-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M2zPxyZnu51z41i6zWjauZoL5UhjtHBaTPWwlM+HjdOs2ltVvQvkBJYH0inOiKuE OblB9W4HWg4oeUkRrFE/Ag== 0000950124-98-006362.txt : 19981113 0000950124-98-006362.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950124-98-006362 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED ACCESSORY SYSTEMS LLC CENTRAL INDEX KEY: 0001057836 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 133848156 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-49011 FILM NUMBER: 98744147 BUSINESS ADDRESS: STREET 1: 12900 HALL RD STREET 2: SUITE 200 CITY: STERLING HEIGHTS STATE: MI ZIP: 48313 BUSINESS PHONE: 8109972900 MAIL ADDRESS: STREET 1: 12900 HALL RD STREET 2: SUITE 200 CITY: STERLING HEIGHTS STATE: MI ZIP: 48313 10-Q 1 FORM 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 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) (810) 997-2900 (Telephone Number) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No ================================================================================ 2 ADVANCED ACCESSORY SYSTEMS, LLC INDEX
Page No. Part I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 1 September 30, 1998 and December 31, 1997 Consolidated Condensed Statements of Income 2 for the Three and Nine Months Ended September 30, 1998 and 1997 Consolidated Condensed Statements of 3 Cash Flows for the Nine Months Ended September 30, 1998 and 1997 Consolidated Condensed Statement of Changes 4 in Members' Equity for the Nine Months Ended September 30, 1998 Notes to Consolidated Condensed Financial 5 Statements Item 2. Management's Discussion and Analysis of 13 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 19 Market Risk Part II. Other Information and Signature Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of 20 Security-holders Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signature 21
3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) (UNAUDITED)
September 30 December 31, ASSETS 1998 1997 Current assets Cash $ 12,528 $ 27,348 Accounts receivable, less reserves of $2,182 and $1,699, respectively 51,836 43,523 Inventories Finished goods 15,768 15,624 Work-in-process 11,588 5,040 Raw materials 14,298 13,744 ------- -------- Total inventories 41,654 34,408 Deferred income taxes 531 -- Other current assets 4,004 6,469 -------- -------- Total current assets 110,553 111,748 Property and equipment, net 64,121 55,928 Goodwill, net 94,758 85,889 Other intangible assets, net 6,369 7,595 Deferred income taxes 3,080 3,626 Other noncurrent assets 2,972 697 -------- -------- $281,853 $265,483 ======== ======== LIABILITIES AND MEMBERS' EQUITY Current liabilities Current maturities of long-term debt $ 3,830 $ 3,746 Accounts payable 27,116 23,479 Accrued liabilities 25,158 18,815 Deferred income taxes 1,760 1,333 -------- -------- Total current liabilities 57,864 47,373 -------- -------- Noncurrent liabilities Deferred income taxes 3,357 3,545 Other noncurrent liabilities 4,558 1,234 Long-term debt, less current maturities 185,187 193,380 -------- -------- Total noncurrent liabilities 193,102 198,159 -------- -------- Mandatorily redeemable warrants 3,732 3,507 -------- -------- Members' equity Class A units 22,965 23,163 Currency translation adjustment (340) (490) Retained earnings (accumulated deficit) 4,530 (6,229) -------- -------- 27,155 16,444 -------- -------- $281,853 $265,483 ======== ========
The accompanying notes are an integral part of the consolidated condensed financial statements. 1 4 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (DOLLARS IN THOUSANDS) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Net sales $67,486 $52,321 $225,765 $123,949 Cost of sales 49,833 38,238 165,321 87,063 ------- ------- -------- -------- Gross profit 17,653 14,083 60,444 36,886 Selling, administrative and product development expenses 12,053 7,976 36,733 20,985 Amortization of intangible assets 833 649 2,558 1,657 ------- ------- -------- -------- Operating income 4,767 5,458 21,153 14,244 ------- ------- -------- -------- Other income (expense) Interest expense (4,724) (2,924) (14,277) (7,630) Foreign currency gain (loss), net 7,121 (3,236) 6,510 (7,502) Other expense (27) (267) (893) (106) ------- ------- -------- -------- Income (loss) before minority interest and income taxes 7,137 (969) 12,493 (994) Provision (benefit) for income taxes 2,344 (700) 1,602 (2,068) ------- ------- -------- -------- Income (loss) before minority interest 4,793 (269) 10,891 1,074 Minority interest -- 25 -- 68 ------- ------- -------- -------- Net income (loss) $ 4,793 $ (294) $ 10,891 $ 1,006 ======= ======= ======== ========
The accompanying notes are an integral part of the consolidated condensed financial statements. 2 5 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (DOLLARS IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,891 $ 1,006 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 10,957 6,425 Loss on disposal of property and equipment 30 -- Deferred taxes 119 (2,068) Foreign currency loss (gain) (6,510) 7,502 Changes in assets and liabilities, net 7,019 (10,494) -------- -------- Net cash provided by operating activities 22,506 2,371 -------- -------- CASH FLOWS USED FOR INVESTING ACTIVITIES: Acquisition of property and equipment (7,341) (4,320) Acquisitions, net of cash acquired (22,770) (71,982) -------- -------- Net cash used for investing activities (30,111) (76,302) -------- -------- CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES: Net increase (reduction) in revolving loan (4,472) 9,924 Long-term debt borrowings -- 69,492 Debt issuance costs -- (2,356) Payments on long-term debt (2,576) (2,500) Issuance of membership units 27 4,499 Distributions to members (132) (2,944) -------- -------- Net cash provided by (used for) financing activities (7,153) 76,115 -------- -------- Effect of exchange rate changes (62) (1,220) -------- -------- Net increase (decrease) in cash (14,820) 964 Cash at beginning of period 27,348 2,514 -------- -------- Cash at end of period $ 12,528 $ 3,478 ======== ========
The accompanying notes are an integral part of the consolidated condensed financial statements. 3 6 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN MEMBERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS) (UNAUDITED)
