** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 
| **(Mark  One)** |                                                                                          |   |
|-----------------|-----------------------------------------------------------------------------------------------|--------|
|            |                                                                                          |   |
| **x**           | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |   |
|            |                                                                                          |   |
|            | **For  the fiscal year ended December 31, 2003**                                              |   |
|            |                                                                                          |   |
|            | **OR**                                                                                        |   |
|            |                                                                                          |   |
| **o**           | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |   |

 

**Commissionfile number 0-21803**

 

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**AFTERMARKET TECHNOLOGY CORP.**

(Exact name of Registrantas specified in its charter)

 

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

** **

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

 

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

 

Securitiesregistered pursuant to Section 12(g) of the Act:**Common Stock, $.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 ýNo 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, 2003) was$154.3 million.

 

The number of shares outstanding of the Registrant’sCommon Stock, as of February 13, 2004, was 20,550,375 shares.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

None.

 

 

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**AFTERMARKET TECHNOLOGY CORP.**

 

**ANNUAL REPORT ON FORM 10-K**

**FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003**

 

 
| ITEM  1.  | BUSINESS.                                                                                        |   |
|-----------|--------------------------------------------------------------------------------------------------|--------|
|      |                                                                                             |   |
| ITEM  2.  | PROPERTIES                                                                                       |   |
|      |                                                                                             |   |
| ITEM  3.  | LEGAL PROCEEDINGS                                                                                |   |
|      |                                                                                             |   |
| ITEM  4.  | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                             |   |
|      |                                                                                             |   |
| ITEM  5.  | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                      |   |
|      |                                                                                             |   |
| ITEM  6.  | SELECTED  FINANCIAL DATA                                                                         |   |
|      |                                                                                             |   |
| ITEM  7.  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      |   |
|      |                                                                                             |   |
| ITEM  7A. | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                      |   |
|      |                                                                                             |   |
| ITEM  8.  | CONSOLIDATED  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                        |   |
|      |                                                                                             |   |
| ITEM  9.  | CHANGE  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE             |   |
|      |                                                                                             |   |
| ITEM  9A. | CONTROLS  AND PROCEDURES                                                                         |   |
|      |                                                                                             |   |
| 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,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                                |   |

 

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**SPECIAL NOTE 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” andsimilar expressions and their variants, as they relate to us or our management,may identify forward-looking statements. These statements reflect our judgment as of the date of this AnnualReport with respect to future events, the outcome of which is subject to risks,which may have a significant impact on our business, operating results orfinancial condition.  Readers arecautioned that these forward-looking statements are 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**

 

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

 

Our DrivetrainRemanufacturing business sells factory-approved remanufactured drivetrainproducts directly to automobile manufacturers (known as OEMs).  Our Drivetrain business products consistprincipally of remanufactured transmissions and also include remanufacturedtorque converters, valve bodies and engines. The OEMs primarily use the remanufactured products as replacementparts for their domestic dealers during the warranty and post-warranty periodsfollowing the sale of a vehicle. Remanufactured products offer several advantages to customers relativeto comparable rebuilt products. Generally, remanufactured products are lower cost, are of higher qualityconsistency and have shorter delivery times. Our principal customers for remanufactured transmissions are Ford MotorCompany, DaimlerChrysler Corporation, General Motors Corporation, Honda MotorCompany and other select foreign OEMs.  In addition, our Drivetrainbusiness sells select remanufactured engines to several European OEMs anddomestically to DaimlerChrysler.

 

Demand for our productswithin the Drivetrain business is largely a function of the number of vehiclesin operation, the average age of vehicles and the average number of milesdriven per vehicle.  These factors havegenerally increased over time, thereby increasing demand for our remanufacturedproducts.  Other factors that influencedemand for our remanufactured products include product complexity andreliability, OEM policies governing repair versus replace decisions madeby their dealers during the warranty period, the length of OEM warranty periods and the severity of weatherconditions.  Because these factors arenot directly dependent on new automotive sales levels, demand forremanufactured products within our Drivetrain business has been largelynon-cyclical.  However, recenttrends have included improved reliability and increases in the length of thewarranty periods. Additionally, we have seen a shift in focus towards thereduction of near-term warranty cost by several of our domestic OEM customersthat has resulted in their dealers utilizing fewer remanufactured units, whichwe believe may potentially increase total warranty cost in the long-run.

 

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Our Drivetrain business hasbeen our primary business since our formation. For the year ended December 31, 2003, revenue from our Drivetrainbusiness was $268.4 million, or 73% of our total revenue, of which Ford,DaimlerChrysler and General Motors accounted for 47%, 26% and 11%,respectively.  (See Item 8.“Consolidated Financial Statements and Supplemental Data - Note 18” for additional financialinformation regarding our Drivetrain segment.) Additionally Honda, which becamea customer in late 2002, has grown rapidly and accounted for 10% of ourDrivetrain segment revenues in 2003. In addition, we also sell remanufacturedengines and transmissions in the independent aftermarket domestically.  For the year ended December 31, 2003,revenue from our aftermarket business was $16.9 million, or 5% of our totalrevenue.

 

Our Logistics businessconsists of three operating units: Logistics Services, a provider of valueadded warehouse, distribution and reverse logistics services, turnkey orderfulfillment and information services for AT&T Wireless Services and to alesser extent, Cingular; Material Recovery, a provider of returned materialreclamation and disposition services and core management services, primarilyfor General Motors and, to a lesser extent, Ford and Mazda; and AutocraftElectronics, a provider of logistics and reverse logistics services andautomotive electronic components remanufacturing primarily for General Motors,Delphi and Visteon.  Services within ourLogistics business are designed to meet the specialized needs of our customers.

 

The logistics industry hasevolved over the last 20 years due to dramatic improvements in technologyand increased demand in customer service requirements.  Growth in our logistics business has largelybeen with AT&T Wireless, driven primarily by cellular telephone handsetdemand and AT&T Wireless’ share of new cellular telephone servicevolume.  We also have benefited fromupgrades in cellular telephone technology through increased replacement demandfor more advanced handsets, from subscriber churn and any net increases in thenumber of AT&T Wireless subscribers and from any expansion of our serviceoffering with AT&T Wireless. Cingular, which was added as a customer in 2003,is expected to follow similar revenue trends. Because we do not take actual ownership of the cellular telephoneinventory, we require less investment and do not face the risk of inventoryobsolescence.  Other growth driverswithin our Logistics business include our ability to leverage our expertise inlogistics in other industries.  For theyear ended December 31, 2003, revenue from our Logistics business was$81.7 million, or 22% of our total revenue, of which AT&T Wirelessaccounted for 71%.  (See Item 8.“Consolidated Financial Statements and Supplemental Data - Note 18” for additional financialinformation regarding our Logistics segment.)

 

**IndustryBackground**

 

***Automotive Aftermarket***

 

The automotive aftermarketin the United States, which consists of sales of parts and services forvehicles after their original purchase, has been largely non-cyclical and hasgenerally experienced steady growth over the past several years, unlike themarket for new vehicle sales.  Thisconsistent growth is due principally to an increase in the number of vehiclesin operation, an increase in the average age of vehicles, and an increase inthe average number of miles driven per vehicle, partially offset byimprovements in vehicle reliability.

 

***Remanufacturing Process***

 

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

 

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

 

•                  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.

 

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In our remanufacturingoperations, we obtain used transmissions, engines and related components,commonly known as cores, from the OEMs. We then sort the cores by vehicle make and model and either place theminto immediate production or store them until needed.  In the remanufacturing process, we evaluate the cores,disassemble them into their component parts and clean, refurbish and test thecomponents that can be incorporated into the remanufactured product.  We replace components that we determine tobe not reusable or repairable with other remanufactured or new components.  We conduct inspection and testing at variousstages of the remanufacturing process, and we test each finished assembly onequipment designed to simulate performance under operating conditions.  After testing, we generally packagecompleted products for immediate delivery.

 

There are four primary benefitsof using remanufactured components in the repair of vehicles:

 

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

 

•                  Second, remanufactured assemblies aregenerally of consistent high quality due to the precision manufacturingtechniques, technical upgrades and rigorous inspection and testing procedureswe employ in remanufacturing.  Bycontrast, the quality of rebuilt assemblies generally is less consistentbecause it is heavily dependent on the skill level of the particular mechanicas well as the availability of adequate tooling and testing equipment.  In addition, the increasing complexity oftransmissions and engines that incorporate electronic components and theshortage of highly trained mechanics qualified to rebuild assemblies arecausing what management believes is a trend toward the use of remanufacturedassemblies for aftermarket repairs.  Forwarranty repairs, consistent quality is important to the OEM providing theapplicable warranty, because once installed, the remanufactured product isusually covered by the OEM’s warranty for the balance of the original warrantyperiod.

 

•                  Third, replacement of a component with 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 allows the dealer and repair shopsto increase their volume of business.

 

•                  Fourth, the environmental benefits ofremanufacturing may be significant to OEMs. Remanufacturing in our facilities, when compared to rebuilding atvarious dealers, generally results in a more efficient re-utilization of partsand a more controlled recycling of scrap materials and excess fluids.  This in turn leads to associated costsavings.  We annually re-processthousands of tons of materials that would otherwise have been discarded.

 

***Logistics Industry***

 

Logistics can generally bedefined as the management and transportation of materials and inventorythroughout the supply chain as well as the provision of value added servicessuch as assembly, packaging, programming and testing.  The logistics industry has evolved over the last 20 yearsdue to dramatic improvements in technology and increased demand in customerservice requirements.  As companies’logistics decisions involve greater emphasis on cost efficiency and increasedfocus on core competencies, companies are increasingly reevaluating theirin-house logistics functions.  Manycompanies 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 aresult, third-party logistics providers have become extensively involved in thefull range of customer supply chain functions. The operational efficiencies of a third-party provider enable companiesto reduce investments in facilities, information technology, inventory andpersonnel.  Third-party services includeorder fulfillment, product labeling and packaging, inventory and warehousemanagement, product return, test and repair, reverse logistics and the physicalmovement of goods.

 

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***Logistics Process***

 

Our logistics process isdetermined in close consultation with our customers.  For instance, for AT&T Wireless, our supply chain managementservices include product warranty and returns, order entry processing, testingand repair, warehousing, picking, kitting, customized packaging, shipping anddelivery of wireless handsets, including wireless data devices, and accessories.  Our integrated logistics services alsoinclude inventory management and private labeling.

 

**OurCompetitive Strengths**

 

We believe our corecompetencies include the following:

 

***Our Remanufacturing Technology***

 

We specialize in volumeremanufacturing of high-quality automotive transmissions, valve bodies, torqueconverters, engine long blocks and automotive electronics.  Our remanufacturing process is completed bytesting products using state-of-the-art equipment such as sophisticated teststands that enable us to replicate OEM test procedures.

 

***Our High Quality Products with a Sound ISOQuality Foundation***

 

Our remanufactured productsare of consistent high quality due to the precision manufacturing techniques,technical upgrades and rigorous inspection and testing procedures employed inour remanufacturing processes.  We arededicated to upholding the quality of our customers’ products and hold QS-9000Certification, ISO-9000 Certification and Ford’s Q1 Certification.

 

***Our Fulfillment and Customer Service Capabilities***

 

Our Logistics businessprovides high-speed, same day, technology driven fulfillment.  Our logistics approach involves our team ofspecialists who work with the client to understand deliverables, understandcommunication points within the supply chain, design solutions, establishoperational and business metrics, eliminate waste and improve efficiencies.

 

***Our Information Technology Management andResponse Skills***

 

In our Logistics business,we use state-of-the-art software and computer systems to meet customers’ needsin 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.

 

***Our Customer Relationships***

 

In recognition of ourconsistently high level of service and product quality throughout ourrelationship with DaimlerChrysler, over the years we have received numerousawards from Chrysler.  Additionally,over the past few years, we have strengthened our relationship with many otherof our customers, as evidenced by the award of new business with Honda, Ford,Jaguar, Isuzu and General Motors.  Tostrengthen our customer relationships and improve all aspects of customerservice and operations, we have implemented our “Lean and ContinuousImprovement” and “Customer Delight” programs. Under these programs, we have implemented a number of training andoperating initiatives aimed at improving efficiency and productivity.

 

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**Our GrowthStrategies**

 

Our strategy is to be aworld-class provider of remanufacturing and logistics products and services.  We are pursuing the following growthstrategies:

 

•                  increasing sales to existing customers;

 

•                  introducing new products and programs;

 

•                  establishing new customer relationships; and

 

•                  pursuing future acquisitions.

 

***Increasing Sales to Existing Customers***

 

*Drivetrain Customers.*  Weintend to increase our business with our existing Drivetrain customers byworking with OEMs to increase dealer utilization of remanufacturedtransmissions in appropriate circumstances in both the warranty andpost-warranty periods.  We are workingin tandem with OEMs to highlight to dealers the quality and costadvantages of using remanufactured assemblies versus major rebuilding.  We are also working with OEMs to reducethe lag time prior to the introduction of a remanufacturing program for newtransmission models and model years.  Inaddition, the post-warranty repair market, which we believe is significantlylarger than the OEM dealer warranty repair market, presents a growth opportunity.  We believe that most post-warranty repairsare performed by aftermarket repair specialists rather than by OEMdealers.  Given the relatively low costand high quality of remanufactured components, OEM dealers may enhance theircost competitiveness, when compared to independent service centers, through theincreased use of remanufactured components as well as providing end customerswith a high quality product.  To theextent that OEM dealers increase their level of post-warranty repairs, we arewell positioned, given our existing OEM relationships, to capitalize on thismarket growth.

 

*Logistics Customers.*  Weintend to increase penetration of our existing Logistics business customer baseby broadening our offering of Logistics products and services and by marketingour core competencies as solutions to our customers’ needs.  Since 2000, AT&T Wireless has awarded usseveral new programs, including the packaging and distribution of cellulartelephone accessories, the testing and repair of returned handsets and an orderentry function for warranty returns.

 

***Introducing New Products and Programs***

 

*Drivetrain Business.*  Wecontinue to work with our OEM customers to identify additional remanufacturedproducts and services where we can provide value to the OEM.  In this way, we believe that we will be ableto leverage our customer relationships and remanufacturing competency.  In 2000, Ford selected us to supplyremanufactured transmissions for use in Ford’s new Focus, and to supply a newline of Motorcraft­branded remanufactured transmissions.  In 2002 we were awarded new business byGeneral Motors and Jaguar. Additionally in 2003, soon after their launch as anew customer, we were awarded additional models by Honda for theirremanufactured transmission program.

 

*Logistics Business.*  We also intend to leverage ourcore competencies in logistics and electronics remanufacturing by working withour existing and new customers to identify products and services where we canadd value in satisfaction of our customers’ needs.  In 2003, Cingular awarded us programs for direct fulfillment andwarranty returns processing and exchange of cellular telephone handsets.Additionally in 2003, General Motors converted a pilot material recoveryprogram into a full national program.

 

***Establishing New Customer Relationships***

 

*Drivetrain Customers.*  Webelieve that opportunities for growth exist with select foreignOEMs regarding United States­based and European-based remanufacturingprograms.  We believe that this representsan opportunity

 

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forgrowth and we are currently working to develop programs with these OEMs. In October 2001, Saturn Corporation awarded us a contract to remanufacturetransmissions, valve body assemblies and pump assemblies, and in October 2002,Honda awarded us a contract to remanufacture transmissions for warranty use inits domestic vehicles.

 

We also look to obtain newcustomers for our drivetrain products in the independent aftermarket.  In July 2001, we began a program withthe National AAMCO Dealers Association, which represents most of the AAMCOdealers across the United States.  Underthis program, we provide select remanufactured domestic transmissions to AAMCOdealers.  These dealers currently face ashrinking base of technicians who are qualified to work with the increasingnumber of transmission types and their increasing technologicalcomplexity.  Through this program, weprovide various incentives for dealers to purchase remanufactured transmissionsdirectly from us.  We believe that theAAMCO dealers represent a substantial portion of the post-warranty transmissionrepair market in the United States. Additionally, we have added several other new customers in theindependent aftermarket, including Cottmans, Moran Industries (which includes AtlasTransmissions, Mr. Transmission, Multistate Transmissions and Dr. NicksTransmissions), ServiceMaster, AutoZone and AutoNation.

 

*Logistics Customers.*  Weplan to leverage our existing relationships with automobile OEMs into newlogistics customer relationships.  Webelieve that our logistics services business should be attractive to newcustomers who recognize that outsourcing this function will enable them to bothfocus on their core competencies and have an efficient product distributionsystem.  We also believe that the costsavings and environmental benefits provided by our material recovery businesswill be attractive to other OEMs.  In June 2001, Mazda North AmericaOperations awarded us a logistics pilot program contract under which we harvestand consolidate used or excess product and then ship it to Mazda authorizeddealers.  In 2002, we were awarded newautomotive telematics business with Motorola. Additionally, in 2003, Cingularawarded to us programs for the direct fulfillment of cellular telephonehandsets and for warranty returns processing and exchange. 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.

 

***Pursuing Future Acquisitions***

 

An important element of ourgrowth strategy is the acquisition and integration of complementary businessesin order to broaden product offerings, capture market share and improveprofitability.  We have made variousacquisitions in the past and, to the extent suitable acquisition candidates,acquisition terms and financing are available, we intend to make acquisitionsin the future.

 

**OurDrivetrain Remanufacturing Business**

 

Our Drivetrain businessconsists of five operating units that primarily remanufacture and selltransmissions directly to automobile manufacturers.  Drivetrain segment sales accounted for 73.1%, 69.2%, 67.7%,68.3%, and 73.6% of our 2003, 2002, 2001, 2000, and 1999 revenues,respectively.

 

We remanufacturefactory-approved transmissions (i) for warranty and post-warranty replacementof transmissions for Ford, DaimlerChrysler, General Motors and select foreignOEMs, including Mitsubishi, Isuzu, and Subaru, and (ii) for warrantyreplacement for Honda. These transmissions are primarily for use in theirUnited States dealer networks.  Thenumber of transmission models we remanufacture has been increasing toaccommodate the greater number of models currently used in vehicles manufacturedby our OEM customers.

 

We operate a facility inEngland that remanufactures factory-approved engines for several European OEMs,including Jaguar and the European divisions of Ford and General Motors.  These engines are used for warranty andpost-warranty replacement.  The facilityin England also does assembly and modification of new production engines andprovides certain machining services for some of our OEM customers.

 

Our largest Drivetrainsegment customers are Ford and DaimlerChrysler, to whom we primarily supplyremanufactured transmissions for use in Ford and Chrysler automobiles and lighttrucks.  Additionally, we provide

 

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remanufacturedcomponents to several other OEMs including transmissions to GeneralMotors, Honda, Mitsubishi, Subaru and Isuzu and engines to Jaguar,DaimlerChrysler, Land Rover, Aston Martin and the European divisions of Fordand General Motors.  In general, theOEMs retain ownership of cores.  Wegenerally sell products to each OEM pursuant to a supply arrangement forindividual transmission or engine models, which supply arrangement typicallymay be terminated by the OEM on 90 days notice or less (except for ouragreement with DaimlerChrysler, which may not be terminated without cause).

 

Historically, we havedeveloped and maintained strong relationships at many levels in both thecorporate and factory organizations of the Chrysler division ofDaimlerChrysler, and we have received numerous awards over the years from Chryslerin recognition of our consistently high level of service and productquality.  Additionally, over the pastfew years, we have strengthened our relationships with many of our otherDrivetrain customers, as evidenced by the award of new business with Honda,Ford, Jaguar, Isuzu and General Motors. In addition, we have received Ford’s “Q-1” and “Dedication to CustomerService” awards in recent years.

 

All of our facilities thatremanufacture transmissions for OEMs have QS-9000 or ISO-9000 certification, acomplete quality management system developed for manufacturers who subscribe tothe ISO 9002 quality standards.  Thesystem is designed to help suppliers, such as us, develop a quality system thatemphasizes defect prevention and continuous improvement in manufacturingprocesses.

 

We began remanufacturingtransmissions for DaimlerChrysler and Ford in 1989, General Motors in 1985 andHonda in 2002.  We believe that we arethe largest provider of remanufactured transmissions to DaimlerChrysler, Fordand Honda for automobiles and light trucks in North America and we are one ofthree suppliers of remanufactured transmissions to General Motors.  We presently do not provide remanufacturedtransmissions or other components to DaimlerChrysler’s Mercedes Benz division.DaimlerChrysler has advised us that, by implementing a remanufacturing programfor Chrysler vehicles, DaimlerChrysler has realized substantial warranty costsavings, standardized the quality of its dealers’ aftermarket repairs andreduced its own inventory of replacement parts.

 

**OurLogistics Business**

 

Our Logistics businessprovides supply chain management to our customers.  Our operations consist of a warehouse, distribution and turnkeyorder fulfillment, reverse logistics and information services business, anautomotive electronic parts remanufacturing and distribution business and amaterial recovery parts processing, or reverse logistics business.  We acquired our Logistics business as partof the Autocraft acquisition in 1998.

 

***Logistics Customers***

 

*AT&T Wireless Services.*  Thelogistics services operating unit provides value added warehouse anddistribution services, turnkey order fulfillment, reverse logistics andinformation services for AT&T Wireless. As part of our product offering, we provide bulk and direct fulfillmentof cellular telephones and accessories to AT&T Wireless subscribers andpartners.  We deliver products both toAT&T Wireless retail locations and directly to individuals who order acellular phone.  Our arrangement withAT&T Wireless originally focused primarily on cellular telephones and wethen expanded our relationship to include accessories.  We also provide accessory packagingservices, inventory tracking and management and process all warranty-serviceexchanges and perform handset testing and repair.  We do not take title to any telephones or accessories and do notreflect any of these items as inventory.

 

*Automotive Electronic Components.*  Theautomotive electronic components operating unit remanufactures and distributesradios and instrument and display clusters for General Motors, Delphi andVisteon, and remanufactures and distributes various cellular products (*e.g.,*navigation systems) primarily forVisteon and General Motors and to lesser extent, Motorola.

 

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*Material Recovery.*  We provide returned materialreclamation and disposition services to assist automobile OEMs with themanagement of their dealer parts inventory, thereby reducing the OEMs’ partscosts and assisting them in being more environmentally responsible.  Under this program, various points in theOEM supply chain send their excess and obsolete parts inventory to our facilityin Oklahoma City.  We then sort theparts and redistribute the useful parts on behalf of the OEM to other dealersto fill back orders or to the OEM’s product distribution centers forrestocking.  Parts that are no longeruseful are scrapped and recycled.  Theparts remain the property of the OEM, and we receive a fee for our redistributionservices. Additionally, we provide certain core management and dispositionservices.

 

**Competition**

 

In our Drivetrain business,we primarily compete in the market for remanufactured transmissions sold to theautomotive aftermarket through the OEM dealer networks.  This market, narrowly defined, is one inwhich the majority of industry supply comes from a limited number ofparticipants.  Competition is basedprimarily on product quality, service, delivery, technical support and priceand tends to be split along customer lines.

 

In our Logistics business,we primarily compete in a fragmented market as a niche participant offering aspecialized value-added service requiring stringent service levelrequirements.  Based on our performancelevels, we believe we are well positioned to compete in this market.  However, some of our competitors in thissegment are larger and have greater financial and other resources.

 

**CorporateHistory**

 

We were formed in 1994 as aDelaware corporation at the direction of Aurora Capital Group.  Since then, we have completed the followingacquisitions: 

 
| **Year** |   | **Company  (1)**                                  |   | **Description  (2)**                                                                                                                                                                                                                          |   | **Acquisition  Price (3)** |   |
|----------|--------|---------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|
|     |   |                                              |   |                                                                                                                                                                                                                                          |   | **(in millions)**          |   |
| 1994     |   | Aaron’s Automotive  Products, Inc.           |   | •             Remanufactures transmissions for  DaimlerChrysler                                                                                                              |   | $                          | 113.2  |   |
| 1995     |   | Component Remanufacturing  Specialists, Inc. |   | •             Remanufactures transmissions for several  foreign OEMs, including Subaru, Mitsubishi and Isuzu                                                                 |   | $                          | 30.5   |   |
| 1997     |   | ATS Remanufacturing                               |   | **•****            **Remanufactures transmissions for General  Motors and Saturn                                                                                             |   | $                          | 12.9   | (4) |
| 1998     |   | Autocraft                                         |   | **•****            **Provides value added warehouse and  distribution services, turnkey order fulfillment and information services  primarily for AT&T Wireless Services |   | $                          | 121.7  |   |
|     |   |                                              |   | **•****            **Provides returned material reclamation and  disposition services (known as reverse logistics)                                                           |   |                       |   |
|     |   |                                              |   | **•****            **Remanufactures transmissions for Ford and Honda and  remanufactures engines for  the European operations of Ford, General  Motors and Jaguar       |   |                       |   |
|     |   |                                              |   | **•****            **Remanufactures and distributes automotive  electronic components                                                                                        |   |                       |   |
| 2003     |   | A-T.A.T., Inc                                     |   | **•****            **Remanufactures automobile and light truck  transmissions for resale in the independent aftermarket                                                      |   | $                          | 1.4    |   |

 

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(1)          Excludes acquisitions that were subsequently sold.

(2)          Updated to reflect changes in these businesses since acquisition.

(3)          Includes transaction fees and related expenses.

(4)          Excludes subsequent payments totaling $19 million due on each ofthe first 14 anniversaries of the closing date, of which a total of $9.8million has been paid through December 31, 2003.

 

8

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In August 2000, weadopted a plan to discontinue and sell a segment of our business that wereferred to as our independent aftermarket. This independent aftermarket segment consisted of two parts.  The first part was the ATC DistributionGroup, Inc., which sold transmission parts to automotive aftermarketcustomers such as independent transmission rebuilders, general repair shops,distributors and retail automotive parts stores.  This group consisted of various companies that we purchasedbetween 1994 and 1999.  We completed thesale of the Distribution Group in October 2000.  The ATC Distribution Group has been reflected as discontinued operationsin the consolidated financial statements and related discussion and analysisincluded in this Annual Report.

 

The second part of thesegment was the independent aftermarket engine business that remanufactureddomestic and foreign engines primarily for sale not to OEMs, as is the case inour Drivetrain business, but instead through a branch distribution network intothe independent aftermarket.  Inpreparing this independent aftermarket engine business for sale, werestructured the business by eliminating our branch distribution network and sellingdirectly to customers on an overnight basis from four regional distributioncenters in the eastern half of the United States, and by applying leanmanufacturing techniques to improve productivity, reduce manufacturing costsand improve product quality.    However,efforts to identify an interested buyer placing sufficient value on thisbusiness were unsuccessful and we ultimately elected to retain our independentaftermarket engine business.  With theexpansion of the product offering to include select remanufactured domestictransmissions, we are now working to grow this business.

 

**Employees**

 

As of December 31,2003, we had approximately 3,000 full-time and temporary employees.  We believe our employee and labor relationsare good.  We have not experienced any workstoppage to date and currently none of our employees are represented by a laborunion.

 

**Environmental**

 

We are subject to variousevolving federal, state, local and foreign environmental laws and regulationsgoverning, among other things, emissions to air, discharge to waters and thegeneration, handling, storage, transportation, treatment and disposal of avariety of hazardous and non-hazardous substances and wastes.  These laws and regulations provide forsubstantial fines and criminal sanctions for violations and impose liabilityfor the costs of cleaning up, and damages resulting from, past spills,disposals or other releases of hazardous substances.

 

In connection with theacquisition of our subsidiaries, some of which have been subsequently divestedor relocated, we conducted certain investigations of these companies’facilities and their compliance with applicable environmental laws.  The investigations, which includedPhase I assessments by independent consultants of all manufacturing andvarious distribution facilities, found that a number of these facilities havehad or may have had releases of hazardous materials that may requireremediation and also may be subject to potential liabilities for contaminationfrom off-site disposal of substances or wastes.  These assessments also found that reporting and other regulatoryrequirements, including waste management procedures, were not or may not havebeen satisfied.  Although there can beno assurance, we believe that, based in part on the investigations conducted,in part on certain remediation completed prior to or since the acquisitions,and in part on the indemnification provisions of the agreements entered into inconnection with our acquisitions, we will not incur any material liabilitiesrelating to these matters.

 

One of the Company’s formersubsidiaries, RPM, leased several facilities in Azusa, California locatedwithin what is now the Baldwin Park Operable Unit of the San Gabriel ValleySuperfund Site.  The entity that leasedthe facilities to RPM has been identified by the United States EnvironmentalProtection Agency, or EPA, as one of approximately nineteen potentiallyresponsible parties, or PRPs, for environmental liabilities associated with theSuperfund 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 are broadly defined under CERCLA, andgenerally include present owners and operators of a site and 

 

9

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certainpast 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 practical matter, however, at sites where there are multiplePRPs, the costs of cleanup typically are allocated among the PRPs according toa volumetric or other standard.  The EPAhas preliminarily estimated that it will cost in excess of $200 million toconstruct and approximately $4 million per year to operate for an indefiniteperiod an interim remedial groundwater pumping and treatment system for thepart of the San Gabriel Valley Superfund site within which RPM’s facilities, aswell as those of many other potentially responsible parties, are or werelocated.  The actual cost of thisremedial action could vary substantially from this estimate, and additional costsassociated with this Superfund site are likely to be assessed.  RPM moved all manufacturing operations outof the San Gabriel Valley Superfund site area in 1995.  Since July 1995, RPM’s only realproperty interest in this area has been the lease of a 6,000 square footstorage and distribution facility. Neither the Company nor any of its affiliates has been named by the EPAas a PRP for the Superfund Site and, based on the Company’s limited connectionwith the Site, the Company does not believe that it is likely to be identifiedas such in the future.  Furthermore, theacquisition agreement by which the Company acquired the assets of RPM in 1994and the leases pursuant to which the Company leased RPM’s facilities after itacquired the assets of RPM expressly provide that the Company did not assumeany liabilities for environmental conditions existing on or before the closingof the acquisition, although the Company could become responsible for thoseliabilities under various legal theories. The Company is indemnified against any such liabilities by the companythat sold RPM to it as well as the shareholders of that company, although theCompany has no information regarding the current financial condition of theseindemnitors and there can be no assurance that the Company would be able tomake any recovery under the indemnification provisions.  While there can be no assurance, the Companybelieves that it will not incur any material liability as a result of RPM’s leaseof properties within the San Gabriel Valley Superfund site.

 

In connection with theOctober 2000 sale of our Distribution Group, we agreed to indemnify thebuyer against environmental liability at former Distribution Group facilitiesthat had been closed prior to the Distribution Group sale, including the formerfacilities in Azusa, California within the Superfund site mentioned above andformer manufacturing facilities in Mexicali, Mexico and Dayton, Ohio.  We also agreed to indemnify the buyeragainst any other environmental liability of the Distribution Group relating toperiods prior to the closing of the Distribution Group sale.  Our indemnification obligations to the buyerare subject to a $750,000 deductible and a $12.0 million cap, except withrespect to closed facilities.  In 2002,we negotiated an additional $100,000 deductible applicable to all DistributionGroup claims for indemnification.

