10-Q 1 k62100e10-q.txt FORM 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------------- --------------- -------------- COMMISSION FILE NUMBER 333-49011 --------- -------------- [ADVANCED ACCESSORY SYSTEMS, LLC. LOGO] ADVANCED ACCESSORY SYSTEMS, LLC. (Exact name of Registrant as specified in its Charter) DELAWARE 13-3848156 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12900 HALL ROAD, SUITE 200, STERLING HEIGHTS, MI 48313 (Address of principal executive offices) (Zip Code) (810) 997-2900 (Telephone Number) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ================================================================================ 2 ADVANCED ACCESSORY SYSTEMS, LLC INDEX

3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED BALANCE SHEETS AS OF MARCH 31, 2001 AND DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of the consolidated condensed financial statements. 1 4 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated condensed financial statements. 2 5 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated condensed financial statements. 3 6 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN MEMBERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2001 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated condensed financial statements. 4 7 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly its financial position as of March 31, 2001 and December 31, 2000 and the results of its operations for the three months ended March 31, 2001 and 2000 and its cash flows for the three months ended March 31, 2001 and 2000. During 2000, the Company adopted the provisions of the EITF 00-10, "Accounting for Shipping and Handling Revenues and Costs", which requires that all amounts billed to customers related to shipping and handling costs be classified as revenue. In prior years, these costs and the reimbursement of these costs were netted in our financial statements. Accordingly, amounts billed to customers are now included in net sales and the related costs are included in cost of sales in the accompanying statement of operations. There was no impact on net income (loss). 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, 2000, filed with the Securities and Exchange Commission on March 27, 2001. 2. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) for the first quarter of 2001 and 2000 of $(599) and $3,997, respectively, includes reported net income (loss) adjusted by the effect of changes in the cumulative translation adjustment. 3. 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 guarantor and non-guarantor subsidiaries for the three months ended March 31, 2001 and 2000 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 March 31, 2001. 5 8 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 3. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2001

6 9 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 3. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000

7 10 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 3. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000

8 11 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 3. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001

9 12 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 3. CONDENSED CONSOLIDATING INFORMATION-- (continued) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000

