**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**Form 10-Q**

 
| **(Mark one)** |
|----------------|
| **ý**     | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|           |   |
| ** **     | **For the quarterly period ended September 30,  2004** |
|           |   |
| **OR**         |
|           |   |
| **o**          | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|           |   |
| ** **     | **For the transition period from                             to                          ** |

 

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**Commission File Number       333-106356**

 

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**CHAAS ACQUISITIONS, LLC.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                     | ** ** | **41-2107245**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or  other jurisdiction of  incorporation or organization) |       | (I.R.S.  Employer  Identification No.) |
|                                                             |       |                                   |
| **12900  Hall Road, Suite 200, Sterling Heights, MI**            | ** ** | **48313**                              |
| (Address of  principal executive offices)                        |       | (Zip Code)                             |

 

**(586)997-2900**

(Registrant’s telephone number,including area code)

 

**NOTAPPLICABLE**

(Former name, former addressand former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such a period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.
|   | Yes  ý | No  o |
|--------|-----------------------|-----------------|

 

Indicate by check mark whether the Registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
|   | Yes  o | No  ý |
|--------|------------------|----------------------|

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 

| **Class**         | ** ** | **Outstanding at November 12,  2004** |
|-------------------|------------|--------------------------------------------|
|              |       |                                       |
| Membership  Units |       | 100                                        |

 

 

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**CHAASACQUISITIONS, LLC**

 

**INDEX**

 
| Part I. Financial Information            |      |
|------------------------------------------|-----------|
|                                     |      |   |   |
|                                     | Item 1.   | Financial Statements |   |
|                                     |      |   |   |
|                                     |      | Consolidated Condensed Balance Sheets of  the Company as of September 30, 2004 and as of December 31, 2003 |   |
|                                     |      |   |   |
|                                     |      | Consolidated Condensed Statements of  Operations of the Company for the three months and the nine months ended September 30,  2004, the three months ended September 30, 2003 and for the period from April 15,  2003 through September 30, 2003 and the Consolidated Condensed  Statements of Operations for the Predecessor for the period January 1,  2003 through April 14, 2003 |   |
|                                     |      |   |   |
|                                     |      | Consolidated Condensed Statements of Cash  Flows for the Company for the nine months ended September 30, 2004 and  the period April 15, 2003 through September 30, 2003 and the  Consolidated Condensed Statements of Cash Flows for the Predecessor for the  period January 1, 2003 through April 14, 2003 |   |
|                                     |      |   |   |
|                                     |      | Consolidated Condensed Statement of Changes  in Members’ Equity for the nine months ended September 30, 2004 for the  Company |   |
|                                     |      |   |   |
|                                     |      | Notes to Consolidated Condensed Financial  Statements |   |
|                                     |      |   |   |
|                                     | Item 2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                     |      |   |   |
|                                     | Item 3.   | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                     |      |   |   |
|                                     | Item 4.   | Controls  and Procedures |   |
|                                     |      |   |   |
| Part II. Other Information and Signature |      |
|                                     |      |   |   |
|                                     | Item 1.   | Legal Proceedings |   |
|                                     |      |   |   |
|                                     | Item 2.   | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity  Securities |   |
|                                     |      |   |   |
|                                     | Item 3.   | Defaults Upon Senior Securities |   |
|                                     |      |   |   |
|                                     | Item 4.   | Submission of Matters to a Vote of  Security-Holders |   |
|                                     |      |   |   |
|                                     | Item 5.   | Other  Information |   |
|                                     |      |   |   |
|                                     | Item 6.   | Exhibits |   |
|                                     |      |   |   |
|                                     | Signature |   |

 

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**PART I. FINANCIAL INFORMATION**

 

Item 1.             FinancialStatements

 

**CHAASACQUISITIONS, LLC**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

**As of September 30,2004 and December 31, 2003**

**(Dollarsin thousands)**

 
| ** **                                                             | ** ** | **Company**                  | ** ** |
|------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| ** **                                                             | ** ** | **(Unaudited)**              | ** ** | ** ** | ** ** |
| ASSETS                                                                 |       |                         |       |   |   |
| Current  assets                                                        |       |                         |       |   |   |
| Cash                                                                   |       | $                            | 8,829      |   | $ | 16,686 |   |
| Accounts  receivable, less reserves of $1,835 and $2,189, respectively |       | 65,204                       |       | 55,363 |   |
| Inventories                                                            |       |                         |       |   |   |
| Raw  materials                                                         |       | 23,081                       |       | 19,039 |   |
| Work-in-process                                                        |       | 12,149                       |       | 9,662 |   |
| Finished  goods                                                        |       | 24,481                       |       | 23,075 |   |
| Reserves                                                               |       | (4,401                       | )          | (3,448 | ) |
| Total  inventories                                                     |       | 55,310                       |       | 48,328 |   |
| Deferred  income taxes                                                 |       | 9,402                        |       | 6,087 |   |
| Other  current assets                                                  |       | 18,060                       |       | 14,987 |   |
| Total  current assets                                                  |       | 156,805                      |       | 141,451 |   |
| Property and  equipment, net                                           |       | 71,852                       |       | 73,795 |   |
| Goodwill                                                               |       | 39,596                       |       | 39,596 |   |
| Other  intangible assets, net                                          |       | 103,103                      |       | 110,156 |   |
| Deferred  income taxes                                                 |       | 474                          |       | 336 |   |
| Other  noncurrent assets                                               |       | 2,718                        |       | 2,257 |   |
| Total Assets                                                           |       | $                            | 374,548    |   | $ | 367,591 |   |
|                                                                   |       |                         |       |   |   |
| LIABILITIES  AND MEMBERS’ EQUITY                                  |       |                         |       |   |   |
| Current  liabilities                                                   |       |                         |       |   |   |
| Current  maturities of long-term debt                                  |       | $                            | 1,886      |   | $ | 1,909 |   |
| Accounts  payable                                                      |       | 42,073                       |       | 33,285 |   |
| Accrued  liabilities                                                   |       | 31,097                       |       | 21,328 |   |
| Deferred  income taxes                                                 |       | 441                          |       | 588 |   |
| Total  current liabilities                                             |       | 75,497                       |       | 57,110 |   |
|                                                                   |       |                         |       |   |   |
| Noncurrent  liabilities                                                |       |                         |       |   |   |
| Deferred  income taxes                                                 |       | 6,136                        |       | 8,343 |   |
| Other  noncurrent liabilities                                          |       | 4,089                        |       | 4,151 |   |
| Long-term  debt, less current maturities                               |       | 189,184                      |       | 196,905 |   |
| Total  noncurrent liabilities                                          |       | 199,409                      |       | 209,399 |   |
|                                                                   |       |                         |       |   |   |
| Members’  equity                                                  |       |                         |       |   |   |
| Units                                                                  |       | 100,900                      |       | 100,900 |   |
| Other  comprehensive income                                            |       | 5,516                        |       | 5,690 |   |
| Accumulated  deficit                                                   |       | (6,774                       | )          | (5,508 | ) |
| Total  Members’ Equity                                            |       | 99,642                       |       | 101,082 |   |
| Total  Liabilities and Members’ Equity                            |       | $                            | 374,548    |   | $ | 367,591 |   |

 

The accompanying notes are anintegral part of theconsolidated condensed financial statements.

 

1

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**CHAASACQUISITIONS, LLC**

**CONSOLIDATEDCONDENSED STATEMENTS OF OPERATIONS**

**(Dollarsin thousands)**

**(Unaudited)**

 
| ** **                                                | ** ** | **Company**                                       | ** ** | **Predecessor**                                  | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **Three months  ended  September 30,  2004** | ** ** | **Nine months  ended  September 30,  2004** | ** ** | **Three months  ended  September 30,  2003** | ** ** | **Period from  April 15, 2003  through  September 30,  2003** | ** ** | **Period from  January 1, 2003  through  April 14,  2003** | ** ** |
|                                                      |       |                                              |       |                                             |       |   |   |   |   |   |   |
| Net sales                                                 |       | $                                                 | 93,749     |                                             | $          | 298,726 |   | $ | 86,770 |   | $ | 171,000 |   | $ | 101,854 |   |
| Cost of sales                                             |       | 74,961                                            |       | 232,354                                          |       | 65,750 |   | 128,825 |   | 76,508 |   |
|                                                      |       |                                              |       |                                             |       |   |   |   |   |   |   |
| Gross profit                                              |       | 18,788                                            |       | 66,372                                           |       | 21,020 |   | 42,175 |   | 25,346 |   |
| Selling,  administrative and Product development expenses |       | 14,408                                            |       | 45,118                                           |       | 13,862 |   | 23,251 |   | 14,908 |   |
| Stock option  compensation                                |       | —                                            |       | —                                           |       | — |   | — |   | 10,125 |   |
| Transaction  expenses                                     |       | —                                            |       | —                                           |       | — |   | — |   | 3,784 |   |
| Amortization  of intangible assets                        |       | 2,045                                             |       | 6,209                                            |       | 208 |   | 208 |   | 11 |   |
|                                                      |       |                                              |       |                                             |       |   |   |   |   |   |   |
| Operating  income (loss)                                  |       | 2,335                                             |       | 15,045                                           |       | 6,950 |   | 18,716 |   | (3,482 | ) |
|                                                      |       |                                              |       |                                             |       |   |   |   |   |   |   |
| Other income (expense)                                    |       |                                              |       |                                             |       |   |   |   |   |   |   |
| Interest  expense                                         |       | (5,456                                            | )          | (16,040                                          | )          | (5,590 | ) | (9,114 | ) | (4,772 | ) |
| Loss  resulting from debt extinguishment                  |       | —                                            |       | —                                           |       | (326 | ) | (6,293 | ) | — |   |
| Foreign  currency gain (loss), net                        |       | 478                                               |       | (280                                             | )          | — |   | 2 |   | 3,240 |   |
| Other income  (expense)                                   |       | 29                                                |       | (155                                             | )          | 61 |   | 132 |   | (84 | ) |
|                                                      |       |                                              |       |                                             |       |   |   |   |   |   |   |
| Income  (loss) before income taxes                        |       | (2,614                                            | )          | (1,430                                           | )          | 1,095 |   | 3,443 |   | (5,098 | ) |
| Provision  for income taxes                               |       | (647                                              | )          | (164                                             | )          | 927 |   | 2,816 |   | 1,600 |   |
| Net income  (loss)                                        |       | $                                                 | (1,967     | )                                                | $          | (1,266 | ) | $ | 168 |   | $ | 627 |   | $ | (6,698 | ) |

 

The accompanying notes are anintegral part of theconsolidated condensed financial statements.

