**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 
| **(Mark  One)**                                  |
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| **ý**                                       | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |
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| **For  the fiscal year ended December 31, 2002** |
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| **OR**                                           |
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| **o**                                            | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number 0-21803**

 

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**AFTERMARKETTECHNOLOGY CORP.**

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

 

Indicate by check markwhether 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 ýNo o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained 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. ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).  Yes o No ý

 

The aggregate marketvalue of the voting stock held by non-affiliates of the Registrant (based onthe closing price of such stock, as reported by The Nasdaq National Market, onJune 28, 2002) was $203.1 million.

 

The number of sharesoutstanding of the Registrant’s Common Stock, as of February 14, 2003, was24,211,786 shares.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

None.

 

 

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**AFTERMARKET TECHNOLOGY CORP.**

 

**ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2002**

 
| ITEM 1.   | BUSINESS.                                                                                        |
|-----------|--------------------------------------------------------------------------------------------------|
|      |                                                                                             |
| ITEM 2.   | PROPERTIES                                                                                       |
|      |                                                                                             |
| ITEM 3.   | LEGAL  PROCEEDINGS                                                                               |
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| ITEM  4.  | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                             |
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| ITEM  5.  | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                      |
|      |                                                                                             |
| ITEM  6.  | SELECTED  FINANCIAL DATA                                                                         |
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| 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 AND RELATED STOCKHOLDER  MATTERS |
|      |                                                                                             |
| ITEM  13. | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                  |
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| ITEM 14.  | CONTROLS AND  PROCEDURES                                                                         |
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| ITEM  15. | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                                |

 

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**SPECIAL NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

 

This Annual Report contains forward–looking statements (as suchterm is defined in Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934) and information relatingto us that are based on the current beliefs of our management as well asassumptions made by and information currently available to management,including statements related to the markets for our products, general trends inour operations or financial results, plans, expectations, estimates andbeliefs.  In addition, when used in thisAnnual Report, the words “may,” “could,” “should,” “anticipate,” “believe,”“estimate,” “expect,” “intend,” “plan,” “predict” and similar expressions andtheir variants, as they relate to us or our management, may identify forward–lookingstatements.  These statements reflectour judgment as of the date of this Annual Report with respect to futureevents, the outcome of which is subject to risks, which may have a significantimpact on our business, operating results or financial condition.  Readers are cautioned that these forward–lookingstatements are inherently uncertain. Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual results or outcomes mayvary materially from those described herein. We undertake no obligation to update forward-looking statements.  The risks identified in the section ofItem 1 entitled “Certain FactorsAffecting the Company,” amongothers, may impact forward-looking statements contained in this Annual Report.

 

**PART I**

 

**ITEM 1.****     BUSINESS**

 

**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 also remanufactures and distributes electroniccomponents.

 

Our DrivetrainRemanufacturing business sells factory–approved remanufactured drivetrainproducts 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 are Ford MotorCompany, DaimlerChrysler Corporation, General Motors Corporation and a numberof foreign OEMs.  In addition, our Drivetrain business sells selectremanufactured engines to several European OEMs.

 

Demand for our productswithin the Drivetrain business is largely a function of the number of vehiclesin operation, the average age of vehicles and the average number of milesdriven per vehicle.  These factors havegenerally 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 Drivetrain business hasbeen our primary business since our formation. For the year ended December 31, 2002, revenue from our Drivetrainbusiness was $286.5 million, or 69% of our total revenue, of which Ford,DaimlerChrysler and General Motors accounted for 51%, 32% and 8%,respectively.  In addition, in theUnited States we also sell remanufactured engines and transmissions in theindependent aftermarket.  For the yearended December 31, 2002, revenue from our aftermarket business was $16.6million, or 4% of our total revenue.

 

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Our Logistics business consists of three operatingunits: Logistics Services, a provider of value added warehouse and distributionservices, turnkey order fulfillment and information services for AT&TWireless Services; Material Recovery, a provider of returned materialreclamation and disposition services and management services for failedcomponents, commonly referred to as cores, primarily for Ford and, to a lesserextent, General Motors and Mazda; and Autocraft Electronics, an automotiveelectronic remanufacturing and distribution business.  Services within our Logistics business are designed to meet thespecialized needs of our customers.

 

The logistics industry hasevolved over the last 20 years due to dramatic improvements in technologyand increased demand in customer service requirements.  Growth in our logistics business withAT&T Wireless is primarily dependent on cellular telephone handset demandand AT&T Wireless’ share of new cellular telephone sales volume.  Our Logistics business benefits fromupgrades in cellular telephone technology through increased replacement demandfor 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, 2002, revenue from ourLogistics business was $114.2 million, or 27% of our total revenue, of whichAT&T Wireless accounted for 67%.

 

**Industry Background**

 

***AutomotiveAftermarket***

 

The automotive aftermarketin the United States, which consists of sales of parts and services for vehiclesafter their original purchase, has been largely non-cyclical and has generallyexperienced steady growth over the past several years, unlike the market fornew vehicle sales.  This consistentgrowth is due principally to an increase in the number of vehicles inoperation, an increase in the average age of vehicles, and an increase in theaverage number of miles driven per vehicle.

 

***RemanufacturingProcess***

 

Remanufacturing is a processthrough which used assemblies are returned to a central facility where they aredisassembled and their component parts are cleaned, refurbished andtested.  The usable component parts arethen combined with new parts in a high volume cellular manufacturing process tocreate remanufactured assemblies.

 

When an assembly such as atransmission or engine fails, there are generally three alternatives availableto return the vehicle to operating condition. The dealer or independent repair shop may:

 

•                  removethe assembly, disassemble it into its component pieces, replace worn or brokenparts with remanufactured or new components, and reinstall the assembly in thevehicle;

 

•                  replacethe assembly with an assembly from a remanufacturer such as us; or

 

•                  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.

 

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

 

•                  First,costs to the OEM associated with remanufactured assemblies generally aresubstantially less than new or dealer-rebuilt assemblies due to our use of highvolume manufacturing techniques and salvage methods that enable us to refurbishand reuse a high percentage of original components, as well as our lower costof production.  The cost savingsproduced by remanufactured assemblies help the OEMs manage their warrantyexpenses.

 

•                  Second,remanufactured assemblies are generally of consistent high quality due to theprecision manufacturing techniques, technical upgrades and rigorous inspectionand testing 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 arecausing 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 a component with a remanufactured component generally takesconsiderably less time than the time needed to rebuild the component, therebysignificantly reducing the time the vehicle is at the dealer or repair shop andallows the dealer and repair shops to increase their volume of business.

 

•                  Fourth,the environmental benefits 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 annually re–process thousands of tons of materials that wouldotherwise 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 increaseddemand in customer service requirements. As companies’ logistics decisions involve greater emphasis on costefficiency and increased focus on core competencies, companies are increasinglyreevaluating their in-house logistics functions.  Many companies have decided to outsource the management of all orpart of 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 physical movement of goods.

 

***Logistics Process***

 

Our logistics process is determined in closeconsultation with our customers.  Forinstance, for AT&T Wireless, our supply chain management services includewarehousing, picking, packing, shipping and delivery of wireless handsets,including wireless data devices, and accessories.  Our integrated logistics services include

 

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inventory management, private labeling, kitting and customizedpackaging, the management and distribution of time sensitive marketingmaterials and product warranty and returns processing.

 

**Our Competitive Strengths**

 

Webelieve our core competencies include the following factors:

 

***OurRemanufacturing Technology***

 

We specialize in volume remanufacturing ofhigh-quality automotive transmissions, torque converters, engine long blocksand automotive electronics.  Ourremanufacturing process is completed by testing products using state-of-the-artequipment such as sophisticated test stands that enable us to replicate OEMtest procedures.

 

***Our High Quality Products with aSound ISO Quality Foundation***

 

Our remanufactured products are of consistent highquality due to the precision manufacturing techniques, technical upgrades andrigorous inspection and testing procedures employed in our remanufacturingprocesses.  We are dedicated toupholding the quality of our customers’ products and hold QS-9000Certification, ISO-9002 Certification and Ford’s Q1 Certification.

 

***Our Fulfillment and Customer ServiceCapabilities***

 

Our Logistics business provides high-speed, same day,technology driven fulfillment.  Ourlogistics approach involves our team of specialists who work with the client tounderstand deliverables, understand communication points within the supplychain, design solutions, establish operational and business metrics, eliminatewaste and improve efficiencies.

 

***Our Information TechnologyManagement and Response Skills***

 

In our Logistics business, we use state-of-the-artsoftware and computer systems to meet customers’ needs in product security andconfidentiality, product qualification and identification, inventorymanagement, interactive electronic communication, authorized product sales andcommodity recycling, as well as providing customers with solutions for theirsupply chain management, reverse logistics, product tracking and producthistory needs, while maintaining service and quality levels.

 

***Our Customer Relationships***

 

In recognition of our consistently high level ofservice and product quality throughout our relationship with DaimlerChrysler,over the years we have received numerous awards from Chrysler.  Additionally, over the past few years, wehave strengthened our relationship with many other of our customers, asevidenced by the award of new business with Ford, Jaguar, Isuzu, Kia andGeneral Motors.  To strengthen ourcustomer relationships and improve all aspects of customer service andoperations, we have implemented our “Lean and Continuous Improvement” and“Customer Delight” programs.  Underthese programs, we have installed a number of training and operatinginitiatives aimed at improving efficiency and productivity.

 

**Our Growth Strategies**

 

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

 

•                  increasingsales to existing customers;

 

•                  introducingnew products and programs;

 

•                  establishingnew customer relationships; and

 

•                  pursuingfuture acquisitions.

 

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***Increasing Salesto Existing Customers***

 

*Drivetrain Customers.*  Weintend to increase our business with our existing Drivetrain customers byworking with OEMs to increase dealer utilization of remanufacturedtransmissions 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 remanufactured components,OEM dealers may enhance their cost competitiveness, when compared toindependent 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.*  Weintend to increase penetration of our existing Logistics business customer baseby broadening our offering of Logistics products and services and by marketingour core competencies as solutions to our customers’ needs.  In 2000, AT&T Wireless awarded usadditional programs covering the packaging and distribution of cellulartelephone accessories and the distribution of point-of-sale and other marketingmaterials.  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 New Products andPrograms***

 

*Drivetrain Business.*  Wecontinue to work with our OEM customers to identify additional remanufacturedproducts and services where we can provide value to the OEM.  In this way, we believe that we will be ableto leverage our customer relationships and remanufacturing competency.  In 2000, Ford selected us to supplyremanufactured transmissions for use in Ford’s new Focus, and to supply a newline of Motorcraft­branded remanufactured transmissions.  In2002 we were awarded new business by General Motors, Kia and Jaguar.

 

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

 

***Establishing New CustomerRelationships***

 

*Drivetrain Customers.*  Webelieve that opportunities for growth exist with select foreignOEMs 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, and in October 2002, Honda awarded us a contract to remanufacturetransmissions for its domestic vehicles.

 

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.*  Weplan to leverage our existing relationships with automobile OEMs into newlogistics customer relationships.  Webelieve that our logistics services business should be attractive to newcustomers who recognize that outsourcing this function will enable them to bothfocus on their core competencies and have an efficient product distributionsystem.  We also believe that the costsavings and environmental benefits

 

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providedby our material recovery business will be attractive to other OEMs.  InJune 2001, Mazda North America Operations awarded us a logistics pilotprogram contract under which we harvest and consolidate used or excess productand then ship it to Mazda authorized dealers. In 2002, we were awarded new automotive telematics business withMotorola.

 

***Pursuing Future Acquisitions***

 

An important element of our growth strategy is theacquisition and integration of complementary businesses in order to broadenproduct offerings, capture market share and improve profitability.  We have made various acquisitions in thepast and, to the extent suitable acquisition candidates, acquisition terms andfinancing are available, we intend to make acquisitions in the future.  We currently expect that there may be moreacquisition opportunities available in the logistics industry than theautomotive drivetrain remanufacturing industry.

 

**Our Drivetrain Remanufacturing Business**

 

Our Drivetrain business consists of five operatingunits that primarily remanufacture and sell transmissions directly toautomobile manufacturers.  Drivetrainsegment sales accounted for 68.9%, 67.7%, 68.3%, 73.6% and 77.3% of our 2002,2001, 2000, 1999 and 1998 revenues, respectively.

 

We remanufacture factory–approved transmissionsfor warranty and post-warranty replacement of transmissions for Ford,DaimlerChrysler, General Motors and several foreign OEMs, including Honda,Mitsubishi, Isuzu, Subaru and Kia, primarily for their United States dealernetworks, and Hyundai for its Canadian network.  The number of transmission models we remanufacture has beenincreasing to accommodate the greater number of models currently used invehicles manufactured by our OEM customers.

 

We operate a facility in England that remanufacturesfactory–approved engines for several European OEMs, including Jaguar andthe European divisions of Ford and General Motors.  These engines are used for warranty and post-warrantyreplacement.  The facility in Englandalso does assembly and modification of new production engines for some of ourOEM customers.

 

Our largest Drivetrain segment customers are Ford andDaimlerChrysler, to whom we primarily supply remanufactured transmissions foruse in Ford and Chrysler automobiles and light trucks.  Additionally, we provide remanufacturedcomponents to several other OEMs including transmissions to GeneralMotors, Honda, Kia, Mitsubishi, Subaru and Isuzu and engines to Jaguar, LandRover, Aston Martin and the European divisions of Ford and General Motors.  In general, the OEMs retain ownership ofcores.  We generally sell products toeach OEM pursuant to supply arrangements for individual transmission or enginemodels, which supply arrangements typically may be terminated by the OEM on90 days notice or less.

 

Historically, we have developed and maintained strongrelationships at many levels in both the corporate and factory organizations ofthe Chrysler division of DaimlerChrysler, and we have received numerous awardsover the years from Chrysler in recognition of our consistently high level ofservice and product quality. Additionally, over the past few 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 addition, we have received Ford’s “Q-1”and “Dedication to Customer Service” awards in recent years.

 

All of our facilities that remanufacture transmissionshave QS-9000 certification, a complete quality management system developed formanufacturers who subscribe to the ISO 9002 quality standards.  The system is designed to help suppliers,such as us, develop a quality system that emphasizes defect prevention andcontinuous improvement in manufacturing processes.

 

DaimlerChrysler began implementing remanufacturingprograms for certain of its Chrysler transmission models in 1986 and hasutilized us as its sole supplier of remanufactured transmissions since1989.  DaimlerChrysler has advised usthat, by implementing a remanufacturing program for Chrysler vehicles,DaimlerChrysler has realized substantial warranty cost savings, standardizedthe quality of its dealers’ aftermarket repairs and reduced its own inventoryof replacement parts.  We presently donot provide remanufactured transmissions or other components toDaimlerChrysler’s Mercedes Benz division.

 

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We began remanufacturing transmissions for Ford in1989 and for General Motors in 1985.  Webelieve that we are the largest provider of remanufactured transmissions toFord for automobiles and light trucks in North America and we are one of threesuppliers of remanufactured transmissions to General Motors.

 

**Our Logistics Business**

 

Our Logistics business provides supply chainmanagement to our customers.  Ouroperations consist of a warehouse, distribution and turnkey order fulfillmentand information services business, an automotive electronic partsremanufacturing and distribution business and a material recovery partsprocessing, or reverse logistics business. We acquired our Logistics business as part of the Autocraft acquisitionin 1998.

 

***Logistics Customers***

 

*AT&T Wireless Services.*  Thelogistics services operating unit provides value added warehouse anddistribution services, turnkey order fulfillment and information services forAT&T Wireless.  As part of ourproduct offering, we provide bulk and direct fulfillment of cellular telephonesand accessories to AT&T Wireless subscribers and partners and point-of-saleand 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.*  Theautomotive electronic components operating unit remanufactures and distributesradios and instrument and display clusters for General Motors, Delphi andVisteon, and remanufactures and distributes various cellular products (*e.g.,*navigation systems) primarily forVisteon and General Motors.

 

*Material Recovery.*  Weprovide returned material reclamation and disposition services to assistautomobile OEMs with the management of their dealer parts inventory,thereby reducing the OEMs’ parts costs and assisting them in being moreenvironmentally responsible.  Under thisprogram, various points in the OEM supply chain send their excess and obsoleteparts inventory to our facility in Oklahoma City.  We then sort the parts and redistribute the useful parts onbehalf of the OEM to other dealers to fill back orders or to the OEM’s productdistribution centers for restocking. Parts that are no longer useful are scrapped and recycled.  The parts remain the property of the OEM,and we receive a fee for our redistribution services.

 

We developed this program primarily with Ford as a wayto substantially improve the rate of recycling of automotive parts.  As a result of the material recovery program,the number of Ford parts that are sent to landfills has been significantlyreduced.  We recently expanded the scopeof this business by providing similar services, currently on a more limitedscale, to General Motors and Mazda.  Webelieve that the opportunity to provide material recovery services for otherOEMs will arise in the future as OEMs recognize the benefits of thisprogram.

 

As part of our material recovery program, we havedeveloped an Internet-enabled interactive system that allows an OEM to trackthe availability, condition and value of core, and to produce dealer creditsand facilitate logistics.  Our systemalso allows an OEM and its dealers and vendors to track product on a real timebasis and provides system-wide inventory management, cross–docking andproduct redistribution capabilities.

 

**Competition**

 

Inour Drivetrain business, we primarily compete in the market for remanufacturedtransmissions sold to the automotive aftermarket through the OEM dealernetworks.  This market, narrowly defined,is one in which the majority of industry supply comes from a limited number ofparticipants.  Competition is basedprimarily on product quality, service, delivery, technical support and priceand tends to be split along customer lines. We believe that we have established excellent relationships with ourcustomers 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.

 

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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.

 

**Corporate History**

 

Wewere formed in 1994 as a Delaware corporation at the direction of AuroraCapital Group.  Since then, we havecompleted the following acquisitions: 

 
| **Year** |   | **Company(1)**                                    |   | **Description**                                                                                                                                                                               |   | **Acquisition  Price(2)** |   |
|----------|--------|---------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|
|     |   |                                              |   |                                                                                                                                                                                          |   | **(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 and Subaru                                      |   | $                         | 30.5   |   |
| 1997     |   | ATS  Remanufacturing                              |   | •        Remanufactures transmissions for General Motors                                                                                              |   | $                         | 12.9   | (3) |
| 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) for Ford                                       |   |                      |   |
|     |   |                                              |   | •        Remanufactures transmissions for Ford and remanufactures engines for European operations of Ford, General Motors and Jaguar                  |   |                      |   |
|     |   |                                              |   | •        Remanufactures and distributes automotive electronic components                                                                              |   |                      |   |

 

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(1)          Excludesacquisitions that were subsequently sold.

(2)          Includestransaction fees and related expenses.

(3)          Excludessubsequent payments totaling $19 million due on each of the first 14anniversaries of the closing date, of which a total of $7.4 million has beenpaid through December 31, 2002.

 

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 consolidatedfinancial statements and related discussion and analysis included in thisannual 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.  However, efforts to identify an interestedbuyer placing sufficient value on this business were unsuccessful and weultimately elected to retain our independent aftermarket engine business.  With the expansion of the product offeringto include select remanufactured domestic transmissions, we are now working togrow this business.

 

8

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**Employees**

 

Asof December 31, 2002, we had approximately 3,500 full-time and temporaryemployees.  We believe our employee andlabor relations are good.  We have notexperienced any work stoppage to date.  At our Mahwah, NJ facility, which remanufactures transmissions, transfercases and assorted components, workers voted (by one vote) in November 2002 tojoin District 6 of the International Union of Industrial, Service, Transport,and Health Employees.  This actionaffects approximately 100 hourly workers. Collective bargaining began in January 2003.

 

**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, which includedPhase I assessments by independent consultants of all manufacturing andvarious distribution facilities, found that a number of these facilities havehad 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 found that reporting and other regulatoryrequirements, including waste management procedures, were not or may not havebeen satisfied.  Although there can beno assurance, we believe that, based in part on the investigations conducted,in part on remediation completed prior to or since the acquisitions, and inpart on the indemnification provisions of the agreements entered into inconnection with our acquisitions, we will not incur any material liabilitiesrelating 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’s leaseof 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 formerDistribution Group facilities that had been closed prior to the DistributionGroup sale, including the former facilities in Azusa, California within theSuperfund site mentioned above and former manufacturing facilities in Mexicali,Mexico and Dayton, Ohio.  We also agreedto indemnify 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 subject to a $750,000 deductible and a$12.0 million cap, except with respect to closed facilities.  In 2002, we negotiated an additional$100,000 deductible applicable to all Distribution Group claims forindemnification.

 

9

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**Certain FactorsAffecting 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.***

 

Afew customers account for a significant majority of our net revenues eachyear.  In 2002, we had three customersthat individually accounted for more than 10% of our revenues.  Ford accounted for 37.0%, 34.6% and 30.0% ofour net sales for 2002, 2001 and 2000, respectively, DaimlerChrysler accountedfor 22.4%, 24.7% and 29.6% of our net sales in 2002, 2001 and 2000,respectively, and AT&T Wireless accounted for 18.5%, 17.6% and 14.1% of ournet sales during 2002, 2001 and 2000, 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, we recently negotiated lower prices with AT&T Wireless inconnection with the renewal of the contract through the end of 2003.  Because of the short termination periods andperiodic price negotiations, we cannot give any assurances of the stability of theprices for our products and, therefore, our revenue streams.  Significant price fluctuations couldmaterially affect our business.

 

***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 has increased.  We have periodically experienced situationsin which the inability to obtain sufficient cores has limited our ability toaccept orders.  We may experience coreshortages in the future.  In addition,from time to time, we experience shortages of components manufactured by ourOEM customers that we require for our transmission remanufacturingprocess.  If we experience suchshortages for an extended period of time, it could have a material adverseeffect 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:

 

•                  consumersretaining automobiles for shorter periods, which could occur in periods ofeconomic growth or stability;

 

•                  transmissiondesign that results in greater reliability;

 

10

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•                  consumersdriving fewer miles per year, which could occur if gasoline prices were toincrease; and

 

•                  mildweather, such as that experienced during the winter of 2001-2002.

 

***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:

 

•                  shortenedwarranty periods that could reduce the demand for our products;

 

•                  reductionsin the amount of inventory our OEM customers elect to retain;

 

•                  longertime periods before remanufactured transmissions are introduced for use with aparticular automobile;

 

•                  guidelinesthat affect dealer decisions to rebuild units at the dealer rather than installremanufactured transmissions; and

 

•                  pricingstrategies.

 

***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 and theircompliance 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 severalfacilities in Azusa, California located within what is now a federal Superfundsite.  The entity that leased thefacilities to RPM has been identified by the United States EnvironmentalProtection Agency as one of the many potentially responsible parties forenvironmental liabilities associated with that Superfund site.  Any liability we may have from this site orotherwise under environmental laws could materially affect our business.

 

11

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***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.

 

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

 

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

 

•                  quarterlyvariations in our results of operations, which may be impacted by, among otherthings, price renegotiations with our customers;

 

•                  quarterlyvariations in the results of operations or stock prices of comparablecompanies;

 

•                  announcementsof new products or services offered by us or our competitors;

 

•                  changesin earnings estimates or buy/sell recommendations by financial analysts;

 

•                  thestock price performance of our customers; and

 

•                  generalmarket conditions or market 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 February 14, 2003, Aurora EquityPartners L.P. and Aurora Overseas Equity Partners I, L.P.collectively owned 7,443,026 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:

 

•                  pricingstrategies;

 

•                  changesin product costs from vendors;

 

•                  therisk of some of the items in our inventory becoming obsolete;

 

•                  therelative mix of products sold during the period; and

 

•                  generalmarket and competitive conditions.

 

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

 

12

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***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 for futuregrowth will also depend on our ability to hire, train and retain skilled workersin all areas of our business.  Wecurrently do not have key executive insurance relating to our senior managementteam.

 

***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 except in the case of our Mahwah, New Jersey facility, we cannot giveany assurance that we will not experience additional union activity in thefuture.  Any union organizationactivity, if successful, could result in increased labor costs and, even ifunsuccessful, could result in a temporary disruption of our productioncapabilities and a distraction to our management.  Additionally, we need qualified managers and a number of skilledemployees with technical experience in order to operate our businesssuccessfully.  From time to time, theremay be a shortage of skilled labor which may make it more difficult andexpensive 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:

 

•                  dilutiveissuances of equity securities;

 

•                  reductionsin our operating results;

 

•                  incurrenceof debt and contingent liabilities;

 

•                  futureimpairment of goodwill and other intangibles; and

 

•                  otheracquisition-related expenses.

 

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 our investment.  In addition, to the extent thatconsolidation becomes more prevalent in our industry, the prices for suitableacquisition candidates may increase to unacceptable levels and limit ourgrowth.

 

***We may encounter problems inintegrating 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:

 

•                  retainkey management members and technical personnel of acquired companies;

 

•                  successfullymerge corporate cultures and operational and financial systems; and

 

13

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•                  realizesale and cost reduction 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.

 

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

 

Asof December 31, 2002, our outstanding indebtedness was $164.6 million, andwe had cash on hand of $65.5 million. While the proceeds from our public offering that was completed onMarch 8, 2002 have been used to reduce our outstanding indebtedness, ourindebtedness may increase from time to time in the future for various reasons,including fluctuations in operating results, capital expenditures and possibleacquisitions.  Our consolidatedindebtedness level could materially affect our business because:

 

•                  asubstantial portion of our cash flow from operations must be dedicated tointerest payments on our indebtedness and is not available for other purposes,which amount would increase if prevailing interest rates rise;

 

•                  itmay materially limit or impair our ability to obtain financing in the future;

 

•                  itmay reduce our flexibility to respond to changing business and economicconditions or take advantage of business opportunities that may arise; and

 

•                  ourability to pay dividends is limited.

 

Inaddition, our credit facility requires us to meet specified financial ratiosand limits our ability to enter into various transactions.

 

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 February 14, 2003, the Aurora partnerships held approximately 40% 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 Related StockholderMatters” and Item 13. “Certain Relationships 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.

