-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JtPvHQ67mppEXEXpkhHgCfXefemWxeThQsJWqb07Dyv17pVtshCLp9IVHWpKyS/Z 3ks7OsvNgPT2GYCHqwDS5A== 0000950124-99-004469.txt : 19990809 0000950124-99-004469.hdr.sgml : 19990809 ACCESSION NUMBER: 0000950124-99-004469 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED ACCESSORY SYSTEMS LLC CENTRAL INDEX KEY: 0001057836 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 133848156 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-49011 FILM NUMBER: 99679341 BUSINESS ADDRESS: STREET 1: 12900 HALL RD STREET 2: SUITE 200 CITY: STERLING HEIGHTS STATE: MI ZIP: 48313 BUSINESS PHONE: 8109972900 MAIL ADDRESS: STREET 1: 12900 HALL RD STREET 2: SUITE 200 CITY: STERLING HEIGHTS STATE: MI ZIP: 48313 10-Q 1 FORM 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1999 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------------- -------------- -------------- COMMISSION FILE NUMBER 333-49011 --------- -------------- [ADVANCED ACCESSORY SYSTEMS, LLC. 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) (810) 997-2900 (Telephone Number) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No ================================================================================ 2 ADVANCED ACCESSORY SYSTEMS, LLC INDEX Page No. Part I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 1 June 30, 1999 and December 31, 1998 Consolidated Condensed Statements of Income 2 for the Three and Six Months Ended June 30, 1999 and 1998 Consolidated Condensed Statements of 3 Cash Flows for the Six Months Ended June 30, 1999 and 1998 Consolidated Condensed Statement of Changes 4 in Members' Equity for the Six Months Ended June 30, 1999 Notes to Consolidated Condensed Financial 5 Statements Item 2. Management's Discussion and Analysis of 12 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 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED BALANCE SHEETS AS OF JUNE 30, 1999 AND DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) (UNAUDITED)
June 30, December 31, 1999 1998 ASSETS Current assets Cash $ 6,075 $ 11,240 Accounts receivable, less reserves of $3,415 and $2,766, respectively 64,462 40,727 Inventories Finished goods 11,087 12,805 Work-in-process 12,548 12,707 Raw materials 13,162 17,575 --------- --------- Total inventory 36,797 43,087 Deferred income taxes 564 280 Other current assets 4,886 3,964 --------- --------- Total current assets 112,784 99,298 Property and equipment, net 59,066 61,295 Goodwill, net 82,918 87,079 Other intangible assets, net 5,880 6,592 Deferred income taxes 2,297 1,933 Other noncurrent assets 3,138 2,784 --------- --------- $ 266,083 $ 258,981 ========= ========= LIABILITIES AND MEMBERS' EQUITY Current liabilities Current maturities of long-term debt $ 7,881 $ 4,536 Accounts payable 32,220 23,115 Accrued liabilities 23,648 21,335 Deferred income taxes -- 1,080 --------- --------- Total current liabilities 63,749 50,066 --------- --------- Noncurrent liabilities Deferred income taxes 1,454 1,790 Other noncurrent liabilities 4,403 4,581 Long-term debt, less current maturities 177,600 182,988 --------- --------- Total noncurrent liabilities 183,457 189,359 --------- --------- Mandatorily redeemable warrants 4,559 4,409 --------- --------- Members' equity Class A Units 22,181 22,276 Other comprehensive loss (1,450) (615) Accumulated deficit (6,413) (6,514) --------- --------- 14,318 15,147 --------- --------- $ 266,083 $ 258,981 ========= =========
The accompanying notes are an integral part of the consolidated condensed financial statements. 1 4 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 Net sales $ 89,572 $ 84,252 $ 167,607 $ 158,279 Cost of sales 63,229 61,762 119,470 115,740 --------- --------- --------- --------- Gross profit 26,343 22,490 48,137 42,539 Selling, administrative and product development expenses 13,022 12,944 26,419 25,294 Amortization of intangible assets 779 940 1,568 1,725 --------- --------- --------- --------- Operating income 12,542 8,606 20,150 15,520 --------- --------- --------- --------- Other income (expense) Interest expense (4,409) (4,617) (8,855) (9,553) Foreign currency loss, net (1,646) 431 (5,619) (611) Other expense -- -- (2,000) -- --------- --------- --------- --------- Income before income taxes 6,487 4,420 3,676 5,356 Provision (benefit) for income taxes 847 429 (131) (742) --------- --------- --------- --------- Net income $ 5,640 $ 3,991 $ 3,807 $ 6,098 ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated condensed financial statements. 2 5 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) (UNAUDITED)
Six Months Ended June 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,807 $ 6,098 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,537 7,578 Loss on disposal of property and equipment 6 93 Deferred taxes (1,957) (1,759) Foreign currency loss 4,219 611 Changes in assets and liabilities, net (9,812) 339 -------- -------- Net cash provided by operating activities 3,800 12,960 CASH FLOWS USED FOR INVESTING ACTIVITIES: Acquisition of property and equipment (6,100) (5,511) Acquisitions, net of cash acquired -- (22,740) Net cash used for investing activities (6,100) (28,251) -------- -------- CASH FLOWS USED FOR FINANCING ACTIVITIES: Net increase (reduction) in revolving loan 4,500 (1,900) Collection on notes receivable for unit purchase 31 -- Payments on long-term debt (5,537) (1,765) Issuance of membership units 50 27 Repurchase of membership units (26) -- Distributions to members (3,706) (116) -------- -------- Net cash used for financing activities (4,688) (3,754) -------- -------- Effect of exchange rate changes 1,823 389 -------- -------- Net decrease in cash (5,165) (18,656) Cash at beginning of period 11,240 27,348 -------- -------- Cash at end of period $ 6,075 $ 8,692 ======== ========
The accompanying notes are an integral part of the consolidated condensed financial statements. 3 6 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN MEMBERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1999 (DOLLARS IN THOUSANDS) (UNAUDITED)