 

2

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**CHAASACQUISITIONS, LLC**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

**(Dollarsin thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Company**                                      | ** ** | **Predecessor**                                                         | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **Nine months  ended  September 30,  2004** | ** ** | **Period from  April 15, 2003  through  September 30,  2003** | ** ** | **Period from  January 1, 2003  through  April 14,  2003** | ** ** |
|                                                                                      |       |                                             |       |                                                                    |       |   |   |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                                    |       |                                             |       |                                                                    |       |   |   |
| Net income  (loss)                                                                        |       | $                                                | (1,266     | )                                                                       | $          | 627 |   | $ | (6,698 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                                             |       |                                                                    |       |   |   |
| Depreciation  and amortization                                                            |       | 16,327                                           |       | 5,370                                                                   |       | 3,695 |   |
| Stock option  compensation                                                                |       | —                                           |       | —                                                                  |       | 10,125 |   |
| Loss  resulting from debt extinguishment                                                  |       | —                                           |       | 6,293                                                                   |       | — |   |
| Deferred  taxes                                                                           |       | (5,196                                           | )          | 550                                                                     |       | (87 | ) |
| Foreign  currency (gain) loss                                                             |       | 268                                              |       | (2                                                                      | )          | (3,061 | ) |
| (Gain) loss  on disposal of assets                                                        |       | 206                                              |       | (11                                                                     | )          | 68 |   |
| Interest  accretion on notes                                                              |       | 1,024                                            |       | —                                                                  |       | — |   |
| Changes in  assets and liabilities, net                                                   |       | (2,693                                           | )          | (2,261                                                                  | )          | (1,144 | ) |
|                                                                                      |       |                                             |       |                                                                    |       |   |   |
| Net cash  provided by (used for) operating activities                                     |       | 8,670                                            |       | 10,566                                                                  |       | 2,898 |   |
|                                                                                      |       |                                             |       |                                                                    |       |   |   |
| CASH FLOWS  USED FOR INVESTING ACTIVITIES:                                                |       |                                             |       |                                                                    |       |   |   |
| Acquisition  of property and equipment                                                    |       | (8,266                                           | )          | (5,510                                                                  | )          | (2,512 | ) |
| Proceeds  from disposals of property & equipment                                      |       | 88                                               |       | —                                                                  |       | — |   |
| Acquisition  of predecessor, net of cash acquired                                         |       | —                                           |       | (108,367                                                                | )          | — |   |
|                                                                                      |       |                                             |       |                                                                    |       |   |   |
| Net cash  (used for) investing activities                                                 |       | (8,178                                           | )          | (113,877                                                                | )          | (2,512 | ) |
|                                                                                      |       |                                             |       |                                                                    |       |   |   |
| CASH FLOWS  USED FOR FINANCING ACTIVITIES:                                                |       |                                             |       |                                                                    |       |   |   |
| Proceeds  from issuance of debt                                                           |       | —                                           |       | 347,533                                                                 |       | — |   |
| Debt  issuance costs                                                                      |       | —                                           |       | (13,302                                                                 | )          | — |   |
| Net increase  (decrease) in revolving loan                                                |       | (7,044                                           | )          | (8,903                                                                  | )          | 6,426 |   |
| Repayment of  debt                                                                        |       | (1,282                                           | )          | (328,767                                                                | )          | (2,218 | ) |
| Issuance of  membership units                                                             |       | —                                           |       | 100,900                                                                 |       | — |   |
| Distributions  to members                                                                 |       | —                                           |       | —                                                                  |       | (121 | ) |
| Net cash  provided by (used for) financing activities                                     |       | (8,326                                           | )          | 97,461                                                                  |       | 4,087 |   |
|                                                                                      |       |                                             |       |                                                                    |       |   |   |
| Effect of  exchange rate changes                                                          |       | (23                                              | )          | 3,368                                                                   |       | (296 | ) |
| Net  (decrease) increase in cash                                                          |       | (7,857                                           | )          | (2,482                                                                  | )          | 4,177 |   |
| Cash at  beginning of period                                                              |       | 16,686                                           |       | 6,830                                                                   |       | 2,653 |   |
| Cash at end  of period                                                                    |       | $                                                | 8,829      |                                                                    | $          | 4,348 |   | $ | 6,830 |   |

 

The accompanying notes are anintegral part of theconsolidated condensed financial statements.

 

3

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**CHAASACQUISITIONS, LLC**

**CONSOLIDATEDCONDENSED STATEMENT OF CHANGES IN MEMBERS’ EQUITY**

**For theNine Months Ended September 30, 2004**

**(Dollarsin thousands)**

**(Unaudited)**

 
| ** **                          | ** ** | **Company**                | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **Members’  capital** | ** ** | **Other  comprehensive  loss** | ** ** | **Retained  earnings** | ** ** | **Total  members’  equity** | ** ** |
|                                |       |                       |       |   |   |   |   |   |   |
| Balance at December 31,  2003  |       | $                          | 100,900    |   | $ | 5,690 |   | $ | (5,508 | ) | $ | 101,082 |   |
| Currency  translation adjustment    |       | —                     |       | (174 | ) | — |   | (174 | ) |
| Net (loss)                          |       | —                     |       | — |   | (1266 | ) | (1,266 | ) |
| Balance at September 30,  2004 |       | $                          | 100,900    |   | $ | 5,516 |   | $ | (6,774 | ) | $ | 99,642 |   |

 

The accompanying notes are anintegral part of theconsolidated condensed financial statements.

 

4

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**CHAASACQUISITIONS, LLC**

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**(Dollarsin thousands)**

**(Unaudited)**

 

1.                                       BASISOF PRESENTATION

 

On April 15, 2003, substantially all ofthe equity interests of Advanced Accessory Systems, LLC (the “Predecessor”)were acquired by Castle Harlan Partners IV, L.P. (the “Acquisition”), a privateequity investment fund organized and managed by Castle Harlan Inc., a leadingprivate equity firm. CHAAS Holdings, LLC was formed in April 2003 inconnection with the Acquisition and is the direct parent of CHAAS Acquisitions,LLC (“CHAAS Acquisitions”) which was formed pursuant to the Acquisition.  Unless the context otherwise requires allinformation which refers to the “Company,” “we,” “our” or “us” refers to CHAASAcquisitions and its subsidiaries.

 

The financial statements of the Company forperiods subsequent to April 14, 2003 are referred to as the financialstatements of the “Company.” All financial statements prior to that date arereferred to as the financial statements of the “Predecessor.”

 

The Acquisition was accounted for in accordancewith the purchase method of accounting. Accordingly, the purchase price of the Acquisition has been allocated toidentifiable assets acquired and liabilities assumed based upon their estimatedfair values at the acquisition date.

 

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions to Form 10-Q.  Accordingly, they do not include allinformation and footnotes required by accounting principles generally acceptedin the Unites States of America for complete financial statements and should beread in conjunction with the Annual Report on Form 10-K for the fiscal yearended December 31, 2003.

 

In the opinionof the Company, the accompanying unaudited consolidated condensed financialstatements contain all adjustments, which are normal and recurring in nature,necessary to present fairly its financial position as of September 30,2004 and December 31, 2003 and the results of its and the Predecessor’soperations for the nine month and three month periods ended September 30,2004 and 2003.

