** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-K**

| **(Mark One)**                                   |   |                                                                                          |
|--------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
| **ý**                                       |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|                                             |   |                                                                                          |
| **For  the fiscal year ended December 31, 2001** |
|                                             |   |                                                                                          |
| **OR**                                           |
|                                             |   |                                                                                          |
| **o**                                            |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**Commissionfile number 0-21803**

----

**AFTERMARKETTECHNOLOGY CORP.**

**(Exactname of Registrant as specified in its charter)**

 

| **DELAWARE**                                                          |   | **95-4486486**                         |
|-----------------------------------------------------------------------|--------|----------------------------------------|
| (State or other jurisdiction of   incorporation or organization) |   | (I.R.S. Employer   Identification No.) |
|                                                                  |   |                                   |
| **One  Oak Hill Center, Suite 400 Westmont, IL**                      |   | **60559**                              |
| (Address of Principal Executive Offices)                              |   | (Zip Code)                             |

**Registrant’s telephone number,including area code:  (630) 455-6000**

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

**Securities registered pursuant to Section 12(g) of the Act:Common Stock, $.01 par value**

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes **ý**No **o**

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to thisForm 10-K. **o**

The aggregate market value of the voting stock held by non-affiliatesof the Registrant (based on the closing price of such stock, as reported by TheNasdaq National Market, on March 1, 2002) was $120.0 million.

The number ofshares outstanding of the Registrant’s Common Stock, as of March 1, 2002, was20,839,562 shares.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

None.

 

 

**AFTERMARKET TECHNOLOGY CORP.**

**ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2001**

 

| ITEM  1.  |   | BUSINESS.                                                                                   |   |
|-----------|--------|---------------------------------------------------------------------------------------------|--------|
|      |   |                                                                                        |   |
| ITEM  2.  |   | PROPERTIES                                                                                  |   |
|      |   |                                                                                        |   |
| ITEM  3.  |   | LEGAL  PROCEEDINGS                                                                          |   |
|      |   |                                                                                        |   |
| ITEM  4.  |   | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |   |
|      |   |                                                                                        |   |
| ITEM  5.  |   | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |   |
|      |   |                                                                                        |   |
| ITEM  6.  |   | SELECTED  FINANCIAL DATA                                                                    |   |
|      |   |                                                                                        |   |
| ITEM  7.  |   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
|      |   |                                                                                        |   |
| ITEM  7A. |   | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |   |
|      |   |                                                                                        |   |
| ITEM  8.  |   | CONSOLIDATED  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                   |   |
|      |   |                                                                                        |   |
| ITEM  9.  |   | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       |   |
|      |   |                                                                                        |   |
| ITEM  10. |   | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                         |   |
|      |   |                                                                                        |   |
| ITEM  11. |   | EXECUTIVE  COMPENSATION                                                                     |   |
|      |   |                                                                                        |   |
| ITEM  12. |   | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                             |   |
|      |   |                                                                                        |   |
| ITEM  13. |   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                             |   |
|      |   |                                                                                        |   |
| ITEM  14. |   | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                            |   |

 

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

This Annual Report contains forward–lookingstatements (as such term is defined in Section 27A of the Securities Actof 1933 and Section 21E of the Securities Exchange Act of 1934) andinformation relating to us that are based on the current beliefs of ourmanagement as well as assumptions made by and information currently availableto management, including statements related to the markets for our products,general trends in our operations or financial results, plans, expectations,estimates and beliefs.  In addition,when used in this Annual Report, the words “may,” “could,” “should,”“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “predict” andsimilar expressions and their variants, as they relate to us or our management,may identify forward–looking statements. These statements reflect our judgment as of the date of this AnnualReport with respect to future events, the outcome of which is subject to risks,which may have a significant impact on our business, operating results orfinancial condition.  Readers arecautioned that these forward–looking statements are inherentlyuncertain.  Should one or more of theserisks or uncertainties materialize, or should underlying assumptions proveincorrect, actual results or outcomes may vary materially from those describedherein.  We undertake no obligation toupdate forward–looking statements. The risks identified in the section of Item 1 entitled “Certain FactorsAffecting the Company,” among others, may impact forward–lookingstatements contained in this Annual Report.

**PARTI**

## **ITEM 1.**                                         BUSINESS

**Overview**

Weare a leading remanufacturer and distributor of drivetrain products used in therepair of automobiles and light trucks in the automotive aftermarket.  Our Logistics business is a provider ofvalue added warehouse and distribution services as well as returned materialreclamation and disposition services. Our Logistics business also remanufactures and distributes electroniccomponents.

OurDrivetrain Remanufacturing business sells factory–approved remanufactureddrivetrain products directly to automobile manufacturers (known as OEMs).  Our Drivetrain business products consistprincipally of remanufactured transmissions and also include remanufacturedtorque converters, valve bodies and engines. The OEMs primarily use the remanufactured products as replacementparts for their domestic dealers during the warranty and post-warranty periodsfollowing the sale of a vehicle. Remanufactured products offer several advantages to customers relativeto comparable rebuilt products. Generally, remanufactured products are lower cost, are of higher qualityconsistency and have shorter delivery times. Our principal customers for remanufactured transmissions areDaimlerChrysler Corporation, Ford Motor Company, General Motors Corporation anda number of foreign OEMs.  In addition, our Drivetrain business sells selectremanufactured engines to several European OEMs.

Demandfor our products within the Drivetrain business is largely a function of thenumber of vehicles in operation, the average age of vehicles and the averagenumber of miles driven per vehicle. These factors have generally increased over time, thereby increasingdemand for our remanufactured products. Other factors that influence demand for our remanufactured productsinclude product complexity and reliability, the length of OEM warranty periodsand the severity of weather conditions. Because these factors are not directly dependent on new automotive saleslevels, demand for remanufactured products within our Drivetrain business hasbeen largely non-cyclical.

OurDrivetrain business has been our primary business since our formation.  For the year ended December 31, 2001,revenue from our Drivetrain business was $266.3 million, or 67% of ourtotal revenue.  In addition, in theUnited States we also sell remanufactured engines in the independent aftermarket.  For the year ended December 31, 2001,revenue from this engines business was $21.9 million, or 6% of our totalrevenue.

1

----

 

OurLogistics business consists of three operating units: Logistics Services, aprovider of value added warehouse and distribution services, turnkey orderfulfillment and information services for AT&T Wireless Services; MaterialRecovery, a provider of returned material reclamation and disposition servicesand management services for failed components, commonly referred to as cores,primarily for Ford and, to a lesser extent, General Motors; and AutocraftElectronics, an automotive electronic remanufacturing and distributionbusiness.  Services within our Logisticsbusiness are designed to meet the specialized needs of our customers.

Thelogistics industry has evolved over the last 20 years due to dramaticimprovements in technology and increased demand in customer servicerequirements.  Growth in our logisticsbusiness with AT&T Wireless is primarily dependent on cellular telephonehandset demand and AT&T Wireless’ share of new cellular telephone salesvolume.  Our logistics business benefitsfrom upgrades in cellular telephone technology through increased replacementdemand for more advanced handsets, from any increases in the number of AT&TWireless subscribers and from any expansion of our service offering withAT&T Wireless.  Because we do nottake actual ownership of our cellular telephone inventory, we do not face therisk of inventory obsolescence.  Othergrowth drivers within our Logistics business include our ability to leverageour expertise in logistics in other industries.  For the year ended December 31, 2001, revenue from ourLogistics business was $105.2 million, or 27% of our total revenue, ofwhich AT&T Wireless accounted for 66%.

**Industry Background**

***AutomotiveAftermarket***

Theautomotive aftermarket in the United States, which consists of sales of partsand services for vehicles after their original purchase, has been largelynon-cyclical and has generally experienced steady growth over the pastnine years, unlike the market for new vehicle sales.  According to materials published by theAutomotive Aftermarket Industry Association, between 1991 and 2000 (the mostrecent period for which data is available), estimated U.S.  automotive aftermarket sales increased fromapproximately $101.8 billion to $168.4 billion.  This consistent growth is due principally toan increase in the number of vehicles in operation, an increase in the averageage of vehicles, and an increase in the average number of miles driven pervehicle.  According to these samematerials, the aftermarket segment for drivetrain parts is estimated to havebeen $5.5 billion in 2000.  Webelieve that within this segment, the market for remanufactured drivetrainproducts has grown faster than the overall automotive aftermarket.

***RemanufacturingProcess***

Remanufacturingis a process through which used assemblies are returned to a central facilitywhere they are disassembled and their component parts are cleaned, refurbishedand tested.  The usable component partsare then combined with new parts in a high volume, precision assembly line orcellular manufacturing process to create remanufactured assemblies.

Whenan assembly such as a transmission or engine fails, there are generally threealternatives available to return the vehicle to operating condition.  The dealer or independent repair shop may:

·                  remove the assembly,disassemble it into its component pieces, replace worn or broken parts withremanufactured or new components, and reinstall the assembly in the vehicle;

·                  replace the assembly with anassembly from a remanufacturer such as us; or

·                  in rare instances, replacethe assembly with a new assembly manufactured by the OEM.

Inour remanufacturing operations, we obtain used transmissions, engines andrelated components, commonly known as cores, from the OEMs.  We then sort the cores by vehicle make andmodel and either place them into immediate production or store them untilneeded.  In the remanufacturing process,we evaluate the cores, disassemble them into their component parts and clean,refurbish and test the components that can be incorporated into theremanufactured product.  We replacecomponents that we determine to be not reusable or repairable with otherremanufactured or new components.  Weconduct inspection and testing at various stages of the remanufacturingprocess, and we test each finished assembly on equipment designed to simulateperformance under operating conditions. After testing, we generally package completed products for immediatedelivery.

2

----

 

Thereare four primary benefits of using remanufactured components in the repair ofvehicles:

·                  First, costs to the OEMassociated with remanufactured assemblies generally are substantially less thannew or dealer–rebuilt assemblies due to our use of high volumemanufacturing techniques and salvage methods that enable us to refurbish andreuse a high percentage of original components, as well as our lower cost ofproduction.  The cost savings producedby remanufactured assemblies helps the OEMs manage their warranty expenses.

·                  Second, remanufacturedassemblies are generally of consistent high quality due to the precisionmanufacturing techniques, technical upgrades and rigorous inspection andtesting procedures we employ in remanufacturing.  By contrast, the quality of rebuilt assemblies generally is lessconsistent because it is heavily dependent on the skill level of the particularmechanic as well as the availability of adequate tooling and testingequipment.  In addition, theproliferation of transmission and engine designs, the increasing complexity oftransmissions and engines that incorporate electronic components and theshortage of highly trained mechanics qualified to rebuild assemblies areleading to what management believes is a trend toward the use of remanufacturedassemblies for aftermarket repairs.  Forwarranty repairs, consistent quality is important to the OEM providing theapplicable warranty, because once installed, the remanufactured product isusually covered by the OEM’s warranty for the balance of the original warrantyperiod.

·                  Third, replacement of acomponent with a remanufactured component generally takes considerably lesstime than the time needed to rebuild the component, thereby significantlyreducing the time the vehicle is at the dealer or repair shop and allows thedealer and repair shops to increase their volume of business.

·                  Fourth, the environmentalbenefits of remanufacturing may be significant to OEMs.  Remanufacturing in our facilities, whencompared to rebuilding at various dealers, generally results in a moreefficient re–utilization of parts and a more controlled recycling ofscrap materials and excess fluids.  Thisin turn leads to associated cost savings. We estimate that we annually re–process thousands of tons ofmaterials that would otherwise have been discarded.

Webelieve that because of this combination of high quality, low cost andefficiency, the use of remanufactured assemblies for repairs is growingcompared to the use of new or rebuilt assemblies.

***LogisticsIndustry***

Logisticscan generally be defined as the management and transportation of materials andinventory throughout the supply chain as well as the provision of value addedservices such as assembly, packaging, programming and testing.  The logistics industry has evolved over thelast 20 years due to dramatic improvements in technology and increased demandin customer service requirements.  Ascompanies’ logistics decisions involve greater emphasis on cost efficiency andincreased focus on core competencies, companies are increasingly reevaluatingtheir in-house logistics functions. Many companies have decided to outsource the management of all or partof their supply chain as a means to reduce costs, increase asset and laborflexibility and improve customer service. As a result, third–party logistics providers have becomeextensively involved in the full range of customer supply chain functions.  The operational efficiencies of a third–partyprovider enable companies to reduce investments in facilities, informationtechnology, inventory and personnel. Third–party services include order fulfillment, product labelingand packaging, inventory and warehouse management, product return and repair,reverse logistics and the actual physical movement of goods.

3

----

 

Themarket for third party logistics providers is highly fragmented.  According to Armstrong &Associates, Inc., the third party logistics market in 2000 was estimated to be$56.4 billion.  Approximately $20.4 billion,or 36% of the estimated third party logistics market in 2000, represents valueadded warehouse and distribution services. This segment of the estimated third party logistics market grew byapproximately 23% in 2000.  The majorityof our Logistics business with AT&T Wireless includes value added warehouseand distribution services.

***Logistics Process***

Ourlogistics process is determined in close consultation with our customers.  For instance, for AT&T Wireless, oursupply chain management services include warehousing, picking, packing,shipping and delivery of wireless handsets, including wireless data devices,and accessories.  Our integratedlogistics services include inventory management, private labeling, kitting andcustomized packaging, the management and distribution of time sensitivemarketing materials and product warranty and returns processing.

**Our Competitive Strengths**

Webelieve our core competencies include the following factors:

***OurRemanufacturing Technology***

Wespecialize in volume remanufacturing of high-quality automotive transmissions,torque converters, engine long blocks and automotive electronics.  Our remanufacturing process is completed bytesting products using state-of-the-art equipment such as sophisticated teststands that enable us to replicate OEM test procedures.

***Our High QualityProducts with a Sound ISO Quality Foundation***

Ourremanufactured products are of consistent high quality due to the precisionmanufacturing techniques, technical upgrades and rigorous inspection andtesting procedures employed in our remanufacturing processes.  We are dedicated to upholding the quality ofour customers’ products and hold QS 9000 Certification, ISO-9002 Certificationand Ford’s Q1 Certification.

***Our Fulfillmentand Customer Service Capabilities***

OurLogistics business provides high-speed, same day, technology drivenfulfillment.  Our logistics approachinvolves our team of specialists who work with the client to understanddeliverables, understand communication points within the supply chain, designsolutions, establish operational and business metrics, eliminate waste andimprove efficiencies.

***Our InformationTechnology Management and Response Skills***

Inour Logistics business, we use state-of-the-art software and computer systemsto meet customers’ needs in product security and confidentiality, productqualification and identification, inventory management, interactive electroniccommunication, authorized product sales and commodity recycling, as well asproviding customers with solutions for their supply chain management, reverselogistics, product tracking and product history needs, while maintainingservice and quality levels.

***Our CustomerRelationships***

Inrecognition of our consistently high level of service and product qualitythroughout our relationship with DaimlerChrysler, in each of the eight yearsprior to and including 2000, we have received the highest award bestowed byChrysler to its suppliers for which we were eligible.  Additionally, over the past two years, we have strengthened ourrelationship with many other of our customers, as evidenced by the award of newbusiness with Ford, Jaguar, Isuzu, Kia and General Motors.  To strengthen our customer relationships andimprove all aspects of customer service and operations, we have implemented our“Lean and Continuous Improvement” and “Customer Delight” programs.  Under these programs, we have installed anumber of training and operating initiatives aimed at improving efficiency andproductivity.

4

----

** **

**Our Growth Strategies**

Ourstrategy is to be a world–class provider of remanufacturing and logisticsproducts and services.  We are pursuingthe following growth strategies:

·                  increasing sales to existingcustomers;

·                  introducing new products;

·                  establishing new customerrelationships; and

·                  pursuing potential futureacquisitions.

***Increasing Salesto Existing Customers***

*Drivetrain Customers.*  We intend to increase our business with our existing Drivetraincustomers by working with OEMs to increase dealer utilization ofremanufactured transmissions in both the warranty and post-warranty periods.  We are working in tandem with OEMs tohighlight to dealers the quality and cost advantages of using remanufacturedassemblies versus rebuilding.  We arealso working with OEMs to reduce the lag time prior to the introduction ofa remanufacturing program for new transmission models and model years.  In addition, the post-warranty repairmarket, which we believe is significantly larger than the OEM dealer warrantyrepair market, presents a growth opportunity. We believe that most post-warranty repairs are performed by aftermarketrepair specialists rather than by OEM dealers. Given the relatively low cost and high quality of remanufacturedcomponents, OEM dealers may enhance their cost competitiveness, when comparedto independent service centers, through the increased use of remanufacturedcomponents as well as providing end customers with a high quality product.  To the extent that OEM dealers increasetheir level of post-warranty repairs, we are well positioned, given ourexisting OEM relationships, to capitalize on this market growth.

*Logistics Customers.*  We intend to increase penetration of our existing Logisticsbusiness customer base by broadening our offering of Logistics products andservices and by marketing our core competencies as solutions to our customers’needs.  In 2000, AT&T Wirelessawarded us additional programs covering the packaging and distribution ofcellular telephone accessories and the distribution of point-of-sale and othermarketing materials.  Also, inSeptember 2001, Ford awarded us additional logistics business related tothe control and management of Ford core inventory supporting Ford’sremanufactured products for automobiles and light trucks in North America.

***Introducing NewProducts***

*Drivetrain Business.*  We continue to work with our OEM customers to identify additionalremanufactured products and services where we can provide value to theOEM.  In this way, we believe that wewill be able to leverage our customer relationships and remanufacturingcompetency.  In 2000, Ford selected usto supply remanufactured transmissions for use in Ford’s new Focus, and tosupply a new line of Motorcraft­branded remanufactured transmissions.  In 2001, Chrysler awarded us new contractsfor remanufacturing torque converters and valve bodies.

*Logistics Business.*  We also intend to leverage our core competencies in logistics andelectronics remanufacturing by working with our existing and new customers toidentify products and services where we can add value in satisfaction of ourcustomers’ needs.  General Motors hasawarded us a pilot national material recovery program.

***Establishing NewCustomer Relationships***

*Drivetrain Customers.*  We believe that opportunities for growth exist with selectforeign OEMs regarding United States­based remanufacturing programs.  We believe that this represents anopportunity for growth and we are currently working to develop programs withthese OEMs.  In October 2001, Saturn Corporation awarded us acontract to remanufacture transmissions, valve body assemblies and pumpassemblies.

5

----

 

Wealso look to obtain new customers for our drivetrain products in theindependent aftermarket.  InJuly 2001, we began a program with the National AAMCO Dealers Association,which represents most of the AAMCO dealers across the United States.  Under this program, we provide selectremanufactured domestic transmissions to AAMCO dealers.  These dealers currently face a shrinkingbase of technicians who are qualified to work with the increasing number oftransmission types and their increasing technological complexity.  Through this program, we provide variousincentives for dealers to purchase remanufactured transmissions directly fromus.  We believe that the AAMCO dealersrepresent a substantial portion of the post-warranty transmission repair marketin the United States.

*Logistics Customers.*  We plan to leverage our existing relationships with automobileOEMs into new logistics customer relationships.  We believe that our logistics services business should beattractive to new customers who recognize that outsourcing this function willenable them to both focus on their core competencies and have an efficientproduct distribution system.  We alsobelieve that the ability to sell product via Internet auctions, as well as costsavings and environmental benefits provided by our material recovery business,will be attractive to other OEMs.  In June 2001, Mazda North AmericaOperations awarded us a logistics pilot program contract under which we willharvest and consolidate used or excess product and then ship it to Mazdaauthorized dealers.

***Pursuing FutureAcquisitions***

Animportant element of our growth strategy is the acquisition and integration ofcomplementary businesses in order to broaden product offerings, capture marketshare and improve profitability.  Wehave made various acquisitions in the past and, to the extent suitableacquisition candidates, acquisition terms and financing are available, weintend to make acquisitions in the future. We currently expect that there may be more acquisition opportunitiesavailable in the logistics industry than the automotive drivetrainremanufacturing industry.

**Our Drivetrain Remanufacturing Business**

OurDrivetrain business consists of five operating units that primarilyremanufacture and sell transmissions directly to automobile manufacturers.  Drivetrain segment sales accounted for77.3%, 73.6%, 68.3% and 67.7% of our 1998, 1999, 2000 and 2001 revenues, respectively.

Weremanufacture factory–approved transmissions for warranty andpost-warranty replacement of transmissions for DaimlerChrysler, Ford, GeneralMotors and several foreign OEMs, including Mitsubishi, Isuzu, Subaru and Kia,primarily for their United States dealer networks, and Hyundai for its Canadiannetwork.  The number of transmissionmodels we remanufacture has been increasing to accommodate the greater numberof models currently used in vehicles manufactured by our OEM customers.

Weoperate a facility in England that remanufactures factory–approvedengines for several European OEMs, including Jaguar and the European divisionsof Ford and General Motors.  Theseengines are used for warranty and post-warranty replacement.  The facility in England also does assemblyand modification of new production engines for a number of our OEM customers.

Ourlargest Drivetrain segment customers are DaimlerChrysler and Ford, to whom weprimarily supply remanufactured transmissions for use in Chrysler and Fordautomobiles and light trucks. Additionally, we provide remanufactured components to several otherOEMs including transmissions to General Motors, Kia, Mitsubishi, Subaruand Isuzu and engines to Jaguar, Land Rover, Aston Martin and the Europeandivisions of Ford and General Motors. In general, the OEMs retain ownership of cores.  We generally sell products to each OEMpursuant to supply arrangements for individual transmission or engine models,which supply arrangements typically may be terminated by the OEM on90 days notice or less.

6

----

 

Historically,we have developed and maintained strong relationships at many levels in boththe corporate and factory organizations of the Chrysler division ofDaimlerChrysler.  In recognition of ourconsistently high level of service and product quality throughout ourrelationship with DaimlerChrysler, in each of the eight years prior to andincluding 2000, we have received the highest award bestowed by Chrysler to itssuppliers for which we were eligible. We are one of a select group of Chrysler’s suppliers to receive theseawards for the eight-year period. Additionally, over the past two years, we have strengthened ourrelationships with many of our other Drivetrain customers, as evidenced by theaward of new business with Ford, Jaguar, Isuzu and General Motors.  In February 2001, we received an awardfrom Ford for “Dedication to Customer Satisfaction.”

Allof our facilities that remanufacture transmissions have QS-9000 certification,a complete quality management system developed for manufacturers who subscribeto the ISO 9002 quality standards.  Thesystem is designed to help suppliers, such as us, develop a quality system thatemphasizes defect prevention and continuous improvement in manufacturingprocesses.  Ford has also awarded us itsQ1 quality certification.

DaimlerChryslerbegan implementing remanufacturing programs for its Chrysler transmissionmodels in 1986 and has utilized us as its sole supplier of remanufacturedtransmissions since 1989.  DaimlerChryslerhas advised us that, by implementing a remanufacturing program for Chryslervehicles, DaimlerChrysler has realized substantial warranty cost savings,standardized the quality of its dealers’ aftermarket repairs and reduced itsown inventory of replacement parts.  Wepresently do not provide remanufactured transmissions or other components toDaimlerChrysler’s Mercedes Benz division.

Webegan remanufacturing transmissions for Ford in 1989 and for General Motors in1985.  We believe that we are the largestprovider of remanufactured transmissions to Ford for automobiles and lighttrucks in North America and we are one of three suppliers of remanufacturedtransmissions to General Motors.

**Our Logistics Business**

OurLogistics business provides supply chain management to our customers.  Our operations consist of a warehouse,distribution and turnkey order fulfillment and information services business,an automotive electronic parts remanufacturing and distribution business and amaterial recovery parts processing, or reverse logistics, and Internet–basedauction business.  We acquired ourLogistics business as part of the Autocraft acquisition in 1998.

***LogisticsCustomers***

*AT&T Wireless Services.*  The logistics services operating unit provides value addedwarehouse and distribution services, turnkey order fulfillment and informationservices for AT&T Wireless.  As partof our product offering, we provide bulk and direct fulfillment of cellulartelephones and accessories to AT&T Wireless subscribers and partners andpoint-of-sale and other marketing materials to AT&T Wireless partners.  We deliver products both to AT&TWireless retail locations and directly to individuals who order a cellularphone.  Our arrangement with AT&TWireless originally focused primarily on cellular telephones and we thenexpanded our relationship to include accessories and promotional items.  We also provide accessory packaging servicesand inventory tracking and management and process all warranty–serviceexchanges.  We do not take title to anytelephones or accessories and do not reflect any of these items as inventory.

*Automotive Electronic Components.*  The automotive electronic componentsoperating unit remanufactures and distributes radios and instrument and displayclusters for General Motors, Delphi and Ford, and remanufactures anddistributes various cellular products (*e.g.,*navigation systems) primarily for Ford and General Motors.

*Material Recovery.*  We provide returned material reclamation and disposition servicesto assist automobile OEMs with the management of their dealer partsinventory, thereby reducing the OEMs’ parts costs and assisting them in beingmore environmentally responsible.  Underthis program, dealers send their excess and obsolete parts inventory to ourfacility in Oklahoma City.  We then sortthe parts and redistribute the useful parts on behalf of the OEM to otherdealers to fill back orders or to the OEM’s product distribution centers forrestocking.  Useful parts that are notneeded by other dealers or the OEM distribution centers are sold toremanufacturers, wholesale distributors and other aftermarket customers orthrough an innovative on-line Internet auction process.  Parts that are no longer useful are scrappedand recycled.  The parts remain theproperty of the OEM, and we receive a fee for our redistribution services.

7

----

 

Wedeveloped this program primarily with Ford as a way to substantially improvethe rate of recycling of automotive parts. As a result of the material recovery program, the number of Ford partsthat are sent to landfills has been significantly reduced.  We recently expanded the scope of thisbusiness by providing similar services, currently on a more limited scale, toGeneral Motors.  We believe that theopportunity to provide material recovery services for other OEMs willarise in the future as OEMs recognize the benefits of this program.

Aspart of our material recovery program, we have developed an Internet–enabledinteractive system that allows an OEM to track the availability, condition andvalue of core, and to produce dealer credits and facilitate logistics.  Our system also allows an OEM and itsdealers and vendors to track product on a real time basis and providessystem-wide inventory management, cross–docking and productredistribution capabilities.

**Competition**

Inour Drivetrain business, we primarily compete in the market for remanufacturedtransmissions sold to the automotive aftermarket through the OEM dealernetworks.  This market, narrowlydefined, is one in which the majority of industry supply comes from a limitednumber of participants.  Competition isbased primarily on product quality, service, delivery, technical support andprice and tends to be split along customer lines.  We believe that we have established excellent relationships withour customers and believe we are well positioned to enhance our competitiveposition by expanding our product line through the development of new productsor acquisition of new businesses.

Inour Logistics business, we primarily compete in a fragmented market as a nicheparticipant offering a specialized value–added service requiring severeservice level requirements.  Based onour performance levels, we believe we are well positioned to compete in thismarket.  However, some of ourcompetitors in this segment are larger and have greater financial and otherresources.

8

----

 

**Corporate History**

Sinceour formation in 1994 at the direction of Aurora Capital Group, we havecompleted the following acquisitions: 

 

| **Year** |   | **Company**                                       |   |       | **Description**                                                                                                                                            |   | **Acquisition   Price (1)** |
|----------|--------|---------------------------------------------------|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|
|     |   |                                              |   |       |                                                                                                                                                       |   | **(in millions)**           |   |
| 1994     |   | Aaron’s Automotive  Products, Inc.           |   | **•** | Remanufactures  transmissions for DaimlerChrysler                                                                                                          |   | $                           | 113.2 |   |
| 1995     |   | Component Remanufacturing  Specialists, Inc. |   | **•** | Remanufactures  transmissions for several foreign OEMs, including Hyundai, Mitsubishi, Isuzu,  Subaru and Kia                                              |   | $                           | 30.5 |   |
| 1997     |   | ATS Remanufacturing                               |   | **•** | Remanufactures  transmissions for General Motors                                                                                                           |   | $                           | 12.9 | (2) |
| 1998     |   | Autocraft                                         |   | **•** | Provides value added  warehouse and distribution services, turnkey order fulfillment and  information services for AT&T Wireless Services              |   | $                           | 121.7 |   |
|     |   |                                              |   | **•** | Provides returned material  reclamation and disposition services (known as reverse logistics), primarily  for Ford and, to a lesser extent, General Motors |   |                        |   |
|     |   |                                              |   | **•** | Remanufactures  transmissions for Ford and remanufactures engines for European operations of  Ford, General Motors and Jaguar                              |   |                        |   |
|     |   |                                              |   | **•** | Remanufactures and  distributes automotive electronic components                                                                                           |   |                        |   |

----

(1)          Includes transaction feesand related expenses.

(2)          Excludes subsequent paymentstotaling $19 million due on each of the first 14 anniversaries of theclosing date, of which a total of $4.4 million has been paid throughDecember 31, 2001.

InAugust 2000, we adopted a plan to discontinue and sell a segment of ourbusiness that we referred to as our independent aftermarket.  This independent aftermarket segmentconsisted of two parts.  The first partwas the ATC Distribution Group, Inc., which sold transmission parts toautomotive aftermarket customers such as independent transmission rebuilders,general repair shops, distributors and retail automotive parts stores.  This group consisted of various companiesthat we purchased between 1994 and 1999. We completed the sale of the Distribution Group inOctober 2000.  The ATC DistributionGroup has been reflected as discontinued operations in the consolidated financialstatements and related discussion and analysis included in this annual report.

Thesecond part of the segment was the independent aftermarket engine business thatremanufactured domestic and foreign engines primarily for sale not to OEMs, asis the case in our Drivetrain business, but instead through a branchdistribution network into the independent aftermarket.  In preparing this independent aftermarketengine business for sale, we restructured the business by eliminating ourbranch distribution network and selling directly to customers on an overnightbasis from four regional distribution centers in the eastern half of the UnitedStates, and by applying lean manufacturing techniques to improve productivity,reduce manufacturing costs and improve product quality.  These efforts returned the independentaftermarket engine business to profitability. However, efforts to identify an interested buyer placing sufficientvalue on this business were unsuccessful and we ultimately elected to retainour independent aftermarket engine business.

**Employees**

Asof December 31, 2001, we had approximately 3,400 full-time employees.  We believe our employee and labor relationsare good.  We have not experienced anywork stoppage, and none of our employees are members of any labor union.

9

----

** **

**Environmental**

Weare subject to various evolving federal, state, local and foreign environmentallaws and regulations governing, among other things, emissions to air, dischargeto waters and the generation, handling, storage, transportation, treatment anddisposal of a variety of hazardous and non-hazardous substances andwastes.  These laws and regulationsprovide for substantial fines and criminal sanctions for violations and imposeliability for the costs of cleaning up, and damages resulting from, pastspills, disposals or other releases of hazardous substances.

Inconnection with the acquisition of our subsidiaries, some of which have beensubsequently divested or relocated, we conducted certain investigations ofthese companies’ facilities and their compliance with applicable environmentallaws.  The investigations, whichincluded Phase I assessments by independent consultants of allmanufacturing and various distribution facilities, found that a number of thesefacilities have had or may have had releases of hazardous materials that mayrequire remediation and also may be subject to potential liabilities forcontamination from off-site disposal of substances or wastes.  These assessments also found that reportingand other regulatory requirements, including waste management procedures, werenot or may not have been satisfied. Although there can be no assurance, we believe that, based in part onthe investigations conducted, in part on remediation completed prior to orsince the acquisitions, and in part on the indemnification provisions of theagreements entered into in connection with our acquisitions, we will not incurany material liabilities relating to these matters.

Oneof our former subsidiaries, RPM, leased several facilities in Azusa, Californialocated within what is part of the San Gabriel Valley Superfund Site (theSuperfund Site).  Neither AftermarketTechnology Corp. nor RPM has been named as a Potentially Responsible Party(PRP) for the Superfund Site, but the entity that leased the facilities to RPMhas been named as one of approximately nineteen PRPs.  Under the Comprehensive Environmental Response Compensation andLiability Act (Superfund), PRPs, which include current and former owners andoperators of a contaminated site, as well as persons who sent or transportedwaste to the site, are responsible for the clean–up of the site and fordamage to natural resources caused by contamination at the site.  The United States Environmental ProtectionAgency (EPA) has preliminarily estimated that it will cost between$150 million and $200 million to construct and operate for anindefinite period an interim groundwater remediation system for the portion ofthe Superfund Site where the leased properties are located.  The actual cost of this remediation couldvary substantially from this estimate and additional costs associated with theSuperfund Site are likely to be assessed. RPM moved all manufacturing operations out of the Superfund Site area in1995.  Since June 1995, RPM’s only realproperty interest in this area has been the lease of a 6000 square footwarehouse.  The company that sold us RPMand that company’s shareholders indemnified us from liabilities for conditionsin existence on or before our acquisition of RPM.  There can be no assurance, however, that we would be able toobtain any recovery under this indemnity. Since our acquisition of RPM, we have engaged in negotiations with EPAto settle any liability that RPM may have for the Superfund Site.  Although there can be no assurance, webelieve that we will not incur any material liability as a result of RPM’slease of properties within the Superfund Site.

Inconnection with the October 2000 sale of our Distribution Group, we haveagreed to indemnify the buyer against environmental liability at former DistributionGroup facilities that had been closed prior to the Distribution Group sale,including the former facilities in Azusa, California within the Superfund sitementioned above and former manufacturing facilities in Mexicali, Mexico andDayton, Ohio.  We also agreed toindemnify the buyer against any other environmental liability of theDistribution Group relating to periods prior to the closing of the DistributionGroup sale.  Our indemnificationobligations to the buyer are, in most cases, subject to a $750,000 deductibleand a $12.0 million cap except with respect to closed facilities.

**Certain Factors Affecting the Company**

***We rely on a few major customers fora significant majority of our business and the loss of any of those customers,or significant changes in prices or other terms with any of our majorcustomers, could reduce our net income and operating results.***

10

----

 

Afew customers account for a significant majority of our net revenues eachyear.  In 2001, we had three customersthat individually accounted for more than 10% of our revenues.  Ford accounted for approximately 29.6%,30.0% and 34.6% of our net sales for 1999, 2000 and 2001, respectively, DaimlerChrysleraccounted for 31.6%, 29.6% and 24.7% of our net sales in 1999, 2000 and 2001,respectively, and AT&T Wireless accounted for 6.3%, 14.1% and 17.6% of ournet sales during 1999, 2000 and 2001, respectively.  If we lose any of these customers, or if any of them reduces orcancels a significant order, our net sales and operating results could decreasesignificantly.

DaimlerChryslerand Ford, like other North American OEMs, generally require that their dealersusing remanufactured products for warranty application use only products fromapproved suppliers.  Although we arecurrently the only factory–approved supplier of remanufacturedtransmissions for Chrysler automobiles and light trucks and one of twosuppliers to Ford, DaimlerChrysler and Ford are not obligated to continue topurchase our products and generally may terminate our agreements on90 days notice or less.  They mayapprove other suppliers in the future and we may not be able to maintain orincrease our sales to them.  Within thelast five years the standard new vehicle warranty provided by our customers hasvaried and shorter warranty periods could be implemented in the future.  Any shortening of warranty periods couldreduce the amount of warranty work performed by dealers and reduce the demandfor our services.

Substantiallyall of our contracts or arrangements with our customers are terminable on90 days notice or less.  Inaddition, we periodically renegotiate the prices and other terms of ourproducts with our customers.  Forinstance, in 2001, we reduced our prices to Chrysler, as requested, byapproximately 5%.  In addition, ourarrangements with AT&T Wireless will expire, and may be subject to a pricerenegotiation, within the next year. Because of the short termination periods and periodic pricenegotiations, we cannot give any assurances of the stability of the prices forour products and, therefore, our revenue streams.  Significant price fluctuations could materially affect ourbusiness.

***Interruptions or delays in obtainingtransmission cores and component parts could impair our business.***

Inour remanufacturing operations, we obtain used transmissions, engines andrelated components, commonly known as cores, which are sorted and either placedinto immediate production or stored until needed.  The majority of the cores we remanufacture are obtained fromOEMs.  Our ability to obtain cores of the types and in the quantities werequire is critical to our ability to meet demand and expand production.  With the increased acceptance in theaftermarket of remanufactured assemblies, the demand for cores hasincreased.  We have periodicallyexperienced situations in which the inability to obtain sufficient cores haslimited our ability to accept orders.  Wemay experience core shortages in the future. In addition, from time to time, we experience shortages of componentsmanufactured by our OEM customers that we require for our transmissionremanufacturing process.  If weexperience such shortages for an extended period of time, it could have a materialadverse effect on our business and negatively impact our competitive position.

***Our financial results are affectedby transmission failure rates, which are outside our control.***

Ourquarterly and annual operating results are affected by transmission failurerates, and a drop in rates could adversely affect sales or profitability orlead to variability of our operating results. Generally, if transmissions last longer, there will be less demand forour remanufactured transmissions. Transmission failure rates could drop due to a number of factors outsideour control, including:

·                  consumers retainingautomobiles for shorter periods, which could occur in periods of economicgrowth or stability;

·                  transmission design thatresults in greater reliability;

·                  consumers driving fewermiles per year, which could occur if gasoline prices were to increase; and

·                  mild weather, such as thatbeing experienced in early 2002.

11

----

*** ***

***Our financial results are affectedby our customers’ policies, which are outside our control.***

Ourfinancial results are also affected by the policies of our OEM customers.  Changes to our key OEM customers’ policiesthat could materially affect our business include:

·                  shortened warranty periodsthat could reduce the demand for our products;

·                  reductions in the amount ofinventory our OEM customers elect to retain;

·                  longer time periods beforeremanufactured transmissions are introduced for use with a particularautomobile; and

·                  guidelines that affectdealer decisions to rebuild units at the dealer rather than installremanufactured transmissions.

***Our Logistics business is dependenton the strength of our customers.***

AT&TWireless, our principal Logistics customer, operates in a highly competitivetechnology market.  The number of cellphones sold by AT&T Wireless, whether to new subscribers or as replacementphones to existing subscribers, is dependent on its ability to keep pace withtechnological advancements and to provide service programs and prices that areattractive to current and potential customers. Our Logistics revenue from AT&T Wireless is substantially related tothe number of phones sold by AT&T Wireless.  Consequently, any material decrease in phones sold by AT&TWireless will materially and adversely affect our Logistics revenue.

***We may incur material liabilitiesunder various federal, state, local and foreign environmental*****laws.**

Weare subject to various evolving federal, state, local and foreign environmentallaws and regulations governing, among other things, emissions to air, dischargeto waters and the generation, handling, storage, transportation, treatment anddisposal of a variety of hazardous and non-hazardous substances andwastes.  These laws and regulationsprovide for substantial fines and criminal sanctions for violations and imposeliability for the costs of cleaning up, and the damages resulting from, pastspills, disposals or other releases of hazardous substances.  In connection with our acquisition activity,we have conducted certain investigations of facilities we have acquired andtheir compliance with applicable environmental laws.  Similarly, in the course of lease terminations, we have generallyconducted investigations into potential environmental impacts resulting fromour operations.  These investigationsrevealed various environmental matters and conditions that could expose us toliability or which have required us to undertake compliance–relatedimprovements or remedial activities. Furthermore, one of our former subsidiaries, RPM, leased several facilitiesin Azusa, California located within what is now a federal Superfund site.  The entity that leased the facilities to RPMhas been identified by the United States Environmental Protection Agency as oneof the many potentially responsible parties for environmental liabilitiesassociated with that Superfund site. Any liability we may have from this site or otherwise underenvironmental laws could materially affect our business.

***Substantial competition could reduceour market share and significantly harm our financial performance.***

Whilewe believe that our business is well positioned to compete in our two primarymarket segments, transmission remanufacturing and logistics, our industrysegments are highly competitive.  We maynot be successful in competing against other companies, some of which arelarger than us and have greater financial and other resources available to themthan we do.  Increased competition couldrequire us to reduce prices or take other actions which may have an adverseeffect on our operating results.

12

----

 

***Our stock price is volatile, andinvestors may not be able to recover their investment if our stock pricedeclines.***

Thestock price of our common stock has been volatile and can be expected to beaffected by factors such as:

·                  quarterly variations in ourresults of operations, which may be impacted by, among other things, pricerenegotiations with our customers;

·                  quarterly variations in theresults of operations or stock prices of comparable companies;

·                  announcements of newproducts or services offered by us or our competitors;

·                  changes in earningsestimates or buy/sell recommendations by financial analysts;

·                  the stock price performanceof our customers; and

·                  general market conditions ormarket conditions specific to particular industries.

Inaddition to the factors listed above affecting us, our competitors and theeconomy generally, the stock price of our common stock may be affected by anysignificant sale of shares by our principal stockholders.  As of March 1, 2002, Aurora EquityPartners L.P. and Aurora Overseas Equity Partners I, L.P.collectively owned 9,761,478 shares of our common stock.  Any significant sales by the Aurorapartnerships of these shares could have a negative impact on our stock price.

***Our future operating results mayfluctuate significantly.***

Wemay experience significant variations in our future quarterly results ofoperations.  These fluctuations mayresult from many factors, including the condition of our industry in generaland shifts in demand and pricing for our products.  Our operating results are also highly dependent on our level ofgross profit as a percentage of net sales. Our gross profit percentage fluctuates due to numerous factors, some ofwhich may be outside of our control. These factors include:

·                  pricing strategies;

·                  changes in product costsfrom vendors;

·                  the risk of some of theitems in our inventory becoming obsolete;

·                  the relative mix of productssold during the period; and

·                  general market andcompetitive conditions.

Resultsof operations in any period, therefore, should not be considered indicative ofthe results to be expected for any future period.

***Our success depends on our abilityto retain our senior management and to attract and retain key personnel.***

Oursuccess depends to a significant extent on the efforts and abilities of oursenior management team.  We have variousprograms in place to motivate, reward and retain our management team, includingbonus and stock option plans.  However,the loss of one or more of these persons could have an adverse effect on ourbusiness.  Our success and plans forfuture growth will also depend on our ability to hire, train and retain skilledworkers in all areas of our business. We currently do not have key executive insurance relating to our seniormanagement team.

13

----

 

***We cannot predict the impact ofunionization efforts or labor shortages on our business.***

Fromtime to time, labor unions have indicated their interest in organizing ourworkforce.  Given that our OEM customersare in the highly unionized automotive industry, our business is likely tocontinue to attract the attention of union organizers.  While these efforts have not been successfulto date, we cannot give any assurance that we will not experience additionalunion activity in the future.  Any unionorganization activity, if successful, could result in increased labor costsand, even if unsuccessful, could result in a temporary disruption of ourproduction capabilities and a distraction to our management.  Additionally, we need qualified managers anda number of skilled employees with technical experience in order to operate ourbusiness successfully.  From time totime, there may be a shortage of skilled labor which may make it more difficultand expensive for us to attract and retain qualified employees.  If we are unable to attract and retainqualified individuals or our costs to do so increase significantly, ouroperations would be materially adversely affected.

***We are subject to risks associatedwith future acquisitions.***

Animportant element of our growth strategy is the acquisition and integration ofcomplementary businesses in order to broaden product offerings, capture marketshare and improve profitability.  Wewill not be able to acquire other businesses if we cannot identify suitableacquisition opportunities, obtain financing on acceptable terms or reachmutually agreeable terms with acquisition candidates.  The negotiation of potential acquisitions as well as theintegration of an acquired business could require us to incur significant costsand cause diversion of our management’s time and resources.  Future acquisitions by us could result in:

·                  dilutive issuances of equitysecurities;

·                  reductions in our operatingresults;

·                  incurrence of debt andcontingent liabilities;

·                  future impairment ofgoodwill and other intangibles; and

·                  other acquisition–relatedexpenses.

Someor all of these items could have a material adverse effect on ourbusiness.  The businesses we acquire inthe future may not achieve sales and profitability that justify ourinvestment.  In addition, to the extentthat consolidation becomes more prevalent in our industry, the prices forsuitable acquisition candidates may increase to unacceptable levels and limitour growth.

***We may encounterproblems in integrating the operations of companies that we acquire.***

Wemay encounter difficulties in integrating any businesses we acquire with ouroperations.  The success of thesetransactions depends on our ability to:

·                  retain key managementmembers and technical personnel of acquired companies;

·                  successfully merge corporatecultures and operational and financial systems; and

·                  realize sale and costreduction synergies.

Furthermore,we may not realize the benefits we anticipated when we entered into thesetransactions.  In addition, after wehave completed an acquisition, our management must be able to assumesignificantly greater responsibilities, and this in turn may cause them todivert their attention from our existing operations.  Any of the foregoing could have a material adverse effect on ourbusiness and results of operations.

14

----

 

***Our level of indebtedness and theterms of our indebtedness could adversely affect our business and liquidityposition.***

Asof December 31, 2001, our outstanding indebtedness was$197.8 million.  While the proceedsfrom our public offering that was completed on March 8, 2002 have beenused to reduce our outstanding indebtedness, we expect that our indebtedness,including borrowings under our new credit facility, may increase from time totime in the future for various reasons, including fluctuations in operatingresults, capital expenditures and possible acquisitions.  Our consolidated indebtedness level couldmaterially affect our business because:

·                  a substantial portion of ourcash flow from operations must be dedicated to interest payments on ourindebtedness and is not available for other purposes, which amount wouldincrease if prevailing interest rates rise;

·                  it may materially limit orimpair our ability to obtain financing in the future;

·                  it may reduce ourflexibility to respond to changing business and economic conditions or takeadvantage of business opportunities that may arise; and

·                  our ability to pay dividendsis limited.

Inaddition, our new credit facility requires us to meet specified financialratios and limits our ability to enter into various transactions.  The terms of our current outstanding 12%senior subordinated notes, which will be fully redeemed on April 8, 2002, limitour ability to incur additional indebtedness.

Ifwe default on any of our indebtedness, or if we are unable to obtain necessaryliquidity, our business could be adversely affected.

***Our significant stockholders havethe ability to influence all matters requiring the approval of our board ofdirectors and our stockholders.***

Asof March 1, 2002, the Aurora partnerships held approximately 66% of ourvoting power, through direct ownership of shares and voting arrangements, andfour of the nine members of our Board of Directors are affiliated with theAurora partnerships.  As a result, theyare able to exercise substantial control over us.  As a result, it may be more difficult for a third party toacquire us.  See Item 12. “SecurityOwnership of Certain Beneficial Owners and Management” and Item 13. “CertainRelationships and Related Transactions.”

***Our certificate of incorporationcontains provisions that may hinder or prevent a change in control of ourcompany.***

Provisionsof our certificate of incorporation could make it more difficult for a thirdparty to obtain control of us, even if such a change in control would benefitour stockholders.  Our Board ofDirectors can issue preferred stock without stockholder approval.  The rights of common stockholders could beadversely affected by the rights of holders of preferred stock that we issue inthe future.  These provisions coulddiscourage a third party from obtaining control of us.  Such provisions may also impede atransaction in which our stockholders could receive a premium over then currentmarket prices and our stockholders’ ability to approve transactions that theyconsider in their best interests.

15

----

**ITEM 2.****           PROPERTIES**

Weconduct our business from the following facilities:

 
| **Location**            |   | **Approx.****Sq. Feet** |   | **Lease Expiration    Date** |   | **Products Produced/Services Provided**                   |   |
|-------------------------|--------|-------------------------|--------|----------------------------------------|--------|----------------------------------------------------------------|--------|
| Joplin, MO              |   | 264,000                 |   | 2008                                   |   | transmissions and transfer  cases (1)                          |   |
| Springfield, MO         |   | 280,800                 |   | 2004                                   |   | transmissions (1)                                              |   |
| Springfield, MO         |   | 200,000                 |   | 2006                                   |   | engines (1)                                                    |   |
| Gastonia, NC            |   | 130,000                 |   | 2002                                   |   | transmissions and valve  bodies (1)                            |   |
| Mahwah, NJ              |   | 160,000                 |   | 2003                                   |   | transmissions, transfer  cases and assorted components (1)     |   |
| Oklahoma City, OK       |   |  98,000            |   | owned                                  |   | returned material  reclamation and disposition (2)             |   |
| Oklahoma City, OK       |   | 207,000                 |   | owned                                  |   | transmissions (1)                                              |   |
| Carrollton (Dallas), TX |   |  39,000            |   | 2006                                   |   | radios and instrument and  display clusters (2)                |   |
| Ft. Worth, TX           |   | 220,000                 |   | 2008                                   |   | cellular phone and  accessory distribution (2)                 |   |
| Ft. Worth, TX           |   | 108,000                 |   | 2005                                   |   | cellular phone accessory  packaging and returns processing (2) |   |
| Houston, TX             |   |  50,000            |   | 2002                                   |   | radios (2)                                                     |   |
| Grantham, England       |   | 120,000                 |   | owned                                  |   | engines and related components(2)                              |   |

 

----

(1)          This facility is used by theDrivetrain business.

(2)          This facility is used by theLogistics business.

We alsolease assorted warehouses and space for our corporate offices and computerservices centers.  We believe that ourcurrent facilities are adequate for the current level of our activities. In theevent we were to require additional facilities, we believe that we couldprocure acceptable facilities.

## **ITEM 3.**                                         LEGAL PROCEEDINGS

Fromtime to time, we have been, and currently are, involved in various legalproceedings.  Management believes thatall of our litigation is routine in nature and incidental to the conduct of ourbusiness, and that none of our litigation, if determined to be adverse to us,would have a material adverse effect, individually or in the aggregate, on us.

## **ITEM 4.**                                         SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

Nomatters were submitted to a vote of the stockholders of the Company during thequarter ended December 31, 2001.

 

16

----

**PART II**

## **ITEM 5.**                                                     MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS

Ourcommon stock has been traded on the Nasdaq National Market under the symbol“ATAC” since our initial public offering in December 1996.  As of March 1, 2002, there wereapproximately 84 record holders of our common stock.  The following table sets forthfor the periods indicated the range of high and low sale prices of the commonstock as reported by Nasdaq: 

 

|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| 2001           |   |     |   |    |   |
| First quarter  |   | $        | 6.00   |    | $      | 2.38 |   |
| Second quarter |   | 7.50     |   | 4.50    |   |
| Third quarter  |   | 15.63    |   | 7.11    |   |
| Fourth quarter |   | 19.99    |   | 13.26   |   |
| 2000           |   |     |   |    |   |
| First quarter  |   | $        | 13.88  |    | $      | 9.44 |   |
| Second quarter |   | 12.88    |   | 5.00    |   |
| Third quarter  |   | 8.88     |   | 5.00    |   |
| Fourth quarter |   | 6.38     |   | 1.63    |   |

On March 1, 2002, the last sale price of the commonstock, as reported by Nasdaq, was $17.09 per share.

We have not paid cash dividends on the common stock todate.  Because we currently intend toretain any earnings to provide funds for the operation and expansion of ourbusiness and for the servicing and repayment of indebtedness, we do not intendto pay cash dividends on the common stock in the foreseeable future.  Furthermore, as a holding company with noindependent operations, the ability of Aftermarket Technology Corp. to pay cashdividends is dependent upon the receipt of dividends or other payments from itssubsidiaries.  The agreement for ourbank credit facility contains certain covenants that, among other things,prohibit the payment of dividends.  See Item 7.“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources.” Any determination to pay cash dividends on the common stock in thefuture will be at the sole discretion of our Board of Directors.

OnJune 23, 2000, September 17, 2001 and September 21, 2001, we issued 114,218shares, 61,775 shares and 120,146 shares, respectively, of our common stock intransactions that were not registered under the Securities Act of 1933, asamended.  The shares were issued uponthe exercise of warrants that had been issued by us in 1994 to two individualsin exchange for services rendered in connection with our originalacquisitions.  The warrant exerciseprice of $1.67 per share was paid in each case by us withholding a number ofthe warrant shares having a fair market value equal to the aggregate exerciseprice.  We relied on Section 4(2) of theSecurities Act as an exemption from registration, based on the private natureof the offering and the limited number of offerees.

 

17

----

 

## **ITEM6.**                                         SELECTED FINANCIAL DATA

Theselected financial data presented below with respect to the statements ofoperations data for the years ended December 31, 2001, 2000 and 1999 andthe balance sheet data as of December 31, 2001 and 2000 are derived fromthe Consolidated Financial Statements of the Company that have been audited byErnst & Young LLP, independent auditors, and are included elsewhereherein, and are qualified by reference to such financial statements and notesrelated thereto.  The selected financialdata with respect to the statement of operations data for the years endedDecember 31, 1998 and 1997 and the balance sheet data as of December 31,1999, 1998 and 1997, are derived from the Consolidated Financial Statements ofthe Company that have been audited by Ernst & Young LLP, independentauditors, but are not included herein. The data provided should be read in conjunction with the ConsolidatedFinancial Statements, related notes and other financial information included inthis Annual Report.  The results of theDistribution Group, Inc. subsidiary, which was sold in October 2000, areclassified as discontinued operations in the selected financial data presentedbelow.
|                                                                           |   | **Year Ended  December 31,**               |    |
|--------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                           |   | **2001**                                   |    | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                                                           |   | **(In  thousands, except per share data)** |    |
| **Statement of Operations Data:**                                              |   |                                       |    |   |   |   |   |   |   |   |   |
| Net sales                                                                      |   | $                                          | 393,381 |   | $ | 372,493 |   | $ | 365,563 |   | $ | 300,723 |   | $ | 191,058 |   |
| Cost of sales                                                                  |   | 255,360                                    |    | 248,438 |   | 246,224 |   | 219,539 |   | 114,956 |   |
| Special charges  (1)                                                           |   | 216                                        |    | 9,134 |   | 2,965 |   | 1,347 |   | — |   |
| Gross profit                                                                   |   | 137,805                                    |    | 114,921 |   | 116,374 |   | 79,837 |   | 76,102 |   |
| Selling, general  and administrative expenses                                  |   | 59,939                                     |    | 57,331 |   | 56,736 |   | 47,496 |   | 30,430 |   |
| Amortization of  intangible  assets                                       |   | 5,028                                      |    | 5,255 |   | 5,527 |   | 5,038 |   | 3,273 |   |
| Special charges  (1)                                                           |   | 5,114                                      |    | 23,450 |   | 4,345 |   | 5,327 |   | — |   |
| Income from  operations                                                        |   | 67,724                                     |    | 28,885 |   | 49,766 |   | 21,976 |   | 42,399 |   |
| Interest income                                                                |   | 1,524                                      |    | 234 |   | — |   | — |   | — |   |
| Interest expense  and other, net                                               |   | (21,623                                    | )       | (24,830 | ) | (23,251 | ) | (21,917 | ) | (15,213 | ) |
| Income tax  expense                                                            |   | (18,098                                    | )       | (1,883 | ) | (9,739 | ) | (974 | ) | (10,902 | ) |
| Income (loss)  from continuing operations (2)(3)                          |   | $                                          | 29,527  |   | $ | 2,406 |   | $ | 16,776 |   | $ | (915 | ) | $ | 16,284 |   |
| Income (loss)  from continuing operations per share (4)                        |   | $                                          | 1.40    |   | $ | 0.11 |   | $ | 0.79 |   | $ | (0.05 | ) | $ | 0.84 |   |
| Shares used in  computation of income from continuing operations per share (4) |   | 21,059                                     |    | 21,163 |   | 21,164 |   | 19,986 |   | 19,335 |   |
|                                                                           |   |                                       |    |   |   |   |   |   |   |   |   |
| **Other Data:**                                                                |   |                                       |    |   |   |   |   |   |   |   |   |
| Capital expenditures (5)                                                  |   | $                                          | 13,516  |   | $ | 11,682 |   | $ | 10,072 |   | $ | 10,764 |   | $ | 6,293 |   |

 

18

----

 
|                                         |   | **As of  December 31,** |   |
|----------------------------------------------|--------|------------------------------|--------|
|                                         |   | **2001**                     |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                         |   | **(In  thousands)**          |   |
| **Balance  Sheet Data:**                     |   |                         |   |   |   |   |   |   |   |   |   |
| Working  capital, continuing operations      |   | $                            | 52,700 |   | $ | 53,457 |   | $ | 29,744 |   | $ | 36,128 |   | $ | 44,855 |   |
| Property,  plant and equipment, net          |   | 52,577                       |   | 46,276 |   | 47,897 |   | 45,830 |   | 16,737 |   |
| Total  assets                                |   | 396,858                      |   | 407,499 |   | 577,782 |   | 517,794 |   | 360,477 |   |
| Long-term  liabilities, less current portion |   | 181,694                      |   | 213,537 |   | 302,491 |   | 258,051 |   | 152,571 |   |
| Common  stockholders’ equity            |   | 109,335                      |   | 80,239 | (6) | 176,144 |   | 168,011 |   | 175,429 |   |
|                                              |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          See Item 8. “ConsolidatedFinancial Statements and Supplementary Data-Note 19” for a description ofspecial charges.

(2)          Income (loss) from continuingoperations for the years ended December 31, 2001, 2000, 1999, 1998 and1997 excludes income (loss) from discontinued operations, net of income taxes,of $(959), $(99,289), $(9,969), $(6,200) and $6,719, respectively.

(3)          Income (loss) fromcontinuing operations for the year ended December 31, 1998 excludes anextraordinary item in the amount of $703 ($1,172 less related income taxbenefit of $469).  In addition, income(loss) from continuing operations for the year ended December 31, 1997excludes an extraordinary item in the amount of $3,749 ($6,269 less relatedincome tax benefit of $2,520).

(4)          See Item 8. “Consolidated FinancialStatements and Supplementary Data-Note 14” for a description of the computationof earnings per share.

(5)          Excludes capital expenditures made bycertain of the Company’s subsidiaries prior to such subsidiaries’ respectiveacquisitions and any capital expenditures made in connection with suchacquisitions.

(6)          Common stockholders’ equity as ofDecember 31, 2000 reflects the loss on the sale of our Distribution Groupbusiness and from the initial discontinuance of, and subsequent election toretain, our independent aftermarket engine business.

 

19

----

 

# **ITEM 7.**                                                     MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OFOPERATIONS

The following discussionshould be read in conjunction with the Consolidated Financial Statements of theCompany and notes thereto included elsewhere in this Annual Report.  See Item 8. “Consolidated FinancialStatements and Supplementary Data.”

Readers arecautioned that the following discussion contains certain forward-lookingstatements and should be read in conjunction with the “Special Note Regarding Forward-LookingStatements” appearing at the beginning of this Annual Report.

**Overview**

We are a leadingremanufacturer and distributor of drivetrain products used in the repair ofautomobiles and light trucks in the automotive aftermarket.  Our Logistics business is a provider ofvalue added warehouse and distribution services as well as returned materialreclamation and disposition services. Our Logistics business alsoremanufactures and distributes electronic components.

Demand for ourproducts within the Drivetrain business is largely a function of the number ofvehicles in operation, the average age of vehicles and the average number ofmiles driven per vehicle.  These factorshave generally increased over time, thereby increasing demand for our remanufacturedproducts.  Other factors that influencedemand for our remanufactured products include product complexity andreliability, the length of OEM warranty periods and the severity of weatherconditions.  Because these factors arenot directly dependent on new automotive sales levels, demand forremanufactured products within our Drivetrain business has been largelynon-cyclical.

Our Drivetrainbusiness has been our primary business since our formation.  For the year ended December 31, 2001,revenue from our Drivetrain business was $266.3 million, or 67.7% of ourtotal revenue.  In addition, in theUnited States we also sell remanufactured engines in the independentaftermarket.  For the year endedDecember 31, 2001, revenue from this engines business was $21.9 million,or 5.6% of our total revenue.

Growth in ourlogistics business with AT&T Wireless is primarily dependent on cellulartelephone handset demand and AT&T Wireless’ share of new cellular telephonesales volume. Our logistics business benefits from upgrades in cellulartelephone technology through increased replacement demand for more advancedhandsets, from any increases in the number of AT&T Wireless subscribers andfrom any expansion of our service offering with AT&T Wireless. Because wedo not take actual ownership of our cellular telephone inventory, we do notface the risk of inventory obsolescence. Other growth drivers within ourLogistics business include our ability to leverage our expertise in logisticsin other industries. For the year ended December 31, 2001, revenue fromour Logistics business was $105.2 million, or 26.7% of our total revenue,of which AT&T Wireless accounted for 65.7%.

**Components of Income and Expense**

*Revenue.*  In our Drivetrain Remanufacturing segmentand independent aftermarket engines business, we recognize revenues, primarilyfrom the sale of remanufactured transmissions and remanufactured engines, atthe time of shipment to the customer and, to a lesser extent, upon thecompletion or performance of a service. In our Logistics segment, revenue isprimarily related to providing;

·                  value addedwarehouse and distribution services;

·                  turnkey orderfulfillment and information services;

·                  returned materialreclamation and disposition services;

·                  core managementservices; and

·                  automotiveelectronic components remanufacturing and distribution services,

and is generallyrecognized upon completion or performance of those services.

 

20

----

 

*Cost of Sales.*  Cost of sales represents the actual cost ofpurchased components and other materials, direct labor, indirect labor andwarehousing cost and manufacturing overhead costs, including depreciation,utilized directly in the production of products or performance of services forwhich revenue has been recognized.

 

*Selling, General & Administrative Expense.*  Selling, general and administrative(“SG&A”) expenses generally are those costs not directly related to theproduction process or the performance of a revenue generating service andinclude all selling, marketing and customer service expenses as well asexpenses related to general management, finance and accounting, informationservices, human resources, legal, and corporate overhead expense.

 

*Amortization of Intangibles.*  Amortization of intangibles consistsprimarily of the amortization of goodwill. In June 2001, the FinancialAccounting Standards Board issued Statements of Financial Accounting Standards(“SFAS”) No. 142, *Goodwill and OtherIntangible Assets*, which no longer permits the amortization ofgoodwill and indefinite–lived intangible assets.  Instead, these assets must be reviewedannually (or more frequently under specified conditions) for impairment inaccordance with SFAS No. 142.  We arerequired to adopt SFAS No. 142 effective January 1, 2002.  The effect of not amortizing goodwill is expected toresult in an increase to income from operations in fiscal 2002 of approximately$5.0 million.  The adoption of theimpairment provisions of SFAS No. 142 is not expected to have a significanteffect on the Company’s results of operations or its financial position.

 

*Special Charges.* We have periodically identified areas where cost reductions andefficiencies could be achieved through consolidation of redundant facilities,outsourcing functions or changing processes or systems. Some of these costreduction or process improvement initiatives result in costs which we havedescribed as special charges and include, but are not limited to, severancebenefits for terminated employees, lease termination and other facility exitcosts, losses on the disposal of fixed assets, impairment of goodwill and write–downof inventories.

 

**CriticalAccounting Policies**

** **

Our financialstatements are based on the selection and application of significant accountingpolicies, some of which require management to make estimates andassumptions.  We believe that thefollowing are some of the more critical judgment areas in the application ofour accounting policies that currently affect our financial condition and resultsof operations.

*Reserve for Inventory Obsolescence.* We write down our inventory for estimated obsolescence or unmarketableinventory equal to the difference between the cost of the inventory and theestimated market value based upon assumptions about market conditions, futuredemand and expected usage rates.  Ifactual market conditions are less favorable than those projected by managementcausing usage rates to vary from those estimated, additional inventory write-downsmay be required.

*Warranty Liability.* We provide an allowance for the estimated cost of product warranties atthe time revenue is recognized.  Whilewe engage in extensive product quality programs and processes, includinginspection and testing at various stages of the remanufacturing process and thetesting of each finished assembly on equipment designed to simulate performanceunder operating conditions, our warranty obligation is affected by productfailure rates.  Should actual productfailure rates differ from our estimates, revisions to the estimated warrantyliability may be required.

*DeferredTax Assets.*  We record a valuation allowance to reduceour deferred tax assets to the amount that is more likely than not to berealized.  While we have consideredfuture taxable income and ongoing prudent and feasible tax planning strategiesin assessing the need for the valuation allowance, in the event we were todetermine that we would be able to realize our deferred tax assets in thefuture in excess of our net recorded amount, an adjustment to the deferred taxasset would increase income in the period such determination was made.  Likewise, should we determine that we wouldnot be able to realize all or part of our deferred tax asset in the future, anadjustment to the deferred tax asset would be charged to income in the periodsuch determination was made.

 

21

----

 

# ***Allowance forDoubtful Accounts.***  We maintainallowances for doubtful accounts for estimated losses resulting from thefailure of our customers to make required payments.  We evaluate the adequacy of our allowance for doubtful accountsand make judgments and estimates in determining the appropriate allowance ateach reporting period.  If a customer’sfinancial condition were to deteriorate, additional allowances may be required.

 

**Segment Reporting**

# **We have tworeportable segments in continuing operations: the Drivetrain Remanufacturingsegment and the Logistics segment. The Drivetrain Remanufacturing segmentconsists of five operating units that primarily sell remanufacturedtransmissions directly to DaimlerChrysler, Ford, General Motors and severalforeign OEMs, primarily for use as replacement parts by their domestic dealersduring the warranty and post-warranty periods following the sale of a vehicle.In addition, the Drivetrain Remanufacturing segment sells select remanufacturedand newly assembled engines to European OEMs including Ford’s and GeneralMotor’s European operations and Jaguar. Our Logistics segment consists of threeoperating units:**

·                  a provider of valueadded warehouse and distribution services, turnkey order fulfillment andinformation services for AT&T Wireless;

·                  a provider ofreturned material reclamation and disposition services and core managementservices primarily to Ford and to a lesser extent, General Motors; and

·                  an automotiveelectronic components remanufacturing and distribution business, includingcomponents for the OnStar program, primarily for Delphi and Visteon.

Our independent aftermarket engine business, which is not a separatereportable segment and is shown as “Other,” remanufactures and distributes domestic and foreign engines and recently begandistributing select remanufactured domestic transmissions from four regionaldistribution centers primarily to independent aftermarket customers.

We evaluate the performance of each segment based upon income fromoperations. The reportable segments and the “other” business unit are eachmanaged and measured separately primarily due to the differing customers, productionprocesses, products sold and distribution channels.

 

**Results of Operations**

 

The following table sets forthfinancial statement data expressed as a percentage of net sales.

 
|                                                   |   | **Year Ended December 31,** |   |
|--------------------------------------------------------|--------|----------------------------------|--------|
|                                                   |   | **2001**                         |   | **2000** |   | **1999** |   |
| Net sales                                              |   | 100.0                            | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                          |   | 64.9                             |   | 66.7 |   | 67.4 |   |
| Special charges                                        |   | 0.1                              |   | 2.5 |   | 0.8 |   |
| Gross profit                                           |   | 35.0                             |   | 30.8 |   | 31.8 |   |
| SG&A expenses                                      |   | 15.2                             |   | 15.4 |   | 15.5 |   |
| Amortization of intangible assets                      |   | 1.3                              |   | 1.4 |   | 1.5 |   |
| Special charges                                        |   | 1.3                              |   | 6.2 |   | 1.2 |   |
| Income from operations                                 |   | 17.2                             |   | 7.8 |   | 13.6 |   |
| Interest income                                        |   | 0.4                              |   | 0.1 |   | — |   |
| Interest expense and other, net                        |   | 5.5                              |   | 6.7 |   | 6.4 |   |
| Income from continuing operations, before income taxes |   | 12.1                             |   | 1.2 |   | 7.2 |   |
| Income tax expense                                     |   | 4.6                              |   | 0.6 |   | 2.6 |   |
| Income from continuing operations                      |   | 7.5                              | %      | 0.6 | % | 4.6 | % |
|                                                   |   |                             |   |   |   |   |   |

 

22

----

 

***Year Ended December 31, 2001Compared to the Year Ended December 31, 2000***

 

Income from continuing operations increased $27.1 million, to$29.5 million in 2001 from $2.4 million in 2000.  During 2001, we recorded pre-tax specialcharges of $5.3 million, primarily related to initiatives designed toimprove operating efficiencies and reduce costs (see “Special Charges” below)and a non-recurring gain of $0.9 million related to the sale of the preferredstock of the Distribution Group, which we received in 2000 as partialconsideration for the sale of that business. Additionally, in 2000, we recorded$32.6 million (pre-tax) of special charges primarily related to thewrite-off of goodwill and the recording of valuation allowances for specifiedassets associated with our decision to discontinue our independent aftermarketengine business.  This business wassubsequently retained (see “Discontinued Operations”).  Excluding the special charges andnon-recurring gain, income from continuing operations increased$9.5 million, or 41.7%, to $32.3 million for the year endedDecember 31, 2001 from $22.8 million in 2000.  This increase was primarily attributable tosubstantial growth in the Logistics segment, productivity improvementsresulting from our lean and continuous improvement program and other costreduction initiatives and increased profitability in the independentaftermarket engine business, partially offset by reduced margins in theDrivetrain Remanufacturing segment largely related to price and inventoryreduction initiatives at certain OEM customers.  Income from continuing operations per diluted share was $1.40 for2001 as compared to $0.11 for 2000. Excluding the special charges and non-recurring gain, income fromcontinuing operations per diluted share was $1.53 for 2001 as compared to $1.08for 2000.

 

*Net Sales.*  Net sales increased $20.9 million, or5.6%, to $393.4 million for 2001 from $372.5 million for 2000.  This increase was driven primarily by:

·                  growth in theLogistics segment, attributable to an increase in sales for value-addedwarehouse and distribution services, driven by the growth in the market forcellular phones and services;

·                  growth in the Logisticssegment attributable to the ramp up of the two new programs we were awarded byAT&T Wireless in early 2000, covering the packaging and distribution ofcell phone accessories and the distribution of point-of-sale and othermarketing materials, which began generating revenue for us in the second halfof 2000; and

·                  growth in the DrivetrainRemanufacturing segment, primarily related to an increase in sales ofremanufactured transmissions to Ford.

 

This increase waspartially offset by a decline in remanufactured transmissions sold toDaimlerChrysler as a result of its inventory reduction initiative, a decline inrevenue in the independent aftermarket engine business resulting from a changein the distribution channel for this business and a decline in revenue in theLogistics segment related to the termination of its remanufactured electroniccontrol module product line.

 

Sales toDaimlerChrysler accounted for 24.7% and 29.6%, Ford accounted for 34.6% and30.0% and AT&T Wireless accounted for 17.6% and 14.1% of our revenues for2001 and 2000, respectively.

 

*Gross Profit.* Gross profit increased $22.9 million, or 19.9%, to$137.8 million for 2001 from $114.9 million for 2000.  Excluding special charges of$0.2 million recorded during 2001 and $9.1 million of special chargesrelated to the independent aftermarket engine business recorded during 2000,gross profit increased $14.0 million, or 11.3%.  This increase was primarily the result of increased sales in theLogistics segment and improved productivity as a result of our lean andcontinuous improvement program and other cost reduction initiatives, partiallyoffset by a decline in gross profit in the Drivetrain Remanufacturing segmentresulting from:

·                  price concessionsprovided to DaimlerChrysler as a result of their request for supplierparticipation in their cost reduction initiatives;

·                  the sales mix ofremanufactured transmissions; and

23

----

 

·                  productioninefficiencies resulting from the impact of DaimlerChrysler’s and GM’sinventory reduction initiatives.

As a percentage of net sales, gross profit before special chargesincreased to 35.1% in 2001 from 33.3% for 2000.

 

*SG&A Expenses.* SG&A expenses increased $2.6 million, or 4.5%, to$59.9 million for 2001 from $57.3 million for 2000.  The increase was primarily the result of anincrease in spending in support of growth initiatives in the Logistics segmentand on our Lean and Continuous Improvement and Customer Delight initiatives,partially offset by a decrease in cost in the independent aftermarket enginebusiness resulting from the elimination of our branch distributionnetwork.  As a percentage of net sales,SG&A expenses decreased slightly to 15.2% for 2001 from 15.4% for 2000.

 

*Amortization of Intangible Assets.*  Amortization of intangible assets decreased$0.3 million, or 5.7%, to $5.0 million for 2001 from$5.3 million for 2000, primarily attributable to the write–off ofgoodwill related to the independent aftermarket engine business onJune 30, 2000.

 

*Special Charges.* During 2001, we recorded $5.3 million of special charges($3.3 million net of tax) including $2.4 million for the DrivetrainRemanufacturing segment, $2.4 million for the Logistics segment and $0.5 millionfor consolidation of our two information systems groups.  The $2.4 million related to theDrivetrain Remanufacturing segment consists of $1.6 million of severanceand related costs for 35 people, primarily associated with the de-layering ofcertain management functions and $0.8 million of facility exit and idlecapacity costs associated with facility consolidations and implementation ofcellularized manufacturing within the segment. The $2.4 million of special charges in the Logistics segment areprimarily related to a decision to exit an unprofitable product line andinclude the following:

·                  $1.9 million ofcosts related to the shut-down of our remanufactured automotive electroniccontrol modules operation including:

o                 $0.7 million of severanceand related costs for 118 people;

o                 $0.6 million related to thewrite-down of fixed assets;

o                 $0.3 million of facilityexit and other costs related to the shutdown;

o                 $0.2 million related toinventory write–downs (classified as Cost of Sales-Special Charges); and

o                 $0.1 million for the write-down ofuncollectible accounts receivable balances; and

·                  $0.5 million ofseverance and related costs for eight people primarily associated with theupgrade of certain management functions within the segment.

             The $0.5 million related toour two information systems groups is related to severance costs for fourpeople primarily associated with the consolidation of those functions.

 

             During 2000, we recorded$32.6 million of special charges related to the reorganization of ourindependent aftermarket engine business. These charges included the following:

·                  $15.6 millionfor the impairment of goodwill;

·                  $5.8 millionfor the write-down of fixed assets to estimated net realizable value;

·                  $5.4 millionfor the write-down of inventory to estimated net realizable value (classifiedas Cost of Sales-Special Charges);

·                  $3.8 millionfor product warranty costs of units remanufactured and sold prior to 2000(classified as Cost of Sales-Special Charges);

·                  $0.9 millionfor the write-down of uncollectible accounts receivable balances; and

24

----

 

·                  $0.7 million ofexit costs and $0.4 million of severance costs for 56 people primarilyassociated with the shutdown of our branch distribution network.

 

As an on-goingpart of our planning process, we continue to identify and evaluate areas wherecost efficiencies can be achieved through consolidation of redundantfacilities, outsourcing functions or changing processes or systems.  Implementation of any of these could requireus to incur special charges, which would be offset over time by the projectedcost savings.

 

*Income from Operations.* Income from operations increased $38.8 million, to$67.7 million for 2001 from $28.9 million for 2000.  Excluding special charges of$5.3 million recorded in 2001 and $32.6 million of special chargesrelated to the independent aftermarket engine business recorded in 2000, incomefrom operations increased $11.5 million, or 18.7%, to $73.0 million for2001 from $61.5 million for 2000. As a percentage of net sales, income from operations before specialcharges increased to 18.6% from 16.5%, between the two periods.

 

*Interest Income.* Interest income of $1.5 million and $0.2 million was recordedduring 2001 and 2000, respectively, on the 18% senior subordinated promissorynote received by us as partial consideration for the sale of the DistributionGroup on October 27, 2000.

 

*Other Income (Expense), Net.*  Other income (expense), net increased $0.9million to income of $0.8 million in 2001 from a loss of $0.1 million in 2000.This increase was the result of a non-recurring gain on the sale of thepreferred stock of the Distribution Group, which was received in 2000 aspartial consideration for the sale of that business.

 

*Interest Expense. *Interest expense decreased $2.4 million, or 9.7%, to$22.4 million for 2001 from $24.8 million for 2000.  This decrease was the result of a generaldecline in interest rates combined with a reduction in debt outstanding.  Interest expense for 2000 of$5.2 million was allocated to discontinued operations based on the actualconsideration received from the sale of the Distribution Group.

 

*Discontinued Operations.*  On August 3, 2000, we adopted a plan todiscontinue a segment of our business that we referred to as our independent aftermarket.This segment consisted of the Distribution Group and the independentaftermarket engine business. We planned to sell the Distribution Group byDecember 31, 2000 and the independent aftermarket engine business byJune 30, 2001. Management believed that the planned exit from thesebusinesses, which provided the opportunity to reduce debt and generated asignificant tax shelter, offered a strategic opportunity to focus resources onour businesses that were profitable and had greater growth potential. As aresult of the decision to exit these businesses, we recorded a charge for theloss on disposal of discontinued operations.

 

             On October 27, 2000, wecompleted the sale of the Distribution Group to an affiliate of The RiversideCompany. Our plan with respect to the independent aftermarket engine businesswas to restructure and return it to profitability prior to finding a buyer. Ourrestructuring of our independent aftermarket engine business, which

·                  eliminated our 21branch distribution network and replaced it with a business model that sellsand distributes remanufactured engines directly to independent aftermarketcustomers on an overnight delivery basis from four regional distributioncenters;

·                  applied leanmanufacturing techniques to improve productivity and reduce manufacturing cost;and

·                  significantlyimproved product quality to reduce product warranty cost,

 

was successful in returning this business toprofitability.  However, efforts toidentify an interested buyer placing sufficient value on this business wereunsuccessful.  Consequently, onJune 25, 2001, we elected to retain our independent aftermarket enginebusiness.  As a result of this decisionand in accordance with EITF 90-16, *Accountingfor Discontinued Operations Subsequently Retained*, the results ofthe remanufactured engines business have been reclassified from discontinuedoperations to continuing operations for all periods presented.

25

----

 

During 2001, we recorded a charge of $1.0 million related todiscontinued operations, net of tax benefits of $0.6 million. This chargeincluded the following on a pre-tax basis: $2.7 million in expense for theincrease to the estimated loss on the sale of the Distribution Group, $2.1 millionin income for the reversal of the estimated accrued loss on disposal of ourindependent aftermarket engine business and $1.0 million in expense for thereclassification of the operating results of our independent aftermarket enginebusiness from discontinued operations to continuing operations, as required perEITF No. 90-16.

 

During the yearended December 31, 2000, we recorded a charge of $94.5 million forthe loss on disposal of discontinued operations ($92.8 million for theDistribution Group and $1.7 million for our independent aftermarket enginebusiness), net of income tax benefits of $46.9 million.  The charge of $94.5 million includedthe write-off of goodwill, valuation allowances for specified assets, provisionsfor anticipated operating losses until disposal, and anticipated costs ofdisposal, including lease terminations, severance, retention and other employeebenefits and professional fees. Additionally, the loss from discontinued operations included a loss of$6.4 million, net of income tax benefits of $3.1 million, from theoperations of the Distribution Group during the six months ended June 30,2000, partially offset by $1.6 million of income (net of tax) for thereclassification of the operating results of our independent aftermarket enginebusiness from discontinued operations to continuing operations, as required perEITF No. 90-16.

 

*DrivetrainRemanufacturing Segment*

 

The followingtable presents net sales, special charges and segment profit expressed inmillions of dollars and as a percentage of net sales:

 
|            |   | **Year Ended December 31,** |   |
|-----------------|--------|----------------------------------|--------|
|            |   | **2001**                         |   | **2000** |   |
| Net sales       |   | $                                | 266.3  |   | 100.0 | % | $ | 254.3 |   | 100.0 | % |
|            |   |                             |   |   |   |   |   |   |   |   |   |
| Special charges |   | $                                | 2.4    |   | 0.9 | % | $ | — |   | — | % |
|            |   |                             |   |   |   |   |   |   |   |   |   |
| Segment profit  |   | $                                | 40.0   |   | 15.0 | % | $ | 49.0 |   | 19.3 | % |

 

*NetSales.*  Net salesincreased $12.0 million, or 4.7%, to $266.3 million for 2001 from$254.3 million for 2000.  Thisincrease was primarily due to an increase in sales of remanufacturedtransmissions to Ford and Kia and growth in our engine remanufacturing programwith Jaguar, partially offset by a decrease in sales of remanufacturedtransmissions to DaimlerChrysler due to price concessions provided toDaimlerChrysler as a result of their request for supplier participation inDaimlerChrysler’s cost reduction initiatives and reduced volume resulting fromDaimlerChrysler’s inventory reduction initiatives, which reduced their targetedinventories by nearly 50% (from about 13 to 7 weeks). Sales of remanufacturedtransmissions to General Motors, which increased slightly, were also dampened asa result of their inventory reduction initiatives, which further reduced GM’stargeted inventories from about 45 days to 30 days.

 

Sales toDaimlerChrysler accounted for 35.6% and 42.5% of segment revenues for 2001 and2000, respectively.  Sales to Ford accountedfor 47.6% and 40.8% of segment revenues 2001 and 2000, respectively.

 

*SpecialCharges.*  During 2001,we recorded $2.4 million of special charges.  The special charges include $1.6 million of severance andrelated costs primarily associated with the de-layering of certain managementfunctions and $0.8 million of facility exit and idle capacity costsassociated with facility consolidations and implementation of cellularizedmanufacturing within the segment.

 

26

----

 

*SegmentProfit.*  Segmentprofit decreased $9.0 million, or 18.4%, to $40.0 million (15.0% ofsegment net sales) for 2001 from $49.0 million (19.3% of segment netsales) for 2000.  Excluding 2001 specialcharges of $2.4 million, segment profit decreased $6.6 million, or13.5%, between the two periods.  Thedecrease was primarily the result of the changes in sales volume, price and mixof remanufactured transmissions as referenced above, combined with productioninefficiencies resulting from the impact of DaimlerChrysler’s inventoryreduction initiatives and project costs related to the re-engineering of ourleast efficient, highest cost remanufacturing facility, which we believe willdrive productivity improvements in the future, partially offset by costreductions resulting from our lean and continuous improvement program and othercost reduction initiatives.

 

*LogisticsSegment*

* *

The followingtable presents net sales, special charges and segment profit expressed inmillions of dollars and as a percentage of net sales:

 
|            |   | **Year Ended December 31,** |   |
|-----------------|--------|----------------------------------|--------|
|            |   | **2001**                         |   | **2000** |   |
| Net sales       |   | $                                | 105.2  |   | 100.0 | % | $ | 89.1 |   | 100.0 | % |
|            |   |                             |   |   |   |   |   |   |   |
| Special charges |   | $                                | 2.4    |   | 2.3 | % | $ | — |   | — | % |
|            |   |                             |   |   |   |   |   |   |   |
| Segment profit  |   | $                                | 26.5   |   | 25.2 | % | $ | 17.4 |   | 19.5 | % |

 

*NetSales.*  Net salesincreased $16.1 million, or 18.1%, to $105.2 million for 2001 from$89.1 million for 2000.  Thisincrease was primarily attributable to

·                  an increase in salesfor value–added warehouse and distribution services, driven by the growthin the market for cellular phones and services;

·                  an increase in salesattributable to the two new programs we were awarded in early 2000 by AT&TWireless covering the packaging and distribution of cell phone accessories andthe distribution of point-of-sale and other marketing materials, which begangenerating revenue in the second half of 2000;

·                  an increase in salesto General Motors and Delphi for electronics remanufacturing and logisticssupport associated with a telematics program that we were awarded in 2001; and

·                  an increase in sales to Ford for core managementservices under the new program we were awarded in 2001,

**partiallyoffset by a decrease in sales of remanufactured electronic control modules as a result of our exit fromthat operation.  Sales to AT&TWireless accounted for 65.7% and 59.1% of segment revenues for 2001 and 2000,respectively.**

 

*Special Charges.* The $2.4 million of special charges recorded during 2001, includedthe following:

·                  $1.9 million ofcosts related to the shut-down of the segment’s remanufactured automotiveelectronic control modules operation including $0.7 million of severanceand related costs; $0.6 million related to the write-down of fixed assets;$0.3 million of facility exit and other costs related to the shutdown;$0.2 million related to inventory write–downs; $0.1 for thewrite-down of uncollectible accounts receivable balances; and

·                  $0.5 million ofseverance and related costs primarily associated with the upgrade of certainmanagement functions within the segment.

 

27

----

 

*Segment Profit.* Segment profit increased $9.1 million, or 52.3%, to$26.5 million (25.2% of segment net sales) for 2001 from$17.4 million (19.5% of segment net sales) for 2000.  Excluding special charges of$2.4 million recorded in 2001, segment profit increased$11.5 million, or 66.1%, between the two periods.  The increase was primarily the result ofchanges in sales volume and mix as referenced above combined with costreductions and other productivity improvements resulting from the increased useof automation and the implementation of lean manufacturing concepts, partiallyoffset by an increase in spending in support of our key growth initiatives inthe segment.

 

*Other*

* *

The following table presents net sales, special charges and segmentprofit (loss) for the independent aftermarket engine business expressed inmillions of dollars and as a percentage of net sales:

 
|                  |   | **Year Ended December 31,** |   |
|-----------------------|--------|-----------------------------|--------|
|                  |   | **2001**                    |   | **2000** |   |
| Net sales             |   | $                           | 21.9   |   | 100.0 | % | $ | 29.1 |   | 100.0 | % |
|                  |   |                        |   |   |   |   |   |   |   |
| Special charges       |   | $                           | — |   | — | % | $ | 32.6 |   | 112.0 | % |
|                  |   |                        |   |   |   |   |   |   |   |
| Segment profit (loss) |   | $                           | 1.7    |   | 7.8 | % | $ | (37.5 | ) | (128.9% | ) |

 

*Net Sales.* Net sales decreased $7.2 million, or 24.7%, to $21.9 millionfor 2001 from $29.1 million for 2000. This decrease was attributable to a decline in sales ofremanufactured engines, resulting primarily from a change in our distributionmethod from a branch network to regional distribution centers.

 

*Special Charges.* During 2000, we recorded $32.6 million of special charges relatedto the original decision to discontinue the independent aftermarket enginesbusiness. These charges included the following:

·                  $15.6 millionfor the impairment of goodwill;

·                  $5.8 millionfor the write-down of fixed assets to estimated net realizable value;

·                  $5.4 millionfor the write-down of inventory to estimated net realizable value (classifiedas Cost of Sales-Special Charges);

·                  $3.8 millionfor product warranty costs of units remanufactured and sold prior to 2000(classified as Cost of Sales-Special Charges);

·                  $0.9 millionfor the write-down of uncollectible accounts receivable balances; and

·                  $0.7 million ofexit costs and $0.4 million of severance costs for 56 people primarilyassociated with the shutdown of our branch distribution network.

 

*SegmentProfit (Loss).*  Segment profit (loss) increased$6.6 million, to a profit of $1.7 million for 2001 from a loss of$4.9 million before special charges of $32.6 million for 2000.  This increase was primarily the result ofcost reduction initiatives implemented in the independent aftermarket enginebusiness in the later part of 2000 and the first half of 2001 including theapplication of lean manufacturing techniques to improve productivity and reducemanufacturing cost, a change in the distribution method from a branch networkto regional distribution centers and a reduction of product warrantyexpense.  During 2001, we recognized areduction in cost of goods sold of approximately $0.8 million, primarilyassociated with the remaining inventory valuation allowances that wereestablished in 2000 related to our original decision to discontinue theindependent aftermarket engines business in 2000.

 

 

28

----

***Year Ended December 31, 2000 Compared to Year EndedDecember 31, 1999***

 

Income from continuing operations decreased $14.4 million, or85.7%, to $2.4 million in 2000 from $16.8 million in 1999.  During 1999, we recorded pre-tax specialcharges of $7.3 million, primarily related to initiatives designed toimprove operating efficiencies and reduce costs (see “Special Charges”below).  Additionally, in 2000, werecorded $32.6 million (pre-tax) of special charges primarily related tothe write-off of goodwill and the recording of valuation allowances forspecified assets associated with our decision to discontinue our independentaftermarket engine business.  Thisbusiness was subsequently retained (see “Discontinued Operations”). Excludingspecial charges, income from continuing operations increased $1.5 million,or 7.0%, to $22.8 million for the year ended December 31, 2000 from$21.3 million in 1999.  Thisincrease was primarily attributable to a significant increase in revenues inthe Logistics segment, partially offset by a decline in revenues in theDrivetrain Remanufacturing segment. Income from continuing operations perdiluted share decreased to $0.11 in 2000 from $0.79 in 1999.  Excluding special charges, income fromcontinuing operations per diluted share increased $0.07, to $1.08 for the yearended December 31, 2000 from $1.01 in 1999.

* *

*Net Sales.* Net sales increased $6.9 million, or 1.9%, to $372.5 millionin 2000 from $365.6 million in 1999. This increase is attributable to increased sales in our Logisticssegment partially offset by a decrease in revenues in the Drivetrain Remanufacturingsegment and our independent aftermarket engine business.  See “Drivetrain Remanufacturing Segment,”“Logistics Segment” and “Other” for a discussion of net sales.

 

Sales to DaimlerChrysler accounted for 29.6% and 31.6%, Ford accountedfor 30.0% and 29.6% and AT&T Wireless accounted for 14.1% and 6.3% of ourrevenues for the years ended December 31, 2000 and 1999, respectively.

 

*Gross Profit.* Gross profit decreased $1.5 million, or 1.3%, to$114.9 million in 2000 from $116.4 million in 1999.  Excluding the component of special chargesreflected in cost of sales of $9.1 million and $3.0 million in 2000and 1999, respectively, gross profit increased $4.6 million, or 3.9%, to$124.0 million in 2000 from $119.4 million in 1999.  This increase is principally due toincreased revenues in the Logistics segment, improved yield and favorable mixof remanufactured transmissions, favorable material variances and the benefitof cost reduction initiatives implemented during 2000 and 1999, partiallyoffset by a decrease in volume in the Drivetrain Remanufacturing segment andour independent aftermarket engine business. As a result, gross profit (excluding special charges) as a percentage ofnet sales increased to 33.3% from 32.6% between the two periods.

 

*SG&A Expenses.* SG&A expenses increased $0.6 million, or 1.1%, to$57.3 million in 2000 from $56.7 million in 1999.  The increase is due primarily to an increasein expense supporting increased sales volume and growth initiatives in theLogistics segment, partially offset by a decrease in expense in the DrivetrainRemanufacturing segment and the independent aftermarket engine business.  As a percentage of net sales, SG&Aexpenses decreased slightly to 15.4% in 2000 from 15.5% in 1999.

 

*Amortization of Intangible Assets.*  Amortization of intangible assets decreasedslightly to $5.3 million in 2000 from $5.5 million in 1999, primarilyrelated to the write-off of goodwill associated with the independentaftermarket engine business.

 

*Special Charges.*During 2000, we recorded$32.6 million of special charges related to the reorganization of ourindependent aftermarket engine business. These charges included the following:

·                  $15.6 millionfor the impairment of goodwill;

·                  $5.8 millionfor the write-down of fixed assets to estimated net realizable value;

·                  $5.4 millionfor the write-down of inventory to estimated net realizable value (classifiedas Cost of Sales-Special Charges);

·                  $3.8 millionfor product warranty costs of units remanufactured and sold prior to 2000 (classifiedas Cost of Sales-Special Charges);

·                  $0.9 millionfor the write-down of uncollectible accounts receivable balances; and

·                  $0.7 million ofexit costs and $0.4 million of severance costs for 56 people primarilyassociated with the shutdown of our branch distribution network.

29

----

 

During 1999, we recorded$7.3 million of special charges, of which $3.0 million was includedas a component of cost of sales.  Thesecharges consisted of $3.3 million of costs associated with the narrowingof the product offering of our independent aftermarket engine business,$2.6 million of severance and other costs related to the reorganization ofmanagement functions, $0.8 million of costs to exit a plant within ourDrivetrain Remanufacturing segment, and $0.6 million of severance, exitand other costs related to our Logistics segment.

 

*Income from Operations.* Principally as a result of the factors described above, income fromoperations decreased $20.9 million, to $28.9 million in 2000 from$49.8 million in 1999.  Excludingthe special charges of $32.6 million and $7.3 million recorded in2000 and 1999, respectively, income from operations increased$4.4 million, to $61.5 million in 2000 from $57.1 million in1999.  As a percentage of net sales,income from operations (excluding special charges) increased to 16.5% from15.6%, between the two periods.

 

*Interest Expense and Other, Net.*  Interest expense and other, net increased$1.5 million, or 6.4%, to $24.8 million in 2000 from$23.3 million in 1999.  Theincrease primarily resulted from an overall increase in interest rates in 2000as compared to 1999.  Interest expenseof $5.2 million for the year ended December 31, 2000 has beenallocated to discontinued operations based on the total consideration receivedfrom the sale of the Distribution Group. Interest expense of $3.3 million for the year endedDecember 31, 1999 has been allocated to the discontinued operations basedon the total consideration received from the sale of the Distribution Groupless the amount of debt attributable to the acquisition of All Trans (part ofthe Distribution Group) in the fourth quarter of 1999.

 

*DiscontinuedOperations.*  On August 3, 2000, we adopted a plan todiscontinue a segment of our business that we referred to as our independentaftermarket.  This independentaftermarket segment consisted of the Distribution Group and the independentaftermarket engine business.  We plannedto sell the Distribution Group by December 31, 2000 and the independentaftermarket engine business by June 30, 2001. Management believed that theplanned exit from these businesses, which provided the opportunity to reducedebt and generated a significant tax shelter, offered a strategic opportunityto focus resources on our businesses that were profitable and had greatergrowth potential.  As a result of thedecision to exit these businesses, we recorded a charge for the loss ondisposal of discontinued operations.

 

On October 27, 2000,we completed the sale of the Distribution Group to an affiliate of TheRiverside Company.  Our plan withrespect to the independent aftermarket engine business was to restructure andreturn it to profitability prior to finding a buyer. Our restructuring of ourindependent aftermarket engine business, which:

·                  eliminated our 21branch distribution network and replaced it with a business model that sellsand distributes remanufactured engines directly to independent aftermarketcustomers on an overnight delivery basis from four regional distributioncenters;

·                  applied leanmanufacturing techniques to improve productivity and reduce manufacturing cost;and

·                  significantlyimproved product quality to reduce product warranty cost,

 

was successful in returning this business toprofitability.  However, efforts toidentify an interested buyer placing sufficient value on this business wereunsuccessful.  Consequently, onJune 25, 2001, we elected to retain our independent aftermarket enginebusiness.  As a result of this decisionand in accordance with EITF 90-16, *Accountingfor Discontinued Operations Subsequently Retained*, the results ofthe remanufactured engines business have been reclassified from discontinuedoperations to continuing operations for all periods presented.

30

----

 

During the yearended December 31, 2000, we recorded a charge of $94.5 million forthe loss on disposal of discontinued operations ($92.8 million for theDistribution Group and $1.7 million for our independent aftermarket enginebusiness), net of income tax benefits of $46.9 million.  The charge of $94.5 million includedthe write-off of goodwill, valuation allowances for specified assets,provisions for anticipated operating losses until disposal, and anticipatedcosts of disposal, including lease terminations, severance, retention and otheremployee benefits and professional fees. Additionally, the loss from discontinued operations included a loss of$6.4 million, net of income tax benefits of $3.1 million, from theoperations of the Distribution Group during the six months ended June 30,2000, partially offset by $1.6 million of income (net of tax) for thereclassification of the operating results of our independent aftermarket enginebusiness from discontinued operations to continuing operations, as required perEITF No. 90-16.

 

*DrivetrainRemanufacturing Segment*

 

The following table presents net sales, special charges and segmentprofit expressed in millions of dollars and as a percentage of net sales: 

 
|            |   | **Year Ended December 31,** |   |
|-----------------|--------|-----------------------------|--------|
|            |   | **2000**                    |   | **1999** |   |
| Net sales       |   | $                           | 254.3  |   | 100.0 | % | $ | 268.9 |   | 100.0 | % |
|            |   |                        |   |   |   |   |   |   |   |
| Special charges |   | $                           | — |   | — | % | $ | 1.0 |   | 0.4 | % |
|            |   |                        |   |   |   |   |   |   |   |
| Segment profit  |   | $                           | 49.0   |   | 19.3 | % | $ | 50.5 |   | 18.8 | % |

 

*Net Sales.* Net sales decreased $14.6 million, or 5.4%, to $254.3 millionin 2000 from $268.9 million in 1999. The decrease was primarily the resultof:

·                  a decline inshipments of Asian car model remanufactured transmissions due to thetermination of an unprofitable contract, delays in the introduction of newmodel years into the remanufacturing program by OEMs and productiondisruptions associated with an unsuccessful union organization campaign andmanagement changes;

·                  a decline in salesof remanufactured transmissions to General Motors due to a reduction of itsinventory levels from approximately 26 weeks to seven weeks and thetermination of an unprofitable contract;

·                  a general decline insales of remanufactured transmissions due to an overall softness in demandresulting from a relatively mild winter in 1999, partially offset by improvedyield and one-time rework projects; and

·                  decreased sales ofengines and related parts in the segment’s European operations.

 

Salesto DaimlerChrysler accounted for 29.6% and 31.6% of our revenues (42.5% and42.0% of segment revenues) in 2000 and 1999, respectively.  Sales to Ford accounted for 30.0% and 29.6%of our revenues (40.8% and 36.8% of segment revenues) in 2000 and 1999,respectively.

 

*Special Charges.* The Drivetrain Remanufacturing segment recorded $1.0 million ofspecial charges in 1999 relating to severance and plant exit costs.

 

*Segment Profit.* Segment profit decreased $1.5 million, or 3.0%, to$49.0 million (19.3% of segment net sales) in 2000 from $50.5 million(18.8% of segment net sales) in 1999. Excluding special charges of $1.0 million in 1999, segment profitwould have decreased $2.5 million, or 4.9%, from $51.5 million (19.2%of segment net sales) in 1999.  Thedecrease was primarily the result of the factors impacting sales as describedabove, partially offset by a reduction in allocated corporate overhead in 2000as compared to 1999.

 

31

----

 

*LogisticsSegment*

 

The following table presents netsales, special charges and segment profit expressed in millions of dollars and asa percentage of net sales:

 
|            |   | **Year Ended December 31,** |   |
|-----------------|--------|----------------------------------|--------|
|            |   | **2000**                         |   | **1999** |   |
| Net sales       |   | $                                | 89.1   |   | 100.0 | % | $ | 59.1 |   | 100.0 | % |
|            |   |                             |   |   |   |   |   |   |   |
| Special charges |   | $                                | — |   | — | % | $ | 0.6 |   | 1.0 | % |
|            |   |                             |   |   |   |   |   |   |   |
| Segment profit  |   | $                                | 17.4   |   | 19.5 | % | $ | 7.7 |   | 13.0 | % |

 

*Net Sales.* Net sales increased $30.0 million, or 50.8%, to $89.1 millionin 2000 from $59.1 million in 1999. This increase was primarilyattributable to an increase in sales for value added warehouse and distributionservices, driven by the strong growth in the market for cellular phones andservices, coupled with the benefit of two new programs we were awarded byAT&T Wireless.  These programs coverthe packaging and distribution of cell phone accessories and the distributionof point-of-sale and other marketing materials.  Sales to AT&T Wireless accounted for 14.1% and 6.3% of ourrevenues (59.1% and 38.9% of segment revenues) in 2000 and 1999, respectively.

 

*Special Charges.* Special charges recorded during 1999 of $0.6 million relate tofacility exit costs and other costs related to the electronics business unit.

* *

*SegmentProfit.*  Segment profit increased $9.7 million,or 126.0%, to $17.4 million (19.5% of segment net sales) in 2000 from$7.7 million (13.0% of segment net sales) in 1999.  Excluding special charges of $0.6 millionin 1999, segment profit would have increased $9.1 million, or 109.6%, from$8.3 million (14.0% of segment net sales) in 1999.  This increase was primarily the result ofthe increased sales volume, combined with the benefit of restructuringinitiatives implemented in the electronics business unit in late 1999.

 

*Other*

 

The following table presents net sales, special charges and segment lossfor the independent aftermarket engine business expressed in millions ofdollars and as a percentage of net sales:

 
|            |   | **Year Ended December 31,** |   |
|-----------------|--------|----------------------------------|--------|
|            |   | **2000**                         |   | **1999** |   |
| Net sales       |   | $                                | 29.1   |   | 100.0 | % | $ | 37.5 |   | 100.0 | % |
|            |   |                             |   |   |   |   |   |   |   |
| Special charges |   | $                                | 32.6   |   | 112.0 | % | $ | 3.3 |   | 8.8 | % |
|            |   |                             |   |   |   |   |   |   |   |
| Segment loss    |   | $                                | (37.5  | ) | (128.9% | ) | $ | (6.0 | ) | (16.0% | ) |

 

*Net Sales.* Net sales decreased $8.4 million, or 22.4%, to $29.1 millionfor the year ended December 31, 2000 from $37.5 million for the yearended December 31, 1999.  Thisdecrease was attributable to a decline in sales of remanufactured engines,primarily resulting from planned cost reduction activities that dramaticallyreduced the number of SKU’s we offered for sale.

* *

*Special Charges.*During 2000, our independent aftermarket enginebusiness recorded $32.6 million of special charges. These charges includedthe following:

 

32

----

 

·                  $15.6 millionfor the impairment of goodwill;

·                  $5.8 millionfor the write-down of fixed assets to estimated net realizable value;

·                  $5.4 millionfor the write-down of inventory to estimated net realizable value (classified asCost of Sales-Special Charges);

·                  $3.8 millionfor product warranty costs of units remanufactured and sold prior to 2000(classified as Cost of Sales-Special Charges);

·                  $0.9 millionfor the write-down of uncollectible accounts receivable balances; and

·                  $0.7 million ofexit costs and $0.4 million of severance costs for 56 people primarilyassociated with the shutdown of our branch distribution network.

Our independent aftermarket engine business recorded $3.3 millionof special charges during 1999 associated with the narrowing of our productoffering.

 

*Segment Loss.* Segment loss increased $31.5 million, to $37.5 million for theyear ended December 31, 2000 from $6.0 million in 1999.  Excluding special charges of $32.6 millionand $3.3 million recorded in 2000 and 1999, respectively, segment lossincreased $2.2 million to $4.9 million in 2000 from $2.7 millionin 1999.  This increase is primarily theresult of volume reductions resulting from planned cost reduction activitiesthat dramatically reduced the number of SKU’s we offered combined with anincrease in warranty costs resulting from quality issues that arose prior tothe year 2000 and which have been mitigated through the application of leanmanufacturing techniques.

 

# **Liquidity andCapital Resources**

 

***Cash Flow & CapitalExpenditures***

 

We had total cashand cash equivalents on hand of $0.6 million at December 31, 2001,representing a net decrease in cash and cash equivalents of $1.5 millionin 2001. Net cash provided by operating activities from continuing operationswas $49.1 million in 2001.  Netcash used in investing activities from continuing operations of$14.5 million included $13.5 million of equipment purchases andfacility improvements and the $3.7 million net working capital adjustmentto the purchase price of the Distribution Group, partially offset by $2.9million in proceeds from the sale of the preferred stock of the DistributionGroup received as partial consideration in the sale of that business.  Net cash used in financing activities of$33.5 million includes net payments of $31.5 million made on ourcredit facility, $2.3 million of common stock purchased for treasury,$0.9 million of payments on capital lease obligations and$0.5 million in payment of amounts due to sellers of acquired companies,partially offset by $1.9 million of proceeds from the exercise of stockoptions.

 

Our capitalexpenditures from continuing operations in 2001 were $13.5 million,consisting of:

·                  $5.2 millionprimarily related to computer systems and machinery and equipment to supportgrowth and productivity initiatives in the Logistics segment;

·                  $7.6 millionfor additional transmission remanufacturing and test equipment and otherimprovements to support increases in productivity and efficiency in a number ofour remanufacturing plants within our Drivetrain Remanufacturing segment; and

·                  $0.7 million primarily related to equipment tosupport growth in our overall infrastructure.

*** ***

***Liquidity and Capital Resources-Other***

 

For 2002, we have budgeted $20.0 million for capital expendituresto support growth initiatives in our Logistics segment and for remanufacturingequipment to support cost reduction initiatives and capacity expansion in ourDrivetrain Remanufacturing segment.

 

33

----

 

Under the terms of our 1997 acquisition of ATS Remanufacturing (whichremanufactures transmissions for General Motors), we are required to makepayments to the seller and to other key individuals on each of the first 14anniversaries of the closing date. Through December 31, 2001, we had made$4.4 million of these payments. Substantially all of the remaining tenpayments, which aggregate to approximately $14.6 million (present value of$13.1 million as of December 31, 2001), are contingent upon the attainmentof sales levels by ATS, which we believe have a substantial likelihood of beingattained.

*** ***

***Financing***

*** ***

On March 8, 2002we replaced our senior bank credit facility with a new facility.  The former facility consisted of a term loanwith $29.4 million outstanding at December 31, 2001 and a$100.0 million revolving credit facility with $45.8 millionoutstanding at December 31, 2001.  Theprior credit facility was available to finance our working capitalrequirements, to make future acquisitions and for other general corporateneeds, and would have expired in December 2003.  Borrowings under the term loan portion of the prior creditfacility were payable in quarterly installments through December 31,2003.  At December 31, 2001,$45.8 million of borrowings and $5.0 million in letters of creditwere outstanding under the revolving portion of the prior facility.

 

Amounts advancedunder the prior credit facility were secured by substantially all of ourassets.  The facility contained severalcovenants, including ones that required us to maintain specified levels of networth, leverage and cash flow coverage and others that limited our ability toincur indebtedness, make capital expenditures, create liens, engage in mergersand consolidations, make restricted payments (including dividends), sellassets, make investments and engage in transactions with our affiliates andaffiliates of our subsidiaries.  As ofDecember 31, 2001, we were in compliance with such covenants.

 

Additionally, atDecember 31, 2001 we had a principal amount of approximately$110.4 million of 12% senior subordinated notes due 2004 outstanding.  The indentures under which the seniorsubordinated notes were issued contain covenants that, among other things,limit our ability to incur additional indebtedness.  As of December 31, 2001, we were in compliance with thesecovenants and believe that we will be able to comply with these covenants inthe future.

 

During 2001, weentered into a revolving credit agreement with HSBC Bank Plc, providing£1.0 million to finance the working capital requirements of our U.K.subsidiary.  Amounts advanced aresecured by substantially all assets of our U.K. subsidiary.  In addition, HSBC Bank may at any timedemand repayment of all sums owing. Interest is payable monthly at the HSBC Bank prime lending rate plus1.50%. As of December 31, 2001, there were no amounts outstanding under thisline of credit.

 

As ofDecember 31, 2001, we had approximately $89 million in federal andstate net operating loss carryforwards available as an offset to future taxableincome.

 

***Financing - Subsequent Events***

 

*PublicOffering of Common Stock*

* *

On March 8, 2002, we completed a public offering of 2,760,000 shares of our common stock at aprice to the public of $16.50 per share.  The net proceeds from the offering, estimated to be approximately$42.2 million after deducting underwriting discounts and commissions andestimated offering expenses payable by us, was used, together with certain borrowingsunder our new credit facility discussed below, to repay all the indebtednessunder our prior bank credit facility on March 8, 2002.

* *

*NewCredit Agreement*

* *

OnFebruary 8, 2002, we executed a credit agreement and a related securityagreement in connection with a new credit facility jointly arranged andsyndicated by JPMorgan Chase Bank and Credit Suisse First Boston.  The new credit facility provides for (i) a$75.0 million, five-year term loan payable in quarterly installments inincreasing amounts over the five-year period, (ii) a $95.0 million, six-yearterm loan payable in quarterly installments over the six-year period (with 95%payable in the sixth year) and an annual excess cash flow sweep and (iii) a$50.0 million, five-year revolving credit facility.  The new credit facility also provides for the addition of anoptional term loan of up to $100.0 million, subject to certain conditionsincluding the receipt from one or more lenders of the additional commitmentsthat may be requested.

 

34

----

 

At our election, amounts advanced under the new credit facility willbear interest at either (i) the Alternate Base Rate plus a specified margin or(ii) the Eurodollar Rate plus a specified margin.  The Alternate Base Rate is equal to the highest of  (a) the lender’s prime rate,(b) the lender’s base CD rate plus 1.00% or (c) the federal funds effectiverate plus 0.50%.  The Eurodollar Rate isthe rate offered for Eurodollar deposits for one, two, three, six, or, ifavailable by all lenders, nine months as selected by us.  The applicable margins for both Alternate Base Rateand Eurodollar Rate loans are subject to quarterly adjustments based on ourleverage ratio as of the end of the four fiscal quarters then completed.  At March 8, 2002, the closing date of ournew credit facility, the margins for the $75.0 million term loan and the $50.0million revolving facility were 1.25% for Alternate Base Rate loans and 2.25%for Eurodollar Rate loans.  For the$95.0 million term loan, the margins were 2.00% for Alternate Base Rate loansand 3.00% for Eurodollar Rate loans as of March 8, 2002.  The interest rates for the optional $100.0million term loan will be determined at the time such loans are provided.  Additionally, we are required to payquarterly in arrears a commitment fee equal to 0.50% per annum of the averagedaily unused portion of the new credit facility.  We must also reimburse the lenders for certain legal and othercosts incurred by the lenders, and pay fees on outstanding letters of credit ata rate per annum equal to the applicable margin then in effect for advancesbearing interest at the Eurodollar Rate.

Amounts advanced under our new credit facility are guaranteed by all ofour domestic subsidiaries and secured by substantially all of our and oursubsidiaries’ assets.  Our new creditfacility contains several covenants comparable to those in our prior creditfacility.  These covenants include onesthat require us to maintain specified levels of net worth, leverage and cashflow coverage and others that limit our ability to incur indebtedness, makecapital expenditures, create liens, engage in mergers and consolidations, makerestricted payments (including dividends), sell assets, make investments, enternew businesses and engage in transactions with our affiliates and affiliates ofour subsidiaries.

OnMarch 8, 2002, the closing date of our new credit facility, we borrowed $55.0million under the new facility and used a portion of those proceeds, togetherwith the proceeds from our public stock offering to repay the entire $82.7million balance outstanding under our prior credit facility.

 

*Redemption of 12% Senior SubordinatedNotes*

* *

On March 8, 2002 we called all of our 12% seniorsubordinated notes due 2004 for redemption. Our senior subordinated notes, which had a face amount outstanding as ofMarch 8, 2002 of approximately $110.4 million, will be redeemed at a premium of102% plus accrued and unpaid interest on or about April 8, 2002.  The redemption will be funded by theremainder of the borrowings made under our new credit facility.

 

*Extraordinary Items*

* *

We expect to incur an extraordinary charge ofapproximately $3.3 million for the write-off of previously capitalized debtissuance costs, a call premium and fees in connection with the replacement ofour previous credit facility and the retirement of our senior subordinatednotes.  However, we expect to realizeannual savings of approximately $7.7 million in interest expense as a result ofthe redemption of the senior subordinated notes.

 

***Impact of New AccountingStandards***

 

InJune 2001, the Financial Accounting Standards Board SFAS No. 141, *Business Combinations*, and No. 142, *Goodwill and Other Intangible Assets*.

 

SFASNo. 141 requires that the purchase method of accounting be used for allbusiness combinations initiated after June 30, 2001.  Use of the pooling-of-interests method is nolonger permitted. SFAS No. 141 also includes guidance on the initialrecognition and measurement of goodwill and other intangible assets acquired ina business combination that is completed after June 30, 2001.  We are required to adopt SFAS No. 141effective January 1, 2002.  Theinitial adoption of SFAS No. 141 is not expected to have a significant effecton the Company’s results of operations or its financial position.

 

35

----

 

SFASNo. 142 no longer permits the amortization of goodwill and indefinite–livedintangible assets. Instead, these assets must be reviewed annually (or morefrequently under specified conditions) for impairment in accordance with SFASNo. 142.  This impairment test usesa fair value approach rather than the undiscounted cash flows approachpreviously required by SFAS No. 121, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to BeDisposed Of*. Intangible assets that do not have indefinite liveswill continue to be amortized over their useful lives and reviewed forimpairment in accordance with SFAS No. 121.  We are required to adopt SFAS No. 142 effectiveJanuary 1, 2002. The effect of not amortizing goodwill is expected toresult in an increase to income from operations in fiscal 2002 of approximately$5.0 million.  The adoption of theimpairment provisions of SFAS No. 142 is not expected to have a significanteffect on the Company’s results of operations or its financial position.

 

**Inflation; Lack of Seasonality**

 

Althoughwe are subject to the effects of changing prices, the impact of inflation hasnot been a significant factor in results of operations for the periods presented.In some circumstances, market conditions or customer expectations may preventus from increasing the prices of our products to offset the inflationarypressures that may increase our costs in the future. Historically, there hasbeen little aggregate seasonal fluctuation in our business.

 

**Environmental Matters**

 

SeeItem 1. “Business-Environmental” for a discussion of environmental mattersrelating to us.

 

**ITEM 7A****.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

*Derivative Financial Instruments.*  We do not hold or issue derivative financialinstruments for trading purposes. We use derivative financial instruments tomanage our exposure to fluctuations in interest rates. Neither the aggregatevalue of these derivative financial instruments nor the market risk posed bythem is material to our business. We use interest rate swaps to convertvariable rate debt to fixed rate debt to reduce volatility risk. For additionaldiscussion regarding our use of such instruments, see Item 8. “ConsolidatedFinancial Statements and Supplementary Data - Note 13.”

 

*             InterestRate Exposure.*  Based on ouroverall interest rate exposure during the year ended December 31, 2001 andassuming similar interest rate volatility in the future, a near-term(12 months) change in interest rates would not materially affect ourconsolidated financial position, results of operation or cash flows. Interestrate movements of 10% would not have a material effect on our financialposition, results of operation or cash flows.

 

*             ForeignExchange Exposure.*  We have oneforeign operation that exposes us to translation risk when the local currencyfinancial statements are translated to U.S. dollars. Since changes intranslation risk are reported as adjustments to stockholders’ equity, a 10%change in the foreign exchange rate would not have a material effect on ourfinancial position, results of operation or cash flows.

 

36

----

 

**ITEM 8.****           CONSOLIDATED FINANCIAL STATEMENTS****AND SUPPLEMENTARY DATA**

**Contents**

 

| Report  of Ernst & Young LLP, Independent Auditors                                                      |   |   |
|-------------------------------------------------------------------------------------------------------------|--------|--------|
| Consolidated Balance Sheets  as of December 31, 2001 and 2000                                               |   |   |
| Consolidated  Statements of Operations for the years ended December 31, 2001, 2000 and 1999                 |   |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2001,  2000 and 1999 |   |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999                 |   |   |
| Notes to  Consolidated Financial Statements                                                                 |   |   |

 

37

----

 

**REPORT OF ERNST & YOUNG LLP,INDEPENDENT AUDITORS**

 

Tothe Stockholders and Board of Directors

AftermarketTechnology Corp.

 

We have audited the accompanying consolidated balance sheets ofAftermarket Technology Corp. and subsidiaries (the Company) as ofDecember 31, 2001 and 2000, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2001. Our audits also included the financial statement schedule listed in theIndex of Item 14 (a).  Thesefinancial statements and schedule are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements and schedule based on ouraudits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Aftermarket Technology Corp. and subsidiaries at December 31, 2001 and2000, and the consolidated results of their operations and their consolidatedcash flows for each of the three years in the period ended December 31,2001, in conformity with accounting principles generally accepted in the UnitedStates.  Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

ERNST &YOUNG LLP

 

Chicago,Illinois

February2, 2002

(exceptfor Note 21, as to which the date is March 8, 2002

 

 

38

----

 

**AFTERMARKETTECHNOLOGY CORP.**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share and per share data)**

 
|                                                                                                                                             |   | **December  31,** |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                                                             |   | **2001**          |    | **2000** |   |
| **Assets**                                                                                                                                       |   |              |    |   |   |
| Current Assets:                                                                                                                                  |   |              |    |   |   |
| Cash and cash  equivalents                                                                                                                       |   | $                 | 555     |   | $ | 2,035 |   |
| Accounts  receivable, net                                                                                                                        |   | 55,816            |    | 61,576 |   |
| Inventories                                                                                                                                      |   | 68,970            |    | 55,479 |   |
| Prepaid and  other assets                                                                                                                        |   | 5,305             |    | 5,331 |   |
| Refundable  income taxes                                                                                                                         |   | —            |    | 2,730 |   |
| Deferred income  taxes                                                                                                                           |   | 26,508            |    | 31,904 |   |
| Total current  assets                                                                                                                            |   | 157,154           |    | 159,055 |   |
|                                                                                                                                             |   |              |    |   |   |
| Property, plant  and equipment, net                                                                                                              |   | 52,577            |    | 46,276 |   |
| Debt issuance  costs, net                                                                                                                        |   | 3,008             |    | 4,175 |   |
| Cost in excess  of net assets acquired, net                                                                                                      |   | 169,194           |    | 174,833 |   |
| Deferred income taxes                                                                                                                            |   | 5,590             |    | 12,852 |   |
| Other assets                                                                                                                                     |   | 9,335             |    | 10,308 |   |
| Total assets                                                                                                                                     |   | $                 | 396,858 |   | $ | 407,499 |   |
|                                                                                                                                             |   |              |    |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                   |   |              |    |   |   |
| Current  Liabilities:                                                                                                                            |   |              |    |   |   |
| Accounts payable                                                                                                                                 |   | $                 | 42,507  |   | $ | 54,215 |   |
| Accrued expenses                                                                                                                                 |   | 39,096            |    | 34,011 |   |
| Income taxes  payable                                                                                                                            |   | 2,622             |    | — |   |
| Credit facility                                                                                                                                  |   | 14,700            |    | 14,700 |   |
| Capital lease  obligation                                                                                                                        |   | 1,121             |    | — |   |
| Amounts due to  sellers of acquired companies                                                                                                    |   | 2,450             |    | 2,672 |   |
| Deferred  compensation                                                                                                                           |   | 1,958             |    | — |   |
| Liabilities of  discontinued operations                                                                                                          |   | 1,375             |    | 8,125 |   |
| Total current  liabilities                                                                                                                       |   | 105,829           |    | 113,723 |   |
|                                                                                                                                             |   |              |    |   |   |
| 12% Series B and  D Senior Subordinated Notes                                                                                                    |   | 110,852           |    | 111,033 |   |
| Amount drawn on  credit facility, less current portion                                                                                           |   | 60,500            |    | 92,000 |   |
| Amounts due to  sellers of acquired companies, less current portion                                                                              |   | 7,269             |    | 6,931 |   |
| Deferred  compensation, less current portion                                                                                                     |   | 1,400             |    | 3,125 |   |
| Capital lease  obligation, less current portion                                                                                                  |   | 897               |    | 175 |   |
| Other long-term  liabilities                                                                                                                     |   | 776               |    | 273 |   |
|                                                                                                                                             |   |              |    |   |   |
| Stockholders’  Equity:                                                                                                                      |   |              |    |   |   |
| Preferred stock,  $.01 par value; shares authorized — 2,000,000; none issued                                                                |   | —            |    | — |   |
| Common stock, $.01 par value;  shares authorized — 30,000,000; Issued — 21,446,396 and 20,923,510 (including  shares held in treasury) |   | 214               |    | 209 |   |
| Additional  paid-in capital                                                                                                                      |   | 141,298           |    | 136,882 |   |
| Accumulated  deficit                                                                                                                             |   | (25,832           | )       | (54,400 | ) |
| Accumulated  other comprehensive loss                                                                                                            |   | (2,008            | )       | (458 | ) |
| Common stock  held in treasury, at cost (611,337 and 172,000 shares)                                                                             |   | (4,337            | )       | (1,994 | ) |
| Total  stockholders’ equity                                                                                                                 |   | 109,335           |    | 80,239 |   |
|                                                                                                                                             |   |              |    |   |   |
| Total  liabilities and stockholders’ equity                                                                                                 |   | $                 | 396,858 |   | $ | 407,499 |   |
|                                                                                                                                             |   |              |    |   |   |

 

See accompanying notes.

 

39

----

 

**AFTERMARKETTECHNOLOGY CORP.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

 
|                                                   |   | **For the  years ended December 31,** |    |
|--------------------------------------------------------|--------|---------------------------------------|---------|
|                                                   |   | **2001**                              |    | **2000** |   | **1999** |   |
| Net sales                                              |   | $                                     | 393,381 |   | $ | 372,493 |   | $ | 365,563 |   |
| Cost of sales                                          |   | 255,360                               |    | 248,438 |   | 246,224 |   |
| Special charges                                        |   | 216                                   |    | 9,134 |   | 2,965 |   |
| Gross profit                                           |   | 137,805                               |    | 114,921 |   | 116,374 |   |
|                                                   |   |                                  |    |   |   |   |   |
| Selling, general and administrative expense            |   | 59,939                                |    | 57,331 |   | 56,736 |   |
| Amortization of intangible assets                      |   | 5,028                                 |    | 5,255 |   | 5,527 |   |
| Special charges                                        |   | 5,114                                 |    | 23,450 |   | 4,345 |   |
|                                                   |   |                                  |    |   |   |   |   |
| Income from operations                                 |   | 67,724                                |    | 28,885 |   | 49,766 |   |
|                                                   |   |                                  |    |   |   |   |   |
| Interest income                                        |   | 1,524                                 |    | 234 |   | — |   |
| Other income (expense), net                            |   | 787                                   |    | (60 | ) | 312 |   |
| Minority interest in losses                            |   | (33                                   | )       | — |   | — |   |
| Interest expense                                       |   | (22,377                               | )       | (24,770 | ) | (23,563 | ) |
|                                                   |   |                                  |    |   |   |   |   |
| Income from continuing operations, before income taxes |   | 47,625                                |    | 4,289 |   | 26,515 |   |
|                                                   |   |                                  |    |   |   |   |   |
| Income tax expense                                     |   | 18,098                                |    | 1,883 |   | 9,739 |   |
|                                                   |   |                                  |    |   |   |   |   |
| Income from continuing operations                      |   | 29,527                                |    | 2,406 |   | 16,776 |   |
|                                                   |   |                                  |    |   |   |   |   |
| Loss from discontinued operations, net of income taxes |   | (959                                  | )       | (99,289 | ) | (9,969 | ) |
|                                                   |   |                                  |    |   |   |   |   |
| Net income (loss)                                      |   | $                                     | 28,568  |   | $ | (96,883 | ) | $ | 6,807 |   |
|                                                   |   |                                  |    |   |   |   |   |
|                                                   |   |                                  |    |   |   |   |   |
| Per common share — basic:                         |   |                                  |    |   |   |   |   |
| Income from continuing operations                      |   | $                                     | 1.44    |   | $ | 0.12 |   | $ | 0.82 |   |
| Loss from discontinued operations                      |   | (0.05                                 | )       | (4.81 | ) | (0.49 | ) |
| Net income (loss)                                      |   | $                                     | 1.39    |   | $ | (4.69 | ) | $ | 0.33 |   |
|                                                   |   |                                  |    |   |   |   |   |
| Per common share — diluted:                       |   |                                  |    |   |   |   |   |
| Income from continuing operations                      |   | $                                     | 1.40    |   | $ | 0.11 |   | $ | 0.79 |   |
| Loss from discontinued operations                      |   | (0.04                                 | )       | (4.69 | ) | (0.47 | ) |
| Net income (loss)                                      |   | $                                     | 1.36    |   | $ | (4.58 | ) | $ | 0.32 |   |
|                                                   |   |                                  |    |   |   |   |   |

 

See accompanying notes.

 

40

----

 

**AFTERMARKETTECHNOLOGY CORP.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Inthousands, except share data)**

 
| ** **                                                                  | ** ** | **Preferred********Stock** | ** ** | **Common********Stock** | ** ** | **Additional********Paid-In   Capital** | ** ** | **Accumulated********(Deficit)********Earnings** | ** ** | **Accumulated********Other   Comprehensive********Income  (Loss)** | ** ** | **Common   Stock in********Treasury** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|-----------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------|------------|-----------|------------|
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Balance at January 1, 1999                                                  |       | $                          | —     |                    | $          | 204                                     |       | $                                                | 135,104    |                                                               | $          | 35,676                                |       | $         | (979       | ) | $ | (1,994 | ) | $ | 168,011 |   |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Issuance of 200,996 shares of common stock from exercise of stock  options  |       | —                     |       | 2                       |       | 790                                     |       | —                                           |       | —                                                             |       | —                                |       | 792       |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Net income                                                                  |       | —                     |       | —                  |       | —                                  |       | 6,807                                            |       | —                                                             |       | —                                |       | 6,807     |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Translation adjustments                                                     |       | —                     |       | —                  |       | —                                  |       | —                                           |       | 534                                                                |       | —                                |       | 534       |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Comprehensive income                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       | 7,341     |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Balance at December 31, 1999                                                |       | —                     |       | 206                     |       | 135,894                                 |       | 42,483                                           |       | (445                                                               | )          | (1,994                                | )          | 176,144   |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Issuance of 196,528 shares of common stock from exercise of stock  options  |       | —                     |       | 2                       |       | 989                                     |       | —                                           |       | —                                                             |       | —                                |       | 991       |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Issuance of 114,218 shares of common stock from exercise of stock  warrants |       | —                     |       | 1                       |       | (1                                      | )          | —                                           |       | —                                                             |       | —                                |       | —    |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Net loss                                                                    |       | —                     |       | —                  |       | —                                  |       | (96,883                                          | )          | —                                                             |       | —                                |       | (96,883   | )          |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Translation adjustments                                                     |       | —                     |       | —                  |       | —                                  |       | —                                           |       | (13                                                                | )          | —                                |       | (13       | )          |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Comprehensive loss                                                          |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       | (96,896   | )          |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Balance at December 31, 2000                                                |       | —                     |       | 209                     |       | 136,882                                 |       | (54,400                                          | )          | (458                                                               | )          | (1,994                                | )          | 80,239    |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Issuance of 340,965 shares of common stock from exercise of stock  options  |       | —                     |       | 3                       |       | 4,418                                   |       | —                                           |       | —                                                             |       | —                                |       | 4,421     |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Issuance of 181,921 shares of common stock from exercise of stock  warrants |       | —                     |       | 2                       |       | (2                                      | )          | —                                           |       | —                                                             |       | —                                |       | —    |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Purchase of 439,337 shares of common stock for treasury                     |       | —                     |       | —                  |       | —                                  |       | —                                           |       | —                                                             |       | (2,343                                | )          | (2,343    | )          |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Net income                                                                  |       | —                     |       | —                  |       | —                                  |       | 28,568                                           |       | —                                                             |       | —                                |       | 28,568    |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Derivative financial instruments                                            |       | —                     |       | —                  |       | —                                  |       | —                                           |       | (419                                                               | )          | —                                |       | (419      | )          |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Translation adjustments                                                     |       | —                     |       | —                  |       | —                                  |       | —                                           |       | (1,131                                                             | )          | —                                |       | (1,131    | )          |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Comprehensive income                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       | 27,018    |       |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |
| Balance at December 31, 2001                                                |       | $                          | —     |                    | $          | 214                                     |       | $                                                | 141,298    |                                                               | $          | (25,832                               | )          | $         | (2,008     | ) | $ | (4,337 | ) | $ | 109,335 |   |
|                                                                        |       |                       |       |                    |       |                                    |       |                                             |       |                                                               |       |                                  |       |      |       |

 

See accompanying notes.

 

41

----

 

**AFTERMARKETTECHNOLOGY CORP.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

 
|                                                                                                                                   |   | **For the  years ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                   |   | **2001**                              |   | **2000** |   | **1999** |   |
| **Operating Activities:**                                                                                                              |   |                                  |   |   |   |   |   |
| Net income (loss)                                                                                                                      |   | $                                     | 28,568 |   | $ | (96,883 | ) | $ | 6,807 |   |
| Net loss from discontinued operations                                                                                                  |   | 959                                   |   | 99,289 |   | 9,969 |   |
| Income from continuing operations                                                                                                      |   | 29,527                                |   | 2,406 |   | 16,776 |   |
|                                                                                                                                   |   |                                  |   |   |   |   |   |
| Adjustments to reconcile income from continuing operations to net  cash provided by operating activities — continuing operations: |   |                                  |   |   |   |   |   |
| Asset impairment loss                                                                                                                  |   | —                                |   | 27,626 |   | — |   |
| Depreciation and amortization                                                                                                          |   | 14,019                                |   | 12,991 |   | 13,300 |   |
| Amortization of debt issuance costs                                                                                                    |   | 1,354                                 |   | 1,238 |   | 978 |   |
| Adjustments to provision for losses on accounts receivable                                                                             |   | (91                                   | )      | 348 |   | 206 |   |
| Loss on sale of equipment                                                                                                              |   | 150                                   |   | 144 |   | 19 |   |
| Gain on sale of preferred stock received from sale of a business                                                                       |   | (931                                  | )      | — |   | — |   |
| Deferred income taxes                                                                                                                  |   | 12,667                                |   | 13,386 |   | (2,577 | ) |
| Changes in operating assets and liabilities, net of businesses  acquired or discontinued/sold:                                         |   |                                  |   |   |   |   |   |
| Accounts receivable                                                                                                                    |   | 5,724                                 |   | (11,848 | ) | 4,661 |   |
| Inventories                                                                                                                            |   | (13,590                               | )      | (7,950 | ) | (162 | ) |
| Prepaid and other assets                                                                                                               |   | 2,059                                 |   | (4,563 | ) | 11,529 |   |
| Accounts payable and accrued expenses                                                                                                  |   | (1,781                                | )      | 9,715 |   | 9,677 |   |
| Net cash provided by operating activities — continuing operations                                                                 |   | 49,107                                |   | 43,493 |   | 54,407 |   |
|                                                                                                                                   |   |                                  |   |   |   |   |   |
| Net cash used in operating activities — discontinued operations                                                                   |   | (2,798                                | )      | (13,667 | ) | (24,313 | ) |
|                                                                                                                                   |   |                                  |   |   |   |   |   |
| **Investing Activities:**                                                                                                              |   |                                  |   |   |   |   |   |
| Purchases of property, plant and equipment                                                                                             |   | (13,516                               | )      | (11,682 | ) | (10,072 | ) |
| Investment of minority interest in a joint venture                                                                                     |   | (182                                  | )      | — |   | — |   |
| Proceeds (refund of proceeds) from sale of businesses                                                                                  |   | (3,675                                | )      | 60,079 |   | 3,808 |   |
| Proceeds from sale of preferred stock received from sale of a  business                                                                |   | 2,860                                 |   | — |   | — |   |
| Proceeds from sale of equipment                                                                                                        |   | 61                                    |   | 103 |   | 164 |   |
| Net cash provided by (used in) investing activities — continuing  operations                                                      |   | (14,452                               | )      | 48,500 |   | (6,100 | ) |
|                                                                                                                                   |   |                                  |   |   |   |   |   |
| Net cash used in investing activities — discontinued operations                                                                   |   | —                                |   | (2,700 | ) | (54,031 | ) |
|                                                                                                                                   |   |                                  |   |   |   |   |   |
| **Financing Activities:**                                                                                                              |   |                                  |   |   |   |   |   |
| Borrowings (payments) on credit facility, net                                                                                          |   | (31,500                               | )      | (79,859 | ) | 48,209 |   |
| Payments on bank line of credit, net                                                                                                   |   | —                                |   | (543 | ) | (1,541 | ) |
| Payment of debt issuance costs                                                                                                         |   | (201                                  | )      | (144 | ) | (1,274 | ) |
| Payments on capital lease obligation                                                                                                   |   | (875                                  | )      | (65 | ) | (27 | ) |
| Proceeds from exercise of stock options                                                                                                |   | 1,908                                 |   | 434 |   | 625 |   |
| Purchase of common stock for treasury                                                                                                  |   | (2,343                                | )      | — |   | — |   |
| Payments on amounts due to sellers of acquired companies                                                                               |   | (486                                  | )      | (1,173 | ) | (8,098 | ) |
| Payments of deferred compensation related to acquired company                                                                          |   | —                                |   | (700 | ) | — |   |
| Net cash provided by (used in) financing activities                                                                                    |   | (33,497                               | )      | (82,050 | ) | 37,894 |   |
|                                                                                                                                   |   |                                  |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash equivalents                                                                           |   | 160                                   |   | (10 | ) | 32 |   |
|                                                                                                                                   |   |                                  |   |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                                                                                       |   | (1,480                                | )      | (6,434 | ) | 7,889 |   |
|                                                                                                                                   |   |                                  |   |   |   |   |   |
| Cash and cash equivalents at beginning of year                                                                                         |   | 2,035                                 |   | 8,469 |   | 580 |   |
| Cash and cash equivalents at end of year                                                                                               |   | $                                     | 555    |   | $ | 2,035 |   | $ | 8,469 |   |
|                                                                                                                                   |   |                                  |   |   |   |   |   |
|                                                                                                                                   |   |                                  |   |   |   |   |   |
| Cash paid (refunded) during the year for:                                                                                              |   |                                  |   |   |   |   |   |
| Interest                                                                                                                               |   | $                                     | 20,100 |   | $ | 29,203 |   | $ | 25,166 |   |
| Income taxes, net                                                                                                                      |   | (2,131                                | )      | 3,856 |   | (6,426 | ) |
| Supplemental disclosures of non-cash activity:                                                                                         |   |                                  |   |   |   |   |   |
| Debt issued for capital lease obligation                                                                                               |   | 2,711                                 |   | — |   | 230 |   |
| Sale of business — note and preferred stock received                                                                              |   | —                                |   | 10,294 |   | — |   |
|                                                                                                                                   |   |                                  |   |   |   |   |   |

 

See accompanying notes.

 

42

----

 

**AFTERMARKETTECHNOLOGY CORP.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(In thousands, except share and per share data)**

 

 

 

**Note 1.  The Company**

The Company hastwo reportable segments in continuing operations: the DrivetrainRemanufacturing segment and the Logistics segment.  The Drivetrain Remanufacturing segment consists of five operatingunits that primarily sell remanufactured transmissions directly toDaimlerChrysler, Ford, General Motors and several foreign Original EquipmentManufacturers (“OEMs”), primarily for use as replacement parts by theirdomestic dealers during the warranty and post-warranty periods following thesale of a vehicle.  In addition, theDrivetrain Remanufacturing segment sells select remanufactured and newlyassembled engines to certain European OEMs, including Ford’s and GeneralMotors’s European operations and Jaguar. The Company’s Logistics segment is comprised of three operatingunits:  (i) a provider of value-addedwarehouse and distribution services, turnkey order fulfillment and informationservices for AT&T Wireless Services; (ii) a provider of returned materialreclamation and disposition services and core management services primarily toFord and to a lesser extent, General Motors; and (iii) an automotive electroniccomponents remanufacturing and distribution business, primarily for Delphi andVisteon.  The Company’s Engines businessunit, which is not a reportable segment and shown as “Other”, remanufacturesand distributes domestic and foreign engines from four regional distributioncenters primarily to independent aftermarket customers.  Establishedin 1994, the Company maintains manufacturing facilities and logisticsoperations in the United States and a manufacturing facility in the UnitedKingdom.

 

**Note2.  Summary of Significant AccountingPolicies**

*Principlesof Consolidation*

The accompanyingconsolidated financial statements include the accounts of the Company and itssubsidiaries.  All significantintercompany balances and transactions have been eliminated.

 

*Use of Estimates*

The preparation of the financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom those estimates.

 

*Cash and Cash Equivalents*

The Company considers all highly liquid investments with originalmaturities of three months or less to be cash equivalents.

 

*Inventories*

Inventories are stated at the lower of cost (first–in, first–outmethod) or market and consist primarily of new and used transmission parts,cores and finished goods.  Considerationis given to deterioration, obsolescence and other factors in evaluating theestimated market value of inventory based upon management’s judgment andavailable information.

 

*Property, Plant and Equipment*

Property, plant and equipment, including amounts capitalized undercapital leases, are stated at cost less accumulated depreciation.  Depreciation is computed using straight–linemethods over the estimated useful lives of the assets for financial reportingpurposes, as follows:  three to tenyears for machinery and equipment, three to six years for autos and trucks,three to ten years for furniture and fixtures and up to 49 years for buildingsand leasehold improvements. Depreciation and amortization expense was $8,991, $7,737 and $7,850 forthe years ended December 31, 2001, 2000 and 1999, respectively.

 

43

----

 

*Internal Use Computer Software*

The Company accounts for these costs in accordance with the provisionsof Statement of Position (“SOP”) 98-1, *Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use.*   Accordingly, the Company expenses costs incurred in thepreliminary stage and, thereafter, capitalizes costs incurred in developing orobtaining internal use software and Web site development.  Such capitalized costs are included inproperty, plant and equipment and are amortized over a period of not more thanfive years.

 

*Foreign Currency Translation*

The functional currency for the Company’s foreign operations is theapplicable local currency.  Accordingly,all balance sheet accounts have been translated using the exchange rates ineffect at the balance sheet date, and income statement amounts have beentranslated using the average exchange rates for the year.  The translation adjustments resulting fromthe changes in exchange rates have been reported separately as a component ofstockholders’ equity.  The effects oftransaction gains and losses, which were reported in income, were not materialfor the periods presented.

 

*Debt Issuance Costs*

Debt issuance costs incurred in connection with the sale of the SeniorNotes (see Note 9) and the Old Credit Facility (see Note 8) are being amortizedover the life of the respective debt using a method which approximates theinterest method.  Debt issuance costs are reflected netof accumulated amortization of $5,962 and $4,608 at December 31, 2001 and2000, respectively.

 

*Cost in Excess of Net Assets Acquired*

The excess of cost over the fairmarket value of the net assets of businesses acquired (goodwill) is amortizedon a straight–line basis over 40 years. Cost in excess of net assets acquired is reflected net of accumulatedamortization of $27,961 and $22,999 at December 31, 2001 and 2000,respectively.  See “*New Accounting Standards*” below.

 

*Other Assets — Long Term*

As part of the proceeds from the sale of the ATC Distribution Group, Inc. (“Distribution Group”) (see Note 3), the Company received from the buyer(i) Series B preferred stock valued by the Company at $1,929 (statedvalue of $8,650 net of a valuation allowance of $6,721) and (ii) an 18% seniorsubordinated promissory note dated October27, 2000 (“18% Buyer Note”) with a principal amount of $10,050 and adiscounted value of $8,365.  The 18% Buyer Note, which matures on October28, 2005, bears interest at (i) 15% per annum compounded semi-annually due andpayable in arrears semi-annually on April 27 and October 27 of each year oruntil the principal amount is paid in full and (ii) 3% per annum compoundedsemi-annually due and payable in full at the earlier of the maturity date orthe date on which the principal amount is paid in full.  During the years ended December 31, 2001 and2000, $1,515 and $228 of interest income was recorded on the 18% Buyer Note,respectively.  The 18% Buyer Note isclassified as a part of other assets in the accompanying balance sheet.  During 2001, the Company sold the SeriesB preferred stock to the buyer for proceedsof $2,860, and recorded a gain of $931 on the sale of the stock.

 

*Impairment of Long-Lived and Intangible Assets*

Long-lived assetsand identifiable intangibles (including related cost in excess of net assetsacquired) are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of the related asset may not berecoverable.  Recoverability of assetsto be held and used is measured by a comparison of the carrying amount of theasset to future undiscounted cash flows expected to be generated by theasset.  If the asset is determined to beimpaired, the impairment recognized is measured by the amount by which thecarrying value of the asset exceeds its fair value.

 

 

44

----

 

*Concentration of Credit Risk*

Financial instruments that potentially subject the Company to asignificant concentration of credit risk consist of accounts receivable fromits customers including DaimlerChrysler, Ford, General Motors and AT&TWireless Services, which are located throughout the United States and, to alesser extent, the United Kingdom. The credit risk associated with theCompany’s accounts receivable is mitigated by its credit evaluation process,although collateral is not required. The Company grants credit to certain customers who meet pre–establishedcredit requirements.

 

Accounts receivable is reflected net of an allowance for doubtful accountsof $1,207 and $1,624 at December 31, 2001 and 2000, respectively.

 

*Revenue Recognition*

Revenues are recognized at thetime of shipment to the customer, which is generally when title passes or asservices are performed.

 

*Warranty Cost Recognition*

The Company accrues for estimated warranty costs as sales are made.

 

*Stock- Based Compensation*

The Company has elected to follow APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations inaccounting for the stock options granted to employees and directors.  Accordingly, employee and directorcompensation expense is recognized only for those options whose price is lessthan fair market value at the measurement date.  The Company has adopted the disclosure-only provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123, *Accountingfor Stock-Based Compensation*.

 

*New Accounting Standards*

In June 2001, theFinancial Accounting Standards Board issued SFAS No. 141, *Business Combinations*, and SFAS No. 142, *Goodwill and Other Intangible Assets*.

SFAS No. 141 requires that the purchase method ofaccounting be used for all business combinations initiated after June 30, 2001.  Use of the pooling-of-interests method is nolonger permitted.  SFAS No. 141 alsoincludes guidance on the initial recognition and measurement of goodwill andother intangible assets acquired in a business combination that is completedafter June 30, 2001.  The Company is required to adopt SFASNo. 141 effective January 1, 2002. The initial adoption of SFAS No. 141 is not expected to have asignificant effect on the Company’s results of operations or its financialposition.

SFAS No. 142 no longer permits the amortization ofgoodwill and indefinite-lived intangible assets.  Instead, these assets must be reviewed annually (or morefrequently under certain conditions) for impairment in accordance with SFAS No.142.  This impairment test uses a fairvalue approach rather than the undiscounted cash flows approach previouslyrequired by SFAS No. 121, *Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of*.  Intangible assets that do not haveindefinite lives will continue to be amortized over their useful lives andreviewed for impairment in accordance with SFAS No. 121.  The Company is required to adopt SFAS No.142 effective January 1, 2002.  Theeffect of not amortizing goodwill is expected to result in an increase to incomefrom operations in fiscal 2002 of approximately $5.0 million.  The adoption of the impairment provisions ofSFAS No. 142 is not expected to have a significant effect on the Company’sresults of operations or its financial position.

 

*Reclassifications*

Certain prior–yearamounts have been reclassified to conform to the 2001 presentation.

 

45

----

 

**Note 3: Discontinued Independent Aftermarket Segment**

 

On August 3, 2000, the Company adopted a plan to discontinue theIndependent Aftermarket segments of its business, which contained (i) theDistribution Group, a distributor of remanufactured transmissions and relateddrivetrain components to independent aftermarket customers, and (ii) theCompany’s domestic remanufactured engines business (“Engines”) whichremanufactured and distributed engines primarily through a branch distributionnetwork to independent aftermarket customers. In accordance with SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information*, the Companyhad aggregated the Distribution Group and Engines segments.  Because the measurement date fordiscontinuance of the Independent Aftermarket segments (the “Measurement Date”)occurred prior to issuance of the Company’s June 30, 2000 interim financialstatements, the discontinued operations presentation was first shown on thosesecond quarter and year-to-date condensed interim financial statements.  At the Measurement Date, the Company plannedto sell the Distribution Group by December 31, 2000 and planned to restructureEngines, return it to profitability and position it for sale by June 30, 2001.

Sale of the DistributionGroup

On October 27, 2000, the Company consummated the sale of all theoutstanding capital stock of the Distribution Group to ATCDG Acquisition Corp.,Inc. (“Buyer”), an indirect wholly owned subsidiary of Aceomatic-Recon HoldingsCorporation, which is an affiliate of The Riverside Company.  The purchase price for the stock of theDistribution Group was comprised of $60,079 in cash (as calculated on October27, 2000), Series B preferred stock of Buyer valued by the Company at $1,929(stated value of $8,650 net of a valuation allowance of $6,721) and an 18%senior subordinated promissory note of Buyer with a principal amount of $10,050and a discounted value of $8,365.  Thecash purchase price was subject to an increase or decrease if it was determinedthat the Distribution Group’s net working capital as of the closing date wasabove or below a specified target amount. On June 29, 2001, Buyer and the Company agreed upon the DistributionGroup’s actual net working capital as of the closing date.  As a result, the purchase price for the saleof the Distribution Group was reduced by $3,675.

Discontinued Operations Subsequently Retained

The Company’srestructuring of Engines, which (i) eliminated its 21 branch distributionnetwork and replaced it with a business model that sells and distributesremanufactured engines directly to independent aftermarket customers on an overnightdelivery basis from four regional distribution centers, (ii) applied leanmanufacturing techniques to improve productivity and reduce manufacturing costand (iii) significantly improved product quality to reduce product warrantycost, was successful in returning this business to profitability.  However, efforts to identify an interestedbuyer placing sufficient value on this business were unsuccessful.  Consequently, on June 25, 2001, the Companyelected to retain Engines.

As a result of this decision and in accordance withEmerging Issues Task Force (“EITF”) No. 90-16, *Accountingfor Discontinued Operations Subsequently Retained*, the Company hasreclassified the results of operations for Engines from discontinued operationsto continuing operations for all periods presented.

At June 30, 2001, thedate the Company reported the re-continuance of Engines, and December 31, 2000,the net assets of Engines were as follows:

 

|                               |   | **June 30, 2001** |   | **December 31, 2000** |   |
|------------------------------------|--------|-------------------|--------|-----------------------|--------|
| Accounts receivable, net           |   | $                 | 3,650  |                  | $      | 2,952 |   |
| Inventories                        |   | 10,723            |   | 11,966                |   |
| Other current assets               |   | 313               |   | 355                   |   |
| Property, plant and equipment, net |   | 1,981             |   | 2,206                 |   |
| Other long-term assets             |   | 261               |   | —                |   |
| Accounts payable                   |   | (2,401            | )      | (52                   | )      |
| Accrued expenses                   |   | (4,527            | )      | (7,427                | )      |
| Net Assets                         |   | $                 | 10,000 |                  | $      | 10,000 |   |

 

46

----

 

For the years ended December 31, 2001, 2000 and 1999, selectedoperating results of Engines were as follows:

 
|                                     |   | **For the  years ended December 31,** |   |
|------------------------------------------|--------|---------------------------------------|--------|
|                                     |   | **2001**                              |   | **2000** |   | **1999** |   |
| Net sales                                |   | $                                     | 21,868 |   | $ | 29,136 |   | $ | 37,539 |   |
| Special charges                          |   | —                                |   | 32,584 |   | 3,333 |   |
| Income (loss)  from operations           |   | 1,694                                 |   | (37,537 | ) | (5,973 | ) |
| Income (loss) from continuing operations |   | 777                                   |   | (24,040 | ) | (4,288 | ) |
|                                          |        |                                       |        |  |  |  |  |  |  |  |

 

At June 30, 2001, thedate the Company reported the re-continuance of Engines, the Companyreclassified $32,584 (see Note 19) of expense for the period ended June 30,2000 related to Engines from loss on discontinued operations to specialcharges, including (i) $3,783 of product warranty costs for unitsremanufactured and sold prior to 2000, (ii) $1,175 of restructuring charges and (iii) a loss of $27,626 related tothe impairment and write-down of certain assets to their estimated netrealizable value which included the following components:
| Impairment of cost in excess of  net assets acquired       |   | $     | 15,614 |   |
|------------------------------------------------------------|--------|-------|--------|--------|
| Impairment of fixed assets                                 |   | 5,790 |   |
| Write-down of inventory                                    |   | 5,351 |   |
| Write-down of un-collectible accounts receivable  balances |   | 871   |   |
|                                                       |   | $     | 27,626 |   |

 

Discontinued Operations

On the Measurement Date, the Company estimated a pre-tax loss ondisposal of the Independent Aftermarket segments of $174,013.  As a result of the Company’s decision toretain Engines, the Company reclassified the Engines operating loss of $32,584from discontinued operations to continuing operations as of June 30, 2000.   As adjusted for the Engines reclass of$32,584, the estimated pre-tax loss of $141,429 for disposal of discontinuedoperations included the following: (i) estimated loss on disposal of theDistribution Group business of $138,823, which included a provision foranticipated losses of $10,779 from the Measurement Date until disposal, thewrite-off of previously allocated goodwill, provisions for the valuation ofcertain assets, and anticipated costs of disposal including lease terminations,severance, retention and other employee benefits, professional fees and othercosts directly associated with the discontinuance; and (ii) estimated provisionfor loss on disposal of Engines of $2,606.

During 2001, based upon (i) the $3,675 net working capital adjustmentto the purchase price, (ii) the actual operating results of the DistributionGroup between the Measurement Date and disposal and (iii) the current estimateof the remaining obligations and other costs related to the sale of theDistribution Group, the Company increased the estimated pre-tax loss ondisposal by $2,710.  Additionally, onJune 30, 2001, in accordance with EITF No. 90-16, the Company reversed intoincome $2,113, the remaining estimated accrued loss on disposal of Engines.

The estimated loss on the sale of the Distribution Group and the actuallosses from discontinued operations incurred since the Measurement Date wereapplied against the accrued loss established effective with the MeasurementDate.  The accrual balance as of December31, 2001 and 2000 of $1,375 and $8,125, respectively, classified as liabilitiesof discontinued operations, represents the estimate of the remainingobligations and other costs related to the sale of the Distribution Group.

The consolidated statements of operations have been reclassified toreport the operating results of the Distribution Group business as discontinuedoperations and, accordingly, such results have been excluded from continuingoperations for all periods presented. Net sales from the Distribution Group business were $172,814 and$199,402 for the years ended December 31, 2000 and 1999, respectively.  Interest expense for the year ended December31, 2000 of $5,188 has been allocated to the discontinued operations based onthe actual consideration received from the sale of the Distribution Group.  Interest expense for the year ended December31, 1999 of $3,332 has been allocated to the discontinued operations based onthe actual consideration received from the sale of the Distribution Group, lessthe amount of debt attributable to the acquisition of All Trans (part of theDistribution Group) in the fourth quarter of 1999.

 

47

----

 

Details of theloss recorded from discontinued operations, net of the reclassification of theEngines discontinued operations to continuing operations, are as follows:

 
|                                                                      |   | **For the  years ended December 31,** |   |
|---------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                      |   | **2001**                              |   | **2000** |   | **1999** |   |
| Loss from operations                                                      |   | $                                     | — |   | $ | 9,429 |   | $ | 15,563 |   |
| Income tax benefit                                                        |   | —                                |   | (3,061 | ) | (5,594 | ) |
| Loss from operations, net of income taxes                                 |   | —                                |   | 6,368 |   | 9,969 |   |
| Estimated loss  from disposal                                             |   | 597                                   |   | 141,429 |   | — |   |
| Reclassification  of discontinued operations to continuing operations (1) |   | 961                                   |   | (2,403 | ) | — |   |
| Income tax  benefit                                                       |   | (599                                  | )      | (46,105 | ) | — |   |
| Loss from  disposal (net), net of income taxes                            |   | 959                                   |   | 92,921 |   | — |   |
| Loss from discontinued operations (net), net of  income taxes             |   | $                                     | 959    |   | $ | 99,289 |   | $ | 9,969 |   |

----

**(1) Represents thereclassification of the operating results for Engines from discontinuedoperations to continuing operations as required per EITF No. 90-16.**

 

**Note 4.  Related–PartyTransactions**

At December 31, 2001 and 2000,amounts due to sellers of acquired companies and deferred compensation consistof additional purchase price payable to former owners and certain officers andemployees of ATS Remanufacturing (“ATS”), acquired in 1997. The ATSacquisition requires subsequent payments due on each of the first eightanniversaries and the fifth through 14th anniversaries of theclosing date to the seller and certain other key officers and employees of ATS,respectively.  Through December 31,2001, the Company had made aggregate payments of $4,410 related to the ATSacquisition.  Substantially all of theremaining payments to be made in the future, which will aggregate toapproximately $14,560 (present value $13,077 as of December 31, 2001), arecontingent upon the attainment of certain sales levels by ATS, which theCompany believes has a substantial likelihood of being attained.   Amounts are payable through 2011.

During 1999, the Companyreceived fees totaling $1,229 from The Fred Jones Companies, Inc., the formerowner of Autocraft, for computer systems support services provided by theCompany.  In addition, during 1999, theCompany sold $63 of products to certain automobile dealerships owned by alimited liability company in which The Fred Jones Companies has a significantequity interest.  Fred Hall, a formerdirector of the Company, is Chairman, President, Chief Executive Officer and asignificant stockholder of The Fred Jones Companies.  Since 1999, the Company continued to have transactions with TheFred Jones Companies, Inc., but it is no longer considered a related party asFred Hall left his position on the Board of Directors of the Company during 1999.

Aurora Capital Partners (“ACP”), which controls theCompany’s largest stockholders, charged to the Company $750 and $800 in feesfor investment banking services provided in connection with companies acquiredor divested in 2000 and 1999, respectively. The amounts charged by to ACP in 2000 and 1999 were associated with theDistribution Group and are presented as discontinued operations in theaccompanying financial statements.  Nosuch amounts were charged to the Company in 2001. In addition, ACP was paidmanagement fees of $549, $549 and $596 in 2001, 2000 and 1999,respectively.  The Company reimbursesACP for out-of-pocket expenses incurred in connection with providing managementservices.  ACP is also entitled tovarious additional fees depending on the Company’s profitability or certainsignificant corporate transactions.  Nosuch additional fees were paid in 2001, 2000 or 1999.

As part of the stock purchase agreement between theCompany and the Buyer of the Distribution Group, the Company received fees forinformation systems services provided to Buyer.  The Company received $255 and $11 for such services during theyear ended December 31, 2001 and 2000, respectively.  The information systems service agreement between the Company andthe Buyer expired on March 31, 2001.  Inaddition, pursuant to the 18% Buyer Note, interest of $1,508 was received bythe Company during the year ended December 31, 2001.

48

----

 

**Note 5.  Inventories**

             Inventories of continuing operationsconsist of the following:

 

|                                       |   | **December 31,** |   |
|--------------------------------------------|--------|-----------------------|--------|
|                                       |   | **2001**              |   | **2000** |   |
| Raw materials, including core  inventories |   | $                     | 50,851 |   | $ | 44,432 |   |
| Work-in-process                            |   | 1,342                 |   | 1,650 |   |
| Finished goods                             |   | 16,777                |   | 9,397 |   |
|                                       |   | $                     | 68,970 |   | $ | 55,479 |   |

 

 

**Note 6.  Property,Plant and Equipment**

             Property, plant and equipment ofcontinuing operations are summarized as follows:

 

|                                                   |   | **December 31,** |   |
|--------------------------------------------------------|--------|-----------------------|--------|
|                                                   |   | **2001**              |   | **2000** |   |
| Land                                                   |   | $                     | 2,036  |   | $ | 2,029 |   |
| Buildings                                              |   | 10,721                |   | 10,616 |   |
| Machinery and equipment                                |   | 52,495                |   | 44,072 |   |
| Autos and trucks                                       |   | 1,293                 |   | 1,325 |   |
| Furniture and fixtures                                 |   | 2,472                 |   | 2,641 |   |
| Leasehold improvements                                 |   | 12,063                |   | 10,712 |   |
| Construction in process                                |   | 4,282                 |   | 754 |   |
|                                                   |   | 85,362                |   | 72,149 |   |
| Less:   Accumulated depreciation and amortization |   | (32,785               | )      | (25,873 | ) |
|                                                   |   | $                     | 52,577 |   | $ | 46,276 |   |

 

 

Assetsrecorded under capital leases are included in property, plant and equipment as follows: 

|                                                   |   | **December 31,** |   |
|--------------------------------------------------------|--------|-----------------------|--------|
|                                                   |   | **2001**              |   | **2000** |   |
| Machinery and equipment                                |   | $                     | 2,354  |   | $ | 296 |   |
| Less:   Accumulated depreciation and amortization |   | (409                  | )      | (158 | ) |
|                                                   |   | $                     | 1,945  |   | $ | 138 |   |

 

49

----

 

**Note 7.  AccruedExpenses**

Accrued expenses of continuing operations are summarized as follows:

 

|                          |   | **December 31,** |   |
|-------------------------------|--------|-----------------------|--------|
|                          |   | **2001**              |   | **2000** |   |
| Payroll and related costs     |   | $                     | 10,187 |   | $ | 10,782 |   |
| Interest payable              |   | 6,161                 |   | 5,818 |   |
| Non-income related taxes      |   | 2,760                 |   | 2,851 |   |
| Warranty                      |   | 4,830                 |   | 3,474 |   |
| Restructuring and other costs |   | 3,915                 |   | 3,752 |   |
| Other                         |   | 11,243                |   | 7,334 |   |
|                          |   | $                     | 39,096 |   | $ | 34,011 |   |

 

**Note 8.  CreditFacility**

At December 31, 2001, theCompany had a credit facility with J.P. Morgan Chase, as agent (the “Bank”),comprised of a $130,000 term loan (the “Term Loan”) and a $100,000 line ofcredit (the “Revolver”) (collectively, the “Old Credit Facility”) to financethe Company’s working capital requirements and future acquisitions (see Note 21for a description of the new credit facility). Amounts advanced under the OldCredit Facility are secured by substantially all assets of the Company. Amountsoutstanding under the Term Loan are payable in quarterly installments throughDecember 31, 2003. Amounts advanced under the Revolver become due onDecember 31, 2003. The balance outstanding on the Term Loan as ofDecember 31, 2001 and 2000 was $29,400 and $44,100, respectively.  The Company may prepay outstanding advancesunder the Revolver or the Term Loan in whole or in part without incurring anypremium or penalty. The balance on the Revolver was $45,800 and $62,600 as ofDecember 31, 2001 and 2000, respectively. In addition, the Company had outstanding letters of credit issuedagainst the Old Credit Facility totaling $5,014 and $4,219 as ofDecember 31, 2001 and 2000, respectively.

At the Company’s election, amounts advanced under the Old CreditFacility will bear interest at either (i) the Alternate Base Rate plus aspecified margin, or (ii) the Eurodollar Rate plus a specified margin. The“Alternate Base Rate” is equal to the highest of (a) the Bank’s primerate, (b) the secondary market rate for three–month certificates ofdeposit plus 1.00% and (c) the federal funds rate plus 0.50%, in each caseas in effect from time to time. The “Eurodollar Rate” is the rate offered bythe Bank for Eurodollar deposits for one, two, three, six or, if available byall lenders, nine months (as selected by the Company). The applicable marginsfor both Alternate Base Rate and Eurodollar Rate loans are subject to aquarterly adjustment based on the Company’s leverage ratio as of the end of thefour fiscal quarters then completed. At December 31, 2001 and 2000, theAlternate Base Rate margin was 0.25% and 1.00%, respectively, and theEurodollar Rate margin was 1.75% and 2.00%, respectively.  Interest payments on advances that bearinterest based upon the Alternate Base Rate are due quarterly in arrears and onthe termination date, and interest payments on advances that bear interestbased upon the Eurodollar Rate are due on the last day of each relevantinterest period (or, if such period exceeds three months, quarterly after thefirst day of such period).  The averageinterest rate on the Old Credit Facility for the years ended December 31,2001, 2000 and 1999 was 6.63%, 8.75% and 7.70%, respectively.

The Company is required to pay the Bank quarterly in arrears acommitment fee equal to a per annum percentage of the average daily unusedportion of the Old Credit Facility during such quarter. The commitment issubject to a quarterly adjustment based on the Company’s leverage ratio as ofthe end of the four fiscal quarters then completed. At December 31, 2001and 2000, the quarterly commitment fee percentage was 0.375% and 0.500%,respectively. The Company must also reimburse the Bank for certain legal andother costs of the Bank and pay a fee on outstanding letters of credit at arate per annum equal to the applicable margin then in effect for advancesbearing interest at the Eurodollar Rate.

The Old CreditFacility contains several covenants, including ones that require the Company tomaintain certain levels of net worth, leverage and cash flow coverage, andothers that limit the Company’s ability to incur indebtedness, make capitalexpenditures, create liens, engage in mergers and consolidations, makerestricted payments (including dividends), sell assets, make investments andengage in transactions with affiliates of the Company and its subsidiaries.

 

50

----

 

Annual maturities of the Company’s Old Credit Facilityare as follows as of December 31, 2001:

| 2002   |   | $      | 14,700 |   |
|--------|--------|--------|--------|--------|
| 2003   |   | 60,500 |   |
|   |   | $      | 75,200 |   |

 

**Note 9.  12%Series B and D Senior Subordinated Notes**

The Company has outstanding 12%Series B and D Senior Subordinated Notes (the “Senior Notes”) in the aggregate principal amount of $110,385(see Note 21.)  Interest on theSenior Notes is payable semiannually on February 1 and August 1 ofeach year.  The Senior Notes will matureon August 1, 2004.  Beginning onAugust 1, 1999, and each anniversary date thereafter, the Senior Notes maybe redeemed at the option of the Company, in whole or in part, at the redemptionprices specified below, plus accrued and unpaid interest:

 

| **August 1,**       |   | **Redemption Price** |   |
|---------------------|--------|----------------------|--------|
| 2001                |   | 102                  | %      |
| 2002 and thereafter |   | 100                  |   |

 

In the event of a change incontrol, the Company would be required to offer to repurchase the Senior Notesat a price equal to 101% of the principal amount plus accrued and unpaidinterest.

The Senior Notes are generalobligations of the Company, subordinated in right of payment to all existingand future senior debt (including the Company’s Old Credit Facility). TheSenior Notes are guaranteed by each of the Company’s existing and futuresubsidiaries other than any subsidiary designated as an unrestricted subsidiary(as defined).  As of December 31, 2001,the Company had no unrestricted subsidiaries. The Company may incur additional indebtedness, including borrowings underits Old Credit Facility (see Note 8), subject to certain limitations ascontained in the Senior Notes indentures.

The indentures under which theSenior Notes were issued contain certain covenants that, among other things,limit the Company’s ability to incur additional indebtedness under certainconditions, issue disqualified capital stock, engage in transactions withaffiliates, incur liens, make certain restricted payments (includingdividends), make certain asset sales and permit certain restrictions on theability of its subsidiaries to make distributions.

 

**Note10.  Income Taxes**

Income tax expense (benefit) from continuing operations consists of thefollowing:

|           |   | **For the years ended December 31,** |   |
|----------------|--------|--------------------------------------|--------|
|           |   | **2001**                             |   | **2000** |   | **1999** |   |
| Current:       |   |                                 |   |   |   |   |   |
| Federal        |   | $                                    | 1,835  |   | $ | (819 | ) | $ | 7,844 |   |
| State          |   | 1,196                                |   | 185 |   | 782 |   |
| Foreign        |   | 81                                   |   | 70 |   | — |   |
| Total current  |   | 3,112                                |   | (564 | ) | 8,626 |   |
| Deferred:      |   |                                 |   |   |   |   |   |
| Federal        |   | 14,066                               |   | 2,486 |   | 1,550 |   |
| State          |   | 671                                  |   | 13 |   | (4 | ) |
| Foreign        |   | 249                                  |   | (52 | ) | (433 | ) |
| Total deferred |   | 14,986                               |   | 2,447 |   | 1,113 |   |
|           |   | $                                    | 18,098 |   | $ | 1,883 |   | $ | 9,739 |   |

 

 

51

----

 

In addition, the Company has recognized tax benefitsrelated to the exercise of certain non-qualified stock options and thedisposition of certain shares pursuant to Incentive Stock Options prior to theexpiration of the statutory holding period as an increase in stockholders’equity of $1,070, $411 and $64 for the years ended December 31, 2001, 2000and 1999, respectively.

 

The reconciliation of income tax expense computed atthe U.S. federal statutory tax rates to income tax expense from continuingoperations is as follows:

 
|                                            |   | **For the years ended December  31,** |   |
|-------------------------------------------------|--------|---------------------------------------|--------|
|                                            |   | **2001**                              |   | **2000** |   | **1999** |   |
|                                            |   | **Amount**                            |   | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   |
| Tax at U.S. statutory rates                     |   | $                                     | 16,670 |   | 35.0 | % | $ | 1,501 |   | 35.0 | % | $ | 9,280 |   | 35.0 | % |
| State income taxes, net of  federal tax benefit |   | 1,477                                 |   | 3.1 |   | 103 |   | 2.4 |   | 758 |   | 2.9 |   |
| Foreign income taxes                            |   | (130                                  | )      | (0.3 | ) | (495 | ) | (11.5 | ) | (740 | ) | (2.8 | ) |
| Nondeductible goodwill  amortization            |   | 236                                   |   | 0.5 |   | 232 |   | 5.4 |   | 235 |   | 0.9 |   |
| Nondeductible expenses                          |   | 131                                   |   | 0.3 |   | 503 |   | 11.7 |   | 61 |   | 0.2 |   |
| Other                                           |   | (286                                  | )      | (0.6 | ) | 39 |   | 0.9 |   | 145 |   | 0.5 |   |
|                                            |   | $                                     | 18,098 |   | 38.0 | % | $ | 1,883 |   | 43.9 | % | $ | 9,739 |   | 36.7 | % |

Deferred incometaxes reflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilitiesare as follows: 

|                                                 |   | **December 31,** |   |
|------------------------------------------------------|--------|------------------|--------|
|                                                 |   | **2001**         |   | **2000** |   |
| Deferred tax assets:                                 |   |             |   |   |   |
| Inventory obsolescence reserve                       |   | $                | 868    |   | $ | 464 |   |
| Property, plant and equipment                        |   | 94               |   | — |   |
| Product warranty accruals                            |   | 1,970            |   | 1,538 |   |
| Special charge accruals                              |   | 2,421            |   | 2,030 |   |
| Other accruals and deferrals                         |   | 3,119            |   | 2,889 |   |
| Discontinued operations reserve                      |   | 524              |   | 12,254 |   |
| AMT credit carryforward                              |   | 739              |   | — |   |
| Net operating losses (excluding valuation allowance) |   | 42,042           |   | 49,186 |   |
| Total deferred tax assets                            |   | 51,777           |   | 68,361 |   |
| Deferred tax liabilities:                            |   |             |   |   |   |
| Amortization of intangible  assets                   |   | 9,720            |   | 12,485 |   |
| Property, plant and equipment                        |   | —           |   | 1,388 |   |
| Other accruals and deferrals                         |   | 867              |   | 545 |   |
| Total deferred tax liabilities                       |   | 10,587           |   | 14,418 |   |
| Valuation allowance                                  |   | (9,092           | )      | (9,187 | ) |
| Net deferred tax asset                               |   | $                | 32,098 |   | $ | 44,756 |   |

 

As of December 31,2001, the Company had Federal and State loss carryforwards of approximately$89,249.  These loss carryforwards areavailable as an offset to the future taxable income of the Company and itssubsidiaries.  The Federal loss carryforwardexpires in 2020, and the state loss carryforwards expire in varying amountsfrom 2004 to 2021.  The Company also hasAlternative Minimum Tax (“AMT”) credit carryforwards of approximately $739available to offset regular income tax payable in future years.  The Company, through its subsidiary in theU.K., has surplus Advance Corporate Tax (“ACT”) of approximately $325 availableas a direct offset to future U.K. tax liability.  The Company’s AMT and surplus ACT can be carried overindefinitely.

A valuation allowance has been established for the taxbenefits associated with certain state loss carryforwards because, due to thelimitations imposed by certain states on the Company’s ability to utilize thesebenefits, realization is not deemed likely. A valuation allowance has also been established for certain foreign taxbenefits due to similar limitations imposed by the foreign tax jurisdiction.During 2001, the valuation allowance decreased $95 from $9,187 to $9,092.  This decrease is attributable to theCompany’s utilization of Surplus ACT to offset its 2001 UK tax liability.  The Company believes that, consistent withaccounting principles generally accepted in the United States, it is morelikely than not that the tax benefits associated with the balance of losscarryforwards and other deferred tax assets will be realized through futuretaxable earnings or alternative tax strategies.

 

52

----

 

**Note 11.  Stock Options and Warrants**

             The Company provides stock optionsto employees, non-employee directors and independent contractors under its 2000Stock Incentive Plan (the “2000 Plan”), its 1998 Stock Incentive Plan (the“1998 Plan”) and its 1996 Stock Incentive Plan (the “1996 Plan”) (collectivelythe “Plans”).  The Plans provide forgranting of non-qualified and incentive stock option awards.  Options under the Plans are generallygranted at fair value and vest over a period of time to be determined by theBoard of Directors, generally from three to five years.  Options under the Plans expire 10 years fromthe date of grant.  The Company hasreserved 750,000, 1,200,000 and 2,400,000 shares of common stock under the2000, 1998 and 1996 Plans, respectively. Options available for grant under the Plans were 154,314, 714,683 and249,355 as of December 31, 2001, 2000 and 1999, respectively.

A summary of the statusof the Company’s option plans are presented below:
|                                                            |   | **2001**   |   | **2000**                                |   | **1999**   |      |
|-----------------------------------------------------------------|--------|------------|--------|-----------------------------------------|--------|------------|-----------|
|                                                            |   | **Shares** |   | **Weighted -****AverageExercise Price** |   | **Shares** |      | **Weighted -   Average   Exercise Price** |   | **Shares** |   | **Weighted - Average   Exercise Price** |   |
| Outstanding at beginning of year                                |   | 2,006,819  |   | $                                       | 8.36   |       | 1,918,675 |   | $ | 7.43 |   | 1,843,920 |   | $ | 7.46 |   |
| Granted                                                         |   | 744,000    |   | $                                       | 5.96   |       | 763,950   |   | $ | 10.93 |   | 544,500 |   | $ | 8.05 |   |
| Exercised                                                       |   | (340,965   | )      | $                                       | 5.60   |       | (196,528  | ) | $ | 2.21 |   | (200,996 | ) | $ | 3.11 |   |
| Canceled                                                        |   | (183,631   | )      | $                                       | 10.24  |       | (479,278  | ) | $ | 11.26 |   | (268,749 | ) | $ | 12.18 |   |
| Outstanding at end of year                                      |   | 2,226,223  |   | $                                       | 7.82   |       | 2,006,819 |   | $ | 8.36 |   | 1,918,675 |   | $ | 7.43 |   |
|                                                            |   |       |   |                                    |   |       |      |   |   |   |   |   |   |
| Exercisable at end of year                                      |   | 1,003,817  |   | $                                       | 7.85   |       | 976,798   |   | $ | 6.14 |   | 874,083 |   | $ | 5.40 |   |
|                                                            |   |       |   |                                    |   |       |      |   |   |   |   |   |   |
| Weighted-average fair value of  options granted during the year |   |       |   | $                                       | 4.07   |       |      |   | $ | 8.44 |   |   |   | $ | 6.07 |   |

 

The following summarizes information about options outstanding as ofDecember 31, 2001:
|                          |              | ***Options  Outstanding*** |    | ***Options  Exercisable***        |      |
|-------------------------------|-------------------|---------------------------------|---------|----------------------------------------|-----------|
| **Range of  Exercise Prices** |              | **Shares**                      |    | **Average Remaining Contractual Life** |      | **Weighted -****AverageExercisePrices** |   | **Shares** |   | **Weighted -****AverageExercisePrices** |   |
| $                             | 4.43—$5.00   |                            | 517,500 |                                   | 6.6 years |   | $ | 4.87 |   | 398,167 |   | $ | 4.97 |   |
| $                             | 5.01—$6.00   |                            | 745,500 |                                   | 8.8 years |   | $ | 5.09 |   | 153,667 |   | $ | 5.20 |   |
| $                             | 6.01—$9.00   |                            | 157,992 |                                   | 7.5 years |   | $ | 8.84 |   | 42,682 |   | $ | 8.84 |   |
| $                             | 9.01—$13.00  |                            | 659,143 |                                   | 7.8 years |   | $ | 10.82 |   | 342,572 |   | $ | 10.49 |   |
| $                             | 13.01—$19.00 |                            | 146,088 |                                   | 6.9 years |   | $ | 17.62 |   | 66,729 |   | $ | 16.94 |   |
|                          |              | 2,226,223                       |    | 7.8 years                              |      | $ | 7.82 |   | 1,003,817 |   | $ | 7.85 |   |

 

             During 1994, the Company issued warrants to purchase421,056 shares of common stock at $1.67 per share, the fair value of the commonstock on the date of grant.  Thewarrants are exercisable through 2004. During the years ended December 31, 2001 and 2000, in cashlesstransactions, 210,528 and 140,352 of these warrants were exercised and 181,921and 114,218 shares of the Company’s common stock were issued, respectively.

 

53

----

 

             Had compensation costfor the Company’s Plans been determined in accordance with SFAS No. 123,*Accountingfor Stock-Based Compensation*, the Company’s reported net income andearnings per share would have been adjusted to the pro forma amounts indicatedbelow: 
|                                      |   | **For the years ended December  31,** |   |
|-------------------------------------------|--------|---------------------------------------|--------|
|                                      |   | **2001**                              |   | **2000** |   | **1999** |   |
| Income (loss) from continuing operations: |   |                                  |   |   |   |   |   |
| As reported                               |   | $                                     | 29,527 |   | $ | 2,406 |   | $ | 16,776 |   |
| Pro forma                                 |   | 27,133                                |   | (470 | ) | 13,653 |   |
| Basic earnings (loss) per common share:   |   |                                  |   |   |   |   |   |
| As reported                               |   | $                                     | 1.44   |   | $ | 0.12 |   | $ | 0.82 |   |
| Pro forma                                 |   | 1.32                                  |   | (0.02 | ) | 0.67 |   |

             The fair value of each option grant is estimated on thedate of grant using the Black-Scholes option-pricing model with the followingweighted-average assumptions:

|                     |   | **For the years ended December  31,** |   |
|--------------------------|--------|---------------------------------------|--------|
|                     |   | **2001**                              |   | **2000** |   | **1999** |   |
| Expected volatility      |   | 86.37                                 | %      | 87.90 | % | 72.17 | % |
| Risk-free interest rates |   | 4.50                                  | %      | 6.25 | % | 5.75 | % |
| Expected lives           |   | 4.6 years                             |   | 5.2 years |   | 7.9 years |   |

 

The Company hasnot paid and does not anticipate paying dividends; therefore, the expecteddividend yield is assumed to be zero.

 

**Note 12.  Common andPreferred Stock**

On January 8,2001, the Company, together with certain members of management and directors ofthe Company, certain principals and affiliates of the Aurora Capital Group andcertain other shareholders of the Company, commenced a program for the purchaseof up to 1,850,000 shares of the Company’s common stock.  Such purchases may be made from time to timein the open market, through privately negotiated transactions or through blockpurchases.  As of December 31,2001, 1,364,200 shares of the Company’s common stock were purchased under theprogram, of which 439,337 shares at an average price of $5.33 per share werepurchased by the Company.

 

On December 20, 2001, the Company filed a registration statement for thesale of 6,000,000 shares of its common stock. The common stock offeringincludes 3,600,000 shares to be offered by selling stockholders of the Companyand 2,400,000 new shares to be offered by the Company.  (See Note 21 — Subsequent Events.)

 

**Note13:  Derivative Financial Instruments**

OnJanuary 1, 2001, the Company adopted SFAS No. 133, *Accounting for Derivative Instrumentsand Hedging Activities* (as amended by SFAS No. 137 and 138) whichrequires that all derivative instruments be recorded on the balance sheet attheir fair value.  Changes in the fairvalue of derivatives are recorded each period in current earnings or othercomprehensive loss, depending on whether a derivative is designated a part of ahedge and, if it is, the type of hedge transaction.  For derivatives qualifying as hedges of future cash flows, theeffective portion of changes in fair value is recorded temporarily in equity,then recognized in earnings along with the related effects of the hedgeditems.  Any ineffective portion of ahedge is reported in earnings as it occurs.

The Company uses aninterest rate swap to convert a portion of its variable rate debt to fixed ratedebt to reduce interest rate volatility risk. The swap is based on a notional amount of $15,000 at the fixed interestrate of 5.95% during its term and is scheduled to mature during July 2003.  The fair value the swap is based on theestimated current settlement cost.  Inaccordance with SFAS No. 133, the Company has designated its swap agreement asa cash flow hedge and recorded the fair value of this hedge agreement as partof other comprehensive loss.   AtJanuary 1, 2001, the Company’s financial statements were adjusted to record acumulative effect of adopting this accounting change as an addition to otherlong-term liabilities of $45, and an increase to other comprehensive loss inthe amount of $28 (net of income tax benefit of $17).  For the year ended December 31, 2001, the effective portion ofchanges in fair value of this derivative amounted to $636 and is recorded as anaddition to other long-term liabilities and an increase to other comprehensiveloss in the amount of $391 (net of income tax benefit of $245).  The fair value of this derivative as aliability amounted to $681 at December 31, 2001.

 

54

----

 

**Note 14.  Earnings Per Share**

** **

The following table sets forththe computation of basic and diluted earnings per share from continuingoperations:

 
|                                              |   | **For the years ended December 31,** |   |
|---------------------------------------------------|--------|--------------------------------------|--------|
|                                              |   | **2001**                             |   | **2000** |   | **1999** |   |
| Numerator:                                        |   |                                 |   |   |   |   |   |
| Income from continuing operations                 |   | $                                    | 29,527 |   | $ | 2,406 |   | $ | 16,776 |   |
|                                              |   |                                 |   |   |   |   |   |
| Denominator:                                      |   |                                 |   |   |   |   |   |
| Weighted-average common shares outstanding        |   | 20,503,936                           |   | 20,663,102 |   | 20,324,640 |   |
| Effect of dilutive securities:                    |   |                                 |   |   |   |   |   |
| Employee stock options and warrants               |   | 554,637                              |   | 500,387 |   | 838,961 |   |
| Denominator for diluted earnings per common share |   | 21,058,573                           |   | 21,163,489 |   | 21,163,601 |   |
|                                              |   |                                 |   |   |   |   |   |
| Basic earnings per common share                   |   | $                                    | 1.44   |   | $ | 0.12 |   | $ | 0.82 |   |
| Diluted earnings per common share                 |   | 1.40                                 |   | 0.11 |   | 0.79 |   |

 

**Note15.  Employee Retirement Plans**

The Company’s defined contribution plans providesubstantially all U.S. salaried and hourly employees of the Company anopportunity to accumulate personal funds for their retirement, subject tominimum duration of employment requirements. Contributions are made on a before-tax basis to substantially all ofthese plans.

As determined by the provisionsof each plan, the Company matches a portion of the employees’ basic voluntarycontributions. Company matching contributions to the plans were approximately$1,511, $998 and $1,003 for the plan years ending in 2001, 2000 and 1999,respectively.

In addition, the Company’ssubsidiary located in the U.K. provides a voluntary retirement benefits planfor its employees.  Company matchingcontributions to this plan were approximately $329, $291 and $414 for the yearsended December 31, 2001, 2000 and 1999, respectively.

**Note 16.  Commitmentsand Contingencies**

The Company leases certainfacilities and equipment under various capital and operating lease agreements,which expire on various dates through 2009. Facility leases that expire generally are expected to be renewed orreplaced by other leases.  Futureminimum rental commitments under non-cancelable capital leases and operatingleases with terms in excess of one year are as follows:

 
| **For the years ended December 31,** |   | **Capital** |   | **Operating** |   |
|-------------------------------------------|--------|-------------|--------|---------------|--------|
|                                      |   | **Leases**  |   | **Leases**    |   |
| 2002                                      |   | $           | 1,204  |          | $      | 8,221 |   |
| 2003                                      |   | 667         |   | 6,774         |   |
| 2004                                      |   | 279         |   | 4,817         |   |
| 2005                                      |   | —      |   | 3,726         |   |
| 2006                                      |   | —      |   | 3,041         |   |
| 2007 and thereafter                       |   | —      |   | 4,189         |   |
| Total minimum lease payments              |   | 2,150       |   | $             | 30,768 |   |
| Less:  Amount  representing interest |   | (132        | )      |          |   |
| Present value of minimum lease payments   |   | $           | 2,018  |          |   |   |

 

55

----

 

Rent expense for all operatingleases approximated $8,231, $7,908 and $7,377 for the years endedDecember 31, 2001, 2000 and 1999, respectively.

 

The Company is subject to various evolving federal,state, local and foreign environmental laws and regulations governing, amongother things, emissions to air, discharge to waters and the generation,handling, storage, transportation, treatment and disposal of a variety ofhazardous and non–hazardous substances and wastes. These laws andregulations provide for substantial fines and criminal sanctions for violationsand impose liability for the costs of cleaning up, and damages resulting from,past spills, disposals or other releases of hazardous substances.

 

In connection with the acquisition of certainsubsidiaries, some of which have been subsequently divested or relocated, theCompany conducted certain investigations of these companies’ facilities andtheir compliance with applicable environmental laws. The investigations, whichincluded Phase I assessments by independent consultants of all manufacturingand various distribution facilities, found that a number of these facilitieshave had or may have had releases of hazardous materials that may requireremediation and also may be subject to potential liabilities for contaminationfrom off-site disposal of substances or wastes. These assessments also foundthat reporting and other regulatory requirements, including waste management procedures,were not or may not have been satisfied. Although there can be no assurance,the Company believes that, based in part on the investigations conducted, inpart on certain remediation completed prior to or since the acquisitions, andin part on the indemnification provisions of the agreements entered into inconnection with the Company’s acquisitions, the Company will not incur anymaterial liabilities relating to these matters.

 

One of the Company’s former subsidiaries, RPM, leasedseveral facilities in Azusa, California located within what is now the BaldwinPark Operable Unit of the San Gabriel Valley Superfund Site. The entity thatleased the facilities to RPM has been identified by the United StatesEnvironmental Protection Agency, or EPA, as one of approximately nineteenpotentially responsible parties, or PRPs, for environmental liabilitiesassociated with the Superfund Site. The Federal Comprehensive EnvironmentalResponse, Compensation, and Liability Act of 1980, as amended (CERCLA orSuperfund) provides for cleanup of sites from which there has been a release orthreatened release of hazardous substances, and authorizes recovery of relatedresponse costs and certain other damages from PRPs. PRPs are broadly definedunder CERCLA, and generally include present owners and operators of a site andcertain past owners and operators. As a general rule, courts have interpretedCERCLA to impose strict, joint and several liability upon all persons liablefor cleanup costs. As a practical matter, however, at sites where there aremultiple PRPs, the costs of cleanup typically are allocated among the PRPsaccording to a volumetric or other standard. The EPA has preliminarilyestimated that it will cost between $150 million and $200 million to constructand to operate for an indefinite period an interim remedial groundwater pumpingand treatment system for the part of the San Gabriel Valley Superfund sitewithin which RPM’s facilities, as well as those of many other potentiallyresponsible parties, are or were located. The actual cost of this remedialaction could vary substantially from this estimate, and additional costsassociated with this Superfund site are likely to be assessed. RPM moved allmanufacturing operations out of the San Gabriel Valley Superfund site area in1995. Since July 1995, RPM’s only real property interest in this area has beenthe lease of a 6,000 square foot storage and distribution facility. Theacquisition agreement by which the Company acquired the assets of RPM in 1994and the leases pursuant to which the Company leased RPM’s facilities after itacquired the assets of RPM expressly provide that the Company did not assumeany liabilities for environmental conditions existing on or before the closingof the acquisition, although the Company could become responsible for thoseliabilities under various legal theories. The Company is indemnified againstany such liabilities by the company that sold RPM to it as well as theshareholders of that company. There can be no assurance, however, that theCompany would be able to make any recovery under any indemnificationprovisions. Since the closing of the acquisition, the Company has been engagedin negotiations with the EPA to settle any liability that it may have for thissite. Although there can be no assurance, the Company believes that it will notincur any material liability as a result of RPM’s lease of properties withinthe San Gabriel Valley Superfund site.

 

In connection with the sale of the Distribution Group(the “DG Sale”) on October 27, 2000 (see Note 3), the Company hasagreed to certain matters with Buyer that could result in contingent liabilityto the Company in the future.  Theseinclude the Company’s indemnification of Buyer against (i) environmentalliability at former Distribution Group facilities that had been closed prior tothe DG Sale, including the former manufacturing facility in Azusa, Californiawithin the Superfund site mentioned above and former manufacturing facilitiesin Mexicali, Mexico and Dayton, Ohio, (ii) any other environmentalliability of the Distribution Group relating to periods prior to the DG Sale,in most cases subject to a $0.8 million deductible and a$12.0 million cap except with respect to closed facilities,(iii) liabilities of the Distribution Group existing at the time of the DGSale but not disclosed to Buyer, subject to the $0.8 million deductibleand $12.0 million cap, (iv) any tax liability of the DistributionGroup relating to periods prior to the DG Sale and (v) certain healthclaims that may be asserted by employees of the Distribution Group relating tothe air quality at one of its facilities prior to the DG Sale.  In addition, prior to the DG Sale several ofthe Distribution Group’s real estate and equipment leases were guaranteed bythe Company.  These guarantees remain ineffect after the DG Sale so the Company continues to be liable for theDistribution Group’s obligations under such leases in the event that theDistribution Group does not honor those obligations.  Buyer has agreed to indemnify the Company for any liability thatthe Company may incur pursuant to the guarantees.  Following the Distribution Group sale, Buyer was merged into theDistribution Group and the Distribution Group succeeded to all of Buyer’sobligations, including its obligation to indemnify the Company with respect tothe guarantees.

 

56

----

**Note17.  Reportable Segments**

 

The Company has two reportable segments in continuing operations: theDrivetrain Remanufacturing segment and the Logistics segment.  The Drivetrain Remanufacturing segmentconsists of five operating units that primarily sell remanufacturedtransmissions directly to DaimlerChrysler, Ford, General Motors and severalforeign OEMs, primarily for use as replacement parts by their domestic dealersduring the warranty and post-warranty periods following the sale of avehicle.  In addition, the DrivetrainRemanufacturing segment sells select remanufactured and newly assembled enginesto certain European OEMs, including Ford’s and General Motors’s Europeanoperations and Jaguar.  The Company’sLogistics segment consists of three operating units: (i) a provider of valueadded warehouse and distribution services, turnkey order fulfillment andinformation services for AT&T Wireless Services; (ii) a provider ofreturned material reclamation and disposition services and core managementservices primarily to Ford and to a lesser extent, General Motors; and (iii) anautomotive electronic components remanufacturing and distribution business,primarily for Delphi and Visteon.  TheCompany’s Engines business unit, which is not a reportable segment and shown as“Other”, remanufactures and distributes domestic and foreign engines from fourregional distribution centers primarily to independent aftermarket customers.

The Company evaluates performance based upon income fromoperations.  The reportable segments’and the “other” business unit’s accounting policies are the same as thosedescribed in the summary of significant accounting policies (see Note 2). The Company fully allocates corporate overheadbased upon budgeted full year profit before tax.

The reportable segments and the “other” business unit are each managedand measured separately primarily due to the differing customers, productionprocesses, products sold and distribution channels.  The reportable segments and other business unit are as follows:

 
|                                            |   | **Drivetrain****Remanufacturing** |    | **Logistics** |   | **Other** |   | **Totals** |   |
|-------------------------------------------------|--------|-----------------------------------|---------|---------------|--------|-----------|--------|------------|--------|
| As of and for the year ended December 31, 2001: |   |                              |    |          |   |      |   |       |   |
| Revenues from external customers                |   | $                                 | 266,258 |          | $      | 105,255   |   | $          | 21,868 |   | $ | 393,381 |   |
| Intersegment revenues                           |   | 2,763                             |    | —        |   | —    |   | 2,763      |   |
| Depreciation and amortization expense           |   | 10,156                            |    | 3,732         |   | 131       |   | 14,019     |   |
| Special charges                                 |   | 2,439                             |    | 2,415         |   | —    |   | 4,854      |   |
| Segment profit                                  |   | 40,044                            |    | 26,461        |   | 1,695     |   | 68,200     |   |
| Segment assets                                  |   | 408,311                           |    | 81,215        |   | 17,701    |   | 507,227    |   |
| Expenditures for long-lived assets              |   | 7,646                             |    | 5,185         |   | —    |   | 12,831     |   |
| As of and for the year ended December 31, 2000: |   |                              |    |          |   |      |   |       |   |
| Revenues from external customers                |   | $                                 | 254,280 |          | $      | 89,077    |   | $          | 29,136 |   | $ | 372,493 |   |
| Depreciation and amortization expense           |   | 9,360                             |    | 2,786         |   | 845       |   | 12,991     |   |
| Special charges                                 |   | —                            |    | —        |   | 32,584    |   | 32,584     |   |
| Segment profit (loss)                           |   | 49,028                            |    | 17,394        |   | (37,537   | )      | 28,885     |   |
| Segment assets                                  |   | 382,499                           |    | 63,090        |   | 17,479    |   | 463,068    |   |
| Expenditures for long-lived assets              |   | 5,156                             |    | 5,556         |   | 306       |   | 11,018     |   |
| As of and for the year ended December 31, 1999: |   |                              |    |          |   |      |   |       |   |
| Revenues from external customers                |   | $                                 | 268,897 |          | $      | 59,127    |   | $          | 37,539 |   | $ | 365,563 |   |
| Depreciation and amortization expense           |   | 9,441                             |    | 2,281         |   | 1,578     |   | 13,300     |   |
| Special charges                                 |   | 975                               |    | 570           |   | 3,333     |   | 4,878      |   |
| Segment profit (loss)                           |   | 50,506                            |    | 7,665         |   | (5,973    | )      | 52,198     |   |
| Segment assets                                  |   | 336,135                           |    | 47,103        |   | 45,538    |   | 428,776    |   |
| Expenditures for long-lived assets              |   | 4,421                             |    | 1,942         |   | 3,124     |   | 9,487      |   |

 

57

----

A reconciliation of the reportable segments toconsolidated net sales, operating income and consolidated assets are asfollows:

 
|                                       |   | **As of and for the**                 |    |
|--------------------------------------------|--------|---------------------------------------|---------|
|                                       |   | **For the Years  Ended December 31,** |    |
|                                       |   | **2001**                              |    | **2000** |   | **1999** |   |
| Net Sales:                                 |   |                                  |    |   |   |   |   |   |
| External revenues from reportable segments |   | $                                     | 371,513 |   | $ | 343,357 |   | $ | 328,024 |   |
| Intersegment revenues                      |   | 2,763                                 |    | — |   | — |   |
| Other revenues                             |   | 21,868                                |    | 29,136 |   | 37,539 |   |
| Elimination of intersegment revenues       |   | (2,763                                | )       | — |   | — |   |
| Consolidated net sales                     |   | $                                     | 393,381 |   | $ | 372,493 |   | $ | 365,563 |   |
|                                       |   |                                  |    |   |   |   |   |
| Profit:                                    |   |                                  |    |   |   |   |   |   |
| Total profit for reportable segments       |   | $                                     | 66,505  |   | $ | 66,422 |   | $ | 58,171 |   |
| Other profit (loss)                        |   | 1,695                                 |    | (37,537 | ) | (5,973 | ) |
| Unallocated amounts:                       |   |                                  |    |   |   |   |   |
| Special charges                            |   | (476                                  | )       | — |   | (2,432 | ) |
| Income from operations                     |   | $                                     | 67,724  |   | $ | 28,885 |   | $ | 49,766 |   |
|                                       |   |                                  |    |   |   |   |   |
| Assets:                                    |   |                                  |    |   |   |   |   |   |
| Total assets for reportable segments       |   | $                                     | 489,526 |   | $ | 445,589 |   | $ | 383,238 |   |
| Other assets                               |   | 17,701                                |    | 17,479 |   | 45,538 |   |
| Elimination of intercompany accounts       |   | (156,412                              | )       | (104,627 | ) | (77,849 | ) |
| Unallocated corporate assets               |   | 46,043                                |    | 49,058 |   | 27,126 |   |
| Discontinued assets                        |   | —                                |    | — |   | 199,729 |   |
| Consolidated assets                        |   | $                                     | 396,858 |   | $ | 407,499 |   | $ | 577,782 |   |
|                                       |   |                                  |    |   |   |   |   |

Other significant itemsas disclosed within the reportable segments are reconciled to the consolidatedtotals as follows:

 

|                                    |   | ***Segment***** Totals** |   | ***Unallocated  Corporate Items*** |   | ***Consolidated*** |   |
|-----------------------------------------|--------|-------------------------------|--------|------------------------------------|--------|--------------------|--------|
| **Other significant items:**            |   |                          |   | ** **                         |   | ** **         |   |   |
| *For the year  ended December 31, 2001* |   |                          |   |                               |   |               |   |
| Special charges                         |   | $                             | 4,854  |                               | $      | 476                |   | $ | 5,330 |   |
| Expenditures for long-lived assets      |   | 12,831                        |   | 685                                |   | 13,516             |   |
|                                    |   |                          |   |                               |   |               |   |
| *For the year  ended December 31, 2000* |   |                          |   |                               |   |               |   |
| Special charges                         |   | $                             | 32,584 |                               | $      | —             |   | $ | 32,584 |   |
| Expenditures for long-lived assets      |   | 11,018                        |   | 664                                |   | 11,682             |   |
|                                    |   |                          |   |                               |   |               |   |
| *For the year  ended December 31, 1999* |   |                          |   |                               |   |               |   |
| Special charges                         |   | $                             | 4,878  |                               | $      | 2,432              |   | $ | 7,310 |   |
| Expenditures for long-lived assets      |   | 9,487                         |   | 585                                |   | 10,072             |   |
|                                         |        |                               |        |                                    |        |                    |        |  |  |  |  |

 

58

----

 

Revenues andlong-lived assets by geographic area are determined by the location of theCompany’s facilities as follows:

 
|                                                 |   | **As of and for the**        |    |
|------------------------------------------------------|--------|------------------------------|---------|
|                                                 |   | **Years ended December 31,** |    |
|                                                 |   | **2001**                     |    | **2000** |   | **1999** |   |
| Net sales:                                           |   |                         |    |   |   |   |   |   |
| United States                                        |   | $                            | 370,830 |   | $ | 351,726 |   | $ | 342,663 |   |
| Canada and Europe                                    |   | 22,551                       |    | 20,767 |   | 22,900 |   |
| Consolidated net sales                               |   | $                            | 393,381 |   | $ | 372,493 |   | $ | 365,563 |   |
|                                                 |   |                         |    |   |   |   |   |
| Long-lived assets:                                   |   |                         |    |   |   |   |   |   |
| United States                                        |   | $                            | 217,280 |   | $ | 217,358 |   | $ | 228,509 |   |
| Europe                                               |   | 13,826                       |    | 14,059 |   | 15,385 |   |
| Assets of discontinued operations held for sale, net |   | —                       |    | — |   | 127,535 |   |
| Consolidated long-lived assets                       |   | $                            | 231,106 |   | $ | 231,417 |   | $ | 371,429 |   |
|                                                      |        |                              |         |  |  |  |  |  |  |  |  |  |

 

For the years ended December 31, 2001 and 2000, the Company had threesignificant external customers, Ford (Drivetrain Remanufacturing and Logisticssegments), Daimler Chrysler (Drivetrain Remanufacturing segment and Other) andAT&T Wireless Services (Logistics segment), representing $136,088, $96,980and $69,121 of consolidated net sales for 2001, respectively, and $111,818,$110,175 and $52,653 of consolidated net sales for 2000, respectively.

For the year ended December 31, 1999, the Company had two significantexternal customers, DaimlerChrysler (Drivetrain Remanufacturing segment) andFord (Drivetrain Remanufacturing and Logistics segments), representing $115,537and $108,257 of consolidated net sales for 1999, respectively.

 

**Note 18.  Fair Value of Financial Instruments**

** **

The carrying amount of the Company’s financial instruments approximatetheir fair values due to the fact that they are either short-term in nature orre-priced to fair value through floating interest rates with the exception ofthe Company’s Senior Notes and the 18% senior subordinated promissory noteinvestment.  The 18% senior subordinatedpromissory note, received by the Company on October 27, 2000 as part of theproceeds from the sale of the Distribution Group, had a fair value whichapproximated its carrying value at December 31, 2001 and 2000.

The carrying amounts andfair values of these financial instruments are as follows: 

 
|                                     |   | **December 31,**     |   |
|------------------------------------------|--------|----------------------|--------|
|                                     |   | **2001**             |   | **2000** |   |
|                                     |   | **Carrying  Amount** |   | **Fair Value** |   | **Carrying  Amount** |   | **Fair Value** |   |
| Series B Senior Notes               |   | $                    | 82,570 |   | $ | 83,809 |   | $ | 82,570 |   | $ | 78,417 |   |
| Series D Senior Notes               |   | 27,815               |   | 28,232 |   | 27,815 |   | 26,416 |   |
| 18% senior subordinated promissory  note |   | 8,600                |   | 8,600 |   | 8,593 |   | 8,593 |   |
| Promissory note with minority  interest  |   | 210                  |   | 210 |   | 3⁄4 |   | 3⁄4 |   |
| Series B preferred stock                 |   | 3⁄4               |   | 3⁄4 |   | 1,929 |   | 1,929 |   |
|                                          |        |                      |        |  |  |  |  |  |  |  |  |  |  |

 

The Series Bpreferred stock, received by the Company on October 27, 2000 as part of theproceeds from the sale of the Distribution Group was sold to ATCDG HoldingCorp., Inc. during the year ended December 31, 2001 for proceeds of $2,860, and the Company recorded a gain, classified asother income (expense), net in the accompanying financial statements, of $931on the sale of the stock.

 

59

----

 

**Note19.  Special Charges**

 

Commencing in 1998, the Companyimplemented certain initiatives designed to improve operating efficiencies andreduce costs.  During1999, the Company recorded $7,310 of special charges, including $2,965classified as Cost of Sales-Special Charges. In June 2000, the Company reclassified $32,584 of expense relatedto the restructuring and then anticipated disposition of its Engines businessfrom loss on discontinued operations to special charges. These charges includedthe following: (i) $15,614 for the impairment of goodwill;(ii) $5,790 for the write-down of fixed assets to estimated net realizablevalue; (iii) $5,351 for the write-down of inventory to estimated netrealizable value (classified as Cost of Sales-Special Charges);(iv) $3,783 of product warranty costs for units remanufactured and soldprior to 2000 (classified as Cost of Sales-Special Charges); (v) $871 forthe write-down of un-collectible accounts receivable balances; and(vi) $732 of exit costs and $443 of severance costs for 56 peopleprimarily associated with the elimination of its branch distribution network.

             In 2001, the Company recorded$5,330 of special charges. These charges included $2,439 for the DrivetrainRemanufacturing segment, $2,415 for the Logistics segment and $476 for theCompany’s two information systems groups. The $2,439 related to the Drivetrain Remanufacturing segment consists of$1,584 of severance and related costs for 35 people primarily associated withthe de-layering of certain management functions and $855 of facility exit andidle capacity costs associated with facility consolidations and implementationof cellularized manufacturing within the segment.  The $2,415 of special charges related to the Logistics segmentincluded the following: (i) $1,942 of costs related to the shut-down ofthe Company’s remanufactured automotive electronic control modules operationincluding $680 of severance for 118 people, $631 related to the write-down offixed assets, $368 of facility exit and other costs related to the shutdown,$216 related to inventory write–downs (classified as Cost ofSales-Special Charges) and $47 for the write-down of un-collectible accountsreceivable balances; and (ii) $473 of severance and related costs foreight people primarily associated with the upgrade of certain managementfunctions within the segment.  The $476related to the Company’s two information systems groups are for severance andrelated costs for four people primarily associated with the consolidation ofthat function.

 
|                                |   | **Termination****Benefits** |   | **Exit / Other****Costs** |   | **Loss on****Write-Down****of Assets** |   | **Total** |   |
|-------------------------------------|--------|-----------------------------|--------|---------------------------|--------|----------------------------------------|--------|-----------|--------|
|                                |   |                        |   |                      |   |                                   |   |      |   |
| Reserve at December 31, 1998        |   | $                           | 840    |                      | $      | 3,279                                  |   | $         | — |   | $ | 4,119 |   |
| Provision 1999                      |   | 2,969                       |   | 519                       |   | 3,822                                  |   | 7,310     |   |
| Payments 1999                       |   | (1,422                      | )      | (1,256                    | )      | —                                 |   | (2,678    | )      |
| Asset write-offs 1999               |   | —                      |   | —                    |   | (842                                   | )      | (842      | )      |
| Reserve at December 31, 1999        |   | 2,387                       |   | 2,542                     |   | 2,980                                  |   | 7,909     |   |
| Provision 2000                      |   | 443                         |   | 4,515                     |   | 27,626                                 |   | 32,584    |   |
| Payments 2000                       |   | (2,132                      | )      | (1,950                    | )      | —                                 |   | (4,082    | )      |
| Asset write-offs 2000               |   | —                      |   | —                    |   | (22,423                                | )      | (22,423   | )      |
| Asset valuation adjustment 2000 (1) |   | —                      |   | —                    |   | (2,962                                 | )      | (2,962    | )      |
| Reclassification 2000               |   | —                      |   | (44                       | )      | 44                                     |   | —    |   |
| Reserve at December 31, 2000        |   | 698                         |   | 5,063                     |   | 5,265                                  |   | 11,026    |   |
| Provision 2001                      |   | 3,213                       |   | 1,223                     |   | 894                                    |   | 5,330     |   |
| Payments 2001                       |   | (2,115                      | )      | (2,991                    | )      | —                                 |   | (5,106    | )      |
| Asset write-offs 2001               |   | —                      |   | —                    |   | (4,225                                 | )      | (4,225    | )      |
| Asset valuation adjustment 2001 (1) |   | —                      |   | —                    |   | 1,764                                  |   | 1,764     |   |
| Reserve at December 31, 2001        |   | $                           | 1,796  |                      | $      | 3,295                                  |   | $         | 3,698  |   | $ | 8,789 |   |

----

(1)                                  Asset valuationadjustments are due to the Company’s initial discontinuance of the Enginesbusiness during 2000 and its subsequent election to retain this business during2001.

 

60

----

 

**Note 20.  Selected Quarterly Financial Data(Unaudited)**

 
|                                                        |   | **Quarter** |   |
|-------------------------------------------------------------|--------|-------------|--------|
|                                                        |   | **First**   |   | **Second** |   | **Third** |   | **Fourth** |   |
| 2001                                                        |   |        |   |   |   |   |   |   |   |
| Net sales                                                   |   | $           | 99,229 |   | $ | 92,220 |   | $ | 100,420 |   | $ | 101,512 |   |
| Gross profit                                                |   | 32,462      |   | 31,258 |   | 35,709 |   | 38,376 |   |
| Income from continuing operations                           |   | 6,345       |   | 6,698 |   | 6,590 |   | 9,894 |   |
| Earnings per common share (1)                               |   | $           | 0.31   |   | $ | 0.33 |   | $ | 0.32 |   | $ | 0.48 |   |
| Earnings per common share-assuming dilution (1)             |   | 0.31        |   | 0.32 |   | 0.31 |   | 0.46 |   |
| 2000                                                        |   |        |   |   |   |   |   |   |   |
| Net sales                                                   |   | $           | 94,705 |   | $ | 90,658 |   | $ | 88,639 |   | $ | 98,491 |   |
| Gross profit                                                |   | 32,840      |   | 19,804 |   | 29,809 |   | 32,468 |   |
| Income (loss) from continuing  operations                   |   | 7,060       |   | (15,764 | ) | 5,559 |   | 5,551 |   |
| Earnings (loss) per common  share (1)                       |   | $           | 0.34   |   | $ | (0.76 | ) | $ | 0.27 |   | $ | 0.27 |   |
| Earnings (loss) per common  share-assuming dilution (1) (2) |   | 0.33        |   | (0.76 | ) | 0.26 |   | 0.27 |   |

----

(1)                                  Earnings per sharedata is presented before discontinued operations.

(2)                                  Due to the loss reported in the secondquarter of 2000, the applicable per share calculation above excludes the antidilutiveeffect of stock options and warrants in the second quarter of 2000.

 

**Note 21.   Subsequent Events**

 

Public Offering ofCommon Stock

 

On March 8, 2002, the Company completed a public offering of 2,760,000 shares of its common stock at aprice to the public of $16.50 per share. The net proceeds from the offering, estimated to be $42,235 was used,together with certain borrowings under the new credit facility discussed below,to repay all the indebtedness under our Old Credit Facility on March 8, 2002.

 

New CreditAgreement

 

OnFebruary 8, 2002, the Company executed a credit agreement and a relatedsecurity agreement in connection with a new credit facility jointly arrangedand syndicated by JPMorgan Chase Bank and Credit Suisse First Boston (the “NewCredit Facility”).  The New CreditFacility provides for (i) a $75,000, five year term loan (the “A-Loan”), withprinciple payable in quarterly installments in increasing amounts over thefive-year period, (ii) a $95,000, six year term loan (the “B-Loan), withprinciple payable in quarterly installments over the six-year period (with 95%of the principle payable in the sixth year) and an annual excess cash flowsweep and (iii) a $50,000, five year revolving credit facility (the “NewRevolver”).  The New Credit Facilityalso provides for the addition of an optional term loan of up to $100,000 (the“C-Loan”), subject to certain conditions including the receipt from one or morelenders of the additional commitments that may be requested.

 

At the Company’s election, amounts advanced under the New CreditFacility will bear interest at either (i) the Alternate Base Rate (“ABR”) plusa specified margin or (ii) the Eurodollar Rate plus a specified margin.  The ABR is equal to the highest of  (a) the lender’s prime rate,(b) the lender’s base CD rate plus 1.00% or (c) the federal funds effectiverate plus 0.50%.  The Eurodollar Rate isthe rate offered by the lenders’ for Eurodollar deposits for one, two, three,six, or, if available by all lenders, nine months as selected by theCompany.  The applicable margins for both Alternate Base Rateand Eurodollar Rate loans are subject to quarterly adjustments based on theCompany’s leverage ratio as of the end of the four fiscal quarters thencompleted.  As of March 8, 2002, theclosing date of the New Credit Facility, the applicable margins for the A-Loanand New Revolver were 1.25% for ABR loans and 2.25% for Eurodollar Rateloans.  For the B-Loan, the margins were2.00% for ABR loans and 3.00% for Eurodollar Rate loans as of March 8,2002.  The interest rates for theoptional C-Loan will be determined at the time such loans are provided.  Additionally, the Company is required to payquarterly in arrears a commitment fee equal to 0.50% per annum of the averagedaily unused portion of the New Credit Facility during such quarter.  The Company must also reimburse the lendersfor certain legal and other costs of the lenders, and pay fees on outstandingletters of credit at a rate per annum equal to the applicable margin then ineffect for advances bearing interest at the Eurodollar Rate.

 

61

----

 

Amounts advanced under the New Credit Facility are guaranteed by all ofthe Company’s domestic subsidiaries and secured by substantially all of theCompany’s assets and its subsidiaries’ assets. The New Credit Facility contains several covenants, including ones thatrequire the Company to maintain specified levels of net worth, leverage andcash flow coverage and others that limit its ability to incur indebtedness,make capital expenditures, create liens, engage in mergers and consolidations,make restricted payments (including dividends), sell assets, make investments,enter new businesses and engage in transactions with the Company’s affiliatesand affiliates of its subsidiaries.

OnMarch 8, 2002, the closing date of the New Credit Facility, the Companyborrowed $55,000 under the New Credit Facility and used a portion of thoseproceeds, together with the proceeds from the public stock offering to repaythe entire $82,700 balance outstanding under our Old Credit Facility.

 

Redemption of 12% Senior Subordinated Notes

 

On March 8, 2002, the Company called all of the SeniorNotes due 2004 for redemption.  TheCompany’s Senior Notes, which had a face amount outstanding as of March 8, 2002of $110,385, will be redeemed at a premium of 102% plus accrued and unpaidinterest on or about April 8, 2002.  Theredemption will be funded by the remainder of the borrowings made under the NewCredit Facility.

 

Extraordinary Items

 

TheCompany expects to incur an extraordinary charge of approximately $3.3 millionfor the write-off of previously capitalized debt issuance costs, a call premiumand fees in connection with the replacement of its Old Credit Facility and theretirement of its Senior Notes.

 

62

----

 

## **ITEM 9.**                                                     CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**PART III**

## **ITEM 10.**                                  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT.

**Directorsand Executive Officers**

The following lists ourdirectors and executive officers and their respective ages and positions as ofDecember 31, 2001: 

 
| **Name**                |   | **Age** |   | **Positions**                                                 |   |
|-------------------------|--------|---------|--------|---------------------------------------------------------------|--------|
| Michael T. DuBose       |   | 48      |   | Chairman  of the Board, President and Chief Executive Officer |   |
| Barry C. Kohn           |   | 46      |   | Vice  President and Chief Financial Officer                   |   |
| Lawrence W. Baker       |   | 59      |   | Vice  President, Automotive Sales and Marketing               |   |
| John J. Machota         |   | 49      |   | Vice  President, Human Resources                              |   |
| Mary T. Ryan            |   | 48      |   | Vice  President, Communications and Investor Relations        |   |
| Joseph Salamunovich     |   | 42      |   | Vice  President, General Counsel and Secretary                |   |
| Paul J. Komaromy        |   | 51      |   | President,  Aaron’s and CRS                              |   |
| Matt J. Pieper          |   | 42      |   | President,  ATC Logistics                                     |   |
| Robert Anderson         |   | 81      |   | Director                                                      |   |
| Richard R. Crowell      |   | 46      |   | Director                                                      |   |
| Dale F. Frey            |   | 69      |   | Director                                                      |   |
| Mark C. Hardy           |   | 38      |   | Director                                                      |   |
| Dr. Michael J. Hartnett |   | 56      |   | Director                                                      |   |
| Gerald L. Parsky        |   | 59      |   | Director                                                      |   |
| Richard K. Roeder       |   | 53      |   | Director                                                      |   |
| J. Richard Stonesifer   |   | 65      |   | Director                                                      |   |

*Michael T. DuBose* joined us asChairman of the Board, President and Chief Executive Officer in 1998.  Prior to that he served as a consultant toAurora Capital Group from 1997.  From1995 to 1997, Mr. DuBose was Chairman and Chief Executive Officer ofGrimes Aerospace Company, an international engineering, manufacturing anddistribution company.  From 1993 to1995, he served as Senior Vice President of SAI Corporation’s computerequipment manufacturing and systems sector. Prior to that, Mr. DuBose held various positions at GeneralInstrument and General Electric Company. Mr. DuBose holds an M.S. in Management from the Stanford UniversityGraduate School of Business.

*Barry C. Kohn* joined us as VicePresident and Chief Financial Officer in January 1999.  During 1998 he served as a self-employedfinancial consultant.  From 1995 to1997, Mr. Kohn was Senior Vice President and Chief Financial Officer ofGrimes Aerospace Company.  Between 1987and 1995, he held increasingly senior positions at Grimes including Treasurer,Controller and Manager of Business Planning. Mr. Kohn holds a Masters of Accounting from The Ohio StateUniversity and is a Certified Public Accountant (inactive).

*Lawrence W.Baker* joined us as Vice President, Automotive Sales & Marketing inJanuary 2001.  Prior to that,Mr. Baker was employed for 35 years with DaimlerChrysler, mostrecently serving as Vice President of the Mopar Parts division from 1999 to2000, as General Manager of Mopar from 1994 to 1999, as General Manager of theJeep/Eagle division from 1990 to 1994 and as General Manager of the DodgeCar & Truck division from 1989 to 1990.  Mr. Baker holds a B.S. in Marketing from The Ohio StateUniversity.

*John J. Machota* joined us as VicePresident, Human Resources in 1997. From 1996 to 1997, he was a self-employed human resourcesconsultant.  From 1995 to 1996,Mr. Machota was Vice President, Compensation for WasteManagement, Inc. and from 1993 to 1995, served as Waste Management’s VicePresident, Human Resource Services. From 1986 to 1993, Mr. Machota was Vice President, Human Resourcesfor a subsidiary of Waste Management and prior to that held various otherpositions in the human resources area. Mr. Machota holds an M.S. in Industrial Relations from LoyolaUniversity.

63

----

*Mary T. Ryan* joined us as VicePresident, Communications and Investor Relations in April 1999.  From 1996 to 1998, Ms. Ryan served asVice President, Corporate Affairs for American Disposal Services, Inc.  From 1995 to 1996, she was a self-employedpublic relations consultant.  Prior tothat, Ms. Ryan was employed for more than ten years with WasteManagement, Inc.  Ms. Ryanholds an M.B.A. from DePaul University.

*JosephSalamunovich* joined us as Vice President, General Counsel and Secretaryin 1997.  From 1995 to 1997,Mr. Salamunovich was a partner in the law firm of Gibson, Dunn &Crutcher LLP, where he specialized in corporate and securities law matters.  Mr. Salamunovich holds a J.D. fromLoyola Law School.

*Paul J.Komaromy* joined us in February 2000 as President of ourAaron’s Automotive Products, Inc. subsidiary.  He has also served as President of our Component RemanufacturingSpecialists, Inc. subsidiary since January 2001.  From 1997 to 1999, Mr. Komaromy wasVice President and General Manager of the Engine Systems and Accessoriesdivision of AlliedSignal, Inc. From 1987 to 1997, Mr. Komaromy was employed with Grimes Aerospace,serving as Senior Vice President and General Manager of the Vision Systemsdivision from 1996 to 1997 and as Senior Vice President, Operations andEngineering from 1991 to 1995.  From1978 to 1987, Mr. Komaromy was employed with the Power Systems division ofCooper Industries.  Mr. Komaromyholds an M.S. in Industrial Administration from the Carnegie–MellonUniversity Graduate School of Industrial Administration.

*Matthew J.Pieper* joined us as General Manager of our Logistics Services business unit inOctober 1998 and served as Vice President of ATC Logistics fromJune 2000 until November 2000 when he became President of ATCLogistics.  Prior to joining us,Mr. Pieper served as a Regional Distribution Manager for the Perrierdivision of Nestlé Foods from 1996 to 1998. Before that, he served in various logistics and manufacturing positionsfor the Pepsi-Cola Company from 1989 to 1996. Mr. Pieper holds a B.B.A. in Transportation/Logistics from IowaState University and an M.B.A. from Baylor University.

*Robert Anderson* became a directorin 1997.  Mr. Anderson has beenassociated with Rockwell International Corporation since 1968, where he hasbeen Chairman Emeritus since 1990 and served previously as Chairman of theExecutive Committee from 1988 to 1990 and as Chairman of the Board and ChiefExecutive Officer from 1979 to 1988.

*Richard R.Crowell* became a director in 1994. Mr. Crowell is President and a founding partner of Aurora CapitalGroup and has been with Aurora Capital Group since it was founded in 1991.

*Dale F. Frey* became a directorin 1997.  Prior to his retirement in1997, Mr. Frey was Chairman of the Board, President and Chief ExecutiveOfficer of General Electric Investment Corporation, a position he had heldsince 1984, and was a Vice President of General Electric Company since1980.  Mr. Frey is a director ofPraxair, Inc., Roadway Express, Community Health Systems, Yankee Candleand McLeod USA.

*Mark C. Hardy* became a directorin 1994.  Mr. Hardy is a ManagingDirector and partner of Aurora Capital Group. Prior to joining Aurora Capital Group in 1993, Mr. Hardy was an Associateand Consultant at Bain & Company, a consulting firm.

*Dr. MichaelJ. Hartnett* became a director in 1994.  Since 1992, Dr. Hartnett has been Chairman, President andChief Executive Officer of Roller Bearing Company of America, Inc., amanufacturer of ball and roller bearings. Prior to joining Roller Bearing in 1990 as General Manager of itsIndustrial Tectonics subsidiary, Dr. Hartnett spent 18 years with TheTorrington Company, a subsidiary of Ingersoll-Rand.

*Gerald L.Parsky* became a director in 1997. Mr. Parsky is the Chairman and a founding partner of Aurora CapitalGroup.  Prior to forming Aurora CapitalGroup in 1991, Mr. Parsky was a senior partner and a member of theExecutive and Management Committees of the law firm of Gibson, Dunn &Crutcher LLP.  Prior to that, he servedas an official with the United States Treasury Department and the FederalEnergy Office, and as Assistant Secretary of the Treasury for InternationalAffairs.

64

----

*Richard K. Roeder* became a director in1994.  Mr. Roeder is a foundingpartner and Managing Director of Aurora Capital Group.  Prior to forming Aurora Capital Group in1991, Mr. Roeder was a partner in the law firm of Paul, Hastings,Janofsky & Walker, where he served as Chairman of the firm’s CorporateLaw Department and a member of its National Management Committee.

*J. RichardStonesifer* became a director in 1997.  Prior to his retirement in 1996, Mr. Stonesifer was employedwith the General Electric Company for 37 years, serving most recently asPresident and Chief Executive Officer of GE Appliances, and was an executiveofficer and Senior Vice President of the General Electric Company, fromJanuary 1992 until his retirement. Mr. Stonesifer is a director of Polaris Industries, Inc.

**Section 16(a) Beneficial OwnershipReporting Compliance.**

Section 16(a)of the Securities Exchange Act of 1934, as amended, requires our officers,directors and persons who own more than 10% of our outstanding common stock tofile reports of ownership and changes in ownership with the Securities andExchange Commission and to furnish copies of these reports to us.  Based solely on a review of the copies ofthe forms that we have received, we believe that all such forms required during2001 were filed on a timely basis, except for the Form 5 of Mr. Crowell for2001, which was filed two weeks late.

 

65

----

##  

## **ITEM11.**         EXECUTIVE COMPENSATION

**SummaryCompensation Table**

Thefollowing table sets forth, for the three most recently completed fiscal years,the cash compensation, for services to us in all capacities, of (i) ourChief Executive Officer and (ii) the four persons who as ofDecember 31, 2001 were the other most highly compensated executiveofficers of Aftermarket Technology Corp. and its subsidiaries:
|                                             |   |     |    | **Annual Compensation** |    | **Long-Term Compensation Awards** |   |                                                |       |
|--------------------------------------------------|--------|----------|---------|-------------------------|---------|-----------------------------------|--------|-----------------------------------------------------|------------|
| **Name and Principal Position**                  |   | **Year** |    | **Salary**              |    | **Bonus (1)**                     |   | **Number of Securities Underlying Options (#) (2)** |       | **All Other Compensation** |   |
| Michael T.  DuBose                               |   | 2001     |    | $                       | 474,615 |                              | $      | 1,211,615                                           |       | 100,000 |   | $ | 22,139 (3 | ) |
| Chairman, President and  Chief Executive Officer |   | 2000     |    | 470,000                 |    | 425,777                           |   | 100,000                                             |       | 23,800 (3 | ) |
|                                             | 1999   |     | 400,000 |                    | 319,500 |                              | — |                                                | 203,940 (4 | ) |
|                                             |   |     |    |                    |    |                              |   |                                                |       |   |   |
| Lawrence W. Baker (5)                            |   | 2001     |    | $                       | 289,327 |                              | $      | 221,587                                             |       | 75,000 |   | $ | 36,000 (6 | ) |
| Vice President,  Automotive Sale and Marketing   |   | 2000     |    | —                  |    | —                            |   | —                                              |       | — |   |
|                                             | 1999   |     | —  |                    | —  |                              | — |                                                | —     |   |
|                                             |   |     |    |                    |    |                              |   |                                                |       |   |   |
| Barry C. Kohn                                    |   | 2001     |    | $                       | 271,731 |                              | $      | 361,042                                             |       | 75,000 |   | $ | 12,548 (3 | ) |
| Chief Financial  Officer                         |   | 2000     |    | 270,000                 |    | 130,451                           |   | 35,000                                              |       | 5,400 (7 | ) |
|                                             | 1999   |     | 226,154 |                    | 110,000 |                              | 90,000 |                                                | 36,963 (8  | ) |
|                                             |   |     |    |                    |    |                              |   |                                                |       |   |   |
| Matt J. Pieper  (9)                              |   | 2001     |    | $                       | 225,000 |                              | $      | 228,244                                             |       | 37,000 |   | $ | 15,043 (3 | ) |
| President, ATC  Logistics                        |   | 2000     |    | 161,904                 |    | 210,000                           |   | 35,000                                              |       | 10,576 (10 | ) |
|                                             | 1999   |     | 117,616 |                    | 84,035  |                              | 5,000  |                                                | 9,725 (10  | ) |
|                                             |   |     |    |                    |    |                              |   |                                                |       |   |   |
| Joseph  Salamunovich                             |   | 2001     |    | $                       | 201,154 |                              | $      | 177,788                                             |       | 30,000 |   | $ | 12,256 (3 | ) |
| Vice President,  General Counsel and Secretary   |   | 2000     |    | 197,308                 |    | 96,630                            |   | 20,000                                              |       | 2,599 (7 | ) |
|                                             | 1999   |     | 186,077 |                    | 90,000  |                              | 20,000 |                                                | 1,321 (7   | ) |

 

----

(1)                Bonuses for a particular year are generally paidduring the first quarter of the following year.

(2)                Consists of options to purchase shares of our commonstock, which options were issued pursuant to our 1996 Stock Incentive Plan,1998 Stock Incentive Plan or 2000 Stock Incentive Plan.  Pursuant to the stock incentive plans, theCompensation and Human Resources Committee of the Board of Directors makesrecommendations to the Board of Directors regarding the amount, terms andconditions of each option to be granted.

(3)                Consists of allowances for automobile, club dues andfinancial planning.

(4)                Includes (i) $176,770 of relocation benefits(including $76,770 of income tax “gross up”) and (ii) $14,954 ofautomobile allowance.

(5)                Mr. Baker joined us in January 2001.

(6)                Consists of a hiring bonus and allowances for clubdues and financial planning.

(7)                Consists of allowances for club dues and financialplanning.

(8)                Includes $31,750 of relocation benefits (including$11,750 of income tax “gross up”).

(9)                Mr. Pieper joined the Company in October 1998 andbecame President of ATC Logistics in November 2000.  At that time his annual base salary was increased to $225,000.

(10)    Consistsof an automobile allowance.

 

66

----

Set forth below is the annual base salary for ourChief Executive Officer and each of our other four most highly compensatedexecutive officers as of March 1, 2002:

 

| **Name**          |   | **Annual Base Salary** |    |
|-------------------|--------|------------------------|---------|
| Michael T. DuBose |   | $                      | 550,000 |   |
| Lawrence W. Baker |   | 315,000                |    |
| Barry C. Kohn     |   | 300,000                |    |
| Paul J. Komaromy  |   | 270,000                |    |
| Matt J. Pieper    |   | 225,000                |    |
|                   |        |                        |         |  |

**OptionGrants Table**

Shown below is information concerning grants ofoptions by us during 2001 to our Chief Executive Officer and each of our otherfour most highly compensated executive officers as of December 31, 2001:

 
|                |   | **Individual Grants**                               |   |                                           |   |               |   | **Potential Realizable Value at Assumed Annual Rates of Stock  Price Appreciation For Option Term(1)** |    |
|---------------------|--------|-----------------------------------------------------|--------|------------------------------------------------|--------|--------------------|--------|--------------------------------------------------------------------------------------------------------|---------|
|                |   | **Number of Securities Underlying Options Granted** |   | **% of Total Options Granted to Employees in** |   | **Exercise Price** |   | **Expiration**                                                                                         |    |   |
| **Name**            |   | **(#)**                                             |   | **Fiscal Year**                                |   | **($/Share)**      |   | **Date**                                                                                               |    | **5% ($)** |   | **10% ($)** |   |
| Michael T. DuBose   |   | 100,000(2                                           | )      | 13.4                                           |   | $                  | 5.060  |                                                                                                   | 5/9/11  |   | $ | 318,221 |   | $ | 806,434 |   |
| Lawrence W. Baker   |   | 75,000(3                                            | )      | 10.1                                           |   | $                  | 4.563  |                                                                                                   | 2/20/11 |   | 215,223 |   | 545,419 |   |
| Barry C. Kohn       |   | 75,000(2                                            | )      | 10.1                                           |   | $                  | 5.060  |                                                                                                   | 5/9/11  |   | 238,666 |   | 604,825 |   |
| Matt J. Pieper      |   | 37,000(2                                            | )      | 5.0                                            |   | $                  | 5.060  |                                                                                                   | 5/9/11  |   | 117,742 |   | 298,380 |   |
| Joseph Salamunovich |   | 30,000(2                                            | )      | 4.0                                            |   | $                  | 5.060  |                                                                                                   | 5/9/11  |   | 95,466 |   | 241,930 |   |
|                     |        |                                                     |        |                                                |        |                    |        |                                                                                                        |         |  |  |  |  |  |  |  |

 

----

(1)                The potential gains shown are net of the optionexercise price and do not include the effect of any taxes associated withexercise.  The amounts shown are for theassumed rates of appreciation only, do not constitute projections of futurestock price performance, and may not necessarily be realized.  Actual gains, if any, on stock optionexercises depend on the future performance of the common stock, continuedemployment of the optionee through the term of the options, and other factors.

(2)                These options were granted under our 2000 StockIncentive Plan.  One third of theoptions vest and become exercisable on each of May 9, 2002, 2003 and 2004.

(3)                These options were granted under our 1996 StockIncentive Plan.  One third of theoptions vest and become exercisable on each of February 20, 2002, 2004 and2006.

 

67

----

**Aggregated Option Exercises andYear-End Option Value Table**

Shownbelow is information relating to (i) the exercise of stock options during2001 by our Chief Executive Officer and each of our other four most highlycompensated executive officers as of December 31, 2001 and (ii) thevalue of unexercised options for each of the CEO and such executive officers asof December 31, 2001:

 
|                |   | **Shares Acquired on** |   | **Value**    |   | **Number of Securities Underlying Unexercised Options  at Fiscal Year-End** |   | **Value of Unexercised In-The-Money Options at Fiscal  Year-End (1)** |   |
|---------------------|--------|------------------------|--------|--------------|--------|-----------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
| **Name**            |   | **Exercise**           |   | **Realized** |   | **Exercisable**                                                             |   | **Unexercisable**                                                     |   | **Exercisable** |   | **Unexercisable** |   |
| Michael T.  DuBose  |   | —                 |   | —       |   | 533,334                                                                     |   | 166,666                                                               |   | $ | 4,758,753 |   | $ | 1,431,497 |   |
| Lawrence W. Baker   |   | —                 |   | —       |   | —                                                                      |   | 75,000                                                                |   | — |   | 872,775 |   |
| Barry C. Kohn       |   | —                 |   | —       |   | 71,667                                                                      |   | 128,333                                                               |   | 725,692 |   | 1,281,687 |   |
| Matt J. Pieper      |   | —                 |   | —       |   | 15,334                                                                      |   | 64,666                                                                |   | 137,069 |   | 654,387 |   |
| Joseph Salamunovich |   | —                 |   | —       |   | 43,393                                                                      |   | 71,695                                                                |   | 115,756 |   | 514,822 |   |
|                     |        |                        |        |              |        |                                                                             |        |                                                                       |        |  |  |  |  |  |  |

 

----

(1)                Based on the closing price of our commonstock on the Nasdaq National Market System on December 31, 2001, which was$16.20 per share.

## **Employment Agreements**

InJanuary 2002 we entered into a new two-year employment agreement with Mr.DuBose, which includes a noncompetition provision for a period of24 months from the termination of Mr. DuBose’s employment and anondisclosure provision.  The agreementalso provides that if Mr. DuBose ceases to be employed by us for any reasonother than termination for cause or voluntary resignation, he would receiveseverance payments equal to two times his base salary plus two times his targetbonus under our incentive compensation plan plus a pro rata portion of hisincentive compensation bonus for the year in which he ceases to beemployed.  Mr. DuBose would also receivemedical benefits for up to ten years following the end of his employment.

Wetypically enter into an employment agreement with each of our other executiveofficers that provides for a three-year term and is automatically renewablethereafter on a year-to-year basis.  Theagreement includes a noncompetition provision for a period of 18 monthsfrom the termination of the executive officer’s employment with the Company aswell as a nondisclosure provision.  Theexecutive officer is entitled to severance equal to his base salary for aperiod of 12 months after termination if he is terminated without cause, exceptin the cases of Mr. Kohn, whose severance period is 18 months.

## **Stock Incentive Plans**

Pursuant to our1996, 1998 and 2000 stock incentive plans, officers, directors, employees andconsultants of Aftermarket Technology Corp. and its affiliates are eligible toreceive options to purchase common stock and other awards.  Awards under the 1996 plan are notrestricted to any specified form or structure and may include, withoutlimitation, sales or bonuses of stock, restricted stock, stock options, reloadstock options, stock purchase warrants, other rights to acquire stock, securitiesconvertible into or redeemable for stock, stock appreciation rights, phantomstock, dividend equivalents, performance units or performance shares.  Awards under the 1998 and 2000 plans maytake the form of stock options, annual incentive bonuses and incentive stock.

The stockincentive plans are administered by the Compensation and Human ResourcesCommittee of our Board of Directors, although the Board of Directors mayexercise any of the Committee’s authority under the plans in lieu of theCommittee’s exercise thereof.  While thestock incentive plans permit the Committee to grant awards, such grants aretypically made by the Board of Directors based on the Committee’srecommendations regarding the recipients and type and amount of awards.  Subject to the express provisions of thestock incentive plans, the Committee has broad authority in administering andinterpreting the plans.  Options grantedto employees may be options intended to qualify as incentive stock optionsunder Section 422 of the Internal Revenue Code of 1986, as amended, or optionsnot intended to so qualify.  Awards toemployees may include a provision terminating the award upon termination ofemployment under certain circumstances or accelerating the receipt of benefitsupon the occurrence of specified events. The vesting of stock options will be accelerated in the event of achange of control of Aftermarket Technology Corp.

68

----

The aggregatenumber of shares of common stock that can be issued under the stock incentiveplans may not exceed 4,350,000.  As ofMarch 1, 2002***,*** therewere outstanding options to purchase an aggregate of 2,208,223 shares ofcommon stock granted to our directors, officers and employees and certainindependent contractors pursuant to the plans, and the number of sharesavailable for issuance pursuant to options yet to be granted under the planswas 167,811.

In most cases,outstanding options are subject to certain vesting provisions and expire on thetenth anniversary of the date of grant. The exercise prices of options outstanding under the stock incentiveplans as of March 1, 2002 are as follows: 

 

| **Number of Option Shares** |   | **Exercise Price** |   |
|-----------------------------|--------|--------------------|--------|
| 20,000                      |   | $                  | 4.438  |   |
| 101,000                     |   | 4.563              |   |
| 24,000                      |   | 4.67               |   |
| 367,500                     |   | 5.00               |   |
| 95,000                      |   | 5.0312             |   |
| 550,000                     |   | 5.06               |   |
| 90,000                      |   | 5.3125             |   |
| 3,000                       |   | 5.563              |   |
| 3,666                       |   | 6.875              |   |
| 23,500                      |   | 8.50               |   |
| 12,500                      |   | 8.9375             |   |
| 106,326                     |   | 9.00               |   |
| 15,000                      |   | 9.125              |   |
| 200,000                     |   | 10.00              |   |
| 272,643                     |   | 11.125             |   |
| 162,000                     |   | 11.4375            |   |
| 2,000                       |   | 11.80              |   |
| 35,088                      |   | 14.75              |   |
| 49,000                      |   | 18.125             |   |
| 25,000                      |   | 18.25              |   |
| 51,000                      |   | 19.00              |   |
| 2,208,223                   |   |               |   |
|                             |        |                    |        |  |

For informationregarding options granted to our directors and officers, see Item 12.“Security Ownership of Certain Beneficial Owners and Management.”

## **Compensation andHuman Resources Committee Interlocks and Insider Participation in Compensation Decisions**

The members of our Compensation and Human ResourcesCommittee are Messrs. Crowell, Parsky and Stonesifer.  Messrs. Crowell and Parsky are (i) two of the threestockholders and directors of Aurora Advisors, Inc., the general partner ofAurora Capital Partners, which is the general partner of Aurora EquityPartners, L.P., our largest stockholder, and (ii) two of the threestockholders and directors of Aurora Overseas Advisors, Ltd., the generalpartner of Aurora Overseas Capital Partners L.P., the general partner of AuroraOverseas Equity Partners I, L.P., another of our significantstockholders.  See Item 12.“Security Ownership of Certain Beneficial Owners and Management.”  In addition, Messrs. Crowell and Parskyare the senior members of Aurora Capital Group (of which Aurora Equity Partnersand Aurora Overseas Equity Partners are a part), which provides investmentbanking and management services to us pursuant to a management servicesagreement.  See Item 13. “CertainRelationships and Related Transactions.”