Other Total Class A comprehensive Accumulated members' Units loss deficit equity ----- ---- ------- ------ Balance at December 31, 1998 $ 22,276 $ (615) $ (6,514) $ 15,147 Issuance of additional units 100 -- -- 100 Notes receivable for unit purchase (50) -- -- (50) Collection on notes receivable for unit purchase 31 -- -- 31 Repurchase of membership units (26) -- -- (26) Accretion of membership warrants (150) -- -- (150) Distributions to members -- -- (3,706) (3,706) Currency translation adjustment -- (835) -- (835) Net income -- -- 3,807 3,807 -------- -------- -------- -------- Balance at June 30, 1999 $ 22,181 $ (1,450) $ (6,413) $ 14,318 ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated condensed financial statements. 4 7 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, 1999 and December 31, 1998 and the results of its operations for the three and six months ended June 30, 1999 and 1998 and its cash flows for the six months ended June 30, 1999 and 1998. 2. OTHER EXPENSE In February 1996, the Company commenced an action against certain individuals 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 $3,800 plus interest and reasonable attorney fees. The Company is currently assessing further actions in response to the verdict. During the first half of 1999, the Company increased its estimated accrual for this matter by $2,000 which charge is included in other expense. 3. COMPREHENSIVE INCOME Comprehensive income for the second quarter of 1999 and 1998 of $5,069 and $3,997, respectively, and for the first half of 1999 and 1998 of $2,972 and $6,130, respectively, includes reported net income adjusted by the non-cash effect of changes in the cumulative translation adjustment. 4. 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 International, Inc. and its subsidiary, and SportRack Automotive GmbH. The guarantor and non-guarantor subsidiaries for the three and six month periods ended June 30, 1999 and 1998 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. Separate financial statements of the guarantor subsidiaries are not presented because management has determined that the separate financial statements are not material to investors. Since its formation in September 1997, AAS Capital Corporation has had no operations and has no assets or liabilities at June 30, 1999. 5. RECLASSIFICATIONS Certain amounts from the Consolidated Condensed Statement of Income for the six months ended June 30, 1998 have been reclassified to conform with the presentation adopted at December 31, 1998. 5 8 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 4. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 1999
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) ASSETS Current assets Cash $ -- $ 245 $ 5,830 $ -- $ 6,075 Accounts receivable -- 39,294 25,168 -- 64,462 Inventories -- 14,148 22,649 -- 36,797 Other current assets 26 3,292 2,132 -- 5,450 --------- --------- --------- --------- --------- Total current assets 26 56,979 55,779 -- 112,784 --------- --------- --------- --------- --------- Property and equipment, net -- 30,116 28,950 -- 59,066 Goodwill, net 1,085 58,180 23,653 -- 82,918 Intangible assets, net 4,653 260 967 -- 5,880 Deferred income taxes and other noncurrent assets 87 2,331 3,017 -- 5,435 Investment in subsidiaries 40,143 9,949 -- (50,092) -- Intercompany notes receivable 110,315 -- -- (110,315) -- --------- --------- --------- --------- --------- Total Assets $ 156,309 $ 157,815 $ 112,366 $(160,407) $ 266,083 ========= ========= ========= ========= ========= LIABILITIES AND MEMBER'S EQUITY Current liabilities Current maturities of long-term debt $ -- $ -- $ 7,881 $ -- $ 7,881 Accounts payable -- 20,892 11,328 -- 32,220 Accrued liabilities and deferred income taxes 5,795 7,519 10,334 -- 23,648 --------- --------- --------- --------- --------- Total current liabilities 5,795 28,411 29,543 -- 63,749 --------- --------- --------- --------- --------- Deferred income taxes and other noncurrent liabilities 1,353 971 3,533 -- 5,857 Long-term debt, less current maturities . 129,079 -- 48,521 -- 177,600 Intercompany debt -- 68,361 41,954 (110,315) -- Mandatorily redeemable warrants 4,559 -- -- -- 4,559 Members' equity 15,523 60,072 (11,185) (50,092) 14,318 --------- --------- --------- --------- --------- Total liabilities and members' equity $ 156,309 $ 157,815 $ 112,366 $(160,407) $ 266,083 ========= ========= ========= ========= =========
6 9 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 4. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 1998
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) ASSETS Current assets Cash................................... $ -- $ 5,636 $ 5,604 $ -- $ 11,240 Accounts receivable.................... -- 28,437 12,290 -- 40,727 Inventories............................ -- 15,630 27,457 -- 43,087 Other current assets................... 4 2,687 1,553 -- 4,244 ----------- ----------- ----------- ----------- ---------- Total current assets.............. 4 52,390 46,904 -- 99,298 ----------- ----------- ----------- ----------- ---------- Property and equipment, net.............. -- 28,416 32,879 -- 61,295 Goodwill, net............................ 1,105 59,261 26,713 -- 87,079 Intangible assets, net................... 4,846 300 1,446 -- 6,592 Deferred income taxes and other noncurrent assets...................... 28 2,285 2,404 -- 4,717 Investment in subsidiaries............... 34,373 10,022 -- (44,395) -- Intercompany notes receivable............ 109,300 -- -- (109,300) -- ------------ ----------- ----------- ----------- ---------- Total Assets...................... $ 149,656 $ 152,674 $ 110,346 $ (153,695) $ 258,981 ============ =========== =========== =========== ========== LIABILITIES AND MEMBER'S EQUITY Current liabilities Current maturities of long-term debt... $ -- $ -- $ 4,536 $ -- $ 4,536 Accounts payable....................... -- 14,260 8,855 -- 23,115 Accrued liabilities and deferred income taxes......................... 3,702 6,995 11,718 -- 22,415 ------------ ----------- ----------- ----------- ---------- Total current liabilities......... 3,702 21,255 25,109 -- 50,066 ------------ ----------- ----------- ----------- ---------- Deferred income taxes and other noncurrent liabilities................. 1,153 1,255 3,963 -- 6,371 Long-term debt, less current maturities.. 124,565 -- 58,423 -- 182,988 Intercompany debt........................ -- 77,951 31,349 (109,300) -- Mandatorily redeemable warrants.......... 4,409 -- -- -- 4,409 Members' equity.......................... 15,827 52,213 (8,498) (44,395) 15,147 ------------ ----------- ----------- ----------- ---------- Total liabilities and members' equity............................ $ 149,656 $ 152,674 $ 110,346 $ (153,695) $ 258,981 ============ =========== =========== =========== ==========