 

2.                                       COMPREHENSIVEINCOME

 

Comprehensive income (loss) for the Company and thePredecessor is as follows:

 
| ** **                                                   | ** ** | **Company**                                       | ** ** | **Predecessor**                                  | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                   | ** ** | **Three months  ended  September 30,  2004** | ** ** | **Nine months  ended  September 30,  2004** | ** ** | **Three months  ended  September 30,  2003** | ** ** | **Period from  April 15, 2003  through  September 30,  2003** | ** ** | **Period from  January 1, 2003  through  April 14, 2003** | ** ** |
| Net income (loss)                                            |       | $                                                 | (1,967     | )                                                | $          | (1,266 | ) | $ | 168 |   | $ | 627 |   | $ | (6,698 | ) |
| Change in  the cumulative translation adjustment, net of tax |       | 1,112                                             |       | (174                                             | )          | 3,373 |   | 2,462 |   | (424 | ) |
| Comprehensive  income (loss)                                 |       | $                                                 | (855       | )                                                | $          | (1,440 | ) | $ | 3,541 |   | $ | 3,089 |   | $ | (7,122 | ) |

 

### **3.**                                       CURRENCY CONTRACTS

 

We havesignificant operations in Europe where the functional currency is theEuro.  During 2003, the Euro strengthenedconsiderably against the U.S. dollar and it is our objective to protectreported earnings from volatility in the Euro/U.S. dollar exchange rates.  On February 12, 2004, when the Euro tothe U.S. Dollar exchange rate was 1.28:1, we entered into a series of foreigncurrency forward option contracts related to the Euro (“Euro Collar”) whichmature quarterly, as summarized below. On May 12, 2004 when the Euro to US Dollar exchange rate was 1.19:1, weentered into additional foreign currency option contracts also summarizedbelow.  We provided a $1,900 letter ofcredit in support of the foreign currency option contracts.  To the extent that the quarter end exchangerate falls between the Euro collar exchange rates, fulfillment of the Eurocollar exchange contracts will result in offsetting foreign currency gains andlosses upon expiration.  For eachreporting period we record the fair value, as determined by independentfinancial institutions, of open obligations and the resultant gains and lossesare recorded in the statement of operations. We recorded an unrealized gain on our foreign currency options in thethird quarter of 2004 of $215 and a loss of $80 for the nine months ended September 30,2004.  These items were recorded in

 

5

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other income (expense).  Three options having zero value expiredduring the third quarter and nine options expired during the first nine monthsof 2004.

 
| ** **             | ** ** | **Euro Collar Exchange Rates** | ** ** |
|------------------------|------------|--------------------------------|------------|
| **Expiration  Date**   | ** ** | **Contract  Date**             | ** ** | **Notional  Value** | ** ** | **Purchased  Put Option** | ** ** | **Sold  Call Option** | ** ** | **Purchased  Call Option** | ** ** |
| ** **             | ** ** | ** **                     | ** ** | **(thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| December 31, 2004 |       | February 12, 2004         |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.354 |   | $ | 1.400 |   |
| March 31, 2005    |       | February 12, 2004         |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.353 |   | $ | — |   |
| June 28, 2005     |       | May 12, 2004                   |       | € | 3,000 |   | $ | 1.150 |   | $ | 1.242 |   | $ | 1.300 |   |

 

4.                                       CONDENSEDCONSOLIDATING INFORMATION

 

On May 23, 2003, the Company’s wholly-ownedsubsidiaries, Advanced Accessory Systems, LLC and AAS Capital Corporation,issued and sold 103⁄4% senior notes due 2011, (the “Senior Notes”).  The Senior Notes are guaranteed on a full,unconditional and joint and several basis by theCompany and all of the Company’s direct and indirect wholly-owned domesticsubsidiaries.  The following condensedconsolidating financial information presents the financial position, results ofoperations and cash flows of (i) the Company (the “Parent”), as if it accountedfor its subsidiaries on the equity method, (ii) Advanced Accessory Systems, LLCand AAS Capital Corporation as issuers; (iii) guarantor subsidiaries which aredomestic, wholly-owned subsidiaries and include SportRack LLC, ValleyIndustries, LLC, AASA Holdings, LLC and ValTek, LLC; and (iv) the non-guarantorsubsidiaries which are foreign, wholly-owned subsidiaries and include BrinkInternational B.V. and its subsidiaries, SportRack Accessories, Inc. and itssubsidiary, and SportRack Automotive GmbH and its subsidiaries. The operatingresults of the guarantor and non-guarantor subsidiaries have been allocated aportion of certain corporate overhead costs on a basis consistent with eachsubsidiary’s relative business activity, including interest on intercompanydebt balances.  Since its formation in September 1997,AAS Capital Corporation has had no operations and has no assets or liabilitiesat September 30, 2004.

 

6

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**CONDENSEDCONSOLIDATING BALANCE SHEET**

**September 30,2004**

 
| ** **                                              | ** ** | **Company**                       | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                              | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                              | ** ** | **(Dollar amounts in thousands)** | ** ** |
| **ASSETS**                                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Current  assets                                         |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash                                                    |       | $                                 | 16         |   | $ | — |   | $ | 5,393 |   | $ | 3,420 |   | $ | — |   | $ | 8,829 |   |
| Accounts  receivable                                    |       | —                            |       | — |   | 36,958 |   | 28,246 |   | — |   | 65,204 |   |
| Inventories                                             |       | —                            |       | — |   | 22,849 |   | 32,461 |   | — |   | 55,310 |   |
| Deferred  income taxes and other current assets         |       | 23                                |       | 9,100 |   | 14,567 |   | 3,772 |   | — |   | 27,462 |   |
| Total  current assets                                   |       | 39                                |       | 9,100 |   | 79,767 |   | 67,899 |   | — |   | 156,805 |   |
| Property and  equipment, net                            |       | —                            |       | 96 |   | 30,622 |   | 41,134 |   | — |   | 71,852 |   |
| Goodwill                                                |       | —                            |       | — |   | 39,596 |   | — |   | — |   | 39,596 |   |
| Other  intangible assets, net                           |       | —                            |       | 5,492 |   | 76,431 |   | 21,180 |   | — |   | 103,103 |   |
| Deferred  income taxes and other noncurrent assets      |       | —                            |       | — |   | 1,499 |   | 1,693 |   | — |   | 3,192 |   |
| Investment  in and advances to subsidiaries             |       | 128,825                           |       | 247,816 |   | 13,666 |   | 238 |   | (390,545 | ) | — |   |
| Total assets                                            |       | $                                 | 128,864    |   | $ | 262,504 |   | $ | 241,581 |   | $ | 132,144 |   | $ | (390,545 | ) | $ | 374,548 |   |
|                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND MEMBERS’ EQUITY**          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Current  maturities of long-term debt                   |       | $                                 | —     |   | $ | — |   | $ | 69 |   | $ | 1,817 |   | $ | — |   | $ | 1,886 |   |
| Accounts  payable                                       |       | —                            |       | — |   | 27,399 |   | 14,674 |   | — |   | 42,073 |   |
| Accrued  liabilities and deferred income taxes          |       | —                            |       | 5,472 |   | 8,994 |   | 17,072 |   | — |   | 31,538 |   |
| Total  current liabilities                              |       | —                            |       | 5,472 |   | 36,462 |   | 33,563 |   | — |   | 75,497 |   |
| Deferred  income taxes and other noncurrent liabilities |       | —                            |       | — |   | 6,163 |   | 4,062 |   | — |   | 10,225 |   |
| Long-term  debt, less current maturities                |       | —                            |       | 150,000 |   | 19,544 |   | 19,640 |   | — |   | 189,184 |   |
| Intercompany  debt                                      |       | 29,222                            |       | — |   | 21,154 |   | 62,360 |   | (112,736 | ) | — |   |
| Members’  equity                                   |       | 99,642                            |       | 107,032 |   | 158,258 |   | 12,519 |   | (277,809 | ) | 99,642 |   |
| Total  liabilities and members’ equity             |       | $                                 | 128,864    |   | $ | 262,504 |   | $ | 241,581 |   | $ | 132,144 |   | $ | (390,545 | ) | $ | 374,548 |   |

 

7

----

 

##### **CONDENSED CONSOLIDATING BALANCE SHEET**

**December 31,2003**

 
| ** **                                              | ** ** | **Company**                       | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                              | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                              | ** ** | **(Dollar amounts in thousands)** | ** ** |
| ASSETS                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Current assets                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash                                                    |       | $                                 | 16         |   | $ | — |   | $ | 12,629 |   | $ | 4,041 |   | $ | — |   | $ | 16,686 |   |
| Accounts  receivable                                    |       | —                            |       | — |   | 33,142 |   | 22,221 |   | — |   | 55,363 |   |
| Inventories                                             |       | —                            |       | — |   | 17,527 |   | 30,801 |   | — |   | 48,328 |   |
| Deferred  income taxes and other current assets         |       | —                            |       | 3,821 |   | 13,778 |   | 3,475 |   | — |   | 21,074 |   |
| Total  current assets                                   |       | 16                                |       | 3,821 |   | 77,076 |   | 60,538 |   | — |   | 141,451 |   |
| Property and  equipment, net                            |       | —                            |       | — |   | 29,476 |   | 44,319 |   | — |   | 73,795 |   |
| Goodwill                                                |       | —                            |       | 3⁄4 |   | 39,596 |   | 3⁄4 |   | — |   | 39,596 |   |
| Other  intangible assets, net                           |       | —                            |       | 6,069 |   | 81,617 |   | 22,470 |   | — |   | 110,156 |   |
| Deferred  income taxes and other noncurrent assets      |       | —                            |       | 33 |   | 888 |   | 1,643 |   | 29 |   | 2,593 |   |
| Investment  in and advances to subsidiaries             |       | 130,083                           |       | 257,438 |   | 13,666 |   | 234 |   | (401,421 | ) | 3⁄4 |   |
| Total assets                                            |       | $                                 | 130,099    |   | $ | 267,361 |   | $ | 242,319 |   | $ | 129,204 |   | $ | (401,392 | ) | $ | 367,591 |   |
|                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND MEMBERS’ EQUITY**          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Current maturities  of long-term debt                   |       | $                                 | —     |   | $ | — |   | $ | 85 |   | $ | 1,824 |   | $ | — |   | $ | 1,909 |   |
| Accounts  payable                                       |       | —                            |       | — |   | 21,938 |   | 11,347 |   | — |   | 33,285 |   |
| Accrued  liabilities and deferred income taxes          |       | (14                               | )          | 1,365 |   | 6,109 |   | 14,456 |   | — |   | 21,916 |   |
| Total  current liabilities                              |       | (14                               | )          | 1,365 |   | 28,132 |   | 27,627 |   | — |   | 57,110 |   |
| Deferred  income taxes and other noncurrent liabilities |       | —                            |       | — |   | 6,163 |   | 6,331 |   | — |   | 12,494 |   |
| Long-term  debt, less current maturities                |       | 150,000                           |       | 28,710 |   | 18,195 |   | — |   | 196,905 |   |   |   |
| Intercompany  debt                                      |       | 29,213                            |       | — |   | 25,195 |   | 67,921 |   | (122,329 | ) | — |   |
| Members’  equity                                   |       | 100,900                           |       | 115,996 |   | 154,119 |   | 9,130 |   | (279,063 | ) | 101,082 |   |
| Total  liabilities and members’ equity             |       | $                                 | 130,099    |   | $ | 267,361 |   | $ | 242,319 |   | $ | 129,204 |   | $ | (401,392 | ) | $ | 367,591 |   |

