UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
Form 10-Q
(Mark one)
| | | |
| | x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| | | |
| | | For the quarterly period ended June 30, 2005 |
OR
| | ¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| | | |
| | | For the transition period from _______________ to ________________ |
______________
Commission File Number 333-106356
______________
CHAAS ACQUISITIONS, LLC.
(Exact name of registrant as specified in its charter)
Delaware | 41-2107245 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | 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 reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such a period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | | Outstanding at August 15, 2005 |
| Membership Units | | 100 |
CHAAS ACQUISITIONS, LLC
INDEX
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Part I. Financial Information | |
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Item 1. Financial Statements | |
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Part II. Other Information and Signature | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHAAS ACQUISITIONS, LLC
CONSOLIDATED CONDENSED BALANCE SHEETS
As of June 30, 2005 and December 31, 2004
(Dollars in thousands)
| | | June 30, | | December 31, | |
| | | 2005 | | 2004 | |
| | (Unaudited) | | | |
| Current assets | | | | | | | |
| Cash | | $ | 5,713 | | $ | 14,747 | |
| Accounts receivable, less reserves | | | | | | | |
| of $1,918 and $2,078, respectively | | | 82,479 | | | 61,745 | |
| Inventories | | | | | | | |
| Raw materials | | | 24,636 | | | 25,400 | |
| Work-in-process | | | 11,418 | | | 12,382 | |
| Finished goods | | | 26,613 | | | 28,937 | |
| Reserves | | | (4,896 | ) | | (5,325 | ) |
| Total inventories | | | 57,771 | | | 61,394 | |
| Other current assets | | | 13,636 | | | 13,976 | |
| Total current assets | | | 159,599 | | | 151,862 | |
| Property and equipment, net | | | 69,612 | | | 75,113 | |
| Goodwill | | | 39,061 | | | 39,061 | |
| Other intangible assets, net | | | 96,192 | | | 102,835 | |
| Deferred income taxes | | | 1,225 | | | 1,047 | |
| Other noncurrent assets | | | 8,643 | | | 8,064 | |
| Total Assets | | $ | 374,332 | | $ | 377,982 | |
| | | | | | | | |
LIABILITIES AND MEMBERS’ EQUITY | | | | | | | |
| Current liabilities | | | | | | | |
| Current maturities of long-term debt | | $ | 3,386 | | $ | 3,068 | |
| Accounts payable | | | 48,435 | | | 46,664 | |
| Accrued liabilities | | | 24,274 | | | 22,951 | |
| Deferred income taxes | | | 1,677 | | | 1,876 | |
| Total current liabilities | | | 77,772 | | | 74,559 | |
| Noncurrent liabilities | | | | | | | |
| Deferred income taxes | | | 6,302 | | | 7,203 | |
| Other noncurrent liabilities | | | 5,409 | | | 4,276 | |
| Long-term debt, less current maturities | | | 205,221 | | | 202,179 | |
| Total noncurrent liabilities | | | 216,932 | | | 213,658 | |
| Members’ equity | | | | | | | |
| Units | | | 100,900 | | | 100,900 | |
| Other comprehensive income | | | 4,751 | | | 8,549 | |
| Accumulated deficit | | | (26,023 | ) | | (19,684 | ) |
| Total Members’ Equity | | | 79,628 | | | 89,765 | |
| Total Liabilities and Members’ Equity | | $ | 374,332 | | $ | 377,982 | |
| | | | | | | | |
The accompanying notes are an integral part of the
consolidated condensed financial statements.
CHAAS ACQUISITIONS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2005 | | 2004 | | 2005 | | 2004 | |
| | | | | | | | | | |
| | $ | 128,422 | | $ | 108,346 | | $ | 239,692 | | $ | 204,977 | |
| Cost of sales | | | 101,899 | | | 83,329 | | | 193,393 | | | 157,393 | |
| Gross profit | | | 26,523 | | | 25,017 | | | 46,299 | | | 47,584 | |
| Selling, administrative and product development expenses | | | 16,545 | | | 15,625 | | | 33,130 | | | 30,710 | |
| Amortization of intangible assets | | | 2,056 | | | 2,113 | | | 4,122 | | | 4,164 | |
| Operating income | | | 7,922 | | | 7,279 | | | 9,047 | | | 12,710 | |
| Other expense | | | | | | | | | | | | | |
| Interest expense | | | (5,254 | ) | | (5,481 | ) | | (10,937 | ) | | (10,584 | ) |
| Foreign currency gain (loss), net | | | (2,197 | ) | | (424 | ) | | (3,528 | ) | | (1,052 | ) |
| Other income (expense) | | | 82 | | | 199 | | | 72 | | | 110 | |
| Income (loss) before income taxes | | | 553 | | | 1,573 | | | (5,346 | ) | | 1,184 | |
| Provision for income taxes | | | 1,017 | | | 587 | | | 993 | | | 483 | |
| Net income (loss) | | $ | (464 | ) | $ | 986 | | $ | (6,339 | ) | $ | 701 | |
The accompanying notes are an integral part of the
consolidated condensed financial statements.
CHAAS ACQUISITIONS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| | | Six months Ended | |
| | | June 30, | |
| | | 2005 | | 2004 | |
| | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| | | | | | | | |
| | $ | (6,339 | ) | $ | 701 | |
| Adjustments to reconcile net loss to net | | | | | | | |
| cash provided by (used for) operating activities: | | | | | | | |
| Depreciation and amortization | | | 12,604 | | | 10,810 | |
| Deferred taxes | | | (671 | ) | | (3,590 | ) |
| Foreign currency (gain) loss | | | 3,478 | | | 166 | |
| Loss on disposal of assets | | | 8 | | | 123 | |
| Interest accretion on notes | | | 689 | | | 682 | |
| Changes in assets and liabilities, net: | | | | | | | |
| Accounts receivable | | | (23,718 | ) | | (20,386 | ) |
| Inventories | | | 5 | | | (3,597 | ) |
| Other current assets | | | (3,341 | ) | | (1,070 | ) |
| Other noncurrent assets | | | 4,057 | | | (255 | ) |
| Accounts payable | | | 3,876 | | | 12,263 | |
| Accrued liabilities | | | 3,288 | | | 5,142 | |
| Other noncurrent liabilities | | | (572 | ) | | (41 | ) |
| Net cash provided by (used for) operating activities | | | (6,636 | ) | | 948 | |
| | | | | | | | |
CASH FLOWS USED FOR INVESTING ACTIVITIES: | | | | | | | |
| | | | | | | | |
| Acquisition of property and equipment | | | (6,766 | ) | | (6,076 | ) |
| Net cash used for investing activities | | | (6,766 | ) | | (6,076 | ) |
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CASH FLOWS USED FOR FINANCING ACTIVITIES: | | | | | | | |
| | | | | | | | |
| Net increase (decrease) in revolving loan | | | 6,182 | | | (769 | ) |
| Repayment of debt | | | (1,045 | ) | | (947 | ) |
| Net cash provided by (used for) financing activities | | | 5,137 | | | (1,716 | ) |
| | | | | | | | |
| Effect of exchange rate changes | | | (769 | ) | | 475 | |
| Net (decrease) increase in cash | | | (9,034 | ) | | (6,369 | ) |
| Cash at beginning of period | | | 14,747 | | | 16,686 | |
| Cash at end of period | | $ | 5,713 | | $ | 10,317 | |
The accompanying notes are an integral part of the
consolidated condensed financial statements.
