**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

 

| **(Mark One)** | ** **                                                    | ** ** |
|----------------|---------------------------------------------------------------|------------|
| **ý**     | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE**     | ** ** |
| ** **     | **SECURITIES  EXCHANGE ACT OF 1934**                          | ** ** |
| ** **     | ** **                                                    | ** ** |
| ** **     | **For the fiscal year ended December 31, 2004**               | ** ** |
|           |                                                          |       |
| ** **     | **OR**                                                        | ** ** |
| ** **     | ** **                                                    | ** ** |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** | ** ** |
| ** **     | **SECURITIES  EXCHANGE ACT OF 1934**                          | ** ** |

** **

**Commission file number 0-21803**

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**AFTERMARKET TECHNOLOGY CORP.**

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

** **
| **DELAWARE**                                                    | ** ** | **95-4486486**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
| ** **                                                      | ** ** | ** **                            |
| **1400 Opus Place, Suite 600  Downers Grove, IL**               | ** ** | **60515**                             |
| (Address of Principal Executive Offices)                        |       | (Zip Code)                            |

** **

Registrant’stelephone number, including area code:  **(630) 271-8100**

 

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

 

Securitiesregistered pursuant to Section 12(g) of the Act: **CommonStock, $.01 par value**

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ýNo o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2).  Yes ý No o

 

The aggregate market value of the voting stock held bynon-affiliates of the Registrant (based on the closing price of such stock, asreported by The Nasdaq National Market, on June 30, 2004) was $207.3 million.

 

The number of shares outstanding of the Registrant’sCommon Stock, as of February 11, 2005, was 21,268,715 shares.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

None.

 

 

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**AFTERMARKETTECHNOLOGY CORP.**

 

**ANNUALREPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2004**

 
| 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                                             |   |
|      |   |                                                                                             |   |
| ITEM  5.  |   | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                      |   |
|      |   |                                                                                             |   |
| ITEM 6.   |   | SELECTED FINANCIAL DATA                                                                          |   |
|      |   |                                                                                             |   |
| ITEM  7.  |   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      |   |
|      |   |                                                                                             |   |
| ITEM  7A. |   | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                      |   |
|      |   |                                                                                             |   |
| ITEM  8.  |   | CONSOLIDATED  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                        |   |
|      |   |                                                                                             |   |
| ITEM  9.  |   | CHANGE  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE             |   |
|      |   |                                                                                             |   |
| ITEM 9A.  |   | CONTROLS AND  PROCEDURES                                                                         |   |
|      |   |                                                                                             |   |
| ITEM 9B.  |   | OTHER INFORMATION                                                                                |   |
|      |   |                                                                                             |   |
| 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                                                  |   |
|      |   |                                                                                             |   |
| ITEM  14. |   | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                          |   |
|      |   |                                                                                             |   |
| ITEM  15. |   | EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES                                                      |   |

 

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**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Annual Report containsforward-looking statements (as such term is defined in Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934) and information relating to us that are based on the current beliefs ofour management as well as assumptions made by and information currentlyavailable to management, including statements related to the markets for ourproducts, general trends in our operations or financial results, plans,expectations, estimates and beliefs.  Inaddition, when used in this Annual Report, the words “may,” “could,” “should,” “anticipate,”“believe,” “estimate,” “expect,” “intend,” “plan,” “predict” and similarexpressions and their variants, as they relate to us or our management, mayidentify forward-looking statements. These statements reflect our judgment as of the date of this AnnualReport with respect to future events, the outcome of which is subject to risks,which may have a significant impact on our business, operating results orfinancial condition.  Readers arecautioned that these forward-looking statements are inherently uncertain.  Should one or more of these risks oruncertainties materialize, or should underlying assumptions prove incorrect,actual results or outcomes may vary materially from those describedherein.  We undertake no obligation toupdate forward-looking statements.  Therisks identified in the section of Item 1 entitled “Certain FactorsAffecting the Company,” amongothers, may impact forward-looking statements contained in this Annual Report.

 

**PART I**

 

## **ITEM 1.**                             BUSINESS

## ** **

**Overview**

 

Weprovide outsourced engineering solutions and supply chain logistics services tothe light vehicle aftermarket and consumer electronics industries.  Through our Drivetrain Business, we providecustomized remanufacturing services focused on complex light vehicle drivetrainproducts, such as automatic transmissions and engines, that are primarily soldthrough the service, repair and parts organizations of our customers.  Through our Logistics Business, we offervalue-added supply-chain services to the consumer electronics and light vehicleaftermarket industries, including fulfillment, returns management, reverselogistics, repair and other related services. We generally provide services under contractual relationships with customersthat distribute high-value, complex products.

 

Webelieve our service offerings are differentiated from those of our competitorsby the degree of customization we provide coupled with our focus on quality andthe consistency of our performance.  Wehave developed business processes, technical capabilities and informationtechnology systems that allow us to design flexible and scaleable solutionsthat help our customers reduce their costs, improve their supply chainefficiency and enhance their profitability. We manage, monitor and communicate detailed information about ourprocesses and our customers’ shipments, returns, products and inventory on areal-time basis.  This information isreadily accessible to our customers, easy-to-use, and is customized to fittheir needs. We also use this information to analyze and improve theperformance of our businesses and to help us achieve our exacting quality andservice benchmarks.

 

***Our Drivetrain Business***

 

OurDrivetrain Business remanufactures and distributes drivetrain products, whichwe sell primarily to Original Equipment Service (“OES”) outlets.  As our OES customers are the service andrepair organizations of automotive Original Equipment Manufacturers (“OEMs”),we are not subject to the same market trends, such as the cyclical nature ofnew light vehicle sales, as Tier 1 suppliers to the automotive industry.  We believe we are the largest independentlight vehicle automatic transmission remanufacturer in the world.  Our drivetrain products consist principallyof remanufactured automatic transmissions and also include remanufacturedtorque converters, valve bodies and engines. Our principal drivetrain customers are the North American service,repair and parts organizations of Ford, Honda and DaimlerChrysler and theEuropean division of Ford.  In addition,we also sell to customers in the independent aftermarket, including AAMCOdealers, AutoZone and Cottman Transmission. Drivetrain Business net salesaccounted for 73.6%, 76.0% 70.9%, 72.4%, and 75.3% of our 2004, 2003, 2002, 2001,and 2000 net sales, respectively.

 

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Remanufacturedproducts are used in the repair of vehicles by dealers and other serviceoutlets during both the warranty and post-warranty periods following the saleof a vehicle.  Remanufacturing is aprocess through which used cores are returned to a central facility where theyare disassembled and the parts are inspected, cleaned, refurbished andtested.  We then combine the reusableparts with new parts, primarily in a high-volume cellular assembly process, tocreate remanufactured components that are of comparable quality to new components.  We remanufacture some of the most complexcomponents of a vehicle, such as the transmission and engine.  Generally, our customers and their designatedsuppliers provide transmission parts and cores to us.  Because we generally do not take ownership ofthe cores, our working capital requirements are reduced.  Furthermore, because we use salvaged partsfrom cores or new parts sourced from our customers and their designatedsuppliers, we are not directly subject to material pricing fluctuations.  We believe remanufactured products aregenerally lower in cost than new replacement components and frequentlyfacilitate a faster, more reliable repair when compared to components that arerebuilt at service outlets.  In addition,remanufactured components efficiently reuse existing parts and are lessdamaging to the environment.

 

We remanufacture factory-approved transmissions forwarranty and/or post-warranty replacement of transmissions for Ford, Honda,DaimlerChrysler, and select foreign OEMs, primarily for use in the UnitedStates service and repair organizations of their dealer networks.  Thenumber of transmission models we remanufacture has been increasing toaccommodate the greater number of models currently used in vehiclesmanufactured by our customers. Additionally, our European facility remanufactures factory-approved gasand diesel engines for several European OEMs, including Jaguar and the Europeandivisions of Ford and GM.  These engines are used for warranty andpost-warranty replacement.  We also assemble and modify new productionengines in our European facility, and provide certain machining services forsome of our customers.

 

We generally sell our products to each customerpursuant to a supply arrangement for individual transmission or engine models,which supply arrangement typically may be terminated by the customer on90 days notice or less (except for our agreement with DaimlerChrysler,which may not be terminated without cause).

 

We work to develop and maintain strong relationshipsat many levels, in both the corporate and factory organizations of ourdrivetrain customers.  We beganremanufacturing transmissions for DaimlerChrysler’s Chrysler division and Fordin 1989, and Honda in 2002.  Over the past few years, we have strengthenedour relationships with many of our other Drivetrain Business customers, asevidenced by the award of new business with Honda, Ford, Jaguar, andIsuzu.  We believe that we are thelargest provider of remanufactured transmissions to DaimlerChrysler, Ford andHonda for light vehicles in North America.

 

All of our facilities that remanufacturetransmissions for OEMs have QS-9000 or ISO-9000 certification, a completequality management system developed for manufacturers who subscribe to the ISO9002 quality standards.  The system is designed to help suppliers, such asus, develop a quality system that emphasizes defect prevention and continuousimprovement in manufacturing processes.

 

***Our Logistics Business***

 

OurLogistics Business provides a number of value-added services that generateoperational efficiencies for our customers through the outsourcing of certainsupply chain functions.  Specifically,our Logistics Business provides value-added warehousing and distribution,reverse logistics, turnkey order fulfillment, electronic equipment testing, andrefurbishment and repair services.  Wegenerally do not take ownership of inventory. As a result, we do not face the risk of inventory obsolescence and werequire relatively less working capital than logistics service providers whotake ownership of inventory.  Ourbusiness model is “asset-light” in that we do not make substantial capitalinvestments in transportation facilities and equipment.  We believe this asset-light business modelincreases our flexibility and allows us to generate significant free cashflow.  Our principal customers arecurrently in the consumer electronics and automotive industries and includeCingular, Delphi, Visteon, GM, Ford and Mazda. Logistics Business segment sales accounted for 26.4%, 24.0%, 29.1%, 27.6%,and 24.7% of our 2004, 2003, 2002, 2001, and 2000 net sales, respectively.

 

We determine our logistics process in closeconsultation with our customers.  Ourinformation technology systems allow rapid integration with our customers’systems and, in conjunction with our customized processes, help us to meetdemanding logistics and repair requirements. By improving our customers’ inventory turns and speed of

 

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repair and refurbishments, as well as enabling our customers to realizevalue from returned products, we believe we help our customers increase theirprofitability, reduce their capital investments and enhance their opportunitiesfor growth.  We customize our products and services to meetthe specific individual needs of customers instead of offering one standardsuite of products and services.

 

Ourlogistics customers market and distribute complex and serialized consumerelectronics such as cellular phones, wireless devices, navigation devices, andlight vehicle audio systems and instrument clusters.  As part of our service offering, we remanufacture, repair and distributelight vehicle audio systems and instrument and display clusters for Delphi,Visteon, GM and Mazda, and various mobile electronics products*,*such as**navigationsystems, primarily for Delphi and GM.  Wealso offer returned material reclamation and disposition services to assistcustomers with the management of their dealer parts inventory, therebyreducing the customers’ parts costs and assisting them in being moreenvironmentally responsible.  Under this program, various points in thecustomer supply chain send their excess and obsolete parts inventory to ourfacility in Oklahoma City.  We then sort the parts and redistribute theuseful parts on behalf of the customer to other dealers to fill back orders orto the customer’s product distribution centers for restocking.  Parts thatare no longer useful are scrapped and recycled.  The parts remain theproperty of the customer, and we receive a fee for our redistributionservices.  Additionally, we providecertain core management and disposition services.

 

We provide bulk and direct fulfillment of cellulartelephones to Cingular and its partners.  We deliver products both toCingular retail locations and directly to individuals who order a cellularphone, and provide inventory tracking and management, process allwarranty-service exchanges and perform handset testing and repair.  Growth in our Logistics Business has largelybeen with Cingular (historically through AT&T Wireless, which was acquiredby Cingular in October 2004).  SinceCingular’s acquisition of AT&T Wireless, we have been designated to launchadditional business with Cingular, expanding on certain lines of service wepreviously provided to AT&T Wireless. We expect these services to grow in 2005 and to offset the loss ofaccessory packaging services that we previously provided to AT&TWireless.  In addition to new businessfrom Cingular, we signed agreements with a number of new logistics customers in2004 that we expect should generate additional sales in 2005.

 

**Industry Background**

 

***Automotive Aftermarket***

 

Demandfor replacement or repair of drivetrain products is a function of numerousfactors, such as the number of vehicles in operation, the average age ofvehicles and the average number of miles driven per vehicle.  Within this overall market, factors thatinfluence demand for our remanufactured products, when compared to repairservices, include product complexity, OEM warranty policies governing repair-versus-replacedecisions made by their dealers, and the length of warranty periods.  In addition, we believe increasing demand forour remanufacturing services, when compared to repair services, is also drivenby the relatively limited number of qualified repair technicians and repairtest equipment, and the increase in customer service demands.  The demand for our products is generally nottied to the cyclical nature of new light vehicle sales.

 

We supply our products to the automotiveaftermarket, which consists of parts and services for light vehicles aftertheir original purchase.  According tothe Frost & Sullivan report dated February 2005, the drivetrain replacementand repair component of this market, including both engines and transmissions,totaled approximately $4.4 billion in 2004 and is expected to grow at acompound annual rate of 4.6% from 2004 to 2011 due to the increasing number ofvehicles in operation, the average age of vehicles and the average number ofmiles driven per vehicle.  We derive themajority of our Drivetrain Business sales from the replacement of automatictransmissions.  According to Frost &Sullivan, this subset of the drivetrain replacement and repair market wasapproximately $2.7 billion in 2004, and is forecast to grow at a compoundannual growth rate of 6.2% from 2004 to 2011.

 

***RemanufacturingProcess***

 

When an assembly such as a transmission or enginefails, there are generally three alternatives available to return the vehicleto operating condition.  The dealer or independent repair shop may:

 

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**•**                    remove the assembly, disassemble it into itscomponent pieces, replace worn or broken parts with remanufactured or newcomponents, and reinstall the assembly in the vehicle;

 

**•**                    replace the assembly with an assembly from aremanufacturer such as us; or

 

**•**                    replace the assembly with a new assemblymanufactured by the OEM.

 

In our remanufacturing process, we generally obtainused transmissions and engines (“cores”) from our customers or their designated suppliers.  We then sortthe cores by vehicle make and model and either place them into immediateproduction or store them until needed.  In the remanufacturing process, weevaluate the cores, disassemble them into their component parts and inspect,clean, refurbish and test the components that can be incorporated into theremanufactured product.  We replace components that we determine to be notreusable or repairable with other remanufactured 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 generallypackage completed products for immediate delivery.

 

There are four primary benefits of usingremanufactured components in the repair of vehicles:

 

**•**                   First, costs to the customers associated withremanufactured assemblies generally are substantially less than costsassociated with either assemblies that have been rebuilt by the dealerfollowing a severe failure or new assemblies.  This is due primarily toour lower labor costs and our use of high volume manufacturing techniques andsalvage methods that enable us to refurbish and reuse a high percentage oforiginal components.  The cost savings produced by remanufacturedassemblies help our customers manage their warranty expenses.

 

**•**                   Second, remanufactured assemblies are generallyof consistent high quality due to the precision manufacturing techniques,technical upgrades and rigorous inspection and testing procedures we employ inremanufacturing.  By contrast, the quality of rebuilt assemblies generallyis less consistent because it is heavily dependent on the skill level of theparticular mechanic as well as the availability of adequate tooling and testingequipment.   For warranty repairs, consistent quality is important tothe customer providing the applicable warranty, because once installed, theremanufactured product is usually covered by the customer’s warranty for thebalance of the original warranty period.

 

**•**                   Third, replacement of a component with aremanufactured component generally takes considerably less time than the timeneeded to rebuild the component, thereby significantly reducing the time thevehicle is at the dealer or repair shop and allowing the dealer and repairshops to increase their volume of business.

 

**•**                   Fourth, the environmental benefits ofremanufacturing may be significant.  We annually re-process thousands oftons of materials that would otherwise have been discarded.  Remanufacturing in our facilities, whencompared to rebuilding at various dealers, generally results in a moreefficient reuse of parts and a more controlled recycling of scrap materials andexcess fluids.  This in turn leads to associated cost savings and benefitsto customers that are increasingly focused on environmental compliance issues.

 

***Logistics Industry***

 

Logistics can generally be defined as the managementand transportation of materials and inventory throughout the supply chain aswell as the provision of value-added services such as assembly, packaging,programming, testing and repair.  The logistics industry has expandedrapidly over the last 15 years due to dramatic improvements in technology,increased demand in customer service requirements, and the significant valueproposition provided to companies by third party logistics (3PL)providers.  As more companies focus on core competencies,many companies have decided to outsource the management of all or part of theirsupply chain as a means to reduce costs, increase asset and labor flexibilityand improve customer service.  As a result, 3PL providers have become

 

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extensively involved in the full range of customer supply chainfunctions.  The operational efficiencies of a 3PL provider enablecompanies to reduce investments in facilities, information technology,inventory and personnel.  Third-party services include turnkey supplychain services, such as order fulfillment, product labeling and packaging,inventory and warehouse management, product return, refurbishment and repair,electronics equipment testing, reverse logistics and the physical movement ofgoods. According to Armstrong & Associates, Inc., the 3PL market grew at a14.1% compound annual rate from $45.3 billion in 1999 to $76.9 billion in 2003.

 

We compete in the value-added warehousingmarket, a subset of the 3PL market, which we believe is fragmented, with nodominant industry player, and growing rapidly. According to the Armstrong & Associates, Inc. report dated December2004, this market size was estimated to be $19.8 billion of gross revenues in2003.

 

**Our Competitive Strengths**

 

We believe we offer products and solutionsthat improve our customers’ profits and operations as a result of ourcompetitive strengths, which include the following:

 

***Customized Service Offering***

 

We are recognized by our customers for our highlevel of service and our flexibility in providing product and servicesolutions.  Our logistics approach involves our team ofspecialists who work with the client to understand the specific deliverablesrequired by that client, understand communication points within the supplychain, design solutions, establish operational and business metrics, eliminatewaste and improve efficiencies.  We offera broad array of products and services to our logistics customers, which allowsus to work with the customer to customize our products and services tomeet the specific individual needs of the customer instead of offering onestandard suite of products and services. We believe our “One-Size-Fits-One” approach helps us attract and retaincustomers.  For instance, for Cingular, our supply chain management services includeproduct warranty and returns, order entry processing, testing and repair,warehousing, picking, kitting, customized packaging, shipping and delivery ofwireless handsets, including wireless data devices.  Our integratedlogistics services also include inventory management and private labeling.  We have strong customer relationshipsand have secured additional new business from our existing customers, includingHonda, Cingular, Ford and the European divisions of Ford.

 

***High Quality Through Engineering andTechnical Know-How***

 

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 partner with our customersto design processes that help ensure that our remanufacturing of complexproducts such as automatic transmissions, valve bodies, torque converters, enginesand automotive electronics replicates OEM quality and test procedures. Our remanufacturing process is completed by testing products usingstate-of-the-art equipment such as sophisticated test stands that enable us toreplicate OEM test procedures.  We arecommitted to upholding the quality of our customers’ products and hold QS-9000Certification, ISO-9000 Certification and Ford’s Q1 Certification.  We monitor our procedures and processes,which allows us to identify and to quickly correct situations that could impactour product quality.  We have a team ofengineers dedicated to enhancing and adding new products, sharing innovativesolutions and reducing our customers’ expenses. Our engineering capabilities include developing new products andassisting in our customers’ parts program acceleration activities.

 

***Information Technology Capabilities***

 

We use information technology to help meet customers’needs in product security and confidentiality, product qualification andidentification, inventory management, interactive electronic communication, aswell as providing customers with solutions for their supply chain management,reverse logistics, product tracking and product history needs, whilemaintaining service and quality levels.  Ouruse of information technology allows us to provide flexible, accurate,customized logistics solutions to help meet customer requirements whileproviding full visibility across the supply chain.  Our solutions can reduce customer-requiredinvestment in information technology, and can improve the efficiency of ourcustomers’ inventory and supply chains by providing enhanced traceability and

 

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visibility of inventory, resulting in market-leading performancemetrics and improved customer profitability. In addition, our information technology systems allow for rapidintegration with our customers’ systems, enhancing the quality of our services.

 

***Strong, Experienced Management Team***

 

Our executive and operations management teamhas extensive experience.  Our Chief ExecutiveOfficer, Donald T. Johnson, Jr., who joined us in January 2004, has 31 years ofexperience in the logistics and automotive industries, including five years asGlobal Director of Parts, Supply and Logistics for Ford and 26 years withinCaterpillar’s Parts and Service and Logistics organizations where he becameVice President, Caterpillar Logistics. Our Vice President and Chief FinancialOfficer, Todd R. Peters, who joined us in March 2004, has 20 years offinancial, acquisition and integration, and automotive operationsexperience.  The President of our ATCLogistics Business, William L. Conley, Jr., has 26 years of logisticsexperience, and the Vice President of our North American RemanufacturingOperations, Brett O. Dickson, has 15 years of operational and supplychain management experience.

 

**Our Growth Strategies**

 

Our strategy is to be a valued partner that providesremanufacturing, logistics and repair services for customers that distributehigh-value, complex products.

 

***Growth Within Our Drivetrain Business***

 

*ExpandOur Addressable Market*.

 

**•**                    Werecently augmented our business and product development teams and are workingto identify new products and processes that enable us to compete for additionalbusinesses with our OES dealer customers, including penetrating the transmission repair market.  For example, we are working with certain ofour OES customers to develop a transmission repair kit product that we willmarket for their use with failed transmissions that are repaired rather thanreplaced.  The transmission repair kitcontains subassemblies and related parts that will be used to repair atransmission component.  The transmissionrepair kit is a collection of new parts and remanufactured subassemblies thatwill enable repair service outlets to exchange worn internal components of thetransmission with factory tested manufactured components that are alreadysubassembled and easy to install.  Webelieve that this product will offer repair service outlets substantial timeand labor savings in transmission repair. The kit program will enable us to realize revenue in the repair sectorof the drivetrain replacement and repair market, expanding our revenue basebeyond the replacement sector.  We expectto introduce our first product offering in the transmission repair market inthe first half of 2005.

 

**•**                    Webelieve we are well positioned to increase our sales to other OES dealerchannels and to the independent aftermarket.  We continue to implement our strategy to penetrate the independentaftermarket, which we believe is more than double the size of our OESmarket.  We believe that most post-warranty repairs are performed by aftermarketrepair specialists, rather than by OEM dealers, and that these aftermarketrepair specialists are currently confronted with a relatively limitednumber of qualified repair technicians.  In July 2001, we began a program with the National AAMCO DealersAssociation (“NADA”), whichrepresents most of the AAMCO dealers across the United States.  Under thisprogram, we provide select remanufactured domestic transmissions to AAMCOdealers through their regional distribution centers under the PROFormance brandname and various incentives for dealers to purchase remanufacturedtransmissions directly from us.  We believe that the AAMCO dealersrepresent a substantial portion of the post-warranty transmission repair marketin the United States.  In October 2002,our initial one-year contract with NADA was renewed for a five-year term.  Our strategy remains in its earlystages, but we have succeeded in developing relationships with customers suchas AAMCO dealers, AutoZone and Cottman Transmission, as well as numerousregional wholesale distributors and independent transmission repair shops.

 

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**•**                    Weare seeking drivetrain remanufacturing opportunities in markets outside ourprimary light vehicle aftermarket, such as the commercial vehicle and marinemarkets. We believe that our expertise in drivetrain remanufacturing willbe directly transferable to these other markets over time.  We believe these other markets presentopportunities as they have less developed remanufacturing capabilities.

 

*Grow Sales to North AmericanTransplant OES Customers.*  Foreignautomobile manufacturers with manufacturing operations in the United States (transplants)have increased their share of North American light vehicle production fromapproximately 16% in 1992 to approximately 28% in 2004 and this trend isexpected to continue.  We continueto target transplant OES customers, many of which currently remanufacture theirdrivetrain products internally oroverseas.  We believe that we candemonstrate to these potential customers the benefits of outsourcing theirdrivetrain remanufacturing business to us. For example, in 2002, we began a program to supply remanufactureddrivetrain products to Honda.  As aresult of our demonstrated ability to improve quality, enhance reliability andreduce costs for Honda, we believe we now serve a majority of Honda’s NorthAmerican demand for remanufactured automatic transmissions. Furthermore, webelieve our success with Honda will enhance our efforts to pursue additionalbusiness with Honda and attract other transplant OES customers.

 

*Expand Our InternationalPresence. *In 2004, we generated approximately92% of our total net sales in North America. We believe that our expertise in drivetrain remanufacturing will bedirectly transferable to foreign markets, which generally have a less developeddrivetrain remanufacturing market than North America.  As such we are actively pursuing additionalopportunities with both new and existing customers to provide remanufacturingservices in both Europe and Asia.  Webelieve that these areas represent an opportunity for growth and we are currently working to develop programs with OEMs inthe growing Chinese automotive market (where we do not currently have apresence) and to strengthen our relationships with foreign customers in Europeby leveraging our manufacturing facility and gas and diesel engine capabilitiesin the United Kingdom.  We continue to explore opportunities in the globalautomotive industry for our products and services in order to capture newbusiness opportunities and improve profitability. See Item 8."Consolidated Financial Statements and Supplementary Data—Note 18. SegmentInformation."

 

***Growth Within Our Logistics Business***

 

*Target New Customers andBroaden Services Provided to Customers*.  We believe we are well positioned tocapitalize on growth in the 3PL services market, particularly with existing andnew customers in the consumer electronics and light vehicle industries, byoffering customized, reliable and cost effective solutions for customers withcomplex logistics requirements involving high-value products.  We planto leverage our existing relationships with automobile OEMs into newlogistics customer relationships.  We believe that the cost savings andenvironmental benefits provided by our material recovery business will beattractive to other OEMs.  In 2003, GM converted a pilot material recoveryprogram into a full scale national program. In 2004, we were awarded new logistics business that we expect togenerate more than $30 million of annualized revenue.  We recently expanded our business developmentand marketing teams and are more actively marketing our offerings to new andexisting customers.

 

We intend to increase penetration of our existingLogistics Business customer base by broadening our offering of Logisticsproducts and services and by marketing our core competencies as solutions toour customers’ needs.  Under our “One-Size-Fits-One” philosophy, we will continue toleverage our broad range of services to target new customers that provideserialized products across a variety of industries and provide them withcustomized products and services to meet their specific needs instead ofoffering one standard suite of products and services.  Wealso intend to leverage our core competencies in logistics and electronicsremanufacturing by working with our existing and new customers to identifyproducts and services where we can add value in satisfaction of our customers’specific needs.  We intend to furtherexpand our penetration of the market for logistics services and electronicsrepair through the addition of other wireless carriers to our customer base andthrough penetration into other vertical markets.  We have also identified and targeted severalnew market segments, including additional classes of consumer electronics.

 

7

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***Additional Corporate Initiatives***

 

*Leverage Operating Efficiencyand Productivity Gains*.  We regularly evaluate ouroperating efficiency and productivity in order to increase our profitabilityand cash flows.  Over the last fouryears, we have completed numerous lean manufacturing, six sigma and continuousimprovement projects that have resulted in significant cost savings andincreased capacity utilization.  Our “Lean and Continuous Improvement” programhas helped us achieve dramatic margin improvements and further enhancement ofquality.  We believe there areadditional opportunities to further improve our cost base and increaseearnings.

 

*Selectively Pursue Acquisitions*. We have a proven ability to effect and integrate acquisitions.  From time to time we evaluate potentialacquisitions of complementary businesses that we believe will broaden ourproduct offerings, diversify our customer base or provide us access to newmarkets.  We have established criteria bywhich we evaluate potential acquisitions, which we use to identify and pursueonly those that we believe will enhance long-term shareholder value.  We have made various acquisitions in the pastand, to the extent suitable acquisition candidates, acquisition terms andfinancing are available, we intend to pursue acquisitions in the future.

 

**Competition**

 

In our Drivetrain Business, we primarily compete inthe market for remanufactured transmissions sold to the automotive aftermarketthrough the OEM dealer networks.  This market, narrowly defined, is one inwhich the majority of industry supply comes from a limited number ofparticipants.  Competition is based primarily on product quality, service,delivery, technical support and price and tends to be split along customerlines.

 

In our Logistics Business, we primarily compete in afragmented market as a niche participant offering a specialized value-addedservice requiring stringent service level requirements.  Based on ourperformance levels, we believe we are well positioned to compete in thismarket.  However, some of our competitors in this segment are larger andhave greater financial and other resources.

 

**Employees**

 

As of December 31, 2004, we had approximately 2,700 full-time andtemporary employees.  We believe our employee and labor relations aregood.  We have not experienced any work stoppage to date and currentlynone of our employees is represented by a labor union.

 

Compensation for our employees is partially incentivebased, in particular for our employees in our Logistics Business.

 

**Environmental**

 

We are subject to various evolving federal, state,local and foreign environmental laws and regulations governing, among otherthings, emissions to air, discharge to waters and the generation, handling,storage, transportation, treatment and disposal of a variety of hazardous andnon-hazardous substances and wastes.  These laws and regulations providefor 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.

 

In connection with the acquisition of oursubsidiaries, some of which have been subsequently divested or relocated, weconducted certain investigations of these companies’ facilities and theircompliance with applicable environmental laws. The investigations, which included Phase I assessments byindependent consultants of all manufacturing and various distributionfacilities, found that a number of these facilities have had or may have hadreleases of hazardous materials that may require remediation and also may besubject to potential liabilities for contamination from off-site disposal ofsubstances or wastes.  These assessments also found that reporting andother regulatory requirements, including waste management procedures, were notor may not have been satisfied.  Although there can be no assurance, webelieve that, based in part on the investigations conducted, in part on certainremediation completed prior to or since the acquisitions, and in part on the indemnificationprovisions of the

 

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agreements entered into in connection with our acquisitions, we willnot incur any material liabilities relating to these matters.

 

One of our former subsidiaries, RPM, leased severalfacilities in Azusa, California located within what is now the Baldwin ParkOperable Unit of the San Gabriel Valley Superfund Site.  The entity thatleased the facilities to RPM has been identified by the United StatesEnvironmental Protection Agency (“EPA”), as one of approximately nineteenpotentially responsible parties (“PRPs”), for environmental liabilitiesassociated with the Superfund Site.  The Federal ComprehensiveEnvironmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”or “Superfund”) provides for cleanup of sites from which there has been arelease or threatened release of hazardous substances, and authorizes recoveryof related response costs and certain other damages from PRPs.  PRPs arebroadly defined under CERCLA, and generally include present owners andoperators of a site and certain past owners and operators.  As a generalrule, courts have interpreted CERCLA to impose strict, joint and severalliability upon all persons liable for cleanup costs.  As a practicalmatter, however, at sites where there are multiple PRPs, the costs of cleanuptypically are allocated among the PRPs according to a volumetric or otherstandard.  The EPA has preliminarily estimated that it will cost in excessof $200 million to construct and operate for at least 15 years a complex seriesof remedial groundwater pumping and treatment systems for the part of the SanGabriel Valley Superfund Site within which RPM’s facilities, as well as thoseof many other potentially responsible parties, are or were located.  Theactual cost of this remedial action could vary substantially from thisestimate, and additional costs associated with this Superfund Site could beassessed.  RPM moved all manufacturing operations out of the San GabrielValley Superfund Site area in 1995.  Currently, a group of eight PRPs(which does not include the entity that leased the facility to RPM) is payingfor the construction of the required remedial systems.  Since July 1995, RPM’s only realproperty interest in this area has been the lease of a 6,000 square footstorage and distribution facility.  We have not been named by the EPA as aPRP for the Superfund Site and, based on our limited connection with the site,we do not believe that we are likely to be identified as such in thefuture.  Furthermore, the acquisition agreement by which we acquired theassets of RPM in 1994 and the leases pursuant to which we leased RPM’sfacilities after we acquired the assets of RPM expressly provide that we didnot assume any liabilities for environmental conditions existing on or beforethe closing of the acquisition, although we could become responsible for thoseliabilities under various legal theories.  We are indemnified against anysuch liabilities by the company that sold RPM to it as well as the shareholdersof that company, although we have no information regarding the currentfinancial condition of these indemnitors and there can be no assurance that wewould be able to make any recovery under the indemnification provisions. While there can be no assurance, we believe that we will not incur any materialliability as a result of RPM’s lease of properties within the San GabrielValley Superfund Site.

 

In connection with the October 2000 sale of ourDistribution Group, we agreed to indemnify the buyer against environmentalliability at former Distribution Group facilities that had been closed prior tothe Distribution Group sale, including the former facilities in Azusa,California within the Superfund site mentioned above and former manufacturingfacilities in Mexicali, Mexico and Dayton, Ohio.  We also agreed toindemnify the buyer against any other environmental liability of theDistribution Group relating to periods prior to the closing of the DistributionGroup sale.  Our indemnification obligations to the buyer are subject to a$750,000 deductible and a $12.0 million cap, except with respect to closedfacilities.  In 2002, we negotiated an additional $100,000 deductible applicableto all Distribution Group claims for indemnification.

 

**Segment Reporting**

 

We have two reportable segments: theDrivetrain Remanufacturing segment and the Logistics segment.  Our independent aftermarket business isreflected as "Other" and is not reportable for segment reportingpurposes.  See Item 8. "ConsolidatedFinancial Statements and Supplementary Data" and Item 7."Management's Discussion and Analysis of Financial Condition and Resultsof Operations."

 

**CertainFactors Affecting the Company**

 

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

 

A few customers account for a significant majority of ournet sales each year.  In 2004, we had fourcustomers that individually accounted for more than 10% of our net sales.  Ford accounted for 29.6%, 38.6% and 39.2% ofour net sales for 2004, 2003 and 2002, respectively, Cingular (primarilythrough AT&T Wireless) accounted for 22.3%, 17.2% and 19.6% of our netsales during 2004, 2003 and 2002, respectively, Honda accounted for 19.4%, 7.5%and less than 1% of our net sales during 2004, 2003 and 2002, respectively, andDaimlerChrysler accounted for 14.7%, 20.6% and 23.7% of our net sales in 2004,2003 and 2002, respectively.  If we loseany of

 

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these customers, or if any of them reduces or cancels a significantorder, our net sales and operating results could decrease significantly.

