<PAGE> 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
================================================================================
<PAGE> 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
<PAGE> 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)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
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
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
1
<PAGE> 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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
2
<PAGE> 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)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
3
<PAGE> 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)
<TABLE>
<CAPTION>
Other Total
Class A comprehensive Accumulated members'
Units loss deficit equity
----- ---- ------- ------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
4
<PAGE> 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
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
6
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
============ =========== =========== =========== ==========
</TABLE>
7
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========== ========== =========== ========== ==========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========== ========== =========== ========== ==========
</TABLE>
8
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========== ========== =========== ========== ==========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========== ========== =========== ========== ==========
</TABLE>
9
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========== ========= ========== ========== ==========
</TABLE>
10
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========== ========= ========== ========== ==========
</TABLE>
11
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
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)
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 23
Exhibit Index
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,075
<SECURITIES> 0
<RECEIVABLES> 64,462
<ALLOWANCES> 3,415
<INVENTORY> 36,797
<CURRENT-ASSETS> 112,784
<PP&E> 59,066
<DEPRECIATION> 21,330
<TOTAL-ASSETS> 266,083
<CURRENT-LIABILITIES> 63,749
<BONDS> 185,481
0
0
<COMMON> 0
<OTHER-SE> 14,318
<TOTAL-LIABILITY-AND-EQUITY> 266,083
<SALES> 167,607
<TOTAL-REVENUES> 167,607
<CGS> 119,470
<TOTAL-COSTS> 119,470
<OTHER-EXPENSES> 38,842
<LOSS-PROVISION> 649
<INTEREST-EXPENSE> 8,855
<INCOME-PRETAX> 3,676
<INCOME-TAX> (131)
<INCOME-CONTINUING> 3,807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,807
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