7 10 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 4. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net sales................................ $ -- $ 57,310 $ 32,262 $ -- $ 89,572 Cost of sales............................ -- 42,208 21,021 -- 63,229 ---------- ---------- ----------- ---------- ---------- Gross profit........................... -- 15,102 11,241 -- 26,343 Selling, administrative and product development expenses................... 369 6,263 6,390 -- 13,022 Amortization of intangible assets........ 10 549 220 -- 779 ---------- ---------- ----------- ---------- ---------- Operating income (loss)................ (379) 8,290 4,631 -- 12,542 Interest expense......................... 728 1,823 1,858 -- 4,409 Equity in income (loss) of subsidiaries.. 8,703 -- -- (8,703) -- Foreign currency (gain) loss............. -- -- 1,646 -- 1,646 ---------- ---------- ----------- ---------- ---------- Income (loss) before income taxes........ 7,596 6,467 1,127 (8,703) 6,487 Provision (benefit) for income taxes..... -- -- 847 -- 847 ---------- ---------- ----------- ---------- ---------- Net income (loss)........................ $ 7,596 $ 6,467 $ 280 $ (8,703) $ 5,640 ========== ========== =========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net sales................................ $ -- $ 51,703 $ 32,549 $ -- $ 84,252 Cost of sales............................ -- 38,385 23,377 -- 61,762 ---------- ---------- ----------- ---------- ---------- Gross profit........................... -- 13,318 9,172 -- 22,490 Selling, administrative and product development expenses................... 157 5,629 7,158 -- 12,944 Amortization of intangible assets........ 10 543 387 -- 940 ---------- ---------- ----------- ---------- ---------- Operating income (loss)................ (167) 7,146 1,627 -- 8,606 Interest expense......................... 922 1,760 1,935 -- 4,617 Equity in income (loss) of subsidiaries.. 5,095 -- -- (5,095) -- Foreign currency (gain) loss............. -- -- (431) -- (431) ---------- ---------- ----------- ---------- ---------- Income (loss) before income taxes........ 4,006 5,386 123 (5,095) 4,420 Provision (benefit) for income taxes..... 15 -- 414 -- 429 ---------- ---------- ----------- ---------- ---------- Net income (loss)........................ $ 3,991 $ 5,386 $ (291) $ (5,095) $ 3,991 ========== ========== =========== ========== ==========
8 11 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 6. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net sales................................ $ -- $ 110,150 $ 57,457 $ -- $ 167,607 Cost of sales............................ -- 81,426 38,044 -- 119,470 ---------- ---------- ----------- ---------- ---------- Gross profit........................... -- 28,724 19,413 -- 48,137 Selling, administrative and product development expenses................... 1,505 13,041 11,873 -- 26,419 Amortization of intangible assets........ 20 1,098 450 -- 1,568 ---------- ---------- ----------- ---------- ---------- Operating income (loss)................ (1,525) 14,585 7,090 -- 20,150 Interest expense......................... 2,435 2,953 3,467 -- 8,855 Equity in income (loss) of subsidiaries.. 9,767 -- -- (9,767) -- Foreign currency (gain) loss............. -- -- 5,619 -- 5,619 Other income (expense)................... (2,000) -- -- -- (2,000) ---------- ---------- ----------- ---------- ---------- Income (loss) before income taxes........ 3,807 11,632 (1,996) (9,767) 3,676 Provision (benefit) for income taxes..... -- -- (131) -- (131) ---------- ---------- ----------- ---------- ---------- Net income (loss)........................ $ 3,807 $ 11,632 $ (1,865) $ (9,767) $ 3,807 ========== ========== =========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net sales................................ $ -- $ 102,920 $ 55,359 $ -- $ 158,279 Cost of sales............................ -- 76,821 38,919 -- 115,740 ---------- ---------- ----------- ---------- ---------- Gross profit........................... -- 26,099 16,440 -- 42,539 Selling, administrative and product development expenses................... 328 11,602 13,364 -- 25,294 Amortization of intangible assets........ 20 1,086 619 -- 1,725 ---------- ---------- ----------- ---------- ---------- Operating income (loss)................ (348) 13,411 2,457 -- 15,520 Interest expense......................... 1,775 3,679 4,099 -- 9,553 Equity in income (loss) of subsidiaries.. 8,236 -- -- (8,236) -- Foreign currency (gain) loss............. -- -- 611 -- 611 ---------- ---------- ----------- ---------- ---------- Income (loss) before income taxes........ 6,113 9,732 (2,253) (8,236) 5,356 Provision (benefit) for income taxes..... 15 -- (757) -- (742) ---------- ---------- ----------- ---------- ---------- Net income (loss)........................ $ 6,098 $ 9,732 $ (1,496) $ (8,236) $ 6,098 ========== ========== =========== ========== ==========