 

Oursignificant OEM customers generally require that their dealers usingremanufactured products for warranty application use only products fromapproved suppliers. Although we are a factory approved supplier of ourcustomers, they generally are not obligated to continue to purchase ourproducts and may switch some or all of their business to other suppliers in thefuture and we may not be able to maintain or increase our sales to them.  Most of our contracts or arrangements withour customers are terminable by the customer subject to a notice period thatranges from 90 days or less to 180 days. Pursuant to such a contract, in September 2004, General Motors notifiedus that they would resource all our remanufactured transmission productioneffective as of October 15, 2004. In addition, we periodically renegotiate the prices and other terms ofour products with our customers.  Forinstance, in 2003 we negotiated lower prices with AT&T Wireless andDaimlerChrysler in connection with the renewal and extension of theirrespective contracts.  Because of theshort termination periods and periodic price negotiations, we cannot give anyassurances of the stability of the demand or prices for our products and,therefore, our revenue streams. Significant demand or price fluctuations could materially affect ourbusiness.

 

Since Cingular’sacquisition of AT&T Wireless, we have been working with Cingular asthey rationalize their supply chain.  To date, this has resulted inthe loss of the accessory packaging services that we previously providedto AT&T Wireless but has also resulted in the expansion of our corelogistics services with Cingular.  This process will continue andcould result in further gains and/or losses of business with Cingular.

 

Lossof a significant customer could also result in us incurring asset impairmentcharges and exit costs associated with the closure of the plant that servicedthat customer.  In connection with theloss of the General Motors transmission business in 2004, we recorded goodwilland other asset impairment charges of $25.3 million and incurred $3.4 millionof exit costs to close our idle Gastonia, North Carolina facility, where we hadproduced units for General Motors.

 

Withinthe last five years the standard new vehicle warranty provided by our customershas varied and shorter warranty periods could be implemented in thefuture.  Any shortening of warrantyperiods could reduce the amount of warranty work performed by dealers andreduce the demand for our products. Additionally, our customers may vary their policies that determine whentheir dealers may use remanufactured products for warranty applications, whichcould reduce the demand for our products.  Our recent results, particularly in 2003, havebeen adversely affected by certain customers changing the policies that governtheir dealer warranty repair-versus-replace decisions, which have resulted indealers repairing more transmissions and consequently replacing fewertransmissions with remanufactured units.

 

***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 remanufactureare obtained from OEMs.  Our ability toobtain cores of the types and in the quantities we require is critical to ourability to meet demand and expand production. With the increasing acceptance in the aftermarket of remanufacturedassemblies, the demand for cores has increased. We have periodically experienced situations in which the inability toobtain sufficient cores has limited our ability to accept orders.  We may experience core shortages in thefuture.  In addition, from time to time,we experience shortages of components manufactured by our OEM customers that werequire for our transmission remanufacturing process.  If we experience such shortages for anextended period of time, it could have a material adverse effect on ourbusiness and negatively impact our competitive position.

 

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

 

Our quarterly and annual operating results are affected bytransmission failure rates, and a drop in rates could adversely affect sales orprofitability or lead to variability of our operating results.  Generally, if transmissions last longer,there will be less demand for our remanufactured transmissions.  Transmission failure rates could drop due toa number of factors outside our control, including:

 

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**•**                  consumers retaining automobiles for shorterperiods, which could occur in periods of economic growth or stability;

 

**•**                  transmission design that results in greaterreliability;

 

**•**                  consumers driving fewer miles per year due tohigh gasoline prices; and

 

**•**                  mild weather.

 

***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:

 

**•**                  guidelines that affect dealer decisions torebuild units at the dealer rather than install remanufactured transmissions;

 

**•**                  shortened warranty periods that could reducethe demand for our products;

 

**•**                  reductions in the amount of inventory our OEMcustomers elect to retain;

 

**•**                  longer time periods before remanufacturedtransmissions are introduced for use with a particular automobile; and

 

**•**                  pricing strategies.

 

***Our Logistics Business is dependenton the strength of Cingular Wireless.***

 

CingularWireless, which accounted for 84.5% of our Logistics segment net sales for2004, operates in a highly competitive technology market.  The number of cell phones sold by Cingular,whether to new subscribers or as replacement phones to existing subscribers, isdependent on its ability to keep pace with technological advancements and toprovide service programs and prices that are attractive to current andpotential customers.  Our Logistics netsales to Cingular is substantially related to the number of phones sold by Cingular.  Consequently, any material decrease in phonessold by Cingular will materially and adversely affect our Logistics net sales.

 

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

 

Weare subject to various evolving federal, state, local and foreign environmentallaws and regulations governing, among other things, emissions to air, dischargeto waters and the generation, handling, storage, transportation, treatment anddisposal of a variety of hazardous and non-hazardous substances andwastes.  These laws and regulationsprovide for substantial fines and criminal sanctions for violations and imposeliability for the costs of cleaning up, and the damages resulting from, pastspills, disposals or other releases of hazardous substances.  In connection with our acquisition activity,we have conducted certain investigations of facilities we have acquired andtheir compliance with applicable environmental laws.  Similarly, in the course of leaseterminations, we have generally conducted investigations into potentialenvironmental impacts resulting from our operations.  These investigations revealed variousenvironmental matters and conditions that could expose us to liability or whichhave required us to undertake compliance-related improvements or remedialactivities.  Furthermore, one of ourformer subsidiaries, RPM, leased several facilities in Azusa, Californialocated within what is now a federal Superfund site.  The entity that leased the facilities to RPMhas been identified by the United States Environmental Protection Agency as oneof the many potentially responsible parties for environmental liabilitiesassociated with that Superfund site.  Anyliability we may have from this site or otherwise under environmental lawscould materially affect our business.

 

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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:

 

**•**                  quarterly variations in our results ofoperations, which may be impacted by, among other things, price renegotiationswith, or loss of, our customers;

 

**•**                  quarterly variations in the results ofoperations or stock prices of comparable companies;

 

**•**                  announcements of new products or servicesoffered by us or our competitors;

 

**•**                  changes in earnings estimates or buy/sellrecommendations by financial analysts;

 

**•**                  the stock price performance of our customers;and

 

**•**                  general market conditions or marketconditions 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 11, 2005, Aurora EquityPartners L.P. and Aurora Overseas Equity Partners I, L.P.collectively owned 5,864,687 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 highlydependent on our level of gross profit as a percentage of net sales.  Our gross profit percentage fluctuates due tonumerous factors, some of which may be outside of our control. These factorsinclude:

 

**•**                  pricing strategies;

 

**•**                  changes to our customers' warranty policies;

 

**•**                  changes in product costs from vendors;

 

**•**                  the risk of some of the items in ourinventory becoming obsolete;

 

**•**                  theavailability and quality of cores;

 

**•**                  the relative mix of products sold during theperiod; and

 

**•**                  general market and competitive conditions.

 

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

 

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

 

Oursuccess depends to a significant extent on the efforts and abilities of oursenior management team.  We have variousprograms in place to motivate, reward and retain our management team, includingbonus and stock option plans.  However,the loss of one or more of these persons could have an adverse effect on ourbusiness.  Our success and plans forfuture growth will also depend on our ability to hire, train and retain skilledworkers in all areas of our business.  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 aportion of our workforce.  Given that ourOEM customers are in the highly unionized automotive industry, our business islikely to continue to attract the attention of union organizers.  While these efforts have not been successfulto date except in the case of our former Mahwah, New Jersey facility (which weclosed in December 2003), we cannot give any assurance that we will notexperience additional union activity in the future.  Any union organization activity, ifsuccessful, could result in increased labor costs and, even if unsuccessful,could result in a temporary disruption of our production capabilities and adistraction to our management.

 

Additionally,we need qualified managers and a number of skilled employees with technicalexperience in order to operate our business successfully.  From time to time, there may be a shortage ofskilled labor, which may make it more difficult and expensive for us to attractand retain qualified employees.  If weare unable to attract and retain qualified individuals or our costs to do soincrease significantly, our operations would be materially adversely affected.

 

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

 

Anelement of our growth strategy is the acquisition and integration ofcomplementary businesses in order to broaden product offerings, capture marketshare and improve profitability.  We willnot 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 aswell as the integration of an acquired business could require us to incursignificant costs and cause diversion of our management’s time andresources.  Future acquisitions by uscould result in:

 

**•**                  dilutive issuances of equity securities;

 

**•**                  reductions in our operating results;

 

**•**                  incurrence of debt and contingentliabilities;

 

**•**                  future impairment of goodwill and otherintangibles; and

 

**•**                  other acquisition-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 ourinvestment.  In addition, to the extentthat consolidation becomes more prevalent in our industry, the prices forsuitable acquisition candidates may increase to unacceptable levels and limitour growth.

 

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***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:

 

**•**                  retain key management members and technicalpersonnel of acquired companies;

 

**•**                  successfully merge corporate cultures andoperational and financial systems; and

 

**•**                  realize sale and cost reduction synergies.

 

Furthermore,we may not realize the benefits we anticipated when we entered into thesetransactions.  In addition, after we havecompleted an acquisition, our management must be able to assume significantlygreater responsibilities, and this in turn may cause them to divert theirattention 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, 2004, our outstanding indebtedness was $112.4 million, andwe had cash and cash equivalents on hand of $18.1 million.  We expect that our indebtedness may increase substantiallyfrom time to time in the future for various reasons, including fluctuations inoperating results, capital expenditures and possible acquisitions.  Our consolidated indebtedness level couldmaterially affect our business because:

 

**•**                  a portion of our cash flow from operationsmust be dedicated to interest payments on our indebtedness and is not availablefor other purposes, which amount would increase if prevailing interest ratesrise;

 

**•**                  it may materially limit or impair our abilityto obtain financing in the future;

 

**•**                  it may reduce our flexibility to respond tochanging business and economic conditions or take advantage of businessopportunities that may arise; and

 

**•**                  our ability to pay dividends is limited.

 

Inaddition, our credit facility requires us to meet specified financial ratiosand limits our ability to enter into various transactions.  If we default on any of our indebtedness, orif we are unable to obtain necessary liquidity, our business could be adverselyaffected.

 

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

 

Asof February 11, 2005, the Aurora partnerships held approximately 28% of ourvoting power, and two of the nine members of our Board of Directors areaffiliated with the Aurora partnerships. As a result, they are able to exercise substantial influence overus.  As a result, it may be moredifficult for a third party to acquire us. See Item 12. “Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters” and Item 13. “Certain Relationshipsand 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 of Directorscan 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

 

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control of us.  Such provisionsmay also impede a transaction in which our stockholders could receive a premiumover then current market prices and our stockholders’ ability to approvetransactions that they consider in their best interests.

 

**AvailableInformation**

 

Ourinternet website is www.goatc.com.  Wemake available free of charge on our website our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and any otherfilings we make with the Securities and Exchange Commission as soon asreasonably practicable.  This informationmay also be obtained by calling the Securities and Exchange Commission at1-800-SEC-0330.  The Securities andExchange Commission also maintains an internet website that contains reports,and other information regarding issuers that file electronically with theSecurities and Exchange Commission at www.sec.gov. We will provide a copy ofany of the foregoing documents to shareholders upon request.  The contents of our website are not part ofthis annual report.

 

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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                     |       | 2008                                    |       | transmissions,  transfer cases and assorted components (1)                   |
| Springfield,  MO         |       | 200,000                     |       | 2006                                    |       | engines  and transmissions (2)                                               |
| Oklahoma  City, OK       |       | 100,000                     |       | 2019                                    |       | transmissions,  transfer cases and assorted components (1)                   |
| Oklahoma  City, OK       |       | 200,000                     |       | owned                                   |       | transmissions  (1)                                                           |
| Oklahoma  City, OK       |       | 94,000                      |       | 2008                                    |       | returned  material reclamation and disposition, core management (3)          |
| Carrollton  (Dallas), TX |       | 39,000                      |       | 2006                                    |       | radios,  telematics and instrument and display clusters (3)                  |
| Ft.  Worth, TX           |       | 221,000                     |       | 2008                                    |       | cellular  phone and accessory distribution (3)                               |
| Ft.  Worth, TX           |       | 108,000                     |       | 2005  (4)                               |       | cellular  phone accessory packaging, returns processing, test and repair (3) |
| Grantham,  England       |       | 120,000                     |       | owned                                   |       | engines  and related components (1)                                          |

 

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(1)          This facility is used by the Drivetrain Remanufacturingsegment.

(2)          This facility is used by our IndependentAftermarket business.

(3)          This facility is used by the Logistics segment.

(4)          This facility is being replaced with a new 208,000square foot facility in Fort Worth.  Thelease for the new facility expires in 2010.

 

We also lease assorted warehouses and space for our corporateoffices and computer services centers. We believe that our current facilities are adequate for the currentlevel of our activities. In the event we were to require additional facilities,we believe that we could procure acceptable facilities.

 

## **ITEM 3.**                             LEGAL PROCEEDINGS

## ** **

From time to time, we have been,and currently are, involved in various legal proceedings.  Management believes that all of ourlitigation is routine in nature and incidental to the conduct of our business,and that none of our litigation, if determined to be adverse to us, would havea material adverse effect, individually or in the aggregate, on us.

 

## **ITEM 4.**                             SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

## ** **

No matters were submitted to a vote of thestockholders of the Company during the quarter ended December 31, 2004.

 

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**PART II**

 

## **ITEM 5.**                             MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS

## ** **

Our common stock has been traded on the NasdaqNational Market under the symbol “ATAC” since our initial public offering inDecember 1996.  As of February 11, 2005,there were approximately 64 record holders of our common stock.  The following table sets forth for theperiods indicated the range of high and low sale prices of the common stock asreported by Nasdaq: 

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2004           |       |     |       |    |       |
| First quarter  |       | $        | 15.50      |    | $          | 13.08 |   |
| Second quarter |       | 17.30    |       | 13.98   |       |
| Third quarter  |       | 16.75    |       | 11.35   |       |
| Fourth quarter |       | 18.36    |       | 12.01   |       |
| 2003           |       |     |       |    |       |
| First quarter  |       | $        | 15.75      |    | $          | 8.91 |   |
| Second quarter |       | 12.35    |       | 6.51    |       |
| Third quarter  |       | 13.50    |       | 9.80    |       |
| Fourth quarter |       | 15.60    |       | 11.29   |       |

 

On February 11, 2005, the last sale price of our commonstock, as reported by Nasdaq, was $14.82 per share.

 

We have not paid cash dividends on the common stock todate.  Because we currently intend toretain any earnings to provide funds for the operation and expansion of ourbusiness and for the servicing and repayment of indebtedness, we do not intendto pay cash dividends on the common stock in the foreseeable future.  Furthermore, as a holding company with noindependent operations, the ability of Aftermarket Technology Corp. to pay cashdividends is dependent upon the receipt of dividends or other payments from oursubsidiaries.  The agreement for our bankcredit facility contains certain covenants that, among other things, prohibitthe payment of dividends.  SeeItem 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations-Liquidity andCapital Resources.”  Any determination topay cash dividends on the common stock in the future will be at the solediscretion of our Board of Directors.

 

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

## ** **

The selected financial data presented below withrespect to the statements of income data for the years ended December 31,2004, 2003 and 2002 and the balance sheet data as of December 31, 2004 and2003 are derived from the Consolidated Financial Statements of the Company thathave been audited by Ernst & Young LLP, independent registered publicaccounting firm, 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 income data for the years ended December 31, 2001 and 2000and the balance sheet data as of December 31, 2002, 2001 and 2000, arederived from the Consolidated Financial Statements of the Company that havebeen audited by Ernst & Young LLP, independent registered publicaccounting firm, but are not included herein. The data provided should be read in conjunction with the ConsolidatedFinancial Statements and related notes, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and other financial informationincluded in this Annual Report.  Duringthe fourth quarter of 2004, the Company disposed of an operating unit from itsDrivetrain Remanufacturing segment which remanufactured transmissions forGeneral Motors.  This business, alongwith our Distribution Group subsidiary, which was sold in October 2000, areclassified as discontinued operations and are excluded from the selectedfinancial data presented below.

 
| ** **                                                                             | ** ** | **Year Ended December 31,**               | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                             | ** ** | **(In thousands, except per share data)** | ** ** |
| **Statements  of Income Data:**                                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Net sales                                                                              |       | $                                         | 395,577    |   | $ | 339,709 |   | $ | 392,453 |   | $ | 381,633 |   | $ | 361,442 |   |
| Cost of sales                                                                          |       | 293,630                                   |       | 244,997 |   | 256,621 |   | 248,362 |   | 241,379 |   |
| Exit, disposal,  certain severance and other charges (1)                          |       | —                                    |       | 200 |   | — |   | 216 |   | 9,134 |   |
| Gross profit                                                                           |       | 101,947                                   |       | 94,512 |   | 135,832 |   | 133,055 |   | 110,929 |   |
| Selling, general  and administrative expense                                           |       | 51,598                                    |       | 50,987 |   | 56,618 |   | 57,315 |   | 55,122 |   |
| Amortization of  intangible assets                                                     |       | 125                                       |       | 299 |   | 333 |   | 4,376 |   | 4,602 |   |
| Exit, disposal,  certain severance and other charges (credits) (1)                     |       | 4,031                                     |       | 8,273 |   | (277 | ) | 5,114 |   | 23,450 |   |
| Income from  operations                                                                |       | 46,193                                    |       | 34,953 |   | 79,158 |   | 66,250 |   | 27,755 |   |
| Interest income                                                                        |       | 2,658                                     |       | 2,863 |   | 2,769 |   | 1,524 |   | 234 |   |
| Interest expense                                                                       |       | (7,271                                    | )          | (8,169 | ) | (12,280 | ) | (22,377 | ) | (24,770 | ) |
| Other income  (expense), net                                                           |       | 170                                       |       | 371 |   | (491 | ) | 747 |   | (60 | ) |
| Redemption of  senior notes                                                            |       | —                                    |       | — |   | (3,022 | ) | — |   | — |   |
| Termination of  credit facility                                                        |       | —                                    |       | — |   | (1,480 | ) | — |   | — |   |
| Income tax  expense                                                                    |       | (14,955                                   | )          | (11,146 | ) | (22,174 | ) | (17,517 | ) | (1,473 | ) |
| Income from  continuing operations (2)                                            |       | $                                         | 26,795     |   | $ | 18,872 |   | $ | 42,480 |   | $ | 28,627 |   | $ | 1,686 |   |
| Income from  continuing operations per diluted share (3)                               |       | $                                         | 1.25       |   | $ | 0.77 |   | $ | 1.76 |   | $ | 1.36 |   | $ | 0.08 |   |
| Shares used in  computation of income from continuing operations per diluted share (3) |       | 21,411                                    |       | 24,486 |   | 24,119 |   | 21,059 |   | 21,163 |   |
|                                                                                   |       |                                      |       |   |   |   |   |   |   |   |   |
| **Other  Data:**                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                  |       | $                                         | 11,081     |   | $ | 13,439 |   | $ | 12,476 |   | $ | 13,256 |   | $ | 11,380 |   |

 

18

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| ** **                                   | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                   | ** ** | **(In thousands)**          | ** ** |
| **Balance  Sheet Data:**                     |       |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                   |       | $                           | 18,085     |   | $ | 59,628 |   | $ | 65,504 |   | $ | 555 |   | $ | 2,035 |   |
| Working capital,  continuing operations      |       | 103,879                     |       | 119,062 |   | 132,053 |   | 50,527 |   | 53,211 |   |
| Property, plant  and equipment, net          |       | 52,835                      |       | 55,022 |   | 52,910 |   | 51,211 |   | 44,930 |   |
| Total assets                                 |       | 389,995                     |       | 447,284 |   | 448,085 |   | 395,969 |   | 406,827 |   |
| Current and  long-term debt outstanding      |       | 112,406                     |       | 127,351 |   | 164,613 |   | 197,789 |   | 227,511 |   |
| Long-term  liabilities, less current portion |       | 122,225                     |       | 134,545 |   | 159,561 |   | 181,694 |   | 213,537 |   |
| Total  stockholders’ equity             |       | 186,373                     |       | 229,251 |   | 206,435 |   | 109,335 |   | 80,239 |   |
|                                              |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          SeeItem 8. “Consolidated Financial Statements and Supplementary Data-Note 20” fora description of exit, disposal, certain severance and other charges (credits).

 

(2)          Incomefrom continuing operations for the years ended December 31, 2004, 2003, 2002,2001 and 2000 excludes gain (loss) from discontinued operations, net of incometaxes, of $(21,019), $1,639, $3,947, $(59) and $(98,569), respectively.

 

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

 

19

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**ITEM 7.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

†The following discussion should beread in conjunction with our consolidated financial statements and notesthereto included elsewhere in this Annual Report.  See Item 8. “Consolidated FinancialStatements and Supplementary Data.”

 

Readers are cautioned that thefollowing discussion contains certain forward-looking statements and should beread in conjunction with the “Special Note Regarding Forward-Looking Statements”appearing at the beginning of this Annual Report.

 

# **Discontinued Operations**

#  

In 2004, General Motors resourced its remanufactured transmissionprogram from our facility located in Gastonia, North Carolina, and correspondingly,we closed this facility.  In accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 144, *Accounting for the Impairment or Disposal of LongLived Assets*, upon the abandonment of the facility in the fourthquarter of 2004, the operations of this business have been reflected in theaccompanying consolidated financial statements and management’s discussion andanalysis as discontinued operations.

 

# **Overview**

#  

*Operations. *We provide remanufacturing, third-partylogistics and electronics repair services to the light vehicle aftermarket andconsumer electronics industries.  Throughour Drivetrain Business, we provide customized remanufacturing services focusedon complex light vehicle drivetrain products, such as automatic transmissionsand engines, that are primarily sold through the service, repair and partsorganizations of our customers.  Throughour Logistics Business, we offer value-added supply-chain services to theconsumer electronics and light vehicle aftermarket industries, includingfulfillment, returns management, reverse logistics, repair and other relatedservices.  We generally provide ourservices under contractual relationships with customers that distributehigh-value, complex products.

 

Demand for replacement or repair of drivetrainproducts is a function of numerous factors, such as the number of vehicles inoperation, the average age of vehicles and the average number of miles drivenper vehicle.  Within this overall market,factors that influence demand for our remanufactured products, when compared torepair services, include product complexity, OEM warranty policies governingreplace versus repair decisions made by their dealers, and the length ofwarranty periods.  In addition, webelieve demand for our remanufacturing services, when compared to repairservices, is also increased by the relatively limited number of qualifiedrepair technicians and repair test equipment, and the increase in customerservice demands.  The demand for ourproducts is not tied to the cyclical nature of new light vehicle sales.  In late 2002 and early 2003, certain of our domesticautomotive OEM customers increased their focus on the reduction of near-termwarranty costs, which resulted in revisions to their policies impactingwarranty repair-versus-replace decisions that negatively impacted demand forour remanufactured drivetrain products as dealers replaced fewer transmissionswith remanufactured units.  We believethat any material impact related to these policy decisions has been reflected inour results of operations for the year ended December 31, 2004 and further materialreductions in demand for our products as a result of these policy decisions arenot anticipated.

 

Our DrivetrainBusiness has been our primary business since our formation.  For the year ended December 31, 2004, netsales from our Drivetrain Remanufacturing segment was $271.2 million, or 68.6%of our total net sales.  In addition, wealso sell remanufactured transmissions and engines to independent aftermarketcustomers domestically.  For the year endedDecember 31, 2004, net sales from this portion of our business, which isnot a reportable segment, was $20.0 million, or 5.1% of our total net sales.  We believe the independent aftermarketrepresents a growth opportunity for our remanufactured drivetrain products and haveactive programs targeted at further penetration of this market.

 

20

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OurLogistics Business provides a number of value-added services that generateoperational efficiencies for our customers through the outsourcing of certainsupply chain functions.  Specifically,our Logistics Business provides value-added warehousing and distribution,reverse logistics, turnkey order fulfillment, electronic equipment testing, andrefurbishment and repair services.  Wegenerally do not take ownership of inventory. As a result, we do not face the risk of inventory obsolescence and we facerelatively less working capital needs than other logistics service providerswho take ownership of inventory.  Additionally,we do not make substantial capital investments in transportation equipment orfacilities.

 

Sales andgrowth in our Logistics segment have largely: (i) been related to services weprovide for Cingular Wireless (historically through AT&T Wireless, whichwas acquired by Cingular in October 2004), (ii) been dependent on demand forcellular phones and services and Cingular’s share of cellular service volumeand (iii) benefited from upgrades in cellular telephone technology throughincreased replacement demand for more advanced handsets, from any increases inthe number of Cingular’s subscribers and from any expansion of our serviceofferings.  In mid-2003, shifts in supplychain management strategy by AT&T Wireless resulted in their decision toconsolidate their printing requirements and re-source the bulk fulfillment oftheir collateral (marketing) materials from us to the printer of thosematerials.  Since Cingular’s acquisitionof AT&T Wireless, we have been designated to launch additional business withCingular, expanding on certain lines of service previously provided.  These services are expected to grow in 2005but will be partially offset by the loss of the accessory packaging servicesthat we had previously provided to AT&T Wireless.  In addition to new business from Cingular, wehave signed agreements with a number of new logistics customers in 2004 thatare expected to generate additional sales in 2005.  We continue to believe our Logistics Businessrepresents a key growth opportunity and we are actively pursing customerdiversification.  For the year endedDecember 31, 2004, net sales from our Logistics Business was $104.4million, or 26.4% of our total net sales, of which Cingular (including AT&TWireless) accounted for 84.5%.

 

*Financing. *On December 16,2003, we initiated a tender offer to purchase up to 2,638,500 shares of ouroutstanding common stock at a price not greater than $15.75 per share and notless than $13.00 per share.  In addition,we agreed to purchase up to 1,169,409 shares at the final tender offer pricefrom two of our significant stockholders, Aurora Equity Partners L.P. andAurora Overseas Equity Partners I, L.P., who did not participate in the tenderoffer.  The maximum number of shares tobe purchased in the tender offer and from the Aurora partnerships represented15.7% of our outstanding common stock. The tender offer was over-subscribed, with 3,538,544 shares beingtendered and not withdrawn, and on January 26, 2004 we completed the purchaseof 74.56% of the total shares tendered, at the price of $15.75 per share.  On February 10, 2004, we completed thepurchase of the 1,169,409 shares from the Aurora partnerships at the same priceas the final tender offer price of $15.75 per share.  The cost of these repurchases totaled $60.0million plus approximately $1.2 million of fees and expenses and was fundedwith available cash on hand.  On February10, 2004, immediately following the repurchase of the shares from the Aurorapartnerships, we had total debt outstanding of $127.3 million, cash and cashequivalents on hand of $6.5 million and $36.9 million available to borrow onour $40.0 million revolving credit facility.

 

# **Components of Income and Expense**

#  

*Net Sales.*  In our Drivetrain Remanufacturing segment andindependent aftermarket business, we recognize sales, primarily from the saleof remanufactured transmissions and remanufactured engines, at the time ofshipment to the customer and, to a lesser extent, upon the completion orperformance of a service.  In ourLogistics segment, sales are primarily related to providing:

 

•                  value-addedwarehouse and distribution services;

 

•                  turnkeyorder fulfillment and information services;

 

•                  returnedmaterial reclamation, disposition, test and repair services;

 

•                  coremanagement services; and

 

•                  automotiveelectronic components remanufacturing and distribution services,

 

21

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and are generally recognized uponcompletion or performance of those services.

 

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

 

*Selling,General & Administrative Expense.*  Selling, general and administrative (“SG&A”)expenses generally are those costs not directly related to the productionprocess or the performance of a service  generating sales and include all selling,marketing and customer service expenses as well as expenses related to generalmanagement, finance and accounting, information services, human resources,legal, and corporate overhead expense.

 

*Amortization ofIntangible Assets.* Expense for amortization of intangibles primarily relates to theamortization of definite lived intangible assets.

 

*Exit, Disposal,Certain Severance and Other Charges (Credits).*  As part of our lean and continuousimprovement philosophy, we haveperiodically identified opportunities to right-size, rationalize andconsolidate operations or manufacturing capacity, alter our processes in aneffort to improve customer service, and fix or discontinue lower-margin productlines, the purpose of which is to improve profitability, reduce costs,streamline operations and improve efficiency.  As a result of this process, we may incurcertain costs, primarily associated with restructuring and other initiativesthat include consolidation of operations or facilities, managementreorganization and delayering, rationalization of certain products, productlines and services and asset impairments.  In management’s opinion these costs aregenerally incremental to our ongoing operation and are separated on ourstatements of income in order to improve the clarity of our reportedoperations.

 

Examples of these costs include severance benefitsfor terminated employees, lease termination and other facility exit costs,moving and relocation costs, losses on the disposal of fixed assets and writedown of inventories.  The components ofthese charges are computed based on actual cash payouts, our estimate of therealizable value of the affected tangible and intangible assets and estimatedexit costs including severance and other employee benefits.

 

These charges can vary significantly from period toperiod and as a result, we may experience fluctuations in our reported netincome and earnings per share due to the timing of these actions.  See Item 8. “Consolidated Financial Statementsand Supplementary Data - Note 20” for a further discussion of thesecosts.

 

### ***Critical AccountingPolicies and Estimates***

###  

Our financial statements are based on theselection and application of significant accounting policies, some of whichrequire management to make estimates and assumptions.  We believe that the following are some of themore critical judgmental areas in the application of our accounting policiesthat currently affect our financial condition and results of operations.

 

*Allowance for Doubtful Accounts.*  We maintain allowances for doubtful accountsfor estimated losses resulting from the failure of our customers to makerequired payments.  We evaluate theadequacy of our allowance for doubtful accounts and make judgments andestimates in determining the appropriate allowance at each reporting periodbased on historical experience, credit evaluations, specific customercollection issues and the length of time a receivable is past due.  Sinceour accounts receivable are often concentrated in a relatively few number ofcustomers, a significant change in the liquidity or financial position of any oneof these customers could have a material adverse impact on our financialstatements. For the years ended December 31, 2004, 2003 and 2002, ourwrite-offs were approximately $1.3 million, $10 thousand and $0.2 million, respectively.As of December 31, 2004, we had $51.3 million of accounts receivable, net ofallowance for doubtful accounts of $0.8 million.

 

22

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*Inventory Valuation.*  We make adjustments to write down ourinventories for estimated excess and obsolete inventory equal to the differencebetween the cost of the inventory and the estimated market value based onassumptions about market conditions, future demand and expected usage rates.Changes in economic conditions, customer demand, product introductions orpricing changes can affect the carrying value of our inventory. Demand for ourproducts has fluctuated in the past and may do so in the future, which couldresult in an increase in excess quantities on hand.  If actual market conditions are lessfavorable than those projected by management, causing usage rates to vary fromthose estimated, additional inventory write-downs may be required. Although noassurance can be given, these write-downs would not be expected to have amaterial adverse impact on our financial statements. For the years endedDecember 31, 2004, 2003 and 2002, we recorded a charge (income) for excess andobsolete inventory of approximately $2.0 million, $1.2 million and $(0.3)million, respectively.  As of December31, 2004 we had inventory of $80.6 million, net of a reserve for excess andobsolete inventory of $6.4 million.

 

*Warranty Liability.*  We provide an allowance for the estimated costof product warranties at the time revenue is recognized.  While we engage in extensive product qualityprograms and processes, including inspection and testing at various stages ofthe remanufacturing process and the testing of each finished assembly onequipment designed to simulate performance under operating conditions, ourwarranty obligation is affected by the number of products sold, historical andanticipated rates of warranty claims and costs per unit and actual productfailure rates.  Additionally, weparticipate in the tear-down and analysis of returned products with certain ofour customers to assess responsibility for product failures. For the yearsended December 31, 2004 and 2003, we (i) recorded reserves for estimatedwarranty costs of approximately $5.6 million and $4.6 million, respectively and(ii) paid and/or settled warranty claims of approximately $6.2 million and $4.4million, respectively. Should actual product failure rates differ from ourestimates, revisions to the estimated warranty liability may be required.Although no assurance can be given, these revisions would not be expected tohave a material adverse impact on our financial statements.

 

*Goodwill and Indefinite Lived Intangible Assets.* Effective with the adoption of SFAS No. 142,goodwill and indefinite lived intangible assets are no longer amortized,however they are tested annually, or more frequently if events or changes incircumstances indicate that goodwill may be impaired, and if the carrying valueis greater than the fair value an impairment loss is recorded.  Impairment is tested at a level of reportingreferred to as a reporting unit, which generally is an operating segment or acomponent of an operating segment as defined in paragraph 10 of SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information*.  Inaccordance with paragraph 30 of SFAS No. 142, certain components of anoperating segment with similar economic characteristics are aggregated anddeemed a single reporting unit.  Inestimating the fair value of our reporting units, we utilize a valuationtechnique based on multiples of projected cash flow, giving consideration tounusual items, cost reduction initiatives, new business initiatives and otherfactors that generally would be considered in determining value.  Actual results may differ from theseestimates under different assumptions or conditions.  If we were to lose a key customer within aparticular operating segment or its sales were to decrease materially,impairment adjustments that may be required could have a material adverseimpact on our financial statements. As of December 31, 2004, we have recorded goodwillof approximately $148.6 million. See Item 8. "Consolidated FinancialStatements and Supplementary Data - Note 16" for a discussion of theimpairment related to our disposed operating unit.

 

# **Segment Reporting**

#  

We have two reportable segments: theDrivetrain Remanufacturing segment and the Logistics segment.  Our Drivetrain Remanufacturing segmentprimarily sells remanufactured transmissions directly to Ford, Honda, DaimlerChryslerand certain other 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 DrivetrainRemanufacturing segment sells select remanufactured engines to certain EuropeanOEMs and domestically to DaimlerChrysler. Through our Logistics segment, we are:

 

•     aprovider of value-added warehouse, distribution and reverse logistics, test andrepair services, turnkey order fulfillment and information services primarily forCingular (historically through AT&T Wireless, which was acquired byCingular in October 2004) and, to a lesser extent, certain other customers inthe wireless electronics industry;

 

23

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•     aprovider of logistics and reverse logistics services and automotive electroniccomponents remanufacturing, primarily for General Motors, Delphi and Visteon;and

 

•     aprovider of returned material reclamation and disposition services and coremanagement services to General Motors and, to a lesser extent, Ford and Mazda.

 

EffectiveJanuary 1, 2004, we revised our internal reporting to align with our currentorganization structure.  As a result, theoperating activities of our independent aftermarket business, whichremanufactures and distributes domestic and foreign engines and domestictransmissions to independent aftermarket customers, is now reflected as “Other”and is not reportable for segment reporting purposes.  Additionally, select transmissions areremanufactured at operating units included in our Drivetrain Remanufacturingsegment and are transferred to our independent aftermarket business for saleinto the independent aftermarket at a fixed unit price that approximatescost.  The results for the prior periodshave also been adjusted to reflect this change.

 

We evaluatethe performance of each segment based upon income from operations.  Our reportable segments and our independentaftermarket business are each managed and measured separately primarily due tothe differing customers, production processes, products sold and distributionchannels.