Retained Currency earnings Total Class A translation (accumulated members' units adjustment deficit) equity -------- ------------ ---------- --------- Balance at December 31, 1997 $23,163 $(490) $(6,229) $16,444 Accretion of membership warrants (225) -- -- (225) Issuance of additional units 150 -- -- 150 Issuance of equity notes receivable (123) -- -- (123) Distributions to members -- -- (132) (132) Currency translation adjustment -- 150 -- 150 Net income -- -- 10,891 10,891 ------- ----- ------- ------- Balance at September 30, 1998 $22,965 $(340) $ 4,530 $27,155 ======= ===== ======= =======
The accompanying notes are an integral part of the consolidated condensed financial statements. 4 7 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments, all of which are normal and recurring in nature, necessary to present fairly the financial position as of September 30, 1998 and December 31, 1997 and the results of operations for the three and nine months ended September 30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998 and 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the fiscal period. Actual results could differ from those estimates. 2. NEW BUSINESSES On January 2, 1998 the Company through Brink International B.V., acquired the net assets of the towbar segment of Ellebi S.p.A. for an aggregate purchase price of approximately $22,000, including costs of the transaction. Ellebi S.p.A. is an Italian manufacturer and distributor of towing systems to the European automotive OEM market and aftermarket. The acquisition has been accounted for under the purchase method of accounting. The excess of the aggregate purchase price over the estimated fair market value of the net assets acquired was approximately $3,250. The acquisition was financed primarily through the Company's Acquisition Revolving Note. In February 1998, the Company, through SportRack International, Inc., acquired the net assets of Transfo-Rakzs, Inc. for an aggregate purchase price of approximately $1,100, including costs of the transaction. Transfo-Rakzs is a designer, manufacturer and distributor of rear hitch rack carrying systems and related products to Canada and the United States. The acquisition has been accounted for under the purchase method of accounting. The excess of the aggregate purchase price over the estimated fair market value of the net assets acquired was approximately $900. The acquisition was financed with proceeds from the Company's Revolving Line of Credit. In addition to the Ellebi and Transfo-Rakzs acquisitions consummated during the first quarter of 1998, discussed above, during the third quarter of 1997 the Company acquired the net assets of the business of Valley Industries, Inc., the net assets of the business of the SportRack division of Bell Sports Canada, Inc ("Bell") and the stock of Nomadic Sports, Inc. Each acquisition has been accounted for under the purchase method of accounting with the results of operations included in the accompanying financial statements from the respective dates of acquisition. Pro forma sales and net loss for the third quarter of 1997 are $67,416, and $(3,143), respectively, and are $198,305, and $(724), respectively, for the first nine months of 1997. This pro forma data illustrates the estimated effects as if the acquisitions had been completed January 1, 1997, after including the impact of certain adjustments for goodwill amortization, depreciation, interest expense and the related income tax effects. Pro forma data for the three and six month periods ended September 30, 1998 is not presented as such data is substantially that of the Company for the period. The pro forma results are not necessarily indicative of the actual results if the transactions had been in effect for the entire period and are not intended to be a projection of future results of operations. 3. MINORITY INTEREST Effective December 31, 1997, Chase Capital Partners, a majority owner of the Company, exchanged its one percent interest in SportRack, LLC, the Company's then (prior to the exchange) 99% owned subsidiary, for a one percent interest in the Company. As of that date and during the nine months ended September 30, 1998, no minority interests existed in any of the Company's subsidiaries. Accordingly, no provision for minority interest has been made as of and for the three or nine months ended September 30, 1998. 5 8 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 4. COMPREHENSIVE INCOME Comprehensive income (loss) for the third quarter of 1998 and 1997 of $4,911 and $(411), respectively, and for the first nine months of 1998 and 1997 of $11,041 and $504, respectively, includes reported net income adjusted by the non-cash effect of changes in the cumulative translation adjustment. 5. CHANGE IN ESTIMATE In July 1997 the Company, through SportRack International, acquired from Bell the net assets of its SportRack division, a Canadian supplier of rack systems and accessories to the automotive aftermarket for approximately $13,500. At the acquisition date, the Company recorded approximately $1,200 of goodwill representing the excess of the purchase price over the then estimated fair value of net assets acquired. In June 1998, an uncertainty was resolved and it was determined that the fair value of certain accounts receivable, inventory and tooling acquired from Bell had a fair value less than the original estimate and the Company revised its estimate of the SportRack International goodwill. Additional goodwill of approximately $4,500, net of a $2,000 reimbursement from Bell, was recorded as of June 30, 1998. Since that date management is revising a business plan for the SportRack International operations and expects to finalize this plan during the fourth quarter of 1998. As a result of information that became available during management's reassessment of the SportRack International operations, accounts receivable and inventory valuation allowances aggregating approximately $850 were recorded and charged to other expense. 6. 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 nine months ended September 30, 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. During the three and nine month periods ended September 30, 1997 only foreign subsidiaries have been charged interest on intercompany 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 September 30, 1998. 6 9 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 6. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 1998