9 12 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 4. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net cash provided by (used for) operating activities.............................. $ -- $ 8,338 $ (4,538) $ -- $ 3,800 ---------- --------- ---------- ---------- ---------- Cash flows from investing activities: Acquisition of property and equipment............................. -- (3,994) (2,106) -- (6,100) ---------- --------- ---------- ---------- --------- Net cash used for investing activities -- (3,994) (2,106) -- (6,100) ---------- --------- ---------- ---------- ---------- Cash flows from financing activities: Change in intercompany debt............. (849) (6,029) 10,584 (3,706) -- Increase (decrease) in revolving loan... 4,500 -- -- -- 4,500 Collection on notes receivable for unit purchase.............................. 31 -- -- -- 31 Repayment of debt....................... -- -- (5,537) -- (5,537) Issuance of membership units............ 50 -- -- -- 50 Repurchase of membership units.......... (26) -- -- -- (26) Distributions to members................ (3,706) (3,706) -- 3,706 (3,706) ---------- --------- ---------- ---------- ---------- Net cash provided by financing activities.......................... -- (9,735) 5,047 -- (4,688) ---------- --------- ---------- ---------- ---------- Effect of exchange rate changes........... -- -- 1,823 -- 1,823 ---------- --------- ---------- ---------- --------- Net increase (decrease) in cash........... -- (5,391) 226 -- (5,165) Cash at beginning of period............... -- 5,636 5,604 -- 11,240 ---------- --------- ---------- ---------- ---------- Cash at end of period..................... $ -- $ 245 $ 5,830 $ -- $ 6,075 ========== ========= ========== ========== ==========
10 13 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 4. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net cash provided by (used for) operating activities.............................. $ (1,804) $ 13,567 $ 1,197 $ -- $ 12,960 ---------- --------- ---------- ---------- ---------- Cash flows from investing activities: Acquisition of property and equipment............................. -- (3,545) (1,966) -- (5,511) Acquisitions, net of cash acquired...... -- -- (22,740) -- (22,740) ---------- --------- ---------- ---------- ---------- Net cash used for investing activities -- (3,545) (24,706) -- (28,251) ---------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Change in intercompany debt............. 3,728 (11,037) 7,360 (51) -- Increase (decrease) in revolving loan... (1,900) -- -- -- (1,900) Repayment of debt....................... -- -- (1,765) -- (1,765) Issuance of membership units............ 27 -- -- -- 27 Distributions to members................ (51) (116) -- 51 (116) ---------- --------- ---------- ---------- ---------- Net cash provided by (used for) financing activities................ 1,804 (11,153) 5,595 -- (3,754) ---------- --------- ---------- ---------- ---------- Effect of exchange rate changes........... -- -- 389 -- 389 ---------- --------- ---------- ---------- --------- Net decrease in cash...................... -- (1,131) (17,525) -- (18,656) Cash at beginning of period............... -- 2,217 25,131 -- 27,348 ---------- --------- ---------- ---------- ---------- Cash at end of period..................... $ -- $ 1,086 $ 7,606 $ -- $ 8,692 ========== ========= ========== ========== ==========
11 14 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, 1999 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. Discussions containing forward-looking statements may be found in the material set forth below. 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, significant raw material price fluctuations, 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 Chase Capital Partners 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. In September 1995, the Company, through its SportRack, LLC subsidiary ("SportRack"), acquired substantially all of the net assets of the MascoTech Accessories division of MascoTech, Inc., a North American supplier of rack systems and accessories to the automotive original equipment manufacturers ("OEM") market and aftermarket. In October 1996, the Company acquired all of the capital stock of Brink B.V., a private company with limited liability incorporated under the laws of The Netherlands and a European supplier of towing systems and accessories to the automotive OEM market and aftermarket. In December 1996, ownership of Brink B.V. and its subsidiaries was transferred to a newly formed subsidiary of the Company, Brink International B.V. ("Brink"). In August 1997, the Company formed Valley Industries, LLC to acquire the net assets of Valley Industries, Inc. ("Valley"), a North American supplier of towing systems and accessories to the automotive OEM market and aftermarket. Two smaller acquisitions were completed in July 1997 by a subsidiary of SportRack, SportRack International, Inc. SportRack International acquired from Bell Sports Corporation the net assets of its sportrack division, a Canadian supplier of rack systems and accessories to the automotive aftermarket. SportRack International also acquired the capital stock of Nomadic Sports, Inc., a Canadian supplier of rack systems and accessories to the automotive OEM market and aftermarket. In January 1998, the Company through Brink, acquired the net assets of the towbar segment Ellebi S.p.A., an Italian supplier of towing systems to the automotive OEM market and aftermarket. In February 1998, the Company through SportRack International, Inc., acquired the net assets of Transfo-Rakzs, a Canadian supplier of rear hitch rack carrying systems and related products to the automotive aftermarket. In each instance, the acquisition was accounted for in accordance with the purchase method of accounting and the operating results of the acquired company have been included in the Company's consolidated financial statements since the date of the respective acquisition. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1998. Net Sales. Net sales for the second quarter of 1999 were $89.6 million, representing an increase of $5.3 million, or 6.3%, over net sales for the second quarter of 1998. This increase resulted primarily from increased sales to OEM's of approximately $3.5 million and growth in aftermarket sales of $1.8 million. Offsetting the Company's increased sales volume was the effect of declining exchange rates between the U.S. Dollar and the currencies used by the Company's foreign subsidiaries. For example the average value of the Dutch Guilder, the functional currency of Brink, as compared to the U.S. Dollar declined by 4.2% during the second quarter of 1999 as compared to the second quarter of 1998 resulting in a similar decrease in sales as reported in U.S. Dollars. 12 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, 1999 Gross Profit. Gross profit for the second quarter of 1999 was $26.3 million, representing an increase of $3.9 million, or 17.1%, over the gross profit for the second quarter of 1998. This increase resulted from the increase in net sales and an increase in the gross margin percentage. Gross profit as a percentage of net sales was 29.4% in the second quarter of 1999 compared to 26.7% in the second quarter of 1998. The increase in the gross margin percentage is attributable to decreased material costs, primarily in steel purchased for products produced in Europe, and the effect of higher net sales on fixed overhead costs. The gross margin percentage in the second quarter of 1998 was impacted negatively by low gross profit margins at SportRack International resulting from (i) its entry into new markets, (ii) high development costs and (iii) excess overhead resulting from its start-up phase. Selling, administrative and product development expenses. Selling, administrative and product development expenses for the second quarter of 1999 were $13.0 million, representing an increase of $78,000, or 0.6%, over the selling, administrative and product development expenses for the second quarter of 1998. During the second quarter of 1998 selling, administrative and product development expenses included $614,000 in restructuring charges related to a reassessment of the operations of SportRack International. No restructuring charges have been recorded in 1999. Selling, administrative and product development expenses as a percentage of net sales decreased to 14.5% in the second quarter of 1999 from 15.4% in the second quarter of 1998. Excluding the SportRack International restructuring charge, selling, administrative and product development expenses as a percentage of sales would have been 14.6% for the second quarter of 1998. Operating income. Operating income for the second quarter of 1999 was $12.5 million, an increase of $3.9 million, or 45.7%, over operating income for the first quarter of 1998 reflecting the increase in net sales. Operating income as a percentage of net sales increased to 14.0% in the second quarter of 1999 from 10.2% in the second quarter of 1998 reflecting an increase in gross margins, and a decrease in selling, general and product development expenses as a percentage of net sales. Interest expense. Interest expense for the second quarter of 1999 was $4.4 million, a decrease of $208,000, or 4.5%, over interest expense for the second quarter of 1998. The decrease was primarily due to lower outstanding senior indebtedness attributable to scheduled principal payments made since the second quarter of 1998 offset by higher average line of credit borrowings during the second quarter of 1999 as compared with the second quarter of 1998, and higher interest rates on the Company's variable rate debt. Foreign currency loss. Foreign currency loss in the second quarter of 1999 was $1.6 million, compared to a foreign currency gain of $431,000 in the second quarter of 1998. The Company's foreign currency loss is primarily related to Brink which has indebtedness denominated in U.S. Dollars. During the second quarter of 1999 the U.S. Dollar strengthened significantly in relation to the Dutch Guilder, the functional currency of Brink. At March 31, 1999, the exchange rate of the Dutch Guilder to the U.S. Dollar was 2.04:1, whereas at June 30, 1999 the exchange rate was 2.14:1, or a 4.9% decline in the relative value of the Dutch Guilder. In the second quarter of 1998, the relationship between the two currencies was less volatile. At March 31, 1998, the exchange rate of the Dutch Guilder to the U.S. Dollar was 2.04:1, whereas at June 30, 1998 the exchange rate was 2.03:1, or a 0.5% increase in the relative value of the Dutch Guilder during the quarter. 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 1999, the Company had income before income taxes for its taxable subsidiaries totaling $1.1 million and recorded a provision for income taxes of $847,000. 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 International recorded during 1999 and differences in the tax rates of foreign countries. During the second quarter of 1998, the Company had a income before income taxes for its taxable subsidiaries totaling $123,000 and recorded a provision for income taxes of $414,000. Net income. Net income for the second quarter of 1999 was $5.6 million, as compared to net income of $4.0 million in the second quarter of 1998, an increase of $1.6 million. The change in net income is primarily attributable to increased operating income and decreased interest expense offset by the foreign currency loss in the second quarter of 1999 compared with a foreign currency gain during the second quarter of 1998 and an increased provision for income taxes. SIX MONTHS ENDED JUNE 31, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998. Net Sales. Net sales for the first half of 1999 were $167.6 million, representing an increase of $9.3 million, or 5.9%, over net sales for the first half of 1998. This increase resulted primarily from increased sales to OEM's of approximately $4.4 million and growth in aftermarket sales of $4.9 million. Aftermarket sales growth resulted primarily from increased sales of towing systems in North America as well as increased sales of roof rack accessories by SportRack International. 