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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2002
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ________________
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COMMISSION FILE NUMBER 333-49011
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[ADVANCED ACCESSORY SYSTEMS LOGO]
ADVANCED ACCESSORY SYSTEMS, LLC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3848156
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
12900 HALL ROAD, SUITE 200, STERLING HEIGHTS, MI 48313
(Address of principal executive offices) (Zip Code)
(586) 997-2900
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter 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
Indicate by check mark whether the registrant is an accelerated filed (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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ADVANCED ACCESSORY SYSTEMS, LLC
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 1
September 30, 2002 and December 31, 2001
Consolidated Condensed Statements of 2
Operations for the Three and Nine Months
Ended September 30, 2002 and 2001
Consolidated Condensed Statements of 3
Cash Flows for the Nine Months
Ended September 30, 2002 and 2001
Consolidated Condensed Statement of Changes 4
in Members' Equity for the Nine Months
Ended September 30, 2002
Notes to Consolidated Condensed Financial 5
Statements
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 19
Market Risk
Item 4. Controls & Procedures 19
Part II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Certifications 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADVANCED ACCESSORY SYSTEMS, LLC
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
September 30, December 31,
2002 2001
ASSETS (Unaudited)
Current assets
Cash $ 1,807 $ 2,139
Accounts receivable, less reserves
of $1,881 and $1,788, respectively 60,430 44,790
Inventories
Raw materials 15,294 14,689
Work-in-process 11,445 10,323
Finished goods 13,935 17,248
Reserves (2,944) (2,828)
------------- --------------
Total inventories 37,730 39,432
Deferred income taxes 115 1,643
Other current assets 7,180 4,133
------------- --------------
Total current assets 107,262 92,137
Property and equipment, net 57,745 54,404
Goodwill, net 46,129 73,394
Other intangible assets, net 3,879 4,685
Deferred income taxes 1,951 1,932
Other noncurrent assets 1,678 1,738
------------- --------------
$ 218,644 $ 228,290
============= ==============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 8,195 $ 11,023
Accounts payable 34,912 29,051
Accrued liabilities 26,777 23,553
Deferred income taxes 674 --
Mandatorily redeemable warrants 5,230 5,130
------------- --------------
Total current liabilities 75,788 68,757
------------- --------------
Noncurrent liabilities
Deferred income taxes 620 828
Other noncurrent liabilities 5,165 4,755
Long-term debt, less current maturities 142,347 145,626
------------- --------------
Total noncurrent liabilities 148,132 151,209
------------- --------------
Members' equity
Class A Units 7,348 7,348
Class A-1 Units 4,117 4,117
Other comprehensive loss 233 (181)
Accumulated deficit (16,974) (2,960)
------------- --------------
(5,276) 8,324
------------- --------------
$ 218,644 $ 228,290
============= ==============
The accompanying notes are an integral part of the
consolidated condensed financial statements.
1
ADVANCED ACCESSORY SYSTEMS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Net sales $ 80,088 $ 75,555 $ 254,279 $ 243,648
Cost of sales 61,143 57,840 191,004 184,170
------------- ------------- ------------- --------------
Gross profit 18,945 17,715 63,275 59,478
Selling, administrative and
product development expenses 11,491 11,006 34,032 34,142
Amortization of intangible assets 6 743 19 2,241
------------- ------------- ------------- --------------
Operating income 7,448 5,906 29,224 23,095
------------- ------------- ------------- --------------
Other income (expense)
Interest expense (4,375) (4,245) (12,232) (13,286)
Foreign currency gain (loss), net (1,167) 2,679 5,747 (3,364)
Other income (expense) 1 (18) (115) (79)
------------- ------------- ------------- --------------
Income before cumulative effect of
accounting change and income taxes 1,907 4,322 22,624 6,366
Cumulative effect of accounting change
for goodwill impairment -- -- (29,207) --
------------- ------------- ------------- --------------
Income (loss) before income taxes 1,907 4,322 (6,583) 6,366
Provision for income taxes 1,140 1,890 4,075 963
------------- ------------- ------------- --------------
Net income (loss) $ 767 $ 2,432 $ (10,658) $ 5,403
============= ============= ============= ==============
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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
2002 2001
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (10,658) $ 5,403
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 9,277 10,468