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) ASSETS Current assets Cash........................................... $ -- $ 5,235 $ 7,293 $ -- $ 12,528 Accounts receivable............................ -- 34,509 17,327 -- 51,836 Inventories.................................... -- 15,035 26,619 -- 41,654 Other current assets........................... 36 2,711 1,788 -- 4,535 -------- -------- -------- --------- -------- Total current assets...................... 36 57,490 53,027 -- 110,553 -------- -------- -------- --------- -------- Property and equipment, net...................... -- 28,137 35,984 -- 64,121 Goodwill, net.................................... 1,115 59,802 33,841 -- 94,758 Intangible assets, net........................... 5,194 320 855 -- 6,369 Deferred income taxes and other noncurrent assets.............................. -- 2,210 3,842 -- 6,052 Investment in subsidiaries....................... 40,552 10,022 -- (50,574) -- Intercompany notes receivable.................... 113,573 -- -- (113,573) -- -------- -------- -------- --------- -------- Total assets.............................. $160,470 $157,981 $127,549 $(164,147) $281,853 ======== ======== ======== ========= ======== LIABILITIES AND MEMBERS' EQUITY Current liabilities Current maturities of long-term debt........... $ -- $ -- $ 3,830 $ -- $ 3,830 Accounts payable............................... -- 17,600 9,516 -- 27,116 Accrued liabilities and deferred income taxes................................. 6,623 7,772 12,523 -- 26,918 -------- -------- -------- --------- -------- Total current liabilities................. 6,623 25,372 25,869 -- 57,864 -------- -------- -------- --------- -------- Deferred income taxes and other noncurrent liabilities......................... 883 1,269 5,763 -- 7,915 Long-term debt, less current maturities.......... 124,557 -- 60,630 -- 185,187 Intercompany debt................................ -- 82,100 31,473 (113,573) -- Mandatorily redeemable warrants.................. 3,732 -- -- -- 3,732 Members' equity.................................. 24,675 49,240 3,814 (50,574) 27,155 -------- -------- -------- --------- -------- Total liabilities and members' equity.................................... $160,470 $157,981 $127,549 $(164,147) $281,853 ======== ======== ======== ========= ========
7 10 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 6. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 1997
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) ASSETS Current assets Cash................................... $ -- $ 2,217 $ 25,131 $ -- $ 27,348 Accounts receivable.................... -- 31,649 11,874 -- 43,523 Inventories............................ -- 14,835 19,573 -- 34,408 Other current assets................... -- 4,912 1,557 -- 6,469 ------- -------- -------- -------- -------- Total current assets.............. -- 53,613 58,135 -- 111,748 ------- -------- -------- -------- -------- Property and equipment, net.............. -- 28,009 27,919 -- 55,928 Goodwill, net............................ 1,145 61,431 23,313 -- 85,889 Intangible assets, net................... 5,558 722 1,315 -- 7,595 Deferred income taxes and other noncurrent assets...................... -- 384 3,939 -- 4,323 Investment in subsidiaries............... 26,500 10,022 -- (36,522) -- Intercompany notes receivable............ 115,056 -- -- (115,056) -- -------- -------- -------- -------- -------- Total assets...................... $148,259 $154,181 $114,621 $(151,578) $265,483 ======== ======== ======== ======== ======== LIABILITIES AND MEMBERS' EQUITY Current liabilities Current maturities of long-term debt... $ -- $ -- $ 3,746 $ -- 3,746 Accounts payable....................... -- 19,053 4,426 -- 23,479 Accrued liabilities and deferred income taxes......................... 4,202 7,180 8,766 -- 20,148 ------- -------- -------- -------- -------- Total current liabilities......... 4,202 26,233 16,938 -- 47,373 ------- -------- -------- -------- -------- Deferred income taxes and other noncurrent liabilities................. -- 1,318 3,461 -- 4,779 Long-term debt, less current maturities.. 126,436 -- 66,944 -- 193,380 Intercompany debt........................ -- 89,218 25,838 (115,056) -- Mandatorily redeemable warrants.......... 3,507 -- -- -- 3,507 Members' equity.......................... 14,114 37,412 1,440 (36,522) 16,444 -------- -------- -------- --------- -------- Total liabilities and members' equity............................ $148,259 $154,181 $114,621 $(151,578) $265,483 ======== ======== ======== ========= ========
8 11 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 6. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net sales................................ $ -- $43,922 $23,564 $ -- $67,486 Cost of sales............................ -- 33,477 16,356 -- 49,833 ------ ------ ------- ------- ------- Gross profit........................... -- 10,445 7,208 -- 17,653 Selling, administrative and product development expenses................... 254 5,932 5,867 -- 12,053 Amortization of intangible assets........ 10 543 280 -- 833 ------ ------ ------- ------- ------- Operating income (loss)................ (264) 3,970 1,061 -- 4,767 Interest expense......................... 891 1,717 2,116 -- 4,724 Equity in income (loss) of subsidiaries 5,948 -- -- (5,948) -- Foreign currency gain (loss)............. -- -- 7,121 -- 7,121 Other income (expense)................... -- (25) (2) -- (27) ------ ------ ------- ------- ------- Income before income taxes............... 4,793 2,228 6,064 (5,948) 7,137 Provision for income taxes............... -- -- 2,344 -- 2,344 ------ ------ ------- ------- ------- Net income............................... $4,793 $2,228 $ 3,720 $(5,948) $ 4,793 ====== ====== ======= ======= =======
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net sales.................................... $ -- $34,373 $17,948 $ -- $52,321 Cost of sales................................ -- 26,133 12,105 -- 38,238 ------ ------- ------- ------- ------- Gross profit............................... -- 8,240 5,843 -- 14,083 Selling, administrative and product development expenses....................... 238 3,470 4,268 -- 7,976 Amortization of intangible assets............ 54 473 122 -- 649 ------ ------- ------- ------- ------- Operating income (loss).................... (292) 4,297 1,453 -- 5,458 Interest expense............................. 163 1,588 1,173 -- 2,924 Equity in income (loss) of subsidiaries...... 186 -- -- (186) -- Foreign currency gain (loss)................. -- 82 (3,318) -- (3,236) Other income (loss).......................... -- (198) (69) -- (267) ------ ------- ------- ------- ------- Income (loss) before minority interest and income taxes.......................... (269) 2,593 (3,107) (186) (969) Provision (benefit) for income taxes......... -- -- (700) -- (700) ------ ------- ------- ------- ------- Income (loss) before minority interest................................. (269) 2,593 (2,407) (186) (269) Minority interest............................ -- -- -- 25 25 ------ ------- ------- ------- ------- Net income (loss)............................ $ (269) $ 2,593 $(2,407) $ (211) $ (294) ====== ======= ======= ======= =======