13 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, 1999 Gross Profit. Gross profit for the first half of 1999 was $48.1 million, representing an increase of $5.6 million, or 13.2%, over the gross profit for the first half of 1998. This increase resulted from the increase in net sales and an increase in the gross margin percentage. Gross profit as a percentage of net sales was 28.7% in the first half of 1999 compared to 26.9% in the first half of 1998. The increase in the gross margin percentage is attributable to decreased material costs, primarily in steel purchased for products produced in Europe, and the effect of higher net sales on fixed overhead costs. The gross margin percentage in the second half of 1998 was impacted negatively by low gross profit margins at SportRack International resulting from (i) its entry into new markets, (ii) high development costs and (iii) excess overhead resulting from its start-up phase. Selling, administrative and product development expenses. Selling, administrative and product development expenses for the first half of 1999 were $26.4 million, representing an increase of $1.1 million, or 4.4%, over the selling, administrative and product development expenses for the first half of 1998, reflecting the increase in net sales. During the second quarter of 1998 selling, administrative and product development expenses included $614,000 in restructuring charges related to a reassessment of the operations of SportRack International. No restructuring charges have been recorded in 1999. Selling, administrative and product development expenses as a percentage of net sales decreased to 15.8% in the first half of 1999 from 16.0% in the first half of 1998. This decrease is attributable to the restructuring charges for SportRack International during the first half of 1998 offset by higher corporate expenses, including severance compensation recorded during the period related to the departure of the Company's former President and Chief Executive Officer. Operating income. Operating income for the first half of 1999 was $20.2 million, an increase of $4.6 million, or 29.8%, over operating income for the first half of 1998 reflecting the increase in net sales. Operating income as a percentage of net sales increased to12.0% in the first half of 1999 from 9.8% in the first half of 1998 reflecting an increase in gross margins, and a decrease in selling, general and product development expenses as a percentage of net sales. Interest expense. Interest expense for the first half of 1999 was $8.9 million, a decrease of $698,000, or 7.3%, over interest expense for the first half of 1998. The decrease was primarily due to lower outstanding senior indebtedness attributable to scheduled principal payments made since the first half of 1998 offset by higher average line of credit borrowings during the first half of 1999 as compared with the first half of 1998, and higher interest rates on the Company's variable rate debt. Foreign currency loss. Foreign currency loss in the first half of 1999 was $5.6 million, compared to a foreign currency loss of $611,000 in the first half of 1998. The Company's foreign currency loss is primarily related to the Brink which has indebtedness denominated in U.S. Dollars. During the first half of 1999 the U.S. Dollar strengthened significantly in relation to the Dutch Guilder, the functional currency of Brink. At December 31, 1998, the exchange rate of the Dutch Guilder to the U.S. Dollar was 1.88:1, whereas at June 30, 1999 the exchange rate was 2.14:1, or a 13.8% decline in the relative value of the Dutch Guilder. In the first half of 1998, the relationship between the two currencies was less volatile. At December 31, 1997, the exchange rate of the Dutch Guilder to the U.S. Dollar was 2.02:1, whereas at June 30, 1998 the exchange rate was 2.03:1, or a 0.5% decline in the relative value of the Dutch Guilder during the quarter. Other expense. In February 1996 the Company commenced an action against certain individuals alleging breach of contract under the terms of an October 1992 Purchase Agreement and Employment Agreement 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 assessing further actions in response to the verdict. During the first half of 1999, the Company increased its estimated accrual for this matter by $2.0 million which charge is included in other expense. 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 half of 1999, the Company had a loss before income taxes for its taxable subsidiaries totaling $2.0 million and recorded a benefit for income taxes of $131,000. 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 International recorded during 1999 and differences in the tax rates of foreign countries. During the first half of 1998, the Company had a loss before income taxes for its taxable subsidiaries totaling $2.3 million and recorded a benefit for income taxes of $757,000. 14 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, 1999 Net income. Net income for the first half of 1999 was $3.8 million, as compared to net income of $6.1 million in the first half of 1998, a decrease of $2.3 million. The decrease in net income is primarily attributable increased foreign currency loss and the other expense recorded in the first half of 1999 offset by increased operating income and decreased interest expense. 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, 1999 was $185.5 million including current maturities of $7.9 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"). WORKING CAPITAL AND CASH FLOWS Working capital and key elements of the consolidated statement of cash flows are (in thousands):
JUNE 30, DECEMBER 31, 1999 1998 -------- -------- Working Capital ............................................................... $ 49,035 $ 49,232 FIRST HALF 1999 1998 -------- -------- Cash flows provided by operating activities .................................. $ 3,800 $ 12,960 Cash flows (used for) investing activities .................................... $ (6,100) $(28,251) Cash flows (used for) financing activities .................................... $ (4,688) $ (3,754)