 

**Results of Operations**

 

On October 26, 2004, AT&T Wireless, which represented20.2%, 17.1% and 19.6% of our net sales for the nine months endedSeptember 30, 2004 and the years ended December 31, 2003 and 2002,respectively, was acquired by Cingular, which became one of our customers inlate 2003.  In this “Results ofOperations” discussion, references to AT&T Wireless and Cingular reflectthe activity of those customers as if they were separate customers.

 

The following table sets forth financialstatement data expressed in millions of dollars and as a percentage of netsales. 

 
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net sales                                                          |       | $                                | 395.6      |   | 100.0 | % | $ | 339.7 |   | 100.0 | % | $ | 392.5 |   | 100.0 | % |
| Gross profit                                                       |       | 101.9                            |       | 25.8 |   | 94.5 |   | 27.8 |   | 135.8 |   | 34.6 |   |
| SG&A expense                                                   |       | 51.6                             |       | 13.0 |   | 51.0 |   | 15.0 |   | 56.6 |   | 14.4 |   |
| Exit, disposal, certain severance and other  charges (credits) (1) |       | 4.0                              |       | 1.0 |   | 8.5 |   | 2.5 |   | (0.3 | ) | (0.1 | ) |
| Income from operations                                             |       | 46.2                             |       | 11.7 |   | 35.0 |   | 10.3 |   | 79.2 |   | 20.2 |   |
| Interest expense                                                   |       | (7.3                             | )          | (1.9 | ) | (8.2 | ) | (2.4 | ) | (12.3 | ) | (3.1 | ) |
| Income from continuing operations                                  |       |                             | 26.8       |   | 6.8 |   |   | 18.9 |   | 5.6 |   |   | 42.5 |   | 10.8 |   |

 

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(1)          Includes$0.2 million of inventory write-downs classified as cost of sales in thestatement of income for 2003.

 

***YearEnded December 31, 2004 Compared to the Year Ended December 31, 2003***

 

Income from continuing operations increased $7.9 million, or 41.8%, to$26.8 million in 2004 from $18.9 million in 2003.  Income from continuing operations per dilutedshare was $1.25 in 2004 as compared to $0.77 in 2003.  Our results for 2004 included (i) exit,disposal, certain severance and other charges of $2.5 million (net of tax) and(ii) an income tax benefit of $0.4 million related to the favorable resolutionof an IRS audit of our 1999 tax year. For 2003, our results included exit, disposal, certain severance andother charges of $5.4 million (net of tax). Excluding these items, income from continuing operations increasedprimarily as a result of:

 

•     the ramp-up of our Hondatransmission remanufacturing program, growth in the logistics services weprovided to AT&T Wireless, and other new business initiatives;

 

24

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•     benefits from our on-goinglean and continuous improvement program and other cost reduction initiatives;and

 

•     an increase in our baselogistics volume with AT&T Wireless,

 

partially offset by:

 

•     price concessions provided in2003 to certain customers in our Drivetrain Remanufacturing and Logisticssegments in order to extend certain agreements;

 

•     a reduction in volume due tothe run-out of certain programs in our Drivetrain Remanufacturing and Logisticssegments, including the bulk collateral fulfillment program for AT&TWireless (substantially completed during the third quarter of 2003), the Kiatransmission remanufacturing program (substantially completed during the secondquarter of 2003), the material recovery and core qualification programs forFord (substantially completed during the second and third quarters of 2003,respectively), and an OnStar telematics modification program for Delphi andGeneral Motors;

 

•     volume declines in our DrivetrainRemanufacturing segment due to the implementation in 2003 by certain of our OEMcustomers of new policies governing repair-versus-replace decisions made bytheir dealers in warranty applications, which resulted in dealers replacingfewer transmissions with remanufactured units;

 

•     a reduction in volume ofDaimlerChrysler remanufactured transmissions resulting from DaimlerChrysler’sdecision not to launch new model years into the remanufacturing program; and

 

•     inventory reductions atcertain of our customers.

 

*Net Sales.*

 

Net sales increased $55.9 million, or 16.5%, to $395.6 million for 2004from $339.7 million for 2003.  Thisincrease was primarily due to the ramp-up of our Honda transmissionremanufacturing program, AT&T Wireless test and repair program and othernew business initiatives, increases in our base logistics volume with AT&TWireless and increases in sales of remanufactured transmissions in theindependent aftermarket, partially offset by:

 

•     a reduction in volume due tothe run-out of certain programs in our Drivetrain Remanufacturing and Logisticssegments, including the bulk collateral fulfillment program for AT&TWireless, the Kia transmission remanufacturing program, the material recoveryand core qualification programs for Ford, and an OnStar telematics modificationprogram for Delphi and General Motors;

 

•     volume declines in ourDrivetrain Remanufacturing segment due to the implementation in 2003 by certainof our OEM customers of new policies governing repair-versus-replace decisionsmade by their dealers in warranty applications, which resulted in dealersreplacing fewer transmissions with remanufactured units;

 

•     a reduction in volume ofDaimlerChrysler remanufactured transmissions resulting from DaimlerChrysler’sdecision not to launch new model years into the remanufacturing program; and

 

•     price concessions provided in2003 to certain customers in our Drivetrain Remanufacturing and Logisticssegments in order to extend certain agreements.

 

Of our net sales for 2004 and 2003, Ford accounted for 29.6% and 38.6%,AT&T Wireless accounted for 21.1% and 17.1% (22.3% and 17.2% forCingular/AT&T Wireless combined), Honda accounted for 19.4% and 7.5% andDaimlerChrysler accounted for 14.7% and 20.6%.

 

# ***Gross Profit.***

#  

Gross profit increased $7.4 million, or 7.8%, to $101.9 millionfor 2004 from $94.5 million for 2003. The increase was primarily the result of the factors described aboveunder “Net Sales” combined with benefits from our on-going lean and continuousimprovement program and other cost reduction initiatives.

 

25

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Primarily as a result of priceconcessions coupled with the mix of new business in our Logistics segment, grossprofit as a percentage of net sales decreased to 25.8% for 2004 from 27.8% for2003.

 

*SG&A Expense.*

 

SG&A expense increased $0.6 million, or 1.2%, to $51.6 millionfor 2004 from $51.0 million for 2003. The increase was primarily the result of compensation expense related toour management incentive compensation program (which was zero in 2003), growthsupport costs in our Drivetrain Remanufacturing segment and independentaftermarket business and an increase in compliance costs associated with Section 404of the Sarbanes-Oxley Act, partially offset by benefits from our on-going leanand continuous improvement program and other cost reduction initiatives.  As a percentage of net sales, SG&Aexpense decreased to 13.0% for 2004 from 15.0% for 2003.

 

*Exit, Disposal, Certain Severance and OtherCharges.*

 

During 2004, we recorded $4.0 million ($2.5 million net of tax) ofexit, disposal, certain severance and other charges including (i) $3.3 millionof certain non-cash stock-based compensation costs related to modifications to unexercised stock optionspreviously granted to our former Chief Executive Officer and Chief FinancialOfficer, per the provisions of the Financial Accounting Standards Board’s Interpretation No. 44, *Accounting for Certain Transactions Involving StockCompensation (an Interpretation of APB Opinion No. 25)*, (ii) $0.8 million of facility exit and othercosts, (iii) $0.5 million of certain non-cash stock-based compensationcosts related to the hiring of our new CEO, (iv) $0.3 million of severance andrelated costs associated with the reorganization and upgrade of certain management functions and other cost reductioninitiatives, and (v) $0.3 million of relocation costs related to thehiring of our new CFO, partially offset by a gain of $1.2 million attributed to the reversal of a previouslyestablished provision related to the Drivetrain Remanufacturing segment for apotential non-income state tax liability upon the finalization of an audit bythe state tax authorities.

 

During 2003, we recorded $8.5 million($5.4 million net of tax) of these costs including (i) $3.6 million for ourDrivetrain Remanufacturing segment related to the closure of our Mahwah, NewJersey facility, consisting of $2.1 million of exit and other costs primarilyassociated with the relocation to a facility in Oklahoma City, $1.2 million forseverance and related costs, $0.6 million related to the write-off of certainfixed assets and $0.2 million of inventory write-downs (classified as cost of sales),partially offset by income of $0.5 million related to the reversal of anaccrual established during 2001 for expected idle capacity costs at this plant,(ii) $3.1 million consisting of $2.6 million of compensation costs payable toour former CEO and CFO and $0.5 million of costs related to the hiring of ournew CEO and CFO, (iii) $1.3 million primarily related to severance and relatedcosts associated with the streamlining of certain operations and thereorganization and de-layering of certain management functions, and (iv) $0.5million primarily related to the write-down of certain customized softwarereflected as fixed assets within the Logistics segment.

 

Wecurrently expect to record a total of approximately $0.6 million to $1.0million of exit, disposal,certain severance and other charges during the first and second quarters of 2005,primarily related to activities in our logistics segment and independentaftermarket business.  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 additional costs of a nature described above, which would be offsetover time by the projected cost savings.

 

# ***Income from Operations.***

#  

Income from operations increased $11.2 million, or 32.0%, to $46.2million for 2004 from $35.0 million for 2003. This increase was primarily the result of the combination of factorsdescribed above under “Gross Profit” and “Exit, Disposal, Certain Severance andOther Charges.”

 

26

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*Interest Income.*

 

Interest income decreased $0.2 million, or 6.9%, to $2.7 millionfor 2004 from $2.9 million for 2003. This decrease was primarily due to our lower cash balances invested incash and cash equivalents during 2004 as compared to 2003, as a result of thestock repurchases we made during 2004.

 

*Interest Expense.*

 

Interest expense decreased $0.9 million, or 11.0%, to $7.3 millionfor 2004 from $8.2 million for 2003. This decrease was primarily due to a reduction in debt outstanding.

 

*Income Tax Expense.*

 

Our effective income tax rate decreased to 35.8% in 2004 from 37.1% for2003.  The decrease was primarily due toan income tax benefit of $0.4 million recorded in 2004 related to the favorableresolution of an IRS audit of our 1999 tax year.  Based on our current estimate of thedistribution of taxable income by state, we expect an effective income tax rateof approximately 39% for 2005.

 

*Discontinued Operations.*

 

In 2004, General Motors’ consolidated its vendor base and resourced itsremanufactured transmission program from our facility located in Gastonia,North Carolina, in connection with which we closed this facility and recorded apre-tax charge of $28.7 million, which included  (i) $22.1 million for the impairment ofgoodwill assigned to this reporting unit, (ii) $1.9 million of costsrelated to the exit from this facility and the termination of our contract withGM, (iii) $1.7 million of inventory write-downs, (iv) $1.5 million offixed asset impairment charges and (v) $1.5 million for severance andrelated costs.  In accordance with SFAS144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, the results of this operation have beenreclassified to discontinued operations for all periods presented.

 

Also in 2004, we recorded an additional loss of $0.8 million related toour former Distribution Group business, which we sold in October 2000, whichincluded (i) a charge of $2.2 million for a valuation allowance related to theexpected expiration of a capital loss carryforward, (ii) a non-cash tax benefitof $1.3 million based upon the resolution of prior year income tax issues withrespect to the tax basis of the Distribution Group and (iii) income of  $0.1 million (net of income taxes of $37,000)based upon updated information regarding obligations and other costs related tothe sale of this business.

 

# ***Reportable Segments***

#  

Drivetrain Remanufacturing Segment

 

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

 
| ** **     | ** ** | **Year ended December 31,** | ** ** |
|----------------|------------|-----------------------------|------------|
| ** **     | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| Net sales      |       | $                           | 271.2      |   | 100.0 | % | $ | 241.0 |   | 100.0 | % |
| Segment profit |       | $                           | 40.5       |   | 14.9 | % | $ | 22.9 |   | 9.5 | % |

 

*Net Sales.*  Net sales increased $30.2 million, or 12.5%,to $271.2 million for 2004 from $241.0 million for 2003.  The increase was primarily due to a $51.1million increase in sales to Honda ($76.7 million for 2004 from $25.6 millionfor 2003) resulting from growth in the transmission remanufacturing program we launched in late 2002, partially offset by:

 

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•     a reduction in volume of remanufacturedtransmissions sold to DaimlerChrysler and Ford due to the implementation in2003 of new policies governing repair-versus-replace decisions made by theirdealers in warranty applications, which resulted in dealers replacing fewertransmissions with remanufactured units;

 

•     a reduction in volume of DaimlerChryslerremanufactured transmissions resulting from DaimlerChrysler’s decision not tolaunch new model years into the remanufacturing program;

 

•     the run out of the Kia transmissionremanufacturing program (which was substantially completed in the secondquarter of 2003); and

 

•     price concessions provided in 2003 to certaincustomers in order to extend certain agreements.

 

Of our segment net sales for 2004 and 2003, Ford accounted for 42.9%and 52.0%, Honda accounted for 28.3% and 10.6% and DaimlerChrysler accountedfor 21.5% and 29.0%, respectively.

 

*Exit, Disposal, Certain Severance and OtherCharges*.  During2004, we recorded a net credit of $0.7 million consisting of income of $1.2million due to the reversal of apreviously established provision for a potential non-income state tax liabilityupon the finalization of an audit by the state tax authorities, partiallyoffset by (i) $0.4 million ofcosts primarily related to the termination of an independent contractoragreement and (ii) $0.1 million of severance and related costs primarilyassociated with the reorganization and upgrade of certain management functions and other cost reductioninitiatives.

 

During 2003, we recorded $4.2 million of costs including (i) $3.6million related to the closure of our transmission remanufacturing facility locatedin Mahwah, New Jersey, consisting of (a) $2.1 million of exit and othercosts primarily associated with the relocation to a facility in Oklahoma City,Oklahoma, (b) $1.2 million of severance and related costs, (c) $0.6million related to the write-off of certain fixed assets and (d) $0.2million of inventory write-downs, partially offset by income of $0.5 millionrelated to the reversal of a special charge accrual established during 2001 forexpected idle capacity costs at the New Jersey plant, and (ii) $0.6 millionprimarily related to severance and related costs associated with thestreamlining of certain operations and the reorganization and de-layering ofcertain management functions within the segment.

 

*Segment Profit*.  Segment profit increased $17.6 million, or 76.9%,to $40.5 million (14.9% of segment net sales) for 2004 from $22.9 million(9.5% of segment net sales) for 2003. Segment profit reflects the previously discussed net credit of $0.7million and costs of $4.2 million recorded during 2004 and 2003, respectively.The increase in segment profit resulted primarily from the factors describedabove under “Net Sales” and under "Exit, Disposal, Certain Severance and OtherCharges," combined with the benefits resulting from our lean and continuousimprovement program and other cost reductions.

 

### ***LogisticsSegment***

 

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

 
| ** **     | ** ** | **Year ended December 31,** | ** ** |
|----------------|------------|-----------------------------|------------|
| ** **     | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| Net sales      |       | $                           | 104.4      |   | 100.0 | % | $ | 81.7 |   | 100.0 | % |
| Segment profit |       | $                           | 15.7       |   | 15.0 | % | $ | 22.0 |   | 26.9 | % |

* *

*Net Sales.*  Net sales increased $22.7 million, or 27.8%,to $104.4 million for 2004 from $81.7 million for 2003.  This increase was primarily attributable tonew business programs, including our test and repair program and other programswith AT&T Wireless and our direct fulfillment and exchange

 

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programs with Cingular,combined with an increase in our base fulfillment business with AT&TWireless, partially offset by (i) a reduction in volume due to the run-out ofthe bulk collateral fulfillment program for AT&T Wireless (substantiallycompleted during the third quarter of 2003), the material recovery and corequalification programs for Ford (substantially completed during the second andthird quarters of 2003, respectively, and an OnStar telematics modificationprogram for Delphi and General Motors and (ii) a price reduction granted toAT&T Wireless in exchange for extending our agreement through July, 2006.  Of our segment net sales for 2004 and 2003,AT&T Wireless accounted for 79.8% and 71.1%, respectively (84.5% and 71.5%for Cingular/AT&T Wireless combined).

 

*Exit and Certain Severance Charges*.  During 2004, we recorded $0.1 million offacility exit costs and $0.1 of severance and related costs associated with cost reduction initiatives.

 

During 2003, we recorded costs of $0.9million consisting of (i) $0.5 million primarily related to the write-down ofcertain customized software reflected as fixed assets and (ii) $0.4 million ofseverance and related costs associated with the streamlining of certainoperations and the reorganization and de-layering of certain managementfunctions within the segment.

 

*Segment Profit*.  Segment profit decreased $6.3 million,or 28.6%, to $15.7 million (15.0% of segment net sales) for 2004 from $22.0 million(26.9% of segment net sales) for 2003.  Segmentprofit reflects the previously discussed costs of $0.2 million and $0.9 millionrecorded during 2004 and 2003, respectively. The decrease in segment profit was primarily the result of the factorsdescribed above under “Net Sales,” partially offset by the benefits of our leanand continuous improvement program and other cost reductions.

 

### ***Other***

 

The following table presents net sales and segmentloss expressed in millions of dollars and as a percentage of net sales:

 
| ** **   | ** ** | **Year ended December 31,** | ** ** |
|--------------|------------|-----------------------------|------------|
| ** **   | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| Net sales    |       | $                           | 20.0       |   | 100.0 | % | $ | 17.1 |   | 100.0 | % |
| Segment loss |       | $                           | (5.7       | ) | — |   | $ | (6.6 | ) | — |   |

* *

*Net Sales.*  Net sales increased $2.9 million, or 17.0%,to $20.0 million for 2004 from $17.1 million for 2003.  This increase was primarily attributable toan increase in sales of remanufactured transmissions resulting from ourinitiative to penetrate the independent aftermarket, partially offset by adecrease in sales of remanufactured engines.

 

*Exit Charges*.  During 2004, we recorded $0.3 million offacility exit costs in order to streamline certain operations.

 

## *SegmentLoss.*  Segment loss decreased $0.9 million, or 13.6%, to a loss of$5.7 million for 2004 from a loss of $6.6 million for 2003.  The reduced loss was primarily the result ofan increase in sales of remanufactured transmissions coupled with benefits fromour lean and continuous improvement program and other cost reductioninitiatives, partially offset by an increase in SG&A expense associatedwith our initiative to penetrate the independent aftermarket for remanufacturedtransmissions.

 

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***Year Ended December 31, 2003 Compared tothe Year Ended December 31, 2002***

 

Income from continuing operations decreased $23.6 million, or 55.5%, to$18.9 million in 2003 from $42.5 million in 2002.  Income from continuing operations per dilutedshare was $0.77 in 2003 as compared to $1.76 in 2002.

 

For 2003, our results included $5.4 million (net of tax) of exit, disposal, certainseverance and other charges discussed below and for 2002 include (i) $2.8 million (net of tax) of charges related to theearly redemption of our 12% senior subordinated notes due 2004 and terminationof our old credit facility, which were reclassified from extraordinary items toincome from continuing operations before income taxes per the provisions ofSFAS No. 145 (adopted on January 1, 2003), (ii) income of $1.8 million (net oftax) for certain non-operating income items primarily related to income taxrefunds and associated interest income, and (iii) income of $0.2 million (netof tax) for an adjustment to disposal costs. Excluding these items, income from continuing operations decreased  primarily as a result of:

 

•     price concessions provided tocertain customers in our Drivetrain Remanufacturing and Logistics segments inorder to extend certain agreements;

 

•     volume declines and associateddisruptions in our Drivetrain Remanufacturing segment caused by theimplementation by certain of our OEM customers of new policies governingrepair-versus-replace decisions made by their dealers in warranty applications,which resulted in dealers replacing fewer transmissions with remanufacturedunits; and

 

•     a reduction in volume due tothe run-out of certain programs in our Logistics and Drivetrain Remanufacturingsegments, including the bulk collateral fulfillment program for AT&TWireless (substantially completed during the third quarter of 2003), an OnStartelematics modification program, the material recovery and core qualificationprograms for Ford (substantially completed during the second and third quartersof 2003, respectively), and the Kia transmission remanufacturing program(substantially completed during the second quarter of 2003),

 

partially offset by:

 

•     the ramp-up of the Hondatransmission remanufacturing program; and

 

•     benefits from our on-goinglean and continuous improvement program and other cost reduction initiatives.

 

# ***Net Sales.***

#  

# **Net sales decreased $52.8 million, or 13.5%,to $339.7 million for 2003 from $392.5 million for 2002.  This decrease was primarily due to:**

#  

•     lower volumes of DaimlerChryslerand Ford remanufactured transmissions due to the OEMs’ implementation of newpolicies governing repair-versus-replace decisions made by their dealers inwarranty applications, which resulted in dealers replacing fewer transmissionswith remanufactured units;

 

•     price concessions provided tocertain customers in our Drivetrain Remanufacturing and Logistics segments inorder to extend certain agreements; and

 

•     a reduction in volume due tothe run-out of certain programs in our Logistics and Drivetrain Remanufacturingsegments, including the bulk collateral fulfillment program for AT&TWireless, an OnStar telematics modification program, the material recovery andcore qualification programs for Ford, and the Kia transmission remanufacturingprogram,

 

partially offset by the ramp-up of the Honda transmissionremanufacturing program, which began in late 2002.

 

Of our net sales for 2003 and 2002, Ford accounted for 38.6% and 39.2%,DaimlerChrysler accounted for 20.6% and 23.7% and AT&T Wireless accountedfor 17.1% and 19.6%, respectively.  Additionally,sales to Honda increased to 7.5% of our net sales for 2003 from 0.1% for 2002.

 

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# ***Gross Profit.***

#  

# **Gross profit decreased $41.3 million, or30.4%, to $94.5 million for 2003 from $135.8 million for 2002.  The decrease was primarily the result of thefactors described above under “Net Sales” combined with inefficiencies andother disruption costs associated with the closure of our Mahwah, New Jerseyremanufacturing facility and transition of production to Oklahoma City,Oklahoma, partially offset by benefits from our on-going lean and continuousimprovement program and other cost reduction initiatives.**

#  

Primarily as a result of the factors described above, gross profit as apercentage of net sales decreased to 27.8% for 2003 from 34.6% for 2002.

 

*SG&A Expense.*

 

SG&A expense decreased $5.6 million, or 9.9%, to $51.0 million for2003 from $56.6 million for 2002.  Thedecrease was primarily the result of benefits from our on-going lean andcontinuous improvement program and other cost reduction initiatives combinedwith elimination of compensation expense related to our management incentivecompensation program, partially offset by an increase in growth support costsrelated to our initiative to penetrate the independent aftermarket.  As a percentage of net sales, SG&Aexpense increased to 15.0% for 2003 from 14.4% for 2002.

 

*Exit, Disposal, Certain Severance and OtherCharges (Credits).*

 

During 2003, we recorded $8.5 million($5.4 million net of tax) of these costs including (i) $3.6 million for ourDrivetrain Remanufacturing segment related to the closure of our Mahwahfacility, consisting of $2.1 million of exit and other costs primarilyassociated with the relocation to the facility in Oklahoma City, $1.2 millionfor severance and related costs, $0.6 million related to the write-off ofcertain fixed assets and $0.2 million of inventory write-downs (classified ascost of sales), partially offset by income of $0.5 million related to thereversal of an accrual established during 2001 for expected idle capacity costsat this plant, (ii) $3.1 million consisting of $2.6 million of compensationcosts payable to our former CEO and CFO and $0.5 million of costs related tothe hiring of our new CEO and CFO, (iii) $1.3 million primarily related toseverance and related costs associated with the streamlining of certainoperations and the reorganization and de-layering of certain managementfunctions and (iv) $0.5 million primarily related to the write-down of certaincustomized software reflected as fixed assets within the Logistics segment.

 

Our decision to consolidate our leasedfacility located in Mahwah, New Jersey into an owned facility in Oklahoma City,Oklahoma was primarily driven by an expectation of lower operating costs(primarily labor and facility related). We completed the consolidation during the fourth quarter of 2003.

 

During 2002, we recorded income of $0.3million ($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 that were no longer expected to beincurred.  Additionally, we recorded again of $0.8 million for the partial reversal of a previously establishedprovision related to the Drivetrain Remanufacturing segment for a potentialnon-income state tax liability whose maximum exposure has been reduced, offsetby a charge of $0.8 million related to the Drivetrain Remanufacturing segmentfor a retroactive insurance premium adjustment related to 1998 and 1999self-insured workers compensation claims.

 

# ***Income from Operations.***

#  

# **Income from operations decreased $44.2million, or 55.8%, to $35.0 million for 2003 from $79.2 million for 2002.  This decrease was primarily the result of thefactors described above under “Gross Profit” and “Exit, Disposal, CertainSeverance and Other Charges (Credits).”**

#  

As a percentage of net sales, income from operations decreased to 10.3%in 2003 from 20.2% in 2002.

 

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*Interest Income.*

 

Interest income increased $0.1 million to $2.9 million for2003 from $2.8 million for 2002. During 2002, we recorded $0.3 million of interest income related tofederal and state income tax refunds.  Excludingthis impact, interest income increased $0.4 million, which was largely due tointerest income earned on our increased cash balances invested in cash and cashequivalents during 2003 as compared to 2002.

 

*Equity in Income (Losses) of Investee.*

 

During 2003, we recorded $0.3 million of income from our equityinvestment in our unconsolidated subsidiary as compared to a loss, primarilyrelated to start-up costs, of $0.6 million in 2002.

 

*Redemption of Senior Notes.*

 

During 2002, we recorded a charge of $3.0 million, related to thepayment of a call premium and the write-off of previously capitalized debtissuance costs in connection with the early redemption of our 12% seniorsubordinated notes due 2004.  This chargewas previously classified as an extraordinary item of $1.9 million, net of incometax benefits of $1.1 million, but was reclassified to income from continuingoperations before income taxes pursuant to our adoption of SFAS No. 145 onJanuary 1, 2003.

 

*Termination of Credit Facility.*

 

During 2002, we recorded a charge of $1.5 million, related to thewrite-off of previously capitalized debt issuance costs in connection with thetermination of our old credit facility. This charge was previously classified as an extraordinary item of $0.9million, net of income tax benefits of $0.6 million, but was reclassified toincome from continuing operations before income taxes pursuant to our adoptionof SFAS No. 145 on January 1, 2003.

 

*Interest Expense.*

 

Interest expense decreased $4.1 million, or 33.3%, to$8.2 million for 2003 from $12.3 million for 2002.  This decrease was primarily due to areduction in debt outstanding combined with a general decline in interest ratesand the use of debt with lower interest rates.

 

*Income Tax Expense.*

 

Our effective income tax rate increased to 37.1% for 2003 from 34.3% in2002.  During 2002 we recorded income of(i) $0.8 million related to federal and state income tax refunds recorded in2002 and (ii) $0.7 million related to adjustments to deferred tax liabilitiesrelating to closed tax years.

 

*Discontinued Operations.*

 

In 2004, General Motors’ consolidated its vendor base and resourced itsremanufactured transmission program from our facility located in Gastonia,North Carolina, in connection with which we closed this facility anddiscontinued this operation in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets.*  The gain of $1.6 million (net of $0.5 millionof income taxes) represented the reclassified results from this operation forthe year ended December 31, 2003.

 

During 2002, we recorded a gain from discontinued operations of $3.9million, consisting of (i) a gain of  $2.6million (net of $1.3 million of income taxes) from the reclassified results ofour drivetrain remanufacturing business with General Motors and (ii) a gain of $1.3million related to the sale of our former Distribution Group business, composedof $1.0 million for an increase in the estimated income tax benefits associatedwith the sale and $0.3 million based upon updated information regarding remainingobligations and other costs.

 

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*Reportable Segments*

 

Drivetrain Remanufacturing Segment

 

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

 
| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|-----------------------------|------------|
| ** **     | ** ** | **2003**                    | ** ** | **2002** | ** ** |
| Net sales      |       | $                           | 241.0      |   | 100.0 | % | $ | 264.6 |   | 100.0 | % |
| Segment profit |       | $                           | 22.9       |   | 9.5 | % | $ | 46.8 |   | 17.7 | % |

 

*Net Sales.*  Net sales decreased $23.6 million, or 8.9%,to $241.0 million for 2003 from $264.6 million for 2002.  The decrease was primarily due to:

 

•     lower volumes of DaimlerChryslerand Ford remanufactured transmissions due to the OEMs’ implementation of newpolicies governing repair-versus-replace decisions made by their dealers inwarranty applications, which resulted in dealers replacing fewer transmissionswith remanufactured units; and

 

•     price concessions provided tocertain customers in order to extend certain agreements;

 

partially offset by the ramp-up of the Honda transmission remanufacturingprogram, which began in late 2002.

 

Of our segment net sales for 2003 and 2002, Ford accounted for 52.0%and 54.3% and DaimlerChrysler accounted for 29.0% and 35.2%, respectively.  Additionally, sales to Honda increased to 10.6%of segment net sales for 2003 from 0.2% for 2002.

 

*Exit, Disposal, Certain Severance and OtherCharges*.  During2003, we recorded $4.2 million of costs including (i) $3.6 million related tothe closure of our transmission remanufacturing facility located in Mahwah, NewJersey, consisting of $2.1 million of exit and other costs primarily associatedwith the relocation to the facility in Oklahoma City, Oklahoma, $1.2 million ofseverance and related costs, $0.6 million related to the write-off of certainfixed assets, and $0.2 million of inventory write-downs, partially offset byincome of $0.5 million related to the reversal of a special charge accrualestablished during 2001 for expected idle capacity costs at the New Jerseyplant and (ii) $0.6 million primarily related to severance and related costsassociated with the streamlining of certain operations and the reorganizationand de-layering of certain management functions within the segment.

 

During 2002 we recorded a gain of $0.8 million for thepartial reversal of a previously established provision for a potentialnon-income state tax liability whose maximum exposure has been reduced, offsetby a charge of $0.8 million for a retroactive insurance premium adjustmentrelated to 1998 and 1999 self-insured workers compensation claims.

 

*Segment Profit*.  Segment profit decreased $23.9 million, or 51.1%,to $22.9 million (9.5% of segment net sales) for 2003 from $46.8 million(17.7% of segment net sales) for 2002.  Segmentprofit reflects the previously discussed costs of $4.2 million recorded during2003.  The decrease in segment profit wasprimarily due to:

 

•     volume declines andassociated disruptions in our Drivetrain Remanufacturing segment caused by theimplementation by certain of our OEM customers of new policies governingrepair-versus-replace decisions made by their dealers in warranty applications,which resulted in dealers replacing fewer transmissions with remanufacturedunits;

 

•     the price concessionsprovided to certain customers; and

 

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•     inefficiencies and otherdisruption costs associated with the closure of our Mahwah, New Jerseyremanufacturing facility and transition of production to Oklahoma City,Oklahoma;

 

partially offset by:

 

•     the ramp-up of the Hondatransmission remanufacturing program; and

 

•     benefits from our on-goinglean and continuous improvement program and other cost reduction initiatives.

 

### ***LogisticsSegment***

###  

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

 
| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|-----------------------------|------------|
| ** **     | ** ** | **2003**                    | ** ** | **2002** | ** ** |
| Net sales      |       | $                           | 81.7       |   | 100.0 | % | $ | 114.2 |   | 100.0 | % |
| Segment profit |       | $                           | 22.0       |   | 26.9 | % | $ | 36.8 |   | 32.2 | % |

* *

*Net Sales.*  Net sales decreased $32.5 million, or28.5%, to $81.7 million for 2003 from $114.2 million for 2002.  This decrease was primarily attributable to:

 

•     price reductions granted to AT&TWireless in connection with the renewal of our contract at the end of 2002 andsubsequent renegotiation and extension of that contract in July 2003;

 

•     a decline in sales as services we performedfor AT&T Wireless related to the distribution of collateral marketingmaterials were transitioned to the printer of those materials;

 

•     a decline in sales related to the wind-downof an OnStar telematics modification program; and

 

•     a decline in sales related to the wind-downof material recovery and core qualification programs for Ford.

 

Sales to AT&T Wireless accounted for71.1% and 67.2% of segment net sales for 2003 and 2002, respectively.

 

*Exit, Disposal, Certain Severance and OtherCharges (Credits)*. During 2003, we recorded costs of $0.9 million consisting of (i) $0.5million primarily related to the write-down of certain customized softwarereflected as fixed assets and (ii) $0.4 million of severance and related costsassociated with the streamlining of certain operations and the reorganizationand de-layering of certain management functions within the segment.

 

During 2002, we recorded income of $0.2million from the reversal of provisions previously established primarily forasset write-downs related to the shut-down of our remanufactured automotiveelectronic control modules operation where actual recoveries from the sale ofassets were favorable to original estimates.

 

*Segment Profit*.  Segment profit decreased $14.8 million,or 40.2%, to $22.0 million (26.9% of segment net sales) for 2003 from$36.8 million (32.2% of segment net sales) for 2002.  Segment profit reflects the previouslydiscussed costs of $0.9 million recorded during 2003 and income of $0.2 millionrecorded during 2002.  The decrease insegment profit was primarily the result of changes in the price, volume and mixof sales described above, offset in part by the benefits of our lean andcontinuous improvement program and other cost reductions.

 

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* *

### ***Other***

 

The following table presents net sales and segmentloss expressed in millions of dollars and as a percentage of net sales:

 
| ** **   | ** ** | **Year Ended December 31,** | ** ** |
|--------------|------------|-----------------------------|------------|
| ** **   | ** ** | **2003**                    | ** ** | **2002** | ** ** |
| Net sales    |       | $                           | 17.1       |   | 100.0 | % | $ | 13.7 |   | 100.0 | % |
| Segment loss |       | $                           | (6.6       | ) | — |   | $ | (4.5 | ) | — |   |

* *

*Net Sales.*  Net sales increased $3.4 million, or 24.8%,to $17.1 million for 2003 from $13.7 million for 2002.  This increase was primarily attributable toan increase in sales of remanufactured transmissions resulting from ourinitiative to penetrate the independent aftermarket.

 

*Segment Loss*.  Segment loss increased $2.1 million, or 46.7%,to a loss of $6.6 million for 2003 from a loss of $4.5 million for2002.  The increased loss was primarilythe result of an increase in costs for additional sales and marketing programsand resources in support of our initiative to penetrate the independentaftermarket for remanufactured transmissions.

 

# **Liquidity and Capital Resources**

#  

##### ***Cash Flow & Capital Expenditures***

#####  

We had total cash and cash equivalents on hand of $18.1 million atDecember 31, 2004.  Net cash provided byoperating activities from continuing operations was $30.9 million in 2004 andincluded $3.9 million from the utilization of deferred tax assets, primarilyrelated to net operating loss carryforwards.  Net cash used in investing activities fromcontinuing operations of $7.2 million during 2004 included $11.1 million for capitalexpenditures primarily related to manufacturing equipment additions to supportthe growth of our Honda remanufacturing program as well as cost reductioninitiatives in both our Drivetrain Remanufacturing and Logistics segments,partially offset by $3.9 million of proceeds primarily from the sale (andsimultaneous lease-back) of one of our drivetrain remanufacturing facilitieslocated in Oklahoma City, Oklahoma.  Netcash used in financing activities of $70.2 million in 2004 included $61.3million for the repurchase of our common stock for treasury, net payments of$10.0 million made on our credit facility, $4.2 million in payment ofconsideration related to previous acquisitions, and $0.4 million of payments oncapital lease obligations, offset by $5.8 million of proceeds from the exerciseof stock options.

