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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ________________
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COMMISSION FILE NUMBER 333-49011
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[ADVANCED ACCESSORY SYSTEMS LOGO]
ADVANCED ACCESSORY SYSTEMS, LLC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3848156
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12900 HALL ROAD, SUITE 200, STERLING HEIGHTS, MI 48313
(Address of principal executive offices) (Zip Code)
(586) 997-2900
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such a period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No
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ADVANCED ACCESSORY SYSTEMS, LLC
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 1
June 30, 2002 and December 31, 2001
Consolidated Condensed Statements of 2
Operations for the Three and Six Months
Ended June 30, 2002 and 2001
Consolidated Condensed Statements of 3
Cash Flows for the Six Months
Ended June 30, 2002 and 2001
Consolidated Condensed Statement of Changes 4
in Members' Equity for the Six Months
Ended June 30, 2002
Notes to Consolidated Condensed Financial 5
Statements
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 19
Market Risk
Part II. Other Information and Signature
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of 19
Security-Holders
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADVANCED ACCESSORY SYSTEMS, LLC
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
June 30, December 31,
2002 2001
(Unaudited)
ASSETS
Current assets
Cash $ 2,422 $ 2,139
Accounts receivable, less reserves
of $1,924 and $1,788, respectively 66,325 44,790
Inventories
Raw materials 16,527 14,689
Work-in-process 10,635 10,323
Finished goods 14,737 17,248
Reserves (3,134) (2,828)
------------- --------------
Total inventories 38,765 39,432
Deferred income taxes 120 1,643
Other current assets 5,651 4,133
------------- --------------
Total current assets 113,283 92,137
Property and equipment, net 56,553 54,404
Goodwill, net 46,071 73,394
Other intangible assets, net 4,192 4,685
Deferred income taxes 2,027 1,932
Other noncurrent assets 1,518 1,738
------------- --------------
$ 223,644 $ 228,290
============= ==============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 8,328 $ 11,023
Accounts payable 38,391 29,051
Accrued liabilities 22,111 23,553
Deferred income taxes 761 --
Mandatorily redeemable warrants 5,130 5,130
------------- --------------
Total current liabilities 74,721 68,757
------------- --------------
Noncurrent liabilities
Deferred income taxes 1,182 828
Other noncurrent liabilities 5,089 4,755
Long-term debt, less current maturities 148,112 145,626
------------- --------------
Total noncurrent liabilities 154,383 151,209
------------- --------------
Members' equity
Class A Units 7,348 7,348
Class A-1 Units 4,117 4,117
Other comprehensive loss (520) (181)
Accumulated deficit (16,405) (2,960)
------------- --------------
(5,460) 8,324
------------- --------------
$ 223,644 $ 228,290
============= ==============
The accompanying notes are an integral part of the
consolidated condensed financial statements.
1
ADVANCED ACCESSORY SYSTEMS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Net sales $ 94,321 $ 88,911 $ 174,191 $ 168,093
Cost of sales 68,907 66,380 129,861 126,330
------------- ------------- ------------- --------------
Gross profit 25,414 22,531 44,330 41,763
Selling, administrative and
product development expenses 11,691 11,345 22,541 23,076
Amortization of intangible assets 6 748 13 1,498
------------- ------------- ------------- --------------
Operating income 13,717 10,438 21,776 17,189
------------- ------------- ------------- --------------
Other income (expense)
Interest expense (3,900) (4,510) (7,857) (9,041)
Foreign currency gain (loss), net 8,158 (1,223) 6,914 (6,043)
Other expense (157) (17) (116) (61)
------------- ------------- ------------- --------------
Income before cumulative effect of
Accounting change and income taxes 17,818 4,688 20,717 2,044
Cumulative effect of accounting change
for goodwill impairment -- -- (29,207) --
------------- ------------- ------------- --------------
Income (loss) before taxes 17,818 4,688 (8,490) 2,044
Provision (benefit) for income taxes 3,303 192 2,935 (927)
------------- ------------- ------------- --------------
Net income (loss) $ 14,515 $ 4,496 $ (11,425) $ 2,971
============= ============= ============= ==============
The accompanying notes are an integral part of the
consolidated condensed financial statements.
2
ADVANCED ACCESSORY SYSTEMS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
2002 2001
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (11,425) $ 2,971
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 5,922 6,938
Cumulative effect of accounting change
for goodwill impairment 29,130 --
Deferred taxes 2,390 (1,593)
Foreign currency (gain) loss (6,565) 5,957
Loss on disposal of assets 139 37
Changes in assets and liabilities, net (12,135) (5,008)
------------- ---------------
Net cash provided by operating activities 7,456 9,302
------------- --------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Acquisition of property and equipment (5,673) (2,317)
------------- --------------
Net cash used for investing activities (5,673) (2,317)
------------- --------------
CASH FLOWS USED FOR FINANCING
ACTIVITIES:
Net increase (decrease) in revolving loan 6,491 (3,343)
Collection of membership notes receivable -- 59
Repayment of debt (6,805) (5,192)
Distributions to members (2,019) (2)
------------- --------------
Net cash used for financing activities (2,333) (8,478)
------------- --------------
Effect of exchange rate changes 833 802
------------- --------------
Net increase (decrease) in cash 283 (691)
Cash at beginning of period 2,139 3,315
------------- --------------
Cash at end of period $ 2,422 $ 2,624
============= ==============
The accompanying notes are an integral part of the
consolidated condensed financial statements.