 

14

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

 

Weconduct our business from the following facilities:

 
| **Location**             |   | **Approx.****Sq. Feet** |   | **Lease****Expiration****Date** |   | **Products Produced/Services Provided**                  |
|--------------------------|--------|-------------------------|--------|---------------------------------|--------|---------------------------------------------------------------|
| Springfield,  MO         |   | 280,800                 |   | 12/31/03                        |   | transmissions(1)                                              |
| Springfield,  MO         |   | 200,000                 |   | 2006                            |   | engines(1)                                                    |
| Gastonia,  NC            |   | 130,000                 |   | 2009                            |   | transmissions  and valve bodies(1)                            |
| Mahwah,  NJ              |   | 147,000                 |   | 12/31/03                        |   | transmissions,  transfer cases and assorted components(1)     |
| Oklahoma  City, OK       |   | 100,000                 |   | owned                           |   | returned  material reclamation and disposition(2)             |
| Oklahoma  City, OK       |   | 200,000                 |   | owned                           |   | transmissions(1)                                              |
| Oklahoma  City, OK       |   | 94,000                  |   | 10/31/08                        |   | core  qualification center(2)                                 |
| Carrollton  (Dallas), TX |   | 39,000                  |   | 2006                            |   | radios  and instrument and display clusters(2)                |
| Ft.  Worth, TX           |   | 221,000                 |   | 2008                            |   | cellular  phone and accessory distribution(2)                 |
| Ft.  Worth, TX           |   | 108,000                 |   | 2005                            |   | cellular  phone accessory packaging and returns processing(2) |
| Houston,  TX             |   | 10,000                  |   | 12/31/03                        |   | radios(2)                                                     |
| Grantham,  England       |   | 120,000                 |   | owned                           |   | engines  and related components(1)                            |

 

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(1)          Thisfacility is used by the Drivetrain business.

(2)          Thisfacility is used by the Logistics business.

 

Wealso lease 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 OF SECURITYHOLDERS**

 

Nomatters were submitted to a vote of the stockholders of the Company during thequarter ended December 31, 2002.

 

15

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**PART II**

 

**ITEM 5.****                                MARKET FOR REGISTRANT’S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS**

## ** **

Our common stock has beentraded on the Nasdaq National Market under the symbol “ATAC” since our initialpublic offering in December 1996.  As ofFebruary 14, 2003, there were approximately 47 record holders of our commonstock.  The following table sets forth for the periods indicated the range ofhigh and low sale prices of the common stock as reported by Nasdaq: 

 
|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| 2002           |   |     |   |    |   |
| First quarter  |   | $        | 19.47  |    | $      | 15.55 |   |
| Second quarter |   | 24.70    |   | 17.50   |   |
| Third quarter  |   | 22.05    |   | 12.65   |   |
| Fourth quarter |   | 14.90    |   | 8.76    |   |
|           |   |     |   |    |   |
| 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   |   |

 

On February14, 2003, the last sale price of the commonstock, as reported by Nasdaq, was $10.11 per share.

 

Wehave not paid cash dividends on the common stock to date.  Because we currently intend to retain anyearnings to provide funds for the operation and expansion of our business andfor the servicing and repayment of indebtedness, we do not intend to pay cashdividends 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.  SeeItem 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Liquidity and Capital Resources.”  Any determination to pay cash dividends onthe common stock in the future will be at the sole discretion of our Board ofDirectors.

 

On July 29, 2002, weissued 70,176 shares of our common stock in a transaction that was notregistered under the Securities Act of 1933, as amended.  The shares were issued upon the exercise ofwarrants that had been issued by us in 1994 to Mr. Michael Hartnett forserving on our Board of Directors.  Thewarrant exercise price of $1.67 per share was paid in cash.  We relied on Section 4(2) of the SecuritiesAct as an exemption from registration, based on the private nature of theoffering and the limited number of offerees.

 

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**ITEM 6.****                                 SELECTED FINANCIAL DATA**

 

The selected financialdata presented below with respect to the statements of operations data for theyears ended December 31, 2002, 2001 and 2000 and the balance sheet data asof December 31, 2002 and 2001 are derived from the Consolidated FinancialStatements of the Company that have been audited by Ernst & Young LLP,independent auditors, and are included elsewhere herein, and are qualified byreference to such financial statements and notes related thereto.  The selected financial data with respect tothe statements of operations data for the years ended December 31, 1999 and1998 and the balance sheet data as of December 31, 2000, 1999 and 1998,are derived from the Consolidated Financial Statements of the Company that havebeen audited by Ernst & Young LLP, independent auditors, but are notincluded herein.  The data providedshould be read in conjunction with the Consolidated Financial Statements, relatednotes and other financial information included in this Annual Report.  The results of the Distribution Group, Inc.subsidiary, which was sold in October 2000, are classified as discontinuedoperations and are excluded from the selected financial data presented below.

 
|                                                                                                             |   | **Year Ended  December 31,**               |    |
|------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                                                             |   | **2002**                                   |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                                                             |   | **(In  thousands, except per share data)** |    |
| **Statement  of Operations Data:**                                                                               |   |                                       |    |   |   |   |   |   |   |   |   |
| Net  sales                                                                                                       |   | $                                          | 415,902 |   | $ | 393,381 |   | $ | 372,493 |   | $ | 365,563 |   | $ | 300,723 |   |
| Cost  of sales                                                                                                   |   | 272,360                                    |    | 255,360 |   | 248,438 |   | 246,224 |   | 219,539 |   |
| Special  charges(1)                                                                                              |   | —                                     |    | 216 |   | 9,134 |   | 2,965 |   | 1,347 |   |
| Gross  profit                                                                                                    |   | 143,542                                    |    | 137,805 |   | 114,921 |   | 116,374 |   | 79,837 |   |
| Selling,  general and administrative expense                                                                     |   | 60,370                                     |    | 59,939 |   | 57,331 |   | 56,736 |   | 47,496 |   |
| Amortization  of intangible assets                                                                               |   | 333                                        |    | 5,028 |   | 5,255 |   | 5,527 |   | 5,038 |   |
| Special  (credits) charges(1)                                                                                    |   | (277                                       | )       | 5,114 |   | 23,450 |   | 4,345 |   | 5,327 |   |
| Income  from operations                                                                                          |   | 83,116                                     |    | 67,724 |   | 28,885 |   | 49,766 |   | 21,976 |   |
| Interest  income                                                                                                 |   | 2,769                                      |    | 1,524 |   | 234 |   | — |   | — |   |
| Interest  expense and other, net                                                                                 |   | (12,768                                    | )       | (21,623 | ) | (24,830 | ) | (23,251 | ) | (21,917 | ) |
| Income  tax expense                                                                                              |   | (25,141                                    | )       | (18,098 | ) | (1,883 | ) | (9,739 | ) | (974 | ) |
| Income  (loss) from continuing operations before extraordinary items(2)(3)                                  |   | $                                          | 47,976  |   | $ | 29,527 |   | $ | 2,406 |   | $ | 16,776 |   | $ | (915 | ) |
| Per  share income (loss) from continuing operations before extraordinary items(4)                                |   | $                                          | 1.99    |   | $ | 1.40 |   | $ | 0.11 |   | $ | 0.79 |   | $ | (0.05 | ) |
| Shares  used in computation of per share income (loss) from continuing operations  before extraordinary items(4) |   | 24,119                                     |    | 21,059 |   | 21,163 |   | 21,164 |   | 19,986 |   |
|                                                                                                             |   |                                       |    |   |   |   |   |   |   |   |   |
| **Other  Data:**                                                                                                 |   |                                       |    |   |   |   |   |   |   |   |   |
| Capital  expenditures(5)                                                                                         |   | $                                          | 13,103  |   | $ | 13,516 |   | $ | 11,682 |   | $ | 10,072 |   | $ | 10,764 |   |

 

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|                                         |   | **As of  December 31,** |       |
|----------------------------------------------|--------|------------------------------|------------|
|                                         |   | **2002**                     |       | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                         |   | **(In thousands)**           | ** ** |
| **Balance  Sheet Data:**                     |   |                         |       |   |   |   |   |   |   |   |   |
| Working  capital, continuing operations      |   | $                            | 128,342    |   | $ | 52,700 |   | $ | 53,457 |   | $ | 29,744 |   | $ | 36,128 |   |
| Property,  plant and equipment, net          |   | 54,616                       |       | 52,577 |   | 46,276 |   | 47,897 |   | 45,830 |   |
| Total  assets                                |   | 454,030                      |       | 396,858 |   | 407,499 |   | 577,782 |   | 517,794 |   |
| Long-term  liabilities, less current portion |   | 159,561                      |       | 181,694 |   | 213,537 |   | 302,491 |   | 258,051 |   |
| Common  stockholders’ equity            |   | 206,435                      |       | 109,335 |   | 80,239 | (6) | 176,144 |   | 168,011 |   |
|                                              |        |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                See Item 8. “Consolidated Financial Statements andSupplementary Data-Note 20” for a description of special (credits) charges.

 

(2)                Income (loss) from continuing operations beforeextraordinary items for the years ended December 31, 2002, 2001, 2000,1999 and 1998 excludes gain (loss) from discontinued operations, net of incometaxes, of $1,279, $(959), $(99,289), $(9,969) and $(6,200), respectively.

 

(3)                Income (loss) from continuing operations beforeextraordinary items for the year ended December 31, 2002 excludesextraordinary items in the amount of $2,828 ($4,502 less related income taxbenefit of $1,674).  In addition, income(loss) from continuing operations before extraordinary items for the year endedDecember 31, 1998 excludes an extraordinary item in the amount of $703($1,172 less related income tax benefit of $469).

 

(4)                SeeItem 8. “Consolidated Financial Statements and Supplementary Data-Note 14” fora description of the computation of earnings per share.

 

(5)                Excludescapital expenditures made by certain of the Company’s subsidiaries prior tosuch subsidiaries’ respective acquisitions and any capital expenditures made inconnection with such acquisitions.

 

(6)                Commonstockholders’ equity as of December 31, 2000 reflects the loss on the sale ofour Distribution Group business and from the initial discontinuance of, andsubsequent election to retain, our independent aftermarket engine business.

 

18

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**ITEM 7.****                        MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

Thefollowing discussion should be read in conjunction with our consolidatedfinancial statements and notes thereto included elsewhere in this AnnualReport.  See Item 8. “ConsolidatedFinancial Statements and Supplementary Data.”

 

Readersare cautioned that the following discussion contains certain forward-lookingstatements and should be read in conjunction with the “Special Note RegardingForward-Looking Statements” appearing at the beginning of this Annual Report.

 

**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 alsoremanufactures and distributes electronic components.

 

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, 2002,revenue from our Drivetrain business was $286.5 million, or 68.9% of our totalrevenue.  In addition, in the United Stateswe also sell remanufactured engines and transmissions to the independentaftermarket.  For the year endedDecember 31, 2002, revenue from this portion of our business was $16.6million, or 4.0% of our total revenue.

 

Growthin our Logistics business with AT&T Wireless is primarily dependent oncellular telephone handset demand and AT&T Wireless’ share of new cellulartelephone sales volume. Our Logistics business benefits from upgrades incellular telephone technology through increased replacement demand for moreadvanced handsets, from any increases in the number of AT&T Wirelesssubscribers and from any expansion of our service offering with AT&TWireless. Because we do not take actual ownership of the cellular telephoneinventory, we do not face the risk of inventory obsolescence. For the yearended December 31, 2002, revenue from our Logistics business was $114.2million, or 27.4% of our total revenue, of which AT&T Wireless accountedfor 67.2%.

 

**COMPONENTS OF INCOME AND EXPENSE**

 

*Revenue.*  In our DrivetrainRemanufacturing segment and independent aftermarket business, we recognizerevenues, primarily from the sale of remanufactured transmissions andremanufactured engines, at the time of shipment to the customer and, to alesser extent, upon the completion or performance of a service. In ourLogistics segment, revenue is primarily related to providing:

 

•                  value added warehouse and distribution services;

 

•                  turnkey order fulfillment and informationservices;

 

•                  returned material reclamation and dispositionservices;

 

•                  core management services; and

 

•                  automotive electronic components remanufacturingand distribution services,

 

and is generallyrecognized upon completion or performance of those services.

 

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*Cost of Sales.*  Cost ofsales represents the actual cost of purchased components and other materials,direct labor, indirect labor and warehousing cost and manufacturing overheadcosts, including depreciation, utilized directly in the production of productsor performance of services for which revenue has been recognized.

 

*Selling, General & Administrative Expense.*  Selling,general and administrative (“SG&A”) expenses generally are those costs notdirectly related to the production process or the performance of a revenuegenerating service and include all selling, marketing and customer serviceexpenses as well as expenses related to general management, finance andaccounting, information services, human resources, legal, and corporateoverhead expense.

 

*Amortization of Intangibles.*   OnJanuary 1, 2002, we adopted Statement 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.  Theadoption of the impairment provisions of SFAS No. 142 has had no effect on ourresults of operations or our financial position.  During 2002, amortization of intangible assets primarilyconsisted of amortization expense for non-compete agreements, whereas prior to2002 this consisted primarily of amortizationof goodwill.

 

*Special (Credits) Charges.*  We have periodicallyidentified areas where cost reductions and efficiencies could be achievedthrough consolidation of redundant facilities, outsourcing functions orchanging processes or systems. Some of these cost reduction or processimprovement initiatives result in costs which we have described as specialcharges and include, but are not limited to, severance benefits for terminatedemployees, lease termination and other facility exit costs, losses on thedisposal of fixed assets, impairment of goodwill and write-down of inventories.

 

**Critical Accounting Policies**

 

Our financial statementsare based on the selection and application of significant accounting policies,some of which require management to make estimates and assumptions.  We believe that the following are some ofthe more critical judgment areas in the application of our accounting policiesthat currently affect our financial condition and results of operations.

 

*Allowancefor Doubtful Accounts.* We maintain allowances for doubtful accounts for estimated lossesresulting from the failure of our customers to make required payments.  We evaluate the adequacy of our allowancefor doubtful accounts and make judgments and estimates in determining theappropriate allowance at each reporting period.  If a customer’s financial condition were to deteriorate,additional allowances that may be required could have a material adverse impacton our financial statements.

 

*Reservefor 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, however these would not be expected to have a material adverseimpact on our financial statements.

 

*WarrantyLiability.*  We providean allowance for the estimated cost of product warranties at the time revenueis recognized.  While we engage inextensive product quality programs and processes, including inspection andtesting at various stages of the remanufacturing process and the testing ofeach finished assembly on equipment designed to simulate performance underoperating conditions, our warranty obligation is affected by product failurerates.  Should actual product failurerates differ from our estimates, revisions to the estimated warranty liabilitymay be required, however these would not be expected to have a material adverseimpact on our financial statements.

 

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**Segment Reporting**

 

We have two reportable segments in continuing operations: the DrivetrainRemanufacturing segment and the Logistics segment. The DrivetrainRemanufacturing segment consists of five operating units that primarily sellremanufactured transmissions directly to Ford, DaimlerChrysler, General Motorsand several foreign OEMs, primarily for use as replacement parts by theirdomestic dealers during the warranty and post-warranty periods following thesale of a vehicle. In addition, the Drivetrain Remanufacturing segment sellsselect remanufactured and newly assembled engines to EuropeanOEMs including Ford’s and General Motor’s European operations and Jaguar.Our Logistics segment consists of three operating units:

 

•                  a provider of value added warehouse anddistribution services, turnkey order fulfillment and information services forAT&T Wireless;

 

•                  a provider of returned material reclamation anddisposition services and core management services primarily to Ford and to alesser extent, General Motors and Mazda; and

 

•                  an automotive electronic components remanufacturingand distribution business, including components for the OnStar program,primarily for Delphi and Visteon.

 

Our “Other” business unit, which is not a separate reportable segment,remanufactures and distributes domestic and foreign engines and, to a lesserextent, distributes domestic remanufactured transmissions from regionaldistribution points 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,production processes, products sold and distribution channels.

 

**Results of Operations**

 

The following table sets forth financial statement data expressed as apercentage of net sales.

 
|                                                                           |   | **Year Ended December 31,** |   |
|--------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                           |   | **2002**                         |   | **2001** |   | **2000** |   |
|                                                                           |   |                             |   |   |   |   |   |
| Net sales                                                                      |   | 100.0                            | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                                                  |   | 65.5                             |   | 64.9 |   | 66.7 |   |
| Special charges                                                                |   | —                           |   | 0.1 |   | 2.5 |   |
| Gross profit                                                                   |   | 34.5                             |   | 35.0 |   | 30.8 |   |
| SG&A expense                                                               |   | 14.5                             |   | 15.2 |   | 15.4 |   |
| Amortization of intangible assets                                              |   | 0.1                              |   | 1.3 |   | 1.4 |   |
| Special (credits) charges                                                      |   | (0.1                             | )      | 1.3 |   | 6.2 |   |
| Income from operations                                                         |   | 20.0                             |   | 17.2 |   | 7.8 |   |
| Interest income                                                                |   | 0.7                              |   | 0.4 |   | 0.1 |   |
| Other income, net                                                              |   | —                           |   | 0.2 |   | — |   |
| Equity in losses of investee                                                   |   | (0.1                             | )      | — |   | — |   |
| Interest expense                                                               |   | (3.0                             | )      | (5.7 | ) | (6.7 | ) |
| Income from continuing operations before income taxes  and extraordinary items |   | 17.6                             |   | 12.1 |   | 1.2 |   |
| Income tax expense                                                             |   | 6.1                              |   | 4.6 |   | 0.6 |   |
| Income from continuing operations before extraordinary  items                  |   | 11.5                             | %      | 7.5 | % | 0.6 | % |

 

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***Year Ended December 31, 2002Compared to the Year Ended December 31, 2001***

 

Income fromcontinuing operations before extraordinary items increased $18.5 million, or 62.7%,to $48.0 million ($1.99 per diluted share) in 2002 from $29.5 million ($1.40per diluted share) in 2001.

 

Our resultsinclude the following special items for 2002:

 

•                  $1.9 million (net of tax), or $0.08per diluted share, for certain non-operating income items primarily related toincome tax refunds and associated interest income which we do not expect torecognize in future periods; and

 

•                  $0.2 million (net of tax), or $0.01per diluted share, of income for an adjustment to previously recorded specialcharges,

 

and the followingspecial items for 2001:

 

•                  $3.4 million (net of tax), or $0.16per diluted share, of expense for amortization of intangibles with nocomparable expense in 2002 due to the adoption of SFAS No. 142 on January 1, 2002, pursuant to which we nolonger recognize goodwill amortization;

 

•                  $3.3 million (net of tax), or $0.16per diluted share, of special charges, see “Special Charge” discussion below;and

 

•                  $0.6 million (net of tax), or $0.03per diluted share, gain related to the saleof the preferred stock of the Distribution Group, which we received in 2000 aspartial consideration for the sale of that business.

 

Excluding theseitems, the increase is primarily attributable to revenue growth and improvedprofitability in our Logistics segment and to a lesser extent in our DrivetrainRemanufacturing segment combined with a reduction in interest expense,partially offset by reduced engines volume in our independent aftermarketbusiness.

 

*Net Sales.*  Net sales increased$22.5 million, or 5.7%, to $415.9 million for 2002 from$393.4 million for 2001.  Thisincrease was driven primarily by:

 

•                  an increase in sales ofremanufactured transmissions to Ford, driven by growth in the installed base, arelatively harsh summer and an improvement in customer fill-rate that resultedin the capture of previously lost sales;

 

•                  an increase in sales to GeneralMotors of approximately $9 million related to a new program that began in July,2002 under which we bill General Motors for previously consigned directmaterials costs plus a fee for materials management and inventory carryingcosts;

 

•                  an increase in sales for value–addedwarehouse and distribution services to AT&T Wireless, driven by continuedgrowth in the market for cellular phones and services;

 

•                  an increase in sales of new enginesand related parts to Ford Power Products in support of certain fleet programs;

 

•                  an increase in sales to GeneralMotors and Delphi for electronics remanufacturing and logistics supportassociated with the OnStar telematics program that began in the third quarterof 2001; and

 

•                  an increase in sales for coremanagement services provided to Ford under a new core management program wewere awarded in 2001, partially offset by

 

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•                  a decrease in sales of remanufacturedengines to the independent aftermarket primarily attributable to a generalsoftness in demand believed to be driven by general economic conditions, whichinclude the continuation of new car incentives, a reduction in used car valuesand a corresponding increase in the utilization of salvage engines, combinedwith an unusually mild winter;

 

•                  a decrease in sales of remanufacturedtransmissions to DaimlerChrysler due to an unusually mild winter, and adisruption of market demand resulting from an OEM-to-dealer price increaseprimarily impacting post warranty sales. This decrease was partially offset by a lessening of the impact ofDaimlerChrysler’s on-going inventory reductions, whereby DaimlerChryslerreduced its inventory levels by approximately six weeks in 2001 but only byapproximately two weeks in 2002.  Weestimate DaimlerChrysler’s inventory level to currently be at about five weeks;

 

•                  a decrease in sales of remanufacturedradios, instrument display clusters and other electronic components; and

 

•                  a decrease in sales of remanufacturedelectronic engine control modules as a result of our exit from that productline.

 

Sales to Ford accountedfor 37.0% and 34.6%, DaimlerChrysler accounted for 22.4% and 24.7% and AT&TWireless accounted for 18.5% and 17.6% of our revenues for 2002 and 2001,respectively.

 

*GrossProfit.*  Gross profitincreased $5.7 million, or 4.1%, to $143.5 million for 2002 from$137.8 million for 2001.  Thisincrease was primarily the result of the changes in volume and mix of revenuesdescribed above coupled with the benefits of our Lean and ContinuousImprovement initiatives and other cost reduction programs. As a percentage ofnet sales, gross profit decreased to 34.5% in 2002 from 35.0% for 2001.  This decrease is primarily the result of thebilling to General Motors of approximately $9 million of direct material costs,which were previously consigned, with a slightly smaller amount reflected in costof goods sold.

 

*SG&A Expense.*  SG&Aexpense increased $0.5 million, or 0.8%, to $60.4 million for 2002from $59.9 million for 2001.  As apercentage of net sales, SG&A expense decreased to 14.5% for 2002 from15.2% for 2001.  The increase resultsprimarily from spending in support of the General Motors materials managementprogram, the Ford core management program and our initiative to penetrate theindependent aftermarket for remanufactured transmissions, largely offsetby benefits from our cost reduction initiatives.

 

*Amortization of Intangible Assets.* Amortization of intangible assets decreased $4.7 million to$0.3 million for 2002 from $5.0 million for 2001.  We no longer amortize goodwill due tothe application of SFAS No. 142.

 

*Special (Credits) Charges.*  During2002, we recorded income of $0.3 million ($0.2 million net of tax) from the adjustment of provisions previouslyestablished (i) primarily for asset write-downs related to the shut-down of ourremanufactured automotive electronic control modules operation where actualrecoveries from the sale of assets were favorable to original estimates and(ii) for severance and related costs primarily related to the consolidation ofour information systems groups thatare no longer expected to be incurred. Additionally, we recorded a gain of $0.8 million for the partialreversal of a previously established provision related to the DrivetrainRemanufacturing segment for a potential non-income state tax liability whosemaximum exposure has been reduced, offset by a special charge of $0.8 million relatedto the Drivetrain Remanufacturing segment for a retroactive insurance premiumadjustment related to 1998 and 1999 self-insured workers compensation claims.

 

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During 2001, werecorded $5.3 million of special charges ($3.3 million net of tax)including $2.4 million for the Drivetrain Remanufacturing segment,$2.4 million for the Logistics segment and $0.5 million forconsolidation of our two information systems groups.  The $2.4 million related to the Drivetrain Remanufacturingsegment consisted of $1.6 million of severance and related costs for 35people, primarily associated with the de-layering of certain managementfunctions and $0.8 million of facility exit and idle capacity costs associatedwith facility consolidations and implementation of cellularized manufacturingwithin the segment.  The$2.4 million of special charges in the Logistics segment consisted of$1.9 million of costs related to the shut-down of our remanufacturedautomotive electronic control modules product line 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 to our two information systems groups was related toseverance costs for four people primarily associated with the consolidation ofthose functions.

 

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.*  Incomefrom operations increased $15.4 million, to $83.1 million for 2002from $67.7 million for 2001.  Thisincrease is primarily attributable to a $5.6 million decrease in specialcharges (credits) for 2002 as compared to 2001 and a $4.7 million decrease inamortization of intangibles for 2002 as compared to 2001 due to the adoption ofSFAS No. 142, combined withrevenue growth and the benefit of cost reduction initiatives, partially offsetby the increase in SG&A expense in support of growth initiatives.   As a percentage of net sales, income fromoperations increased to 20.0% in 2002 from 17.2% in 2001.

 

*Interest Income.*  Interestincome increased $1.3 million, or 86.7%, to $2.8 million for2002 from $1.5 million for 2001.  Thisincrease was primarily due to interest income earned on our increased cashbalances invested in cash and cash equivalents during 2002 as compared to2001.  In addition, 2002 includes $0.3million of interest income from tax refunds recorded during 2002, which we donot expect to recognize in future periods.

 

*Other Income (Expense), Net.*  Otherincome (expense) net, decreased $0.7 million, to $0.1 million for 2002 from$0.8 million for 2001.  During 2001, werecorded a gain of $0.9 million on the sale of the preferred stock of theDistribution Group, which was received in 2000 as partial consideration for thesale of that business.

 

*Equity in Losses of Investee.*  The lossfrom our equity investment in our unconsolidated subsidiary increased $0.5million in 2002 as compared to 2001, primarily due to start-up costs of thisbusiness.

 

*Interest Expense. *Interest expensedecreased $10.1 million, or 45.1%, to $12.3 million for 2002 from $22.4 million for 2001.  This decrease was primarily due to a generaldecline in interest rates and the use of lower rate debt, combined with areduction in debt outstanding.  Inaddition, we recorded income of $0.2 millionfor an interest expense adjustment related to deferred compensation paymentsassociated with the 1997 ATS acquisition that were made during 2002.

 

*Income Tax Expense. *Our effective income tax rate decreased to 34.4% for 2002 from38.0% in 2001.  During 2002 we recordedincome, which we do not expect to recognize in future periods, of (i) $0.8million related to federal and state income tax refunds recorded in 2002 and(ii) $0.7 million related to adjustments to deferred tax liabilities relatingto closed tax years.  The balance of our effective income tax ratereduction is primarily the result of the adoption of SFAS No. 142 and theimpact of tax deductible goodwill, combined with a favorable change in the mixof taxable income generated in states with lower tax rates in 2002 as comparedto 2001.