Cumulative effect of accounting change
for goodwill impairment 29,207 --
Loss on disposal of property and equipment 216 162
Deferred taxes 883 12
Foreign currency (gain) loss (6,127) 3,035
Changes in assets and liabilities, net (4,835) 1,141
------------- --------------
Net cash provided by operating activities 17,963 20,221
------------- --------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Acquisition of property and equipment (9,849) (5,414)
------------- --------------
Net cash used for investing activities (9,849) (5,414)
------------- --------------
CASH FLOWS USED FOR FINANCING
ACTIVITIES:
Net increase (decrease) in revolving loan 5,096 (6,594)
Collection of membership notes receivable -- 59
Repayment of debt (11,308) (8,789)
Distributions to members (3,355) (815)
------------- --------------
Net cash used for financing activities (9,567) (16,139)
------------- --------------
Effect of exchange rate changes 1,121 (146)
------------- --------------
Net decrease in cash (332) (1,478)
Cash at beginning of period 2,139 3,315
------------- --------------
Cash at end of period $ 1,807 $ 1,837
============= ==============
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 NINE MONTHS ENDED SEPTEMBER 30, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Other Total
Members' comprehensive Accumulated members'
capital loss deficit equity
------------- ------------- ------------- -------------
Balance at December 31, 2001 $ 11,465 $ (181) $ (2,960) $ 8,324
Distributions to members -- -- (3,356) (3,356)
Currency translation adjustment -- 414 -- 414
Net loss -- -- (10,658) (10,558)
------------- ------------- ------------- -------------
Balance at September 30, 2002 $ 11,465 $ 233 $ (16,974) $ (5,276)
============= ============= ============= =============
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 September 30, 2002 and December 31, 2001 and
the results of its operations for the three and nine months ended
September 30, 2002 and 2001 and its cash flows for the nine months
ended September 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 (loss) income for the third quarter of 2002 and 2001 of
$1,520 and $3,096, respectively, and for the first nine months of 2002
and 2001 of ($10,244) and $6,309, 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 41,000 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 third quarter of 2002 as compared with the
third quarter of 2001 of $737 and a reduction during the first nine
months of 2002 as compared with the first nine months of 2001 of
$2,222. 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 third quarter 2001
and first nine months of 2001, as adjusted for the non-amortization
provisions of SFAS No. 142.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------- ------------ ------------ --------
Reported net income (loss) $ 767 $ 2,432 $(10,658) $5,403
Add back: Goodwill amortization -- 737 -- 2,222
----------- ----------- -------- ------
Adjusted net income (loss) $ 767 $ 3,169 $(10,658) $7,625
=========== =========== ======== ======
Other intangible assets at September 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 $5,848 and
5
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
$6,577, respectively, and accumulated amortization of $3,836 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 nine
months ended September 30, 2002 was $354 and $860, respectively, and
for the three and nine months ended September 30, 2001 was $201 and
$585, respectively.
Aggregate amortization expense related to other intangible assets for
each of the five succeeding fiscal years as of June 30, 2002 is as
follows:
Year Ended December 31,
----------------------------
Remainder of 2002 $ 206
2003 825
2004 605
2005 670
2006 742
For the nine months ended September 30, 2002, the carrying amount of
goodwill decreased by $29,207 as a result of the impairment write down
discussed above and increased by $1,942 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 nine
months ended September 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 September 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
SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ------------- ----------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
Current assets
Cash................................... $ 386 $ 124 $ 1,297 $ -- $ 1,807
Accounts receivable.................... -- 40,090 20,340 -- 60,430
Inventories............................ -- 15,695 22,035 -- 37,730
Deferred income taxes and other
current assets........................ 67 5,546 1,682 -- 7,295
----------- ----------- ----------- ----------- ----------
Total current assets.............. 453 61,455 45,354 -- 107,262
----------- ----------- ----------- ----------- ----------
Property and equipment, net.............. -- 32,161 25,584 -- 57,745
Goodwill, net............................ 985 24,723 20,421 -- 46,129
Other intangible assets, net............. 3,159 401 319 -- 3,879
