**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  June 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)

 

**NOT APPLICABLE**

(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 August 11, 2004** |
|------------------|------------|-----------------------------------------|
| Membership Units |       | 100                                     |

 

 

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**CHAAS ACQUISITIONS, LLC**

 

**INDEX**

 
| Part I.  Financial Information             |   |
|-------------------------------------------------|--------|
|                                            |   |   |   |
| Item 1.                                         |   | Financial Statements |   |
|                                            |   |   |   |
|                                            |   | Consolidated Condensed Balance Sheet of the  Company as of June 30, 2004 and as of December 31, 2003 |   |
|                                            |   |   |   |
|                                            |   | Consolidated Condensed Statements of  Operations of the Company for the three months ended June 30, 2004,  the six months ended June 30, 2004 and for the period from  April 15, 2003 through June 30, 2003 and the Consolidated Condensed  Statements of Operations for the Predecessor for the periods April 1,  2003 through April 14, 2003 and January 1, 2003 through  April 14, 2003 |   |
|                                            |   |   |   |
|                                            |   | Consolidated Condensed Statements of Cash  Flows for the Company for the six months ended June 30, 2004 and the  period April 15, 2003 through June 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 six months ended June 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 |   |
|                                            |   |   |   |
| Item 3.                                         |   | Defaults Upon Senior Securities |   |
|                                            |   |   |   |
| Item 4.                                         |   | Submission of Matters to a Vote of  Security-Holders |   |
|                                            |   |   |   |
| Item 5.                                         |   | Other Information |   |
|                                            |   |   |   |
| Item 6.                                         |   | Exhibits and Reports on Form 8-K |   |
|                                            |   |   |   |
| Signature                                       |   |
|                                                 |        |  |  |  |  |

 

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**PART I. FINANCIAL INFORMATION**

 

Item 1.    Financial Statements

 

**CHAAS ACQUISITIONS, LLC**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

**As of June 30, 2004 andDecember 31, 2003**

**(Dollars in thousands)**

 
| ** **                                                             | ** ** | **Company**             | ** ** |
|------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                             | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|                                                                   |       | **(Unaudited)**         |       |   |   |
| ASSETS                                                                 |       |                    |       |   |   |
| Current assets                                                         |       |                    |       |   |   |
| Cash                                                                   |       | $                       | 10,317     |   | $ | 16,686 |   |
| Accounts receivable, less reserves of  $1,939 and $2,189, respectively |       | 75,113                  |       | 55,363 |   |
| Inventories                                                            |       |                    |       |   |   |
| Raw materials                                                          |       | 21,199                  |       | 19,039 |   |
| Work-in-process                                                        |       | 10,217                  |       | 9,662 |   |
| Finished goods                                                         |       | 23,450                  |       | 23,075 |   |
| Reserves                                                               |       | (3,847                  | )          | (3,448 | ) |
| Total inventories                                                      |       | 51,019                  |       | 48,328 |   |
| Deferred income taxes                                                  |       | 9,654                   |       | 6,087 |   |
| Other current assets                                                   |       | 16,121                  |       | 14,987 |   |
| Total current assets                                                   |       | 162,224                 |       | 141,451 |   |
| Property and equipment, net                                            |       | 72,580                  |       | 73,795 |   |
| Goodwill                                                               |       | 39,596                  |       | 39,596 |   |
| Other intangible assets, net                                           |       | 104,909                 |       | 110,156 |   |
| Deferred income taxes                                                  |       | 474                     |       | 336 |   |
| Other noncurrent assets                                                |       | 2,397                   |       | 2,257 |   |
|                                                                   |       | $                       | 382,180    |   | $ | 367,591 |   |
|                                                                   |       |                    |       |   |   |
| LIABILITIES AND MEMBERS’ EQUITY                                   |       |                    |       |   |   |
| Current liabilities                                                    |       |                    |       |   |   |
| Current maturities of long-term debt                                   |       | $                       | 1,859      |   | $ | 1,909 |   |
| Accounts payable                                                       |       | 45,222                  |       | 33,285 |   |
| Accrued liabilities                                                    |       | 26,222                  |       | 21,328 |   |
| Deferred income taxes                                                  |       | 547                     |       | 588 |   |
| Total current liabilities                                              |       | 73,850                  |       | 57,110 |   |
|                                                                   |       |                    |       |   |   |
| Noncurrent liabilities                                                 |       |                    |       |   |   |
| Deferred income taxes                                                  |       | 8,419                   |       | 8,343 |   |
| Other noncurrent liabilities                                           |       | 4,042                   |       | 4,151 |   |
| Long-term debt, less current maturities                                |       | 195,372                 |       | 196,905 |   |
| Total noncurrent liabilities                                           |       | 207,833                 |       | 209,399 |   |
|                                                                   |       |                    |       |   |   |
| Members’ equity                                                   |       |                    |       |   |   |
| Units                                                                  |       | 100,900                 |       | 100,900 |   |
| Other comprehensive income                                             |       | 4,404                   |       | 5,690 |   |
| Accumulated deficit                                                    |       | (4,807                  | )          | (5,508 | ) |
|                                                                   |       | 100,497                 |       | 101,082 |   |
|                                                                   |       | $                       | 382,180    |   | $ | 367,591 |   |

 

The accompanying notes are an integral partof theconsolidated condensed financial statements.

 

1

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**CHAAS ACQUISITIONS, LLC**

**CONSOLIDATED CONDENSED STATEMENTS OFOPERATIONS**

**(Dollars in thousands)**

**(Unaudited)**

 
| ** **                                                | ** ** | **Company**                                  | ** ** | **Predecessor**                            | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **Three months  ended  June 30,  2004** | ** ** | **Six months  ended  June 30,  2004** | ** ** | **Period from  April 15, 2003  through  June 30,  2003** | ** ** | **Period from  April 1, 2003  through  April 14,  2003** | ** ** | **Period from  January 1, 2003  through  April 14,  2003** | ** ** |
|                                                      |       |                                         |       |                                       |       |   |   |   |   |   |   |
| Net sales                                                 |       | $                                            | 108,346    |                                       | $          | 204,977 |   | $ | 84,230 |   | $ | 16,514 |   | $ | 101,854 |   |
| Cost of sales                                             |       | 83,329                                       |       | 157,393                                    |       | 63,075 |   | 12,247 |   | 76,508 |   |
|                                                      |       |                                         |       |                                       |       |   |   |   |   |   |   |
| Gross profit                                              |       | 25,017                                       |       | 47,584                                     |       | 21,155 |   | 4,267 |   | 25,346 |   |
|                                                      |       |                                         |       |                                       |       |   |   |   |   |   |   |
| Selling, administrative and product  development expenses |       | 15,625                                       |       | 30,710                                     |       | 9,389 |   | 2,688 |   | 14,908 |   |
| Stock option compensation                                 |       | —                                       |       | —                                     |       | — |   | 10,125 |   | 10,125 |   |
| Transaction expenses                                      |       | —                                       |       | —                                     |       | — |   | 3,605 |   | 3,784 |   |
| Amortization of intangible assets                         |       | 2,113                                        |       | 4,164                                      |       | — |   | 4 |   | 11 |   |
|                                                      |       |                                         |       |                                       |       |   |   |   |   |   |   |
| Operating income (loss)                                   |       | 7,279                                        |       | 12,710                                     |       | 11,766 |   | (12,155 | ) | (3,482 | ) |
|                                                      |       |                                         |       |                                       |       |   |   |   |   |   |   |
| Other income (expense)                                    |       |                                         |       |                                       |       |   |   |   |   |   |   |
| Interest expense                                          |       | (5,481                                       | )          | (10,584                                    | )          | (3,524 | ) | (940 | ) | (4,772 | ) |
| Loss resulting from debt extinguishment                   |       | —                                       |       | —                                     |       | (5,967 | ) | — |   | — |   |
| Foreign currency gain (loss), net                         |       | 15                                           |       | (758                                       | )          | 2 |   | (356 | ) | 3,240 |   |
| Other income (expense)                                    |       | (240                                         | )          | (184                                       | )          | 71 |   | (19 | ) | (84 | ) |
|                                                      |       |                                         |       |                                       |       |   |   |   |   |   |   |
| Income (loss) before income taxes                         |       | 1,573                                        |       | 1,184                                      |       | 2,348 |   | (13,470 | ) | (5,098 | ) |
| Provision for income taxes                                |       | 587                                          |       | 483                                        |       | 1,889 |   | 39 |   | 1,600 |   |
| Net income (loss)                                         |       | $                                            | 986        |                                       | $          | 701 |   | $ | 459 |   | $ | (13,509 | ) | $ | (6,698 | ) |

 

The accompanying notes are an integral partof theconsolidated condensed financial statements.