 

For 2005, we have planned $17-19 millionfor capital expenditures, including $6 million in support of capacity expansionin our Logistics segment, $6 million in support of new business initiatives inboth our Logistics and Drivetrain Remanufacturing segments and $5-7 million insupport of capacity maintenance and cost reduction initiatives.

 

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

###  

On December16, 2003, we initiated a tender offer to purchase up to 2,638,500 shares of ouroutstanding common stock at a price not greater than $15.75 per share and notless than $13.00 per share.  In addition,we agreed to purchase up to 1,169,409 shares at the final tender offer pricefrom the Aurora partnerships (who did not participate in the tender offer).  The maximum number of shares to be purchasedin the tender offer and the Aurora purchase represented 15.7% of ouroutstanding common stock.  The tenderoffer was over subscribed, with 3,538,544 shares being tendered and notwithdrawn, and on January 26, 2004 we completed the purchase of 74.56% of thetotal shares tendered, at the price of $15.75 per share.  On February 10, 2004, we completed thepurchase of the 1,169,409 shares from the Aurora partnerships at the same priceas the final tender offer price of $15.75 per share.  The total cost of the tender offer and theAurora

 

35

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purchase was $60.0 million plusapproximately $1.2 million of fees and expenses and was funded with availablecash on hand.

 

***Financing***

 

On February 8, 2002, we executed a creditagreement and related security agreement in connection with a creditfacility.  The credit facility providesfor (i) a $75.0 million, five-year term loan payable in quarterly installmentsin increasing amounts over the five-year period ($26.9 million outstanding atDecember 31, 2004), (ii) a $95.0 million, six-year, two-tranche term loanpayable in quarterly installments over the six-year period ($83.0 millionoutstanding at December 31, 2004 and with approximately 98% of the outstandingbalance payable in the sixth year) with an annual excess cash flow sweeppayable as defined in the credit agreement and (iii) a $50.0 million, five-yearrevolving credit facility ($40.0 million as amended).  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.  On December 12, 2003, we amended our creditfacility to permit the repurchase of shares in the tender offer and from theAurora partnerships described above.  Additionally,this amendment required us to prepay $20.0 million of term loans and reducedour revolving credit facility to $40.0 million.

 

At our election, amounts advanced under the creditfacility will bear interest at either (i) the Alternate Base Rate plus aspecified margin or (ii) the Eurodollar Rate plus a specified margin.  The Alternate Base Rate is equal to thehighest of (a) the lender’s prime rate, (b) the lender’s base CD rateplus 1.00% or (c) the federal funds effective rate plus 0.50%.  Theapplicable margins for both Alternate Base Rate and Eurodollar Rate loans aresubject to quarterly adjustments based on our leverage ratio as of the end ofthe four fiscal quarters then completed. As of December 31, 2004, the margins for the $75.0 million term loan andthe $40.0 million revolving facility were 1.50% for Alternate Base Rate loans and2.50% for Eurodollar Rate loans.  For the$95.0 million term loan, the margins were 2.25% for Alternate Base Rate loansand 3.25% for Eurodollar Rate loans as of December 31, 2004.  Based on our results of operations for thefour quarters ended December 31, 2004 each of the specified margins are expectedto decrease by 0.25% in March 2005.

 

Based on results of operations for the year endedDecember 31, 2004, a mandatory prepayment for excess cash flow for the yearended December 31, 2004 is not required.

 

As ofDecember 31, 2004, our borrowing capacity under the revolving portion of thecredit facility was $36.5 million, net of $3.5 million for outstanding lettersof credit.  In addition, we had cash andcash equivalents on hand of $18.1 million at December 31, 2004.

 

As part ofan ownership agreement we have for a 45% interest in an unconsolidatedsubsidiary, we have given the subsidiary’s bank a $0.9 million letter of creditin the event of the subsidiary’s default on outstanding debt.

 

As part ofan earn-out related to the 1997 acquisition of ATS Remanufacturing, we madepayments of $4.0 million during 2004 and a final payment of $2.4 million inJanuary 2005.  See Item 8."Consolidated Financial Statements and Supplementary Data - Note 17"for a discussion of payments related to our ATS Remanufacturing acquisition andinformation regarding other contingencies.

 

Ourrevolving credit agreement with HSBC Bank Plc provides for £0.5 million,or $0.9 million in U.S. dollars, to finance the working capital requirements ofour U.K. subsidiary.  Amounts advancedare secured by substantially all the assets of our U.K. subsidiary.  Interest accrues at the HSBC Bank primelending rate plus 1.50% and is payable monthly. HSBC Bank may at any time demand repayment of all sums owing.  As of December 31, 2004, there were noamounts outstanding under this line of credit.

 

As ofDecember 31, 2004, we had approximately $34 million in federal losscarryforwards and approximately $15 million in state loss carryforwardsavailable as an offset to future taxable income.  We expect to utilize these carryforwardsprior to their respective expiration.

 

We believe that cash on hand, cash flow fromoperations and existing borrowing capacity will be sufficient to fund ongoingoperations and budgeted capital expenditures.  In pursuing future acquisitions,

 

36

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we will continue to considerthe effect any such acquisition costs may have on liquidity.  In order to consummate such acquisitions, wemay need to seek funds through additional borrowings or equity financing.

 

***Off-Balance Sheet Arrangements***

 

We are notengaged in any off-balance sheet arrangements that have a material currenteffect or are reasonably likely to have a material future effect on ourfinancial condition or results of operations. However, we are subject to various other commitments and contingenciesas disclosed in Item 8. “Consolidated Financial Statements and SupplementaryData - Note 17.”

 

***Contractual Obligations***

 

The followingtable summarizes our contractual obligations expressed in millions of dollarsas of December 31, 2004:

 
| ** **                                           | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 – 3 years** | ** ** | **3 – 5 years** | ** ** | **More than  5 years** | ** ** |
|------------------------------------------------------|------------|-----------|------------|-----------------------|------------|----------------------|------------|----------------------|------------|------------------------|------------|
|                                                 |       |      |       |                  |       |                 |       |                 |       |                   |       |
| Credit facility                                      |       | $         | 109.9      |                  | $          | 10.6                 |       | $                    | 79.0       |                   | $          | 20.3 |   | $ | — |   |
| Amount due to sellers of acquired Companies (a) |       | 2.5       |       | 2.4                   |       | 0.1                  |       | 3⁄4               |       | 3⁄4                 |       |
| Operating lease obligations (b)                      |       | 27.3      |       | 7.5                   |       | 10.9                 |       | 3.4                  |       | 5.5                    |       |
| Purchase obligations                                 |       | 0.4       |       | 0.1                   |       | 0.2                  |       | 0.1                  |       | 3⁄4                 |       |
| Executive compensation agreements (c)                |       | 2.8       |       | 1.7                   |       | 1.0                  |       | 0.1                  |       | 3⁄4                 |       |
| Deferred compensation (d)                            |       | 0.9       |       | 0.1                   |       | 0.3                  |       | 0.3                  |       | 0.2                    |       |
| Total                                                |       | $         | 143.8      |                  | $          | 22.4                 |       | $                    | 91.5       |                   | $          | 24.2 |   | $ | 5.7 |   |

 

----

(a)          Primarilyrelates to our 1997 acquisition of ATS Remanufacturing (which remanufacturedtransmissions for General Motors and was discontinued in 2004), which requiresus to make payments to the seller on each of the first eight anniversaries ofthe closing date.  ThroughDecember 31, 2004, we had made $11.2 million of these payments(including $4.0 million paid in 2004). The remaining payment of $2.4 million was paid in January 2005.

 

(b)         In February2005, we entered into a five-year lease for a new facility that will replace afacility on which the lease is expiring in 2005.  The total rent payable under the new lease is$9.5 million, of which $1.1 million is payable during the first 12 months,$4.2 million is payable in the following two years and $4.2 million is payablein the final two years.

 

(c)          Representsamounts payable to our former CEO and CFO. See Item 11. “Executive Compensation—Summary Compensation Table”and Item 11.  “ExecutiveCompensation—Employment Agreements.”

 

(d)         Relates tothe 1997 acquisition of ATS, which requires us to make certain payments to keyemployees of the seller on various dates subsequent to the closing date.  Through December 31, 2004, we had made$2.8 million of these payments (including $0.1 million paid in 2004).  The remaining payments aggregate toapproximately $0.9 million (present value of $0.7 million as of December 31,2004).

 

37

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# **Impact of New Accounting Standards**

#  

In November 2004, the Financial Accounting Standards Board issued SFASNo. 151,*Inventory Costs – An Amendment ofARB No. 43, Chapter 4.*  SFASNo. 151 clarifies that abnormal amounts of idle facility expense, freight,handling costs, and wasted materials (spoilage) should be recognized ascurrent-period charges.  In addition,this Statement requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities.  As allowed under SFAS No.151, we plan to adopt the provisions of this standard for inventory costsincurred during fiscal years beginning after June 15, 2005.  The initial adoption of SFAS No. 151 is notexpected to have a material effect on our results of operations or financialposition.

 

In November 2004, the Emerging Issues Task Force issued EITF No. 03-13,*Applying the Conditions in Paragraph 42 ofFASB Statement No. 144 in Determining Whether to Report DiscontinuedOperations. *EITF 03-13assists in the development of a model for evaluating (a) which cash flows areto be considered in determining whether cash flows have been or will beeliminated and (b) what types of continuing involvement constitute significantcontinuing involvement when determining whether the disposal or sale of acomponent of a business is to be accounted for as discontinued operations.  We applied the guidance from this standardduring 2004 in our classification for the disposal of our operating unit whichremanufactured transmissions for General Motors as discontinued operations.  (See Item 8. “Consolidated FinancialStatements and Supplementary Data - Note 16.)

 

In December 2004, the Financial Accounting Standards Board issued FASBStaff Position, 109-1, *Application of FASBStatement No. 109, “Accounting for Income Taxes,” to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of****2004.*   In this staff position statement, the FASBconcluded that the tax relief (special tax deduction for domesticmanufacturing) from this legislation should be accounted for as a “specialdeduction” instead of a tax rate reduction. The guidance in this statement was effective December 21, 2004 and hadno impact on our results of operations or financial position.

 

In December 2004, the Financial Accounting Standards Board issued FASBStaff Position, 109-2,*Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2*004. The American Jobs Creation Act of 2004 introduces a special one-timedividends received deduction on the repatriation of certain foreign earnings toa U.S. taxpayer (repatriation provision), provided certain criteria aremet.  This staff position gives a companyadditional time to evaluate the effects of the legislation on any plan forreinvestment or repatriation of foreign earnings for purposes of applying SFASNo. 109, *Accounting for Income Taxes.* See Item 8. “Consolidated Financial Statementsand Supplementary Data -Note 10, for additional disclosures relative to thisstandard.

 

In December 2004, the Financial Accounting Standards Board issued SFASNo. 123R,*Share-Based Payment.*  SFAS No. 123R requires a public entity tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award andrecognize this cost in the statements of income over the period during whichthe employee is required to provide such services.  Under the provisions of SFAS 123R, we willapply the modified prospective application of this statement with an effectivedate of July 1, 2005.  Under the modifiedprospective application, SFAS No. 123R, which provides for certain changes to themethod for valuing stock-based compensation among other changes, will apply tonew awards and to awards that are outstanding on the effective date and aresubsequently modified or cancelled. Compensation expense for outstanding awards for which the requisiteservice has not been rendered as of the effective date will be recognized overthe remaining service period using the compensation cost calculated for proforma disclosure purposes under SFAS No. 123. As of December 31, 2004, we expect to record approximately $0.9million before income taxes, during the third and fourth quarters of 2005 from unamortizedcompensation expense related to stock options granted, as determined inaccordance with SFAS No. 123.  Inaddition, for any new awards that may be granted during 2005, we will incuradditional expense during the third and fourth quarters of 2005 that cannot yetbe quantified.  We are in the process ofdetermining how the new method of valuing stock-based compensation asprescribed in SFAS 123R will be applied to valuing stock-based awards grantedafter the effective date and the impact the recognition of compensation expenserelated to such awards will have on our financial statements.

 

38

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# **Inflation; Lack of Seasonality**

#  

Although we are subject to the effects ofchanging prices, the impact of inflation has not been a significant factor inresults of operations for the periods presented.  In some circumstances, market conditions orcustomer expectations may prevent us from increasing the prices of our productsto offset the inflationary pressures that may increase our costs in the future. Historically, there has been littleaggregate seasonal fluctuation in our business.

 

# **Environmental Matters**

#  

See Item 1. “Business–Environmental” and Item8. “Consolidated Financial Statements and Supplementary Data - Note 17” for adiscussion of environmental matters relating to us.

 

**ITEM 7A.       QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*Derivative FinancialInstruments.*  Wedo not hold or issue derivative financial instruments for trading purposes.  We have used derivative financial instrumentsto manage our exposure to fluctuations in interest rates.  Neither the aggregate value of thesederivative financial instruments nor the market risk posed by them has beenmaterial to our business.  As of December31, 2004, we are not using any derivative financial instruments.  See Item 8. “Consolidated FinancialStatements and Supplementary Data - Note 13,” for additional discussion regardingour use of such instruments.

 

*Interest RateExposure.*  Basedon our overall interest rate exposure during the year ended December 31,2004 and 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.  Interest rate movements of 10% would not havea material effect on our financial position, results of operation or cashflows.

 

*Foreign ExchangeExposure.*  Wehave one foreign operation that exposes us to translation risk when the localcurrency financial statements are translated to U.S. dollars.  Since changes in translation risk are reportedas adjustments to stockholders’ equity, a 10% change in the foreign exchangerate would not have a material effect on our financial position, results ofoperation or cash flows.

 

39

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**ITEM8.**          CONSOLIDATEDFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

**Contents**

 
| Management’s  Report on Internal Control Over Financial Reporting                                      |   |
|-------------------------------------------------------------------------------------------------------------|--------|
| Reports  of Independent Registered Public Accounting Firm                                                   |   |
| Consolidated Balance Sheets  as of December 31, 2004 and 2003                                               |   |
| Consolidated  Statements of Income for the years ended December 31, 2004, 2003 and 2002                     |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2004,  2003 and 2002 |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                 |   |
| Notes to  Consolidated Financial Statements                                                                 |   |

 

40

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**Management’sReport on Internal Control Over Financial Reporting**

 

Management of Aftermarket Technology Corp. is responsiblefor establishing and maintaining adequate internal control over financialreporting, as such term is defined in the Securities Exchange Act of 1934 Rule13a-15(f). Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of the Company’s internal controlover financial reporting as of December 31, 2004 as required by the SecuritiesExchange Act of 1934 Rule 13a-15(c). In making this assessment, we used thecriteria set forth in the framework in *InternalControl–Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in *Internal Control–IntegratedFramework*, our management concluded that our internal control overfinancial reporting was effective as of December 31, 2004.

 

Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2004 has been audited by Ernst & Young LLP, anindependent registered public accounting firm, as stated in their report whichappears on page 43.

 

AftermarketTechnology Corp.

 

Downers Grove, Illinois February 23, 2005

 

41

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**Reportsof Independent Registered Public Accounting Firm**

 

Tothe Stockholders and Board of Directors

AftermarketTechnology Corp.

 

We have audited the accompanyingconsolidated balance sheets of Aftermarket Technology Corp. and subsidiaries(the Company) as of December 31, 2004 and 2003, and the relatedconsolidated statements of income, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2004.  Our audits also included the financialstatement schedule listed in the Index of Item 15 (a).  These financial statements and schedule arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the (consolidated) financial position of Aftermarket Technology Corp.and subsidiaries at December 31, 2004 and 2003, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2004, in conformity with U.S. generallyaccepted accounting principles.  Also, inour opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

 

                We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of Aftermarket Technology Corp.'s internal control over financialreporting as of December 31, 2004, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 23, 2005expressed an unqualified opinion thereon.

 

ERNST & YOUNG LLP

 

Chicago,Illinois

February23, 2005

 

42

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Tothe Stockholders and Board of Directors

AftermarketTechnology Corp.

 

We have auditedmanagement’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting,that Aftermarket Technology Corp.maintained effective internal control over financial reporting as of December31, 2004, based on criteria established in Internal Control–IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO criteria). Aftermarket Technology Corp.'s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the company’s internalcontrol over financial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion,management’s assessment that Aftermarket Technology Corp. maintained effectiveinternal control over financial reporting as of December 31, 2004, is fairlystated, in all material respects, based on the COSO criteria. Also, in ouropinion, Aftermarket Technology Corp. maintained, in all material respects,effective internal control over financial reporting as of December 31, 2004,based on the COSO criteria.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheetsof Aftermarket Technology Corp. as of December 31, 2004 and 2003, andthe related consolidated statements of income,stockholders' equity, and cash flows for each of the three years in theperiod ended December 31, 2004, and our report dated February 23, 2005expressed an unqualified opinion thereon.

 

ERNST & YOUNG LLP

 

Chicago, Illinois February 23, 2005

 

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**AFTERMARKETTECHNOLOGY CORP.**

**CONSOLIDATEDBALANCE SHEETS**

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

 
| ** **                                                                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                              | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                                                                                                    |       |             |       |   |   |
| **Assets**                                                                                                              |       |             |       |   |   |
| Current Assets:                                                                                                         |       |             |       |   |   |
| Cash and cash  equivalents                                                                                              |       | $                | 18,085     |   | $ | 59,628 |   |
| Accounts  receivable, net                                                                                               |       | 51,257           |       | 41,596 |   |
| Inventories                                                                                                             |       | 80,635           |       | 76,474 |   |
| Notes receivable                                                                                                        |       | 10,622           |       | — |   |
| Prepaid and  other assets                                                                                               |       | 3,401            |       | 4,896 |   |
| Refundable  income taxes                                                                                                |       | 808              |       | — |   |
| Deferred income  taxes                                                                                                  |       | 19,587           |       | 19,956 |   |
| Assets of  discontinued operations, net                                                                                 |       | —           |       | 1,601 |   |
| Total current  assets                                                                                                   |       | 184,395          |       | 204,151 |   |
|                                                                                                                    |       |             |       |   |   |
| Property, plant  and equipment, net                                                                                     |       | 52,835           |       | 55,022 |   |
| Debt issuance  costs, net                                                                                               |       | 3,353            |       | 4,676 |   |
| Goodwill                                                                                                                |       | 148,589          |       | 147,850 |   |
| Intangible  assets, net                                                                                                 |       | 406              |       | 525 |   |
| Other assets                                                                                                            |       | 417              |       | 9,986 |   |
| Assets of  discontinued operations, net                                                                                 |       | —           |       | 25,074 |   |
| Total assets                                                                                                            |       | $                | 389,995    |   | $ | 447,284 |   |
|                                                                                                                    |       |             |       |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                          |       |             |       |   |   |
| Current  Liabilities:                                                                                                   |       |             |       |   |   |
| Accounts payable                                                                                                        |       | $                | 39,588     |   | $ | 38,786 |   |
| Accrued expenses                                                                                                        |       | 27,723           |       | 32,272 |   |
| Income taxes  payable                                                                                                   |       | —           |       | 60 |   |
| Credit facility                                                                                                         |       | 10,629           |       | 10,018 |   |
| Capital lease  obligation                                                                                               |       | —           |       | 344 |   |
| Amounts due to  sellers of acquired companies                                                                           |       | 2,461            |       | 1,891 |   |
| Deferred  compensation                                                                                                  |       | 115              |       | 117 |   |
| Liabilities of  discontinued operations, net                                                                            |       | 881              |       | — |   |
| Total current  liabilities                                                                                              |       | 81,397           |       | 83,488 |   |
|                                                                                                                    |       |             |       |   |   |
| Amount drawn on  credit facility, less current portion                                                                  |       | 99,244           |       | 109,873 |   |
| Amounts due to  sellers of acquired companies, less current portion                                                     |       | 72               |       | 5,225 |   |
| Deferred  compensation, less current portion                                                                            |       | 621              |       | 717 |   |
| Deferred income  taxes                                                                                                  |       | 22,288           |       | 18,730 |   |
|                                                                                                                    |       |             |       |   |   |
| 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  (including shares held in treasury) - 26,023,419 and 25,173,856 as of  December 31, 2004 and 2003, respectively |       | 260              |       | 252 |   |
| Additional  paid-in capital                                                                                             |       | 205,747          |       | 194,204 |   |
| Retained  earnings                                                                                                      |       | 46,882           |       | 41,106 |   |
| Accumulated  other comprehensive income                                                                                 |       | 3,542            |       | 1,891 |   |
| Unearned  compensation                                                                                                  |       | (749             | )          | (231 | ) |
| Common stock  held in treasury, at cost - 4,754,704 and 933,737 shares as of December 31,  2004 and 2003, respectively  |       | (69,309          | )          | (7,971 | ) |
| Total  stockholders’ equity                                                                                        |       | 186,373          |       | 229,251 |   |
|                                                                                                                    |       |             |       |   |   |
| Total  liabilities and stockholders’ equity                                                                        |       | $                | 389,995    |   | $ | 447,284 |   |

* *

*Seeaccompanying notes.*

 

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**AFTERMARKET TECHNOLOGY CORP.**

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                                     | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                           |       |                                 |       |   |   |   |   |
| Net sales:                                                     |       |                                 |       |   |   |   |   |
| Products                                                       |       | $                                    | 291,192    |   | $ | 258,009 |   | $ | 278,250 |   |
| Services                                                       |       | 104,385                              |       | 81,700 |   | 114,203 |   |
| Total net sales                                                |       | 395,577                              |       | 339,709 |   | 392,453 |   |
|                                                           |       |                                 |       |   |   |   |   |
| Cost of sales:                                                 |       |                                 |       |   |   |   |   |
| Products                                                       |       | 220,810                              |       | 201,652 |   | 201,216 |   |
| Products -  disposal costs                                     |       | —                               |       | 200 |   | — |   |
| Services                                                       |       | 72,820                               |       | 43,345 |   | 55,405 |   |
| Total cost of  sales                                           |       | 293,630                              |       | 245,197 |   | 256,621 |   |
|                                                           |       |                                 |       |   |   |   |   |
| Gross profit                                                   |       | 101,947                              |       | 94,512 |   | 135,832 |   |
|                                                           |       |                                 |       |   |   |   |   |
| Selling, general  and administrative expense                   |       | 51,598                               |       | 50,987 |   | 56,618 |   |
| Amortization of  intangible assets                             |       | 125                                  |       | 299 |   | 333 |   |
| Exit, disposal,  certain severance and other charges (credits) |       | 4,031                                |       | 8,273 |   | (277 | ) |
|                                                           |       |                                 |       |   |   |   |   |
| Income from  operations                                        |       | 46,193                               |       | 34,953 |   | 79,158 |   |
|                                                           |       |                                 |       |   |   |   |   |
| Interest income                                                |       | 2,658                                |       | 2,863 |   | 2,769 |   |
| Other income,  net                                             |       | 24                                   |       | 94 |   | 84 |   |
| Equity in income  (losses) of investee                         |       | 146                                  |       | 277 |   | (575 | ) |
| Redemption of  senior notes                                    |       | —                               |       | — |   | (3,022 | ) |
| Termination of  credit facility                                |       | —                               |       | — |   | (1,480 | ) |
| Interest expense                                               |       | (7,271                               | )          | (8,169 | ) | (12,280 | ) |
|                                                           |       |                                 |       |   |   |   |   |
| Income from  continuing operations before income taxes         |       | 41,750                               |       | 30,018 |   | 64,654 |   |
|                                                           |       |                                 |       |   |   |   |   |
| Income tax  expense                                            |       | 14,955                               |       | 11,146 |   | 22,174 |   |
|                                                           |       |                                 |       |   |   |   |   |
| Income from  continuing operations                             |       | 26,795                               |       | 18,872 |   | 42,480 |   |
|                                                           |       |                                 |       |   |   |   |   |
| Gain (loss) from  discontinued operations, net of income taxes |       | (21,019                              | )          | 1,639 |   | 3,947 |   |
| Net income                                                     |       | $                                    | 5,776      |   | $ | 20,511 |   | $ | 46,427 |   |
| * *                                                       | * *   | * *                             | * *   | * * | * * | * * | * * |
| Per common share  - basic:                                     |       |                                 |       |   |   |   |   |
| Income from  continuing operations                             |       | $                                    | 1.27       |   | $ | 0.78 |   | $ | 1.81 |   |
| Gain (loss) from  discontinued operations                      |       | (1.00                                | )          | 0.07 |   | 0.17 |   |
| Net income                                                     |       | $                                    | 0.27       |   | $ | 0.85 |   | $ | 1.98 |   |
|                                                           |       |                                 |       |   |   |   |   |
| Per common share  - diluted:                                   |       |                                 |       |   |   |   |   |
| Income from  continuing operations                             |       | $                                    | 1.25       |   | $ | 0.77 |   | $ | 1.76 |   |
| Gain (loss) from  discontinued operations                      |       | (0.98                                | )          | 0.07 |   | 0.16 |   |
| Net income                                                     |       | $                                    | 0.27       |   | $ | 0.84 |   | $ | 1.92 |   |

 

*See accompanyingnotes.*

 

45

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**AFTERMARKET TECHNOLOGY CORP.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

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

 
| ** **                                                                              | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In Capital** | ** ** | **Retained  Earnings  (Accumulated  Deficit)** | ** ** | **Accumulated  Other  Comprehensive  (Loss) Income** | ** ** | **Unearned  Compensation** | ** ** | **Common  Stock in  Treasury** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|---------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|-----------|------------|
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Balance at  January 1, 2002                                                             |       | $                    | —     |              | $          | 214                             |       | $                                              | 141,298    |                                                 | $          | (25,832                    | )          | $                              | (2,008     | )         | $          | — |   | $ | (4,337 | ) | $ | 109,335 |   |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| 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    |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| 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    | )          |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Balance at  December 31, 2002                                                           |       | —               |       | 251               |       | 193,869                         |       | 20,595                                         |       | (309                                                 | )          | —                     |       | (7,971                         | )          | 206,435   |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Net income                                                                              |       | —               |       | —            |       | —                          |       | 20,511                                         |       | —                                               |       | —                     |       | —                         |       | 20,511    |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Derivative  financial instruments, net of income taxes                                  |       | —               |       | —            |       | —                          |       | —                                         |       | 237                                                  |       | —                     |       | —                         |       | 237       |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Translation  adjustments                                                                |       | —               |       | —            |       | —                          |       | —                                         |       | 1,963                                                |       | —                     |       | —                         |       | 1,963     |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Comprehensive  income                                                                   |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       | 22,711    |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Issuance of  20,000 shares of common stock from incentive stock awards                  |       | —               |       | 1                 |       | 243                             |       | —                                         |       | —                                               |       | (244                       | )          | —                         |       | —    |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Issuance of  8,333 shares of common stock from exercise of stock options                |       | —               |       | —            |       | 92                              |       | —                                         |       | —                                               |       | —                     |       | —                         |       | 92        |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Amortization of  unearned compensation                                                  |       | —               |       | —            |       | —                          |       | —                                         |       | —                                               |       | 13                         |       | —                         |       | 13        |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Balance at  December 31, 2003                                                           |       | —               |       | 252               |       | 194,204                         |       | 41,106                                         |       | 1,891                                                |       | (231                       | )          | (7,971                         | )          | 229,251   |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Net income                                                                              |       | —               |       | —            |       | —                          |       | 5,776                                          |       | —                                               |       | —                     |       | —                         |       | 5,776     |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Translation  adjustments                                                                |       | —               |       | —            |       | —                          |       | —                                         |       | 1,651                                                |       | —                     |       | —                         |       | 1,651     |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Comprehensive  income                                                                   |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       | 7,427     |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Issuance of  141,500 shares of common stock from incentive stock awards                 |       | —               |       | 1                 |       | 2,039                           |       | —                                         |       | —                                               |       | (2,040                     | )          | —                         |       | —    |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Issuance of  708,063 shares of common stock from exercise of stock options              |       | —               |       | 7                 |       | 6,164                           |       | —                                         |       | —                                               |       | —                     |       | —                         |       | 6,171     |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Stock-based  compensation expense from modification of stock options                    |       | —               |       | —            |       | 3,323                           |       | —                                         |       | —                                               |       | —                     |       | —                         |       | 3,323     |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Amortization of  unearned compensation and other                                        |       | —               |       | —            |       | 17                              |       | —                                         |       | —                                               |       | 1,522                      |       | —                         |       | 1,539     |       |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Purchase of  3,820,967 shares of common stock for treasury                              |       | —               |       | —            |       | —                          |       | —                                         |       | —                                               |       | —                     |       | (61,338                        | )          | (61,338   | )          |
|                                                                                    |       |                 |       |              |       |                            |       |                                           |       |                                                 |       |                       |       |                           |       |      |       |
| Balance at  December 31, 2004                                                           |       | $                    | —     |              | $          | 260                             |       | $                                              | 205,747    |                                                 | $          | 46,882                     |       | $                              | 3,542      |      | $          | (749 | ) | $ | (69,309 | ) | $ | 186,373 |   |

 

*Seeaccompanying notes.*

 

46

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**AFTERMARKET TECHNOLOGY CORP.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                                                  | ** ** | **For the years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                        |       |                                 |       |   |   |   |   |
| **Operating  Activities:**                                                                                  |       |                                 |       |   |   |   |   |
| Net income                                                                                                  |       | $                                    | 5,776      |   | $ | 20,511 |   | $ | 46,427 |   |
|                                                                                                        |       |                                 |       |   |   |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities -  continuing operations: |       |                                 |       |   |   |   |   |
| Net loss (gain)  from discontinued operations                                                               |       | 21,019                               |       | (1,639 | ) | (3,947 | ) |
| Termination of  credit facility and redemption of senior notes                                              |       | —                               |       | — |   | 4,502 |   |
| Depreciation and  amortization                                                                              |       | 12,117                               |       | 11,225 |   | 10,647 |   |
| Noncash  stock-based compensation                                                                           |       | 4,845                                |       | 13 |   | — |   |
| Amortization of  debt issuance costs                                                                        |       | 1,323                                |       | 1,134 |   | 1,211 |   |
| Adjustments to  provision for losses on accounts receivable                                                 |       | 633                                  |       | (9 | ) | 338 |   |
| Loss on sale of  equipment                                                                                  |       | 15                                   |       | 34 |   | 7 |   |
| Deferred income  taxes                                                                                      |       | 3,891                                |       | 12,470 |   | 18,364 |   |
| Changes in  operating assets and liabilities, net of businesses discontinued/sold:                          |       |                                 |       |   |   |   |   |
| Accounts  receivable                                                                                        |       | (9,797                               | )          | 6,962 |   | 6,642 |   |
| Inventories                                                                                                 |       | (3,736                               | )          | (10,001 | ) | 3,320 |   |
| Prepaid and  other assets                                                                                   |       | (323                                 | )          | (806 | ) | (465 | ) |
| Accounts payable  and accrued expenses                                                                      |       | (4,850                               | )          | 12,126 |   | (18,219 | ) |
| Net cash provided  by operating activities - continuing operations                                          |       | 30,913                               |       | 52,020 |   | 68,827 |   |
|                                                                                                        |       |                                 |       |   |   |   |   |
| Net cash  provided by (used in) operating activities - discontinued operations                              |       | 6,322                                |       | (3,617 | ) | 8,229 |   |
|                                                                                                        |       |                                 |       |   |   |   |   |
| **Investing  Activities:**                                                                                  |       |                                 |       |   |   |   |   |
| Purchases of property,  plant and equipment                                                                 |       | (11,081                              | )          | (13,439 | ) | (12,476 | ) |
| Acquisition of  company, net of cash received                                                               |       | —                               |       | (1,095 | ) | — |   |
| Proceeds from  sale of property, plant and equipment                                                        |       | 3,887                                |       | 81 |   | 323 |   |
| Net cash used in  investing activities - continuing operations                                              |       | (7,194                               | )          | (14,453 | ) | (12,153 | ) |
|                                                                                                        |       |                                 |       |   |   |   |   |
| Net cash used in  investing activities - discontinued operations                                            |       | (1,438                               | )          | (1,117 | ) | (627 | ) |
|                                                                                                        |       |                                 |       |   |   |   |   |
| **Financing  Activities:**                                                                                  |       |                                 |       |   |   |   |   |
| (Payments)  borrowings on credit facility, net                                                              |       | (10,018                              | )          | (35,025 | ) | 79,716 |   |
| Payment of debt  issuance costs                                                                             |       | —                               |       | (658 | ) | (6,064 | ) |
| Redemption of  senior subordinated notes                                                                    |       | —                               |       | — |   | (112,593 | ) |
| Sale of common  stock, net of offering costs                                                                |       | —                               |       | — |   | 42,012 |   |
| Payments on  capital lease obligation                                                                       |       | (351                                 | )          | (706 | ) | (1,134 | ) |
| Proceeds from  exercise of stock options and warrants                                                       |       | 5,760                                |       | 81 |   | 5,444 |   |
| Repurchases of  common stock for treasury                                                                   |       | (61,338                              | )          | — |   | (3,634 | ) |
| Payments on  amounts due to sellers of acquired companies                                                   |       | (4,067                               | )          | (2,233 | ) | (1,392 | ) |
| Payments of  deferred compensation related to acquired company                                              |       | (148                                 | )          | (292 | ) | (1,639 | ) |
| Net cash (used  in) provided by financing activities                                                        |       | (70,162                              | )          | (38,833 | ) | 716 |   |
|                                                                                                        |       |                                 |       |   |   |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                               |       | 16                                   |       | 124 |   | (43 | ) |
|                                                                                                        |       |                                 |       |   |   |   |   |
| (Decrease)  increase in cash and cash equivalents                                                           |       | (41,543                              | )          | (5,876 | ) | 64,949 |   |
|                                                                                                        |       |                                 |       |   |   |   |   |
| Cash and cash  equivalents at beginning of year                                                             |       | 59,628                               |       | 65,504 |   | 555 |   |
| Cash and cash  equivalents at end of year                                                                   |       | $                                    | 18,085     |   | $ | 59,628 |   | $ | 65,504 |   |
|                                                                                                        |       |                                 |       |   |   |   |   |
| Cash paid during  the year for:                                                                             |       |                                 |       |   |   |   |   |
| Interest                                                                                                    |       | $                                    | 5,300      |   | $ | 7,703 |   | $ | 15,442 |   |
| Income taxes,  net                                                                                          |       | 1,828                                |       | 162 |   | 1,155 |   |

 

*Seeaccompanying notes.*

 

47

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**AFTERMARKET TECHNOLOGY CORP.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

 

**Note 1.  The Company**

 

The Company has two reportable segments: theDrivetrain Remanufacturing segment and the Logistics segment.  The Drivetrain Remanufacturing segmentprimarily sells remanufactured transmissions directly to Ford, Honda, DaimlerChryslerand certain other foreign Original Equipment Manufacturers (“OEMs”), primarilyfor use as replacement parts by their domestic dealers during the warranty andpost-warranty periods following the sale of a vehicle.  In addition, the Drivetrain Remanufacturingsegment sells select remanufactured engines to certain European OEMs anddomestically to DaimlerChrysler.  TheCompany’s Logistics segment provides the following services:  (i) value-added warehouse, distribution andreverse logistics, test and repair services, turnkey order fulfillment andinformation services primarily for Cingular (historically through AT&TWireless, which was acquired by Cingular in October 2004) and, to a lesserextent, certain other customers in the wireless electronics industry; (ii) logisticsand reverse logistics services and automotive electronic componentsremanufacturing, primarily for General Motors, Delphi and Visteon; and (iii)returned material reclamation and disposition services and core managementservices to General Motors and, to a lesser extent, Ford and Mazda.  The Company’s independent aftermarketbusiness, which is not reportable for segment reporting purposes, remanufacturesand distributes domestic and foreign engines and domestic transmissions toindependent aftermarket customers and is reported as “Other.”  Establishedin 1994, the Company maintains manufacturing facilities and logisticsoperations in the United States and a manufacturing facility in the UnitedKingdom.