 

**CertainFactors Affecting the Company**

 

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

 

A few customers account fora significant majority of our net revenues each year.  In 2003, we had three customers that individually accounted formore than 10% of our revenues.  Fordaccounted for 35.7%, 37.0% and 34.6% of our net sales for 2003, 2002 and 2001,respectively, DaimlerChrysler accounted for 19.0%, 22.4% and 24.7% of our netsales in 2003, 2002 and 2001, respectively, and AT&T Wireless accounted for15.8%, 18.5% and 17.6% of our net sales during 2003, 2002 and 2001,respectively.  In addition, revenuesfrom General Motors accounted for 9.4%, 8.9% and 7.4% of our revenues in 2003,2002 and 2001, respectively, and Honda accounted for 7.0% of our revenues in2003 and is expected to represent a significantly higher percentage in thefuture. If we lose any of these customers, or if any of them reduces or cancelsa significant order, our net sales and operating results could decreasesignificantly.

 

Our significant OEM customers generally require thattheir dealers using remanufactured products for warranty application use onlyproducts from approved suppliers. Although we are a factory approved supplierof our customers, 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. In addition, we periodically renegotiate the prices and other terms ofour

 

10

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products with ourcustomers.  For instance, we recentlynegotiated lower prices with AT&T Wireless and DaimlerChrysler inconnection with the renewal and extension of their respective contracts.  Because of the short termination periods andperiodic price negotiations, we cannot give any assurances of the stability ofthe demand or prices for our products and, therefore, our revenue streams.  Significant demand or price fluctuationscould materially affect our business.

 

Within the last five yearsthe standard new vehicle warranty provided by our customers has varied andshorter warranty periods could be implemented in the future.  Any shortening of warranty periods couldreduce the amount of warranty work performed by dealers and reduce the demandfor our products.  Additionally, ourcustomers may vary their policies governing decisions that determine when theirdealers may use remanufactured products for warranty applications, which couldreduce the demand for our products.

 

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

 

In our remanufacturingoperations, we obtain used transmissions, engines and related components,commonly known as cores, which are sorted and either placed into immediateproduction or stored until needed.  Themajority of the cores we remanufacture are obtained from OEMs.  Ourability to obtain cores of the types and in the quantities we require iscritical to our ability to meet demand and expand production.  With the increased acceptance in theaftermarket of remanufactured assemblies, the demand for cores hasincreased.  We have periodicallyexperienced situations in which the inability to obtain sufficient cores haslimited our ability to accept orders. We may experience core shortages in the future.  In addition, from time to time, weexperience shortages of components manufactured by our OEM customers that werequire for our transmission remanufacturing process.  If we experience such shortages for an extended period of time,it could have a material adverse effect on our business and negatively impactour competitive position.

 

***Our financial results are affected bytransmission failure rates, which are outside our control.***

 

Our quarterly and annualoperating results are affected by transmission failure rates, and a drop inrates could adversely affect sales or profitability or lead to variability ofour operating results.  Generally, iftransmissions last longer, there will be less demand for our remanufacturedtransmissions.  Transmission failurerates could drop due to a number of factors outside our control, including:

 

•                  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, whichcould occur if gasoline prices were to increase; and

 

•                  mild weather, such as that experienced duringthe winter of 2001-2002.

 

***Our financial results are affected by ourcustomers’ policies, which are outside our control.***

 

Our financial results arealso affected by the policies of our OEM customers.  Changes to our key OEM customers’ policies that could materiallyaffect our business include:

 

•                  guidelines that affect dealer decisions to rebuildunits 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;

 

11

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

 

•                  pricing strategies.

 

***Our Logistics business is dependent on thestrength of our customers.***

 

AT&T Wireless, ourprincipal Logistics customer, operates in a highly competitive technologymarket.  The number of cell phones soldby AT&T Wireless, whether to new subscribers or as replacement phones toexisting subscribers, is dependent on its ability to keep pace withtechnological advancements and to provide service programs and prices that areattractive to current and potential customers. Our Logistics revenue from AT&T Wireless is substantially related tothe number of phones sold by AT&T Wireless.  Consequently, any material decrease in phones sold by AT&TWireless will materially and adversely affect our Logistics revenue.  In addition, although we believe we are wellpositioned to benefit from any potential merger of AT&T Wireless andanother wireless carrier, no assurance to this can be given and any potentialmerger could result in a significant loss of revenues in our Logisticsbusiness.

 

***We may incur material liabilities undervarious federal, state, local and foreign environmental*****laws.**

 

We are subject to variousevolving federal, state, local and foreign environmental laws and regulationsgoverning, among other things, emissions to air, discharge to waters and thegeneration, handling, storage, transportation, treatment and disposal of avariety of hazardous and non-hazardous substances and wastes.  These laws and regulations provide forsubstantial fines and criminal sanctions for violations and impose liabilityfor the costs of cleaning up, and the damages resulting from, past spills,disposals or other releases of hazardous substances.  In connection with our acquisition activity, we have conductedcertain investigations of facilities we have acquired and their compliance withapplicable environmental laws. Similarly, in the course of lease terminations, we have generallyconducted investigations into potential environmental impacts resulting fromour operations.  These investigationsrevealed various environmental matters and conditions that could expose us toliability or which have required us to undertake compliance-relatedimprovements or remedial activities. Furthermore, one of our former subsidiaries, RPM, leased severalfacilities in Azusa, California located within what is now a federal Superfundsite.  The entity that leased thefacilities to RPM has been identified by the United States EnvironmentalProtection Agency as one of the many potentially responsible parties forenvironmental liabilities associated with that Superfund site.  Any liability we may have from this site orotherwise under environmental laws could materially affect our business.

 

***Substantial competition could reduce ourmarket share and significantly harm our financial performance.***

 

While we believe that ourbusiness is well positioned to compete in our two primary market segments,transmission remanufacturing and logistics, our industry segments are highlycompetitive.  We may not be successfulin competing against other companies, some of which are larger than us and havegreater financial and other resources available to them than we do.  Increased competition could require us toreduce prices or take other actions which may have an adverse effect on ouroperating results.

 

***Our stock price is volatile, and investorsmay not be able to recover their investment if our stock price declines.***

 

The trading price of ourcommon stock has been volatile and can be expected to be affected by factorssuch as:

 

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

 

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

 

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•                  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.

 

In addition to the factorslisted above affecting us, our competitors and the economy generally, the stockprice of our common stock may be affected by any significant sale of shares byour principal stockholders.  As ofFebruary 13, 2004, Aurora Equity Partners L.P. and Aurora OverseasEquity Partners I, L.P. collectively owned 6,273,617 shares ofour common stock.  Any significant salesby the Aurora partnerships of these shares could have a negative impact on ourstock price.

 

***Our future operating results may fluctuatesignificantly.***

 

We may experience significantvariations in our future quarterly results of operations.  These fluctuations may result from manyfactors, including the condition of our industry in general and shifts indemand and pricing for our products. Our operating results are also highly dependent on our level of grossprofit as a percentage of net sales. Our gross profit percentage fluctuates due to numerous factors, some ofwhich may be outside of our control. These factors include:

 

•                  pricing strategies;

 

•                  changes in product costs from vendors;

 

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

 

•                  the relative mix of products sold during theperiod; and

 

•                  general market and competitive conditions.

 

Results of operations in anyperiod, therefore, should not be considered indicative of the results to beexpected for any future period.

 

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

 

Our success depends to asignificant extent on the efforts and abilities of our senior managementteam.  We have various programs in placeto motivate, reward and retain our management team, including bonus and stockoption plans.  However, the loss of oneor more of these persons could have an adverse effect on our business.  Our success and plans for future growth willalso depend on our ability to hire, train and retain skilled workers in allareas of our business.  We currently donot have key executive insurance relating to our senior management team.

 

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

 

From time to time, laborunions have indicated their interest in organizing a portion of ourworkforce.  Given that our OEM customersare in the highly unionized automotive industry, our business is likely tocontinue to attract the attention of union organizers.  While these efforts have not been successfulto date except in the case of our former Mahwah, New Jersey facility, we cannotgive any assurance that we will not experience additional union activity in thefuture.  Any union organizationactivity, if successful, could result in increased labor costs and, even ifunsuccessful, could result in a temporary disruption of our productioncapabilities and a distraction to our management.  Additionally, we need qualified managers and a number of skilledemployees with technical experience in order to operate our businesssuccessfully.  From time to time, theremay be a shortage of skilled labor,

 

13

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whichmay make it more difficult and expensive for us to attract and retain qualifiedemployees.  If we are unable to attractand retain qualified individuals or our costs to do so increase significantly,our operations would be materially adversely affected.

 

***We are subject to risks associated withfuture acquisitions.***

 

An important element of ourgrowth strategy is the acquisition and integration of complementary businessesin order to broaden product offerings, capture market share and improve profitability.  We will not be able to acquire otherbusinesses if we cannot identify suitable acquisition opportunities, obtainfinancing on acceptable terms or reach mutually agreeable terms withacquisition candidates.  The negotiationof potential acquisitions as well as the integration of an acquired businesscould require us to incur significant costs and cause diversion of ourmanagement’s time and resources.  Futureacquisitions by us could 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.

 

Some or all of these itemscould have a material adverse effect on our business.  The businesses we acquire in the future may not achieve sales andprofitability that justify our investment. In addition, to the extent that consolidation becomes more prevalent inour industry, the prices for suitable acquisition candidates may increase tounacceptable levels and limit our growth.

 

***We may encounter problems in integratingthe operations of companies that we acquire.***

 

We may encounterdifficulties in integrating any businesses we acquire with our operations.  The success of these transactions depends onour 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 notrealize the benefits we anticipated when we entered into thesetransactions.  In addition, after wehave completed an acquisition, our management must be able to assumesignificantly greater responsibilities, and this in turn may cause them todivert their attention from our existing operations.  Any of the foregoing could have a material adverse effect on ourbusiness and results of operations.

 

***Our level of indebtedness and the terms ofour indebtedness could adversely affect our business and liquidity position.***

 

As of December 31,2003, our outstanding indebtedness was $127.4 million, and we had cash and cashequivalents on hand of $59.6 million. However, on February 10, 2004, subsequent to the closing andsettlement of our tender offer to purchase 2,638,500 shares of our outstandingcommon stock at a price of $15.75 per share and immediately after therepurchase 1,169,409 shares of our common stock at a price of $15.75 per sharefrom our affiliates, Aurora Equity Partners L.P. and Aurora Overseas EquityPartners I, L.P., we had total debt outstanding of $127.3 million, cash andcash equivalents on hand of $6.5 million, and $36.9 million borrowing capacityunder our $40.0 million revolving credit facility. Furthermore, our indebtedness may increase from time to time in thefuture for

 

14

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variousreasons, including fluctuations in operating results, capital expenditures andpossible acquisitions.  Our consolidatedindebtedness level could materially 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.

 

In addition, our creditfacility requires us to meet specified financial ratios and limits our abilityto enter into various transactions.

 

If we default on any of ourindebtedness, or if we are unable to obtain necessary liquidity, our businesscould be adversely affected.

 

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

 

As of February 13, 2004, theAurora partnerships held approximately 40% of our voting power, through directownership of shares and voting arrangements, and four of the nine members ofour Board of Directors are affiliated with the Aurora partnerships.  As a result, they are able to exercisesubstantial control over us.  As a result,it may be more difficult for a third party to acquire us.  See Item 12. “Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters” and Item 13.“Certain Relationships and Related Transactions.”

 

***Our certificate of incorporation containsprovisions that may hinder or prevent a change in control of our company.***

 

Provisions of ourcertificate of incorporation could make it more difficult for a third party toobtain control of us, even if such a change in control would benefit ourstockholders.  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 control of us.  Such provisions may also impede atransaction in which our stockholders could receive a premium over then currentmarket prices and our stockholders’ ability to approve transactions that theyconsider in their best interests.

 

**AvailableInformation**

 

Our internet website is www.goatc.com.  We make available free of charge on ourwebsite our annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and any other filings we make with the Securitiesand Exchange Commission as soon as reasonably practicable.  This information may also be obtained bycalling the Securities and Exchange Commission at 1-800-SEC-0330.  The Securities and Exchange Commission alsomaintains an internet website that contains reports, and other informationregarding issuers that file electronically with the Securities and ExchangeCommission at www.sec.gov. We will provide a copy of any of theforegoing documents to shareholders upon request.

 

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## **ITEM 2**.                                         PROPERTIES

## ** **

We conduct our business fromthe following facilities:

 
| **Location**            |   | **Approx.  Sq. Feet** |   | **Lease  Expiration  Date** |   | **Products  Produced/Services Provided**                                |
|-------------------------|--------|-----------------------|--------|-----------------------------|--------|------------------------------------------------------------------------------|
| Springfield, MO         |   | 280,800               |   | 2008                        |   | transmissions (1)                                                            |
| Springfield, MO         |   | 200,000               |   | 2006                        |   | engines and transmissions  (2)                                               |
| Gastonia, NC            |   | 130,000               |   | 2009                        |   | transmissions and valve  bodies (1)                                          |
| Oklahoma City, OK       |   | 100,000               |   | owned                       |   | 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                        |   | 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 business.

(2)          This facility is used by our Independent Aftermarket business.

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

 

We also lease assortedwarehouses and space for our corporate offices and computer servicescenters.  We believe that our currentfacilities are adequate for the current level of our activities. In the eventwe were to require additional facilities, we believe that we could procureacceptable facilities.

 

## **ITEM 3**.                                         LEGALPROCEEDINGS

## ** **

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

 

## **ITEM 4**.                                         SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

## ** **

No matters were submitted to a vote of thestockholders of the Company during the quarter ended December 31, 2003.

 

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**PART II**

 

## **ITEM 5**.                                         MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER 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 13, 2004,there were approximately 51 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** |   |
|----------------|--------|----------|--------|---------|--------|
| 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   |   |
| 2002           |   |     |   |    |   |
| First quarter  |   | $        | 19.47  |    | $      | 15.55 |   |
| Second quarter |   | 24.70    |   | 17.50   |   |
| Third quarter  |   | 22.05    |   | 12.65   |   |
| Fourth quarter |   | 14.90    |   | 8.76    |   |

 

On February 13, 2004, the last sale price of thecommon stock, as reported by Nasdaq, was $14.79 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 no independentoperations, the ability of Aftermarket Technology Corp. to pay cash dividendsis dependent upon the receipt of dividends or other payments from itssubsidiaries.  The agreement for ourbank credit facility contains certain covenants that, among other things,prohibit the payment of dividends.  SeeItem 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations-Liquidity andCapital Resources.”  Any determinationto pay 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**.                                         SELECTEDFINANCIAL DATA

## ** **

The selected financial data presented below withrespect to the statements of income data for the years ended December 31,2003, 2002 and 2001 and the balance sheet data as of December 31, 2003 and2002 are derived from the Consolidated Financial Statements of the Company thathave been audited by Ernst & Young LLP, independent auditors, and areincluded elsewhere herein, and are qualified by reference to such financialstatements and notes related thereto. The selected financial data with respect to the statements of incomedata for the years ended December 31, 2000 and 1999 and the balance sheet dataas of December 31, 2001, 2000 and 1999, are derived from the ConsolidatedFinancial Statements of the Company that have been audited by Ernst &Young LLP, independent auditors, but are not included herein.  The data provided should be read inconjunction with the Consolidated Financial Statements, related notes and otherfinancial information included in this Annual Report.  The results of the Distribution Group, Inc. subsidiary, which wassold in October 2000, are classified as discontinued operations and are excludedfrom the selected financial data presented below.

 
|                                                                                   |   | **Year Ended  December 31,**               |    |
|----------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                                   |   | **2003**                                   |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                                                   |   | **(In  thousands, except per share data)** |    |
| **Statements of Income Data:**                                                         |   |                                       |    |   |   |   |   |   |   |   |   |
| Net sales                                                                              |   | $                                          | 367,064 |   | $ | 415,902 |   | $ | 393,381 |   | $ | 372,493 |   | $ | 365,563 |   |
| Cost of sales                                                                          |   | 266,316                                    |    | 272,360 |   | 255,360 |   | 248,438 |   | 246,224 |   |
| Exit, disposal,  certain severance and other charges (1)                               |   | 200                                        |    | — |   | 216 |   | 9,134 |   | 2,965 |   |
| Gross profit                                                                           |   | 100,548                                    |    | 143,542 |   | 137,805 |   | 114,921 |   | 116,374 |   |
| Selling, general  and administrative expense                                           |   | 54,731                                     |    | 60,370 |   | 59,939 |   | 57,331 |   | 56,736 |   |
| Amortization of  intangible assets                                                     |   | 299                                        |    | 333 |   | 5,028 |   | 5,255 |   | 5,527 |   |
| Exit, disposal,  certain severance and other charges (credits) (1)                     |   | 8,427                                      |    | (277 | ) | 5,114 |   | 23,450 |   | 4,345 |   |
| Income from  operations                                                                |   | 37,091                                     |    | 83,116 |   | 67,724 |   | 28,885 |   | 49,766 |   |
| Interest income                                                                        |   | 2,863                                      |    | 2,769 |   | 1,524 |   | 234 |   | — |   |
| Interest expense                                                                       |   | (8,169                                     | )       | (12,280 | ) | (22,377 | ) | (24,770 | ) | (23,563 | ) |
| Other, net                                                                             |   | 369                                        |    | (488 | ) | 754 |   | (60 | ) | 312 |   |
| Redemption of  senior notes                                                            |   | —                                     |    | (3,022 | ) | — |   | — |   | — |   |
| Termination of  credit facility                                                        |   | —                                     |    | (1,480 | ) | — |   | — |   | — |   |
| Income tax  expense                                                                    |   | (11,643                                    | )       | (23,467 | ) | (18,098 | ) | (1,883 | ) | (9,739 | ) |
| Income from  continuing operations (2)                                            |   | $                                          | 20,511  |   | $ | 45,148 |   | $ | 29,527 |   | $ | 2,406 |   | $ | 16,776 |   |
| Income from  continuing operations per diluted share (3)                               |   | $                                          | 0.84    |   | $ | 1.87 |   | $ | 1.40 |   | $ | 0.11 |   | $ | 0.79 |   |
| Shares used in  computation of income from continuing operations per diluted share (3) |   | 24,486                                     |    | 24,119 |   | 21,059 |   | 21,163 |   | 21,164 |   |
|                                                                                   |   |                                       |    |   |   |   |   |   |   |   |   |
| **Other Data:**                                                                        |   |                                       |    |   |   |   |   |   |   |   |   |
| Capital  expenditures (4)                                                         |   | $                                          | 14,556  |   | $ | 13,103 |   | $ | 13,516 |   | $ | 11,682 |   | $ | 10,072 |   |

 

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|                                         |   | **As of  December 31,** |   |
|----------------------------------------------|--------|------------------------------|--------|
|                                         |   | **2003**                     |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                         |   | **(In  thousands)**          |   |
| **Balance Sheet Data:**                      |   |                         |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                   |   | $                            | 59,628 |   | $ | 65,504 |   | $ | 555 |   | $ | 2,035 |   | $ | 8,469 |   |
| Working capital,  continuing operations      |   | 120,954                      |   | 128,342 |   | 52,700 |   | 53,457 |   | 29,744 |   |
| Property, plant  and equipment, net          |   | 57,461                       |   | 54,616 |   | 52,577 |   | 46,276 |   | 47,897 |   |
| Total assets                                 |   | 451,862                      |   | 454,030 |   | 396,858 |   | 407,499 |   | 577,782 |   |
| Current and  long-term debt outstanding      |   | 127,351                      |   | 164,613 |   | 197,789 |   | 227,511 |   | 308,714 |   |
| Long-term  liabilities, less current portion |   | 134,545                      |   | 159,561 |   | 181,694 |   | 213,537 |   | 302,491 |   |
| Common  stockholders’ equity            |   | 229,251                      |   | 206,435 |   | 109,335 |   | 80,239 | (5) | 176,144 |   |
|                                              |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          See Item 8.“Consolidated Financial Statements and Supplementary Data-Note 20” for adescription of exit, disposal, certain severance and other charges (credits).

 

(2)          Income from continuingoperations for the years ended December 31, 2002, 2001, 2000 and 1999excludes gain (loss) from discontinued operations, net of income taxes, of$1,279, $(959), $(99,289) and $(9,969), respectively.

 

(3)          See Item 8.“Consolidated Financial Statements and Supplementary Data-Note 14” for adescription of the computation of earnings per share.

 

(4)          Excludes capitalexpenditures made by certain of the Company’s subsidiaries prior to suchsubsidiaries’ respective acquisitions and any capital expenditures made inconnection with such acquisitions.

 

(5)          Common stockholders’equity as of December 31, 2000 reflects the loss on the sale of ourDistribution Group business and from the initial discontinuance of, andsubsequent election to retain, our independent aftermarket engine business.

 

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# **ITEM7**.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

The followingdiscussion should be read in conjunction with our consolidated financialstatements and notes thereto included elsewhere in this Annual Report.  See Item 8. “Consolidated FinancialStatements and Supplementary Data.”

 

Readers arecautioned that the following discussion contains certain forward-looking statementsand should be read in conjunction with the “Special Note RegardingForward-Looking Statements” appearing at the beginning of this Annual Report.

 

# **Overview**

 

*Operations. *We are a leadingremanufacturer and distributor of drivetrain products used in the repair ofautomobiles and light trucks in the automotive aftermarket.  Our Logistics business is a provider ofvalue added warehouse and distribution services, reverse logistics services andelectronics testing and remanufacturing.

 

Demand for our productswithin the Drivetrain segment is largely a function of the number of vehiclesin operation, the average age of vehicles and the average number of milesdriven per vehicle.  These factors havegenerally increased over time, thereby increasing demand for our remanufacturedproducts.  Other factors that influencedemand for our remanufactured products include product complexity andreliability, automobile OEM policies governing repair-versus-replace decisionsmade by their dealers during the warranty period, the length of OEM warrantyperiods, our product quality and customer satisfaction levels, and the severityof weather conditions.  Because thesefactors are not directly dependent on new automotive sales levels, demand forremanufactured products within our Drivetrain business has been largelynon-cyclical. However, a recent increase in focus on the reduction of near-termwarranty cost by several of our domestic automotive OEM customers has resultedin revisions to their policies impacting warranty repair-versus-replacedecisions that negatively impacted demand for our remanufactured Drivetrainproducts as dealers replaced fewer transmissions with remanufactured units. Webelieve that any material impact related to these policy decisions is reflectedin our results of operations for the year ended December 31, 2003 and thatfurther reductions in demand for our products as a result of these policydecisions are not anticipated. Furthermore, we believe these policy decisionsshould ultimately result in an increase in total OEM warranty cost which couldresult in the reversal or partial reversal of these policy decisions.

 

Our Drivetrain business has been our primary businesssince our formation.  For the year endedDecember 31, 2003, revenue from our Drivetrain business was $268.4million, or 73.1% of our total revenue. In addition, we also sell remanufactured engines and transmissions toindependent aftermarket customers domestically.  For the year ended December 31, 2003, revenue from thisportion of our business was $16.9 million, or 4.6% of our total revenue. Webelieve the independent aftermarket represents a key growth opportunity for ourremanufactured Drivetrain products and we have active programs targeted atfurther penetration of this market.

 

Our Logistics business focuses on providing valueadded warehouse and distribution services, reverse logistics services and to alesser extent, electronics testing, repair and remanufacturing services.Revenues and growth in this segment have largely (i) been related to serviceswe provide for AT&T Wireless, (ii) been dependent on cellular telephonehandset demand and AT&T Wireless’ share of new cellular telephone salesvolume and (iii) benefited from upgrades in cellular telephone technologythrough increased replacement demand for more advanced handsets, from anyincreases in the number of AT&T Wireless subscribers and from any expansionof our service offering with AT&T Wireless. Because we do not take actualownership of the cellular telephone inventory, we do not face the risk ofinventory obsolescence. Recent shifts in supply chain management strategy byAT&T Wireless resulted in their decision to consolidate their printingrequirements and re-source the bulk fulfillment of their collateral (marketing)materials from us to the printer of those materials in the second half of 2003.However, our Logistics business represents another key growth opportunity andwe are actively pursing customer diversification. In addition to securing along-term agreement with AT&T Wireless, which includes the providing ofadditional value added services, we

 

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have added Cingular as anew Logistics customer during 2003. For the year ended December 31, 2003,revenue from our Logistics business was $81.7 million, or 22.2% of our totalrevenue, of which AT&T Wireless accounted for 71.1%.

 

*Financing. *On December 16, 2003, weinitiated a tender offer to purchase up to 2,638,500 shares of our outstandingcommon stock at a price not greater than $15.75 per share and not less than$13.00 per share. In addition, we agreed to purchase up to 1,169,409 shares atthe final tender offer price from our affiliates, Aurora Equity Partners L.P.and Aurora Overseas Equity Partners I, L.P. (collectively, “Aurora”) on theeleventh business day following the close of the tender offer.  The maximum number of shares to be purchasedin the tender offer and from Aurora represented 15.7% of our outstanding commonstock.  The tender offer was oversubscribed, with 3,538,544 shares being tendered and not withdrawn, and onJanuary 26, 2004 we completed the purchase of 74.56% of the total sharestendered, at the price of $15.75 per share. In addition, on February 10, 2004, we purchased 1,169,409 shares of ourcommon stock from Aurora at the same price as the final tender offer price of$15.75 per share.  The total cost ofthese repurchases totaled $60.0 million plus approximately $1.2 million of feesand expenses and was funded with available cash on hand.  On February 10, 2004, immediately followingthe repurchase of shares from Aurora, we had total debt outstanding of $127.3million, cash and cash equivalents on hand of $6.5 million and $36.9 millionavailable to borrow on our $40.0 million revolving credit facility.

 

# **Components of Income and Expense**

 

*Revenue.*  In our Drivetrain Remanufacturing segmentand independent aftermarket business, we recognize revenues, primarily from thesale of 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 our Logistics segment, revenue is primarilyrelated to providing:

 

•                  value added warehouse anddistribution services;

 

•                  turnkey order fulfillment and informationservices;

 

•                  returned material reclamation,disposition, test and repair services;

 

•                  core management services; and

 

•                  automotive electronic componentsremanufacturing and distribution services,

 

and is generally recognized upon completion or performance of thoseservices.

 

*Cost ofSales.*   Cost of salesrepresents the actual cost of purchased components and other materials, directlabor, indirect labor and warehousing cost and manufacturing overhead costs,including depreciation, utilized directly in the production of products orperformance of services for which revenue has been recognized.

 

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

 

*Amortizationof Intangibles.*   OnJanuary 1, 2002, we adopted Statement of Financial Accounting Standards(“SFAS”) No. 142, *Goodwill and OtherIntangible Assets*, under which goodwill and indefinite-livedintangible assets are no longer amortized. After the adoption of SFAS No. 142,expense for amortization of intangibles primarily relates to the amortizationof definite lived intangible assets.

 

*Exit,Disposal, Certain Severance and Other Charges (Credits).*   As part of our lean and continuousimprovement philosophy, we have periodically identified opportunities toright-size, rationalize and consolidate operations or manufacturing capacity,alter our processes in an effort to improve customer

 

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service, and fix ordiscontinue lower-margin product lines, the purpose of which is to improveprofitability, reduce costs, streamline operations and improve efficiency. As aresult of this process, we may incur certain costs, primarily associated withrestructuring and other initiatives that include consolidation of operations orfacilities, management reorganization and delayering, rationalization ofcertain products, product lines and services and asset impairments. Inmanagement’s opinion these costs are generally incremental to our ongoingoperation and are separated on our statements of income in order to improve theclarity of our reported operations.

 

Examples of these costsinclude severance benefits for terminated employees, lease termination andother facility exit costs, moving and relocation costs, losses on the disposalof fixed assets and write down of inventories. The components of these chargesare computed based on actual cash payouts, our estimate of the realizable valueof the affected tangible and intangible assets and estimated exit costsincluding 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 Statements and Supplementary Data -Note 20” for a further discussion of these costs.

 

### ***CriticalAccounting Policies***

### * *

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

 

*Allowancefor Doubtful Accounts.* We maintain allowances for doubtful accounts for estimated lossesresulting from the failure of our customers to make required payments.  We evaluate the adequacy of our allowancefor doubtful accounts and make judgments and estimates in determining theappropriate allowance at each reporting period.  The company performs ongoing credit evaluation of its customersand maintains sufficient allowances for potential credit losses.  The company evaluates the collectibility ofits accounts receivable based on the length of time the receivable is past dueand the anticipated future write-off based on historic experience.  If a customer’s financial condition were todeteriorate, additional allowances that may be required could have a materialadverse impact on our financial statements.

 

*Reservefor Inventory Obsolescence.* We write down our inventory for estimated obsolescence or unmarketableinventory equal to the difference between the cost of the inventory and theestimated market value based upon assumptions about market conditions, futuredemand and expected usage rates.  Ifactual market conditions are less favorable than those projected by managementcausing usage rates to vary from those estimated, additional inventorywrite-downs may be required, however these would not be expected to have amaterial adverse impact on our financial statements.

 

*WarrantyLiability.*  We providean allowance for the estimated cost of product warranties at the time revenueis recognized.  While we engage inextensive product quality programs and processes, including inspection andtesting at various stages of the remanufacturing process and the testing ofeach finished assembly on equipment designed to simulate performance underoperating conditions, our warranty obligation is affected by the number ofproducts sold, historical and anticipated rates of warranty claims and costsper unit and actual product failure rates. Should actual product failure rates differ from our estimates, revisionsto the estimated warranty liability may be required, however these would not beexpected to have a material adverse impact on our financial statements.

 

*Goodwilland 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 istested at a level of reporting referred to as a reporting unit, which generallyis an operating segment or a component of an

 

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operating segment asdefined in paragraph 10 of SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information*. 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 and other factors that generallywould be considered in determining value.  Actual results may differ from these estimates under differentassumptions or conditions.  If we wereto lose a key customer within a particular operating segment or its revenueswere to decrease materially, impairment adjustments that may be required couldhave a material adverse impact on our financial statements.

 

# **Segment Reporting**

 

We have two reportablesegments: the Drivetrain Remanufacturing segment and the Logistics segment. TheDrivetrain Remanufacturing segment consists of five operating units thatprimarily sell remanufactured transmissions directly to Ford, DaimlerChrysler,General Motors, Honda and certain other foreign OEMs, primarily for use asreplacement parts by their domestic dealers during the warranty andpost-warranty periods following the sale of a vehicle. In addition, theDrivetrain Remanufacturing segment (i) sells select remanufactured and newlyassembled engines to certain European OEMs (including the European operationsof Ford, General Motors and Jaguar) and certain remanufactured engines toDaimlerChrysler and (ii) remanufactures certain engines and transmissions thatare transferred to our aftermarket distribution business, which is not areportable segment, for sale directly into the independent aftermarket.  The Logistics segment consists of threeoperating units:

 

•                  a provider of value added warehouse,distribution and reverse logistics, test and repair services, turnkey orderfulfillment and information services for AT&T Wireless Services and to alesser extent, Cingular;

 

•                  a provider of returned materialreclamation and disposition services and core management services to GeneralMotors and to a lesser extent, Ford and Mazda; and

 

•                  a provider of logistics and reverselogistics services and automotive electronic components remanufacturing,primarily for General Motors, Delphi and Visteon.

 

The Company’s “Other” business unit, which is notreportable for segment reporting purposes, distributes domestic and foreignengines and domestic remanufactured transmissions to independent aftermarketcustomers.

 

Effective January 1, 2003, the Company revised itsinternal reporting to provide better alignment with its current organizationstructure.  As a result, allremanufacturing activities are reflected in our Drivetrain Remanufacturingsegment.  Engines and transmissions thatare remanufactured for sale into the independent aftermarket are transferred toour “Other” business unit at cost, therefore all costs and operating profitsrelated to the independent aftermarket sales are contained within this singlebusiness.  The results for the priorperiods have also been adjusted to reflect this change.