9 12 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 NINE MONTHS ENDED SEPTEMBER 30, 1998
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net sales................................ $ -- $146,842 $78,923 $ -- $225,765 Cost of sales............................ -- 110,298 55,023 -- 165,321 ------- -------- ------- -------- -------- Gross profit........................... -- 36,544 23,900 -- 60,444 Selling, administrative and product development expenses................... 582 17,534 18,617 -- 36,733 Amortization of intangible assets........ 30 1,629 899 -- 2,558 ------- -------- ------- -------- -------- Operating income (loss)................ (612) 17,381 4,384 -- 21,153 Interest expense......................... 2,666 5,396 6,215 -- 14,277 Equity in income (loss) of subsidiaries 14,184 -- -- (14,184) -- Foreign currency gain (loss)............. -- -- 6,510 -- 6,510 Other income (expense)................... -- (25) (868) -- (893) ------- -------- ------- -------- -------- Income before income taxes............... 10,906 11,960 3,811 (14,184) 12,493 Provision for income taxes............... 15 -- 1,587 -- 1,602 ------- -------- ------- -------- -------- Net income............................... $10,891 $ 11,960 $ 2,224 $(14,184) $ 10,891 ======= ======== ======= ======== ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net sales................................ $ -- $73,463 $50,486 $ -- $123,949 Cost of sales............................ -- 52,895 34,168 -- 87,063 ------ ------- ------- ------- -------- Gross profit........................... -- 20,568 16,318 -- 36,886 Selling, administrative and product development expenses................... 613 9,144 11,228 -- 20,985 Amortization of intangible assets........ 74 1,019 564 -- 1,657 ------ ------- ------- ------- -------- Operating income (loss)................ (687) 10,405 4,526 -- 14,244 Interest expense......................... 725 3,496 3,409 -- 7,630 Equity in income (loss) of subsidiaries.. 1,455 -- -- (1,455) -- Foreign currency gain (loss)............. 963 -- (8,465) -- (7,502) Other income (expense)................... -- -- (106) -- (106) ------ ------- ------- ------- --------- Income (loss) before minority interest and income taxes...................... 1,006 6,909 (7,454) (1,455) (994) Provision (benefit) for income taxes..... -- -- (2,068) -- (2,068) ------ ------- ------- ------- -------- Income (loss) before minority interest............................. 1,006 6,909 (5,386) (1,455) 1,074 Minority interest........................ -- -- -- 68 68 ------ ------- ------ ------- -------- Net income (loss)........................ $1,006 $ 6,909 $(5,386) $(1,523) $ 1,006 ====== ======= ======= ======= ========
10 13 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 6. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net cash provided by operating activities.............................. $ 419 $15,253 $ 6,834 $ -- $ 22,506 ------- ------- -------- ------ -------- Cash flows used for investing activities: Acquisition of property and equipment............................. -- (4,800) (2,541) -- (7,341) Acquisitions, net of cash acquired...... -- -- (22,770) -- (22,770) ------- ------- -------- ------ -------- Net cash used for investing........... -- (4,800) (25,311) -- (30,111) ------- ------- -------- ------ -------- activities................................ Cash flows from (used for) financing activities: Change in intercompany debt............. 1,586 (7,303) 5,849 (132) -- Net reduction in revolving loan......... (1,900) -- (2,572) -- (4,472) Repayment of debt....................... -- -- (2,576) -- (2,576) Issuance of membership units............ 27 -- -- -- 27 Distributions to members................ (132) (132) -- 132 (132) ------- ------- -------- ------ -------- Net cash provided by (used for) financing activities................ (419) (7,435) 701 -- (7,153) -------- ------- -------- ------ -------- Effect of exchange rate changes........... -- -- (62) -- (62) -------- ------- -------- ------ ------- Net increase (decrease) in cash........... -- 3,018 (17,838) -- (14,820) Cash at beginning of period............... -- 2,217 25,131 -- 27,348 ------- ------- -------- ------ -------- Cash at end of period..................... $ -- $ 5,235 $ 7,293 $ -- $ 12,528 ======= ======= ======== ====== ========
11 14 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 6. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
GUARANTOR NON-GUARANTOR ELIMINATIONS/ ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------- ------------ ------------ ----------- ------------ (DOLLAR AMOUNTS IN THOUSANDS) Net cash provided by (used for) operating activities.............................. $ (571) $ 1,597 $ 1,345 $ -- $ 2,371 -------- -------- -------- ------- -------- Cash flows used for investing activities: Acquisition of property and equipment............................ -- (2,605) (1,715) -- (4,320) Acquisition of subsidiaries, net of cash acquired.................. -- (57,628) (14,354) -- (71,982) ------- -------- -------- ------- -------- Net cash used for investing........... -- (60,233) (16,069) -- (76,302) ------- -------- -------- ------- -------- activities................................ Cash flows from financing activities: Change in intercompany debt............. 1,342 1,970 (398) (2,914) -- Net increase in revolving loan.......... -- 8,110 1,814 -- 9,924 Long-term debt borrowings............... -- 55,000 14,492 -- 69,492 Debt issuance costs..................... (2,356) -- -- -- (2,356) Repayment of debt....................... -- (2,500) -- -- (2,500) Issuance of membership units............ 4,499 -- -- -- 4,499 Distributions to members................ (2,914) (2,944) -- 2,914 (2,944) ------- -------- -------- ------- -------- Net cash provided by financing activities............... 571 59,636 15,908 -- 76,115 ------- -------- -------- ------- -------- Effect of exchange rate changes........... -- -- (1,220) -- (1,220) ------- -------- -------- ------- ------- Net increase (decrease) in cash........... -- 1,000 (36) -- 964 Cash at beginning of period............... -- 148 2,366 -- 2,514 ------- -------- -------- ------- -------- Cash at end of period..................... $ -- $ 1,148 $ 2,330 $ -- $ 3,478 ======= ======== ======== ======= ========