Deferred income taxes and other
noncurrent assets...................... 93 871 2,665 -- 3,629
Investment in subsidiaries............... 68,296 9,955 -- (78,251) --
Intercompany notes receivable............ 71,855 -- -- (71,855) --
------------ ----------- ----------- ------------ ----------
Total assets...................... $ 144,841 $ 129,566 $ 94,343 $ (150,106) $ 218,644
============ =========== =========== =========== ==========
LIABILITIES AND MEMBERS'
EQUITY
Current liabilities
Current maturities of long-term debt... $ -- $ 54 $ 8,141 $ -- $ 8,195
Accounts payable....................... -- 25,530 9,382 -- 34,912
Accrued liabilities and deferred
income taxes......................... 9,934 7,945 9,572 -- 27,451
Mandatorily redeemable warrants........ 5,230 -- -- -- 5,230
------------ ----------- ----------- ----------- ----------
Total current liabilities......... 15,164 33,529 27,095 -- 75,788
Deferred income taxes and other
noncurrent liabilities................. 2,003 893 2,889 -- 5,785
Long-term debt, less current maturities.. 132,803 275 9,269 -- 142,347
Intercompany debt........................ -- 1,708 70,147 (71,855) --
Members' equity.......................... (5,129) 93,161 (15,057) (78,251) (5,276)
------------ ----------- ----------- ----------- ----------
Total liabilities and members'
equity............................ $ 144,841 $ 129,566 $ 94,343 $ (150,106) $ 218,644
============ =========== =========== ========== ==========
7
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
5. CONDENSED CONSOLIDATING INFORMATION-- (continued)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ------------- ----------------- -------------- ------------
ASSETS
Current assets
Cash................................... $ 334 $ 2 $ 1,803 $ -- $ 2,139
Accounts receivable.................... -- 29,094 15,696 -- 44,790
Inventories............................ -- 15,603 23,829 -- 39,432
Deferred income taxes and other
current assets........................ 7 2,326 3,443 -- 5,776
----------- ----------- ----------- ----------- ----------
Total current assets.............. 341 47,025 44,771 -- 92,137
----------- ----------- ----------- ----------- ----------
Property and equipment, net.............. -- 34,071 20,333 -- 54,404
Goodwill, net............................ 985 53,930 18,479 -- 73,394
Other intangible assets, net............. 3,670 412 603 -- 4,685
Deferred income taxes and other
noncurrent assets...................... 93 1,340 2,237 -- 3,670
Investment in subsidiaries............... 70,323 9,955 -- (80,278) --
Intercompany notes receivable............ 74,601 -- -- (74,601) --
------------ ----------- ----------- ----------- ----------
Total assets...................... $ 150,013 $ 146,733 $ 86,423 $ (154,879) $ 228,290
============ =========== =========== =========== ==========
LIABILITIES AND MEMBERS'
EQUITY
Current liabilities
Current maturities of long-term debt... $ -- $ 1,108 $ 9,915 $ -- $ 11,023
Accounts payable....................... -- 19,562 9,489 -- 29,051
Accrued liabilities and deferred
income taxes......................... 6,731 7,804 9,018 -- 23,553
Mandatorily redeemable warrants........ 5,130 -- -- -- 5,130
------------ ----------- ----------- ----------- ----------
Total current liabilities......... 11,861 28,474 28,422 -- 68,757
------------ ----------- ----------- ----------- ----------
Deferred income taxes and other
noncurrent liabilities................. 2,003 719 2,861 -- 5,583
Long-term debt, less current maturities.. 127,675 297 17,654 -- 145,626
Intercompany debt........................ -- 16,920 57,681 (74,601) --
Members' equity.......................... 8,474 100,323 (20,195) (80,278) 8,324
------------ ----------- ----------- ----------- ----------
Total liabilities and members'
equity............................ $ 150,013 $ 146,733 $ 86,423 $ (154,879) $ 228,290
============ =========== =========== =========== ==========
8
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
5. CONDENSED CONSOLIDATING INFORMATION-- (continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ------------- ----------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales................................ $ -- $ 56,566 $ 23,522 $ -- $ 80,088
Cost of sales............................ -- 44,419 16,724 -- 61,143
---------- ---------- ----------- ---------- ----------
Gross profit........................... -- 12,147 6,798 -- 18,945
Selling, administrative and product
development expenses................... (18) 6,082 5,427 -- 11,491
Amortization of intangible assets........ -- 3 3 -- 6
---------- ---------- ----------- ---------- ----------
Operating income....................... 18 6,062 1,368 -- 7,448
Interest expense......................... 2,859 64 1,452 -- 4,375
Equity in income of subsidiaries......... 3,608 -- -- (3,608) --
Foreign currency loss, net............... -- (13) (1,154) -- (1,167)
Other income (expense)................... -- (36) 37 -- 1