 

During the fourth quarter of2004, the Company disposed of an operating unit from its DrivetrainRemanufacturing segment. The operating unit had remanufactured transmissionsfor General Motors.  The results of thisoperating unit are presented as discontinued operations in the accompanyingfinancial statements.  (See Note 16 –Discontinued Operations.)

 

**Note 2.  Summary of Significant Accounting Policies**

 

###### *Principles ofConsolidation*

 

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

 

*Use of Estimates*

 

The preparation of the financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates.

 

*Cash and Cash Equivalents*

 

The Company considers all highlyliquid investments with original effective maturities of three months or lessto be cash equivalents.

 

*Inventories*

 

Inventories are stated at thelower of cost (first-in, first-out method) or market and consistprimarily of new and used transmission parts, cores and finished goods.  Consideration is given to deterioration,obsolescence and other factors in evaluating the estimated market value ofinventory based upon management’s judgment and available information whichincludes assumptions about market conditions, future demand and expectedusage rates which may vary from those estimated.

 

48

----

 

*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 seven years forautos and trucks, four to seven years for furniture and fixtures, two to fifteenyears for leasehold improvements and up to 40 years for buildings.  Depreciation expense was $11,992, $10,926 and$10,314 for the years ended December 31, 2004, 2003 and 2002,respectively.

 

*Internal Use Computer Software*

 

The Company accounts for thesecosts in accordance with the provisions of Statement of Position (“SOP”) 98-1, *Accounting for the Costs of Computer Software Developed or Obtained forInternal Use.*  Accordingly,the Company expenses costs incurred in the preliminary stage and, thereafter,capitalizes costs incurred in developing or obtaining internal use software andWeb site development.  Such capitalizedcosts are included in property, plant and equipment and are amortized over aperiod of not more than five years.

 

*Foreign Currency Translation*

 

The functional currency for theCompany’s foreign operations is the applicable local currency.  Accordingly, all balance sheet accounts havebeen translated using the exchange rates in effect at the balance sheet date,and income statement amounts have been translated using the average exchangerates for the year.  The translationadjustments resulting from the changes in exchange rates have been reportedseparately 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.

 

*Debt Issuance Costs*

 

Debt issuance costs incurred inconnection with the Credit Facility (see Note 9 – Credit Facility) are beingamortized over the life of the respective debt using a method whichapproximates the interest method.  Debtissuance costs are reflected net ofaccumulated amortization of $3,404 and $2,071 as of December 31, 2004 and2003, respectively.

 

###### *Goodwill and OtherIntangible Assets*

###### * *

In accordance with theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets,*theCompany tests its goodwill for impairment annually as of September 30thof each year unless events or circumstances would require an immediatereview.  Impairment is tested at a levelof reporting referred to as a reporting unit, which generally is an operatingsegment or a component of an operating segment as defined in paragraph 10 ofSFAS No. 131, *Disclosures about Segments ofan Enterprise and Related Information*.  In accordance with paragraph 30 of SFAS No.142, certain components of an operating segment with similar economiccharacteristics are aggregated and deemed a single reporting unit.  In estimating the fair value of its reportingunits, the Company utilizes a valuation technique based on multiples ofprojected cash flow, giving consideration to unusual items, cost reductioninitiatives, new business initiatives and other factors that generally would beconsidered in determining value.  Impairmentsare recorded (i) if the fair value is less than the carrying value or (ii) whenan individual reporting unit is disposed of. Goodwill amounts are generally allocated to the reporting units basedupon the amounts allocated at the time of their respective acquisition,adjusted for significant transfers of business between reporting units.  The annual impairment tests made by theCompany as of September 30, 2004 resulted in no adjustment to the carryingvalue of its goodwill from continuing operations. See Note 16 – DiscontinuedOperations for a discussion of the impairment related to the Company’s disposedoperating unit.  Per the provisions ofSFAS No. 142, the Company’s definite lived intangible assets, consistingprimarily of non-compete agreements, are amortized over their useful lives.(See Note 6 – Goodwill and Intangible Assets.)

 

49

----

 

*Promissory Note Receivable*

 

As part of the proceeds from the 2000sale of ATC Distribution Group, Inc. (“Distribution Group”) (see Note 16 – Discontinued Operations), theCompany received from the buyer a senior subordinated promissory note,as amended, at a stated rate of 18%, with a principal amount of $10,050 and adiscounted value of $8,365 at the date of issuance (“18% Buyer Note”).  The 18%Buyer Note, which matures on October 28, 2005, bears interest at (i) 15% perannum compounded semi-annually due and payable in arrears semi-annually onApril 27 and October 27 of each year or until the principal amount is paid infull and (ii) 3% per annum compounded semi-annually due and payable in full atthe earlier of the maturity date or the date on which the principal amount ispaid in full.  During the years endedDecember 31, 2004, 2003 and 2002, $2,581, $2,156 and $1,807 of interest incomewas recorded on the 18% Buyer Note, respectively.  As of December 31, 2004 and 2003, thecarrying value of the 18% Buyer Note was $10,622 and $9,548, respectively.  During 2004, the carrying value of the 18%Buyer Note was reclassified from other assets to current assets-notesreceivable in the accompanying balance sheet.

 

*Impairment of Long-Lived andIntangible Assets*

 

Long-lived assets and identifiable intangibles arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of the related asset may not be recoverable.  Recoverability of assets to be held and used ismeasured 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.  Fora discussion of impairments to property, plant and equipment recorded by theCompany, see Note 16 – Discontinued Operations and Note 20 – Exit, Disposal,Certain Severance and Other Charges.

 

###### *Concentration of CreditRisk*

###### * *

Financial instruments that potentiallysubject the Company to a significant concentration of credit risk consist ofaccounts receivable from its customers including Ford, Honda, DaimlerChrysler,and Cingular, which are located throughout the United States and, to a lesserextent, the United Kingdom. The Company performs ongoing creditevaluation of its customers and maintains sufficient allowances for potentialcredit losses.  The company evaluates thecollectibility of its accounts receivable based on the length of time thereceivable is past due and the anticipated future write-off based on historicexperience.  Accounts receivable balancesare written off against allowance for doubtful accounts after a finaldetermination of uncollectibility has been made.  Thecredit risk associated with the Company’s accounts receivable is mitigated byits credit evaluation process, although collateral is not required.  The Company grants credit to certaincustomers who meet pre-established credit requirements.

 

Accounts receivable is recorded at the time of revenuerecognition and is reflected netof an allowance for doubtful accounts of $839 and $1,515 at December 31,2004 and 2003, respectively.

 

###### *Revenue Recognition*

###### * *

TheCompany recognizes revenues when all of the following conditions are satisfied:  (i) persuasive evidence of an arrangement exists; (ii) the price isfixed or determinable; (iii) collectibility is reasonably assured; and (iv)delivery has occurred or services have been rendered.  Inaddition, the Company includes the reimbursement of certain costs by itscustomers separately as revenue and expense in its Consolidated Statements ofIncome.

 

###### *Warranty Cost Recognition*

 

The Company accrues for estimatedwarranty costs as sales are made.

 

###### *Costs Associated withExit or Disposal Activities*

###### * *

In accordance with theprovisions of SFAS No. 146, *Accounting forCosts Associated with Exit or Disposal Activities,* the Companyrecognizes a liability for costs associated with exit or disposal activities inthe period in which the liability is incurred. The Company classifies the costs associated with exit or

 

50

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disposal activities as apart of Exit, Disposal, Certain Severance and Other Charges (Credits) on itsConsolidated Statements of Income. (See Note 20 -Exit, Disposal, Certain Severance and Other Charges.)

 

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

###### * *

The Company applied theintrinsic value method under the provisions of Accounting Principles Board (“APB”)Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations inaccounting for the stock options granted to its employees and directors for allperiods presented.  Accordingly, employee and director compensationexpense is recognized only for those options whose exercise price is less thanthe market value of the Company’s common stock at the measurement date.

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model assuming no expected dividends and the followingweighted-average assumptions:

 

| ** **                | ** ** | **For the years ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Expected  volatility      |       | 65.71                                | %          | 78.77 | % | 44.96 | % |
| Risk-free  interest rates |       | 3.05                                 | %          | 2.95 | % | 3.37 | % |
| Expected lives            |       | 3.7 years                            |       | 4.3 years |   | 2.9 years |   |

 

The Company also awards shares of its common stock tocertain employees in the form of unvested stock.  These awards are recorded at the market valueof the Company’s common stock on the date of issuance as unearned compensationand amortized ratably as expense over the applicable vesting period.  During the years ended December 31, 2004 and2003, the Company recognized compensation expense of $1,522 ($937 net of incometaxes) and $13 ($8 net of income taxes), respectively, related to theamortization of unearned compensation related to incentive stock awards.  During 2004, in accordance with APB No. 25and related interpretations, the Company recorded compensation expense of$3,323 ($2,044 net of income taxes) from the effective modification of stockoptions held by the Company’s former Chief Executive Officer and former ChiefFinancial Officer.

 

Hadcompensation cost for the Company’s Plans (see  Note 11 – Stock-Based Awards) been determined in accordance with SFAS No. 123, *Accounting for Stock-Based Compensation*, theCompany’s reported income from continuing operations and earnings per sharewould have been adjusted to the pro forma amounts indicated below: 

 
| ** **                                                                                                                                                                                                            | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                                                            | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Income from  continuing operations as reported                                                                                                                                                                        |       | $                                    | 26,795     |   | $ | 18,872 |   | $ | 42,480 |   |
| Stock-based  employee compensation costs included in the determination of income from  continuing operations as reported, net of income taxes                                                                         |       | 2,981                                |       | 8 |   | 3⁄4 |   |
| Stock-based  employee compensation costs that would have been included in the  determination of income from continuing operations if the fair value based  method had been applied to all awards, net of income taxes |       | (4,459                               | )          | (1,469 | ) | (2,269 | ) |
| Pro forma income  from continuing operations as if the fair value based method had been applied  to all awards                                                                                                        |       | $                                    | 25,317     |   | $ | 17,411 |   | $ | 40,211 |   |
|                                                                                                                                                                                                                  |       |                                 |       |   |   |   |   |
| Per common share  – basic:                                                                                                                                                                                       |       |                                 |       |   |   |   |   |
| Income from  continuing operations as reported                                                                                                                                                                        |       | $                                    | 1.27       |   | $ | 0.78 |   | $ | 1.81 |   |
| Pro forma as if  the fair value based method had been applied to all awards                                                                                                                                           |       | $                                    | 1.20       |   | $ | 0.72 |   | $ | 1.71 |   |
| Per common share  – diluted:                                                                                                                                                                                     |       |                                 |       |   |   |   |   |
| Income from  continuing operations as reported                                                                                                                                                                        |       | $                                    | 1.25       |   | $ | 0.77 |   | $ | 1.76 |   |
| Pro forma as if  the fair value based method had been applied to all awards                                                                                                                                           |       | $                                    | 1.18       |   | $ | 0.71 |   | $ | 1.67 |   |

 

51

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###### *New Accounting Standards*

###### * *

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 151,*Inventory Costs – An Amendment of ARB No. 43,Chapter 4.*  SFAS No. 151clarifies that abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials (spoilage) should be recognized as current-periodcharges.  In addition, this Statementrequires that allocation of fixed production overheads to the costs of conversionbe based on the normal capacity of the production facilities.  As allowed under SFAS No. 151, the Companyplans to adopt the provisions of this standard for inventory costs incurredduring fiscal years beginning after June 15, 2005.  The initial adoption of SFAS No. 151 is notexpected to have a material effect on the Company’s results of operations orits financial position.

 

In November 2004, theEmerging Issues Task Force (“EITF”) issued EITF No. 03-13, *Applying the Conditions in Paragraph 42 of FASBStatement No. 144 in Determining Whether to Report DiscontinuedOperations. *EITF 03-13assists in the development of a model for evaluating (a) which cash flows areto be considered in determining whether cash flows have been or will beeliminated and (b) what types of continuing involvement constitute significantcontinuing involvement when determining whether the disposal or sale of acomponent of a business is to be accounted for as discontinued operations.  The Company applied the guidance from thisstandard during 2004 in its classification for the disposal of its operatingunit which remanufactured transmissions forGeneral Motors as discontinued operations. (See Note 16 – Discontinued Operations.)

 

In December 2004, theFASB issued FASB Staff Position, 109-1 ("FSP FAS 109-1”), *Application of FASB Statement No. 109, “Accountingfor Income Taxes,” to the Tax Deduction on Qualified Production ActivitiesProvided by the American Jobs Creation Act of****2004.*  In FSP FAS109-1, the FASB concluded that the tax relief (special tax deduction fordomestic manufacturing) from this legislation should be accounted for as a “specialdeduction” instead of a tax rate reduction. The guidance in FSP FAS 109-1 was effective December 21, 2004 and had noimpact on the Company’s results of operations or its financial position.

 

In December 2004, theFASB issued FSP FAS 109-2,*Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2*004. The American Jobs Creation Act of 2004 introduces a special one-timedividends received deduction on the repatriation of certain foreign earnings toa U.S. taxpayer (repatriation provision), provided certain criteria aremet.  FSP FAS 109-2 gives a companyadditional time to evaluate the effects of the legislation on any plan forreinvestment or repatriation of foreign earnings for purposes of applying SFASNo. 109, *Accounting for Income Taxes.* See Note 10 – Income Taxes, for the Company’srequired disclosures relative to this standard.

 

In December 2004, the FASBissued SFAS No. 123R,*Share-Based Payment.* SFAS No. 123R requires a public entityto measure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award andrecognize this cost in the statements of income over the period during whichthe employee is required to provide such services.  Under the provisions of SFAS No. 123R, theCompany expects to apply the modified prospective application of this statementwith an effective date of July 1, 2005.  Underthe modified prospective application, SFAS No. 123R, which provides certainchanges to the method for valuing stock-based compensation among other changes,will apply to new awards and to awards that are outstanding on the effectivedate and are subsequently modified or cancelled.  Compensation expense for outstanding awardsfor which the requisite service had not been rendered as of the effective datewill be recognized over the remaining service period using the compensationcost calculated for pro forma disclosure purposes under SFAS No. 123.  As of December 31, 2004, the Companyexpects to record a total of approximately $899 before income taxes, during thethird and fourth quarters of 2005 from unamortized compensation expense relatedto stock options granted, as determined in accordance with SFAS No. 123.  In addition, for any new awards that may begranted during 2005, the Company will incur additional expense during the thirdand fourth quarters of 2005 that cannot yet be quantified.  The Company is in the process of determininghow the new method of valuing stock-based compensation as prescribed in SFAS No.123R will be applied to valuing

 

52

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stock-based awardsgranted after the effective date and the impact the recognition of compensationexpense related to such awards will have on its financial statements.

 

###### *Reclassifications*

 

Certain prior-year amounts have beenreclassified to conform to the 2004 presentation.

 

**Note 3.  Related-Party Transactions**

 

An affiliate of AuroraCapital Group (“Aurora Capital”), which controls certain of the Company’slargest stockholders, was paid management fees of $348, $302 and $476 in 2004,2003 and 2002, respectively.  InSeptember 2002 and December 2004, the management fee was reduced due to areduction in Aurora Capital’s percentage ownership of the Company.  The Company also reimburses Aurora Capital forout-of-pocket expenses incurred in connection with providing managementservices.  Aurora Capital is alsoentitled to various additional fees depending on the Company’s profitability orcertain significant corporate transactions. During 2003, the Company was charged $28 in fees for investment bankingservices provided in connection with the acquisition of A-T.A.T., Inc.  No such amounts were charged to the Companyin 2004 or 2002.

 

On February 10, 2004, the Company repurchased1,169,409 shares of its common stock at a price of $15.75 per share from itsaffiliates, Aurora Equity Partners L.P. and Aurora Overseas Equity Partners I,L.P., limited partnerships controlled by Aurora Capital. The per share pricepaid to the Aurora partnerships was the same as the price paid by the Companyto other shareholders in a tender offer completed in January 2004.  (See Note 12 -Repurchases of Common Stock.)

 

**Note 4. Inventories**

 

Inventories of continuing operations consist of thefollowing: 

 
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Raw materials,  including core inventories |       | $                     | 67,999     |   | $ | 63,178 |   |
| Work-in-process                            |       | 1,139                 |       | 1,188 |   |
| Finished goods                             |       | 11,497                |       | 12,108 |   |
|                                       |       | $                     | 80,635     |   | $ | 76,474 |   |

 

**Note 5.  Property, Plant and Equipment**

 

Property, plant and equipment ofcontinuing operations are summarized asfollows:

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                             |       |                  |       |   |   |
| Land                                             |       | $                     | 1,802      |   | $ | 2,043 |   |
| Buildings                                        |       | 11,150                |       | 11,926 |   |
| Machinery and  equipment                         |       | 83,388                |       | 72,358 |   |
| Autos and trucks                                 |       | 1,928                 |       | 1,529 |   |
| Furniture and  fixtures                          |       | 2,454                 |       | 2,301 |   |
| Leasehold  improvements                          |       | 12,533                |       | 11,364 |   |
| Construction in  process                         |       | 1,545                 |       | 2,686 |   |
|                                             |       | 114,800               |       | 104,207 |   |
| Less:  Accumulated depreciation and amortization |       | (61,965               | )          | (49,185 | ) |
|                                             |       | $                     | 52,835     |   | $ | 55,022 |   |

 

Asof December 31, 2004, the Company’s capital lease obligations were paid infull. Assets held by the Company relating to these leases are presented in thetable above.  As of December 31, 2003,the

 

53

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Companyhad machinery and equipment held under capital leases of $1,440, net ofaccumulated depreciation of $1,241 included in property, plant and equipment.

 

TheCompany retained property, plant and equipment from its disposed operating unit(see Note 16 – Discontinued Operations) of $1,896, net of accumulateddepreciation and amortization of $785, as of December 31, 2004 and transferredthese assets to other Drivetrain Remanufacturing segment operations located inthe United States.

 

**Note 6.  Goodwill and Intangible Assets**

 

The change in thecarrying amount of goodwill of continuing operations by reportable segment issummarized as follows:

 
| ** **                                                               | ** ** | **Drivetrain  Remanufacturing** | ** ** | **Logistics** | ** ** | **Other /  Unallocated** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------|------------|---------------|------------|--------------------------|------------|------------------|------------|
| Balance at  December 31, 2002                                            |       | $                               | 126,486    |          | $          | 18,973                   |       | $                | 135        |   | $ | 145,594 |   |
| Aggregate amount  of goodwill acquired                                   |       | —                          |       | —        |       | 1,385                    |       | 1,385            |       |
| Effect of  exchange rate changes from the translation of U.K. subsidiary |       | 871                             |       | —        |       | —                   |       | 871              |       |
| Balance at  December 31, 2003                                            |       |                            | 127,357    |          |       | 18,973                   |       |             | 1,520      |   |   | 147,850 |   |
| Effect of  exchange rate changes from the translation of U.K. subsidiary |       | 739                             |       | —        |       | —                   |       | 739              |       |
| Balance at  December 31, 2004                                            |       | $                               | 128,096    |          | $          | 18,973                   |       | $                | 1,520      |   | $ | 148,589 |   |

 

In February 2003, theCompany acquired substantially all of the assets of A-T.A.T., Inc., doingbusiness as Automotive Transmission and Transaxles, (the “Seller”) a smallremanufacturer of automatic transmissions for sale to the independentaftermarket located in Springfield, Missouri. To complete this acquisition, the Company made cash payments totaling$1,095, including transaction fees and related expenses.  In addition, the Company is required to makesubsequent cash payments to the Seller in the aggregate amount of $350 due inmonthly installments through February 2008. The Company applied the purchase method of accounting for theacquisition of A-T.A.T., Inc. and recordedgoodwill of $1,385.  The operations of A-T.A.T.,Inc. are not material to the Company’sconsolidated operations.

 

The Company’s intangibleassets of continuing operations, primarily consisting of non-compete agreementsbeing amortized over their estimated useful lives are summarized as follows:

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                            |       |                  |       |   |   |
| Intangible  assets              |       | $                     | 1,260      |   | $ | 1,260 |   |
| Less:  Accumulated amortization |       | (854                  | )          | (735 | ) |
|                            |       | $                     | 406        |   | $ | 525 |   |

 

Estimated amortizationexpense for the five succeeding fiscal years is as follows:

 
| ** ** | ** ** | **Estimated  Amortization  Expense** | ** ** |
|------------|------------|--------------------------------------|------------|
|       |       |                                 |       |
| 2005       |       | $                                    | 125        |   |
| 2006       |       | 125                                  |       |
| 2007       |       | 125                                  |       |
| 2008       |       | 21                                   |       |
| 2009       |       | —                               |       |
|       |       | $                                    | 396        |   |

 

54

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**Note 7.  Accrued Expenses**

 

Accruedexpenses of continuing operationsare summarized as follows:

 
| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                                      |       |                  |       |   |   |
| Payroll,  employee benefits and related costs             |       | $                     | 10,913     |   | $ | 9,129 |   |
| Customer related  allowances, discounts and other credits |       | 4,459                 |       | 7,370 |   |
| Warranty                                                  |       | 3,848                 |       | 4,622 |   |
| Exit, disposal,  certain severance and other charges      |       | 2,301                 |       | 6,244 |   |
| Interest payable                                          |       | 1,202                 |       | 798 |   |
| Other                                                     |       | 5,000                 |       | 4,109 |   |
|                                                      |       | $                     | 27,723     |   | $ | 32,272 |   |

 

**Note 8.  Warranty Liability**

 

TheCompany offers various product warranties for (i) transmissions and engines soldto its customers in the Drivetrain Remanufacturing segment and (ii) engines andtransmissions sold to its independent aftermarket customers.  The specific terms and conditions of thewarranties vary depending upon the customer and the product sold.  Factors that affect the Company’s warrantyliability include number of products sold, historical and anticipated rates ofwarranty claims and cost per claim.  TheCompany accrues for estimated warranty costs as sales are made and periodicallyassesses the adequacy of its recorded warranty liability and adjusts the amountas necessary.

 

Changesto the Company’s warranty liability of continuing operations during the yearsended December 31, 2003 and 2004 are summarized as follows:

 
| Balance at  December 31, 2002                     |   | $      | 4,571  |   |
|---------------------------------------------------|--------|--------|--------|--------|
| Warranties  issued                                |   | 4,585  |   |
| Claims paid /  settlements                        |   | (4,390 | )      |
| Changes in  liability for pre-existing warranties |   | (264   | )      |
| Balance added  through acquisition of company     |   | 120    |   |
| Balance at  December 31, 2003                     |   | 4,622  |   |
| Warranties  issued                                |   | 5,575  |   |
| Claims paid /  settlements                        |   | (6,213 | )      |
| Changes in  liability for pre-existing warranties |   | (136   | )      |
| Balance at  December 31, 2004                     |   | $      | 3,848  |   |

 

**Note 9.  CreditFacility**

 

On February 8, 2002,the Company executed a credit agreement and a related security agreement (the “CreditFacility”).  The Credit Facility providesfor (i) a $75,000, five year term loan (the “A-Loan”), with principal payablein quarterly installments in increasing amounts over the five-year period, (ii)a $95,000, six year, two-tranche term loan (the “B-Loans”), with principalpayable in quarterly installments over the six-year period (with 98% of theoutstanding balance payable in the sixth year) and an annual excess cash flowsweep payable as defined in the credit agreement, and (iii) a $50,000 five yearrevolving credit facility ($40,000 as amended in 2003) (the “Revolver”).  The Credit Facility also provides for theaddition of one or more optional term loans of up to $100,000 in the aggregate(the “C-Loans”), subject to certain conditions (including the receipt from oneor more lenders of the additional commitments that may be requested) andachievement of certain financial ratios. On December 12, 2003, the Company amended the Credit Facility to permitthe Stock Repurchase (see Note 12 - Repurchases of Common Stock).  In connection with this amendment, the Companywas required to make a prepayment of $20,000 towards the term loans and reducethe Revolver limit to $40,000.

 

At theCompany’s election, amounts advanced under the Credit Facility will bearinterest at either (i) the Alternate Base Rate (“ABR”) plus a specified

 

55

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margin or (ii) theEurodollar Rate plus a specified margin. The ABR is equal to the highest of (a) the lender’s prime rate,(b) the lender’s base CD rate plus 1.00% or (c) the federal funds effectiverate plus 0.50%.  The applicable margins for both ABR andEurodollar Rate loans are subject to quarterly adjustments based on the Company’sleverage ratio as of the end of the four fiscal quarters then completed.  As of December 31, 2004, the margins for theA-Loan and Revolver were 1.50% for ABR loans and 2.50% for Eurodollar Rateloans.  For the B-Loans, the margins were2.25% for ABR loans and 3.25% for Eurodollar Rate loans as of December 31, 2004.  The interest rates for the optional C-Loanswill be determined at the time such loans are provided.  Additionally, the Company is required to payquarterly in arrears a commitment fee equal to 0.50% per annum of the averagedaily unused portion of the Credit Facility during such quarter.  The Company must also reimburse the lendersfor certain legal and other costs of the lenders, and pay fees on outstandingletters of credit at a rate per annum equal to the applicable margin then ineffect for advances bearing interest at the Eurodollar Rate.

 

Amountsadvanced under the Credit Facility are guaranteed by all of the Company’sdomestic subsidiaries and secured by substantially all of the Company’s assetsand its subsidiaries’ assets.  The CreditFacility contains several covenants, including ones that require the Company tomaintain specified levels of net worth, leverage and interest coverage andothers that limit its ability to incur indebtedness, make capital expenditures,create liens, engage in mergers and consolidations, make restricted payments(including dividends), sell assets, make investments, enter new businesses andengage in transactions with the Company’s affiliates and affiliates of itssubsidiaries.

 

Basedon the Company’s results of operations for the year ended December 31, 2004, aprepayment for the excess cash flow for the year ended December 31, 2004 is notrequired.

 

At December 31, 2004 and 2003, $26,883 and $36,048 wereoutstanding under the A-Loan and $82,990 and $83,843 were outstanding under theB-Loans portions of the Credit Facility, respectively, and no amounts wereoutstanding under the Revolver.  Inaddition, the Company had outstanding letters of credit issued against theCredit Facility totaling $3,485 and $3,125 as of December 31, 2004 and 2003,respectively.

 

Annual maturities of theCredit Facility are as follows as of December 31, 2004:

 

| 2005   |   | $      | 10,629  |   |
|--------|--------|--------|---------|--------|
| 2006   |   | 14,295 |    |
| 2007   |   | 64,681 |    |
| 2008   |   | 20,268 |    |
| 2009   |   | — |    |
|   |   | $      | 109,873 |   |

 

**Note 10. Income Taxes**

 

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

 
| ** **     | ** ** | **For the years ended December 31,** | ** ** |
|----------------|------------|--------------------------------------|------------|
| ** **     | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|           |       |                                 |       |   |   |   |   |
| Current:       |       |                                 |       |   |   |   |   |
| Federal        |       | $                                    | 5,200      |   | $ | (594 | ) | $ | (1,234 | ) |
| State          |       | (57                                  | )          | 2 |   | (2 | ) |
| Foreign        |       | 519                                  |       | 210 |   | 1,139 |   |
| Total current  |       | 5,662                                |       | (382 | ) | (97 | ) |
| Deferred:      |       |                                 |       |   |   |   |   |
| Federal        |       | 7,835                                |       | 9,976 |   | 20,916 |   |
| State          |       | 1,297                                |       | 1,041 |   | 1,572 |   |
| Foreign        |       | 161                                  |       | 511 |   | (217 | ) |
| Total deferred |       | 9,293                                |       | 11,528 |   | 22,271 |   |
|           |       | $                                    | 14,955     |   | $ | 11,146 |   | $ | 22,174 |   |

 

56

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In addition, the Company has recognized tax benefitsrelated to the exercise of certain non-qualified stock options and thedisposition of certain shares acquired upon exercise of incentive stock optionsprior to the expiration of the statutory holding period as an increase instockholders’ equity of $411, $11, and $4,706 for the years endedDecember 31, 2004, 2003 and 2002, respectively.

 

Income from continuingoperations before income taxes is summarized as follows:

 
| ** ** | ** ** | **For the years ended December 31,** | ** ** |
|------------|------------|--------------------------------------|------------|
| ** ** | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Domestic   |       | $                                    | 39,631     |   | $ | 27,344 |   | $ | 62,154 |   |
| Foreign    |       | 2,119                                |       | 2,674 |   | 2,500 |   |
| Total      |       | $                                    | 41,750     |   | $ | 30,018 |   | $ | 64,654 |   |
|            |            |                                      |            |  |  |  |  |  |  |  |  |

 

The reconciliation ofincome tax expense computed at the U.S. federal statutory tax rates to incometax expense from continuing operations is as follows:

 
| ** **                                        | ** ** | **For the years ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                        | ** ** | **Amount**                           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Tax at U.S.  statutory rates                      |       | $                                    | 14,612     |   | 35.0 | % | $ | 10,506 |   | 35.0 | % | $ | 22,629 |   | 35.0 | % |
| State income  taxes, net of federal tax benefit   |       | 921                                  |       | 2.2 |   | 70 |   | 0.2 |   | 1,292 |   | 2.0 |   |
| Foreign income  taxes                             |       | (106                                 | )          | (0.3 | ) | (134 | ) | (0.5 | ) | (125 | ) | (0.2 | ) |
| Increase  (decrease) in valuation allowance       |       | (8                                   | )          | — |   | 893 |   | 3.0 |   | — |   | — |   |
| Nondeductible  expenses                           |       | 104                                  |       | 0.3 |   | 93 |   | 0.3 |   | 103 |   | 0.2 |   |
| Federal refund                                    |       | —                               |       | — |   | — |   | — |   | (575 | ) | (0.9 | ) |
| Federal and  state impact of IRS audit resolution |       | (441                                 | )          | (1.1 | ) | — |   | — |   | — |   | — |   |
| Other                                             |       | (127                                 | )          | (0.3 | ) | (282 | ) | (0.9 | ) | (1,150 | ) | (1.8 | ) |
|                                              |       | $                                    | 14,955     |   | 35.8 | % | $ | 11,146 |   | 37.1 | % | $ | 22,174 |   | 34.3 | % |

 

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

 

| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Deferred tax  assets:                                         |       |             |       |   |   |
| Inventory  obsolescence reserve                               |       | $                | 2,362      |   | $ | 1,848 |   |
| Product warranty  accruals                                    |       | 1,379            |       | 1,654 |   |
| Exit, disposal,  certain severance and other charges accruals |       | 1,281            |       | 2,254 |   |
| Other  nondeductible accruals                                 |       | 2,437            |       | 2,777 |   |
| Credit  carryforwardss                                        |       | 1,059            |       | 469 |   |
| Net operating  loss carryforwards                             |       | 24,021           |       | 20,012 |   |
| Other deferred  items                                         |       | 4,065            |       | 3,122 |   |
| Total deferred  tax assets                                    |       | 36,604           |       | 32,136 |   |
| Deferred tax  liabilities:                                    |       |             |       |   |   |
| Amortization of  intangible assets                            |       | 20,734           |       | 17,718 |   |
| Property, plant  and equipment                                |       | 4,690            |       | 3,106 |   |
| Total deferred  tax liabilities                               |       | 25,424           |       | 20,824 |   |
|                                                          |       |             |       |   |   |
| Valuation  allowance                                          |       | (13,881          | )          | (10,086 | ) |
|                                                          |       |             |       |   |   |
| Net deferred tax  (liability) asset                           |       | $                | (2,701     | ) | $ | 1,226 |   |

 

57

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As ofDecember 31, 2004, the Company had federal operating loss carryforwards ofapproximately $34,343 ($29,967 expiring in 2020 with the remainder expiring in2024) and state loss carryforwards attributable to states in which the Company’sprimary operations are located of approximately $15,058 (expiring in varyingamounts from 2005 to 2024).  These losscarryforwards are available as an offset to the future taxable income of theCompany and its subsidiaries.  Inaddition, the Company has state loss carryforwards attributable to states inwhich the Company no longer conducts business that are subject to a fullvaluation allowance.  The Company alsohas Alternative Minimum Tax (“AMT”) credit carryforwards of approximately $630available to offset regular income tax payable in future years.  The Company, through its subsidiary in theU.K., has surplus Advance Corporate Tax (“ACT”) of approximately $429 availableas a direct offset to future U.K. tax liability.  The Company’s AMT credit and surplus ACT canbe carried over indefinitely.

