10-Q 1 k70897e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q (Mark one) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 OR [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to ________________ -------------- COMMISSION FILE NUMBER 333-49011 ----------- -------------- [ADVANCED ACCESSORY SYSTEMS LOGO] ADVANCED ACCESSORY SYSTEMS, LLC. (Exact name of registrant as specified in its charter) DELAWARE 13-3848156 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12900 HALL ROAD, SUITE 200, STERLING HEIGHTS, MI 48313 (Address of principal executive offices) (Zip Code) (586) 997-2900 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such a period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No ================================================================================ ADVANCED ACCESSORY SYSTEMS, LLC INDEX

PART I. FINANCIAL INFORMATION Item 1. Financial Statements ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED BALANCE SHEETS AS OF JUNE 30, 2002 AND DECEMBER 31, 2001 (DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of the consolidated condensed financial statements. 1 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated condensed financial statements. 2 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated condensed financial statements. 3 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN MEMBERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2002 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated condensed financial statements. 4 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly its financial position as of June 30, 2002 and December 31, 2001 and the results of its operations for the three and six months ended June 30, 2002 and 2001 and its cash flows for the six months ended June 30, 2002 and 2001. These consolidated condensed financial statements should be read together with the Company's audited financial statements presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 20, 2002. 2. COMPREHENSIVE INCOME Comprehensive income for the second quarter of 2002 and 2001 of $14,006 and $3,812, respectively, and for the first half of 2002 and 2001 of $11,764 and $3,213, respectively, includes reported net loss adjusted by the effect of changes in the cumulative translation adjustment. 3. SIGNIFICANT EVENT In early July 2002, three European automotive OEM customers of Brink Sweden recalled in total approximately 38,000 towbars which were supplied by the Company. The recall affects vehicles fitted with the G 3.0 model removable towbar system sold between January 1999 and March 2000. The Company is in the process of working with its customers to provide technical and other support in response to the recall. Management can not estimate at this time what the financial impact would be to the Company, if any, as a result of the recall. 4. CUMULATIVE EFFECT OF ACCOUNTING CHANGE On January 1, 2002, the Company adopted the accounting standards set forth in Statement of Financial Accounting Standards No. 142, "Goodwill and other Intangible Assets" (SFAS 142) and Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 142 changed the methodology for assessing goodwill impairments. The initial application of this statement resulted in an impairment of goodwill of $29,207 to write down goodwill related to the Valley Industries Acquisition. The impairment was due solely to the change in accounting standards and was reported as a cumulative effect of accounting change during the first quarter of 2002. Under the new standard, impairment is determined by comparing the carrying values of reporting units to the corresponding fair values, which was determined based on the discounted estimated future cash flows of the reporting units. As the impairment related to Valley Industries, LLC for which taxable income accrues to the individual members, no tax effect was recorded for this charge. Additionally, under the new standard, goodwill is no longer amortized but is to be tested periodically for impairment. The effect of no longer amortizing goodwill resulted in a reduction in amortization of intangible assets during the second quarter of 2002 as compared with the first quarter of 2001 of $742 and a reduction during the first six months of 2002 as compared with the first six months of 2001 of $1,485. The adoption of SFAS 144 did not have a material impact on the Company's financial position, results of operations or cash flows. The following table presents net income (loss) for the second quarter 2001 and first six months of 2001, as adjusted for the non-amortization provisions of SFAS No. 142.

Other intangible assets at June 30, 2002 and December 31, 2001 consist of deferred financing costs, a defined benefit pension asset and patents and licenses. Deferred financing costs have a gross carrying amount of $6,689 and 5 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) $6,577, respectively, and accumulated amortization of $2,995 and $2,483, respectively, and are amortized under the effective interest method over the terms of the related debt agreements. Aggregate amortization related to other intangible assets for the three and six months ended June 30, 2002 was $246 and $506, respectively, and for the three and six months ended March 31, 2001 was $946 and $1,893, respectively. Aggregate amortization expense related to other intangible assets for each of the five succeeding fiscal years as of June 30, 2002 is as follows:

For the six months ended June 30, 2002, the carrying amount of goodwill decreased by $29,207 as a result of the impairment write down discussed above and increased by $1,884 as a result of the change in exchange rates between the U.S. Dollar and the European Euro, the functional currency of Brink International B.V. 5. CONDENSED CONSOLIDATING INFORMATION On October 1, 1997, the Company and its wholly-owned subsidiary, AAS Capital Corporation, issued and sold $125,000 of its 9 3/4% Senior Subordinated Notes due 2007 ("the Notes"). The Notes are guaranteed on a full, unconditional and joint and several basis by all of the Company's direct and indirect wholly-owned domestic subsidiaries. The following condensed consolidating financial information presents the financial position, results of operations and cash flows of (i) the Company as parent, as if it accounted for its subsidiaries on the equity method, and AAS Capital Corporation as issuers; (ii) guarantor subsidiaries which are domestic, wholly-owned subsidiaries and include SportRack LLC, AAS Holdings, Inc., Valley Industries, LLC, and ValTek, LLC; and (iii) the non-guarantor subsidiaries which are foreign, wholly-owned subsidiaries and include Brink International B.V. and its subsidiaries, SportRack Accessories, Inc. and its subsidiary, and SportRack Automotive GmbH and its subsidiaries. The operating results of the guarantor and non-guarantor subsidiaries for the three and six months ended June 30, 2002 and 2001 have been allocated a portion of certain corporate overhead costs on a basis consistent with each subsidiary's relative business activity, including interest on intercompany debt balances. Since its formation in September 1997, AAS Capital Corporation has had no operations and has no assets or liabilities at June 30, 2002. 6 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2002