 

2

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**CHAAS ACQUISITIONS, LLC**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Company**                                | ** ** | **Predecessor**                                                    | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **Six months  ended  June 30,  2004** | ** ** | **Period from  April 15, 2003  through  June 30,  2003** | ** ** | **Period from  January 1, 2003  through  April 14,  2003** | ** ** |
|                                                                                      |       |                                       |       |                                                               |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                                       |       |                                                               |       |   |   |
| Net income (loss)                                                                         |       | $                                          | 701        |                                                               | $          | 459 |   | $ | (6,698 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                                       |       |                                                               |       |   |   |
| Depreciation and amortization                                                             |       | 10,810                                     |       | 2,753                                                              |       | 3,695 |   |
| Stock option compensation                                                                 |       | —                                     |       | —                                                             |       | 10,125 |   |
| Loss resulting from debt extinguishment                                                   |       | —                                     |       | 5,939                                                              |       | — |   |
| Deferred taxes                                                                            |       | (3,590                                     | )          | (1,237                                                             | )          | (87 | ) |
| Foreign currency (gain) loss                                                              |       | 166                                        |       | (2                                                                 | )          | (3,061 | ) |
| (Gain) loss on disposal of assets                                                         |       | 123                                        |       | (11                                                                | )          | 68 |   |
| Interest accretion on notes                                                               |       | 682                                        |       | —                                                             |       | — |   |
| Changes in assets and liabilities, net                                                    |       | (7,944                                     | )          | (11,361                                                            | )          | (1,144 | ) |
|                                                                                      |       |                                       |       |                                                               |       |   |   |
| Net cash provided by (used for) operating  activities                                     |       | 948                                        |       | (3,460                                                             | )          | 2,898 |   |
|                                                                                      |       |                                       |       |                                                               |       |   |   |
| CASH FLOWS USED FOR INVESTING ACTIVITIES:                                                 |       |                                       |       |                                                               |       |   |   |
| Acquisition of property and equipment                                                     |       | (6,076                                     | )          | (2,061                                                             | )          | (2,512 | ) |
| Acquisition of predecessor, net of cash  acquired                                         |       | —                                     |       | (108,367                                                           | )          | — |   |
|                                                                                      |       |                                       |       |                                                               |       |   |   |
| Net cash (used for) investing activities                                                  |       | (6,076                                     | )          | (110,428                                                           | )          | (2,512 | ) |
|                                                                                      |       |                                       |       |                                                               |       |   |   |
| CASH FLOWS USED FOR FINANCING ACTIVITIES:                                                 |       |                                       |       |                                                               |       |   |   |
| Proceeds from issuance of debt                                                            |       | —                                     |       | 347,533                                                            |       | — |   |
| Debt issuance costs                                                                       |       | —                                     |       | (11,374                                                            | )          | — |   |
| Net increase (decrease) in revolving loan                                                 |       | (769                                       | )          | 2,252                                                              |       | 6,426 |   |
| Repayment of debt                                                                         |       | (947                                       | )          | (328,306                                                           | )          | (2,218 | ) |
| Issuance of membership units                                                              |       | —                                     |       | 100,900                                                            |       | — |   |
| Distributions to members                                                                  |       | —                                     |       | —                                                             |       | (121 | ) |
| Net cash provided by (used for) financing  activities                                     |       | (1,716                                     | )          | 111,005                                                            |       | 4,087 |   |
|                                                                                      |       |                                       |       |                                                               |       |   |   |
| Effect of exchange rate changes                                                           |       | 475                                        |       | 867                                                                |       | (296 | ) |
| Net (decrease) increase in cash                                                           |       | (6,369                                     | )          | (2,016                                                             | )          | 4,177 |   |
| Cash at beginning of period                                                               |       | 16,686                                     |       | 6,830                                                              |       | 2,653 |   |
| Cash at end of period                                                                     |       | $                                          | 10,317     |                                                               | $          | 4,814 |   | $ | 6,830 |   |

 

The accompanying notes are an integral partof theconsolidated condensed financial statements.

 

3

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**CHAAS ACQUISITIONS, LLC**

**CONSOLIDATED CONDENSED STATEMENT OF CHANGESIN MEMBERS’ EQUITY**

**(Dollars in 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   |       | —                     |       | (1,286 | ) | — |   | (1,286 | ) |
| Net income                        |       | —                     |       | — |   | 701 |   | 701 |   |
| Balance at June 30, 2004     |       | $                          | 100,900    |   | $ | 4,404 |   | $ | (4,807 | ) | $ | 100,497 |   |

 

The accompanying notes are an integral partof theconsolidated condensed financial statements.

 

4

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**CHAAS ACQUISITIONS, LLC**

**NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS**

**(Dollars in thousands)**

**(Unaudited)**

 

1.             BASISOF PRESENTATION

 

On April 15, 2003, substantially all of the equity interests ofAdvanced Accessory Systems, LLC (the “Predecessor”) were acquired by CastleHarlan Partners IV, L.P. (the “Acquisition”), a private equity investment fundorganized and managed by Castle Harlan Inc., a leading private equity firm.CHAAS Holdings, LLC was formed in April 2003 in connection with the Acquisitionand is the direct parent of CHAAS Acquisitions, LLC (“CHAAS Acquisitions”)which was formed pursuant to the Acquisition. Unless the context otherwise requires all information which refers tothe “Company,” “we,” “our” or “us” refers to CHAAS Acquisitions and itssubsidiaries.

 

The financial statements of the Company for periods subsequent toApril 14, 2003 are referred to as the financial statements of the“Company.” All financial statements prior to that date are referred to as thefinancial statements of the “Predecessor.”

 

The Acquisition was accounted for in accordance with the purchasemethod of accounting.  Accordingly, thepurchase price of the Acquisition has been allocated to identifiable assetsacquired and liabilities assumed based upon their estimated fair values at theacquisition date.

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and with theinstructions to Form 10-Q.  Accordingly,they do not include all information and footnotes required by accountingprinciples generally accepted in the Unites States of America for completefinancial statements and should be read in conjunction with the Annual Reporton Form 10-K for the fiscal year ended December 31, 2003.

 

In the opinion of the Company, theaccompanying unaudited consolidated condensed financial statements contain alladjustments, which are normal and recurring in nature, necessary to presentfairly its and the Predecessor’s financial position as of June 30, 2004and December 31, 2003 and the results of its and the Predecessor’soperations for the six month and three month periods ended June 30, 2004and 2003.

