**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**Form 10-Q**

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

 

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**CommissionFile Number  333-114547**

 

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**ADVANCED ACCESSORY HOLDINGS CORPORATION**

(Exact name ofregistrant as specified 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’stelephone number, including area code)

 

**NOTAPPLICABLE**

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such a period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

Yes    ý          No   o

 

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes    o          No   ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class** | ** ** | **Outstanding at November 12, 2004** |
|-----------|------------|--------------------------------------|
|      |       |                                 |
| Common    |       | 100                                  |

 

 

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**ADVANCEDACCESSORY HOLDINGS CORPORATION**

** **

**INDEX**

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

 

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**PART I.  FINANCIAL INFORMATION**

 

Item 1.    Financial Statements

 

**ADVANCEDACCESSORY HOLDINGS CORPORATION**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

**As ofSeptember 30, 2004 and December 31, 2003**

**(Dollarsin thousands)**

 
| ** **                                                             | ** ** | **Company**       | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                             | ** ** | **2004**          | ** ** | **2003** | ** ** |
| ** **                                                             | ** ** | **(Unaudited)**   | ** ** | ** ** | ** ** |
| ASSETS                                                                 |       |              |       |   |   |
| Current  assets                                                        |       |              |       |   |   |
| Cash                                                                   |       | $                 | 9,442      |   | $ | 16,686 |   |
| Accounts  receivable, less reserves of $1,835 and $2,189, respectively |       | 65,204            |       | 55,363 |   |
| Inventories                                                            |       |              |       |   |   |
| Raw  materials                                                         |       | 23,081            |       | 19,039 |   |
| Work-in-process                                                        |       | 12,149            |       | 9,662 |   |
| Finished  goods                                                        |       | 24,481            |       | 23,075 |   |
| Reserves                                                               |       | (4,401            | )          | (3,448 | ) |
| Total  inventories                                                     |       | 55,310            |       | 48,328 |   |
| Deferred  income taxes                                                 |       | 10,906            |       | 6,087 |   |
| Other  current assets                                                  |       | 18,060            |       | 14,987 |   |
| Total  current assets                                                  |       | 158,922           |       | 141,451 |   |
| Property  and equipment, net                                           |       | 71,852            |       | 73,795 |   |
| Goodwill                                                               |       | 39,596            |       | 39,596 |   |
| Other  intangible assets, net                                          |       | 105,482           |       | 110,156 |   |
| Deferred  income taxes                                                 |       | 474               |       | 336 |   |
| Other  noncurrent assets                                               |       | 2,714             |       | 2,257 |   |
| Total  Assets                                                          |       | $                 | 379,040    |   | $ | 367,591 |   |
|                                                                   |       |              |       |   |   |
| LIABILITIES  AND MEMBERS’ EQUITY                                  |       |              |       |   |   |
| Current  liabilities                                                   |       |              |       |   |   |
| Current  maturities of long-term debt                                  |       | $                 | 1,886      |   | $ | 1,909 |   |
| Accounts  payable                                                      |       | 42,073            |       | 33,285 |   |
| Accrued  liabilities                                                   |       | 31,206            |       | 21,328 |   |
| Deferred  income taxes                                                 |       | 441               |       | 588 |   |
| Total  current liabilities                                             |       | 75,606            |       | 57,110 |   |
|                                                                   |       |              |       |   |   |
| Noncurrent  liabilities                                                |       |              |       |   |   |
| Deferred  income taxes                                                 |       | 6,136             |       | 8,343 |   |
| Other  noncurrent liabilities                                          |       | 4,089             |       | 4,151 |   |
| Long-term  debt, less current maturities                               |       | 238,866           |       | 196,905 |   |
| Total  noncurrent liabilities                                          |       | 249,091           |       | 209,399 |   |
|                                                                   |       |              |       |   |   |
| Members’  equity                                                  |       |              |       |   |   |
| Units                                                                  |       | 58,582            |       | 100,900 |   |
| Other  comprehensive income                                            |       | (174              | )          | 5,690 |   |
| Accumulated  deficit                                                   |       | (4,065            | )          | (5,508 | ) |
| Total  Members’ Equity                                            |       | 54,343            |       | 101,082 |   |
| Total  Liabilities and Members’ Equity                            |       | $                 | 379,040    |   | $ | 367,591 |   |
|                                                                        |            |                   |            |  |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of the

consolidatedcondensed financial statements.