 

A valuation allowance has been established for certainfederal tax benefits due to limitations in the carryforward period.  Also, a valuation allowance has beenestablished for the tax benefits associated with certain state losscarryforwards as realization is not deemed likely due to limitations imposed bycertain states on the Company’s ability to utilize these benefits.  A valuation allowance has also beenestablished for certain foreign tax benefits due to similar limitations imposedby the foreign tax jurisdiction.  During2004, the valuation allowance increased by $3,795 to $13,881 from $10,086.  During 2004, the Company placed a valuationallowance of $2,218 on its capital loss carryforward ending on December 31,2005, based upon management’s assessment is that it is more likely than notthat this tax attribute will expire unused (see Note 16 – DiscontinuedOperations).  Also during 2004, theCompany placed a valuation allowance of $1,104 on its North Carolina netoperating loss carryforward due to the closure of its Gastonia, North Carolinafacility.  Finally, the valuationallowance has also been adjusted to reflect changes to the valuation of foreigncarryovers due to exchange rate fluctuation.  The Company believes that, consistent withaccounting principles generally accepted in the United States, it is morelikely than not that the tax benefits associated with the balance of losscarryforwards and other deferred tax assets will be realized through futuretaxable earnings or alternative tax strategies.

 

As of December 31, 2004, there are approximately$3,451 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.  On October 22, 2004, the American JobsCreation Act (P. L. No. 108-357) was enacted, including a new provision under§965 allowing for a one-time 85% dividends received deduction on repatriatedearnings.  Management is currentlyanalyzing the impact of the new provision and expects to complete its analysisby the end of the second quarter of 2005. The range of reasonably possible amounts that are being considered for repatriationis $0-$3,451.  The potential tax impactof repatriation, if any, will be estimated upon completion of an internationalearnings and profits study, also to be completed by the end of the secondquarter of 2005.

 

**Note 11. Stock-Based Awards**

 

The Company provides stock options and other incentivestock awards (“Stock Awards”) to employees, non-employee directors andindependent contractors under its 2004 Stock Incentive Plan (the “2004 Plan”), its2002 Stock Incentive Plan (the “2002 Plan”), its 2000 Stock Incentive Plan (the“2000 Plan”), its 1998 Stock Incentive Plan (the “1998 Plan”) and its 1996Stock Incentive Plan, expired on July 29, 2004, (the “1996 Plan”) (collectivelythe “Plans”).  The Plans provide forgranting of non-qualified and incentive stock option awards.  Stock options under the Plans are generallygranted at the market price of the Company’s common stock on the date of grantand typically vest over a three to five year period of time, as determined bythe Board of Directors.  Options underthe Plans expire 10 years from the date of grant.  The 2004, 2002, 2000 and 1998 plans authorizethe issuance of 1,000,000, 1,000,000, 750,000 and 1,200,000 shares of theCompany’s common stock, respectively. Shares available for grant under the Plans in the aggregate were 746,248,300,799 and 500,305 as of December 31, 2004, 2003 and 2002, respectively.

 

58

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A summary of the Plans stock option activities arepresented below:

 
| ** **                                                       | ** ** | **2004**   | ** ** | **2003**                                | ** ** | **2002**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                                       | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of year                                |       | 2,182,454  |       | $                                       | 14.34      |       | 2,011,281  |   | $ | 14.97 |   | 2,226,223 |   | $ | 7.82 |   |
| Granted at  market price                                         |       | 637,000    |       | $                                       | 14.96      |       | 300,000    |   | $ | 9.85 |   | 459,000 |   | $ | 20.67 |   |
| Granted above  market price                                      |       | 3⁄4     |       | $                                       | —     |       | —     |   | $ | — |   | 350,000 |   | $ | 30.00 |   |
| Exercised                                                        |       | (708,063   | )          | $                                       | 8.14       |       | (8,333     | ) | $ | 9.67 |   | (868,951 | ) | $ | 6.42 |   |
| Canceled/forfeited                                               |       | (228,496   | )          | $                                       | 13.78      |       | (120,494   | ) | $ | 13.93 |   | (154,991 | ) | $ | 11.11 |   |
| Outstanding at  end of year                                      |       | 1,882,895  |       | $                                       | 16.95      |       | 2,182,454  |   | $ | 14.34 |   | 2,011,281 |   | $ | 14.97 |   |
|                                                             |       |       |       |                                    |       |       |       |   |   |   |   |   |   |
| Exercisable at  end of year                                      |       | 939,876    |       | $                                       | 19.27      |       | 1,311,295  |   | $ | 16.01 |   | 881,737 |   | $ | 17.66 |   |
|                                                             |       |       |       |                                    |       |       |       |   |   |   |   |   |   |
| Weighted-average  fair value of options granted during the year: |       |       |       |                                    |       |       |       |   |   |   |   |   |   |
| Grant price  equal to market price                               |       |       |       | $                                       | 7.49       |       |       |   | $ | 6.02 |   |   |   | $ | 7.75 |   |
| Grant price  above market price                                  |       |       |       | $                                       | —     |       |       |   | $ | — |   |   |   | $ | 3.43 |   |

 

The following summarizes information about optionsoutstanding as of December 31, 2004:

 
| ** **                 | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                   | ** ** |
|----------------------------|------------|-------------------------|------------|-------------------------------------------|------------|
| **Range ofExercisePrices** | ** ** | **Shares**              | ** ** | **Average  Remaining  Contractual  Life** | ** ** | **Weighted-Average  ExercisePrices** | ** ** | **Shares** | ** ** | **Weighted-Average  ExercisePrices** | ** ** |
| $4.56-$7.00                |       | 183,163                 |       | 5.7 years                                 |       | $ | 5.03 |   | 158,332 |   | $ | 5.02 |   |
| $7.01-$12.00               |       | 367,145                 |       | 6.4 years                                 |       | $ | 10.04 |   | 186,099 |   | $ | 10.06 |   |
| $12.01-$20.00              |       | 736,920                 |       | 8.5 years                                 |       | $ | 15.18 |   | 102,422 |   | $ | 16.33 |   |
| $20.01-$30.00              |       | 595,667                 |       | 7.2 years                                 |       | $ | 27.07 |   | 493,023 |   | $ | 27.94 |   |
|                       |       | 1,882,895               |       | 7.4 years                                 |       | $ | 16.95 |   | 939,876 |   | $ | 19.27 |   |

 

During the years ended December 31, 2004 and 2003, theCompany issued 141,500 shares at a weighted average fair value of $14.41 pershare and 20,000 shares at a fair value of $12.20 per share, respectively, ofits common stock to certain executives of the Company as compensation forfuture services.  Unearned compensation of$2,040 and $244 was recorded for these awards during the years ended December31, 2004 and 2003, respectively, based upon the market price of the Company’sstock on the date of grant.  These sharesvest over a period of up to three years from the date of grant.  The related compensation expense is beingamortized ratably over the applicable vesting period.  Expense related to these awards was $1,522and $13 for years ended December 31, 2004 and 2003, respectively.

 

During the year ended December 31, 2002, the remaining70,176 stock warrants outstanding were exercised in a cash transaction.  These warrants were issued in 1994 at $1.67per share, the fair value of the Company’s common stock on the date of grant.

 

59

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**Note 12.  Repurchasesof Common Stock**

 

On December 16, 2003, the Company initiated a tenderoffer to purchase up to 2,638,500 shares of its common stock outstanding at aprice not greater than $15.75 per share and not less than $13.00 per share.  In addition, the Company agreed to purchaseup to 1,169,409 shares at the final tender offer price from our affiliates,Aurora Equity Partners L.P. and Aurora Overseas Equity Partners I, L.P.(collectively, “Aurora”), who did not participate in the tender offer. (Thetender offer and the Aurora repurchase collectively, the “Stock Repurchase.”)  The maximum number of shares to be purchasedin the Stock Repurchase represented 15.7% of our outstanding common stock.  On January 26, 2004, the Company completed thetender offer and purchased 2,638,500 shares of its common stock at $15.75 pershare (the “Tender Price”), based upon a final share count of 3,538,544 sharestendered and not withdrawn.  Due to theover-subscription, the Company purchased 74.56% of each stockholder’s totalshares tendered at the Tender Price.  OnFebruary 10, 2004, the Company completed the purchase of the 1,169,409 sharesfrom Aurora at the same price as the Tender Price.  The total cost of the Stock Repurchase was$59,975 plus fees and expenses of $1,173 and was funded with available cash onhand.

 

During 2004, certain employees of the Company delivered to the Company13,058 shares of the Company’s common stock in payment of $190 of withholdingtax obligations arising from the vesting of restricted stock awards.  Per the stock incentive plan under which thestock awards were granted, the withholding tax obligation was based upon the fairmarket value of the Company’s common stock on the vesting date.

 

**Note13.  Derivative Financial Instruments**

 

The Company used an interest rate swap to convert aportion of its variable rate debt to fixed rate debt to reduce interest ratevolatility risk.  The swap, which expiredin July 2003, was based on a notional amount of $15,000 at the fixed interestrate of 5.95% during its term.  The fairvalue of the swap was based on the estimated current settlement cost.  In accordance with SFAS No. 133 *Accounting for Derivative Instruments and Hedging Activities*(as amended by SFAS No. 137, 138 and 149), the Company designated this swapagreement as a cash flow hedge and recorded the fair value of this hedgeagreement as part of accumulated other comprehensive income.  The following table sets forth the effectiveportion of changes in the fair value of this derivative:

 

| ** **                | ** ** | **For the years ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Increase in fair  value   |       | $                                    | —     |   | $ | 370 |   |
| Income taxes              |       | —                               |       | (133 | ) |
| Other comprehensive  gain |       | $                                    | —     |   | $ | 237 |   |

 

**Note 14. Earnings Per Share**

 

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

 
| ** **                                         | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                         | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Numerator:                                         |       |                                 |       |   |   |   |   |
| Income from  continuing operations                 |       | $                                    | 26,795     |   | $ | 18,872 |   | $ | 42,480 |   |
|                                               |       |                                 |       |   |   |   |   |
| Denominator:                                       |       |                                 |       |   |   |   |   |
| Weighted-average  common shares outstanding        |       | 21,096,921                           |       | 24,213,185 |   | 23,493,092 |   |
| Common stock  equivalents                          |       | 314,341                              |       | 272,451 |   | 625,681 |   |
| Denominator for  diluted earnings per common share |       | 21,411,262                           |       | 24,485,636 |   | 24,118,773 |   |
|                                               |       |                                 |       |   |   |   |   |
| Per common share  – basic                     |       | $                                    | 1.27       |   | $ | 0.78 |   | $ | 1.81 |   |
| Per common share  – diluted                   |       | 1.25                                 |       | 0.77 |   | 1.76 |   |

 

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**Note 15.  Employee Retirement Plans**

 

The Company’s definedcontribution plans provide substantially all U.S. salaried and hourly employeesof the Company an opportunity to accumulate personal funds for theirretirement, subject to minimum duration of employment requirements.  Contributions are made on a before-tax basisto 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 $1,158,$1,202 and $1,344 for the years ended December 31, 2004, 2003 and 2002,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 $318, $249 and $212 for the yearsended December 31, 2004, 2003 and 2002, respectively.

 

## **Note 16.  Discontinued Operations**

 

On September 9, 2004, theCompany announced (i) General Motors’ decision to resource its remanufacturedtransmission program from the Company’s facility located in Gastonia, NorthCarolina by the end of 2004 and (ii) the Company’s decision to close theGastonia facility.  On October 15, 2004,the Company completed its production requirements under the settlementagreement with General Motors and ceased operations at its Gastonia, NorthCarolina facility.  As a result of thisdecision, the Company recorded a pre-tax charge of $28,379 during the thirdquarter of 2004 and an additional charge of $394 during the fourth quarter of2004.  The total pre-tax loss of $28,773related to the disposal of this operating unit included (i) $22,114 to writeoff all of the allocated goodwill, (ii) $1,905 of costs related to thetermination of the contract with General Motors and other facility exit costs, (iii)$1,716 of inventory write-downs, (iv) $1,519 for the impairment of property,plant and equipment to its fair value and (v) $1,519 of severance and relatedcosts. In accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long Lived Assets*, upon theabandonment of the facility in the fourth quarter of 2004, the results of operationsof this operating unit within the Company’s Drivetrain Remanufacturing segment werereclassified as discontinued operations. As of December 31, 2004, the Company transferred property, plant and equipment valued at $1,896 from its Gastoniafacility to other Drivetrain Remanufacturing segment facilities located in theUnited States.

 

During 2000, the Companysold the Distribution Group, a distributor of remanufactured transmissions andrelated drivetrain components to independent aftermarket customers, classifiedthe results of this business as part of discontinued operations and recorded apre-tax loss from the sale of this business of $141,429.  During 2004, the Company recorded anadditional loss of $794 related to the Distribution Group including (i) acharge of $2,218 for a valuation allowance related to the expected expirationof a capital loss carryforward, (ii) a non-cash tax benefit of $1,368 basedupon the resolution of prior year income tax issues with respect to the taxbasis of the Distribution Group and (iii) income of $56 (net of income taxes of$37) based upon updated information regarding obligations and other costsrelated to the sale of the Distribution Group.  During 2002, the Company recorded a gain of$1,279 related to the sale of the Distribution Group which included (i) $1,004from a reduction of certain tax contingency reserves associated with the sale and(ii) $275 (net of income taxes of $155) from a revision to the estimated lossbased upon updated information regarding obligations and other costs.

 

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Details of the gain (loss)recorded from discontinued operations are as follows:

 
| ** **                                                     | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Disposal of  Gastonia Operations:                              |       |                                 |       |   |   |   |   |
| Sales                                                          |       | $                                    | 19,992     |   | $ | 27,355 |   | $ | 23,449 |   |
| Impairment of  goodwill                                        |       | 22,114                               |       | — |   | — |   |
| Exit, disposal,  certain severance and other charges           |       | 6,906                                |       | 154 |   | — |   |
| Other costs and  expenses                                      |       | 21,788                               |       | 25,065 |   | 19,488 |   |
| Income (loss)  before income taxes                             |       | (30,816                              | )          | 2,136 |   | 3,961 |   |
| Income tax  expense (benefit)                                  |       | (10,591                              | )          | 497 |   | 1,293 |   |
|                                                           |       | (20,225                              | )          | 1,639 |   | 2,668 |   |
| Sale of  Distribution Group:                                   |       |                                 |       |   |   |   |   |
| Estimated gain  (loss) from sale                               |       | 93                                   |       | — |   | 430 |   |
| Income tax  (expense) benefit                                  |       | (37                                  | )          | — |   | (155 | ) |
| Adjustment to  valuation allowance on capital losses           |       | (2,218                               | )          | — |   | — |   |
| Adjustment to  income tax benefit                              |       | 1,368                                |       | — |   | 1,004 |   |
|                                                           |       | (794                                 | )          | — |   | 1,279 |   |
|                                                           |       |                                 |       |   |   |   |   |
| Gain (loss) from  discontinued operations, net of income taxes |       | $                                    | (21,019    | ) | $ | 1,639 |   | $ | 3,947 |   |

 

Details of assets andliabilities of discontinued operations are as follows:

 
| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Disposal of  Gastonia Operations:                        |       |                  |       |   |   |
| Current Assets                                           |       | $                     | 282        |   | $ | 6,179 |   |
| Property, plant  and equipment, net                      |       | 3⁄4                |       | 2,439 |   |
| Goodwill                                                 |       | 3⁄4                |       | 22,635 |   |
| Current  liabilities                                     |       | (1,026                | )          | (4,287 | ) |
|                                                     |       | (744                  | )          | 26,966 |   |
| Sale of  Distribution Group:                             |       |                  |       |   |   |
| Obligations from  the sale of the distribution group (1) |       | (137                  | )          | (291 | ) |
|                                                     |       |                  |       |   |   |
| Assets  (liabilities) of discontinued operations, net    |       | $                     | (881       | ) | $ | 26,675 |   |

 

----

(1)  Represents the Company’s current estimate ofthe remaining obligations and other costs related to the sale of theDistribution Group.  (See Note 17 –Commitments and Contingencies.)

 

**Note 17.  Commitments and Contingencies**

 

The Company leases certainfacilities and equipment under various operating lease agreements, which expireon various dates through 2019.  Facilityleases that expire generally are expected to be renewed or replaced by otherleases.  Future minimum rentalcommitments under non-cancelable operating leases with terms in excess of oneyear are as follows:

 
| **For the years ended  December 31,** | ** ** | **Operating  Leases** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| 2005                                       |       | $                     | 7,441      |   |
| 2006                                       |       | 6,225                 |       |
| 2007                                       |       | 4,681                 |       |
| 2008                                       |       | 2,773                 |       |
| 2009                                       |       | 647                   |       |
| 2010 and  thereafter                       |       | 5,525                 |       |
| Total minimum  lease payments              |       | $                     | 27,292     |   |

 

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Rent expense for all operatingleases approximated $9,272, $9,942 and $10,560 for the years endedDecember 31, 2004, 2003 and 2002, respectively.

 

At December 31, 2004 and2003, amounts due to sellers of acquired companies and deferred compensationconsist primarily of additional purchase price payable to the seller and a keyindividual of ATS Remanufacturing (“ATS”), acquired in 1997.  The ATS acquisition requires the Company tomake subsequent payments to the seller and certain other key individuals of ATSon each of the first 14 anniversaries of the closing date.  Through December 31, 2004, the Company hadmade aggregate payments of $13,988 related to the ATS acquisition with $2,400to be paid in January 2005 and $868 (present value of $736) to be paid between2005 and 2011.

 

From time to time, theCompany has been, and currently is, involved in various legal claims arising inconnection with its business.  While theresults of these claims cannot be predicted with certainty, as of December 31,2004, there were no asserted claims against the Company that, in the opinion ofmanagement, if adversely decided, would have a material effect on the Company’sfinancial position, results of operations and cash flows.

 

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 withthe acquisition of certain subsidiaries, some of which have been subsequentlydivested or relocated, the Company conducted certain investigations of thesecompanies’ facilities and their compliance with applicable environmental laws.The investigations, which included Phase I assessments by independentconsultants of all manufacturing and various distribution facilities, foundthat a number of these facilities have had or may have had releases ofhazardous materials that may require remediation and also may be subject to potentialliabilities for contamination from off-site disposal of substances or wastes.These assessments 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’sformer subsidiaries, RPM, leased several facilities in Azusa, Californialocated within what is now the Baldwin Park Operable Unit of the San GabrielValley Superfund Site. The entity that leased the facilities to RPM has beenidentified by the United States Environmental Protection Agency, or EPA, as oneof approximately nineteen potentially responsible parties, or PRPs, forenvironmental liabilities associated with the Superfund Site. The FederalComprehensive Environmental Response, Compensation, and Liability Act of 1980,as amended (CERCLA or Superfund) provides for cleanup of sites from which therehas been a release or threatened release of hazardous substances, andauthorizes recovery of related response costs and certain other damages fromPRPs. PRPs are broadly defined under CERCLA, and generally include presentowners and operators of a site and certain past owners and operators. As ageneral rule, courts have interpreted CERCLA to impose strict, joint andseveral liability upon all persons liable for cleanup costs. As a practicalmatter, however, at sites where there are multiple PRPs, the costs of cleanup typicallyare allocated among the PRPs according to a volumetric or other standard. TheEPA has preliminarily estimated that it will cost in excess of $200,000 toconstruct and operate for at least 15 years a complex series of remedialgroundwater pumping and treatment systems for the part of the San GabrielValley Superfund site within which RPM’s facilities, as well as those of manyother potentially responsible parties, are or were located. The actual cost ofthis remedial action could vary substantially from this estimate, andadditional costs associated with this Superfund site could be assessed. Currently,a group of eight PRPs (which does not include the entity that leased thefacilities to RPM) is paying for the construction of the required remedial systems.  RPM moved all manufacturing operations out ofthe San Gabriel Valley Superfund site area in 1995. Since July 1995, RPM’sonly real property interest in this area has been the lease

 

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of a 6,000 square foot storage and distributionfacility.  Neither the Company nor any ofits affiliates has been named by the EPA as a PRP for the Superfund Site and,based on the Company’s limited connection with the Site, the Company does notbelieve that it is likely to be identified as such in the future.  Furthermore, the acquisition agreement bywhich the Company acquired the assets of RPM in 1994 and the leases pursuant towhich the Company leased RPM’s facilities after it acquired the assets of RPMexpressly provide that the Company did not assume any liabilities forenvironmental conditions existing on or before the closing of the acquisition,although the Company could become responsible for those liabilities undervarious legal theories. The Company is indemnified against any such liabilitiesby the company that sold RPM to it as well as the shareholders of that company,although the Company has no information regarding the current financialcondition of these indemnitors and there can be no assurance that the Companywould be able to make any recovery under the indemnification provisions.  The Company cannot estimate its potentialliability, if any, relating to the San Gabriel Valley Superfund site.  However, the Company believes that it willnot incur any material liability, although no assurance can be given.

 

Inconnection with the sale of the Distribution Group, a former segment of theCompany’s business discontinued and sold during 2000 (the “DG Sale”), theCompany agreed to certain matters with the buyer that could result incontingent liability to the Company in the future.  These include the Company’s indemnificationof the buyer against (i) environmental liability at former DistributionGroup facilities that had been closed prior to the DG Sale, including theformer manufacturing facility in Azusa, California within the Superfund sitementioned above and former manufacturing facilities in Mexicali, Mexico andDayton, Ohio, (ii) any other environmental liability of the DistributionGroup relating to periods prior to the DG Sale, in most cases subject to a $750deductible and a $12,000 cap except with respect to closed facilities and(iii) any tax liability of the Distribution Group relating to periodsprior to the DG Sale.  During 2002, the Company negotiated an additional$100 deductible applicable to all Distribution Group claims forindemnification.  In addition, prior tothe DG Sale several of the Distribution Group’s real estate and equipmentleases with terms ending on various dates during 2004 and 2007, were guaranteedby the Company.  These guarantees, whichoriginated prior to the time of the DG Sale, remain in effect after the DG Saleso the Company continues to be liable for the Distribution Group’s obligationsunder such leases in the event that the Distribution Group does not honor thoseobligations.  The Distribution Group hasindemnified the Company against any damages relating to the Company’sguarantees, however the Company holds no assets as collateral against theseobligations.  As of December 31,2004, these lease guarantees relating to minimum lease obligations totaled $1,815and $36 for real estate and personal property, respectively.

 

TheCompany has a 45% equity interest in an unconsolidated subsidiary whose bankcredit facility is secured in part by a $850 letter of credit given by theCompany to the lending bank in March 2002. This letter of credit is to stay in effect until the expiration of thebank credit facility in April 2005.  Asof December 31, 2004, the letter of credit had not been drawn upon and theCompany believes that it is less than probable that the Company will incur aloss with respect to the letter of credit in the future, and therefore has notestablished a liability with respect thereto.

 

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**Note 18.  Segment Information**

 

Within the Company, financial performance is measuredby lines of business.  The Company hastwo reportable segments: the Drivetrain Remanufacturing segment and theLogistics segment.  The DrivetrainRemanufacturing segment primarily sells remanufactured transmissions directlyto Ford, Honda, DaimlerChrysler, and certain other foreign OEMs, primarily foruse as replacement parts by their domestic dealers during the warranty andpost-warranty periods following the sale of a vehicle.  In addition, the Drivetrain Remanufacturingsegment sells select remanufactured engines to certain European OEMs and domesticallyto DaimlerChrysler.  The Company’sLogistics segment provides the following services (i) value-added warehouse,distribution and reverse logistics, test and repair services, turnkey orderfulfillment and information services for Cingular Wireless (historicallythrough AT&T Wireless, which was acquired by Cingular in October 2004)  and to a lesser extent, certain othercustomers in the wireless electronics industry; (ii) logistics and reverselogistics services and automotive electronic components remanufacturing,primarily for General Motors, Delphi and Visteon; and (iii) returned materialreclamation and disposition services and core management services to GeneralMotors, and to a lesser extent, Ford and Mazda. The Company’s independent aftermarket business, which is not reportablefor segment reporting purposes, remanufactures and distributes domestic andforeign engines and domestic transmissions to independent aftermarket customersand is reported as “Other.”  Thereportable segments and the “Other” business unit are each managed and measuredseparately primarily due to the differing customers, production processes,products sold and distribution channels.

 

Effective January 1,2004, the Company revised its internal reporting to align with its currentorganization structure.  As a result,operating activities related to the remanufacturing and distribution of allengines and certain transmissions for sale into the independent aftermarket arenow reflected in the “Other” business unit. Additionally, select transmissions are remanufactured at operating unitsincluded in our Drivetrain Remanufacturing segment and are transferred to our “Other”business unit also for sale into the independent aftermarket at a fixed unitprice that approximates cost.  Theresults for the prior periods have also been adjusted to reflect this change.

 

The Company evaluatesperformance based upon income from operations. The reportable segments’ and the “Other” business unit’s accountingpolicies are the same as those described in the summary of significantaccounting policies (see Note 2 – Summary of Significant AccountingPolicies).  The Company fully allocates (i)corporate overhead generally based upon budgeted full year profit before taxand (ii) internal systems costs based upon usage estimates.  Total assets by reportable segments’ and the “Other”business unit include those reported by the Company in its consolidated balancesheet, eliminating non-trade intercompany assets effective with the reportingas of December 31, 2004 with adjustments to prior periods to reflect thischange.

 

65

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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** | ** ** | **Discontinued  Assets** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------|------------|---------------|------------|-----------|------------|------------------------------|------------|--------------------------|------------|------------------|------------|
| 2004:                                                          |       |                            |       |          |       |      |       |                         |       |                     |       |             |       |
| Net sales from  external customers                             |       | $                               | 271,215    |          | $          | 104,385   |       | $                            | 19,977     |                     | $          | —           |       | $ | — |   | $ | 395,577 |   |
| Depreciation and  amortization expense                         |       | 7,496                           |       | 3,782         |       | 436       |       | 403                          |       | —                   |       | 12,117           |       |
| Exit, disposal,  certain severance and other charges (credits) |       | (705                            | )          | 156           |       | 265       |       | 4,315                        |       | —                   |       | 4,031            |       |
| Income (loss)  from operations                                 |       | 40,524                          |       | 15,679        |       | (5,695    | )          | (4,315                       | )          | —                   |       | 46,193           |       |
| Total assets                                                   |       | 272,006                         |       | 48,352        |       | 25,002    |       | 44,635                       |       |                     |       | 389,995          |       |
| Goodwill                                                       |       | 128,096                         |       | 18,973        |       | 1,385     |       | 135                          |       | —                   |       | 148,589          |       |
| Expenditures for  long-lived assets                            |       | 8,051                           |       | 2,253         |       | 261       |       | 516                          |       | —                   |       | 11,081           |       |
|                                                           |       |                            |       |          |       |      |       |                         |       |                     |       |             |       |
| 2003:                                                          |       |                            |       |          |       |      |       |                         |       |                     |       |             |       |
| Net sales from  external customers                             |       | $                               | 240,957    |          | $          | 81,700    |       | $                            | 17,052     |                     | $          | —           |       | $ | — |   | $ | 339,709 |   |
| Depreciation and  amortization expense                         |       | 6,851                           |       | 3,921         |       | 453       |       | —                       |       | —                   |       | 11,225           |       |
| Exit, disposal,  certain severance and other charges           |       | 4,212                           |       | 922           |       | —    |       | 3,339                        |       | —                   |       | 8,473            |       |
| Income (loss)  from operations                                 |       | 22,939                          |       | 21,994        |       | (6,641    | )          | (3,339                       | )          | —                   |       | 34,953           |       |
| Total assets                                                   |       | 271,423                         |       | 40,261        |       | 22,432    |       | 86,493                       |       | 26,675                   |       | 447,284          |       |
| Goodwill                                                       |       | 127,357                         |       | 18,973        |       | 1,385     |       | 135                          |       | —                   |       | 147,850          |       |
| Expenditures for  long-lived assets                            |       | 10,578                          |       | 2,077         |       | 512       |       | 272                          |       | —                   |       | 13,439           |       |
|                                                           |       |                            |       |          |       |      |       |                         |       |                     |       |             |       |
| 2002:                                                          |       |                            |       |          |       |      |       |                         |       |                     |       |             |       |
| Net sales from  external customers                             |       | $                               | 264,561    |          | $          | 114,203   |       | $                            | 13,689     |                     | $          | —           |       | $ | — |   | $ | 392,453 |   |
| Depreciation and  amortization expense                         |       | 5,995                           |       | 4,144         |       | 508       |       | —                       |       | —                   |       | 10,647           |       |
| Exit, disposal,  certain severance and other charges (credits) |       | —                          |       | (154          | )          | —    |       | (123                         | )          | —                   |       | (277             | )          |
| Income (loss)  from operations                                 |       | 46,795                          |       | 36,768        |       | (4,528    | )          | 123                          |       | —                   |       | 79,158           |       |
| Total assets                                                   |       | 262,074                         |       | 49,911        |       | 14,483    |       | 97,276                       |       | 24,341                   |       | 448,085          |       |
| Goodwill                                                       |       | 126,486                         |       | 18,973        |       | —    |       | 135                          |       | —                   |       | 145,594          |       |
| Expenditures for  long-lived assets                            |       | 8,221                           |       | 4,078         |       | —    |       | 177                          |       | —                   |       | 12,476           |       |

 

66

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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,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|                              |       |                                            |       |   |   |   |   |
| Net sales:                        |       |                                            |       |   |   |   |   |
| United States                     |       | $                                               | 362,395    |   | $ | 306,036 |   | $ | 363,747 |   |
| Europe and Canada                 |       | 33,182                                          |       | 33,673 |   | 28,706 |   |
| Consolidated net sales            |       | $                                               | 395,577    |   | $ | 339,709 |   | $ | 392,453 |   |
|                              |       |                                            |       |   |   |   |   |
| Long-lived assets:                |       |                                            |       |   |   |   |   |
| United States                     |       | $                                               | 185,059    |   | $ | 196,900 |   | $ | 193,223 |   |
| Europe                            |       | 17,188                                          |       | 16,483 |   | 15,268 |   |
| Assets of discontinued operations |       | —                                          |       | 25,074 |   | 24,341 |   |
| Consolidated long-lived assets    |       | $                                               | 202,247    |   | $ | 238,457 |   | $ | 232,832 |   |

 

During the year ended December 31, 2004, net sales fromfour customers amounted to 10 percent or more of the Company’s net sales.  For the years ended December 31, 2004, 2003and 2002, sales to the Ford (Drivetrain Remanufacturing and Logistics segments)accounted for $117,083, $131,106 and $153,957, DaimlerChrysler (DrivetrainRemanufacturing segment) accounted for $58,220, $69,875 and $93,189, Cingular (Logisticssegment) accounted for $88,233, $58,384 and $76,774, and Honda (DrivetrainRemanufacturing segment) accounted for $76,671, $25,643 and $450, respectively.

 

**Note 19.  Fair Value of Financial Instruments**

 

The fair value of the Company’s 18% seniorsubordinated promissory note, received by the Company on October 27, 2000 aspart of the proceeds from the sale of the Distribution Group, was initially estimatedat a discount rate confirmed by an independent third party.  The Company periodically receives and reviewsthe financial statements of the note issuer and has made an assessment that thenote’s estimated fair value of $10,622 and $9,548 approximates its carryingvalue at December 31, 2004 and 2003, respectively. (See Note 2 – Summaryof Significant Accounting Policies – Promissory Note Receivable.)

 

**Note 20.  Exit, Disposal, Certain Severance and OtherCharges**

 

FacilitiesConsolidation Costs – Drivetrain Remanufacturing Segment

 

On June 23, 2003, theCompany announced its decision to consolidate one of its transmission remanufacturing operations from aleased facility located in Mahwah, New Jersey into a Company-owned idlefacility in Oklahoma City, Oklahoma. This decision was primarily driven by an expectation of lower operatingcosts (primarily labor and facility related). The relocation from the Mahwah facility to the Oklahoma City facilitywas completed during November 2003 and the Mahwah lease expired on December 31,2003.  The Company terminated a total of163 employees, consisting of manufacturing and management personnel, as part ofthe Mahwah facility closure.  For theyear ended December 31, 2003, $4,081 of costs were incurred related to theMahwah plant closure including (i) $1,317 of moving and travel costs torelocate equipment and certain management employees from the Mahwah facility tothe facility in Oklahoma City, (ii) $1,210 of severance and related costs,(iii) $617 primarily related to the write-off of previously capitalizedleasehold improvement costs at the Mahwah facility, (iv) $459 of other exitcosts primarily related to idle plant capacity at the Mahwah facility, (v) $278of insurance costs related to certain workers compensation claims incurred forthe terminated employees and (vi) $200 for the write-down of raw materialsinventory no longer required (classified as Cost of Sales - Products).  During 2004, the Companyrecorded a net credit of $13 for the Mahwah facility closure, primarily relatedto adjustments to liability estimates.

 

67

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Followingis an analysis of the costs associated with the facilities consolidation withinthe Drivetrain Remanufacturing segment:

 
| ** **                                       | ** ** | **Termination  Benefits** | ** ** | **Exit / Other  Costs** | ** ** | **Loss on  Write-Down  of Assets** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|------------------------------------|------------|-----------|------------|
| Total amount  expected to be incurred            |       | $                         | 1,186      |                    | $          | 2,065                              |       | $         | 817        |   | $ | 4,068 |   |
| Total amount  incurred through December 31, 2004 |       | $                         | 1,186      |                    | $          | 2,065                              |       | $         | 817        |   | $ | 4,068 |   |
|                                             |       |                      |       |                    |       |                               |       |      |       |
| Reserve as of  December 31, 2002                 |       | $                         | —     |                    | $          | —                             |       | $         | —     |   | $ | — |   |
| Provision 2003                                   |       | 1,210                     |       | 2,054                   |       | 817                                | (1)        | 4,081     |       |
| Payments – 2003                             |       | (639                      | )          | (1,655                  | )          | —                             |       | (2,294    | )          |
| Asset write-offs  2003                           |       | —                    |       | —                  |       | (617                               | )          | (617      | )          |
| Reserve as of  December 31, 2003                 |       | 571                       |       | 399                     |       | 200                                |       | 1,170     |       |
| Provision 2004                                   |       | (24                       | )          | 11                      |       | —                             |       | (13       | )          |
| Payments – 2004                             |       | (547                      | )          | (99                     | )          | —                             |       | (646      | )          |
| Reserve as of  December 31, 2004                 |       | $                         | —     |                    | $          | 311                                |       | $         | 200        |   | $ | 511 |   |

 

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(1)   Includes$200 of inventory write-downs classified as cost of sales in the accompanyingstatements of income.

 

Other ActivitiesRelating to Exit, Disposal, Certain Severance and Other Charges:

 

Commencing in 1998, the Companyimplemented certain initiatives designed to improve operating efficiencies andreduce costs.  In 2002, the Companyrecorded a charge of approximately $800 related to the DrivetrainRemanufacturing segment for a retroactive insurance premium adjustment relatedto 1998 and 1999 self-insured workers compensation claims.  In addition, the Company recorded a gain ofapproximately $800 for a partial reversal of a previously establishedprovision related to the DrivetrainRemanufacturing segment for a potential non-income state tax liability whosemaximum exposure had been reduced. In addition, the Company recordedincome of $277 for the reversal of previously established provisions including(i) $154 for the shut-down of the Company’s remanufactured automotiveelectronic control modules operation primarily related to asset write-downs whereactual recoveries from the sale of assets were favorable to original estimatesand (ii) $123 of severance and related costs primarily related to theconsolidation of the information systems groups that were no longer expected tobe incurred.