 

69

----

 

**ITEM 12.****         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

The following table setsforth the beneficial ownership of our common stock (the only class of ourissued and outstanding voting securities), as of March 1, 2002 by each ofour directors, our Chief Executive Officer, each of our other four most highlycompensated executive officers as of December 31, 2001, our directors andexecutive officers as a group, and each person who at March 1, 2002 wasknown to us to beneficially own more than 5% of our outstanding common stock. 

 
|                                                                                                                                         |   | **Number of  Shares (1)** |   | **Voting  Percentage** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|------------------------|--------|
| Aurora Equity  Partners L.P. (other beneficial owners: Richard R.  Crowell, Gerald L. Parsky and Richard K. Roeder) (2)(3)              |   | 12,324,746                |   | 59.1                   |   |
| Aurora Overseas  Equity Partners I, L.P. (other beneficial owners:  Richard R. Crowell, Gerald L. Parsky and Richard K. Roeder)  (4)(5) |   | 5,250,960                 |   | 25.2                   |   |
| General Electric  Pension Trust (6)                                                                                                          |   | 2,479,539                 |   | 11.9                   |   |
| Michael T.  DuBose (7)                                                                                                                       |   | 588,737                   |   | 2.8                    |   |
| Lawrence W.  Baker (8)                                                                                                                       |   | 25,000                    |   | *                      |   |
| Barry C. Kohn  (9)                                                                                                                           |   | 137,454                   |   | *                      |   |
| Matt J. Pieper  (10)                                                                                                                         |   | 26,075                    |   | *                      |   |
| Joseph  Salamunovich (11)                                                                                                                    |   | 55,089                    |   | *                      |   |
| Robert Anderson  (12)(13)                                                                                                                    |   | 73,295                    |   | *                      |   |
| Richard R.  Crowell (2)(3)(4)(5)(13)                                                                                                         |   | 13,668,592                |   | 65.6                   |   |
| Dale F. Frey  (14)                                                                                                                           |   | 60,181                    |   | *                      |   |
| Mark C. Hardy  (13)(15)                                                                                                                      |   | 26,059                    |   | *                      |   |
| Dr. Michael J.  Hartnett (16)                                                                                                                |   | 93,966                    |   | *                      |   |
| Gerald L. Parsky  (2)(3)(4)(5)(13)(17)                                                                                                       |   | 13,668,592                |   | 65.6                   |   |
| Richard K.  Roeder (2)(3)(4)(5)(13)                                                                                                          |   | 13,668,592                |   | 65.6                   |   |
| J. Richard  Stonesifer (18)                                                                                                                  |   | 80,216                    |   | *                      |   |
| All directors  and officers as a group (16 persons) (19)                                                                                     |   | 14,872,134                |   | 67.9                   |   |

 

----

*                       Less than 1%.

(1)                The shares of common stock underlyingoptions granted under our stock incentive plans that are exercisable as ofMarch 1, 2002 or that will become exercisable within 60 days thereafter(such options being referred to as “exercisable”) are deemed to be outstandingfor the purpose of calculating the beneficial ownership of the holder of suchoptions, but are not deemed to be outstanding for the purpose of computing thebeneficial ownership of any other person.

(2)                Aurora Equity Partners is a Delawarelimited partnership the general partner of which is Aurora Capital Partners, aDelaware limited partnership whose general partner is Aurora Advisors,Inc.  Messrs. Crowell, Parsky andRoeder are the sole stockholders and directors of Aurora Advisors, are limitedpartners of Aurora Capital Partners and may be deemed to beneficially share ownershipof the common stock beneficially owned by Aurora Equity Partners and may bedeemed to be the organizers of Aftermarket Technology Corp. under regulationspromulgated under the Securities Act of 1933. Aurora Equity Partners’ address is 10877 Wilshire Boulevard, Suite2100, Los Angeles, CA 90024.

(3)                Consists of (i) 8,417,632 sharesowned by Aurora Equity Partners, (ii) 2,479,539 shares owned by theGeneral Electric Pension Trust (see Note 6 below) and (iii) 1,427,575shares that are subject to an irrevocable proxy granted to the Aurorapartnerships by some of our original stockholders, includingMessrs. Anderson, Crowell, Hardy, Parsky and Roeder (the “AuroraProxy”).  The Aurora Proxy terminatesupon the earlier of the transfer of such shares or July 31, 2004.

(4)                Aurora Overseas Equity Partners is aCayman Islands limited partnership the general partner of which is AuroraOverseas Capital Partners, L.P., a Cayman Islands limited partnership, whosegeneral partner is Aurora Overseas Advisors, Ltd.  Messrs. Crowell, Parsky and Roeder are the sole stockholdersand directors of Aurora Overseas Advisor, are limited partners of AuroraOverseas Capital Partners and may be deemed to beneficially own the shares ofthe common stock beneficially owned by . Aurora Overseas Equity Partners’ address is West Wind Building, P.O. Box1111, Georgetown, Grand Cayman, Cayman Islands, B.W.I.

 

70

----

 

(5)                Consists of (i) 1,343,846 sharesowned by Aurora Overseas Equity Partners, (ii) 2,479,539 shares owned bythe General Electric Pension Trust (see Note 6 below) and(iii) 1,427,575 shares that are subject to the Aurora Proxy.

(6)                With limited exceptions, the GeneralElectric Pension Trust has agreed to vote these shares in the same manner asthe Aurora partnerships vote their respective shares of common stock.  This provision terminates upon the earlierof  the transfer of such shares or July31, 2004.  The GE Pension Trust’saddress is 3003 Summer Street, Stamford, CT 06905.

(7)                Includes 566,667 shares subject toexercisable options.  Excludes 133,333shares subject to options that are not exercisable.

(8)                Consists of shares subject to exercisableoptions.  Excludes 50,000 shares subjectto options that are not exercisable.

(9)                Includes 113,333 shares subject toexercisable options.  Excludes 86,667shares subject to options that are not exercisable.

(10)          Includes 15,334 shares subject toexercisable options.  Excludes 64,666shares subject to options that are not exercisable.

(11)          Consists of shares subject to exercisableoptions.  Excludes 59,999 shares subjectto options that are not exercisable.

(12)          Includes 53,667 shares subject toexercisable options.  Excludes 51,333shares subject to options that are not exercisable.

(13)          The shares actually owned by this person(as distinguished from the shares that this person is deemed to beneficiallyown) are subject to the Aurora Proxy.

(14)          Includes (i) 15,257 shares owned bya limited partnership of which Mr. Frey is general partner,(ii) 4,000 shares held by him as trustee for his grandchildren and(iii) 35,667 shares subject to exercisable options.  Excludes 51,333 shares subject tooptions that are not exercisable. Mr. Frey disclaims beneficial ownership of 96% of the shares ownedby the limited partnership.

(15)          Includes 12,000 shares subject toexercisable options.

(16)          Includes 70,176 shares subject toexercisable warrants.  Excludes 30,000shares subject to options that are not exercisable.

(17)          Includes 2,000 shares held by Mr.Parsky’s wife, as to which Mr. Parsky disclaims beneficial ownership.

(18)          Includes 53,667 shares subject toexercisable options.  Excludes 51,333shares subject to options that are not exercisable.

(19)          Includes 1,055,602 shares subject toexercisable options and warrants. Excludes 753,662 shares subject to options that are not exercisable.

 

71

----

##  

## **ITEM13.**                                  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

Webelieve the transactions described below were beneficial to us and were enteredinto on terms at least as favorable to us as we could have obtained fromunaffiliated third parties in arms-length negotiations.

**Relationship with Aurora Capital Group**

We were formed in 1994 at the direction of Aurora Capital Group as avehicle to acquire and consolidate companies in the fragmented drivetrainremanufacturing industry.  AuroraCapital Group is controlled by three of our directors, Messrs. Crowell,Parsky and Roeder.

We pay toAurora Management Partners, which is a part of Aurora Capital Group, a baseannual management fee for advisory and consulting services pursuant to awritten management services agreement. Aurora Management Partners is also entitled to reimbursements from usfor all of its reasonable out-of-pocket costs and expenses incurred inconnection with the performance of its obligations under the managementservices agreement.  The base annualmanagement fee is subject to increase, at the discretion of the disinterestedmembers of our board of directors, by up to an aggregate of $250,000 in theevent that we consummate one or more significant corporate transactions.  The base annual management fee has not beenincreased as a result of any of our acquisitions.  The base annual management fee is also subject to increase forspecified cost of living increases.  Thebase annual management fee was most recently increased in January 1999from $540,000.  If our EBITDA in any yearexceeds management’s budgeted EBITDA by 15.0% or more for that year, AuroraManagement Partners is entitled to receive an additional management fee equalto one half of its base annual management fee for that year.  Because our EBITDA did not exceedmanagement’s budgeted EBITDA by 15.0% in 2001, Aurora Management Partners didnot receive this additional management fee in 2000.  The base annual management fee payable to Aurora ManagementPartners, which was $550,000 for 2001, will be reduced as the collectivebeneficial ownership of our common stock by the Aurora partnerships declinesbelow 50%.  If the Aurora partnerships’collective beneficial ownership declines below 20%, the management servicesagreement will terminate.  Upon thecompletion of our recent public offering the Aurora partnerships’ ownershipdecreased from approximately 66% to approximately 58%.

If weconsummate any significant acquisitions, Aurora Management Partners will beentitled to receive a fee from us for investment banking services in connectionwith the acquisition.  The fee is equalto 2.0% of the first $75.0 million of the acquisition consideration(including debt assumed and current assets retained) and 1.0% of acquisitionconsideration (including debt assumed and current assets retained) in excess of$75.0 million.  Since ourformation, we have paid approximately $5.2 million of fees to AuroraManagement Partners for investment banking services in connection with ouracquisitions.  In January 2001, wepaid Aurora Management Partners a $750,000 fee for services in connection withthe October 2000 sale of the Distribution Group.  We are not obligated to make any payment to Aurora ManagementPartners at any time that we are in default under our senior subordinated notesor credit facility.

InOctober 1996, we granted options to purchase an aggregate of 48,000 sharesof common stock to Mr. Hardy (a director), Kurt Larsen (a former director)and two of our consultants, all four of whom were then employees of AuroraCapital Group.  These options, whichhave an exercise price of $4.67 per share, become exercisable in one-thirdincrements on each of the first three anniversaries of the date of grant andexpire in 2006.  In 1997, 12,000 ofthese options terminated when Mr. Larsen resigned from Aurora CapitalGroup and, in 2000, one of the consultants exercised 12,000 options.

**IndemnificationAgreements**

We haveentered into separate but identical indemnification agreements with each of ourdirectors and executive officers.  Theseagreements provide for, among other things, indemnification to the fullestextent permitted by law and advancement of expenses.

**Registration Rights**

Theholders of common stock outstanding before our initial public offering inDecember 1996 have “demand” and “piggyback” registration rights pursuantto a stockholders agreement.  Inaddition, General Electric Pension Trust has “demand” and “piggyback”registration rights with respect to a portion of the shares of common stock itowns.

 

72

----

## **ITEM14.**         EXHIBITS, FINANCIAL STATEMENTSCHEDULES, AND REPORTS ON FORM 8-K

(a)                                  Indexto Financial Statements, Financial Statement Schedules and Exhibits:

1.   FinancialStatements Index

See Index to Financial Statements and SupplementalData on page 37.

2.               FinancialStatement Schedules Index

II — Valuation andQualifying Accounts.................................................................. 80

All other schedules forwhich provision is made in the applicable accounting regulation of theSecurities and Exchange Commission are not required under the relatedinstructions or are inapplicable and therefore have been omitted.

3.   ExhibitIndex

The following exhibits are filed as part of thisAnnual Report on Form 10–K, or are incorporated herein by reference.

 
| **Exhibit****Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|-----------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1                   |   | Restated Certificate of  Incorporation of Aftermarket Technology Corp (previously filed as Exhibit 3.1  to the Company’s Current Report on Form 8-K filed on December 21, 2001  and incorporated herein by this reference)                                                                                                                                                                                                                                                                                                                           |   |
| 3.2                   |   | Amended  and Restated Bylaws of Aftermarket Technology Corp (previously filed as  Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on  December 21, 2001 and incorporated herein by this reference)                                                                                                                                                                                                                                                                                                                                     |   |
| 4.1                   |   | Indenture,  dated August 2, 1994, among Aftermarket Technology Corp., the Guarantors  named therein and Firstar Bank of Minnesota, N.A. (formerly known as American  Bank N.A., as Trustee for the Series B Notes (previously filed as  Exhibit 4.1 to the Company’s Registration Statement on Form S-4 filed on  November 30, 1994, Commission File No. 33-86838, and incorporated herein  by this reference)                                                                                                                             |   |
| 4.2                   |   | Indenture,  dated June 1, 1995, among Aftermarket Technology Corp., the Guarantors  named therein and Firstar Bank of Minnesota, N.A. (formerly known as American  Bank N.A., as Trustee for the Series D Notes (previously filed as  Exhibit 4.1 to the Company’s Registration Statement on Form S-4 filed on  June 21, 1995, Commission File No. 33-93776, and incorporated herein by  this reference)                                                                                                                                   |   |
| 4.3                   |   | First  Supplemental Indenture, dated as of February 23, 1995, among Aftermarket  Technology Corp., the Guarantors named therein and Firstar Bank of Minnesota,  N.A. (formerly known as American Bank N.A., as Trustee for the Series B  Notes (previously filed as Exhibit 4.3 to Amendment No. 1 to the Company’s  Registration Statement on Form S-1 filed on October 25, 1996, Commission  File No. 333-6697, and incorporated herein by this reference)                                                                          |   |
| 4.4                   |   | Second  Supplemental Indenture, dated as of June 1, 1995, among Aftermarket  Technology Corp., the Guarantors named therein and Firstar Bank of Minnesota,  N.A. (formerly known as American Bank N.A., as Trustee for the Series B  Notes (previously filed as Exhibit 4.4 to Amendment No. 1 to the Company’s  Registration Statement on Form S-1 filed on October 25, 1996, Commission  File No. 333-5597, and incorporated herein by this reference)                                                                              |   |
| 4.5                   |   | Third  Supplemental Indenture to the Series B Indenture and First Supplemental  Indenture to the Series D Indenture, dated as of July 25, 1996,  among Aftermarket Technology Corp., the Guarantors named therein and Firstar  Bank of Minnesota, N.A. (formerly known as American Bank N.A., as Trustee for  the Notes (previously filed as Exhibit 4.5 to Amendment No. 1 to the  Company’s Registration Statement on Form S-1 filed on October 25, 1996,  Commission File No. 333-5597, and incorporated herein by this reference) |   |

 

73

----

 
| 4.6   |   | Fourth  Supplemental Indenture to the Series B Indenture and Second Supplemental  Indenture to the Series D Indenture, dated as of June 1, 1998,  among Aftermarket Technology Corp., the Guarantors named therein and Firstar  Bank of Minnesota, N.A. (formerly known as American Bank N.A., as Trustee for  the Notes (previously filed as Exhibit 4.6 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1998 and  incorporated herein by this reference)                       |   |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.1  |   | Stockholders  Agreement, dated as of August 2, 1994, among Holdings, and certain of  its stockholders, optionholders and warrant holders (the Stockholders  Agreement (previously filed as Exhibit 10.1 to the Company’s Registration  Statement on Form S-4 filed on November 30, 1994, Commission File  No. 33-86838, and incorporated herein by this reference)                                                                                                                                                           |   |
| 10.2  |   | Amendment  No. 1 to the Stockholders Agreement, dated as of June 24, 1996  (previously filed as Exhibit 10.38 to Amendment No. 2 to the Company’s Registration  Statement on Form S-1 filed on November 6, 1996, Commission File No.  333-5597, and incorporated herein by this reference)                                                                                                                                                                                                                                   |   |
| 10.3  |   | Amendment  No. 2 to the Stockholders Agreement, dated as of October 24, 1996  (previously filed as Exhibit 10.39 to Amendment No. 2 to the Company’s  Registration Statement on Form S-1 filed on November 6, 1996, Commission  File No. 333-5597, and incorporated herein by this reference)                                                                                                                                                                                                                                     |   |
| 10.4  |   | Amendment  No. 3 to Stockholders Agreement, dated as of December 4, 1996 (previously  filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for  the year ended December 31, 1996 and incorporated herein by this  reference)                                                                                                                                                                                                                                                                                    |   |
| 10.5  |   | Amendment  No. 4 to Stockholders Agreement, dated as of December 16, 1996  (previously filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K  for the year ended December 31, 1996 and incorporated herein by this  reference)                                                                                                                                                                                                                                                                                        |   |
| 10.6  |   | Amended  and Restated Credit Agreement, dated as of March 6, 1998, among  Aftermarket Technology Corp., the Lenders from time to time parties thereto  and The Chase Manhattan Bank (the Credit Agreement (previously filed as  Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the  year ended December 31, 1997 and incorporated herein by this reference)                                                                                                                                               |   |
| 10.7  |   | Guarantee  and Collateral Agreement, dated as of March 6, 1998, by Aftermarket  Technology Corp. and each of the signatories thereto in favor of The Chase  Manhattan Bank as Agent for the banks and other financial institutions from  time to time parties to the Amended and Restated Credit Agreement (see  Exhibit 10.6 (previously filed as Exhibit 10.7 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1997 and  incorporated herein by this reference)                           |   |
| 10.8  |   | Amended  and Restated Tax Sharing Agreement, dated as of December 20, 1996, among  Aftermarket Technology Holdings Corp., Aaron’s Automotive  Products, Inc., ATC Components, Inc., CRS Holdings Corp., Diverco  Acquisition Corp., H.T.P., Inc., Mamco Converters, Inc., R.P.M.  Merit, Inc. and Tranzparts Acquisition Corp. (previously filed as  Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year  ended December 31, 1996 and incorporated herein by this reference) |   |
| 10.9  |   | Amended  and Restated Management Services Agreement, dated as of November 18,  1996, by and among Aftermarket Technology Corp., the subsidiaries of  Aftermarket Technology Corp., and Aurora Capital Partners L.P. (previously  filed as Exhibit 10.4 to Amendment No. 4 to the Company’s Registration  Statement on Form S-1 filed on October 25, 1996, Commission File No.  333-5597, and incorporated herein by this reference)                                                                                               |   |
| 10.10 |   | Aftermarket  Technology Corp. 1996 Stock Incentive Plan (previously filed as Exhibit 10.10  to the Company’s Annual Report on Form 10-K for the year ended December 31,  1996 and incorporated herein by this reference)                                                                                                                                                                                                                                                                                                               |   |
| 10.11 |   | Form  of Incentive Stock Option Agreement (previously filed as Exhibit 10.36 to  Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed on  October 25, 1996, Commission File No. 333-5597, and incorporated  herein by this reference)                                                                                                                                                                                                                                                                        |   |
| 10.12 |   | Form  of Non-Qualified Stock Option Agreement (previously filed as Exhibit 10.37 to  Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed on  October 25, 1996, Commission File No. 333-5597, and incorporated  herein by this reference)                                                                                                                                                                                                                                                                    |   |
| 10.13 |   | Amended  and Restated Warrant Certificate, dated June 24, 1996, for 70,176  warrants issued to Michael J. Hartnett (previously filed as Exhibit 10.20 to  the Company’s Annual Report on Form 10-K for the year ended December 31,  1996 and incorporated herein by this reference)                                                                                                                                                                                                                                               |   |

 

74

----

 
| 10.14 |   | Asset  Purchase Agreement, dated June 24, 1994, by and among RPM Merit, Donald  W. White, John A. White, The White Family Trust and RPM Acquisition Corp.  (previously filed as Exhibit 10.17 to the Company’s Registration Statement on  Form S-4 filed on November 30, 1994, Commission File No. 33-86838,  and incorporated herein by this reference)                                                                                                         |   |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.15 |   | Lease,  dated January 1, 1994, between CRW, Incorporated and Aaron’s Automotive  Products, Inc. with respect to property located at 2600 North Westgate,  Springfield, Missouri (previously filed as Exhibit 10.4 to the Company’s  Registration Statement on Form S-4 filed on November 30, 1994,  Commission File No. 33-86838, and incorporated herein by this reference)                                                                           |   |
| 10.16 |   | Amended  and Restated Lease, dated as of June 1, 1997, by and among Confar Investors  II, L.L.C. and Aaron’s Automotive Products, Inc. (previously filed as Exhibit 10.33  to the Company’s Annual Report on Form 10-K for the year ended  December 31, 1997 and incorporated herein by this reference)                                                                                                                                                     |   |
| 10.17 |   | Sublease,  dated April 20, 1994, between Troll Associates, Inc. and Component  Remanufacturing Specialists, Inc. with respect to property located at  400 Corporate Drive, Mahwah, New Jersey (previously filed as Exhibit 10.40 to  Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed on  November 6, 1996, Commission File No. 333-5597, and incorporated herein  by this reference)                                              |   |
| 10.18 |   | Sublease  Modification and Extension Agreement, dated as of February 28, 1996,  between Olde Holding Company and Component Remanufacturing  Specialists, Inc. with respect to property located at 400 Corporate  Drive, Mahwah, New Jersey (previously filed as Exhibit 10.41 to Amendment No.  2 to the Company’s Registration Statement on Form S-1 filed on  November 6, 1996, Commission File No. 333-5597, and incorporated  herein by this reference) |   |
| 10.19 |   | Stock  Subscription Agreement, dated as of November 18, 1996, between  Aftermarket Technology Corp. and the Trustees of the General Electric Pension  Trust (previously filed as Exhibit 10.44 to Amendment No. 4 to the  Company’s Registration Statement on Form S-1 filed on October 25, 1996,  Commission File No. 333-5597, and incorporated herein by this reference)                                                                                 |   |
| 10.20 |   | Asset Purchase Agreement dated  as of July 31, 1997 among Automatic Transmission Shops Inc., C.W. Smith,  ATS Remanufacturing, Inc. and Aftermarket Technology Corp. (previously  filed as Exhibit 10.41 to the Company’s Registration Statement on Form S-1  (File No. 333-35543 filed on September 12, 1997 and incorporated  herein by this reference)                                                                                                   |   |
| 10.21 |   | Lease  Agreement dated as July 31, 1997 between C.W. Smith and ATS  Remanufacturing, Inc. (previously filed as Exhibit 10.42 to the  Company’s Registration Statement on Form S-1 (File No. 333-35543 filed  on September 12, 1997 and incorporated herein by this reference)                                                                                                                                                                               |   |
| 10.22 |   | Form  of Indemnification Agreement between Aftermarket Technology Corp. and  directors and certain officers (previously filed as Exhibit 10.46 to  Amendment No. 1 the Company’s Registration Statement on Form S-1 (File  No. 333-35543 filed on October 1, 1997 and incorporated herein by this  reference)                                                                                                                                                              |   |
| 10.23 |   | Employment Agreement, dated as  of January 28, 2002, between Michael T. DuBose and Aftermarket Technology  Corp. (previously filed as Exhibit 10.3 to Amendment No. 1 the Company’s  Registration Statement on Form S-3 (File No. 333-75618 filed on  February 11, 2002 and incorporated herein by this reference)                                                                                                                                               |   |
| 10.24 |   | Aftermarket  Technology Corp. 1998 Stock Incentive Plan (previously filed as  Exhibit 10.55 to the Company’s Annual Report on Form 10-K for the  year ended December 31, 1998 and incorporated herein by this reference)                                                                                                                                                                                                                                         |   |
| 10.25 |   | Waiver and Amendment dated as  of March 26, 1999 to the Amended and Restated Credit Agreement, dates as of  March 26, 1998, among Aftermarket Technology Corp., the several banks and  other financial institutions from time to time parties thereto and The Chase  Manhattan Bank, as agent (previously filed as Exhibit 10.56 to the  Company’s Annual Report on Form 10-K for the year ended  December 31, 1998 and incorporated herein by this reference)   |   |
| 10.26 |   | Consent and Amendment dated as  of August 25, 1999 to the Amended and Restated Credit Agreement, dates as of  March 26, 1998, among Aftermarket Technology Corp., the several banks and  other financial institutions from time to time parties thereto and The Chase  Manhattan Bank, as agent (previously filed as Exhibit 10.57 to the  Company’s Annual Report on Form 10-K for the year ended  December 31, 1999 and incorporated herein by this reference) |   |
| 10.27 |   | Third  Amendment dated as of December 20, 1999 to the Amended and Restated Credit  Agreement, dates as of March 26, 1998, among Aftermarket Technology Corp.,  the several banks and other financial institutions from time to time parties  thereto and The Chase Manhattan Bank, as agent (previously filed as  Exhibit 10.58 to the Company’s Annual Report on Form 10-K for the  year ended December 31, 1999 and incorporated herein by this reference)     |   |

 

75

----

 
| 10.28 |   | Form of Employment Agreement  between Aftermarket Technology Corp. and its officers (previously filed as  Exhibit 10.60 to the Company’s Annual Report on Form 10-K for the  year ended December 31, 1999 and incorporated herein by this reference)                                                                                                                                                                                                  |   |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.29 |   | Stock Purchase Agreement dated as of  September 1, 2000 between Aftermarket Technology Corp. and ATCDG  Acquisition Corp., Inc. (previously filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K dated October 27, 2000 and  incorporated herein by this reference)                                                                                                                                                                     |   |
| 10.30 |   | Amendment to Stock Purchase Agreement dated as of  October 27, 2000 between Aftermarket Technology Corp. and ATCDG  Acquisition Corp., Inc. (previously filed as Exhibit 10.2 to the  Company’s Current Report on Form 8-K dated October 27, 2000 and  incorporated herein by this reference)                                                                                                                                                         |   |
| 10.31 |   | Amendment and Waiver, dated as of August 2,  2000, to the Amended and Restated Credit Agreement, dated as of March 6,  1998, among Aftermarket Technology Corp., the several banks and other  financial institutions from time to time parties thereto and The Chase  Manhattan Bank, as agent (previously filed as Exhibit 10.3 to the Company’s  Current Report on Form 8-K dated October 27, 2000 and incorporated  herein by this reference) |   |
| 10.32 |   | Consent and Amendment, dated as of October 26,  2000, to the Amended and Restated Credit Agreement, dated as of March 6,  1998, among Seller, the several banks and other financial institutions from  time to time parties thereto and The Chase Manhattan Bank, as agent  (previously filed as Exhibit 10.4 to the Company’s Current Report on  Form 8-K dated October 27, 2000 and incorporated herein by this reference)                     |   |
| 10.33 |   | Aftermarket Technology Corp.  2000 Stock Incentive Plan (previously filed as Exhibit 10.57 to the  Company’s Annual Report on Form 10-K for the year ended  December 31, 2000 and incorporated herein by this reference)                                                                                                                                                                                                                              |   |
| 10.34 |   | Amendment, dated as of March 1, 2001, to the  Amended and Restated Credit Agreement, dated as of March 6, 1998, among  Seller, the several banks and other financial institutions from time to time  parties thereto and The Chase Manhattan Bank, as agent (previously filed as  Exhibit 10.58 to the Company’s Annual Report on Form 10-K for the  year ended December 31, 2000 and incorporated herein by this reference)                |   |
| 10.35 |   | Amendment No. 2 to Stock Purchase Agreement  dated as of May 25, 2001 between Aftermarket Technology Corp. and ATC Distribution  Group (as the successor to ATCDG Acquisition Corp., Inc. (previously filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on  December 21, 2001 and incorporated herein by this reference)                                                                                                       |   |
| 10.36 |   | Agreement dated as of July 2, 2001 between  Aftermarket Technology Corp. and ATC Distribution Group (as the successor to  ATCDG Acquisition Corp., Inc. (previously filed as Exhibit 10.2 to the  Company’s Current Report on Form 8-K filed on December 21, 2001 and  incorporated herein by this reference)                                                                                                                                              |   |
| 10.37 |   | Amendment No. 3 to Stock Purchase Agreement  dated as of October 19, 2001 between Aftermarket Technology Corp. and  ATC Distribution Group (as the successor to ATCDG Acquisition Corp., Inc.  (previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K  filed on December 21, 2001 and incorporated herein by this reference)                                                                                                   |   |
| 10.38 |   | Credit  Agreement, dated as of February 8, 2002, made by Aftermarket Technology  Corp., the several Lenders from time to time party thereto, J.P. Morgan  Securities, Inc., JPMorgan Chase Bank and Credit Suisse First Boston  (previously filed as Exhibit 10.1 to Amendment No. 1 the Company’s  Registration Statement on Form S-3 (File No. 333-75618 filed on  February 11, 2002 and incorporated herein by this reference)                     |   |
| 10.39 |   | Guarantee and Collateral Agreement, dated as of February 8, 2002, made  by Aftermarket Technology Corp. and certain of its subsidiaries in favor of  JPMorgan Chase Bank, as Administrative Agent (previously filed as  Exhibit 10.2 to Amendment No. 1 the Company’s Registration Statement on  Form S-3 (File No. 333-75618 filed on February 11, 2002 and  incorporated herein by this reference)                                                  |   |

 

76

----

 
| *10.40 |   | Amendment No. 4 to  Stock Purchase Agreement dated as of December 28, 2001 between Aftermarket  Technology Corp. and ATC Distribution Group (as the successor to ATCDG  Acquisition Corp., Inc.)  |   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 21     |   | List of Subsidiaries (previously filed as Exhibit 21 to the  Company’s Annual Report on Form 10-K for the year ended  December 31, 2000 and incorporated herein by this reference) |   |
| *23    |   | Consent of Ernst & Young LLP, independent auditors)                                                                                                                                           |   |

 

----

*  Filed herewith.

(b)        Reportson Form 8-K

During the quarterended December 31, 2001 the Company filed the following reports on Form 8-K:

(1)          Reportdated December 21, 2001, filing certain exhibits.

(c)        Referto (a) 3 above.

(d)        Referto (a) 2 above.

 

77

----

 

**SIGNATURES**

Pursuantto the requirements of Section 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this Annual Report on Form 10-K to be signed onits behalf by the undersigned, thereunto duly authorized, on March 11, 2002.

 

| AFTERMARKET TECHNOLOGY  CORP. |
|-------------------------------|
|                          |
| By:                           |   | /s/ Michael T. DuBose |
|                          |   | Michael T. DuBose |
|                          |   | Chairman of the Board, President and Chief Executive  Officer |

Pursuant to therequirements of the Securities Exchange Act of 1934, this Annual Report on Form10–K has been signed by the following persons in the capacities indicatedon the dates indicated. 

 

| **Signature**             |   | **Title**                                                                                   |   | **Date**       |
|---------------------------|--------|---------------------------------------------------------------------------------------------|--------|----------------|
| /s/ Michael T. DuBose     |   | Chairman of the Board,  President and Chief Executive Officer (Principal Executive Officer) |   | March 11, 2002 |
| Michael T. DuBose         |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
| /s/ Barry C. Kohn         |   | Chief Financial Officer  (Principal Financial and Accounting Officer)                       |   | March 11, 2002 |
| Barry C. Kohn             |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
| /s/ Robert  Anderson |   | Director                                                                                    |   | March 11, 2002 |
| Robert  Anderson     |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
| /s/ Richard R. Crowell    |   | Director                                                                                    |   | March 11, 2002 |
| Richard R. Crowell        |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
| /s/ Dale F. Frey          |   | Director                                                                                    |   | March 11, 2002 |
| Dale F. Frey              |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
| /s/ Mark C. Hardy         |   | Director                                                                                    |   | March 11, 2002 |
| Mark C. Hardy             |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
| /s/ Michael J. Hartnett   |   | Director                                                                                    |   | March 11, 2002 |
| Michael J. Hartnett       |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |
| /s/ Gerald L. Parsky      |   | Director                                                                                    |   | March 11, 2002 |
| Gerald L. Parsky          |   |                                                                                        |   |           |
|                      |   |                                                                                        |   |           |

 

78

----

 

|                      |   |     |   |           |
|---------------------------|--------|----------|--------|----------------|
| /s/ Richard K. Roeder     |   | Director |   | March 11, 2002 |
| Richard K. Roeder         |   |     |   |           |
|                      |   |     |   |           |
|                      |   |     |   |           |
| /s/ J. Richard Stonesifer |   | Director |   | March 11, 2002 |
| J. Richard Stonesifer     |   |     |   |           |

 

79

----

**AftermarketTechnology Corp.**

** **

**Schedule II - Valuation andQualifying Accounts**

**(In Thousands)**

 

 
|                                                  |   |                               |   | **Additions**                             |   |                                     |   |           |   |
|-------------------------------------------------------|--------|------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|----------------|--------|
|                                                  |   | **Balance at Beginning of Period** |   | **Charge (Income) to Costs and Expenses** |   | **Adjustments   to Other Accounts** |   | **Deductions** |   | **Balance at End of Period** |   |
| Year  ended December 31, 1999:                        |   |                               |   |                                      |   |                                     |   |           |   |   |   |
| Reserve  and allowances deducted from asset accounts: |   |                               |   |                                      |   |                                     |   |           |   |   |   |
| Allowance  for uncollectible accounts                 |   | $                                  | 726    |                                      | $      | 206                                      |   | $              | 98     | (2) | $ | 163 | (1) | $ | 867 |   |
| Reserve  for inventory obsolescence                   |   | 5,294                              |   | 3,452                                     |   | —                                   |   | 4,252          |   | 4,494 |   |
| Year  ended December 31, 2000:                        |   |                               |   |                                      |   |                                     |   |           |   |   |   |
| Reserve  and allowances deducted from asset accounts: |   |                               |   |                                      |   |                                     |   |           |   |   |   |
| Allowance  for uncollectible accounts                 |   | 867                                |   | 1,219                                     |   | —                                   |   | 462            | (1)    | 1,624 |   |
| Reserve  for inventory obsolescence                   |   | 4,494                              |   | 5,765                                     |   | (2,962                                   | )(3)   | 821            |   | 6,476 |   |
| Year  ended December 31, 2001:                        |   |                               |   |                                      |   |                                     |   |           |   |   |   |
| Reserve  and allowances deducted from asset accounts: |   |                               |   |                                      |   |                                     |   |           |   |   |   |
| Allowance  for uncollectible accounts                 |   | 1,624                              |   | (44                                       | )      | —                                   |   | 373            | (1)    | 1,207 |   |
| Reserve  for inventory obsolescence                   |   | 6,476                              |   | 915                                       |   | 1,764                                    | (3)    | 4,134          |   | 5,021 |   |
|                                                       |        |                                    |        |                                           |        |                                          |        |                |        |  |  |  |  |  |  |  |

----

(1)                                       Accounts written off, net of recoveries.

(2)                                       Balances added or removed throughacquisitions or sales of companies.

(3)                                       Asset valuation adjustments are due tothe Company’s initial discontinuance of the independent aftermarket enginesbusiness during 2000 and its subsequent election to retain this business during2001.

** **

 

80

----