 

1

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**ADVANCEDACCESSORY HOLDINGS CORPORATION**

**CONSOLIDATEDCONDENSED STATEMENTS OF OPERATIONS**

**(Dollarsin thousands)**

**(Unaudited)**

 
| ** **                                                | ** ** | **Company**       | ** ** | **Predecessor**   | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **                                                | ** ** | **Three months**  | ** ** | **Nine months**   | ** ** | **Three months** | ** ** | **April 15, 2003** | ** ** | **January 1, 2003** | ** ** |
| ** **                                                | ** ** | **ended**         | ** ** | **ended**         | ** ** | **ended** | ** ** | **through** | ** ** | **through** | ** ** |
| ** **                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **April 14,** | ** ** |
| ** **                                                | ** ** | **2004**          | ** ** | **2004**          | ** ** | **2003** | ** ** | **2003** | ** ** | **2003** | ** ** |
| ** **                                                | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                                |       | $                 | 93,749     |              | $          | 298,726 |   | $ | 86,770 |   | $ | 171,000 |   | $ | 101,854 |   |
| Cost  of sales                                            |       | 74,961            |       | 232,354           |       | 65,750 |   | 128,825 |   | 76,508 |   |
| Gross  profit                                             |       | 18,788            |       | 66,372            |       | 21,020 |   | 42,175 |   | 25,346 |   |
| Selling,  administrative and product development expenses |       | 14,411            |       | 45,125            |       | 13,862 |   | 23,251 |   | 14,908 |   |
| Stock  option compensation                                |       | —            |       | —            |       | — |   | — |   | 10,125 |   |
| Transaction  expenses                                     |       | —            |       | —            |       | — |   | — |   | 3,784 |   |
| Amortization  of intangible assets                        |       | 2,045             |       | 6,209             |       | 208 |   | 208 |   | 11 |   |
| Operating  income (loss)                                  |       | 2,332             |       | 15,038            |       | 6,950 |   | 18,716 |   | (3,482 | ) |
| Other  income (expense)                                   |       |              |       |              |       |   |   |   |   |   |   |
| Interest  expense                                         |       | (7,146            | )          | (20,334           | )          | (5,590 | ) | (9,114 | ) | (4,772 | ) |
| Loss  resulting from debt extinguishment                  |       | —            |       | —            |       | (326 | ) | (6,293 | ) | — |   |
| Foreign  currency gain (loss), net                        |       | 478               |       | (280              | )          | — |   | 2 |   | 3,240 |   |
| Other  income (expense)                                   |       | 29                |       | (155              | )          | 61 |   | 132 |   | (84 | ) |
|                                                      |       |              |       |              |       |   |   |   |   |   |   |
| Income  (loss) before income taxes                        |       | (4,307            | )          | (5,731            | )          | 1,095 |   | 3,443 |   | (5,098 | ) |
| Provision  (benefit) for income taxes                     |       | (1,239            | )          | (1,666            | )          | 927 |   | 2,816 |   | 1,600 |   |
|                                                      |       |              |       |              |       |   |   |   |   |   |   |
| Net  income (loss)                                        |       | $                 | (3,068     | )                 | $          | (4,065 | ) | $ | 168 |   | $ | 627 |   | $ | (6,698 | ) |
|                                                           |            |                   |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of the

consolidatedcondensed financial statements.

 

2

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**ADVANCEDACCESSORY HOLDINGS CORPORATION**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

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

**(Dollarsin thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Company**       | ** ** | **Predecessor**    | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                | ** ** | ** **        | ** ** | **Period from**    | ** ** | **Period from** | ** ** |
| ** **                                                                                | ** ** | **Nine months**   | ** ** | **April 15, 2003** | ** ** | **January 1, 2003** | ** ** |
| ** **                                                                                | ** ** | **ended**         | ** ** | **through**        | ** ** | **through** | ** ** |
| ** **                                                                                | ** ** | **September 30,** | ** ** | **September 30,**  | ** ** | **April 14,** | ** ** |
| ** **                                                                                | ** ** | **2004**          | ** ** | **2003**           | ** ** | **2003** | ** ** |
|                                                                                      |       |              |       |               |       |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                    |       |              |       |               |       |   |   |
| Net  income (loss)                                                                        |       | $                 | (4,065     | )                  | $          | 627 |   | $ | (6,698 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |              |       |               |       |   |   |
| Depreciation  and amortization                                                            |       | 16,327            |       | 5,370              |       | 3,695 |   |
| Stock  option compensation                                                                |       | —            |       | —             |       | 10,125 |   |
| Loss  resulting from debt extinguishment                                                  |       | —            |       | 6,293              |       | — |   |
| Deferred  taxes                                                                           |       | (6,700            | )          | 550                |       | (87 | ) |
| Foreign  currency (gain) loss                                                             |       | 268               |       | (2                 | )          | (3,061 | ) |
| (Gain)  loss on disposal of assets                                                        |       | 206               |       | (11                | )          | 68 |   |
| Interest  accretion on notes                                                              |       | 5,463             |       | —             |       | — |   |
| Changes  in assets and liabilities, net                                                   |       | (2,580            | )          | (2,261             | )          | (1,144 | ) |
|                                                                                      |       |              |       |               |       |   |   |
| Net  cash provided by (used for) operating activities                                     |       | 8,919             |       | 10,566             |       | 2,898 |   |
|                                                                                      |       |              |       |               |       |   |   |
| CASH  FLOWS USED FOR INVESTING ACTIVITIES:                                                |       |              |       |               |       |   |   |
| Acquisition  of predecessor, net of cash acquired                                         |       | —            |       | (108,367           | )          | — |   |
| Acquisition  of CHAAS Acquisitions, net of cash acquired                                  |       | (84,396           | )          | —             |       | — |   |
| Acquisition  of property and equipment                                                    |       | (8,266            | )          | (5,510             | )          | (2,512 | ) |
| Proceeds  from disposals of property and equipment                                        |       | 88                |       | —             |       | — |   |
| Net  cash (used for) investing activities                                                 |       | (92,574           | )          | (113,877           | )          | (2,512 | ) |
|                                                                                      |       |              |       |               |       |   |   |
| CASH  FLOWS USED FOR FINANCING ACTIVITIES:                                                |       |              |       |               |       |   |   |
| Proceeds  from issuance of debt                                                           |       | 50,273            |       | 347,533            |       | — |   |
| Debt  issuance costs                                                                      |       | (2,379            | )          | (13,302            | )          | — |   |
| Net  increase (decrease) in revolving loan                                                |       | (7,044            | )          | (8,903             | )          | 6,426 |   |
| Repayment  of debt                                                                        |       | (6,312            | )          | (328,767           | )          | (2,218 | ) |
| Issuance  of membership units                                                             |       | 101,082           |       | 100,900            |       | — |   |
| Distributions  to members                                                                 |       | (42,500           | )          | —             |       | (121 | ) |
| Net  cash provided by financing activities                                                |       | 93,120            |       | 97,461             |       | 4,087 |   |
|                                                                                      |       |              |       |               |       |   |   |
| Effect  of exchange rate changes                                                          |       | (23               | )          | 3,368              |       | (296 | ) |
| Net  increase (decrease) in cash                                                          |       | 9,442             |       | (2,482             | )          | 4,177 |   |
| Cash  at beginning of period                                                              |       | —            |       | 6,830              |       | 2,653 |   |
| Cash  at end of period                                                                    |       | $                 | 9,442      |               | $          | 4,348 |   | $ | 6,830 |   |

 

The accompanyingnotes are an integral part of the

consolidatedcondensed financial statements.

 

3

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**ADVANCEDACCESSORY HOLDINGS CORPORATION**

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

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

**(Dollarsin thousands)**

**(Unaudited)**

 
| ** **                       | ** ** | **Company**       | ** ** |
|----------------------------------|------------|-------------------|------------|
| ** **                       | ** ** | ** **        | ** ** | **Other** | ** ** | ** ** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **Members’** | ** ** | **comprehensive** | ** ** | **Retained** | ** ** | **members’** | ** ** |
| ** **                       | ** ** | **capital**       | ** ** | **loss** | ** ** | **earnings** | ** ** | **equity** | ** ** |
|                             |       |              |       |   |   |   |   |   |   |
| Sale  of Membership interest     |       | $                 | 101,082    |   | $ | — |   | $ | — |   | $ | 101,082 |   |
| Currency  translation adjustment |       | —            |       | (174 | ) | — |   | (174 | ) |
| Distribution  to members         |       | (42,500           | )          | — |   | — |   | (42,500 | ) |
| Net  (loss)                      |       | —            |       | — |   | (4,065 | ) | (4,065 | ) |
| Balance  at September 30, 2004   |       | $                 | 58,582     |   | $ | (174 | ) | $ | (4,065 | ) | $ | 54,343 |   |

 

The accompanyingnotes are an integral part of the

consolidatedcondensed financial statements.

 

4

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**ADVANCEDACCESSORY HOLDINGS CORPORATION**

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**(Dollarsin thousands)**

**(Unaudited)**

 

1.             BASISOF PRESENTATION

 

In January 2004, AdvancedAccessory Holdings Corporation (“AAHC”) was formed by our direct parent, CHAASHoldings, LLC (“CHAAS Holdings”) in connection with an offering of our $88,000aggregate principal amount at maturity, 131⁄4% Senior Discount Notes due 2011(the “Senior Discount Notes”).  At thattime our direct parent made a contribution of all of its equity interests inCHAAS Acquisitions, LLC to AAHC in exchange for all the outstanding membershipunits of AAHC.  AAHC is the indirectparent 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” were acquired byCastle Harlan Partners IV, L.P. (the “Acquisition”), a private equityinvestment fund organized and managed by Castle Harlan Inc., a leading privateequity firm.  CHAAS Holdings, LLC and itssubsidiary, CHAAS Acquisitions, LLC (“CHAAS Acquisitions”) were formed in April2003 in connection with the Acquisition.

 

The accompanyingfinancial statements designated as the “Company” are the financial statementsof AAHC for periods subsequent to its formation in January 2004 and are thefinancial statements of CHAAS Acquisitions LLC, its subsidiary, prior toJanuary 2004.  All financial statementsprior to April 15, 2003, the date of the Acquisition, are that of AdvancedAccessory Systems, LLC and are referred to as the financial statements of the “Predecessor.”

 

The Acquisition wasaccounted for in accordance with the purchase method of accounting.  Accordingly, the purchase price of theAcquisition has been allocated to identifiable assets acquired and liabilitiesassumed based upon their estimated fair values at the acquisition date.

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include allinformation and footnotes required by accounting principles generally acceptedin the Unites States of America for complete financial statements and should beread in conjunction with the Registration Statement on Form S-4 and the AnnualReport on Form 10-K for the year ended December 31, 2003 for CHAASAcquisitions, LLC.

 

In the opinion of theCompany, the accompanying unaudited consolidated condensed financial statementscontain all adjustments, which are normal and recurring in nature, necessary topresent fairly its financial position as of September 30, 2004 and December 31,2003 and the results of its and the Predecessor’s operations for the nine-monthand three-month periods ended September 30, 2004 and 2003.

 

2.             COMPREHENSIVEINCOME

 

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

 
| ** **                                                   | ** ** | **Company**                                  | ** ** | **Predecessor**                             | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **Three months  ended  September 30,  2004** | ** ** | **Nine months  ended  September 30,  2004** | ** ** | **Three months  ended  September 30,  2003** | ** ** | **Period from  April 15, 2003  through  September 30,  2003** | ** ** | **Period from  January 1, 2003  through April  14,**

**2003** | ** ** |
| Net income  (loss)                                           |       | $                                            | (3,068     | )                                           | $          | (4,065 | ) | $ | 168 |   | $ | 627 |   | $ | (6,698 | ) |
| Change in the  cumulative translation adjustment, net of tax |       | 1,112                                        |       | (174                                        | )          | 3,373 |   | 2,462 |   | (424 | ) |
| Comprehensive  income (loss)                                 |       | $                                            | (1,956     | )                                           | $          | (4,239 | ) | $ | 3,541 |   | $ | 3,089 |   | $ | (7,122 | ) |

 

### **3.**             CURRENCYCONTRACTS

 

We have significantoperations in Europe where the functional currency is the Euro.  During 2003, the Euro strengthenedconsiderably against the U.S. dollar and it is our objective to protect reportedearnings from volatility in the Euro/U.S. dollar exchange rates.  On February 12, 2004, when the Euro to theU.S. Dollar exchange rate was 1.28:1, we entered into a series of

 

5

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foreign currency forwardoption contracts related to the Euro (“Euro Collar”) 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 $1,900 letter of credit insupport of the foreign currency option contracts.  To the extent that the quarter end exchangerate falls between the Euro collar exchange rates, fulfillment of the Eurocollar exchange contracts will result in offsetting foreign currency gains andlosses upon expiration.  For eachreporting period we record the fair value, as determined by independentfinancial institutions, of open obligations and the resultant gains and lossesare recorded in the statement of operations. We recorded an unrealized gain on our foreign currency options in thethird quarter of 2004 of $215 and a loss of $80 for the nine months endedSeptember 30, 2004.  These items wererecorded in other income (expense). Three options having zero value expired during the third quarter andnine options expired during the first nine months of 2004.

 

**EuroCollar Exchange Rates**

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

 

4.             LONG-TERMDEBT

 

On February 4, 2004, AAHCissued the Senior Discount Notes, which will have an aggregate principal amountof $88,000 at maturity in a offering exempt from the registration requirementsof the Securities Act.  The net proceedsfrom the issuance were approximately $47,773 after deducting expenses relatedto the issuance of debt.  In conjunctionwith the offering, we committed to purchase, repay or prepay, on terms as maybe negotiated, not less than $5,000 in the aggregate principal amount of theour then outstanding debt.  On February5, 2004, we purchased $4,666 face value of the subordinated promissory notesheld by members of our Predecessor in connection with the Acquisition.  Proceeds of $42,500 were used to redeem aportion of the equity interests of our direct parent, CHAAS Holdings.

 

In connection with theissuance of the Senior Discount Notes, we entered into a registration rightsagreement which required us to offer the holders of the original notes theopportunity 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 theSecurities and Exchange Commission (“SEC”) on April 16, 2004.  The SEC declared the registration statementeffective on April 29, 2004.  We launchedan exchange offer with respect to the $88,000 of the original notes on April30, 2004.  The exchange offer expired onMay 28, 2004 and was consummated on September 1, 2004.

 

6

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

 

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

 

### **OVERVIEW**

 

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

 

### **Company Background**

 

On April 15, 2003,substantially all of the equity interests of the Predecessor were acquired byCastle Harlan Partners IV, L.P., a private equity investment fund organized andmanaged 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. In January 2004, AAHC was formed by our direct parent, CHAAS Holdings inconnection with an offering of our 131⁄4% Senior Discount Notes.  At that time our direct parent made acontribution of all of its equity interests in CHAAS Acquisitions, LLC to AAHCin exchange for all the outstanding membership units of AAHC.  AAHC is the indirect parent of the Predecessor.

 

**RESULTS OF OPERATIONS**

 

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

 

*Net sales.* Net sales for thethird quarter of 2004 were $93.7 million, representing an increase of $6.9million, or 8.0%, compared with net sales of $86.8 million for the thirdquarter of 2003.  This increase includesapproximately $2.2 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 $722,000, an increase of approximately $2.5 million representingrevenue from surcharges for steel imposed primarily on products sold to aftermarketcustomers and other increases in aftermarket sales of $1.5 million.  Sales to OEM customers were higher due to newprogram launches for SportRack in Europe and for Valley in North America.

 

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

 

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during the third quarter of 2004 due to several factors includingincreased demand for steel products from China, the weakened U.S. Dollar, theconsolidation of the steel producing industry and a reduction in overallproduction capacity.  During the quarter,increased cost of steel resulted in lower gross profit of approximately$736,000 net of recovery through the introduction of steel surcharges on someof our aftermarket towing systems products. In order to secure future businesswith certain of our OEM customers we granted price decreases on severalproducts.  These reduced prices totaledapproximately $1.6 million during the third quarter.

 

*Selling, administrative and product developmentexpenses.*Selling, administrative and product development expensesfor the third quarter of 2004 were $14.4 million representing an increase of$549,000, or 4.0%, compared with selling, administrative and productdevelopment expenses of $13.9 million for the third quarter of 2003.  This increase is primarily due to higherselling expenses at Brink, which includes the effect of a weaker U.S. dollarexchange rate against the Euro and higher corporate expenses.

 

*Amortizationof intangible assets*. Amortization of intangible assets for the third quarter of 2004 was $2.0million representing an increase of $1.8 million compared with amortization ofintangible assets of $208,000 for the third quarter of 2003.  The increase in amortization results fromamortization of intangible assets identified in the allocation of the Acquisitionpurchase price over their respective economic lives.

 

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

 

*Interest expense.*  Interest expense for the third quarter of 2004was $7.1 million representing an increase of $1.6 million or 27.8%, comparedwith interest expense of $5.6 million for the third quarter of 2003.  This increase is due to the higher level ofdebt outstanding during the third quarter of 2004 resulting from the issuanceof our Senior Discount Notes in February 2004.

 

*Foreigncurrency gain (loss).* We had a foreign currency gain in the third quarter of 2004 of $478,000as compared to no foreign currency gain or loss in the third quarter of2003.  The gain is primarily attributableto the U.S. dollar denominated intercompany indebtedness of Brink, whosefunctional currency is the Euro and a weakening of the U.S. Dollar against theEuro during the third quarter of 2004. The intercompany indebtedness for our foreign subsidiaries other thanBrink are 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 account andincluded in other comprehensive income. Our Predecessor’s foreign currency gains and losses were primarilyrelated to the intercompany indebtedness of our foreign subsidiaries includingBrink.

 

*Provisionfor income taxes.* During the third quarter of 2004 we had aloss before income taxes of $4.3 million and recorded an income tax benefit of$1.2 million.  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, the Predecessor’sdomestic taxable income accrued to the individual members.  Certain of the Company’s domesticsubsidiaries and foreign subsidiaries were subject to income taxes in theirrespective jurisdictions. Effective on April 20, 2003 we filed an election forall our domestic subsidiaries to be treated as regular corporations andtherefore they are now subject to federal income tax.  During the third quarter of 2003 we had netincome before taxes of $1.1 million and recorded a provision for income taxesof $927,000.

 

*Net income (loss)*. We had a netloss of $3.1 million for the third quarter of 2004 and net income of $168,000for the third quarter of 2003.  Thedecrease of $3.2 million is due to lower operating income and higher interestexpense in 2004.  These were partiallyoffset by the 2003 loss resulting from debt extinguishment, the 2004 foreigncurrency gain and an income tax benefit in 2004 compared to an income taxprovision in 2003.

 

**Nine Months Ended September 30,2004 for the Company Compared to the Period April 15, 2003 through September30, 2003 for the Company and the Period from January 1, 2003 through April 14,2003 for the Predecessor.**

 

*Net sales.* Netsales for the first nine months of 2004 were $298.7 million.  Net sales for the period from April 15, 2003through September 30, 2003 and for the period from January 1, 2003 throughApril 14, 2003 were $171.0 million and $101.9 million respectively.  This increase of  $25.9 million, or 9.5%, includesapproximately $8.3 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 $10.5 million, an increase of approximately $3.1 million in salesto our automotive aftermarket customers and an increase of approximately $4.4million 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 Europe and for Valley in North America.  These increases were partially offset bydecreased prices

 

8

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

 

*Gross profit.* Gross profit forthe first nine months of 2004 was $66.4 million.  Gross profit for the period from April 15,2003 through September 30, 2003 and for the period from January 1, 2003 throughApril 14, 2003 was $42.2 million and $25.3 million, respectively.  This decrease of $1.1 million resulted from adecrease in the gross profit percentage partially offset by higher sales.  Gross profit as a percentage of net sales was22.2% for the first nine months of 2004, 24.7% for the period from April 15,2003 through September 30, 2003 and 24.9% for the period from January 1, 2003through April 14, 2003. The decreased gross margin percentage reflects highercosts for steel and aluminum, price decreases to our OEM customers and higherrent expense. The price of steel increased dramatically during the first threequarters of 2004 due primarily to several factors including increased demandfor steel products from China, 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 first nine months of 2004increased cost of steel resulted in lower gross profit of approximately $3.1million net of recovery through the introduction of steel surcharges on some ofour aftermarket towing systems products. In order to secure future business with certain of our OEM customers wegranted price decreases on several products. These reduced prices totaled approximately $2.4 million during the firstnine months. Gross profit was further reduced by approximately $900,000 inincreased rent expense for two manufacturing facilities that were included in asale and leaseback transaction during the fourth quarter of 2003.