 

We evaluate the performance of each segment based uponincome from operations. The reportable segments and the “Other” business unitare each managed and measured separately primarily due to the differingcustomers, production processes, products sold and distribution channels.

 

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**Resultsof Operations**

 

The following table setsforth financial statement data expressed in millions of dollars and as apercentage of net sales.

 
|                                                               |   | **Year  Ended December 31,** |   |
|--------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                               |   | **2003**                          |   | **2002** |   | **2001** |   |
| Net  sales                                                         |   | $                                 | 367.1  |   | 100.0 | % | $ | 415.9 |   | 100.0 | % | $ | 393.4 |   | 100.0 | % |
| Gross  profit                                                      |   | 100.5                             |   | 27.4 |   | 143.5 |   | 34.5 |   | 137.8 |   | 35.0 |   |
| SG&A  expense                                                  |   | 54.7                              |   | 14.9 |   | 60.4 |   | 14.5 |   | 59.9 |   | 15.2 |   |
| Exit,  disposal, certain severance and other charges (credits) (1) |   | 8.6                               |   | 2.3 |   | (0.3 | ) | (0.1 | ) | 5.3 |   | 1.4 |   |
| Income  from operations                                            |   | 37.1                              |   | 10.1 |   | 83.1 |   | 20.0 |   | 67.7 |   | 17.2 |   |
| Interest  expense                                                  |   | (8.2                              | )      | (2.2 | ) | (12.3 | ) | (3.0 | ) | (22.4 | ) | (5.7 | ) |
| Income  from continuing operations                                 |   | $                                 | 20.5   |   | 5.6 | % | $ | 45.1 |   | 10.9 | % | $ | 29.5 |   | 7.5 | % |

 

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(1)          Includes $0.2 million ofinventory write-downs classified as cost of sales in the statements of incomefor each of 2003 and 2001.

 

***Year Ended December 31, 2003 Compared to the Year EndedDecember 31, 2002***

 

Income from continuing operations decreased $24.6million, or 54.5%, to $20.5 million in 2003 from $45.1 million in 2002.  Income from continuing operations perdiluted share was $0.84 in 2003 as compared to $1.87 in 2002.

 

For 2003, ourresults include $5.5 million (net of tax) of exit, disposal, certain severanceand other charges discussed below and for 2002 include (i) $2.8 million (net oftax) of charges related to the early redemption of our 12% senior subordinatednotes due 2004 and termination of our old credit facility, which werereclassified from extraordinary items to income from continuing operationsbefore income taxes per the provisions of SFAS No. 145 (adopted on January 1,2003), (ii) income of $1.8 million (net of tax), for certain non-operating incomeitems primarily related to income tax refunds and associated interest income,and (iii) income of $0.2 million (net of tax) for an adjustment to disposalcosts.  Excluding these items, incomefrom continuing operations decreased $19.9 million, or 43.4%, during 2003 ascompared to 2002, primarily as a result of:

 

•                  priceconcessions provided to certain customers in our Drivetrain and Logisticssegments as a result of negotiating and extending certain agreements;

 

•                  volume declinesand associated disruptions in our Drivetrain segment caused by theimplementation by certain of our OE customers of new policies governingrepair-versus-replace decisions made by their dealers in warranty applications,which has resulted in dealers replacing fewer transmissions with remanufacturedunits; and

 

•                  a reduction involume due to the run-out of certain programs in our Logistics and Drivetrainsegments, including the bulk collateral fulfillment program for AT&TWireless Services, an OnStar telematics modification program, the materialrecovery and core qualification programs for Ford, and the Kia transmissionremanufacturing program,

 

partially offset by:

 

•                  the ramp-up ofthe Honda transmission remanufacturing program; and

 

•                  benefits fromour on-going lean and continuous improvement program and other cost reductioninitiatives.

 

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*NetSales.* Net salesdecreased $48.8 million, or 11.7%, to $367.1 million for 2003 from $415.9million for 2002.  This decrease wasprimarily due to:

 

•                  lower volumes ofChrysler, Ford and General Motors remanufactured transmissions due to the OEMs’implementation of new policies governing repair-versus-replace decisions madeby their dealers in warranty applications, which has resulted in dealersreplacing fewer transmissions with remanufactured units;

 

•                  priceconcessions provided to certain customers in our Drivetrain and Logisticssegments as a result of negotiating and extending certain agreements; and

 

•                  a reduction involume due to the run-out of certain programs in our Logistics and Drivetrainsegments, including the bulk collateral fulfillment program for AT&TWireless Services, an OnStar telematics modification program, the materialrecovery and core qualification programs for Ford, and the Kia transmissionremanufacturing program,

 

partially offset by:

 

•                  the ramp-up ofthe Honda transmission remanufacturing program, which began in late 2002; and

 

•                  an increase insales to General Motors of approximately $10 million related to a program thatbegan in July, 2002 under which we charge General Motors for previouslyconsigned direct material costs plus a fee for materials management andinventory carrying costs.

 

Of our revenues for 2003 and 2002, Ford accounted for35.7% and 37.0%, DaimlerChrysler accounted for 19.0% and 22.4%, AT&TWireless Services accounted for 15.8% and 18.5% and General Motors accountedfor 9.4% and 8.9%, respectively. Additionally, sales to Honda increased to 7.0% of the Company’s revenuesfor 2003 from 0.1% for 2002.

 

*GrossProfit.*  Gross profitdecreased $43.0 million, or 30.0%, to $100.5 million for 2003 from$143.5 million for 2002.  Thedecrease was primarily the result of the factors described above under “NetSales” combined with inefficiencies and other disruption costs associated withthe closure of our Mahwah, New Jersey remanufacturing facility and transitionof production to Oklahoma City, Oklahoma, partially offset by benefits from ouron-going lean and continuous improvement program and other cost reductioninitiatives.

 

Primarily as a result of the factors described above,gross profit as a percentage of net sales decreased to 27.4% for 2003 from34.5% for 2002.

 

*SG&AExpense. *SG&Aexpense decreased $5.7 million, or 9.4%, to $54.7 million for 2003 from $60.4million for 2002.   The decrease wasprimarily the result of benefits from our on-going lean and continuousimprovement program and other cost reduction initiatives combined with reducedcompensation expense related to our incentive compensation program, partiallyoffset by an increase in growth support costs related to our initiative topenetrate the independent aftermarket. As a percentage of net sales, SG&A expense increased to 14.9% for2003 from 14.5% for 2002.

 

*Exit,Disposal, Certain Severance and Other Charges (Credits).*During2003, we recorded $8.6 million ($5.5 million net of tax) of these costsincluding (i) $3.6 million for our Drivetrain Remanufacturing segment relatedto the closure of our Mahwah facility, consisting of $2.1 million of exit andother costs primarily associated with the relocation to the facility inOklahoma City, $1.2 million for severance and related costs, $0.6 millionrelated to the write-off of certain fixed assets and $0.2 million of inventorywrite-downs (classified as Cost of Sales), partially offset by income of $0.5million related to the reversal of an accrual established during 2001 forexpected idle capacity costs at this plant, (ii) $3.1 million consisting ofcompensation costs payable to our former Chief Executive Officer and currentChief Financial Officer of $1.9 million and $0.7 million, respectively,contingent upon a conversion from full time to part time employment, and $0.5million of associated relocation and hiring related costs, (iii) $1.4 million primarilyrelated to severance and related costs associated with the streamlining ofcertain operations and the reorganization and de-layering of certain managementfunctions (expected to result in annual cost savings of

 

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approximately $2.0million) and (iv) $0.5 million primarily related to the write-down of certaincustomized software reflected as fixed assets within the Logistics segment.

 

Our decision toconsolidate our leased facility located in Mahwah, New Jersey into an ownedfacility in Oklahoma City, Oklahoma was primarily driven by an expectation oflower operating costs (primarily labor and facility related).  We completed the consolidation during thefourth quarter of 2003 and expect this action to result in annual cost savingsof approximately $2.0 million beginning in 2004.

 

During 2002, we recordedincome of $0.3 million ($0.2 million net of tax) from the adjustment ofprovisions previously established (i) primarily for asset write-downs relatedto the shut-down of our remanufactured automotive electronic control modulesoperation where actual recoveries from the sale of assets were favorable tooriginal estimates and (ii) for severance and related costs primarily relatedto the consolidation of our information systems groups that were no longerexpected to be incurred.  Additionally,we recorded a gain of $0.8 million for the partial reversal of a previouslyestablished provision related to the Drivetrain Remanufacturing segment for apotential non-income state tax liability whose maximum exposure has beenreduced, offset by a charge of $0.8 million related to the DrivetrainRemanufacturing segment for a retroactive insurance premium adjustment relatedto 1998 and 1999 self-insured workers compensation claims.

 

Wecurrently expect to record approximately $1.5 million of cost primarily in thefirst and second quarters of 2004 primarily related to remaining costsassociated with the closure of our Mahwah, New Jersey facility, certainseverance and related costs associated with remaining management de-layeringinitiatives and certain compensation costs associated with hiring of our newChief Executive Officer.

 

As an on-going part ofour planning process, we continue to identify and evaluate areas where costefficiencies can be achieved through consolidation of redundant facilities,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.

 

*Incomefrom Operations*. Income from operations decreased $46.0 million, or 55.4%, to $37.1million for 2003 from $83.1 million for 2002. This decrease was primarily the result of the factors described aboveunder “Gross Profit” and “SG&A Expense.”

 

As a percentage of net sales, income from operationsdecreased to 10.1% in 2003 from 20.0% in 2002.

 

*InterestIncome. *Interestincome increased $0.1 million to $2.9 million for 2003 from$2.8 million for 2002.  During2002, we recorded $0.3 million of interest income related to federal and stateincome tax refunds. Excluding this impact, interest income increased $0.4million, which was largely due to interest income earned on our increased cashbalances invested in cash and cash equivalents during 2003 as compared to 2002.

 

*Equityin Income (Losses) of Investee.*During 2003, we recorded $0.3million of income from our equity investment in our unconsolidated subsidiaryas compared to a loss, primarily related to start-up costs, of $0.6 million in2002.

 

*Redemptionof Senior Notes. *During2002, we recorded a charge of $3.0 million, related to the payment of a callpremium and the write-off of previously capitalized debt issuance costs inconnection with the early redemption of our senior subordinated notes.  This charge was previously classified as anextraordinary item of $1.9 million, net of income tax benefits of $1.1 million,but was reclassified to income from continuing operations before income taxespursuant to our adoption of SFAS No. 145 on January 1, 2003.

 

*Terminationof Credit Facility. *During2002, we recorded a charge of $1.5 million, related to the write-off ofpreviously capitalized debt issuance costs in connection with the terminationof our old credit facility.  This chargewas previously classified as an extraordinary item of $0.9 million, net ofincome tax

 

26

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benefits of $0.6 million,but was reclassified to income from continuing operations before income taxespursuant to our adoption of SFAS No. 145 on January 1, 2003.

 

*InterestExpense. *Interestexpense decreased $4.1 million, or 33.3%, to $8.2 million for 2003from $12.3 million for 2002.  Thisdecrease was primarily due to a reduction in debt outstanding combined with ageneral decline in interest rates and the use of debt with lower interestrates.

 

*IncomeTax Expense. *Oureffective income tax rate increased to 36.2% for 2003 from 34.2% in 2002.  During 2002 we recorded income of (i) $0.8million related to federal and state income tax refunds recorded in 2002 and(ii) $0.7 million related to adjustments to deferred tax liabilities relatingto closed tax years.  Based on ourcurrent estimate of the distribution of taxable income by state, we expect oureffective income tax rate for 2004 to be approximately 38.5% (excluding theimpact of any potential adjustments related to IRS audits of open tax years.)

 

*ReportableSegments*

 

DrivetrainRemanufacturing Segment

 

The following table presents net sales and segment profit expressed inmillions of dollars and as a percentage of net sales:

 
|                                                                       |   | **Year Ended  December 31,** |   |
|----------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                       |   | **2003**                     |   | **2002** |   |
| Net sales                                                                  |   | $                            | 268.4  |   | 100.0 | % | $ | 288.0 |   | 100.0 | % |
| Segment profit  before exit, disposal, certain severance and other charges |   | $                            | 27.6   |   | 10.3 | % | $ | 50.2 |   | 17.4 | % |
| Less:  Exit, disposal, certain severance and  other charges           |   | 4.4                          |   |   |   | — |   |   |   |
| Segment profit                                                             |   | $                            | 23.2   |   | 8.6 | % | $ | 50.2 |   | 17.4 | % |

 

*NetSales.*  Net salesdecreased $19.6 million, or 6.8%, to $268.4 million for 2003 from $288.0 millionfor 2002.  The decrease was primarilydue to:

 

•                  lower volumes ofChrysler, Ford and General Motors remanufactured transmissions due to the OEMs’implementation of new policies governing repair-versus-replace decisions madeby their dealers in warranty applications, which has resulted in dealersreplacing fewer transmissions with remanufactured units; and

 

•                  priceconcessions provided to certain customers as a result of negotiating andextending certain agreements,

 

partially offset by:

 

•                  the ramp-up ofthe Honda transmission remanufacturing program, which began in late 2002; and

 

•                  an increase insales to General Motors of approximately $10 million related to a program thatbegan in July, 2002 under which we charge General Motors for previouslyconsigned direct material costs plus a fee for materials management andinventory carrying costs.

 

Sales to Ford accounted for 46.7% and 49.9%,DaimlerChrysler accounted for 26.0% and 32.4%, and General Motors accounted for10.5% and 8.3% of segment revenues for 2003 and 2002, respectively.  Additionally, sales to Honda increased to9.6% of segment revenues for 2003 from 0.2% for 2002.

 

Furthermore, we expect sales to Honda to increasesignificantly in 2004 as we benefit from additional transmission models andquantities, that were added to our Honda remanufacturing program in late 2003.

 

27

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*Exit,Disposal, Certain Severance and Other Charges*.  During 2003, we recorded $4.4 million ofcosts including (i) $3.6 million related to the closure of our transmissionremanufacturing facility located in Mahwah, New Jersey, consisting of $2.1million of exit and other costs primarily associated with the relocation to thefacility in Oklahoma City, Oklahoma, $1.2 million of severance and relatedcosts, $0.6 million related to the write-off of certain fixed assets and $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) $0.8 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.

 

During 2002 werecorded a gain of $0.8 million for the partial reversal of a previouslyestablished provision for a potential non-income state tax liability whosemaximum exposure has been reduced, offset by a charge of $0.8 million for aretroactive insurance premium adjustment related to 1998 and 1999 self-insuredworkers compensation claims.

 

*SegmentProfit*.  Segmentprofit decreased $27.0 million, or 53.8%, to $23.2 million (8.6% ofsegment net sales) for 2003 from $50.2 million (17.4% of segment netsales) for 2002.  Excluding thepreviously discussed costs of $4.4 million recorded during 2003, segment profitdecreased $22.6 million, or 45.0%, to $27.6 million (10.3% of segment netsales) for 2003.  This decrease wasprimarily due to:

 

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

 

•                  the priceconcessions provided to certain customers; and

 

•                  inefficienciesand other disruption costs associated with the closure of our Mahwah, NewJersey remanufacturing facility and transition of production to Oklahoma City,Oklahoma,

 

partially offset by:

 

•                  the ramp-up ofthe Honda transmission remanufacturing program; and

 

•                  benefits fromour on-going lean and continuous improvement program and other cost reductioninitiatives.

 

Logistics Segment

### * *

The followingtable presents net sales and segment profit expressed in millions of dollarsand as a percentage of net sales:

 
|                                                                                 |   | **Year Ended  December 31,** |   |
|--------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                 |   | **2003**                     |   | **2002** |   |
| Net sales                                                                            |   | $                            | 81.7   |   | 100.0 | % | $ | 114.2 |   | 100.0 | % |
| Segment profit  before exit, disposal, certain severance and other charges (credits) |   | $                            | 22.9   |   | 28.0 | % | $ | 36.6 |   | 32.0 | % |
| Less:  Exit, disposal, certain severance and  other charges (credits)           |   | 0.9                          |   |   |   | (0.2 | ) |   |   |
| 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&T Wireless Services in connectionwith the renewal of our contract at the end of 2002 and subsequentrenegotiation and extension of that contract in July 2003;

 

•                  a decline in revenues as services we performed for AT&T WirelessServices related to the distribution of collateral marketing materials weretransitioned to the printer of those materials;

 

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•                  a decline in revenues related to the wind-down of an OnStartelematics modification program; and

 

•                  a decline in revenues related to the wind-down of material recovery andcore qualification programs for Ford.

 

In the future, we expectrevenues in this segment to begin increasing as several new programs withAT&T Wireless Services and Cingular mature. Sales to AT&T WirelessServices accounted for 71.1% and 67.2% of segment revenues for 2003 and 2002,respectively.

 

*Exit, Disposal, Certain Severanceand Other Charges (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 recordedincome of $0.2 million from the reversal of provisions previously establishedprimarily for asset write-downs related to the shut-down of our remanufacturedautomotive electronic control modules operation where actual recoveries fromthe sale of assets 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.  Excluding the previously discussed costs of$0.9 million recorded during 2003 and income of $0.2 million recorded during2002, segment profit decreased $13.7 million, or 37.4%, to $22.9 million(28.0% of segment net sales) for 2003 from $36.6 million (32.0% of segmentnet sales) for 2002.  The decrease wasprimarily the result of changes in the price, volume and mix of revenuesdescribed above, offset in part by the benefits of our lean and continuousimprovement program and other cost reductions.

 

Other

 

The followingtable presents net sales and segment loss for the independent aftermarketengine and transmission business expressed in millions of dollars and as apercentage of net sales:

 
|         |   | **Year Ended  December 31,** |   |
|--------------|--------|------------------------------|--------|
|         |   | **2003**                     |   | **2002** |   |
| Net sales    |   | $                            | 16.9   |   | 100.0 | % | $ | 13.7 |   | 100.0 | % |
| Segment loss |   | $                            | (4.8   | ) | (28.4 | )% | $ | (3.9 | ) | (28.5 | )% |

 

*Net Sales.*  Net sales increased $3.2 million, or23.4%, to $16.9 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 $0.9 million, or23.1%, to a loss of $4.8 million for 2003 from a loss of $3.9 millionfor 2002.  The increased loss wasprimarily the result of an increase in costs for additional sales and marketingprograms and resources in support of our initiative to penetrate theindependent aftermarket for remanufactured transmissions.

 

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

 

Income from continuingoperations increased $15.6 million, or 52.9%, to $45.1 million ($1.87 perdiluted share) in 2002 from $29.5 million ($1.40 per diluted share) in 2001.

 

Our results include thefollowing items for 2002:

 

•                  $2.8 million (net of tax) of chargesrelated to the early redemption of our 12% senior subordinated notes due 2004and termination of our old credit facility, which were

 

29

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reclassified fromextraordinary items to income from continuing operations before income taxesper the provisions of SFAS No. 145 (adopted on January 1, 2003);

 

•                  $1.8 million (net of tax), forcertain non-operating income items primarily related to income tax refunds andassociated interest income; and

 

•                  $0.2 million (net of tax), of incomefor an adjustment to previously recorded disposal costs,

 

and the followingitems for 2001:

 

•                  $3.4 million (net of tax), of expensefor amortization of intangibles with no comparable expense in 2002 due to theadoption of SFAS No. 142 on January 1, 2002, pursuant to which we nolonger recognize goodwill amortization;

 

•                  $3.3 million (net of tax), of exit,disposal, certain severance and other charges, see discussion below; and

 

•                  $0.6 million (net of tax), gainrelated to the sale of the preferred stock of the Distribution Group, which wereceived in 2000 as partial consideration for the sale of that business.

 

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

 

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

 

•                  an increase insales of remanufactured transmissions to Ford, driven by growth in theinstalled base, a relatively harsh summer and an improvement in customerfill-rate that resulted in the capture of previously lost sales;

 

•                  an increase insales to General Motors of approximately $9 million related to a new programthat began in July, 2002 under which we bill General Motors for previouslyconsigned direct materials costs plus a fee for materials management andinventory carrying costs;

 

•                  an increase insales for value-added warehouse and distribution services to AT&T Wireless,driven by continued growth in the market for cellular phones and services;

 

•                  an increase insales of new engines and related parts to Ford Power Products in support ofcertain fleet programs;

 

•                  an increase insales to General Motors and Delphi for electronics remanufacturing andlogistics support associated with the OnStar telematics program that began in thethird quarter of 2001; and

 

•                  an increase insales for core management services provided to Ford under a new core managementprogram we were awarded in 2001,

 

partially offsetby

 

•                  a decrease insales of remanufactured engines to the independent aftermarket primarilyattributable to a general softness in demand believed to be driven by generaleconomic conditions, which include the continuation of new car incentives, areduction in used car values and a corresponding increase in the utilization ofsalvage engines, combined with an unusually mild winter;

 

•                  a decrease insales of remanufactured transmissions to DaimlerChrysler due to an unusuallymild winter, and a disruption of market demand resulting from an OEM-to-dealerprice increase primarily impacting post warranty sales.  This decrease was partially offset by a

 

30

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lessening of the impact of DaimlerChrysler’s on-goinginventory reductions, whereby DaimlerChrysler reduced its inventory levels byapproximately six weeks in 2001 but only by approximately two weeks in2002.  At the end of 2002, we estimatedDaimlerChrysler’s inventory level to be at about five weeks;

 

•                  a decrease insales of remanufactured radios, instrument display clusters and other electroniccomponents; and

 

•                  a decrease insales of remanufactured electronic engine control modules as a result of ourexit from that product line.

 

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

 

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

 

*SG&AExpense.*  SG&Aexpense increased $0.5 million, or 0.8%, to $60.4 million for 2002from $59.9 million for 2001.  As apercentage of net sales, SG&A expense decreased to 14.5% for 2002 from15.2% for 2001.  The $0.5 millionincrease was primarily from spending in support of the General Motors materialsmanagement program, the Ford core management program and our initiative topenetrate the independent aftermarket for remanufactured transmissions, largelyoffset by benefits from our cost reduction initiatives.

 

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

 

*Exit,Disposal, Certain Severance and Other Charges (Credits).*  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 be incurred.  Additionally, we recorded a gain of $0.8million for the partial reversal of a previously established provision relatedto the Drivetrain Remanufacturing segment for a potential non-income state taxliability whose maximum exposure has been reduced, offset by a charge of $0.8million related to the Drivetrain Remanufacturing segment for a retroactiveinsurance premium adjustment related to 1998 and 1999 self-insured workerscompensation claims.

 

During 2001, we recorded$5.3 million of costs ($3.3 million net of tax) including$2.4 million for the Drivetrain Remanufacturing segment, $2.4 millionfor the Logistics segment and $0.5 million for consolidation of our twoinformation systems groups.  The$2.4 million related to the Drivetrain Remanufacturing segment consistedof $1.6 million of severance and related costs for 35 people, primarilyassociated with the de-layering of certain management functions and$0.8 million of facility exit and idle capacity costs associated withfacility consolidations and implementation of cellularized manufacturing withinthe segment.  The $2.4 million ofcosts in the Logistics segment consisted of $1.9 million of costs relatedto the shut-down of our remanufactured automotive electronic control modulesproduct line and $0.5 million of severance and related costs for eightpeople primarily associated with the upgrade of certain management functionswithin the segment. The $0.5 million related to our two informationsystems groups

 

31

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was related to severancecosts for four people primarily associated with the consolidation of thosefunctions.

 

*Incomefrom Operations.* Income from operations increased $15.4 million, to$83.1 million for 2002 from $67.7 million for 2001.  This increase is primarily attributable to a$5.6 million decrease in exit, disposal, certain severance and other charges(credits) for 2002 as compared to 2001 and a $4.7 million decrease inamortization of intangibles for 2002 as compared to 2001 due to the adoption ofSFAS No. 142, combined with revenue growth and the benefit of costreduction initiatives, partially offset by the increase in SG&A expense insupport of growth initiatives.   As apercentage of net sales, income from operations increased to 20.0% in 2002 from17.2% in 2001.

 

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

 

*OtherIncome, Net.*  Otherincome, net decreased $0.7 million, to $0.1 million for 2002 from $0.8 millionfor 2001.  During 2001, we recorded again of $0.9 million on the sale of the preferred stock of the DistributionGroup, which was received in 2000 as partial consideration for the sale of thatbusiness.

 

*Equityin Losses of Investee.* The loss from our equity investment in our unconsolidated subsidiaryincreased $0.5 million in 2002 as compared to 2001, primarily due to start-upcosts of this business.

 

*Redemptionof Senior Notes. *During2002, we recorded a charge of $3.0 million, related to the payment of a callpremium and the write-off of previously capitalized debt issuance costs inconnection with the early redemption of our senior subordinated notes.  This charge was previously classified as anextraordinary item of $1.9 million, net of income tax benefits of $1.1 million,but was reclassified to income from continuing operations before income taxespursuant to our adoption of SFAS No. 145 on January 1, 2003.

 

*Termination of Credit Facility. *During 2002, we recorded acharge of $1.5 million, related to the write-off of previously capitalized debtissuance costs in connection with the termination of our old creditfacility.  This charge was previouslyclassified as an extraordinary item of $0.9 million, net of income tax benefitsof $0.6 million, but was reclassified to income from continuing operationsbefore income taxes pursuant to our adoption of SFAS No. 145 on January 1,2003.

 

*InterestExpense. *Interestexpense decreased $10.1 million, or 45.1%, to $12.3 million for 2002 from$22.4 million for 2001.  Thisdecrease was primarily due to a general decline in interest rates and the useof lower rate debt, combined with a reduction in debt outstanding.  In addition, we recorded income of $0.2million for an interest expense adjustment related to deferred compensationpayments associated with the 1997 ATS acquisition that were made during 2002.

 

*IncomeTax Expense. *Oureffective income tax rate decreased to 34.2% for 2002 from 38.0% in 2001.  During 2002 we recorded income of (i) $0.8million related to federal and state income tax refunds recorded in 2002 and(ii) $0.7 million related to adjustments to deferred tax liabilities relatingto closed tax years.  The balance of oureffective income tax rate reduction is primarily the result of the adoption ofSFAS No. 142 and the impact of tax deductible goodwill, combined with afavorable change in the mix of taxable income generated in states with lowertax rates in 2002 as compared to 2001.

 

*DiscontinuedOperations.*  During2002, we recorded a gain from discontinued operations of $1.3 million relatedto the sale of the Distribution Group comprised of (i) $1.0 million for anincrease in the estimated income tax benefits associated with the sale and (ii)$0.3 million based upon updated information regarding remaining obligations andother costs.

 

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During 2001, we recorded a loss from discontinuedoperations of $1.0 million, net of income tax benefits of $0.6 million.  This charge included the following on apre-tax basis: (i) $2.7 million in expense for the increase to the estimatedloss on the sale of the Distribution Group; (ii) $2.1 million in income for thereversal of the estimated accrued loss on disposal of our independentaftermarket engines business; and (iii) $1.0 million in expense for thereclassification of the operating results of our independent aftermarketengines business from discontinued operations to continuing operations, asrequired by EITF No. 90-16.

 

*ReportableSegments*

 

Drivetrain RemanufacturingSegment

 

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

 
|                                                                                       |   | **Year  Ended December 31,** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                       |   | **2002**                          |   | **2001** |   |
| Net sales                                                                                  |   | $                                 | 288.0  |   | 100.0 | % | $ | 266.3 |   | 100.0 | % |
| Segment profit  before exit, certain severance and other charges and goodwill amortization |   | $                                 | 50.2   |   | 17.4 | % | $ | 46.7 |   | 17.5 | % |
| Less:  Exit, certain severance and other charges                                      |   | —                            |   |   |   | 2.4 |   |   |   |
| Less:  Goodwill amortization                                                          |   | —                            |   |   |   | 4.3 |   |   |   |
| Segment profit                                                                             |   | $                                 | 50.2   |   | 17.4 | % | $ | 40.0 |   | 15.0 | % |

 

*NetSales.*  Net salesincreased $21.7 million, or 8.1%, to $288.0 million for 2002 from$266.3 million for 2001.  Thisincrease was driven primarily by:

 

•                  an increase insales of remanufactured transmissions to Ford, driven by growth in the installedbase, a relatively harsh summer and an improvement in customer fill-rate thatresulted in the capture of previously lost sales;

 

•     an increase in sales toGeneral Motors of approximately $9 million related to a new program that beganin July, 2002 under which we bill General Motors for previously consigneddirect materials costs plus a fee for materials management and inventorycarrying costs; and

 

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

 

a decrease in sales of remanufactured transmissions to DaimlerChryslerdue to an unusually mild winter, and a disruption of market demand resultingfrom an OEM-to-dealer price increase primarily impacting post-warranty sales.  This decrease was partially offset by alessening of the impact of DaimlerChrysler’s on-going inventory reductions,whereby DaimlerChrysler reduced its inventory levels by approximately six weeksin 2001 but by only approximately two weeks in 2002.  At the end of 2002 we estimated DaimlerChrysler’s inventory levelto be at about five weeks.

 

Sales to Ford accounted for 49.9% and 47.6% of segmentrevenues for 2002 and 2001, respectively. Sales to DaimlerChrysler accountedfor 32.4% and 35.6% of segment revenues for 2002 and 2001, respectively.

 

*Exit,Certain Severance and Other Charges.*  During 2002 we recorded a gain of $0.8million for the partial reversal of a previously established provision for apotential non-income state tax liability whose maximum exposure has beenreduced, offset by a charge of $0.8 million related to the DrivetrainRemanufacturing segment for a retroactive insurance premium adjustment relatedto 1998 and 1999 self-insured workers compensation claims.

 

33

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During 2001, we recorded $2.4 million of costsincluding $1.6 million of severance and related costs primarily associatedwith the de-layering of certain management functions and $0.8 million offacility exit and idle capacity costs associated with facility consolidationsand implementation of cellularized manufacturing within the segment.

 

*SegmentProfit.*  Segmentprofit increased $10.2 million, or 25.5%, to $50.2 million (17.4% ofsegment net sales) for 2002 from $40.0 million (15.0% of segment netsales) for 2001.  Excluding the exit,certain severance and other charge and goodwill amortization expense itemstotaling $6.7 million recorded in 2001, segment profit increased$3.5 million, or 7.5%, between the two periods.  The increase was primarily the result of changes in sales volume,price and mix of remanufactured transmissions as referenced above combined withthe benefit of cost reductions realized as a result of our lean and continuousimprovement program and other cost reduction initiatives, which includeavoidance of vendor direct material price increases, engineering gain sharingwith customers and other material usage and salvage programs, implementation ofcellular and lean manufacturing techniques and process reengineering.

 

Logistics 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,** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                            |   | **2002**                          |   | **2001** |   |
| Net sales                                                                                                       |   | $                                 | 114.2  |   | 100.0 | % | $ | 105.2 |   | 100.0 | % |
| Segment profit before  exit, disposal, certain severance and other (credits) charges and goodwill  amortization |   | $                                 | 36.6   |   | 32.0 | % | $ | 29.4 |   | 27.9 | % |
| Less:  Exit, disposal, certain severance and  other (credits) charges                                      |   | (0.2                              | )      |   |   | 2.4 |   |   |   |
| Less:  Goodwill amortization                                                                               |   | —                            |   |   |   | 0.5 |   |   |   |
| Segment profit                                                                                                  |   | $                                 | 36.8   |   | 32.2 | % | $ | 26.5 |   | 25.2 | % |

 

*NetSales.*  Net salesincreased $9.0 million, or 8.6%, to $114.2 million for 2002 from$105.2 million for 2001.  Thisincrease was primarily attributable to

 

•     an increase in sales forvalue-added warehouse and distribution services to AT&T Wireless, driven bycontinued growth in the market for cellular phones and services;

 

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

 

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

 

partially offset by:

 

•     a decrease in sales ofremanufactured radios, instrument display clusters and other electroniccomponents; and

 

•     a decrease in sales ofremanufactured electronic engine control modules as a result of our exit fromthat product line.