3
ADVANCED ACCESSORY SYSTEMS, LLC
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Other Total
Members' comprehensive Accumulated members'
capital loss deficit equity
------------- ------------- ------------- -------------
Balance at December 31, 2001 $ 11,465 $ (181) $ (2,960) $ 8,324
Distributions to members -- -- (2,020) (2,020)
Currency translation adjustment -- (339) -- (339)
Net loss -- -- (11,425) (11,425)
------------- ------------- ------------- -------------
Balance at June 30, 2002 $ 11,465 $ (520) $ (16,405) $ (5,460)
============= ============= ============= =============
The accompanying notes are an integral part of the
consolidated condensed financial statements.
4
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, which are
normal and recurring in nature, necessary to present fairly its
financial position as of June 30, 2002 and December 31, 2001 and the
results of its operations for the three and six months ended June 30,
2002 and 2001 and its cash flows for the six months ended June 30, 2002
and 2001.
These consolidated condensed financial statements should be read
together with the Company's audited financial statements presented in
the Company's Annual Report on Form 10-K for the year ended December
31, 2001, filed with the Securities and Exchange Commission on March
20, 2002.
2. COMPREHENSIVE INCOME
Comprehensive income for the second quarter of 2002 and 2001 of $14,006
and $3,812, respectively, and for the first half of 2002 and 2001 of
$11,764 and $3,213, respectively, includes reported net loss adjusted
by the effect of changes in the cumulative translation adjustment.
3. SIGNIFICANT EVENT
In early July 2002, three European automotive OEM customers of Brink
Sweden recalled in total approximately 38,000 towbars which were
supplied by the Company. The recall affects vehicles fitted with the G
3.0 model removable towbar system sold between January 1999 and March
2000. The Company is in the process of working with its customers to
provide technical and other support in response to the recall.
Management can not estimate at this time what the financial impact
would be to the Company, if any, as a result of the recall.
4. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On January 1, 2002, the Company adopted the accounting standards set
forth in Statement of Financial Accounting Standards No. 142, "Goodwill
and other Intangible Assets" (SFAS 142) and Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 142 changed the
methodology for assessing goodwill impairments. The initial application
of this statement resulted in an impairment of goodwill of $29,207 to
write down goodwill related to the Valley Industries Acquisition. The
impairment was due solely to the change in accounting standards and was
reported as a cumulative effect of accounting change during the first
quarter of 2002. Under the new standard, impairment is determined by
comparing the carrying values of reporting units to the corresponding
fair values, which was determined based on the discounted estimated
future cash flows of the reporting units. As the impairment related to
Valley Industries, LLC for which taxable income accrues to the
individual members, no tax effect was recorded for this charge.
Additionally, under the new standard, goodwill is no longer amortized
but is to be tested periodically for impairment. The effect of no
longer amortizing goodwill resulted in a reduction in amortization of
intangible assets during the second quarter of 2002 as compared with
the first quarter of 2001 of $742 and a reduction during the first six
months of 2002 as compared with the first six months of 2001 of $1,485.
The adoption of SFAS 144 did not have a material impact on the
Company's financial position, results of operations or cash flows. The
following table presents net income (loss) for the second quarter 2001
and first six months of 2001, as adjusted for the non-amortization
provisions of SFAS No. 142.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------- ------------ ------------ -----------
Reported net income (loss) $ 14,515 $ 4,496 $ (11,425) $ 2,971
Add back: Goodwill amortization -- 742 -- 1,485
-------------- ------------ ------------ -----------
Adjusted net income (loss) $ 14,515 $ 5,238 $ (11,425) $ 4,456
============== ============ ============ ===========
Other intangible assets at June 30, 2002 and December 31, 2001 consist
of deferred financing costs, a defined benefit pension asset and
patents and licenses. Deferred financing costs have a gross carrying
amount of $6,689 and
5
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
$6,577, respectively, and accumulated amortization of $2,995 and
$2,483, respectively, and are amortized under the effective interest
method over the terms of the related debt agreements. Aggregate
amortization related to other intangible assets for the three and six
months ended June 30, 2002 was $246 and $506, respectively, and for the
three and six months ended March 31, 2001 was $946 and $1,893,
respectively.
Aggregate amortization expense related to other intangible assets for
each of the five succeeding fiscal years as of June 30, 2002 is as
follows:
Year Ended December 31,
-------------------------------
Remainder of 2002 $ 455
2003 825
2004 605
2005 670
2006 742
For the six months ended June 30, 2002, the carrying amount of goodwill
decreased by $29,207 as a result of the impairment write down discussed
above and increased by $1,884 as a result of the change in exchange
rates between the U.S. Dollar and the European Euro, the functional
currency of Brink International B.V.
5. CONDENSED CONSOLIDATING INFORMATION
On October 1, 1997, the Company and its wholly-owned subsidiary, AAS
Capital Corporation, issued and sold $125,000 of its 9 3/4% Senior
Subordinated Notes due 2007 ("the Notes"). The Notes are guaranteed on
a full, unconditional and joint and several basis by all of the
Company's direct and indirect wholly-owned domestic subsidiaries. The
following condensed consolidating financial information presents the
financial position, results of operations and cash flows of (i) the
Company as parent, as if it accounted for its subsidiaries on the
equity method, and AAS Capital Corporation as issuers; (ii) guarantor
subsidiaries which are domestic, wholly-owned subsidiaries and include
SportRack LLC, AAS Holdings, Inc., Valley Industries, LLC, and ValTek,
LLC; and (iii) the non-guarantor subsidiaries which are foreign,
wholly-owned subsidiaries and include Brink International B.V. and its
subsidiaries, SportRack Accessories, Inc. and its subsidiary, and
SportRack Automotive GmbH and its subsidiaries. The operating results
of the guarantor and non-guarantor subsidiaries for the three and six
months ended June 30, 2002 and 2001 have been allocated a portion of
certain corporate overhead costs on a basis consistent with each
subsidiary's relative business activity, including interest on
intercompany debt balances. Since its formation in September 1997, AAS
Capital Corporation has had no operations and has no assets or
liabilities at June 30, 2002.