---------- ---------- ----------- ---------- ----------
Income (loss) before income taxes........ 767 5,949 (1,201) (3,608) 1,907
Provision for income taxes............... -- -- 1,140 -- 1,140
---------- ---------- ----------- ---------- ----------
Net income (loss)........................ $ 767 $ 5,949 $ (2,341) $ (3,608) $ 767
========== ========== =========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ------------- ----------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales................................ $ -- $ 53,656 $ 21,899 $ -- $ 75,555
Cost of sales............................ -- 43,493 14,347 -- 57,840
---------- ---------- ----------- ---------- ----------
Gross profit........................... -- 10,163 7,552 -- 17,715
Selling, administrative and product
development expenses................... 72 5,992 5,002 -- 11,066
Amortization of intangible assets........ 9 549 185 -- 743
---------- ---------- ----------- ---------- ----------
Operating income (loss)................ (81) 3,622 2,365 -- 5,906
Interest expense......................... 2,210 526 1,509 -- 4,245
Equity in income of subsidiaries......... 4,723 -- -- (4,723) --
Foreign currency gain, net............... -- -- 2,679 -- 2,679
Other income (expense)................... -- (60) 42 -- (18)
---------- ---------- ----------- ---------- ----------
Income before income taxes............... 2,432 3,036 3,577 (4,723) 4,322
Provision for income taxes............... -- -- 1,890 -- 1,890
---------- ---------- ----------- ---------- ----------
Net income .............................. $ 2,432 $ 3,036 $ 1,687 $ (4,723) $ 2,432
========== ========== =========== ==========- ==========
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 NINE MONTHS ENDED SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ------------- ----------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales................................ $ -- $ 179,260 $ 75,019 $ -- $ 254,279
Cost of sales............................ -- 138,629 52,375 -- 191,004
---------- ---------- ----------- ---------- ----------
Gross profit........................... -- 40,631 22,644 -- 63,275
Selling, administrative and product
development expenses................... (23) 17,938 16,117 -- 34,032
Amortization of intangible assets........ -- 9 10 -- 19
---------- ---------- ----------- ---------- ----------
Operating income....................... 23 22,684 6,517 -- 29,224
Interest expense......................... 8,298 411 3,523 -- 12,232
Equity in loss of subsidiaries........... (2,383) -- -- 2,383 --
Foreign currency gain (loss), net........ -- (13) 5,760 -- 5,747
Other income (expense)................... -- (161) 46 -- (115)
---------- ----------- ----------- ---------- ----------
Income (loss) before cumulative effect
of accounting change and income taxes.. (10,658) 22,099 8,800 2,383 22,624
Cumulative effect of accounting change... -- (29,207) -- -- (29,207)
---------- ---------- ----------- ---------- ----------
Income (loss) before income taxes........ (10,658) (7,108) 8,800 2,383 (6,583)
Provision for income taxes............... -- -- 4,075 -- 4,075
---------- ---------- ----------- ---------- ----------
Net income (loss)........................ $ (10,658) $ (7,108) $ 4,725 $ 2,383 $ (10,658)
========== ========== =========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ------------- ----------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales................................ $ -- $ 172,276 $ 71,372 $ -- $ 243,648
Cost of sales............................ -- 136,171 47,999 -- 184,170
---------- ---------- ----------- ---------- ----------
Gross profit........................... -- 36,105 23,373 -- 59,478
Selling, administrative and product
development expenses................... 220 18,528 15,394 -- 34,142
Amortization of intangible assets........ 27 1,656 558 -- 2,241
---------- ---------- ----------- ---------- ----------
Operating income (loss)................ (247) 15,921 7,421 -- 23,095
Interest expense......................... 5,940 2,307 5,039 -- 13,286
Equity in income of subsidiaries......... 11,590 -- -- (11,590) --
Foreign currency loss.................... -- -- 3,364 -- 3,364
Other income (expense)................... -- (82) 3 -- (79)
---------- ---------- ----------- ---------- ----------
Income (loss) before income taxes........ 5,403 13,532 (979) (11,590) 6,366
Provision for income taxes............... -- -- 963 -- 963
---------- ---------- ----------- ---------- ----------
Net income (loss)........................ $ 5,403 $ 13,532 $ (1,942) $ (11,590) $ 5,403
========== ========== =========== ========== ==========
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 NINE MONTHS ENDED SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------ ------------- ----------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net cash provided by (used for) operating
activities.............................. $ (4,434) $ 19,020 $ 3,377 $ -- $ 17,963