 

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*Discontinued Operations.*  During 2002, we recorded a gain fromdiscontinued operations of $1.3 million related to the sale of the DistributionGroup comprised of (i) $1.0 million for an increase in the estimated income taxbenefits associated with the sale and (ii) $0.3 million based upon updatedinformation regarding remaining obligations and other costs.

 

During 2001, we recordeda loss from discontinued operations of $1.0 million, net of income tax benefitsof $0.6 million.  This charge includedthe following on a pre-tax basis: (i) $2.7 million in expense for the increaseto the estimated loss on the sale of the Distribution Group; (ii) $2.1 millionin income for the reversal of the estimated accrued loss on disposal of ourindependent aftermarket engines business; and (iii) $1.0 million in expense forthe reclassification of the operating results of our independent aftermarketengines business from discontinued operations to continuing operations, asrequired by EITF No. 90-16.

 

*Extraordinary Items. *During 2002, we recorded acharge of $2.8 million, net of income tax benefits of $1.7 million, related to(i) the write-off of previously capitalized debt issuance costs and a callpremium associated with the early redemption of our 12% senior subordinatednotes and (ii) the write-off of previously capitalized debt issuance costs inconnection with the termination of our old credit facility.

 

**DrivetrainRemanufacturing Segment**

 

The following tablepresents net sales, segment profit before special charges and goodwillamortization and segment profit expressed in millions of dollars and as apercentage of net sales: 

 
|                                                             |   | **Year Ended December 31,** |   |
|------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                             |   | **2002**                         |   | **2001** |   |
| Net  sales                                                       |   | $                                | 286.5  |   | 100.0 | % | $ | 266.3 |   | 100.0 | % |
| Segment  profit before special charges and goodwill amortization |   | $                                | 51.0   |   | 17.8 | % | $ | 46.7 |   | 17.5 | % |
| Less:  Special charges                                      |   | —                           |   |   |   | 2.4 |   |   |   |
| Less:  Goodwill amortization                                |   | —                           |   |   |   | 4.3 |   |   |   |
| Segment profit                                                   |   | $                                | 51.0   |   | 17.8 | % | $ | 40.0 |   | 15.0 | % |

 

*Net Sales.*  Net sales increased$20.2 million, or 7.6%, to $286.5 million for 2002 from$266.3 million for 2001.  Thisincrease was driven primarily by:

 

•                  an increase in sales ofremanufactured transmissions to Ford, driven by growth in the installed base, arelatively harsh summer and an improvement in customer fill-rate that resultedin the capture of previously lost sales;

 

•                  an increase in sales to GeneralMotors of approximately $9 million related to a new program that began in July,2002 under which we bill General Motors for previously consigned directmaterials costs plus a fee for materials management and inventory carryingcosts; and

 

•                  an increase in sales of new enginesand related parts to Ford Power Products in support of certain fleet programs;partially offset by

 

a decrease in sales ofremanufactured transmissions to DaimlerChrysler due to an unusually mildwinter, and a disruption of market demand resulting from an OEM-to-dealer priceincrease primarily impacting post-warranty sales.  This decrease was partially offset by a lessening of the impactof DaimlerChrysler’s on-going inventory reductions, whereby DaimlerChryslerreduced its inventory levels by approximately six weeks in 2001 but by onlyapproximately two weeks in 2002.  Weestimate DaimlerChrysler’s inventory level to currently be at about five weeks.

 

Sales to Ford accounted for 50.6% and 47.6% of segment revenues for 2002and 2001, respectively. Sales to DaimlerChrysler accounted for 31.5% and 35.6%of segment revenues for 2002 and 2001, respectively.

 

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*Special Charges.*  During2002 we recorded a gain of $0.8 million for the partial reversal of apreviously established provision for a potential non-income state tax liabilitywhose maximum exposure has been reduced, offset by a special charge of $0.8million related to the Drivetrain Remanufacturing segment for a retroactiveinsurance premium adjustment related to 1998 and 1999 self-insured workerscompensation claims.

 

During2001, we recorded $2.4 million of special charges.  The special charges include$1.6 million of severance and related costs primarily associated with thede-layering of certain management functions and $0.8 million of facilityexit and idle capacity costs associated with facility consolidations andimplementation of cellularized manufacturing within the segment.

 

*Segment Profit.*  Segmentprofit increased $11.0 million, or 27.5%, to $51.0 million (17.8% ofsegment net sales) for 2002 from $40.0 million (15.0% of segment netsales) for 2001.  Excluding the specialcharge and goodwill amortization expense items totaling $6.7 million recordedin 2001, segment profit increased $4.3 million, or 9.2%, between the twoperiods.  The increase wasprimarily the result of changes in sales volume, price and mix ofremanufactured transmissions as referenced above combined with the benefit ofcost reductions realized as a result of our lean and continuous improvementprogram and other cost reduction initiatives, which include avoidance of vendordirect material price increases, engineering gain sharing with customers andother material usage and salvage programs, implementation of cellular and leanmanufacturing techniques and process reengineering.

 

*LogisticsSegment*

 

Thefollowing table presents net sales, segment profit before special (credits)charges and goodwill amortization and segment profit expressed in millions ofdollars and as a percentage of net sales:

 
|                                                                       |   | **Year Ended December 31,** |   |
|----------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                       |   | **2002**                         |   | **2001** |   |
| Net  sales                                                                 |   | $                                | 114.2  |   | 100.0 | % | $ | 105.2 |   | 100.0 | % |
| Segment  profit before special (credits) charges and goodwill amortization |   | $                                | 36.6   |   | 32.0 | % | $ | 29.4 |   | 27.9 | % |
| Less:  Special (credits) charges                                      |   | (0.2                             | )      |   |   | 2.4 |   |   |   |
| Less:  Goodwill amortization                                          |   | —                           |   |   |   | 0.5 |   |   |   |
| Segment  profit                                                            |   | $                                | 36.8   |   | 32.2 | % | $ | 26.5 |   | 25.2 | % |

 

*Net Sales.*  Net sales increased$9.0 million, or 8.6%, to $114.2 million for 2002 from $105.2 millionfor 2001.  This increase was primarilyattributable to

 

•                  an increase in sales for value–addedwarehouse and distribution services to AT&T Wireless, driven by continuedgrowth in the market for cellular phones and services;

 

•                  an increase in sales to GeneralMotors and Delphi for electronics remanufacturing and logistics supportassociated with the OnStar telematics program that began in the third quarterof 2001;

 

•                  an increase in sales for coremanagement services provided to Ford under a new core management program wewere awarded in 2001;

 

partially offset by:

 

•                  a decrease in sales of remanufacturedradios, instrument display clusters and other electronic components; and

 

•                  a decrease in sales of remanufacturedelectronic engine control modules as a result of our exit from that productline.

 

Sales to AT&TWireless accounted for 67.2% and 65.7% of segment revenues for 2002 and 2001,respectively.

 

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*Special (Credits) Charges.*  Duringthe year ended December 31, 2002, we recorded income of $0.2 million primarilyrelated to the reversal of a provision previously established principally forasset write-downs related to the shut-down of our remanufactured automotiveelectronic control modules product line where actual recoveries from the saleof assets were favorable to original estimates.

 

The$2.4 million of special charges recorded during 2001, included thefollowing:

 

•                  $1.9 million of costs related to theshut-down of the segment’s remanufactured automotive electronic control modulesproduct line including $0.7 million of severance and related costs;$0.6 million related to the write-down of fixed assets; $0.3 millionof facility exit and other costs related to the shutdown; $0.2 millionrelated to inventory write–downs; and $0.1 for the write-down ofuncollectible accounts receivable balances; and

 

•                  $0.5 million of severance and related costsprimarily associated with the upgrade of certain management functions withinthe segment.

 

*Segment Profit.*  Segmentprofit increased $10.3 million, or 38.9%, to $36.8 million (32.2% ofsegment net sales) for 2002 from $26.5 million (25.2% of segment netsales) for 2001.  Excluding the specialcharge income item of $0.2 million recorded in 2002 and the special charge andgoodwill amortization expense items totaling $2.9 million recorded in2001, segment profit increased $7.2 million, or 24.5%, between the twoperiods.  The increase wasprimarily the result of changes in sales volume, price and mix as describedabove combined with cost reductions and other productivity improvementsresulting from the increased use of automation and process reengineering andthe implementation of lean manufacturing techniques, partially offset by (i)inefficiencies and other costs associated with the launch and ramp-up of theFord core management program, (ii) an increase in spending in support of keygrowth initiatives in the segment and (iii) a reduction in the inventory shrinkperformance bonus from AT&T Wireless based on a reduction in the averagevalue of inventory.

 

*Other*

 

Thefollowing table presents net sales and segment profit (loss) for theindependent aftermarket engine and transmission business expressed in millionsof dollars and as a percentage of net sales: 

 
|                  |   | **Year Ended December 31,** |   |
|-----------------------|--------|-----------------------------|--------|
|                  |   | **2002**                    |   | **2001** |   |
| Net sales             |   | $                           | 16.6   |   | 100.0 | % | $ | 21.9 |   | 100.0 | % |
|                  |   |                        |   |   |   |   |   |   |   |   |   |
| Segment profit (loss) |   | $                           | (4.5   | ) | (27.1 | )% | $ | 1.7 |   | 7.8 | % |

 

*Net Sales.*  Net sales decreased$5.3 million, or 24.2%, to $16.6 million for 2002 from$21.9 million for 2001. This decrease was primarily attributable toa general softness in demand for remanufactured engines believed to be drivenby general economic conditions, which include the continuation of new carincentives, a reduction in used car values and a corresponding increase in theutilization of salvage engines, combined with a mild winter. Additionally, weexperienced a decline in demand for remanufactured engines as a result of acompetitor’s aggressive price reductions late in the third quarter of 2001.  During the first quarter of 2002 we adjustedour prices and have since recaptured and subsequently added to our marketshare. Furthermore, sales increased $1.6 million from the launch of ourinitiative to sell remanufactured transmissions directly into the independentaftermarket via this channel.

 

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*SegmentProfit (Loss).* Segment profit (loss) decreased $6.2 million, to a loss of$4.5 million for 2002 from a profit of $1.7 million for 2001.  This decrease was primarily the result of

 

•                  the sales volume, price and mix asdescribed above;

 

•                  a decline in operating leverageresulting from the volume decline and a reduction in finished goodsinventories;

 

•                  one-time warranty costs associatedwith a defective valve seal obtained from a certain supplier;

 

•                  the reversing impact of the prioryear’s inventory valuation allowance adjustment; and

 

•                  an increase in cost to support theCompany’s aftermarket transmissions initiative,

 

partially offset by costreductions and other productivity improvements realized as a result of theCompany’s lean and continuous improvement program and other cost reductioninitiatives.

 

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

 

Income from continuing operations increased $27.1 million, to$29.5 million ($1.40 per diluted share) in 2001 from $2.4 million($0.11 per diluted share) in 2000. During 2001, we recorded $3.3 million (net of tax), or $0.16 per dilutedshare, of special charges, primarily related to initiatives designed to improveoperating efficiencies and reduce costs (see “Special Charges” below) and a$0.6 million (net of tax), or $0.03 per diluted share, gain related to the saleof the preferred stock of the Distribution Group, which we received in 2000 aspartial consideration for the sale of that business.  During 2000, we recorded $20.4 million (net of tax), or $0.97 perdiluted share of special charges primarily related to the write-off of goodwilland the recording of valuation allowances for specified assets associated withour decision to discontinue our independent aftermarket engine business.  This business was subsequently retained (see“Discontinued Operations”).  Excludingthe special charges and the gain on the sale of the preferred stock, thisincrease was primarily attributable to substantial growth in the Logisticssegment, productivity improvements resulting from our lean and continuousimprovement program and other cost reduction initiatives and increasedprofitability in the independent aftermarket engine business, partially offsetby reduced margins in the Drivetrain Remanufacturing segment largely related toprice and inventory reduction initiatives at certain OEM customers.

 

*Net Sales.*  Net sales increased$20.9 million, or 5.6%, to $393.4 million for 2001 from$372.5 million for 2000.  Thisincrease was driven primarily by:

 

•                  growth in the Logistics segment, attributable toan increase in sales for value-added warehouse and distribution services,driven by the growth in the market for cellular phones and services;

 

•                  growth in the Logistics segment attributable tothe ramp up of the two new programs we were awarded by AT&T Wireless inearly 2000, covering the packaging and distribution of cell phone accessoriesand the distribution of point-of-sale and other marketing materials, whichbegan generating revenue for us in the second half of 2000; and

 

•                  growth in the Drivetrain Remanufacturing segment,primarily related to an increase in sales of remanufactured transmissions toFord.

 

Thisincrease was partially offset by a decline in remanufactured transmissions soldto DaimlerChrysler as a result of its inventory reduction initiative, a declinein revenue in the independent aftermarket engine business resulting from achange in the distribution channel for this business and a decline in revenuein the Logistics segment related to the termination of its remanufacturedelectronic control module product line.

 

Salesto DaimlerChrysler 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.

 

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*Gross Profit.*  Gross profit increased$22.9 million, or 19.9%, to $137.8 million for 2001 from$114.9 million for 2000.  Thisincrease was primarily the result of increased sales in the Logistics segmentand improved productivity as a result of our lean and continuous improvementprogram and other cost reduction initiatives, partially offset by a decline ingross profit in the Drivetrain Remanufacturing segment resulting from:

 

•                  price concessions provided to DaimlerChrysler as aresult of their request for supplier participation in their cost reductioninitiatives;

 

•                  the sales mix of remanufactured transmissions; and

 

•                  production inefficiencies resulting from theimpact of DaimlerChrysler’s and GM’s inventory reduction initiatives.

 

Inaddition, gross profit increased $8.9 million in 2001 as compared to 2000 as aresult of a decrease in special charges. (see “Special Charges” below)

 

*SG&A Expense.*  SG&Aexpense increased $2.6 million, or 4.5%, to $59.9 million for 2001from $57.3 million for 2000.  Theincrease was primarily the result of an increase in spending in support ofgrowth initiatives in the Logistics segment and on our Lean and ContinuousImprovement and Customer Delight initiatives, partially offset by a decrease incost in the independent aftermarket engine business resulting from theelimination of our branch distribution network.  As a percentage of net sales, SG&A expense decreased slightlyto 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, primarilyattributable to the write–off of goodwill related to the independentaftermarket engine business on June 30, 2000.

 

*Special Charges.*  During2001, we recorded $5.3 million of special charges ($3.3 million netof tax) including $2.4 million for the Drivetrain Remanufacturing segment,$2.4 million for the Logistics segment and $0.5 million forconsolidation of our two information systems groups.  The $2.4 million related to the Drivetrain Remanufacturingsegment consists of $1.6 million of severance and related costs for 35people, 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.  The$2.4 million of special charges in the Logistics segment are primarilyrelated to a decision to exit an unprofitable product line and include thefollowing:

 

•                  $1.9 million of costs related to theshut-down of our remanufactured automotive electronic control modules productline including:

 

•                  $0.7 million of severance and related costsfor 118 people;

 

•                  $0.6 million related to the write-down offixed assets;

 

•                  $0.3 million of facility exit and other costsrelated to the shutdown;

 

•                  $0.2 million related to inventory write–downs(classified as Cost of Sales-Special Charges); and

 

•                  $0.1 million for the write-down of uncollectibleaccounts receivable balances; and

 

•                  $0.5 million of severance and related costsfor eight people primarily associated with the upgrade of certain managementfunctions within the segment.

 

The$0.5 million related to our two information systems groups is related toseverance costs for four people primarily associated with the consolidation ofthose functions.

 

During2000, we recorded $32.6 million of special charges related to thereorganization of our independent aftermarket engine business. These chargesincluded the following:

 

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•                  $15.6 million for the impairment of goodwill;

 

•                  $5.8 million for the write-down of fixedassets to estimated net realizable value;

 

•                  $5.4 million for the write-down of inventoryto estimated net realizable value (classified as Cost of Sales-SpecialCharges);

 

•                  $3.8 million for product warranty costs ofunits remanufactured and sold prior to 2000 (classified as Cost ofSales-Special Charges);

 

•                  $0.9 million for the write-down ofuncollectible accounts receivable balances; and

 

•                  $0.7 million of exit costs and$0.4 million of severance costs for 56 people primarily associated withthe shutdown of our branch distribution network.

 

*Incomefrom Operations.* Income from operations increased $38.8 million, to$67.7 million for 2001 from $28.9 million for 2000, primarily as a result of the factorsdescribed above.

 

*Interest Income.*  Interestincome of $1.5 million and $0.2 million was recorded during 2001 and 2000,respectively, on the 18% senior subordinated promissory note received by us aspartial consideration for the sale of the Distribution Group on October 27,2000.

 

*Other Income (Expense), Net.*  Otherincome (expense), net increased $0.9 million to income of $0.8 million in 2001from a loss of $0.1 million in 2000. This increase was the result the $0.9million gain recorded during 2001 on the sale of the preferred stock of theDistribution Group, which was received in 2000 as partial consideration for thesale of that business.

 

*Interest Expense. *Interest expensedecreased $2.4 million, or 9.7%, to $22.4 million for 2001 from $24.8 millionfor 2000.  This decrease was the resultof a general decline in interest rates combined with a reduction in debtoutstanding.  Interest expense for 2000of $5.2 million was allocated to discontinued operations based on theactual consideration received from the sale of the Distribution Group.

 

*Discontinued Operations.*  OnAugust 3, 2000, we adopted a plan to discontinue a segment of our businessthat we referred to as our independent aftermarket. This segment consisted ofthe Distribution Group and the independent aftermarket engine business. Weplanned to sell the Distribution Group by December 31, 2000 and theindependent aftermarket engine business by June 30, 2001. Managementbelieved that the planned exit from these businesses, which provided theopportunity to reduce debt and generated a significant tax shelter, offered astrategic opportunity to focus resources on our businesses that were profitableand had greater growth potential. As a result of the decision to exit thesebusinesses, we recorded a charge for the loss on disposal of discontinuedoperations.

 

OnOctober 27, 2000, we completed the sale of the Distribution Group to anaffiliate of The Riverside Company. Our plan with respect to the independentaftermarket engine business was to restructure and return it to profitabilityprior to finding a buyer. Our restructuring of our independent aftermarketengine business, which

 

•                  eliminated our 21 branch distribution network andreplaced it with a business model that sells and distributes remanufacturedengines directly to independent aftermarket customers on an overnight deliverybasis from four regional distribution centers;

 

•                  applied lean manufacturing techniques to improveproductivity and reduce manufacturing cost; and

 

•                  significantly improved product quality to reduceproduct warranty cost,

 

wassuccessful 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, weelected to retain our independent aftermarket engine business.  As a result of this decision and inaccordance with EITF 90-16, *Accounting forDiscontinued Operations Subsequently Retained*, the results of theremanufactured

 

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enginesbusiness have been reclassified from discontinued operations to continuingoperations for all periods presented.

 

During2001, we recorded a charge of $1.0 million related to discontinuedoperations, net of tax benefits of $0.6 million. This charge included thefollowing on a pre-tax basis: $2.7 million in expense for the increase tothe estimated loss on the sale of the Distribution Group, $2.1 million inincome 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 year endedDecember 31, 2000, we recorded a charge of $94.5 million for the losson disposal of discontinued operations ($92.8 million for the DistributionGroup and $1.7 million for our independent aftermarket engine business),net of income tax benefits of $46.9 million.  The charge of $94.5 million included the write-off ofgoodwill, valuation allowances for specified assets, provisions for anticipatedoperating losses until disposal, and anticipated costs of disposal, includinglease terminations, severance, retention and other employee benefits andprofessional fees.  Additionally, theloss from discontinued operations included a loss of $6.4 million, net ofincome tax benefits of $3.1 million, from the operations of theDistribution Group during the six months ended June 30, 2000, partiallyoffset by $1.6 million of income (net of tax) for the reclassification ofthe operating results of our independent aftermarket engine business fromdiscontinued operations to continuing operations, as required per EITFNo. 90-16.

 

*DrivetrainRemanufacturing Segment*

## ** **

The following tablepresents net sales, segment profit before special charges, special charges andsegment profit expressed in millions of dollars and as a percentage of netsales: 

 
|                                  |   | **Year Ended December 31,** |   |
|---------------------------------------|--------|----------------------------------|--------|
|                                  |   | **2001**                         |   | **2000** |   |
| Net sales                             |   | $                                | 266.3  |   | 100.0 | % | $ | 254.3 |   | 100.0 | % |
|                                  |   |                             |   |   |   |   |   |   |   |
| Segment profit before special charges |   | $                                | 42.4   |   | 15.9 | % | $ | 49.0 |   | 19.3 | % |
|                                  |   |                             |   |   |   |   |   |   |   |
| Less: Special charges                 |   | 2.4                              |   |   |   | — |   |   |   |
|                                  |   |                             |   |   |   |   |   |   |   |
| Segment profit                        |   | $                                | 40.0   |   | 15.0 | % | $ | 49.0 |   | 19.3 | % |

 

*Net Sales.*  Net sales increased$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 in DaimlerChrysler’scost reduction initiatives and reduced volume resulting from DaimlerChrysler’sinventory reduction initiatives, which reduced their targeted inventories bynearly 50% (from about 13 to 7 weeks). Sales of remanufactured transmissions toGeneral Motors, which increased slightly, were also dampened as a result oftheir inventory reduction initiatives, which further reduced GM’s targetedinventories from about 45 days to 30 days.

 

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

 

*Special Charges.*  During 2001, we recorded$2.4 million of special charges. The special charges include $1.6 million of severance and relatedcosts primarily associated with the de-layering of certain management functionsand $0.8 million of facility exit and idle capacity costs associated withfacility consolidations and implementation of cellularized manufacturing withinthe segment.

 

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*Segment Profit.*  Segment profit decreased$9.0 million, or 18.4%, to $40.0 million (15.0% of segment net sales)for 2001 from $49.0 million (19.3% of segment net sales) for 2000.  Excluding 2001 special charges of$2.4 million, segment profit decreased $6.6 million, or 13.5%,between the two periods.  The decreasewas primarily the result of the changes in sales volume, price and mix ofremanufactured 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 following table presents net sales, segment profitbefore special charges, 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 | % |
|                                  |   |                             |   |   |   |   |   |   |   |
| Segment profit before special charges |   | $                                | 28.9   |   | 27.5 | % | $ | 17.4 |   | 19.5 | % |
|                                  |   |                             |   |   |   |   |   |   |   |
| Less: Special charges                 |   | 2.4                              |   |   |   | — |   |   |   |
|                                  |   |                             |   |   |   |   |   |   |   |
| Segment profit                        |   | $                                | 26.5   |   | 25.2 | % | $ | 17.4 |   | 19.5 | % |

 

*Net Sales.*  Net sales increased$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 sales for value-added warehouse anddistribution services, driven by the growth in the market for cellular phonesand services;

•                  an increase in sales attributable to the two newprograms we were awarded in early 2000 by AT&T Wireless covering thepackaging and distribution of cell phone accessories and the distribution ofpoint-of-sale and other marketing materials, which began generating revenue inthe second half of 2000;

•                  an increase in sales to General Motors and Delphifor electronics remanufacturing and logistics support associated with atelematics program that we were awarded in 2001; and

•                  an increase in sales to Ford for coremanagement services under the new program we were awarded in 2001,

 

partially offset by adecrease in sales of remanufactured electronic control modules as a result ofour exit from that product line.  Salesto AT&T Wireless accounted for 65.7% and 59.1% of segment revenues for 2001and 2000, respectively.

 

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*Special Charges.*  The $2.4 million ofspecial charges recorded during 2001, included the following:

 

•                  $1.9 million of costs related to theshut-down of the segment’s remanufactured automotive electronic control modulesproduct line including $0.7 million of severance and related costs;$0.6 million related to the write-down of fixed assets; $0.3 millionof facility exit and other costs related to the shutdown; $0.2 millionrelated to inventory write–downs; $0.1 for the write-down ofuncollectible accounts receivable balances; and

 

•                  $0.5 million of severance and related costsprimarily associated with the upgrade of certain management functions withinthe segment.

 

*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, segment profit(loss) before special charges, special charges and segment profit (loss) forthe independent aftermarket engine business expressed in millions of dollarsand as a percentage of net sales: 

 
|                                         |   | **Year Ended December 31,** |   |
|----------------------------------------------|--------|-----------------------------|--------|
|                                         |   | **2001**                    |   | **2000** |   |
| Net sales                                    |   | $                           | 21.9   |   | 100.0 | % | $ | 29.1 |   | 100.0 | % |
|                                         |   |                        |   |   |   |   |   |   |   |
| Segment profit (loss) before special charges |   | $                           | 1.7    |   | 7.8 | % | $ | (4.9 | ) | (16.8 | )% |
|                                         |   |                        |   |   |   |   |   |   |   |
| Less: Special charges                        |   | —                      |   |   |   | 32.6 |   |   |   |
|                                         |   |                        |   |   |   |   |   |   |   |
| 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 million for 2001 from$29.1 million for 2000. This decrease was attributable to a decline insales of remanufactured engines, resulting primarily from a change in ourdistribution method from a branch network to regional distribution centers.

 

*Special Charges.*  During 2000, we recorded$32.6 million of special charges related to the original decision todiscontinue the independent aftermarket engines business. These chargesincluded the following:

 

•                  $15.6 million for the impairment of goodwill;

 

•                  $5.8 million for the write-down of fixedassets to estimated net realizable value;

 

•                  $5.4 million for the write-down of inventoryto estimated net realizable value (classified as Cost of Sales-SpecialCharges);

 

•                  $3.8 million for product warranty costs ofunits remanufactured and sold prior to 2000 (classified as Cost ofSales-Special Charges);

 

•                  $0.9 million for the write-down ofuncollectible accounts receivable balances; and

 

•                  $0.7 million of exit costs and$0.4 million of severance costs for 56 people primarily associated withthe shutdown of our branch distribution network.

 

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*Segment Profit (Loss).*  Segmentprofit (loss) increased $6.6 million, to a profit of $1.7 million for2001 from a loss of $4.9 million before special charges of $32.6 millionfor 2000.  This increase was primarilythe result of cost reduction initiatives implemented in the independentaftermarket engine business in the later part of 2000 and the first half of 2001including the application of lean manufacturing techniques to improveproductivity and reduce manufacturing cost, a change in the distribution methodfrom a branch network to regional distribution centers and a reduction ofproduct warranty expense.  During 2001,we recognized a reduction in cost of goods sold of approximately $0.8 million,primarily associated with the remaining inventory valuation allowances thatwere established in 2000 related to our original decision to discontinue theindependent aftermarket engines business in 2000.