6
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
5. CONDENSED CONSOLIDATING INFORMATION -- (continued)
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------- ------------ -------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
Current assets
Cash................................... $ 193 $ 87 $ 2,142 $ -- $ 2,422
Accounts receivable.................... -- 40,546 25,779 -- 66,325
Inventories............................ -- 15,783 22,982 -- 38,765
Deferred income taxes and other
current assets........................ 184 3,785 1,802 -- 5,771
----------- ----------- ----------- ----------- ----------
Total current assets.............. 377 60,201 52,705 -- 113,283
----------- ----------- ----------- ----------- ----------
Property and equipment, net.............. -- 32,640 23,913 -- 56,553
Goodwill, net............................ 985 24,728 20,358 -- 46,071
Other intangible assets, net............. 3,326 410 456 -- 4,192
Deferred income taxes and other
noncurrent assets...................... 93 1,006 2,446 -- 3,545
Investment in subsidiaries............... 63,943 9,955 -- 73,898 --
Intercompany notes receivable............ 73,964 -- -- 73,964 --
------------ ----------- ----------- ----------- ----------
Total assets...................... $ 142,688 $ 128,940 $ 99,878 $ 147,862 $ 223,644
============ =========== =========== =========== ==========
LIABILITIES AND MEMBERS'
EQUITY
Current liabilities
Current maturities of long-term debt... $ -- $ 54 $ 8,274 $ -- $ 8,328
Accounts payable....................... -- 26,219 12,172 -- 38,391
Accrued liabilities and deferred
income taxes......................... 6,673 7,703 8,496 -- 22,111
Mandatorily redeemable warrants........ 5,130 -- -- -- 5,891
------------ ----------- ----------- ----------- ----------
Total current liabilities......... 11,803 33,976 28,942 -- 74,721
Deferred income taxes and other
noncurrent liabilities................. 2,003 852 3,416 -- 6,271
Long-term debt, less current maturities.. 134,187 299 13,626 -- 148,112
Intercompany debt........................ -- 6,601 67,363 73,964 --
Members' equity.......................... (5,305) 87,212 (13,469) 73,898 (5,460)
------------ ----------- ----------- ----------- ----------
Total liabilities and members'
equity............................ $ 142,688 $ 128,940 $ 99,878 $ 147,862 $ 223,644
============ =========== =========== =========== ==========
7
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
5. CONDENSED CONSOLIDATING INFORMATION -- (continued)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------- ------------ -------------- -------------- -------------
ASSETS
Current assets
Cash................................... $ 334 $ 2 $ 1,803 $ -- $ 2,139
Accounts receivable.................... -- 29,094 15,696 -- 44,790
Inventories............................ -- 15,603 23,829 -- 39,432
Deferred income taxes and other
current assets........................ 7 2,326 3,443 -- 5,776
----------- ----------- ----------- ----------- ----------
Total current assets.............. 341 47,025 44,771 -- 92,137
----------- ----------- ----------- ----------- ----------
Property and equipment, net.............. -- 34,071 20,333 -- 54,404
Goodwill, net............................ 985 53,930 18,479 -- 73,394
Other intangible assets, net............. 3,670 412 603 -- 4,685
Deferred income taxes and other
noncurrent assets...................... 93 1,340 2,237 -- 3,670
Investment in subsidiaries............... 70,323 9,955 -- (80,278) --
Intercompany notes receivable............ 74,601 -- -- (74,601) --
------------ ----------- ----------- ----------- ----------
Total assets...................... $ 150,013 $ 146,733 $ 86,423 $ (154,879) $ 228,290
============ =========== =========== =========== ==========
LIABILITIES AND MEMBERS'
EQUITY
Current liabilities
Current maturities of long-term debt... $ -- $ 1,108 $ 9,915 $ -- $ 11,023
Accounts payable....................... -- 19,562 9,489 -- 29,051
Accrued liabilities and deferred
income taxes......................... 6,731 7,804 9,018 -- 23,553
Mandatorily redeemable warrants........ 5,130 -- -- -- 5,130
------------ ----------- ----------- ----------- ----------
Total current liabilities......... 11,861 28,474 28,422 -- 68,757
------------ ----------- ----------- ----------- ----------
Deferred income taxes and other
noncurrent liabilities................. 2,003 719 2,861 -- 5,583
Long-term debt, less current maturities.. 127,675 297 17,654 -- 145,626
Intercompany debt........................ -- 16,920 57,681 (74,601) --
Members' equity.......................... 8,474 100,323 (20,195) (80,278) 8,324
------------ ----------- ----------- ----------- ----------
Total liabilities and members'
equity........................... $ 150,013 $ 146,733 $ 86,423 $ (154,879) $ 228,290
============ =========== =========== =========== ==========
8
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
5. CONDENSED CONSOLIDATING INFORMATION -- (continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------- ------------ -------------- ------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales................................ $ -- $ 65,854 $ 28,467 $ -- $ 94,321
Cost of sales............................ -- 49,452 19,455 -- 68,907
---------- ---------- ----------- ---------- ----------
Gross profit........................... -- 16,402 9,012 -- 25,414
Selling, administrative and product
development expenses................... 15 6,041 5,635 -- 11,691
Amortization of intangible assets........ -- 3 3 -- 6
---------- ---------- ----------- ---------- ----------
Operating income....................... 15 10,358 3,374 -- 13,717
Interest expense......................... 2,776 144 980 -- 3,900
Equity in income of subsidiaries......... 17,306 -- -- (17,306) --
Foreign currency loss, net............... -- -- 8,158 -- 8,158
Other expense............................ -- (134) (23) -- (157)
---------- ---------- ----------- ---------- ----------
Income before income taxes............... 14,515 10,080 10,529 (17,306) 17,818
Provision for income taxes............... -- -- 3,303 -- 3,303
---------- ---------- ----------- ---------- ----------
Net income............................... $ 14,515 $ 10,080 $ 7,226 $ (17,306) $ 14,515
========== ========== =========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------- ------------ -------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales................................ $ -- $ 61,861 $ 27,050 $ -- $ 88,911