7 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001

8 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001

9 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001

10 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002

11 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 2001

12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the financial statements and notes thereto of the Company included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth above, in the material set forth below, as well as in this Form 10-Q generally. These may include statements projecting, forecasting or estimating Company performance and industry trends. General risks that may impact the achievement of such forecasts include, but are not limited to: compliance with new laws and regulations, general economic conditions in the markets in which the Company operates, fluctuation in demand for the Company's products and in the production of vehicles for which the Company is a supplier, significant raw material price fluctuations, labor disputes involving the Company or its significant customers or suppliers, changes in consumer preferences, dependence on significant automotive customers, the level of competition in the automotive supply industry, pricing pressure from automotive customers, the substantial leverage of the Company, limitations imposed by the Company's debt facilities, changes in the popularity of particular vehicle models or towing and rack systems, the loss of programs on particular vehicle models, risks associated with conducting business in foreign countries and other business factors. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements. All of these forward-looking statements are based on estimates and assumptions made by management of the Company which, although believed to be reasonable, are inherently uncertain. The Company does not intend to update these forward-looking statements. GENERAL An affiliate of J.P. Morgan Partners, LLC ("JPMP") and certain members of the Company's management formed the Company in September 1995 to make strategic acquisitions of automotive exterior accessory manufacturers and to integrate those acquisitions into a global enterprise that would be a preferred supplier to the automotive industry. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2001. Net sales. Net sales for the second quarter of 2002 were $94.3 million, representing an increase of $5.4 million, or 6.1%, compared with net sales for the second quarter of 2001. This increase resulted primarily from increased sales to automotive OEMs of approximately $6.6 million primarily resulting from increased production levels of vehicles in North America compared to the prior year. Additionally, sales benefited by $1.2 million from an increase in exchange rates between the U.S. Dollar and the currencies, primarily the European Euro, used by the Company's foreign subsidiaries. Offsetting these increases was a decline in aftermarket sales of approximately $2.4 million. Gross profit. Gross profit for the second quarter of 2002 was $25.4 million, representing an increase of $2.9 million, or 12.8%, from the gross profit for the second quarter of 2001. This increase resulted from the increase in sales and an increase in the gross margin percentage. Gross profit as a percentage of net sales was 26.9% in the second quarter of 2002 compared to 25.3% in the second quarter of 2001. The increase in the gross margin percentage is primarily attributable to the effects of spreading fixed costs over a higher sales base and increased gross margin for North American towing products resulting from increased productivity and cost cutting efforts. Selling, administrative and product development expenses. Selling, administrative and product development expenses for the second quarter of 2002 were $11.7 million, representing an increase of $346,000, or 3.0%, over the selling, administrative and product development expenses for the second quarter of 2001. Selling, administrative and product development expenses as a percentage of net sales decreased to 12.4% in the second quarter of 2002 from 12.8% in the second quarter of 2001. This decrease is primarily attributable to the effect of covering fixed costs with greater sales and the Company's ongoing cost containment initiatives. Amortization of intangible assets. Amortization of intangible assets for the second quarter of 2002 was $6,000, representing a decrease of $742,000 compared with amortization of intangible assets, which included amortization of goodwill, for the second quarter of 2001. This decrease was the result of a new accounting standard adopted on January 1, 2002, which ceased the amortization of goodwill as of that date. See "New Accounting Pronouncements". 13 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 Operating income. Operating income for the second quarter of 2002 was $13.7 million, an increase of $3.3 million, or 31.4%, from operating income for the second quarter of 2001, reflecting the increase in gross profit and the decrease in amortization of intangible assets, partially offset by the increase in selling, administrative and product development expenses. Operating income as a percentage of net sales increased to 14.5% in the second quarter of 2002 from 11.7% in the second quarter of 2001. Interest expense. Interest expense for the second quarter of 2002 was $3.9 million, which was $610,000 lower than interest expense for the second quarter of 2001. The decrease was due to lower interest rates charged on the Company's variable rate indebtedness and reduced average borrowings. Foreign currency gain (loss). Foreign currency gain in the second quarter of 2002 was $8.2 million, compared to a foreign currency loss of $1.2 million in the second quarter of 2001. The Company's foreign currency gains and losses are primarily related to Brink which has indebtedness denominated in U.S. Dollars, including intercompany debt and a portion of the loans under the Company's Second Amended and Restated Credit Agreement. During the second quarter of 2002, the U.S. Dollar weakened significantly in relation to the European Euro whereas during the second quarter of 2001, the U.S. Dollar strengthened in relation to the European Euro, the functional currency of Brink. Provision for income taxes. The Company and certain of its domestic subsidiaries have elected to be taxed as limited liability companies for federal income tax purposes. As a result of this election, the Company's domestic taxable income accrues to the individual members. Certain of the Company's domestic subsidiaries and foreign subsidiaries are subject to income taxes in their respective jurisdictions. During the second quarter of 2002, the Company had income before income taxes for its taxable subsidiaries totaling $10.5 million and recorded a provision for income taxes of $3.3 million. The effective tax rate differs from the U.S. federal income tax rate primarily due to changes in valuation allowances on the deferred tax assets of SportRack Accessories recorded during 2002 and differences in the tax rates of foreign countries. During the second quarter of 2001, the Company had income before income taxes for its taxable subsidiaries totaling $736,000 and recorded a provision for income taxes of $192,000. Net income. Net income for the second quarter of 2002 was $14.5 million, as compared to net income of $4.5 million in the second quarter of 2001, an increase of $10.0 million. The change in net income is primarily attributable to the increase in operating income, the reduction in interest expense and the foreign currency gain in the second quarter of 2002, as compared with a foreign currency loss in the second quarter of 2001, offset partially by the increase in the provision for income taxes. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001. Net sales. Net sales for the first six months of 2002 were $174.2 million, representing an increase of $6.1 million, or 3.6%, compared with net sales for the first six months of 2001. This increase resulted primarily from increased sales to automotive OEMs of approximately $7.6 million primarily resulting from increased production levels of vehicles in North America compared to the prior year. Additionally, sales benefited by $281,000 from an increase in exchange rates between the U.S. Dollar and the currencies, primarily the European Euro, used by the Company's foreign subsidiaries. Offsetting these increases was a decline in aftermarket sales of approximately $1.8 million. Gross profit. Gross profit for the first six months of 2002 was $44.3 million, representing an increase of $2.6 million, or 6.1%, from the gross profit for the first six months of 2001. This increase resulted from the increase in sales and an increase in the gross margin percentage. Gross profit as a percentage of net sales was 25.4% in the first six months of 2002 compared to 24.8% in the first six months of 2001. The increase in the gross margin percentage is primarily attributable to the effects of spreading fixed costs over a higher sales base and increased gross margin for North American towing products resulting from increased productivity and cost cutting efforts. These increases were partially offset by reduced gross margin resulting from a change in the mix of products sold being weighted more towards lower margin products and lower production efficiency of Brink which restructured its Netherlands manufacturing facilities during the first quarter of 2002. Selling, administrative and product development expenses. Selling, administrative and product development expenses for the first six months of 2002 were $22.5 million, representing an increase of $535,000, or 2.3%, over the selling, administrative and product development expenses for the first six months of 2001. Selling, administrative and product development expenses as a percentage of net sales decreased to 12.9% in the first six months of 2002 from 13.7% in the first six months of 2001. This decrease is primarily attributable to the effect of covering fixed costs with greater sales, the Company's ongoing cost containment initiatives and the lack of costs incurred to relocate a warehouse operation during the first quarter of 2001. Amortization of intangible assets. Amortization of intangible assets for the first six months of 2002 was $13,000, representing a decrease of $1.2 million compared with amortization of intangible assets, which included amortization of goodwill, for 14 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 the first six months of 2001. This decrease was the result of a new accounting standard adopted on January 1, 2002, which ceased the amortization of goodwill as of that date. See "New Accounting Pronouncements". Operating income. Operating income for the first six months of 2002 was $21.8 million, an increase of $4.6 million, or 26.7%, over operating income for the first six months of 2001, reflecting the increase in gross profit and the decrease in amortization of intangible assets, partially offset by the increase in selling, administrative and product development expenses. Operating income as a percentage of net sales increased to 12.5% in the first six months of 2002 from 10.2% in the first six months of 2001. Interest expense. Interest expense for the first six months of 2002 was $7.9 million, which was $1.2 million lower than interest expense for the first six months of 2001. The decrease was due to lower interest rates charged on the Company's variable rate indebtedness and reduced average borrowings. Foreign currency loss. Foreign currency gain in the first six months of 2002 was $6.9 million, compared to a foreign currency loss of $6.0 million in the first six months of 2001. The Company's foreign currency loss is primarily related to Brink which has indebtedness denominated in U.S. Dollars, including intercompany debt and a portion of the loans under the Company's Second Amended and Restated Credit Agreement. During the first six months of 2002 the U.S. Dollar weakened significantly in relation to the European Euro whereas during the first six months of 2001, the U.S. Dollar strengthened in relation to the European Euro, the functional currency of Brink. Provision (benefit) for income taxes. The Company and certain of its domestic subsidiaries have elected to be taxed as limited liability companies for federal income tax purposes. As a result of this election, the Company's domestic taxable income accrues to the individual members. Certain of the Company's domestic subsidiaries and foreign subsidiaries are subject to income taxes in their respective jurisdictions. During the first six months of 2002, the Company had income before income taxes for its taxable subsidiaries totaling $10.0 million and recorded a provision for income taxes of $2.9 million. The effective tax rate differs from the U.S. federal income tax rate primarily due to changes in valuation allowances on the deferred tax assets of SportRack Accessories recorded during 2002 and differences in the tax rates of foreign countries. During the first six months of 2001, the Company had a loss before income taxes for its taxable subsidiaries totaling $4.6 million and recorded a benefit for income taxes of $927,000. Cumulative effect of accounting change. On January 1, 2002, the Company adopted the accounting standards set forth in Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). See "New Accounting Pronouncements". As a result of this accounting change, the Company recorded a loss totaling $29.2 million to write down goodwill recorded in connection with the Valley Industries Acquisition. Net income (loss). Net loss for the first six months of 2002 was $11.4 million, as compared to net income of $3.0 million in the first six months of 2001, a change of $14.4 million. The change in net loss is primarily attributable to the cumulative effect of accounting change due to the adoption of SFAS 142 offset partially by the increase in operating income, lower interest expense and the foreign currency gain in the first six months of 2002 as compared with the foreign currency loss of the first six months of 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity requirements are to service its debt and meet its working capital and capital expenditure needs. The Company's indebtedness at June 30, 2002 was $156.4 million including current maturities of $8.3 million. The Company expects to be able to meet its liquidity requirements through cash provided by operations and through borrowings available under the Second Amended and Restated Credit Agreement ("U.S. Credit Facility"). 15 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 WORKING CAPITAL AND CASH FLOWS Working capital and key elements of the consolidated statement of cash flows are:

Working capital Working capital increased by $15.2 million to $38.6 million at June 30, 2002 from $23.4 million at December 31, 2001 due primarily to an increase in accounts receivable of $18.9 million, an increase of $2.3 in other current assets, a decrease in accrued liabilities of $2.1 million and a decrease in the current portion of long term debt of $2.7 million. These working capital increases were partially offset by a decrease in inventory of $2.6 million and an increase in accounts payable of $8.4 million. The increase in accounts receivable was attributable to increased sales levels in the second quarter of 2002 as compared with the fourth quarter of 2001 and due to a difference in the timing of a payment from the Company's second largest OEM customer. Differences in sales levels between the two consecutive quarters are partly due to seasonal cycles and increased sales to automotive OEMs. Increases in accounts payable during the quarter reflected increased purchasing activities to support the increased sales volume. Inventory decreased primarily at Brink which sold product out of inventory during a plant reorganization in the Netherlands. Operating Activities Cash flow provided by operating activities for the first six months of 2002 was $7.5 million, compared to $9.3 million in the second quarter of 2001. Cash flow for the first six months of 2002 decreased primarily due to an increase in working capital during the first six months of 2002 which was greater than the increase in working capital during the first six months of 2001. Partially offsetting the increased working capital was greater operating income during the first six months of 2002 compared with the first six months of 2001. Investing Activities During the first six months of 2002 and 2001, investing cash flows included acquisitions of property and equipment of $5.7 million and $2.3 million, respectively, and were primarily for the expansion of capacity, productivity and process improvements and maintenance. The increase was primarily due to the construction of a new production facility in France which began during the second quarter of 2002 and is expected to be completed during the third quarter of 2002. The Company's ability to make capital expenditures is subject to restrictions in the U.S. Credit Facility, including a maximum of $12.5 million of capital expenditures annually. Financing Activities During the first six months of 2002 and 2001, financing cash flows included scheduled payments of principal on the Company's term indebtedness of $6.8 million and $5.2 million, respectively. Distributions to members, representing amounts sufficient to meet the tax liability on the Company's domestic taxable income which accrues to individual members, were $2.0 million 16 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 for the first six months of 2002 and were not significant during the first six months of 2001. Financing cash flows during the first six months of 2002 also included net borrowings under the Company's revolving loans of $5.3 million. Financing cash flows during the first six months of 2001 included net repayments under the Company's revolving loans of $5.2 million. DEBT AND CREDIT SOURCES The Company's indebtedness was $156.4 million and $156.6 million at June 30, 2002 and December 31, 2001, respectively. The Company expects that its primary sources of cash will be from operating activities and borrowings under its revolving credit facilities. As of June 30, 2002, the Company had borrowings under the revolving credit facilities totaling $9.5 million and had $17.2 million of available borrowing capacity. Borrowing availability was reduced by an $8.3 million outstanding letter of credit issued to benefit plaintiffs in a lawsuit against the Company. As of June 30, 2002, the Company was in compliance with the various covenants under the debt agreements pursuant to which it has borrowed or may borrow money and believes the Company will remain in compliance with such covenants through the period ending June 30, 2003. Management believes that, based on current and expected levels of operations, cash flows from operations and borrowings under the Revolving Credit Facilities will be sufficient to fund its debt service requirements, working capital needs, and capital expenditures for the foreseeable future, although no assurances can be given in this regard. The Company's ability to satisfy its debt obligations will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business, and other factors, certain of which are beyond its control, as well as the availability of revolving credit borrowings under its current or successor credit facilities. The Company anticipates that, based on current and expected levels of operations, its operating cash flow, together with borrowings under the U.S. Credit Facility and the Canadian Credit Facility, should be sufficient to meet its debt service, working capital and capital expenditure requirements for the foreseeable future, although no assurances can be given in this regard, including as to the ability to increase revenues or profit margins. If the Company is unable to service its indebtedness, it will be forced to take actions such as reducing or delaying acquisitions and/or capital expenditures, selling assets, restructuring or refinancing its indebtedness, or seeking additional equity capital. There is no assurance that any of these remedies can be effected on satisfactory terms, if at all, including, whether, and on what terms, the Company could raise equity capital. See the introductory paragraph of this Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company conducts operations in several