Working capital Working capital decreased by $197,000 to $49.0 million at June 30, 1999 from $49.2 million at December 31, 1998 due to a decrease in cash of $5.2 million, an increase in accounts payable of $10.3 million, an increase in accrued liabilities of $3.9 million, decrease in inventory of $4.3 million and an increase in the current portion of long term debt of $3.3 million. Offsetting these was an increase in accounts receivable of $26.5 million related to an increase in sales in the second quarter of 1999 as compared with the fourth quarter of 1998, primarily in the automotive aftermarket, and the timing of collections of accounts receivable from large customers, primarily OEMs. Cash decreased by $5.2 million to $6.1 million at June 30, 1999 from $11.2 million at December 31, 1998 primarily due to cash used for investing and financing activities of $6.1 million and $4.7 million, respectively, partially offset by cash provided by operating activities of $3.8 million. Accounts payable increased primarily due to increased raw material purchases during the second quarter of 1999 as compared with the fourth quarter of 1998 to support higher sales levels. Accrued liabilities increased as a result of the Company's recording of a $2.0 million charge related to an ongoing legal action, as discussed above, the liability recorded for the severance payments to the Company's former President and Chief Executive Officer and an increase of $1.0 million in accrued interest for the Company's Notes as compared with that recorded as of December 31, 1998. The current portion of long term debt increased due to the scheduled commencement of principal payments due under the Company's Acquisition Revolving Note in January 2000 and increased scheduled principal payments during the first half of 2000 as compared with the first half of 1999. Operating Activities Cash flow provided by operating activities for the first half of 1999 was $3.8 million, compared to $13.0 million in the first half of 1998. Cash flow for the first half of 1999 decreased primarily due to the timing of the collection of accounts receivable from large customers, primarily OEM's, and an increase in aftermarket sales which generally have longer collection terms than sales to OEM customers. 15 18 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, 1999 Investing Activities During the first half of 1999 and 1998, investing cash flows include acquisitions of property and equipment of $6.1 million and $5.5 million, respectively and were primarily for the expansion of capacity, productivity and process improvements and maintenance. 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. Investing cash flows also include cash payments totaling $21.8 million in the first half of 1998 for the acquisitions of Ellebi and Tranfo-Rakzs. Financing Activities During the first half of 1999 and 1998, financing cash flows included payments of principal on the Company's term indebtedness of $5.5 million and $1.8 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 $3.7 million during the first half of 1999 and were not significant during the first half of 1998. Financing cash flows during the first half of 1999 also included net borrowings under the Company's revolving loans of $4.5 million compared with net repayments of $1.9 million during the first half of 1998. DEBT AND CREDIT SOURCES The Company's indebtedness was $185.5 million and $187.5 million at June 30, 1999 and December 31, 1998, 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, 1999, the Company had borrowings of $4.5 million under the revolving credit facilities and had $20.5 million of available borrowing capacity. As of June 30, 1999, 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 in all material respects through the period ending June 30, 2000. 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 is exposed to interest rate volatility with regard to variable rate debt. The Company uses interest rate swaps to reduce interest rate volatility. At June 30, 1999 and 1998 the notional value of interest rate swaps was $18.5 million. Under the terms of the interest rate swap agreements, the Company pays a fixed interest rate on the notional principal amount. The effects of interest rate swaps are reflected in interest expense and are not material. 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. The Company conducts operations in several foreign countries including Canada, The Netherlands, Denmark, the United Kingdom, Sweden, France, Germany, Poland, Spain and, Italy. Net sales from international operations during the first half of 1999 were approximately $57.5 million, or 34.3% of the Company's net sales. At June 30, 1999, assets associated with these operations were approximately 42.2% of total assets, and the Company had indebtedness denominated in currencies other than the U.S. Dollar of approximately $21.6 million. 16 19 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, 1999 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, 1999 and does not use derivative financial instruments for trading or speculative purposes. YEAR 2000 General The "Year 2000 Issue" is the result of computer programs that were written using two digits rather than four to define the applicable year. If the Company's computer programs with date-sensitive functions are not Year 2000 compliant, they may recognize a date using "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company and each of its operating subsidiaries have substantially completed a Year 2000 readiness programs. The objective of these programs was to have all significant business systems, including those that affect facilities and manufacturing activities, functioning properly with respect to the Year 2000 Issue before June 30, 1999. Project Generally each subsidiary's Year 2000 program was divided into three major