Cost of sales............................ -- 48,327 18,053 -- 66,380
---------- ---------- ----------- ---------- ----------
Gross profit........................... -- 13,534 8,997 -- 22,531
Selling, administrative and product
development expenses................... 66 6,134 5,145 -- 11,345
Amortization of intangible assets........ 9 558 181 -- 748
---------- ---------- ----------- ---------- ----------
Operating income (loss)................ (75) 6,842 3,671 -- 10,438
Interest expense......................... 2,092 723 1,695 -- 4,510
Equity in net income of subsidiaries 6,663 -- -- (6,663) --
Foreign currency loss.................... -- (22) 1,245 -- 1,223
Other income (expense)................... -- (22) 5 -- (17)
---------- ----------- ----------- ---------- ----------
Income before income taxes............... 4,496 6,119 736 (6,663) 4,688
Provision for income taxes............... -- -- 192 -- 192
---------- ---------- ----------- ---------- ----------
Net income............................... $ 4,496 $ 6,119 $ 544 $ (6,663) $ 4,496
========== ========== =========== ========== ==========
9
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
5. CONDENSED CONSOLIDATING INFORMATION -- (continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------- ------------ -------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales................................ $ -- $ 122,694 $ 51,497 $ -- $ 174,191
Cost of sales............................ -- 94,210 35,651 -- 129,861
---------- ---------- ----------- ---------- ----------
Gross profit........................... -- 28,484 15,846 -- 44,330
Selling, administrative and product
development expenses................... (5) 11,856 10,690 -- 22,541
Amortization of intangible assets........ -- 6 7 -- 13
---------- ---------- ----------- ---------- ----------
Operating income....................... 5 16,622 5,149 -- 21,776
Interest expense......................... 5,439 347 2,071 -- 7,857
Equity in loss of subsidiaries........... (5,991) -- -- 5,991 --
Foreign currency gain, net............... -- -- 6,914 -- 6,914
Other income (expense)................... -- (125) 9 -- (116)
---------- ----------- ----------- ---------- ----------
Income (loss) before cumulative effect
of accounting change and income
taxes.. ............................... (11,425) 16,150 10,001 5,991 20,717
Cumulative effect of accounting change... -- (29,207) -- -- (29,207)
---------- ---------- ----------- ---------- ----------
Income (loss) before income taxes........ (11,425) (13,057) 10,001 5,991 (8,490)
Provision for income taxes............... -- -- 2,935 -- 2,935
---------- ---------- ----------- ---------- ----------
Net income (loss)........................ $ (11,425) $ (13,057) $ 7,066 $ 5,991 $ (11,425)
========== ========== =========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------- ------------ -------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales................................ $ -- $ 118,620 $ 49,473 $ -- $ 168,093
Cost of sales............................ -- 92,678 33,652 -- 126,330
---------- ---------- ----------- ---------- ----------
Gross profit........................... -- 25,942 15,821 -- 41,763
Selling, administrative and product
development expenses................... 148 12,536 10,392 -- 23,076
Amortization of intangible assets........ 18 1,107 373 -- 1,498
---------- ---------- ----------- ---------- ----------
Operating income (loss)................ (166) 12,299 5,056 -- 17,189
Interest expense......................... 3,730 1,781 3,530 -- 9,041
Equity in income of subsidiaries......... 6,867 -- -- (6,867) --
Foreign currency loss.................... -- -- 6,043 -- 6,043
Other (expense).......................... -- (22) (39) -- (61)
---------- ---------- ----------- ---------- ----------
Income before income taxes............... 2,971 10,496 (4,556) (6,867) 2,044
Benefit for income taxes................. -- -- 927 -- 927
---------- ---------- ----------- ---------- ----------
Net income (loss)........................ $ 2,971 $ 10,496 $ (3,629) $ (6,867) $ 2,971
========== ========== =========== ========== ==========
10
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
5. CONDENSED CONSOLIDATING INFORMATION -- (continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------- ------------ -------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net cash provided by (used for) operating
activities................................ $ (5,249) $ 13,024 $ (319) $ -- $ 7,456
---------- --------- ---------- ---------- ----------
Cash flows from investing activities:
Acquisition of property and
equipment............................... -- (1,682) (3,991) -- (5,673)
---------- --------- ---------- ---------- ---------
Net cash used for investing activities.. -- (1,682) (3,991) -- (5,673)
---------- --------- ---------- ---------- ----------
Cash flows from financing activities:
Change in intercompany debt............... 636 (10,318) 9,682 -- --
Net decrease in revolving loan............ 6,491 -- -- -- 6,491
Repayment of debt......................... -- (939) (5,866) -- (6,805)
Distributions to members.................. (2,019) -- -- -- (2,019)
---------- --------- ---------- ---------- ----------
Net cash provided by (used for)
financing activities.................. 5,108 (11,257) 3,816 -- (2,333)
---------- --------- ---------- ---------- ----------
Effect of exchange rate changes............. -- -- 833 833
Net increase (decrease) in cash............. (141) 85 339 283
Cash at beginning of period................. 334 2 1,803 -- 2,139
---------- --------- ---------- ---------- ----------
Cash at end of period....................... $ 193 $ 87 $ 2,142 $ -- $ 2,422
========== ========= ========== ========== ==========
11
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
5. CONDENSED CONSOLIDATING INFORMATION -- (continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2001
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------- ------------ -------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net cash provided by (used for) operating
activities................................ $ (4,454) $ 15,717 $ (1,961) $ -- $ 9,302
----------- --------- ---------- ---------- ----------
Cash flows from investing activities:
Acquisition of property and
equipment............................... -- (1,222) (1,095) -- (2,317)
---------- --------- ---------- ---------- ---------