CHAAS ACQUISITIONS, LLC
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN MEMBERS’ EQUITY
For the Six Months Ended June 30, 2005
(Dollars in thousands)
(Unaudited)
| | | Other | | Total |
| | Members’ | comprehensive | Accumulated | members’ |
| | capital | income (loss) | deficit | equity |
| | | | | |
| $100,900 | $8,549 | $(19,684) | $89,765 |
Currency translation adjustment | — | (3,798) | | (3,798) |
Net loss | | | (6,339) | (6,339) |
| Balance at June 30, 2005 | $100,900 | $4,751 | $(26,023) | $79,628 |
The accompanying notes are an integral part of the
consolidated condensed financial statements.
CHAAS ACQUISITIONS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
On April 15, 2003, substantially all of the equity interests of the Advanced Accessory Systems, LLC (åthe Predecessoræ) were acquired by Castle Harlan Partners IV, L.P. ("the Acquisition"), a private equity investment fund organized and managed by Castle Harlan Inc., a private New York based equity firm. CHAAS Holdings, LLC ("CHAAS Holdings") was formed in April 2003 in connection with the Acquisition and was the direct parent of CHAAS Acquisitions, LLC ("CHAAS Acquisitions" or "the Company") which was also formed pursuant to the Acquisition.
In January 2004, Advanced Accessory Holdings Corporation ("AAHC") was formed by CHAAS Holdings. At that time, CHAAS Holdings made a contribution of all of its equity interests in CHAAS Acquisitions to AAHC in exchange for all the outstanding membership units of AAHC. Subsequent to this transaction, CHAAS Holdings is the direct parent of AAHC and AAHC is the direct parent of CHAAS Acquisitions and the indirect parent of the Predecessor. Unless the context otherwise requires, all information which refers to "we," "our" or "us" refers to CHAAS Acquisitions and its subsidiaries.
The Acquisition was accounted for in accordance with the purchase method of accounting. Accordingly, the purchase price of the Acquisition has been allocated to identifiable assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date.
The North American subsidiaries of the Company use a fiscal month-end that corresponds to two four-week months and one five-week month per quarter, each ending on Saturday. The exception to this rule is at year-end, when the subsidiaries close on December 31. The Company’s Brink subsidiary uses the calendar month-end and year-end. The Company’s financial statements are dated as of the end of the calendar period, although they reflect the different closing dates identified above.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly its financial position as of June 30, 2005 and December 31, 2004 and the results of its operations for the three and six months ended June 30, 2005 and 2004. The Company has reclassified certain prior year amounts to conform to the presentation of our current consolidated financial statements.
Comprehensive loss for the Company is as follows:
| | | Three months ended | | Six months ended | |
| | | June 30, 2005 | | June 30, 2004 | | June 30, 2005 | | June 30, 2004 | |
| | | | | | | | | | |
| Net loss | | $ | (464 | ) | $ | 986 | | $ | (6,339 | ) | $ | 701 | |
| Change in the cumulative translation adjustment, net of tax | | | (2,108 | ) | | (301 | ) | | (3,798 | ) | | (1,286 | ) |
| Comprehensive loss | | $ | (2,572 | ) | $ | 685 | | $ | (10,137 | ) | $ | (585 | ) |
CHAAS ACQUISITIONS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
The Company has significant operations in Europe where the functional currency is the Euro. On February 12, 2004, when the Euro to the US Dollar exchange rate was 1.28:1.00, the Company entered into a series of foreign currency forward option contracts related to the Euro ("Euro Collar"), which matured quarterly on a staggered basis. On May 12, 2004 when the Euro to US Dollar exchange rate was 1.19:1.00, the Company entered into additional foreign currency option contracts. The Company provided a $1,900 letter of credit in support of the foreign currency option contracts. To the extent that the quarter end exchange rate fell between the Euro collar exchange rates, fulfillment of the Euro collar exchange contracts would have resulted in offsetting foreign currency gains and losses upon expiration. For each reporting period, the Company recorded the fair value, as determined by independent financial institutions, of open obligations and the resultant gains and losses were recorded in the Statement of Operations. For the three and six months ended June 30, 2005 and 2004 the Company recorded unrealized gains (losses) on foreign currency options in the amounts of $26, $164, ($440) and ($295), respectively. The final three option contracts expired during the second quarter of 2005 and five options expired during the first six months of 2005. Three option contracts expired during the second quarter of 2004 and six option contracts expired during the first six months of 2004.
One of the options that expired in the second quarter of 2005 was the sale of a call option and was based on the average exchange rate of the period for which the option was active. The option expired in the money, requiring us to make a payment of $0.1 million. This amount was accrued at June 30, 2005 and was paid subsequent to that date.
Because of the expiration of the option contracts, the $1,900 letter of credit described above expired during the second quarter of 2005.
4. GOODWILL AND INTANGIBLE ASSETS
The carrying amount of goodwill was $39,061 at June 30, 2005 and December 31, 2004. A summary of intangible assets identified by the Company in the allocation of the April 15, 2003 purchase consideration follows:
| | Customer Contracts | Customer Relationships | Technology | Intangible Pension Asset | Tradename / Trademark | Deferred Financing Costs | Total |
| | | | | | | | |
| Amortization period in years | 8 - 10 | 18 - 21 | 10 | 15 | Indefinite | | |
| | | | | | | | |
| Balance at December 31, 2004 | $35,475 | $34,206 | $14,992 | $514 | $11,477 | $ 6,171 | $102,835 |
Additions | — | — | 15 | — | — | — | 15 |
Foreign currency translation | (152) | (1,428) | (30) | — | (339) | (55) | (2,004) |
Amortization | (2,059) | (1,151) | (900) | — | — | (544) | (4,654) |
| | | | | | | | |
| Balance at June 30, 2005 | $33,264 | $31,627 | $14,077 | $514 | $11,138 | $5,572 | $96,192 |
Amortization expense of identifiable intangible assets for the three and six months ended June 30, 2005 was $2,321 and $4,654, respectively.
| | 5. | CONDENSED CONSOLIDATING INFORMATION |
On May 23, 2003, the Company’s wholly-owned subsidiaries, Advanced Accessory Systems, LLC and AAS Capital Corporation, issued and sold 10¾% Senior Notes - Series A due 2011. On November 18, 2003, these notes were exchanged for 10¾% Senior Notes - Series B , (the "10¾% Senior Notes") having substantially the same terms. The 10¾% Senior Notes are guaranteed on a full, unconditional and joint and several basis by the Company and all of the Company’s direct and indirect wholly-owned domestic subsidiaries.
The following condensed consolidating financial information presents the financial position, results of operations and cash flows of (i) the Company (the "Parent"), as of June 30, 2005 and December 31, 2004 and for the three and six months ended June 30, 2005 and 2004 as if it accounted for its subsidiaries on the equity method, (ii) Advanced Accessory Systems, LLC and AAS Capital Corporation as issuers; (iii) guarantor subsidiaries which are domestic, wholly-owned subsidiaries and include SportRack LLC, Valley Industries, LLC, AASA Holdings, LLC and ValTek, LLC; and (iv) the non-guarantor subsidiaries which are foreign, wholly-owned subsidiaries and include Brink International B.V. and its subsidiaries, SportRack Accessories, Inc. and its subsidiary, and SportRack Automotive GmbH and its subsidiaries.
CHAAS ACQUISITIONS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
| | 5. | CONDENSED CONSOLIDATING INFORMATION — (continued) |
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2005
| | | Parent | | Issuers | | Guarantor subsidiaries | | Non-guarantor subsidiaries | | Eliminations/ adjustments | | Consolidated | |
ASSETS | | | | | | | | | | | | | | | | | | | |
| Current assets | | | | | | | | | | | | | | | | | | | |
| Cash | | $ | 16 | | $ | — | | $ | 1,594 | | $ | 4,103 | | $ | — | | $ | 5,713 | |
| Accounts receivable | | | — | | | — | | | 46,410 | | | 36,069 | | | — | | | 82,479 | |
| Inventories | | | — | | | — | | | 22,560 | | | 35,211 | | | — | | | 57,771 | |
| Other current assets | | | — | | | 633 | | | 9,417 | | | 3,586 | | | — | | | 13,636 | |
| Total current assets | | | 16 | | | 633 | | | 79,981 | | | 78,969 | | | — | | | 159,599 | |
| Property and equipment, net | | | — | | | 143 | | | 32,354 | | | 37,115 | | | — | | | 69,612 | |
| Goodwill | | | — | | | — | | | 39,061 | | | — | | | — | | | 39,061 | |
| Other intangible assets, net | | | — | | | 4,881 | | | 71,493 | | | 19,818 | | | — | | | 96,192 | |
| Deferred income taxes and other noncurrent assets | | | — | | | 7,064 | | | 386 | | | 2,418 | | | — | | | 9,868 | |
| Investment in and advances to subsidiaries | | | 104,635 | | | 228,965 | | | 13,993 | | | 245 | | | (347,838 | ) | | — | |
| Total assets | | $ | 104,651 | | $ | 241,686 | | $ | 237,268 | | $ | 138,565 | | $ | (347,838 | ) | $ | 374,332 | |
LIABILITIES AND MEMBERS’ EQUITY | | | | | | | | | | | | | | | |
| Current liabilities | | | | | | | | | | | | | | | | | | | |
| Current maturities of long-term debt | | $ | — | | $ | — | | $ | 61 | | $ | 3,325 | | $ | — | | $ | 3,386 | |
| Accounts payable | | �� | — | | | — | | | 29,440 | | | 18,995 | | | — | | | 48,435 | |
| Accrued liabilities and deferred income taxes | | | — | | | 1,295 | | | 7,245 | | | 17,411 | | | — | | | 25,951 | |
| Total current liabilities | | | — | | | 1,295 | | | 36,746 | | | 39,731 | | | — | | | 77,772 | |
| Deferred income taxes and other noncurrent liabilities | | | — | | | 2,348 | | | 329 | | | 9,034 | | | — | | | 11,711 | |
| Long-term debt, less current maturities | | | — | | | 150,000 | | | 36,704 | | | 18,517 | | | — | | | 205,221 | |
| Intercompany debt | | | 25,023 | | | — | | | 6,172 | | | 62,661 | | | (93,856 | ) | | — | |
| Members’ equity | | | 79,628 | | | 88,043 | | | 157,317 | | | 8,622 | | | (253,982 | ) | | 79,628 | |
| Total liabilities and members’ equity | | $ | 104,651 | | $ | 241,686 | | $ | 237,268 | | $ | 138,565 | | $ | (347,838 | ) | $ | 374,332 | |
CHAAS ACQUISITIONS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
| | 5. | CONDENSED CONSOLIDATING INFORMATION — (continued) |
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2004
| | Parent | | Issuers | | Guarantor subsidiaries | | Non-guarantor subsidiaries | | Eliminations/ adjustments | | Consolidated | |
ASSETS | | | | | | | | | | | | | | | | | | | |
| Current assets | | | | | | | | | | | | | | | | | | | |
| Cash | | $ | 16 | | $ | ¾ | | $ | 5,466 | | $ | 9,265 | | $ | — | | $ | 14,747 | |
| Accounts receivable | | | — | | | — | | | 37,296 | | | 24,449 | | | — | | | 61,745 | |
| Inventories | | | — | | | — | | | 22,834 | | | 38,560 | | | — | | | 61,394 | |
| Other current assets | | | 23 | | | 663 | | | 10,879 | | | 2,411 | | | — | | | 13,976 | |
| Total current assets | | | 39 | | | 663 | | | 76,475 | | | 74,685 | | | — | | | 151,862 | |
| Property and equipment, net | | | — | | | 133 | | | 31,084 | | | 43,896 | | | — | | | 75,113 | |
| Goodwill | | | — | | | ¾ | | | 39,061 | | | ¾ | | | — | | | 39,061 | |
| Other intangible assets, net | | | — | | | 5,288 | | | 74,980 | | | 22,567 | | | — | | | 102,835 | |
| Deferred income taxes and other noncurrent assets | | | 4,199 | | | 6,074 | | | (4,396 | ) | | 3,205 | | | 29 | | | 9,111 | |
| Investment in and advances to subsidiaries | | | 114,749 | | | 239,156 | | | 13,682 | | | 250 | | | (367,837 | ) | | ¾ | |
| Total assets | | $ | 118,987 | | $ | 251,314 | | $ | 230,886 | | $ | 144,603 | | $ | (367,808 | ) | $ | 377,982 | |
LIABILITIES AND MEMBERS’ EQUITY | | | | | | | | | | | | | | | |
| Current liabilities | | | | | | | | | | | | | | | | | | | |
| Current maturities of long-term debt | | $ | — | | $ | — | | $ | 61 | | $ | 3,007 | | $ | — | | $ | 3,068 | |
| Accounts payable | | | — | | | — | | | 27,385 | | | 19,279 | | | — | | | 46,664 | |
| Accrued liabilities and deferred income taxes | | | — | | | 1,297 | | | 6,551 | | | 16,979 | | | — | | | 24,827 | |
| Total current liabilities | | | — | | | 1,297 | | | 33,997 | | | 39,265 | | | — | | | 74,559 | |
| Deferred income taxes and other noncurrent liabilities | | | — | | | 2,348 | | | (1,157 | ) | | 10,288 | | | — | | | 11,479 | |
| Long-term debt, less current maturities | | | — | | | 150,000 | | | 32,260 | | | 19,919 | | | — | | | 202,179 | |
| Intercompany debt | | | 29,222 | | | — | | | 9,879 | | | 64,946 | | | (104,047 | ) | | — | |
| Members’ equity | | | 89,765 | | | 97,669 | | | 155,907 | | | 10,185 | | | (263,761 | ) | | 89,765 | |
| Total liabilities and members’ equity | | $ | 118,987 | | $ | 251,314 | | $ | 230,886 | | $ | 144,603 | | $ | (367,808 | ) | $ | 377,982 | |
CHAAS ACQUISITIONS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
| | 5. | CONDENSED CONSOLIDATING INFORMATION — (continued) |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended June 30, 2005
| | Parent | | Issuers | | Guarantor subsidiaries | | Non-guarantor subsidiaries | | Eliminations/ adjustments | | Consolidated | |
| | | (Dollar amounts in thousands) | |
Net sales | | $ | — | | $ | — | | $ | 77,209 | | $ | 51,213 | | $ | — | | $ | 128,422 | |
Cost of sales | | | — | | | — | | | 65,968 | | | 35,931 | | | — | | | 101,899 | |
Gross profit | | | — | | | — | | | 11,241 | | | 15,282 | | | — | | | 26,523 | |
| Selling, administrative and product development expenses | | | — | | | 1,353 | | | 6,591 | | | 8,601 | | | — | | | 16,545 | |
| Amortization of intangible assets | | | — | | | — | | | 1,725 | | | 331 | | | — | | | 2,056 | |
Operating income (loss) | | | — | | | (1,353 | ) | | 2,925 | | | 6,350 | | | — | | | 7,922 | |
| Interest expense | | | — | | | (3,380 | ) | | (826 | ) | | (1,048 | ) | | — | | | (5,254 | ) |
| Equity in income (loss) of subsidiaries | | | (441 | ) | | — | | | — | | | — | | | 441 | | | — | |
Foreign currency gain (loss), net | | | — | | | 26 | | | — | | | (2,223 | ) | | — | | | (2,197 | ) |
| Other income (expense) | | | (23 | ) | | — | | | 41 | | | 64 | | | — | | | 82 | |
| Income (loss) before income taxes | | | (464 | ) | | (4,707 | ) | | 2,140 | | | 3,143 | | | 441 | | | 553 | |
| Provision (benefit) for income taxes | | | — | | | — | | | (3 | ) | | 1,020 | | | — | | | 1,017 | |
| Net income (loss) | | $ | (464 | ) | $ | (4,707 | ) | $ | 2,143 | | $ | 2,123 | | $ | 441 | | $ | (464 | ) |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended June 30, 2004
| | Parent | | Issuers | | Guarantor subsidiaries | | Non-guarantor subsidiaries | | Eliminations/ adjustments | | Consolidated | |
| | | (Dollar amounts in thousands) | |
Net sales | | $ | — | | $ | — | | $ | 64,327 | | $ | 44,019 | | $ | — | | $ | 108,346 | |
Cost of sales | | | — | | | — | | | 52,987 | | | 30,342 | | | — | | | 83,329 | |
Gross profit | | | — | | | — | | | 11,340 | | | 13,677 | | | — | | | 25,017 | |
| Selling, administrative and product development expenses | | | — | | | 896 | | | 6,464 | | | 8,265 | | | — | | | 15,625 | |
| Amortization of intangible assets | | | — | | | — | | | 1,799 | | | 314 | | | — | | | 2,113 | |
Operating income (loss) | | | — | | | (896 | ) | | 3,077 | | | 5,098 | | | — | | | 7,279 | |
| Interest expense | | | — | | | (2,742 | ) | | (657 | ) | | (2,082 | ) | | — | | | (5,481 | ) |
| Equity in income (loss) of subsidiaries | | | 986 | | | — | | | — | | | — | | | (986 | ) | | — | |
Foreign currency gain (loss), net | | | — | | | — | | | — | | | (424 | ) | | — | | | (424 | ) |
| Other income (expense) | | | — | | | — | | | (205 | ) | | 404 | | | — | | | 199 | |
| Income (loss) before income taxes | | | 986 | | | (3,638 | ) | | 2,215 | | | 2,996 | | | (986 | ) | | 1,573 | |
| Provision (benefit) for income taxes | | | — | | | (1,273 | ) | | 829 | | | 1,031 | | | — | | | 587 | |
| Net income (loss) | | $ | 986 | | $ | (2,365 | ) | $ | 1,386 | | $ | 1,965 | | $ | (986 | ) | $ | 986 | |
CHAAS ACQUISITIONS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
| | 5. | CONDENSED CONSOLIDATING INFORMATION — (continued) |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended June 30, 2005
| | Parent | | Issuers | | Guarantor subsidiaries | | Non-guarantor subsidiaries | | Eliminations/ adjustments | | Consolidated | |
| | | (Dollar amounts in thousands) | |
Net sales | | $ | — | | $ | — | | $ | 147,495 | | $ | 92,197 | | $ | — | | $ | 239,692 | |
Cost of sales | | | — | | | — | | | 127,874 | | | 65,519 | | | — | | | 193,393 | |
Gross profit | | | — | | | — | | | 19,621 | | | 26,678 | | | — | | | 46,299 | |
| Selling, administrative and product development expenses | | | — | | | 3,019 | | | 13,209 | | | 16,902 | | | — | | | 33,130 | |
Amortization of intangible assets | | | — | | | — | | | 3,450 | | | 672 | | | — | | | 4,122 | |
Operating income (loss) | | | — | | | (3,019 | ) | | 2,962 | | | 9,104 | | | — | | | 9,047 | |
| Interest expense | | | — | | | (6,807 | ) | | (1,579 | ) | | (2,551 | ) | | — | | | (10,937 | ) |
| Equity in income (loss) of subsidiaries | | | (6,316 | ) | | — | | | — | | | — | | | 6,316 | | | — | |
Foreign currency gain (loss) | | | — | | | 164 | | | 7 | | | (3,699 | ) | | — | | | (3,528 | ) |
| Other income (expense) | | | (23 | ) | | — | | | 38 | | | 57 | | | — | | | 72 | |
| Income (loss) before income taxes | | | (6,339 | ) | | (9,662 | ) | | 1,428 | | | 2,911 | | | 6,316 | | | (5,346 | ) |
| Provision for income taxes | | | — | | | — | | | 12 | | | 981 | | | — | | | 993 | |
| Net income | | $ | (6,339 | ) | $ | (9,662 | ) | $ | 1,416 | | $ | 1,930 | | $ | 6,316 | | $ | (6,339 | ) |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended June 30, 2004
| | Parent | | Issuers | | Guarantor subsidiaries | | Non-guarantor subsidiaries | | Eliminations/ adjustments | | Consolidated | |
| | | (Dollar amounts in thousands) | |
Net sales | | $ | — | | $ | — | | $ | 126,355 | | $ | 78,622 | | $ | — | | $ | 204,977 | |
Cost of sales | | | — | | | — | | | 102,938 | | | 54,455 | | | — | | | 157,393 | |
Gross profit | | | — | | | — | | | 23,417 | | | 24,167 | | | — | | | 47,584 | |
| Selling, administrative and product development expenses | | | — | | | 2,283 | | | 12,738 | | | 15,689 | | | — | | | 30,710 | |
Amortization of intangible assets | | | — | | | — | | | 3,524 | | | 640 | | | — | | | 4,164 | |
Operating income (loss) | | | — | | | (2,283 | ) | | 7,155 | | | 7,838 | | | — | | | 12,710 | |
| Interest expense | | | — | | | (6,660 | ) | | (1,241 | ) | | (2,683 | ) | | — | | | (10,584 | ) |
| Equity in income (loss) of subsidiaries | | | 701 | | | — | | | — | | | — | | | (701 | ) | | — | |
Foreign currency gain (loss) | | | — | | | — | | | — | | | (1,052 | ) | | — | | | (1,052 | ) |
| Other income (expense) | | | — | | | — | | | (296 | ) | | 406 | | | — | | | 110 | |
| Income (loss) before income taxes | | | 701 | | | (8,943 | ) | | 5,618 | | | 4,509 | | | (701 | ) | | 1,184 | |
| Provision (benefit) for income taxes | | | — | | | (3,130 | ) | | 2,065 | | | 1,548 | | | — | | | 483 | |
| Net income | | $ | 701 | | $ | (5,813 | ) | $ | 3,553 | | $ | 2,961 | | $ | (701 | ) | $ | 701 | |
CHAAS ACQUISITIONS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
| | 5. | CONDENSED CONSOLIDATING INFORMATION — (continued) |
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2005
| | | Parent | | Issuers | | Guarantor subsidiaries | | Non-guarantor subsidiaries | | Eliminations/ adjustments | | Consolidated | |
| Net cash provided by (used for) operating activities | | $ | — | | $ | 10 | | $ | (2,123 | ) | $ | (4,523 | ) | $ | — | | $ | (6,636 | ) |
| Cash flows used for investing activities: | | | | | | | | | | | | | | | | | | | |
Acquisition of property and equipment | | | — | | | (10 | ) | | (5,474 | ) | | (1,282 | ) | | — | | | (6,766 | ) |
| Net cash used for investing activities | | | — | | | (10 | ) | | (5,474 | ) | | (1,282 | ) | | — | | | (6,766 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in revolving loan | | | — | | | — | | | 3,654 | | | 2,528 | | | — | | | 6,182 | |
Repayment of debt | | | — | | | — | | | 71 | | | (1,116 | ) | | — | | | (1,045 | ) |
| Net cash provided by (used for) financing activities | | | — | | | — | | | 3,725 | | | 1,412 | | | — | | | 5,137 | |
| Effect of exchange rate changes | | | — | | | — | | | — | | | (769 | ) | | — | | | (769 | ) |
| Net decrease in cash | | | — | | | — | | | (3,872 | ) | | (5,162 | ) | | — | | | (9,034 | ) |
| Cash at beginning of period | | | 16 | | | — | | | 5,466 | | | 9,265 | | | — | | | 14,747 | |
| Cash at end of period | | $ | 16 | | $ | — | | $ | 1,594 | | $ | 4,103 | | $ | — | | $ | 5,713 | |
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2004
| | Parent | | Issuers | | Guarantor subsidiaries | | Non-guarantor subsidiaries | | Eliminations/ adjustments | | Consolidated | |
| | | (Dollar amounts in thousands) | |
| Net cash provided by (used for) operating activities | | $ | (9 | ) | $ | (8,738 | ) | $ | 8,220 | | $ | 1,475 | | $ | — | | $ | 948 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | |
Acquisition of property and equipment | | | — | | | — | | | (4,314 | ) | | (1,762 | ) | | — | | | (6,076 | ) |
Net cash used for investing activities | | | — | | | — | | | (4,314 | ) | | (1,762 | ) | | — | | | (6,076 | ) |
Cash flows from financing activities: Change in intercompany debt | | | 9 | | | 8,738 | | | (4,358 | ) | | (4,389 | ) | | — | | | — | |
Net increase (decrease) in revolving loan | | | — | | | — | | | (3,852 | ) | | 3,083 | | | — | | | (769 | ) |
Repayment of debt | | | — | | | — | | | (56 | ) | | (891 | ) | | — | | | (947 | ) |
Net cash provided by (used for) financing activities | | | 9 | | | 8,738 | | | (8,266 | ) | | (2,197 | ) | | — | | | (1,716 | ) |
Effect of exchange rate changes | | | — | | | — | | | — | | | 475 | | | — | | | 475 | |
Net increase (decrease) in cash | | | — | | | — | | | (4,360 | ) | | (2,009 | ) | | — | | | (6,369 | ) |
Cash at beginning of period | | | 16 | | | — | | | 12,629 | | | 4,041 | | | — | | | 16,686 | |
Cash at end of period | | $ | 16 | | $ | — | | $ | 8,269 | | $ | 2,032 | | $ | — | | $ | 10,317 | |
| | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion of our results of operations and financial condition should be read in conjunction with our financial statements and notes thereto included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth above, in the material set forth below, as well as in this Form 10-Q generally. Forward-looking statements generally can be identified by the use of terms such as "may," "will," "should," "expect," "anticipate," "believe," "intend," "plan," "estimate," "predict," "potential," "forecast," "project," "will be," "continue" or variations of such terms, or the use of these terms in the negative. Our actual results may differ significantly from the results discussed in the forward-looking statements, and such differences may be material. General risks that may impact the achievement of such forecasts include, but are not limited to: compliance with new laws and regulations, general economic conditions in the markets in which we operate, fluctuation in demand for our products and in the production of vehicles for which we are a supplier, significant raw material price fluctuations, labor disputes with our employees or those of our significant customers or suppliers, changes in consumer preferences, dependence on significant automotive customers, the level of competition in the automotive supply industry, pricing pressure from automotive customers, our substantial leverage, limitations imposed by our debt facilities, changes in the popularity of particular vehicle models or towing and rack systems, the loss of programs on particular vehicle models, risks associated with conducting business in foreign countries, other business factors and other risks detailed from time to time in the Company’s reports filed with the Securities & Exchange Commission. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements. All of these forward-looking statements are based on estimates and assumptions made by our management which, although believed to be reasonable, are inherently uncertain. Given these risks and uncertainties, readers are cautioned not to place undue reliance on forward-looking statements. We disclaim any obligation to update any forward-looking statements.
OVERVIEW
We are one of the world’s leading designers and manufacturers of exterior accessories for automotive original equipment manufacturers and the aftermarket. We design and manufacture a wide array of both rack systems and towing systems and related accessories. Our broad offering of rack systems includes fixed and detachable racks and accessories, which can be installed on vehicles to carry items such as bicycles, skis, luggage, surfboards, and sailboards. Our towing products and accessories include trailer hitches, trailer balls, ball mounts, electrical harnesses, safety chains and locking pins. Our products are sold to OEM’s as standard accessories or options for a variety of light vehicles and to the aftermarket.
Company Background
On April 15, 2003, substantially all of the equity interests of Advanced Accessory Systems, LLC ("the Predecessor") were acquired by Castle Harlan Partners IV, L.P. ("the Acquisition"), a private equity investment fund organized and managed by Castle Harlan Inc., a private New York based equity firm. CHAAS Holdings, LLC ("CHAAS Holdings") was formed in April 2003 in connection with the Acquisition and was the direct parent of CHAAS Acquisitions, LLC ("CHAAS Acquisitions" or "the Company") which was also formed pursuant to the Acquisition.
In January 2004, Advanced Accessory Holdings Corporation ("AAHC") was formed by CHAAS Holdings. At that time, CHAAS Holdings made a contribution of all of its equity interests in CHAAS Acquisitions to AAHC in exchange for all the outstanding membership units of AAHC. Subsequent to this transaction, CHAAS Holdings is the direct parent of AAHC and AAHC is the direct parent of CHAAS Acquisitions and the indirect parent of the Predecessor. Unless the context otherwise requires, all information which refers to "we", "our" or "us" refers to CHAAS Acquisitions and its subsidiaries.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2005 Compared to the Three Months Ended June 30, 2004
Net sales. Net sales for the second quarter of 2005 were $128.4 million, representing an increase of $20.1 million, or 18.6%, compared with net sales of $108.3 million for the second quarter of 2004. This increase includes approximately $2.0 million due to the increase of the average exchange rates between the US Dollar and primarily the Euro, the functional currency of Brink and SportRack Europe. Additionally, North American OEM sales increased approximately $11.9 million, primarily as a result of new program launches at SportRack. Offsetting these increases in sales were agreed-upon price concessions with certain large OEM customers at SportRack US of $0.9 million. Sales to our aftermarket customers in both North America and Europe increased $6.2 million of which approximately $3.8 million represented revenue from price increases related to steel economics with the remainder attributable to other volume increases.
Gross profit. Gross profit for the second quarter of 2005 was $26.5 million, which represents an increase of $1.5 million, or 6.0%, compared with gross profit of $25.0 for the second quarter of 2004. Gross profit as a percentage of net sales was 20.7% for the second quarter of 2005 and 23.1% for the second quarter of 2004. Excluding a $0.3 million impact for foreign exchange, the increase in gross profit reflects the impact of higher volumes offset by OEM price reductions, manufacturing performance associated with product launches and depreciation related to capital investments. Increases in raw material costs on aftermarket products have been substantially recovered through price increases in the second quarter of 2005. The lower gross profit percentage relates to the factors above as well as the impact of overall product mix.
Selling, administrative and product development expenses. Selling, administrative and product development expenses for the second quarter of 2005 were $16.5 million representing an increase of $0.9 million, or 5.8%, compared with $15.6 million for the second quarter of 2004. This increase is primarily due to the change in average exchange rates between the US Dollar and local currencies. Excluding foreign exchange, selling and engineering costs increased slightly and were partially offset by lower tooling and program costs.
Operating income. Our operating income for the second quarter of 2005 was $7.9 million representing an increase of $0.6 million, or 8.2%, compared with operating income of $7.3 million for the second quarter of 2004. The increase resulted from increased gross profit net of increased selling, administrative and product development expenses.
Interest expense. Interest expense for the second quarter of 2005 was $5.3 million representing a decrease of $0.2 million or 3.6%, compared with interest expense of $5.5 million for the second quarter of 2004.