 

**Liquidity and Capital Resources**

 

***Cash Flow & Capital Expenditures***

 

Wehad total cash and cash equivalents on hand of $65.5 million atDecember 31, 2002, representing a net increase in cash and cashequivalents of $64.9 million in 2002. Net cash provided by operatingactivities from continuing operations was $77.7 million in 2002.  Net cash used in investing activities fromcontinuing operations of $12.8 million included $13.1 million ofequipment purchases and facility improvements, partially offset by $0.3 millionin proceeds from the sale of fixed assets. Net cash provided byfinancing activities of $0.7 million includes $42.0 million from the publicoffering of common stock completed in March 2002, net borrowings of $79.7million made on the old and new credit facilities and $5.4 million of proceedsfrom the exercise of stock options and warrants (net of costs related to thesecondary shelf offering completed in August 2002), partially offset by $112.6million used to redeem our 12% senior subordinated notes in April 2002, $6.1million of payments for debt issuance costs related to our new credit facility(see discussion below), $3.6 million of treasury stock purchases, $3.0 millionin payment of amounts related to an acquired company (see discussion below) and$1.1 million of payments on capital lease obligations.

 

Our capital expenditures from continuing operations in2002 were $13.1 million, consisting of:

 

•                  $4.1 million primarily related to computersystems and machinery and equipment to support growth and productivityinitiatives in the Logistics segment;

 

•                  $8.9 million for additional transmissionremanufacturing and test equipment and other improvements to support increasesin productivity and efficiency in a number of our remanufacturing plants withinour Drivetrain Remanufacturing segment; and

 

•                  $0.1 million primarily related to equipmentto support growth in our overall infrastructure.

 

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

 

For 2003, we have budgeted $20 million forcapital expenditures, primarily to support new business, capacity expansion andcost reduction initiatives in each of our businesses.

 

Under the terms of our 1997 acquisition of ATSRemanufacturing (which remanufactures transmissions for General Motors), we arerequired to make payments to the seller and to other key individuals on each ofthe first 14 anniversaries of the closing date.  Through December 31, 2002, we had made $7.4 million ofthese payments (including $3.0 million paid in August 2002 consisting of $1.6million in payments of deferred compensation and $1.4 million in payments ofamounts due to the seller). Substantially all of the remaining nine payments,which aggregate to approximately $10.7 million (present value of$9.8 million as of December 31, 2002), are contingent upon the attainmentof certain sales to General Motors, which we believe have a substantiallikelihood of being attained.

 

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***Financing***

 

On February 8, 2002,we executed a credit agreement and related security agreement in connectionwith a credit facility.  The creditfacility provides for (i) a $75.0 million, five-year term loan payable inquarterly installments in increasing amounts over the five-year period, (ii) a$95.0 million, six-year, two-tranche term loan payable in quarterlyinstallments over the six-year period (with approximately 96% of theoutstanding balance payable in the sixth year) and an annual excess cash flowsweep payable as defined in the credit agreement (see prepayment amounts below)and (iii) a $50.0 million, five-year revolving credit facility.  The credit facility also provides for theaddition of one or more optional term loans of up to $100.0 million in theaggregate, subject to certain conditions (including the receipt from one ormore lenders of the additional commitments that may be requested) andachievement of certain financial ratios.

 

At our election, amountsadvanced under the credit facility will bear interest at either (i) theAlternate Base Rate plus a specified margin or (ii) the Eurodollar Rate plus aspecified margin.  The Alternate BaseRate is equal to the highest of  (a) thelender’s prime rate, (b) the lender’s base CD rate plus 1.00% or (c) thefederal funds effective rate plus 0.50%. The applicable margins for both Alternate Base Rate and Eurodollar Rateloans are subject to quarterly adjustments based on our leverage ratio as ofthe end of the four fiscal quarters then completed.  As of December 31, 2002, the margins for the $75.0 million termloan and the $50.0 million revolving facility were 1.25% for Alternate BaseRate loans and 2.25% for Eurodollar Rate loans.  For the $95.0 million term loan, the margins were 2.00% forAlternate Base Rate loans and 3.00% for Eurodollar Rate loans as of December31, 2002.

 

OnMarch 8, 2002, we completed a public offering of 2,760,000 shares of ourcommon stock at a price to the public of $16.50 per share.  Also on March 8, 2002, the closing date ofour credit facility, we borrowed $40.0 million under the term loan portion and$15.0 million under the revolving portion and used a portion of those proceeds,together with the $42.0 million of proceeds from our public stock offering,after deducting underwriting discounts, commissions and other offeringexpenses, to repay the entire $82.7 million balance outstanding under our priorbank credit facility.

 

On April 8, 2002, weredeemed the entire $110.4 million principal balance of our 12% seniorsubordinated notes at 102% plus accrued and unpaid interest.  The redemption was funded by borrowings madeunder our credit facility.

 

On November 21, 2002, wemade an optional prepayment of $6.0 million, representing a portion of theexcess cash flow sweep payable in connection with the first anniversary of thecredit agreement.  The $4.5 million balanceof the excess cash flow sweep was paid on February 11, 2003.

 

In addition, during thefourth quarter of 2002, we resumed our stock buyback program (initiallycommenced in January 2001) and purchased 322,400 shares of our common stock atan average price of $11.27 per share.  As of December 31, 2002, there are up to 1,238,263 shares remaining forpurchase under this program, subject to certain annual limitations imposed bythe terms of our credit agreement, which for 2003 is $8.0 million.

 

As of December 31, 2002,our borrowing capacity under the revolving portion of the new credit facilitywas $46.5 million. In addition, we had cash and cash equivalents on hand of$65.5 million at December 31, 2002.

 

As part of an ownershipagreement we have for a 45% interest in an unconsolidated subsidiary, we havegiven the subsidiary’s bank a $0.9 million letter of credit in the event of thesubsidiary’s default on outstanding debt.

 

During 2001, we enteredinto 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 the 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, 2002, there were no amounts outstanding under thisline of credit.

 

As of December 31, 2002we had approximately $49 million in federal and state net operating loss carryforwardsavailable as an offset to future taxable income.

 

35

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We believe that cash onhand, cash flow from operations and existing borrowing capacity will besufficient to fund ongoing operations and budgeted capital expenditures. Inpursuing future acquisitions, we will continue to consider the effect any suchacquisition costs may have on liquidity. In order to consummate suchacquisitions, we may need to seek funds through additional borrowings or equityfinancing.

 

**Impact of New Accounting Standards**

 

In April 2002, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 145, *Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections*.  SFAS No. 145 requires that certain gains andlosses on extinguishments of debt be classified as income or loss fromcontinuing operations rather than as extraordinary items as previously requiredunder SFAS No. 4, *Reporting Gains and Lossesfrom Extinguishment of Debt*. This statement also amends SFAS No. 13, *Accountingfor Leases,* to require certain modifications to capital leases betreated as a sale-leaseback and modifies the accounting for sub-leases when theoriginal lessee remains a secondary obligor (or guarantor).  In addition, SFAS No. 145 rescinded SFAS No.44, *Accounting for Intangible Assets ofMotor Carriers*, which addressed the accounting for intangible assetsof motor carriers and made numerous technical corrections to various FASBpronouncements.  We will be required toadopt SFAS No. 145 on January 1, 2003, and will reclassify extraordinary items(see Note 19 – Extraordinary Items) to continuing operations.

 

In June 2002, the FASBissued SFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities.*SFAS No. 146, whichrequires that a liability for a cost associated with an exit or disposalactivity be recognized in the period in which the liability is incurred, iseffective for exit or disposal activities initiated after December 31,2002.  The adoption of SFAS No. 146 isnot expected to have a significant effect on our results of operations or ourfinancial 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 periodspresented. In some circumstances, market conditions or customer expectationsmay prevent us from increasing the prices of our products to offset theinflationary pressures that may increase our costs in the future. Historically,there has been little aggregate seasonal fluctuation in our business.

 

**Environmental Matters**

 

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

 

36

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**ITEM 7A.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*Derivative Financial Instruments.*  We do nothold or issue derivative financial instruments for trading purposes. We usederivative financial instruments to manage our exposure to fluctuations ininterest rates. Neither the aggregate value of these derivative financialinstruments nor the market risk posed by them is material to our business. Weuse interest rate swaps to convert variable rate debt to fixed rate debt toreduce volatility risk. For additional discussion regarding our use of suchinstruments, see Item 8. “Consolidated Financial Statements and SupplementaryData - Note 13.”

 

*Interest Rate Exposure.*  Based onour overall interest rate exposure during the year ended December 31, 2002and assuming 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.

 

*Foreign Exchange Exposure.*  We haveone foreign operation that exposes us to translation risk when the localcurrency financial 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.

 

37

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**ITEM 8.****                                 CONSOLIDATEDFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**Contents**

 
| Report  of Ernst & Young LLP, Independent Auditors                                                      |
|-------------------------------------------------------------------------------------------------------------|
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                               |
| Consolidated  Statements of Operations for the years ended December 31, 2002, 2001 and 2000                 |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2002,  2001 and 2000 |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000                 |
| Notes to  Consolidated Financial Statements                                                                 |

 

38

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**REPORT OF ERNST & YOUNG LLP, INDEPENDENTAUDITORS**

 

Tothe Stockholders and Board of Directors

AftermarketTechnology Corp.

 

Wehave audited the accompanying consolidated balance sheets of AftermarketTechnology Corp. and subsidiaries (the Company) as of December 31, 2002and 2001, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the three years in the period endedDecember 31, 2002.  Our auditsalso included the financial statement schedule listed in the Index of Item15 (a).  These financial statementsand schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofAftermarket Technology Corp. and subsidiaries at December 31, 2002 and2001, and the consolidated results of their operations and their consolidatedcash flows for each of the three years in the period ended December 31,2002, 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.

 

As discussed inNote 2, in 2002 the Company changed its method of accounting for goodwill andother intangible assets to conform to Statement of Financial AccountingStandards No. 142, "Goodwill and Other Intangible Assets."

 

ERNST &YOUNG LLP

 

Chicago,Illinois

February6, 2003

 

39

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**AFTERMARKET TECHNOLOGY CORP.**

**CONSOLIDATEDBALANCE SHEETS**

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

 
|                                                                                                                                   |   | **December 31,** |    |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|
|                                                                                                                                   |   | **2002**         |    | **2001** |   |
|                                                                                                                                   |   |             |    |   |   |
| **Assets**                                                                                                                             |   |             |    |   |   |
| Current  Assets:                                                                                                                       |   |             |    |   |   |
| Cash  and cash equivalents                                                                                                             |   | $                | 65,504  |   | $ | 555 |   |
| Accounts  receivable, net                                                                                                              |   | 49,283           |    | 55,816 |   |
| Inventories                                                                                                                            |   | 70,262           |    | 68,970 |   |
| Prepaid  and other assets                                                                                                              |   | 4,891            |    | 5,305 |   |
| Deferred  income taxes                                                                                                                 |   | 26,106           |    | 26,508 |   |
| Total  current assets                                                                                                                  |   | 216,046          |    | 157,154 |   |
|                                                                                                                                   |   |             |    |   |   |
| Property,  plant and equipment, net                                                                                                    |   | 54,616           |    | 52,577 |   |
| Debt  issuance costs, net                                                                                                              |   | 5,152            |    | 3,008 |   |
| Goodwill                                                                                                                               |   | 168,229          |    | 168,049 |   |
| Intangible  assets, net                                                                                                                |   | 819              |    | 1,145 |   |
| Deferred  income taxes                                                                                                                 |   | —           |    | 5,590 |   |
| Other  assets                                                                                                                          |   | 9,168            |    | 9,335 |   |
| Total  assets                                                                                                                          |   | $                | 454,030 |   | $ | 396,858 |   |
|                                                                                                                                   |   |             |    |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                          |   |             |    |   |   |
| Current  Liabilities:                                                                                                                  |   |             |    |   |   |
| Accounts  payable                                                                                                                      |   | $                | 37,963  |   | $ | 42,507 |   |
| Accrued  expenses                                                                                                                      |   | 29,996           |    | 39,096 |   |
| Income  taxes payable                                                                                                                  |   | 847              |    | 2,622 |   |
| Credit  facility                                                                                                                       |   | 15,805           |    | 14,700 |   |
| Capital  lease obligation                                                                                                              |   | 678              |    | 1,121 |   |
| Amounts  due to sellers of acquired companies                                                                                          |   | 2,261            |    | 2,450 |   |
| Deferred  compensation                                                                                                                 |   | 154              |    | 1,958 |   |
| Liabilities  of discontinued operations                                                                                                |   | 330              |    | 1,375 |   |
| Total  current liabilities                                                                                                             |   | 88,034           |    | 105,829 |   |
|                                                                                                                                   |   |             |    |   |   |
| 12%  Series B and D Senior Subordinated Notes                                                                                          |   | —           |    | 110,852 |   |
| Amount  drawn on credit facility, less current portion                                                                                 |   | 139,111          |    | 60,500 |   |
| Amounts  due to sellers of acquired companies, less current portion                                                                    |   | 6,474            |    | 7,269 |   |
| Deferred  compensation, less current portion                                                                                           |   | 912              |    | 1,400 |   |
| Capital  lease obligation, less current portion                                                                                        |   | 284              |    | 897 |   |
| Other  long-term liabilities                                                                                                           |   | 370              |    | 776 |   |
| Deferred  income taxes                                                                                                                 |   | 12,410           |    | — |   |
|                                                                                                                                   |   |             |    |   |   |
| 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 - 25,145,523  and 21,446,396 (including shares held in treasury) |   | 251              |    | 214 |   |
| Additional  paid-in capital                                                                                                            |   | 193,869          |    | 141,298 |   |
| Retained  earnings and (accumulated deficit)                                                                                           |   | 20,595           |    | (25,832 | ) |
| Accumulated  other comprehensive loss                                                                                                  |   | (309             | )       | (2,008 | ) |
| Common  stock held in treasury, at cost (933,737 and 611,337 shares)                                                                   |   | (7,971           | )       | (4,337 | ) |
| Total  stockholders’ equity                                                                                                       |   | 206,435          |    | 109,335 |   |
|                                                                                                                                   |   |             |    |   |   |
| Total  liabilities and stockholders’ equity                                                                                       |   | $                | 454,030 |   | $ | 396,858 |   |

 

*Seeaccompanying notes.*

 

40

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**AFTERMARKET TECHNOLOGY CORP.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

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

 
|                                                                            |   | **For the  years ended December 31,** |    |
|---------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                            |   | **2002**                              |    | **2001** |   | **2000** |   |
|                                                                            |   |                                  |    |   |   |   |   |
| Net sales                                                                       |   | $                                     | 415,902 |   | $ | 393,381 |   | $ | 372,493 |   |
| Cost of sales                                                                   |   | 272,360                               |    | 255,360 |   | 248,438 |   |
| Special charges                                                                 |   | —                                |    | 216 |   | 9,134 |   |
|                                                                            |   |                                  |    |   |   |   |   |
| Gross profit                                                                    |   | 143,542                               |    | 137,805 |   | 114,921 |   |
|                                                                            |   |                                  |    |   |   |   |   |
| Selling, general and administrative expense                                     |   | 60,370                                |    | 59,939 |   | 57,331 |   |
| Amortization of intangible assets                                               |   | 333                                   |    | 5,028 |   | 5,255 |   |
| Special (credits) charges                                                       |   | (277                                  | )       | 5,114 |   | 23,450 |   |
|                                                                            |   |                                  |    |   |   |   |   |
| Income from operations                                                          |   | 83,116                                |    | 67,724 |   | 28,885 |   |
|                                                                            |   |                                  |    |   |   |   |   |
| Interest income                                                                 |   | 2,769                                 |    | 1,524 |   | 234 |   |
| Other income (expense), net                                                     |   | 87                                    |    | 787 |   | (60 | ) |
| Equity in losses of investee                                                    |   | (575                                  | )       | (33 | ) | — |   |
| Interest expense                                                                |   | (12,280                               | )       | (22,377 | ) | (24,770 | ) |
|                                                                            |   |                                  |    |   |   |   |   |
| Income from continuing operations, before income  taxes and extraordinary items |   | 73,117                                |    | 47,625 |   | 4,289 |   |
|                                                                            |   |                                  |    |   |   |   |   |
| Income tax expense                                                              |   | 25,141                                |    | 18,098 |   | 1,883 |   |
|                                                                            |   |                                  |    |   |   |   |   |
| Income from continuing operations before  extraordinary items                   |   | 47,976                                |    | 29,527 |   | 2,406 |   |
|                                                                            |   |                                  |    |   |   |   |   |
| Gain (loss) from discontinued operations, net of  income taxes                  |   | 1,279                                 |    | (959 | ) | (99,289 | ) |
|                                                                            |   |                                  |    |   |   |   |   |
| Income (loss) before extraordinary items                                        |   | 49,255                                |    | 28,568 |   | (96,883 | ) |
|                                                                            |   |                                  |    |   |   |   |   |
| Extraordinary items, net of income taxes                                        |   | (2,828                                | )       | — |   | — |   |
|                                                                            |   |                                  |    |   |   |   |   |
| Net income (loss)                                                               |   | $                                     | 46,427  |   | $ | 28,568 |   | $ | (96,883 | ) |
|                                                                            |   |                                  |    |   |   |   |   |
| Per common share - basic:                                                       |   |                                  |    |   |   |   |   |
| Income from continuing operations before  extraordinary items                   |   | $                                     | 2.04    |   | $ | 1.44 |   | $ | 0.12 |   |
| Gain (loss) from discontinued operations                                        |   | 0.06                                  |    | (0.05 | ) | (4.81 | ) |
| Extraordinary items                                                             |   | (0.12                                 | )       | — |   | — |   |
| Net income (loss)                                                               |   | $                                     | 1.98    |   | $ | 1.39 |   | $ | (4.69 | ) |
| Per common share - diluted:                                                     |   |                                  |    |   |   |   |   |
| Income from continuing operations before  extraordinary items                   |   | $                                     | 1.99    |   | $ | 1.40 |   | $ | 0.11 |   |
| Gain (loss) from discontinued operations                                        |   | 0.05                                  |    | (0.04 | ) | (4.69 | ) |
| Extraordinary items                                                             |   | (0.12                                 | )       | — |   | — |   |
| Net income (loss)                                                               |   | $                                     | 1.92    |   | $ | 1.36 |   | $ | (4.58 | ) |

 

*Seeaccompanying notes.*

 

41

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**AFTERMARKETTECHNOLOGY CORP.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Inthousands, except share data)**

** **
|                                                                                    |   | **Preferred  Stock** |   | **Common  Stock** |   | **Additional  Paid-In Capital** |   | **Retained  Earnings  (Accumulated  Deficit)** |    | **Accumulated(1)  Other  Comprehensive  Income (Loss)** |   | **Common  Stock in  Treasury** |   | **Total** |   |
|-----------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------|--------|---------------------------------|--------|------------------------------------------------|---------|---------------------------------------------------------|--------|--------------------------------|--------|-----------|--------|
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Balance at January 1, 2000                                                         |   | $                    | — |              | $      | 206                             |   | $                                              | 135,894 |                                                    | $      | 42,483                         |   | $         | (445   | ) | $ | (1,994 | ) | $ | 176,144 |   |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Issuance of 310,746 shares of common stock from exercise of stock  options and warrants |   | —               |   | 3                 |   | 988                             |   | —                                         |    | —                                                  |   | —                         |   | 991       |   |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| 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 522,886 shares of common stock from exercise of stock  options and warrants |   | —               |   | 5                 |   | 4,416                           |   | —                                         |    | —                                                  |   | —                         |   | 4,421     |   |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Purchase of 439,337 shares of common stock for treasury                                 |   | —               |   | —            |   | —                          |   | —                                         |    | —                                                  |   | (2,343                         | )      | (2,343    | )      |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Net income                                                                              |   | —               |   | —            |   | —                          |   | 28,568                                         |    | —                                                  |   | —                         |   | 28,568    |   |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Derivative financial instruments, net of income taxes                                   |   | —               |   | —            |   | —                          |   | —                                         |    | (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   |   |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Issuance of 2,760,000 shares of common stock from public offering                       |   | —               |   | 28                |   | 41,984                          |   | —                                         |    | —                                                  |   | —                         |   | 42,012    |   |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Issuance of 939,127 shares of common stock from exercise of stock  options and warrants |   | —               |   | 9                 |   | 10,587                          |   | —                                         |    | —                                                  |   | —                         |   | 10,596    |   |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Purchase of 322,400 shares of common stock for treasury                                 |   | —               |   | —            |   | —                          |   | —                                         |    | —                                                  |   | (3,634                         | )      | (3,634    | )      |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Net income                                                                              |   | —               |   | —            |   | —                          |   | 46,427                                         |    | —                                                  |   | —                         |   | 46,427    |   |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Derivative financial instruments, net of income taxes                                   |   | —               |   | —            |   | —                          |   | —                                         |    | 182                                                     |   | —                         |   | 182       |   |
|                                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   |      |   |
| Translation adjustments                                                                 |   | —               |   | —            |   | —                          |   | —                                         |    | 1,517                                                   |   | —                         |   | 1,517     |   |
| Comprehensive income                                                                    |   |                 |   |              |   |                            |   |                                           |    |                                                    |   |                           |   | 48,126    |   |
| Balance at December 31, 2002                                                       |   | $                    | — |              | $      | 251                             |   | $                                              | 193,869 |                                                    | $      | 20,595                         |   | $         | (309   | ) | $ | (7,971 | ) | $ | 206,435 |   |

 

----

(1)     At December 31, 2002, theaccumulated other comprehensive loss includes $237 and $72 for derivativefinancial instruments and translation adjustments, respectively.

 

*See accompanying notes.*

 

42

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**AFTERMARKETTECHNOLOGY CORP.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

 
|                                                                                                              |   | **For the  years ended December 31,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                              |   | **2002**                              |   | **2001** |   | **2000** |   |
|                                                                                                              |   |                                  |   |   |   |   |   |
| **Operating Activities:**                                                                                         |   |                                  |   |   |   |   |   |
| Net income (loss)                                                                                                 |   | $                                     | 46,427 |   | $ | 28,568 |   | $ | (96,883 | ) |
|                                                                                                              |   |                                  |   |   |   |   |   |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities - continuing operations: |   |                                  |   |   |   |   |   |
| Net loss (gain) from discontinued operations                                                                      |   | (1,279                                | )      | 959 |   | 99,289 |   |
| Extraordinary items                                                                                               |   | 2,828                                 |   | — |   | — |   |
| Asset impairment loss                                                                                             |   | —                                |   | — |   | 27,626 |   |
| Depreciation and amortization                                                                                     |   | 10,935                                |   | 14,019 |   | 12,991 |   |
| Amortization of debt issuance costs                                                                               |   | 1,211                                 |   | 1,354 |   | 1,238 |   |
| Adjustments to provision for losses on accounts receivable                                                        |   | 338                                   |   | (91 | ) | 348 |   |
| Loss on sale of equipment                                                                                         |   | 7                                     |   | 150 |   | 144 |   |
| Gain on sale of preferred stock received from sale of a business                                                  |   | —                                |   | (931 | ) | — |   |
| Deferred income taxes                                                                                             |   | 18,364                                |   | 12,667 |   | 13,386 |   |
| Changes in operating assets and liabilities, net of businesses  discontinued/sold:                                |   |                                  |   |   |   |   |   |
| Accounts receivable                                                                                               |   | 6,713                                 |   | 5,724 |   | (11,848 | ) |
| Inventories                                                                                                       |   | (879                                  | )      | (13,590 | ) | (7,950 | ) |
| Prepaid and other assets                                                                                          |   | 782                                   |   | 2,059 |   | (4,563 | ) |
| Accounts payable and accrued expenses                                                                             |   | (7,777                                | )      | (1,781 | ) | 9,715 |   |
| Net cash provided by operating activities - continuing operations                                                 |   | 77,670                                |   | 49,107 |   | 43,493 |   |
|                                                                                                              |   |                                  |   |   |   |   |   |
| Net cash used in operating activities - discontinued operations                                                   |   | (614                                  | )      | (2,798 | ) | (13,667 | ) |
|                                                                                                              |   |                                  |   |   |   |   |   |
| **Investing Activities:**                                                                                         |   |                                  |   |   |   |   |   |
| Purchases of property, plant and equipment                                                                        |   | (13,103                               | )      | (13,516 | ) | (11,682 | ) |
| Investment in a joint venture                                                                                     |   | —                                |   | (182 | ) | — |   |
| Proceeds (refund of proceeds) from sale of a business                                                             |   | —                                |   | (3,675 | ) | 60,079 |   |
| Proceeds from sale of preferred stock received from sale of a  business                                           |   | —                                |   | 2,860 |   | — |   |
| Proceeds from sale of equipment                                                                                   |   | 323                                   |   | 61 |   | 103 |   |
| Net cash provided by (used in) investing activities - continuing  operations                                      |   | (12,780                               | )      | (14,452 | ) | 48,500 |   |
|                                                                                                              |   |                                  |   |   |   |   |   |
| Net cash used in investing activities - discontinued operations                                                   |   | —                                |   | — |   | (2,700 | ) |
|                                                                                                              |   |                                  |   |   |   |   |   |
| **Financing Activities:**                                                                                         |   |                                  |   |   |   |   |   |
| Borrowings (payments) on credit facility, net                                                                     |   | 79,716                                |   | (31,500 | ) | (79,859 | ) |
| Payments on bank line of credit, net                                                                              |   | —                                |   | — |   | (543 | ) |
| Payment of debt issuance costs                                                                                    |   | (6,064                                | )      | (201 | ) | (144 | ) |
| Redemption of senior subordinated notes                                                                           |   | (112,593                              | )      | — |   | — |   |
| Sale of common stock, net of offering costs                                                                       |   | 42,012                                |   | — |   | — |   |
| Payments on capital lease obligation                                                                              |   | (1,134                                | )      | (875 | ) | (65 | ) |
| Proceeds from exercise of stock options and warrants                                                              |   | 5,444                                 |   | 1,908 |   | 434 |   |
| Purchase of common stock for treasury                                                                             |   | (3,634                                | )      | (2,343 | ) | — |   |
| Payments on amounts due to sellers of acquired companies                                                          |   | (1,392                                | )      | (486 | ) | (1,173 | ) |
| Payments of deferred compensation related to acquired company                                                     |   | (1,639                                | )      | — |   | (700 | ) |
| Net cash provided by (used in) financing activities                                                               |   | 716                                   |   | (33,497 | ) | (82,050 | ) |
|                                                                                                              |   |                                  |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash equivalents                                                      |   | (43                                   | )      | 160 |   | (10 | ) |
|                                                                                                              |   |                                  |   |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                                                                  |   | 64,949                                |   | (1,480 | ) | (6,434 | ) |
|                                                                                                              |   |                                  |   |   |   |   |   |
| Cash and cash equivalents at beginning of year                                                                    |   | 555                                   |   | 2,035 |   | 8,469 |   |
| Cash and cash equivalents at end of year                                                                          |   | $                                     | 65,504 |   | $ | 555 |   | $ | 2,035 |   |
|                                                                                                              |   |                                  |   |   |   |   |   |
| Cash paid (refunded) during the year for:                                                                         |   |                                  |   |   |   |   |   |
| Interest                                                                                                          |   | $                                     | 15,442 |   | $ | 20,100 |   | $ | 29,203 |   |
| Income taxes, net                                                                                                 |   | 1,155                                 |   | (2,131 | ) | 3,856 |   |
| Supplemental disclosures of non-cash activity:                                                                    |   |                                  |   |   |   |   |   |
| Debt issued for capital lease obligation                                                                          |   | —                                |   | 2,711 |   | — |   |
| Sale of business - note and preferred stock received                                                              |   | —                                |   | — |   | 10,294 |   |

 

*Seeaccompanying notes.*

 

43

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**AFTERMARKET TECHNOLOGY CORP.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS****(In thousands, except share and per share data)**

 

**Note1.  The Company**

 

The Company has tworeportable segments in continuing operations: the Drivetrain Remanufacturingsegment and the Logistics segment.  TheDrivetrain Remanufacturing segment consists of five operating units thatprimarily sell remanufactured transmissions directly to Ford, DaimlerChrysler,General Motors and several foreign Original Equipment Manufacturers (“OEMs”),primarily for use as replacement parts by their domestic dealers during thewarranty and post-warranty periods following the sale of a vehicle.  In addition, the Drivetrain Remanufacturingsegment sells select remanufactured and newly assembled engines to certainEuropean OEMs, including Ford’s and General Motors’s European operations andJaguar.  The Company’s Logistics segmentis comprised of three operating units: (i) a provider of value-added warehouse and distribution services,turnkey order fulfillment and information services for AT&T WirelessServices; (ii) a provider of returned material reclamation and dispositionservices and core management services primarily to Ford and to a lesser extent,General Motors and Mazda; and (iii) an automotive electronic componentsremanufacturing and distribution business, primarily for Delphi andVisteon.  The Company’s “Other” businessunit, which is not reportable for segment reporting purposes, remanufacturesand distributes domestic and foreign engines and, to a lesser extent,distributes domestic remanufactured transmissions from regional distributionpoints 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**

 

*Principles of Consolidation*

 

The accompanying consolidated financial statementsinclude the accounts of the Company and its subsidiaries.  All significant intercompany balances andtransactions have been eliminated.

