**UNITEDSTATES**

**SECURITIESAND 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  March 31, 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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**ADVANCEDACCESSORY 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 address  and former fiscal year, if changed since last report) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such a period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

| Yes |   | ý |   | No |   | o |
|-----|--------|--------|--------|----|--------|---|

 

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

 

| Yes |   | o |   | No |   | ý |
|-----|--------|---|--------|----|--------|--------|

 

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

 

| **Class**        |   | **Outstanding at May 12, 2004** |
|------------------|--------|---------------------------------|
| Membership Units |   | 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 March 31, 2004  and as of December 31, 2003 |   |
|                                            |      |   |   |
|                                            |      | Consolidated Condensed Statements of  Operations of the Company for the three months  ended March 31, 2004 and the Consolidated Condensed Statements of  Operations for  the Predecessor for the three months ended March 31, 2003 |   |
|                                            |      |   |   |
|                                            |      | Consolidated Condensed Statements of Cash  Flows for the Company for the three months  ended March 31, 2004 and the Consolidated Condensed Statements of Cash  Flows for the  Predecessor for the three months ended March 31, 2003 |   |
|                                            |      |   |   |
|                                            |      | Consolidated Condensed Statement of Changes  in Members’ Equity for the three months  ended March 31, 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

 

**ADVANCEDACCESSORY HOLDINGS CORPORATION**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

**Asof March 31, 2004 and December 31, 2003**

**(Dollarsin thousands)**

 
|                                                                   |   | **Company**            |    |
|------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                   |   | **March 31,2004** |    | **December 31,2003** |   |
|                                                                   |   | **(Unaudited)**        |    |   |   |
| ASSETS                                                                 |   |                   |    |   |   |
| Current assets                                                         |   |                   |    |   |   |
| Cash                                                                   |   | $                      | 18,916  |   | $ | 16,686 |   |
| Accounts receivable, less reserves of  $2,048 and $2,189, respectively |   | 65,056                 |    | 55,363 |   |
| Inventories                                                            |   |                   |    |   |   |
| Raw materials                                                          |   | 19,728                 |    | 19,039 |   |
| Work-in-process                                                        |   | 9,969                  |    | 9,662 |   |
| Finished goods                                                         |   | 24,972                 |    | 23,075 |   |
| Reserves                                                               |   | (3,703                 | )       | (3,448 | ) |
| Total inventories                                                      |   | 50,966                 |    | 48,328 |   |
| Deferred income taxes                                                  |   | 8,304                  |    | 6,087 |   |
| Other current assets                                                   |   | 16,097                 |    | 14,987 |   |
| Total current assets                                                   |   | 159,339                |    | 141,451 |   |
| Property and equipment, net                                            |   | 72,311                 |    | 73,795 |   |
| Goodwill                                                               |   | 39,596                 |    | 39,596 |   |
| Other intangible assets, net                                           |   | 109,562                |    | 110,156 |   |
| Deferred income taxes                                                  |   | 551                    |    | 336 |   |
| Other noncurrent assets                                                |   | 2,395                  |    | 2,257 |   |
|                                                                   |   | $                      | 383,754 |   | $ | 367,591 |   |
|                                                                   |   |                   |    |   |   |
| LIABILITIES AND MEMBERS’ EQUITY                                   |   |                   |    |   |   |
| Current liabilities                                                    |   |                   |    |   |   |
| Current maturities of long-term debt                                   |   | $                      | 1,892   |   | $ | 1,909 |   |
| Accounts payable                                                       |   | 41,446                 |    | 33,285 |   |
| Accrued liabilities                                                    |   | 28,253                 |    | 21,328 |   |
| Deferred income taxes                                                  |   | 555                    |    | 588 |   |
| Total current liabilities                                              |   | 72,146                 |    | 57,110 |   |
|                                                                   |   |                   |    |   |   |
| Noncurrent liabilities                                                 |   |                   |    |   |   |
| Deferred income taxes                                                  |   | 8,326                  |    | 8,343 |   |
| Other noncurrent liabilities                                           |   | 4,136                  |    | 4,151 |   |
| Long-term debt, less current maturities                                |   | 242,504                |    | 196,905 |   |
| Total noncurrent liabilities                                           |   | 254,966                |    | 209,399 |   |
|                                                                   |   |                   |    |   |   |
| Members’ equity                                                   |   |                   |    |   |   |
| Units                                                                  |   | 58,582                 |    | 100,900 |   |
| Other comprehensive income                                             |   | (985                   | )       | 5,690 |   |
| Retained earnings (accumulated deficit)                                |   | (955                   | )       | (5,508 | ) |
|                                                                   |   | 56,642                 |    | 101,082 |   |
|                                                                   |   | $                      | 383,754 |   | $ | 367,591 |   |

 

The accompanying notes are an integral partof the

consolidated condensed financial statements.

