| LKQ CORP ITEM 1A RISK FACTORS Risks Relating to Our Business We face intense competition from local, national, and internet-based light vehicle products providers, and this competition could negatively affect our business |
| The light vehicle replacement products industry is highly competitive and is served by numerous suppliers of OEM products, recycled OEM products, and aftermarket products |
| Within each of these categories of suppliers, there are local owner-operated companies, larger regional suppliers, national providers, and internet-based suppliers |
| Providers of light vehicle replacement products that have traditionally sold only certain categories of such products may decide to expand their product offerings into other categories of light vehicle replacement products, which may further increase competition |
| Some of our current and potential competitors may have more operational expertise; greater financial, technical, manufacturing, distribution, and other resources; longer operating histories; lower cost structures; and better relationships in the insurance and vehicle repair industries |
| In certain regions of the US, local light vehicle recycling companies have formed cooperative efforts to compete in the recycled OEM products industry |
| As a result of these factors, our competitors may be able to provide products that we are unable to supply, provide their products at lower costs, or supply products to customers that we are unable to serve |
| 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 salvage inventory consists of vehicles offered at salvage auctions by several companies that own auction facilities in numerous locations across the US We do not have contracts with any auction company |
| According to industry analysts, three companies control over 50prca of the salvage auction market in the US 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 |
| Moreover, auction companies have begun to allow bids to be submitted on salvage vehicles through the internet, which increases the number of potential bidders and may increase our cost of goods sold for recycled OEM products |
| We also acquire some of our inventory directly from insurance companies, original equipment manufacturers, aftermarket parts manufacturers, and others |
| To the extent that these suppliers decide to 13 ______________________________________________________________________ discontinue these arrangements, our business could be adversely affected through higher costs or the resulting potential inability to service our customers |
| In addition, we purchase aftermarket parts primarily from foreign manufacturers in Taiwan |
| In the event that our business relationships with these suppliers deteriorated or terminated, or in the event that the importing of products into the US from Taiwan or the exporting of products by Taiwan to the US was disrupted, our business could be adversely affected through higher costs or the resulting inability to service our customers |
| We may not be able to sell our products due to existing or new laws and regulations prohibiting or restricting the sale of recycled OEM or aftermarket products |
| Some jurisdictions have enacted laws prohibiting or severely restricting the sale of certain recycled OEM products that we provide, such as airbags |
| These and other jurisdictions could enact similar laws or could prohibit or severely restrict the sale of additional recycled OEM products |
| Restrictions on the products we are able to sell could decrease our revenue and have an adverse effect on our business and operations |
| We became involved in the aftermarket products business upon the closing of an acquisition in February 2004 |
| Since 1998, most states have passed laws that prohibit or limit the use of aftermarket products in collision repair work and/or require enhanced disclosure or vehicle owner consent before using aftermarket products in such repair work |
| Additional bills of this kind may be introduced in the future |
| If additional laws prohibiting or restricting the use of aftermarket products are passed, it could have an adverse impact on our aftermarket products business |
| Certain organizations test the quality and safety of light vehicle replacement products |
| In the event that such organizations decide that a particular vehicle product does not meet applicable quality or safety standards, we may decide to discontinue sales of such product or insurance companies may decide to discontinue authorization of repairs using such product |
| Such events could adversely affect our business |
| If our business relationships with insurance companies end, we may lose important sales opportunities |
| We rely on business relationships with certain insurance companies |
| These insurance companies encourage vehicle repair facilities to use products we provide |
| Our arrangements with these companies may be terminated 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: · the emission and discharge of hazardous materials into the ground, air, or water; · the exposure to hazardous materials; and · the generation, handling, storage, use, treatment, identification, transportation, and disposal of industrial by-products, waste water, storm water, and mercury and other hazardous materials |
| We are also required to obtain environmental 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 |
| 14 ______________________________________________________________________ Under certain environmental laws, we could be held responsible for all of the costs relating to any contamination at, or migration 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 |
| 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 a vehicle 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 |
| 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 burdens and costs on us that otherwise would not normally exist, and could discourage our customers from purchasing our products if the proposed regulations are adopted |
| 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 aftermarket parts results in insurance companies modifying arrangements affecting the use of recycled OEM or aftermarket products in the repair process |
| 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 dlra456 million, and the judge assessed an additional dlra730 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 dlra130 million because of duplicative damage awards |
| On August 18, 2005, the Illinois Supreme Court reversed the awards made by the circuit court and found, among other things, that the plaintiffs had failed to establish any breach of contract on the part of State Farm |
| As a result of this case, some insurance companies had reduced or eliminated their use of 15 ______________________________________________________________________ aftermarket products |
| Although our products are primarily recycled OEM parts, we entered the aftermarket products business through an acquisition in February 2004 |
| Because the decision by the Illinois Supreme Court was rendered so recently, we are uncertain how the decision will affect the practices of insurance companies in the future, but our financial results could be affected, perhaps adversely, if insurance companies modified or terminated the arrangements pursuant to which repair shops buy aftermarket or recycled OEM products from us due to a fear of similar claims with respect to such products |
| If the number of vehicles involved in accidents declines, our business could suffer |
| Because our business depends on vehicle accidents for both the supply of recycled OEM products and the demand for repairs using our products, factors which influence the number and/or severity of accidents, including, but not limited to, the number of vehicles on the road, the number of miles driven, the ages of drivers, the use of cellular telephones and other electronic equipment by drivers, the congestion of traffic, the occurrence and severity of certain weather conditions, the use of alcohol and drugs by drivers, and the condition of roadways, impact our business |