 

*Use ofEstimates*

 

Thepreparation of the financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.

 

*Cashand Cash Equivalents*

 

TheCompany considers all highly liquid investments with original maturities ofthree months or less to be cash equivalents.

 

*Inventories*

 

Inventoriesare stated at the lower of cost (first–in, first–out method) ormarket and consist primarily of new and used transmission parts, cores andfinished goods.  Consideration is givento deterioration, obsolescence and other factors in evaluating the estimatedmarket value of inventory based upon management’s judgment and availableinformation.

 

44

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*Property,Plant and Equipment*

 

Property, plant and equipment, including amountscapitalized under capital leases, are stated at cost less accumulateddepreciation.  Depreciation is computedusing straight–line methods over the estimated useful lives of the assetsfor financial reporting purposes, as follows: three to ten years for machinery and equipment, three to six years forautos and trucks, three to ten years for furniture and fixtures and up to 40years for buildings and leasehold improvements.  Depreciation and amortization expense was $10,602, $8,991 and$7,737 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

*InternalUse Computer Software*

 

TheCompany accounts for these costs in accordance with the provisions of Statementof 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.

 

*ForeignCurrency Translation*

 

Thefunctional currency for the Company’s foreign operations is the applicablelocal currency.  Accordingly, allbalance sheet accounts have been translated using the exchange rates in effectat the balance sheet date, and income statement amounts have been translatedusing the average exchange rates for the year. The translation adjustments resulting from the changes in exchange rateshave been reported separately as a component of stockholders’ equity.  The effects of transaction gains and losses,which were reported in income, were not material for the periods presented.

 

*DebtIssuance Costs*

 

Debtissuance costs incurred in connection with the Credit Facility (see Note 9 –Credit Facility) are being amortized over the life of the respective debt usinga method which approximates the interest method.  Debt issuance costsare reflected net of accumulated amortization of $925 and $5,962 atDecember 31, 2002 and 2001, respectively.

 

*Goodwill and Other Intangible Assets*

 

On January 1, 2002, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets,*which eliminates theamortization of goodwill and instead requires that goodwill be tested forimpairment at least annually. Transitional impairment tests of goodwill made by the Company during thequarter ended March 31, 2002 and annual impairment tests made during thequarter ended September 30, 2002, did not require adjustment to the carryingvalue of its goodwill.  Per theprovisions of SFAS No. 142, the Company’s definite lived intangible assets,consisting primarily of non-compete agreements, are amortized over their usefullives. (See Note 7 – Goodwill and Intangible Assets.)

 

*OtherAssets – Long Term*

 

Aspart of the proceeds from the sale of ATC Distribution Group, Inc.(“Distribution Group”) (see Note 3 —Discontinued Independent Aftermarket Segment), the Company received from thebuyer a senior subordinated promissory note, as amended, at a statedrate of 18%, with a principal amount of $10,050 and a discounted value of$8,365 (“18% Buyer Note”).  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, 2002,2001 and 2000, $1,807, $1,515 and $228 of interest income was recorded on the18% Buyer Note, respectively.  The 18%Buyer Note is classified as a part of other assets in the accompanying balancesheet.

 

45

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*Impairmentof Long-Lived and Intangible Assets*

 

Long-lived assets and identifiable intangibles are reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount of the related asset may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of the asset to futureundiscounted cash flows expected to be generated by the asset.  If the asset is determined to be impaired,the impairment recognized is measured by the amount by which the carrying valueof the asset exceeds its fair value.

 

###### *Concentration of Credit Risk*

###### * *

Financial instruments that potentially subject theCompany to a significant concentration of credit risk consist of accountsreceivable from its customers including Ford, DaimlerChrysler, General Motorsand AT&T Wireless Services, which are located throughout the United Statesand, to a lesser extent, the United Kingdom. The credit risk associated withthe Company’s accounts receivable is mitigated by its credit evaluationprocess, although collateral is not required. The Company grants credit to certain customers who meet pre–establishedcredit requirements.

 

Accounts receivable is reflected net of an allowancefor doubtful accounts of $1,320 and $1,207 at December 31, 2002 and 2001,respectively.

 

###### *Revenue Recognition*

###### * *

Revenuesare recognized at the time of shipment to the customer, which is generally whentitle passes, or as services are performed. In addition, the Company includes the reimbursements of certain costs byits customers separately as revenues and expenses in its Statements of Operations.

 

###### *Warranty Cost Recognition*

###### * *

TheCompany accrues for estimated warranty costs as sales are made.

 

###### *Stock - Based Compensation*

 

TheCompany has elected to follow Accounting Principles Board 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 of SFASNo. 123, *Accountingfor Stock-Based Compensation*.

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option-pricing model assuming noexpected dividends and the following weighted-average assumptions:

 
|                     |   | **For the years ended December  31,** |   |
|--------------------------|--------|---------------------------------------|--------|
|                     |   | **2002**                              |   | **2001** |   | **2000** |   |
| Expected volatility      |   | 44.96                                 | %      | 86.37 | % | 87.90 | % |
| Risk-free interest rates |   | 3.37                                  | %      | 4.50 | % | 6.25 | % |
| Expected lives           |   | 2.9 years                             |   | 4.6 years |   | 5.2 years |   |

 

Had compensation cost for theCompany’s Plans (see Note 11 - Stock Options and Warrants) been determined inaccordance with SFAS No. 123, the Company’s reported income from continuingoperations before extraordinary items and earnings per share would have beenadjusted to the pro forma amounts indicated below: 

 
|                                                           |   | **For the years ended December  31,** |   |
|----------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                           |   | **2002**                              |   | **2001** |   | **2000** |   |
| Income from continuing operations before  extraordinary items: |   |                                  |   |   |   |   |   |
| As reported                                                    |   | $                                     | 47,976 |   | $ | 29,527 |   | $ | 2,406 |   |
| Pro forma                                                      |   | 45,707                                |   | 28,105 |   | 913 |   |
| Basic earnings per common share:                               |   |                                  |   |   |   |   |   |
| As reported                                                    |   | $                                     | 2.04   |   | $ | 1.44 |   | $ | 0.12 |   |
| Pro forma                                                      |   | 1.95                                  |   | 1.37 |   | 0.04 |   |

 

46

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*NewAccounting Standards*

 

In April 2002, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 145, *Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections*.  SFASNo. 145 requires that certain gains and losses on extinguishments of debt beclassified as income or loss from continuing operations rather than asextraordinary items as previously required under SFAS No. 4, *Reporting Gains and Losses from Extinguishment ofDebt*.  This statement alsoamends SFAS No. 13, *Accounting for Leases,*to require certain modifications to capital leases be treated as asale-leaseback and modifies the accounting for sub-leases when the originallessee remains a secondary obligor (or guarantor).  In addition, SFAS No. 145 rescinded SFAS No. 44, *Accounting for Intangible Assets of Motor Carriers*,which addressed the accounting for intangible assets of motor carriers and madenumerous technical corrections to various FASB pronouncements.  The Company will be required to adopt SFASNo. 145 on January 1, 2003, and will reclassify extraordinary items (see Note19 – Extraordinary Items) to continuing operations.

 

In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities.*SFAS No. 146, which requires that a liability for a costassociated with an exit or disposal activity be recognized in the period inwhich the liability is incurred, is effective for exit or disposal activitiesinitiated after December 31, 2002.  Theadoption of SFAS No. 146 is not expected to have a significant effect on theCompany’s results of operations or its financial position.

 

*Reclassifications*

 

Certain prior-year amounts have been reclassified toconform to the 2002 presentation.

 

## **Note3.  Discontinued Independent AftermarketSegment**

## ** **

During 2000, the Company adopted a plan to discontinuethe Independent 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. On October 27, 2000, the Company sold the Distribution Group and on June25, 2001, the Company elected to retain Engines.

 

During 2002, based upon updated information regardingobligations and other costs related to the sale of the Distribution Group, theCompany revised its estimated loss and recorded income of $275 (net of incometaxes of $155).  In addition, theCompany reduced certain tax contingency reserves associated with the sale ofthe Distribution Group resulting in a gain of $1,004.  The estimated loss on the sale of the Distribution Group and theactual losses from discontinued operations incurred since the measurement datewere applied against the accrued loss established effective with themeasurement date.  The accrual balanceas of December 31, 2002 and 2001 of $330 and $1,375, respectively, classifiedas liabilities of discontinued operations, represents the Company’s currentestimate of the remaining obligations and other costs related to the sale ofthe Distribution Group.  (See Note 16 —Commitments and Contingencies)

 

The consolidated statements of operations have beenreclassified to report the operating results of the Distribution Group businessas discontinued operations and, accordingly, such results have been excludedfrom continuing operations for all periods presented.  Net sales from the Distribution Group business were $172,814 forthe year ended December 31, 2000. Interest expense for the year ended December 31, 2000 of $5,188 has beenallocated to the discontinued operations based on the actual considerationreceived from the sale of the Distribution Group.

 

47

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Details of the gain (loss) recorded from discontinuedoperations, net of the reclassification of the Engines business fromdiscontinued operations to continuing operations, are as follows:

 
|                                                                     |   | **For the  years ended December 31,** |   |
|--------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                     |   | **2002**                              |   | **2001** |   | **2000** |   |
| Loss from  operations                                                    |   | $                                     | — |   | $ | — |   | $ | (9,429 | ) |
| Income tax  benefit                                                      |   | —                                |   | — |   | 3,061 |   |
| Loss from  operations, net of income taxes                               |   | —                                |   | — |   | (6,368 | ) |
| Estimated gain  (loss) from disposal                                     |   | 430                                   |   | (597 | ) | (141,429 | ) |
| Reclassification  of discontinued operations to continuing operations(1) |   | —                                |   | (961 | ) | 2,403 |   |
| Income tax  (expense) benefit                                            |   | (155                                  | )      | 599 |   | 46,105 |   |
| Adjustment to  income tax benefit                                        |   | 1,004                                 |   | — |   | — |   |
| Gain (loss) from  disposal, net of income taxes                          |   | 1,279                                 |   | (959 | ) | (92,921 | ) |
| Gain (loss) from  discontinued operations, net of income taxes           |   | $                                     | 1,279  |   | $ | (959 | ) | $ | (99,289 | ) |

 

----

(1)     Represents thereclassification of the operating results for Engines from discontinuedoperations to continuing operations as required per Emerging Issues Task ForceNo. 90-16.

 

**Note4.  Related-Party Transactions**

 

Aurora Capital Partners (“ACP”), which controls theCompany’s largest stockholders, charged to the Company $750 in fees forinvestment banking services provided in connection with the divestiture of theDistribution Group in 2000 and is presented as discontinued operations in theaccompanying financial statements.  Nosuch amounts were charged to the Company in 2002 or 2001.  In addition, ACP was paid management fees of$476, $549 and $549 in 2002, 2001 and 2000, respectively.  In September 2002, the management fee wasreduced due to a reduction in ACP’s percentage ownership of the Company.  The Company reimburses ACP for out-of-pocketexpenses incurred in connection with providing management services.  ACP is also entitled to various additionalfees depending on the Company’s profitability or certain significant corporatetransactions.  No such additional feeswere paid in 2002, 2001 or 2000.

 

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 the 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 of the Distribution Group expired on March 31, 2001.  In addition, pursuant to the 18% Buyer Note,interest of $1,508 and $1,508 was received by the Company during the yearsended December 31, 2002 and 2001, respectively.

 

**Note5.  Inventories**

 

Inventoriesconsist of the following:

 
|                                      |   | **December 31,** |   |
|-------------------------------------------|--------|-----------------------|--------|
|                                      |   | **2002**              |   | **2001** |   |
|                                      |   |                  |   |   |   |
| Raw materials, including core inventories |   | $                     | 56,215 |   | $ | 50,851 |   |
| Work-in-process                           |   | 2,365                 |   | 1,342 |   |
| Finished goods                            |   | 11,682                |   | 16,777 |   |
|                                      |   | $                     | 70,262 |   | $ | 68,970 |   |

 

48

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**Note6.  Property, Plant and Equipment**

 

Property,plant and equipment are summarized as follows:

 
|                                                   |   | **December 31,** |   |
|--------------------------------------------------------|--------|-----------------------|--------|
|                                                   |   | **2002**              |   | **2001** |   |
|                                                   |   |                  |   |   |   |
| Land                                                   |   | $                     | 2,043  |   | $ | 2,036 |   |
| Buildings                                              |   | 11,357                |   | 10,721 |   |
| Machinery and equipment                                |   | 65,284                |   | 52,495 |   |
| Autos and trucks                                       |   | 1,248                 |   | 1,293 |   |
| Furniture and fixtures                                 |   | 2,506                 |   | 2,472 |   |
| Leasehold improvements                                 |   | 12,546                |   | 12,063 |   |
| Construction in process                                |   | 500                   |   | 4,282 |   |
|                                                   |   | 95,484                |   | 85,362 |   |
| Less:   Accumulated depreciation and amortization |   | (40,868               | )      | (32,785 | ) |
|                                                   |   | $                     | 54,616 |   | $ | 52,577 |   |

 

Assets recorded undercapital leases are included in property, plant and equipment as follows: 

 
|                                                   |   | **December 31,** |   |
|--------------------------------------------------------|--------|-----------------------|--------|
|                                                   |   | **2002**              |   | **2001** |   |
|                                                   |   |                  |   |   |   |
| Machinery and equipment                                |   | $                     | 2,460  |   | $ | 2,354 |   |
| Less:   Accumulated depreciation and amortization |   | (843                  | )      | (409 | ) |
|                                                   |   | $                     | 1,617  |   | $ | 1,945 |   |

 

**Note 7.  Goodwill and Intangible Assets**

 

During 2002, the Company made certain paymentstotaling $1,639 related to the 1997 acquisition of ATS Remanufacturing (“ATS”),which is part of the Drivetrain Remanufacturing segment (see Note 17 –Reportable Segments).  According to theterms of the purchase agreement, these payments were primarily variable, basedupon the attainment of certain sales levels by the Company to GeneralMotors.  As a result, a reduction togoodwill of $583 was recorded based upon the difference between the originalestimate and the actual amounts paid. In addition, as a result of changes in the exchange rates used totranslate the financial statements of the Company’s U.K. subsidiary, which ispart of the Drivetrain Remanufacturing segment, goodwill increased $763 during2002.

 

As of December 31, 2002 and 2001, the Company’sdefinite lived intangible assets of $819 and $1,145, net of accumulatedamortization of $1,046 and $709, respectively, primarily consist of non-competeagreements and continue to be amortized over their useful lives.

 

Amortization expense for definite lived intangible assetsduring the years ended December 31, 2002, 2001 and 2000 was $333, $155 and$125.  Estimated amortization expensefor the five succeeding fiscal years is as follows:

 
|   |   | **Estimated  Amortization Expense** |   |
|--------|--------|-------------------------------------|--------|
|   |   |                                |   |
| 2003   |   | $                                   | 299    |   |
| 2004   |   | 125                                 |   |
| 2005   |   | 125                                 |   |
| 2006   |   | 125                                 |   |
| 2007   |   | 125                                 |   |
|        |        |                                     |        |  |

 

49

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Actual results of operations for the year endedDecember 31, 2002 and the pro forma results of operations for the years endedDecember 31, 2001 and 2000 had we applied the non-amortization provisions ofSFAS 142 in the prior period are as follows:                                  

 
|                                                                   |   | **For the  years ended December 31,** |         |
|------------------------------------------------------------------------|--------|---------------------------------------|--------------|
|                                                                   |   | **2002**                              |         | **2001** |   | **2000** |   |
|                                                                   |   |                                  |         |   |   |   |   |
| Income from  continuing operations before extraordinary items          |   | $                                     |  47,976 |   | $ | 29,527 |   | $ | 2,406 |   |
| Add:  Goodwill amortization, net of tax                           |   | —                                |         | 3,321 |   | 3,387 |   |
| Adjusted income  from continuing operations before extraordinary items |   | $                                     |  47,976 |   | $ | 32,848 |   | $ | 5,793 |   |
|                                                                   |   |                                  |         |   |   |   |   |
| Per common share  – basic:                                        |   |                                  |         |   |   |   |   |
| Income from  continuing operations before extraordinary items          |   | $                                     | 2.04         |   | $ | 1.44 |   | $ | 0.12 |   |
| Add:  Goodwill amortization, net of tax                           |   | —                                |         | 0.16 |   | 0.16 |   |
|                                                                   |   | $                                     | 2.04         |   | $ | 1.60 |   | $ | 0.28 |   |
|                                                                   |   |                                  |         |   |   |   |   |
| Per common share  – diluted:                                      |   |                                  |         |   |   |   |   |
| Income from  continuing operations before extraordinary items          |   | $                                     | 1.99         |   | $ | 1.40 |   | $ | 0.11 |   |
| Add:  Goodwill amortization, net of tax                           |   | —                                |         | 0.16 |   | 0.16 |   |
|                                                                   |   | $                                     | 1.99         |   | $ | 1.56 |   | $ | 0.27 |   |

 

**Note8.  Accrued Expenses**

 

Accruedexpenses are summarized as follows:

 
|                          |   | **December 31,** |   |
|-------------------------------|--------|-----------------------|--------|
|                          |   | **2002**              |   | **2001** |   |
|                          |   |                  |   |   |   |
| Payroll and related costs     |   | $                     | 9,515  |   | $ | 10,187 |   |
| Interest payable              |   | 1,758                 |   | 6,161 |   |
| Non-income related taxes      |   | 1,204                 |   | 2,760 |   |
| Warranty                      |   | 4,721                 |   | 4,830 |   |
| Restructuring and other costs |   | 727                   |   | 3,915 |   |
| Other                         |   | 12,071                |   | 11,243 |   |
|                          |   | $                     | 29,996 |   | $ | 39,096 |   |

 

**Note 9.  Credit Facility**

* *

On February 8, 2002, the Company executed acredit agreement and a related security agreement in connection with a newcredit facility (the “Credit Facility”). The Credit Facility provides for (i) a $75,000, five year term loan (the“A-Loan”), with principal payable in quarterly installments in increasingamounts over the five-year period, (ii) a $95,000, six year, two-tranche termloan (the “B-Loans”), with principal payable in quarterly installments over thesix-year period (with 96% of the outstanding balance payable in the sixth year)and an annual excess cash flow sweep payable as defined in the creditagreement, and (iii) a $50,000, five year revolving credit facility (the“Revolver”).  The Credit Facility alsoprovides for the addition of one or more optional term loans of up to $100,000in the aggregate (the “C-Loans”), subject to certain conditions (including thereceipt from one or more lenders of the additional commitments that may berequested) and achievement of certain financial ratios.

 

At the Company’s election, amounts advanced under theCredit Facility will bear interest at either (i) the Alternate Base Rate(“ABR”) plus a specified margin or (ii) the Eurodollar Rate plus a specified

 

50

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margin.  The ABR is equal to thehighest 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 applicable marginsfor both ABR and Eurodollar Rate loans are subject to quarterly adjustmentsbased on the Company’s leverage ratio as of the end of the four fiscal quartersthen completed.  As of December 31,2002, the margins for the A-Loan and Revolver were 1.25% for ABR loans and2.25% for Eurodollar Rate loans.  Forthe B-Loan, the margins were 2.00% for ABR loans and 3.00% for Eurodollar Rateloans as of December 31, 2002.  Theinterest rates for the optional C-Loans will be determined at the time suchloans are provided.  Additionally, theCompany is required to pay quarterly in arrears a commitment fee equal to 0.50%per annum of the average daily unused portion of the Credit Facility duringsuch quarter.  The Company must alsoreimburse the lenders for certain legal and other costs of the lenders, and payfees on outstanding letters of credit at a rate per annum equal to theapplicable margin then in effect for advances bearing interest at theEurodollar Rate.

 

Amounts advanced under the Credit Facility areguaranteed by all of the Company’s domestic subsidiaries and secured bysubstantially all of the Company’s assets and its subsidiaries’ assets.  The Credit Facility contains severalcovenants, including ones that require the Company to maintain specified levelsof net worth, leverage and cash flow coverage and others that limit its abilityto incur indebtedness, make capital expenditures, create liens, engage inmergers and consolidations, make restricted payments (including dividends),sell assets, make investments, enter new businesses and engage in transactionswith the Company’s affiliates and affiliates of its subsidiaries.

 

On March 8, 2002, the Company terminated its oldcredit facility, which consisted of a $130,000 term loan and a $100,000 line ofcredit, with the proceeds from the Credit Facility and a public offering of itscommon stock (see Note 12 — Common and Preferred Stock).

 

On November 21, 2002, the Company made an optionalprepayment of $6,000 representing a portion of the excess cash flow sweeppayable in connection with the first anniversary of the credit agreement.  The $4,500 balance of the excess cash flowsweep is payable during the first quarter of 2003.

 

At December 31, 2002, $65,280 and $89,636 wereoutstanding under the A-Loan and B-Loans portions of the Credit Facility,respectively, and no amounts were outstanding under the Revolver.  At December 31, 2001, under the Company’sold credit facility which was terminated during 2002, $29,400 and $45,800 wereoutstanding under the term loan and revolving portions, respectively.  In addition, the Company had outstandingletters of credit issued against the Credit Facility totaling $3,524 as ofDecember 31, 2002.  At December 31,2001, the Company had outstanding letters of credit issued against the oldcredit facility totaling $5,014.