12 15 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 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 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 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 June 1998, an uncertainty was resolved and it was determined that the fair value of certain accounts receivable, inventory and tooling acquired from Bell had a fair value less than the original estimate and the Company revised its estimate of the SportRack International goodwill. Additional goodwill of approximately $4.5 million, net of a $2.0 million reimbursement from Bell, was recorded as of June 30, 1998. During the fourth quarter of 1998 management will continue to assess and develop a business plan for the SportRack International operations. In January 1998, the Company through Brink International B.V., acquired the net assets of the towbar segment of Ellebi S.p.A. ("Ellebi") for an aggregate purchase price of approximately $22 million including estimated costs of the transaction. Ellebi is an Italian manufacturer and distributor of towing systems to the European automotive OEM market and aftermarket. The acquisition was financed primarily through the Company's acquisition revolving note. Total revenue for Ellebi was $21.3 million for the year ended December 31, 1997. In February 1998, the Company through SportRack International, Inc., acquired the net assets of Transfo-Rakzs, Inc. (Tranfo-Rakzs) for an aggregate purchase price of approximately $1.1 million, including estimated costs of the transaction. Transfo-Rakzs is a designer, manufacturer and distributor of rear hitch rack carrying systems and related products to Canada and the U.S. The acquisition was financed primarily through borrowings under the Company's revolving credit facility. Total revenue for Transfo-Rakzs, Inc. was $0.5 million for the year ended December 31, 1997. 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. 13 16 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997. Net Sales. Net sales for the third quarter of 1998 were $67.5 million, representing an increase of $15.2 million, or 29.0%, over net sales for the third quarter of 1997. This increase resulted primarily from the acquisitions of Valley, Ellebi and Transfo-Rakzs. Acquisition related increased sales from these subsidiaries totaled $10.9 million. The remaining increase of $4.3 million resulted primarily from increased sales volumes of OEM rack systems and growth in towing systems sold in Europe. Gross Profit. Gross profit for the third quarter of 1998 was $17.7 million, representing an increase of $3.6 million, or 25.3%, over the gross profit for the third quarter of 1997. This increase resulted primarily from the increase in net sales, partially offset by a decrease in the gross margin percentage. Gross profit as a percentage of net sales was 26.2% in the third quarter of 1998 compared to 26.9% in the third quarter of 1997. This decrease in gross profit margins is attributable to having a greater percentage of sales for roof rack programs with lower gross margins in the third quarter of 1998 compared to the third quarter of 1997. Selling, administrative and product development expenses. Selling, administrative and product development expenses for the third quarter of 1998 were $12.1 million, representing an increase of $4.1 million, or 51.1%, over the selling, administrative and product development expenses for the third quarter of 1997, primarily reflecting the increase in net sales. Selling, administrative and product development expenses as a percentage of net sales increased to 17.9% in the third quarter of 1998 from 15.2 % in the third quarter of 1997. This increase is the result of increased spending on research and development activities and increased costs in the roof rack aftermarket as a percentage of sales. Operating income. Operating income for the third quarter of 1998 was $4.8 million, a decrease of $0.7 million, or 12.7%, over operating income for the third quarter of 1997 reflecting the increase in selling, administrative and product development expenses. Operating income as a percentage of net sales decreased to 7.1% in the third quarter of 1998 from 10.4% in the third quarter of 1997 reflecting a decrease in gross margins and an increase in selling, administrative and product development expenses as a percentage of net sales. Interest expense. Interest expense for the third quarter of 1998 was $4.7 million, an increase of $1.8 million, or 61.6%, over interest expense for the third quarter of 1997. The increase was primarily due to additional borrowings to finance (i) the acquisition of Ellebi in January 1998, (ii) the acquisition of Transfo-Rakzs in February 1998 and (iii) the effect of the issuance of $125 million of the Company's 9 3/4% Senior Subordinated Notes in October 1997, which proceeds were used to repay debt from the acquisition of Valley and other then existing debt. These increases were partially offset by lower interest expense due to lower average line of credit borrowings during the quarter and lower interest rates on the Company's variable rate debt. Foreign currency gain (loss). Foreign currency gain in the third quarter of 1998 was $7.1 million, compared to a foreign currency loss of $3.2 million in the third quarter of 1997. The Company's Foreign currency exposure is primarily related to Brink which has indebtedness denominated in U.S. dollars. During the third quarter of 1998, the U.S. dollar weakened in relation to the Dutch Guilder, the functional currency of Brink. At September 30, 1998, the exchange rate of the Dutch Guilder to the U.S. dollar was 1.84:1, whereas at June 30, 1998 the exchange rate was 2.03:1, or a 9.4% increase in the relative value of the Dutch Guilder. In the third quarter of 1997 the U.S. dollar strengthened in relation to the Dutch Guilder. At September 30, 1997, the exchange rate of the Dutch Guilder to the U.S. dollar was 2.05:1, whereas at June 30, 1997 the exchange rate was 1.96:1, or a 4.6% decline in the relative value of the Dutch Guilder during the quarter. 