10-Q 1 k65563e10-q.txt FORM 10-Q FOR QUARTER ENDING SEPTEMBER 30, 2001 ================================================================================ 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, 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 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 ================================================================================ ADVANCED ACCESSORY SYSTEMS, LLC INDEX

PART I. FINANCIAL INFORMATION Item 1. Financial Statements ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of the consolidated condensed financial statements. 1 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated condensed financial statements. 2 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated condensed financial statements. 3 ADVANCED ACCESSORY SYSTEMS, LLC CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN MEMBERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated condensed financial statements. 4 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly its financial position as of September 30, 2001 and December 31, 2000 and the results of its operations for the three and nine months ended September 30, 2001 and 2000 and its cash flows for the nine months ended September 30, 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 Comprehensive income for the third quarter of 2001 and 2000 of $3,096 and $(3,081), respectively, and for the first nine months of 2001 and 2000 of $6,309 and $8,177, respectively, includes reported net income adjusted by the effect of changes in the cumulative translation adjustment. 3. MANDATORILY REDEEMABLE WARRANTS Effective June 30, 2001, the Company adopted Emerging Issues Task Force (EITF) Consensus 00-19, "Determination of Whether Share Settlement is Within the Control of the Issuer for Purposes of Applying Issue No. 96-13, 'Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock'". Accordingly, based upon the terms of the warrants, the Company has reclassified the mandatorily redeemable warrants to a component of current liabilities. Future accretion will be included in the determination of net income or loss for each reporting period. 4. DEBT Effective as of September 30, 2001 the Company received a waiver from its senior lenders which waived violations in the maintenance of certain financial covenants for the quarter ending September 30, 2001 until December 15, 2001. The waiver is intended to allow the Company sufficient time to negotiate an amendment to the Second Amended and Restated Credit Agreement with its lenders which would reset the financial covenant requirements to levels consistent with future operating projections. Unless the Company obtains such an amendment or future waivers of its existing credit facilities or is able to refinance such credit facilities, the Company believes that it is probable that it will not be in compliance with one or more of the financial covenants during future periods. Accordingly, the related debt has been classified as current. 5 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION On October 1, 1997, the Company and its wholly-owned subsidiary, AAS Capital Corporation, issued and sold $125,000 of its 9 3/4 Senior Subordinated Notes due 2007 ("the Notes"). The Notes are guaranteed on a full, unconditional and joint and several basis by all of the Company's direct and indirect wholly-owned domestic subsidiaries. The following condensed consolidating financial information presents the financial position, results of operations and cash flows of (i) the Company as parent, as if it accounted for its subsidiaries on the equity method, and AAS Capital Corporation as issuers; (ii) guarantor subsidiaries which are domestic, wholly-owned subsidiaries and include SportRack LLC, AAS Holdings, Inc., Valley Industries, LLC, and ValTek, LLC; and (iii) the non-guarantor subsidiaries which are foreign, wholly-owned subsidiaries and include Brink International B.V. and its subsidiaries, SportRack Accessories, Inc. and its subsidiary, and SportRack Automotive GmbH and its subsidiaries. The guarantor and non-guarantor subsidiaries for the three and nine months ended September 30, 2001 and 2000 have been allocated a portion of certain corporate overhead costs on a basis consistent with each subsidiary's relative business activity and interest on intercompany debt balances. Since its formation in September 1997, AAS Capital Corporation has had no operations and has no assets or liabilities at September 30, 2001. 6 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2001

7 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000

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

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000

9 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000

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

11 ADVANCED ACCESSORY SYSTEMS, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 5. CONDENSED CONSOLIDATING INFORMATION -- (continued) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000

12 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000. Net sales. Net sales for the third quarter of 2001 were $75.5 million, representing an increase of $2.4 million, or 3.3%, over net sales for the third quarter of 2000. This increase resulted primarily from increased sales to OEMs of approximately $2.2 million resulting from sales of new products for new vehicles introduced during 2001. This increase was partially offset by lower production levels by the OEMs compared to the prior year. Aftermarket sales also increased by $653,000 during the quarter. Partially offsetting these increases was lower sales of approximately $418,000 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 third quarter of 2001 was $17.7 million, representing an increase of $1.2 million, or 7.3%, over the gross profit for the third quarter of 2000. This increase resulted from the increase in net sales and an increase in the gross margin percentage. Gross profit as a percentage of net sales was 23.4% in the third quarter of 2001 compared to 22.6% in the third quarter of 2000. The increase in the gross margin percentage is attributable to the effects of spreading fixed costs over a higher sales base. Selling, administrative and product development expenses. Selling, administrative and product development expenses for the third quarter of 2001 were $11.0 million were unchanged as compared with the selling, administrative and product development expenses for the third quarter of 2000. Selling, administrative and product development expenses as a percentage of net sales decreased to 14.6% in the third quarter of 2001 from 15.1% in the third quarter of 2000. This decrease is the result of spreading fixed costs over a higher sales base and decreased corporate administrative expenses. Operating income. Operating income for the third quarter of 2001 was $5.9 million, an increase of $1.2 million, or 24.2%, over operating income for the third quarter of 2000 due to increased gross profit and decreased selling, administrative and product development expenses. Operating income as a percentage of net sales increased to 7.8% in the third quarter of 2001 from 6.5% in the third quarter of 2000 due to the increase in the gross margin percentage and the decrease in the percentage of selling, administrative and product development expenses to sales. 13 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 Interest expense. Interest expense for the third quarter of 2001 was $4.2 million, which was approximately the same as interest expense for the third quarter of 2000. Higher interest expense attributable to increased interest rates on the Company's variable rate debt offset the lower average indebtedness for the period. Foreign currency gain (loss). Foreign currency gain in the third quarter of 2001 was $2.7 million, compared to a foreign currency loss of $4.9 million in the third quarter of 2000. The Company's foreign currency loss is primarily related to Brink which has indebtedness denominated in U.S. Dollars. During the third quarter of 2001 the U.S. Dollar weakened in relation to the European Euro, the functional currency of Brink, as compared with third quarter of 2000 when the U.S. Dollar strengthened in relation to the European Euro. Provision for income taxes. The Company and certain of its domestic subsidiaries have elected to be taxed as limited liability companies for federal income tax purposes. As a result of this election, most of 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 2001, the Company had income before income taxes for its taxable subsidiaries totaling $3.6 million and recorded a provision for income taxes of $1.9 million. 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 and differences in the tax rates of foreign countries. During the third quarter of 2000, the Company had a loss before income taxes for its taxable subsidiaries totaling $4.6 million and recorded a benefit for income taxes of $1.1 million. Net income. Net income for the third quarter of 2001 was $2.4 million, as compared to a net loss of $3.4 million in the third quarter of 2000, a change of $5.8 million. The change in net income is primarily attributable to increased operating income and the foreign currency gain in the third quarter of 2001 as compared with a foreign currency loss during the third quarter of 2000. NINE MONTHS ENDED SEPTEMBER 31, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000. Net sales. Net sales for the first nine months of 2001 were $243.6 million, representing a decrease of $8.3 million, or 3.3%, from net sales for the first nine months of 2000. This decrease resulted from decreased sales to OEMs of approximately $7.4 million and the effect of declining exchange rates between the U.S. Dollar and the currencies used by the Company's foreign subsidiaries totaling $3.2 million. The North American OEMs reduced vehicle production beginning in the fourth quarter of 2000 and continuing in the first nine months of 2001 in response to lower sales of new vehicles in the North American automotive market. These decreases were partially offset by sales of new products for new vehicles introduced during 2001 and higher sales to the automotive aftermarket totaling $2.3 million. Gross profit. Gross profit for the first nine months of 2001 was $59.5 million, representing a decrease of $6.1 million, or 9.4%, from the gross profit for the first nine months of 2000. This decrease resulted from the decrease in net sales and by a decrease in the gross margin percentage. Gross profit as a percentage of net sales was 24.4% in the first nine months of 2001 compared to 26.0% in the first nine months of 2000. The decrease in the gross margin percentage is attributable to the effects of spreading fixed costs over a lower sales base, lower gross margin for North American towing products and proportionately lower sales for Brink which has a greater gross margin percentage as compared with the Company as a whole. Selling, administrative and product development expenses. Selling, administrative and product development expenses for the first nine months of 2001 were $34.1 million, representing a decrease of $777,000, or 2.2%, compared with the selling, administrative and product development expenses for the first nine months of 2000. Selling, administrative and product development expenses as a percentage of net sales increased to 14.0% in the first nine months of 2001 from 13.9% in the first nine months of 2000. Operating income. Operating income for the first nine months of 2001 was $23.1 million, a decrease of $5.4 million, or 18.8%, over operating income for the first nine months of 2000. Operating income as a percentage of net sales decreased to 9.5% in the first nine months of 2001 from 11.3% in the first nine months of 2000 due to the decrease in the gross margin percentage and the increase in the percentage of selling, administrative and product development expenses to sales. Interest expense. Interest expense for the first nine months of 2001 was $13.3 million, which was approximately the same as interest expense for the first nine months of 2000. Higher interest expense attributable to increased interest rates on the Company's variable rate debt offset the lower average indebtedness for the period. Foreign currency loss. Foreign currency loss in the first nine months of 2001 was $3.4 million, compared to a foreign currency loss of $8.9 million in the first nine months of 2000. The Company's foreign currency loss is primarily related to the Brink which has indebtedness denominated in U.S. Dollars. During the first nine months of 2001 and 2000 the U.S. Dollar strengthened in 14 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 relation to the European Euro, the functional currency of Brink. This U.S. Dollar strengthening was more significant during the first nine months of 2000 than the same period in 2001. 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 2001, the Company had a loss before income taxes for its taxable subsidiaries totaling $979,000 and recorded a provision for income taxes of $963,000. 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 and differences in the tax rates of foreign countries. During the first nine months of 2000, the Company had a loss before income taxes for its taxable subsidiaries totaling $4.5 million and recorded a benefit for income taxes of $1.1 million. Net income. Net income for the first nine months of 2001 was $5.4 million, as compared to net income of $7.4 million in the first nine months of 2000, a decrease of $2.0 million. The decrease in net income is primarily attributable to decreased operating income partially offset by the decreased foreign currency loss. LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity requirements are to service its debt and meet its working capital and capital expenditure needs. The Company's indebtedness at September 30, 2001 was $160.9 million including current maturities of $36.3 million. The Company expects to be able to meet its liquidity requirements in the next fiscal quarter through cash provided by operations and through borrowings available under the Second Amended and Restated Credit Agreement, as amended ("U.S. Credit Facility"), or other financing sources, see "Debt and Credit Sources" below. WORKING CAPITAL AND CASH FLOWS Working capital and key elements of the consolidated statement of cash flows are (in thousands):

Working capital Working capital decreased by $30.5 million to $4.3 million at September 30, 2001 from $34.8 million at December 31, 2000 due to an increase in the current portion of long term debt of $24.5 million, an increase in accounts payable of $6.4 million, an increase in accrued liabilities of $3.9 million, a reclassification of mandatorily redeemable warrants as a component of current liabilities of $5.1 million, a decrease in inventory of $1.9 million, and a decrease in cash of $1.5 million. These were partially offset by an increase in accounts receivable of $12.8 million. See "Debt and Credit Sources" below for a discussion about the increase in the current portion of long term debt. Increases in accounts receivable were attributable to increased sales levels in the third quarter of 2001 as compared with the fourth quarter of 2000. Increases in accounts payable reflected increased purchasing activities to support the increased sales volume during the third quarter of 2001 as compared with the forth quarter of 2000. Accrued liabilities increased primarily from an increase in accrued interest on the Company's Senior Subordinated Notes, which is paid semiannually on October 1 and April 1. 15 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 Operating activities Cash flow provided by operating activities for the first nine months of 2001 was $20.2 million. Operating cash flow was comparable between the first nine months of 2001 and 2000 regardless of a decrease in operating profit for the period due to reduced working capital during 2001 which was the result of efforts to manage working capital investment during an environment of slowing economic activity. Investing activities During the first nine months of 2001 and 2000, investing cash flows include acquisitions of property and equipment of $5.4 million and $7.6 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 nine months of 2000 also included $2.8 million paid to acquire the net assets of Titan Industries, Inc. on February 22, 2000 and the net assets of the Wiswall Hill Corporation on September 5, 2000. Financing activities During the first nine months of 2001 and 2000, financing cash flows included payments of principal on the Company's term indebtedness of $8.8 million and $10.8 million, respectively. Distributions to members, representing amounts sufficient to meet the tax liability on the Company's domestic taxable income which accrues to individual members were $815,000 during the first nine months of 2001 and were $6.1 million in the first nine months of 2000. Financing cash flows also included net repayments under the Company's revolving loans of $6.6 million during the first nine months of 2001 and net borrowings of $2.0 million during the first nine months of 2000. DEBT AND CREDIT SOURCES The Company's indebtedness was $160.9 million and $175.6 million at September 30, 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 September 30, 2001, the Company had borrowings of $4.7 million under the revolving credit facilities and had a $8.0 million outstanding letter of credit issued to benefit plaintiffs in a lawsuit against the Company. The available borrowing capacity as of September 30, 2001 was $12.3 million. Effective as of September 30, 2001 the Company received a waiver from its senior lenders which waived violations in the maintenance of certain financial covenants for the quarter ending September 30, 2001 until December 15, 2001. The waiver is intended to allow the Company sufficient time to negotiate an amendment to the Second Amended and Restated Credit Agreement with its lenders which would reset the financial covenant requirements to levels consistent with future operating projections. Unless the Company obtains such an amendment or future waivers of its existing credit facilities or is able to refinance such credit facilities, the Company believes that it is probable that it will not be in compliance with one or more of the financial covenants during future periods. Accordingly, the related debt has been classified as current. While the Company has been successful in obtaining amendments under its existing credit facilities and believes that it should be able to obtain a new amendment, there is no assurance that any amendments or further waivers will be obtained. The Company is also in discussions with a financial institution to provide new senior secured credit facilities, which if entered into, would refinance in full its existing senior credit facilities and provide additional revolving credit availability. There is no assurance that the Company and the new financial institution will be able to enter into the new senior secured credit facilities. In addition to the foregoing, 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. 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. 16 ADVANCED ACCESSORY SYSTEMS, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 The Company conducts operations in several foreign countries including Canada, The Netherlands, Denmark, the United Kingdom, Sweden, France, Germany, Poland, Spain, Czech Republic and Italy. Net sales from international operations during the first nine months of 2001 were approximately $71.4 million, or 29.3% of the Company's net sales. At September 30, 2001, assets associated with these operations were approximately 36.6% of total assets, and the Company had indebtedness denominated in currencies other than the U.S. Dollar of approximately $5.2 million. The Company's international operations may be subject to volatility because of currency fluctuations, inflation and changes in political and economic conditions in these countries. Most of the revenues and costs and expenses of the Company's operations in these countries are denominated in the local currencies. The financial position and results of operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Certain of the Company's foreign subsidiaries have debt denominated in currencies other than their functional currency. As the exchange rates between the currency of the debt and the subsidiaries functional currency change the Company is subject to foreign currency gains and losses. The Company may periodically use foreign currency forward option contracts to offset the effects of exchange rate fluctuations on cash flows denominated in foreign currencies. The Company has no outstanding foreign currency forward options at September 30, 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. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The Company is currently reviewing the impact of SFAS Nos. 141 and 142 and will be performing a fair-value analysis at a later date in connection with the adoption of SFAS No. 142 on January 1, 2002. Effective June 30, 2001, the Company adopted Emerging Issues Task Force (EITF) Consensus 00-19, "Determination of Whether Share Settlement is Within the Control of the Issuer for Purposes of Applying Issue No. 96-13, 'Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock'". Accordingly, based upon the terms of the warrants, the Company has reclassified the mandatorily redeemable warrants to a component of current liabilities. Future accretion will be included in the determination of net income or loss for each reporting period. 17 ADVANCED ACCESSORY SYSTEMS, LLC 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. 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 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: November 12, 2001 /s/ BARRY G. STEELE ----------------------------------- Barry G. Steele Corporate Controller and Treasurer (chief accounting officer and authorized signatory) 19

ADVANCED ACCESSORY SYSTEMS LLC 10-Q