 

8

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For thethree months ended September 30, 2004**

 
| ** **                                                | ** ** | **Company**                       | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net sales                                                 |       | $                                 | —     |   | $ | — |   | $ | 58,712 |   | $ | 35,037 |   | $ | — |   | $ | 93,749 |   |
| Cost of  sales                                            |       | —                            |       | — |   | 49,588 |   | 25,373 |   | — |   | 74,961 |   |
| Gross profit                                              |       | —                            |       | — |   | 9,124 |   | 9,664 |   | — |   | 18,788 |   |
| Selling,  administrative and product development expenses |       | —                            |       | 1,101 |   | 5,928 |   | 7,379 |   | — |   | 14,408 |   |
| Amortization  of intangible assets                        |       | —                            |       | — |   | 1,725 |   | 320 |   | — |   | 2,045 |   |
| Operating  income (loss)                                  |       | —                            |       | (1,101 | ) | 1,471 |   | 1,965 |   | — |   | 2,335 |   |
| Interest  expense                                         |       | —                            |       | 3,746 |   | 602 |   | 1,108 |   | — |   | 5,456 |   |
| Equity in  income (loss) of subsidiaries                  |       | (1,967                            | )          | — |   | — |   | — |   | 1,967 |   | — |   |
| Foreign  currency gain (loss), net                        |       | —                            |       | — |   | — |   | 478 |   | — |   | 478 |   |
| Other income  (expense)                                   |       | —                            |       | — |   | 108 |   | (79 | ) | — |   | 29 |   |
| Income  (loss) before income taxes                        |       | (1,967                            | )          | (4,847 | ) | 977 |   | 1,256 |   | 1,967 |   | (2,614 | ) |
| Provision (benefit)  for income taxes                     |       | —                            |       | (1,696 | ) | 386 |   | 663 |   | — |   | (647 | ) |
| Net income  (loss)                                        |       | $                                 | (1,967     | ) | $ | (3,151 | ) | $ | 591 |   | $ | 593 |   | $ | 1,967 |   | $ | (1,967 | ) |

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For thenine months ended September 30, 2004**

 
| ** **                                                | ** ** | **Company**                       | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net sales                                                 |       | $                                 | —     |   | $ | — |   | $ | 185,067 |   | $ | 113,659 |   | $ | — |   | $ | 298,726 |   |
| Cost of  sales                                            |       | —                            |       | — |   | 152,526 |   | 79,828 |   | — |   | 232,354 |   |
| Gross profit                                              |       | —                            |       | — |   | 32,541 |   | 33,831 |   | — |   | 66,372 |   |
| Selling,  administrative and product development expenses |       | —                            |       | 3,384 |   | 18,666 |   | 23,068 |   | — |   | 45,118 |   |
| Amortization  of intangible assets                        |       | —                            |       | — |   | 5,249 |   | 960 |   | — |   | 6,209 |   |
| Operating  income (loss)                                  |       | —                            |       | (3,384 | ) | 8,626 |   | 9,803 |   | — |   | 15,045 |   |
| Interest  expense                                         |       | —                            |       | 10,406 |   | 1,843 |   | 3,791 |   | — |   | 16,040 |   |
| Equity in  income (loss) of subsidiaries                  |       | (1,266                            | )          | — |   | — |   | — |   | 1,266 |   | — |   |
| Foreign  currency gain (loss)                             |       | —                            |       | — |   | — |   | (280 | ) | — |   | (280 | ) |
| Other income  (expense)                                   |       | —                            |       | — |   | (188 | ) | 33 |   | — |   | (155 | ) |
| Income  (loss) before income taxes                        |       | (1,266                            | )          | (13,790 | ) | 6,595 |   | 5,765 |   | 1,266 |   | (1,430 | ) |
| Provision  (benefit) for income taxes                     |       | —                            |       | (4,826 | ) | (2,451 | ) | (2,211 | ) | — |   | (164 | ) |
| Net income                                                |       | $                                 | (1,266     | ) | $ | (8,964 | ) | $ | 4,144 |   | $ | 3,554 |   | $ | 1,266 |   | $ | (1,266 | ) |

 

9

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For thethree months ended September 30, 2003**

 
| ** **                                                | ** ** | **Company**                       | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net sales                                                 |       | $                                 | —     |   | $ | — |   | $ | 57,608 |   | $ | 29,162 |   | $ | — |   | $ | 86,770 |   |
| Cost of  sales                                            |       | —                            |       | — |   | 44,878 |   | 20,872 |   | — |   | 65,750 |   |
| Gross profit                                              |       | —                            |       | — |   | 12,730 |   | 8,290 |   | — |   | 21,020 |   |
| Selling,  administrative and product development expenses |       | —                            |       | 1,386 |   | 6,385 |   | 6,091 |   | — |   | 13,862 |   |
| Amortization  of Intangible Assets                        |       | —                            |       | — |   | 208 |   | — |   | — |   | 208 |   |
| Operating  income (loss)                                  |       | —                            |       | (1,386 | ) | 6,137 |   | 2,199 |   | — |   | 6,950 |   |
| Interest  expense                                         |       | —                            |       | 3,599 |   | 1,206 |   | 785 |   | — |   | 5,590 |   |
| Loss  resulting from debt extingushment                   |       | —                            |       | — |   | — |   | 326 |   | — |   | 326 |   |
| Equity in  income (loss) of subsidiaries                  |       | 168                               |       | — |   | — |   | — |   | (168 | ) | — |   |
| Foreign  currency gain (loss), net                        |       | —                            |       | — |   | — |   | — |   | — |   | — |   |
| Other income  (expense)                                   |       | —                            |       | — |   | (7 | ) | 68 |   | — |   | 61 |   |
| Income  before income taxes                               |       | 168                               |       | (4,985 | ) | 4,924 |   | 1,156 |   | (168 | ) | 1,095 |   |
| Provision  (benefit) for income taxes                     |       | —                            |       | (1,747 | ) | 1,723 |   | 951 |   | — |   | 927 |   |
| Net income  (loss)                                        |       | $                                 | 168        |   | $ | (3,238 | ) | $ | 3,201 |   | $ | 205 |   | $ | (168 | ) | $ | 168 |   |

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For theperiod from April 15, 2003 through September 30, 2003**

 
| ** **                                                | ** ** | **Company**                       | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net sales                                                 |       | $                                 | —     |   | $ | — |   | $ | 108,383 |   | $ | 62,617 |   | $ | — |   | $ | 171,000 |   |
| Cost of  sales                                            |       | —                            |       | — |   | 84,197 |   | 44,628 |   | — |   | 128,825 |   |
| Gross profit                                              |       | —                            |       | — |   | 24,186 |   | 17,989 |   | — |   | 42,175 |   |
| Selling,  administrative and product development expenses |       | —                            |       | 1,197 |   | 9,868 |   | 12,186 |   | — |   | 23,251 |   |
| Amortization  of intangible assets                        |       | —                            |       | — |   | 208 |   | — |   | — |   | 208 |   |
| Operating  income (loss)                                  |       | —                            |       | (1,197 | ) | 14,110 |   | 5,803 |   | — |   | 18,716 |   |
| Interest  expense                                         |       | 715                               |       | 5,653 |   | 1,492 |   | 1,254 |   | — |   | 9,114 |   |
| Loss  resulting from debt extingushment                   |       | 550                               |       | — |   | 4,060 |   | 1,683 |   | — |   | 6,293 |   |
| Equity in  income (loss) of subsidiaries                  |       | 1,892                             |       | — |   | — |   | — |   | (1,892 | ) | — |   |
| Foreign  currency gain (loss), net                        |       | —                            |       | — |   | 2 |   | — |   | — |   | 2 |   |
| Other income  (expense)                                   |       | —                            |       | — |   | 7 |   | 125 |   | — |   | 132 |   |
| Income  (loss) before income taxes                        |       | 627                               |       | (6,850 | ) | 8,567 |   | 2,991 |   | (1,892 | ) | 3,443 |   |
| Provision  (benefit) for income taxes                     |       | —                            |       | (2,400 | ) | 2,998 |   | 2,218 |   | — |   | 2,816 |   |
| Net income  (loss)                                        |       | $                                 | 627        |   | $ | (4,450 | ) | $ | 5,569 |   | $ | 773 |   | $ | (1,892 | ) | $ | 627 |   |

 