 

*Selling, administrative and product developmentexpenses.*  Selling,administrative and product development expenses for the first nine months of2004 were $45.1 million.  Selling,administrative and product development expenses for the period from April 15,2003 through September 30, 2003 and from the period from January 1, 2003 throughApril 14, 2003 were $23.3 million and $14.9 million, respectively. Thisincrease of $6.9 million, or 18.2% is primarily due to higher administrativeexpenses of $2.1 million, higher selling expenses of $1.1 million, $1.7 millionresulting from an increase in the average exchange rates between the U.S.dollar and the Euro, the inclusion of management fees to Castle Harlan sinceApril 15, 2003 which resulted in a net increase of $870,000 in 2004 and$590,000 in increased product development costs.

 

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

 

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

 

*Operating income. *Our operating income was $15.0 million for the firstnine months of 2004 and $18.7 million for the period form April 15, 2003through September 30, 2003.  We had anoperating loss for the period from January 1, 2003 through April 14, 2003of  $3.5 million.  This decrease of $189,000 resulted fromdecreased gross margin and increased selling, administrative and productdevelopment expense and amortization of intangible assets in 2004.  These were partially offset by stock optioncompensation and transaction expenses of $10.1 million and $3.8 million,respectively, that were incurred in 2003.

 

*Interest expense.*  Interest expense for the first nine months of2004 was $20.3 million.  Interest expensefor the period from April 15, 2003 through September 30, 2003 and for theperiod from January 1, 2003 through April 14, 2003 was $9.1 million and $4.8million, respectively.  This increaseof  $6.4 million, or 46.4%, is due to thehigher level of debt outstanding resulting from the issuance of our SeniorDiscount Notes in February 2004.

 

*Lossresulting from debt extinguishment.*  On May 23, 2003, our subsidiaries issued $150million of our 103⁄4% senior notes due 2011, the proceeds of which were used torepay a senior subordinated bridge note and a portion of our creditfacility.  As a result we incurred anextinguishment loss of $6.3 million.

 

*Foreign currency gain (loss).*  We had a foreign currency loss for the firstnine months of 2004 of $280,000.  We hadforeign currency gains during the period from April 15, 2003 through September30, 2003 and the period from January 1, 2003 through April 14, 2003, of $2,000and $3.2 million, respectively. The foreign currency loss is primarilyattributable to the U.S. dollar denominated intercompany indebtedness of Brink,whose functional currency is the Euro. During the first nine months of 2004 the U.S. Dollar at firststrengthened in comparison with the Euro and then weakened, resulting in asmall net strengthening for the period. The intercompany indebtedness for our foreign subsidiaries other thanBrink is deemed to be permanently invested and therefore changes in

 

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the intercompany balances for these subsidiaries caused by foreigncurrency fluctuations have been recorded in the currency translation adjustmentaccount and included in other comprehensive income.  Our Predecessor’s foreign currency gains andlosses were primarily related to the intercompany indebtedness of our foreignsubsidiaries including Brink.  During theperiod from April 15, 2003 through September 30, 2003 and the period fromJanuary 1, 2003 through April 14, 2003 the U.S. dollar weakened in relation tothe Euro and the Canadian dollar resulting in the foreign currency gainrecorded in those periods.

 

*Provisionfor income taxes.* During the first nine months of 2004 we hada loss before income taxes of $5.7 million and recorded an income tax benefitof $1.7 million.  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, the Predecessor’sdomestic taxable income accrued to the individual members.  Certain of the Company’s domesticsubsidiaries and foreign subsidiaries were subject to income taxes in theirrespective jurisdictions. Effective on April 20, 2003 we filed an 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 throughSeptember 30, 2003, we had net income before taxes of $3.4 million and recordeda provision for income taxes of $2.8 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 $4.1 million for the firstnine months of 2004, net income of $627,000 for the period from April 15, 2003through September 30, 2003 and a net loss of $6.7 million for the period fromJanuary 1, 2003 through April 14, 2003. The increase of $2.0 million is due tolower operating income and higher interest expense in 2004.  These were partially offset by the lossresulting from debt extinguishment in 2003 and recording an income tax benefitin 2004 rather than a provision for income taxes in 2003.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our principal liquidity requirements are to serviceour debt and meet our working capital and capital expenditure needs.  Our indebtedness at September 30, 2004 was$240.8 million including current maturities of $1.9 million.  We expect to be able to meet our liquidityrequirements for the foreseeable future through cash provided by operations andthrough borrowings available under our revolving credit facilities.

