**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 June 30,  2004**                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| **OR** |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| o      |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | **For the transition period from                                to                             ** |

 

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**Commission File Number    333-114547**

 

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**ADVANCED ACCESSORY HOLDINGS CORPORATION**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **56-2426615**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **12900 Hall Road, Suite 200, Sterling  Heights, MI**           | ** ** | **48313**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

**(586) 997-2900**

(Registrant’s telephone number,including area code)

 

**NOT APPLICABLE**

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such a period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements 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 August 11, 2004** |
|-----------|------------|------------------------------------|
|      |       |                               |
| Common    |       | 100                                |

 

 

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**ADVANCED ACCESSORY HOLDINGS CORPORATION**

 

**INDEX**

 
| Part I.  Financial Information             |      |
|-------------------------------------------------|-----------|
|                                            |      |   |   |
|                                            | Item 1.   | Financial Statements |   |
|                                            |      |   |   |
|                                            |      | Consolidated Condensed Balance Sheet of the  Company as of June 30, 2004 and as of December 31, 2003 |   |
|                                            |      |   |   |
|                                            |      | Consolidated Condensed Statements of  Operations of the Company for the three months ended June 30, 2004, the six  months ended June 30, 2004 and for the period from April 15, 2003 through  June 30, 2003 and the Consolidated Condensed Statements of Operations for the  Predecessor for the periods April 1, 2003 through April 14, 2003 and January  1, 2003 through April 14, 2003 |   |
|                                            |      |   |   |
|                                            |      | Consolidated Condensed Statements of Cash  Flows for the Company for the six months ended June 30, 2004 and the period  April 15, 2003 through June 30, 2003 and the Consolidated Condensed  Statements of Cash Flows for the Predecessor for the period January 1, 2003  through April 14, 2003 |   |
|                                            |      |   |   |
|                                            |      | Consolidated Condensed Statement of Changes  in Members’ Equity for the six months ended June 30, 2004 for the Company |   |
|                                            |      |   |   |
|                                            |      | Notes to Consolidated Condensed Financial  Statements |   |
|                                            |      |   |   |
|                                            | Item 2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                            |      |   |   |
|                                            | Item 3.   | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                            |      |   |   |
|                                            | Item 4.   | Controls and Procedures |   |
|                                            |      |   |   |
| Part II.   Other Information and Signature |      |
|                                            |      |   |   |
|                                            | Item 1.   | Legal Proceedings |   |
|                                            |      |   |   |
|                                            | Item 2.   | Changes in Securities |   |
|                                            |      |   |   |
|                                            | Item 3.   | Defaults Upon Senior Securities |   |
|                                            |      |   |   |
|                                            | Item 4.   | Submission of Matters to a Vote of  Security-Holders |   |
|                                            |      |   |   |
|                                            | Item 5.   | Other Information |   |
|                                            |      |   |   |
|                                            | Item 6.   | Exhibits and Reports on Form 8-K |   |
|                                            |      |   |   |
|                                            | Signature |   |

 

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##### **PART I.  FINANCIAL INFORMATION**

 

Item 1.    FinancialStatements

 

**ADVANCED ACCESSORY HOLDINGS CORPORATION**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

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

**(Dollars in thousands)**

 
| ** **                                                             | ** ** | **Company**        | ** ** |
|------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                             | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| ** **                                                             | ** ** | **(Unaudited)**    | ** ** | ** ** | ** ** |
| ASSETS                                                                 |       |               |       |   |   |
| Current assets                                                         |       |               |       |   |   |
| Cash                                                                   |       | $                  | 10,950     |   | $ | 16,686 |   |
| Accounts receivable, less reserves of  $1,939 and $2,189, respectively |       | 75,113             |       | 55,363 |   |
| Inventories                                                            |       |               |       |   |   |
| Raw materials                                                          |       | 21,199             |       | 19,039 |   |
| Work-in-process                                                        |       | 10,217             |       | 9,662 |   |
| Finished goods                                                         |       | 23,450             |       | 23,075 |   |
| Reserves                                                               |       | (3,847             | )          | (3,448 | ) |
| Total inventories                                                      |       | 51,019             |       | 48,328 |   |
| Deferred income taxes                                                  |       | 10,566             |       | 6,087 |   |
| Other current assets                                                   |       | 16,121             |       | 14,987 |   |
| Total current assets                                                   |       | 163,769            |       | 141,451 |   |
| Property and equipment, net                                            |       | 72,580             |       | 73,795 |   |
| Goodwill                                                               |       | 39,596             |       | 39,596 |   |
| Other intangible assets, net                                           |       | 107,371            |       | 110,156 |   |
| Deferred income taxes                                                  |       | 474                |       | 336 |   |
| Other noncurrent assets                                                |       | 2,397              |       | 2,257 |   |
|                                                                   |       | $                  | 386,187    |   | $ | 367,591 |   |
|                                                                   |       |               |       |   |   |
| LIABILITIES AND MEMBERS’ EQUITY                                   |       |               |       |   |   |
| Current liabilities                                                    |       |               |       |   |   |
| Current maturities of long-term debt                                   |       | $                  | 1,859      |   | $ | 1,909 |   |
| Accounts payable                                                       |       | 45,222             |       | 33,285 |   |
| Accrued liabilities                                                    |       | 26,348             |       | 21,328 |   |
| Deferred income taxes                                                  |       | 547                |       | 588 |   |
| Total current liabilities                                              |       | 73,976             |       | 57,110 |   |
|                                                                   |       |               |       |   |   |
| Noncurrent liabilities                                                 |       |               |       |   |   |
| Deferred income taxes                                                  |       | 8,419              |       | 8,343 |   |
| Other noncurrent liabilities                                           |       | 4,042              |       | 4,151 |   |
| Long-term debt, less current maturities                                |       | 243,451            |       | 196,905 |   |
| Total noncurrent liabilities                                           |       | 255,912            |       | 209,399 |   |
|                                                                   |       |               |       |   |   |
| Members’ equity                                                   |       |               |       |   |   |
| Units                                                                  |       | 58,582             |       | 100,900 |   |
| Other comprehensive income                                             |       | (1,286             | )          | 5,690 |   |
| Accumulated deficit                                                    |       | (997               | )          | (5,508 | ) |
|                                                                   |       | 56,299             |       | 101,082 |   |
|                                                                   |       | $                  | 386,187    |   | $ | 367,591 |   |

 

The accompanying notes are an integral part of the consolidatedcondensed financial statements.

 

1

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**ADVANCED ACCESSORY HOLDINGS CORPORATION**

**CONSOLIDATED CONDENSED STATEMENTS OFOPERATIONS**

**(Dollars in thousands)**

**(Unaudited)**

 
| ** **                                                | ** ** | **Company**                             | ** ** | **Predecessor**                       | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** ** | **Three months  ended  June 30,  2004** | ** ** | **Six months  ended  June 30,  2004** | ** ** | **Period from  April 15, 2003  through  June 30,  2003** | ** ** | **Period from  April 1, 2003  through  April 14,  2003** | ** ** | **Period from  January 1, 2003  through  April 14,  2003** | ** ** |
| ** **                                                | ** ** | ** **                              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                 |       | $                                       | 108,346    |                                  | $          | 204,977 |   | $ | 84,230 |   | $ | 16,514 |   | $ | 101,854 |   |
| Cost of sales                                             |       | 83,329                                  |       | 157,393                               |       | 63,075 |   | 12,247 |   | 76,508 |   |
|                                                      |       |                                    |       |                                  |       |   |   |   |   |   |   |
| Gross profit                                              |       | 25,017                                  |       | 47,584                                |       | 21,155 |   | 4,267 |   | 25,346 |   |
| Selling, administrative and product  development expenses |       | 15,629                                  |       | 30,714                                |       | 9,389 |   | 2,688 |   | 14,908 |   |
| Stock option compensation                                 |       | —                                  |       | —                                |       | — |   | 10,125 |   | 10,125 |   |
| Transaction expenses                                      |       | —                                  |       | —                                |       | — |   | 3,605 |   | 3,784 |   |
| Amortization of intangible assets                         |       | 2,113                                   |       | 4,164                                 |       | — |   | 4 |   | 11 |   |
|                                                      |       |                                    |       |                                  |       |   |   |   |   |   |   |
| Operating income (loss)                                   |       | 7,275                                   |       | 12,706                                |       | 11,766 |   | (12,155 | ) | (3,482 | ) |
| Other income (expense)                                    |       |                                    |       |                                  |       |   |   |   |   |   |   |
| Interest expense                                          |       | (7,054                                  | )          | (13,188                               | )          | (3,524 | ) | (940 | ) | (4,772 | ) |
| Loss resulting from debt extinguishment                   |       | —                                  |       | —                                |       | (5,967 | ) | — |   | — |   |
| Foreign currency gain (loss), net                         |       | 15                                      |       | (758                                  | )          | 2 |   | (356 | ) | 3,240 |   |
| Other income (expense)                                    |       | (240                                    | )          | (184                                  | )          | 71 |   | (19 | ) | (84 | ) |
|                                                      |       |                                    |       |                                  |       |   |   |   |   |   |   |
| Income (loss) before income taxes                         |       | (4                                      | )          | (1,424                                | )          | 2,348 |   | (13,470 | ) | (5,098 | ) |
| Provision (benefit) for income taxes                      |       | 38                                      |       | (427                                  | )          | 1,889 |   | 39 |   | 1,600 |   |
|                                                      |       |                                    |       |                                  |       |   |   |   |   |   |   |
| Net income (loss)                                         |       | $                                       | (42        | )                                     | $          | (997 | ) | $ | 459 |   | $ | (13,509 | ) | $ | (6,698 | ) |

 

The accompanying notes are an integral part of the consolidatedcondensed financial statements.

 

2

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**ADVANCED ACCESSORY HOLDINGS CORPORATION**

**CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS**

**(Dollarsin thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Company**                           | ** ** | **Predecessor**                                          | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **Six months  ended  June 30,  2004** | ** ** | **Period from  April 15, 2003  through  June 30,  2003** | ** ** | **Period from  January 1, 2003  through  April 14,  2003** | ** ** |
|                                                                                      |       |                                  |       |                                                     |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                                  |       |                                                     |       |   |   |
| Net income (loss)                                                                         |       | $                                     | (997       | )                                                        | $          | 459 |   | $ | (6,698 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                                  |       |                                                     |       |   |   |
| Depreciation and amortization                                                             |       | 10,810                                |       | 2,753                                                    |       | 3,695 |   |
| Stock option compensation                                                                 |       | —                                |       | —                                                   |       | 10,125 |   |
| Loss resulting from debt extinguishment                                                   |       | —                                |       | 5,939                                                    |       | — |   |
| Deferred taxes                                                                            |       | (4,502                                | )          | (1,237                                                   | )          | (87 | ) |
| Foreign currency (gain) loss                                                              |       | 166                                   |       | (2                                                       | )          | (3,061 | ) |
| (Gain) loss on disposal of assets                                                         |       | 123                                   |       | (11                                                      | )          | 68 |   |
| Interest accretion on notes                                                               |       | 3,376                                 |       | —                                                   |       | — |   |
| Changes in assets and liabilities, net                                                    |       | (7,818                                | )          | (11,361                                                  | )          | (1,144 | ) |
|                                                                                      |       |                                  |       |                                                     |       |   |   |
| Net cash provided by (used for) operating  activities                                     |       | 1,158                                 |       | (3,460                                                   | )          | 2,898 |   |
|                                                                                      |       |                                  |       |                                                     |       |   |   |
| CASH FLOWS USED FOR INVESTING ACTIVITIES:                                                 |       |                                  |       |                                                     |       |   |   |
| Acquisition of predecessor, net of cash  acquired                                         |       | (84,396                               | )          | (108,367                                                 | )          | — |   |
| Acquisition of property and equipment                                                     |       | (6,076                                | )          | (2,061                                                   | )          | (2,512 | ) |
| Net cash (used for) investing activities                                                  |       | (90,472                               | )          | (110,428                                                 | )          | (2,512 | ) |
|                                                                                      |       |                                  |       |                                                     |       |   |   |
| CASH FLOWS USED FOR FINANCING ACTIVITIES:                                                 |       |                                  |       |                                                     |       |   |   |
| Proceeds from issuance of debt                                                            |       | 50,273                                |       | 347,533                                                  |       | — |   |
| Debt issuance costs                                                                       |       | (2,462                                | )          | (11,374                                                  | )          | — |   |
| Net increase (decrease) in revolving loan                                                 |       | (769                                  | )          | 2,252                                                    |       | 6,426 |   |
| Repayment of debt                                                                         |       | (5,835                                | )          | (328,306                                                 | )          | (2,218 | ) |
| Issuance of membership units                                                              |       | 101,082                               |       | 100,900                                                  |       | — |   |
| Distributions to members                                                                  |       | (42,500                               | )          | —                                                   |       | (121 | ) |
| Net cash provided by financing activities                                                 |       | 99,789                                |       | 111,005                                                  |       | 4,087 |   |
|                                                                                      |       |                                  |       |                                                     |       |   |   |
| Effect of exchange rate changes                                                           |       | 475                                   |       | 867                                                      |       | (296 | ) |
| Net increase (decrease) in cash                                                           |       | 10,950                                |       | (2,016                                                   | )          | 4,177 |   |
| Cash at beginning of period                                                               |       | —                                |       | 6,830                                                    |       | 2,653 |   |
| Cash at end of period                                                                     |       | $                                     | 10,950     |                                                     | $          | 4,814 |   | $ | 6,830 |   |

 

The accompanying notes are an integral part of the consolidatedcondensed financial statements.

 

3

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**ADVANCED ACCESSORY HOLDINGS CORPORATION**

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

**(Dollars in thousands)**

**(Unaudited)**

 
| ** **                      | ** ** | **Company**                | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **Members’  capital** | ** ** | **Other  comprehensive  loss** | ** ** | **Retained  earnings** | ** ** | **Total  members’  equity** | ** ** |
| ** **                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sale of Membership interest     |       | $                          | 101,082    |   | $ | — |   | $ | — |   | $ | 101,082 |   |
| Currency translation adjustment |       | —                     |       | (1,286 | ) | — |   | (1,286 | ) |
| Distribution to members         |       | (42,500                    | )          | — |   | — |   | (42,500 | ) |
| Net loss                        |       | —                     |       | — |   | (997 | ) | (997 | ) |
| Balance at June 30, 2004        |       | $                          | 58,582     |   | $ | (1,286 | ) | $ | (997 | ) | $ | 56,299 |   |

 

The accompanying notes are an integral part of the consolidatedcondensed financial statements.

 

4

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**ADVANCED ACCESSORY HOLDINGS CORPORATION**

**NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS**

**(Dollars in thousands)**

**(Unaudited)**

 

1.                                       BASIS OFPRESENTATION

 

In January2004, Advanced Accessory Holdings Corporation (“AAHC”) was formed by our directparent, CHAAS Holdings, LLC (“CHAAS Holdings”) in connection with an offeringof our $88,000 aggregate principal amount at maturity, 131⁄4% Senior DiscountNotes due 2011 (the “Senior Discount Notes”). At that time our direct parent made a contribution of all of its equityinterests in CHAAS Acquisitions, LLC to AAHC in exchange for all the outstandingmembership units of AAHC.  AAHC is theindirect parent of Advanced Accessory Systems, LLC (the “Predecessor”).  Unless the context otherwise requires, allinformation which refers to “we,” “our” or “us” refers to AAHC and itssubsidiaries.

 

On April 15,2003, substantially all of the equity interests of the “Predecessor” wereacquired by Castle Harlan Partners IV, L.P. (the “Acquisition”), a privateequity investment fund organized and managed by Castle Harlan Inc., a leadingprivate equity firm.  CHAAS Holdings, LLCand its subsidiary, CHAAS Acquisitions, LLC (“CHAAS Acquisitions”) were formedin April 2003 in connection with the Acquisition.

 

Theaccompanying financial statements designated as the “Company” are the financialstatements of AAHC for periods subsequent to its formation in January 2004 andare the financial statements of CHAAS Acquisitions LLC, its subsidiary, priorto January 2004.  All financialstatements prior to April 15, 2003, the date of the Acquisition, are that ofAdvanced Accessory Systems, LLC and are referred to as the financial statementsof the “Predecessor.”

 

TheAcquisition was accounted for in accordance with the purchase method ofaccounting.  Accordingly, the purchaseprice of the Acquisition has been allocated to identifiable assets acquired andliabilities assumed based upon their estimated fair values at the acquisitiondate.

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions to Form10-Q.  Accordingly, they do not includeall information and footnotes required by accounting principles generallyaccepted in the Unites States of America for complete financial statements andshould be read in conjunction with the Registration Statement on Form S-4 andthe Annual Report on Form 10-K for the year ended December 31, 2003 for CHAASAcquisitions, LLC.

 

In the opinionof the Company, the accompanying unaudited consolidated condensed financialstatements contain all adjustments, which are normal and recurring in nature,necessary to present fairly its and the Predecessor’s financial position as ofJune 30, 2004 and December 31, 2003 and the results of its and thePredecessor’s operations for the six-month and three-month periods ended June30, 2004 and 2003.

 

2.                                       COMPREHENSIVEINCOME

 

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

 
| ** **                                                   | ** ** | **Company**                                 | ** ** | **Predecessor**                       | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **Three months ended  June 30,  2004** | ** ** | **Six months  ended  June 30,  2004** | ** ** | **Period from  April 15, 2003  through  June 30, 2003** | ** ** | **Period from  April 1, 2003  through  April 14, 2003** | ** ** | **Period from  January 1, 2003  through  April 14, 2003** | ** ** |
| Net income (loss)                                            |       | $                                           | (42        | )                                     | $          | (997 | ) | $ | 459 |   | $ | (13,509 | ) | $ | (6,698 | ) |
| Change in the cumulative translation  adjustment, net of tax |       | (301                                        | )          | (1,286                                | )          | (911 | ) | 628 |   | (424 | ) |
| Comprehensive income (loss)                                  |       | $                                           | (343       | )                                     | $          | (2,283 | ) | $ | (452 | ) | $ | (12,881 | ) | $ | (7,122 | ) |

 

3.                                       CURRENCYCONTRACTS

 

We have significant operations in Europe where the functional currencyis the Euro.  During 2003, the Eurostrengthened considerably against the U.S. dollar and it is our objective toprotect reported earnings from volatility in the Euro/U.S. dollar exchangerates.  On February 12, 2004, when theEuro to the U.S. Dollar exchange rate was 1.28:1, we entered into a series offoreign currency forward option contracts related to the Euro (“Euro Collar”),each with a notional value of €3,000, which

 

5

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mature quarterly, as summarized below. On May 12, 2004 when the Euro to US Dollar exchange rate was 1.19:1, weentered into additional foreign currency option contracts also summarizedbelow.  We provided a $1,900 letter ofcredit in support of the foreign currency option contracts.  To the extent that the quarter end exchangerate falls between the Euro collar exchange rates, fulfillment of the Eurocollar exchange contracts will result in offsetting foreign currency gains andlosses upon expiration.  For eachreporting period we record the fair value, as determined by independentfinancial institutions, of open obligations and the resultant gains and lossesare recorded in the statement of operations. For the three and six months ended June 30, 2004 we had unrealizedlosses on our foreign currency options totaling $440 and $295, respectively,which were recorded in other expense. Three options having zero value expired during the second quarter andsix options expired during the first six months of 2004.

 
| ** **          | ** ** | **Euro Collar Exchange Rates** | ** ** |
|---------------------|------------|--------------------------------|------------|
| **Expiration Date** | ** ** | **Contract Date**              | ** ** | **Notional Value** | ** ** | **Purchased  Put Option** | ** ** | **Sold  Call Option** | ** ** | **Purchased  Call Option** | ** ** |
| ** **          | ** ** | ** **                     | ** ** | **(thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| September 30, 2004  |       | February 12, 2004              |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.357 |   | $ | 1.400 |   |
| December 31, 2004   |       | February 12, 2004              |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.354 |   | $ | 1.400 |   |
| March 31, 2005      |       | February 12, 2004              |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.353 |   | $ | — |   |
| June 28, 2005       |       | May 12, 2004                   |       | € | 3,000 |   | $ | 1.150 |   | $ | 1.242 |   | $ | 1.300 |   |

 

4.                                       LONG-TERM DEBT

 

On February 4,2004, AAHC issued the Senior Discount Notes, which will have an aggregateprincipal amount of $88,000 at maturity in a offering exempt from theregistration requirements of the Securities Act.  The net proceeds from the issuance wereapproximately $47,773 after deducting expenses related to the issuance ofdebt.  In conjunction with the offering,we committed to purchase, repay or prepay, on terms as may be negotiated, notless than $5,000 in the aggregate principal amount of the our then outstandingdebt.  On February 5, 2004, we purchased$4,666 face value of the subordinated promissory notes held by members of ourPredecessor in connection with the Acquisition. Proceeds of $42,500 were used to redeem a portion of the equityinterests of our direct parent, CHAAS Holdings.

 

In connection with the issuance of the Senior Discount Notes, weentered into a registration rights agreement which required us to offer theholders of the original notes the opportunity to exchange them for replacementnotes which are identical in principal amount and all other material respectsto the original notes, except that the New Senior Discount Notes would not bearlegends restricting the transfer thereof. We filed a registration statement on Form S-4 for the New SeniorDiscount Notes with the Securities and Exchange Commission (“SEC”) on April 16,2004.  The SEC declared the registrationstatement effective on April 29, 2004. We launched an exchange offer with respect to the $88,000 of theoriginal notes on April 30, 2004.  Theexchange offer expired on May 28, 2004 and was consummated on June 1, 2004.

 

6

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**Item 2.****    MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion of our results ofoperations and financial condition should be read in conjunction with ourfinancial statements and notes thereto included elsewhere in this Form10-Q.  This Form 10-Q 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-Q generally.Forward looking statements generally can be identified by the use of terms suchas “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “plan,”“estimate,” “predict,” “potential,” “forecast,” “project,” “will be,”“continue” or variations of such terms, or the use of these terms in thenegative.  Our actual results may differ significantly from the resultsdiscussed in the forward-looking statements, and such differences may bematerial.  General risks that may impact the achievement of such forecastsinclude, but are not limited to: compliance with new laws and regulations,general economic conditions in the markets in which we operate, fluctuation indemand for our products and in the production of vehicles for which we are asupplier, significant raw material price fluctuations, labor disputes with ouremployees or of our significant customers or suppliers, changes in consumerpreferences, dependence on significant automotive customers, the level ofcompetition in the automotive supply industry, pricing pressure from automotivecustomers, our substantial leverage, limitations imposed by our debtfacilities, changes in the popularity of particular vehicle models or towingand rack systems, the loss of programs on particular vehicle models, risksassociated with conducting business in foreign countries and other businessfactors.  Any such forward-looking statements are not guarantees of futureperformance and involve risks and uncertainties.  Actual events or resultsmay differ materially from those discussed in the forward-lookingstatements.  All of these forward-looking statements are based onestimates and assumptions made by our management which, although believed to bereasonable, are inherently uncertain.  Given these risks anduncertainties, readers are cautioned not to place undue reliance onforward-looking statements.  The company disclaims any obligation toupdate any forward-looking statements.

 

**OVERVIEW**

 

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

 

### **CompanyBackground**

 

On April 15,2003, substantially all of the equity interests of the Predecessor wereacquired by Castle Harlan Partners IV, L.P., a private equity investment fundorganized and managed by Castle Harlan Inc., a leading private equity firm.  CHAAS Holdings, LLC was formed in April 2003by Castle Harlan Partners IV, L.P. in connection with the Acquisition and isthe indirect parent of the CHAAS Acquisitions.

 

**RESULTS OF OPERATIONS**

 

**Three Months Ended June 30, 2004 for the Company Compared to the PeriodApril 15, 2003 through June 30, 2003 for the Company and the Period from April1, 2003 through April 14, 2003 for the Predecessor.**

 

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

 

*Gross profit.*  Gross profit for the second quarter of 2004was $25.0 million.  Gross profit for theperiod from April 15, 2003 through June 30, 2003 was $21.2 million and for theperiod from April 1, 2003 through April 14, 2003 was $4.3 million.  Gross profit as a percentage of net sales was23.1% for the second quarter of 2004. The gross profit percentage was 25.1% and 25.8% during the

 

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period from April 15, 2003 through June 30, 2003 and the period fromApril 1, 2003 through April 14, 2003, respectively.  The decrease in gross profit of $405,000 or1.6% and in gross margin percentage reflects higher costs for steel andaluminum, price decreases to our OEM customers and higher rent expense.  The price of steel continued to increasedramatically during the second quarter of 2004 due primarily to several trendsin the steel producing industry including increased demand for steel productsfrom China, the weakened U.S. Dollar, the consolidation of the steel producingindustry and a reduction in overall production capacity.  In addition to the higher prices we alsoexperienced delays in procurement of some steel components.  During the quarter, increased cost of steeland production inefficiencies caused by delays in procurement of steel andcomponents having a high steel content resulted in lower gross profit ofapproximately $1.9 million net of recovery through the introduction of steelsurcharges on some of our aftermarket towing systems products. In order tosecure future business with certain of our OEM customers we granted pricedecreases on several products.  Thesereduced prices totaled approximately $800,000 during the second quarter.  Gross profit was further reduced byapproximately $258,000 in increased rent expense for two manufacturingfacilities that were included in a sale and leaseback transaction during thefourth quarter of 2003.

 

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

 

*Stock option compensation.*  During the period from April 1, 2003 throughApril 14, 2003, holders of all outstanding membership units and warrantsexercised their options to purchase membership units of our Predecessor priorto the acquisition.  In connection withthe transaction, our Predecessor recorded stock option compensation during thisperiod of $10.1 million, representing the fair market value of the underlyingunits less the related exercise price and the recorded value of the warrants.

 

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

 

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

 

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

 

*Interest expense.*  Interest expense for the second quarter of2004 was $7.1 million.  Interest expensefor the period from April 15, 2003 through June 30, 2003 and for the periodfrom April 1, 2003 through April 14, 2003 was $3.5 million and $940,000,respectively.  This increase of  $2.6 million, or 58.0% is due to the higherlevel of debt outstanding during the second quarter of 2004 resulting from ourpurchase of the Predecessor on April 15, 2003 and the issuance of our SeniorDiscount Notes in February 2004.

 

*Foreign currency gain (loss).*  We had a foreign currency gain in the secondquarter of 2004 of $15,000.  We had aforeign currency gain during the period from April 15, 2003 through June 30,2003 of  $2,000 and a foreign currencyloss during the period from April 1, 2003 through April 14, 2003, of$356,000.  This increase of  $369,000 is primarily attributable to theU.S. dollar denominated intercompany indebtedness of Brink, whose functionalcurrency is the Euro.  During the secondquarter of 2004 the U.S. Dollar first strengthened in comparison with the Euroand then had two months of weakening. This mix and changes in the underlying U.S. Dollar loan exposureresulted in the immaterial gain at Brink. The intercompany indebtedness for our foreign subsidiaries other thanBrink are deemed to be permanently invested and therefore changes in the intercompanybalances for these subsidiaries caused by foreign currency fluctuations havebeen recorded in the currency translation adjustment account and included inother comprehensive income.  OurPredecessor’s foreign currency gains and losses were primarily related to theintercompany indebtedness of our foreign subsidiaries including Brink.

 

*Provisionfor income taxes.* During the second quarter of 2004 wehad a loss before income taxes of $4,000 and recorded an income tax provisionof $38,000.  The effective tax ratediffers from the U.S. federal income tax rate primarily due to changes invaluation allowances on the deferred tax assets of SportRack Accessories anddifferences in the tax rates of foreign countries. Prior to April 2003 ourPredecessor and certain of its domestic subsidiaries had elected to be taxed aslimited liability companies for federal income tax purposes.  As a result of this election, thePredecessor’s domestic taxable income accrued to the individual members.

 

8

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Certain of the Company’s domestic subsidiaries and foreign subsidiarieswere subject to income taxes in their respective jurisdictions. Effective onApril 20, 2003 we filed an election for all our domestic subsidiaries to betreated as regular corporations and therefore they are now subject to federalincome tax.  During the period from April15, 2003 through June 30, 2003 we had net income before taxes of $2.3 millionand recorded a provision for income taxes of $1.9 million.  During the period from April 1, 2003 throughApril 14, 2003we had a loss before income taxes of $13.5 million and recorded abenefit for income taxes of $39,000.

 

*Net income (loss)*.We had a net loss of $42,000 for the second quarter of 2004, net income of $459thousand for the period from April 15, 2003 through June 30, 2003 and a netloss of $13.5 million for the period from April 1, 2003 through April 14, 2003.The increase of $13.0 million is due to higher operating income in 2004, theloss resulting from debt extinguishment in 2003, the foreign currency gain in2004 as compared with a foreign currency loss in 2003 and a lower provision forincome taxes in 2004.  These werepartially offset by higher interest expense in 2004.

 

**Six Months Ended June 30, 2004 for the Company Compared to the PeriodApril 15, 2003 through June 30, 2003 for the Company and the Period fromJanuary 1, 2003 through April 14, 2003 for the Predecessor.**

 

*Net sales.*  Net sales for the first six months of 2004were $205.0 million.  Net sales for theperiod from April 15, 2003 through June 30, 2003 and for the period fromJanuary 1, 2003 through April 14, 2003 were $84.2 million and $101.9 millionrespectively.  This increase of  $18.9 million, or 10.2%, includesapproximately $6.0 million due to the increase of the average exchange ratesbetween the U.S. dollar and the currencies used by our foreign subsidiaries,primarily in Europe.  The balance of theincrease in net sales reflects an increase in sales to our OEM customers ofapproximately $9.8 million, an increase of approximately $1.9 million in salesto our automotive aftermarket customers and an increase of approximately $1.9million representing revenue from surcharges for steel imposed primarily onproducts sold to aftermarket customers. Sales to OEM customers were higher due to new program launches forSportRack in North America and Europe and for Valley in North America.  These increases were partially offset bydecreased prices and lower volumes on existing programs.  Sales for Brink were higher due to strongEuropean new car sales and an increase in sales of the higher priced detachabletowbars.  Aftermarket sales were higherdue to strong orders of hitches in North America.

 

*Gross profit.*  Gross profit for the first six months of 2004was $47.6 million.  Gross profit for theperiod from April 15, 2003 through June 30, 2003 and for the period fromJanuary 1, 2003 through April 14, 2003 was $21.2 million and $25.3 million,respectively.  This increase of $1.1million, or 2.3%, resulted from our higher net sales offset partially by adecrease in the gross profit percentage. Gross profit as a percentage of net sales was 23.2% for the first sixmonths of 2004, 25.1% for the period from April 15, 2003 through June 30, 2003and 24.9% for the period from January 1, 2003 through April 14, 2003. Thedecreased gross margin percentage reflects higher costs for steel and aluminum,price decreases to our OEM customers and higher rent expense. The price ofsteel increased dramatically during the first half of 2004 due primarily toseveral trends in the steel producing industry including increased demand forsteel products from China, the weakened U.S. Dollar, the consolidation of thesteel producing industry and a reduction in overall production capacity.  In addition to the higher prices we alsoexperienced delays in procurement of some steel components.  During the first six months of 2004 increasedcost of steel and production inefficiencies caused by delays in procurement ofsteel and components having a high steel content resulted in lower gross profitof approximately $2.4 million net of recovery through the introduction of steelsurcharges on some of our aftermarket towing systems products.  In order to secure future business withcertain of our OEM customers we granted price decreases on severalproducts.  These reduced prices totaledapproximately $800,000 during the first six months. Gross profit was furtherreduced by approximately $600,000 in increased rent expense for two manufacturingfacilities that were included in a sale and leaseback transaction during thefourth quarter of 2003.

 

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

 

*Stock option compensation.*  During the period from April 1, 2003 throughApril 14, 2003, holders of all outstanding membership units and warrantsexercised their options to purchase membership units of our Predecessor priorto the acquisition.  In connection withthe transaction, our Predecessor recorded stock option compensation during thisperiod of $10.1 million, representing the fair market value of the underlyingunits less the related exercise price and the recorded value of the warrants.

 

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

 

9

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

 

*Operating income. *Our operating incomewas $12.7 million for the first six months of 2004 and $11.8 million for theperiod form April 15, 2003 through June 30, 2003.  We had an operating loss for the period fromJanuary 1, 2003 through April 14, 2003 of $3.5 million.  This increase of$4.4 million resulted from higher gross profit in 2004 and stock optioncompensation and transaction expenses of $10.1 million and $3.6 million,respectively, that were incurred in 2003. These were partially offset by increased selling, administrative andproduct development expenses and an increase in amortization of intangibleassets.

 

*Interest expense.*  Interest expense for the first six months of2004 was $13.2 million.  Interest expensefor the period from April 15, 2003 through June 30, 2003 and for the periodfrom January 1, 2003 through April 14, 2003 was $3.5 million and $4.8 million,respectively.  This increase of  $4.9 million, or 59.0%, is due to the higherlevel of debt outstanding during the first six months of 2004 resulting fromour purchase of the Predecessor on April 15, 2003 and the issuance of ourSenior Discount Notes in February 2004.

 

*Lossresulting from debt extinguishment.*  On May 23, 2003, we issued $150 million ofour 103⁄4% senior notes due 2011, the proceeds of which were used to repay asenior subordinated bridge note and a portion of our credit facility.  As a result we incurred an extinguishmentloss of $6.0 million.

 

*Foreign currency gain (loss).*  We had a foreign currency loss for the firstsix months of 2004 of $758,000.  We hadforeign currency gains during the period from April 15, 2003 through June 30,2003 and the period from January 1, 2003 through April 14, 2003, of $2,000 and$3.2 million, respectively. The foreign currency loss is primarily attributableto the U.S. dollar denominated intercompany indebtedness of Brink, whosefunctional currency is the Euro.  Duringthe first six months of 2004 the U.S. Dollar strengthened in comparison withthe Euro resulting in the loss at Brink. The intercompany indebtedness for our foreign subsidiaries other thanBrink is deemed to be permanently invested and therefore changes in theintercompany balances for these subsidiaries caused by foreign currencyfluctuations have been recorded in the currency translation adjustment accountand included in other comprehensive income. Our Predecessor’s foreign currency gains and losses were primarilyrelated to the intercompany indebtedness of our foreign subsidiaries includingBrink.  During the period from April 15,2003 through June 30, 2003 and the period from January 1, 2003 through April14, 2003 the U.S. dollar weakened in relation to the Euro and the Canadiandollar resulting in the foreign currency gain recorded in those periods.

 

*Provisionfor income taxes.* During the first six months of 2004we had a loss before income taxes of $1.4 million and recorded an income taxbenefit of $427,000.  The effective taxrate differs from the U.S. federal income tax rate primarily due to changes invaluation allowances on the deferred tax assets of SportRack Accessories anddifferences in the tax rates of foreign countries. Prior to April 2003 ourPredecessor and certain of its domestic subsidiaries had elected to be taxed aslimited liability companies for federal income tax purposes.  As a result of this election, thePredecessor’s domestic taxable income accrued to the individual members.  Certain of the Company’s domesticsubsidiaries and foreign subsidiaries were subject to income taxes in theirrespective jurisdictions. Effective on April 20, 2003 we filed an election forall our domestic subsidiaries to be treated as regular corporations andtherefore they are now subject to federal income tax.  During the period from April 15, 2003 throughJune 30, 2003, we had net income before taxes of $2.3 million and recorded aprovision for income taxes of $1.9 million. During the period from January 1, 2003 through April 14, 2003 we had aloss before income taxes of $5.1 million and recorded a provision for incometaxes of $1.6 million.

 

*Net income (loss)*.  We had a net loss of $1.0 million for thefirst six months of 2004, net income of $459,000 for the period from April 15,2003 through June 30, 2003 and a net loss of $6.7 million for the period fromJanuary 1, 2003 through April 14, 2003. The increase of $5.2 million is due tohigher operating income in 2004, the loss resulting from debt extinguishment in2003 and recording an income tax benefit in 2004 rather than a provision forincome taxes in 2003.  These werepartially offset by higher interest expense in 2004 and the foreign currencyloss in 2004 as compared with a foreign currency gain in 2003.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our principalliquidity requirements are to service our debt and meet our working capital andcapital expenditure needs.  Ourindebtedness at June 30, 2004 was $245.3 million including current maturitiesof $1.9 million.  We expect to be able tomeet our liquidity requirements for the foreseeable future through cashprovided by operations and through borrowings available under our revolvingcredit facilities.

 

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**WorkingCapital and Cash Flows**

 

Working capital and keyelements of the consolidated statement of cash flows are:

 

 
| ** **      | ** ** | **Company**        | ** ** |
|-----------------|------------|--------------------|------------|
| ** **      | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| ** **      | ** ** | **(in thousands)** | ** ** |
| Working Capital |       | $                  | 89,793     |   | $ | 84,341 |   |
|                 |            |                    |            |  |  |  |  |

 
|                                         |   | **Company**                           |    | **Predecessor**                                         |   |
|----------------------------------------------|--------|---------------------------------------|---------|---------------------------------------------------------|--------|
|                                         |   | **Six months  ended  June 30,  2004** |    | **Period from  April 15, 2003  through  June 30, 2003** |   | **Period from  January 1, 2003  through  April 14, 2003** |   |
|                                         |   | **(in thousands)**                    |    | **(in thousands)**                                      |   |
|                                         |   |                                  |    |                                                    |   |   |   |
| Cash flows provided by  operating activities |   | $                                     | 1,158   |                                                    | $      | (3,460 | ) | $ | 2,898 |   |
| Cash flows (used for) investing  activities  |   | $                                     | (90,472 | )                                                       | $      | (110,428 | ) | $ | (2,512 | ) |
| Cash flows provided by  financing activities |   | $                                     | 99,789  |                                                    | $      | 111,005 |   | $ | 4,087 |   |

 

*Working capital*

 

Working capitalincreased by $5.5 million to $89.8 million at June 30, 2004 from $84.3 millionat December 31, 2003 due primarily to an increase in accounts receivable of$20.4 million, an increase in inventories of $3.6 million, an increase indeferred tax assets of $4.5 million and an increase in other current assets of$1.1 million. These increases were partially offset by a decrease in cash of$5.7 million, an increase in accounts payable of $12.3 million, an increase inother current liabilities of $5.1 million and a decrease related to foreigncurrency exchange rates of the functional currencies of our foreignsubsidiaries of $980,000.

 

The increase inaccounts receivable was attributable to the timing of payments from OEM customersand to increased sales levels in the second quarter of 2004 as compared withthe fourth quarter 2003.  Differences insales levels between the two periods are primarily due to increased sales toautomotive OEMs and seasonal sales levels of our aftermarket products.  Our aftermarket products have higher sales inthe second and third quarters and lower sales in the fourth and firstquarters.  Increases in accounts payablereflected increased purchasing activities to support the increased sales volume.  Inventory increased primarily for ouraftermarket products to support seasonally higher sales for the period ascompared with the period prior to December 31, 2003.  The increase in accrued expenses is primarilydue to an increase in accrued interest on our subsidiary’s $150 million ofSenior Notes.

 

*Operating Activities*

 

Our operationsprovided $1.2 million in cash during the first six months of 2004 compared to ause of $562,000 in cash for the first six months of 2003.  The increase for 2004 is primarily due to theuse in 2003 of $10.1 million for stock option compensation and $6.0 million forextinguishment of debt.  These uses areoffset by increased net income before depreciation and amortization of $9.8million during the first six months of 2004 as compared to $209,000 in thefirst six months of 2003 and a smaller increase in working capital excludingcash for the same periods.

 

*Investing Activities*

 

During thefirst six months of 2004 we acquired CHAAS Acquisitions, our wholly ownedsubsidiary, from our direct parent for $84.4 million net of cash on hand of$16.7 million and during the first six months of 2003 we acquired all of theequity interests of Advanced Accessory Systems, LLC for $108.4 million. Cashflow used for investing activities for the first six months of 2004 and 2003also included acquisitions of property and equipment of $6.1 million and $4.6million, respectively, and were primarily for the expansion of capacity,productivity and process improvements and maintenance.

 

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*Financing Activities*

* *

During thefirst six months of 2004 financing cash flows included the issuance of ourmembership units for $101.1 million, proceeds from the issuance of our SeniorDiscount Notes of $50.3 million, payment of debt issuance costs of $2.5million, repayment of debt of $5.8 million, a reduction in the revolving lineof credit of $769,000 and a payment to our direct parent of $42.5 million toredeem a portion of their equity interest.

 

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

 

During theperiod from January 1, 2003 through April 14, 2003 our Predecessor made $2.2million in regularly scheduled principal payments on its term notes under itsthen existing credit facility, borrowed $6.4 million on its revolving facilityand made distributions to its members totaling $121,000.

 

***Debt and Credit Sources***

* *

Our indebtedness was $245.3 million at June 30, 2004.  The Company expects that its primary sourcesof cash will be from operating activities and borrowings under its revolvingcredit facilities.  As of June 30, 2004,we had borrowings under the revolving credit facilities totaling $16.9 millionand had $31.7 million of available borrowing capacity.  Standby letters of credit totaling $2.9million provided as security for our U.S. workers compensation program and $1.9million provided security to a financial institution for foreign currencyinstruments reduced borrowing availability. As of June 30, 2004, we were in compliance with the various covenantsunder the debt agreements pursuant to which we have borrowed or mayborrow.   Management believes that, basedon current and expected levels of operations, cash flows from operations andborrowings under the revolving credit facilities will be sufficient to fund itsdebt service requirements, working capital needs, and capital expenditures forthe foreseeable future, although no assurances can be given in this regard.

 

On February 4, 2004, we issued our Senior Discount Notes, which willhave an aggregate principal amount of $88.0 million at maturity in a offeringexempt from the registration requirements of the Securities Act.  The net proceeds from the issuance wereapproximately $47.8 million after deduction of expenses related to theissuance.  In conjunction with the offering,we committed to purchase, repay or prepay, on terms as may be negotiated, notless than $5.0 million in the aggregate principal amount of our thenoutstanding debt.  On February 5, 2004,we purchased $4.7 million face value of the subordinated promissory notes heldby members of our Predecessor in connection with the Acquisition.  Proceeds of $42.5 million were used to redeema portion of the equity interests of our direct parent, CHAAS Holdings.

 

In connectionwith the issuance of the Senior Discount Notes, we entered into a registrationrights agreement which required us to offer the holders of the original notesthe opportunity to exchange them for replacement notes which are identical inprincipal amount and all other material respects to the original notes, exceptthat the New Senior Discount Notes would not bear legends restricting thetransfer thereof.  We filed aregistration statement on Form S-4 for the New Senior Discount Notes with theSEC on April 16, 2004.  The SEC declaredthe registration statement effective on April 29, 2004.  We launched an exchange offer with respect tothe $88.0 million of the original notes on April 30, 2004.  The exchange was consummated on May 29, 2004.

 

Our ability tosatisfy our debt obligations will depend upon our future operating performance,which will be affected by prevailing economic conditions and financial,business, and other factors, certain of which are beyond our control, as wellas the availability of revolving credit borrowings under our current orsuccessor credit facilities.  We anticipatethat, based on current and expected levels of operations, our operating cashflow, together with borrowings under the revolving credit facility, should besufficient to meet our debt service, working capital and capital expenditurerequirements for the foreseeable future, although no assurances can be given inthis regard, including as to the ability to increase revenues or profitmargins. If we are unable to service our indebtedness we will be forced to takeactions such as reducing or delaying acquisitions and/or capital expenditures, sellingassets,

 

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restructuring or refinancing our indebtedness or seeking additionalequity capital. There is no assurance that any of these remedies can beeffected on satisfactory terms, if at all, including, whether, and on whatterms, we could raise equity capital. See the introductory paragraph of this Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

 

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

 

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

 

**Currencycontracts**

 

We have significant operations in Europe where the functional currencyis the Euro.  During 2003 the Eurostrengthened considerably against the U.S. dollar and it is our objective toprotect reported earnings from volatility in the Euro/U.S. dollar exchangerates.  On February 12, 2004, when theEuro to the U.S. Dollar exchange rate was 1.28:1, we entered into a series offoreign currency forward option contracts related to the Euro (“Euro Collar”),each with a notional value of €3.0 million, which mature quarterly, assummarized below.  On May 12, 2004 whenthe Euro to US Dollar exchange rate was 1.19:1, we entered into additionalforeign currency option contracts also summarized below.  We provided a $1.9 million letter of creditin support of the foreign currency option contracts.  To the extent that the quarter end exchangerate falls between the Euro collar exchange rates, fulfillment of the Eurocollar exchange contracts will result in offsetting foreign currency gains andlosses upon expiration.  For eachreporting period we record the fair value, as determined by independentfinancial institutions, of open obligations and the resultant gains and lossesare recorded in the statement of operations. For the three and six months endedJune 30, 2004 we had unrealized losses on our foreign currency options totaling$440,000 and $295,000, respectively, which was recorded in other expense.  Three options having zero value expired duringthe second quarter and six options expired during the first six months of 2004.

 
| ** **          | ** ** | **Euro Collar Exchange Rates** | ** ** |
|---------------------|------------|--------------------------------|------------|
| **Expiration Date** | ** ** | **Contract Date**              | ** ** | **Notional Value** | ** ** | **Purchased  Put Option** | ** ** | **Sold  Call Option** | ** ** | **Purchased  Call Option** | ** ** |
| ** **          | ** ** | ** **                     | ** ** | **(thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| September 30, 2004  |       | February 12, 2004              |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.357 |   | $ | 1.400 |   |
| December 31, 2004   |       | February 12, 2004              |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.354 |   | $ | 1.400 |   |
| March 31, 2005      |       | February 12, 2004              |       | € | 3,000 |   | $ | 1.200 |   | $ | 1.353 |   | $ | — |   |
| June 28, 2005       |       | May 12, 2004                   |       | € | 3,000 |   | $ | 1.150 |   | $ | 1.242 |   | $ | 1.300 |   |

 

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Item 3.             Quantitativeand Qualitative Disclosures About Market Risk

 

InFebruary 2004, we executed several foreign currency option contracts.  See “ – Management’s Discussion and Analysisof Financial Condition and Results of Operations – Currency Contracts”.

 

Item 4.             Controls andProcedures

 

Under the supervision and with the participation of management,including our principal executive officer and principal financial officer, theCompany has evaluated the effectiveness of the design and operation of itsdisclosure controls and procedures as of June 30, 2004, and, based on theirevaluation, the principal executive officer and principal financial officerhave concluded that these controls and procedures are effective.  There were no significant changes in internalcontrols or in other factors that could significantly affect these controlsduring the quarter.

 

Disclosure controls and procedures are the Company’s controls and otherprocedures that are designed to ensure that information required to bedisclosed by the Company in the reports that it files or submits under theSecurities Exchange Act of 1934 as amended (the “Exchange Act”) is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed in the reports that the Company files under theExchange Act is accumulated and communicated to management, including theprincipal executive officer and principal financial officer, as appropriate toallow timely decisions regarding required disclosure.

 

**PART II. OTHER INFORMATION AND SIGNATURE**

 

Item 1.             Legal Proceedings

 

From time to time, we are subject to routinelegal proceedings incidental to the operation of our business.  The outcome of any threatened or pendingproceedings is not expected to have a material adverse effect on our financialcondition, operating results or cash flows, based on our current understandingof the relevant facts.  The Companymaintains insurance coverage against claims in an amount which it believes tobe adequate.

 

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Item 2.             Changes inSecurities

 

None

 

Item 3.             Defaults Upon Senior Securities

 

None

 

Item 4.             Submission ofMatters to a Vote of Security-Holders

 

None

 

Item 5. Other Information

 

None

 

Item 6.             Exhibits andReports on Form 8-K

 

(a)          Exhibits

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

 

(b)         Reports on Form 8-K

 

None

 

15

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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.

 
|                                         | ADVANCED ACCESSORY HOLDINGS CORPORTION |
|----------------------------------------------|----------------------------------------|
|                                         |                                   |
|                                         |                                   |
|                                         |                                   |
| Date:    August 11, 2004 | /s/ Ronald J. Gardhouse                |   |
|                                         | Ronald J. Gardhouse                    |
|                                         | Chief Financial Officer                |
|                                         | (Principal Financial Officer           |
|                                         | and Authorized Signatory)              |

 

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**EXHIBITINDEX**

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

 

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