10

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For thePeriod from January 1, 2003 through April 14, 2003**

 
| ** **                                                | ** ** | **Predecessor**                   | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **Issuers**                       | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  Subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net sales                                                 |       | $                                 | —     |   | $ | 67,769 |   | $ | 34,085 |   | $ | — |   | 101,854 |   |
| Cost of  sales                                            |       | —                            |       | 52,853 |   | 23,655 |   | — |   | 76,508 |   |
| Gross profit                                              |       | —                            |       | 14,916 |   | 10,430 |   | — |   | 25,346 |   |
| Selling,  administrative and product development expenses |       | (834                              | )          | 8,331 |   | 7,411 |   | — |   | 14,908 |   |
| Stock option  compensation                                |       | 10,125                            |       | — |   | — |   | — |   | 10,125 |   |
| Transaction  expenses                                     |       | 3,784                             |       | 3,784 |   |   |   |   |   |   |   |
| Amortization  of intangible assets                        |       | —                            |       | 6 |   | 5 |   | — |   | 11 |   |
| Operating  income (loss)                                  |       | (13,075                           | )          | 6,579 |   | 3,014 |   | — |   | (3,482 | ) |
| Interest expense                                          |       | 3,495                             |       | 93 |   | 1,184 |   | — |   | 4,772 |   |
| Equity in  income of subsidiaries                         |       | 9,872                             |       | — |   | — |   | (9,872 | ) | — |   |
| Foreign  currency gain, net                               |       | —                            |       | 3 |   | 3,237 |   | — |   | 3,240 |   |
| Other income  (expense)                                   |       | —                            |       | (27 | ) | (57 | ) | — |   | (84 | ) |
| Income  (loss) before income taxes                        |       | (6,698                            | )          | 6,462 |   | 5,010 |   | (9,872 | ) | (5,098 | ) |
| Provision  for income taxes                               |       | —                            |       | — |   | 1,600 |   | — |   | 1,600 |   |
| Net income  (loss)                                        |       | $                                 | (6,698     | ) | $ | 6,462 |   | $ | 3,410 |   | $ | (9,872 | ) | $ | (6,698 | ) |
|                                                           |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

11

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**For thenine months ended September 30, 2004**

 
| ** **                                            | ** ** | **Company**                       | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                            | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net cash  provided by (used for) operating activities |       | $                                 | (9         | ) | $ | (9,526 | ) | $ | 12,571 |   | $ | 5,634 |   | $ | — |   | $ | 8,670 |   |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash flows  from investing activities:                |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition  of property and equipment                |       | —                            |       | (96 | ) | (5,651 | ) | (2,519 | ) | — |   | (8,266 | ) |
| Proceeds  from Disposals                              |       | —                            |       | — |   | 88 |   | — |   | — |   | 88 |   |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net cash  used for investing activities               |       | —                            |       | (96 | ) | (5,563 | ) | (2,519 | ) | — |   | (8,178 | ) |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash flows  from financing activities:                |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Change in  intercompany debt                          |       | 9                                 |       | 9,622 |   | (4,039 | ) | (5,592 | ) | — |   | — |   |
| Net increase  (decrease) in revolving loan            |       | —                            |       | — |   | (10,127 | ) | 3,083 |   | — |   | (7,044 | ) |
| Repayment of  debt                                    |       | —                            |       | — |   | (78 | ) | 1,204 |   | — |   | (1,282 | ) |
| Net cash  provided by (used for) financing activities |       | 9                                 |       | 9,622 |   | (14,244 | ) | (3,713 | ) | — |   | (8,326 | ) |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  exchange rate changes                      |       | —                            |       | — |   | — |   | (23 | ) | — |   | (23 | ) |
| Net increase  (decrease) in cash                      |       | —                            |       | — |   | (7,236 | ) | (621 | ) | — |   | (7,857 | ) |
| Cash at  beginning of period                          |       | 16                                |       | — |   | 12,629 |   | 4,041 |   | — |   | 16,686 |   |
| Cash at end  of period                                |       | $                                 | 16         |   | $ | — |   | $ | 5,393 |   | $ | 3,420 |   | $ | — |   | $ | 8,829 |   |

 

12

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**For theperiod from April 15, 2003 through September 30, 2003**

 
| ** **                                            | ** ** | **Company**                       | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor subsidiaries** | ** ** | **Non-guarantor subsidiaries** | ** ** | **Eliminations/ adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                            | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net cash  provided by (used for) operating activities |       | $                                 | (215       | ) | $ | (7,405 | ) | $ | 12,593 |   | $ | 5,593 |   | $ | — |   | $ | 10,556 |   |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash flows  from investing activities:                |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition  of subsidiaries, net of cash acquired    |       | (108,367                          | )          | — |   | — |   | — |   | — |   | (108,367 | ) |
| Acquisition  of property and equipment                |       | —                            |       | — |   | (3,306 | ) | (2,204 | ) | — |   | (5,510 | ) |
| Net cash  used for investing activities               |       | (108,367                          | )          | — |   | (3,306 | ) | (2,204 | ) | — |   | (113,877 | ) |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash flows  from financing activities:                |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Change in  intercompany debt                          |       | 8,248                             |       | 817 |   | 7,641 |   | (16,706 | ) | — |   | — |   |
| Proceeds  from issuance of debt                       |       | 55,000                            |       | 150,000 |   | 88,916 |   | 53,617 |   | — |   | 347,533 |   |
| Debt  issuance costs                                  |       | (550                              | )          | (6,595 | ) | (4,377 | ) | (1,780 | ) | — |   | (13,302 | ) |
| Net decrease  in revolving loan                       |       | —                            |       | — |   | (8,416 | ) | (487 | ) | — |   | (8,903 | ) |
| Repayment of  debt                                    |       | (55,000                           | )          | (140,000 | ) | (92,256 | ) | (41,511 | ) | — |   | (328,767 | ) |
| Issuance of  membership units                         |       | 100,900                           |       | — |   | — |   | — |   | — |   | 100,900 |   |
| Net cash  provided by (used for) financing activities |       | 108,598                           |       | 4,222 |   | (8,492 | ) | (6,867 | ) | — |   | 97,461 |   |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  exchange rate changes                      |       | —                            |       | — |   | — |   | 3,368 |   | — |   | 3,368 |   |
| Net increase  (decrease) in cash                      |       | 16                                |       | (3,183 | ) | 795 |   | (110 | ) | — |   | (2,482 | ) |
| Cash at  beginning of period                          |       | —                            |       | 4,056 |   | 83 |   | 2,691 |   | — |   | 6,830 |   |
| Cash at end  of period                                |       | $                                 | 16         |   | $ | 873 |   | $ | 878 |   | $ | 2,581 |   | $ | — |   | $ | 4,348 |   |

 

13

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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**For theperiod from January 1, 2003 through April 14, 2003**

 
| ** **                                            | ** ** | **Predecessor**                   | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | **Issuers**                       | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                            | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net cash  provided by (used for) operating activities |       | $                                 | (6,163     | ) | $ | 5,750 |   | $ | 3,311 |   | $ | — |   | $ | 2,898 |   |
| Cash flows  from investing activities:                |       |                              |       |   |   |   |   |   |   |   |   |
| Acquisition  of property and equipment                |       | —                            |       | (1,222 | ) | (1,290 | ) | — |   | (2,512 | ) |
|   Net  cash used for investing activities   |       | —                            |       | (1,222 | ) | (1,290 | ) | — |   | (2,512 | ) |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |
| Cash flows  from financing activities:                |       |                              |       |   |   |   |   |   |   |   |   |
| Change in  intercompany debt                          |       | 3,474                             |       | (4,495 | ) | 1,021 |   | — |   | — |   |
| Net increase  in revolving loan                       |       | 6,426                             |       | — |   | — |   | — |   | 6,426 |   |
| Repayment of  debt                                    |       | —                            |       | (27 | ) | (2,191 | ) | — |   | (2,218 | ) |
| Distributions  to members                             |       | (121                              | )          | — |   | — |   | — |   | (121 | ) |
| Net cash  provided by (used for) financing activities |       | 9,779                             |       | (4,522 | ) | (1,170 | ) | — |   | 4,087 |   |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |
| Effect of  exchange rate changes                      |       | —                            |       | — |   | (296 | ) | — |   | (296 | ) |
| Net increase  (decrease) in cash                      |       | 3,616                             |       | 6 |   | 555 |   | — |   | 4,177 |   |
| Cash at  beginning of period                          |       | 440                               |       | 77 |   | 2,136 |   | — |   | 2,653 |   |
| Cash at end  of period                                |       | $                                 | 4,056      |   | $ | 83 |   | $ | 2,691 |   | $ | — |   | $ | 6,830 |   |

 

14

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**Item 2****.****           MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion of our results ofoperations and financial condition should be read in conjunction with ourfinancial statements and notes thereto included elsewhere in this Form10-Q.  This Form 10-Q contains forward-lookingstatements.  Discussions containingforward-looking statements may be found in the material set forth above, in thematerial set forth below, as well as in this Form 10-Q generally. Forwardlooking statements generally can be identified by the use of terms such as “may,”“will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “plan,” “estimate,”“predict,” “potential,” “forecast,” “project,” “will be,” “continue” orvariations of such terms, or the use of these terms in the negative.  Ouractual results may differ significantly from the results discussed in theforward-looking statements, and such differences may be material.  Generalrisks that may impact the achievement of such forecasts include, but are notlimited to: compliance with new laws and regulations, general economicconditions in the markets in which we operate, fluctuation in demand for ourproducts and in the production of vehicles for which we are a supplier,significant raw material price fluctuations, labor disputes with our employeesor of our significant customers or suppliers, changes in consumer preferences,dependence on significant automotive customers, the level of competition in theautomotive supply industry, pricing pressure from automotive customers, our substantialleverage, limitations imposed by our debt facilities, changes in the popularityof particular vehicle models or towing and rack systems, the loss of programson particular vehicle models, risks associated with conducting business inforeign countries and other business factors.  Any such forward-lookingstatements are not guarantees of future performance and involve risks anduncertainties.  Actual events or results may differ materially from thosediscussed in the forward-looking statements.  All of these forward-lookingstatements are based on estimates and assumptions made by our management which,although believed to be reasonable, are inherently uncertain.  Given theserisks and uncertainties, readers are cautioned not to place undue reliance onforward-looking statements.  The company disclaims any obligation toupdate any forward-looking statements.

