, automobile, general liability and workers' compensation claims based upon the expected amount of all such claims. If actual claims are higher than what we anticipated, our accrual might be insufficient to cover our claims costs, which would have an adverse impact on our operating results in that period. If we were to incur claims up to our aggregate stop-loss insurance coverage, we would have an additional expense of approximately $3.0 million on an annual basis.

Contingencies

       We are subject to the possibility of various loss contingencies arising in the ordinary course of business resulting from litigation, claims and other commitments and a variety of environmental and pollution control laws and regulations. We consider the likelihood of loss or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. We accrue an estimated loss contingency when it is probable that a liability has been incurred and the

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amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether the accruals should be adjusted. If the amount of an actual loss is greater than the amount we have accrued, this would have an adverse impact on our operating results in that period.

Accounting for Income Taxes

       We record a valuation allowance to reduce our deferred tax assets to the amount that we expect is more likely than not to be realized. We consider historical taxable income, expectations and risks associated with our estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance. We had a $0.1 million valuation allowance as of each of December 31, 2001 and 2002, and June 30, 2003, against our deferred tax assets. Should we determine that it is more likely than not that we would be able to realize all of our deferred tax assets in the future, an adjustment to the net deferred tax asset would increase income in the period such determination was made. Conversely, should we determine that it is more likely than not that we would not be able to realize all of our deferred tax assets in the future, an adjustment to the net deferred tax assets would decrease income in the period such determination was made.

Acquisitions

       We acquired three automotive recycling businesses in 2003 for an aggregate of $3.5 million in cash, $0.2 million of which will be paid subsequent to June 30, 2003, and 50,000 shares of our common stock, which are reflected as redeemable common stock on our balance sheet. These are the first companies we have acquired since 1999. We continue to target certain strategic markets that would enhance and extend our existing network, and expect to establish additional redistribution centers or open new sales and processing facilities in markets where acceptable acquisition targets cannot be located.

Segment Reporting

       All of our operations are conducted in the United States. We manage our operations geographically. Because approximately 95% of all revenue and 92% of all profits are derived from, and 95% of all assets are used in, our salvage operations, we have concluded that our business activities fall into one reportable segment.

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Results of Operations

       The following table sets forth statement of operations data as a percentage of total revenue for the periods indicated: