**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**Form 10-Q**

 

| **(Mark one)** |
|----------------|
| **ý**     |   | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|           |   |   |
|           |   | **For the quarterly period ended  September 30, 2003** |
|           |   |   |
| **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.**

(Exactname of registrant as specified 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 address and 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 Registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes    o      No    ý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Class**         |   | **Outstanding  at November 12, 2003** |
|-------------------|--------|--------------------------------------------|
| 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 September 30, 2003 and the Consolidated Condensed Balance  Sheet for the Predecessor as of December 31, 2002                                                                                                                                                                                                                                                                 |   |
|                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|                                            | Consolidated Condensed Statements of  Operations of the Company for the three months ended September 30, 2003  and for the period from April 15, 2003 through September 30, 2003  and the Consolidated Condensed Statements of Operations for the Predecessor  for the period January 1, 2003 through April 14, 2003, the three  months ended September 30, 2002 and the Nine Months ended  September 30, 2002 |   |
|                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|                                            | Consolidated Condensed Statements of Cash  Flows for the Company for the period from April 15, 2003 through  September 30, 2003 and the Consolidated Condensed Statements of Cash  Flows for the Predecessor for the period January 1, 2003 through  April 14, 2003 and the Nine Months ended September 30, 2002                                                                                                         |   |
|                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|                                            | Consolidated Condensed Statement of Changes  in Members’ Equity for the period from April 15, 2003 through  September 30, 2003 for the Company and the period from January 1,  2003through April 14, 2003 for the Predecessor                                                                                                                                                                                            |   |
|                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|                                            | 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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**PARTI.  FINANCIAL INFORMATION**

 

Item 1.    FinancialStatements

 

**CHAAS ACQUISITIONS, LLC**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

**As of September 30, 2003 andDecember 31, 2002**

**(Dollarsin thousands)**

 
|                                                                   |   | **Company**                  |    | **Predecessor**             |   |
|------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                                   |   | **September 30,  2003** |    | **December 31,  2002** |   |
|                                                                   |   | **(Unaudited)**              |    |                        |   |
| ASSETS                                                                 |   |                         |    |                        |   |
| Current assets                                                         |   |                         |    |                        |   |
| Cash                                                                   |   | $                            | 4,348   |                        | $      | 2,653 |   |
| Accounts receivable, less reserves of  $1,897 and $1,857, respectively |   | 65,725                       |    | 51,526                      |   |
| Inventories                                                            |   |                         |    |                        |   |
| Raw materials                                                          |   | 17,168                       |    | 14,631                      |   |
| Work-in-process                                                        |   | 10,970                       |    | 9,893                       |   |
| Finished goods                                                         |   | 20,006                       |    | 19,068                      |   |
| Reserves                                                               |   | (3,537                       | )       | (2,910                      | )      |
| Total inventories                                                      |   | 44,607                       |    | 40,682                      |   |
| Deferred income taxes                                                  |   | 3,134                        |    | 109                         |   |
| Other current assets                                                   |   | 15,691                       |    | 13,370                      |   |
| Total current assets                                                   |   | 133,505                      |    | 108,340                     |   |
| Property and equipment, net                                            |   | 61,884                       |    | 60,572                      |   |
| Goodwill                                                               |   | 165,217                      |    | 47,308                      |   |
| Other intangible assets, net                                           |   | 7,219                        |    | 3,635                       |   |
| Deferred income taxes                                                  |   | 2,804                        |    | 1,981                       |   |
| Other noncurrent assets                                                |   | 1,987                        |    | 2,319                       |   |
|                                                                   |   | $                            | 372,616 |                        | $      | 224,155 |   |
|                                                                   |   |                         |    |                        |   |
| LIABILITIES AND MEMBERS’ EQUITY                                   |   |                         |    |                        |   |
| Current liabilities                                                    |   |                         |    |                        |   |
| Current maturities of long-term debt                                   |   | $                            | 2,197   |                        | $      | 18,215 |   |
| Accounts payable                                                       |   | 36,050                       |    | 33,159                      |   |
| Accrued liabilities                                                    |   | 39,328                       |    | 30,762                      |   |
| Deferred income taxes                                                  |   | 2,998                        |    | —                      |   |
| Mandatorily redeemable warrants                                        |   | —                       |    | 5,250                       |   |
| Total current liabilities                                              |   | 80,573                       |    | 87,386                      |   |
|                                                                   |   |                         |    |                        |   |
| Noncurrent liabilities                                                 |   |                         |    |                        |   |
| Deferred income taxes                                                  |   | 1,651                        |    | 629                         |   |
| Other noncurrent liabilities                                           |   | 2,933                        |    | 5,796                       |   |
| Long-term debt, less current maturities                                |   | 183,470                      |    | 136,732                     |   |
| Total noncurrent liabilities                                           |   | 188,054                      |    | 143,157                     |   |
|                                                                   |   |                         |    |                        |   |
| Members’ equity                                                   |   |                         |    |                        |   |
| Units                                                                  |   | 100,900                      |    | —                      |   |
| Class A Units                                                          |   | —                       |    | 7,348                       |   |
| Class A-1 Units                                                        |   | —                       |    | 4,117                       |   |
| Other comprehensive loss                                               |   | 2,462                        |    | 85                          |   |
| Retained earnings (accumulated deficit)                                |   | 627                          |    | (17,938                     | )      |
|                                                                   |   | 103,989                      |    | (6,388                      | )      |
|                                                                   |   | $                            | 372,616 |                        | $      | 224,155 |   |

 

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

 

1

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**CHAASACQUISITIONS, LLC**

**CONSOLIDATEDCONDENSED STATEMENTS OF OPERATIONS**

** (Dollars in thousands)**

**(Unaudited)**

 
|                                                                          |   | **Company**                                        |   | **Predecessor**                                                          |   |
|-------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|--------------------------------------------------------------------------|--------|
|                                                                          |   | **Three  months  ended  September 30,  2003** |   | **Period  from  April 15, 2003  through  September 30,  2003** |   | **Period  from  January 1, 2003  through  April 14,  2003** |   | **Three  months  ended  September 30,  2002** |   | **Nine  months  ended  September 30,  2002** |   |
|                                                                          |   |                                               |   |                                                                     |   |   |   |   |   |   |   |
| Net sales                                                                     |   | $                                                  | 86,770 |                                                                     | $      | 171,000 |   | $ | 101,854 |   | $ | 80,088 |   | $ | 254,279 |   |
| Cost of sales                                                                 |   | 65,750                                             |   | 128,825                                                                  |   | 76,508 |   | 61,143 |   | 191,004 |   |
|                                                                          |   |                                               |   |                                                                     |   |   |   |   |   |   |   |
| Gross profit                                                                  |   | 21,020                                             |   | 42,175                                                                   |   | 25,346 |   | 18,945 |   | 63,275 |   |
|                                                                          |   |                                               |   |                                                                     |   |   |   |   |   |   |   |
| Selling, administrative and product  development expenses                     |   | 13,862                                             |   | 23,251                                                                   |   | 14,908 |   | 11,491 |   | 34,032 |   |
| Stock option compensation                                                     |   | —                                             |   | —                                                                   |   | 10,125 |   | — |   | — |   |
| Transaction expenses                                                          |   | —                                             |   | —                                                                   |   | 3,784 |   | — |   | — |   |
| Amortization of intangible assets                                             |   | 208                                                |   | 208                                                                      |   | 11 |   | 6 |   | 19 |   |
|                                                                          |   |                                               |   |                                                                     |   |   |   |   |   |   |   |
| Operating income (loss)                                                       |   | 6,950                                              |   | 18,716                                                                   |   | (3,482 | ) | 7,448 |   | 29,224 |   |
|                                                                          |   |                                               |   |                                                                     |   |   |   |   |   |   |   |
| Other income (expense)                                                        |   |                                               |   |                                                                     |   |   |   |   |   |   |   |
| Interest expense                                                              |   | (5,590                                             | )      | (9,114                                                                   | )      | (4,772 | ) | (4,375 | ) | (12,232 | ) |
| Loss resulting from debt extinguishment                                       |   | (326                                               | )      | (6,293                                                                   | )      | — |   | — |   | — |   |
| Foreign currency gain (loss), net                                             |   | —                                             |   | 2                                                                        |   | 3,240 |   | (1,167 | ) | 5,747 |   |
| Other income (expense)                                                        |   | 61                                                 |   | 132                                                                      |   | (84 | ) | 1 |   | (115 | ) |
|                                                                          |   |                                               |   |                                                                     |   |   |   |   |   |   |   |
| Income (loss) before income taxes and  cumulative effect of accounting change |   | 1,095                                              |   | 3,443                                                                    |   | (5,098 | ) | 1,907 |   | 22,624 |   |
| Provision for income taxes                                                    |   | 927                                                |   | 2,816                                                                    |   | 1,600 |   | 1,140 |   | 4,075 |   |
| Income (loss) before cumulative effect of  accounting change                  |   | 168                                                |   | 627                                                                      |   | (6,698 | ) | 767 |   | 18,549 |   |
| Cumulative effect of accounting change for  goodwill impairment               |   | —                                             |   | —                                                                   |   | — |   | — |   | (29,207 | ) |
|                                                                          |   |                                               |   |                                                                     |   |   |   |   |   |   |   |
| Net income (loss)                                                             |   | $                                                  | 168    |                                                                     | $      | 627 |   | $ | (6,698 | ) | $ | 767 |   | $ | (10,658 | ) |

 

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

 

2

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**CHAASACQUISITIONS, LLC**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

**(Dollarsin thousands)**

**(Unaudited)**

 
|                                                                             |   | **Company**                                                              |   | **Predecessor**                                                       |   |
|----------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
|                                                                             |   | **Period  from  April 15, 2003  through  September 30,  2003** |   | **Period  from  January 1, 2003  through  April 14,  2003** |   | **Nine  Months  ended  September 30,  2002** |   |
|                                                                             |   |                                                                     |   |                                                                  |   |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                            |   |                                                                     |   |                                                                  |   |   |   |
| Net income (loss)                                                                |   | $                                                                        | 627    |                                                                  | $      | (6,698 | ) | $ | (10,658 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                                                                     |   |                                                                  |   |   |   |
| Depreciation and amortization                                                    |   | 5,370                                                                    |   | 3,695                                                                 |   | 9,277 |   |
| Cumulative effect of accounting change for  goodwill impairment                  |   | —                                                                   |   | —                                                                |   | 29,207 |   |
| Stock option compensation                                                        |   | —                                                                   |   | 10,125                                                                |   | — |   |
| Loss resulting from debt extinguishment                                          |   | 6,293                                                                    |   | —                                                                |   | — |   |
| Deferred taxes                                                                   |   | 550                                                                      |   | (87                                                                   | )      | 883 |   |
| Foreign currency (gain) loss                                                     |   | (2                                                                       | )      | (3,061                                                                | )      | (6,127 | ) |
| (Gain) loss on disposal of assets                                                |   | (11                                                                      | )      | 68                                                                    |   | 216 |   |
| Changes in assets and liabilities, net                                           |   | (2,261                                                                   | )      | (1,144                                                                | )      | (4,835 | ) |
|                                                                             |   |                                                                     |   |                                                                  |   |   |   |
| Net cash provided by operating activities                                        |   | 10,566                                                                   |   | 2,898                                                                 |   | 17,963 |   |
|                                                                             |   |                                                                     |   |                                                                  |   |   |   |
| CASH FLOWS USED FOR INVESTING ACTIVITIES:                                        |   |                                                                     |   |                                                                  |   |   |   |
| Acquisition of property and equipment                                            |   | (5,510                                                                   | )      | (2,512                                                                | )      | (9,849 | ) |
| Acquisition of predecessor, net of cash  acquired                                |   | (108,367                                                                 | )      | —                                                                |   | — |   |
|                                                                             |   |                                                                     |   |                                                                  |   |   |   |
| Net cash (used for) investing activities                                         |   | (113,877                                                                 | )      | (2,512                                                                | )      | (9,849 | ) |
|                                                                             |   |                                                                     |   |                                                                  |   |   |   |
| CASH FLOWS USED FOR FINANCING ACTIVITIES:                                        |   |                                                                     |   |                                                                  |   |   |   |
| Proceeds from issuance of debt                                                   |   | 347,533                                                                  |   | —                                                                |   | — |   |
| Debt issuance costs                                                              |   | (13,302                                                                  | )      | —                                                                |   | — |   |
| Net increase (decrease) in revolving loan                                        |   | (8,903                                                                   | )      | 6,426                                                                 |   | 5,096 |   |
| Repayment of debt                                                                |   | (328,767                                                                 | )      | (2,218                                                                | )      | (11,308 | ) |
| Issuance of membership units                                                     |   | 100,900                                                                  |   | —                                                                |   | — |   |
| Distributions to members                                                         |   | —                                                                   |   | (121                                                                  | )      | (3,355 | ) |
| Net cash provided by (used for) financing  activities                            |   | 97,461                                                                   |   | 4,087                                                                 |   | (9,567 | ) |
|                                                                             |   |                                                                     |   |                                                                  |   |   |   |
| Effect of exchange rate changes                                                  |   | 3,368                                                                    |   | (296                                                                  | )      | 1,121 |   |
| Net (decrease) increase in cash                                                  |   | (2,482                                                                   | )      | 4,177                                                                 |   | (332 | ) |
| Cash at beginning of period                                                      |   | 6,830                                                                    |   | 2,653                                                                 |   | 2,139 |   |
| Cash at end of period                                                            |   | $                                                                        | 4,348  |                                                                  | $      | 6,830 |   | $ | 1,807 |   |

 

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

 

3

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**CHAASACQUISITIONS, LLC**

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

**(Dollarsin thousands)**

**(Unaudited)**

 
|                              |   | **Predecessor**            |   |
|-----------------------------------|--------|----------------------------|--------|
|                              |   | **Members’  capital** |   | **Other  comprehensive  loss** |   | **Accumulated  deficit** |   | **Total  members’  equity** |   |
|                              |   |                       |   |   |   |   |   |   |   |
| Balance at December 31, 2002 |   | $                          | 11,465 |   | $ | 85 |   | $ | (17,938 | ) | $ | (6,388 | ) |
| Distributions to members          |   | —                     |   | — |   | (122 | ) | (122 | ) |
| Currency translation adjustment   |   | —                     |   | (424 | ) | — |   | (424 | ) |
| Net (loss)                        |   | —                     |   | — |   | (6,698 | ) | (6,698 | ) |
| Balance at April 14, 2003    |   | $                          | 11,465 |   | $ | (339 | ) | $ | (24,758 | ) | $ | (13,632 | ) |

 
|                                                 |   | **Company**                |    |
|------------------------------------------------------|--------|----------------------------|---------|
|                                                 |   | **Members’  capital** |    | **Other  comprehensive  loss** |   | **Retained  earnings** |   | **Total  members’  equity** |   |
|                                                 |   |                       |    |   |   |   |   |   |   |
| Sale of Membership interests on  April 15, 2003 |   | $                          | 100,900 |   | $ | — |   | $ | — |   | $ | 100,900 |   |
| Currency translation adjustment                      |   | —                     |    | 2,462 |   | — |   | 2,462 |   |
| Net income                                           |   | —                     |    | — |   | 627 |   | 627 |   |
| Balance at September 30, 2003                   |   | $                          | 100,900 |   | $ | 2,462 |   | $ | 627 |   | $ | 103,989 |   |

 

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

 

4

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**CHAASACQUISITIONS, LLC**

**NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**(Dollarsin thousands)**

**(Unaudited)**

 

1.             BASIS OFPRESENTATION

 

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 (the “Company”) which wasalso formed pursuant to the Acquisition.

 

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.  However, it is notpossible at this time to reasonably estimate the separate amounts attributableto identifiable intangible assets or goodwill since the measurement of theseassets requires the expertise of an independent appraiser.  Accordingly, the entire amount of the excessof the purchase consideration has currently been allocated to goodwill, but isexpected to be allocated between goodwill and other identifiable intangibleassets based upon the appraiser’s valuation. The Company has engaged an independent appraiser whose work is ongoing.

 

In the opinion of the Company, the accompanying unaudited consolidatedcondensed financial statements contain all adjustments, which are normal andrecurring in nature, necessary to present fairly its and the Predecessor’sfinancial position as of September 30, 2003 and December 31, 2002 andthe results of its and the Predecessor’s operations for the three month periodended September 30, 2003, the period from April 15, 2003 throughSeptember 30, 2003, the period from January 1, 2003 throughApril 14, 2003 and the three and nine month period endedSeptember 30, 2002.

 

2.                                       INDEBTEDNESS

 

On May 23, 2003, the Company sold $150,000 of its Senior Notes dueJune 15, 2011 (“Senior Notes”). Interest on the Senior Notes accrues at a rate of 10 3⁄4% per anum and ispaid semiannually on June 15 and December 15 each year.  The first interest payment is dueDecember 15, 2003.  The SeniorNotes are unsecured and rank pari passu with existing and future senior debt ofthe Company.  Prior to June 15,2006, the Company, at its option, may redeem up to 35% of the Senior Notes withthe proceeds of from one or more public equity offerings at a price equal to110.75% of the principal amount of the notes being redeemed.  Upon the occurrence of a change in controlof the Company, as defined by the indenture, the Company is required to make anoffer to repurchase the Senior Notes at a price equal to 101% of the principalamount of the Senior Notes.  Theindenture places certain limits on the Company, the most restrictive of whichinclude the restriction on the incurrence of additional indebtedness by theCompany, the payment of dividends on and redemption of capital of the Company,the redemption of  certain subordinatedobligations, investments, sales of assets and stock of certain subsidiaries,transaction with affiliates, consolidations, mergers and transfers of all orsubstantially all of the Company’s assets.