 

### **OVERVIEW**

 

We are one of the world’s largest designersand manufacturers of exterior accessories for the automotive original equipmentmanufacturers (“OEM”) market and after market. We design and manufacture a wide array of both rack systems and towingsystems and related accessories.  Ourbroad offering of rack systems includes fixed and detachable racks, roof boxesand accessories, which can be installed on vehicles to carry items such asbicycles, skis, luggage, surfboards, and sailboards.  Our towing products and accessories includetrailer hitches, trailer balls, ball mounts, electrical harnesses, safety chainsand locking pins.  Our products are soldas standard accessories or options for a variety of light vehicles.

 

### **Company Background**

 

On April 15, 2003, substantially all ofthe equity interests of the Predecessor were acquired by Castle Harlan PartnersIV, L.P., a private equity investment fund organizedand managed by Castle Harlan Inc., a leading private equity firm. CHAASHoldings, LLC was formed in April 2003 by Castle Harlan Partners IV, L.P.in connection with the Acquisition and is the indirect parent of CHAASAcquisitions.

 

Unless the context otherwise requires, allinformation which refers to “we”, “our” or “us” refers to CHAAS Acquisitionsand its subsidiaries.

 

**RESULTS OF OPERATIONS**

 

**Three Months Ended September 30, 2004Compared to the Three Months Ended September 30, 2003.**

 

*Net sales.*Net sales for the third quarter of 2004 were $93.7 million, representing anincrease of $6.9 million, or 8.0%, compared with net sales of $86.8 million forthe third quarter of 2003.  This increaseincludes approximately $2.2 million due to the increase of the average exchangerates between the U.S. dollar and the currencies used by our foreignsubsidiaries, primarily in Europe.  Thebalance of the increase in net sales reflects an increase in sales to our OEMcustomers of approximately $722,000, an increase of approximately $2.5 millionrepresenting revenue from surcharges for steel imposed primarily on productssold to aftermarket customers and other increases in aftermarket sales of $1.5million.  Sales to OEM customers werehigher due to new program launches for SportRack in Europe and for Valley inNorth America.

 

*Grossprofit.***Gross profitfor the third quarter of 2004 was $18.8 million, which represents a decrease of$2.2 million, or 10.6%, compared with gross profit of $21.0 for the thirdquarter of 2003.  Gross profit as apercentage of net sales was 20.0% for the third quarter of 2004 and was 24.2%for the third quarter of 2003.  Thedecrease in gross profit and gross margin percentage reflects higher costs forsteel and aluminum, price decreases to our OEM customers and higher rentexpense.  The price of steel remainedhigh

 

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during the third quarter of 2004 due to several factors includingincreased demand for steel products from China, the weakened U.S. Dollar, theconsolidation of the steel producing industry and a reduction in overallproduction capacity. During the quarter, increased cost of steel resulted inlower gross profit of approximately $736,000 net of recovery through theintroduction of steel surcharges on some of our aftermarket towing systemsproducts. In order to secure future business with certain of our OEM customerswe granted price decreases on several products. These reduced prices totaled approximately $1.6 million during the thirdquarter.

 

*Selling,administrative and product development expenses.***Selling, administrative and product development expensesfor the third quarter of 2004 were $14.4 million representing an increase of$546,000, or 3.9%, compared with selling, administrative and productdevelopment expenses of $13.9 million for the third quarter of 2003.  This increase is primarily due to higherselling expenses at Brink, which includes the effect of a weaker U.S. dollarexchange rate against the Euro, and higher corporate expenses.

 

*Amortizationof intangible assets*.  Amortization of intangible assets for thethird quarter of 2004 was $2.0 million representing an increase of $1.8 millioncompared with amortization of intangible assets of $208,000 for the third quarterof 2003.  The increase in amortizationresults from amortization of intangible assets identified in the allocation ofthe Acquisition purchase price over their respective economic lives.

 

*Operatingincome.***Our operatingincome for the third quarter of 2004 was $2.3 million representing a decreaseof $4.6 million, or 66.4%, compared with operating income of $7.0 million forthe third quarter of 2003.  The decreaseresulted from decreased gross profit, increased amortization of intangibleassets and increased selling, administrative and product development expenses.

 

*Interestexpense.* Interest expense for the third quarter of 2004 was $5.5 millionrepresenting a decrease of $134,000, or 2.4%, compared with interest expense of$5.6 million for the third quarter of 2003. This decrease reflects the slightly lower level of debt outstandingduring the third quarter of 2004 relative to the third quarter of 2003.

 

*Foreign currency gain (loss).*We had a foreign currency gain in the third quarter of 2004 of $478,000compared to no foreign currency gain or loss in the third quarter of 2003.  This gain is primarily attributable to theU.S. dollar denominated intercompany indebtedness of Brink, whose functionalcurrency is the Euro.  During the thirdquarter of 2004 the U.S. Dollar weakened in comparison with the Euro.  The intercompany indebtedness for our foreignsubsidiaries other than Brink are deemed to be permanently invested andtherefore changes in the intercompany balances for these subsidiaries caused byforeign currency fluctuations have been recorded in the currency translationadjustment account and included in other comprehensive income.  Our Predecessor’s foreign currency gains andlosses were primarily related to the intercompany indebtedness of our foreignsubsidiaries including Brink.

 

*Provisionfor income taxes.* During the third quarter of2004 we recorded a loss before income taxes of $2.6 million and recorded anincome tax benefit of $647,000.  Theeffective tax rate differs from the U.S. federal income tax rate primarily dueto changes in valuation allowances on the deferred tax assets of SportRackAccessories and differences in the tax rates of foreign countries. Prior to April 2003our Predecessor and certain of its domestic subsidiaries had elected to betaxed as limited liability companies for federal income tax purposes.  As a result of this election, the Predecessor’sdomestic taxable income accrued to the individual members.  Certain of the Company’s domesticsubsidiaries and foreign subsidiaries were subject to income taxes in theirrespective jurisdictions. Effective on April 20, 2003 we filed an electionfor all our domestic subsidiaries to be treated as regular corporations andtherefore they are now subject to federal income tax.  During the third quarter of 2003 we had netincome before taxes of $1.1 million and recorded a provision of $927,000.

 

*Net income(loss)*. We recorded a net loss of $2.0 million in the third quarter of 2004 andnet income of $168,000 in the third quarter of 2003. The decrease of $2.1million is primarily due to lower operating income in 2004 compared to2003.  This was partially offset by theloss resulting from debt extinguishment in 2003 and the foreign currency gainand the tax benefit in 2004 compared to the provision for income taxes in 2003.

 

**Nine Months Ended September 30, 2004 forthe Company Compared to the Period April 15, 2003 through September 30,2003 for the Company and the Period from January 1, 2003 through April 14,2003 for the Predecessor.**

 

*Net sales.*Net sales for the first nine months of 2004 were $298.7 million.  Net sales for the period from April 15,2003 through September 30, 2003 and for the period from January 1,2003 through April 14, 2003 were $171.0 million and $101.9 millionrespectively.  This increase of  $25.9 million, or9.5%, includes approximately $8.3 million due to the increase of the averageexchange rates between the U.S. dollar and the currencies used by our foreignsubsidiaries, primarily in Europe.  Thebalance of the increase in net sales reflects an increase in sales to our OEMcustomers of approximately $10.5 million, an increase of approximately $3.1million in sales to our automotive aftermarket customers and an increase ofapproximately $4.4 million representing revenue from surcharges for steelimposed primarily on products sold to aftermarket customers.  Sales to OEM customers were higher due to newprogram launches for SportRack in Europe and for Valley in North America.  These increases were partially offset bydecreased prices

 

16

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and lower volumeson existing programs. Aftermarket sales were slightly higher in the hitch(Valley) and accessory (SportRack) product lines in North America.

 

*Grossprofit.* Gross profit for the first nine monthsof 2004 was $66.4 million.  Gross profitfor the period from April 15, 2003 through September 30, 2003 and forthe period from January 1, 2003 through April 14, 2003 was $42.2million and $25.3 million, respectively. This decrease of $1.1 million resulted from a decrease in the grossprofit percentage partially offset by higher net sales.  Gross profit as a percentage of net sales was22.2% for the first nine months of 2004, 24.7% for the period from April 15,2003 through September 30, 2003 and 24.9% for the period from January 1,2003 through April 14, 2003. The decreased gross margin percentagereflects higher costs for steel and aluminum, pricedecreases to our OEM customers and higher rent expense. The price of steelincreased dramatically during the first three quarters of 2004 due primarily toseveral factors including increased demand for steel products from China, theconsolidation of the steel producing industry and a reduction in overallproduction capacity.  In addition to thehigher prices we also experienced delays in procurement of some steelcomponents.  During the first nine monthsof 2004 increased cost of steel resulted in lower gross profit of approximately$3.1 million net of recovery through the introduction of steel surcharges onsome of our aftermarket towing systems products.  In order to secure future business withcertain of our OEM customers we granted price decreases on severalproducts.  These reduced prices totaledapproximately $2.4 million during the first nine months. Gross profit wasfurther reduced by approximately $900,000 in increased rent expense for twomanufacturing facilities that were included in a sale and leaseback transactionduring the fourth quarter of 2003.