 

2.             COMPREHENSIVEINCOME

 

Comprehensiveincome (loss) for the Company and the Predecessor is as follows:

 
| ** **                                                   | ** ** | **Company**                                  | ** ** | **Predecessor**                            | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                   | ** ** | **Three months  ended  June 30,  2004** | ** ** | **Six months  ended  June 30,  2004** | ** ** | **Period from  April 15, 2003  through  June 30, 2003** | ** ** | **Period from  April 1, 2003  through  April 14, 2003** | ** ** | **Period from  January 1, 2003  through  April 14, 2003** | ** ** |
| Net income (loss)                                            |       | $                                            | 986        |                                       | $          | 701 |   | $ | 459 |   | $ | (13,509 | ) | $ | (6,698 | ) |
| Change in the cumulative translation  adjustment, net of tax |       | (301                                         | )          | (1,286                                     | )          | (911 | ) | 628 |   | (424 | ) |
| Comprehensive income (loss)                                  |       | $                                            | 685        |                                       | $          | (585 | ) | $ | (452 | ) | $ | (12,881 | ) | $ | (7,122 | ) |

 

3.             CURRENCY CONTRACTS

 

We have significant operations in Europewhere the functional currency is the Euro. During 2003, the Euro strengthened considerably against the U.S. dollarand it is our objective to protect reported earnings from volatility in theEuro/U.S. dollar exchange rates.  OnFebruary 12, 2004, when the Euro to the U.S. Dollar exchange rate was1.28:1, we entered into a series of foreign currency forward option contractsrelated to the Euro (“Euro Collar”), each with a notional value of €3,000,which mature 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. For the three and six months ended June 30, 2004 we had unrealizedlosses on our foreign currency options totaling $440 and $295, respectively,which were

 

5

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recorded in other expense.  Three options having zero value expiredduring the second quarter and six options expired during the first six monthsof 2004.

 
| ** **               | ** ** | **Euro Collar Exchange Rates** | ** ** |
|--------------------------|------------|--------------------------------|------------|
| **Expiration Date**      | ** ** | **Contract Date**              | ** ** | **Notional Value** | ** ** | **Purchased  Put Option** | ** ** | **Sold  Call Option** | ** ** | **Purchased  Call Option** | ** ** |
| ** **               | ** ** | ** **                     | ** ** | **(thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| September 30,  2004 |       | February 12, 2004         |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.357 |   | $ | 1.400 |   |
| 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-owned subsidiaries, AdvancedAccessory Systems, LLC and AAS Capital Corporation, issued and sold 103⁄4% seniornotes due 2011, (the “Senior Notes”). The Senior Notes are guaranteed on a full, unconditional and joint andseveral basis by the Company and all of the Company’s direct and indirectwholly-owned domestic subsidiaries.  Thefollowing condensed consolidating financial information presents the financialposition, results of operations and cash flows of (i) the Company (the“Parent”), as if it accounted for its subsidiaries on the equity method, (ii)Advanced Accessory Systems, LLC and AAS Capital Corporation as issuers; (ii)guarantor subsidiaries which are domestic, wholly-owned subsidiaries andinclude SportRack LLC, Valley Industries, LLC, AASA Holdings, LLC and ValTek,LLC; and (iii) the non-guarantor subsidiaries which are foreign, wholly-ownedsubsidiaries and include Brink International B.V. and its subsidiaries,SportRack Accessories, Inc. and its subsidiary, and SportRack Automotive GmbHand its subsidiaries. The operating results of the guarantor and non-guarantorsubsidiaries have been allocated a portion of certain corporate overhead costson a basis consistent with each subsidiary’s relative business activity,including interest on intercompany debt balances.  Since its formation in September 1997,AAS Capital Corporation has had no operations and has no assets or liabilitiesat June 30, 2004.

 

6

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**CONDENSED CONSOLIDATING BALANCE SHEET**

**June 30, 2004**

 
| ** **                                              | ** ** | **Company**                       | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                              | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                              | ** ** | **(Dollar amounts in thousands)** | ** ** |
| **ASSETS**                                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Current assets                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash                                                    |       | $                                 | 16         |   | $ | — |   | $ | 8,269 |   | $ | 2,032 |   | $ | — |   | $ | 10,317 |   |
| Accounts receivable                                     |       | —                            |       | — |   | 40,135 |   | 34,978 |   | — |   | 75,113 |   |
| Inventories                                             |       | —                            |       | — |   | 19,631 |   | 31,388 |   | — |   | 51,019 |   |
| Deferred income taxes and other current  assets         |       | 23                                |       | 7,395 |   | 14,334 |   | 4,023 |   | — |   | 25,775 |   |
| Total current assets                                    |       | 39                                |       | 7,395 |   | 82,369 |   | 72,421 |   | — |   | 162,224 |   |
| Property and equipment, net                             |       | —                            |       | — |   | 30,950 |   | 41,630 |   | — |   | 72,580 |   |
| Goodwill                                                |       | —                            |       | — |   | 39,596 |   | — |   | — |   | 39,596 |   |
| Other intangible assets, net                            |       | —                            |       | 5,695 |   | 78,164 |   | 21,050 |   | — |   | 104,909 |   |
| Deferred income taxes and other noncurrent  assets      |       | —                            |       | — |   | 1,161 |   | 1,710 |   | — |   | 2,871 |   |
| Investment in and advances to subsidiaries              |       | 129,680                           |       | 251,926 |   | 13,666 |   | 221 |   | (395,493 | ) | — |   |
| Total assets                                            |       | $                                 | 129,719    |   | $ | 265,016 |   | $ | 245,906 |   | $ | 137,032 |   | $ | (395,493 | ) | $ | 382,180 |   |
|                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND  MEMBER’S EQUITY**               |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                                     |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Current maturities of long-term debt                    |       | $                                 | —     |   | $ | — |   | $ | 69 |   | $ | 1,790 |   | $ | — |   | $ | 1,859 |   |
| Accounts payable                                        |       | —                            |       | — |   | 27,526 |   | 17,696 |   | — |   | 45,222 |   |
| Accrued liabilities and deferred income  taxes          |       | —                            |       | 1,607 |   | 8,334 |   | 16,828 |   | — |   | 26,769 |   |
| Total current liabilities                               |       | —                            |       | 1,607 |   | 35,929 |   | 36,314 |   | — |   | 73,850 |   |
| Deferred income taxes and other noncurrent  liabilities |       | —                            |       | — |   | 6,161 |   | 6,300 |   | — |   | 12,461 |   |
| Long-term debt, less current maturities                 |       | —                            |       | 150,000 |   | 25,499 |   | 19,873 |   | — |   | 195,372 |   |
| Intercompany debt                                       |       | 29,222                            |       | 3,226 |   | 20,835 |   | 63,563 |   | (116,846 | ) | — |   |
| Member’s equity                                    |       | 100,497                           |       | 110,183 |   | 157,482 |   | 10,982 |   | (278,647 | ) | 100,497 |   |
| Total liabilities and member’s equity              |       | $                                 | 129,719    |   | $ | 265,016 |   | $ | 245,906 |   | $ | 137,032 |   | $ | (395,493 | ) | $ | 382,180 |   |

 

7

----

 

##### **CONDENSEDCONSOLIDATING 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  MEMBER’S 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 maturites                  |       | 150,000                           |       | 28,710 |   | 18,195 |   | — |   | 196,905 |   |   |   |
| Intercompany debt                                       |       | 29,213                            |       | — |   | 25,195 |   | 67,921 |   | (122,329 | ) | — |   |
| Member’s equity                                    |       | 100,900                           |       | 115,996 |   | 154,119 |   | 9,130 |   | (279,063 | ) | 101,082 |   |
| Total liabilities and member’s equity              |       | $                                 | 130,099    |   | $ | 267,361 |   | $ | 242,319 |   | $ | 129,204 |   | $ | (401,392 | ) | $ | 367,591 |   |

 

8

----

 

**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**For the three months ended June 30, 2004**

 
| ** **                                                | ** ** | **Company**                       | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net sales                                                 |       | $                                 | —     |   | $ | — |   | $ | 64,327 |   | $ | 44,019 |   | $ | — |   | $ | 108,346 |   |
| Cost of sales                                             |       | —                            |       | — |   | 52,987 |   | 30,342 |   | — |   | 83,329 |   |
| Gross profit                                              |       | —                            |       | — |   | 11,340 |   | 13,677 |   | — |   | 25,017 |   |
| Selling, administrative and product  development expenses |       | —                            |       | 896 |   | 6,464 |   | 8,265 |   | — |   | 15,625 |   |
| Amortization of intangible assets                         |       | —                            |       | — |   | 1,799 |   | 314 |   | — |   | 2,113 |   |
|   Operating income (loss)                       |       | —                            |       | (896 | ) | 3,077 |   | 5,098 |   | — |   | 7,279 |   |
| Interest expense                                          |       | —                            |       | 2,742 |   | 657 |   | 2,082 |   | — |   | 5,481 |   |
| Equity in income (loss) of subsidiaries                   |       | 986                               |       | — |   | — |   | — |   | (986 | ) | — |   |
| Foreign currency gain (loss), net                         |       | —                            |       | — |   | — |   | 15 |   | — |   | 15 |   |
| Other income (expense)                                    |       | —                            |       | — |   | (205 | ) | (35 | ) | — |   | (240 | ) |
| Income (loss) before income taxes                         |       | 986                               |       | (3,638 | ) | 2,215 |   | 2,996 |   | (986 | ) | 1,573 |   |
| Provision (benefit) for income taxes                      |       | —                            |       | (1,273 | ) | 829 |   | 1,031 |   | — |   | 587 |   |
| Net income (loss)                                         |       | $                                 | 986        |   | $ | (2,365 | ) | $ | 1,386 |   | $ | 1,965 |   | $ | (986 | ) | $ | 986 |   |

 

**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**For the six months ended June 30, 2004**

 
| ** **                                                | ** ** | **Company**                       | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net sales                                                 |       | $                                 | —     |   | $ | — |   | $ | 126,355 |   | $ | 78,622 |   | $ | — |   | $ | 204,977 |   |
| Cost of sales                                             |       | —                            |       | — |   | 102,938 |   | 54,455 |   | — |   | 157,393 |   |
| Gross profit                                              |       | —                            |       | — |   | 23,417 |   | 24,167 |   | — |   | 47,584 |   |
| Selling, administrative and product  development expenses |       | —                            |       | 2,283 |   | 12,738 |   | 15,689 |   | — |   | 30,710 |   |
| Amortization of intangible assets                         |       | —                            |       | — |   | 3,524 |   | 640 |   | — |   | 4,164 |   |
| Operating income (loss)                                   |       | —                            |       | (2,283 | ) | 7,155 |   | 7,838 |   | — |   | 12,710 |   |
| Interest expense                                          |       | —                            |       | 6,660 |   | 1,241 |   | 2,683 |   | — |   | 10,584 |   |
| Equity in income (loss) of subsidiaries                   |       | 701                               |       | — |   | — |   | — |   | (701 | ) | — |   |
| Foreign currency gain (loss)                              |       | —                            |       | — |   | — |   | (758 | ) | — |   | (758 | ) |
| Other income (expense)                                    |       | —                            |       | — |   | (296 | ) | 112 |   | — |   | (184 | ) |
| Income (loss) before income taxes                         |       | 701                               |       | (8,943 | ) | 5,618 |   | 4,509 |   | (701 | ) | 1,184 |   |
| Provision (benefit) for income taxes                      |       | —                            |       | (3,130 | ) | 2,065 |   | 1,548 |   | — |   | 483 |   |
| Net income                                                |       | $                                 | 701        |   | $ | (5,813 | ) | $ | 3,553 |   | $ | 2,961 |   | $ | (701 | ) | $ | 701 |   |

 

9

----

 

**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**For the period from April 15, 2003through June 30, 2003**

 
| ** **                                                | ** ** | **Company**                       | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **Parent**                        | ** ** | **Issuers** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net sales                                                 |       | $                                 | —     |   | $ | — |   | $ | 50,775 |   | $ | 33,455 |   | $ | — |   | $ | 84,230 |   |
| Cost of sales                                             |       | —                            |       | — |   | 39,319 |   | 23,756 |   | — |   | 63,075 |   |
| Gross profit                                              |       | —                            |       | — |   | 11,456 |   | 9,699 |   | — |   | 21,155 |   |
| Selling, administrative and product  development expenses |       | —                            |       | (189 | ) | 3,483 |   | 6,095 |   | — |   | 9,389 |   |
|   Operating income                              |       | —                            |       | 189 |   | 7,973 |   | 3,604 |   | — |   | 11,766 |   |
| Interest expense                                          |       | 715                               |       | 2,054 |   | 286 |   | 469 |   | — |   | 3,524 |   |
| Loss resulting from debt extingushment                    |       | 550                               |       | — |   | 4,060 |   | 1,357 |   | — |   | 5,967 |   |
| Equity in income (loss) of subsidiaries                   |       | 1,724                             |       | — |   | — |   | — |   | (1,724 | ) | — |   |
| Foreign currency gain (loss), net                         |       | —                            |       | — |   | 2 |   | — |   | — |   | 2 |   |
| Other income (expense)                                    |       | —                            |       | — |   | 14 |   | 57 |   | — |   | 71 |   |
| Income before income taxes                                |       | 459                               |       | (1,865 | ) | 3,643 |   | 1,835 |   | (1,724 | ) | 2,348 |   |
| Provision (benefit) for income taxes                      |       | —                            |       | (653 | ) | 1,275 |   | 1,267 |   | — |   | 1,889 |   |
| Net income (loss)                                         |       | $                                 | 459        |   | $ | (1,212 | ) | $ | 2,368 |   | $ | 568 |   | $ | (1,724 | ) | $ | 459 |   |

 

**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**For the Period from April 1, 2003through April 14, 2003**

 
| ** **                                                | ** ** | **Predecessor**                   | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **Issuers**                       | ** ** | **Guarantor subsidiaries** | ** ** | **Non-guarantor  subsidiaries** | ** ** | **Eliminations/  adjustments** | ** ** | **Consolidated** | ** ** |
| ** **                                                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net sales                                                 |       | $                                 | —     |   | $ | 10,340 |   | $ | 6,174 |   | $ | — |   | $ | 16,514 |   |
| Cost of sales                                             |       | —                            |       | 7,887 |   | 4,360 |   | — |   | 12,247 |   |
| Gross profit                                              |       | —                            |       | 2,453 |   | 1,814 |   | — |   | 4,267 |   |
| Selling, administrative and product  development expenses |       | (791                              | )          | 2,294 |   | 1,185 |   | — |   | 2,688 |   |
| Stock option compensation                                 |       | 10,125                            |       | — |   | — |   | — |   | 10,125 |   |
| Transaction expenses                                      |       | 3,605                             |       | — |   | — |   | — |   | 3,605 |   |
| Amortization of intangible assets                         |       | —                            |       | 1 |   | 3 |   | — |   | 4 |   |
| Operating income (loss)                                   |       | (12,939                           | )          | 158 |   | 626 |   | — |   | (12,155 | ) |
| Interest expense                                          |       | 503                               |       | 136 |   | 301 |   | — |   | 940 |   |
| Equity in net loss of subsidiaries                        |       | (67                               | )          | — |   | — |   | 67 |   | — |   |
| Foreign currency loss                                     |       | —                            |       | 3 |   | (359 | ) | — |   | (356 | ) |
| Other income (expense)                                    |       | —                            |       | (3 | ) | (16 | ) | — |   | (19 | ) |
| Income before income taxes                                |       | (13,509                           | )          | 22 |   | (50 | ) | 67 |   | (13,470 | ) |
| Provision for income taxes                                |       | —                            |       | — |   | 39 |   | — |   | 39 |   |
| Net income (loss)                                         |       | $                                 | (13,509    | ) | $ | 22 |   | $ | (89 | ) | $ | 67 |   | $ | (13,509 | ) |

 

10

----

 

**CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**For the Period from January 1, 2003through April 15, 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                                          |       | (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

----

 

**CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS**

**For the six months ended June 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         | ) | $ | (8,738 | ) | $ | 8,220 |   | $ | 1,475 |   | $ | — |   | $ | 948 |   |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition of property and equipment                 |       | —                            |       | — |   | (4,314 | ) | (1,762 | ) | — |   | (6,076 | ) |
| Net cash used for investing activities                |       | —                            |       | — |   | (4,314 | ) | (1,762 | ) | — |   | (6,076 | ) |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Change in intercompany debt                           |       | 9                                 |       | 8,738 |   | (4,358 | ) | (4,389 | ) | — |   | — |   |
| Net increase (decrease) in revolving loan             |       | —                            |       | — |   | (3,852 | ) | 3,083 |   | — |   | (769 | ) |
| Repayment of debt                                     |       | —                            |       | — |   | (56 | ) | (891 | ) | — |   | (947 | ) |
| Net cash provided by (used for) financing  activities |       | 9                                 |       | 8,738 |   | (8,266 | ) | (2,197 | ) | — |   | (1,716 | ) |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Effect of exchange rate changes                       |       | —                            |       | — |   | — |   | 475 |   | — |   | 475 |   |
| Net increase (decrease) in cash                       |       | —                            |       | — |   | (4,360 | ) | (2,009 | ) | — |   | (6,369 | ) |
| Cash at beginning of period                           |       | 16                                |       | — |   | 12,629 |   | 4,041 |   | — |   | 16,686 |   |
| Cash at end of period                                 |       | $                                 | 16         |   | $ | — |   | $ | 8,269 |   | $ | 2,032 |   | $ | — |   | $ | 10,317 |   |

 

12

----

 

**CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS**

**For the period from April 15, 2003through June 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 |       | $                                 | 300        |   | $ | (4,307 | ) | $ | 152 |   | $ | 395 |   | $ | — |   | $ | (3,460 | ) |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition of subsidiaries, net of cash  acquired    |       | (108,367                          | )          | — |   | — |   | — |   | — |   | (108,367 | ) |
| Acquisition of property and equipment                 |       | —                            |       | — |   | (846 | ) | (1,215 | ) | — |   | (2,061 | ) |
| Net cash used for investing activities                |       | (108,367                          | )          | — |   | (846 | ) | (1,215 | ) | — |   | (110,428 | ) |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Change in intercompany debt                           |       | 7,733                             |       | (5,081 | ) | 6,446 |   | (9,098 | ) | — |   | — |   |
| Proceeds from issuance of debt                        |       | 55,000                            |       | 150,000 |   | 88,916 |   | 53,617 |   | — |   | 347,533 |   |
| Debt issuance costs                                   |       | (550                              | )          | (4,668 | ) | (4,694 | ) | (1,462 | ) | — |   | (11,374 | ) |
| Net decrease in revolving loan                        |       | —                            |       | — |   | 2,154 |   | 98 |   | — |   | 2,252 |   |
| Repayment of debt                                     |       | (55,000                           | )          | (140,000 | ) | (92,211 | ) | (41,095 | ) | — |   | (328,306 | ) |
| Issuance of membership units                          |       | 100,900                           |       | — |   | — |   | — |   | — |   | 100,900 |   |
| Net cash provided by (used for) financing  activities |       | 108,083                           |       | 251 |   | 611 |   | 2,060 |   | — |   | 111,005 |   |
|                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Effect of exchange rate changes                       |       | —                            |       | — |   | — |   | 867 |   | — |   | 867 |   |
| Net increase (decrease) in cash                       |       | 16                                |       | (4,056 | ) | (83 | ) | 2,107 |   | — |   | (2,016 | ) |
| Cash at beginning of period                           |       | —                            |       | 4,056 |   | 83 |   | 2,691 |   | — |   | 6,830 |   |
| Cash at end of period                                 |       | $                                 | 16         |   | $ | — |   | $ | — |   | $ | 4,798 |   | $ | — |   | $ | 4,814 |   |

 

13

----

 

**CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS**

**For the period from January 1, 2003through 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 of operations and financialcondition should be read in conjunction with our financial statements and notesthereto included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements.  Discussions containing forward-lookingstatements may be found in the material set forth above, in the material setforth below, as well as in this Form 10-Q generally. Forward looking statementsgenerally 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, oursubstantial leverage, limitations imposed by our debt facilities, changes inthe popularity of particular vehicle models or towing and rack systems, theloss of programs on particular vehicle models, risks associated with conductingbusiness in foreign countries and other business factors.  Any suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties.  Actual events or results may differ materiallyfrom those discussed in the forward-looking statements.  All of theseforward-looking statements are based on estimates and assumptions made by ourmanagement which, although believed to be reasonable, are inherently uncertain. Given these risks and uncertainties, readers are cautioned not to place unduereliance on forward-looking statements.  The company disclaims anyobligation to update any forward-looking statements.

 

### **OVERVIEW**

 

We are one of the world’s largest designers and manufacturers ofexterior accessories for the automotive original equipment manufacturers(“OEM”) market and after market.  Wedesign and manufacture a wide array of both rack systems and towing systems andrelated accessories.  Our broad offeringof rack systems includes fixed and detachable racks and accessories, which canbe installed on vehicles to carry items such as bicycles, skis, luggage,surfboards, and sailboards.  Our towingproducts and accessories include trailer hitches, trailer balls, ball mounts, electricalharnesses, safety chains and locking pins. Our products are sold as standard accessories or options for a varietyof light vehicles.

 

### **CompanyBackground**

 

On April 15, 2003, substantially all of the equity interests ofthe Predecessor were acquired by Castle Harlan Partners IV, L.P., a privateequity investment fund organized and managed by Castle Harlan Inc., a leadingprivate equity firm. CHAAS Holdings, LLC was formed in April 2003 byCastle Harlan Partners IV, L.P. in connection with the Acquisition and is theindirect parent of CHAAS Acquisitions.

 

Unless the context otherwise requires, all information which refers to“we”, “our” or “us” refers to CHAAS Acquisitions and its subsidiaries.

 

**RESULTS OF OPERATIONS**

 

**Three Months Ended June 30, 2004 for the Company Compared to thePeriod April 15, 2003 through June 30, 2003 for the Company and thePeriod from April 1, 2003 through April 14, 2003 for the Predecessor.**

 

*Net sales.* Net salesfor the second quarter of 2004 were $108.3 million.  Net sales for the period from April 15,2003 through June 30, 2003 were $84.2 million and for the period fromApril 1, 2003 through April 14, 2003 were $16.5 million.  This increase for the full quarter of $7.6million, or 7.5%, includes approximately $2.2 million due to the increase ofthe average exchange rates between the U.S. dollar and the currencies used byour foreign subsidiaries, primarily in Europe. The balance of the increase in net sales reflects an increase in salesto our OEM customers of approximately $3.6 million and an increase ofapproximately $1.8 million representing revenue from surcharges for steelimposed primarily on products sold to aftermarket customers. Without the effectof these surcharges, sales to aftermarket customers were virtually unchangedduring the period.  Sales to OEMcustomers were higher due to new program launches for SportRack in Europe andfor Valley in North America.  Sales forBrink were higher due to strong European new car sales and an increase in salesof the higher priced detachable towbars. These increases were partially offset by decreased prices and lowervolumes on existing programs.

 

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*Gross profit.*Grossprofit for the second quarter of 2004 was $25.0 million.  Gross profit for the period fromApril 15, 2003 through June 30, 2003 was $21.2 million and for theperiod from April 1, 2003 through April 14, 2003 was $4.3million.  Gross profit as a percentage ofnet sales was 23.1% for the second quarter of 2004.  The gross profit percentage was 25.1% and25.8% during the period from April 15, 2003 through June 30, 2003 andthe period from April 1, 2003 through April 14, 2003,respectively.  The decrease in grossprofit of $405,000 or 1.6% and in gross margin percentage reflects higher costsfor steel and aluminum, price decreases to our OEM customers and higher rentexpense.  The price of steel continued toincrease dramatically during the second quarter of 2004 due primarily to severaltrends in the steel producing industry including increased demand for steelproducts from China, the weakened U.S. Dollar, the consolidation of the steelproducing industry and a reduction in overall production capacity.  In addition to the higher prices we alsoexperienced delays in procurement of some steel components.  During the quarter, increased cost of steeland production inefficiencies caused by delays in procurement of steel andcomponents having a high steel content resulted in lower gross profit ofapproximately $1.9 million net of recovery through the introduction of steelsurcharges on some of our aftermarket towing systems products. In order tosecure future business with certain of our OEM customers we granted pricedecreases on several products.  Thesereduced prices totaled approximately $800,000 during the second quarter.  Gross profit was further reduced byapproximately $258,000 in increased rent expense for two manufacturingfacilities that were included in a sale and leaseback transaction during thefourth quarter of 2003.

 

*Selling, administrative and productdevelopment expenses.*Selling, administrative andproduct development expenses for the second quarter of 2004 were $15.6million.  Selling, administrative andproduct development expenses for the period from April 15, 2003 throughJune 30, 2003 and for the period from April 1, 2003 throughApril 14, 2003 were $9.4 million and $2.7 million, respectively.  This increase of $3.6 million, or 29.4%, isprimarily due to our higher sales, an increase of $500,000 resulting from anincrease in the average exchange rates between the U.S. dollar and the Euro,increases in product development costs for SportRack in support of new OEMprograms that are expected to be launched in the second half of 2004 and beyondand higher corporate expenses.

 

*Stock option 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 ourPredecessor prior to the acquisition.  Inconnection with the transaction, our Predecessor recorded stock optioncompensation during this period of $10.1 million, representing the fair marketvalue of the underlying units less the related exercise price and the recordedvalue of the warrants.

 

*Transaction expenses. *During the periodfrom April 1, 2003 through April 14, 2003, our Predecessor incurred$3.6 million in expenses related to the Acquisition, including legal,accounting and other advisor fees.

 

*Amortization of intangible assets*. Amortization of intangible assets forthe second quarter of 2004 was $2.1 million and was $4,000 from April 1,2003 through April 14, 2003.  Theincrease in amortization results from amortization related to intangible assetsidentified in the allocation of the Acquisition purchase price.

 

*Operating income.*Ouroperating income for the second quarter of 2004 was $7.3 million.  Our operating income for the period fromApril 15, 2003 through June 30, 2004 was $11.8 million.  We had an operating loss of $12.2 millionduring the period from April 1, 2003 through April 14, 2003.  The change in operating income of $7.7million resulted from stock option compensation and transaction expenses of$10.1 million and $3.6 million, respectively, incurred in 2003.  These were partially offset by the increasedselling, administrative and product development expenses in 2004, increasedamortization of intangible assets and decreased gross profit.

 

*Interest expense.*  Interest expense for the second quarter of2004 was $5.5 million. Interest expense for the period from April 15, 2003through June 30, 2003 and for the period from April 1, 2003 throughApril 14, 2003 was $3.5 million and $940,000, respectively.  This increase of $1.0 million, or 22.8% isdue to the higher level of debt outstanding during the second quarter of 2004resulting from our purchase of the Predecessor on April 15, 2003.

 

*Foreign currency gain (loss).*We had a foreign currency gain in the second quarter of 2004 of $15,000.  We had a foreign currency gain during theperiod from April 15, 2003 through June 30, 2003 of $2,000 and aforeign currency loss during the period from April 1, 2003 throughApril 14, 2003, of $356,000.  Thisincrease of $369,000 is primarily attributable to the U.S. dollar denominated intercompanyindebtedness of Brink, whose functional currency is the Euro.  During the second quarter of 2004 the U.S.Dollar first strengthened in comparison with the Euro and then had two monthsof weakening.  This mix and changes inthe underlying U.S. Dollar loan exposure resulted in the immaterial gain atBrink.  The intercompany indebtedness forour foreign subsidiaries other than Brink are deemed to be permanently investedand therefore changes in the intercompany balances for these subsidiaries causedby foreign 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.

 

*Provision for income taxes.*During the second quarter of 2004 we had a gain before income taxes of $1.6million and recorded an income tax provision of $587,000.  The effective tax rate differs from the U.S.federal income tax rate primarily due to

 

16

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changes in valuation allowances on the deferred tax assets of SportRackAccessories and differences in the tax rates of foreign countries. Prior toApril 2003 our Predecessor and certain of its domestic subsidiaries hadelected to be taxed as limited liability companies for federal income taxpurposes.  As a result of this election,the Predecessor’s domestic taxable income accrued to the individualmembers.  Certain of the Company’sdomestic subsidiaries and foreign subsidiaries were subject to income taxes intheir respective jurisdictions. Effective on April 20, 2003 we filed anelection for all our domestic subsidiaries to be treated as regularcorporations and therefore they are now subject to federal income tax.  During the period from April 15, 2003through June 30, 2003 we had net income before taxes of $2.3 million andrecorded a provision of $1.9 million. During the period from April 1, 2003 through April 15, 2003 wehad a loss before income taxes of $13.5 million and recorded a benefit forincome taxes of $39,000.

 

*Net income (loss)*.  We had a net gain of $986,000 for the secondquarter of 2004, net income of $459 thousand for the period from April 15,2003 through June 30, 2003 and a net loss of $13.5 million for the periodfrom April 1, 2003 through April 14, 2003. The increase of $14.0million is due to higher operating income in 2004, the loss resulting from debtextinguishment in 2003, the foreign currency gain in 2004 as compared with aforeign currency loss in 2003 and a lower provision for income taxes in2004.  These were partially offset byhigher interest expense in 2004.

 

**Six Months Ended June 30, 2004 for the Company Compared to thePeriod April 15, 2003 through June 30, 2003 for the Company and thePeriod from January 1, 2003 through April 14, 2003 for thePredecessor.**

 

*Net sales.* Net salesfor the first six months of 2004 were $205.0 million.  Net sales for the period from April 15,2003 through June 30, 2003 and for the period from January 1, 2003through April 14, 2003 were $84.2 million and $101.9 millionrespectively.  This increase of $18.9million, or 10.2%, includes approximately $6.0 million due to the increase ofthe average exchange rates between the U.S. dollar and the currencies used byour foreign subsidiaries, primarily in Europe. The balance of the increase in net sales reflects an increase in salesto our OEM customers of approximately $9.8 million, an increase ofapproximately $1.9 million in sales to our automotive aftermarket customers andan increase of approximately $1.9 million representing revenue from surchargesfor steel imposed primarily on products sold to aftermarket customers.  Sales to OEM customers were higher due to newprogram launches for SportRack in North America and Europe and for Valley inNorth America.  These increases werepartially offset by decreased prices and lower volumes on existing programs.  Sales for Brink were higher due to strongEuropean new car sales and an increase in sales of the higher priced detachabletowbars.  Aftermarket sales were higherdue to strong orders of hitches in North America.

 

*Gross profit.* Grossprofit for the first six months of 2004 was $47.6 million.  Gross profit for the period fromApril 15, 2003 through June 30, 2003 and for the period fromJanuary 1, 2003 through April 14, 2003 was $21.2 million and $25.3million, respectively.  This increase of$1.1 million, or 2.3%, resulted from our higher net sales offset partially by adecrease in the gross profit percentage. Gross profit as a percentage of net sales was 23.2% for the first sixmonths of 2004, 25.1% for the period from April 15, 2003 throughJune 30, 2003 and 24.9% for the period from January 1, 2003 throughApril 14, 2003. The decreased gross margin percentage reflects highercosts for steel and aluminum, price decreases to our OEM customers and higherrent expense. The price of steel increased dramatically during the first halfof 2004 due primarily to several trends in the steel producing industryincluding increased demand for steel products from China, the weakened U.S.Dollar, the consolidation of the steel producing industry and a reduction inoverall production capacity.  In additionto the higher prices we also experienced delays in procurement of some steelcomponents.  During the first six monthsof 2004 increased cost of steel and production inefficiencies caused by delaysin procurement of steel and components having a high steel content resulted inlower gross profit of approximately $2.4 million net of recovery through theintroduction of steel surcharges on some of our aftermarket towing systemsproducts.  In order to secure futurebusiness with certain of our OEM customers we granted price decreases on severalproducts.  These reduced prices totaledapproximately $800,000 during the first six months. Gross profit was furtherreduced by approximately $600,000 in increased rent expense for twomanufacturing facilities that were included in a sale and leaseback transactionduring the fourth quarter of 2003.

 

*Selling, administrative and productdevelopment expenses.* Selling, administrative and product development expenses for the firstsix months of 2004 were $30.7 million. Selling, administrative and product development expenses for the periodfrom April 15, 2003 through June 30, 2003 and from the period fromJanuary 1, 2003 through April 14, 2003 were $9.4 million and $14.9million, respectively.  This increase of$6.4 million, or 26.4% is primarily due to our higher sales, $1.6 millionresulting from an increase in the average exchange rates between the U.S.dollar and the Euro, increases in product development costs for SportRack insupport of new OEM programs that are expected to be launched in the second halfof 2004 and beyond, the inclusion of management fees to Castle Harlan of$870,000 in the first six months of 2004 and higher corporate expenses.

 

*Stock option 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 ourPredecessor prior to the acquisition.  Inconnection with the transaction, our Predecessor recorded stock option compensationduring this period of $10.1 million, representing the fair market value of theunderlying units less the related exercise price and the recorded value of thewarrants.

 

17

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*Transaction expenses. *During the periodfrom January 1, 2003 through April 14, 2003, our Predecessor incurred$3.8 million in expenses related to the acquisition, including legal,accounting and other advisor fees.

 

*Amortization of intangible assets*.  Amortization of intangible assets was $4.2million for the first six months of 2004 and $11,000 for the period fromJanuary 1, 2003 through April 14, 2003.  The increase in amortization primarilyresults from amortization related to intangible assets identified in the allocationof the Acquisition purchase price.

 

*Operating income. *Our operating incomewas $12.7 million for the first six months of 2004 and $11.8 million for theperiod form April 15, 2003 through June 30, 2003.  We had an operating loss for the period fromJanuary 1, 2003 through April 14, 2003 of $3.5 million.  This increase of $4.4 million resulted fromhigher gross profit in 2004 and stock option compensation and transactionexpenses of $10.1 million and $3.8 million, respectively, that were incurred in2003.  These were partially offset byincreased selling, administrative and product development expenses and anincrease in amortization of intangible assets.

 

*Interest expense.*  Interest expense for the first six months of2004 was $10.6 million.  Interest expensefor the period from April 15, 2003 through June 30, 2003 and for theperiod from January 1, 2003 through April 14, 2003 was $3.5 millionand $4.8 million, respectively.  Thisincrease of $2.3 million, or 27.6% is due to the higher level of debtoutstanding during the first six months of 2004 resulting from our purchase ofthe Predecessor on April 15, 2003.

 

*Loss resulting from debt extinguishment. *On May 23, 2003, weissued $150 million of our 103⁄4% Senior Notes due 2011, the proceeds of whichwere used to repay a senior subordinated bridge note and a portion of ourcredit facility (see — “Debt and Credit Sources” below).  As a result we incurred an extinguishmentloss of $6.0 million.

 

*Foreign currency gain (loss).* We had a foreigncurrency loss for the first six months of 2004 of $758,000.  We had foreign currency gains during theperiod from April 15, 2003 through June 30, 2003 and the period fromJanuary 1, 2003 through April 14, 2003, of $2,000 and $3.2 million,respectively. The foreign currency loss is primarily attributable to the U.S.dollar denominated intercompany indebtedness of Brink, whose functionalcurrency is the Euro.  During the firstsix months of 2004 the U.S. Dollar strengthened in comparison with the Euroresulting in the loss at Brink.  Theintercompany indebtedness for our foreign subsidiaries other than Brink isdeemed to be permanently invested and therefore changes in 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 June 30, 2003 and the period from January 1, 2003 throughApril 14, 2003 the U.S. dollar weakened in relation to the Euro and theCanadian dollar resulting in the foreign currency gain recorded in thoseperiods.

 

*Provision for income taxes.*During the first six months of 2004 we had income before income taxes of $1.2million and recorded an income tax provision of $483,000.  The effective tax rate differs from the U.S.federal income tax rate primarily due to changes in valuation allowances on thedeferred tax assets of SportRack Accessories and differences in the tax ratesof foreign countries. Prior to April 2003 our Predecessor and certain ofits domestic subsidiaries had elected to be taxed as limited liabilitycompanies for federal income tax purposes. As a result of this election, the Predecessor’s domestic taxable incomeaccrued to the individual members. Certain of the Company’s domestic subsidiaries and foreign subsidiarieswere subject to income taxes in their respective jurisdictions. Effective onApril 20, 2003 we filed an election for all our domestic subsidiaries tobe treated as regular corporations and therefore they are now subject tofederal income tax. During the period from April 15, 2003 throughJune 30, 2003 we had net income before taxes of $2.3 million and recordeda provision of $1.9 million.  During theperiod from January 1, 2003 through April 15, 2003 we had a lossbefore income taxes of $5.1 million and recorded a provision for income taxesof $1.6 million.

 

*Net income (loss)*.  We had net income of $701,000 for the firstsix months of 2004, net income of $459,000 for the period from April 15,2003 through June 30, 2003 and a net loss of $6.7 million for the periodfrom January 1, 2003 through April 14, 2003. The increase of $6.9million is due to higher operating income in 2004, the loss resulting from debtextinguishment in 2003 and lower provision for income taxes in 2004.  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 service our debt and meetour working capital and capital expenditure needs.  Our indebtedness at June 30, 2004 was$197.2 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.

 

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

 

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

 
| ** **       | ** ** | **Company**             | ** ** |
|------------------|------------|-------------------------|------------|
| ** **       | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| ** **       | ** ** | **(in thousands)**      | ** ** |
| ** **       | ** ** | ** **              | ** ** |
| Working  Capital |       | $                       | 88,374     |   | $ | 84,341 |   |
|                  |            |                         |            |  |  |  |  |

 
| ** **                                              | ** ** | **Company**                                | ** ** | **Predecessor**                                                   | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Six months  ended  June 30,  2004** | ** ** | **Period from  April 15, 2003  through  June 30, 2003** | ** ** | **Period from  January 1, 2003  through  April 14, 2003** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                         | ** ** | **(in thousands)**                                                | ** ** |
| ** **                                              | ** ** | ** **                                 | ** ** | ** **                                                        | ** ** |
| Cash flows  provided by operating activities            |       | $                                          | 948        |                                                              | $          | (3,460 | ) | $ | 2,898 |   |
|                                                    |       |                                       |       |                                                              |       |   |   |   |   |   |
| Cash flows  (used for) investing activities             |       | $                                          | (6,076     | )                                                                 | $          | (110,428 | ) | $ | (2,512 | ) |
|                                                    |       |                                       |       |                                                              |       |   |   |   |   |   |
| Cash flows  provided by (used for) financing activities |       | $                                          | (1,716     | )                                                                 | $          | 111,005 |   | $ | 4,087 |   |

 

*Working capital*

 

Workingcapital increased by $4.0 million to $88.4 million at June 30, 2004 from$84.3 million at December 31, 2003 due primarily to an increase inaccounts receivable of $20.4 million, an increase in inventories of $3.6million, an increase in deferred tax assets of $3.6 million and an increase inother current assets of $1.1 million. These increases were partially offset bya decrease in cash of $5.7 million, an increase in accounts payable of $12.3million, an increase in other current liabilities of $5.1 million and adecrease related to foreign currency exchange rates of the functionalcurrencies of our foreign subsidiaries of $980,000.

 

The increase in accounts receivable was attributable to the timing ofpayments from OEM customers and to increased sales levels in the second quarterof 2004 as compared with the fourth quarter 2003.  Differences in sales levels between the twoperiods are primarily due to increased sales to automotive OEMs and seasonalsales levels of our aftermarket products. Our aftermarket products have higher sales in the second and thirdquarters and lower sales in the fourth and first quarters.  Increases in accounts payable reflectedincreased purchasing activities to support the increased sales volume.  Inventory increased primarily for ouraftermarket products to support seasonally higher sales for the period ascompared with the period prior to December 31, 2003.  The increase in accrued expenses is primarilydue to an increase in accrued interest on our $150 million of Senior Notes.

* *

*OperatingActivities*

 

Ouroperations provided $948,000 in cash during the first six months of 2004compared to a use of $562,000 in cash for the first six months of 2003.  The increase for 2004 is primarily due to theuse in 2003 of $10.1 million for stock option compensation and $6.0 million forextinguishment of debt.  These uses areoffset by increased net income before depreciation and amortization of $11.5million during the first six months of 2004 as compared to $209,000 in the firstsix months of 2003 and a smaller increase in working capital excluding cash forthe same periods.

 

*InvestingActivities*

 

Cash flow used for investing activities for the first six months of2004 and 2003 also included acquisitions of property and equipment of $6.1million and $4.6 million, respectively, and were primarily for the expansion ofcapacity, productivity and process improvements and maintenance.  Cash flows for investing activities for thefirst six months of 2003 also included the Acquisition totaling $108.4 million.

 

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*FinancingActivities*

 

During the first six months of 2004 financing cash flows included areduction in the revolving line of credit of $769,000 and repayment of debt of$947,000.

 

During the period from April 15, 2003 through June 30, 2003financing cash flows included the proceeds from the issuance of membershipunits totaling $100.9 million and proceeds from borrowing related to ourpurchase of the Predecessor on April 15, 2003, including $106.0 million borrowedunder a new credit facility, a $55.0 million convertible senior subordinatedbridge note and a $10.0 subordinated promissory note issued by the sellers ofAdvanced Accessory Systems, LLC (see “*Debt and Credit Sources”*below).  A portion of these proceeds wereused to pay debt issuance costs and pay a portion of our Predecessor’sindebtedness including all amounts due under its then existing creditfacility.  On May 23, 2003 we sold $150.0million of our Senior Notes due 2011 which proceeds were used to refinance theconvertible senior subordinated note and a portion of loans under the newcredit facility.  We also borrowed anadditional $2.3 million under our revolving loans.

 

During the period from January 1, 2003 through April 14, 2003our Predecessor made $2.2 million in regularly scheduled principal payments onits term notes under its then existing credit facility, borrowed $6.4 millionon its revolving facility and made distributions to its members totaling $121thousand.

 

***Debt and Credit Sources***

 

Our indebtedness at June 30, 2004 was $197.2million.  The Company expects that itsprimary sources of cash will be from operating activities and borrowings underits revolving credit facilities.  As ofJune 30, 2004, we had borrowings under the revolving credit facilitiestotaling $16.9 million and had $31.7 million of available borrowingcapacity.  Standby letters of credittotaling $2.9 million provided as security for our U.S. workers compensationprogram and $1.9 million providing security to a financial institution forforeign currency instruments reduced borrowing availability.  As of June 30, 2004, we were incompliance with the various covenants under the debt agreements pursuant towhich we have borrowed or may borrow money. Management believes that, based on current and expected levels ofoperations, cash flows from operations and borrowings under the revolvingcredit facilities will be sufficient to fund its debt service requirements,working capital needs, and capital expenditures for the foreseeable future,although no assurances can be given in this regard.

 

Our ability to satisfy our debt obligations will depend upon our futureoperating performance, which will be affected by prevailing economic conditionsand financial, business, and other factors, certain of which are beyond ourcontrol, as well as the availability of revolving credit borrowings under ourcurrent or successor credit facilities. We anticipate that, based on current and expected levels of operations,our operating cash flow, together with borrowings under the revolving creditfacility, should be sufficient to meet our debt service, working capital andcapital expenditure requirements for the foreseeable future, although noassurances can be given in this regard, including as to the ability to increaserevenues or profit margins. If we are unable to service our indebtedness, wewill be forced to take actions such as reducing or delaying acquisitions and/orcapital expenditures, selling assets, restructuring or refinancing ourindebtedness, or seeking additional equity capital. There is no assurance thatany 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.

 

We conduct operations in several foreign countries including Canada,The Netherlands, Denmark, the United Kingdom, Sweden, France, Germany, Poland,Spain, the Czech Republic and Italy.  Netsales from international operations during the second quarter of 2004 wereapproximately $44.0 million, or 40.6% of our net sales. At June 30, 2004,assets associated with these operations were approximately 35.4% of totalassets, and we had indebtedness denominated in currencies other than the U.S.Dollar of approximately $21.7 million.

 

Our international operations may be subject to volatility because ofcurrency fluctuations, inflation and changes in political and economicconditions in these countries.  Most ofthe revenues and costs and expenses of our operations in these countries aredenominated in the local currencies. The financial position and results ofoperations of the Company’s foreign subsidiaries are measured using the localcurrency as the functional currency.

 

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### **Currency contracts**

 

We have significantoperations in Europe where the functional currency is the Euro.  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”), eachwith a notional value of €3.0 million, which mature quarterly, 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.For the three and six months ended June 30, 2004 we had unrealized losseson our foreign currency options totaling $440,000 and $295,000, respectively,which was recorded in other expense. Three options having zero value expired during the second quarter andsix options expired during the first six months of 2004.

 
|                     |       | **Euro Collar Exchange Rates** |       |
|--------------------------|------------|--------------------------------|------------|
| **Expiration Date**      | ** ** | **Contract Date**              | ** ** | **Notional Value** | ** ** | **Purchased  Put Option** | ** ** | **Sold  Call Option** | ** ** | **Purchased  Call Option** |   |
|                     |       | **(thousands)**                |       |
| September 30,  2004 |       | February 12, 2004         |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.357 |   | $ | 1.400 |   |
| 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, we executed several foreigncurrency option contracts.  See “ –Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Currency Contracts”.

 

Item 4.    Controls and Procedures

 

Under the supervision and with theparticipation of management, including our principal executive officer andprincipal financial officer, the Company has evaluated the effectiveness of thedesign and operation of its disclosure controls and procedures as ofJune 30, 2004, and, based on their evaluation, the principal executiveofficer and principal financial officer have concluded that these controls andprocedures are effective.  There were nosignificant changes in internal controls or in other factors that couldsignificantly affect these controls during the quarter.

 

Disclosure controls and procedures are theCompany’s controls and other procedures that are designed to ensure thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Securities Exchange Act of 1934 as amended (the“Exchange Act”) is recorded, processed, summarized and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules andforms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed in the reports that the Companyfiles under the Exchange Act is accumulated and communicated to management,including the principal executive officer and principal financial officer, asappropriate to allow timely decisions regarding required disclosure.

 

**PARTII.  OTHER INFORMATION AND SIGNATURE**

 

Item 1.    Legal Proceedings

 

From time totime, we are subject to routine legal proceedings incidental to the operationof our business.  The outcome of anythreatened or pending proceedings is not expected to have a material adverseeffect on our financial condition, operating results or cash flows, based onour current understanding of the relevant facts.  The Company maintains insurance coverageagainst claims in an amount which it believes to be adequate.

 

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Item 2.             Changes in Securities

 

None

 

Item 3.             Defaults Upon Senior Securities

 

None

 

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

 

None

 

Item 5. Other Information

 

None

 

Item 6.    Exhibits and Reports on Form 8-K

 
| (a)          | 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 |
|         |                                                                                                                                                          |
| (b)          | Reports on Form 8-K                                                                                                                                           |
|         |                                                                                                                                                          |
| None         |                                                                                                                                                          |

 

23

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|   |                 |   | CHAAS ACQUISITIONS, LLC         |
|--------|----------------------|--------|---------------------------------|
|   |                 |   |                            |
|   |                 |   |                            |
| Date:  | August 11, 2004 |   | /s/ Ronald J. Gardhouse         |
|   |                 |   | Ronald J. Gardhouse             |
|   |                 |   | Chief Financial Officer         |
|   |                 |   | (Principal Financial Officer    |
|   |                 |   |  and Authorized Signatory) |

 

24

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| **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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