 

1

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**ADVANCEDACCESSORY HOLDINGS CORPORATION**

**CONSOLIDATEDCONDENSED STATEMENTS OF OPERATIONS**

** (Dollars in thousands)**

**(Unaudited)**

 
|                                                      |   | **Company**                                  |   | **Predecessor**                              |   |
|-----------------------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------------|--------|
|                                                      |   | **Three  months  endedMarch 31,  2004** |   | **Three  months  endedMarch 31,  2003** |   |
|                                                      |   |                                         |   |                                         |   |
| Net sales                                                 |   | $                                            | 96,631 |                                         | $      | 85,340 |   |
| Cost of sales                                             |   | 74,064                                       |   | 64,261                                       |   |
|                                                      |   |                                         |   |                                         |   |
| Gross profit                                              |   | 22,567                                       |   | 21,079                                       |   |
|                                                      |   |                                         |   |                                         |   |
| Selling, administrative and product  development expenses |   | 15,085                                       |   | 12,399                                       |   |
| Amortization of intangible assets                         |   | 2,051                                        |   | 7                                            |   |
|                                                      |   |                                         |   |                                         |   |
| Operating income (loss)                                   |   | 5,431                                        |   | 8,673                                        |   |
|                                                      |   |                                         |   |                                         |   |
| Other income (expense)                                    |   |                                         |   |                                         |   |
| Interest expense                                          |   | (6,134                                       | )      | (3,832                                       | )      |
| Foreign currency gain (loss), net                         |   | (773                                         | )      | 3,596                                        |   |
| Other income (expense)                                    |   | 56                                           |   | (65                                          | )      |
|                                                      |   |                                         |   |                                         |   |
| Income (loss) before income taxes                         |   | (1,420                                       | )      | 8,372                                        |   |
| Provision (benefit) for income taxes                      |   | (465                                         | )      | 1,561                                        |   |
| Net income (loss)                                         |   | $                                            | (955   | )                                            | $      | 6,811 |   |

 

The accompanying notes are an integral partof the

consolidated condensed financial statements.

 

2

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**ADVANCEDACCESSORY HOLDINGS CORPORATION**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

**(Unaudited)**

 
|                                                                             |   | **Company**                                  |   | **Predecessor**                              |   |
|----------------------------------------------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------------|--------|
|                                                                             |   | **Three  months  endedMarch 31,  2004** |   | **Three  months  endedMarch 31,  2003** |   |
|                                                                             |   |                                         |   |                                         |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                            |   |                                         |   |                                         |   |
| Net income (loss)                                                                |   | $                                            | (955   | )                                            | $      | 6,811 |   |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                                         |   |                                         |   |
| Depreciation and amortization                                                    |   | 5,305                                        |   | 3,246                                        |   |
| Deferred taxes                                                                   |   | (2,167                                       | )      | 75                                           |   |
| Foreign currency gain                                                            |   | (5                                           | )      | (3,529                                       | )      |
| Loss on disposal of assets                                                       |   | 114                                          |   | 68                                           |   |
| Interest accretion on notes                                                      |   | 1,410                                        |   | —                                       |   |
| Changes in assets and liabilities, net                                           |   | 740                                          |   | (5,036                                       | )      |
|                                                                             |   |                                         |   |                                         |   |
| Net cash provided by operating activities                                        |   | 4,442                                        |   | 1,635                                        |   |
|                                                                             |   |                                         |   |                                         |   |
| CASH FLOWS USED FOR INVESTING ACTIVITIES:                                        |   |                                         |   |                                         |   |
| Acquisition net of cash acquired                                                 |   | (84,396                                      | )      | —                                       |   |
| Acquisition of property and equipment                                            |   | (2,645                                       | )      | (2,512                                       | )      |
|                                                                             |   |                                         |   |                                         |   |
| Net cash used for investing activities                                           |   | (87,041                                      | )      | (2,512                                       | )      |
|                                                                             |   |                                         |   |                                         |   |
| CASH FLOWS USED FOR FINANCING ACTIVITIES:                                        |   |                                         |   |                                         |   |
| Proceeds from issuance of debt                                                   |   | 50,273                                       |   | 722                                          |   |
| Debt issuance costs                                                              |   | (2,251                                       | )      | —                                       |   |
| Net increase (decrease) in revolving loan                                        |   | (390                                         | )      | 1,850                                        |   |
| Repayment of debt                                                                |   | (5,227                                       | )      | (2,218                                       | )      |
| Issuance of membership units                                                     |   | 101,082                                      |   | —                                       |   |
| Distributions to members                                                         |   | (42,500                                      | )      | (121                                         | )      |
| Net cash provided by financing activities                                        |   | 100,987                                      |   | 233                                          |   |
|                                                                             |   |                                         |   |                                         |   |
| Effect of exchange rate changes                                                  |   | 528                                          |   | (22                                          | )      |
| Net increase (decrease) in cash                                                  |   | 18,916                                       |   | (666                                         | )      |
| Cash at beginning of period                                                      |   | —                                       |   | 2,653                                        |   |
| Cash at end of period                                                            |   | $                                            | 18,916 |                                         | $      | 1,987 |   |