Net cash used for investing activities.. -- (1,222) (1,095) -- (2,317)
---------- --------- ---------- ---------- ----------
Cash flows from financing activities:
Change in intercompany debt............... 7,242 (14,134) 6,892 -- --
Net decrease in revolving loan............ (3,343) -- -- -- (3,343)
Collection on note receivable for unit
purchase................................ 59 -- -- -- 59
Repayment of debt......................... -- -- (5,192) -- (5,192)
Distributions to members.................. (2) -- -- -- (2)
---------- --------- ---------- ---------- ----------
Net cash provided by (used for)
financing activities.................. 3,956 (14,134) (1,700) -- (8,478)
---------- --------- ---------- ---------- ----------
Effect of exchange rate changes............. -- -- 802 -- 802
Net increase (decrease) in cash............. (498) 361 (554) -- (691)
Cash at beginning of period................. 1,153 246 1,916 -- 3,315
---------- --------- ---------- ---------- ----------
Cash at end of period....................... $ 655 $ 607 $ 1,362 $ -- $ 2,624
========== ========= ========== ========== ==========
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ADVANCED ACCESSORY SYSTEMS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the financial
statements and notes thereto of the Company included elsewhere in this Form
10-Q. This Form 10-Q contains forward-looking statements. Discussions containing
forward-looking statements may be found in the material set forth above, in the
material set forth below, as well as in this Form 10-Q generally. These may
include statements projecting, forecasting or estimating Company performance and
industry trends. General risks that may impact the achievement of such forecasts
include, but are not limited to: compliance with new laws and regulations,
general economic conditions in the markets in which the Company operates,
fluctuation in demand for the Company's products and in the production of
vehicles for which the Company is a supplier, significant raw material price
fluctuations, labor disputes involving the Company or its significant customers
or suppliers, changes in consumer preferences, dependence on significant
automotive customers, the level of competition in the automotive supply
industry, pricing pressure from automotive customers, the substantial leverage
of the Company, limitations imposed by the Company's debt facilities, changes in
the popularity of particular vehicle models or towing and rack systems, the loss
of programs on particular vehicle models, risks associated with conducting
business in foreign countries and other business factors. Any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual events or results may differ materially from
those discussed in the forward-looking statements. All of these forward-looking
statements are based on estimates and assumptions made by management of the
Company which, although believed to be reasonable, are inherently uncertain. The
Company does not intend to update these forward-looking statements.
GENERAL
An affiliate of J.P. Morgan Partners, LLC ("JPMP") and certain members
of the Company's management formed the Company in September 1995 to make
strategic acquisitions of automotive exterior accessory manufacturers and to
integrate those acquisitions into a global enterprise that would be a preferred
supplier to the automotive industry.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2001.
Net sales. Net sales for the second quarter of 2002 were $94.3 million,
representing an increase of $5.4 million, or 6.1%, compared with net sales for
the second quarter of 2001. This increase resulted primarily from increased
sales to automotive OEMs of approximately $6.6 million primarily resulting from
increased production levels of vehicles in North America compared to the prior
year. Additionally, sales benefited by $1.2 million from an increase in exchange
rates between the U.S. Dollar and the currencies, primarily the European Euro,
used by the Company's foreign subsidiaries. Offsetting these increases was a
decline in aftermarket sales of approximately $2.4 million.
Gross profit. Gross profit for the second quarter of 2002 was $25.4
million, representing an increase of $2.9 million, or 12.8%, from the gross
profit for the second quarter of 2001. This increase resulted from the increase
in sales and an increase in the gross margin percentage. Gross profit as a
percentage of net sales was 26.9% in the second quarter of 2002 compared to
25.3% in the second quarter of 2001. The increase in the gross margin percentage
is primarily attributable to the effects of spreading fixed costs over a higher
sales base and increased gross margin for North American towing products
resulting from increased productivity and cost cutting efforts.
Selling, administrative and product development expenses. Selling,
administrative and product development expenses for the second quarter of 2002
were $11.7 million, representing an increase of $346,000, or 3.0%, over the
selling, administrative and product development expenses for the second quarter
of 2001. Selling, administrative and product development expenses as a
percentage of net sales decreased to 12.4% in the second quarter of 2002 from
12.8% in the second quarter of 2001. This decrease is primarily attributable to
the effect of covering fixed costs with greater sales and the Company's ongoing
cost containment initiatives.
Amortization of intangible assets. Amortization of intangible assets
for the second quarter of 2002 was $6,000, representing a decrease of $742,000
compared with amortization of intangible assets, which included amortization of
goodwill, for the second quarter of 2001. This decrease was the result of a new
accounting standard adopted on January 1, 2002, which ceased the amortization of
goodwill as of that date. See "New Accounting Pronouncements".
13
ADVANCED ACCESSORY SYSTEMS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
Operating income. Operating income for the second quarter of 2002 was
$13.7 million, an increase of $3.3 million, or 31.4%, from operating income for
the second quarter of 2001, reflecting the increase in gross profit and the
decrease in amortization of intangible assets, partially offset by the increase
in selling, administrative and product development expenses. Operating income as
a percentage of net sales increased to 14.5% in the second quarter of 2002 from
11.7% in the second quarter of 2001.