 

Sales to AT&T Wireless accounted for 67.2% and65.7% of segment revenues for 2002 and 2001, respectively.

 

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*Exit,Disposal, Certain Severance and Other (Credits) Charges.*  During the year ended December 31, 2002, werecorded income of $0.2 million primarily related to the reversal of aprovision previously established principally for asset write-downs related tothe shut-down of our remanufactured automotive electronic control modulesproduct line where actual recoveries from the sale of assets were favorable tooriginal estimates.

 

The $2.4 million of costs recorded during 2001,included the following:

 

•                  $1.9 millionof costs related to the shut-down of the segment’s remanufactured automotiveelectronic control modules product line including $0.7 million ofseverance and related costs; $0.6 million related to the write-down offixed assets; $0.3 million of facility exit and other costs related to theshutdown; $0.2 million related to inventory write-downs; and $0.1 for thewrite-down of uncollectible accounts receivable balances; and

 

•                  $0.5 millionof severance and related costs primarily associated with the upgrade of certainmanagement functions within the segment.

 

*SegmentProfit.*  Segmentprofit increased $10.3 million, or 38.9%, to $36.8 million (32.2% ofsegment net sales) for 2002 from $26.5 million (25.2% of segment netsales) for 2001.  Excluding the incomeitem of $0.2 million recorded in 2002 and the exit, disposal, certain severanceand other charges and goodwill amortization expense items totaling$2.9 million recorded in 2001, segment profit increased $7.2 million,or 24.5%, between the two periods.  Theincrease was primarily the result of changes in sales volume, price and mix asdescribed above combined with cost reductions and other productivityimprovements resulting from the increased use of automation and processreengineering and the implementation of lean manufacturing techniques,partially offset by (i) inefficiencies and other costs associated with thelaunch and ramp-up of the Ford core management program, (ii) an increase inspending in support of key growth initiatives in the segment and (iii) areduction in the inventory shrink performance bonus from AT&T Wirelessbased on a reduction in the average value of inventory.

 

Other

 

The following table presents net sales and segmentprofit (loss) for the independent aftermarket engine and transmission businessexpressed in millions of dollars and as a percentage of net sales: 

 
|                   |   | **Year  Ended December 31,** |   |
|------------------------|--------|------------------------------|--------|
|                   |   | **2002**                     |   | **2001** |   |
| Net sales              |   | $                            | 13.7   |   | 100.0 | % | $ | 21.9 |   | 100.0 | % |
|                   |   |                         |   |   |   |   |   |   |   |
| Segment profit  (loss) |   | $                            | (3.9   | ) | (28.5 | )% | $ | 1.7 |   | 7.8 | % |

 

*NetSales.*  Net salesdecreased $8.2 million, or 37.4%, to $13.7 million for 2002 from$21.9 million for 2001. This decrease was primarily attributable to ageneral softness in demand for remanufactured engines believed to be driven bygeneral economic conditions, which include the continuation of new carincentives, a reduction in used car values and a corresponding increase in theutilization of salvage engines, combined with a mild winter. Additionally, weexperienced a decline in demand for remanufactured engines as a result of acompetitor’s aggressive price reductions late in the third quarter of2001.  During the first quarter of 2002we adjusted our prices and have since recaptured and subsequently added to ourmarket share. Furthermore, sales increased $1.6 million from the launch of ourinitiative to sell remanufactured transmissions directly into the independentaftermarket via this channel.

 

*SegmentProfit (Loss).* Segment profit decreased $5.6 million, to a loss of$3.9 million for 2002 from a profit of $1.7 million for 2001.  This decrease was primarily the result of

 

•      the sales volume, price and mix asdescribed above;

 

35

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•      a decline in operating leverage resultingfrom the volume decline and a reduction in finished goods inventories;

 

•      one-time warranty costs associated with adefective valve seal obtained from a certain supplier;

 

•      the reversing impact of the prior year’sinventory valuation allowance adjustment; and

 

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

 

partially offset by cost reductions and other productivity improvementsrealized as a result of the Company’s lean and continuous improvement programand other cost reduction initiatives.

 

**Liquidity and Capital Resources**

 

***Cash Flow & Capital Expenditures***

 

We had total cash and cash equivalents on hand of$59.6 million at December 31, 2003.  Netcash provided by operating activities from continuing operations was $48.4million in 2003 and includes $12.4 million from the utilization of deferred taxassets, primarily related to net operating loss carryforwards “NOL”). Weanticipate the cash flow benefit from our remaining NOL will end during2004.  Net cash used in investingactivities of $15.6 million included (i) $14.6 million primarily related tomanufacturing equipment additions within our Drivetrain remanufacturing segmentin support of (x) our new Honda remanufactured transmission program, (y) theclosure of the leased Mahwah, New Jersey facility and subsequent transfer ofproduction to the facility we own in Oklahoma City, Oklahoma, and (z) othercost reduction initiatives, and (ii) $1.1 million for the acquisition ofAutomotive Transmission and Transaxles, a small remanufacturer of automatictransmissions for sale to the independent aftermarket.  Net cash used in financing activities of$38.8 million included net payments of $35.0 million made on our creditfacility, $2.5 million in payment of consideration related to previousacquisitions, $0.7 million of payments on capital lease obligations and $0.7million of payments for debt issuance costs related to our credit facility (seediscussion below).

 

For 2004, we have budgeted $18.0 million forcapital expenditures, primarily to support new business and cost reductioninitiatives and capacity maintenance in each of our businesses.

 

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

 

On December 16, 2003, we (i) initiated a tender offerto purchase up to 2,638,500 shares of our outstanding common stock at a pricenot greater than $15.75 per share and not less than $13.00 per share and (ii)agreed to purchase up to 1,169,409 shares at the final tender offer price fromAurora on the eleventh business day following the close of the tender offer (iand ii collectively, “the Stock Repurchase”). The maximum number of shares to be purchased in the Stock Repurchaserepresented 15.7% of our outstanding common stock. The tender offer was oversubscribed, with 3,538,544 shares being tendered and not withdrawn, and onJanuary 26, 2004 we completed the purchase of 74.56% of the total sharestendered, at the price of $15.75 per share. In addition, on February 10, 2004, we purchased 1,169,409 shares of ourcommon stock from Aurora at the same price as the final tender offer price of$15.75 per share. The total cost of the Stock Repurchase was $60.0 million plusapproximately $1.2 million of fees and expenses and was funded with availablecash on hand.  On February 10, 2004,immediately following the repurchase of shares from Aurora, we had total debtoutstanding of $127.3 million, cash and cash equivalents on hand of $6.5million and $36.9 million available to borrow on our $40.0 million revolvingcredit facility.

 

***Financing***

 

On February 8, 2002, we executed a creditagreement and related security agreement in connection with a creditfacility.  The credit facility providedfor (i) a $75.0 million, five-year term loan payable in quarterly installmentsin increasing amounts over the five-year period ($36.1 million outstanding atDecember 31, 2003), (ii) a $95.0 million, six-year, two-tranche term loanpayable in quarterly installments

 

36

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over the six-year period ($83.8 million outstanding at December 31,2003 and with approximately 97% of the outstanding balance payable in the sixthyear) and an annual excess cash flow sweep payable as defined in the creditagreement and (iii) a $50.0 million, five-year revolving credit facility.  The credit facility also provided 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 ourcredit facility to permit the Stock Repurchase. Additionally, this amendmentrequired us to prepay $20.0 million of term loans and reduced our revolvingcredit 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 rate plus1.00% or (c) the federal funds effective rate plus 0.50%.  The applicable margins for both Alternate BaseRate and Eurodollar Rate loans are subject to quarterly adjustments based onour leverage ratio as of the end of the four fiscal quarters thencompleted.  As of December 31, 2003, themargins for the $75.0 million term loan and the $50.0 million revolvingfacility were 1.50% for Alternate Base Rate loans and 2.50% for Eurodollar Rateloans.  For the $95.0 million term loan,the margins were 2.25% for Alternate Base Rate loans and 3.25% for EurodollarRate loans as of December 31, 2003.

 

Based on results of operations for the year endedDecember 31, 2003 and the $20.0 million prepayment associated with the December12, 2003 amendment to the our credit facility, a prepayment for excess cashflow for the year ended December 31, 2003 was not required.

 

As of December 31, 2003, our borrowing capacity underthe revolving portion of the credit facility was $36.9 million.  In addition, we had cash and cashequivalents on hand of $59.6 million at December 31, 2003.

 

As part of an ownership agreement we have for a 45%interest in an unconsolidated subsidiary, we have given the subsidiary’s bank a$0.9 million letter of credit in the event of the subsidiary’s default onoutstanding debt.

 

During 2003, we entered into a revolving creditagreement with HSBC Bank Plc, providing £0.5 million to finance the workingcapital requirements of our U.K. subsidiary. Amounts advanced are secured by substantially all the assets of our U.K.subsidiary.  In addition, HSBC Bank mayat any time demand repayment of all sums owing.  Interest is payable monthly at the HSBC Bank prime lending rateplus 1.50%.  As of December 31, 2003,there were no amounts outstanding under this line of credit.

 

As of December 31, 2003, we had approximately $27million in federal loss carryforwards and approximately $18 million in stateloss carryforwards available as an offset to future taxable income.

 

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,we will continue to consider the effect any such acquisition costs may have onliquidity. In order to consummate such acquisitions, we may need to seek fundsthrough additional borrowings or equity financing.

 

***Off-Balance Sheet Arrangements***

 

We are not engaged in any off-balance sheetarrangements that have a material current effect or are reasonably likely tohave a material future effect on our financial condition or results ofoperations.

 

However, we are subject to various other commitmentsand contingencies as disclosed in Item 8. “Consolidated Financial Statementsand Supplementary Data - Note 17.”

 

37

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***Contractual Obligations***

 

The following table summarizes our contractualobligations expressed in millions of dollars as of December 31, 2003:

 
|                                             |   | **Total** |   | **Less than   1 year** |   | **1 – 3  years** |   | **3 – 5  years** |   | **More than  5 years** |   |
|--------------------------------------------------|--------|-----------|--------|------------------------|--------|-----------------------|--------|-----------------------|--------|------------------------|--------|
| Credit facility                                  |   | $         | 119.9  |                   | $      | 10.0                  |   | $                     | 24.9   |                   | $      | 85.0 |   | $ | — |   |
| Amount due to  sellers of acquired Companies (a) |   | 7.1       |   | 1.9                    |   | 5.2                   |   | —                |   | —                 |   |
| Operating lease  obligations                     |   | 24.4      |   | 8.1                    |   | 10.5                  |   | 5.5                   |   | 0.3                    |   |
| Capital lease  obligations                       |   | 0.4       |   | 0.4                    |   | —                |   | —                |   | —                 |   |
| Purchase  obligations                            |   | —    |   | —                 |   | —                |   | —                |   | —                 |   |
| Executive  compensation agreements (b)           |   | 2.6       |   | 1.2                    |   | 1.4                   |   | —                |   | —                 |   |
| Deferred  compensation (c)                       |   | 0.8       |   | 0.1                    |   | 0.3                   |   | 0.2                   |   | 0.2                    |   |
| Total                                            |   | $         | 155.2  |                   | $      | 21.7                  |   | $                     | 42.3   |                   | $      | 90.7 |   | $ | 0.5 |   |

 

----

(a)          Primarily related to our1997 acquisition of ATS Remanufacturing (which remanufactures transmissions forGeneral Motors), we are required to make payments to the seller on each of thefirst eight anniversaries of the closing date. Through December 31, 2003, we had made $7.2 million of thesepayments (including $2.1 million paid in 2003).  The remaining two payments, which aggregate to approximately$7.3 million (present value of $6.9 million as of December 31, 2003),are contingent upon the attainment of certain sales to General Motors, which webelieve have a substantial likelihood of being attained.

 

(b)         Represents amountspayable to our former Chief Executive Officer and current Chief FinancialOfficer. Per the terms of their employment agreements, these amounts arepayable contingent upon their conversion from full time to part timeemployment.

 

(c)          Related to the 1997acquisition of ATS, we are required to make certain payments to other keyindividuals on various dates subsequent to the closing date.  Through December 31, 2003, we had made$2.6 million of these payments (including $0.3 million paid in 2003). Theremaining payments aggregate to approximately $1.0 million (present value of$0.8 million as of December 31, 2003).

 

**Impact of New Accounting Standards**

 

In January 2003, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation No. 46, *Consolidationof Variable Interest Entities, an Interpretation of Accounting ResearchBulletin No. 51*, (“FIN 46”), which was later updated in December2003.  FIN 46 requires consolidation ofentities in which the Company absorbs a majority of the entity’s expectedlosses, receives a majority of the entity’s expected residual returns, or both,as a result of ownership, contractual or other financial interests in theentity.  Currently, entities areconsolidated when the Company has a controlling financial interest throughownership of a majority voting interest in an entity.  Application of FIN 46 is required in financial statements ofpublic entities that have interests in variable interest entities or potentialvariable interest entities commonly referred to as special-purpose entities forperiods ending after December 15, 2003. Application by public entities for all other types of entities isrequired in financial statements for periods ending after March 31, 2004.  The adoption of FIN 46 did not have animpact on the Company’s results of operations or its financial position.

 

In April 2003, the FASB issued SFAS No. 149,*Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities.*  ThisStatement amends and clarifies the accounting and reporting for derivativeinstruments, including embedded derivatives, and for hedging activities underSFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities.* SFAS No. 149 was effective forcontracts entered into or modified after June 30, 2003, and for hedgingrelationships designated after June 30, 2003.

 

38

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The adoption of SFAS No. 149 did not have an impact on the Company’sresults of operations or its financial position.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.  SFAS No. 150 provides guidance on how anentity classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  This statement was effective for financial instruments enteredinto or modified after May 31, 2003, and otherwise was effective at thebeginning of the first interim period beginning after June 15, 2003 (thirdquarter for a calendar year-end public company).  The adoption of SFAS No. 150 did not have an impact on theCompany’s results of operations or its financial position.

 

**Inflation; Lack of Seasonality**

 

Although we are subjectto the effects of changing prices, the impact of inflation has not been asignificant factor in results of operations for the periods presented. In somecircumstances, market conditions or customer expectations may prevent us fromincreasing the prices of our products to offset the inflationary pressures thatmay increase our costs in the future. Historically, there has been littleaggregate seasonal fluctuation in our business.

 

**Environmental Matters**

 

See Item 1.“Business–Environmental” for a discussion of environmental matters relating tous.

 

**ITEM 7A****.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

*DerivativeFinancial Instruments.* We do not hold or issue derivative financial instruments for tradingpurposes. We have used derivative financial instruments to manage our exposureto 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 December 31, 2003, we are not using anyderivative financial instruments.   Foradditional discussion regarding our use of such instruments, see Item 8. “ConsolidatedFinancial Statements and Supplementary Data - Note 13.”

 

*InterestRate Exposure.*  Basedon our overall interest rate exposure during the year ended December 31,2003 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. Interestrate movements of 10% would not have a material effect on our financialposition, results of operation or cash flows.

 

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

 

39

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***ITEM 8*****.           CONSOLIDATED FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

* *

**Contents**

 
| Report of Ernst & Young LLP,  Independent Auditors                                                     |   |
|------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets as of  December 31, 2003 and 2002                                              |   |
| Consolidated Statements of Income  for the years ended December 31, 2003, 2002 and 2001                    |   |
| Consolidated Statements of  Stockholders’ Equity for the years ended December 31, 2003, 2002 and 2001 |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                |   |
| Notes to  Consolidated Financial Statements                                                                |   |

 

40

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**REPORTOF ERNST**** & YOUNG LLP, INDEPENDENT AUDITORS**

 

To the Stockholders andBoard of Directors

Aftermarket TechnologyCorp.

 

We have audited theaccompanying consolidated balance sheets of Aftermarket Technology Corp. andsubsidiaries (the Company) as of December 31, 2003 and 2002, and therelated consolidated statements of income, stockholders’ equity, and cash flowsfor each of the three years in the period endedDecember 31, 2003.  Our auditsalso included the financial statement schedule listed in the Index of Item15 (a).  These financial statementsand schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial 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 ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of AftermarketTechnology Corp. and subsidiaries at December 31, 2003 and 2002, and theconsolidated results of their operations and their consolidated cash flows foreach of the three years in the period ended December 31, 2003, inconformity with accounting principles generally accepted in the UnitedStates.  Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

As discussed in Note 2,in 2002 the Company changed its method of accounting for goodwill and otherintangible assets to conform to Statement of Financial Accounting Standards No.142, “Goodwill and Other Intangible Assets.”

 

 

ERNST &YOUNG LLP

 

Chicago, Illinois

February 10, 2004

 

41

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**AFTERMARKETTECHNOLOGY CORP.**

**CONSOLIDATED BALANCESHEETS**

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

 
|                                                                                                                                                                                        |   | **December 31,** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|
|                                                                                                                                                                                        |   | **2003**         |    | **2002** |   |
|                                                                                                                                                                                        |   |             |    |   |   |
| **Assets**                                                                                                                                                                                  |   |             |    |   |   |
| Current Assets:                                                                                                                                                                             |   |             |    |   |   |
| Cash and cash equivalents                                                                                                                                                                   |   | $                | 59,628  |   | $ | 65,504 |   |
| Accounts receivable, net                                                                                                                                                                    |   | 42,538           |    | 49,283 |   |
| Inventories                                                                                                                                                                                 |   | 81,711           |    | 70,262 |   |
| Prepaid and other assets                                                                                                                                                                    |   | 4,896            |    | 4,891 |   |
| Deferred income taxes                                                                                                                                                                       |   | 19,956           |    | 26,106 |   |
| Total current assets                                                                                                                                                                        |   | 208,729          |    | 216,046 |   |
|                                                                                                                                                                                        |   |             |    |   |   |
| Property, plant and equipment, net                                                                                                                                                          |   | 57,461           |    | 54,616 |   |
| Debt issuance costs, net                                                                                                                                                                    |   | 4,676            |    | 5,152 |   |
| Goodwill                                                                                                                                                                                    |   | 170,485          |    | 168,229 |   |
| Intangible assets, net                                                                                                                                                                      |   | 525              |    | 819 |   |
| Other assets                                                                                                                                                                                |   | 9,986            |    | 9,168 |   |
| Total assets                                                                                                                                                                                |   | $                | 451,862 |   | $ | 454,030 |   |
|                                                                                                                                                                                        |   |             |    |   |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                              |   |             |    |   |   |
| Current Liabilities:                                                                                                                                                                        |   |             |    |   |   |
| Accounts payable                                                                                                                                                                            |   | $                | 42,630  |   | $ | 37,963 |   |
| Accrued expenses                                                                                                                                                                            |   | 32,715           |    | 29,996 |   |
| Income taxes payable                                                                                                                                                                        |   | 60               |    | 847 |   |
| Credit facility                                                                                                                                                                             |   | 10,018           |    | 15,805 |   |
| Capital lease obligation                                                                                                                                                                    |   | 344              |    | 678 |   |
| Amounts due to sellers of acquired companies                                                                                                                                                |   | 1,891            |    | 2,261 |   |
| Deferred compensation                                                                                                                                                                       |   | 117              |    | 154 |   |
| Liabilities of discontinued operations                                                                                                                                                      |   | 291              |    | 330 |   |
| Total current liabilities                                                                                                                                                                   |   | 88,066           |    | 88,034 |   |
|                                                                                                                                                                                        |   |             |    |   |   |
| Amount drawn on credit facility, less current portion                                                                                                                                       |   | 109,873          |    | 139,111 |   |
| Amounts due to sellers of acquired companies, less  current portion                                                                                                                         |   | 5,225            |    | 6,474 |   |
| Deferred compensation, less current portion                                                                                                                                                 |   | 717              |    | 912 |   |
| Capital lease obligation, less current portion                                                                                                                                              |   | —           |    | 284 |   |
| Other long-term liabilities                                                                                                                                                                 |   | —           |    | 370 |   |
| Deferred income taxes                                                                                                                                                                       |   | 18,730           |    | 12,410 |   |
|                                                                                                                                                                                        |   |             |    |   |   |
| Stockholders’ Equity:                                                                                                                                                                  |   |             |    |   |   |
| Preferred stock, $.01 par value; shares authorized -  2,000,000; none issued                                                                                                                |   | —           |    | — |   |
| Common stock, $.01 par value; shares authorized -  30,000,000;  Issued (including shares held in treasury) - 25,173,856 and 25,145,523 as of  December 31, 2003 and 2002, respectively |   | 252              |    | 251 |   |
| Additional paid-in capital                                                                                                                                                                  |   | 194,204          |    | 193,869 |   |
| Retained earnings                                                                                                                                                                           |   | 41,106           |    | 20,595 |   |
| Accumulated other comprehensive income (loss)                                                                                                                                               |   | 1,891            |    | (309 | ) |
| Unearned compensation                                                                                                                                                                       |   | (231             | )       | — |   |
| Common stock held in treasury, at cost (933,737  shares)                                                                                                                                    |   | (7,971           | )       | (7,971 | ) |
| Total stockholders’ equity                                                                                                                                                             |   | 229,251          |    | 206,435 |   |
|                                                                                                                                                                                        |   |             |    |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                             |   | $                | 451,862 |   | $ | 454,030 |   |

 

*See accompanying notes.*

 

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**AFTERMARKET TECHNOLOGY CORP.**

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
|                                                          |   | **For the  years ended December 31,** |     |
|---------------------------------------------------------------|--------|---------------------------------------|----------|
|                                                          |   | **2003**                              |     | **2002** |   | **2001** |   |
|                                                          |   |                                  |     |   |   |   |   |
| Net sales:                                                    |   |                                  |     |   |   |   |   |
| Products                                                      |   | $                                     | 285,364  |   | $ | 301,699 |   | $ | 288,126 |   |
| Services                                                      |   | 81,700                                |     | 114,203 |   | 105,255 |   |
| Total net sales                                               |   | 367,064                               |     | 415,902 |   | 393,381 |   |
|                                                          |   |                                  |     |   |   |   |   |
| Cost of sales:                                                |   |                                  |     |   |   |   |   |
| Products                                                      |   | 222,971                               |     | 216,955 |   | 203,487 |   |
| Products - disposal costs                                     |   | 200                                   |     | — |   | — |   |
| Services                                                      |   | 43,345                                |     | 55,405 |   | 51,873 |   |
| Services - disposal costs                                     |   | —                                |     | — |   | 216 |   |
| Total cost of sales                                           |   | 266,516                               |     | 272,360 |   | 255,576 |   |
| Gross Profit                                                  |   | 100,548                               |     | 143,542 |   | 137,805 |   |
|                                                          |   |                                  |     |   |   |   |   |
| Selling, general and administrative expense                   |   | 54,731                                |     | 60,370 |   | 59,939 |   |
| Amortization of intangible assets                             |   | 299                                   |     | 333 |   | 5,028 |   |
| Exit, disposal, certain severance and other charges (credits) |   | 8,427                                 |     | (277 | ) | 5,114 |   |
| Income from operations                                        |   | 37,091                                |     | 83,116 |   | 67,724 |   |
|                                                          |   |                                  |     |   |   |   |   |
| Interest income                                               |   | 2,863                                 |     | 2,769 |   | 1,524 |   |
| Other income, net                                             |   | 92                                    |     | 87 |   | 787 |   |
| Equity in income (losses) of investee                         |   | 277                                   |     | (575 | ) | (33 | ) |
| Redemption of senior notes                                    |   | —                                |     | (3,022 | ) | — |   |
| Termination of credit facility                                |   | —                                |     | (1,480 | ) | — |   |
| Interest expense                                              |   | (8,169                                | )        | (12,280 | ) | (22,377 | ) |
| Income from continuing operations before income taxes         |   | 32,154                                |     | 68,615 |   | 47,625 |   |
|                                                          |   |                                  |     |   |   |   |   |
| Income tax expense                                            |   | 11,643                                |     | 23,467 |   | 18,098 |   |
| Income from continuing operations                             |   | 20,511                                |     | 45,148 |   | 29,527 |   |
|                                                          |   |                                  |     |   |   |   |   |
| Gain (loss) from discontinued operations, net of income taxes |   | —                                |     | 1,279 |   | (959 | ) |
| Net income                                                    |   | $                                     | 20,511   |   | $ | 46,427 |   | $ | 28,568 |   |
|                                                          |   |                                  | * * |   | * * |   | * * |
| Per common share - basic:                                     |   |                                  |     |   |   |   |   |
| Income from continuing operations                             |   | $                                     | 0.85     |   | $ | 1.92 |   | $ | 1.44 |   |
| Gain (loss) from discontinued operations                      |   | —                                |     | 0.06 |   | (0.05 | ) |
| Net income                                                    |   | $                                     | 0.85     |   | $ | 1.98 |   | $ | 1.39 |   |
|                                                          |   |                                  |     |   |   |   |   |
| Per common share - diluted:                                   |   |                                  |     |   |   |   |   |
| Income from continuing operations                             |   | $                                     | 0.84     |   | $ | 1.87 |   | $ | 1.40 |   |
| Gain (loss) from discontinued operations                      |   | —                                |     | 0.05 |   | (0.04 | ) |
| Net income                                                    |   | $                                     | 0.84     |   | $ | 1.92 |   | $ | 1.36 |   |

 

*See accompanying notes.*

 

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**AFTERMARKETTECHNOLOGY CORP.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Inthousands, except share data)**

 
|                                                                                    |   | **Preferred  Stock** |   | **Common  Stock** |   | **Additional    Paid-In Capital** |   | **Retained  Earnings  (Accumulated  Deficit)** |    | **Accumulated  Other  Comprehensive  (Loss) Income** |   | **Unearned  Compensation** |   | **Common  Stock in  Treasury** |   | **Total** |   |
|-----------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------|--------|-----------------------------------|--------|------------------------------------------------|---------|------------------------------------------------------|--------|----------------------------|--------|--------------------------------|--------|-----------|--------|
| Balance at  January 1, 2001                                                             |   | $                    | — |              | $      | 209                               |   | $                                              | 136,882 |                                                 | $      | (54,400                    | )      | $                              | (458   | )         | $      | — |   | $ | (1,994 | ) | $ | 80,239 |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Issuance of 522,886 shares of common stock from exercise of stock  options and warrants |   | —               |   | 5                 |   | 4,416                             |   | —                                         |    | —                                               |   | —                     |   | —                         |   | 4,421     |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Purchase of 439,337 shares of common stock for treasury                                 |   | —               |   | —            |   | —                            |   | —                                         |    | —                                               |   | —                     |   | (2,343                         | )      | (2,343    | )      |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Net income                                                                              |   | —               |   | —            |   | —                            |   | 28,568                                         |    | —                                               |   | —                     |   | —                         |   | 28,568    |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Derivative financial instruments, net of income taxes                                   |   | —               |   | —            |   | —                            |   | —                                         |    | (419                                                 | )      | —                     |   | —                         |   | (419      | )      |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Translation adjustments                                                                 |   | —               |   | —            |   | —                            |   | —                                         |    | (1,131                                               | )      | —                     |   | —                         |   | (1,131    | )      |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Comprehensive income                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   | 27,018    |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Balance at December 31, 2001                                                            |   | —               |   | 214               |   | 141,298                           |   | (25,832                                        | )       | (2,008                                               | )      | —                     |   | (4,337                         | )      | 109,335   |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Issuance of 2,760,000 shares of common stock from public offering                       |   | —               |   | 28                |   | 41,984                            |   | —                                         |    | —                                               |   | —                     |   | —                         |   | 42,012    |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Issuance of 939,127 shares of common stock from exercise of stock  options and warrants |   | —               |   | 9                 |   | 10,587                            |   | —                                         |    | —                                               |   | —                     |   | —                         |   | 10,596    |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Purchase of 322,400 shares of common stock for treasury                                 |   | —               |   | —            |   | —                            |   | —                                         |    | —                                               |   | —                     |   | (3,634                         | )      | (3,634    | )      |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Net income                                                                              |   | —               |   | —            |   | —                            |   | 46,427                                         |    | —                                               |   | —                     |   | —                         |   | 46,427    |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Derivative financial instruments, net of income taxes                                   |   | —               |   | —            |   | —                            |   | —                                         |    | 182                                                  |   | —                     |   | —                         |   | 182       |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Translation adjustments                                                                 |   | —               |   | —            |   | —                            |   | —                                         |    | 1,517                                                |   | —                     |   | —                         |   | 1,517     |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Comprehensive income                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   | 48,126    |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Balance at December 31, 2002                                                            |   | —               |   | 251               |   | 193,869                           |   | 20,595                                         |    | (309                                                 | )      | —                     |   | (7,971                         | )      | 206,435   |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| 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        |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| 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    |   |
|                                                                                    |   |                 |   |              |   |                              |   |                                           |    |                                                 |   |                       |   |                           |   |      |   |
| Balance at December 31, 2003                                                            |   | $                    | — |              | $      | 252                               |   | $                                              | 194,204 |                                                 | $      | 41,106                     |   | $                              | 1,891  |      | $      | (231 | ) | $ | (7,971 | ) | $ | 229,251 |   |

 

*See accompanying notes.*

 