 

Annual maturities of the Credit Facility are as followsas of December 31, 2002:

 

| 2003   |   | $      | 15,805  |   |
|--------|--------|--------|---------|--------|
| 2004   |   | 13,908 |    |
| 2005   |   | 14,775 |    |
| 2006   |   | 19,980 |    |
| 2007   |   | 69,193 |    |
| 2008   |   | 21,255 |    |
|   |   | $      | 154,916 |   |

 

51

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**Note 10.  Income Taxes**

 

Income tax expense (benefit) from continuingoperations consists of the following:

 
|           |   | **For the years ended December 31,** |   |
|----------------|--------|--------------------------------------|--------|
|           |   | **2002**                             |   | **2001** |   | **2000** |   |
| Current:       |   |                                 |   |   |   |   |   |
| Federal        |   | $                                    | (1,234 | ) | $ | 1,835 |   | $ | (819 | ) |
| State          |   | (209                                 | )      | 1,196 |   | 185 |   |
| Foreign        |   | 1,139                                |   | 81 |   | 70 |   |
| Total current  |   | (304                                 | )      | 3,112 |   | (564 | ) |
| Deferred:      |   |                                 |   |   |   |   |   |
| Federal        |   | 24,077                               |   | 14,066 |   | 2,486 |   |
| State          |   | 1,585                                |   | 671 |   | 13 |   |
| Foreign        |   | (217                                 | )      | 249 |   | (52 | ) |
| Total deferred |   | 25,445                               |   | 14,986 |   | 2,447 |   |
|           |   | $                                    | 25,141 |   | $ | 18,098 |   | $ | 1,883 |   |

 

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 $4,706, $1,070 and $411 for the years ended December 31, 2002,2001 and 2000, 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,** |   |
|------------------------------------------------|--------|---------------------------------------|--------|
|                                           |   | **2002**                              |   | **2001** |   | **2000** |   |
|                                           |   | **Amount**                            |   | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   |
| Tax at U.S. statutory rates                    |   | $                                     | 25,591 |   | 35.0 | % | $ | 16,670 |   | 35.0 | % | $ | 1,501 |   | 35.0 | % |
| State income taxes, net of federal tax benefit |   | 1,062                                 |   | 1.5 |   | 1,477 |   | 3.1 |   | 103 |   | 2.4 |   |
| Foreign income taxes                           |   | 47                                    |   | 0.1 |   | (130 | ) | (0.3 | ) | (495 | ) | (11.5 | ) |
| Nondeductible goodwill amortization            |   | —                                |   | — |   | 236 |   | 0.5 |   | 232 |   | 5.4 |   |
| Nondeductible expenses                         |   | 108                                   |   | 0.1 |   | 131 |   | 0.3 |   | 503 |   | 11.7 |   |
| Federal refund                                 |   | (575                                  | )      | (0.8 | ) | — |   | — |   | — |   | — |   |
| Other                                          |   | (1,092                                | )      | (1.5 | ) | (286 | ) | (0.6 | ) | 39 |   | 0.9 |   |
|                                           |   | $                                     | 25,141 |   | 34.4 | % | $ | 18,098 |   | 38.0 | % | $ | 1,883 |   | 43.9 | % |

 

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Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income taxpurposes.  Significant components of theCompany’s deferred tax assets and liabilities are as follows: 

 
|                              |   | **December 31,** |   |
|-----------------------------------|--------|------------------|--------|
|                              |   | **2002**         |   | **2001** |   |
| Deferred tax assets:              |   |             |   |   |   |
| Inventory obsolescence reserve    |   | $                | 1,834  |   | $ | 868 |   |
| Property, plant and equipment     |   | —           |   | 94 |   |
| Product warranty accruals         |   | 1,705            |   | 1,970 |   |
| Special charge accruals           |   | 577              |   | 2,421 |   |
| Other nondeductible accruals      |   | 2,663            |   | 1,570 |   |
| Discontinued operations reserve   |   | 127              |   | 524 |   |
| Credit carryforwards              |   | 555              |   | 1,064 |   |
| Net operating loss carryforwards  |   | 27,577           |   | 42,042 |   |
| Other deferred items              |   | 4,119            |   | 1,224 |   |
| Total deferred tax assets         |   | 39,157           |   | 51,777 |   |
| Deferred tax liabilities:         |   |             |   |   |   |
| Amortization of intangible assets |   | 14,320           |   | 9,720 |   |
| Property, plant and equipment     |   | 1,396            |   | — |   |
| Other accruals and deferrals      |   | 552              |   | 867 |   |
| Total deferred tax liabilities    |   | 16,268           |   | 10,587 |   |
| Valuation allowance               |   | (9,193           | )      | (9,092 | ) |
| Net deferred tax asset            |   | $                | 13,696 |   | $ | 32,098 |   |

 

As of December 31, 2002, the Company had federal andstate loss carryforwards of approximately $49,200.  These loss carryforwards are available as an offset to the futuretaxable income of the Company and its subsidiaries.  The federal loss carryforward expires in 2020, and the state losscarryforwards expire in varying amounts from 2004 to 2021.  The Company also has Alternative Minimum Tax(“AMT”) credit carryforwards of approximately $197 available to offset regularincome tax payable in future years.  TheCompany, through its subsidiary in the U.K., has surplus Advance Corporate Tax(“ACT”) of approximately $358 available as a direct offset to future U.K. taxliability.  The Company’s AMT credit andsurplus ACT can be carried over indefinitely.

 

A valuation allowance has been established for the taxbenefits associated with certain state loss carryforwards as realization is notdeemed likely due to limitations imposed by certain states on the Company’sability to utilize these benefits.  Avaluation allowance has also been established for certain foreign tax benefitsdue to similar limitations imposed by the foreign tax jurisdiction. During2002, the valuation allowance increased $101, to $9,193 from $9,092.  This increase is attributable to a state taxlaw change suspending the Company’s ability to utilize previously existing netoperating loss carryforwards, as well as changes to the valuation of foreigncarryovers due to exchange rate fluctuation. The Company believes that, consistent with accounting principlesgenerally accepted in the United States, it is more likely than not that thetax benefits associated with the balance of loss carryforwards and otherdeferred tax assets will be realized through future taxable earnings oralternative tax strategies.

 

As of December 31, 2002, there are approximately$2,400 of accumulated unremitted earnings from the Company’s U.K. subsidiarywith respect to which deferred tax has not been provided as the undistributedearnings of the U.K. subsidiary are indefinitely reinvested.

 

**Note 11.  Stock Options and Warrants**

 

The Company provides stock options to employees,non-employee directors and independent contractors under its 2002 StockIncentive Plan (the “2002 Plan”), its 2000 Stock Incentive Plan (the “2000Plan”), its 1998 Stock Incentive Plan (the “1998 Plan”) and its 1996 StockIncentive Plan (the “1996 Plan”) (collectively the “Plans”).  The Plans provide for granting ofnon-qualified and incentive stock option awards.  Options under the Plans are generally granted at fair value and typicallyvest over a three to five year period of 

 

53

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time, as determined by the Board of Directors.  Options under the Plans expire 10 years fromthe date of grant.  The 2002, 2000, 1998and 1996 plans authorize the issuance of 1,000,000, 750,000, 1,200,000 and2,400,000 shares of the Company’s common stock, respectively.  Options available for grant under the Plansin the aggregate were 500,305, 154,314 and 714,683 as of December 31,2002, 2001 and 2000, respectively.

 

A summary of the status of the Company’s option plansare presented below:

 
|                                                             |   | **2002**   |   | **2001**                                           |   | **2000**   |      |
|------------------------------------------------------------------|--------|------------|--------|----------------------------------------------------|--------|------------|-----------|
|                                                             |   | **Shares** |   | **Weighted -****Average Exercise Price** |   | **Shares** |      | **Weighted -****Average  ExercisePrice** |   | **Shares** |   | **Weighted -****Average  ExercisePrice** |   |
| Outstanding at beginning of year                                 |   | 2,226,223  |   | $                                                  | 7.82   |       | 2,006,819 |   | $ | 8.36 |   | 1,918,675 |   | $ | 7.43 |   |
| Granted at fair value                                            |   | 459,000    |   | $                                                  | 20.67  |       | 744,000   |   | $ | 5.96 |   | 763,950 |   | $ | 10.93 |   |
| Granted above fair value                                         |   | 350,000    |   | $                                                  | 30.00  |       | —    |   | $ | — |   | — |   | $ | — |   |
| Exercised                                                        |   | (868,951   | )      | $                                                  | 6.42   |       | (340,965  | ) | $ | 5.60 |   | (196,528 | ) | $ | 2.21 |   |
| Canceled/forfeited                                               |   | (154,991   | )      | $                                                  | 11.11  |       | (183,631  | ) | $ | 10.24 |   | (479,278 | ) | $ | 11.26 |   |
| Outstanding at end of year                                       |   | 2,011,281  |   | $                                                  | 14.97  |       | 2,226,223 |   | $ | 7.82 |   | 2,006,819 |   | $ | 8.36 |   |
|                                                             |   |       |   |                                               |   |       |      |   |   |   |   |   |   |
| Exercisable at end of year                                       |   | 881,737    |   | $                                                  | 17.66  |       | 1,003,817 |   | $ | 7.85 |   | 976,798 |   | $ | 6.14 |   |
|                                                             |   |       |   |                                               |   |       |      |   |   |   |   |   |   |
| Weighted-average fair value of options granted during  the year: |   |       |   |                                               |   |       |      |   |   |   |   |   |   |
| At fair value                                                    |   |       |   | $                                                  | 7.75   |       |      |   | $ | 4.07 |   |   |   | $ | 8.44 |   |
| Above fair value                                                 |   |       |   | $                                                  | 3.43   |       |      |   | $ | — |   |   |   | $ | — |   |

 

The following summarizes information about optionsoutstanding as of December 31, 2002:

 
|                       |   | ***Options Outstanding*** |   | ***Options Exercisable***             |   |
|----------------------------|--------|---------------------------|--------|---------------------------------------|--------|
| **Range ofExercisePrices** |   | **Shares**                |   | **AverageRemaining  ContractualLife** |   | **Weighted-Average  ExercisePrices** |   | **Shares** |   | **Weighted-Average  ExercisePrices** |   |
| $ 4.56 - $7.00             |   | 550,645                   |   | 8.1 years                             |   | $ | 4.99 |   | 150,335 |   | $ | 5.00 |   |
| $ 7.01 - $12.00            |   | 610,716                   |   | 6.9 years                             |   | $ | 10.64 |   | 316,311 |   | $ | 10.29 |   |
| $ 12.01 - $20.00           |   | 168,420                   |   | 7.4 years                             |   | $ | 16.42 |   | 65,091 |   | $ | 16.42 |   |
| $ 20.01 - $30.00           |   | 681,500                   |   | 9.4 years                             |   | $ | 26.55 |   | 350,000 |   | $ | 30.00 |   |
|                       |   | 2,011,281                 |   | 8.1 years                             |   | $ | 14.97 |   | 881,737 |   | $ | 17.66 |   |

 

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.  As ofDecember 31, 2002, all of these warrants have been exercised.  During the year ended December 31, 2002,70,176 of these warrants were exercised in a cash transaction.  During the years ended December 31, 2001 and2000, in cashless transactions, 210,528 and 140,352 of these warrants wereexercised and 181,921 and 114,218 shares of the Company’s common stock wereissued, respectively.

 

**Note 12.  Common and Preferred Stock**

 

On March 8, 2002, theCompany completed a public offering of 2,760,000 shares of its common stock ata price to the public of $16.50 per share. The $42,012 of net proceeds from the offering was used, together withborrowings under the Credit Facility, to repay all the indebtedness under theCompany’s old credit facility on March 8, 2002.

 

On August 1, 2002,pursuant to a secondary shelf offering, certain shareholders of the Companycompleted the sale of 4,500,000 shares of the Company’s common stock, for whichthe Company received no 

 

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proceeds.  In connection with the shelf offering, theCompany received net proceeds of $2,610 from the exercise of 448,907 stockoptions and 70,176 stock warrants.

 

InOctober 2002, the Company resumed the stock buyback program initially commencedin January 2001.  This program, asapproved by the Company’s Board of Directors, allows for the purchase of up toan aggregate of 2,000,000 shares of its common stock.  Such purchases may be made from time to time in the open market,through privately negotiated transactions or through block purchases.  During 2002, the Company purchased 322,400shares of its common stock at an average price of $11.27 per share.  As of December 31, 2002, there are up to1,238,263 shares remaining for purchase under this program, subject tocertain annual limitations imposed by the terms of our credit agreement, whichfor 2003 is $8,000.

 

**Note 13:  Derivative Financial Instruments**

 

On January 1, 2001, the Company adopted SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities* (as amended bySFAS No. 137 and 138) which requires that all derivative instruments berecorded on the balance sheet at their fair value.  Changes in the fair value of derivatives are recorded each periodin current earnings or other comprehensive loss, depending on whether aderivative is designated a part of a hedge and, if it is, the type of hedgetransaction.  For derivatives qualifyingas hedges of future cash flows, the effective portion of changes in fair valueis recorded temporarily in equity, then recognized in earnings along with therelated effects of the hedged items. Any ineffective portion of a hedge is reported in earnings as it occurs.

 

The Company uses an interest rate swap to convert aportion of its variable rate debt to fixed rate debt to reduce interest ratevolatility risk.  The swap is based on anotional amount of $15,000 at the fixed interest rate of 5.95% during its termand is scheduled to mature during July 2003.  The fair value of the swap is based on the estimated currentsettlement cost.  In accordance withSFAS No. 133, the Company has designated its swap agreement as a cash flow hedgeand recorded the fair value of this hedge agreement as part of other comprehensiveloss.   The following table sets forththe effective portion of changes in the fair value of this derivative:

 
|                                        |   | **For the years ended December  31,** |   |
|---------------------------------------------|--------|---------------------------------------|--------|
|                                        |   | **2002**                              |   | **2001** |   |
| Transition adjustment as of January 1, 2001 |   | $                                     | — |   | $ | (45 | ) |
| Increase (decrease) in fair value           |   | 311                                   |   | (636 | ) |
| Income taxes                                |   | (129                                  | )      | 262 |   |
| Other comprehensive gain (loss), net        |   | $                                     | 182    |   | $ | (419 | ) |

 

The fair value of this derivative as a liabilityamounted to $370 and $681 at December 31, 2002 and 2001, respectively.

 

**Note 14.  Earnings Per Share**

* *

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

 
|                                                          |   | **For the years ended December 31,** |   |
|---------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                          |   | **2002**                             |   | **2001** |   | **2000** |   |
| Numerator:                                                    |   |                                 |   |   |   |   |   |
| Income from continuing operations before extraordinary  items |   | $                                    | 47,976 |   | $ | 29,527 |   | $ | 2,406 |   |
|                                                          |   |                                 |   |   |   |   |   |
| Denominator:                                                  |   |                                 |   |   |   |   |   |
| Weighted-average common shares outstanding                    |   | 23,493,092                           |   | 20,503,936 |   | 20,663,102 |   |
| Effect of dilutive securities:                                |   |                                 |   |   |   |   |   |
| Employee stock options and warrants                           |   | 625,681                              |   | 554,637 |   | 500,387 |   |
| Denominator for diluted earnings per common share             |   | 24,118,773                           |   | 21,058,573 |   | 21,163,489 |   |
|                                                          |   |                                 |   |   |   |   |   |
| Basic earnings per common share                               |   | $                                    | 2.04   |   | $ | 1.44 |   | $ | 0.12 |   |
| Diluted earnings per common share                             |   | 1.99                                 |   | 1.40 |   | 0.11 |   |

 

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**Note 15.  Employee Retirement Plans**

 

TheCompany’s defined contribution plans provide substantially all U.S. salariedand hourly employees of the Company an opportunity to accumulate personal fundsfor their retirement, subject to minimum duration of employmentrequirements.  Contributions are made ona before-tax basis to substantially all of these 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$1,433, $1,511 and $998 for the plan years ending in 2002, 2001 and 2000,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 $212, $329 and $291 for the yearsended December 31, 2002, 2001 and 2000, respectively.

 

**Note 16.  Commitments and Contingencies**

 

TheCompany leases certain facilities and equipment under various capital andoperating lease agreements, which expire on various dates through 2009.  Facility leases that expire generally areexpected to be renewed or replaced by other leases.  Future minimum rental commitments under non-cancelable capitalleases and operating leases with terms in excess of one year are as follows:

 
| **For the  years ended December 31,** |   | **Capital  Leases** |   | **Operating  Leases** |   |
|--------------------------------------------|--------|---------------------|--------|-----------------------|--------|
| 2003                                       |   | $                   | 713    |                  | $      | 8,869 |   |
| 2004                                       |   | 308                 |   | 6,207                 |   |
| 2005                                       |   | 2                   |   | 5,060                 |   |
| 2006                                       |   | —              |   | 3,915                 |   |
| 2007                                       |   | —              |   | 2,535                 |   |
| 2008 and thereafter                        |   | —              |   | 1,814                 |   |
| Total minimum lease payments               |   | 1,023               |   | $                     | 28,400 |   |
| Less:  Amount  representing interest  |   | (61                 | )      |                  |   |
| Present value of minimum lease payments    |   | $                   | 962    |                  |   |   |

 

Rent expense for all operatingleases approximated $11,068, $8,231 and $7,908 for the years endedDecember 31, 2002, 2001 and 2000, respectively.

 

At December 31, 2002 and 2001,amounts due to sellers of acquired companies and deferred compensation consistof additional purchase price payable to the seller and to other key individualsof ATS Remanufacturing (“ATS”), acquired in 1997.  The ATS acquisition requires the Company to makesubsequent payments to the seller and certain other key individuals of ATS oneach of the first 14 anniversaries of the closing date.  Through December 31, 2002, the Company hadmade aggregate payments of $7,441 related to the ATS acquisition.  Substantially all of the remaining paymentsto be made in the future, which will aggregate to approximately $10,673 (presentvalue $9,801 as of December 31, 2002), are contingent upon the attainment ofcertain sales levels by the Company to General Motors, which the Companybelieves has a substantial likelihood of being attained.   Amounts are payable through 2011.

 

The Company is subject tovarious evolving federal, state, local and foreign environmental laws andregulations governing, among other things, emissions to air, discharge towaters and the generation, handling, storage, transportation, treatment anddisposal of a variety of hazardous and non–hazardous substances andwastes. These laws and regulations provide for substantial fines and criminalsanctions for violations and impose liability for the costs of cleaning up, anddamages resulting from, past spills, disposals or other releases of hazardoussubstances.

 

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 allmanufacturing and various distribution facilities, found that a number of these

 

56

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facilities have had or may have had releases of hazardous materialsthat may require remediation and also may be subject to potential liabilitiesfor contamination from off-site disposal of substances or wastes. Theseassessments also found that 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 onthe investigations conducted, in part on certain remediation completed prior toor since the acquisitions, and in part on the indemnification provisions of theagreements entered into in connection with the Company’s acquisitions, theCompany will not incur any material 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 Environmental Response,Compensation, and Liability Act of 1980, as amended (CERCLA or Superfund)provides for cleanup of sites from which there has been a release or threatenedrelease of hazardous substances, and authorizes recovery of related responsecosts and certain other damages from PRPs. PRPs are broadly defined underCERCLA, 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 preliminarily estimatedthat it will cost between $150,000 and $200,000 to construct and to operate foran indefinite period an interim remedial groundwater pumping and treatmentsystem for the part of the San Gabriel Valley Superfund site within which RPM’sfacilities, as well as those of many other potentially responsible parties, areor were located. The actual cost of this remedial action could varysubstantially from this estimate, and additional costs associated with thisSuperfund site are likely to be assessed. RPM moved all manufacturingoperations out of the San Gabriel Valley Superfund site area in 1995. SinceJuly 1995, RPM’s only real property interest in this area has been thelease 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.  Although there can be noassurance, the Company believes that it will not incur any material liabilityas a result of RPM’s lease of properties within the San Gabriel ValleySuperfund site.

 

In connection with the saleof the Distribution Group (the “DG Sale”) on October 27, 2000 (seeNote 3 – Discontinued Independent Aftermarket Segment), the Company agreedto certain matters with the buyer that could result in contingent liability tothe Company in the future.  Theseinclude the Company’s indemnification of the buyer against(i) environmental liability at former Distribution Group facilities thathad been closed prior to the DG Sale, including the former manufacturingfacility in Azusa, California within the Superfund site mentioned above andformer manufacturing facilities in Mexicali, Mexico and Dayton, Ohio,(ii) any other environmental liability of the Distribution Group relatingto periods prior to the DG Sale, in most cases subject to a $750 deductible anda $12,000 cap except with respect to closed facilities and (iii) any taxliability of the Distribution Group relating to periods prior to the DGSale.  In addition, prior to the DG Saleseveral of the Distribution Group’s real estate and equipment leases wereguaranteed by the Company.  Theseguarantees remain in effect after the DG Sale so the Company continues to beliable for the Distribution Group’s obligations under such leases in the eventthat the Distribution Group does not honor those obligations.  In 2002, the Company negotiated anadditional $100 deductible applicable to all Distribution Group claims forindemnification.

 

57

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**Note 17.  Reportable Segments**

 

The Company has two reportable segments in continuingoperations: the Drivetrain Remanufacturing segment and the Logisticssegment.  The Drivetrain Remanufacturingsegment consists of five operating units that primarily sell remanufacturedtransmissions directly to Ford, DaimlerChrysler, 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’s Logisticssegment consists of three operating units: (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 Mazda; and (iii) an automotiveelectronic components remanufacturing and distribution business, primarily forDelphi and Visteon.  The Company’s“Other” business unit, which is not reportable for segment reporting purposes,remanufactures and distributes domestic and foreign engines and, to a lesserextent, distributes domestic remanufactured transmissions from regionaldistribution points primarily to independent aftermarket customers.

 

The Company evaluates performance based upon incomefrom operations.  The reportablesegments’ and the “Other” business unit’s accounting policies are the same asthose described in the summary of significant accounting policies(see Note 2 — Summary of Significant Accounting Policies).  The Company fully allocates corporateoverhead based upon budgeted full year profit before tax.  The reportable segments and the “Other”business unit are each managed and measured separately primarily due to thediffering customers, production processes, products sold and distributionchannels.

 

In consolidation, the Company eliminates the sale ofcertain transmissions remanufactured and sold to Drivetrain Remanufacturingcustomers that are simultaneously repurchased for re-sale to customers in theindependent aftermarket through the Company’s aftermarket business.  Additionally, and in consolidation, theCompany eliminates any profits associated with any remanufactured transmissionsthat have been repurchased for re-sale that remain in inventory.

 

58

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Financial information relating to the Company’ssegments and a reconciliation to the consolidated financial statements are asfollows as of and for the years ended December 31: 

 
|                                  |   | **Drivetrain  Remanufacturing** |    | **Logistics** |   | **Other** |   | **Corporate /  Unallocated** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------|--------|---------------------------------|---------|---------------|--------|-----------|--------|------------------------------|--------|------------------|--------|------------------|--------|
|                                  |   |                            |    |          |   |      |   |                         |   |             |   |             |   |
| 2002:                                 |   |                            |    |          |   |      |   |                         |   |             |   |             |   |
| Revenues from external customers      |   | $                               | 286,493 |          | $      | 114,203   |   | $                            | 16,652 |             | $      | —           |   | $ | (1,446 | ) | $ | 415,902 |   |
| Depreciation and amortization expense |   | 6,283                           |    | 4,144         |   | 508       |   | —                       |   | —           |   | 10,935           |   |
| Special (credits) charges             |   | —                          |    | (154          | )      | —    |   | (123                         | )      | —           |   | (277             | )      |
| Income (loss) from operations         |   | 50,962                          |    | 36,768        |   | (4,528    | )      | 123                          |   | (209             | )      | 83,116           |   |
| Total assets                          |   | 432,106                         |    | 100,690       |   | 14,483    |   | 97,752                       |   | (191,001         | )      | 454,030          |   |
| Goodwill                              |   | 149,121                         |    | 18,973        |   | —    |   | 135                          |   | —           |   | 168,229          |   |
| Expenditures for long-lived assets    |   | 8,848                           |    | 4,078         |   | —    |   | 177                          |   | —           |   | 13,103           |   |
| 2001:                                 |   |                            |    |          |   |      |   |                         |   |             |   |             |   |
| Revenues from external customers      |   | $                               | 266,258 |          | $      | 105,255   |   | $                            | 21,868 |             | $      | —           |   | $ | — |   | $ | 393,381 |   |
| Depreciation and amortization expense |   | 10,156                          |    | 3,732         |   | 131       |   | —                       |   | —           |   | 14,019           |   |
| Special charges                       |   | 2,439                           |    | 2,415         |   | —    |   | 476                          |   | —           |   | 5,330            |   |
| Income (loss) from operations         |   | 40,044                          |    | 26,461        |   | 1,695     |   | (476                         | )      | —           |   | 67,724           |   |
| Total assets                          |   | 408,311                         |    | 81,215        |   | 17,701    |   | 46,043                       |   | (156,412         | )      | 396,858          |   |
| Goodwill                              |   | 148,941                         |    | 18,973        |   | —    |   | 135                          |   | —           |   | 168,049          |   |
| Expenditures for long-lived assets    |   | 7,646                           |    | 5,185         |   | —    |   | 685                          |   | —           |   | 13,516           |   |
| 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           |   |
| Income (loss) from operations         |   | 49,028                          |    | 17,394        |   | (37,537   | )      | —                       |   | —           |   | 28,885           |   |
| Total assets                          |   | 382,499                         |    | 63,090        |   | 17,479    |   | 49,058                       |   | (104,627         | )      | 407,499          |   |
| Goodwill                              |   | 154,301                         |    | 19,498        |   | —    |   | 138                          |   | —           |   | 173,937          |   |
| Expenditures for long-lived assets    |   | 5,156                           |    | 5,556         |   | 306       |   | 664                          |   | —           |   | 11,682           |   |

 

59

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Geographic information for revenues, determined bydestination of sale and long-lived assets, determined by the location of theCompany’s facilities is as follows:

 
|                           |   | **As of and for the  Years ended December 31,** |    |
|--------------------------------|--------|-------------------------------------------------|---------|
|                           |   | **2002**                                        |    | **2001** |   | **2000** |   |
|                           |   |                                            |    |   |   |   |   |
| Net sales:                     |   |                                            |    |   |   |   |   |
| United States                  |   | $                                               | 387,196 |   | $ | 369,162 |   | $ | 351,726 |   |
| Canada and Europe              |   | 28,706                                          |    | 24,219 |   | 20,767 |   |
| Consolidated net sales         |   | $                                               | 415,902 |   | $ | 393,381 |   | $ | 372,493 |   |
|                           |   |                                            |    |   |   |   |   |
| Long-lived assets:             |   |                                            |    |   |   |   |   |
| United States                  |   | $                                               | 217,564 |   | $ | 217,280 |   | $ | 217,358 |   |
| Europe                         |   | 15,268                                          |    | 13,826 |   | 14,059 |   |
| Consolidated long-lived assets |   | $                                               | 232,832 |   | $ | 231,106 |   | $ | 231,417 |   |

 

For the years ended December 31, 2002, 2001 and 2000,the Company had three significant external customers, Ford (DrivetrainRemanufacturing and Logistics segments), Daimler Chrysler (DrivetrainRemanufacturing segment and Other) and AT&T Wireless Services (Logisticssegment), representing $153,957, $93,189 and $76,774 of consolidated net salesfor 2002, respectively, $136,088, $96,980 and $69,121 of consolidated net salesfor 2001, respectively, and $111,818, $110,175 and $52,653 of consolidated netsales for 2000, respectively.

 

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

 

The carrying amount of the Company’s financialinstruments approximate their fair values due to the fact that they are eithershort-term in nature or re-priced to fair value through floating interestrates.  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, 2002 and 2001.

 

The carrying amounts and fair values of thesefinancial instruments are as follows: 

 
|                                    |   | **December 31,**     |   |
|-----------------------------------------|--------|----------------------|--------|
|                                    |   | **2002**             |   | **2001** |   |
|                                    |   | **Carrying  Amount** |   | **FairValue** |   | **Carrying  Amount** |   | **FairValue** |   |
| Series B Senior Notes              |   | $                    | 3⁄4 |   | $ | 3⁄4 |   | $ | 82,570 |   | $ | 83,809 |   |
| Series D Senior Notes              |   | 3⁄4               |   | 3⁄4 |   | 27,815 |   | 28,232 |   |
| 18% senior subordinated promissory note |   | 8,899                |   | 8,899 |   | 8,600 |   | 8,600 |   |
| Promissory note with minority interest  |   | 3⁄4               |   | 3⁄4 |   | 210 |   | 210 |   |
|                                         |        |                      |        |  |  |  |  |  |  |  |  |  |  |

 

**Note 19:  Extraordinary Items**

 

In March 2002, in connection with the termination ofthe Company’s old credit facility, the Company recorded an extraordinary itemof $928, net of income tax benefits of $552, related to the write-off ofpreviously capitalized debt issuance costs.