 

The accompanying notes are an integral partof the

consolidated condensed financial statements.

 

3

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**ADVANCEDACCESSORY HOLDINGS CORPORATION**

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

**(Dollarsin thousands)**

**(Unaudited)**

 
|                            |   | **Company**                |    |
|---------------------------------|--------|----------------------------|---------|
|                            |   | **Members’  capital** |    | **Othercomprehensive  loss** |   | **Retained  earnings** |   | **Totalmembers’  equity** |   |
|                            |   |                       |    |   |   |   |   |   |   |
| Sale of Membership interest     |   | $                          | 101,082 |   | $ | — |   | $ | — |   | $ | 101,082 |   |
| Currency translation adjustment |   | —                     |    | (985 | ) | — |   | (985 | ) |
| Distribution to members         |   | (42,500                    | )       | — |   | — |   | (42,500 | ) |
| Net loss                        |   | —                     |    | — |   | (955 | ) | (955 | ) |
| Balance at March 31, 2003  |   | $                          | 58,582  |   | $ | (985 | ) | $ | (955 | ) | $ | 56,642 |   |

 

The accompanying notes are an integral partof the

consolidated condensed financial statements.

 

4

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**ADVANCED ACCESSORY HOLDINGS CORPORATION**

**NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS**

**(Dollars in thousands)**

**(Unaudited)**

 

1.                                       BASISOF PRESENTATION

 

In January 2004, Advanced Accessory Holdings Corporation (“AAHC”)was formed by our direct parent, CHAAS Holdings, LLC (“CHAAS Holdings”) inconnection with an offering of our $88,000 aggregate principal amount atmaturity, 131⁄4 Senior Discount Notes due 2011 (the “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 AdvancedAccessory Systems, LLC (the “Predecessor”). Unless the context otherwise requires, all information which refers to“we,” “our” or “us” refers to AAHC and its subsidiaries.

 

On April 15, 2003, substantially all of the equity interests ofthe “Predecessor” were acquired by Castle Harlan Partners IV, L.P. (the“Acquisition”), a private equity investment fund organized and managed byCastle Harlan Inc., a leading private equity firm.  CHAAS Holdings, LLC and its subsidiary, CHAAS Acquisitions, LLC(“CHAAS Acquisitions”) were formed in April 2003 in connection with theAcquisition.

 

The accompanying financial statements designated as the “Company” arethe financial statements of AAHC for periods subsequent to its formation inJanuary 2004 and are the financial statements of CHAAS Acquisitions, itssubsidiary, prior to January 2004. All financial statements prior to April 15, 2003, the date of theAcquisition, are that of Advanced Accessory Systems, LLC and are referred to asthe financial statements of the “Predecessor.”

 

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

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and with theinstructions to Form 10-Q.  Accordingly,they do not include all information and footnotes required by accountingprinciples generally accepted in the Unites States of America for completefinancial statements and should be read in conjunction with the RegistrationStatement on Form S-4 and the Annual Report on Form 10-K for the year endedDecember 31, 2003 for CHAAS Acquisitions, LLC.

 

In the opinion of the Company, the accompanying unaudited consolidatedcondensed financial statements contain all adjustments, which are normal andrecurring in nature, necessary to present fairly its and the Predecessor’sfinancial position as of March 31, 2004 and December 31, 2003 and theresults of its and the Predecessor’s operations for the three month periodsended March 31, 2004 and 2003.

 

2.                                       COMPREHENSIVEINCOME

 

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

 
|                                                         |   | **Company**                                    |   | **Predecessor**                                |   |
|--------------------------------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------|--------|
|                                                         |   | **Three  months  ended  March 31,  2004** |   | **Three  months  ended  March 31,  2003** |   |
| Net income (loss)                                            |   | $                                              | (955   | )                                              | $      | 6,811 |   |
| Change in the cumulative translation  adjustment, net of tax |   | (985                                           | )      | (1,052                                         | )      |
| Comprehensive income (loss)                                  |   | $                                              | (1,940 | )                                              | $      | 5,759 |   |

 

### **3.**                                       CURRENCY CONTRACTS

 

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, whenthe Euro to the U.S. Dollar exchange rate was 1.28:1, we entered into a seriesof foreign currency forward exchange contracts related to the Euro (“EuroCollar”), each with a notional value of €3,000, which

 

5

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mature quarterly, as summarized below. We provided a $1,900 letter of credit in support of the foreign currencyoption contracts.  To the extent thatthe quarter end exchange rate falls between the Euro collar exchange rates,fulfillment of the Euro collar exchange contracts will result in offsettingforeign currency gains and losses upon expiration.  For each reporting period we record the fair value, as determinedby independent financial institutions, of open obligations and the resultantgains and losses are recorded in the statement of operations.  During the first quarter of 2004 we hadunrealized gains on our foreign currency options totaling $145, which wasrecorded in other expense, and three option contracts having zero valueexpired.

 
|                     |   | **Euro  Collar Exchange Rates, in U.S. Dollars per Euro** |   |
|--------------------------|--------|-----------------------------------------------------------|--------|
|                     |   | **Notional Value**                                        |   | **Purchased  Put Option** |   | **Sold  Call Option** |   | **Purchased  Call Option** |   |
|                     |   | **(thousands)**                                           |   |   |   |   |   |   |   |
| June 30,  2004      |   | €                                                    | 3,000  |   | $ | 1.200 |   | $ | 1.359 |   | $ | 1.400 |   |
| September 30,  2004 |   | €                                                    | 3,000  |   | $ | 1.200 |   | $ | 1.357 |   | $ | 1.400 |   |
| December 31,  2004  |   | €                                                    | 3,000  |   | $ | 1.200 |   | $ | 1.354 |   | $ | 1.400 |   |
| March 31,  2005     |   | €                                                    | 3,000  |   | $ | 1.200 |   | $ | 1.353 |   | $ | — |   |

 

4.                                       LONG-TERMDEBT

 

On February 4, 2004, AAHC issued the Senior Discount Notes, whichwill have an aggregate principal amount of $88,000 at maturity in a offeringexempt from the registration 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, wepurchased $4,666 face value of the subordinated promissory notes held bymembers of our Predecessor in connection with the Acquisition.  The amount and terms of additional debtrepayments are being negotiated. 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 to theholders of the original notes the opportunity to exchange the original notesfor replacement notes (“New Senior Discount Notes”) having a like principalamount of the original notes and identical in all material respects to theoriginal 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”) onApril 16, 2004.  The registrationstatement was declared effective by the SEC on April 29, 2004.  We launched an exchange offer with respectto the $88,000 of the original notes on April 30, 2004.  The exchange offer will expire at 5:00 PMEDT, on May 28, 2004 and we expect to consummate the exchange offer promptlythereafter.

 

6

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

 

The following discussion of our results of operations and financialcondition should be read in conjunction with our financial statements and notesthereto included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements.  Discussions containing forward-lookingstatements may be found in the material set forth above, in the material setforth below, as well as in this Form 10-Q generally. Forward looking statementsgenerally can be identified by the use of terms such as “may,” “will,”“should,” “expect,” “anticipate,” “believe,” “intend,” “plan,” “estimate,”“predict,” “potential,” “forecast,” “project,” “will be,” “continue” orvariations of such terms, or the use of these terms in the negative.  Ouractual results may differ significantly from the results discussed in theforward-looking statements, and such differences may be material.  Generalrisks that may impact the achievement of such forecasts include, but are notlimited to: compliance with new laws and regulations, general economicconditions in the markets in which we operate, fluctuation in demand for ourproducts and in the production of vehicles for which we are a supplier,significant raw material price fluctuations, labor disputes with our employeesor of our significant customers or suppliers, changes in consumer preferences,dependence on significant automotive customers, the level of competition in theautomotive supply industry, pricing pressure from automotive customers, oursubstantial leverage, limitations imposed by our debt facilities, changes inthe popularity of particular vehicle models or towing and rack systems, theloss of programs on particular vehicle models, risks associated with conductingbusiness in foreign countries and other business factors.  Any suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties.  actual events or results may differ materiallyfrom those discussed in the forward-looking statements.  All of theseforward-looking statements are based on estimates and assumptions made by ourmanagement which, although believed to be reasonable, are inherentlyuncertain.  Given these risks and uncertainties, readers are cautioned notto place undue reliance on forward-looking statements.  The companydisclaims any obligation to update any forward looking statements.

 

### **OVERVIEW**

### ** **

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

 

### **CompanyBackground**

### ** **

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

 

**RESULTS OF OPERATIONS**

 

**Three Months EndedMarch 31, 2004 for the Company Compared to the Three Months Ended March 31,2003 for the Predecessor.**

 

*Net sales.* Net sales for the first quarter of 2004 were $96.6 million, representingan increase of  $11.3 million, or 13.2%,compared with net sales of $85.3 million for the first quarter of 2003.  The increase includes approximately $3.9million due to the increase of the average exchange rates between the U.S.dollar and the currencies used by our foreign subsidiaries, primarily inEurope.  The balance of the increase innet sales reflects an increase in sales to our OEM customers of approximately$6.1 million and an increase of approximately $1.3 million in sales to ourautomotive aftermarket customers.  Salesto OEM customers were higher due to new program launches for SportRack in NorthAmerica and Europe and for Valley in North America.  These increases were partially offset by decreased prices andlower volumes on existing programs. Sales for Brink were also higher due to strong European new car salesand an increase in sales of the higher priced detachable towbars.  Aftermarket sales were higher due to strongorders of hitches in North America.

 

*Gross profit.* Gross profit for the first quarter of 2004 was $22.6 million,representing an increase of $1.5 million, or 7.1%, compared with gross profitof $21.1 million for the first quarter of 2003.  The increased gross profit amount resulted from our higher netsales offset partially by a decrease in the gross profit percentage.  Gross profit as a percentage of net saleswas 23.4% for the first quarter of 2004 compared to 24.7% for the first quarterof 2003. The decreased gross margin percentage reflects higher costs for steel

 

7

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and aluminum and price decreases to our OEM customers.  The price of steel increased dramaticallyduring the first quarter of 2004 due primarily to several trends in the steelproducing industry including increased demand for steel products from China, aweakening U.S. Dollar, the consolidation of the steel producing industry and areduction in overall production capacity. In addition to the higher prices we also experienced procurement delaysfor some steel components.  During thequarter increased cost of steel and production inefficiencies caused by steelprocurement delays for steel and components having a high steel contentresulted in lower gross profit of approximately $500,000 net of recoverythrough the introduction of steel surcharges on some of our aftermarket towingsystems products.

 

*Selling, administrative and product development expenses.*  Selling, administrative and productdevelopment expenses for the first quarter of 2004 were $15.1 million,representing an increase of $2.7 million, or 21.7%, compared with selling,administrative and product development expenses of $12.4 million for the firstquarter of 2003. This increase is primarily due to our higher sales, $1.1million resulting from an increase in the average exchange rates between theU.S. dollar and the European Euro, increases in product development costs forSportRack in support of new OEM programs that are expected to be launched in2004 and beyond, and the inclusion of management fees to Castle Harlan of$746,000 in the first quarter of 2004.