 

In connection with the issuance of the Senior Notes, we entered into aregistration rights agreement, which required the Company to offer to theholders of the original notes the opportunity to exchange the original notesfor replacement notes (“New Senior Notes”) having a like principal amount ofthe original notes and identical in all material respects to the originalnotes, except that the New Senior Notes would not bear legends restricting thetransfer thereof. The Company filed a registration statement on Form S-4 forthe New Senior Notes with the Securities and Exchange Commission (“SEC”) onJune 6, 2003.  The registrationstatement was declared effective by the SEC on October 16, 2003.  The Company launched an exchange offer withrespect to $150,000 of the original notes on October 17, 2003. Theexchange offer will expire at 12:00 midnight EST, on November 17, 2003 andthe Company expects to consummate the exchange offer on November 18, 2003.

 

5

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On April 15, 2003, the Company entered into a new credit facilityconsisting of a revolving credit facility and term loans as follows:  (1) a revolving credit facility comprised of(a) a $29,700 U.S. revolving credit facility and (b) a 9,600 European Eurorevolving credit facility; (2) a term loan A facility comprised of (a) a$29,700 U.S. term loan A and (b) a 9,600 European Euro term loan A; and (3) aterm loan B comprised of (a) a $48,200 U.S. term loan B and (b) a 15,600European Euro term loan B.  The Companyused a portion of the proceeds from the sale of our $150,000 Senior Notesoffering to (i) repay our U.S. term loan A, (ii) repay its U.S. term loan B and(iii) repay a portion of our European term loan B, together with interestaccrued thereon.  In addition, uponconsummation of the offering, its revolving credit facility was increased to a$35,000 U.S. revolving credit facility and a 15,000 million European Eurorevolving credit facility.

 

On April 15, 2003, a convertible senior subordinated bridge notein the principal amount of $55,000 was issued to CHP IV by Valley andSportRack.  The Company used a portionof the proceeds from the sale of its $150,000 Senior Notes offering to fully repaythe bridge note, together with accrued interest thereon.  The interest rate on the bridge note was 12%per annum.

 

On April 15, 2003, subordinated promissory notes in an aggregateprincipal amount of $10,000 were issued to the sellers by Valley and SportRack.  The interest rate on the subordinatedpromissory notes is 12% per annum until maturity, subject to certainexceptions.  Accrued interest is notpayable in cash but is capitalized and added to principal.  The maturity date on the subordinated promissorynotes will be no earlier than 91 days subsequent to the maturity date of our$150,000 Senior Notes, subject to certain exceptions as described in the debtagreements.

 

On May 16, 2003, we redeemed all of our then outstanding 93⁄4 %Senior Subordinated Notes due 2007 at the optional redemption price of 104 7/8%of the principal amount thereof plus accrued interest.  Upon consummation of the acquisition of thePrececessor, we deposited funds in escrow sufficient to effect a covenantdefeasance of the senior subordinated notes and to consummate the redemptionthrough the redemption date.  The amountof the redemption, which includes accrued interest and premiums, was $132,600.

 

3.                                       MEMBERS’EQUITY

 

In connection with the Acquisition, the Company sold 100 of itsmembership units to CHAAS Holdings, LLC for $100,900 in cash.

 

4.                                       COMPREHENSIVEINCOME

 

Comprehensive income (loss) for the Company and the Predecessor is asfollows:

 
|                                            |   | **Company**                                        |   | **Predecessor**                                                          |   |
|-------------------------------------------------|--------|----------------------------------------------------|--------|--------------------------------------------------------------------------|--------|
|                                            |   | **Three  months  ended  September 30,  2003** |   | **Period  from  April 15, 2003  through  September 30,  2003** |   | **Period  from  January 1, 2003  through  April 14,  2003** |   | **Three  months  ended  September 30,  2002** |   | **Nine  months  ended  September 30,  2002** |   |
| Net income (loss)                               |   | $                                                  | 168    |                                                                     | $      | 627 |   | $ | (6,698 | ) | $ | 767 |   | $ | (10,658 | ) |
| Change in the cumulative translation adjustment |   | 3,373                                              |   | 2,462                                                                    |   | (424 | ) | 753 |   | 414 |   |
| Comprehensive income (loss)                     |   | $                                                  | 3,541  |                                                                     | $      | 3,089 |   | $ | (7,122 | ) | $ | 1,520 |   | $ | (10,244 | ) |

 

5.             CUMULATIVEEFFECT OF ACCOUNTING CHANGE (PREDECESSOR)

 

OnJanuary 1, 2002, the Predecessor adopted the accounting standards setforth in Statement of Financial Accounting Standards No. 142, “Goodwill andother Intangible Assets” (SFAS 142) and Statement of Financial AccountingStandards No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” (SFAS 144).  SFAS 142 changedthe methodology for assessing goodwill impairments.  The initial application of this statement resulted in animpairment of goodwill of $29,207 to write down goodwill related to the ValleyIndustries Acquisition.  The impairmentwas due solely to the change in accounting standards and was reported as acumulative effect of

 

6

----

 

accountingchange during the first quarter of 2002. Under the new standard, impairment is determined by comparing thecarrying values of reporting units to the corresponding fair values, which wasdetermined based on the discounted estimated future cash flows of the reportingunits.  As the impairment related toValley Industries, LLC for which taxable income accrues to the individualmembers, no tax effect was recorded for this charge.  Additionally, under the new standard, goodwill is no longeramortized but is to be tested periodically for impairment. The adoption of SFAS144 did not have a material impact on the Company’s financial position, resultsof operations or cash flows

 

Otherintangible assets at September 30, 2003 and December 31, 2002 consistof deferred financing costs, a defined benefit pension asset and patents andlicenses.

 

6.                                       CONDENSEDCONSOLIDATING INFORMATION

 

On May 23, 2003, the Company’s wholly-owned subsidiaries, AdvancedAccessory Systems, LLC and AAS Capital Corporation, issued and sold the SeniorNotes.  The Senior Notes are guaranteedon a full, unconditional and joint and several basis by the Company and all ofthe Company’s direct and indirect wholly-owned domestic subsidiaries.  The following condensed consolidatingfinancial information presents the financial position, results of operationsand cash flows of (i) the Company (the “Parent”), as if it accounted for itssubsidiaries on the equity method, (ii) Advanced Accessory Systems, LLC and AASCapital Corporation as issuers; (ii) guarantor subsidiaries which are domestic,wholly-owned subsidiaries and include SportRack LLC, Valley Industries, LLC,AASA Holdings, LLC and ValTek, LLC; and (iii) the non-guarantor subsidiarieswhich are foreign, wholly-owned subsidiaries and include Brink InternationalB.V. and its subsidiaries, SportRack Accessories, Inc. and its subsidiary, andSportRack Automotive GmbH and its subsidiaries. The operating results of theguarantor and non-guarantor subsidiaries have been allocated a portion ofcertain corporate overhead costs on a basis consistent with each subsidiary’srelative business activity, including interest on intercompany debtbalances.  Since its formation inSeptember 1997, AAS Capital Corporation has had no operations and has noassets or liabilities at September 30, 2003.

 

7

----

 