 

In2003, the Company recorded costs of $4,392 consisting of (i) compensation costspayable to our former CEO and CFO of $1,953 and $685, respectively, related totheir conversion from full time to part time employment, (ii) $1,260 ofseverance and related costs for 30 management and operational support personnelprimarily associated with the reorganization and de-layering of certainmanagement functions and the streamlining of certain operations, (iii) $492 ofrelocation and other costs related to the hiring of a new CEO and CFO, (iv)$405 related to the write-down of certain customized software recorded as afixed asset due to the loss of the business this software had supported and (v)$59 of other costs, partially offset by anincome item of $462 related to the reversal of a special charge accrualestablished during 2001 for expected idle capacity costs at the Mahwah facilitythat was no longer needed due to the exit from this plant.

 

In 2004, the Companyrecorded a net charge of $4,044 consisting of (i) $3,323 of non-cashcompensation expense related to modifications to unexercised stock optionspreviously granted to our former CEO and former CFO, (ii) $795 of exit and other costs primarilyrelated to the termination of an independent contractor agreement and costsrelated to the closure of two facilities, (iii) $525 of certain stock-based compensation costs relatedto the hiring of our new CEO, (iv) $292 of severance and related costs for 10 management and operational supportpersonnel associated with the reorganization and upgrade of certain management functions and other cost reductioninitiatives and (v) $260 ofrelocation costs primarily related to the hiring of our new CFO,partially offset by a gain of $1,151related to the reversal of a

 

68

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previouslyestablished provision related to the Drivetrain Remanufacturing segment for apotential non-income state tax liability that has been reduced through thefinalization of an audit by the state tax authorities.

 

Followingis an analysis of the reserves relating to these activities: 

 
| ** **                                         | ** ** | **Termination  Benefits** | ** ** | **Exit / Other  Costs** | ** ** | **Loss on  Write-Down  Of Assets** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|------------------------------------|------------|-----------|------------|
|                                               |       |                      |       |                    |       |                               |       |      |       |
| Reserve as of  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 as of  December 31, 2002                   |       | 134                       |       | 1,797                   |       | —                             |       | 1,931     |       |
| Provision 2003                                     |       | 3,898                     |       | 89                      |       | 405                                |       | 4,392     |       |
| Payments 2003                                      |       | (342                      | )          | (302                    | )          | 3⁄4                             |       | (644      | )          |
| Asset write-offs  2003                             |       | —                    |       | —                  |       | (405                               | )          | (405      | )          |
| Reserve as of  December 31, 2003                   |       | 3,690                     |       | 1,584                   |       | —                             |       | 5,274     |       |
| Provision 2004                                     |       | 3,615                     |       | 429                     |       | —                             |       | 4,044     |       |
| Payments 2004                                      |       | (2,348                    | )          | (1,132                  | )          | —                             |       | (3,480    | )          |
| Non-cash  stock-based compensation write-offs 2004 |       | (3,323                    | )          | (525                    | )          | —                             |       | (3,848    | )          |
| Reserve as of  December 31, 2004                   |       | $                         | 1,634      |                    | $          | 356                                |       | $         | —     |   | $ | 1,990 |   |

 

69

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**Note21.  Selected Quarterly Financial Data(Unaudited)**

 
| ** **                                               | ** ** | **Quarter** | ** ** |
|----------------------------------------------------------|------------|-------------|------------|
| ** **                                               | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| 2004                                                     |       |        |       |   |   |   |   |   |   |
| Net sales                                                |       | $           | 85,025     |   | $ | 98,109 |   | $ | 107,601 |   | $ | 104,842 |   |
| Gross profit                                             |       | 20,693      |       | 26,783 |   | 28,218 |   | 26,253 |   |
| Exit, disposal,  certain severance and other charges     |       | 791         |       | 2,685 |   | 488 |   | 67 |   |
| Income from  continuing operations                       |       | 3,807       |       | 6,205 |   | 8,438 |   | 8,345 |   |
| Net income                                               |       | 3,913       |       | 6,431 |   | (9,067 | ) | 4,499 |   |
| Earnings per  common share (1)                           |       | $           | 0.17       |   | $ | 0.30 |   | $ | 0.41 |   | $ | 0.39 |   |
| Earnings per  common share-assuming dilution (1)         |       | 0.17        |       | 0.30 |   | $ | 0.40 |   | 0.39 |   |
|                                                     |       |        |       |   |   |   |   |   |   |
| 2003                                                     |       |        |       |   |   |   |   |   |   |
| Net sales                                                |       | $           | 88,188     |   | $ | 93,469 |   | $ | 77,437 |   | $ | 80,615 |   |
| Gross profit                                             |       | 27,797      |       | 25,900 |   | 21,740 |   | 19,075 |   |
| Exit, disposal,  certain severance and other charges (2) |       | —      |       | 931 |   | 1,126 |   | 6,416 |   |
| Income from  continuing operations                       |       | 8,694       |       | 6,522 |   | 4,299 |   | (643 | ) |
| Net income                                               |       | 9,853       |       | 6,499 |   | 3,869 |   | 290 |   |
| Earnings per  common share (1)                           |       | $           | 0.36       |   | $ | 0.27 |   | $ | 0.18 |   | $ | (0.03 | ) |
| Earnings per  common share-assuming dilution (1)         |       | 0.35        |       | 0.27 |   | 0.18 |   | (0.03 | ) |

 

----

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

(2)           Includes $200 of inventory write-downs recordedduring the second quarter of 2003 classified as costs of sales in theaccompanying statements of income.

 

Duringthe fourth quarter of 2004, the Company disposed of an operating unit from itsDrivetrain Remanufacturing segment which remanufactured transmissions forGeneral Motors.  The results of thisoperating unit are presented as discontinued operations for all interim periodspresented in the table above.  Incomefrom continuing operations for the first, second, third and fourth quarters of2004 exclude gain (loss) from discontinued operations related to the disposalof this operating unit of $106, $(1,161), $(17,505) and $(1,665),respectively.  Income from continuingoperations for the first, second, third and fourth quarters of 2003 excludegain (loss) from discontinued operations related to the disposal of thisoperating unit of $1,159, $(23), $(430) and $933, respectively.

 

70

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## **ITEM 9.**          CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

## **ITEM 9A.**       CONTROLS AND PROCEDURES

 

**(i) Disclosure Controls and Procedures.**

 

Our Chief Executive Officerand Chief Financial Officer conducted an evaluation of the effectiveness of ourdisclosure controls and procedures. Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of December 31, 2004. 

 

**(ii) Internal Control Over Financial Reporting.**

 

**(a) Management’s annual report on internal control overfinancial reporting.**

 

Our management report oninternal control over financial reporting is set forth in Item 8 “ConsolidatedFinancial Statements and Supplementary Data” in this Annual Report on Form 10-Kon page 41. 

 

**(b) Attestation report of the registered public accountingfirm.**

 

The attestation report ofErnst & Young LLP, our independent registered public accounting firm, onmanagement’s assessment of the effectiveness of our internal control overfinancial reporting and the effectiveness of our internal control overfinancial reporting is set forth in Item 8 “Consolidated Financial Statementsand Supplementary Data” in this Annual Report on Form 10-K on page 43.

 

**(c) Changes in internal control over financial reporting.**

 

There was no change in ourinternal control over financial reporting during our fourth fiscal quarterended December 31, 2004 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

## **ITEM 9B.**       OTHER INFORMATION

 

None.

 

71

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**PART III**

 

## **ITEM 10.**       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

**Directors and Executive Officers**

 

The following lists our executiveofficers and directors and their respective ages and positions as ofDecember 31, 2004: 

 
| **Name**                 | ** ** | **Age** | ** ** | **Positions**                                              |
|--------------------------|------------|---------|------------|------------------------------------------------------------|
| Donald  T. Johnson, Jr.  |       | 52      |       | President  and Chief Executive Officer, Director           |
| Todd  R. Peters          |       | 42      |       | Vice  President and Chief Financial Officer                |
| John  J. Machota         |       | 52      |       | Vice  President, Human Resources                           |
| Mary  T. Ryan            |       | 51      |       | Vice  President, Communications and Investor Relations     |
| Joseph  Salamunovich     |       | 45      |       | Vice  President, General Counsel and Secretary             |
| John  R. Colarossi       |       | 52      |       | President,  Independent Aftermarket                        |
| William  L. Conley, Jr.  |       | 56      |       | President,  ATC Logistics                                  |
| Brett  O. Dickson        |       | 40      |       | Vice  President, North American Remanufacturing Operations |
| Michael  T. DuBose       |       | 51      |       | Chairman  of the Board (non-executive)                     |
| Robert  Anderson         |       | 84      |       | Director                                                   |
| Robert  L. Evans         |       | 52      |       | Director                                                   |
| Curtland  E. Fields      |       | 53      |       | Director                                                   |
| Dale  F. Frey            |       | 72      |       | Director                                                   |
| Mark  C. Hardy           |       | 41      |       | Director                                                   |
| Dr.  Michael J. Hartnett |       | 59      |       | Director                                                   |
| Michael  D. Jordan       |       | 58      |       | Director                                                   |
| Gerald  L. Parsky        |       | 62      |       | Director                                                   |
| S.  Lawrence Prendergast |       | 63      |       | Director                                                   |
| Edward  Stewart          |       | 62      |       | Director                                                   |

 

*Donald T. Johnson, Jr.* joined us as President and Chief OperatingOfficer in January 2004.  In February2004, Mr. Johnson succeeded Michael T. DuBose as Chief Executive Officerand became a director in May 2004. Before joining us, Mr. Johnson was Global Director, Parts, Supplyand Logistics for Ford Motor Company since 1999.  Prior to that, Mr. Johnson spent 26years working for Caterpillar, Inc. and its subsidiaries, including serving asVice President of Caterpillar Logistics Services, Inc. from 1992 until hejoined Ford.  Mr. Johnson holds aB.A. in Management from the University of Illinois.

 

*Todd R. Peters* joined us as Vice President, Finance inMarch 2004 and was appointed Vice President and Chief Financial Officer inMay 2004.  Before joining us, Mr.Peters served TriMas Corporation, a manufacturer of automotive accessories andindustrial products, as Executive Vice President and Chief Financial Officerfrom 2002 to 2003 and as Vice President of Finance from 2001 to 2002.  From 1994 to 2001, he held various positionswith Dana Corporation, a manufacturer in the automotive, mobile off-highway,marine, recreational and small engine industries, including Global WorkingCapital Team Leader from 2000 to 2001, Director of Operations — LongManufacturing from 1999 to 2000 and Vice President of Finance from 1994 to1999.  Prior to that, Mr. Peters workedfor Coopers & Lybrand for over eight years.  Mr. Peters holds a B.S. in BusinessAdministration from Central Michigan University and is a certified publicaccountant.

 

*John J. Machota* joined us as Vice President, Human Resourcesin 1997.  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. 

 

*Mary T. Ryan* joined us as Vice President, Communications and Investor Relations in 1999.  From 1996 to 1998, Ms. Ryan served as VicePresident, Corporate Affairs for American Disposal Services, Inc.  From 1995 to 1996,

 

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shewas a self-employed public relations consultant.  Prior to that, Ms. Ryan was employed formore than ten years with Waste Management, Inc.  Ms. Ryan holds an M.B.A. from DePaulUniversity. 

 

*Joseph Salamunovich* joined us as Vice President, General Counseland Secretary in 1997.  From 1995 to1997, Mr. Salamunovich was a partner in the law firm of Gibson,Dunn & Crutcher LLP, where he specialized in corporate and securitieslaw matters.  Mr. Salamunovich holdsa J.D. from Loyola Law School, Los Angeles. 

 

*John R. Colarossi* joined us in 2003 as President of ourIndependent Aftermarket business.  Priorto joining us, Mr. Colarossi served as Chief Operating Officer of CottmanTransmission Systems since 2001.  During1999 and 2000 he was Executive Vice President of Sales and Marketing forCapsule Communications (formerly US WATS). Between 1993 and 1999 Mr. Colarossi held various positions with MoranIndustries, including President from 1998 to 1999, and from 1984 to 1992 he wasemployed by AAMCO Transmissions, serving as Executive Vice President – Salesand Operations between 1989 and 1992. Mr. Colarossi holds a B.S. in Economics from the University ofPittsburgh.

 

*William L. Conley, Jr.* joined us in 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.

 

*Brett O. Dickson*joined us in 2001 as Director of Lean and Continuous Improvement.  That same year he became Vice President andGeneral Manager of our Autocraft Industries business and became an executive officerin May 2004 when he was promoted to Vice President of our North AmericanRemanufacturing Operations.  Prior tojoining us, Mr. Dickson held increasingly responsible positions in operations,supply chain management and repositioning within Grimes Aerospace Company, aninternational engineering, manufacturing and distribution company, from 1995 to2000, most recently serving as the Business Unit Manager for Grimes’ ExteriorLighting business.  Between 1985 and 1995he held various positions with Honeywell (formerly AlliedSignal) includingPlant Manager, Production Engineering Manager and Six Sigma specialist.  Mr. Dickson holds a B.S. in ElectronicEngineering Technology from the DeVry Institute of Technology.

* *

*Michael T. DuBose* joined us as Chairman of the Board,President and Chief Executive Officer in 1998 and is currently serving asChairman of the Board, stepping down from his role as President in January 2004and Chief Executive Officer in February 2004. Prior to joining Aftermarket Technology Corp., he served as a consultantto Aurora Capital Group from 1997.  From1995 to 1997, Mr. DuBose was Chairman and Chief Executive Officer ofGrimes Aerospace Company.  From 1993 to1995, he served as Senior Vice President of SAI Corporation’s computer equipmentmanufacturing and systems sector.  Priorto that, Mr. DuBose held various positions at General Instrument andGeneral Electric Company. Mr. DuBose holds an M.S. in Management from the Stanford UniversityGraduate School of Business. 

 

*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. 

 

*Robert L. Evans*became a director in December 2004.  Heserved as Managing Director of Symphony Technology Group (a strategic holdingcompany that invests primarily in software and services firms) and apredecessor firm, the Valent Group, from 2001 until October 2004.  Prior to that, he was President and ChiefOperating Officer of Aspect Development, Inc. from 1999 until its acquisitionby *i2* Technologies, Inc. in 2000, afterwhich he served as Chief Operating Officer of *i2*Technologies.  Mr. Evans was employed byAccenture (formerly Andersen Consulting) from 1993 to 1999, where he held avariety of positions, including Managing Partner of the Americas Supply Chainpractice.  From 1990 to 1993 Mr. Evansserved as Vice President, Customer Support (Parts & Service) for MazdaMotor of America, and between 1975 and 1990 he held various positions withCaterpillar Inc., including President of Caterpillar Logistics Services. 

 

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*Curtland E. Fields* became a director in December 2004. Mr. Fields is the Executive Director and chief executive officer and atrustee of the Turrell Fund, a $130 million foundation serving the needs ofunderprivileged children.  Prior tojoining the Turrell Fund in 2003, Mr. Fields was employed by AT&TCorporation for over 30 years, serving most recently as President of theConsumer Transactions Services Group between 2000 and 2003, as President of theConsumer Markets Group (Central Region) from 1999 to 2000 and Vice President,Strategy and Marketing for the Business Markets Group from 1998 to 1999.  Prior to that he held other positions withAT&T including Financial Vice President for Investor Relations. 

 

*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 Community Health Systems, Yankee Candle,Ambassadors Group and McLeod USA.

 

*Mark C. Hardy* became a director in 1994.  Mr. Hardy is a Managing Director andpartner of Aurora Capital Group.  Priorto joining Aurora Capital Group in 1993, Mr. Hardy was an AssociateConsultant at Bain & 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. 

 

*MichaelD. Jordan*, became a director in May 2004.  Prior to retirement in 2001, he was employedby Ford Motor Company for over 30 years, serving most recently as President ofFord’s Automotive Consumer Services Group since 1997.  Prior to that he was President of the FordCustomer Service Division—Europe for three years.  Mr. Jordan is a director and chairman ofthe audit committee of Overnite Corporation.

 

*Gerald L. Parsky* became a director in 1997.  Mr. Parsky is the Chairman and afounding partner of Aurora Capital Group. Prior to forming Aurora Capital Group in 1991, Mr. Parsky was asenior partner and a member of the Executive and Management Committees of thelaw firm of Gibson, Dunn & Crutcher LLP.  Prior to that, he served as AssistantSecretary of the Treasury for International Affairs. 

 

*S.Lawrence Prendergast* became a director in May 2004.  Since 1999 he**has been Executive Vice President of Finance of LaBranche &Co. Inc., a New York Stock Exchange specialist firm.  Prior to that he spent over 30 years withAT&T Corporation, including serving as Chairman of the Board and ChiefExecutive Officer of AT&T Investment Management Corp. from 1997 to 1999 andas Vice President and Treasurer of AT&T Corporation for 14 years beforethat.

 

*Edward Stewart*became a director in December 2004. Prior to his retirement in 2002, he was employed by General ElectricCompany for 37 years, serving most recently as Executive Vice President of GECapital and Chief Executive Officer of GE Card Services from 1997, and prior tothat he was a Vice President of General Electric since 1991. 

 

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

 

**AuditCommittee Financial Expert.**

 

OurBoard of Directors has determined that Mr. S. Lawrence Prendergast, Chairman ofour Audit Committee, is a financial expert for purposes of Item 401(h) ofRegulation S-K under the Exchange Act. Mr. Prendergast is an independent director within the meaning ofItem 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

 

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

 

Section 16(a) of the Exchange Act requires ourofficers, directors and persons who own more than 10% of our outstanding commonstock to file reports of ownership and changes in ownership with the Securitiesand Exchange Commission and to furnish copies of these reports to us.  Based solely on a review of the copies of theforms that we have received, we believe that all such forms required during 2004were filed on a timely basis, except for the Form 3 of Mr. Evans, whichwas due on December 13 but was filed on December 15.

 

**Code ofEthics**

 

We have adopted a code of ethics that applies to ourdirectors, officers and employees.  Thecode of ethics contains written standards that we believe are reasonablydesigned to deter wrongdoing and to promote (i) honest and ethicalconduct, (ii) full, fair, accurate, timely and understandable disclosurein our reports that we file with or submit to the Securities and ExchangeCommission and our other public communications, (iii) compliance withapplicable governmental laws, rules and regulations, (iv) prompt internalreporting of violations of the code of ethics to an appropriate person, and(v) accountability for adherence to the code.

 

The full text of our code of ethics was filed as anexhibit to our 2003 Annual Report on Form 10-K.  A copy of the code of ethics may be obtainedwithout charge by sending a written request to us at 1400 Opus Place,Suite 600, Downers Grove, Illinois 60515, attention: CorporateSecretary.  We intend to disclose futureamendments to certain provisions of our code of ethics, or waivers of suchprovisions granted to executive officers and directors, on our web site, www.goatc.com,within five business days following the date of such amendment or waiver.

 

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## **ITEM 11.**       EXECUTIVE COMPENSATION

 

**SummaryCompensation Table**

** **

The following table sets forth, for the three mostrecently completed fiscal years, the cash compensation, for services to us inall capacities, of those persons who were, as of December 31, 2004(i) our current Chief Executive Officer, (ii) our former Chief ExecutiveOfficer, (iii) the four persons who were the other most highly compensatedexecutive officers of Aftermarket Technology Corp. and its subsidiaries, and (iv) oneperson who would have been among our four other most highly compensatedexecutive officers if he had continued to serve as an executive officer throughthe end of 2004:

 
|                            |       |     |   |                     |       |          |    |                                |   | **Long-Term  Compensation Awards**      |       |                                            |       |
|---------------------------------|------------|----------|--------|--------------------------|------------|---------------|---------|-------------------------------------|--------|-----------------------------------------|------------|-------------------------------------------------|------------|
|                            |       |     |   |                     |       |          |    |                                |   | **Restricted  Stock Award(s)  ($) (3)** | ** ** | **Securities  Under-  lying  Options  (#) (4)** | ** ** | **All Other  Compensation** |   |
|                            |       |     |   | **Annual  Compensation** |       |          |    |                                |
|                            |       |     |   | **Salary**               | ** ** | **Bonus (1)** |    | **Other  Annual  Compensation (2)** |   |                                    |       |                                            |
| **Name and Principal Position** | ** ** | **Year** |   |                     |       |          |    |                                |   |
|                            |       |     |   |                     |       |          |    |                                |   |                                    |       |                                            |       |   |   |
| Donald T. Johnson, Jr. (5)      | ** ** | 2004     |   | $                        | 500,000    |          | $       | 53,614                              |   | $                                       | 26,420     |                                            | $          | 1,050,000 |   | 140,000 |   | $ | 201,413 | (6) |
| Current President and CEO       | ** ** | 2003     |   | 3⁄4                   |       | 3⁄4        |    | 3⁄4                              |   | 3⁄4                                  |       | 3⁄4                                          |       | 3⁄4 |   |
|                            |       | 2002     |   | 3⁄4                   |       | 3⁄4        |    | 3⁄4                              |   | 3⁄4                                  |       | 3⁄4                                          |       | 3⁄4 |   |
|                            |       |     |   |                     |       |          |    |                                |   |                                    |       |                                            |       |   |   |
| Michael T. DuBose (7)           |       | 2004     |   | $                        | 290,847    |          | 3⁄4  |                                | $      | 14,877                                  |       | 3⁄4                                          |       | 3⁄4 |   | $ | 703,365 | (8) |
| Former President and            |       | 2003     |   | 550,000                  |       | 3⁄4        |    | 25,400                              |   | 3⁄4                                  |       | 3⁄4                                          |       | 3⁄4 |   |
| Chief Executive Officer         |       | 2002     |   | 550,000                  |       | $             | 412,500 |                                | 25,400 |                                    | 3⁄4     |                                            | 250,000    |   | 1,000,000 | (9) |
|                            |       |     |   |                     |       |          |    |                                |   |                                    |       |                                            |       |   |   |
| Todd R. Peters (10)             |       | 2004     |   | $                        | 244,262    |          | $       | 27,500                              |   | $                                       | 13,072     |                                            | $          | 371,250 |   | 70,000 |   | $ | 254,448 | (6) |
| Current CFO                     |       | 2003     |   | 3⁄4                   |       | 3⁄4        |    | 3⁄4                              |   | 3⁄4                                  |       | 3⁄4                                          |       | 3⁄4 |   |
| and Vice President              |       | 2002     |   | 3⁄4                   |       | 3⁄4        |    | 3⁄4                              |   | 3⁄4                                  |       | 3⁄4                                          |       | 3⁄4 |   |
|                            |       |     |   |                     |       |          |    |                                |   |                                    |       |                                            |       |   |   |
| Brett O. Dickson (11)           |       | 2004     |   | $                        | 238,081    |          | $       | 46,750                              |   | $                                       | 1,183      | (12)                                            | $          | 149,000 |   | 15,000 |   | 3⁄4 |   |
| Vice President, N.A.            |       | 2003     |   | 183,672                  |       | 21,720        |    | 3⁄4                              |   | 3⁄4                                  |       | 3⁄4                                          |       | 3⁄4 |   |
| Remanufacturing Ops.            |       | 2002     |   | 176,500                  |       | 205,726       |    | 3⁄4                              |   | 3⁄4                                  |       | 5,000                                           |       | $ | 43,304 | (6) |
|                            |       |     |   |                     |       |          |    |                                |   |                                    |       |                                            |       |   |   |
| William L. Conley, Jr. (13)     |       | 2004     |   | $                        | 235,000    |          | $       | 146,187                             |   | $                                       | 14,300     |                                            | $          | 37,250 |   | 10,000 |   | 3⁄4 |   |
| President, ATC Logistics        |       | 2003     |   | 235,000                  |       | 3⁄4        |    | 23,785                              |   | 3⁄4                                  |       | 3⁄4                                          |       | 3⁄4 |   |
|                            |       | 2002     |   | 109,452                  |       | 55,237        |    | 14,081                              |   | 3⁄4                                  |       | 25,000                                          |       | $ | 14,963 | (6) |
|                            |       |     |   |                     |       |          |    |                                |   |                                    |       |                                            |       |   |   |
| Joseph Salamunovich             |       | 2004     |   | $                        | 220,000    |          | $       | 22,300                              |   | $                                       | 10,370     |                                            | $          | 74,500 |   | 10,000 |   | 3⁄4 |   |
| Vice President, General         |       | 2003     |   | 220,000                  |       | 3⁄4        |    | 12,566                              |   | 61,000                                  |       | 3⁄4                                          |       | 3⁄4 |   |
| Counsel and Secretary           |       | 2002     |   | 220,000                  |       | 149,000       |    | 11,454                              |   | 3⁄4                                  |       | 25,000                                          |       | 3⁄4 |   |
|                            |       |     |   |                     |       |          |    |                                |   |                                    |       |                                            |       |   |   |
| Barry C. Kohn (14)              |       | 2004     |   | $                        | 166,885    |          | 3⁄4  |                                | 3⁄4 |                                    | 3⁄4     |                                            | 3⁄4     |   | $ | 246,370 | (15) |
| Former Chief Financial          |       | 2003     |   | 300,000                  |       | 3⁄4        |    | 15,600                              |   | 3⁄4                                  |       | 3⁄4                                          |       | 3⁄4 |   |
|                            |       | 2002     |   | 300,000                  |       | $             | 150,000 |                                | 15,600 |                                    | 3⁄4     |                                            | 100,000    |   | 300,000 | (16) |

 

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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 allowances for automobile, club dues and financial planning except whereotherwise noted.

 

(3)     Calculatedby multiplying the number of shares awarded by the closing price of our commonstock on the Nasdaq National Market System on the day the restricted stock wasawarded.  No consideration was paid forthe shares.

 

(4)     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, 2002 Stock Incentive Plan or 2004 Stock Incentive Plan.  Pursuant to the stock incentive plans, theCompensation and Human Resources Committee of the Board of Directors makesrecommendations to the Board of Directors regarding the amount, terms andconditions of each option to be granted.

 

(5)     Mr.Johnson joined us as President in January 2004 and became Chief ExecutiveOfficer in February 2004.

 

(6)     Consistsof relocation benefits.

 

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(7)     Mr.DuBose ceased to be President in January 2004 and Chief Executive Officer inFebruary 2004.  He became a part-timeemployee in April 2004, at which time his annual salary was reduced from$550,000 to $200,000.

 

(8)     Consistsof a portion of the $1,925,000 special conversion bonus called for under Mr. DuBose’semployment agreement, which is payable over the 24-month period following Mr.DuBose’s conversion from full-time to part-time employment with us.  The $1,221,635 balance of the conversionbonus will be paid during 2005 and the first quarter of 2006.  See “Employment Agreements” below.

 

(9)     Consistsof a special one-time payment of $1,000,000 made when Mr. DuBose entered intoan amended and restated employment agreement in July 2002.  See “Employment Agreements” below.

 

(10)   Mr.Peters joined us as Vice President, Finance in March 2004 at an annual salaryof $300,000 and became Chief Financial Officer in May 2004.

 

(11)   Mr.Dickson became an executive officer in May 2004, at which time his annualsalary was increased from $217,200 to $250,000.

 

(12)   Consistsof allowances for club dues and financial planning.  Mr. Dickson is provided with a company car.

 

(13)   Mr.Conley joined us in July 2002.

 

(14)   Mr.Kohn ceased to be Chief Financial Officer in May 2004.  He became a part-time employee in June 2004,at which time his annual salary was reduced from $300,000 to $60,000.

 

(15)   Consistsof a portion of the $675,000 special conversion bonus called for underMr. Kohn’s employment agreement, which is payable over the 18-month periodfollowing Mr. Kohn’s conversion from full-time to part-time employment withus.  The $432,692 balance of theconversion bonus will be paid during 2005. See “Employment Agreements” below.

 

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

 

Set forth below is the annual base salary for ourcurrent Chief Executive Officer and each of our four other most highlycompensated executive officers as of February 11, 2005:

 

| **Name**               | ** ** | **Annual  Base Salary** | ** ** |
|------------------------|------------|-------------------------|------------|
| Donald T. Johnson, Jr. |       | $                       | 500,000    |   |
| Todd R. Peters         |       | 300,000                 |       |
| Brett O. Dickson       |       | 250,000                 |       |
| William L. Conley, Jr. |       | 235,000                 |       |
| Joseph Salamunovich    |       | 226,700                 |       |
|                        |            |                         |            |  |

 

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**OptionGrants Table**

 

Shown below is information concerning grants ofoptions by us during 2004 to our current and former Chief Executive Officers,each of our four other most highly compensated executive officers as ofDecember 31, 2004, and one person who would have been among our four othermost highly compensated executive officers if he had continued to serve as anexecutive officer through the end of 2004:

 
|                   |       | **Individual  Grants**                                 |       |                                              |       |           |       | **Potential Realizable  Value at Assumed  Annual Rates of  Stock Price  Appreciation  For Option Term(1)** |       |
|------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------|------------|----------------|------------|------------------------------------------------------------------------------------------------------------|------------|
|                   |       | **Number of  Securities  Underlying  Options Granted** |       | **% of Total  Options  Granted to  Employees in** |       |           |       |                                                                                                       |       |   |
|                   |       |                                                   |       |                                              |       |           |       |                                                                                                       |
|                   |       |                                                   |       | **Exercise  Price**                               |       | **Expiration** |       |                                                                                                       |
| **Name**               | ** ** | **(#)**                                                | ** ** | **Fiscal  Year**                                  | ** ** | **($/Share)**  | ** ** | **Date**                                                                                                   | ** ** | **5% ($)** | ** ** | **10% ($)** |   |
| Donald T. Johnson, Jr. |       | 140,000                                                | (2)        | 22.0                                              |       | $              | 14.00      |                                                                                                       | 1/1/14     |   | $ | 1,232,633 |   | $ | 3,123,735 |   |
| Michael T. DuBose      |       | 3⁄4                                                 |       | 3⁄4                                            |       | 3⁄4         |       | 3⁄4                                                                                                     |       | 3⁄4 |   |   |   |
| Todd R. Peters         |       | 70,000                                                 | (3)        | 11.0                                              |       | $              | 14.85      |                                                                                                       | 3/9/14     |   | 653,736 |   | 1,656,695 |   |
| Brett O. Dickson       |       | 15,000                                                 | (4)        | 2.4                                               |       | $              | 14.90      |                                                                                                       | 5/12/14    |   | 140,558 |   | 356,201 |   |
| William L. Conley      |       | 10,000                                                 | (4)        | 1.6                                               |       | $              | 14.90      |                                                                                                       | 5/12/14    |   | 93,705 |   | 237,468 |   |
| Joseph Salamunovich    |       | 10,000                                                 | (4)        | 1.6                                               |       | $              | 14.90      |                                                                                                       | 5/12/14    |   | 93,705 |   | 237,468 |   |
| Barry C. Kohn          |       | 3⁄4                                                 |       | 3⁄4                                            |       | 3⁄4         |       | 3⁄4                                                                                                     |       | 3⁄4 |   | 3⁄4 |   |
|                        |            |                                                        |            |                                                   |            |                |            |                                                                                                            |            |  |  |  |  |  |  |  |

 

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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 ratesof appreciation only, do not constitute projections of future stock priceperformance, and may not necessarily be realized.  Actual gains, if any, on stock optionexercises depend on the future performance of the common stock, continuedemployment of the optionee through the term of the options, and other factors. 

 

(2)     Theseoptions were granted under our 2002 Stock Incentive Plan.  One third of the options vest and becomeexercisable on each of January 1, 2005, 2006 and 2007.

 

(3)     40,000of these options were granted under our 1998 Stock Incentive Plan and thebalance were granted under our 2002 Stock Incentive Plan.  One third of the options vest and becomeexercisable on each of March 9, 2005, 2006 and 2007.

 

(4)     Theseoptions were granted under our 2004 Stock Incentive Plan.  One third of the options vest and becomeexercisable on each of May 12, 2005, 2006 and 2007.

 

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

 

Shown below is information relating to (i) theexercise of stock options during 2004 by our current and former Chief ExecutiveOfficers, each of our four other most highly compensated executive officers asof December 31, 2004, and one person who would have been among our fourother most highly compensated executive officers if he had continued to serveas an executive officer through the end of 2004, and (ii) the value ofunexercised options for each of such persons as of December 31, 2004:

 
| ** **             | ** ** | **Shares  Acquired on** | ** ** | **Value**    | ** ** | **Number of Securities  Underlying Unexercised  Options at Fiscal Year-End** | ** ** | **Value of Unexercised  In-The-Money Options  at Fiscal Year-End (1)** | ** ** |
|------------------------|------------|-------------------------|------------|--------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **Name**               | ** ** | **Exercise**            | ** ** | **Realized** | ** ** | **Exercisable**                                                              | ** ** | **Unexercisable**                                                      | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Donald T. Johnson, Jr. |       | 3⁄4                  |       | 3⁄4       |       | 3⁄4                                                                       |       | 140,000                                                                |       | 3⁄4 |   | $ | 294,000 |   |
| Michael T. DuBose      |       | 422,070                 |       | $            | 2,179,593  |                                                                         | 250,000    |                                                                   | —     |   | — |   | 3⁄4 |   |
| Todd R. Peters         |       | —                  |       | —       |       | —                                                                       |       | 70,000                                                                 |       | 3⁄4 |   | 87,500 |   |
| Brett O. Dickson       |       | —                  |       | —       |       | 13,334                                                                       |       | 24,166                                                                 |       | $ | 57,685 |   | 46,843 |   |
| William L. Conley      |       | —                  |       | —       |       | 16,667                                                                       |       | 18,333                                                                 |       | 33,167 |   | 28,583 |   |
| Joseph Salamunovich    |       | —                  |       | —       |       | 100,788                                                                      |       | 25,000                                                                 |       | 377,025 |   | 45,168 |   |
| Barry C. Kohn          |       | 118,121                 |       | 1,085,553    |       | 100,000                                                                      |       | —                                                                 |       | — |   | 3⁄4 |   |
|                        |            |                         |            |              |            |                                                                              |            |                                                                        |            |  |  |  |  |  |  |  |

 

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(1)     Basedon the closing price of our common stock on the Nasdaq National Market System onDecember 31, 2004, which was $16.10 per share.

 

## **Employment Agreements**

 

We have entered into an employment agreement with eachof our executive officers that provides for a three-year term and isautomatically renewable thereafter on a year-to-year basis.  Each 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, as well as medicalbenefits during the severance period.  Ifthe termination occurs within 18 months after a change of control, theexecutive will also receive a payment equal to his target bonus under theincentive compensation plan.