 

In addition, on March 8, 2002, the Company called all of its 12% SeriesB and D Senior Subordinated Notes due 2004 (the “Senior Notes”) forredemption.  The Senior Notes, with aface amount outstanding of $110,385, were redeemed on April 8, 2002 at a priceof 102% plus accrued and unpaid interest. In connection with this redemption, which was funded by borrowings made underthe Credit Facility, the Company recorded an extraordinary charge of $1,900(net of income tax benefits of $1,122) related to the write-off of previouslycapitalized debt issuance costs and a call premium associated with thistransaction.

 

60

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**Note 20.  Special Charges**

 

Commencingin 1998, the Company implemented certain initiatives designed to improveoperating efficiencies and reduce costs. In 2000, the Company recorded $32,584 of special charges (including$9,134 classified as Cost of Sales-Special Charges) related to its Enginesbusiness, primarily for the impairment and write-down of certain assets.  In 2001, the Company recorded $5,330 ofspecial charges, including (i) $2,439 for the Drivetrain Remanufacturingsegment consisting of severance and related costs and exit and idle facilitycosts, (ii) $2,415 for the Logistics segment primarily related to the shut-downof the Company’s remanufactured automotive electronic control modules productline and severance and related costs primarily associated with the upgrade ofcertain management functions and (iii) $476 of severance and related costsrelated to the Company’s two information systems groups.

 

In 2002, the Company recorded a special charge of approximately $800related to the Drivetrain Remanufacturing segment for a retroactive insurancepremium adjustment related to 1998 and 1999 self-insured workers compensationclaims.  In addition, the Companyrecorded a gain of approximately $800 for a partial reversal of apreviously established provision related tothe Drivetrain Remanufacturing segment for a potential non-income state taxliability whose maximum exposure has been reduced.  In addition, the Company recorded income of $277 for the reversal of previouslyestablished special charge provisions including (i) $154 for the shut-down ofthe Company’s remanufactured automotive electronic control modules operationprimarily related to asset write-downs where actual recoveries from the sale ofassets were favorable to original estimates and (ii) $123 of severance andrelated costs primarily related to the consolidation of the information systemsgroups that are no longer expected to be incurred.   Following is an analysis of the special charge reserve, which isclassified as accrued expenses in the Consolidated Balance Sheets: 

 
|                               |   | **Termination  Benefits** |   | **Exit / Other  Costs** |   | **Loss on  Write-Down  of Assets** |   | **Total** |   |
|------------------------------------|--------|---------------------------|--------|-------------------------|--------|------------------------------------|--------|-----------|--------|
|                               |   |                      |   |                    |   |                               |   |      |   |
| Reserve at January 1, 2000         |   | $                         | 2,387  |                    | $      | 2,542                              |   | $         | 2,980  |   | $ | 7,909 |   |
| Provision 2000                     |   | 441                       |   | 4,254                   |   | 27,889                             |   | 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       |   | 696                       |   | 4,802                   |   | 5,528                              |   | 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       |   | 1,794                     |   | 3,034                   |   | 3,961                              |   | 8,789     |   |
| Provision adjustment 2002          |   | (123                      | )      | (28                     | )      | (126                               | )      | (277      | )      |
| Payments 2002                      |   | (1,537                    | )      | (1,087                  | )      | —                             |   | (2,624    | )      |
| Asset write-offs 2002              |   | —                    |   | —                  |   | (3,614                             | )      | (3,614    | )      |
| Asset valuation adjustment 2002(1) |   | —                    |   | (122                    | )      | (221                               | )      | (343      | )      |
| Reserve at December 31, 2002       |   | $                         | 134    |                    | $      | 1,797                              |   | $         | — |   | $ | 1,931 |   |

 

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(1)                                  Asset valuation adjustments are due to theCompany’s initial discontinuance of the Engines business during 2000 and itssubsequent election to retain this business during 2001.

 

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**Note 21.  Selected Quarterly Financial Data(Unaudited)**

 
|                                                          |   | **Quarter** |    |
|---------------------------------------------------------------|--------|-------------|---------|
|                                                          |   | **First**   |    | **Second** |   | **Third** |   | **Fourth** |   |
| 2002                                                          |   |        |    |   |   |   |   |   |   |
| Net sales                                                     |   | $           | 101,266 |   | $ | 100,706 |   | $ | 110,577 |   | $ | 103,353 |   |
| Gross profit                                                  |   | 34,144      |    | 36,447 |   | 37,533 |   | 35,418 |   |
| Income from continuing operations before extraordinary  items |   | 9,486       |    | 11,330 |   | 13,431 |   | 13,729 |   |
| Net income                                                    |   | 8,558       |    | 9,430 |   | 13,706 |   | 14,733 |   |
| Earnings per common share(1)                                  |   | $           | 0.44    |   | $ | 0.48 |   | $ | 0.55 |   | $ | 0.56 |   |
| Earnings per common share-assuming dilution(1)                |   | 0.42        |    | 0.46 |   | 0.54 |   | 0.56 |   |
| 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 |   |
| Net income                                                    |   | 6,020       |    | 5,878 |   | 6,590 |   | 10,080 |   |
| 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 |   |

 

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(1)                                  Earnings per share data is presented beforediscontinued operations and extraordinary items.

 

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**ITEM 9.****                                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**PART III**

 

**ITEM 10.****                                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT.**

## ** **

**Directorsand Executive Officers**

 

The following lists our directors and executiveofficers and their respective ages and positions as of December 31, 2002: 

 
| **Name**                 |   | **Age** |   | **Positions**                                                 |
|--------------------------|--------|---------|--------|---------------------------------------------------------------|
| Michael  T. DuBose       |   | 49      |   | Chairman  of the Board, President and Chief Executive Officer |
| Barry  C. Kohn           |   | 47      |   | Vice  President and Chief Financial Officer                   |
| John  J. Machota         |   | 50      |   | Vice  President, Human Resources                              |
| Mary  T. Ryan            |   | 49      |   | Vice  President, Communications and Investor Relations        |
| Joseph  Salamunovich     |   | 43      |   | Vice  President, General Counsel and Secretary                |
| Paul  J. Komaromy        |   | 52      |   | President,  Drivetrain Remanufacturing                        |
| William  L. Conley, Jr.  |   | 54      |   | President,  ATC Logistics                                     |
| Robert  Anderson         |   | 82      |   | Director                                                      |
| Richard  R. Crowell      |   | 47      |   | Director                                                      |
| Dale  F. Frey            |   | 70      |   | Director                                                      |
| Mark  C. Hardy           |   | 39      |   | Director                                                      |
| Dr.  Michael J. Hartnett |   | 57      |   | Director                                                      |
| Gerald  L. Parsky        |   | 60      |   | Director                                                      |
| Richard  K. Roeder       |   | 54      |   | Director                                                      |
| J.  Richard Stonesifer   |   | 66      |   | Director                                                      |

* *

*Michael T. DuBose* joined us as Chairman of the Board, President andChief Executive Officer in 1998.  Priorto that he served as a consultant to Aurora Capital Group from 1997.  From 1995 to 1997, Mr. DuBose wasChairman and Chief Executive Officer of Grimes Aerospace Company, aninternational engineering, manufacturing and distribution company.  From 1993 to 1995, he served as Senior VicePresident of SAI Corporation’s computer equipment manufacturing and systemssector.  Prior to that, Mr. DuBoseheld various positions at General Instrument and General Electric Company.  Mr. DuBose holds an M.S. in Managementfrom the Stanford University Graduate School of Business.

 

*Barry C. Kohn* joined us as Vice President and Chief Financial Officer inJanuary 1999.  During 1998 heserved as a self-employed financial consultant.  From 1995 to 1997, Mr. Kohn was Senior Vice President andChief Financial Officer of Grimes Aerospace Company.  Between 1987 and 1995, he held increasingly senior positions atGrimes including Treasurer, Controller and Manager of Business Planning.  Mr. Kohn holds a Masters of Accountingfrom The Ohio State University and is a Certified Public Accountant (inactive).

 

*John J. Machota* joined us as Vice President, Human Resources in1997.  From 1996 to 1997, he was aself-employed human resources consultant. From 1995 to 1996, Mr. Machota was Vice President, Compensation forWaste Management, Inc. and from 1993 to 1995, served as Waste Management’sVice President, 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.

 

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*Mary T. Ryan* joined us as Vice President, Communications and Investor Relations inApril 1999.  From 1996 to 1998,Ms. Ryan served as Vice President, Corporate Affairs for American DisposalServices, Inc.  From 1995 to 1996,she was a self-employed public relations consultant.  Prior to that, Ms. Ryan was employed for more than ten yearswith Waste Management, Inc. Ms. Ryan holds an M.B.A. from DePaul University.

 

*Joseph Salamunovich* joined us as Vice President, General Counsel andSecretary in 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 lawmatters.  Mr. Salamunovich holds aJ.D. from Loyola Law School, Los Angeles.

 

*Paul J. Komaromy* joined us in February 2000 as President ofour Aaron’s Automotive Products, Inc. subsidiary.  He has also served as President of ourComponent Remanufacturing Specialists, Inc. subsidiary sinceJanuary 2001.  In May 2002Mr. Komaromy became President of our entire Drivetrain Remanufacturingbusiness. From 1997 to 1999, Mr. Komaromy was Vice President and General Managerof the Engine Systems and Accessories division of AlliedSignal, Inc.  From 1987 to 1997, Mr. Komaromy wasemployed with Grimes Aerospace, serving as Senior Vice President and GeneralManager of the Vision Systems division from 1996 to 1997 and as Senior VicePresident, Operations and Engineering from 1991 to 1995.  From 1978 to 1987, Mr. Komaromy wasemployed with the Power Systems division of Cooper Industries.  Mr. Komaromy holds an M.S. inIndustrial Administration from the Carnegie–Mellon University GraduateSchool of Industrial Administration.

 

*WilliamL. Conley, Jr.* joined us in July 2002 as President of our ATCLogistics business.  Prior to joining usMr. Conley spent nearly 24 years with FedEx Corporation in a series ofincreasingly responsible sales and leadership positions.  Most recently, Mr. Conley served as VicePresident and General Manager – Europe, Middle East and Africa for FedEx SupplyChain Services (FedEx’s logistics operations). Mr. Conley holds a B.S. in Aeronautics from Parks College ofAeronautical Technology of St. Louis University.

 

*Robert Anderson* became a director in 1997.  Mr. Anderson has been associated withRockwell International Corporation since 1968, where he has been ChairmanEmeritus since 1990 and served previously as Chairman of the ExecutiveCommittee from 1988 to 1990 and as Chairman of the Board and Chief ExecutiveOfficer from 1979 to 1988.

 

*Richard R. Crowell* became a director in 1994.  Mr. Crowell is President and a foundingpartner of Aurora Capital Group and has been with Aurora Capital Group since itwas founded in 1991.  Mr. Crowell is adirector of Roller Bearing Company of America, Inc.

 

*Dale F. Frey* became a director in 1997. Prior to his retirement in 1997, Mr. Frey was Chairman of theBoard, President and Chief Executive Officer of General Electric InvestmentCorporation, a position he had held since 1984, and was a Vice President ofGeneral Electric Company since 1980. Mr. Frey is a director of Praxair, Inc., Roadway Express,Community Health Systems, Yankee Candle and McLeod USA.

 

*Mark C. Hardy* became a director in 1994. Mr. Hardy is a Managing Director and partner of Aurora CapitalGroup.  Prior to joining Aurora CapitalGroup in 1993, Mr. Hardy was an Associate and Consultant atBain & Company, a consulting firm.

 

*Dr. Michael J. Hartnett* became a director in 1994.  Since 1992, Dr. Hartnett has beenChairman, President and Chief Executive Officer of Roller Bearing Company ofAmerica, Inc., a manufacturer of ball and roller bearings.  Prior to joining Roller Bearing in 1990 asGeneral Manager of its Industrial Tectonics subsidiary, Dr. Hartnett spent18 years with The Torrington Company, a subsidiary of Ingersoll-Rand.

 

*Gerald L. Parsky* became a director in 1997.  Mr. Parsky is the Chairman and a foundingpartner of Aurora Capital Group.  Priorto forming Aurora Capital Group in 1991, Mr. Parsky was a senior partnerand a member of the Executive and Management Committees of the law firm ofGibson, Dunn & Crutcher LLP. Prior to that, he served as an official with the United States TreasuryDepartment and the Federal Energy Office, and as Assistant Secretary of theTreasury for International Affairs.

 

64

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*Richard K. Roeder* became a director in 1994.  Mr. Roeder is a founding partner andManaging Director of Aurora Capital Group. Prior to forming Aurora Capital Group in 1991, Mr. Roeder was apartner in the law firm of Paul, Hastings, Janofsky & Walker, where heserved as Chairman of the firm’s Corporate Law Department and a member of itsNational Management Committee.

 

*J. Richard Stonesifer* became a director in 1997.  Prior to his retirement in 1996,Mr. Stonesifer was employed with the General Electric Company for37 years, serving most recently as President and Chief Executive Officerof GE Appliances, and a Senior Vice President of the General Electric Company,from January 1992 until his retirement. Mr. Stonesifer is a director of Polaris Industries, Inc.

 

Directors serveone-year terms and are elected annually. Executive officers serve until they resign or replacements are appointedby the Board of Directors.

 

**Section16(a) Beneficial Ownership Reporting Compliance.**

 

Section 16(a) of the Securities Exchange Act of1934, as amended, requires our officers, directors and persons who own morethan 10% of our outstanding common stock to file reports of ownership andchanges in ownership with the Securities and Exchange Commission and to furnishcopies of these reports to us.  Basedsolely on a review of the copies of the forms that we have received, we believethat all such forms required during 2002 were filed on a timely basis.

 

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## **ITEM 11.**                                              EXECUTIVECOMPENSATION

 

**SummaryCompensation Table**

 

The following table sets forth, for the three mostrecently completed fiscal years, the cash compensation, for services to us inall capacities, of (i) our Chief Executive Officer and (ii) the fourpersons who as of December 31, 2002 were the other most highly compensatedexecutive officers 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(3)** |   |
| Michael T.  DuBose  Chairman, President and Chief Executive Officer  |   | 2002     |    | $                        | 550,000   |                                | $       | 412,500                                               |    | 250,000 |   | $ | 1,025,400 | (4) |
|                                                                 | 2001   |     | 474,615 |                     | 1,211,615 |                                | 100,000 |                                                  | 22,139  |   |
|                                                                 | 2000   |     | 470,000 |                     | 425,777   |                                | 100,000 |                                                  | 23,800  |   |
|                                                                 |   |     |    |                     |      |                                |    |                                                  |    |   |   |
| Barry C. Kohn  Chief Financial Officer                               |   | 2002     |    | $                        | 300,000   |                                | $       | 150,000                                               |    | 100,000 |   | $ | 315,600 | (5) |
|                                                                 | 2001   |     | 271,731 |                     | 361,042   |                                | 75,000  |                                                  | 12,548  |   |
|                                                                 | 2000   |     | 270,000 |                     | 130,451   |                                | 35,000  |                                                  | 5,400   | (6) |
|                                                                 |   |     |    |                     |      |                                |    |                                                  |    |   |   |
| Paul J.  Komaromy(7)  President, Drivetrain Remanufacturing Division |   | 2002     |    | $                        | 287,500   |                                | $       | —                                                |    | 25,000 |   | $ | 3,922 | (8) |
|                                                                 | 2001   |     | 270,000 |                     | 45,000    |                                | 50,000  |                                                  | 3,876   | (8) |
|                                                                 | 2000   |     | 238,850 |                     | 81,000    |                                | 50,000  |                                                  | 156,746 | (9) |
|                                                                 |   |     |    |                     |      |                                |    |                                                  |    |   |   |
| Joseph  Salamunovich  Vice President, General Counsel and Secretary  |   | 2002     |    | $                        | 220,000   |                                | $       | 149,000                                               |    | 25,000 |   | $ | 11,454 |   |
|                                                                 | 2001   |     | 201,154 |                     | 177,788   |                                | 30,000  |                                                  | 12,256  |   |
|                                                                 | 2000   |     | 197,308 |                     | 96,630    |                                | 20,000  |                                                  | 2,599   | (6) |
|                                                                 |   |     |    |                     |      |                                |    |                                                  |    |   |   |
| John J. Machota  Vice President, Human Resources                     |   | 2002     |    | $                        | 180,000   |                                | $       | 121,000                                               |    | 25,000 |   | $ | 9,950 |   |
|                                                                 | 2001   |     | 157,100 |                     | 135,463   |                                | 25,000  |                                                  | 659     |   |
|                                                                 | 2000   |     | 151,250 |                     | 74,888    |                                | 20,000  |                                                  | 3,100   | (6) |

 

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(1)                            Bonusesunder our incentive compensation plan for a particular year are generally paidduring the first quarter of the following year.

 

(2)                            Consistsof options to purchase shares of our common stock, which options were issuedpursuant to our 1996 Stock Incentive Plan, 1998 Stock Incentive Plan, 2000Stock Incentive Plan or 2002 Stock Incentive Plan.  Pursuant to the stock incentive plans, the Compensation and HumanResources Committee of the Board of Directors makes recommendations to theBoard of Directors regarding the amount, terms and conditions of each option tobe granted.

 

(3)                            Consistsof allowances for automobile, club dues and financial planning except whereotherwise noted.

 

(4)                            Includesa special one-time payment of $1,000,000 made when Mr. DuBose entered into anamended and restated employment agreement in July 2002.  See “Employment Agreements” below.

 

(5)                            Includesa special one-time payment of $300,000 made when Mr. Kohn entered into anemployment agreement in July 2002.  See“Employment Agreements” below.

 

(6)                            Consistsof allowances for club dues and financial planning.

 

(7)                            Mr.Komaromy joined us in February 2000.

 

(8)                            Consistsof allowances for club dues and financial planning.  We also provide Mr. Komaromy with a leased automobile.

 

(9)                            Consistsof relocation benefits.

 

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Set forth below is the annual base salary for ourChief Executive Officer and each of our other four most highly compensatedexecutive officers as of February 14, 2003:

 

| **Name**                |   | **Annual  Base Salary** |    |
|-------------------------|--------|-------------------------|---------|
| Michael T.  DuBose      |   | $                       | 550,000 |   |
| Barry C. Kohn           |   | 300,000                 |    |
| Paul J. Komaromy        |   | 300,000                 |    |
| William L.  Conley, Jr. |   | 235,000                 |    |
| Joseph  Salamunovich    |   | 220,000                 |    |
|                         |        |                         |         |  |

**OptionGrants Table**

 

Shown below is information concerning grants ofoptions by us during 2002 to our Chief Executive Officer and each of our otherfour most highly compensated executive officers as of December 31, 2002:

 
|                                  |   | **Individual Grants**                             |   | **Exercise  Price** |   | **Expiration** |   | **Potential Realizable   Value at Assumed   Annual Rates of   Stock Price   Appreciation   For Option Term(1)** |   |
|---------------------------------------|--------|---------------------------------------------------|--------|---------------------|--------|----------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|
| **Number of  Securities  Underlying** |   | **% of Total  Options  Granted to  Employees in** |
| **Name**                              |   | **Options  Granted(#)**                           |   | **Fiscal  Year**    |   | **($/Share)**  |   | **Date**                                                                                                        |   | **5% ($)** |   | **10% ($****)** |   |
|                                  |   |                                              |   |                |   |           |   |                                                                                                            |   |   |   |   |   |
| Michael T.  DuBose                    |   | 250,000                                           | (2)    | 30.9                |   | $              | 30.00  |                                                                                                            | 5/8/12 |   | $ | 1,825,422 |   | $ | 7,349,176 |   |
| Barry C. Kohn                         |   | 100,000                                           | (2)    | 12.4                |   | $              | 30.00  |                                                                                                            | 5/8/12 |   | 730,169 |   | 2,939,670 |   |
| Paul J. Komaromy                      |   | 25,000                                            | (3)    | 3.1                 |   | $              | 22.90  |                                                                                                            | 5/8/12 |   | 360,042 |   | 912,418 |   |
| Joseph  Salamunovich                  |   | 25,000                                            | (3)    | 3.1                 |   | $              | 22.90  |                                                                                                            | 5/8/12 |   | 360,042 |   | 912,418 |   |
| John J. Machota                       |   | 25,000                                            | (3)    | 3.1                 |   | $              | 22.90  |                                                                                                            | 5/8/12 |   | 360,042 |   | 912,418 |   |
|                                       |        |                                                   |        |                     |        |                |        |                                                                                                                 |        |  |  |  |  |  |  |  |

 

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(1)                            Thepotential gains shown are net of the option exercise price and do not includethe effect of any taxes associated with exercise.  The amounts shown are for the assumed rates of appreciation only,do not constitute projections of future stock price performance, and may notnecessarily be realized.  Actual gains,if any, on stock option exercises depend on the future performance of thecommon stock, continued employment of the optionee through the term of theoptions, and other factors.

 

(2)                            Theseoptions were granted under our 2002 Stock Incentive Plan.  All of the options vested and becameexercisable on May 20, 2002.

 

(3)                            Theseoptions were granted under our 2002 Stock Incentive Plan.  One third of the options vest and becomeexercisable on each of May 8, 2003, 2004 and 2005.

 

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**AggregatedOption Exercises and Year-End Option Value Table**

 

Shown below is information relating to (i) theexercise of stock options during 2002 by our Chief Executive Officer and eachof our other four most highly compensated executive officers as of December 31,2002 and (ii) the value of unexercised options for each of the CEO andsuch executive officers as of December 31, 2002:

 
| **Name**             |   | **Shares  Acquired on  Exercise** |            | **Value  Realized** |              | **Number of  Securities  Underlying Unexercised  Options at Fiscal Year-End** |    | **Value of  Unexercised  In-The-Money Options  at Fiscal Year-End(1)** |   |
|----------------------|--------|-----------------------------------|-----------------|---------------------|-------------------|-------------------------------------------------------------------------------|---------|------------------------------------------------------------------------|--------|
| **Exercisable**      |   | **Unexercisable**                 | **Exercisable** |                | **Unexercisable** |
| Michael T. DuBose    |   | 277,930                           |            | $                   | 4,148,955         |                                                                          | 572,071 |                                                                   | 99,999 |   | $ | 1,628,506 |   | $ | 731,409 |   |
| Barry C. Kohn        |   | 81,879                            |            | 1,048,423           |              | 156,454                                                                       |    | 61,667                                                                 |   | 533,832 |   | 507,730 |   |
| Paul J. Komaromy     |   | 33,335                            |            | 352,327             |              | —                                                                        |    | 91,665                                                                 |   | — |   | 421,951 |   |
| Joseph  Salamunovich |   | 24,300                            |            | 345,693             |              | 47,455                                                                        |    | 68,333                                                                 |   | 19,238 |   | 270,467 |   |
| John J. Machota      |   | —                            |            | —              |              | 38,334                                                                        |    | 66,666                                                                 |   | 181,172 |   | 242,328 |   |
|                      |        |                                   |                 |                     |                   |                                                                               |         |                                                                        |        |  |  |  |  |  |  |  |

 

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(1)                            Basedon the closing price of our common stock on the Nasdaq National Market Systemon December 31, 2002, which was $14.50 per share.

 

## **Employment Agreements**

## ** **

In July 2002 we entered into an amended and restatedemployment agreement with Mr. DuBose that provides that he will serve as ourChairman, President and CEO through January 2004, at an annual base salary of$550,000 (subject to adjustment at the discretion of our Board), and thereafterthe agreement will automatically renew on a year-to-year basis unless either weor Mr. DuBose elect not to renew. After Mr. DuBose ceases to be Chairman, President and CEO, he willserve for five years in a part-time capacity as Chairman Emeritus, or suchother position as our Board of Directors determines, at an annual salary of$200,000.  When Mr. DuBose ceasesto be Chairman, President and CEO for any reason other than termination forcause or voluntary resignation, he will receive payments totaling two times hisbase salary plus two times his target bonus under our incentive compensationplan plus a pro rata portion of his incentive compensation bonus for the yearin which he ceases to be Chairman, President and CEO.  If Mr. DuBose ceases to be employed for any reason other thantermination for cause or voluntary resignation before he transitions topart-time status, then he will also receive a payment of $1 million.  If Mr. DuBose transitions to part-timestatus but within five years thereafter ceases to be employed by us for anyreason other than termination for cause or voluntary resignation, he willreceive monthly payments of $16,666 for the balance of the five-yearperiod.  Mr. DuBose will alsoreceive medical benefits for up to ten years following the end of his employment.  The employment agreement contains a provisionthat Mr. DuBose will not compete against us during the period ending onthe later of January 28, 2009 or the second anniversary of the date heceases to be employed by us, which is considerably longer than thenoncompetition provision contained in his previous employment agreement.  Inconnection with this amended and restated employment agreement, Mr. DuBosereceived a special one-time payment of $1,000,000.

 

In July 2002 we entered into an employment agreementwith Mr. Kohn that provides that he will serve as our CFO through January2004, at an annual base salary of $300,000 (subject to adjustment at thediscretion of our Board), and thereafter the agreement will automatically renewon a year-to-year basis unless either we or Mr. Kohn elect not to renew.  After Mr. Kohn ceases to be CFO, hewill serve for five years in a part-time capacity at an annual salary of$60,000.  When Mr. Kohn ceases tobe CFO for any reason other than termination for cause or voluntaryresignation, he will receive payments totaling 1.5 times his base salary plus1.5 times his target bonus under our incentive compensation plan plus a prorata portion of his incentive compensation bonus for the year in which heceases to be CFO.  If Mr. Kohnceases to be employed for any reason other than termination for cause orvoluntary resignation before he transitions to part-time status, then he willalso receive a payment of $300,000.  IfMr. Kohn transitions to part-time status but within five years thereafterceases to be employed by us for any reason other than termination for cause orvoluntary resignation, he will receive monthly payments of $5,000 for thebalance of the five-year period. Mr. Kohn will also receive medical benefits for up to 18 monthsfollowing the end of his employment. The employment agreement contains a provision that Mr. Kohn willnot compete against us 

 

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during the period ending on the later of January 28, 2009 or thesecond anniversary of the date he ceases to be employed by us, which isconsiderably longer than the noncompetition provision contained in our standardform of executive employment agreement.  In connection with this employmentagreement, Mr. Kohn received a special one-time payment of $300,000.