Interest expense. Interest expense for the second quarter of 2002 was
$3.9 million, which was $610,000 lower than interest expense for the second
quarter of 2001. The decrease was due to lower interest rates charged on the
Company's variable rate indebtedness and reduced average borrowings.
Foreign currency gain (loss). Foreign currency gain in the second
quarter of 2002 was $8.2 million, compared to a foreign currency loss of $1.2
million in the second quarter of 2001. The Company's foreign currency gains and
losses are primarily related to Brink which has indebtedness denominated in U.S.
Dollars, including intercompany debt and a portion of the loans under the
Company's Second Amended and Restated Credit Agreement. During the second
quarter of 2002, the U.S. Dollar weakened significantly in relation to the
European Euro whereas during the second quarter of 2001, the U.S. Dollar
strengthened in relation to the European Euro, the functional currency of Brink.
Provision for income taxes. The Company and certain of its domestic
subsidiaries have elected to be taxed as limited liability companies for federal
income tax purposes. As a result of this election, the Company's domestic
taxable income accrues to the individual members. Certain of the Company's
domestic subsidiaries and foreign subsidiaries are subject to income taxes in
their respective jurisdictions. During the second quarter of 2002, the Company
had income before income taxes for its taxable subsidiaries totaling $10.5
million and recorded a provision for income taxes of $3.3 million. The effective
tax rate differs from the U.S. federal income tax rate primarily due to changes
in valuation allowances on the deferred tax assets of SportRack Accessories
recorded during 2002 and differences in the tax rates of foreign countries.
During the second quarter of 2001, the Company had income before income taxes
for its taxable subsidiaries totaling $736,000 and recorded a provision for
income taxes of $192,000.
Net income. Net income for the second quarter of 2002 was $14.5
million, as compared to net income of $4.5 million in the second quarter of
2001, an increase of $10.0 million. The change in net income is primarily
attributable to the increase in operating income, the reduction in interest
expense and the foreign currency gain in the second quarter of 2002, as compared
with a foreign currency loss in the second quarter of 2001, offset partially by
the increase in the provision for income taxes.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001.
Net sales. Net sales for the first six months of 2002 were $174.2
million, representing an increase of $6.1 million, or 3.6%, compared with net
sales for the first six months of 2001. This increase resulted primarily from
increased sales to automotive OEMs of approximately $7.6 million primarily
resulting from increased production levels of vehicles in North America compared
to the prior year. Additionally, sales benefited by $281,000 from an increase in
exchange rates between the U.S. Dollar and the currencies, primarily the
European Euro, used by the Company's foreign subsidiaries. Offsetting these
increases was a decline in aftermarket sales of approximately $1.8 million.
Gross profit. Gross profit for the first six months of 2002 was $44.3
million, representing an increase of $2.6 million, or 6.1%, from the gross
profit for the first six months of 2001. This increase resulted from the
increase in sales and an increase in the gross margin percentage. Gross profit
as a percentage of net sales was 25.4% in the first six months of 2002 compared
to 24.8% in the first six months of 2001. The increase in the gross margin
percentage is primarily attributable to the effects of spreading fixed costs
over a higher sales base and increased gross margin for North American towing
products resulting from increased productivity and cost cutting efforts. These
increases were partially offset by reduced gross margin resulting from a change
in the mix of products sold being weighted more towards lower margin products
and lower production efficiency of Brink which restructured its Netherlands
manufacturing facilities during the first quarter of 2002.
Selling, administrative and product development expenses. Selling,
administrative and product development expenses for the first six months of 2002
were $22.5 million, representing an increase of $535,000, or 2.3%, over the
selling, administrative and product development expenses for the first six
months of 2001. Selling, administrative and product development expenses as a
percentage of net sales decreased to 12.9% in the first six months of 2002 from
13.7% in the first six months of 2001. This decrease is primarily attributable
to the effect of covering fixed costs with greater sales, the Company's ongoing
cost containment initiatives and the lack of costs incurred to relocate a
warehouse operation during the first quarter of 2001.
Amortization of intangible assets. Amortization of intangible assets
for the first six months of 2002 was $13,000, representing a decrease of $1.2
million compared with amortization of intangible assets, which included
amortization of goodwill, for
14
ADVANCED ACCESSORY SYSTEMS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
the first six months of 2001. This decrease was the result of a new accounting
standard adopted on January 1, 2002, which ceased the amortization of goodwill
as of that date. See "New Accounting Pronouncements".
Operating income. Operating income for the first six months of 2002 was
$21.8 million, an increase of $4.6 million, or 26.7%, over operating income for
the first six months of 2001, reflecting the increase in gross profit and the
decrease in amortization of intangible assets, partially offset by the increase
in selling, administrative and product development expenses. Operating income as
a percentage of net sales increased to 12.5% in the first six months of 2002
from 10.2% in the first six months of 2001.
Interest expense. Interest expense for the first six months of 2002 was
$7.9 million, which was $1.2 million lower than interest expense for the first
six months of 2001. The decrease was due to lower interest rates charged on the
Company's variable rate indebtedness and reduced average borrowings.
Foreign currency loss. Foreign currency gain in the first six months of
2002 was $6.9 million, compared to a foreign currency loss of $6.0 million in
the first six months of 2001. The Company's foreign currency loss is primarily
related to Brink which has indebtedness denominated in U.S. Dollars, including
intercompany debt and a portion of the loans under the Company's Second Amended
and Restated Credit Agreement. During the first six months of 2002 the U.S.
Dollar weakened significantly in relation to the European Euro whereas during
the first six months of 2001, the U.S. Dollar strengthened in relation to the
European Euro, the functional currency of Brink.