---------- --------- ---------- ---------- ----------
Cash flows from investing activities:
Acquisition of property and
equipment............................. -- (2,611) (7,238) -- (9,849)
---------- --------- ---------- ---------- ---------
Net cash used for investing activities -- (2,611) (7,238) -- (9,849)
---------- --------- ---------- ---------- ----------
Cash flows from financing activities:
Change in intercompany debt............. 2,745 (15,211) 12,466 -- --
Net increase in revolving loan.......... 5,096 -- -- -- 5,096
Repayment of debt....................... -- (1,076) (10,232) -- (11,308)
Distributions to members................ (3,355) -- -- -- (3,355)
---------- --------- ---------- ---------- ----------
Net cash provided by (used for)
financing activities................ 4,486 (16,287) 2,234 -- (9,567)
---------- --------- ---------- ---------- ----------
Effect of exchange rate changes........... -- -- 1,121 -- 1,121
---------- --------- ---------- ---------- ---------
Net increase (decrease) in cash........... 52 122 (506) -- (332)
Cash at beginning of period............... 334 2 1,803 -- 2,139
---------- --------- ---------- ---------- ----------
Cash at end of period..................... $ 386 $ 124 $ 1,297 $ -- $ 1,087
========== ========= ========== ========== ==========
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 NINE MONTHS ENDED SEPTEMBER 30, 2001
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------ ------------- ----------------- -------------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Net cash provided by (used for) operating
activities.............................. $ (3,387) $ 23,110 $ 498 $ -- $ 20,221
---------- --------- ---------- ---------- ----------
Cash flows from investing activities:
Acquisition of property and
equipment............................. -- (3,494) (1,920) -- (5,414)
---------- --------- ---------- ---------- -----------
Net cash used for investing activities -- (3,494) (1,920) -- (5,414)
---------- --------- ---------- ---------- ----------
Cash flows from financing activities:
Change in intercompany debt............. 10,713 (19,620) 8,907 -- --
Decrease in revolving loan.............. (6,594) -- -- -- (6,594)
Collection on notes receivable for unit
purchase.............................. 59 -- -- -- 59
Repayment of debt....................... -- -- (8,789) -- (8,789)
Distributions to members................ (815) -- -- -- (815)
---------- --------- ---------- ---------- ----------
Net cash provided by (used for)
financing activities................ 3,363 (19,620) 118 -- (16,139)
---------- --------- ---------- ---------- ----------
Effect of exchange rate changes........... -- -- (146) -- (146)
---------- --------- ---------- ---------- ---------
Net decrease in cash...................... (24) (4) (1,450) -- (1,478)
Cash at beginning of period............... 1,153 246 1,916 -- 3,315
---------- --------- ---------- ---------- ----------
Cash at end of period..................... $ 1,129 $ 242 $ 466 $ -- $ 1,837
========== ========= ========== ========== ==========
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 NINE MONTHS ENDED SEPTEMBER 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 SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001.
Net sales. Net sales for the third quarter of 2002 were $80.1 million,
representing an increase of $4.5 million, or 6.0%, compared with net sales for
the third quarter of 2001. This increase resulted primarily from increased sales
to automotive OEMs of approximately $1.9 million primarily resulting from
increased production levels of vehicles in North America compared to the prior
year. Partially offsetting this increase was a reduction in North American OEM
hitch sales due to the resourcing of several OEM programs by one customer and a
reduction of sales to Volvo in Sweden resulting from a temporary halt in
shipments of detachable towbars to Volvo during a recall investigation. Sales of
detachable towbars to Volvo began again in August. See further discussion
regarding the recall below. Sales to aftermarket customers also increased during
the quarter by approximately $572,000. Additionally, sales were higher by $2.0
million due to an increase in average exchange rates for the period between the
U.S. Dollar and the currencies, primarily the European Euro, used by the
Company's foreign subsidiaries.
Gross profit. Gross profit for the third quarter of 2002 was $18.9
million, representing an increase of $1.2 million, or 6.9%, from the gross
profit for the third 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 23.7% in the third quarter of 2002 compared to 23.4%
in the third quarter of 2001. The gross margin was higher primarily as a result
of spreading fixed costs over a higher sales base partially offset by higher
material and labor costs for Brink associated with a reorganization of the
production facility in the Netherlands.