 

*Amortization of intangible assets*.  Amortization of intangible assets for thefirst quarter of 2004 was $2.1 million compared to $7,000 for the first quarterof 2004.  The increase in amortizationprimarily results from amortization related to intangible assets identified inthe allocation of the Acquisition purchase price.

 

*Operating income. *Ouroperating income for the first quarter of 2004 was $5.4 million, representing adecrease of $3.2 million, or 37.4%, compared to our operating income of $8.7million for the first quarter of 2003. This decrease results from the increasein selling, administrative and product development expenses and increase inamortization of intangible assets, offset partially by the increase in grossprofit.

 

*Interest expense.*  Interest expense for the first quarter of 2004 was $6.1 million,representing an increase of  $2.3million, or 60.1%, compared to interest expense of $3.8 million for the firstquarter of 2003.  The increase is due tothe higher level of debt outstanding during the first quarter of 2004 resultingfrom our purchase of the Predecessor on April 15, 2003 and the issuance ofour Senior Discount Notes in February 2004.

 

*Foreign currency gain (loss).*  We had a foreign currency loss for the firstquarter of 2004 of $773,000 and our Predecessor had a foreign currency gain forthe first quarter of 2003 of $3.6 million. The foreign currency loss is primarily attributable to the U.S. dollardenominated intercompany indebtedness of Brink, whose functional currency isthe Euro.  During the first quarter of2004 the U.S. Dollar strengthened in comparison with the Euro resulting in theloss at Brink.  The intercompanyindebtedness for our foreign subsidiaries other than Brink are deemed to bepermanently invested and therefore changes in the intercompany balances forthese subsidiaries caused by foreign currency fluctuations have been recordedin the currency translation adjustment account and included in othercomprehensive income.  Our Predecessor’sforeign currency gains and losses were primarily related to the intercompanyindebtedness of our foreign subsidiaries including Brink.  During the first quarter of 2003 the U.S.dollar weakened significantly in relation to the Euro and the Canadian dollarresulting in the foreign currency gain recorded in that period.

 

*Provision for income taxes.* During the firstquarter of 2004 we had a loss before income taxes of $1.4 million and recordedan income tax benefit of $465,000.  Theeffective tax rate differs from the U.S. federal income tax rate primarily dueto changes in valuation allowances on the deferred tax assets of SportRackAccessories and differences in the tax rates of foreign countries. Prior toApril 2003 our Predecessor and certain of its domestic subsidiaries hadelected to be taxed as limited liability companies for federal income taxpurposes.  As a result of this election,the Predecessor’s domestic taxable income accrued to the individualmembers.  Certain of the Company’sdomestic subsidiaries and foreign subsidiaries were subject to income taxes intheir respective jurisdictions. Effective on April 20, 2003 we filed anelection for all our domestic subsidiaries to be treated as regularcorporations and therefore they are now subject to federal income tax.  During the first quarter of 2003, thePredecessor had income before income taxes for its taxable subsidiariestotaling $5.1 million and recorded a provision for income taxes of $1.6million.

 

*Net income (loss)*.  We had a net loss of $955,000 for the first quarter of 2004 andour Predecessor had net income of $6.8 million for the first quarter of2003.  The decrease in the first quarterof 2004 reflects lower operating income together with increased interestexpense, the foreign currency loss for the first quarter of 2004 as compared tothe foreign currency gain during the first quarter of 2003. These were offsetpartially by the tax benefit during the first quarter of 2004 as compared to atax provision for the first quarter of 2003.

 

8

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**LIQUIDITY AND CAPITALRESOURCES**

 

Our principal liquidity requirements are to service our debt and meetour working capital and capital expenditure needs.  Our indebtedness at March 31, 2004 was $244.4 millionincluding current maturities of $1.9 million. We expect to be able to meet our liquidity requirements for theforeseeable future through cash provided by operations and through borrowingsavailable under our revolving credit facilities.

