1. Foreign exchange – With the acquisition of Tec-Mar, over 50% of the Company’s operations are denominated in US dollars. As such, the rise of the Canadian dollar this year resulted in a lower profit contribution from the Company’s U.S. operations when expressed in Canadian currency. The impact on operating income year to date is approximately $0.7 million.
   
2. Power outage - The power outage that impacted the north-east of Canada and the United States shut down plants resulting in up to 3 days lost production.
   
3. Saturn L production – Production volume has decreased 49% from 2002. This is the single largest contributor to the lower than expected operating income. Operating income is approximately $1.9 million lower in 2003 than 2002 as a result of the volume shortfall.
   
4. Lansing facility ramp-up costs – The ramp-up costs for the second shift of the Lansing facility were higher than expected. This facility provides services to the Lansing Grand River car assembly plant which produces the Cadillac CTS and SRX vehicles. The impact on operating income year to date is approximately $0.5 million.

Foreign Exchange
The foreign exchange translation loss of approximately $0.4 million arose from the strong surge in the Canadian dollar in the current year. The translation loss amounts to an adjustment in the carrying value of the Delaware operations assets and liabilities and did not result in a cash loss.

Other Income
Other income declined by 3.4% of sales, reflecting lower securities gains. Also included in other income in 2002 was a gain relating to the disposition of the Company’s previous head office. Automodular no longer maintains an investment portfolio, and does not expect material amounts of other income in the remainder of 2003 or in future years.

Depreciation and amortization
Depreciation and amortization declined from 6.1% of sales in the first nine months of 2002 to 4.8% of sales in the same period of 2003. On a dollar basis, depreciation and amortization increased from $2.5 million to $3.8 million due to the acquisition of Tec-Mar. Included in amortization is also the amortization of the capitalized value of the production contracts that Tec-Mar had in place when acquired. This intangible asset was capitalized on acquisition and is being amortized over the weighted average contract life of four years. The total amount expensed in the current year relating to this intangible asset is $0.7 million.

Interest expense
Automodular borrowed approximately $17.5 million in early 2003 to fund the Tec-Mar acquisition, and expects commensurately higher interest charges in the rest of 2003.

Income taxes
The effective tax rate has increased in 2003 due to the fact that there was $1.1 million in non-taxable securities gains in 2002. Automodular expects the remaining 2003 income tax rates to be slightly lower than 2002 on operating income, but anticipates no material amount of non-taxable gains.


LIQUIDITY AND CAPITAL RESOURCES
Cash provided in operating activities of $1.6 million for the current year to date compared to cash provided by operating activities of $7.5 million in 2002, largely as a result of increased accounts receivable balance. The Tec-Mar acquisition consumed approximately $37 million cash, funded by the usage of available cash and a $17.5 million term loan.

As a result of the weaker than expected operating income year to date, the Company contravened one of its bank covenants. All interest and principal payments have been made as required under the terms of the credit agreements. Subsequent to the quarter end, the Company obtained a waiver of the covenant breach and negotiated revised banking arrangements. The Corporation has a $5 million operating line available to it and believes it has sufficient liquidity to meet all plans and programs contemplated for the remainder of 2003.

Capital Expenditures
Year to date, the Company expended $2.8 million on capital and other assets, compared to $3.9 million in the same period of 2002.

Dividends
Dividends paid in the current year were $4.0 million, consistent with the amount paid in the prior year. The Directors of Automodular have decided to omit the fourth quarter dividend.

Equity
Shareholders' equity decreased from $38.5 million to $35.9 million due to the translation adjustment relating to the net investment in Tec-Mar combined with the increase in the deficit.

Outlook
The automotive parts industry will continue to face lower volumes in the remainder of 2003. The Tec-Mar acquisition broadens and strengthens Automodular as it will more than double our annual sales and will make a meaningful contribution to net income and cash flow despite the industry slow down. The Company’s balance sheet reflects management’s judgment on the valuation of the assets and management believes the Company is poised for further growth through expansion of its automotive parts sequencing operations both internally and through selective acquisitions.