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 third quarter of 1998 the company had income before income taxes for its taxable subsidiaries totaling $6.1 million and recorded a provision for income taxes of $2.3 million. During the third quarter of 1997 the company had a loss before income taxes for its taxable subsidiaries totaling $3.1 million and recorded a benefit for income taxes of $0.7 million. Net income. Net income for the third quarter of 1998 was $4.8 million, compared to a $0.3 million loss in the third quarter of 1997, a change of $5.1 million. The increase in net income is primarily attributable to and a foreign currency gain in the third quarter of 1998 compared to a foreign currency loss in the third quarter of 1997 offset by decreased operating income, a provision for income taxes in the third quarter of 1998 compared to a benefit for income taxes in the third quarter of 1997, and increased interest expense related to the acquisitions of Valley, Ellebi and Transfo-Rakzs. 14 17 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997. Net Sales. Net sales for the first nine months of 1998 were $225.8 million, representing an increase of $101.9 million, or 82.1%, over net sales for the first nine months of 1997. This increase resulted primarily from the acquisitions of Valley, SportRack International, Ellebi and Transfo-Rakzs. Acquisition related increased sales from these subsidiaries totaled $75.4 million during the first nine months of 1998. The remaining increase of $26.5 million resulted primarily from increased sales volumes of OEM rack systems on existing programs, the effect of having a full period of sales on new OEM rack programs launched during 1997 and growth in sales of towing systems in Europe. Gross Profit. Gross profit for the first nine months of 1998 was $60.4 million, representing an increase of $23.6 million, or 63.9%, over the gross profit for the first nine months of 1997. This increase resulted primarily from the increase in net sales, partially offset by a decrease in the gross margin percentage. Gross profit as a percentage of net sales was 26.8% in the first nine months of 1998 compared to 29.8% in the first nine months of 1997. This decrease in gross profit margins resulted primarily from lower gross profit margins of newly acquired businesses, particularly at SportRack International, which had low margins resulting from (i) its entry into new markets, (ii) high development costs and (iii) excess overhead resulting from its start-up phase and (iv) a significant weather related disruption in operations in January 1998. Selling, administrative and product development expenses. Selling, administrative and product development expenses for the first nine months of 1998 were $36.7 million, representing an increase of $15.7 million, or 75.0%, over the selling, administrative and product development expenses for the first nine months of 1997, reflecting the increase in net sales. Selling, administrative and product development expenses as a percentage of net sales decreased to 16.3% in the first nine months of 1998 from 16.9% in the first nine months of 1997. This decrease relative to net sales reflects the impact of spreading certain fixed costs over a higher sales base and lower selling, administrative and product development expense as a percentage of net sales for certain newly acquired businesses other than SportRack International which has high selling, administrative and product development expenses resulting from its start-up phase. Operating income. Operating income for the first nine months of 1998 was $21.2 million, an increase of $6.9 million, or 48.5%, over operating income for the first nine months of 1997 reflecting the increase in net sales. Operating income as a percentage of net sales decreased to 9.4% in the first nine months of 1998 from 11.5% in the first nine months of 1997 reflecting a decrease in gross margins, offset partially by a decrease in selling, administrative and product development expenses as a percentage of net sales. Interest expense. Interest expense for the first nine months of 1998 was $14.3 million, an increase of $6.6 million, or 87.1%, over interest expense for the first nine months of 1997. The increase was primarily due to additional borrowings to finance (i) the acquisition of SportRack International in July 1997, (ii) the acquisition of Valley in August 1997, (iii) the acquisition of Ellebi in January 1998, (iv) the acquisition of Transfo-Rakzs in February 1998 and (v) the effect of the issuance of $125 million of the Company's 9 3/4 %Senior Subordinated Notes in October 1997, which proceeds were used to repay debt from the acquisition of Valley and other then existing debt. Foreign currency gain (loss). Foreign currency gain in the first nine months of 1998 was $6.5 million, compared to a foreign currency loss of $7.5 million in the first nine months of 1997. The Company's Foreign currency exposure is primarily related to Brink which has indebtedness denominated in U.S. dollars. During the first nine months of 1998 the U.S. dollar weakened in relation to the Dutch Guilder, the functional currency of Brink. At September 30, 1998, the exchange rate of the Dutch Guilder to the U.S. dollar was 1.84:1, whereas at December 31, 1997 the exchange rate was 2.02:1, or a 8.9% increase in the relative value of the Dutch Guilder. During the first nine months of 1997, the U.S. dollar strengthened significantly in relation to the Dutch Guilder. At September 30, 1997, the exchange rate of the Dutch Guilder to the U.S. dollar was 2.05:1, whereas at December 31, 1996 the exchange rate was 1.75:1, or a 17.1% decline in the relative value of the Dutch Guilder during the period. Other income (expense). As a result of information that became available during the second quarter of 1998, management reassessed certain SportRack International operations and the Company recorded a charge of $0.9 million related to accounts receivable and inventory of the SportRack International business. 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 nine months of 1998 the company had income before income taxes for its taxable subsidiaries totaling $3.8 million and recorded a provision for income taxes of $1.6 million. During the first nine months of 1997 the company had a loss before income taxes for its taxable subsidiaries totaling $7.5 million and recorded a benefit for income taxes of $2.1 million. 