 

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

# * *

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

 
|             |   | **Company**              |   |
|------------------|--------|--------------------------|--------|
|             |   | **March 31,  2004** |   | **December 31,  2003** |   |
|             |   | **(in  thousands)**      |   |
|             |   |                     |   |
| Working  Capital |   | $                        | 87,193 |   | $ | 84,341 |   |
|                  |        |                          |        |  |  |  |  |

 
|                                         |   | **Company**                                    |    | **Predecessor**                                |   |
|----------------------------------------------|--------|------------------------------------------------|---------|------------------------------------------------|--------|
|                                         |   | **Three  months  ended  March 31,  2004** |    | **Three  months  ended  March 31,  2003** |   |
|                                         |   | **(in  thousands)**                            |    | **(in  thousands)**                            |   |
|                                         |   |                                           |    |                                           |   |
| Cash flows provided  by operating activities |   | $                                              | 4,442   |                                           | $      | 1,635 |   |
| Cash flows  (used for) investing activities  |   | $                                              | (87,041 | )                                              | $      | (2,512 | ) |
| Cash flows  provided by financing activities |   | $                                              | 100,987 |                                           | $      | 233 |   |

 

*Working capital*

* *

Workingcapital increased by $2.9 million to $87.2 million at March 31, 2004 from$84.3 million at December 31, 2003 due primarily to an increase inaccounts receivable of $10.3 million, an increase in inventories of $3.4million, an increase in other current assets of $1.2 million, increase in cashof $1.4 million and a change in the net current deferred tax assets andliabilities of $2.3 million.  Theseincreases were partially offset by increases in accounts payable and accruedliabilities of $8.5 million and $7.4 million, respectively.  Working capital was further reduced by$690,000 due to the effect of declining exchange rates between the U.S. dollarand both the European Euro and the Canadian dollar, which are the functionalcurrencies of several of our foreign subsidiaries.

 

The increase in accounts receivable was attributable to the timing ofpayments from OEM customers and to increased sales levels in the first quarterof 2004 as compared with the fourth quarter of 2003.  Differences in sales levels between the two quarters are partlydue to seasonal factors and increased sales to automotive OEMs.  Increases in accounts payable reflectedincreased purchasing activities to support the increased sales volume.  Inventory increased primarily for ouraftermarket products to support seasonally higher sales for the period ascompared with the period prior to December 31, 2003.  The increase in accrued expenses isprimarily due to an increase in accrued interest on our subsidiary’s $150million of senior notes.

 

*OperatingActivities*

* *

Ouroperations provided $4.4 million in cash during the first quarter of 2004 andour Predecessor’s operations provided $1.6 million in cash for the firstquarter of 2003.  The increase for 2004is primarily due to a smaller increase in working capital excluding cash duringthe first quarter of 2004 as compared to the increase in working capitalexcluding cash for the first quarter of 2003. A decrease in operating income partially offset this increase.

 

9

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*InvestingActivities*

* *

In conjunction with our Senior Discount Notes offering our directparent, CHAAS Holdings mad a contribution of all the outstanding membershipunits in CHAAS Acquisitions to AAHC for all the outstanding membership units ofAAHC.  Cash flow used for investing activitiesfor the first quarter of 2004 and 2003 also included acquisitions of propertyand equipment of $2.6 million and $2.5 million, respectively, and wereprimarily for the expansion of capacity, productivity and process improvementsand maintenance.

 

*FinancingActivities*

* *

During the first quarter of 2004 financing cash flows included, theissuance of our membership units for $101.1 million, proceeds from the issuanceof our Senior Discount Notes of $50.2 million, payment of debt issuance costsof $2.3 million, repayment of debt of $5.2 million, a reduction in therevolving line of credit of $390,000 and repayments under our term note andcapital leases of $480,000.  During thefirst quarter of 2003 our Predecessor made $2.2 million in regularly scheduledprincipal payments on its term notes under its then existing credit facility,borrowed $1.9 million on its revolving facility, borrowed $722,000 undercapital leases and made distributions to its members totaling $121,000.

 