10 13 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 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 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. RECENT ACQUISITIONS In February 2000, the Company through Valley Industries, acquired the net assets of Titan Industries, Inc. ("Titan"). Titan is a North American supplier of trailer balls and other towing related accessories to the automotive aftermarket. In September 2000, the Company through SportRack Accessories, acquired the net assets of the Wiswall Hill Corporation ("Wiswall Hill" or "Barrecrafters"). Wiswall Hill is a North American supplier of rack systems and accessories to the automotive aftermarket under its popular brand name, Barrecrafters. In each instance, the acquisition was accounted for in accordance with the purchase method of accounting and the operating results of the acquired company have been included in the Company's consolidated financial statements since the date of the respective acquisition. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000. Net sales. Net sales for the first quarter of 2001 were $79.2 million, representing a decrease of $6.4 million, or 7.5%, compared with net sales for the first quarter of 2000. This decrease resulted primarily from decreased sales to OEM's of approximately $5.1 million resulting from decreased production levels of vehicles compared to the prior year. The North American OEM's reduced vehicle production beginning in the fourth quarter of 2000 and continuing in the first quarter of 2001 in anticipation of lower sales and to address vehicle inventories which had generally grown above acceptable levels. Net sales was also reduced by approximately $1.1 million due to the effect of declining exchange rates between the U.S. Dollar and the currencies used by the Company's foreign subsidiaries. Gross profit. Gross profit for the first quarter of 2001 was $19.2 million, representing a decrease of $4.0 million, or 17.1%, from the gross profit for the first quarter of 2000. This decrease resulted from the decrease in net sales and a decrease in the gross margin percentage. Gross profit as a percentage of net sales was 24.3% in the first quarter of 2001 compared to 27.1% in the first quarter of 2000. The decrease in the gross margin percentage is attributable to the effects of spreading fixed costs over a lower sales base and a change in the mix of products sold being weighted more toward lower margin products than in the prior year. Selling, administrative and product development expenses. Selling, administrative and product development expenses for the first quarter of 2001 were $11.7 million, representing a decrease of $596,000, or 4.8%, over the selling, administrative and product development expenses for the first quarter of 2000. Selling, administrative and product development expenses as a percentage of net sales increased to 14.8% in the first quarter of 2001 from 14.4% in the first quarter of 2000. Operating income. Operating income for the first quarter of 2001 was $6.8 million, a decrease of $3.3 million, or 33.0%, from operating income for the first quarter of 2000 reflecting the decrease in gross profit and offset by the decrease in selling, administrative and product development expenses. Operating income as a percentage of net sales decreased to 8.5% in the first quarter of 2001 from 11.8% in the first quarter of 2000. 11 14 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 Interest expense. Interest expense for the first quarter of 2001 was $4.5 million, which was $110,000 higher than interest expense for the first quarter of 2000. In the first quarter of 2001, higher interest rates charged on the Company's variable rate indebtedness was partially offset by lower interest expense resulting from reduced average borrowings. Foreign currency loss. Foreign currency loss in the first quarter of 2001 was $4.8 million, compared to a foreign currency loss of $3.5 million in the first quarter of 2000. The Company's foreign currency loss is primarily related to Brink which has indebtedness denominated in U.S. Dollars including intercompany debt and a portion of the loans under the Company's Second Amended and Restated Credit Agreement. During the first quarter of 2001 and the first quarter of 2000, the U.S. Dollar strengthened significantly in relation to the European Euro, the functional currency of Brink. 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 quarter of 2001, the Company had a loss before income taxes for its taxable subsidiaries totaling $5.2 million and recorded a benefit for income taxes of $1.1 million. The effective tax rate differs from the U.S. federal income tax rate primarily due to changes in valuation allowances on the deferred tax assets of SportRack Accessories recorded during 2001 and differences in the tax rates of foreign countries. During the first quarter of 2000, the Company had a loss before income taxes for its taxable subsidiaries totaling $2.7 million and recorded a benefit for income taxes of $1.1 million. Net income (loss). Net loss for the first quarter of 2001 was $(1.5) million, as compared to a net income of $3.6 million in the first quarter of 2000, a change of $5.1 million. The change in net income (loss) is primarily attributable to the decrease in operating income and the increase in the foreign currency loss recorded in the first quarter 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 March 31, 2001 was $167.0 million including current maturities of $11.7 million. The Company expects to be able to meet its liquidity requirements through cash provided by operations and through borrowings available under the Second Amended and Restated Credit Agreement ("U.S. Credit Facility"). WORKING CAPITAL AND CASH FLOWS Working capital and key elements of the consolidated statement of cash flows are:

Working capital Working capital decreased by $3.2 million to $31.6 million at March 31, 2001 from $34.8 million at December 31, 2000 due to increases in accounts payable and accrued liabilities of $14.4 million and $2.1 million, respectively, and due to decreases in cash and other current assets of $1.3 million and $856,000, respectively. Working capital was further reduced by $2.2 million due to the 12 15 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 effects of declining currency exchange rates for the functional currencies of the Company's foreign subsidiaries. These decreases were partially offset by increases in accounts receivable, inventories and current deferred tax assets of $13.2 million, $3.0 million and $1.4 million, respectively. Cash decreased by $1.3 million to $2.0 million at March 31, 2001 from $3.3 million at December 31, 2000 primarily due to cash used for financing and investing activities of $8.2 million and $1.3 million, respectively, partially offset by cash provided by operating activities of $7.5 million. Increases in accounts receivable and inventory were attributable to increased sales levels in the first quarter of 2001 as compared with the fourth quarter of 2000. Increases in accounts payable and accrued liabilities during the quarter reflected increased purchasing activities to support the increased sales volume. Differences in sales levels between the two consecutive quarters are partly due to seasonal cycles and increased sales to OEM's. 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 as of December 31, 2000. Operating Activities Cash flow provided by operating activities for the first quarter of 2001 was $7.5 million, compared to $2.9 million in the first quarter of 2000. Cash flow for the first quarter of 2001 increased primarily due to changes in working capital items other than cash during the first quarter of 2001 as compared with an increase for the first quarter of 2000. This was offset by reduced operating income during the first quarter of 2001 compared with the first quarter of 2000. Investing Activities During the first quarter of 2001 and 2000, investing cash flows include acquisitions of property and equipment of $1.3 million and $3.2 million, respectively, and were primarily for the expansion of capacity, productivity and process improvements and maintenance. The Company's ability to make capital expenditures is subject to restrictions in the U.S. Credit Facility, including a maximum of $12.5 million of capital expenditures annually. Investing cash flows for the first quarter of 2000 also included $1.5 million paid to acquire the net assets of Titan Industries, Inc. on February 22, 2000. Financing Activities During the first quarter of 2001 and 2000, financing cash flows included scheduled payments of principal on the Company's term indebtedness of $2.9 million and $4.0 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 not significant during the first quarter of 2001 and were $1.0 million for the first quarter of 2000. Financing cash flows during the first quarter of 2001 also included net repayments under the company's revolving loans of $5.3 million. DEBT AND CREDIT SOURCES The Company's indebtedness was $167.0 million and $175.6 million at March 31, 2001 and December 31, 2000, respectively. The Company expects that its primary sources of cash will be from operating activities and borrowings under its revolving credit facilities. As of March 31, 2001, the Company had borrowings under the revolving credit facilities totaling $6.0 million and had $12.6 million of available borrowing capacity. Borrowing availability was reduced by a $6.4 million outstanding letter of credit issued to benefit plaintiffs in a lawsuit against the Company. As of March 31, 2001, the Company was in compliance with the various covenants under the debt agreements pursuant to which it has borrowed or may borrow money and believes the Company will remain in compliance with such covenants through the period ending March 31, 2002. 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. 13 16 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 The Company's ability to satisfy its debt obligations will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business, and other factors, certain of which are beyond its control, as well as the availability of revolving credit borrowings under its current or successor credit facilities. The Company anticipates that, based on current and expected levels of operations, its operating cash flow, together with borrowings under the U.S. Credit Facility and the Canadian Credit Facility, should be sufficient to meet its debt service, working capital and capital expenditure requirements for the foreseeable future, although no assurances can be given in this regard, including as to the ability to increase revenues or profit margins. If the Company is unable to service its indebtedness, it will be forced to take actions such as reducing or delaying acquisitions and/or capital expenditures, selling assets, restructuring or refinancing its indebtedness, or seeking additional equity capital. There is no assurance that any of these remedies can be effected on satisfactory terms, if at all, including, whether, and on what terms, the Company could raise equity capital. The Company conducts operations in several foreign countries including Canada, The Netherlands, Denmark, the United Kingdom, Sweden, France, Germany, Poland, Spain, the Czech Republic and, Italy. Net sales from international operations during the first quarter 2001 were approximately $22.4 million, or 28.3% of the Company's net sales. At March 31, 2001, assets associated with these operations were approximately 35.6% of total assets, and the Company had indebtedness denominated in currencies other than the U.S. Dollar of approximately $6.5 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 March 31, 2001 and does not use derivative financial instruments for trading or speculative purposes. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). The Company adopted this statement at the beginning of fiscal 2001. This pronouncement did not have a material impact on the Company's results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable as there have been no changes since that reported in the Company's annual report on Form 10-K filed with the commission on March 27, 2001. 14 17 ADVANCED ACCESSORY SYSTEMS, LLC PART II. OTHER INFORMATION AND SIGNATURE Item 1. Legal Proceedings Gibbs vs. AAS: In February 1996, the Company commenced an action against certain individuals alleging breach of contract under the terms of an October 1992 Purchase Agreement and the individuals' respective Employment Agreements with the predecessor of the Company. In March 1996, the individuals filed a separate lawsuit against the Company alleging breach of contract under the respective Purchase Agreement and their respective 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 plans to file an appeal once a judgment is entered by the court. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security-Holders None Items 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 15 18 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: May 3, 2001 /s/ BARRY G. STEELE --------------------------- Barry G. Steele Corporate Controller (chief accounting officer and authorized signatory) 16

ADVANCED ACCESSORY SYSTEMS LLC 10-Q