15 18 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income. Net income for the first nine months of 1998 was $10.9 million, as compared to net income $1.0 million in the first nine months of 1997, an increase of $9.9 million. The increase in net income is attributable to increased operating income and a foreign currency gain in the first nine months of 1998 compared to a foreign currency loss in the first nine months of 1997 offset by increased interest expense related to the acquisitions of Valley, SportRack International, Ellebi and Transfo-Rakzs, a charge related to the SportRack International business, and an income tax provision in the first nine months of 1998 compared to a benefit for income taxes in the first nine months of 1997. LIQUIDITY AND CAPITAL RESOURCES Liquidity The Company's principal liquidity requirements are to service its debt under its Amended and Restated Credit Agreement, the Canadian Credit Agreement and the Company's Senior Subordinated Notes, and to meet its working capital and capital expenditure needs. Working capital at September 30, 1998 was $52.7 million, a decrease of $11.7 million as compared to December 31, 1997. Cash decreased to $12.5 million at September 30, 1998 from $27.3 million at December 31, 1997 primarily as a result of the purchase of Ellebi in January 1998 for approximately $22.0 million. Key elements of the consolidated statement of cash flows are:
Nine Months Ended (Dollars in thousands) 1998 1997 ---- ---- Net cash provided by operating activities $ 22,506 $ 2,371 Net cash used in investing activities (30,111) (76,302) Net cash provided by (used for) financing activities (7,153) 76,115
Cash flows from operating activities reflect the Company's net income, adjusted for non-cash items and changes in working capital. Non-cash charges for depreciation and amortization were $11.0 million and $6.4 million for the first nine months of 1998 and 1997, respectively. During the first nine months of 1998 the Company had a non-cash foreign currency gain of $6.5 million and during the first nine months of 1997 the Company had a non-cash foreign currency loss of $7.5 million. Investing cash flows include acquisitions of property and equipment of $7.3 million and $4.3 million during the first nine months of 1998 and 1997, respectively. Increased acquisitions of property and equipment reflect greater volume of equipment replacement and upgrades reflecting the acquisitions of Valley, SportRack International, Ellebi and Transfo-Rakzs. The Company's ability to make capital expenditures is subject to restrictions under the Credit Agreement. Investing cash flows also include $22.7 million and $72.0 during the first nine months of 1998 and 1997, respectively for the acquisitions of Ellebi and Transfo-Rakzs in 1998 and the acquisitions of Valley and SportRack International in 1998. Financing cash flows for the first nine months of 1998 include, (i) scheduled principal repayments under the Company's term notes of $2.6 million, (ii) net repayments of $4.5 million under the Company's revolving credit facilities, and (iii) distributions to members in amounts sufficient to meet their tax liability on the Company's domestic taxable income which accrues to individual members. Financing cash flows for the first nine months of 1997 include, (i) scheduled principal repayments under the Company's term notes of $2.5 million, (ii) net borrowings of $9.9 million under the Company's revolving credit facilities, (iii) distributions to members in amounts sufficient to meet their tax liability on the Company's domestic taxable income which accrues to individual members, (iv) borrowings of $69.5 million under the Company's credit facilities used to acquire Valley and SportRack International, (v) payment of debt issue costs of $2.4 million, and (vi) proceeds of $4.5 million from the issuance of membership units. 16 19 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources The Company's indebtedness was $189.0 million and $197.1 million at September 30, 1998 and December 31, 1997, respectively. The Company expects that its primary sources of cash will be from operating activities and borrowings under its Revolving Credit Facilities. As of September 30, 1998, the Company had no outstanding borrowings under the revolving credit facilities and had $25.0 million of available borrowing capacity. Management believes that, as of September 30, 1998, 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 September 30, 1999. 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 intends to pursue acquisitions which will expand its customer base by providing an entree to new customers, including expansion into selected geographic areas. Management believes that such acquisitions should provide additional opportunities for increased net sales and cash flow by enhancing the Company's manufacturing and marketing capabilities. However, future acquisitions, if any, may require additional third party financing and there can be no assurances that such funds would be available on terms satisfactory to the Company, if at all. Capital expenditures for the first nine months of 1998 were $7.3 million. The Company expects that capital expenditures for 1998 will be approximately $10.0 million, the 1998 limit under the Company's Credit Agreement, and that such expenditures will be adequate for normal growth and replacement. INTERNATIONAL OPERATIONS For the first nine months of 1998, approximately 35.0% of net sales were from international operations. As of September 30, 1998, approximately 45.3% of identifiable assets were associated with these operations and the company had debt denominated in currencies other than the U.S. dollar of approximately $10.3 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 revenues, costs and expenses of these operations are denominated in the local currencies. The financial position and results of operations of these foreign subsidiaries are measured using the local currency as the functional currency. 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 balance of these contracts as of September 30, 1998 was not significant, and the Company 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 are in the process of implementing Year 2000 readiness programs with the objective of having all of their significant business systems, including those that affect facilities and manufacturing activities, functioning properly with respect to the Year 2000 Issue before June 30, 1999. Each operating subsidiary is in a different stage of Year 2000 readiness. 