foreign countries including Canada, The Netherlands, Denmark, the United Kingdom, Sweden, France, Germany, Poland, Spain, the Czech Republic and Italy. Net sales from international operations during the first six months of 2002 were approximately $51.5 million, or 29.6% of the Company's net sales. At June, 2002, assets associated with these operations were approximately 44.7% of total assets, and the Company had indebtedness denominated in currencies other than the U.S. Dollar of approximately $3.4 million. The Company's international operations may be subject to volatility because of currency fluctuations, inflation and changes in political and economic conditions in these countries. Most of the revenues and costs and expenses of the Company's operations in these countries are denominated in the local currencies. The financial position and results of operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Certain of the Company's foreign subsidiaries have debt denominated in currencies other than their functional currency. As the exchange rates between the currency of the debt and the subsidiaries functional currency change, the Company is subject to foreign currency gains and losses. The Company may periodically use foreign currency forward option contracts to offset the effects of exchange rate fluctuations on cash flows denominated in foreign currencies. The Company has no outstanding foreign currency forward options at June 30, 2002 and does not use derivative financial instruments for trading or speculative purposes. NEW ACCOUNTING PRONOUNCEMENTS On January 1, 2002, the Company adopted the accounting standards set forth in Statement of Financial Accounting Standards No. 142, "Goodwill and other Intangible Assets" (SFAS 142) and Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 142 changed the methodology for assessing goodwill impairments. The initial application of this statement resulted in an impairment of goodwill of $29.2 million to write down goodwill 17 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 related to the Valley Industries Acquisition. The impairment was due solely to the change in accounting standards and was reported as a cumulative effect of accounting change during the first quarter of 2002. Under the new standard, impairment is determined by comparing the carrying values of reporting units to the corresponding fair values, which was determined based on the discounted estimated future cash flows of the reporting units. As the impairment related to Valley Industries, LLC for which taxable income accrues to the individual members, no tax effect was recorded for this charge during the first quarter of 2002. Additionally, under the new standard, goodwill is no longer amortized but is to be tested periodically for impairment. The effect of no longer amortizing goodwill resulted in a reduction of $743,000 in amortization of intangible assets during the first quarter of 2002 as compared with the first quarter of 2001. The adoption of SFAS 144 did not have a material impact on the Company's financial position, results of operations or cash flows. SIGNIFICANT EVENT In early July 2002, three European automotive OEM customers of Brink Sweden recalled in total approximately 38,000 towbars which were supplied by the Company. The recall affects vehicles fitted with the G 3.0 model removable towbar system sold between January 1999 and March 2000. The Company is in the process of working with its customers to provide technical and other support in response to the recall. Management can not estimate at this time what the financial impact would be to the Company, if any, as a result of the recall. 18 ADVANCED ACCESSORY SYSTEMS, LLC Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes since those which were reported in the Company's annual report on Form 10-K, filed with the Commission on March 20, 2002. PART II. OTHER INFORMATION AND SIGNATURE Item 1. Legal Proceedings Gibbs v. Advanced Accessory Systems, LLC. In February 1996, the Company commenced an action against two former employees alleging breach of contract under the terms of an October 1992 Purchase Agreement and Employment Agreements with the predecessor of the Company. The individuals then filed a separate lawsuit against the Company alleging breach of contract under the respective Purchase and Employment agreements. On May 7, 1999 a jury in the United States District Court for the Eastern District of Michigan reached a verdict against the Company and awarded the individuals approximately $3.8 million plus interest and reasonable attorney fees. The Company is currently pursuing an appeal in the Sixth Circuit Court of Appeals. During the first six months of 2002 and 2001, the Company increased its estimated accrual for this matter by $300,000 which charge is included in interest expense. No amounts have been paid as of June 30, 2002. In addition to the above, from time to time, the Company is subject to legal proceedings and other claims arising in the ordinary course of its business. Management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company maintains insurance coverage against claims in an amount which it believes to be adequate. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security-Holders None Items 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 19 ADVANCED ACCESSORY SYSTEMS, LLC SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANCED ACCESSORY SYSTEMS, LLC (Registrant) Date: July 30, 2002 /s/ BARRY G. STEELE -------------------------------------------- Barry G. Steele Chief Financial Officer (Principal Accounting and Financial Officer and Authorized Signatory) 20

ADVANCED ACCESSORY SYSTEMS LLC 10-Q