 

*Selling,administrative and product development expenses.*  Selling, administrative and productdevelopment expenses for the first nine months of 2004 were$45.1 million.  Selling, administrativeand product development expenses for the period from April 15, 2003through September 30, 2003 and from the period from January 1, 2003through April 14, 2003 were $23.3 million and $14.9 million,respectively.  This increase of $6.9million, or 18.2% is primarily due to higher administrative expenses of $2.1million, higher selling expenses of $1.1 million, $1.7 million resulting froman increase in the average exchange rates between the U.S. dollar and the Euro,the inclusion of management fees to Castle Harlan since April 15, 2003which resulted in a net increase of $870,000 in 2004 and $590,000 in increasedproduct development costs.

 

*Stockoption compensation.*  During the period from April 1, 2003through April 14, 2003, holders of all outstanding membership units andwarrants exercised their options to purchase membership units of our Predecessorprior to the acquisition.  In connectionwith the transaction, our Predecessor recorded stock option compensation duringthis period of $10.1 million, representing the fair market value of theunderlying units less the related exercise price and the recorded value of thewarrants.

 

*Transactionexpenses.** *During the period from January 1,2003 through April 14, 2003, our Predecessor incurred $3.8 million inexpenses related to the acquisition, including legal, accounting and otheradvisor fees.

 

*Amortizationof intangible assets*.  Amortization of intangible assets was $6.2million for the first nine months of 2004. Amortization of intangible assets for the period from April 15,2003 through September 30, 2003 and from the period from January 1,2003 through April 14, 2003 was $208,000 and $11,000, respectively.  The increase in amortization primarilyresults from amortization related to intangible assets identified in theallocation of the Acquisition purchase price.

 

*Operatingincome.** *Our operating income was $15.0million for the first nine months of 2004 and $18.7 million for the period formApril 15, 2003 through September 30, 2003.  We had an operating loss for the period from January 1,2003 through April 14, 2003 of  $3.5 million.  This decrease of $189,000 resulted from anincrease in amortization of intangible assets, decreased gross profit andincreased selling, administrative and product development expenses in2004.  These were partially offset bystock option compensation and transaction expenses of $10.1 million and $3.8million, respectively, that were incurred in 2003.

 

*Interestexpense.* Interest expense for the first nine months of 2004 was $16.0million.  Interest expense for the periodfrom April 15, 2003 through September 30, 2003 and for the periodfrom January 1, 2003 through April 14, 2003 was $9.1 million and $4.8million, respectively.  This increase of  $2.2 million, or15.5% is due to the higher level of debt outstanding resulting from ourpurchase of the Predecessor on April 15, 2003.

 

*Lossresulting from debt extinguishment.** *On May 23, 2003, oursubsidiaries issued $150 million of our 103⁄4% Senior Notes due 2011, theproceeds of which were used to repay a senior subordinated bridge note and aportion of our credit facility (see — “Debt and Credit Sources” below).  As a result we incurred an extinguishmentloss of $6.3 million.

 

*Foreign currency gain (loss).*We had a foreign currency loss for the first nine months of 2004 of$280,000.  We had foreign currency gainsduring the period from April 15, 2003 through September 30, 2003 andthe period from January 1, 2003 through April 14, 2003, of $2,000 and$3.2 million, respectively. The foreign currency loss is primarily attributableto the U.S. dollar denominated intercompany indebtedness of Brink, whosefunctional currency is the Euro.  Duringthe first nine months of 2004 the U.S. Dollar at first strengthened incomparison with the Euro and then weakened, resulting in a small netstrengthening for the period.  Theintercompany indebtedness for our foreign subsidiaries other than Brink isdeemed to be permanently invested and therefore changes in

 

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the intercompanybalances for these subsidiaries caused by foreign currency fluctuations havebeen recorded in the currency translation adjustment account and included inother comprehensive income.  OurPredecessor’s foreign currency gains and losses were primarily related to theintercompany indebtedness of our foreign subsidiaries including Brink.  During the period from April 15, 2003through September 30, 2003 and the period from January 1, 2003through April 14, 2003 the U.S. dollar weakened in relation to the Euroand the Canadian dollar resulting in the foreign currency gain recorded in thoseperiods.

 

*Provisionfor income taxes.* During the first nine monthsof 2004 we had a loss before income taxes of $1.4 million and recorded anincome tax benefit of $164,000.  Theeffective tax rate differs from the U.S. federal income tax rate primarily dueto changes in valuation allowances on the deferred tax assets of SportRackAccessories and differences in the tax rates of foreign countries. Prior to April 2003our Predecessor and certain of its domestic subsidiaries had elected to betaxed as limited liability companies for federal income tax purposes.  As a result of this election, the Predecessor’sdomestic taxable income accrued to the individual members.  Certain of the Company’s domesticsubsidiaries and foreign subsidiaries were subject to income taxes in theirrespective jurisdictions. Effective on April 20, 2003 we filed an electionfor all our domestic subsidiaries to be treated as regular corporations andtherefore they are now subject to federal income tax. During the period from April 15,2003 through September 30, 2003 we had net income before taxes of $3.4million and recorded a provision of $2.8 million.  During the period from January 1, 2003through April 15, 2003 we had a loss before income taxes of $5.1 millionand recorded a provision for income taxes of $1.6 million.

 

*Net income(loss)*. We had net loss of $1.3 million for the first nine months of 2004, netincome of $627,000 for the period from April 15, 2003 through September 30,2003 and a net loss of $6.7 million for the period from January 1, 2003through April 14, 2003. The increase of $4.8 million is due to higheroperating income in 2004, the loss resulting from debt extinguishment in 2003and the tax benefit in 2004 relative to the tax expense in 2003.  These were partially offset by higherinterest expense in 2004 and the foreign currency loss in 2004 as compared witha foreign currency gain in 2003.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our principal liquidity requirements are to serviceour debt and meet our working capital and capital expenditure needs.  Our indebtedness at September 30, 2004was $191.1 million including current maturities of $1.9 million.  We expect to be able to meet our liquidityrequirements for the foreseeable future through cash provided by operations andthrough borrowings available under our revolving credit facilities.

 

# ***Working Capital and Cash Flows***

 

Working capital and key elements of the consolidatedstatement of cash flows are:

 
| ** **                                             | ** ** | **Company**                                      | ** ** | ** **                                                              | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **September 30,  2004**                     | ** ** | **December 31,  2003**                                             | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                               | ** ** | ** **                                                              | ** ** |
|                                                   |       |                                             |       |                                                                    |       |
| Working Capital                                        |       | $                                                | 81,308     |                                                                    | $          | 84,341 |   |   |   |
|                                                   |       |                                             |       |                                                                    |       |   |   |
| ** **                                             | ** ** | **Company**                                      | ** ** | **Predecessor**                                                         | ** ** |
| ** **                                             | ** ** | **Nine months  ended  September 30,  2004** | ** ** | **Period from  April 15, 2003  through  September 30,  2003** | ** ** | **Period from  January 1, 2003  through  April 14, 2003** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                               | ** ** | **(in thousands)**                                                      | ** ** |
| ** **                                             | ** ** | ** **                                       | ** ** | ** **                                                              | ** ** |
| Cash flows provided by operating activities            |       | $                                                | 8,670      |                                                                    | $          | 10,566 |   | $ | 2,898 |   |
| Cash flows (used for) investing activities             |       | $                                                | (8,178     | )                                                                       | $          | (113,877 | ) | $ | (2,512 | ) |
| Cash flows provided by (used for) financing activities |       | $                                                | (8,326     | )                                                                       | $          | 97,461 |   | $ | 4,087 |   |

 

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*Working capital*

 

Working capital decreased by $3.0 million to $81.3million at September 30, 2004 from $84.3 million at December 31,2003.  This is due primarily to a decreasein cash of $7.9 million, an increase in accounts payable of $8.7 million and anincrease in other current liabilities of $9.9 million. These increases werepartially offset by an increase in accounts receivable of $9.7 million, anincrease in inventories of $7.0 million, an increase in deferred tax assets of$3.3 million and an increase in other current assets of $3.0 million.

 

Increases in accounts payable reflected increasedpurchasing activities to support the increased sales volume.   The increase in accrued expenses isprimarily due to an increase in accrued interest on our $150 million of SeniorNotes.  The increase in accountsreceivable was attributable to the timing of payments from OEM customers and toincreased sales levels in the third quarter of 2004 as compared with the fourthquarter 2003.  Inventory increasedprimarily for our aftermarket products to support seasonally higher sales forthe period as compared with the period prior to December 31, 2003.Differences in sales levels between the two periods are primarily due toincreased sales to automotive OEMs and seasonal sales levels of our aftermarketproducts.  Our aftermarket products havehigher sales in the second and third quarters and lower sales in the fourth andfirst quarters.

* *

*OperatingActivities*

 

Our operations provided $8.7 million in cash duringthe first nine months of 2004 compared to $10.6 million for the period April 15,2003 through September 30, 2003 and $2.9 million for the period January 1,2003 through April 14, 2003.  Thedecrease of $4.8 million is primarily due to decreased net income beforedepreciation and amortization and before expenses for stock option compensationand debt extinguishment of $15.1 million during the first nine months of 2004as compared to $19.4 million in the first nine months of 2003 and an increasein deferred tax assets in 2004 of $5.7 million. These uses are primarily offset by a foreign currency loss in the firstnine months of 2004 of $268,000 compared to a gain in the first nine months of2003 of $3.1 million and a smaller increase in working capital excluding cashfor the same periods.