44

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**AFTERMARKETTECHNOLOGY CORP.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

 
|                                                                                                        |   | **For the years ended December 31,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                        |   | **2003**                             |   | **2002** |   | **2001** |   |
|                                                                                                        |   |                                 |   |   |   |   |   |
| **Operating  Activities:**                                                                                  |   |                                 |   |   |   |   |   |
| Net income                                                                                                  |   | $                                    | 20,511 |   | $ | 46,427 |   | $ | 28,568 |   |
|                                                                                                        |   |                                 |   |   |   |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities - continuing  operations: |   |                                 |   |   |   |   |   |
| Net (gain) loss from  discontinued operations                                                               |   | —                               |   | (1,279 | ) | 959 |   |
| Termination of credit  facility and redemption of senior notes                                              |   | —                               |   | 4,502 |   | — |   |
| Depreciation and  amortization                                                                              |   | 11,606                               |   | 10,935 |   | 14,019 |   |
| Amortization of debt  issuance costs                                                                        |   | 1,134                                |   | 1,211 |   | 1,354 |   |
| Adjustments to provision  for losses on accounts receivable                                                 |   | (9                                   | )      | 338 |   | (91 | ) |
| Loss on sale of equipment                                                                                   |   | 40                                   |   | 7 |   | 150 |   |
| Gain on sale of preferred  stock received from sale of a business                                           |   | —                               |   | — |   | (931 | ) |
| Deferred income taxes                                                                                       |   | 12,470                               |   | 18,364 |   | 12,667 |   |
| Changes in operating  assets and liabilities, net of businesses discontinued/sold:                          |   |                                 |   |   |   |   |   |
| Accounts receivable                                                                                         |   | 7,609                                |   | 6,713 |   | 5,724 |   |
| Inventories                                                                                                 |   | (10,923                              | )      | (879 | ) | (13,590 | ) |
| Prepaid and other assets                                                                                    |   | (766                                 | )      | 782 |   | 2,059 |   |
| Accounts payable and  accrued expenses                                                                      |   | 6,770                                |   | (9,451 | ) | (1,781 | ) |
| Net cash provided by  operating activities - continuing operations                                          |   | 48,442                               |   | 77,670 |   | 49,107 |   |
|                                                                                                        |   |                                 |   |   |   |   |   |
| Net cash used in operating  activities - discontinued operations                                            |   | (39                                  | )      | (614 | ) | (2,798 | ) |
|                                                                                                        |   |                                 |   |   |   |   |   |
| **Investing  Activities:**                                                                                  |   |                                 |   |   |   |   |   |
| Purchases of property,  plant and equipment                                                                 |   | (14,556                              | )      | (13,103 | ) | (13,516 | ) |
| Investment in a joint  venture                                                                              |   | —                               |   | — |   | (182 | ) |
| Acquisition of company,  net of cash received                                                               |   | (1,095                               | )      | — |   | — |   |
| Proceeds (refund of  proceeds) from sale of a business                                                      |   | —                               |   | — |   | (3,675 | ) |
| Proceeds from sale of  preferred stock received from sale of a business                                     |   | —                               |   | — |   | 2,860 |   |
| Proceeds from sale of  equipment                                                                            |   | 81                                   |   | 323 |   | 61 |   |
| Net cash used in investing  activities - continuing operations                                              |   | (15,570                              | )      | (12,780 | ) | (14,452 | ) |
|                                                                                                        |   |                                 |   |   |   |   |   |
| **Financing  Activities:**                                                                                  |   |                                 |   |   |   |   |   |
| (Payments) borrowings on  credit facility, net                                                              |   | (35,025                              | )      | 79,716 |   | (31,500 | ) |
| Payment of debt issuance  costs                                                                             |   | (658                                 | )      | (6,064 | ) | (201 | ) |
| Redemption of senior  subordinated notes                                                                    |   | —                               |   | (112,593 | ) | — |   |
| Sale of common stock, net  of offering costs                                                                |   | —                               |   | 42,012 |   | — |   |
| Payments on capital lease  obligation                                                                       |   | (706                                 | )      | (1,134 | ) | (875 | ) |
| Proceeds from exercise of  stock options and warrants                                                       |   | 81                                   |   | 5,444 |   | 1,908 |   |
| Purchase of common stock  for treasury                                                                      |   | —                               |   | (3,634 | ) | (2,343 | ) |
| Payments on amounts due to  sellers of acquired companies                                                   |   | (2,233                               | )      | (1,392 | ) | (486 | ) |
| Payments of deferred  compensation related to acquired company                                              |   | (292                                 | )      | (1,639 | ) | — |   |
| Net cash (used in)  provided by financing activities                                                        |   | (38,833                              | )      | 716 |   | (33,497 | ) |
|                                                                                                        |   |                                 |   |   |   |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                                               |   | 124                                  |   | (43 | ) | 160 |   |
|                                                                                                        |   |                                 |   |   |   |   |   |
| (Decrease) increase in  cash and cash equivalents                                                           |   | (5,876                               | )      | 64,949 |   | (1,480 | ) |
|                                                                                                        |   |                                 |   |   |   |   |   |
| Cash and cash equivalents  at beginning of year                                                             |   | 65,504                               |   | 555 |   | 2,035 |   |
| Cash and cash equivalents  at end of year                                                                   |   | $                                    | 59,628 |   | $ | 65,504 |   | $ | 555 |   |
|                                                                                                        |   |                                 |   |   |   |   |   |
| Cash paid (refunded)  during the year for:                                                                  |   |                                 |   |   |   |   |   |
| Interest                                                                                                    |   | $                                    | 7,703  |   | $ | 15,442 |   | $ | 20,100 |   |
| Income taxes, net                                                                                           |   | 162                                  |   | 1,155 |   | (2,131 | ) |
| Supplemental disclosures  of non-cash activity:                                                             |   |                                 |   |   |   |   |   |
| Debt issued for capital  lease obligation                                                                   |   | —                               |   | — |   | 2,711 |   |

 

*See accompanying notes.*

 

45

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**AFTERMARKETTECHNOLOGY CORP.**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS****(In thousands, except share and per share data)**

 

**Note 1.  The Company**

 

The Companyhas two reportable segments in continuing operations: the DrivetrainRemanufacturing segment and the Logistics segment.  The Drivetrain Remanufacturing segment consists of five operatingunits that primarily sell remanufactured transmissions directly to Ford,DaimlerChrysler, General Motors, Honda and certain other foreign OriginalEquipment Manufacturers (“OEMs”), primarily for use as replacement parts bytheir domestic dealers during the warranty and post-warranty periods followingthe sale of a vehicle.  In addition, theDrivetrain Remanufacturing segment (i) sells select remanufactured and newlyassembled engines to certain European OEMs (including the European operationsof Ford, General Motors and Jaguar) and certain remanufactured engines toDaimlerChrysler and (ii) remanufactures certain engines and transmissions thatare transferred to our aftermarket distribution business, which is not areportable segment, for sale directly into the independent aftermarket.  The Company’s Logistics segment consists ofthree operating units:  (i) a providerof value-added warehouse, distribution and reverse logistics, test and repairservices, turnkey order fulfillment and information services for AT&TWireless Services and to a lesser extent, Cingular; (ii) a provider of returnedmaterial reclamation and disposition services and core management services to GeneralMotors and to a lesser extent, Ford and Mazda; and (iii) a provider oflogistics and reverse logistics services and automotive electronic componentsremanufacturing, primarily for General Motors, Delphi and Visteon.  The Company’s “Other” business unit, whichis not reportable for segment reporting purposes, distributes domestic andforeign engines and domestic remanufactured transmissions to independentaftermarket customers.  Established in1994, the Company maintains manufacturing facilities and logistics operationsin the United States and a manufacturing facility in the United Kingdom.

 

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

 

*Principles of Consolidation*

 

Theaccompanying consolidated financial statements include the accounts of theCompany and its subsidiaries.  Allsignificant intercompany balances and transactions have been eliminated.

 

*Use of Estimates*

 

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

 

*Cash and CashEquivalents*

 

The Companyconsiders all highly liquid investments with original effective maturities ofthree months or less to be cash equivalents.

 

*Inventories*

 

Inventoriesare stated at the lower of cost (first-in, first-out method) or market andconsist primarily of new and used transmission parts, cores and finishedgoods.  Consideration is given todeterioration, obsolescence and other factors in evaluating the estimatedmarket value of inventory based upon management’s judgment and availableinformation.

 

46

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*Property, Plant andEquipment*

 

Property,plant and equipment, including amounts capitalized under capital leases, arestated at cost less accumulated depreciation. Depreciation is computed using straight-line methods over the estimateduseful lives of the assets for financial reporting purposes, as follows:  two to ten years for machinery andequipment, three to six years for autos and trucks, three to ten years forfurniture and fixtures, five to sixteen years for leasehold improvements and upto 40 years for buildings.  Depreciationexpense was $11,307, $10,602 and $8,991 for the years ended December 31,2003, 2002 and 2001, respectively.

 

*Internal UseComputer Software*

 

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

 

*Foreign CurrencyTranslation*

 

The functionalcurrency for the Company’s foreign operations is the applicable localcurrency.  Accordingly, all balancesheet accounts have been translated using the exchange rates in effect at thebalance sheet date, and income statement amounts have been translated using theaverage exchange rates for the year. The translation adjustments resulting from the changes in exchange rateshave been reported separately as a component of stockholders’ equity.  The effects of transaction gains and losses,which were reported in income, were not material for the periods presented.

 

*Debt Issuance Costs*

 

Debt issuancecosts incurred in connection with the Credit Facility (see Note 9 – CreditFacility) are being amortized over the life of the respective debt using amethod which approximates the interest method. Debt issuance costs are reflectednet of accumulated amortization of $2,071 and $925 at December 31, 2003and 2002, respectively.

 

*Goodwill and Other Intangible Assets*

######  

On January 1,2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 142, *Goodwill and Other IntangibleAssets,*which eliminated the amortization of goodwill and insteadrequires that goodwill be tested for impairment at least annually.  The Company tests its goodwill forimpairment during the third quarter of each fiscal year unless events orcircumstances change that would more likely than not reduce the fair value of areporting unit below its carrying amount. Annual impairment tests made by the Company during the quarter endedSeptember 30, 2003 resulted in no adjustment to the carrying value of itsgoodwill.  Per the provisions of SFASNo. 142, the Company’s definite lived intangible assets, consisting primarilyof non-compete agreements, are amortized over their useful lives. (See Note 6 –Goodwill and Intangible Assets.)

 

*Other Assets – LongTerm*

 

As part of theproceeds from the sale of ATC Distribution Group, Inc. (“Distribution Group”)(see Note 16 – Discontinued Operations), the Company received from the buyer asenior subordinated promissory note, as amended, at a stated rate of 18%, witha principal amount of $10,050 and a discounted value of $8,365 at the date ofissuance (“18% Buyer Note”).  The 18% Buyer Note, which matures on October28, 2005, bears interest at (i) 15% per annum compounded semi-annually due andpayable in arrears semi-annually on April 27 and October 27 of each year oruntil the principal amount is paid in full and (ii) 3% per annum compoundedsemi-annually due and payable in full at the earlier of the maturity date orthe date on which the principal amount is paid in full.  During the years ended December 31, 2003,2002 and 2001, $2,156, $1,807 and $1,515 of interest income was recorded on the18% Buyer Note, respectively.  As ofDecember 31, 2003 and 2002, the carrying value of the 18% Buyer Note was $9,548and $8,899, respectively.  The 18% BuyerNote is classified as a part of other assets in the accompanying balance sheet.

 

47

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*Impairment of Long-Lived and IntangibleAssets*

 

Long-livedassets and identifiable intangibles are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying amount of the relatedasset may not be recoverable. Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of the asset to future undiscounted cash flows expectedto be generated by the asset.  If theasset is determined to be impaired, the impairment recognized is measured bythe amount by which the carrying value of the asset exceeds its fair value.

 

*Concentration of Credit Risk*

 

Financialinstruments that potentially subject the Company to a significant concentrationof credit risk consist of accounts receivable from its customers includingFord, DaimlerChrysler, General Motors, Honda and AT&T Wireless Services,which are located throughout the United States and, to a lesser extent, theUnited Kingdom. The Company performs ongoing credit evaluation of its customersand maintains sufficient allowances for potential credit losses.  The company evaluates the collectibility ofits accounts receivable based on the length of time the receivable is past dueand the anticipated future write-off based on historic experience.  The credit risk associated with theCompany’s accounts receivable is mitigated by its credit evaluation process,although collateral is not required. The Company grants credit to certain customers who meet pre-establishedcredit requirements.

 

Accountsreceivable is reflected net of an allowance for doubtful accounts of $1,535 and$1,320 at December 31, 2003 and 2002, respectively.

 

*Revenue Recognition*

 

The Companyrecognizes revenues when all of the following conditions are satisfied:  (i) persuasive evidence of an arrangementexists; (ii) the price is fixed or determinable; (iii) collectibility isreasonably assured; and (iv) delivery has occurred or services have beenrendered.  In addition, the Companyincludes the reimbursement of certain costs by its customers separately asrevenue and expense in its Consolidated Statements of Income.

 

*Warranty Cost Recognition*

 

The Companyaccrues for estimated warranty costs as sales are made.

 

*Costs Associated with Exit or Disposal Activities*

 

The FinancialAccounting Standards Board (“FASB”) issued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities,*effective for exit or disposal activities initiatedafter December 31, 2002.  SFAS No. 146requires that a liability for a cost associated with an exit or disposalactivity be recognized in the period in which the liability is incurred.  The Company classifies the costs associatedwith exit or disposal activities as a part of Exit, Disposal, Certain Severanceand Other Charges (Credits) on its Consolidated Statements of Income. (See Note20 - Exit, Disposal,Certain Severance and Other Charges.)

 

*Stock- Based Compensation*

 

The Companyhas elected to adopt the disclosure only provisions of SFAS No. 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure,* and applies the intrinsic value method under theprovisions 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.  Accordingly, employee and directorcompensation expense is recognized only for those options whose price is lessthan fair market value at the measurement date.  The Company has adopted the disclosure-only provisions of SFASNo. 123, *Accountingfor Stock-Based Compensation*,as amended.

 

48

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The fair valueof each option 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,** |   |
|--------------------------|--------|--------------------------------------|--------|
|                     |   | **2003**                             |   | **2002** |   | **2001** |   |
| Expected volatility      |   | 78.77%                               |   | 44.96% |   | 86.37% |   |
| Risk-free interest rates |   | 2.95%                                |   | 3.37% |   | 4.50% |   |
| Expected lives           |   | 4.3 years                            |   | 2.9 years |   | 4.6 years |   |

 

Had compensation cost for the Company’s Plans (see  Note 11 – Stock-Based Awards) been determined in accordance withSFAS No. 123, the Company’s reported income from continuing operations andearnings per share would have been adjusted to the pro forma amounts indicatedbelow: 

 
|                                                                                                                                                                                                                  |   | **For the years ended December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                                                                                                                  |   | **2003**                             |   | **2002** |   | **2001** |   |
|                                                                                                                                                                                                                  |   |                                 |   |   |   |   |   |
| Income from continuing operations as  reported                                                                                                                                                                        |   | $                                    | 20,511 |   | $ | 45,148 |   | $ | 29,527 |   |
| Stock-based employee compensation costs  included in the determination of income from continuing operations as  reported, net of income taxes                                                                         |   | 8                                    |   | — |   | — |   |
| 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 |   | (1,469                               | )      | (2,269 | ) | (1,422 | ) |
| Pro forma income from continuing operations  as if the fair value based method had been applied to all awards                                                                                                         |   | $                                    | 19,050 |   | $ | 42,879 |   | $ | 28,105 |   |
|                                                                                                                                                                                                                  |   |                                 |   |   |   |   |   |
| Per common share – basic:                                                                                                                                                                                        |   |                                 |   |   |   |   |   |
| Income from continuing operations as  reported                                                                                                                                                                        |   | $                                    | 0.85   |   | $ | 1.92 |   | $ | 1.44 |   |
| Pro forma as if the fair value based method  had been applied to all awards                                                                                                                                           |   | $                                    | 0.79   |   | $ | 1.83 |   | $ | 1.37 |   |
|                                                                                                                                                                                                                  |   |                                 |   |   |   |   |   |
| Per common share – diluted:                                                                                                                                                                                      |   |                                 |   |   |   |   |   |
| Income from continuing operations as  reported                                                                                                                                                                        |   | $                                    | 0.84   |   | $ | 1.87 |   | $ | 1.40 |   |
| Pro forma as if the fair value based method  had been applied to all awards                                                                                                                                           |   | $                                    | 0.78   |   | $ | 1.78 |   | $ | 1.33 |   |

 

The Companyalso issues shares of its common stock to employees in the form of incentivestock awards.  These awards are recordedat the market value on the date of issuance as unearned compensation andamortized as expense over the applicable vesting period.

 

*New Accounting Standards*

 

On January 1, 2003, the Company adopted SFAS No. 145, *Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections*.  As per the provisions of this statementrelated to the classification of certain gains and losses on extinguishments ofdebt, the Company reclassified from extraordinary items to income fromcontinuing operations before income taxes (i) a call premium and write-off ofpreviously capitalized debt issuance costs totaling $3,022 ($1,900 net ofincome tax benefits of $1,122) in connection with the entire redemption of its12% Series B and D Senior Subordinated Notes (“Senior Notes”) during the threemonths ended June 30, 2002 and (ii) the write-off of previously capitalizeddebt issuance costs of $1,480 ($928 net of income tax benefits of $552) inconnection with the termination of the Company’s old credit facility during thethree months ended March 31, 2002. Income from continuing operations for the year ended December 31, 2002was reduced by $0.12 per share (basic and diluted), as a result of thisreclassification.

 

49

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In January 2003,the FASB issued Interpretation No. 46, *Consolidationof Variable Interest Entities, an Interpretation of Accounting ResearchBulletin No. 51,*(“FIN 46”), which was later updated in December2003.  FIN 46 requires consolidation ofentities in which the Company absorbs a majority of the entity’s expectedlosses, receives a majority of the entity’s expected residual returns, or both,as a result of ownership, contractual or other financial interests in theentity.  Currently, entities areconsolidated when the Company has a controlling financial interest throughownership of a majority voting interest in an entity.  Application of FIN 46 is required in financial statements ofpublic entities that have interests in variable interest entities or potentialvariable interest entities commonly referred to as special-purpose entities forperiods ending after December 15, 2003. Application by public entities for all other types of entities isrequired in financial statements for periods ending after March 31, 2004.  The adoption of FIN 46 did not have animpact on the Company’s results of operations or its financial position.

 

In April 2003,the FASB issued SFAS No. 149,*Amendment ofStatement 133 on Derivative Instruments and Hedging Activities.*  This Statement amends and clarifies theaccounting and reporting for derivative instruments, including embeddedderivatives, and for hedging activities under SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities.* SFAS No. 149 was effective for contracts entered into ormodified after June 30, 2003, and for hedging relationships designated afterJune 30, 2003.  The adoption of SFAS No.149 did not have an impact on the Company’s results of operations or its financialposition.

 

In May 2003,the FASB issued SFAS No. 150, *Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity*.  SFAS No. 150provides guidance on how an entity classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  This statement was effective for financialinstruments entered into or modified after May 31, 2003, and otherwise waseffective at the beginning of the first interim period beginning after June 15,2003 (third quarter for a calendar year-end public company).  The adoption of SFAS No. 150 did not have animpact on the Company’s results of operations or its financial position.

 

*Reclassifications*

 

Certainprior-year amounts have been reclassified to conform to the 2003 presentation.

 

**Note 3.  Related-Party Transactions**

 

An affiliate of Aurora Capital Partners (“ACP”), whichcontrols the Company’s largest stockholders, charged to the Company $28 in feesduring 2003 for investment banking services provided in connection with theacquisition of A-T.A.T., Inc.  No suchamounts were charged to the Company in 2002 or 2001.  In addition, ACP was paid management fees of $302, $476 and $549in 2003, 2002 and 2001, respectively. In September 2002, the management fee was reduced due to a reduction inACP’s percentage ownership of the Company. The Company reimburses ACP for out-of-pocket expenses incurred inconnection with providing management services. ACP is also entitled to various additional fees depending on theCompany’s profitability or certain significant corporate transactions.  No such additional fees were paid in 2003,2002 or 2001.

 

On December16, 2003, as part of a tender offer, the Company agreed to purchase up to1,169,409 shares its common stock at the final tender offer price of $15.75 pershare from our affiliates, Aurora Equity Partners L.P. and Aurora OverseasEquity Partners I, L.P., limited partnerships controlled by ACP.  (See Note 12 -Common and Preferred Stock and Note 22 -Subsequent Event).

 

**Note 4.  Inventories**

 

Inventories consistof the following: 

 
|                                      |   | **December 31,** |   |
|-------------------------------------------|--------|-----------------------|--------|
|                                      |   | **2003**              |   | **2002** |   |
| Raw materials, including core inventories |   | $                     | 67,579 |   | $ | 56,215 |   |
| Work-in-process                           |   | 1,443                 |   | 2,365 |   |
| Finished goods                            |   | 12,689                |   | 11,682 |   |
|                                      |   | $                     | 81,711 |   | $ | 70,262 |   |

 

50

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

 

Property,plant and equipment are summarized as follows:

 
|                                                   |   | **December 31,** |   |
|--------------------------------------------------------|--------|-----------------------|--------|
|                                                   |   | **2003**              |   | **2002** |   |
|                                                   |   |                  |   |   |   |
| Land                                                   |   | $                     | 2,043  |   | $ | 2,043 |   |
| Buildings                                              |   | 11,926                |   | 11,357 |   |
| Machinery and equipment                                |   | 74,918                |   | 65,284 |   |
| Autos and trucks                                       |   | 1,632                 |   | 1,248 |   |
| Furniture and fixtures                                 |   | 2,445                 |   | 2,506 |   |
| Leasehold improvements                                 |   | 11,979                |   | 12,546 |   |
| Construction in process                                |   | 3,007                 |   | 500 |   |
|                                                   |   | 107,950               |   | 95,484 |   |
| Less:   Accumulated depreciation and amortization |   | (50,489               | )      | (40,868 | ) |
|                                                   |   | $                     | 57,461 |   | $ | 54,616 |   |

 

Assets recorded under capital leases areincluded in property, plant and equipment as follows: 

 
|                                                   |   | **December 31,** |   |
|--------------------------------------------------------|--------|-----------------------|--------|
|                                                   |   | **2003**              |   | **2002** |   |
|                                                   |   |                  |   |   |   |
| Machinery and equipment                                |   | $                     | 2,681  |   | $ | 2,460 |   |
| Less:   Accumulated depreciation and amortization |   | (1,241                | )      | (843 | ) |
|                                                   |   | $                     | 1,440  |   | $ | 1,617 |   |

 

**Note6.  Goodwill and Intangible Assets**

 

In February2003, the Company acquired substantially all of the assets of A-T.A.T., Inc.,doing business as Automotive Transmission and Transaxles, (the “Seller”) asmall remanufacturer 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 the acquisitionof A-T.A.T., Inc. and recorded goodwill of $1,385.  The operations of A-T.A.T., Inc. are not material to theCompany’s consolidated operations.

 

The change inthe carrying amount of goodwill is summarized as follows:

 
| Balance at December 31, 2001                                             |   | $       | 168,049 |   |
|--------------------------------------------------------------------------|--------|---------|---------|--------|
| Purchase price adjustment related to the  acquisition of ATS             |   | (583    | )       |
| Effect of exchange rate changes from the  translation of U.K. subsidiary |   | 763     |    |
| Carrying value of goodwill at December 31,  2002                         |   | 168,229 |    |
| Aggregate amount of goodwill acquired                                    |   | 1,385   |    |
| Effect of exchange rate changes from the  translation of U.K. subsidiary |   | 871     |    |
| Carrying value of goodwill at December 31,  2003                         |   | $       | 170,485 |   |

 

As of December31, 2003 and 2002, the Company’s definite lived intangible assets of $525 and$819, net of accumulated amortization of $1,352 and $1,046, respectively,primarily consist of non-compete agreements and continue to be amortized overtheir useful lives.  Amortizationexpense for definite lived intangible assets during the years ended December31, 2003, 2002 and 2001 was $299, $333 and $155, respectively.

 

51

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Estimatedamortization expense for the five succeeding fiscal years is as follows:

 
|   |   | **Estimated  Amortization Expense** |   |
|--------|--------|-------------------------------------|--------|
|   |   |                                |   |
| 2004   |   | $                                   | 126    |   |
| 2005   |   | 126                                 |   |
| 2006   |   | 126                                 |   |
| 2007   |   | 126                                 |   |
| 2008   |   | 21                                  |   |
|        |        |                                     |        |  |

 

Actual resultsof operations for the years ended December 31, 2003 and 2002 and the pro formaresults of operations for the year ended December 31, 2001 had we applied thenon-amortization provisions of SFAS 142 in the prior period are as follows:

 
|                                          |   | **For the  years ended December 31,** |   |
|-----------------------------------------------|--------|---------------------------------------|--------|
|                                          |   | **2003**                              |   | **2002** |   | **2001** |   |
| Income from continuing operations             |   | $                                     | 20,511 |   | $ | 45,148 |   | $ | 29,527 |   |
| Add:   Goodwill amortization, net of tax |   | —                                |   | — |   | 3,321 |   |
| Adjusted income from continuing operations    |   | $                                     | 20,511 |   | $ | 45,148 |   | $ | 32,848 |   |
|                                          |   |                                  |   |   |   |   |   |
| Per common share – basic:                |   |                                  |   |   |   |   |   |
| Income from continuing operations             |   | $                                     | 0.85   |   | $ | 1.92 |   | $ | 1.44 |   |
| Add:   Goodwill amortization, net of tax |   | —                                |   | — |   | 0.16 |   |
|                                          |   | $                                     | 0.85   |   | $ | 1.92 |   | $ | 1.60 |   |
| Per common share – diluted:              |   |                                  |   |   |   |   |   |
| Income from continuing operations             |   | $                                     | 0.84   |   | $ | 1.87 |   | $ | 1.40 |   |
| Add:   Goodwill amortization, net of tax |   | —                                |   | — |   | 0.16 |   |
|                                          |   | $                                     | 0.84   |   | $ | 1.87 |   | $ | 1.56 |   |

 

**Note 7.  Accrued Expenses**

 

Accruedexpenses are summarized as follows:

 
|                                                 |   | **December 31,** |   |
|------------------------------------------------------|--------|-----------------------|--------|
|                                                 |   | **2003**              |   | **2002** |   |
|                                                 |   |                  |   |   |   |
| Payroll and related costs                            |   | $                     | 5,219  |   | $ | 9,515 |   |
| Interest payable                                     |   | 798                   |   | 1,758 |   |
| Warranty                                             |   | 4,772                 |   | 4,721 |   |
| Exit, disposal, certain severance and other  charges |   | 6,318                 |   | 1,931 |   |
| Other                                                |   | 15,608                |   | 12,071 |   |
|                                                 |   | $                     | 32,715 |   | $ | 29,996 |   |

 

**Note 8.  Warranty Liability**

 

The Companyoffers various product warranties for (i) transmissions sold to its customersin the Drivetrain Remanufacturing segment and (ii) engines and transmissionssold to its independent aftermarket customers. The specific terms and conditions of the warranties vary depending uponthe customer and the product sold. Factors that affect the Company’s warranty liability include number ofproducts sold, historical and anticipated rates of warranty claims and cost perclaim.  The Company accrues for estimatedwarranty costs as sales are made and periodically assesses the adequacy of itsrecorded warranty liability and adjusts the amount as necessary.

 

52

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Changes to theCompany’s warranty liability during the years ended December 31, 2002 and 2003are summarized as follows:

 
| Balance at December 31, 2001                      |   | $      | 4,830  |   |
|---------------------------------------------------|--------|--------|--------|--------|
| Warranties issued                                 |   | 5,648  |   |
| Claims paid / settlements                         |   | (5,611 | )      |
| Changes in liability for pre-existing  warranties |   | (146   | )      |
| Balance at December 31, 2002                      |   | 4,721  |   |
| Warranties issued                                 |   | 4,726  |   |
| Claims paid / settlements                         |   | (4,531 | )      |
| Changes in liability for pre-existing  warranties |   | (264   | )      |
| Balance added through acquisition of  company     |   | 120    |   |
| Balance at December 31, 2003                      |   | $      | 4,772  |   |

 

**Note9.  Credit Facility**

 

On February 8, 2002,the Company executed a credit agreement and a related security agreement (the“Credit Facility”).  The Credit Facilityprovides for (i) a $75,000, five year term loan (the “A-Loan”), with principalpayable in quarterly installments in increasing amounts over the five-yearperiod, (ii) a $95,000, six year, two-tranche term loan (the “B-Loans”), withprincipal payable in quarterly installments over the six-year period (with 97%of the outstanding balance payable in the sixth year) and an annual excess cashflow sweep payable as defined in the credit agreement, and (iii) a $50,000,five year revolving credit facility (the “Revolver”), reduced to $40,000 asamended.  The Credit Facility also providesfor the addition of one or more optional term loans of up to $100,000 in theaggregate (the “C-Loans”), subject to certain conditions (including the receiptfrom one or more lenders of the additional commitments that may be requested)and achievement of certain financial ratios. On December 12, 2003, the Company amended the Credit Facility to permitthe Stock Repurchase (see Note 12 - Common and Preferred Stock).  In addition, this amendment required theCompany to make a prepayment of $20,000 towards the term loans and reduce theRevolver limit to $40,000.

 

At the Company’s election,amounts advanced under the Credit Facility will bear interest at either (i) theAlternate Base Rate (“ABR”) plus a specified margin or (ii) the Eurodollar Rateplus a specified margin.  The ABR isequal to the highest of (a) the lender’s prime rate, (b) the lender’sbase CD rate plus 1.00% or (c) the federal funds effective rate plus0.50%.  The applicable margins for both ABR and Eurodollar Rate loans aresubject to quarterly adjustments based on the Company’s leverage ratio as ofthe end of the four fiscal quarters then completed.  As of December 31, 2003, the margins for the A-Loan and Revolverwere 1.50% for ABR loans and 2.50% for Eurodollar Rate loans.  For the B-Loans, the margins were 2.25% forABR loans and 3.25% for Eurodollar Rate loans as of December 31, 2003.  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.

 

Amounts advanced under theCredit Facility are guaranteed by all of the Company’s domestic subsidiariesand secured by substantially all of the Company’s assets and its subsidiaries’assets.  The Credit Facility containsseveral covenants, including ones that require the Company to maintainspecified levels of net worth, leverage and cash flow coverage and others thatlimit its ability to incur indebtedness, make capital expenditures, createliens, 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.

 

On November 21, 2002, theCompany made an optional prepayment of $6,000, representing a portion of theexcess cash flow sweep payable in connection with the first anniversary of thecredit agreement.  The $4,500 balance ofthe excess cash flow sweep was paid on February 11, 2003.

 

53

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Based on the Company’sresults of operations for the year ended December 31, 2003 and the $20,000prepayment associated with the December 12, 2003 amendment to the CreditFacility, a prepayment for the excess cash flow for the year ended December 31,2003 is not required.

 

At December31, 2003 and 2002, $36,048 and $65,280 were outstanding under the A-Loan and$83,843 and $89,636 were outstanding under the B-Loans portions of the CreditFacility, respectively, and no amounts were outstanding under theRevolver.  In addition, the Company hadoutstanding letters of credit issued against the Credit Facility totaling$3,125 and $3,524 as of December 31, 2003 and 2002.

 

Annualmaturities of the Credit Facility are as follows as of December 31, 2003:

 

| 2004   |   | $      | 10,018  |   |
|--------|--------|--------|---------|--------|
| 2005   |   | 10,629 |    |
| 2006   |   | 14,295 |    |
| 2007   |   | 64,681 |    |
| 2008   |   | 20,268 |    |
|   |   | $      | 119,891 |   |

 

**Note 10.  Income Taxes**

 

Income taxexpense (benefit) from continuing operations consists of the following:

 
|           |   | **For the years ended December 31,** |   |
|----------------|--------|--------------------------------------|--------|
|           |   | **2003**                             |   | **2002** |   | **2001** |   |
| Current:       |   |                                 |   |   |   |   |   |
| Federal        |   | $                                    | (594   | ) | $ | (1,234 | ) | $ | 1,835 |   |
| State          |   | (78                                  | )      | (209 | ) | 1,196 |   |
| Foreign        |   | 210                                  |   | 1,139 |   | 81 |   |
| Total current  |   | (462                                 | )      | (304 | ) | 3,112 |   |
| Deferred:      |   |                                 |   |   |   |   |   |
| Federal        |   | 11,040                               |   | 22,550 |   | 14,066 |   |
| State          |   | 554                                  |   | 1,438 |   | 671 |   |
| Foreign        |   | 511                                  |   | (217 | ) | 249 |   |
| Total deferred |   | 12,105                               |   | 23,771 |   | 14,986 |   |
|           |   | $                                    | 11,643 |   | $ | 23,467 |   | $ | 18,098 |   |

 

In addition,the Company has recognized tax benefits related to the exercise of certainnon-qualified stock options and the disposition of certain shares acquired uponexercise of incentive stock options prior to the expiration of the statutoryholding period as an increase in stockholders’ equity of $11, $4,706 and $1,070for the years ended December 31, 2003, 2002 and 2001, respectively.