# * *

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

 

Working capitaland key elements of the consolidated statement of cash flows are:

 
| ** **      | ** ** | **Company**             | ** ** |
|-----------------|------------|-------------------------|------------|
| ** **      | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| ** **      | ** ** | **(in thousands)**      | ** ** |
| Working Capital |       | $                       | 83,316     |   | $ | 84,341 |   |
|                 |            |                         |            |  |  |  |  |

 
| ** **                                  | ** ** | **Company**                                | ** ** | **Predecessor**                                               | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Nine months  ended  September 30, 2004** | ** ** | **Period from  April 15, 2003  through  September 30,  2003** | ** ** | **Period from  January 1, 2003  through  April 14,**

**2003** | ** ** |
| ** **                                  | ** ** | **(in thousands)**                         | ** ** | **(in thousands)**                                            | ** ** |
| Cash flows provided by operating activities |       | $                                          | 8,919      |                                                          | $          | 10,566 |   | $ | 2,898 |   |
| Cash flows (used for) investing activities  |       | $                                          | (92,574    | )                                                             | $          | (113,877 | ) | $ | (2,512 | ) |
| Cash flows provided by financing activities |       | $                                          | 93,120     |                                                          | $          | 97,461 |   | $ | 4,087 |   |

 

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*Working capital*

 

Workingcapital decreased by $1.0 million to $83.3 million at September 30, 2004 from$84.3 million at December 31, 2003.  Thisnet decrease includes a decrease in cash of $7.2 million, an increase inaccounts payable of $8.7 million and an increase in other current liabilitiesof $9.9 million. These decreases were partially offset by an increase inaccounts receivable of $9.7 million, an increase in inventories of $7.0million, an increase in deferred tax assets of $4.8 million and an increase inother current assets of $3.0 million.

 

Increases in accounts payable reflected increasedpurchasing activities to support the increased sales volume.  The increase in accrued expenses is primarilydue to an increase in accrued interest on our subsidiary’s $150 million ofSenior Notes.  The increase in accountsreceivable was attributable to the timing of payments from OEM customers and toincreased sales levels in the third quarter of 2004 as compared with the fourthquarter of 2003.  Inventory increasedprimarily for our aftermarket products to support seasonally higher sales forthe period as compared with the period prior to December 31, 2003.  Differences in sales levels between the twoperiods are primarily due to increased sales to automotive OEMs and seasonalsales levels of our aftermarket products. Our aftermarket products have higher sales in the second and thirdquarters and lower sales in the fourth and first quarters.

* *

*Operating Activities*

 

Ouroperations provided $8.9 million in cash during the first nine months of 2004compared to $10.6 million for the period April 15, 2003 through September 30,2003 and $2.9 million for the period January 1, 2003 through April 14,2003.  The decrease of $4.5 million isprimarily due to decreased net income before depreciation and amortization andbefore expenses for stock option compensation and debt extinguishment of $12.3million during the first nine months of 2004 as compared to $19.4 million inthe first nine months of 2003 and an increase in deferred tax assets in 2004 of$5.7 million.  These uses are primarilyoffset by a foreign currency loss in the first nine months of 2004 of $268,000compared to a gain in the first nine months of 2003 of $3.1 million and asmaller increase in working capital excluding cash for the same periods.

 

*Investing Activities*

 

During the first ninemonths of 2004 we acquired CHAAS Acquisitions, our wholly owned subsidiary,from our direct parent for $84.4 million net of cash on hand of $16.7 millionand during the first nine months of 2003 we acquired all of the equityinterests of Advanced Accessory Systems, LLC for $108.4 million. Cash flow usedfor investing activities for the first nine months of 2004 and 2003 alsoincluded acquisitions of property and equipment of $8.2 million and $8.0million, respectively, and were primarily for the expansion of capacity,productivity and process improvements and maintenance.

 

*Financing Activities*

 

During the first ninemonths of 2004 financing cash flows included the issuance of our membershipunits for $101.1 million, proceeds from the issuance of our Senior DiscountNotes of $50.3 million, payment of debt issuance costs of $2.4 million,repayment of debt of $6.3 million, a reduction in borrowings under therevolving line of credit of $7.1million and a payment to our direct parent of$42.5 million to redeem a portion of their equity interest.

 

During the period fromApril 15, 2003 through September 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 indebtedness,including all amounts due under its then existing credit facility.  On May 23, 2003 we sold $150.0 million of ourSenior Notes due 2011 which proceeds were used to refinance the convertiblesenior subordinated note and a portion of loans under the new creditfacility.  We also borrowed an additional$2.3 million under our revolving loans.

 

During the period fromJanuary 1, 2003 through April 14, 2003 our Predecessor made $2.2 million inregularly scheduled principal payments on its term notes under its thenexisting credit facility, borrowed $6.4 million on its revolving facility andmade distributions to its members totaling $121,000.

 

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***Debt and Credit Sources***

 

Our indebtedness was$240.8 million at September 30, 2004.  Weexpect that its primary sources of cash will be from operating activities andborrowings under its revolving credit facilities.  As of September 30, 2004, we had borrowingsunder the revolving credit facilities totaling $10.6 million and had $38.1million of available borrowing capacity. Standby letters of credit totaling $2.9 million provided as security forour U.S. workers compensation program and $1.9 million provided security to afinancial institution for foreign currency instruments reduced borrowingavailability.  As of September 30, 2004,we were in compliance with the various covenants under the debt agreementspursuant to which we have borrowed or may borrow.

 

On February 4, 2004, weissued our Senior Discount Notes, which will have an aggregate principal amountof $88.0 million at maturity in a offering exempt from the registrationrequirements of the Securities Act.  Thenet proceeds from the issuance were approximately $47.8 million after deductionof expenses related to the issuance.  Inconjunction with the offering, we committed to purchase, repay or prepay, onterms as may be negotiated, not less than $5.0 million in the aggregateprincipal amount of our then outstanding debt. On February 5, 2004, we purchased $4.7 million face value of thesubordinated promissory notes held by members of our Predecessor in connectionwith the Acquisition.  Proceeds of $42.5million were used to redeem a portion of the equity interests of our directparent, CHAAS Holdings.