 

We have entered into an employment agreement with eachof our other executive officers that provides for a three-year term and isautomatically renewable thereafter on a year-to-year basis.  The agreement includes a noncompetitionprovision for a period of 18 months from the termination of the executiveofficer’s employment with Aftermarket Technology Corp.  If the executive officer is terminatedwithout cause, he will receive severance equal to his base salary for a periodof 12 months after termination plus a pro rata portion of his incentivecompensation bonus for the year in which he is terminated.  If the termination occurs within18 months after a change of control, the executive will also receive apayment equal to his target bonus under the incentive compensation plan.

 

Any executive who ceases to be employed undercircumstances that entitle him to severance payments will ordinarily receivethose payments over time unless the end of employment occurs within18 months after a change in control, in which case the severance will bemade in a single payment.

 

Each of our executive employment agreements contains aconfidentiality provision and a provision that prohibits the executive officer,during a specified period after leaving Aftermarket Technology Corp., fromsoliciting our employees for employment by other companies.

 

## **Stock Incentive Plans**

## ** **

Pursuant to our 1996, 1998, 2000 and 2002 stockincentive plans, officers, directors, employees and consultants of AftermarketTechnology Corp. and its affiliates are eligible to receive options to purchasecommon stock and other awards.  Awardsunder the 1996 plan are not restricted to any specified form or structure andmay include, without limitation, sales or bonuses of stock, restricted stock,stock options, reload stock options, stock purchase warrants, other rights toacquire stock, securities convertible into or redeemable for stock, stockappreciation rights, phantom stock, dividend equivalents, performance units orperformance shares.  Awards under the1998, 2000 and 2002 plans may take the form of stock options, annual incentivebonuses and incentive stock.

 

The stock incentive plans are administered by theCompensation and Human Resources Committee of our Board of Directors, althoughthe Board of Directors may exercise any of the Committee’s authority under theplans in lieu of the Committee’s exercise thereof.  While the stock incentive plans permit the Committee to grantawards, such grants are typically made by the Board of Directors based on theCommittee’s recommendations regarding the recipients and type and amount ofawards.  Subject to the expressprovisions of the stock incentive plans, the Committee has broad authority inadministering and interpreting the plans. Options granted to employees may be options intended to qualify asincentive stock options under Section 422 of the Internal Revenue Code of 1986,as amended, or options not intended to so qualify.  Awards to employees may include a provision terminating the awardupon termination of employment under certain circumstances or accelerating thereceipt of benefits upon the occurrence of specified events.  The vesting of stock options will beaccelerated in the event of a change of control of Aftermarket Technology Corp.

 

The aggregate number of shares of common stock thatcan be issued under the stock incentive plans may not exceed 5,350,000.  As of February 14, 2003***,*** there wereoutstanding options to purchase an aggregate of 2,010,281 shares of commonstock granted to our directors, officers and employees and certain independentcontractors pursuant to the plans, and the number of shares available forissuance pursuant to options yet to be granted under the plans was 501,305.

 

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In most cases, outstandingoptions are subject to certain vesting provisions and expire on the tenthanniversary of the date of grant.  Theexercise prices of options outstanding under the stock incentive plans as ofFebruary 14, 2003 are as follows: 

 

| **Number of Option  Shares** |   | **Exercise  Price** |   |
|------------------------------|--------|---------------------|--------|
| 80,300                       |   | $                   | 4.563  |   |
| 22,070                       |   | 5.00                |   |
| 33,121                       |   | 5.0312              |   |
| 412,488                      |   | 5.06                |   |
| 2,666                        |   | 6.875               |   |
| 22,832                       |   | 8.50                |   |
| 5,000                        |   | 8.9375              |   |
| 29,663                       |   | 9.00                |   |
| 5,000                        |   | 9.125               |   |
| 200,000                      |   | 10.00               |   |
| 173,388                      |   | 11.125              |   |
| 130,333                      |   | 11.4375             |   |
| 43,500                       |   | 11.79               |   |
| 1,000                        |   | 11.80               |   |
| 48,000                       |   | 14.11               |   |
| 35,088                       |   | 14.75               |   |
| 37,332                       |   | 18.125              |   |
| 22,000                       |   | 18.25               |   |
| 25,000                       |   | 19.00               |   |
| 331,500                      |   | 22.90               |   |
| 350,000                      |   | 30.00               |   |
| 2,010,281                    |   |                |   |
|                              |        |                     |        |  |

 

For information regarding options granted to ourdirectors and officers, see Item 12. “Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.”

 

## **Director Compensation**

## ** **

Directorsdo not receive cash compensation for service on our Board of Directors or itscommittees.  Directors are reimbursedfor their expenses in connection with attending Board and committee meetings.

 

In2000 each of Messrs. Anderson, Frey and Stonesifer received options topurchase 25,000 shares of our common stock at an exercise price of $11.125 pershare.  In 2001 and 2002 each ofMessrs. Anderson, Frey, Hartnett and Stonesifer received options topurchase 30,000 shares of our common stock at an exercise price of $5.06 pershare and 25,000 shares of common stock at an exercise price of $22.90 pershare, respectively.  The optionexercise price in each case was equal to the closing price of a share of ourcommon stock on the Nasdaq National Market System on the date the option wasgranted.  Each option vests and becomesexercisable in one-third increments on the first, second and thirdanniversaries of the date of grant.

 

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

 

The members of ourCompensation and Human Resources Committee are Messrs. Crowell, Parsky andStonesifer.  Messrs. Crowell andParsky are (i) two of the three stockholders and directors of AuroraAdvisors, Inc., the general partner of Aurora Capital Partners, which is thegeneral partner of Aurora Equity Partners, L.P., our largest stockholder, and(ii) two of the three stockholders and directors of Aurora OverseasAdvisors, Ltd., the general partner of Aurora Overseas Capital Partners L.P.,the general partner of Aurora Overseas Equity Partners I, L.P., another ofour significant stockholders.  SeeItem 12. “Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters.”  Inaddition, Messrs. Crowell and Parsky are the senior members of AuroraCapital Group (of which 

 

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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.”

 

## **ITEM 12.**                                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

## ** **

**Security Ownership**

###### * *

The following table sets forth the beneficialownership of our common stock (the only class of our issued and outstandingvoting securities), as of February 14, 2003 by each of our directors, ourChief Executive Officer, each of our other four most highly compensatedexecutive officers as of December 31, 2002, our directors and executiveofficers as a group, and each person who at February 14, 2003 was known tous 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)              |   | 8,587,951                |   | 35.5                   |   |
|                                                                                                                                        |   |                     |   |                   |   |
| Aurora Overseas  Equity Partners I, L.P. (other beneficial owners:  Richard R. Crowell, Gerald L. Parsky and Richard K.  Roeder)(4)(5) |   | 3,194,263                |   | 13.2                   |   |
|                                                                                                                                        |   |                     |   |                   |   |
| General Electric  Pension Trust(6)                                                                                                          |   | 1,623,751                |   | 6.7                    |   |
| Wellington  Management Co. LLP(7)                                                                                                           |   | 1,545,139                |   | 6.4                    |   |
| Michael T.  DuBose(8)                                                                                                                       |   | 605,404                  |   | 2.4                    |   |
| Barry C. Kohn(9)                                                                                                                            |   | 174,121                  |   |                   | *      |
| Paul J.  Komaromy(10)                                                                                                                       |   | 13,333                   |   |                   | *      |
| Joseph  Salamunovich(11)                                                                                                                    |   | 47,455                   |   |                   | *      |
| John J.  Machota(12)                                                                                                                        |   | 41,489                   |   |                   | *      |
| Robert  Anderson(13)                                                                                                                        |   | —                   |   |                   | *      |
| Richard R.  Crowell(2)(3)(4)(5)(14)                                                                                                         |   | 9,612,620                |   | 39.7                   |   |
| Dale F. Frey(15)                                                                                                                            |   | —                   |   |                   | *      |
| Mark C. Hardy                                                                                                                               |   | —                   |   |                   | *      |
| Dr. Michael J.  Hartnett(16)                                                                                                                |   | 10,000                   |   |                   | *      |
| Gerald L.  Parsky(2)(3)(4)(5)(14)                                                                                                           |   | 9,612,620                |   | 39.7                   |   |
| Richard K.  Roeder(2)(3)(4)(5)(13)                                                                                                          |   | 9,612,620                |   | 39.7                   |   |
| J. Richard  Stonesifer(17)                                                                                                                  |   | 26,549                   |   |                   | *      |
| All directors  and officers as a group (16 persons)(18)                                                                                     |   | 10,538,971               |   | 42.0                   |   |

 

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*   Less than1%.

 

(1)                            Theshares of common stock underlying options granted under our stock incentiveplans that are exercisable as of February 14, 2003 or that will becomeexercisable within 60 days thereafter (such options being referred to as“exercisable”) are deemed to be outstanding for the purpose of calculating thebeneficial ownership of the holder of such options, but are not deemed to beoutstanding for the purpose of computing the beneficial ownership of any otherperson.

 

(2)                            AuroraEquity Partners is a Delaware limited partnership the general partner of whichis Aurora Capital Partners, a Delaware limited partnership whose generalpartner is Aurora Advisors, Inc.  Messrs. Crowell,Parsky and Roeder are the sole stockholders and directors of Aurora Advisors,are limited partners of Aurora Capital Partners and may be deemed tobeneficially share ownership of the common stock beneficially owned by AuroraEquity Partners and may be deemed to be the organizers of AftermarketTechnology Corp. under 

 

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regulations promulgated under the Securities Act of1933.  Aurora Equity Partners’ addressis 10877 Wilshire Boulevard, Suite 2100, Los Angeles, CA 90024.

 

(3)                            Consistsof (i) 6,418,357 shares owned by Aurora Equity Partners,(ii) 1,623,751 shares owned by the General Electric Pension Trust (seeNote 6 below) and (iii) 545,843 shares that are subject to anirrevocable proxy granted to the Aurora partnerships by some of our originalstockholders, including Messrs. Crowell, Parsky and Roeder (the “AuroraProxy”).  The Aurora Proxy terminatesupon the earlier of the transfer of such shares or July 31, 2004.

 

(4)                            AuroraOverseas Equity Partners is a Cayman Islands limited partnership the generalpartner of which is Aurora Overseas Capital Partners, L.P., a Cayman Islandslimited partnership, whose general partner is Aurora Overseas Advisors,Ltd.  Messrs. Crowell, Parsky andRoeder are the sole stockholders and directors of Aurora Overseas Advisor, arelimited partners of Aurora Overseas Capital Partners and may be deemed tobeneficially own the shares of the common stock beneficially owned by AuroraOverseas Equity Partners.  Aurora OverseasEquity Partners’ address is West Wind Building, P.O. Box 1111, Georgetown,Grand Cayman, Cayman Islands, B.W.I.

 

(5)                            Consistsof (i) 1,024,669 shares owned by Aurora Overseas Equity Partners,(ii) 1,623,751 shares owned by the General Electric Pension Trust (seeNote 6 below) and (iii) 545,843 shares that are subject to the AuroraProxy.

 

(6)                            Withlimited exceptions, the General Electric Pension Trust has agreed to vote theseshares in the same manner as the Aurora partnerships vote their respective sharesof common stock.  This provisionterminates upon the earlier of the transfer of such shares or July 31,2004.  The GE Pension Trust’s address is3003 Summer Street, Stamford, CT 06905.

 

(7)                            WellingtonManagement’s address is 75 State Street, Boston, Massachusetts 02109.

 

(8)                            Consistsof shares subject to exercisable options. Excludes 66,666 shares subject to options that are not exercisable.

 

(9)                            Consistsof shares subject to exercisable options. Excludes 50,000 shares subject to options that are not exercisable.

 

(10)                      Includes8,333 shares subject to exercisable options. Excludes 83,332 shares subject to options that are not exercisable.

 

(11)                      Consists ofshares subject to exercisable options. Excludes 68,333 shares subject to options that are not exercisable.

 

(12)                      Includes38,334 shares subject to exercisable options. Excludes 66,666 shares subject to options that are not exercisable.

 

(13)                      Excludes53,334 shares subject to options that are not exercisable.

 

(14)                      The sharesactually owned by this person (as distinguished from the shares that thisperson is deemed to beneficially own) are subject to the Aurora Proxy.

 

(15)                      Excludes53,334 shares subject to options that are not exercisable.

 

(16)                      Consists ofshares subject to exercisable options.  Excludes45,000 shares subject to options that are not exercisable.

 

(17)                      Excludes53,334 shares subject to options that are not exercisable.

 

(18)                      Includes882,647 shares subject to exercisable options. Excludes 618,332 shares subject to options that are not exercisable.

 

Unless otherwise noted above, the address of each person in the abovetable is One Oak Hill Center, Suite 400, Westmont, Illinois 60559.

 

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**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

The following table sets forth certaininformation regarding our equity compensation plans as of December 31,2002:
| **Plan  category**                                              |   | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights** |       | **Weighted-average  exercise price of  outstanding options,   warrants and rights** |       | **Number of securities  remaining available for   future issuances under  equity compensation plans  (excluding securities  reflected in column (a))** |        |
|-----------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
|                                                            |   | **(a)**                                                                                             |       | **(b)**                                                                             |       | **(c)**                                                                                                                                                |        |
|                                                            |   |                                                                                                |       |                                                                                |       |                                                                                                                                                   |        |
| **Equity compensation plans approved by security  holders**     |   | **2,011,281**                                                                                       | ** ** | **$**                                                                               | **14.97**  | ** **                                                                                                                                             | **500,305** | ** ** |
| **Equity compensation plans not approved by security  holders** |   | **—**                                                                                          | ** ** | **—**                                                                          | ** ** | **—**                                                                                                                                             | ** **  |
| **Total**                                                       |   | **2,011,281**                                                                                       | ** ** |                                                                                | ** ** | **500,305**                                                                                                                                            | ** **  |
|                                                                 |        |                                                                                                     |            |                                                                                     |            |                                                                                                                                                        |             |  |

 

## **ITEM 13.**                                  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

We believe the transactionsdescribed below were beneficial to us and were entered into on terms at leastas favorable to us as we could have obtained from unaffiliated third parties inarms-length negotiations.

 

**Relationshipwith Aurora Capital Group**

 

We were formed in 1994 atthe direction of Aurora Capital Group as a vehicle to acquire and consolidatecompanies in the fragmented drivetrain remanufacturing industry.  Aurora Capital Group is controlled by threeof our directors, Messrs. Crowell, Parsky and Roeder.

 

We pay to Aurora ManagementPartners, which is a part of Aurora Capital Group, a base annual management feefor advisory and consulting services pursuant to a written management servicesagreement.  Aurora Management Partnersis also entitled to reimbursements from us for all of its reasonableout-of-pocket costs and expenses incurred in connection with the performance ofits obligations under the management services agreement.  The base annual management fee is subject toincrease, at the discretion of the disinterested members of our board ofdirectors, by up to an aggregate of $250,000 in the event that we consummateone or more significant corporate transactions.  The base annual management fee has not been increased as a resultof any of our acquisitions.  The baseannual management fee is also subject to increase for specified cost of livingincreases, although no such adjustment has been made in the last threeyears.  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 2002, Aurora Management Partners didnot receive this additional management fee in 2002.  The base annual management fee payable to Aurora ManagementPartners will be reduced as the collective beneficial ownership of our commonstock by the Aurora partnerships declines below 50%.  If the Aurora partnerships’ collective beneficial ownershipdeclines below 20%, the management services agreement will terminate.  At the beginning of 2002 the annual fee was$550,000 but was reduced to $330,000 in September 2002 when the Aurorapartnerships’ collective beneficial ownership declined from approximately 66%to approximately 40% upon the completion of a secondary public offering inwhich the partnerships, the General Electric Pension Trust and holders ofshares subject to the Aurora Proxy sold an aggregate of 3.94 millionshares.  In 2002, we paid AuroraManagement Partners a total of $476,000 in management fees.

 

 

If we consummate anysignificant acquisitions, Aurora Management Partners will be entitled toreceive a fee from us for investment banking services in connection with theacquisition.  The fee is equal to 2.0%of the first $75.0 million of the acquisition consideration (includingdebt assumed and current assets retained)

 

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and 1.0% of acquisition consideration (including debtassumed and current assets retained) in excess of $75.0 million.  Since our formation, we have paidapproximately $5.2 million of fees to Aurora Management Partners for investmentbanking services in connection with our acquisitions.  In January 2001, we paid Aurora Management Partners a$750,000 fee for services in connection with the October 2000 sale of theDistribution Group.  We are notobligated to make any payment to Aurora Management Partners at any time that weare in default under our credit facility.

 

**IndemnificationAgreements**

 

We have entered into separate but identical indemnificationagreements with each of our directors and executive officers.  These agreements provide for, among otherthings, indemnification to the fullest extent permitted by law and advancementof expenses.

 

**RegistrationRights**

 

The holders of common stock outstanding before our initialpublic offering in December 1996 have “demand” and “piggyback”registration rights pursuant to a stockholders agreement.  In addition, General Electric Pension Trusthas “demand” and “piggyback” registration rights with respect to a portion ofthe shares of common stock it owns.

 

Pursuant to these registration rights, in June 2002, weregistered 4,500,000 shares of our common stock for resale by the Aurorapartnerships, General Electric Pension Trust, the members of our Board ofDirectors, our Chief Financial Officer and certain other stockholders, and paid$256,000 of SEC filing fees, legal fees and other expenses relating to thesecondary offering.

 

## **ITEM 14.**                                              CONTROLSAND PROCEDURES

 

Our management, including Chief ExecutiveOfficer Michael T. DuBose and Chief Financial Officer Barry C. Kohn, haveevaluated our disclosure controls and procedures within the 90 days proceedingthe date of this filing.  Under rulespromulgated by the SEC, disclosure controls and procedures are defined as those“controls or other procedures of an issuer that are designed to ensure thatinformation required to be disclosed by the issuer in the reports filed orsubmitted by it under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Commission’s rules andforms.”  Based on the evaluation of ourdisclosure controls and procedures, management determined that such controlsand procedures were effective as of February 5, 2003, the date of theconclusion of the evaluation.

 

Further, there were no significant changes inthe internal controls or in other factors that could significantly affect thesecontrols after February 5, 2003, the date of the conclusion of theevaluation of disclosure controls and procedures.

 

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

## ** **

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

 

1.   Financial Statements Index

 

See Index toFinancial Statements and Supplemental Data on page 38.

 

2.         FinancialStatement Schedules Index

 

II – Valuation and Qualifying Accounts

 

All otherschedules for which provision is made in the applicable accounting regulationof the Securities and Exchange Commission are not required under the relatedinstructions or are inapplicable and therefore have been omitted.

 

3.   Exhibit Index

 

The followingexhibits are filed as part of this Annual Report on Form 10–K, or areincorporated 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)                                                                                                                                                                                                                                                                                                                       |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 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. 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)                                                                                                                                                                                                                                                                                         |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3                  |   | 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) |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4                  |   | 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)                                                                                               |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5                  |   | 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)                                                                                                                                                                                                                                                                                                               |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6                  |   | 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)                                                                                                                                                                                                                                                                         |

 

75

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| 10.7   |   | 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)                                                                                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8   |   | 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)                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9   |   | 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)                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.10  |   | 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)                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.11  |   | 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)                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.12  |   | 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) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.13  |   | 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)                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.14  |   | 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)                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.15  |   | 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)                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.16  |   | 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)                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.17  |   | 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)                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.18  |   | 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)                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.19  |   | 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)                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.20  |   | 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)                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.21  |   | 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.)                                                                                                                                                                                                                                                                               |

 

76

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|   |   | (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)                                                                                                                                                                                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.22  |   | 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)                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.23  |   | 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)                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.24  |   | 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.) (previously  filed as Exhibit 10.40 to the Company’s Annual Report on Form 10-K  for the year ended December 31, 2001 and incorporated herein by this  reference)                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.25  |   | 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) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.26  |   | 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)                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *10.27 |   | Form of Executive Employment Agreement between Aftermarket Technology  Corp. and certain of its officers                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.28  |   | Amended and Restated Employment Agreement, dated as of July 1,  2002, between Michael T. DuBose and Aftermarket Technology Corp. (previously  filed as Exhibit 10.1 to the Company’s Quarterly Report on  Form 10-Q for the quarterly period ended June 30, 2002 and  incorporated herein by this reference)                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *10.29 |   | Amendment No. 5 to Stock Purchase Agreement dated as of August  2, 2002 between Aftermarket Technology Corp. and ATC Distribution Group (as  the successor to ATCDG Acquisition Corp., Inc.)                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.30  |   | Employment Agreement, dated as of July 1,  2002, between Barry C. Kohn and Aftermarket Technology Corp. (previously filed as Exhibit 10.2 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ended  June 30, 2002 and incorporated herein by this reference)                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *10.31 |   | Aftermarket Technology Corp.  2002 Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 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                                                                                                                                                                                                                                                                                                                                                                                          |

 

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*  Filed herewith.

 

(b)        Reports on Form 8-K

 

During the quarterended December 31, 2002 the Company did not file any reports on Form 8–K.

 

(c)        Refer to (a) 3 above.

 

(d)        Refer to (a) 2 above.

 

77

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**SIGNATURES**

 

Pursuant to the requirements of Section 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this AnnualReport on Form 10-K to be signed on its behalf by the undersigned, thereuntoduly authorized, on February 25, 2003.

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

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Annual Report on Form 10-K has been signed by thefollowing persons in the capacities indicated on the dates indicated.

 
| **Signature**            |   | **Title**                                                                                   |   | **Date**           |
|--------------------------|--------|---------------------------------------------------------------------------------------------|--------|--------------------|
|                     |   |                                                                                        |   |               |
| /s/  Michael T. DuBose   |   | Chairman of the  Board, President and Chief Executive Officer (Principal Executive Officer) |   | February 25,  2003 |
| Michael  T. DuBose       |   |                                                                                        |   |               |
| /s/  Barry C. Kohn       |   | Chief Financial  Officer (Principal Financial and Accounting Officer)                       |   | February 25,  2003 |
| Barry  C. Kohn           |   |                                                                                        |   |               |
|                     |   |                                                                                        |   |               |
| /s/  Robert Anderson     |   | Director                                                                                    |   | February 25,  2003 |
| Robert  Anderson         |   |                                                                                        |   |               |
|                     |   |                                                                                        |   |               |
| /s/  Richard R. Crowell  |   | Director                                                                                    |   | February 25,  2003 |
| Richard  R. Crowell      |   |                                                                                        |   |               |
|                     |   |                                                                                        |   |               |
| /s/  Dale F. Frey        |   | Director                                                                                    |   | February 25,  2003 |
| Dale  F. Frey            |   |                                                                                        |   |               |
|                     |   |                                                                                        |   |               |
| /s/  Mark C. Hardy       |   | Director                                                                                    |   | February 25, 2003  |
| Mark  C. Hardy           |   |                                                                                        |   |               |
|                     |   |                                                                                        |   |               |
| /s/  Michael J. Hartnett |   | Director                                                                                    |   | February 25,  2003 |
| Michael  J. Hartnett     |   |                                                                                        |   |               |
|                     |   |                                                                                        |   |               |
| /s/  Gerald L. Parsky    |   | Director                                                                                    |   | February 25,  2003 |
| Gerald  L. Parsky        |   |                                                                                        |   |               |

 

78

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| /s/  Richard K. Roeder     |   | Director |   | February 25,  2003 |
|----------------------------|--------|----------|--------|--------------------|
| Richard  K. Roeder         |   |     |   |               |
|                       |   |     |   |               |
| /s/  J. Richard Stonesifer |   | Director |   | February 25,  2003 |
| J.  Richard Stonesifer     |   |     |   |               |

 

79

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**Certifications**

 

I, Michael T. DuBose, certify that:

 

1. I have reviewed this annual report on Form 10-K of AftermarketTechnology Corp.;

 

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

 

4. The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

(a) Designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this annual report is being prepared;

 

(b) Evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisannual report (the “Evaluation Date”); and

 

(c) Presented in this annual report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officer and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing the equivalentfunction):

 

(a) All significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

(b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officer and I have indicated inthis annual report whether there were significant changes in internal controlsor in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

Date:  February 25, 2003

 
|                                        |
|---------------------------------------------|
| /s/ Michael T. DuBose                       |   |
| Michael T. DuBose,  Chief Executive Officer |

 

80

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I, Barry C. Kohn, certify that:

 

1. I have reviewed this annual report on Form 10-K of AftermarketTechnology Corp.;

 

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

 

4. The registrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a) Designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this annual report is being prepared;

 

(b) Evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisannual report (the “Evaluation Date”); and

 

(c) Presented in this annual report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officer and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing the equivalentfunction):

 

(a) All significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

(b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officer and I have indicated inthis annual report whether there were significant changes in internal controlsor in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

Date:  February 25, 2003

 
|                                    |
|-----------------------------------------|
| /s/ Barry C. Kohn                       |   |
| Barry C. Kohn, Chief  Financial Officer |

 

81

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**AftermarketTechnology Corp.**

** **

**ScheduleII - Valuation and Qualifying 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, 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                              | )(2)   | 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                               | (2)    | 4,134          |   | 5,021 |   |
| Year  ended December 31, 2002:                       |   |                                 |   |                                          |   |                                |   |           |   |   |   |
| Reserve and allowances deducted from asset accounts: |   |                                 |   |                                          |   |                                |   |           |   |   |   |
| Allowance for uncollectible accounts                 |   | 1,207                                |   | 338                                           |   | —                              |   | 225            | (1)    | 1,320 |   |
| Reserve for inventory obsolescence                   |   | 5,021                                |   | 424                                           |   | 237                                 | (2)    | 713            |   | 4,969 |   |

 

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(1)                                       Accountswritten off, net of recoveries.

 

(2)                                       Assetvaluation adjustments are due to the Company’s initial discontinuance of theindependent aftermarket engines business during 2000 and its subsequentelection to retain this business during 2001.

 

S-1

----