Provision (benefit) for income taxes. The Company and certain of its
domestic subsidiaries have elected to be taxed as limited liability companies
for federal income tax purposes. As a result of this election, the Company's
domestic taxable income accrues to the individual members. Certain of the
Company's domestic subsidiaries and foreign subsidiaries are subject to income
taxes in their respective jurisdictions. During the first six months of 2002,
the Company had income before income taxes for its taxable subsidiaries totaling
$10.0 million and recorded a provision for income taxes of $2.9 million. The
effective tax rate differs from the U.S. federal income tax rate primarily due
to changes in valuation allowances on the deferred tax assets of SportRack
Accessories recorded during 2002 and differences in the tax rates of foreign
countries. During the first six months of 2001, the Company had a loss before
income taxes for its taxable subsidiaries totaling $4.6 million and recorded a
benefit for income taxes of $927,000.
Cumulative effect of accounting change. On January 1, 2002, the Company
adopted the accounting standards set forth in Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). See "New
Accounting Pronouncements". As a result of this accounting change, the Company
recorded a loss totaling $29.2 million to write down goodwill recorded in
connection with the Valley Industries Acquisition.
Net income (loss). Net loss for the first six months of 2002 was $11.4
million, as compared to net income of $3.0 million in the first six months of
2001, a change of $14.4 million. The change in net loss is primarily
attributable to the cumulative effect of accounting change due to the adoption
of SFAS 142 offset partially by the increase in operating income, lower interest
expense and the foreign currency gain in the first six months of 2002 as
compared with the foreign currency loss of the first six months of 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements are to service its debt
and meet its working capital and capital expenditure needs. The Company's
indebtedness at June 30, 2002 was $156.4 million including current maturities of
$8.3 million. The Company expects to be able to meet its liquidity requirements
through cash provided by operations and through borrowings available under the
Second Amended and Restated Credit Agreement ("U.S. Credit Facility").
15
ADVANCED ACCESSORY SYSTEMS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
WORKING CAPITAL AND CASH FLOWS
Working capital and key elements of the consolidated statement of cash
flows are:
JUNE 30, DECEMBER 31,
2002 2001
-------------- --------------
(IN THOUSANDS)
Working Capital........................................ $ 38,562 $ 23,380
FIRST SIX MONTHS OF
2002 2001
-------------- --------------
(IN THOUSANDS)
Cash flows provided by operating activities............ $ 7,456 $ 9,302
Cash flows (used for) investing activities............. $ (5,673) $ (2,317)
Cash flows (used for) financing activities............. $ (2,333) $ (8,478)
Working capital
Working capital increased by $15.2 million to $38.6 million at June 30,
2002 from $23.4 million at December 31, 2001 due primarily to an increase in
accounts receivable of $18.9 million, an increase of $2.3 in other current
assets, a decrease in accrued liabilities of $2.1 million and a decrease in the
current portion of long term debt of $2.7 million. These working capital
increases were partially offset by a decrease in inventory of $2.6 million and
an increase in accounts payable of $8.4 million.
The increase in accounts receivable was attributable to increased sales
levels in the second quarter of 2002 as compared with the fourth quarter of 2001
and due to a difference in the timing of a payment from the Company's second
largest OEM customer. Differences in sales levels between the two consecutive
quarters are partly due to seasonal cycles and increased sales to automotive
OEMs. Increases in accounts payable during the quarter reflected increased
purchasing activities to support the increased sales volume. Inventory decreased
primarily at Brink which sold product out of inventory during a plant
reorganization in the Netherlands.
Operating Activities
Cash flow provided by operating activities for the first six months of
2002 was $7.5 million, compared to $9.3 million in the second quarter of 2001.
Cash flow for the first six months of 2002 decreased primarily due to an
increase in working capital during the first six months of 2002 which was
greater than the increase in working capital during the first six months of
2001. Partially offsetting the increased working capital was greater operating
income during the first six months of 2002 compared with the first six months of
2001.
Investing Activities
During the first six months of 2002 and 2001, investing cash flows
included acquisitions of property and equipment of $5.7 million and $2.3
million, respectively, and were primarily for the expansion of capacity,
productivity and process improvements and maintenance. The increase was
primarily due to the construction of a new production facility in France which
began during the second quarter of 2002 and is expected to be completed during
the third quarter of 2002. The Company's ability to make capital expenditures is
subject to restrictions in the U.S. Credit Facility, including a maximum of
$12.5 million of capital expenditures annually.
Financing Activities
During the first six months of 2002 and 2001, financing cash flows
included scheduled payments of principal on the Company's term indebtedness of
$6.8 million and $5.2 million, respectively. Distributions to members,
representing amounts sufficient to meet the tax liability on the Company's
domestic taxable income which accrues to individual members, were $2.0 million
16
ADVANCED ACCESSORY SYSTEMS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
for the first six months of 2002 and were not significant during the first six
months of 2001. Financing cash flows during the first six months of 2002 also
included net borrowings under the Company's revolving loans of $5.3 million.
Financing cash flows during the first six months of 2001 included net repayments
under the Company's revolving loans of $5.2 million.
DEBT AND CREDIT SOURCES
The Company's indebtedness was $156.4 million and $156.6 million at
June 30, 2002 and December 31, 2001, respectively. The Company expects that its
primary sources of cash will be from operating activities and borrowings under
its revolving credit facilities. As of June 30, 2002, the Company had borrowings
under the revolving credit facilities totaling $9.5 million and had $17.2
million of available borrowing capacity. Borrowing availability was reduced by
an $8.3 million outstanding letter of credit issued to benefit plaintiffs in a
lawsuit against the Company. As of June 30, 2002, the Company was in compliance
with the various covenants under the debt agreements pursuant to which it has
borrowed or may borrow money and believes the Company will remain in compliance
with such covenants through the period ending June 30, 2003. Management believes
that, based on current and expected levels of operations, cash flows from
operations and borrowings under the Revolving Credit Facilities will be
sufficient to fund its debt service requirements, working capital needs, and
capital expenditures for the foreseeable future, although no assurances can be
given in this regard.