 

*InvestingActivities*

 

Cash flow used for investing activities forthe first nine months of 2004 and 2003 included acquisitions of property andequipment of $8.3 million and $8.0 million, respectively, and were primarilyfor the expansion of capacity, productivity and process improvements andmaintenance.  Cash flows used forinvesting activities for the first nine months of 2003 also included theAcquisition totaling $108.4 million.

 

*FinancingActivities*

 

During the first nine months of 2004financing cash flows included a reduction in borrowings under the revolvingline of credit of $7.0 million and repayment of debt of $1.3 million.

 

During the period from April 15, 2003through September 30, 2003 financing cash flows included the proceeds fromthe issuance of membership units totaling $100.9 million and proceeds fromborrowing related to our purchase of the Predecessor on April 15, 2003,including $106.0 million borrowed under a new credit facility, a $55.0 millionconvertible senior subordinated bridge note and a $10.0 subordinated promissorynote issued by the sellers of Advanced Accessory Systems, LLC (see “*Debt and Credit Sources”* below).   A portion of these proceeds were used to paydebt issuance costs and pay a portion of our Predecessor’s indebtedness,including all amounts due under its then existing credit facility.  On May 23, 2003 we sold $150.0 million of ourSenior Notes due 2011 which proceeds were used to refinance the convertiblesenior subordinated note and a portion of loans under the new creditfacility.   We also borrowed anadditional $2.3 million under our revolving loans.

 

During the period from January 1, 2003through April 14, 2003 our Predecessor made $2.2 million in regularlyscheduled principal payments on its term notes under its then existing creditfacility, borrowed $6.4 million on its revolving facility and madedistributions to its members totaling $121 thousand.

 

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***Debt and Credit Sources***

 

Our indebtedness at September 30, 2004 was $191.1million.  We expect that its primarysources of cash will be from operating activities and borrowings under itsrevolving credit facilities.  As of September 30,2004, we had borrowings under the revolving credit facilities totaling $10.6million and had $38.1 million of available borrowing capacity.  Standby letters of credit totaling $2.9million provided as security for our U.S. workers compensation program and $1.9million providing security to a financial institution for foreign currencyinstruments reduced borrowing availability. As of September 30, 2004, we were in compliance with the variouscovenants under the debt agreements pursuant to which we have borrowed or mayborrow money.

 

Our ability to satisfy our debt obligationswill depend upon our future operating performance, which will be affected byprevailing economic conditions and financial, business, and other factors,certain of which are beyond our control, as well as the availability ofrevolving credit borrowings under our current or successor creditfacilities.  We anticipate that, based oncurrent and expected levels of operations, our operating cash flow, togetherwith borrowings under the revolving credit facility, should be sufficient tomeet our debt service, working capital and capital expenditure requirements forthe foreseeable future, although no assurances can be given in this regard,including as to the ability to increase revenues or profit margins. If we areunable to service our indebtedness, we will be forced to take actions such asreducing or delaying acquisitions and/or capital expenditures, selling assets,restructuring or refinancing our indebtedness, or seeking additional equitycapital. There is no assurance that any of these remedies can be effected on satisfactory terms, if at all, including,whether, and on what terms, we could raise equity capital.  See the introductory paragraph of thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

### **InternationalOperations**

 

We conduct operations in several foreigncountries including Canada, the Czech Republic, Denmark, France, Germany,Italy, The Netherlands, Poland, Spain, Sweden and the United Kingdom.  Net sales from international operationsduring the first three quarters of 2004 were $113.7 million, or 38.0% of ournet sales. At September 30, 2004, assets associated with these operationswere approximately 35.3% of total assets, and we had indebtedness denominatedin currencies other than the U.S. Dollar of approximately $21.5 million.

 

Our international operations may be subjectto volatility because of currency fluctuations, inflation and changes inpolitical and economic conditions in these countries.  Most of the revenues and costs and expensesof our operations in these countries are denominated in the local currencies.The financial position and results of operations of the Company’s foreignsubsidiaries are measured using the local currency as the functional currency.

 

### **Currency contracts**

 

We have significant operations in Europe where thefunctional currency is the Euro.  By theend of 2003 the Euro strengthened considerably against the U.S. dollar and itis our objective to protect reported earnings from volatility in the Euro/U.S.dollar exchange rates.  On February 12,2004, when the Euro to the U.S. Dollar exchange rate was 1.28:1, we enteredinto a series of foreign currency forward option contracts related to the Euro(“Euro Collar”), which mature quarterly on a staggered basis, as summarizedbelow.  On May 12, 2004 when the Euro toUS Dollar exchange rate was 1.19:1, we entered into additional foreign currencyoption contracts also summarized below. We provided a $1.9 million letter of credit in support of the foreigncurrency option contracts.  To the extentthat the quarter end exchange rate falls between the Euro collar exchangerates, fulfillment of the Euro collar exchange contracts will result inoffsetting foreign currency gains and losses upon expiration.  For each reporting period we record the fairvalue, as determined by independent financial institutions, of open obligationsand the resultant gains and losses are recorded in the statement of operations.  We recorded an unrealized gain on our foreigncurrency options in the third quarter of 2004 of $215,000 and a loss of $80,000for the nine months ended September 30, 2004.  These items were recorded in other income(expense).  Three options having zero valueexpired during the third quarter and nine options expired during the first ninemonths of 2004.

 
| ** **             | ** ** | **Euro Collar Exchange Rates** | ** ** |
|------------------------|------------|--------------------------------|------------|
| **Expiration  Date**   | ** ** | **Contract  Date**             | ** ** | **Notional  Value** | ** ** | **Purchased  Put Option** | ** ** | **Sold  Call Option** | ** ** | **Purchased  Call Option** | ** ** |
| ** **             | ** ** | ** **                     | ** ** | **(thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| December 31, 2004 |       | February 12, 2004         |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.354 |   | $ | 1.400 |   |
| March 31, 2005    |       | February 12, 2004         |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.353 |   | $ | — |   |
| June 28, 2005     |       | May 12, 2004                   |       | € | 3,000 |   | $ | 1.150 |   | $ | 1.242 |   | $ | 1.300 |   |

 

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Item 3.             Quantitative andQualitative Disclosures About Market Risk

 

In February 2004, weexecuted several foreign currency option contracts.  See “ – Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Currency Contracts”.

 

Item 4.             Controls andProcedures

 

Under thesupervision and with the participation of management, including our principalexecutive officer and principal financial officer, the Company has evaluatedthe effectiveness of the design and operation of its disclosure controls andprocedures as of September 30, 2004, and, based on their evaluation, theprincipal executive officer and principal financial officer have concluded thatthese controls and procedures are effective. There were no significant changes in internal controls or in otherfactors that could significantly affect these controls during the quarter.

 

Disclosurecontrols and procedures are the Company’s controls and other procedures thatare designed to ensure that information required to be disclosed by the Companyin the reports that it files or submits under the Securities Exchange Act of1934, as amended (the “Exchange Act”), is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed in the reportsthat the Company files under the Exchange Act is accumulated and communicatedto management, including the principal executive officer and principalfinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**PART II.****  OTHERINFORMATION AND SIGNATURE**

 

Item 1.             Legal Proceedings

 

From time to time, we are subject to routine legal proceedingsincidental to the operation of our business. The outcome of any threatened or pending proceedings is not expected tohave a material adverse effect on our financial condition, operating results orcash flows, based on our current understanding of the relevant facts.  The Company maintains insurance coverageagainst claims in an amount that it believes to be adequate.

 

Item 2.             Changesin Securities, Use of Proceeds and Issuer Purchases of EquitySecurity

 

None

 

Item 3.             Defaults Upon Senior Securities

 

None

 

Item 4.             Submission of Matters to a Vote ofSecurity-Holders

 

None

 

Item 5.Other Information

 

None

 

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Item 6.             Exhibits

 
| Exhibit 31.1 |   | Certification of Chief Executive Officer  Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002     |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                          |
| Exhibit 31.2 |   | Certification of Chief Financial Officer  Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002     |
|         |   |                                                                                                                                                          |
| Exhibit 32.1 |   | Certification of Chief Executive Officer  Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906  Of The Sarbanes-Oxley Act Of 2002 |
|         |   |                                                                                                                                                          |
| Exhibit 32.2 |   | Certification of Chief Financial Officer  Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906  Of The Sarbanes-Oxley Act Of 2002 |

 

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**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                                           |   |                                                    |
|------------------------------------------------|--------|---------------------------------------------------------|
|                                           |   | CHAAS ACQUISITIONS, LLC                                 |
|                                           |   |                                                    |
|                                           |   |                                                    |
| Date:   November 12,  2004 |   | /s/ Ronald J. Gardhouse                                 |   |
|                                           |   | Ronald J. Gardhouse                                     |
|                                           |   | Chief Financial Officer                                 |
|                                           |   | (Principal Financial Officer  and Authorized Signatory) |

 

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**EXHIBITINDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                           |
| 31.1        |       | Certification of Chief Executive Officer  Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002      |
|        |       |                                                                                                                                                           |
| 31.2        |       | Certification of Chief Financial Officer  Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002      |
|        |       |                                                                                                                                                           |
| 32.1        |       | Certification of Chief Executive Officer  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |
|        |       |                                                                                                                                                           |
| 32.2        |       | Certification of Chief Financial Officer  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |

 

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