sections - internal business software and hardware, internal non-financial software and embedded chip technology and external compliance by customers and suppliers. The general phases common to all sections are: (1) inventorying Year 2000 items; (2) assessing the Year 2000 compliance of identified items; (3) repairing or replacing material items that are determined not to be Year 2000 compliant; (4) testing material items; and (5) designing and implementing contingency and business continuation plans for each organization and company location. The internal business software and hardware section of the Company's Year 2000 program varied by operating subsidiary and included either the conversion or reprogramming of applications software that was not Year 2000 compliant, the inclusion of acquired companies on the Company's existing Enterprise Resource Planning System (ERP System) or, where available from the supplier, the upgrading of such software to a Year 2000 compliant version. The total cost of the Year 2000 program was approximately $935,000 of which approximately $335,000 related to the cost of software modification and approximately $600,000 related to the cost of upgrading existing software to Year 2000 compliant versions. Funds for the program were provided from existing operating budgets for all items and were included in operating expenses as incurred. The Company has completed all phases of its Year 2000 plan related to non-financial software, embedded chip technology, and its non-financial systems such as manufacturing equipment, security equipment, etc. Few of these systems were identified as not being in compliance. Accordingly, the cost of achieving Year 2000 compliance for these systems was minimal. The Company has identified and contacted its critical suppliers, service providers and contractors to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remedy their own Year 2000 issues. Each of the suppliers contacted have indicated that they are currently undergoing or have completed programs related to the Year 2000 problem within their organizations. Due to the satisfactory responses with its critical suppliers, the Company does not intend to change suppliers, service 17 20 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, 1999 providers or contractors. The Company has not independently verified the status of its critical suppliers', service providers' and contractors' Year 2000 readiness. Many of the Company's customers are large OEMs which are preparing for the Year 2000 Issue and it is believed that they will be compliant by the Year 2000. However, the Company does not currently have any formal information concerning the Year 2000 compliance status of its customers, particularly in the aftermarket, but has received indications that most of its customers are working on Year 2000 compliance. Risks The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in large part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on its results of operations, liquidity or financial condition. The Year 2000 program has significantly reduced the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of its material customers and suppliers. The Company believes that, with the implementation of new business systems and completion of the program, the possibility of significant interruptions of normal operations has been reduced. NEW ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued SOP 98-1, "Accounting For the Costs of Computer Software Developed For or Obtained For Internal Use" ("SOP 98-1"). SOP 98-1 was effective for the Company beginning on January 1, 1999. SOP 98-1 requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. This statement has been applied prospectively, however, the impact of this new standard has not had a significant effect on the Company's financial position or results of operations. In April 1998, the AICPA issued Statement of Position ("SOP 98-5"), "Reporting the Costs of Start-up Activities" (SOP 98-5). SOP 98-5 was effective beginning on January 1,1999, and required that start-up costs capitalized prior to January 1, 1999 be written off and any future start-up costs to be expensed as incurred. The Company has adopted the standard established by SOP 98-5 and there has been no impact on the Company's earnings or financial position. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities"("FAS 133"). The statement is effective for fiscal years beginning after June 15, 1999. The Company plans to adopt this statement at the beginning of fiscal 2000. The Company is completing an analysis of FAS 133 which is not expected to have a material impact on the Company's results of operations. 18 21 ADVANCED ACCESSORY SYSTEMS, LLC Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable PART II. OTHER INFORMATION AND SIGNATURE Item 1. Legal Proceedings See "Note 2" of the Company's "Notes to Consolidated Condensed Financial Statements" 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 EXHIBIT NUMBER DESCRIPTION -------------- ----------- 27 Financial Data Schedule (b) Reports on Form 8-K On April 22, 1999, the Company filed a report on Form 8-K to announce the appointment of Terence C. Seikel and Richard E. Borghi to the Board of Managers and as President and Chief Executive Officer of the Company and President of SportRack, respectively. Also announced was the termination of Marshall D. Gladchun, as President and Chief Executive Officer of the Company and Board Member. 19 22 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: August 5, 1999 /s/ TERENCE C. SEIKEL ----------------------------------- Terence C. Seikel President and Chief Executive Officer (chief accounting officer and authorized signatory) 20 23 Exhibit Index Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 6,075 0 64,462 3,415 36,797 112,784 59,066 21,330 266,083 63,749 185,481 0 0 0 14,318 266,083 167,607 167,607 119,470 119,470 38,842 649 8,855 3,676 (131) 3,807 0 0 0 3,807 0 0
-----END PRIVACY-ENHANCED MESSAGE-----