Selling, administrative and product development expenses. Selling,
administrative and product development expenses for the third quarter of 2002
were $11.5 million, representing an increase of $485,000, or 4.4%, over the
selling, administrative and product development expenses for the third quarter
of 2001. Selling, administrative and product development expenses as a
percentage of net sales decreased to 14.3% in the third quarter of 2002 from
14.6% in the third 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 partially offset by the increase in sales for Brink
which has a higher percentage of selling, administrative and product development
expenses than the Company as a whole.
Amortization of intangible assets. Amortization of intangible assets
for the third quarter of 2002 was $6,000, representing a decrease of $737,000
compared with amortization of intangible assets, which included amortization of
goodwill, for the third 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 NINE MONTHS ENDED SEPTEMBER 30, 2002
Operating income. Operating income for the third quarter of 2002 was
$7.4 million, an increase of $1.5 million, or 26.1%, from operating income for
the third 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 9.3% in the third quarter of 2002 from
7.8% in the third quarter of 2001.
Interest expense. Interest expense for the third quarter of 2002 was
$4.4 million, which was $130,000 higher than interest expense for the third
quarter of 2001. The increase was primarily due to the increase in the interest
rates on the Company's senior debt, partially offset by lower interest rates
charged on the Company's variable rate indebtedness and reduced average
borrowings.
Foreign currency gain (loss). Foreign currency loss in the third
quarter of 2002 was $1.2 million, compared to a foreign currency gain of $2.7
million in the third quarter of 2001. The Company's foreign currency gains and
losses are primarily related to Brink and SportRack Accessories which have
indebtedness denominated in U.S. Dollars, including intercompany debt and a
portion of the loans under the Company's Third Amended and Restated Credit
Agreement. During the third quarter of 2002, the U.S. Dollar strengthened in
relation to the European Euro and the Canadian Dollar, the functional currency
of Brink and SportRack Accessories, respectively, whereas during the third
quarter of 2001 the U.S. Dollar weakened in relation to the European Euro and
Canadian Dollar.
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 third quarter of 2002, the Company
recorded a tax provision amounting to $735,000 related to an ongoing income tax
audit in Italy covering the periods 1998 to 2001. During the third quarter of
2002, the Company had a loss before income taxes for its taxable subsidiaries
totaling $1.2 million and recorded a provision for income taxes of $390,000
exclusive of the $735,000 provision related to the income tax audit. 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 totaling approximately $589,000 and differences
in the tax rates of foreign countries. During the third quarter of 2001, the
Company had income before income taxes for its taxable subsidiaries totaling
$3.6 million and recorded a provision for income taxes of $1.9 million.
Net income. Net income for the third quarter of 2002 was $767,000, as
compared to net income of $2.4 million in the third quarter of 2001, a decrease
of $1.7 million. The change in net income is primarily attributable to the
foreign currency loss in the third quarter of 2002, as compared with a foreign
currency gain in the third quarter of 2001, partially offset by the increase in
operating income and decrease in the provision for income taxes.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001.
Net sales. Net sales for the first nine months of 2002 were $254.3
million, representing an increase of $10.6 million, or 4.4%, compared with net
sales for the first nine months of 2001. This increase resulted primarily from
increased sales to automotive OEMs of approximately $9.6 million primarily
resulting from increased production levels of vehicles in North America compared
to the prior year. Additionally, sales were higher by $2.2 due to an increase in
average exchange rates for the period between the U.S. Dollar and the
currencies, primarily the European Euro, used by the Company's foreign
subsidiaries. Partially offsetting these increases was a decline in aftermarket
sales of approximately $1.1 million.
Gross profit. Gross profit for the first nine months of 2002 was $63.3
million, representing an increase of $3.8 million, or 6.4%, from the gross
profit for the first nine 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 24.9% in the first nine months of 2002 compared
to 24.4% in the first nine 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 at 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 nine months of
2002 were $34.0 million, representing a decrease of $110,000, or 0.3%, from the
selling, administrative and product development expenses for the first nine
months of 2001. Selling, administrative and product development expenses as a
percentage of net sales decreased to 13.4% in the first nine months of 2002 from
14.0% in the first nine 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.