 

Income fromcontinuing operations before income taxes is summarized as follows:

 
|     |   | **For the years ended December 31,** |   |
|----------|--------|--------------------------------------|--------|
|     |   | **2003**                             |   | **2002** |   | **2001** |   |
| Domestic |   | $                                    | 29,480 |   | $ | 66,115 |   | $ | 46,416 |   |
| Foreign  |   | 2,674                                |   | 2,500 |   | 1,209 |   |
| Total    |   | $                                    | 32,154 |   | $ | 68,615 |   | $ | 47,625 |   |

 

54

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Thereconciliation of income tax expense computed at the U.S. federal statutory taxrates to income tax expense from continuing operations is as follows:

 
|                                            |   | **For the years ended December 31,** |   |
|-------------------------------------------------|--------|--------------------------------------|--------|
|                                            |   | **2003**                             |   | **2002** |   | **2001** |   |
|                                            |   | **Amount**                           |   | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   |
| Tax at U.S. statutory rates                     |   | $                                    | 11,254 |   | 35.0 | % | $ | 24,016 |   | 35.0 | % | $ | 16,670 |   | 35.0 | % |
| State income taxes, net of federal tax  benefit |   | (328                                 | )      | (1.0 | ) | 966 |   | 1.4 |   | 1,477 |   | 3.1 |   |
| Foreign income taxes                            |   | (214                                 | )      | (0.7 | ) | 47 |   | 0.1 |   | (130 | ) | (0.3 | ) |
| Increase in valuation allowance                 |   | 893                                  |   | 2.8 |   | — |   | — |   | — |   | — |   |
| Nondeductible goodwill amortization             |   | —                               |   | — |   | — |   | — |   | 236 |   | 0.5 |   |
| Nondeductible expenses                          |   | 96                                   |   | 0.3 |   | 108 |   | 0.1 |   | 131 |   | 0.3 |   |
| Federal refund                                  |   | —                               |   | — |   | (575 | ) | (0.8 | ) | — |   | — |   |
| Other                                           |   | (58                                  | )      | (0.2 | ) | (1,095 | ) | (1.6 | ) | (286 | ) | (0.6 | ) |
|                                            |   | $                                    | 11,643 |   | 36.2 | % | $ | 23,467 |   | 34.2 | % | $ | 18,098 |   | 38.0 | % |

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of the Company’s deferred tax assets andliabilities are as follows: 

 
|                                                          |   | **December 31,** |   |
|---------------------------------------------------------------|--------|------------------|--------|
|                                                          |   | **2003**         |   | **2002** |   |
| Deferred tax assets:                                          |   |             |   |   |   |
| Inventory obsolescence reserve                                |   | $                | 1,848  |   | $ | 1,834 |   |
| Product warranty accruals                                     |   | 1,654            |   | 1,705 |   |
| Exit, disposal, certain severance and other  charges accruals |   | 2,342            |   | 577 |   |
| Other nondeductible accruals                                  |   | 2,777            |   | 2,663 |   |
| Discontinued operations reserve                               |   | 107              |   | 127 |   |
| Credit carryforwards                                          |   | 469              |   | 555 |   |
| Net operating loss carryforwards                              |   | 20,012           |   | 27,577 |   |
| Other deferred items                                          |   | 2,927            |   | 4,119 |   |
| Total deferred tax assets                                     |   | 32,136           |   | 39,157 |   |
| Deferred tax liabilities:                                     |   |             |   |   |   |
| Amortization of intangible assets                             |   | 17,718           |   | 14,320 |   |
| Property, plant and equipment                                 |   | 3,106            |   | 1,396 |   |
| Other accruals and deferrals                                  |   | 3⁄4           |   | 552 |   |
| Total deferred tax liabilities                                |   | 20,824           |   | 16,268 |   |
|                                                          |   |             |   |   |   |
| Valuation allowance                                           |   | (10,086          | )      | (9,193 | ) |
|                                                          |   |             |   |   |   |
| Net deferred tax asset                                        |   | $                | 1,226  |   | $ | 13,696 |   |

 

As of December31, 2003, the Company had federal operating loss carryforwards of approximately$26,770 and state loss carryforwards attributable to states in which theCompany’s primary operations are located of approximately $17,661.  These loss carryforwards are available as anoffset to the future taxable income of the Company and its subsidiaries.  State loss carryforwards attributable tostates in which the Company no longer conducts business are subject to a fullvaluation allowance.  The federaloperating loss carryforward expires in 2020, and the state loss carryforwardsexpire in varying amounts from 2004 to 2021. The Company also has Alternative Minimum Tax (“AMT”) creditcarryforwards of approximately $197 available to offset regular income taxpayable in future years.  The Company,through its subsidiary in the U.K., has surplus Advance Corporate Tax (“ACT”)of approximately $272 available as a direct offset to future U.K. taxliability.  The Company’s AMT credit andsurplus ACT can be carried over indefinitely.

 

55

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A valuationallowance has been established for the tax benefits associated with certainstate loss carryforwards as realization is not deemed likely due to limitationsimposed by certain states on the Company’s ability to utilize thesebenefits.  A valuation allowance hasalso been established for certain foreign tax benefits due to similarlimitations imposed by the foreign tax jurisdiction. During 2003, the valuationallowance increased $893, to $10,086 from $9,193.  This increase is attributable to the Company’s relocation of itsMahwah, N.J. facility to Oklahoma City. As a result of the Company’s departurefrom the State of New Jersey the utilization of pre-existing net operating losscarryforwards attributable to operations in that state is no longer deemedlikely.  The valuation allowance hasalso been adjusted to reflect changes to the valuation of foreign carryoversdue 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 December31, 2003, there are approximately $1,173 of accumulated unremitted earningsfrom the Company’s U.K. subsidiary with respect to which deferred tax has not beenprovided as the undistributed earnings of the U.K. subsidiary are indefinitelyreinvested.

 

**Note 11.  Stock-Based Awards**

 

The Companyprovides stock options and other incentive stock awards (“Stock Awards”) toemployees, non-employee directors and independent contractors under its 2002Stock 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 (the “1996 Plan”) (collectively the “Plans”).  The Plans provide for granting ofnon-qualified and incentive stock option awards.  Stock options under the Plans are generally granted at the marketprice of the Company’s common stock on the date of grant and typically vestover a three to five year period of time, as determined by the Board ofDirectors.  Options under the Plansexpire 10 years from the date of grant. The 2002, 2000, 1998 and 1996 plans authorize the issuance of 1,000,000,750,000, 1,200,000 and 2,400,000 shares of the Company’s common stock,respectively.  Shares available forgrant under the Plans in the aggregate were 300,799, 500,305 and 154,314 as ofDecember 31, 2003, 2002 and 2001, respectively.

 

A summary ofthe Plans stock option activities are presented below:

 
|                                                             |   | **2003**   |   | **2002**                                |   | **2001**   |      |
|------------------------------------------------------------------|--------|------------|--------|-----------------------------------------|--------|------------|-----------|
|                                                             |   | **Shares** |   | **Weighted-****AverageExercise  Price** |   | **Shares** |      | **Weighted-****AverageExercisePrice** |   | **Shares** |   | **Weighted-****AverageExercise  Price** |   |
| Outstanding at beginning of year                                 |   | 2,011,281  |   | $                                       | 14.97  |       | 2,226,223 |   | $ | 7.82 |   | 2,006,819 |   | $ | 8.36 |   |
| Granted at market price                                          |   | 300,000    |   | $                                       | 9.85   |       | 459,000   |   | $ | 20.67 |   | 744,000 |   | $ | 5.96 |   |
| Granted above market price                                       |   | —     |   | $                                       | — |       | 350,000   |   | $ | 30.00 |   | — |   | $ | — |   |
| Exercised                                                        |   | (8,333     | )      | $                                       | 9.67   |       | (868,951  | ) | $ | 6.42 |   | (340,965 | ) | $ | 5.60 |   |
| Canceled/forfeited                                               |   | (120,494   | )      | $                                       | 13.93  |       | (154,991  | ) | $ | 11.11 |   | (183,631 | ) | $ | 10.24 |   |
| Outstanding at end of year                                       |   | 2,182,454  |   | $                                       | 14.34  |       | 2,011,281 |   | $ | 14.97 |   | 2,226,223 |   | $ | 7.82 |   |
|                                                             |   |       |   |                                    |   |       |      |   |   |   |   |   |   |
| Exercisable at end of year                                       |   | 1,311,295  |   | $                                       | 16.01  |       | 881,737   |   | $ | 17.66 |   | 1,003,817 |   | $ | 7.85 |   |
|                                                             |   |       |   |                                    |   |       |      |   |   |   |   |   |   |
| Weighted-average fair value of options  granted during the year: |   |       |   |                                    |   |       |      |   |   |   |   |   |   |
| Grant price equal to market price                                |   |       |   | $                                       | 6.02   |       |      |   | $ | 7.75 |   |   |   | $ | 4.07 |   |
| Grant price above market price                                   |   |       |   | $                                       | — |       |      |   | $ | 3.43 |   |   |   | $ | — |   |

 

56

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The followingsummarizes information about options outstanding as of December 31, 2003:

** **
|                             |   | **Options Outstanding** |   | **Options Exercisable**                 |   |
|----------------------------------|--------|-------------------------|--------|-----------------------------------------|--------|
| **Range of****Exercise  Prices** |   | **Shares**              |   | **Average****RemainingContractualLife** |   | **Weighted-****AverageExercisePrices** |   | **Shares** |   | **Weighted-****AverageExercisePrices** |   |
| $4.56-$7.00                      |   | 525,646                 |   | 6.8 years                               |   | $ | 4.99 |   | 289,665 |   | $ | 5.04 |   |
| $7.01-$12.00                     |   | 842,719                 |   | 6.8 years                               |   | $ | 10.31 |   | 462,841 |   | $ | 10.61 |   |
| $12.01-$20.00                    |   | 162,754                 |   | 6.2 years                               |   | $ | 15.88 |   | 101,091 |   | $ | 16.40 |   |
| $20.01-$30.00                    |   | 651,335                 |   | 8.2 years                               |   | $ | 26.72 |   | 457,698 |   | $ | 28.33 |   |
|                             |   | 2,182,454               |   | 7.2 years                               |   | $ | 14.34 |   | 1,311,295 |   | $ | 16.01 |   |

 

During 1994,the Company issued warrants to purchase 421,056 shares of common stock at $1.67per share, the fair value of the common stock on the date of grant.  As of December 31, 2003, all of thesewarrants have been exercised.  Duringthe year ended December 31, 2002, 70,176 of these warrants were exercised in acash transaction and during the year ended December 31, 2001, in cashlesstransactions, 210,528 of these warrants were exercised and 181,921 shares ofthe Company’s common stock were issued.

 

On November 6,2003, the Company issued 20,000 shares of its common stock to certainexecutives of the Company as compensation for future services.  A total of $244 of unearned compensation wasrecorded for these awards, based upon a fair value of $12.20 per share, themarket price on the date of grant. These shares vest in one-third increments at the end of each year over aperiod of three years from the date of grant. The related compensation expense is being amortized on a straight-linebasis over the vesting period.  Expenserelated to these awards was $12 for year ended December 31, 2003.

 

**Note 12.  Common and Preferred Stock**

 

On December16, 2003, the Company (i) initiated a tender offer to purchase up to 2,638,500shares of its common stock outstanding at a price not greater than $15.75 pershare and not less than $13.00 per share and (ii) agreed to purchase up to1,169,409 shares at the final tender offer price from our affiliates, AuroraEquity Partners L.P. and Aurora Overseas Equity Partners I, L.P. (collectively,“Aurora”) on the eleventh business day following the close of the tender offer(i and ii collectively, the “Stock Repurchase”).  The maximum number of shares to be purchased in the StockRepurchase represented 15.7% of our outstanding common stock. (See Note 22 -Subsequent Event.)

 

**Note 13. Derivative Financial Instruments**

 

The Companyused an interest rate swap to convert a portion of its variable rate debt tofixed rate debt to reduce interest rate volatility risk.  The swap, which expired in July 2003, wasbased on a notional amount of $15,000 at the fixed interest rate of 5.95%during its term.  The fair value of theswap was based on the estimated current settlement cost.  In accordance with SFAS No. 133 *Accountingfor Derivative Instruments and Hedging Activities* (as amended bySFAS No. 137, 138 and 149), the Company designated this swap agreement as acash flow hedge and recorded the fair value of this hedge agreement as part ofaccumulated other comprehensive income (loss). The fair value of this derivative as a liability was $370 at December31, 2002.  The following table setsforth the effective portion of changes in the fair value of this derivative:

 
|                     |   | **For the years ended December 31,** |   |
|--------------------------|--------|--------------------------------------|--------|
|                     |   | **2003**                             |   | **2002** |   |
| Increase in fair value   |   | $                                    | 370    |   | $ | 311 |   |
| Income taxes             |   | (133                                 | )      | (129 | ) |
| Other comprehensive gain |   | $                                    | 237    |   | $ | 182 |   |

 

57

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**Note14.  Earnings Per Share**

 

The following table sets forth the computation of basic and dilutedearnings per share from continuing operations:

 
|                                               |   | **For the years ended December 31,** |   |
|----------------------------------------------------|--------|--------------------------------------|--------|
|                                               |   | **2003**                             |   | **2002** |   | **2001** |   |
| Numerator:                                         |   |                                 |   |   |   |   |   |
| Income from continuing operations                  |   | $                                    | 20,511 |   | $ | 45,148 |   | $ | 29,527 |   |
|                                               |   |                                 |   |   |   |   |   |
| Denominator:                                       |   |                                 |   |   |   |   |   |
| Weighted-average common shares outstanding         |   | 24,213,185                           |   | 23,493,092 |   | 20,503,936 |   |
| Common stock equivalents                           |   | 272,451                              |   | 625,681 |   | 554,637 |   |
| Denominator for diluted earnings per common  share |   | 24,485,636                           |   | 24,118,773 |   | 21,058,573 |   |
|                                               |   |                                 |   |   |   |   |   |
| Per common share -  basic                          |   | $                                    | 0.85   |   | $ | 1.92 |   | $ | 1.44 |   |
| Per common share -  diluted                        |   | 0.84                                 |   | 1.87 |   | 1.40 |   |

 

See Note 22 –Subsequent Event for a discussion of repurchases the Company made of its commonstock subsequent to December 31, 2003.

 

**Note15.  Employee Retirement Plans**

 

The Company’sdefined contribution plans provide substantially all U.S. salaried and hourlyemployees of 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 provisions of each plan, the Company matches aportion of the employees’ basic voluntary contributions. Company matchingcontributions to the plans were approximately $1,317, $1,433 and $1,511 for theyears ended December 31, 2003, 2002 and 2001, respectively.

 

In addition, the Company’s subsidiary located in the U.K. provides avoluntary retirement benefits plan for its employees.  Company matching contributions to this plan were approximately$249, $212 and $329 for the years ended December 31, 2003, 2002 and 2001,respectively.

 

**Note16.  Discontinued Operations**

 

During 2000,the Company adopted a plan to discontinue the Independent Aftermarket segmentsof its business, which contained (i) the Distribution Group, a distributor ofremanufactured transmissions and related drivetrain components to independentaftermarket customers, and (ii) the Company’s domestic remanufactured enginesbusiness (“Engines”) which remanufactured and distributed engines primarilythrough a branch distribution network to independent aftermarketcustomers.  On October 27, 2000, theCompany sold the Distribution Group and on June 25, 2001, the Company electedto retain Engines.  The estimated losson the sale of the Distribution Group and the actual losses from discontinuedoperations incurred since the measurement date were applied against the accruedloss established effective with the measurement date.  The accrual balance as of December 31, 2003 and 2002 of $291 and$330, respectively, classified as liabilities of discontinued operations,represents the Company’s current estimate of the remaining obligations andother costs related to the sale of the Distribution Group.  (See Note 17 – Commitments andContingencies).

 

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Details of thegain (loss) recorded from discontinued operations, net of the reclassificationof the Engines business from discontinued operations to continuing operations,are as follows:

 
|                                                                      |   | **For the  years ended December 31,** |   |
|---------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                      |   | **2003**                              |   | **2002** |   | **2001** |   |
| Loss from operations                                                      |   | $                                     | — |   | $ | — |   | $ | — |   |
| Income tax benefit                                                        |   | —                                |   | — |   | — |   |
| Loss from operations, net of income taxes                                 |   | —                                |   | — |   | — |   |
| Estimated gain (loss) from disposal                                       |   | —                                |   | 430 |   | (597 | ) |
| Reclassification of discontinued operations  to continuing operations (1) |   | —                                |   | — |   | (961 | ) |
| Income tax (expense) benefit                                              |   | —                                |   | (155 | ) | 599 |   |
| Adjustment to income tax benefit                                          |   | —                                |   | 1,004 |   | — |   |
| Gain (loss) from disposal, net of income  taxes                           |   | —                                |   | 1,279 |   | (959 | ) |
| Gain (loss) from discontinued operations,  net of income taxes            |   | $                                     | — |   | $ | 1,279 |   | $ | (959 | ) |

 

----

(1) Represents the reclassification of the operating results forEngines from discontinued operations to continuing operations as required perEmerging Issues Task Force No. 90-16.

 

**Note17.  Commitments and Contingencies**

 

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

 
| **For the years ended  December 31,** |   | **Capital  Leases** |   | **Operating  Leases** |   |
|--------------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                       |   |                |   |                  |   |
| 2004                                       |   | $                   | 349    |                  | $      | 8,072 |   |
| 2005                                       |   | 2                   |   | 5,887                 |   |
| 2006                                       |   | —              |   | 4,617                 |   |
| 2007                                       |   | —              |   | 3,292                 |   |
| 2008                                       |   | —              |   | 2,205                 |   |
| 2009 and thereafter                        |   | —              |   | 330                   |   |
| Total minimum lease payments               |   | 351                 |   | $                     | 24,403 |   |
|                                       |   |                |   |                  |   |
| Less:   Amount representing interest  |   | (7                  | )      |                  |   |
| Present value of minimum lease payments    |   | $                   | 344    |                  |   |   |

 

Rent expense for all operating leases approximated $10,551, $11,068 and$8,231 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

At December 31, 2003 and 2002, amounts due to sellers of acquiredcompanies and deferred compensation consist primarily of additional purchaseprice payable to the seller and to other key individuals of ATS Remanufacturing(“ATS”), acquired in 1997.  The ATSacquisition requires the Company to make subsequent payments to the seller andcertain other key individuals of ATS on each of the first 14 anniversaries ofthe closing date.  Through December 31,2003, the Company had made aggregate payments of $9,840 related to the ATSacquisition.  Substantially all of theremaining payments to be made in the future, which will aggregate toapproximately $8,301 (present value $7,766 as of December 31, 2003), are contingentupon the attainment of certain sales levels by the Company to General Motors,which the Company believes has a substantial likelihood of being attained.  Amountsare payable through 2011.

 

The Company issubject 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 and wastes.These laws and regulations provide for substantial fines and criminal sanctionsfor

 

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violations and impose liabilityfor the costs of cleaning up, and damages resulting from, past spills,disposals or other releases of hazardous substances.

 

In connectionwith the acquisition of certain subsidiaries, some of which have beensubsequently divested or relocated, the Company conducted certaininvestigations of these companies’ facilities and their compliance withapplicable environmental laws. The investigations, which included Phase Iassessments by independent consultants of all manufacturing and variousdistribution facilities, found that a number of these facilities have had ormay have had releases of hazardous materials that may require remediation andalso may be subject to potential liabilities for contamination from off-sitedisposal of substances or wastes. These assessments also found that reportingand other regulatory requirements, including waste management procedures, werenot or may not have been satisfied. Although there can be no assurance, theCompany believes that, based in part on the investigations conducted, in parton certain remediation completed prior to or since the acquisitions, and inpart on the indemnification provisions of the agreements entered into inconnection with the Company’s acquisitions, the Company will not incur anymaterial liabilities relating to these matters.

 

One of theCompany’s former 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 present ownersand operators 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 practical matter,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 approximately $4,000 per year to operate for an indefinite periodan interim remedial groundwater pumping and treatment system for the part ofthe San Gabriel Valley Superfund site within which RPM’s facilities, as well asthose of 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 are likelyto be assessed. RPM moved all manufacturing operations out of the San GabrielValley Superfund site area in 1995. Since July 1995, RPM’s only realproperty interest in this area has been the lease of a 6,000 square footstorage and distribution facility. Neither the Company nor any of its affiliates has been named by the EPAas a PRP for the Superfund Site and, based on the Company’s limited connectionwith the Site, the Company does not believe that it is likely to be identifiedas such in the future.  Furthermore, theacquisition agreement by which the Company acquired the assets of RPM in 1994and the leases pursuant to which the Company leased RPM’s facilities after itacquired the assets of RPM expressly provide that the Company did not assumeany liabilities for environmental conditions existing on or before the closingof the acquisition, although the Company could become responsible for thoseliabilities under various legal theories. The Company is indemnified againstany such liabilities by the company that sold RPM to it as well as theshareholders of that company, although the Company has no information regardingthe current financial condition of these indemnitors and there can be noassurance that the Company would be able to make any recovery under theindemnification provisions.  While therecan be no assurance, the Company believes that it will not incur any materialliability as a result of RPM’s lease of properties within the San GabrielValley Superfund site.

 

In connection with the saleof the Distribution Group (the “DG Sale”) on October 27, 2000 (seeNote 16 – Discontinued Operations), the Company agreed to certain matterswith the buyer that could result in contingent liability to the Company in thefuture.  These include the Company’sindemnification of the buyer against (i) environmental liability at formerDistribution Group facilities that had been closed prior to the DG Sale,including the former manufacturing facility in Azusa, California within theSuperfund site mentioned above and former manufacturing facilities in Mexicali,Mexico and Dayton, Ohio, (ii) any other environmental liability of theDistribution Group relating to periods prior to the DG Sale, in most casessubject to a $750 deductible and a $12,000 cap except with respect to closedfacilities and (iii) any tax liability of the Distribution Group relatingto periods prior to the DG Sale.  During 2002, the Company negotiated an

 

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additional $100 deductible applicable to allDistribution Group claims for indemnification. In addition, prior to the DG Sale several of the Distribution Group’sreal estate and equipment leases with terms ending on various dates during 2004and 2007, were guaranteed by the Company. These guarantees, which originated prior to the time of the DG Sale,remain in effect after the DG Sales so the Company continues to be liable forthe Distribution Group’s obligations under such leases in the event that theDistribution Group does not honor those obligations.  As of December 31, 2003, these lease guarantees relatingto minimum lease obligations totaled $2,717 and $196 for real estate andpersonal property, respectively.

 

The Companyhas a 45% equity interest in an unconsolidated subsidiary whose bank creditfacility is secured in part by a $850 letter of credit given by the Company tothe lending bank in March 2002.  Thisletter of credit is to stay in effect until the expiration of the bank creditfacility in April 2005.  As of December31, 2003, the letter of credit had not been drawn upon and the Company believesthat it is less than probable that the Company will incur a loss with respectto the letter of credit in the future, and therefore has not established aliability with respect thereto.

 

**Note18.  Reportable Segments**

 

The Companyhas two reportable segments in continuing operations: the DrivetrainRemanufacturing segment and the Logistics segment.  The Drivetrain Remanufacturing segment consists of five operatingunits that primarily sell remanufactured transmissions directly to Ford,DaimlerChrysler, General Motors, Honda and certain other foreign OEMs,primarily for use as replacement parts by their domestic dealers during thewarranty and post-warranty periods following the sale of a vehicle.  In addition, the Drivetrain Remanufacturingsegment (i) sells select remanufactured and newly assembled engines to certainEuropean OEMs (including the European operations of Ford, General Motors andJaguar) and certain remanufactured engines to DaimlerChrysler and (ii)remanufactures certain engines and transmissions that are transferred to our aftermarketdistribution business, which is not a reportable segment, for sale directlyinto the independent aftermarket.  TheCompany’s Logistics segment consists of three operating units: (i) a providerof value added warehouse, distribution and reverse logistics, test and repairservices, turnkey order fulfillment and information services for AT&TWireless Services and to a lesser extent, Cingular; (ii) a provider of returnedmaterial reclamation and disposition services and core management services toGeneral Motors and to a lesser extent, Ford and Mazda; and (iii) a provider oflogistics and reverse logistics services and automotive electronic componentsremanufacturing, primarily for General Motors, Delphi and Visteon.  The Company’s “Other” business unit, whichis not reportable for segment reporting purposes, distributes domestic andforeign engines and domestic remanufactured transmissions to independentaftermarket customers.

 

EffectiveJanuary 1, 2003, the Company revised its internal reporting to provide betteralignment with its current organization structure.  As a result, all remanufacturing activities are reflected in theDrivetrain Remanufacturing segment. Engines and transmissions that are remanufactured for sale into theindependent aftermarket are transferred to the “Other” business unit at cost,therefore all costs and operating profits related to the independentaftermarket sales are contained within this single business.  The results for the prior periods have alsobeen adjusted to reflect this change.

 

The Companyevaluates performance based upon income from operations.  The reportable segments’ and the “Other”business unit’s accounting policies are the same as those described in thesummary of significant accounting policies (see Note 2 – Summary ofSignificant Accounting Policies).  TheCompany fully allocates corporate overhead based upon budgeted full year profitbefore tax.  The reportable segments andthe “Other” business unit are each managed and measured separately primarilydue to the differing customers, production processes, products sold anddistribution channels.

 

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Financialinformation relating to the Company’s segments and a reconciliation to theconsolidated financial statements are as follows as of and for the years endedDecember 31: 

 
|                                                           |   | **Drivetrain********Remanufacturing** |    | **Logistics** |   | **Other** |   | **Corporate /  Unallocated** |   | **Eliminations** |   | **Consolidated** |   |
|----------------------------------------------------------------|--------|---------------------------------------|---------|---------------|--------|-----------|--------|------------------------------|--------|------------------|--------|------------------|--------|
| 2003:                                                          |   |                                  |    |          |   |      |   |                         |   |             |   |             |   |
| Revenues from external customers                               |   | $                                     | 268,435 |          | $      | 81,700    |   | $                            | 16,929 |             | $      | —           |   | $ | — |   | $ | 367,064 |   |
| Depreciation and amortization expense                          |   | 7,671                                 |    | 3,921         |   | 14        |   | —                       |   | —           |   | 11,606           |   |
| Exit, disposal, certain severance and other  charges           |   | 4,366                                 |    | 922           |   | —    |   | 3,339                        |   | —           |   | 8,627            |   |
| Income (loss) from operations                                  |   | 23,187                                |    | 21,994        |   | (4,751    | )      | (3,339                       | )      | —           |   | 37,091           |   |
| Total assets                                                   |   | 456,545                               |    | 110,488       |   | 5,014     |   | 87,032                       |   | (207,217         | )      | 451,862          |   |
| Goodwill                                                       |   | 151,377                               |    | 18,973        |   | —    |   | 135                          |   | —           |   | 170,485          |   |
| Expenditures for long-lived assets                             |   | 12,207                                |    | 2,077         |   | —    |   | 272                          |   | —           |   | 14,556           |   |
|                                                           |   |                                  |    |          |   |      |   |                         |   |             |   |             |   |
| 2002:                                                          |   |                                  |    |          |   |      |   |                         |   |             |   |             |   |
| Revenues from external customers                               |   | $                                     | 288,010 |          | $      | 114,203   |   | $                            | 13,689 |             | $      | —           |   | $ | — |   | $ | 415,902 |   |
| Depreciation and amortization expense                          |   | 6,779                                 |    | 4,144         |   | 12        |   | —                       |   | —           |   | 10,935           |   |
| Exit, disposal, certain severance and other  (credits) charges |   | —                                |    | (154          | )      | —    |   | (123                         | )      | —           |   | (277             | )      |
| Income (loss) from operations                                  |   | 50,172                                |    | 36,768        |   | (3,947    | )      | 123                          |   | —           |   | 83,116           |   |
| Total assets                                                   |   | 442,746                               |    | 100,690       |   | 3,843     |   | 97,752                       |   | (191,001         | )      | 454,030          |   |
| Goodwill                                                       |   | 149,121                               |    | 18,973        |   | —    |   | 135                          |   | —           |   | 168,229          |   |
| Expenditures for long-lived assets                             |   | 8,848                                 |    | 4,078         |   | —    |   | 177                          |   | —           |   | 13,103           |   |
|                                                           |   |                                  |    |          |   |      |   |                         |   |             |   |             |   |
| 2001:                                                          |   |                                  |    |          |   |      |   |                         |   |             |   |             |   |
| Revenues from external customers                               |   | $                                     | 266,258 |          | $      | 105,255   |   | $                            | 21,868 |             | $      | —           |   | $ | — |   | $ | 393,381 |   |
| Depreciation and amortization expense                          |   | 10,156                                |    | 3,732         |   | 131       |   | —                       |   | —           |   | 14,019           |   |
| Exit, disposal, certain severance and other  charges           |   | 2,439                                 |    | 2,415         |   | —    |   | 476                          |   | —           |   | 5,330            |   |
| Income (loss) from operations                                  |   | 40,044                                |    | 26,461        |   | 1,695     |   | (476                         | )      | —           |   | 67,724           |   |
| Total assets                                                   |   | 417,936                               |    | 81,215        |   | 8,076     |   | 46,043                       |   | (156,412         | )      | 396,858          |   |
| Goodwill                                                       |   | 148,941                               |    | 18,973        |   | —    |   | 135                          |   | —           |   | 168,049          |   |
| Expenditures for long-lived assets                             |   | 7,646                                 |    | 5,185         |   | —    |   | 685                          |   | —           |   | 13,516           |   |

 

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Geographicinformation for revenues, determined by destination of sale and long-livedassets, determined by the location of the Company’s facilities is as follows:

 
|                            |   | **As of and for the  Years ended December 31,** |    |
|---------------------------------|--------|-------------------------------------------------|---------|
|                            |   | **2003**                                        |    | **2002** |   | **2001** |   |
|                            |   |                                            |    |   |   |   |   |
| Net sales:                      |   |                                            |    |   |   |   |   |
| United States                   |   | $                                               | 333,391 |   | $ | 387,196 |   | $ | 369,162 |   |
| Canada and  Europe              |   | 33,673                                          |    | 28,706 |   | 24,219 |   |
| Consolidated  net sales         |   | $                                               | 367,064 |   | $ | 415,902 |   | $ | 393,381 |   |
|                            |   |                                            |    |   |   |   |   |
| Long-lived  assets:             |   |                                            |    |   |   |   |   |
| United States                   |   | $                                               | 221,974 |   | $ | 217,564 |   | $ | 217,280 |   |
| Europe                          |   | 16,483                                          |    | 15,268 |   | 13,826 |   |
| Consolidated  long-lived assets |   | $                                               | 238,457 |   | $ | 232,832 |   | $ | 231,106 |   |

 

Of theCompany’s revenues for the years ended December 31, 2003, 2002 and 2001, salesto the Ford (Drivetrain Remanufacturing and Logistics segments) accounted for$131,106, $153,957 and $136,088, Daimler Chrysler (Drivetrain Remanufacturingsegment) accounted for $69,875, $93,189 and $96,980, and AT&T WirelessServices (Logistics segment) accounted for $58,117, $76,774 and $69,121,respectively.