The Company's ability to satisfy its debt obligations will depend upon
its future operating performance, which will be affected by prevailing economic
conditions and financial, business, and other factors, certain of which are
beyond its control, as well as the availability of revolving credit borrowings
under its current or successor credit facilities. The Company anticipates that,
based on current and expected levels of operations, its operating cash flow,
together with borrowings under the U.S. Credit Facility and the Canadian Credit
Facility, should be sufficient to meet its debt service, working capital and
capital expenditure requirements for the foreseeable future, although no
assurances can be given in this regard, including as to the ability to increase
revenues or profit margins. If the Company is unable to service its
indebtedness, it will be forced to take actions such as reducing or delaying
acquisitions and/or capital expenditures, selling assets, restructuring or
refinancing its indebtedness, or seeking additional equity capital. There is no
assurance that any of these remedies can be effected on satisfactory terms, if
at all, including, whether, and on what terms, the Company could raise equity
capital. See the introductory paragraph of this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Company conducts operations in several foreign countries including
Canada, The Netherlands, Denmark, the United Kingdom, Sweden, France, Germany,
Poland, Spain, the Czech Republic and Italy. Net sales from international
operations during the first six months of 2002 were approximately $51.5 million,
or 29.6% of the Company's net sales. At June, 2002, assets associated with these
operations were approximately 44.7% of total assets, and the Company had
indebtedness denominated in currencies other than the U.S. Dollar of
approximately $3.4 million.
The Company's international operations may be subject to volatility because
of currency fluctuations, inflation and changes in political and economic
conditions in these countries. Most of the revenues and costs and expenses of
the Company's operations in these countries are denominated in the local
currencies. The financial position and results of operations of the Company's
foreign subsidiaries are measured using the local currency as the functional
currency. Certain of the Company's foreign subsidiaries have debt denominated in
currencies other than their functional currency. As the exchange rates between
the currency of the debt and the subsidiaries functional currency change, the
Company is subject to foreign currency gains and losses.
The Company may periodically use foreign currency forward option contracts
to offset the effects of exchange rate fluctuations on cash flows denominated in
foreign currencies. The Company has no outstanding foreign currency forward
options at June 30, 2002 and does not use derivative financial instruments for
trading or speculative purposes.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted the accounting standards set forth in
Statement of Financial Accounting Standards No. 142, "Goodwill and other
Intangible Assets" (SFAS 142) and Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 142 changed the methodology for assessing goodwill impairments. The
initial application of this statement resulted in an impairment of goodwill of
$29.2 million to write down goodwill
17
ADVANCED ACCESSORY SYSTEMS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
related to the Valley Industries Acquisition. The impairment was due solely to
the change in accounting standards and was reported as a cumulative effect of
accounting change during the first quarter of 2002. Under the new standard,
impairment is determined by comparing the carrying values of reporting units to
the corresponding fair values, which was determined based on the discounted
estimated future cash flows of the reporting units. As the impairment related to
Valley Industries, LLC for which taxable income accrues to the individual
members, no tax effect was recorded for this charge during the first quarter of
2002. Additionally, under the new standard, goodwill is no longer amortized but
is to be tested periodically for impairment. The effect of no longer amortizing
goodwill resulted in a reduction of $743,000 in amortization of intangible
assets during the first quarter of 2002 as compared with the first quarter of
2001. The adoption of SFAS 144 did not have a material impact on the Company's
financial position, results of operations or cash flows.
SIGNIFICANT EVENT
In early July 2002, three European automotive OEM customers of Brink Sweden
recalled in total approximately 38,000 towbars which were supplied by the
Company. The recall affects vehicles fitted with the G 3.0 model removable
towbar system sold between January 1999 and March 2000. The Company is in the
process of working with its customers to provide technical and other support in
response to the recall. Management can not estimate at this time what the
financial impact would be to the Company, if any, as a result of the recall.
18
ADVANCED ACCESSORY SYSTEMS, LLC
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes since those which were reported
in the Company's annual report on Form 10-K, filed with the Commission
on March 20, 2002.
PART II. OTHER INFORMATION AND SIGNATURE
Item 1. Legal Proceedings
Gibbs v. Advanced Accessory Systems, LLC. In February 1996, the
Company commenced an action against two former employees alleging
breach of contract under the terms of an October 1992 Purchase
Agreement and Employment Agreements with the predecessor of the
Company. The individuals then filed a separate lawsuit against the
Company alleging breach of contract under the respective Purchase and
Employment agreements. On May 7, 1999 a jury in the United States
District Court for the Eastern District of Michigan reached a verdict
against the Company and awarded the individuals approximately $3.8
million plus interest and reasonable attorney fees. The Company is
currently pursuing an appeal in the Sixth Circuit Court of Appeals.
During the first six months of 2002 and 2001, the Company increased its
estimated accrual for this matter by $300,000 which charge is included
in interest expense. No amounts have been paid as of June 30, 2002.
In addition to the above, from time to time, the Company is subject
to legal proceedings and other claims arising in the ordinary course of
its business. Management believes that the resolution of these matters
will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows. The Company maintains
insurance coverage against claims in an amount which it believes to be
adequate.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security-Holders
None
Items 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
19
ADVANCED ACCESSORY SYSTEMS, LLC
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED ACCESSORY SYSTEMS, LLC
(Registrant)
Date: July 30, 2002 /s/ BARRY G. STEELE
--------------------------------------------
Barry G. Steele
Chief Financial Officer
(Principal Accounting and Financial Officer
and Authorized Signatory)
20