 

Mr. Johnson’s agreement is the same as those of theother executive officers except that (i) his severance period (which alsoapplies in the case of his permanent disability) runs for 24 months if he isterminated prior to June 30, 2005 or for 18 months if he is terminatedthereafter, and (ii) his noncompetition provision runs for the sameperiod.

 

Mr. Peters’ agreement is the same as those of theother executive officers except that his severance period runs for 18 monthsand his noncompetition provision runs for 24 months.

 

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.

 

In July 2002 we entered into an amended and restatedemployment agreement with Mr. DuBose that provides that he would serve as ourChairman, President and CEO through January 2004, at an annual base salary of$550,000, and thereafter the agreement would automatically renew on ayear-to-year basis unless either we or Mr. DuBose elected not torenew.  Mr. DuBose ceased to bePresident in January 2004 and CEO in February 2004.  Under his employment agreement, he will servefor five years in a part-time capacity in such position as our Board

 

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of Directors determines, at an annual salary of$200,000.  In addition to his part-timesalary, Mr. DuBose is receiving payments totaling two times hispre-conversion base salary plus two times his 2004 target bonus under ourincentive compensation plan, paid over the 24-month period following hisconversion to part-time status.  If heceases to be a part-time employee for any reason other than termination forcause or voluntary resignation within five years following his conversion topart-time status, he will continue to receive monthly payments of $16,666through the end of the five-year period. Mr. DuBose will also receive medical benefits for up to ten yearsfollowing the end of his employment.  Theemployment agreement contains a provision that Mr. DuBose will not competeagainst us during the period ending on the later of January 28, 2009 orthe second anniversary of the date he ceases to be employed by us, which isconsiderably longer than the noncompetition provision contained in his previousemployment agreement.  In connection with the signing of thisamended and restated employment agreement, Mr. DuBose received a specialone-time payment of $1,000,000 in 2002.

 

In July 2002 we entered into an employment agreementwith Mr. Kohn that provides that he would serve as our CFO through January2004, at an annual base salary of $300,000, and thereafter the agreement wouldautomatically renew on a year-to-year basis unless either we or Mr. Kohnelected not to renew.  Mr. Kohnceased to be CFO in May 2004.  Under hisemployment agreement, he will serve for five years in a part-time capacity atan annual salary of $60,000.  In additionto his part-time salary, Mr. Kohn is receiving payments totaling 1.5 timeshis CFO base salary plus 1.5 times his target bonus under our incentivecompensation plan, paid over the 18-month period following his conversion topart-time status.  If he ceases to be apart-time employee for any reason other than termination for cause or voluntaryresignation within five years following his conversion to part-time status, hewill continue to receive monthly payments of $5,000 through the end of thefive-year period.  Mr. Kohn willalso receive medical benefits for up to 18 months following the end of hisemployment.  The employment agreementcontains a provision that Mr. Kohn will not compete against us during theperiod ending on the later of January 28, 2009 or the second anniversaryof the date he ceases to be employed by us, which is considerably longer thanthe noncompetition provision contained in our standard form of executiveemployment agreement.  In connection with the signing of thisemployment agreement, Mr. Kohn received a special one-time payment of$300,000 in 2002.

 

## **Stock Incentive Plans**

 

Pursuantto our 1998, 2000, 2002 and 2004 stock incentive plans, officers, directors,employees and consultants of Aftermarket Technology Corp. and its affiliatesare eligible to receive stock options, annual incentive bonuses and incentivestock.  In addition, we have stockoptions outstanding under a 1996 stock incentive plan under which awards may nolonger be made.

 

Thestock incentive plans are administered by the Compensation and Human ResourcesCommittee of our Board of Directors, although the Board of Directors makesdecisions with respect to awards for our Chief Executive Officer and mayexercise any of the Committee’s other authority under the plans in lieu of theCommittee’s exercise thereof.  Subject tothe express provisions of the stock incentive plans, the Committee has broadauthority in administering and interpreting the plans.  Options granted to employees may be optionsintended to qualify as incentive stock options under Section 422 of theInternal Revenue Code of 1986, as amended, or options not intended to soqualify.  Awards to employees may includea provision terminating the award upon termination of employment under certaincircumstances or accelerating the receipt of benefits upon the occurrence ofspecified events.  The vesting of stockoptions and restricted stock will be accelerated in the event of a change ofcontrol of Aftermarket Technology Corp. Restricted stock granted under the stock incentive plans are subject tovesting provision.  In most cases,outstanding options are also subject to vesting provisions and expire on thetenth anniversary of the date of grant.

 

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Asof February 11, 2005***,*** therewere 117,332 shares of restricted stock issued to our officers and employeesand 1,882,895 options to purchase common stock granted to our directors,officers and employees pursuant to the plans, and the number of sharesavailable for issuance pursuant to the plans was 746,248.  The exerciseprices of options outstanding under the stock incentive plans as ofFebruary 11, 2005 are as follows:

 

| **Number of Option  Shares** | ** ** | **Exercise Price** | ** ** |
|------------------------------|------------|--------------------|------------|
| 17,500                       |       | $                  | 4.563      |   |
| 1,667                        |       | 5.0312             |       |
| 162,663                      |       | 5.06               |       |
| 1,333                        |       | 6.875              |       |
| 21,499                       |       | 8.50               |       |
| 12,667                       |       | 9.00               |       |
| 5,000                        |       | 9.125              |       |
| 206,333                      |       | 9.63               |       |
| 112,313                      |       | 11.125             |       |
| 2,000                        |       | 11.4375            |       |
| 3,000                        |       | 11.45              |       |
| 3,333                        |       | 11.79              |       |
| 1,000                        |       | 11.80              |       |
| 3,000                        |       | 12.20              |       |
| 140,000                      |       | 14.00              |       |
| 38,000                       |       | 14.11              |       |
| 14,500                       |       | 14.36              |       |
| 35,088                       |       | 14.75              |       |
| 8,000                        |       | 14.80              |       |
| 70,000                       |       | 14.85              |       |
| 309,000                      |       | 14.90              |       |
| 60,000                       |       | 17.89              |       |
| 654,999                      |       | 18.00 or greater   |       |
| 1,882,895                    |       |               |       |
|                              |            |                    |            |  |

 

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

 

## **Director Compensation**

 

Prior to 2004 we did not pay cash compensation to ourdirectors for service on our Board of Directors or its committees.  Beginning in 2004, we now pay our independentdirectors an annual fee of $50,000.  Eachindependent director also receives an annual grant of options to purchase10,000 shares of our common stock and each new independent director receives aone-time grant of options to purchase 20,000 shares.  Directors are reimbursed for their expensesin connection with attending Board and committee meetings.

 

In 2002, 2003 and 2004 each of Messrs. Anderson,Frey and Hartnett received options to purchase 25,000 shares of common stock atan exercise price of $22.90 per share, 50,000 shares of common stock at anexercise price of $9.63 per share, and 10,000 shares of common stock at anexercise price of $14.90 per share, respectively.  In 2004 each of Messrs. Jordan andPrendergast received options to purchase 20,000 shares of common stock at anexercise price of $14.90 per share and each of Messrs. Evans, Fields andStewart received options to purchase 20,000 shares of common stock at anexercise price of $17.89 per share.  Theoption exercise price in each case was equal to the closing price of our commonstock 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, except for the options granted to Messrs.Anderson, Frey and Hartnett in 2004, which vest and become exercisable inone-half increments on the first and second anniversaries of the date ofgrant.  All the options expire on thetenth anniversary of the date of grant.

 

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

 

Prior to May 2004, the members of our Compensation andHuman Resources Committee were current director Gerald L. Parsky andformer directors Richard R. Crowell and J. Richard Stonesifer.  Messrs. Crowell and Parsky are(i) two of the three stockholders and directors of Aurora Advisors, Inc.,the general partner of Aurora Capital Partners, which is the general partner ofAurora Equity Partners, L.P., our largest stockholder, and (ii) two of thethree stockholders and directors of Aurora Overseas Advisors, Ltd., the generalpartner of Aurora Overseas Capital Partners L.P., the general partner of AuroraOverseas Equity Partners I, L.P., another of our significant stockholders.  See Item 12. “Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.”  In addition, Messrs. Crowell and Parskyare the senior members of Aurora Capital Group (of which Aurora Equity Partnersand Aurora Overseas Equity Partners are a part), which provides investmentbanking and management services to us pursuant to a management servicesagreement.  See Item 13. “CertainRelationships and Related Transactions.”

 

In May 2004, Messrs. Crowell, Parsky and Stonesiferwere replaced on the Compensation and Human Resources Committee by Messrs.Evans, Fields, Hartnett and Jordan, each of whom is independent as defined inthe Nasdaq listing standards and the regulations of the Securities and ExchangeCommission.

 

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## **ITEM 12.**       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

###### **SecurityOwnership**

 

The following table sets forth the beneficialownership of our common stock (the only class of our issued and outstandingvoting securities), as of February 15, 2005 by each of our directors, our currentChief Executive Officer, our former Chief Executive Officer, each of our fourother most highly compensated executive officers as of December 31, 2004,one person who would have been among our four other most highly compensatedexecutive officers if he had continued to serve as an executive officer throughthe end of 2004, our directors and executive officers as a group, and eachperson who at February 15, 2005 was known to us to beneficially own morethan 5% of our outstanding common stock.

 
| ** **                                                                   | ** ** | **Number of  Shares (1)** | ** ** | **Voting  Percentage** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------|------------|
| Aurora Equity Partners L.P. (other  beneficial owners: Gerald L. Parsky) (2) |       | 5,057,304                 |       | 23.8                   |       |
| Wasatch Advisors, Inc. (3)                                                   |       | 2,942,101                 |       | 13.8                   |       |
| General Electric Pension Trust (4)                                           |       | 1,306,095                 |       | 6.1                    |       |
| Daruma Asset Management, Inc. (5)                                            |       | 1,267,900                 |       | 6.0                    |       |
| Wells Fargo & Company (6)                                                |       | 1,121,958                 |       | 5.3                    |       |
| Donald T. Johnson, Jr. (7)                                                   |       | 110,623                   |       |                   | *          |
| Michael T. DuBose (8)                                                        |       | 250,000                   |       | 1.2                    |       |
| Todd R. Peters (9)                                                           |       | 48,334                    |       |                   | *          |
| Brett O. Dickson (10)                                                        |       | 23,334                    |       |                   | *          |
| William L. Conley, Jr. (11)                                                  |       | 19,167                    |       |                   | *          |
| Joseph Salamunovich (12)                                                     |       | 110,297                   |       |                   | *          |
| Barry C. Kohn (8)                                                            |       | 100,000                   |       |                   | *          |
| Robert Anderson (13)                                                         |       | 78,334                    |       |                   | *          |
| Robert L. Evans (14)                                                         |       | 0                         |       | 3⁄4                 |       |
| Curtland E. Fields (14)                                                      |       | 0                         |       | 3⁄4                 |       |
| Dale F. Frey (13)                                                            |       | 78,334                    |       |                   | *          |
| Mark C. Hardy                                                                |       | 0                         |       | 3⁄4                 |       |
| Dr. Michael J. Hartnett (13)                                                 |       | 80,000                    |       |                   | *          |
| Michael D. Jordan (14)                                                       |       | 0                         |       | 3⁄4                 |       |
| Gerald L. Parsky (2)(15)                                                     |       | 5,879,687                 |       | 27.6                   |       |
| S. Lawrence Prendergast (14)                                                 |       | 1,000                     |       |                   | *          |
| Edward Stewart (14)                                                          |       | 0                         |       | 3⁄4                 |       |
| All directors and officers as a group (19  persons) (16)                     |       | 6,836,850                 |       | 31.0                   |       |

 

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*       Lessthan 1%. 

 

(1)     Theshares of common stock underlying options granted under our stock incentiveplans that are exercisable as of February 11, 2005 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 the beneficialownership of the holder of such options, but are not deemed to be outstandingfor the purpose of computing the beneficial ownership of any other person. 

 

(2)     AuroraEquity Partners is a limited partnership the general partner of which is AuroraCapital Partners, a limited partnership whose general partner is AuroraAdvisors, Inc.  Mr. Parsky is one of thethree stockholders and directors of Aurora Advisors, is a limited partner ofAurora Capital Partners and may be deemed to beneficially share ownership ofthe common stock beneficially owned by Aurora Equity Partners and may be deemedto be an organizer of Aftermarket Technology Corp. under regulationspromulgated under the Securities Act of 1933. Aurora Equity Partners’ address is 10877 Wilshire Boulevard, Suite2100, Los Angeles, CA 90024.

 

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(3)     WasatchAdvisors’ address is 150 Social Hall Avenue, Salt Lake City, UT 84111.

 

(4)     TheGE Pension Trust’s address is 3003 Summer Street, Stamford, CT 06905.

 

(5)     DarumaAsset Management’s address is 80 West 40th Street, 9thFloor, New York, NY 10018.

 

(6)     WellsFargo’s address is 420 Montgomery Street, San Francisco, CA 94163.

 

(7)     Includes37,500 shares of restricted stock and 46,667 shares subject to exercisableoptions.  Excludes 93,333 shares subjectto options that are not exercisable.

 

(8)     Consistsof shares subject to exercisable options.

 

(9)     Consistsof 25,000 shares of restricted stock and 23,334 shares subject to exercisableoptions.  Excludes 46,666 shares subjectto options that are not exercisable.

 

(10)   Consistsof 10,000 shares of restricted stock and 13,334 shares subject to exercisableoptions.  Excludes 24,166 shares subjectto options that are not exercisable.

 

(11)   Consistsof 2,500 shares of restricted stock and 16,667 shares subject to exercisableoptions.  Excludes 18,333 shares subjectto options that are not exercisable.

 

(12)   Includes8,333 shares of restricted stock and 100,788 shares subject to exercisableoptions.  Excludes 25,000 shares subjectto options that are not exercisable.

 

(13)   Consistsof shares subject to exercisable options. Excludes 35,000 shares subject to options that are not exercisable.

 

(14)   Excludes20,000 shares subject to options that are not exercisable.

 

(15)   Includesthe shares owned by Aurora Equity Partners and 807,383 shares owned by AuroraOverseas Equity Partners I, L.P. (*i.e.,* theAurora partnerships).

 

(16)   Includes105,832 shares of restricted stock and 817,458 shares subject to exercisableoptions.  Excludes 476,664 shares subjectto options that are not exercisable.

 

Unlessotherwise noted above, the address of each person in the above table is 1400Opus Place, Suite 600, Downers Grove, IL 60515. 

 

**Securities Authorized for Issuance Under EquityCompensation Plans**

** **

The following table sets forthcertain information regarding our equity compensation plans as ofDecember 31, 2004:

 
| **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     |       | 1,882,895                                                                                           |       | $                                                                                  | 16.95      |                                                                                                                                                  | 746,248    |   |
| Equity compensation plans not approved by  security holders | ** ** | **—**                                                                                          | ** ** | **—**                                                                         | ** ** | **—**                                                                                                                                            |       |
| Total                                                       |       | 1,882,895                                                                                           |       |                                                                               |       | 746,248                                                                                                                                               |       |
|                                                             |            |                                                                                                     |            |                                                                                    |            |                                                                                                                                                       |            |  |

 

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## **ITEM 13.**       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

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

 

**Relationship with Aurora Capital Group**

 

Wewere formed in 1994 at the direction of Aurora Capital Group as a vehicle toacquire and consolidate companies in the fragmented drivetrain remanufacturingindustry.  Aurora Capital Group iscontrolled by Mr. Parsky, one of our directors, and Richard Crowell andRichard Roeder, two of our former directors. 

 

We payto Aurora Management Partners, which is a part of Aurora Capital Group, a baseannual management fee for advisory and consulting services pursuant to awritten management services agreement. Aurora Management Partners is also entitled to reimbursements from usfor all of its reasonable out-of-pocket costs and expenses incurred inconnection with the performance of its obligations under the managementservices agreement.  The base annualmanagement fee is subject to increase, at the discretion of the disinterestedmembers of our board of directors, by up to an aggregate of $250,000 in theevent that we consummate one or more significant corporate transactions.  The base annual management fee has not beenincreased as a result of any of our acquisitions.  The base annual management fee is alsosubject to increase for specified cost of living increases, although no suchadjustment has been made in the last three years.  If our EBITDA in any year exceeds management’sbudgeted EBITDA by 15.0% or more for that year, Aurora Management Partners isentitled to receive an additional management fee equal to one half of its baseannual management fee for that year. Because our EBITDA did not exceed management’s budgeted EBITDA by 15.0%in 2004, Aurora Management Partners did not receive this additional managementfee in 2004.  The base annual managementfee payable to Aurora Management Partners, which was $330,000 in 2004, wasreduced at the end of 2004 to $220,000 when the collective beneficial ownershipof our common stock by Aurora Equity Partners L.P. and Aurora Overseas EquityPartners I, L.P. (limited partnerships that are part of the Aurora CapitalGroup) declined below 30%.  If theircollective beneficial ownership declines below 20%, the management services agreementwill terminate.

 

If weconsummate any significant acquisitions, Aurora Management Partners will beentitled to receive a fee from us for investment banking services in connectionwith the acquisition.  The fee is equalto 2.0% of the first $75.0 million of the acquisition consideration(including debt assumed and current assets retained) and 1.0% of acquisitionconsideration (including debt assumed and current assets retained) in excess of$75.0 million.  Since our formation,we have paid approximately $5.3 million of fees to Aurora ManagementPartners for investment banking services in connection with ouracquisitions.  In 2001, we paid AuroraManagement Partners a $750,000 fee for services in connection with the 2000sale of our Distribution Group business. We are not obligated to make any payment to Aurora Management Partnersat any time that we are in default under our credit facility.  

 

InDecember 2003, we entered into an agreement with Aurora Equity Partners andAurora Overseas Equity Partners to purchase up to a total of 1,169,409 sharesof our outstanding common stock held by the partnerships at a price equal to theprice that we paid to our other stockholders in the tender offer that wecompleted in January 2004.  In February2004, we completed the purchase of these shares at the final tender offer priceof $15.75 per share and paid to the Aurora partnerships a total of $18.4million.  See Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources.”

 

**Indemnification Agreements**

 

Wehave entered into separate but identical indemnification agreements with eachof our directors and executive officers. These agreements provide for, among other things, indemnification to thefullest extent permitted by law and advancement of expenses. 

 

**Registration Rights**

 

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

 

Pursuantto these registration rights, in June 2002, we registered 4,500,000 shares ofour common stock for resale by the Aurora partnerships, General ElectricPension Trust, the members of our Board of Directors at the

 

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time, our Chief Financial Officer at the time and certain otherstockholders, and paid $256,000 of SEC filing fees, legal fees and otherexpenses relating to the secondary offering.

 

InOctober 2004, we filed a registration statement on Form S-3 to register theresale of up to 7,685,782 shares of our common stock by the Aurora partnerships,General Electric Pension Trust and Gerald L. Parsky.  We were not obligated under the stockholdersagreement to file this registration statement, and the selling stockholders,instead of us, are responsible for the SEC filing fees and any transactionrelated expenses.

 

## **ITEM 14.**       PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Ourprincipal outside accountant is Ernst & Young LLP.  Set forth below are the fees and expenses forErnst & Young for each of the last two years for the followingservices provided to us:

 
| ** **             | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Audit Fees (1)         |       | $        | 1,219,580  |     | $          | 425,160 |   |
| Audit-Related Fees (2) |       | 9,220    |       | 11,850   |       |
| Tax Fees (3)           |       | 102,635  |       | 143,205  |       |
| All Other Fees (4)     |       | 133,183  |       | 21,120   |       |
| Total Fees             |       | $        | 1,464,618  |     | $          | 601,335 |   |

 

----

(1)   For 2004 includes $611,600 of fees andexpenses for the audit of our internal control over financial reporting pursuantto Section 404 of the Sarbanes-Oxley Act of 2002.

(2)   For 2004 consists of fees and expenses forfinancial accounting consultations.  For2003 consists of fees and expenses for assistance with responding to an SECcomment letter regarding our 2002 10-K.

(3)   For 2004 consists of fees and expenses forassistance with (i) state, federal and foreign tax returns ($71,354) and(ii) state, federal and sales tax audits and refunds ($31,281).  For 2003 consists of fees and expenses forassistance with (i) state, federal and foreign tax returns ($73,750),(ii) state, federal and sales tax audits and refunds ($62,995) and(iii) tax planning ($6,460).

(4)   For 2004 consists of fees and expenses for servicesrelating to (i) a Statement of Auditing Standards No. 70 review ($120,394),(ii) diligence for a potential divestiture ($7,289) and (iii) the Form S-8registration statement relating to our 2004 Stock Incentive Plan ($5,500).  For 2003 consists of fees and expenses for servicesrelating to compliance with the Sarbanes-Oxley Act ($4,850) and diligence for apotential acquisition ($16,270).

 

TheAudit Committee of our Board of Directors adopted a pre-approval policy in 2003pursuant to which the Audit Committee pre-approves each non-audit engagement orservice with or by our independent auditor. Prior to pre-approving any such non-audit engagement or service, it isthe Committee’s practice to first receive information regarding the engagementor service that (i) is detailed as to the specific engagement or service, and(ii) enables the Committee to make a well-reasoned assessment of the impact ofthe engagement or service on the auditor’s independence.  In addition, the Chairman of the AuditCommittee is authorized to pre-approve any non-audit service between regularlyscheduled meetings of the Audit Committee provided that the fees for suchservice do not exceed $50,000 and the Chairman’s approvals are reported to thefull Audit Committee at the next Audit Committee meeting.  The Audit Committee or the Audit CommitteeChairman pre-approved all non-audit engagements with, and services provided by,the Company’s auditors during 2004.

 

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**PART IV**

 

## **ITEM 15.**       EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)           Index toFinancial Statements, Financial Statement Schedules and Exhibits:

 
|   | 1.                                                                   | Financial  Statements Index          |   |
|--------|----------------------------------------------------------------------|--------------------------------------|--------|
|   |                                                                 |                                 |   |
|   | See Index to Financial  Statements and Supplemental Data on page 40. |                                 |
|   |                                                                 |                                 |   |
|   | 2.                                                                   | Financial Statement  Schedules Index |   |
|   |                                                                 |                                 |   |
|   | II –                                                            | Valuation  and Qualifying Accounts   |   |
|        |                                                                      |                                      |        |  |

 

All other schedules for which provision is made in theapplicable accounting regulation of the Securities and Exchange Commission arenot required under the related instructions or are inapplicable and thereforehave been omitted.

 
|   | 3. | Exhibit Index |   |
|--------|----|---------------|--------|

 

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

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Restated  Certificate of Incorporation of Aftermarket Technology Corp (previously filed  as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on  December 21, 2001 and incorporated herein by this reference)                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2                 |       | Bylaws  of Aftermarket Technology Corp. (previously filed as Exhibit 3.2 to the  Company’s Annual Report on Form 10-K for the year ended December 31,  2003 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 (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                |       | 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)                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6                |       | 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                                                                                                                                                                                                     |

 

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|         |   | No. 33-86838,  and incorporated herein by this reference)                                                                                                                                                                                                                                                                                                               |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7         |   | 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)                                            |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.8†   |   | 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)                                                                                                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.9†   |   | Form  of Incentive Stock Option Agreement (previously filed as Exhibit 10.36 to  Amendment No. 1 to the Company’s Registration Statement on Form S-1  filed on October 25, 1996, Commission File No. 333-5597, and  incorporated herein by this reference)                                                                                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10†  |   | 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)                                                                                                |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.11†  |   | 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)                                                                                                                                |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.12†  |   | 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)                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.13†  |   | Aftermarket  Technology Corp. 2002 Stock Incentive Plan (previously filed as  Exhibit 10.31 to the Company’s Annual Report on Form 10-K for  the year ended December 31, 2002 and incorporated herein by this  reference)                                                                                                                                |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.14†  |   | Aftermarket  Technology Corp. 2004 Stock Incentive Plan (previously filed as Exhibit 10.1  to the Company’s Current Report on Form 8-K filed on December 14, 2004  and incorporated herein by this reference)                                                                                                                                                      |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.15†  |   | Standard Terms and Conditions Governing Nonemployee  Director Stock Options Granted on or after May 12, 2004 under the  Aftermarket Technology Corp. 1998, 2000, 2002, and 2004 Stock Incentive Plans  (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K  filed on December 14, 2004 and incorporated herein by this reference)   |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.16†  |   | Standard Terms and Conditions Governing Employee  Non-Qualified Stock Options Granted on or after May 12, 2004 under the  Aftermarket Technology Corp. 1998, 2000, 2002, and 2004 Stock Incentive Plans  (previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K  filed on December 14, 2004 and incorporated herein by this reference) |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.17†  |   | Standard Terms and Conditions Governing Nonemployee  Director Stock Options under the Aftermarket Technology Corp. 1998, 2000 and  2002 Stock Incentive Plans (previously filed as Exhibit 10.4 to the Company’s  Current Report on Form 8-K filed on December 14, 2004 and incorporated  herein by this reference)                                                |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.18†  |   | Standard Terms and Conditions Governing Employee  Non-Qualified Stock Options under the Aftermarket Technology Corp. 1998, 2000  and 2002 Stock Incentive Plans (previously filed as Exhibit 10.5 to the  Company’s Current Report on Form 8-K filed on December 14, 2004 and  incorporated herein by this reference)                                              |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.19†  |   | 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)                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.20†  |   | 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)                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.21†  |   | Executive Employment Agreement, dated as of  January 1, 2004, between Aftermarket Technology Corp. and Donald T.  Johnson, Jr. (previously filed as Exhibit 10.17 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 2003 and  incorporated herein by this reference)                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| *10.22† |   | Executive  Employment Agreement, dated as of March 9, 2004, between Aftermarket  Technology Corp. and Todd R. Peters                                                                                                                                                                                                                                                         |
|         |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.23†  |   | Form of Executive Employment Agreement between  Aftermarket Technology Corp. and certain of its                                                                                                                                                                                                                                                                              |

 

88

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|        |   | officers (previously filed as Exhibit 10.27 to the Company’s  Annual Report on Form 10-K for the year ended December 31,  2002 and incorporated herein by this reference)                                                                                                                                                                                                                                                                                     |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.24† |   | 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)                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.25       |   | 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)                                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.26       |   | 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)                                                                                                                                                                             |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.27       |   | 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)                                                                                                                                                                 |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.28       |   | Amendment No. 2 to Stock Purchase Agreement  dated as of May 25, 2001 between Aftermarket Technology Corp. and ATC  Distribution Group (as the successor to ATCDG Acquisition Corp., Inc.)  (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on December 21, 2001 and incorporated herein by this reference)                                                                                                              |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.29       |   | 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)                                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.30       |   | 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)                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.31       |   | 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)                                                                                        |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.32       |   | 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.)  (previously filed as Exhibit 10.29 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2002 and  incorporated herein by this reference)                                                                                           |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.33       |   | 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)                             |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.34       |   | 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)                                                        |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.35       |   | First Amendment, Dated as of December 12, 2003,  to the Credit Agreement dated as of February 8, 2002 among 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 10.31 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2003 and  incorporated herein by this reference) |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.36       |   | Remanufacturing  supply agreement between DaimlerChrysler Corporation and Aaron’s Automotive  Products, Inc. (previously filed as Exhibit 10.32 to the Company’s  Annual Report on Form 10-K for the year ended December 31,  2003 and incorporated herein by this reference) Note: Certain portions of  this Exhibit have been omitted for which confidential treatment has been  granted by the Securities and                                         |

 

89

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|   |   | Exchange  Commission. Those portions of this Exhibit have been filed separately with the  Securities and Exchange Commission.                                                                                                                                                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 10.37  |   | Stock  Purchase Agreement dated December 15, 2003 among Aurora Equity Partners,  L.P., Aurora Overseas Equity Partners I, L.P. and Aftermarket Technology  Corp. (previously filed as Exhibit 99(d)(1) to the Company’s Schedule TO  filed on December 16, 2003 and incorporated herein by this reference) |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| 14     |   | Code  of Ethics (previously filed as Exhibit 14 to the Company’s Annual Report  on Form 10-K for the year ended December 31, 2003 and  incorporated herein by this reference)                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| *21    |   | List  of Subsidiaries                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| *23    |   | Consent  of Ernst & Young LLP, independent auditors                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| *31.1  |   | Rule  13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| *31.2  |   | Rule  13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| *32.1  |   | Section  1350 Certification of Chief Executive Officer                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                      |
| *32.2  |   | Section  1350 Certification of Chief Financial Officer                                                                                                                                                                                                                                                                    |

 

----

*  Filedherewith.

 
| † |   | Compensation  plan or arrangements in which directors or executive officers are eligible to  participate. |
|--------|--------|-----------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                      |
| (b)    |   | Refer to (a) 3  above.                                                                                    |
|   |   |                                                                                                      |
| (c)    |   | Refer to (a) 2  above.                                                                                    |

 

90

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |   | AFTERMARKET  TECHNOLOGY CORP. |
|--------|--------|-------------------------------|
|   |   |                          |
|   |   | By:                           | /s/ Donald T. Johnson, Jr. |   |
|   |   |                          | Donald T. Johnson, Jr. |   |
|   |   |                          | President and Chief Executive Officer |   |
|   |   |                          |   |   |
|   |   |                          | March 1, 2005 |   |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Annual Report on Form 10-K has been signed bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated. 

 

 
|   | March 1, 2005 | /s/ Donald T. Johnson, Jr.                                                          |   |
|--------|---------------|-------------------------------------------------------------------------------------|--------|
|   |          | Donald T. Johnson, Jr.                                                              |   |
|   |          | President and Chief Executive Officer  (principal executive officer)                |   |
|   |          |                                                                                |   |
|   |          |                                                                                |   |
|   | March 1, 2005 | /s/ Todd R. Peters                                                                  |   |
|   |          | Todd R. Peters Vice                                                                 |   |
|   |          | President and Chief Financial Officer  (principal financial and accounting officer) |   |
|   |          |                                                                                |   |
|   |          |                                                                                |   |
|   | March 1, 2005 | /s/ Michael T. DuBose                                                               |   |
|   |          | Michael T. DuBose                                                                   |   |
|   |          | Chairman of the Board                                                               |   |
|   |          |                                                                                |   |
|   |          |                                                                                |   |
|   | March 1, 2005 | /s/ Robert Anderson                                                                 |   |
|   |          | Robert Anderson, Director                                                           |   |
|   |          |                                                                                |   |
|   |          |                                                                                |   |
|   | March 1, 2005 | /s/ Robert L. Evans                                                                 |   |
|   |          | Robert L. Evans, Director                                                           |   |
|   |          |                                                                                |   |
|   |          |                                                                                |   |
|   | March 1, 2005 | /s/ Curtland E. Fields                                                              |   |
|   |          | Curtland E. Fields, Director                                                        |   |
|   |          |                                                                                |   |
|   |          |                                                                                |   |
|   | March 1, 2005 | /s/ Dale F. Frey                                                                    |   |
|   |          | Dale F. Frey, Director                                                              |   |
|   |          |                                                                                |   |
|   |          |                                                                                |   |
|   | March 1, 2005 | /s/ Mark C. Hardy                                                                   |   |
|   |          | Mark C. Hardy, Director                                                             |   |

 

91

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|   | March 1, 2005 | /s/ Michael J. Hartnett           |   |
|--------|---------------|-----------------------------------|--------|
|   |          | Michael J. Hartnett, Director     |   |
|   |          |                              |   |
|   |          |                              |   |
|   | March 1, 2005 | /s/ Michael D. Jordan             |   |
|   |          | Michael D. Jordan, Director       |   |
|   |          |                              |   |
|   |          |                              |   |
|   | March 1, 2005 | /s/ Gerald L. Parsky              |   |
|   |          | Gerald L. Parsky, Director        |   |
|   |          |                              |   |
|   |          |                              |   |
|   | March 1, 2005 | /s/ S. Lawrence Prendergast       |   |
|   |          | S. Lawrence Prendergast, Director |   |
|   |          |                              |   |
|   |          |                              |   |
|   | March 1, 2005 | /s/ Edward Stewart                |   |
|   |          | Edward Stewart, Director          |   |

 

92

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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, 2002:                         |       |                                   |       |                                           |       |                                 |       |           |       |   |   |
| Reserve and allowances deducted from asset  accounts: |       |                                   |       |                                           |       |                                 |       |           |       |   |   |
| Allowance for uncollectible accounts                  |       | $                                      | 1,187      |                                           | $          | 338                                  |       | $              | —     |   | $ | 225 | (1) | $ | 1,300 |   |
| Reserve for excess and obsolete inventory             |       | 5,021                                  |       | (312                                           | )          | 237                                  | (2)        | 713            |       | 4,233 |   |
| Valuation allowance on deferred tax assets            |       | 9,092                                  |       | 101                                            |       | —                               |       | —         |       | 9,193 |   |
| Year ended  December 31, 2003:                        |       |                                   |       |                                           |       |                                 |       |           |       |   |   |
| Reserve and allowances deducted from asset  accounts: |       |                                   |       |                                           |       |                                 |       |           |       |   |   |
| Allowance for uncollectible accounts                  |       | 1,300                                  |       | (9                                             | )          | 234                                  | (3)        | 10             | (1)        | 1,515 |   |
| Reserve for excess and obsolete inventory             |       | 4,233                                  |       | 1,166                                          |       | 165                                  | (3)        | 441            |       | 5,123 |   |
| Valuation allowance on deferred tax assets            |       | 9,193                                  |       | 893                                            |       | —                               |       | —         |       | 10,086 |   |
| Year ended  December 31, 2004:                        |       |                                   |       |                                           |       |                                 |       |           |       |   |   |
| Reserve and allowances deducted from asset  accounts: |       |                                   |       |                                           |       |                                 |       |           |       |   |   |
| Allowance for uncollectible accounts                  |       | 1,515                                  |       | 633                                            |       | —                               |       | 1,309          | (1)        | 839 |   |
| Reserve for excess and obsolete inventory             |       | 5,123                                  |       | 2,029                                          |       | —                               |       | 777            |       | 6,375 |   |
| Valuation allowance on deferred tax assets            |       | 10,086                                 |       | 3,795                                          |       | —                               |       | —         |       | 13,881 |   |
|                                                       |            |                                        |            |                                                |            |                                      |            |                |            |  |  |  |  |  |  |  |

 

----

| (1) |   | Accounts written off, net of recoveries.                                                                                                                                                                      |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Asset valuation adjustment is due to the Company’s  initial discontinuance of the independent aftermarket engines business during  2000 and its subsequent election to retain this business during 2001. |
| (3) |   | Balances added through acquisitions.                                                                                                                                                                          |

 

S-1

----