| In this regard, a number of states and municipalities have adopted, or are considering adopting, legislation banning the use of handheld cellular telephones while driving and such restrictions could lead to a decline in accidents |
| Moreover, rising fuel prices may cause the number of vehicles on the road to decline as motorists seek alternative transportation options and this also could lead to a decline in accidents |
| 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 |
| If we buy a company or a division of a company, we may experience difficulty integrating that company’s or division’s personnel and operations, which could negatively affect our operating results |
| In addition: · the key personnel of the acquired company may decide not to work for us; · we may experience business disruptions as a result of information technology systems conversions; · we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, and financial reporting; · 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; · our ongoing business may be disrupted or receive insufficient management attention; and · 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 could involve the imposition of restrictive covenants or be dilutive to our existing stockholders |
| 16 ______________________________________________________________________ Our 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: · incurring or guarantying additional debt; · paying dividends or other distributions to our stockholders or redeeming, repurchasing, or retiring our capital stock or subordinated obligations; · making investments and capital expenditures; · creating liens on our assets; · selling, transferring, leasing, licensing, or otherwise disposing of assets other than in the ordinary course of business; · engaging in transactions with stockholders and affiliates; · engaging in mergers, consolidations, or acquisitions; · engaging in any material line of business substantially different from, and unrelated to, those lines of business currently carried on by us; and · making changes to our equity capital structure or amending our certificate of incorporation, bylaws, or any stockholder rights agreement |
| 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 |
| A default, if not waived, could result in acceleration of our debt, in which case the debt would become immediately due and payable |
| Even if new financing were available, it may be on terms that are less attractive to us than our existing credit 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, improve or expand our operations, respond to competitive pressures, or make acquisitions |
| From time to time, 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 |
| 17 ______________________________________________________________________ Our annual and quarterly performance may fluctuate |
| Our revenue, cost of goods sold, 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: · fluctuations in the pricing of new OEM replacement products; · the availability and cost of inventory; · variations in vehicle accident rates; · competition in the vehicle replacement parts industry; · changes in state or federal laws or regulations affecting our business; · changes in the types of replacement parts that insurance carriers will accept in the repair process; · our ability to integrate and manage our acquisitions successfully; · fluctuations in fuel prices; · changes in the demand for our products and the supply of our inventory due to 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; and · declines in the values of our assets |
| Due to the foregoing factors, our operating results in 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 |
| We rely on information technology in critical areas of our operations and a disruption relating to such technology could harm our business |
| We use information technology systems owned by other companies for management of our facilities and our financial functions |
| In the event that the providers of these systems terminate their relationships with us, we could suffer disruptions to our operations |
| In addition, we continually monitor these systems to find areas for improvement |
| In the event that we decided to switch providers or to implement our own systems, we may also suffer disruptions to our 18 ______________________________________________________________________ business |
| We may be unsuccessful if we try to develop our own systems, and we may underestimate the costs and expenses of developing and implementing our own systems |
| Also, our revenue may be hampered during the period of implementing an alternative system, which period could extend longer than we anticipated |
| If we experience problems with our fleet of trucks, our business could be harmed |
| We are subject to the risks associated with providing trucking services, including inclement weather, disruptions in the transportation infrastructure, availability and price of fuel, liabilities arising from accidents to the extent we are not covered by insurance, and insurance premium increases |
| In addition, our failure to deliver products in a timely and accurate manner could harm our reputation and brand, which could have a material adverse effect on our business |
| If we determine that our goodwill has become impaired, we may incur significant charges to our pre-tax income |
| Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations |
| In the future, goodwill and intangible assets may increase as a result of future acquisitions |
| Goodwill and intangible assets are reviewed at least annually for impairment |
| Impairment may result from, among other things, deterioration in the performance of acquired businesses, adverse market conditions, and adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business |
| As of December 31, 2005, our total goodwill, subject to future impairment testing, was approximately dlra181dtta8 million |
| Challenges to the validity of aftermarket products could adversely effect our business |
| Original equipment manufacturers have attempted to use claims of intellectual property infringement against manufacturers and distributors of aftermarket products to restrict or eliminate the sale of aftermarket products that are the subject of the claims |
| The original equipment manufacturers have brought such claims in federal court and with the United States International Trade Commission |
| To the extent that the original equipment manufacturers are successful with these claims, we could be restricted or prohibited from selling certain aftermarket products which could have an adverse effect on our business |
| Risks Relating to Our Common Stock Our executive officers, directors, and their affiliates hold a large percentage of our stock and their interests may differ from other stockholders |
| As of December 31, 2005, our executive officers, directors, and their affiliates, in the aggregate, beneficially owned approximately 21prca of our common stock |
| 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 may also issue shares of common stock in connection with the exercise of outstanding options or 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 19 ______________________________________________________________________ in specific circumstances |
| In addition, if 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 |
| 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 price 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 price of our common stock to fall |
| Delaware law and our charter documents may impede or discourage a takeover, which could affect the price 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 price of our common stock |