 

In connection with the issuance of the Senior DiscountNotes, we entered into a registration rights agreement which required us tooffer the holders of the original notes the opportunity to exchange them forreplacement notes which are identical in principal amount and all othermaterial respects to the original notes, except that the New Senior DiscountNotes would not bear legends restricting the transfer thereof.  We filed a registration statement on Form S-4for the New Senior Discount Notes with the SEC on April 16, 2004.  The SEC declared the registration statementeffective on April 29, 2004.  We launchedan exchange offer with respect to the $88.0 million of the original notes onApril 30, 2004.  The exchange wasconsummated on May 29, 2004.

 

Our ability to satisfyour debt obligations will depend upon our future operating performance, whichwill be affected by prevailing economic conditions and financial, business, andother factors, certain of which are beyond our control, as well as theavailability of revolving credit borrowings under our current or successorcredit facilities.  We anticipate that,based on current and expected levels of operations, our operating cash flow,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,selling assets, restructuring or refinancing our indebtedness or seekingadditional equity capital. There is no assurance that any of these remedies canbe effected 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.

 

### **International Operations**

 

We conduct operations inseveral foreign countries including Canada, the Czech Republic, Denmark,France, Germany, Italy, The Netherlands, Poland, Spain, Sweden and the UnitedKingdom.  Net sales from internationaloperations during the third quarter of 2004 were approximately $35.0 million,or 37.4% of our net sales. At September 30, 2004, assets associated with theseoperations were approximately 34.9% of total assets, and we had indebtednessdenominated in currencies other than the U.S. Dollar of approximately $21.5million.

 

Our internationaloperations may be subject to volatility because of currency fluctuations,inflation and changes in political and economic conditions in thesecountries.  Most of the revenues andcosts and expenses of our operations in these countries are denominated in thelocal currencies. The financial position and results of operations of theCompany’s foreign subsidiaries are measured using the local currency as thefunctional currency.

 

### **Currency contracts**

 

We have significantoperations in Europe where the functional currency is the Euro.  By the end of 2003 the Euro strengthenedconsiderably against the U.S. dollar and it is our objective to protectreported earnings from volatility in the Euro/U.S. dollar exchange rates.  On February 12, 2004, when the Euro to theU.S. Dollar exchange rate was 1.28:1, we entered into a series of foreigncurrency forward option contracts related to the Euro (“Euro Collar”), whichmature quarterly on a staggered basis, as summarized below.  On May 12, 2004 when the Euro to US Dollarexchange rate was 1.19:1, we entered into additional foreign currency optioncontracts also summarized below.  Weprovided a $1.9 million letter of credit in support of the foreign currencyoption contracts.  To the extent that 

 

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the quarter end exchangerate falls between the Euro collar exchange rates, fulfillment of the Eurocollar exchange contracts will result in offsetting foreign currency gains andlosses upon expiration.  For eachreporting period we record the fair value, as determined by independentfinancial institutions, of open obligations and the resultant gains and lossesare recorded in the statement of operations. We recorded an unrealized gain on our foreign currency options in thethird quarter of 2004 of $215,000 and a loss of $80,000 for the nine monthsended September 30, 2004.  These itemswere recorded in other income (expense). Three options having zero value expired during the third quarter andnine options expired during the first nine months of 2004.

 

**EuroCollar Exchange Rates**

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

 

Item 3.    Quantitative and QualitativeDisclosures About Market Risk

 

In February 2004, weexecuted several foreign currency option contracts.  See “ — Management’s Discussion and Analysisof Financial Condition and Results of Operations — Currency Contracts”.

 

Item 4.    Controls and Procedures

 

Underthe supervision and with the participation of management, including ourprincipal executive officer and principal financial officer, the Company hasevaluated the effectiveness of the design and operation of its disclosurecontrols and procedures as of September 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.

 

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

 

**PART II.  OTHER INFORMATION AND SIGNATURE**

 

Item 1.    Legal Proceedings

 

From time to time, we are subject to routine legalproceedings 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.

 

Item 2.    Changesin Securities, Use of Proceeds andIssuer Purchases of Equity Securities

 

None

 

Item 3.    Defaults Upon Senior Securities

 

None

 

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Item 4.    Submission of Matters to a Voteof Security-Holders

 

None

 

Item 5. Other Information

 

None

 

Item 6.    Exhibits

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

 

14

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |              | ADVANCED ACCESSORY  HOLDINGS CORPORTION |
|--------|-------------------|-----------------------------------------|
|   |              |                                    |
|   |              |                                    |
| Date:  | November 12, 2004 | /s/ Ronald J. Gardhouse                 |   |
|   |              | Ronald J. Gardhouse                     |
|   |              | Chief Financial Officer                 |
|   |              | (Principal Financial  Officer           |
|   |              |  and Authorized Signatory)         |

 

15

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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. |

 

16

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