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**September 30,2003**

 
|                                                    |   | **Company**                        |    |
|---------------------------------------------------------|--------|------------------------------------|---------|
|                                                    |   | **Parent**                         |    | **Issuers** |   | **Guarantor  subsidiaries** |   | **Non-guarantor  subsidiaries** |   | **Eliminations/  adjustments** |   | **Consolidated** |   |
|                                                    |   | **(Dollar  amounts in thousands)** |    |
| **ASSETS**                                              |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Current assets                                          |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Cash                                                    |   | $                                  | 16      |   | $ | 873 |   | $ | 878 |   | $ | 2,581 |   | $ | — |   | $ | 4,348 |   |
| Accounts receivable                                     |   | —                             |    | — |   | 40,459 |   | 25,266 |   | — |   | 65,725 |   |
| Inventories                                             |   | —                             |    | — |   | 16,669 |   | 27,938 |   | — |   | 44,607 |   |
| Deferred income taxes and other current  assets         |   | —                             |    | 3,845 |   | 10,786 |   | 4,194 |   | — |   | 18,825 |   |
| Total current assets                                    |   | 16                                 |    | 4,718 |   | 68,792 |   | 59,979 |   | — |   | 133,505 |   |
| Property and equipment, net                             |   | —                             |    | — |   | 33,221 |   | 28,663 |   | — |   | 61,884 |   |
| Goodwill                                                |   | —                             |    | 54,284 |   | 52,835 |   | 58,098 |   | — |   | 165,217 |   |
| Other intangible assets, net                            |   | —                             |    | 6,595 |   | 312 |   | 312 |   | — |   | 7,219 |   |
| Deferred income taxes and other noncurrent  assets      |   | —                             |    | — |   | 723 |   | 4,068 |   | — |   | 4,791 |   |
| Investment in  subsidiaries                             |   | 115,203                            |    | 82,605 |   | 12,212 |   | 222 |   | (210,242 | ) | — |   |
| Intercompany notes receivable                           |   | —                             |    | 86,031 |   | 1,682 |   | — |   | (87,713 | ) | — |   |
| Total assets                                            |   | $                                  | 115,219 |   | $ | 234,233 |   | $ | 169,777 |   | $ | 151,342 |   | $ | (297,955 | ) | $ | 372,616 |   |
|                                                    |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND MEMBERS’  EQUITY**          |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities                                    |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Current  maturities of long-term debt                   |   | $                                  | —  |   | $ | — |   | $ | 100 |   | $ | 2,097 |   | $ | — |   | $ | 2,197 |   |
| Accounts payable                                        |   | —                             |    | — |   | 24,548 |   | 11,502 |   | — |   | 36,050 |   |
| Accrued liabilities and  deferred income taxes          |   | 500                                |    | 13,077 |   | 11,928 |   | 16,821 |   | — |   | 42,326 |   |
| Total current liabilities                               |   | 500                                |    | 13,077 |   | 36,576 |   | 30,420 |   | — |   | 80,573 |   |
| Deferred income taxes and other noncurrent  liabilities |   | —                             |    | — |   | 149 |   | 4,435 |   | — |   | 4,584 |   |
| Long-term debt, less currentmaturities                  |   | —                             |    | 150,000 |   | 16,634 |   | 16,836 |   | — |   | 183,470 |   |
| Intercompany  debt                                      |   | 10,730                             |    | — |   | — |   | 76,983 |   | (87,713 | ) | — |   |
| Members’ equity                                    |   | 103,989                            |    | 71,156 |   | 116,418 |   | 22,668 |   | (210,242 | ) | 103,989 |   |
| Total liabilities and members’ equity              |   | $                                  | 115,219 |   | $ | 234,233 |   | $ | 169,777 |   | $ | 151,342 |   | $ | (297,955 | ) | $ | 372,616 |   |

 

8

----

 

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**December 31, 2002**

 
|                                                    |   | **Predecessor** |    |
|---------------------------------------------------------|--------|-----------------|---------|
|                                                    |   | **Issuers**     |    | **Guarantor  subsidiaries** |   | **Non-guarantor    subsidiaries** |   | **Eliminations/    adjustments** |   | **Consolidated** |   |
| **ASSETS**                                              |   |            |    |   |   |   |   |   |   |   |   |
| Current assets                                          |   |            |    |   |   |   |   |   |   |   |   |
| Cash                                                    |   | $               | 440     |   | $ | 77 |   | $ | 2,136 |   | $ | — |   | $ | 2,653 |   |
| Accounts receivable                                     |   | —          |    | 31,920 |   | 19,606 |   | — |   | 51,526 |   |
| Inventories                                             |   | —          |    | 16,810 |   | 23,872 |   | — |   | 40,682 |   |
| Deferred income taxes and other current  assets         |   | 80              |    | 6,836 |   | 6,563 |   | — |   | 13,479 |   |
| Total current assets                                    |   | 520             |    | 55,643 |   | 52,177 |   | — |   | 108,340 |   |
| Property and equipment, net                             |   | —          |    | 33,433 |   | 27,139 |   | — |   | 60,572 |   |
| Goodwill                                                |   | 985             |    | 24,729 |   | 21,594 |   | — |   | 47,308 |   |
| Other intangible assets, net                            |   | 2,971           |    | 371 |   | 293 |   | — |   | 3,635 |   |
| Deferred income taxes and other noncurrent  assets      |   | 93              |    | 794 |   | 3,413 |   | — |   | 4,300 |   |
| Investment in subsidiaries                              |   | 78,160          |    | 9,955 |   | — |   | (88,115 | ) | — |   |
| Intercompany notes receivable                           |   | 59,487          |    | 3,591 |   | — |   | (63,078 | ) | — |   |
| Total assets                                            |   | $               | 142,216 |   | $ | 128,516 |   | $ | 104,616 |   | $ | (151,193 | ) | $ | 224,155 |   |
|                                                    |   |            |    |   |   |   |   |   |   |   |   |
| **LIABILITIES AND MEMBERS’ EQUITY**                |   |            |    |   |   |   |   |   |   |   |   |
| Current liabilities                                     |   |            |    |   |   |   |   |   |   |   |   |
| Current maturities of long-term debt                    |   | $               | 8,574   |   | $ | 54 |   | $ | 9,587 |   | $ | — |   | $ | 18,215 |   |
| Accounts payable                                        |   | —          |    | 22,346 |   | 10,813 |   | — |   | 33,159 |   |
| Accrued liabilities and  deferred income taxes          |   | 8,060           |    | 7,846 |   | 14,856 |   | — |   | 30,762 |   |
| Mandatorily redeemable warrants                         |   | 5,250           |    | — |   | — |   | — |   | 5,250 |   |
| Total current liabilities                               |   | 21,884          |    | 30,246 |   | 35,256 |   | — |   | 87,386 |   |
| Deferred income taxes and other noncurrent  liabilities |   | 2,003           |    | 1,391 |   | 3,031 |   | — |   | 6,425 |   |
| Long-term debt, less current maturities                 |   | 124,717         |    | 252 |   | 11,763 |   | — |   | 136,732 |   |
| Intercompany debt                                       |   | —          |    | — |   | 63,078 |   | (63,078 | ) | — |   |
| Members’ equity (deficit)                          |   | (6,388          | )       | 96,627 |   | (8,512 | ) | (88,115 | ) | (6,388 | ) |
| Total liabilities and members’ equity              |   | $               | 142,216 |   | $ | 128,516 |   | $ | 104,616 |   | $ | (151,193 | ) | $ | 224,155 |   |

 

9

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**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**Forthe three months ended September 30, 2003**

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

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**Forthe period from April 15, 2003 through September 30, 2003**

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

 

10

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**Forthe Period from January 1, 2003 through April 14, 2003**

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

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**Forthe three months ended September 30, 2002**

 
|                                                      |   | **Predecessor**                    |   |
|-----------------------------------------------------------|--------|------------------------------------|--------|
|                                                      |   | **Issuers**                        |   | **Guarantor  subsidiaries** |   | **Non-guarantor  subsidiaries** |   | **Eliminations/  adjustments** |   | **Consolidated** |   |
|                                                      |   | **(Dollar  amounts in thousands)** |   |
| Net sales                                                 |   | $                                  | — |   | $ | 56,566 |   | $ | 23,522 |   | $ | — |   | $ | 80,088 |   |
| Cost of sales                                             |   | —                             |   | 44,419 |   | 16,724 |   | — |   | 61,143 |   |
| Gross profit                                              |   | —                             |   | 12,147 |   | 6,798 |   | — |   | 18,945 |   |
| Selling, administrative and product  development expenses |   | (18                                | )      | 6,082 |   | 5,427 |   | — |   | 11,491 |   |
| Amortization of intangible assets                         |   | —                             |   | 3 |   | 3 |   | — |   | 6 |   |
| Operating income                                          |   | 18                                 |   | 6,062 |   | 1,368 |   | — |   | 7,448 |   |
| Interest expense                                          |   | 2,859                              |   | 64 |   | 1,452 |   | — |   | 4,375 |   |
| Equity in income of  subsidiaries                         |   | 3,608                              |   | — |   | — |   | (3,608 | ) | — |   |
| Foreign currency loss,  net                               |   | —                             |   | (13 | ) | (1,154 | ) | — |   | (1,167 | ) |
| Other income (expense)                                    |   | —                             |   | (36 | ) | 37 |   | — |   | 1 |   |
| Income (loss) before income taxes                         |   | 767                                |   | 5,949 |   | (1,201 | ) | (3,608 | ) | 1,907 |   |
| Provision for income taxes                                |   | —                             |   | — |   | 1,140 |   | — |   | 1,140 |   |
| Net income (loss)                                         |   | $                                  | 767    |   | $ | 5,949 |   | $ | (2,341 | ) | $ | (3,608 | ) | $ | 767 |   |

 