Foreign currency loss. Foreign currency loss in the second quarter of 2005 was $2.2 million compared to a foreign currency loss of $0.4 million in the second quarter of 2004. The loss in the second quarter of 2005 was primarily attributable to the US Dollar denominated intercompany indebtedness of Brink, whose functional currency is the Euro. During the second quarter of 2005 the US Dollar strengthened in comparison with the Euro. The intercompany indebtedness for our Canadian subsidiaries are deemed to be permanently invested and therefore changes in the intercompany balances for these subsidiaries caused by foreign currency fluctuations have been recorded in the currency translation adjustment account and included in other comprehensive income.
Provision for income taxes. During the second quarter of 2005 we recorded a profit before income taxes of $0.6 million and recorded an income tax provision of $1.0 million. The effective tax rate differs from the US federal income tax rate primarily due to changes in valuation allowances on the deferred tax assets of all North American operations and differences in the tax rates of foreign countries. During the second quarter of 2004 we had a net profit before taxes of $1.6 million and recorded an income tax provision of $0.6 million.
Net loss. We recorded a net loss of $0.5 million in the second quarter of 2005 and a net profit of $1.0 million in the second quarter of 2004. The net losses were a result of the items discussed above related to net sales, gross profit, foreign currency loss and the other expense and income items.
Six Months Ended June 30, 2005 Compared to the Six Months Ended June 30, 2004
Net sales. Net sales for the first six months of 2005 were $239.7 million, representing an increase of $34.7 million, or 16.9%, compared with net sales of $205.0 million for the first six months of 2004. This increase includes approximately $4.7 million due to the increase of the average exchange rates between the US Dollar and primarily the Euro, the functional currency of Brink and SportRack Europe. Additionally, North American OEM sales increased approximately $18.7 million, primarily as a result of new program launches at SportRack. Offsetting increased sales were agreed-upon price concessions with certain large OEM customers at SportRack US of $2.3 million. Sales to our aftermarket customers in both North America and Europe increased $12.1 million partially attributable to price increases in the aftermarket of $7.0 million to offset raw material economics.
Gross profit. Gross profit for the first six months of 2005 was $46.3 million, which represents a decrease of $1.3 million, or 2.7%, compared with gross profit of $47.6 for the first six months of 2004. Gross profit as a percentage of net sales was 19.3% for the first six months of 2005 versus 23.2% for the first six months of 2004. The overall decrease in gross profit reflects OEM price reductions, plant operating manufacturing performance associated with product launches and depreciation related to capital investments offset by the impact of higher volumes and favorable exchange rates between the US Dollar and local currencies. Increases in raw material costs on aftermarket products have been substantially recovered through price increases in the first six months of 2005. The lower gross profit percentage relates to the factors above as well as the impact of overall product mix.
Selling, administrative and product development expenses. Selling, administrative and product development expenses for the first six months of 2005 were $33.1 million representing an increase of $2.4 million, or 7.8%, compared with $30.7 million for the first six months of 2004. This increase is due to the change in average exchange rates between the US Dollar and local currencies and selling and engineering expense increases, offset by lower tooling and program costs.
Operating income. Our operating income for the first six months of 2005 was $9.0 million representing a decrease of $3.7 million, or 29.1%, compared with operating income of $12.7 million for the first six months of 2004. The decrease resulted from decreased gross profit and increased tooling costs and Euro value when expressed in US Dollars.
Interest expense. Interest expense for the first six months of 2005 was $10.9 million representing an increase of $0.3 million or 2.8%, compared with interest expense of $10.6 million for the first six months of 2004.
Foreign currency loss. Foreign currency loss in the first six months of 2005 was $3.5 million compared to $1.1 million in the first six months of 2004. These losses were primarily attributable to the US Dollar denominated intercompany indebtedness of Brink, whose functional currency is the Euro. During the first six months of both 2004 and 2005 the US Dollar strengthened in comparison with the Euro. The intercompany indebtedness for our Canadian subsidiaries are deemed to be permanently invested and therefore changes in the intercompany balances for these subsidiaries caused by foreign currency fluctuations have been recorded in the currency translation adjustment account and included in other comprehensive income.
Provision for income taxes. During the first six months of 2005 we recorded a loss before income taxes of $5.3 million and recorded an income tax provision of $1.0 million. The effective tax rate differs from the US federal income tax rate primarily due to changes in valuation allowances on the deferred tax assets of all North American operations and differences in the tax rates of foreign countries. During the first six months of 2004 we had a net profit before taxes of $1.2 million and recorded an income tax provision of $0.5 million.
Net loss. We recorded a net loss of $6.3 million in the first six months of 2005 and a net profit of $0.7 million in the first six months of 2004. The net losses were a result of the items discussed above related to net sales, gross profit, foreign currency loss and the other expense and income items.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity requirements are to service our debt and meet our working capital and capital expenditure needs. Our indebtedness at June 30, 2005 was $208.6 million including current maturities of $3.4 million.
In 2004 our operating results and operating cash flows were negatively impacted primarily by the costs associated with launching an unprecedented number of new roof rack programs, the high costs of steel and pricing pressures from certain OEM customers. As a result of these and other factors, our availability under our revolving credit facilities declined to $27.1 million at December 31, 2004 from $38.1 million available at September 30, 2004. Although we met our covenants for the quarter ended December 31, 2004, we anticipated that we would be unable to meet our fixed charge coverage ratio and senior secured leverage ratio covenants for future quarters. On March 30, 2005, we entered into the Fourth Amendment to the Amended and Restated Credit Agreement (the "Fourth Amendment") with General Electric Capital Corporation individually as a lender and as agent for the lenders referred to therein to modify the fixed charge coverage ratio and the senior secured leverage ratio.
Under the modified fixed charge coverage ratio covenant, the required minimum fixed charge coverage ratio will be determined quarterly for all borrowers for specified quarterly periods and for European borrowers for specified quarterly periods. Prior to this modification the required minimum fixed charge coverage ratios for all borrowers and their subsidiaries were 1.15:1.00. As modified, the required minimum fixed charge coverage ratios for all borrowers and their subsidiaries range from 1.15:1.00 for each fiscal quarter from the fiscal quarter ending June 30, 2004 through and including the fiscal quarter ending December 31, 2004; 1.05:1.00 for the fiscal quarter ending December 31, 2005; and 1.15:1.00 for each fiscal quarter ending thereafter. The required minimum fixed charge coverage ratio for the European borrowers and their subsidiaries is 1.25:1.00 for the fiscal quarters ending March 31, 2005, June 30, 2005 and September 30, 2005. The actual fixed charge coverage ratio for the European borrowers for the fiscal quarter ending June 30, 2005 was 1.88:1.0 and we were in compliance with this covenant as of June 30, 2005.