 

**Note19.  Fair Value of Financial Instruments**

 

The carryingamount of the Company’s financial instruments approximate their fair values dueto the fact that they are either short-term in nature or re-priced to fairvalue through floating interest rates. The 18% senior subordinated promissory note, received by the Company onOctober 27, 2000 as part of the proceeds from the sale of the DistributionGroup, had a fair value that approximated its carrying value atDecember 31, 2003 and 2002.

 

The carryingamounts and fair values of these financial instruments are as follows: 

 
|                                    |   | **December  31,**    |   |
|-----------------------------------------|--------|----------------------|--------|
|                                    |   | **2003**             |   | **2002** |   |
|                                    |   | **Carrying  Amount** |   | **Fair  Value** |   | **Carrying  Amount** |   | **Fair  Value** |   |
| 18% senior subordinated promissory note |   | $                    | 9,548  |   | $ | 9,548 |   | $ | 8,899 |   | $ | 8,899 |   |
| Promissory note with minority interest  |   | 210                  |   | 210 |   | — |   | — |   |
|                                         |        |                      |        |  |  |  |  |  |  |  |  |  |  |

 

**Note20.  Exit, Disposal, Certain Severanceand Other Charges**

 

Facilities Consolidation Costs – Drivetrain Remanufacturing Segment

 

On June 23,2003, the Company announced its decision to consolidate one of its transmissionremanufacturing operations from a leased facility located in Mahwah, New Jerseyinto a Company-owned idle facility in Oklahoma City, Oklahoma.  This decision was primarily driven by anexpectation of lower operating costs (primarily labor and facility related).  The relocation from the Mahwah facility tothe Oklahoma City facility was completed during November 2003 and the Mahwahlease expired on December 31, 2003.  TheCompany terminated a total of 162 employees, comprised of manufacturing andmanagement personnel as part of the Mahwah facility closure.  For the year ended December 31, 2003, $4,081of costs were incurred related to the Mahwah plant closure including (i) $1,317of moving and travel costs to relocate equipment and certain managementemployees from the Mahwah facility to the facility in Oklahoma City, (ii)$1,210 of severance and related costs, (iii) $617 primarily related to thewrite-off of previously capitalized leasehold improvement costs at the Mahwahfacility, (iv) $459 of other exit costs primarily related to idle plantcapacity at the Mahwah facility, (v) $278 of insurance costs related to certainworkers compensation claims incurred for the terminated employees and (vi) $200for the write-down of raw materials inventory no longer required (classified asCost of Sales - Products).

 

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Following isan 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                                 |   | $                         | 1,210  |                          | $      | 2,439                                    |   | $         | 817    |   | $ | 4,466 |   |
| Amount incurred to date and during the year  ended December 31, 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 |   |

 

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

 

Other Activities Relating to Exit, Disposal, Certain Severance andOther Charges:

 

Commencing in1998, the Company implemented certain initiatives designed to improve operatingefficiencies and reduce costs.  In 2001,the Company recorded $5,330 of costs, including (i) $2,439 for the DrivetrainRemanufacturing segment consisting of severance and related costs and exit andidle facility costs, (ii) $2,415 for the Logistics segment primarily related tothe shut-down of the Company’s remanufactured automotive electronic controlmodules product line and severance and related costs primarily associated withthe upgrade of certain management functions and (iii) $476 of severanceand related costs related to the Company’s two information systems groups.

 

In 2002, theCompany recorded 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 established provisionrelated to the Drivetrain Remanufacturing segment for a potential non-incomestate tax liability whose maximum exposure has been reduced.  In addition, the Company recorded income of$277 for the reversal of previously established provisions including (i) $154for the shut-down of the Company’s remanufactured automotive electronic controlmodules operation primarily related to asset write-downs where actualrecoveries from the sale of assets were favorable to original estimates and(ii) $123 of severance and related costs primarily related to the consolidationof the information systems groups that were no longer expected to be incurred.

 

In 2003, theCompany recorded costs of $1,416 consisting of (i) $1,414 of severance andrelated costs for 31 management and operational support personnel primarilyassociated with the reorganization and de-layering of certain managementfunctions and the streamlining of certain operations, (ii) $405 related to thewrite-down of certain customized software recorded as a fixed asset due to theloss of the business this software had supported and (iii) $59 of other costs,partially offset by an income item of $462 related to the reversal of a specialcharge accrual established during 2001 for expected idle capacity costs at theMahwah facility that was no longer needed due to the exit from this plant.

 

In December2003, the Company recorded $3,130 of charges consisting of compensation costspayable to our current Chief Executive Officer and Chief Financial Officer of$1,953 and $685, respectively, due contingent upon a conversion from full timeto part time employment, and $492 of associated relocation and hiring relatedcosts.

 

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Following isan analysis of the reserves relating to these activities: 

 
|                                |   | **Termination********Benefits** |   | **Exit / Other********Costs** |   | **Loss on********Write-Down********Of Assets** |   | **Total** |   |
|-------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|------------------------------------------------|--------|-----------|--------|
|                                |   |                            |   |                          |   |                                           |   |      |   |
| Reserve as of January 1, 2001       |   | $                               | 696    |                          | $      | 4,802                                          |   | $         | 5,528  |   | $ | 11,026 |   |
| Provision 2001                      |   | 3,213                           |   | 1,223                         |   | 894                                            |   | 5,330     |   |
| Payments 2001                       |   | (2,115                          | )      | (2,991                        | )      | —                                         |   | (5,106    | )      |
| Asset write-offs 2001               |   | —                          |   | —                        |   | (4,225                                         | )      | (4,225    | )      |
| Asset valuation adjustment 2001 (1) |   | —                          |   | —                        |   | 1,764                                          |   | 1,764     |   |
| Reserve 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                      |   | 4,052                           |   | 89                            |   | 405                                            |   | 4,546     |   |
| Payments 2003                       |   | (422                            | )      | (302                          | )      | —                                         |   | (724      | )      |
| Asset write-offs 2003               |   | —                          |   | —                        |   | (405                                           | )      | (405      | )      |
| Reserve as of December 31, 2003     |   | $                               | 3,764  |                          | $      | 1,584                                          |   | $         | — |   | $ | 5,348 |   |

 

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(1)                Asset valuation adjustments are due tothe Company’s initial discontinuance of the Engines business during 2000 andits subsequent election to retain this business during 2001.

 

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

 
|                                             |   | **Quarter** |    |
|--------------------------------------------------|--------|-------------|---------|
|                                             |   | **First**   |    | **Second** |   | **Third** |   | **Fourth (1)** |   |
| 2003                                             |   |        |    |   |   |   |   |   |   |
| Net sales                                        |   | $           | 95,062  |   | $ | 100,085 |   | $ | 84,335 |   | $ | 87,582 |   |
| Gross profit                                     |   | 30,743      |    | 26,744 |   | 22,081 |   | 20,980 |   |
| Net income                                       |   | 9,853       |    | 6,499 |   | 3,869 |   | 290 |   |
| Earnings per common share                        |   | $           | 0.41    |   | $ | 0.27 |   | $ | 0.16 |   | $ | 0.01 |   |
| Earnings per common share-assuming dilution      |   | 0.40        |    | 0.27 |   | 0.16 |   | 0.01 |   |
|                                             |   |        |    |   |   |   |   |   |   |
| 2002                                             |   |        |    |   |   |   |   |   |   |
| Net sales                                        |   | $           | 101,266 |   | $ | 100,706 |   | $ | 110,577 |   | $ | 103,353 |   |
| Gross profit                                     |   | 34,144      |    | 36,447 |   | 37,533 |   | 35,418 |   |
| Income from continuing operations                |   | 8,558       |    | 9,430 |   | 13,431 |   | 13,729 |   |
| Net income                                       |   | 8,558       |    | 9,430 |   | 13,706 |   | 14,733 |   |
| Earnings per common share (1)                    |   | $           | 0.40    |   | $ | 0.40 |   | $ | 0.55 |   | $ | 0.56 |   |
| Earnings per common share-assuming dilution  (1) |   | 0.38        |    | 0.38 |   | 0.54 |   | 0.56 |   |

 

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(1)                During the fourth quarter of 2003, theCompany recorded $6,570 of costs classified as exit, disposal, certainseverance and other charges.

 

(2)                Earnings per share data is presentedbefore discontinued operations.

 

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**Note22.  Subsequent Event**

 

On January 26,2004, the Company settled the tender offer (see Note 12 -Common and Preferred Stock) and purchased 2,638,500 shares of its common stockat $15.75 per share (the “Tender Price”), based upon a final share count of3,538,544 shares being tendered and not withdrawn.  Due to the over-subscription, the Company purchased 74.56% ofeach stockholder’s total shares tendered at the Tender Price.  In addition, on February 10, 2004, the Companypurchased 1,169,409 shares of its common stock from Aurora at the same price asthe Tender Price.  The total cost of theStock Repurchase was $59,975 plus fees and expenses of approximately $1,200 andwas funded with available cash on hand. On February 10, 2004, immediately following the repurchase of sharesfrom Aurora, the Company had a total of 4,741,646 shares of its common stockheld in Treasury.

 

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

 

None.

 

**ITEM 9A****.****                                            CONTROLSAND PROCEDURES**

 

Ourmanagement, including then Chief Executive Officer Michael T. DuBose andcurrent Chief Financial Officer Barry C. Kohn, have evaluated ourdisclosure controls and procedures as of December 31, 2003.  Under rules promulgated by the SEC, disclosurecontrols and procedures are defined as those “controls or other procedures ofan issuer that are designed to ensure that information required to be disclosedby the issuer in the reports filed or submitted by it under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Commission’s rules and forms.” Based on the evaluation of our disclosure controls and procedures,Messrs. DuBose and Kohn concluded that such controls and procedures wereeffective as of December 31, 2003 in alerting them on a timely basis tomaterial information relating to the Company (including our consolidatedsubsidiaries) required to be included in our periodic filings under theExchange Act.

 

**PARTIII**

 

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

 

**Directors and Executive Officers**

 

The followinglists our directors and executive officers and their respective ages andpositions as of December 31, 2003: 

 
| **Name**                |   | **Age** |   | **Positions**                                                |
|-------------------------|--------|---------|--------|--------------------------------------------------------------|
| Michael T. DuBose       |   | 50      |   | Chairman of the Board, President and Chief Executive Officer |
| Barry C. Kohn           |   | 48      |   | Vice President and Chief Financial Officer                   |
| John J. Machota         |   | 51      |   | Vice President, Human Resources                              |
| Mary T. Ryan            |   | 50      |   | Vice President, Communications and Investor Relations        |
| Joseph Salamunovich     |   | 44      |   | Vice President, General Counsel and Secretary                |
| John R. Colarossi       |   | 51      |   | President, Independent Aftermarket                           |
| William L. Conley, Jr.  |   | 55      |   | President, ATC Logistics                                     |
| Robert Anderson         |   | 83      |   | Director                                                     |
| Richard R. Crowell      |   | 48      |   | Director                                                     |
| Dale F. Frey            |   | 71      |   | Director                                                     |
| Mark C. Hardy           |   | 40      |   | Director                                                     |
| Dr. Michael J. Hartnett |   | 58      |   | Director                                                     |
| Gerald L. Parsky        |   | 61      |   | Director                                                     |
| Richard K. Roeder       |   | 55      |   | Director                                                     |
| J. Richard Stonesifer   |   | 67      |   | Director                                                     |

* *

*Michael T. DuBose*joined us as Chairman of the Board, President and Chief Executive Officer in1998.  Prior to that he served as aconsultant to Aurora Capital Group from 1997. From 1995 to 1997, Mr. DuBose was Chairman and Chief ExecutiveOfficer of Grimes Aerospace Company, an international engineering,manufacturing and distribution company. From 1993 to 1995, he served as Senior Vice President of SAICorporation’s computer equipment manufacturing and systems sector.  Prior to that, Mr. DuBose held variouspositions at General Instrument and General Electric Company.  Mr. DuBose holds an M.S. in Managementfrom the Stanford University Graduate School of Business.

 

*Barry C. Kohn* joinedus as Vice President and Chief Financial Officer in January 1999.  During 1998 he served as a self-employedfinancial consultant.  From 1995 to1997, Mr. Kohn was Senior Vice President and Chief

 

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Financial Officer of GrimesAerospace Company.  Between 1987 and1995, he held increasingly senior positions at Grimes including Treasurer,Controller and Manager of Business Planning. Mr. Kohn holds a Masters of Accounting from The Ohio StateUniversity and is a Certified Public Accountant (inactive).

 

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

 

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

 

*Joseph Salamunovich*joined us as Vice President, General Counsel and Secretary in 1997.  From 1995 to 1997, Mr. Salamunovich wasa partner in the law firm of Gibson, Dunn & Crutcher LLP, where hespecialized in corporate and securities law matters.  Mr. Salamunovich holds a J.D. from Loyola Law School, LosAngeles.

 

*William L. Conley, Jr.*joined us in July 2002 as President of our ATC Logistics business.  Prior to joining us Mr. Conley spentnearly 24 years with FedEx Corporation in a series of increasingly responsiblesales and leadership positions.  Mostrecently, Mr. Conley served as Vice President and General Manager – Europe,Middle East and Africa for FedEx Supply Chain Services (FedEx’s logisticsoperations).  Mr. Conley holds a B.S. in Aeronautics from Parks College ofAeronautical Technology of St. Louis University.

 

*John R. Colarossi*joined us in January 2003 as President of our Independent Aftermarket businessand became an executive officer in March 2003. Prior to joining us, Mr. Colarossi served as Chief OperatingOfficer of Cottman Transmission Systems since 2001.  During 1999 and 2000 he was Executive Vice President of Sales andMarketing for Capsule Communications (formerly US WATS).  Between 1993 and 1999 Mr. Colarossi heldvarious positions with Moran Industries, including President from 1998 to 1999,and from 1984 to 1992 he was employed by AAMCO Transmissions, serving asExecutive Vice President – Sales and Operations between 1989 and 1992.  Mr. Colarossi holds a B.S. in Economicsfrom the University of Pittsburgh.

 

*Robert Anderson*became a director in 1997. Mr. Anderson has been associated with Rockwell International Corporationsince 1968, where he has been Chairman Emeritus since 1990 and servedpreviously as Chairman of the Executive Committee from 1988 to 1990 and asChairman of the Board and Chief Executive Officer from 1979 to 1988.

 

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

 

*Dale F. Frey* becamea director in 1997.  Prior to hisretirement in 1997, Mr. Frey was Chairman of the Board, President andChief Executive Officer of General Electric Investment Corporation, a positionhe had held since 1984, and was a Vice President of General Electric Companysince 1980.  Mr. Frey is a directorof Community Health Systems, Yankee Candle, Ambassadors Group andMcLeod USA.

 

*Mark C. Hardy* becamea director in 1994.  Mr. Hardy is aManaging Director and partner of Aurora Capital Group.  Prior to joining Aurora Capital Group in1993, Mr. Hardy was an Associate and Consultant at Bain &Company, a consulting firm.

 

*Dr. Michael J. Hartnett*became a director in 1994.  Since 1992,Dr. Hartnett has been Chairman, President and Chief Executive Officer ofRoller Bearing Company of America, Inc., a manufacturer of ball and rollerbearings.

 

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Prior to joining Roller Bearingin 1990 as General Manager of its Industrial Tectonics subsidiary,Dr. Hartnett spent 18 years with The Torrington Company, a subsidiaryof Ingersoll-Rand.

 

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

 

*Richard K. Roeder*became a director in 1994. Mr. Roeder is a founding partner and Managing Director of AuroraCapital Group.  Prior to forming AuroraCapital Group in 1991, Mr. Roeder was a partner in the law firm of Paul, Hastings,Janofsky & Walker, where he served as Chairman of the firm’s CorporateLaw Department and a member of its National Management Committee.

 

*J. Richard Stonesifer*became a director in 1997.  Prior to hisretirement in 1996, Mr. Stonesifer was employed with the General ElectricCompany for 37 years, serving most recently as President and ChiefExecutive Officer of GE Appliances, and a Senior Vice President of the GeneralElectric Company, from January 1992 until his retirement.  Mr. Stonesifer is a director of PolarisIndustries, Inc.

 

Effective January 1, 2004, Mr. Donald T. Johnson, Jr. joined us asPresident and Chief Operating Officer, with Mr. DuBose continuing asChairman of the Board and Chief Executive Officer.  On February 19, 2004, Mr. Johnson succeeded Mr. DuBoseas Chief Executive Officer.  Beforejoining us, Mr. Johnson was Global Director, Parts, Supply and Logisticsfor Ford Motor Company since 1999.  Priorto that, Mr. Johnson spent 26 years working for Caterpillar, Inc. and itssubsidiaries, including serving as Vice President of Caterpillar LogisticsServices, Inc. from 1992 until he joined Ford. Mr. Johnson holds a B.A. in Management from the University ofIllinois.

 

Directors serve one-year terms and are elected annually.  Executive officers serve until they resignor replacements are appointed by the Board of Directors.

 

**Audit CommitteeFinancial Expert.**

 

Our Board of Directors has determined that Mr. Dale F. Frey,Chairman of our Audit Committee, is a financial expert for purposes of Item401(h) of Regulation S-K under the Exchange Act.  Mr. Frey is an independent director within the meaning of Item7(d)(3)(iv) of Schedule 14A under the Exchange Act.

 

**Section 16(a)Beneficial Ownership Reporting Compliance.**

 

Section 16(a)of the Exchange Act requires our officers, directors and persons who own morethan 10% of our outstanding common stock to file reports of ownership andchanges in ownership with the Securities and Exchange Commission and to furnishcopies of these reports to us.  Basedsolely on a review of the copies of the forms that we have received, we believethat all such forms required during 2003 were filed on a timely basis, exceptfor Forms 4 to disclose our November 2003 grant of 5,000 shares of restrictedstock to each of Messrs. Colarossi, Machota and Salamunovich and Ms. Ryan,which were inadvertently overlooked until January 2004 when the oversight wasdiscovered and the required forms were filed.

 

**Code of Ethics**

 

We haveadopted a code of ethics that applies to our directors, officers andemployees.  The code of conduct containswritten standards that we believe are reasonably designed to deter wrongdoingand to promote (i) honest and ethical conduct, (ii) full, fair, accurate,timely and understandable disclosure in our reports that we file with or submitto the Securities and Exchange Commission and our other public communications,(iii) compliance with applicable governmental laws, rules and regulations,(iv) prompt internal reporting of violations of the code of conduct to anappropriate person, and (v) accountability for adherence to the code.

 

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The full textof our code of ethics is filed as an exhibit to this Annual Report.  A copy of the code of ethics may be obtainedwithout charge by sending a written request to us at One Oak Hill Center, Suite400, Westmont, IL 60559, attention: Corporate Secretary.  We intend to disclose future amendments tocertain provisions of our code of ethics, or waivers of such provisions grantedto executive officers and directors, on our web site, www.goATC.com, withinfive business days following the date of such amendment or waiver.

 

## ***ITEM 11*****.****                                             ****EXECUTIVECOMPENSATION**

## * *

**Summary CompensationTable**

 

The followingtable sets forth, for the three most recently completed fiscal years, the cashcompensation, for services to us in all capacities, of (i) our ChiefExecutive Officer as of December 31, 2003, (ii) the four persons who as ofDecember 31, 2003 were the other most highly compensated executiveofficers of Aftermarket Technology Corp. and its subsidiaries and(iii) one person who would have been among our four other most highlycompensated executive officers during 2003 if he had continued to serve as anexecutive officer through the end of the year:

 
|                            |   |     |   | **Annual  Compensation** |    | **Long-Term  Compensation  Awards** |    |                                       |   |
|---------------------------------|--------|----------|--------|--------------------------|---------|-------------------------------------|---------|--------------------------------------------|--------|
| **Name and Principal Position** |   | **Year** |   | **Salary**               |    | **Bonus (1)**                       |    | **Restrict-  ed Stock  Award(s)  ($) (2)** |   | **Securities  Under-  lying  Options  (#) (3)** |   | **All Other  Compensation (4)** |   |
| Michael T. DuBose (5)           |   | 2003     |   | $                        | 550,000 |                                | —  |                                       | — |   | — |   | $ | 25,400 |   |
| Chairman, President and         |   | 2002     |   | 550,000                  |    | $                                   | 412,500 |                                       | — |   | 250,000 |   | 1,025,400 | (6) |
| Chief Executive Officer         |   | 2001     |   | 474,615                  |    | 1,211,615                           |    | —                                     |   | 100,000 |   | 22,139 |   |
|                            |   |     |   |                     |    |                                |    |                                       |   |   |   |   |   |
| Barry C. Kohn                   |   | 2003     |   | $                        | 300,000 |                                | —  |                                       | — |   | — |   | $ | 15,600 |   |
| Chief Financial Officer         |   | 2002     |   | 300,000                  |    | $                                   | 150,000 |                                       | — |   | 100,000 |   | 315,600 | (7) |
|                            |   | 2001     |   | 271,731                  |    | 361,042                             |    | —                                     |   | 75,000 |   | 12,548 |   |
|                            |   |     |   |                     |    |                                |    |                                       |   |   |   |   |   |
| William L. Conley, Jr. (8)      |   | 2003     |   | $                        | 235,000 |                                | —  |                                       | — |   | — |   | $ | 23,785 |   |
| President, ATC Logistics        |   | 2002     |   | 109,452                  |    | $                                   | 55,237  |                                       | — |   | 25,000 |   | 29,044 | (9) |
|                            |   | 2001     |   | —                   |    | —                              |    | —                                     |   | — |   | — |   |
|                            |   |     |   |                     |    |                                |    |                                       |   |   |   |   |   |
| Joseph Salamunovich             |   | 2003     |   | $                        | 220,000 |                                | —  |                                       | $      | 61,000 |   | — |   | $ | 12,566 |   |
| Vice President, General Counsel |   | 2002     |   | 220,000                  |    | $                                   | 149,000 |                                       | — |   | 25,000 |   | 11,454 |   |
| and Secretary                   |   | 2001     |   | 201,154                  |    | 177,788                             |    | —                                     |   | 30,000 |   | 12,256 |   |
|                            |   |     |   |                     |    |                                |    |                                       |   |   |   |   |   |
| John R. Colarossi (10)          |   | 2003     |   | $                        | 212,644 |                                | —  |                                       | $      | 61,000 |   | 25,000 |   | $ | 10,912 |   |
| President, Independent After-   |   | 2002     |   | —                   |    | —                              |    | —                                     |   | — |   | — |   |
| market                          |   | 2001     |   | —                   |    | —                              |    | —                                     |   | — |   | — |   |
|                            |   |     |   |                     |    |                                |    |                                       |   |   |   |   |   |
| Paul J. Komaromy (11)           |   | 2003     |   | $                        | 300,000 |                                | —  |                                       | — |   | — |   | $ | 3,127 | (12) |
| Former President, Drivetrain    |   | 2002     |   | 287,500                  |    | —                              |    | —                                     |   | 25,000 |   | 3,922 | (12) |
| Remanufacturing Division        |   | 2001     |   | 270,000                  |    | $                                   | 45,000  |                                       | — |   | 50,000 |   | 3,876 | (12) |

 

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(1)                 Bonuses under our incentivecompensation plan for a particular year are generally paid during the firstquarter of the following year.

 

(2)                 Calculated by multiplying the numberof shares awarded by $12.20 (the closing price of our stock on the NasdaqNational Market System on November 6, 2003, the day the restricted stockwas awarded).  No consideration was paidfor the shares.

 

(3)                 Consists of options to purchase sharesof our common stock, which options were issued pursuant to our 1996 StockIncentive Plan, 1998 Stock Incentive Plan, 2000 Stock Incentive Plan or 2002Stock Incentive Plan.  Pursuant to thestock incentive plans, the Compensation and Human Resources Committee of theBoard of Directors makes recommendations to the Board of Directors regardingthe amount, terms and conditions of each option to be granted.

 

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(4)                 Consists of allowances for automobile,club dues and financial planning except where otherwise noted.

 

(5)                 Mr. DuBose was succeeded by Mr. Johnsonas President on January 1, 2004 and Chief Executive Officer onFebruary 19, 2004.

 

(6)                 Includes a special one-time payment of$1,000,000 made when Mr. DuBose entered into an amended and restated employmentagreement in July 2002.  See “EmploymentAgreements” below.

 

(7)                 Includes a special one-time payment of$300,000 made when Mr. Kohn entered into an employment agreement in July2002.  See “Employment Agreements”below.

 

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

 

(9)                 Also includes relocation benefits.

 

(10)           Mr. Colarossi joined us in January 2003.

 

(11)           Mr. Komaromy ceased to be an executiveofficer in December 2003.

 

(12)           Consists of allowances for club dues andfinancial planning.  Mr. Komaromy wasalso provided with a leased automobile.

 

Effective January1, 2004, Mr. Donald T. Johnson, Jr. joined us as President and Chief OperatingOfficer at an annual salary of $500,000. Set forth below is the annual base salary for our Chief ExecutiveOfficer and each of our four other most highly compensated executive officersas of February 13, 2004:

 

| **Name**               |   | **Annual  Base Salary** |    |
|------------------------|--------|-------------------------|---------|
| Michael T. DuBose      |   | $                       | 550,000 |   |
| Donald T. Johnson, Jr. |   | 500,000                 |    |
| Barry C. Kohn          |   | 300,000                 |    |
| William L. Conley, Jr. |   | 235,000                 |    |
| Joseph Salamunovich    |   | 220,000                 |    |
|                        |        |                         |         |  |

 

**Option Grants Table**

 

Shown below isinformation concerning grants of options by us during 2003 to our ChiefExecutive Officer as of December 31, 2003, each of our four other most highlycompensated executive officers as of December 31, 2003, and one person whowould have been among our four other most highly compensated executive officersduring 2003 if he had continued to serve as an executive officer through theend of the year:

 
|                |   | **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  Fiscal Year** |   | **Exercise  Price  ($/Share)** |   | **Expiration  Date**                                                                                        |    |   |
|                |
| **Name**            |   | **5% ($)**                                                  |   | **10% ($)**                                                    |   |
| Michael T.  DuBose  |   | —                                                      |   | —                                                         |   | —                         |   | —                                                                                                      |    | — |   | 3⁄4 |   |
| Barry C. Kohn       |   | 3⁄4                                                      |   | 3⁄4                                                         |   | 3⁄4                         |   | 3⁄4                                                                                                      |    | 3⁄4 |   | 3⁄4 |   |
| William L. Conley   |   | 3⁄4                                                      |   | 3⁄4                                                         |   | 3⁄4                         |   | 3⁄4                                                                                                      |    | 3⁄4 |   | 3⁄4 |   |
| Joseph Salamunovich |   | 3⁄4                                                      |   | 3⁄4                                                         |   | 3⁄4                         |   | 3⁄4                                                                                                      |    | 3⁄4 |   | 3⁄4 |   |
| John Colarossi      |   | 25,000                                                      | (2)    | 8.3                                                            |   | $                              | 9.63   |                                                                                                        | 2/19/13 |   | $ | 151,406 |   | $ | 383,693 |   |
| Paul J. Komaromy    |   | 3⁄4                                                      |   | 3⁄4                                                         |   | 3⁄4                         |   | 3⁄4                                                                                                      |    | 3⁄4 |   | 3⁄4 |   |
|                     |        |                                                             |        |                                                                |        |                                |        |                                                                                                             |         |  |  |  |  |  |  |  |

 

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(1)                 The potential gains shown are net ofthe option exercise price and do not include the effect of any taxes associatedwith exercise.  The amounts shown arefor the assumed rates of appreciation only, do not constitute projections offuture stock price performance, and may not necessarily be realized.  Actual gains, if

 

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any, on stock option exercises depend on the future performance of thecommon stock, continued employment of the optionee through the term of theoptions, and other factors.

 

(2)                 These options were granted under our2000 Stock Incentive Plan.  One third ofthe options vest and become exercisable on each of February 19, 2004, 2005 and2006.

 

**Aggregated OptionExercises and Year-End Option Value Table**

 

Shown below isinformation relating to (i) the exercise of stock options during 2003 byour Chief Executive Officer as of December 31, 2003, each of our four othermost highly compensated executive officers as of December 31, 2003, and oneperson who would have been among our four other most highly compensatedexecutive officers during 2003 if he had continued to serve as an executiveofficer through the end of the year, and (ii) the value of unexercisedoptions for each of the CEO and such executive officers and former executiveofficer as of December 31, 2003:

 
|                |   | **Shares  Acquired on  Exercise** |            | **Value  Realized** |              | **Number of  Securities  Underlying Unexercised  Options at Fiscal Year-End** |            | **Value of  Unexercised  In-The-Money Options  at Fiscal Year-End (1)** |              |
|---------------------|--------|-----------------------------------|-----------------|---------------------|-------------------|-------------------------------------------------------------------------------|-----------------|-------------------------------------------------------------------------|-------------------|
| **Name**            |   |                              | **Exercisable** |                | **Unexercisable** |                                                                          | **Exercisable** |                                                                    | **Unexercisable** |   |
| Michael T. DuBose   |   | 3⁄4                            |            | 3⁄4              |              | 638,737                                                                       |            | 33,333                                                                  |              | $ | 1,742,037 |   | $ | 288,664 |   |
| Barry C. Kohn       |   | —                            |            | —              |              | 193,121                                                                       |            | 25,000                                                                  |              | 732,927 |   | 216,500 |   |
| William L. Conley   |   | —                            |            | —              |              | 8,334                                                                         |            | 16,666                                                                  |              | 3⁄4 |   | 3⁄4 |   |
| Joseph Salamunovich |   | —                            |            | —              |              | 75,788                                                                        |            | 40,000                                                                  |              | 118,690 |   | 135,369 |   |
| John Colarossi      |   | —                            |            | —              |              | 3⁄4                                                                        |            | 25,000                                                                  |              | 3⁄4 |   | 102,250 |   |
| Paul J. Komaromy    |   | —                            |            | —              |              | 41,666                                                                        |            | 3⁄4                                                                  |              | 184,972 |   | 3⁄4 |   |
|                     |        |                                   |                 |                     |                   |                                                                               |                 |                                                                         |                   |  |  |  |  |  |  |

 

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(1)                  Based on the closing price of ourcommon stock on the Nasdaq National Market System on December 31, 2003,which was $13.72 per share.

 

## ***Employment Agreements***

## * *

In July 2002we entered into an amended and restated employment agreement with Mr. DuBosethat provides that he would serve as our Chairman, President and CEO through January2004, at an annual base salary of $550,000 (subject to adjustment at thediscretion of our Board), and thereafter the agreement will automatically renewon a year-to-year basis unless either we or Mr. DuBose elect not to renew.  After Mr. DuBose ceases to be Presidentand CEO, he will serve for five years in a part-time capacity in such positionas our Board of Directors determines, at an annual salary of $200,000.  It is expected that Mr. DuBose will convertto this part-time status during the second quarter of 2004 but will continue asChairman of the Board of Directors.  Inaddition to his part-time salary, Mr. DuBose will also receive paymentstotaling two times his pre-conversion base salary plus two times his 2004target bonus under our incentive compensation plan plus a pro rata portion ofhis incentive compensation bonus for 2004, paid over the 24-month periodfollowing his conversion to part-time status. If he ceases to be employed by us for any reason other than terminationfor cause or voluntary resignation within five years following his conversionto part-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. The employment agreement contains a provision that Mr. DuBose willnot compete against us during the period ending on the later ofJanuary 28, 2009 or the second anniversary of the date he ceases to beemployed by us, which is considerably longer than the noncompetition provisioncontained in his previous employment agreement.  In connection with this amendedand restated employment agreement, Mr. DuBose received a special one-timepayment of $1,000,000 in 2002.