17 20 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Project Generally each subsidiary's Year 2000 program is divided into three major sections - internal business software and hardware, internal non-financial software and imbedded 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 plans vary by operating subsidiary and include either the conversion or reprogramming of applications software that is 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 Company estimates that this phase is on schedule to be completed by March 1999. The testing phase of this section, scheduled for completion by March 1999, is ongoing. The Company does not currently have contingency plans in place for its internal business software and hardware. Such contingency plans will be developed in the first quarter of 1999 should the current implementation plans fall behind schedule. The total cost associated with required modifications to the Company's internal business software and hardware to become Year 2000 compliant is not expected to be material to the Company's financial position. The estimated total cost of the Year 2000 program is approximately $1.0 million. The total amount expended on the program through September 30, 1998, was $0.3 million, of which approximately $0.2 million related to the cost of software modification and approximately $0.1 million related to the cost of and upgrading existing software to Year 2000 compliant versions. The estimated future cost of completing the Year 2000 program is estimated to be approximately $0.1 million for reprogramming of applications software and approximately $0.6 million related to the cost of including acquired companies on existing ERP Systems. Funds for the program are provided from existing operating budgets for all items and are included in operating expenses as incurred. The Company is nearing the completion of the data gathering phase with regard to non-financial software, imbedded chip technology, and its non-financial systems such as manufacturing equipment, security equipment, etc., with Year 2000 compliance scheduled for December 1998. To date, few of these systems have been identified as not being in compliance. Accordingly, the cost of achieving Year 2000 compliance for these systems is expected to be minimal. The Company does not currently have a contingency plan in place for its internal non-financial software and imbedded chip technology, which may not be Year 2000 compliant. A contingency plan may be developed in the first quarter of 1999 pending the outcome of the data gathering phase. The Company is in the process of identifying and contacting 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. It is expected that full identification will be completed by December 1998. To the extent that responses to Year 2000 readiness are unsatisfactory, the Company intends to change suppliers, service providers or contractors to those who have demonstrated Year 2000 readiness but the Company cannot be assured that it will be successful in finding such alternative suppliers, service providers and contractors. Many of the Company's customers are large automotive Original Equipment Manufacturers ("OEM's") 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. 18 21 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 is expected to significantly reduce 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 as scheduled, the possibility of significant interruptions of normal operations should be reduced. EURO On January 1, 1999, eleven of fifteen member countries of the European Union are scheduled to establish fixed conversion rates between their existing currencies ("legacy currencies") and one common currency - the euro. The euro will then trade on currency exchanges and may be used in business transactions. The conversion to the euro will eliminate currency exchange rate risk between the member countries. Beginning in January 2002, new euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the euro conversion have established plans to address the issues raised by the euro currency conversion. These issues include, among others, the need to adapt computer and financial systems to accommodate euro-denominated transactions and the impact of one common currency on pricing. Since existing financial systems and processes currently accommodate multiple currencies, the plans contemplate conversion by January 1999. The Company does not expect the system conversion costs to be material. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standard Board has issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and Related Information," and No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits," which require a change in the method for determining and reporting business segment information and revise employer's disclosures about pension and other postretirement benefit plans. Although, the Company operates in one business segment, SFAS No. 131 will require the Company to report revenues and long-lived assets on a country level. SFAS No. 132 will standardize the Company's disclosure requirements for pensions and other postretirement benefits and requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures. The Company in fiscal 1998 as required will adopt these statements and, as such statements relate to matters of disclosure only, there will be no impact upon the Company's operating results. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable 19 22 ADVANCED ACCESSORY SYSTEMS, LLC PART II. OTHER INFORMATION AND SIGNATURE Item 1. Legal Proceedings None 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 None 20 23 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: November 10, 1998 /s/ TERENCE C. SEIKEL -------------------------------------------- Terence C. Seikel Vice President, Finance and Administration - Chief Financial Officer (chief accounting officer and authorized signatory) 21 24 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule 24 EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 US DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 12,528 0 51,836 2,182 41,654 110,553 64,121 16,033 281,853 57,864 189,017 0 0 0 27,155 281,853 225,765 225,765 165,321 165,321 54,461 1,200 14,277 12,493 1,602 10,891 0 0 0 10,891 0 0
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