<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended 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
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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)
(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
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<PAGE> 2
ADVANCED ACCESSORY SYSTEMS, LLC
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
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
</TABLE>
<PAGE> 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)
<TABLE>
<CAPTION>
September 30 December 31,
ASSETS 1998 1997
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
1
<PAGE> 4
ADVANCED ACCESSORY SYSTEMS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
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
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
2
<PAGE> 5
ADVANCED ACCESSORY SYSTEMS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
3
<PAGE> 6
ADVANCED ACCESSORY SYSTEMS, LLC
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Retained
Currency earnings Total
Class A translation (accumulated members'
units adjustment deficit) equity
-------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
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
======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
4
<PAGE> 7
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, 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
<PAGE> 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
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash........................................... $ -- $ 5,235 $ 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
======== ======== ======== ========= ========
</TABLE>
7
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash................................... $ -- $ 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
======== ======== ======== ========= ========
</TABLE>
8
<PAGE> 11
ADVANCED ACCESSORY SYSTEMS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
6. CONDENSED CONSOLIDATING INFORMATION -- (continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................................ $ -- $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
====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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)
====== ======= ======= ======= =======
</TABLE>
9
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
======= ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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
====== ======= ======= ======= ========
</TABLE>
10
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by 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
======= ======= ======== ====== ========
</TABLE>
11
<PAGE> 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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATIONS/
ISSUERS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used for) operating
activities.............................. $ (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
======= ======== ======== ======= ========
</TABLE>
12
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Nine Months Ended
(Dollars in thousands)
1998 1997
---- ----
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 24
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
24
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<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
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<SECURITIES> 0
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<PP&E> 64,121
<DEPRECIATION> 16,033
<TOTAL-ASSETS> 281,853
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0
0
<COMMON> 0
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<SALES> 225,765
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<OTHER-EXPENSES> 54,461
<LOSS-PROVISION> 1,200
<INTEREST-EXPENSE> 14,277
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<INCOME-TAX> 1,602
<INCOME-CONTINUING> 10,891
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