14
ADVANCED ACCESSORY SYSTEMS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
Amortization of intangible assets. Amortization of intangible assets
for the first nine months of 2002 was $19,000, representing a decrease of $2.2
million compared with amortization of intangible assets, which included
amortization of goodwill, for the first nine 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 nine months of 2002
was $29.2 million, an increase of $6.1 million, or 26.5%, over operating income
for the first nine months of 2001, reflecting the increase in gross profit, the
decrease in amortization of intangible assets and by the decrease in selling,
administrative and product development expenses. Operating income as a
percentage of net sales increased to 11.5% in the first nine months of 2002 from
9.5% in the first nine months of 2001.
Interest expense. Interest expense for the first nine months of 2002
was $12.2 million, which was $1.1 million lower than interest expense for the
first nine months of 2001. The decrease was due to lower average interest rates
charged on the Company's variable rate indebtedness and reduced average
borrowings.
Foreign currency loss. Foreign currency gain in the first nine months
of 2002 was $5.7 million, compared to a foreign currency loss of $3.4 million in
the first nine months of 2001. The Company's foreign currency gain 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 Third Amended
and Restated Credit Agreement. During the first nine months of 2002 the U.S.
Dollar weakened significantly in relation to the European Euro, the functional
currency of Brink, whereas during the first nine months of 2001, the U.S. Dollar
strengthened in relation to the European Euro. This was partially offset by the
foreign currency loss of SportRack Accessories which has intercompany
indebtedness denominated in U.S. Dollars. During the first nine months of 2002
the U.S. Dollar strengthened in relation to the Canadian Dollar, the functional
currency of SportRack Accessories.
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 2002, the
Company recorded a tax provision amounting to $735,000 related to an ongoing
income tax audit in Italy covering the periods 1998 to 2001. During the first
nine months of 2002, the Company had income before income taxes for its taxable
subsidiaries totaling $8.8 million and recorded a provision for income taxes of
$3.3 million exclusive of the $735,000 provision related to the income tax
audit. 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 nine months of 2001, the Company had a loss
before income taxes for its taxable subsidiaries totaling $979,000 and recorded
a provision for income taxes of $963,000.
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 nine months of 2002 was $10.7
million, as compared to net income of $5.4 million in the first nine months of
2001, a change of $16.1 million. The change in net loss is primarily
attributable to the cumulative effect of accounting change due to the adoption
of SFAS 142 and the increase in the provision for income taxes offset partially
by the increase in operating income, lower interest expense and the foreign
currency gain in the first nine months of 2002 as compared with the foreign
currency loss of the first nine 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 September 30, 2002 was $150.5 million including current
maturities of $8.2 million. The Company expects to be able to meet its liquidity
requirements through cash provided by operations and through borrowings
available under the Third 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 NINE MONTHS ENDED SEPTEMBER 30, 2002
WORKING CAPITAL AND CASH FLOWS
Working capital and key elements of the consolidated statement of cash
flows are:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- -----------
(IN THOUSANDS)
Working Capital........................................ $ 31,474 $ 23,380
FIRST NINE MONTHS OF
2002 2001
-------------- -----------
(IN THOUSANDS)
Cash flows provided by operating activities............ $ 17,963 $ 20,221
Cash flows (used for) investing activities............. $ (9,849) $ (5,414)
Cash flows (used for) financing activities............. $ (9,567) $(16,139)
Working capital
Working capital increased by $8.1 million to $31.5 million at September
30, 2002 from $23.4 million at December 31, 2001 due primarily to an increase in
accounts receivable of $14.1 million, an increase of $3.9 in other current
assets a decrease in the current portion of long term debt of $2.7 million and
an increase related to foreign currency exchange rate of the Company's
subsidiaries' functional currencies against the U.S. dollar of $2.7 million.
These working capital increases were partially offset by a decrease in inventory
of $3.7 million, a change in current deferred tax assets and liabilities of $2.2
million, an increase in accounts payable of $5.1 million, an increase in accrued
liabilities of $3.8 million and a decrease in cash of $332,000.
The increase in accounts receivable was attributable to increased sales
levels in the third quarter of 2002 as compared with the fourth quarter of 2001
and to a difference in the timing of a payment from the Company's second largest
OEM customer. Differences in sales levels between the two 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.
Accrued liabilities increased as a result of an increase of $3.0 million in
accrued interest for the Company's Notes as compared with amounts recorded at
December 31, 2001. Other current assets increased primarily due to an increased
amount of tooling costs reimbursable from the Company's North American OEM
customers related to new programs currently under development.