11

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**Forthe nine months ended September 30, 2002**

 
|                                                                          |   | **Predecessor**                    |    |
|-------------------------------------------------------------------------------|--------|------------------------------------|---------|
|                                                                          |   | **Issuers**                        |    | **Guarantor  subsidiaries** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations/  adjustments** |   | **Consolidated** |   |
|                                                                          |   | **(Dollar  amounts in thousands)** |    |
| Net sales                                                                     |   | $                                  | —  |   | $ | 179,260 |   | $ | 75,019 |   | $ | — |   | $ | 254,279 |   |
| Cost of sales                                                                 |   | —                             |    | 138,629 |   | 52,375 |   | — |   | 191,004 |   |
| Gross profit                                                                  |   | —                             |    | 40,631 |   | 22,644 |   | — |   | 63,275 |   |
| Selling, administrative and product  development expenses                     |   | (23                                | )       | 17,938 |   | 16,117 |   | — |   | 34,032 |   |
| Amortization of intangible assets                                             |   | —                             |    | 9 |   | 10 |   | — |   | 19 |   |
| Operating income                                                              |   | 23                                 |    | 22,684 |   | 6,517 |   | — |   | 29,224 |   |
| Interest expense                                                              |   | 8,298                              |    | 411 |   | 3,523 |   | — |   | 12,232 |   |
| Equity in loss of  subsidiaries                                               |   | 26,824                             |    | — |   | — |   | (26,824 | ) | — |   |
| Foreign currency gain  (loss), net                                            |   | —                             |    | (13 | ) | 5,760 |   | — |   | 5,747 |   |
| Other income (expense)                                                        |   | —                             |    | (161 | ) | 46 |   | — |   | (115 | ) |
| Income (loss) before cumulative effect of  accounting change and income taxes |   | 18,549                             |    | 22,099 |   | 8,800 |   | (26,824 | ) | 22,624 |   |
| Cumulative effect of accounting change                                        |   | (29,207                            | )       | (29,207 | ) | — |   | 29,207 |   | (29,207 | ) |
| Income (loss) before income taxes                                             |   | (10,658                            | )       | (7,108 | ) | 8,800 |   | 2,383 |   | (6,583 | ) |
| Provision for income taxes                                                    |   | —                             |    | — |   | 4,075 |   | — |   | 4,075 |   |
| Net income (loss)                                                             |   | $                                  | (10,658 | ) | $ | (7,108 | ) | $ | 4,725 |   | $ | 2,383 |   | $ | (10,658 | ) |

 

12

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**Forthe period from April 15, 2003 through September 30, 2003**

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

 

13

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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**Forthe period from January 1, 2003 through April 14, 2003**

 
|                                                  |   | **Predecessor**                    |       |
|-------------------------------------------------------|--------|------------------------------------|------------|
|                                                  |   | **Issuers**                        |       | **Guarantor  subsidiaries** |   | **Non-guarantor  subsidiaries** |   | **Eliminations/  adjustments** |   | **Consolidated** |   |
|                                                  |   | **(Dollar  amounts in thousands)** | ** ** |
| Net cash provided by (used for) operating  activities |   | $                                  | (6,163     | ) | $ | 5,750 |   | $ | 3,311 |   | $ | — |   | $ | 2,898 |   |
| Cash flows from investing activities:                 |   |                               |       |   |   |   |   |   |   |   |   |
| Acquisition of property and equipment                 |   | —                             |       | (1,222 | ) | (1,290 | ) | — |   | (2,512 | ) |
| Net cash used for investing activities                |   | —                             |       | (1,222 | ) | (1,290 | ) | — |   | (2,512 | ) |
| Cash flows from financing activities:                 |   |                               |       |   |   |   |   |   |   |   |   |
| Change in intercompany debt                           |   | 3,474                              |       | (4,495 | ) | 1,021 |   | — |   | — |   |
| Net increase in revolving loan                        |   | 6,426                              |       | — |   | — |   | — |   | 6,426 |   |
| Repayment of debt                                     |   | —                             |       | (27 | ) | (2,191 | ) | — |   | (2,218 | ) |
| Distributions to members                              |   | (121                               | )          | — |   | — |   | — |   | (121 | ) |
| Net cash provided by (used for) financing  activities |   | 9,779                              |       | (4,522 | ) | (1,170 | ) | — |   | 4,087 |   |
| Effect of exchange rate changes                       |   | —                             |       | — |   | (296 | ) | — |   | (296 | ) |
| Net increase 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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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**Forthe nine months ended September 30, 2002**

 
|                                                  |   | **Predecessor**                    |   |
|-------------------------------------------------------|--------|------------------------------------|--------|
|                                                  |   | **Issuers**                        |   | **Guarantor  subsidiaries** |   | **Non-guarantor  subsidiaries** |   | **Eliminations/  adjustments** |   | **Consolidated** |   |
|                                                  |   | **(Dollar  amounts in thousands)** |   | ** ** |
| Net cash provided by (used for) operating  activities |   | $                                  | (4,434 | ) | $ | 19,020 |   | $ | 3,377 |   | $ | — |   | $ | 17,963 |   |
| Cash flows from investing activities:                 |   |                               |   |   |   |   |   |   |   |   |   |
| Acquisition of property and equipment                 |   | —                             |   | (2,611 | ) | (7,238 | ) | — |   | (9,849 | ) |
| Net cash used for investing activities                |   | —                             |   | (2,611 | ) | (7,238 | ) | — |   | (9,849 | ) |
| Cash flows from financing activities:                 |   |                               |   |   |   |   |   |   |   |   |   |
| Change in intercompany debt                           |   | 2,745                              |   | (15,211 | ) | 12,466 |   | — |   | — |   |
| Net increase in revolving loan                        |   | 5,096                              |   | — |   | — |   | — |   | 5,096 |   |
| Repayment of debt                                     |   | —                             |   | (1,076 | ) | (10,232 | ) | — |   | (11,308 | ) |
| Distributions to members                              |   | (3,355                             | )      | — |   | — |   | — |   | (3,355 | ) |
| Net cash provided by (used for) financing  activities |   | 4,486                              |   | (16,287 | ) | 2,234 |   | — |   | (9,567 | ) |
| Effect of exchange rate changes                       |   | —                             |   | — |   | 1,121 |   | — |   | 1,121 |   |
| Net increase (decrease) in cash                       |   | 52                                 |   | 122 |   | (506 | ) | — |   | (332 | ) |
| Cash at beginning of period                           |   | 334                                |   | 2 |   | 1,803 |   | — |   | 2,139 |   |
| Cash at end of period                                 |   | $                                  | 386    |   | $ | 124 |   | $ | 1,297 |   | $ | — |   | $ | 1,087 |   |

 

15

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**CHAAS ACQUISITIONS, LLC**

** **

**Item 2. ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

The following discussion of our results ofoperations and financial condition should be read in conjunction with ourfinancial statements and notes thereto included elsewhere in this Form10-Q.  This Form 10-Q containsforward-looking statements.  Discussionscontaining forward-looking statements may be found in the material set forthabove, in the material set forth below, as well as in this Form 10-Qgenerally.  These may include statementsprojecting, forecasting or estimating our performance and industry trends.  General risks that may impact the achievementof such forecasts include, but are not limited to: compliance with new laws andregulations, general economic conditions in the markets in which we operate,fluctuation in demand for our products and in the production of vehicles forwhich we are a supplier, significant raw material price fluctuations, labordisputes with our employees or that of our significant customers or suppliers,changes in consumer preferences, dependence on significant automotivecustomers, the level of competition in the automotive supply industry, pricingpressure from automotive customers, our substantial leverage, limitationsimposed by our debt facilities, changes in the popularity of particular vehiclemodels or towing and rack systems, the loss of programs on particular vehiclemodels, risks associated with conducting business in foreign countries andother business factors.  Any suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties.  Actual eventsor results may differ materially from those discussed in the forward-lookingstatements.  All of theseforward-looking statements are based on estimates and assumptions made by ourmanagement which, although believed to be reasonable, are inherentlyuncertain.  We do not intend to updatethese forward-looking statements.

 

### **OVERVIEW**

### ** **

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

 

### **Company Background**

### ** **

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 by Castle Harlan Partners IV,L.P. in connection with the Acquisition and is the direct parent of the CHAASAcquisitions, LLC.

 

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

 

**RESULTSOF OPERATIONS**

 

**ThreeMonths Ended September 30, 2003 Compared to the Three Months EndedSeptember 30, 2002.**

 

*Net sales.* Net sales for the third quarter of 2003 were $86.8 million, representingan increase of  $6.7 million, or 8.3%,compared with net sales of $80.1 million for the third quarter of 2002.  The increase for the period of $6.7 millionincludes approximately $3.0 million due to the increase of the average exchangerates between the U.S. dollar and the currencies used by our foreignsubsidiaries, primarily in Europe.  Thebalance of the increase in net sales reflects an increase in sales to our OEMcustomers of approximately $3.9 million offset by a decrease of approximately$200,000 in sales to our automotive aftermarket customers.  Sales to our SportRack and Brink OEMcustomers increased by $4.3 million and $2.4 million, respectively, as a resultof new program launches, while sales to Valley OEM customers decreased $2.8million.

 

*Gross profit.* Gross profit for the third quarter of 2003 was $21.0 million,representing an increase of $2.1 million, or 11.0%, compared with gross profitof $18.9 million for the third quarter of 2002.  The increased gross profit amount resulted from our higher netsales and a small increase in the gross profit percentage.  Gross profit as a percentage of net saleswas 24.2% for the third quarter of 2003 compared to 23.7% for the third quarterof 2002. The increased gross margin percentage reflects the mix of productssold in the third quarter of 2003 including a higher percentage of our netsales being made by Brink, which has a higher gross margin percentage than wedo as a whole.

 

*Selling, administrative and product development expenses.*  Selling, administrative and product developmentexpenses for the third quarter of 2003 were $13.9 million, representing anincrease of $2.4 million, or 20.6%, compared with selling, administrative andproduct development expenses of $11.5 million for the third quarter of 2002.This increase is primarily due to our higher sales, continuing productdevelopment costs for SportRack which is working with its OEM customers onseveral new programs that are expected to be launched in 2004 and beyond, andthe inclusion of management fees to Castle Harlan of $746,000 in the thirdquarter of 2003.

 

16

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*Amortization of intangible assets*.  Amortization of intangible assets for thethird quarter of 2003 was $208,000 compared to $6,000 for the third quarter of2002, the increase primarily reflecting increased amortization related tocustomer owned tooling.  We expect ouramortization expense to increase in future periods after we receive theindependent appraiser’s report and allocate separate amounts attributable toidentifiable intangible assets which may be amortized, or goodwill which willnot be amortized.  At September 30,2003, the entire excess purchase consideration is included in goodwill and hasnot been amortized.

 

*Operating income. *Ouroperating income for the third quarter of 2003 was $7.0 million, representing adecrease of $498,000, or 0.6%, compared to our operating income of $7.4 millionfor the third quarter of 2003. This decrease results from the increase inselling, administrative and product development expenses, offset partially bythe increase in gross profit.

 

*Interest expense.*  Interest expense for the third quarter of 2003 was $5.6 million,representing an increase of  $1.2million, or 27.8%, compared to interest expense of $4.4 million for the thirdquarter of 2002.  The increase is due tothe higher level of debt outstanding during the third quarter of 2003 resultingfrom our purchase of the Predecessor on April 15, 2003.

 

*Loss resulting from debt extinguishment.*  On May 23, 2003 we issued $150 millionof our Senior Notes due 2011 which proceeds were used to repay a seniorsubordinated bridge note and a portion of our credit facility (see — Debt andCredit Sources below).

 

*Foreign currency gain (loss).*  We had no foreign currency gain or lossduring the third quarter of 2003. During the third quarter of 2002 our Predecessor had a foreign currencyloss of $1.2 million.   ThePredecessor’s foreign currency gains and losses are primarily related to Brink,which had indebtedness denominated in U.S. Dollars, including intercompanydebt.  During the third quarter of 2002,the U.S. Dollar weakened in relation to the European Euro, the functionalcurrency of Brink.  On April 15,2003 we refinanced our debt and repaid all the U.S. dollar denominated debt forBrink, except for intercompany indebtedness. The intercompany indebtedness was significantly reduced and is deemed tobe permanently invested, and further changes in the intercompany balancescaused by foreign currency fluctuations will be recorded to the currencytranslation adjustment account and included in other comprehensive income.

 

*Provision for income taxes.*  Prior to April 2003 our Predecessor andcertain of its domestic subsidiaries had elected to be taxed as limitedliability companies for federal income tax purposes.  As a result of this election, the Predecessor’s domestic taxableincome accrued to the individual members. Certain of the Company’s domestic subsidiaries and foreign subsidiariesare subject to income taxes in their 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 third quarter of 2003 we hadincome before income taxes of $1.1 million and recorded an income tax provisionof $927,000.  During the third quarterof 2002, the Predecessor had a loss before income taxes for its taxablesubsidiaries totaling $1.2 million and recorded a provision for income taxes of$1.1 million, including a $735,000 provision related to an ongoing income taxaudit in Italy covering the periods 1998 to 2001.  The effective tax rate differs from the U.S. federal income taxrate primarily due to changes in valuation allowances on the deferred taxassets of SportRack Accessories and differences in the tax rates of foreigncountries.

 

*Net income (loss)*.  We had net income of $168,000 for the third quarter of 2003 andour Predecessor had net income of $767,000 for the third quarter of 2002.  The decrease in the third quarter of 2003reflects a lesser operating income together with increased interest expense,offset by a reduced foreign currency loss and a lower provision for incometaxes.

 

**Periodfrom April 15, 2003 through September 30, 2003 for the Company andthe Period from January 1, 2003 through April 14, 2003 for thePredecessor compared to the Nine Months Ended September 30, 2002 for thePredecessor.**

 

*Net sales.* Net sales for the period from April 15, 2003 throughSeptember 30, 2003 were $171.0 million and for the period fromJanuary 1, 2003 through April 14, 2003 were $101.9 million.  During the first nine months of 2002, netsales were $254.3 million.  Thisincrease for the period of $18.6 million, or 7.3%, is primarily due to a $13.5million increase resulting from an increase in the average exchange rates forthe period betweeen the U.S. dollar and the currencies used by our foreignsubsidiaries, primarily in Europe. Additionally, sales to the automotive aftermarket increased byapproximately $3.5 million, primarily at Valley.  Sales to our OEM customers increased by $1.6 representingincreases at SportRack and Brink of $10.8 million and $4.0 million,respectively, offset by a decrease in Valley OEM sales of $13.2 million.

 

*Gross profit.* Gross profit for the period from April 15, 2003 throughSeptember 30, 2003 was $42.2 million and for the period fromJanuary 1, 2003 through April 14, 2003 was $25.3 million. During thefirst nine months of 2002, gross profit was $63.3 million.  This increase in 2003 of $4.2 millionresulted from the increase in sales partially offset by a small decrease in thegross margin percentage.  Gross profitas a percentage of net sales was 24.7% for the period from April 15, 2003through September 30, 2003 and was 24.9% for the period fromJanuary 1, 2003 through April 14, 2003.  During the first nine months of 2002, the gross

 

17

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margin percent was 24.9%.  The decrease in the gross margin percentagewas primarily attributable to a higher cost basis for inventory that wasacquired on April 15, 2003 from our Predecessor and sold during the periodtotaling $1.2 million and a decrease in the gross margin percentage caused by achange in the mix of products sold being weighted more towards low marginproducts than in the prior year.  Thesedecreases were partially offset by higher production efficiency for Brink,which restructured its manufacturing facilities in The Netherlands during thefirst quarter of 2002 and due to a higher percentage of our aggregate net salesby Brink, which has a higher gross margin percentage than we do as a whole.

 

*Selling, administrative and product development expenses.*  Selling, administrative and productdevelopment expenses for the period from April 15, 2003 throughSeptember 30, 2003 were $23.3 million and for the period fromJanuary 1, 2003 through April 14, 2003 were $14.9 million. Selling,administrative and product development expenses for the first nine months of2002 were $34.0 million.  The increasein 2003 of $4.1 million, or 12.1%, is primarily due to the higher sales,increased product development expenses, and the inclusion of management fees toCastle Harlan from April 15, 2003 of $1.4 million.

 

*Stock Option Compensation.*  On April 14, 2003 holders of alloutstanding membership units and warrants exercised their options to purchasemembership units of Advanced Accessory Systems, LLC prior to sale of all theequity interests of Advanced Accessory Systems, LLC.  In connection with this transaction our Predecessor recordedstock option compensation in the period from January 1, 2003 throughApril 14, 2003 of $10.1 million which was equal to the fair market valueof the underlying units less the related exercise price, previously recognizedcompensation expense and the recorded value of the warrants.

 

*Transaction expenses.*  During the period from January 1, 2003thorough April 14, 2003, our Predecessor incurred $3.8 million in expensesrelated to our Acquisition of the Predecessor including legal, accounting andother advisor fees.

 

*Amortization of intangible assets*.  Amortization of intangible assets for theperiod from April 15, 2003 through September 30, 2003 was $208,000and was $11,000 for the period from January 1, 2003 through April 14,2003.  During the first nine months of2002 our Predecessor had $19,000 of amortization.  The increase primarily reflects more amortization related to customerowned tooling in 2003.  We expect ouramortization expense to increase in future periods after we receive theindependent appraiser’s report and allocate separate amounts attributable toidentifiable intangible assets or goodwill. At September 30, 2003, the entire excess purchase consideration isincluded in goodwill and has not been amortized.

 

*Operating income (loss). *Wehad operating income for the period from April 15, 2003 throughSeptember 30, 2003 of $18.7 million and our Predecessor had an operatingloss of $3.5 million for the period from January 1, 2003 throughApril 14, 2003.  During the firstnine months of 2002 our Predecessor had operating income of $29.2 million.  The decrease in 2003 of $14.0 million isprimarily attributable to expenses recorded in 2003 for stock optioncompensation, the transaction expenses, and the increase in selling,administrative and product development expenses, offset partially by theincrease in gross profit.

 

*Interest expense.*  Interest expense for the period from April 15, 2003 throughSeptember 30, 2003 was $9.1 million and was $4.8 million for the periodfrom January 1, 2003 through April 14, 2003.  Interest expense for the first nine monthsof 2002 was $12.2 million. This increase of $1.6 million was primarily due tothe higher level of debt outstanding during the period from April 15, 2003through September 30, 2003 resulting from our purchase of the Predecessoron April 15, 2003.

 

*Loss resulting from debt extinguishment.*  On May 23, 2003 we issued $150 millionof our Senior Notes due 2011 which proceeds were used to repay a senior subordinatedbridge note and a portion of our credit facility (see — Debt and Credit Sourcesbelow).

 

*Foreign currency gain (loss). *Foreigncurrency gain in the period from April 15, 2003 through September 30,2003 was $2,000 and was $3.2 million for the period from January 1, 2003through April 14, 2003.  During thefirst nine months of 2002 our Predecessor had a foreign currency gain of $5.7million.   Our Predecessor’s foreigncurrency gains and losses were primarily related to Brink, which hasindebtedness denominated in U.S. Dollars, including intercompany debt.  During the first nine months of 2002, theU.S. Dollar weakened significantly in relation to the European Euro, thefunctional currency of Brink.  OnApril 15, 2003 we refinanced our debt and repaid all the U.S. dollardenominated debt for Brink, except for intercompany indebtedness.  The intercompany indebtedness wassignificantly reduced and is deemed to be permanently invested, and furtherchanges in the intercompany balances caused by foreign currency fluctuationswill be recorded to the currency translation adjustment account and included inother comprehensive income.

 

*Provision for income taxes.*  Prior to April 2003 our Predecessor andcertain of its domestic subsidiaries had elected to be taxed as limitedliability companies for federal income tax purposes.  As a result of this election, our Predecessor’s domestic taxableincome accrued to the individual members. Certain of the Company’s domestic subsidiaries and foreign subsidiariesare subject to income taxes in their 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 September 30, 2003 we had income before income taxes of $3.4million and an income tax provision of $2.8 million.  During

 

18

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the period from January 1,2003 through April 14, 2003 our Predecessor had a income before incometaxes for its taxable subsidiaries of $5.0 million and a income tax provisionof $1.6 million.  During the first ninemonths of 2002, our Predecessor had income before income taxes for its taxablesubsidiaries totaling $8.8 million and recorded a provision for income taxes of$4.1 million, including a $735,000 provision related to an ongoing income taxaudit in Italy covering the periods 1998 to 2001.  The effective tax rate differs from the U.S. federal income taxrate primarily due to changes in valuation allowances on the deferred taxassets of SportRack Accessories and differences in the tax rates of foreigncountries.

 

*Cumulative effect of accounting change*. OnJanuary 1, 2002, the Predecessor adopted the accounting standards setforth in Statement of Financial Accounting Standards No. 142, “Goodwill andOther Intangible Assets: (SFAS 142). See “New Accounting Pronouncements”. As a result of this accounting change, the Predecessor recorded a losstotaling $29.2 million to write down goodwill recorded in connection with theValley Industries Acquisition.

 

*Net income (loss)*.  We had net income for the period from April 15, 2003 throughSeptember 30, 2003 of $627,000 and our Predecessor had a net loss of $6.7million for the period from January 1, 2003 through April 14,2003.  Our Predecessor net loss for thefirst nine months of 2002 was $10.7 million. The higher net loss in 2002 reflects the cumulative effect of accountingchange recorded in 2002 partially offset by a decrease in operating income, theincrease in interest expense, the stock option compensation, the transactionsexpenses and the loss resulting from debt extinguishment in 2003.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

Our principal liquidity requirements are to service our debt and meetour working capital and capital expenditure needs.  Our indebtedness at September 30, 2003 was $185.7 millionincluding current maturities of $2.2 million. We expect to be able to meet our liquidity requirements for the foreseeablefuture through cash provided by operations and through borrowings availableunder our revolving credit facilities.

 

# ***Working Capital andCash Flows***

# * *

Working capital and key elements of the consolidated statement of cashflows are:

 
|             |   | **Company**                    |   | **Predecessor**               |   |
|------------------|--------|--------------------------------|--------|-------------------------------|--------|
|             |   | **September 30,****2003** |   | **December 31,****2002** |   |
|             |   | **(in  thousands)**            |   | **(in  thousands)**           |   |
| Working  Capital |   | $                              | 52,932 |                          | $      | 20,954 |   |
|                  |        |                                |        |                               |        |  |  |

 
|                                                    |   | **Company**                                                             |       | **Predecessor**                                                       | ** ** |
|---------------------------------------------------------|--------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
|                                                    |   | **Period  from  April 15,2003  Through  September 30,  2003** | ** ** | **Period  from  January 1, 2003  through  April 14,  2003** | ** ** | **Nine  months  Ended  September 30,  2002** | ** ** |
|                                                    |   | **(in  thousands)**                                                     |       | **(in  thousands)**                                                   | ** ** |
| Cash flows  provided by operating activities            |   | $                                                                       | 10,566     |                                                                  | $          | 2,898 |   | $ | 17,963 |   |
|                                                    |   |                                                                    |       |                                                                  |       |   |   |
| Cash flows  (used for) investing activities             |   | $                                                                       | (113,877   | )                                                                     | $          | (2,512 | ) | $ | (9,849 | ) |
|                                                    |   |                                                                    |       |                                                                  |       |   |   |
| Cash flows  provided by (used for) financing activities |   | $                                                                       | 97,461     |                                                                  | $          | 4,087 |   | $ | (9,567 | ) |

 

*Working capital*

 

Working capital increased by $32.0 million to $52.9 million atSeptember 30, 2003 from $21.0 million at December 31, 2002 dueprimarily to a decrease in the current maturities of long-term debt of $16.0million, the elimination of mandatorily redeemable warrants of $5.3 million, anincrease in accounts receivable of $13.0 million, an increase of $3.8 millionin other current assets, an increase of $2.8 million in inventories, anincrease in cash of $1.7 million, an increase in deferred tax assets, net of adecrease in current deferred tax liabilities of $27,000, and the effects of anincreased exchange rate between the U.S. Dollar and the European Euro as ofSeptember 30, 2003 as compared with that as of December 31, 2002totaling $5.2 million.  Partiallyoffsetting these

 

19

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increases was a reduction inworking capital resulting from an increase of $4.9 million in accounts payableand an increase in accrued liabilities of $9.6 million.

 

The increase in accounts receivable was attributable the timing ofpayments from OEM customers and to increased sales levels in the third quarterof 2003 as compared with the fourth quarter of 2001.  Differences in sales levels between the two quarters are partlydue to seasonal cycles and increased sales to automotive OEMs.  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, 2002.  The increase in accrued expenses isprimarily due to an increase in accrued interest on our $150 million of SeniorNotes.

 

*Operating Activities*

 

Our operations provided $10.6 million in cash for the period fromApril 15, 2003 through September 30, 2003 and our Predecessor’soperations provided $2.9 million in cash for the period from January 1,2003 through April 14, 2003. During the first nine months of 2002 our Predecessor’s operationsprovided $18.0 million in cash.  Cashflow for the first nine months of 2003 decreased primarily due to an increasein working capital during the first nine months of 2003 which was greater thanthe increase in working capital during the first nine months of 2002.  In addition operating income during thefirst nine months of 2003 was lower than the first nine months of 2002.

 

*Investing Activities*

 

Cash flow used for investing activities for the period fromApril 15, 2003 through September 30, 2003, the period fromJanuary 1, 2003 through April 14, 2003 and the nine months endedSeptember 30, 2002 included acquisitions of property and equipment of $5.5million, $2.5 million and $9.8 million, respectively, and were primarily forthe expansion of capacity, productivity and process improvements andmaintenance.  Cash flows for investingactivities for the period from April 15, 2003 through September 30,2003 included the acquisition of all the equity interests of our Predecessortotaling $108.4 million.