***Debt and Credit Sources***

* *

Our indebtedness was $244.4 million at March 31, 2004.  The Company expects that its primary sourcesof cash will be from operating activities and borrowings under its revolvingcredit facilities.  As of March 31,2004, we had borrowings under the revolving credit facilities totaling $17.3million and had $31.3 million of available borrowing capacity.  Standby letters of credit totaling $2.9million provided as security for our U.S. workers compensation program and $1.9million providing security to a financial institution for foreign currencyinstruments reduced borrowing availability. As of March 31, 2004, we were in compliance with the variouscovenants under 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, whichwill have an aggregate principal amount of $88.0 million at maturity in aoffering exempt 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 theoffering, we committed to purchase, repay or prepay, on terms as may benegotiated, not less than $5.0 million in the aggregate principal amount of theour then outstanding debt.  OnFebruary 5, 2004, we purchased $4.7 face value of the subordinatedpromissory notes held by members of our Predecessor in connection with theAcquisition.  The amount and terms ofadditional debt repayments are being negotiated.  Proceeds of $42.5 million were used to redeem a portion of theequity interests 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 to theholders of the original notes the opportunity to exchange the original notesfor replacement notes having a like principal amount of the original notes andidentical in all material respects tot he original notes, except that the NewSenior Discount Notes would not bear legends restricting the transferthereof.  We filed a registrationstatement on Form S-4 for the New Senior Discount Notes with the SEC onApril 16, 2004.  The registrationstatement was declared effective by the SEC on April 29, 2004.  We launched an exchange offer with respectto the $88.0 million of the original notes on April 30, 2004.  The exchange offer will expire at 5:00 PMEDT, on May 28, 2004 and we expect to consummate the exchange offer on May 29,2004.

 

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

 

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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. Net sales from international operations during the first quarter of 2004were approximately $34.6 million, or 35.8% of our net sales. At March 31,2004, assets associated with these operations were approximately 35.0% of totalassets, and we had indebtedness denominated in currencies other than the U.S.Dollar of approximately $22.1 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, whenthe Euro to the U.S. Dollar exchange rate was 1.28:1, we entered into a seriesof foreign currency forward exchange contracts related to the Euro (“EuroCollar”), each with a notional value of €3.0 million, which mature quarterly,as summarized below.  We provided a $1.9million letter of credit in support of the foreign currency optioncontracts.  To the extent that the quarterend exchange rate falls between the Euro collar exchange rates, fulfillment ofthe Euro collar exchange contracts will result in offsetting foreign currencygains and losses upon expiration.  Foreach reporting 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. During the first quarter of 2004 we had unrealized gains on our foreigncurrency options totaling $145,000, which was included in other expense andthree option contracts having zero value expired.

 
|                     |   | **Euro  Collar Exchange Rates** |   |
|--------------------------|--------|---------------------------------|--------|
|                     |   | **Notional Value**              |   | **Purchased  Put Option** |   | **Sold  Call Option** |   | **Purchased  Call Option** |   |
|                     |   | **(thousands)**                 |   |   |   |   |   |   |   |
| June 30,  2004      |   | €                          | 3,000  |   | $ | 1.200 |   | $ | 1.359 |   | $ | 1.400 |   |
| September 30,  2004 |   | €                          | 3,000  |   | $ | 1.200 |   | $ | 1.357 |   | $ | 1.400 |   |
| December 31,  2004  |   | €                          | 3,000  |   | $ | 1.200 |   | $ | 1.354 |   | $ | 1.400 |   |
| March 31,  2005     |   | €                          | 3,000  |   | $ | 1.200 |   | $ | 1.353 |   | $ | — |   |

 

11

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Item 3.             Quantitative and QualitativeDisclosures About Market Risk

 

In February 2004, we executed several foreigncurrency option contracts.  See “ –Managements Discussion and Analysis of Financial Condition and Results ofOperations – Currency Contracts”.

 

Item 4.             Controls and Procedures

 

Under the supervision and with theparticipation of management, including our principal executive officer andprincipal financial officer, the Company has evaluated the effectiveness of thedesign and operation of its disclosure controls and procedures as ofMarch 31, 2004, and, based on their evaluation, the principal executiveofficer and principal financial officer have concluded that these controls andprocedures are effective.  There were nosignificant changes in internal controls or in other factors that couldsignificantly affect these controls during the quarter.

 

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

 

**PARTII.  OTHER INFORMATION AND SIGNATURE**

 

Item 1.    Legal Proceedings

 

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

 

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Item 2.    Changes in Securities

 

None

 

Item 3.    Defaults Upon Senior Securities

 

None

 

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

 

None

 

Item 5.    Other Information

 

None

 

Item 6.    Exhibits and Reports on Form 8-K

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

 

(b)   Reports on Form 8-K

 

None

 

13

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**ADVANCEDACCESSORY HOLDINGS CORPORATION**

 

**SIGNATURE**

 

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

 

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

 

14

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**ADVANCEDACCESSORY HOLDINGS CORPORATION**

 

**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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