 

In July 2002we entered into an employment agreement with Mr. Kohn that provides thathe will serve as our CFO through January 2004, at an annual base salary of$300,000 (subject to adjustment at the discretion of our Board), and thereafterthe agreement will automatically renew on a year-to-year basis unless either weor Mr. Kohn elect not to renew. After Mr. Kohn ceases to be CFO, he will serve for five years in apart-time capacity at an annual salary of $60,000.  When Mr. Kohn ceases to be CFO for any reason other thantermination for cause or

 

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voluntary resignation, he willreceive payments totaling 1.5 times his CFO base salary plus 1.5 times histarget bonus under our incentive compensation plan plus a pro rata portion ofhis incentive compensation bonus for the year in which he ceases to beCFO.  If Mr. Kohn ceases to beemployed for any reason other than termination for cause or voluntaryresignation before he transitions to part-time status, then he will also receivea payment of $300,000.  If Mr. Kohntransitions to part-time status but within five years thereafter ceases to beemployed by us for any reason other than termination for cause or voluntaryresignation, he will receive monthly payments of $5,000 for the balance 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 this employmentagreement, Mr. Kohn received a special one-time payment of $300,000 in2002.

 

We haveentered into an employment agreement with each of our other executive officersthat provides for a three-year term and is automatically renewable thereafteron a year-to-year basis.  The agreementincludes a noncompetition provision for a period of 18 months from thetermination of the executive officer’s employment with Aftermarket TechnologyCorp.  If the executive officer isterminated without cause, he will receive severance equal to his base salaryfor a period of 12 months after termination plus a pro rata portion of hisincentive compensation bonus for the year in which he is terminated.  If the termination occurs within18 months after a change of control, the executive will also receive apayment equal to his target bonus under the incentive compensation plan.

 

Any executivewho ceases to be employed under circumstances that entitle him to severancepayments will ordinarily receive those payments over time unless the end ofemployment occurs within 18 months after a change in control, in whichcase the severance will be made in a single payment.

 

Each of ourexecutive employment agreements contains a confidentiality provision and aprovision that prohibits the executive officer, during a specified period afterleaving Aftermarket Technology Corp., from soliciting our employees foremployment by other companies.

 

## ***Stock Incentive Plans***

## * *

Pursuant toour 1996, 1998, 2000 and 2002 stock incentive plans, officers, directors,employees and consultants of Aftermarket Technology Corp. and its affiliatesare eligible to receive options to purchase common stock and other awards.  Awards under the 1996 plan are notrestricted to any specified form or structure and may include, withoutlimitation, sales or bonuses of stock, restricted stock, stock options, reloadstock options, stock purchase warrants, other rights to acquire stock,securities convertible into or redeemable for stock, stock appreciation rights,phantom stock, dividend equivalents, performance units or performanceshares.  Awards under the 1998, 2000 and2002 plans may take the form of stock options, annual incentive bonuses andincentive stock.

 

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

 

The aggregate number of shares of common stock that can be issued underthe stock incentive plans may not exceed 5,350,000.  As of February 13, 2004***,*** there were outstanding options to purchase anaggregate of

 

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2,233,788 shares of commonstock granted to our directors, officers and employees and certain independentcontractors pursuant to the plans, and the number of shares available for issuancepursuant to the plans was 131,300.

 

In most cases,outstanding options are subject to certain vesting provisions and expire on thetenth anniversary of the date of grant. The exercise prices of options outstanding under the stock incentiveplans as of February 13, 2004 are as follows: 

 

| **Number of Option  Shares** |   | **Exercise  Price** |    |
|------------------------------|--------|---------------------|---------|
| 79,300                       |   |                | $       | 4.563 |   |
| 22,070                       |   |                | 5.00    |   |
| 33,121                       |   |                | 5.0312  |   |
| 369,824                      |   |                | 5.06    |   |
| 2,333                        |   |                | 6.875   |   |
| 22,832                       |   |                | 8.50    |   |
| 2,500                        |   |                | 8.9375  |   |
| 23,997                       |   |                | 9.00    |   |
| 5,000                        |   |                | 9.125   |   |
| 255,000                      |   |                | 9.63    |   |
| 200,000                      |   |                | 10.00   |   |
| 16,000                       |   |                | 11.00   |   |
| 137,391                      |   |                | 11.125  |   |
| 113,667                      |   |                | 11.4375 |   |
| 6,000                        |   |                | 11.45   |   |
| 18,833                       |   |                | 11.79   |   |
| 1,000                        |   |                | 11.80   |   |
| 13,000                       |   |                | 12.20   |   |
| 140,000                      |   |                | 14.00   |   |
| 47,000                       |   |                | 14.11   |   |
| 35,088                       |   |                | 14.75   |   |
| 36,332                       |   |                | 18.125  |   |
| 6,000                        |   |                | 18.25   |   |
| 20,000                       |   |                | 19.00   |   |
| 277,500                      |   |                | 22.90   |   |
| 350,000                      |   |                | 30.00   |   |
| 2,233,788                    |   |                |    |   |
|                              |        |                     |         |  |  |

 

For information regarding options granted to our directors andofficers, see Item 12. “Security Ownership of Certain Beneficial Ownersand Management and Related Stockholder Matters.”

 

## ***Director Compensation***

## * *

Prior to 2004we have not paid cash compensation to our directors for service on our Board ofDirectors or its committees.  Beginningin 2004, we will pay our independent directors an annual fee of $50,000.  Each independent director will also receivean annual grant of options to purchase 10,000 shares of our common stock andnew independent directors will receive a one-time grant of options to purchase20,000 shares.  Directors are reimbursedfor their expenses in connection with attending Board and committee meetings.

 

In 2001, 2002and 2003 each of Messrs. Anderson, Frey, Hartnett and Stonesifer receivedoptions to purchase 30,000 shares of our common stock at an exercise price of$5.06 per share, 25,000 shares of common stock at an exercise price of $22.90per share, and 50,000 shares of common stock at an exercise price of $9.63 pershare, respectively.  The optionexercise price in each case was equal to the closing price of a share of ourcommon stock on the Nasdaq National Market System on the date the option wasgranted.  Each option vests and becomesexercisable in one-third increments on the first, second and thirdanniversaries of the date of grant and expires on the tenth anniversary of thedate of grant.

 

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## ***Compensation and Human Resources Committee Interlocks and InsiderParticipation in Compensation Decisions***

## * *

The members ofour Compensation and Human Resources Committee are Messrs. Crowell, Parsky andStonesifer.  Messrs. Crowell andParsky are (i) two of the three stockholders and directors of AuroraAdvisors, Inc., the general partner of Aurora Capital Partners, which is thegeneral partner of Aurora Equity Partners, L.P., our largest stockholder, and(ii) two of the three stockholders and directors of Aurora OverseasAdvisors, Ltd., the general partner of Aurora Overseas Capital Partners L.P.,the general partner of Aurora Overseas Equity Partners I, L.P., another ofour significant stockholders.  SeeItem 12. “Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters.”  Inaddition, Messrs. Crowell and Parsky are the senior members of AuroraCapital Group (of which Aurora Equity Partners and Aurora Overseas EquityPartners are a part), which provides investment banking and management servicesto us pursuant to a management services agreement.  See Item 13. “Certain Relationships and RelatedTransactions.”

 

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**ITEM12****.****                                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

## * *

###### **Security Ownership**

######  

The followingtable sets forth the beneficial ownership of our common stock (the only classof our issued and outstanding voting securities), as of February 13, 2004by each of our directors, our then Chief Executive Officer, each of our fourother most highly compensated executive officers as of December 31, 2003,one person who would have been among our four other most highly compensatedexecutive officers during 2003 if he had continued to serve as an executiveofficer through the end of the year, our directors and executive officers as agroup, and each person who at February 13, 2004 was known to us tobeneficially own more than 5% of our outstanding common stock.

 
|                                                                                                                                         |   | **Number of  Shares (1)** |   | **Voting  Percentage** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|------------------------|--------|
| Aurora Equity Partners L.P. (other  beneficial owners: Richard R.   Crowell, Gerald L. Parsky and Richard K. Roeder) (2)(3)             |   | 7,340,478                 |   | 35.7                   |   |
| Aurora Overseas Equity Partners I, L.P.  (other beneficial owners:  Richard R.  Crowell, Gerald L. Parsky and Richard K. Roeder) (4)(5) |   | 2,794,217                 |   | 13.6                   |   |
| Wellington Management Company LLP (6)                                                                                                        |   | 1,511,939                 |   | 7.4                    |   |
| General Electric Pension Trust (7)                                                                                                           |   | 1,397,165                 |   | 6.8                    |   |
| Kennedy Capital Management, Inc. (8)                                                                                                         |   | 1,279,754                 |   | 6.2                    |   |
| Barclays Global Investors, NA (9)                                                                                                            |   | 1,206,897                 |   | 5.9                    |   |
| Michael T. DuBose (10)                                                                                                                       |   | 638,737                   |   | 3.0                    |   |
| Barry C. Kohn (11)                                                                                                                           |   | 199,121                   |   | *                      |   |
| William L. Conley, Jr. (12)                                                                                                                  |   | 8,334                     |   | *                      |   |
| Joseph Salamunovich (13)                                                                                                                     |   | 80,788                    |   | *                      |   |
| John R. Colarossi (14)                                                                                                                       |   | 13,334                    |   | *                      |   |
| Paul J. Komaromy                                                                                                                             |   | 0                         |   | *                      |   |
| Robert Anderson (15)                                                                                                                         |   | 43,335                    |   | *                      |   |
| Richard R. Crowell (2)(3)(4)(5)(16)                                                                                                          |   | 8,204,156                 |   | 39.9                   |   |
| Dale F. Frey (17)                                                                                                                            |   | 43,335                    |   | *                      |   |
| Mark C. Hardy                                                                                                                                |   | 0                         |   | *                      |   |
| Dr. Michael J. Hartnett (18)                                                                                                                 |   | 45,001                    |   | *                      |   |
| Gerald L. Parsky (2)(3)(4)(5)(16)                                                                                                            |   | 8,204,156                 |   | 39.9                   |   |
| Richard K. Roeder (2)(3)(4)(5)(16)                                                                                                           |   | 8,204,156                 |   | 39.9                   |   |
| J. Richard Stonesifer (19)                                                                                                                   |   | 69,884                    |   | *                      |   |
| All directors and officers as a group (16  persons) (20)                                                                                     |   | 9,526,610                 |   | 43.8                   |   |

 

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*                   Less than 1%.

 

(1)                        The shares of common stockunderlying options granted under our stock incentive plans that are exercisableas of February 13, 2004 or that will become exercisable within 60 daysthereafter (such options being referred to as “exercisable”) are deemed to beoutstanding for the purpose of calculating the beneficial ownership of theholder of such options, but are not deemed to be outstanding for the purpose ofcomputing the beneficial ownership of any other person.

 

(2)                        Aurora Equity Partners is aDelaware limited partnership the general partner of which is Aurora CapitalPartners, a Delaware limited partnership whose general partner is AuroraAdvisors, Inc.  Messrs. Crowell,Parsky and Roeder are the sole stockholders and directors of Aurora Advisors,are limited partners of Aurora Capital Partners and may be deemed tobeneficially share ownership of the common stock beneficially owned by AuroraEquity Partners and may be deemed to be the organizers of AftermarketTechnology Corp. under regulations promulgated under the Securities Act of1933.  Aurora Equity Partners’ addressis 10877 Wilshire Boulevard, Suite 2100, Los Angeles, CA 90024.

 

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(3)                        Consists of (i) 5,409,939shares owned by Aurora Equity Partners, (ii) 1,397,165 shares owned by theGeneral Electric Pension Trust (see Note 7 below) and (iii) 533,374shares that are subject to an irrevocable proxy granted to the Aurorapartnerships by some of our original stockholders, including Messrs. Crowell,Parsky and Roeder (the “Aurora Proxy”). The Aurora Proxy terminates upon the earlier of the transfer of suchshares or July 31, 2004.

 

(4)                        Aurora Overseas Equity Partnersis a Cayman Islands limited partnership the general partner of which is AuroraOverseas Capital Partners, L.P., a Cayman Islands limited partnership, whosegeneral partner is Aurora Overseas Advisors, Ltd.  Messrs. Crowell, Parsky and Roeder are the sole stockholdersand directors of Aurora Overseas Advisor, are limited partners of Aurora OverseasCapital Partners and may be deemed to beneficially own the shares of the commonstock beneficially owned by Aurora Overseas Equity Partners.  Aurora Overseas Equity Partners’ address isWest Wind Building, P.O. Box 1111, Georgetown, Grand Cayman, Cayman Islands,B.W.I.

 

(5)                        Consists of (i) 863,678shares owned by Aurora Overseas Equity Partners, (ii) 1,397,165 sharesowned by the General Electric Pension Trust (see Note 7 below) and(iii) 533,374 shares that are subject to the Aurora Proxy.

 

(6)                        Wellington Management’s addressis 75 State Street, Boston, Massachusetts 02109.

 

(7)                        With limited exceptions, theGeneral Electric Pension Trust has agreed to vote these shares in the samemanner as the Aurora partnerships vote their respective shares of commonstock.  This provision terminates uponthe earlier of the transfer of such shares or July 31, 2004.  The GE Pension Trust’s address is3003 Summer Street, Stamford, CT 06905.

 

(8)                        Kennedy Capital’s address is10829 Olive Blvd., St. Louis, Missouri 63141.

 

(9)                        Barclays Global Investors’address is 45 Fremont Street, San Francisco, California 94105.

 

(10)                  Consists of shares subject toexercisable options.  Excludes 33,333shares subject to options that are not exercisable.

 

(11)                  Includes 193,121 shares subject toexercisable options.  Excludes 25,000 sharessubject to options that are not exercisable.

 

(12)                  Consists of shares subject toexercisable options.  Excludes 16,666shares subject to options that are not exercisable.

 

(13)                  Consists of 5,000 shares ofrestricted stock and 75,788 shares subject to exercisable options.  Excludes 40,000 shares subject to optionsthat are not exercisable.

 

(14)                  Consists of 5,000 shares ofrestricted stock and 8,334 shares subject to exercisable options.  Excludes 16,666 shares subject to optionsthat are not exercisable.

 

(15)                  Consists of shares subject toexercisable options.  Excludes 59,999shares subject to options that are not exercisable.

 

(16)                  The shares actually owned by thisperson (as distinguished from the shares that this person is deemed tobeneficially own) are subject to the Aurora Proxy.

 

(17)                  Consists of shares subject toexercisable options.  Excludes 59,999shares subject to options that are not exercisable.

 

(18)                  Consists of shares subject toexercisable options.  Excludes 59,999shares subject to options that are not exercisable.

 

(19)                  Includes 43,335 shares subject toexercisable options.  Excludes 59,999shares subject to options that are not exercisable.

 

(20)                  Includes 95,000 shares of restrictedstock and 1,190,987 shares subject to exercisable options.  Excludes 583,327 shares subject to optionsthat are not exercisable.

 

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

 

**Securities Authorized for Issuance UnderEquity Compensation Plans**

 

The followingtable sets forth certain information regarding our equity compensation plans asof December 31, 2003:

 
| ***Plan category***                                           |   | ***Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights*** |     | ***Weighted-average  exercise price of  outstanding options,  warrants and rights*** |     | ***Number of securities  remaining available for  future issuances under  equity compensation plans  (excluding securities  reflected in column (a))*** |      |
|---------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|----------|--------------------------------------------------------------------------------------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
|                                                          |   | ***(a)***                                                                                             |     | ***(b)***                                                                            |     | ***(c)***                                                                                                                                               |      |
|                                                          |   |                                                                                                  |     |                                                                                 |     |                                                                                                                                                    |      |
| *Equity  compensation plans approved by security holders*     |   | *2,182,454*                                                                                           | * * | *$*                                                                                  | *14.34*  | * *                                                                                                                                                | *300,799* | * * |
| *Equity  compensation plans not approved by security holders* |   | *—*                                                                                              | * * | *—*                                                                             | * * | *—*                                                                                                                                                | * *  |
| *Total*                                                       |   | *2,182,454*                                                                                           | * * |                                                                                 | * * | *300,799*                                                                                                                                               | * *  |
|                                                               |        |                                                                                                       |          |                                                                                      |          |                                                                                                                                                         |           |  |

## * *

## ***ITEM 13*****.****                                 ****CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

## * *

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

 

**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 three of our directors, Messrs. Crowell, Parsky and Roeder.

 

We pay to Aurora ManagementPartners, which is a part of Aurora Capital Group, a base annual management feefor advisory and consulting services pursuant to a written management servicesagreement.  Aurora Management Partnersis also entitled to reimbursements from us for all of its reasonableout-of-pocket costs and expenses incurred in connection with the performance ofits obligations under the management services agreement.  The base annual management fee is subject toincrease, at the discretion of the disinterested members of our board ofdirectors, by up to an aggregate of $250,000 in the event that we consummateone or more significant corporate transactions.  The base annual management fee has not been increased as a resultof any of our acquisitions.  The baseannual management fee is also subject to increase for specified cost of livingincreases, although no such adjustment has been made in the last 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 2003, Aurora Management Partners did not receive this additional managementfee in 2003.  The base annual managementfee payable to Aurora Management Partners will be reduced as the collectivebeneficial ownership of our common stock by the Aurora partnerships declinesbelow 30%.  If the Aurora partnerships’collective beneficial ownership declines below 20%, the management servicesagreement will terminate.  During 2003the management fee was $330,000.

 

If we consummate any significantacquisitions, Aurora Management Partners will be entitled to receive a fee fromus for investment banking services in connection with the acquisition.  The fee is equal to 2.0% of the first$75.0 million of the acquisition consideration (including debt assumed andcurrent assets retained) and 1.0% of acquisition consideration (including debtassumed and current assets retained) in excess of $75.0 million.  Since our

 

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formation, we have paidapproximately $5.3 million of fees to Aurora Management Partners forinvestment banking services in connection with our acquisitions, including$28,000 in fees during 2003.  InJanuary 2001, we paid Aurora Management Partners a $750,000 fee forservices in connection with the October 2000 sale of the DistributionGroup.  We are not obligated to make anypayment to Aurora Management Partners at any time that we are in default underour credit facility.

 

In December 2003, we enteredinto an agreement with Aurora Equity Partners L.P. and Aurora OverseasEquity Partners I, L.P., limited partnerships controlled by Aurora CapitalPartners, to purchase up to a total of 1,169,409 shares of our outstandingcommon stock at a price equal to our tender offer price.  On February 10, 2004, we completed thepurchase of these shares at the final tender offer price of $15.75 per shareand paid to these partnerships a total of $18.4 million.  See Item 7. "Management's Discussionand Analysis of Financial Condition and Results of Operations – Liquidity andCapital Resources."

 

**Indemnification Agreements**

 

We have entered intoseparate but identical indemnification agreements with each of our directorsand executive officers.  Theseagreements provide for, among other things, indemnification to the fullestextent permitted by law and advancement of expenses.

 

**Registration Rights**

 

The holders of common stockoutstanding before our initial public offering in December 1996 have“demand” and “piggyback” registration rights pursuant to a stockholdersagreement.  In addition, GeneralElectric Pension Trust has “demand” and “piggyback” registration rights withrespect to a portion of the shares of common stock it owns.

 

Pursuant to theseregistration rights, in June 2002, we registered 4,500,000 shares of our commonstock for resale by the Aurora partnerships, General Electric Pension Trust,the members of our Board of Directors, our Chief Financial Officer and certainother stockholders, and paid $256,000 of SEC filing fees, legal fees and other expensesrelating to the secondary offering.

 

## ***ITEM 14*****.****                                             ****PRINCIPALACCOUNTANT FEES AND SERVICES**

## * *

Our principal outsideaccountant is Ernst & Young LLP. Set forth below are the fees billed to us by Ernst & Young foreach of the last two years for the indicated services:

 
|                   |   | **2003** |    | **2002** |   |
|------------------------|--------|----------|---------|----------|--------|
| Audit Fees             |   | $        | 425,160 |     | $      | 369,354 |   |
| Audit-Related Fees (1) |   | 11,850   |    | 15,700   |   |
| Tax Fees (2)           |   | 143,205  |    | 172,437  |   |
| All Other Fees (3)     |   | 21,120   |    | 386,635  |   |
| Total Fees             |   | $        | 601,335 |     | $      | 944,126 |   |

 

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(1)            For 2003 consists of fees for assistancewith responding to an SEC comment letter regarding the 2002 10-K.  For 2002 consists of services in connectionwith the filing of two S-3 registration statements.

 

(2)            For 2003 consists of fees for assistancewith (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).  For2002 consists primarily of fees for assistance with (i) state, federal andforeign tax returns ($119,100) and (ii) state, federal and sales taxaudits and refunds ($53,337).

 

(3)            For 2003 consists of services relating tocompliance with the Sarbanes-Oxley Act of 2002 ($4,850) and diligence on apotential acquisition ($16,270).  For2002 consists primarily of services in connection with the filing of two S-3registration statements ($242,850) and diligence on a potential acquisition($143,785).

 

The AuditCommittee 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 engagement orservice 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 of theengagement or service on the auditor’s independence.  In addition, the Chairman of the Audit Committee is authorized topre-approve any non-audit service

 

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between regularly scheduled meetings of the Audit Committee providedthat the fees for such service do not exceed $50,000 and the Chairman’sapprovals are reported to the full Audit Committee at the next Audit Committeemeeting.  The Audit Committee or theAudit Committee Chairman pre-approved all non-audit engagements with, andservices provided by, the Company’s auditors during 2003.

 

**PARTIV**

 

**ITEM15****.****                                              EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

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

 

1.                                       FinancialStatements Index

 

See Index to Financial Statements and Supplemental Data on page 40.

 

2.                                       FinancialStatement Schedules Index

 

II – Valuation and Qualifying Accounts

 

All other schedules for which provision is made in the applicableaccounting regulation of the Securities and Exchange Commission are notrequired under the related instructions or are inapplicable and therefore havebeen omitted.

 

3.                                       ExhibitIndex

 

The following exhibits are filed as part of this Annual Report on Form10-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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1                  |   | Stockholders Agreement, dated as of August 2, 1994, among  Holdings, and certain of its stockholders, optionholders and warrant holders  (the Stockholders Agreement) (previously filed as Exhibit 10.1 to the  Company’s Registration Statement on Form S-4 filed on November 30, 1994,  Commission File No. 33-86838, and incorporated herein by this reference)                                                                                                                                                           |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2                  |   | Amendment No. 4 to Stockholders Agreement, dated as of  December 16, 1996 (previously filed as Exhibit 10.5 to the Company’s  Annual Report on Form 10-K for the year ended December 31, 1996 and  incorporated herein by this reference)                                                                                                                                                                                                                                                                                         |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3                  |   | Amended and Restated Tax Sharing Agreement, dated as of  December 20, 1996, among Aftermarket Technology Holdings Corp., Aaron’s  Automotive Products, Inc., ATC Components, Inc., CRS Holdings  Corp., Diverco Acquisition Corp., H.T.P., Inc., Mamco  Converters, Inc., R.P.M. Merit, Inc. and Tranzparts Acquisition  Corp. (previously filed as Exhibit 10.8 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 1996 and incorporated  herein by this reference) |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4                  |   | Amended and Restated Management Services Agreement, dated as of  November 18, 1996, by and among Aftermarket Technology Corp., the  subsidiaries of Aftermarket Technology Corp., and Aurora Capital Partners  L.P. (previously filed as Exhibit 10.4 to Amendment No. 4 to the Company’s  Registration Statement on Form S-1 filed on October 25, 1996, Commission  File No. 333-5597, and incorporated herein by this reference)                                                                                                |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5                  |   | Stock Subscription Agreement, dated as of November 18, 1996,  between Aftermarket Technology Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

80

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|   |   | 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 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   |   | Lease Agreement dated as July 31, 1997 between C.W. Smith and  ATS Remanufacturing, Inc. (previously filed as Exhibit 10.42 to the  Company’s Registration Statement on Form S-1 (File No. 333-35543) filed  on September 12, 1997 and incorporated herein by this reference)                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.9   |   | 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)                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | 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)                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | 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)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | 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)                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | 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)                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.14  |   | 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)                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.15  |   | 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)                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.16  |   | 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)                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.17 |   | Executive Employment Agreement, dated as of January 1, 2004,  between Aftermarket Technology Corp. and Donald T. Johnson, Jr.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.18  |   | Form of Executive Employment Agreement between Aftermarket Technology  Corp. and certain of its 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)                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.19  |   | 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)                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.20  |   | 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)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.21  |   | Asset Purchase Agreement dated as of July 31, 1997 among  Automatic Transmission Shops Inc., C.W. Smith, ATS Remanufacturing, Inc.  and Aftermarket Technology Corp. (previously filed as Exhibit 10.41 to the  Company’s Registration Statement on Form S-1 (File No. 333-35543) filed  on September 12, 1997 and incorporated herein by this reference)                         |

 

81

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| 10.22        |   | 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)                                                                                                                                                  |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.23        |   | 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)                                                                                                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.24        |   | 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)                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.25        |   | 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)                                                                                                                         |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.26        |   | 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)                                                                              |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.27        |   | 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)                                                             |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.28        |   | 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)                                                                |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.29        |   | 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) |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.30        |   | 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)                             |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *10.31       |   | 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                                                                                                                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *10.32† |   | Remanufacturing supply agreement between DaimlerChrysler Corporation  and Aaron’s Automotive Products, Inc.                                                                                                                                                                                                                                                                                                                                      |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.33        |   | 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                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *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                                                                                                                                                                                                                                                                                                                                                                                                 |

 

82

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*                 Filed herewith.

 

†                  Certain portions of this Exhibit havebeen omitted for which confidential treatment has been requested and filedseperately with the Securities and Exchange Commission.

 

(b)                                 Reportson Form 8-K

 

During the quarter ended December 31, 2003 the Company filed thefollowing reports on Form 8-K:

 

(1)                              Report dated October 28,2003 reporting certain information under Item 12 and filing as an exhibit apress release containing such information.

 

(2)                              Report dated December 2,2003 reporting certain information under Item 9 and filing as an exhibit apress release containing such information.

 

(c)                                  Referto (a) 3 above.

 

(d)                                 Referto (a) 2 above.

 

83

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**SIGNATURES**

 

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

 
|   | AFTERMARKET TECHNOLOGY CORP.                                  |
|--------|---------------------------------------------------------------|
|   |                                                          |
|   | By:                                                           | /s/ Donald T. Johnson, Jr. |
|   | Donald T. Johnson, Jr.  President and Chief Executive Officer |
|   |                                                          |
|   | February 26, 2004                                             |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this Annual Report on Form 10-K has been signed by the following persons onbehalf of the registrant and in the capacities and on the dates indicated. 

 

 
| February 26, 2004 | /s/ Donald T. Johnson, Jr.                                                                   |
|-------------------|----------------------------------------------------------------------------------------------|
|              | Donald T. Johnson, Jr.  President and Chief Executive Officer  (principal executive officer) |
|              |                                                                                         |
|              |                                                                                         |
| February 26, 2004 | /s/ Barry C. Kohn                                                                            |
|              | Barry C. Kohn  Chief Financial Officer  (principal financial and accounting officer)         |
|              |                                                                                         |
|              |                                                                                         |
| February 26, 2004 | /s/ Michael T. DuBose                                                                        |
|              | Michael T. DuBose  Chairman of the Board                                                     |
|              |                                                                                         |
|              |                                                                                         |
| February 26, 2004 | /s/ Robert Anderson                                                                          |
|              | Robert Anderson  Director                                                                    |
|              |                                                                                         |
|              |                                                                                         |
| February 26, 2004 | /s/ Richard R. Crowell                                                                       |
|              | Richard R. Crowell  Director                                                                 |
|              |                                                                                         |
|              |                                                                                         |
| February 26, 2004 | /s/ Dale F. Frey                                                                             |
|              | Dale F. Frey  Director                                                                       |
|              |                                                                                         |
|              |                                                                                         |
| February 26, 2004 | /s/ Mark C. Hardy                                                                            |
|              | Mark C. Hardy  Director                                                                      |

 

84

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| February 26, 2004 | /s/ Michael J. Hartnett         |
|-------------------|---------------------------------|
|              | Michael J. Hartnett  Director   |
|              |                            |
|              |                            |
| February 26, 2004 | /s/ Gerald L. Parsky            |
|              | Gerald L. Parsky  Director      |
|              |                            |
|              |                            |
| February 26, 2004 | /s/ Richard K. Roeder           |
|              | Richard K. Roeder  Director     |
|              |                            |
|              |                            |
| February 26, 2004 | /s/ J. Richard Stonesifer       |
|              | J. Richard Stonesifer  Director |

 

85

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**Aftermarket Technology Corp.**

 

**Schedule II - Valuation and QualifyingAccounts**

**(InThousands)**

 
|                                                  |   |                                 |   | **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, 2001:                         |   |                                 |   |                                         |   |                                  |   |           |   |   |   |
| Reserve and allowances deducted from asset  accounts: |   |                                 |   |                                         |   |                                  |   |           |   |   |   |
| Allowance for uncollectible accounts                  |   | $                                    | 1,624  |                                         | $      | (44                                   | )      | $              | — |   | $ | 373 | (1) | $ | 1,207 |   |
| Reserve for inventory obsolescence                    |   | 6,476                                |   | 915                                          |   | 1,764                                 | (2)    | 4,134          |   | 5,021 |   |
| Valuation allowance on deferred tax assets            |   | 9,187                                |   | (95                                          | )      | 3⁄4                                |   | 3⁄4         |   | 9,092 |   |
| Year ended December 31, 2002:                         |   |                                 |   |                                         |   |                                  |   |           |   |   |   |
| Reserve and allowances deducted from asset  accounts: |   |                                 |   |                                         |   |                                  |   |           |   |   |   |
| Allowance for uncollectible accounts                  |   | 1,207                                |   | 338                                          |   | 3⁄4                                |   | 225            | (1)    | 1,320 |   |
| Reserve for inventory obsolescence                    |   | 5,021                                |   | 424                                          |   | 237                                   | (2)    | 713            |   | 4,969 |   |
| Valuation allowance on deferred tax assets            |   | 9,092                                |   | 101                                          |   | 3⁄4                                |   | 3⁄4         |   | 9,193 |   |
| Year ended December 31, 2003:                         |   |                                 |   |                                         |   |                                  |   |           |   |   |   |
| Reserve and allowances deducted from asset  accounts: |   |                                 |   |                                         |   |                                  |   |           |   |   |   |
| Allowance for uncollectible accounts                  |   | 1,320                                |   | (9                                           | )      | 234                                   | (3)    | 10             | (1)    | 1,535 |   |
| Reserve for inventory obsolescence                    |   | 4,969                                |   | 905                                          |   | 165                                   | (3)    | 441            |   | 5,598 |   |
| Valuation allowance on deferred tax assets            |   | 9,193                                |   | 893                                          |   | 3⁄4                                |   | 3⁄4         |   | 10,086 |   |
|                                                       |        |                                      |        |                                              |        |                                       |        |                |        |  |  |  |  |  |  |  |

 

----

(1)                                  Accounts written off,net of recoveries.

 

(2)                                  Asset valuationadjustments are due to the Company’s initial discontinuance of the independentaftermarket engines business during 2000 and its subsequent election to retainthis business during 2001.

 

(3)                                  Balances addedthrough acquisitions.

 

S-1

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