Operating Activities
Cash flow provided by operating activities for the first nine months of
2002 was $18.0 million, compared to $20.2 million in the first nine months of
2001. Cash flow provided by operating activities for the first nine months of
2002 decreased primarily due to an increase in working capital during the first
nine months of 2002, compared to a decrease in working capital during the first
nine months of 2001. Partially offsetting the increased working capital was
greater operating income during the first nine months of 2002 compared with the
first nine months of 2001.
Investing Activities
During the first nine months of 2002 and 2001, investing cash flows
included acquisitions of property and equipment of $9.8 million and $5.4
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 first quarter of 2002 and is expected to be completed during
the fourth 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.
16
ADVANCED ACCESSORY SYSTEMS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
Financing Activities
During the first nine months of 2002 and 2001, financing cash flows
included scheduled payments of principal on the Company's term indebtedness of
$11.3 million and $8.8 million, respectively. Distributions to members,
representing amounts sufficient to meet the tax liability on the Company's
domestic taxable income which accrues to individual members, were $3.4 million
for the first nine months of 2002 and were $815,000 during the first nine months
of 2001. Financing cash flows during the first nine months of 2002 also included
net borrowings under the Company's revolving loans of $5.1 million, whereas
during the first nine months of 2001 financing cash flows included net payments
on the revolving line of credit of $6.6 million.
DEBT AND CREDIT SOURCES
The Company's indebtedness was $150.5 million and $156.6 million at
September 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 September 30, 2002, the Company had
borrowings under the revolving credit facilities totaling $8.1 million.
Borrowing availability was further reduced by an $8.3 million outstanding letter
of credit issued to benefit plaintiffs in a lawsuit against the Company and by a
$1.2 million letter of credit provided as security for the Company's workers
compensation benefit program in North America. After the above items, the
Company had $17.4 million of available borrowing capacity. As of September 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 September 30,
2003.
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 nine months of 2002 were approximately $75.0
million, or 29.5% of the Company's net sales. At September 30, 2002, assets
associated with these operations were approximately 43.2% of total assets, and
the Company had indebtedness denominated in currencies other than the U.S.
Dollar of approximately $2.6 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 September 30, 2002 and does not use derivative
financial instruments for trading or speculative purposes.
NEW ACCOUNTING PRONOUNCEMENTS
17
ADVANCED ACCESSORY SYSTEMS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
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 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 and a reduction of $2.2 million during the first nine months of 2002 as
compared with the first nine months of 2002. 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 41,000 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
SIGNATURE
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.
Item 4. Controls and Procedures
Under the supervision and with the participation of management,
including our principal executive officer and principal financial
officer, the Company has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures within 90 days of
the filing date of this quarterly report, and, based on their
evaluation, the principal executive officer and principal financial
officer have concluded that these controls and procedures are
effective. There were no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent
to the date of their evaluation.
Disclosure controls and procedures are the Company's controls and
other procedures that are designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure
that information required to be disclosed in the reports that the
Company files under the Exchange Act is accumulated and communicated to
management, including the principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding
required disclosure.
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 nine months of 2002 and 2001, the Company increased
its estimated accrual for this matter by $450,000 which charge is
included in interest expense. No amounts have been paid as of September
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification of Chief Executive Officer Pursuant To 18
U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of
The Sarbanes-Oxley Act Of 2002
Exhibit 99.2 Certification of Chief Financial Officer Pursuant To 18
U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of
The Sarbanes-Oxley Act Of 2002
(b) Reports on Form 8-K
None
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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 12, 2002 /s/ BARRY G. STEELE
-----------------------------------
Barry G. Steele
Chief Financial Officer
(Principal Accounting Officer
and Duly Authorized Officer)
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ADVANCED ACCESSORY SYSTEMS, LLC
CERTIFICATIONS
I, Terence C. Seikel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Advanced
Accessory Systems, LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ TERENCE C. SEIKEL
-----------------------------------
Terence C. Seikel, President and
Chief Executive Officer
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ADVANCED ACCESSORY SYSTEMS, LLC
CERTIFICATIONS
I, Barry G. Steele, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Advanced
Accessory Systems, LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ BARRY G. STEELE
-----------------------------------
Barry G. Steele, Chief Financial
Officer
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ADVANCED ACCESSORY SYSTEMS, LLC
EXHIBIT INDEX
Exhibit Description
- ------- -----------
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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