 

*Financing Activities*

 

During the period from April 15, 2003 through September 30,2003 financing cash flows included the proceeds from the issuance of membershipunits totaling $100.9 million and proceeds from borrowing related to ourpurchase of our Predecessor on April 15, 2003, including $106.0 millionborrowed under a new credit facility, a $55.0 million convertible seniorsubordinated bridge note and a $10.0 subordinated promissory note issued by thesellers of our Predecessor (see “*Debt and Credit Sources”* below).   A portion of these proceeds were used topay debt issuance costs and pay a portion of our Predecessor’s indebtednessincluding all amounts due under its then existing credit facility.  On May 23, 2003 we sold $150.0 millionof 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 repaid $8.9million 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$121,000.

 

During the first nine months of 2002, financing cash flows of ourPredecessor included payments of principal on its term notes under its thenexisting credit facility, distributions to members and net borrowings under itsrevolving line of credit.

 

**Debt and Credit Sources**

 

Our indebtedness was $185.7 million at September 30, 2003.  The Company expects that its primary sourcesof cash will be from operating activities and borrowings under its revolvingcredit facilities.  As ofSeptember 30, 2003, we had borrowings under the revolving creditfacilities totaling $6.0 million and had $45.1 million of available borrowingcapacity.  A $1.4 million outstandingletter of credit provided as security for our U.S. workers compensation programreduced borrowing availability.  As ofSeptember 30, 2003, we were in compliance with the various covenants underthe debt agreements pursuant to which we have borrowed or may borrow money andwe believe we will remain in compliance with such covenants through the periodending September 30, 2004.  Management believes that, based on current and expected levels ofoperations, cash flows from operations and borrowings under the

 

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revolving credit facilitieswill be sufficient to fund its debt service requirements, working capitalneeds, and capital expenditures for the foreseeable future, although noassurances can be given in this regard.

 

On April 15, 2003, we entered into a new credit facilityconsisting of a revolving credit facility and term loans as follows:  (1) a revolving credit facility comprised of(a) a $29.7 million U.S. revolving credit facility and (b) a 9.6 million EuropeanEuro revolving credit facility; (2) a term loan A facility comprised of (a) a$29.7 million U.S. term loan A and (b) a 9.6 European Euro term loan A; and (3)a term loan B comprised of (a) a $48.2 million U.S. term loan B and (b) a 15.6million European Euro term loan B.  Weused a portion of the proceeds from the sale of our $150 million Senior Notesoffering to (i) repay our U.S. term loan A, (ii) repay our U.S. term loan B and(iii) repay a portion of our European term loan B, together with interestaccrued thereon.  In addition, uponconsummation of the offering, our revolving credit facility was increased to a$35 million U.S. revolving credit facility and a 15 million European Eurorevolving credit facility.

 

On April 15, 2003, a convertible senior subordinated bridge notein the principal amount of $55 million was issued to CHP IV by Valley andSportRack.  We to use a portion of theproceeds from the sale of our $150 million Senior Notes offering to fully repaythe bridge note, together with accrued interest thereon.  The interest rate on the bridge note was 12%per annum.

 

On April 15, 2003, subordinated promissory notes in an aggregateprincipal amount of $10.0 million were issued to the sellers by Valley andSportRack.  The interest rate on thesubordinated promissory notes is 12% per annum until maturity, subject tocertain exceptions.  Accrued interest isnot payable in cash but is capitalized and added to principal.  The maturity date on the subordinatedpromissory notes will be no earlier than 91 days subsequent to the maturitydate of our $150 million Senior Notes, subject to certain exceptions.

 

On May 16, 2003, we redeemed all of our then outstanding 93⁄4 %Senior Subordinated Notes due 2007 at the optional redemption price of 104 7/8%of the principal amount thereof plus accrued interest.  Upon consummation of the acquisition of thePrececessor, we deposited funds in escrow sufficient to effect a covenantdefeasance of the senior subordinated notes and to consummate the redemptionthrough the redemption date.  The amountof the redemption, which included accrued interest and premiums, was $132.6million.

 

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 no assurancescan be given in this regard, including as to the ability to increase revenuesor profit margins. If we are unable to service our indebtedness, we will beforced to take actions such as reducing or delaying acquisitions and/or capitalexpenditures, selling assets, restructuring or refinancing our indebtedness, orseeking additional equity capital. There is no assurance that any of theseremedies 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 this Management’s Discussionand Analysis of Financial Condition and Results of Operations.

 

We conductoperations in several foreign countries including Canada, The Netherlands,Denmark, the United Kingdom, Sweden, France, Germany, Poland, Spain, the CzechRepublic and Italy.  Net sales frominternational operations during the period ended from April 15, 2003through September 30, 2003 were approximately $62.6 million, or 36.6% ofour net sales. At September 30, 2003, assets associated with theseoperations were approximately 40.6% of total assets, and we had indebtednessdenominated in currencies other than the U.S. Dollar of approximately $18.9million.

 

Ourinternational operations may be subject to volatility because of currencyfluctuations, inflation and changes in political and economic conditions inthese countries.  Most of the revenuesand costs and expenses of our operations in these countries are denominated inthe local currencies. The financial position and results of operations of theCompany’s foreign subsidiaries are measured using the local currency as thefunctional currency.

 

We mayperiodically use foreign currency forward option contracts to offset theeffects of exchange rate fluctuations on cash flows denominated in foreigncurrencies. We had no outstanding foreign currency forward options atSeptember 30, 2003 and we do not use derivative financial instruments fortrading or speculative purposes.

 

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Item 3.             Quantitative andQualitative Disclosures About Market Risk

 

None

 

Item 4.             Controls andProcedures

 

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 ofSeptember 30, 2003, and, based on their evaluation, the principalexecutive officer and principal financial officer have concluded that thesecontrols and procedures are effective. There were no significant changes in internal controls or in otherfactors that could significantly 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 thetime periods 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 theCompany files under the Exchange Act is accumulated and communicated tomanagement, including the principal executive officer and principal financialofficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**PART II. OTHER INFORMATION AND SIGNATURE**

 

Item 1.             LegalProceedings

 

*Gibbs v. Advanced Accessory Systems, LLC*.  InFebruary 1996, our Predecessor commenced an action against two formeremployees alleging breach of contract under the terms of an October 1992Purchase Agreement and Employment Agreements with the Predecessor of theCompany.  The individuals then filed aseparate lawsuit against our Predecessor alleging breach of contract under therespective Purchase and Employment agreements. On May 7, 1999 a jury in the United States District Court for theEastern District of Michigan reached a verdict against our Predecessor andawarded the individuals approximately $3.8 million plus interest and reasonableattorney fees.  Both the Predecessor andthe Gibbs appealed the judgment before the United States Court of Appeals forthe Sixth Circuit.  To secure its appealthe predecessor issued a letter of credit in the amount of $8.3 million for thebenefit of the Gibbs’.  In conjunctionwith the Acquisition we and our affiliates were indemnified by the sellers ofthe Predecessor, without regard to any threshold, cap or time limitation, forany losses incurred in connection with this litigation.  On April 15, 2003 in conjunction withthe closing of the Acquisition, the sellers deposited with the financialinstitution that issued the letter of credit, $9.0 million in cash in an escrowaccount to cash collateralize the letter of credit and to secure the sellers’obligations to pay all losses incurred by us in connection with the Gibbslitigation.  In June 2003, theCourt of Appeals entered a judgment that reduced the judgment against thePredecessor from $3.8 million to $2.8 million and reduced the interest rateused in calculating pre-judgment interest. In August 2003, the judgment was satisfied by way of a payment fromthe escrow account to the Gibbs in the amount of approximately $5.6million.  The remaining proceeds of theescrow account were distributed to the sellers, except for $500,000 whichremained in escrow to secure a contingent obligation of the sellers to payapproximately $350,000 in post-trial legal fees claimed by the Gibbs’, whichamount remains in dispute.  Inconjunction with the satisfaction of the judgment, the letter of credit wascanceled.

 

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

 

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Item 2.             Changesin 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 ChiefExecutive Officer Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 31.2            Certification of ChiefFinancial Officer Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.1            Certification of ChiefExecutive Officer Pursuant To 18 U.S.C. Section 1350, As Adopted PursuantTo Section 906 Of The Sarbanes-Oxley Act Of 2002

 

Exhibit 32.2            Certification of ChiefFinancial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted PursuantTo Section 906 Of The Sarbanes-Oxley Act Of 2002

 

(b)                                                         Reportson Form 8-K

 

None

 

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**SIGNATURE**

 

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

 

 
|                                                                                                                                           | CHAAS ACQUISITIONS, LLC                                                      |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|--------|
|                                                                                                                                           |                                                                         |   |
|                                                                                                                                           |                                                                         |
| Date:                    November 12, 2003 | /s/ BARRY G. STEELE                                                          |   |
|                                                                                                                                           | Barry G. Steele                                                              |
|                                                                                                                                           | Controller                                                                   |   |
|                                                                                                                                           | (Principal Accounting  and Financial Officer  and Authorized Signatory) |
|                                                                                                                                                |                                                                              |        |  |

 

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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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