The modified senior secured leverage ratio covenant requires that we meet a senior secured leverage ratio of 1.75:1.00 for the fiscal quarters ending March 31, 2005 and June 30, 2005; 1.50:1.00 for the fiscal quarter ending September 30, 2005; and 1.25:1.00 for each fiscal quarter ending thereafter. Prior to this modification, the credit facility required that we meet a senior secured leverage ratio of 1.25:1.00 for each fiscal quarter. The actual leverage ratio for the fiscal quarter ending June 30, 2005 was 1.06:1.00 and we were in compliance with this covenant as of June 30, 2005.
Although we anticipate the ability to meet our modified covenants, there can be no such assurance. Our principal sources of liquidity are funds derived from operations and borrowings under our revolving credit facilities. Management believes that, based on current and expected levels of operations, cash flows from operations and borrowings under the revolving credit facilities will be sufficient to fund its debt service requirements, working capital needs, and capital expenditures for the next twelve months, although no assurances can be given in this regard. Our ability to fund operations, make scheduled payments of interest and principal on our indebtedness and maintain compliance with the terms of our revolving credit facilities, including our fixed charge coverage ratio covenant and senior secured leverage ratio covenant, depends on our future operating performance, which is subject to economic, financial, competitive and other factors beyond our control. If we are unable to generate sufficient cash flows from operations to meet our financial obligations and achieve compliance with our debt covenants, there would be a material adverse effect on our business, financial condition and results of operations.
Working Capital and Cash Flows
Working capital and key elements of the consolidated statement of cash flows are:
| | June 30, 2005 | December 31, 2004 |
| | (in thousands) |
| Working Capital | $ 81,827 | $ 77,303 |
| | Six months ended June 30, |
| | 2005 | 2004 |
| | (in thousands) |
| Cash flows provided by (used for) operating activities | $(6,636) | $948 |
| Cash flows used for investing activities | $(6,766) | $(6,076) |
| Cash flows provided by (used for) financing activities | $5,137 | $(1,716) |
Working Capital
Working capital increased by $4.5 million to $81.8 million at June 30, 2005 from $77.3 million at December 31, 2004. This increase is primarily due to an increase in accounts receivable of $20.7 million, partially offset by decreases in cash, inventory and other current assets of $9.0 million, $3.6 million and $0.4 million, respectively and increases in accounts payable, other accrued liabilities and current maturities of long-term debt of $1.8 million, 1.3 million and $0.3 million. The net working capital increase was also negatively impacted by the decreased exchange rate between the US Dollar and local currencies as of June 30, 2005 as compared with the exchange rate as of December 31, 2004.
Two of the major components of the working capital change were accounts receivable and inventory. The increase in accounts receivable was attributable to the timing of payments from OEM customers and to increased sales levels on a year-to-date basis as compared with the last several months of 2004. Inventory decreased as a result of the seasonal nature of certain segments of the business and an overall company focus on increasing inventory turnover.
Investing Activities
Cash flow used for investing activities for the first six months of 2005 and 2004 represented acquisitions of property and equipment of $6.8 million and $6.1 million, respectively, and were primarily for the expansion of capacity, productivity, process improvements and maintenance.
Financing Activities
During the first six months of 2005, financing cash flows included an increase in borrowings under the revolving line of credit of $6.2 million and repayment of debt of $1.0 million. For the same period in 2004 the financing cash flows included a reduction in the revolving line of credit of $0.8 million and repayment of debt of $0.9 million.
Debt and Credit Sources
Our indebtedness at June 30, 2005 was $208.6 million. We expect that our primary sources of cash will be from operating activities and borrowings under our revolving credit facilities. As of June 30, 2005, we had borrowings under the revolving credit facilities totaling $29.0 million and had $20.2 million of available borrowing capacity. Standby letters of credit totaling $3.9 million providing security for our US workers compensation program reduced borrowing availability.
On March 30, 2005 we entered into the Fourth Amendment to the Amended and Restated Credit Agreement. See the discussion of the amendment to the credit facility in "- Liquidity and Capital Resources".
International Operations
We conduct operations in several foreign countries including Canada, the Czech Republic, Denmark, France, Germany, Italy, The Netherlands, Poland, Spain, Sweden and the United Kingdom. Net sales from international operations during the first six months of 2005 were $92.2 million, or 38.5% of our net sales. At June 30, 2005, assets associated with these operations were approximately 37.0% of total assets, and we had indebtedness denominated in currencies other than the US Dollar of approximately $21.8 million.
Our international operations may be subject to volatility because of currency fluctuations, inflation and changes in political and economic conditions in these countries. Most of the revenues and costs and expenses of our operations in these countries are denominated in the local currencies. The financial position and results of operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency.
Currency contracts
We have significant operations in Europe where the functional currency is the Euro. On February 12, 2004, when the Euro to the US Dollar exchange rate was 1.28:1.00, we entered into a series of foreign currency forward option contracts related to the Euro ("Euro Collar"), which matured quarterly on a staggered basis. On May 12, 2004 when the Euro to US Dollar exchange rate was 1.19:1.00, we entered into additional foreign currency option contracts. We provided a $1.9 million letter of credit in support of the foreign currency option contracts. To the extent that the quarter end exchange rate fell between the Euro collar exchange rates, fulfillment of the Euro collar exchange contracts would have resulted in offsetting foreign currency gains and losses upon expiration. For each reporting period we recorded the fair value, as determined by independent financial institutions, of open obligations and the resultant gains and losses were recorded in the Statement of Operations. For the three and six months ended June 30, 2005 and 2004 the Company recorded unrealized gains (losses) on foreign currency options in the amounts of $26, $164, ($440) and ($295), respectively. The final three option contracts expired during the second quarter of 2005 and five options expired during the first six months of 2005. Three option contracts expired during the second quarter of 2004 and six option contracts expired during the first six months of 2004.
One of the options that expired in the second quarter of 2005 was the sale of a call option and was based on the average exchange rate of the period for which the option was active. The option expired in the money, requiring us to make a payment of $0.1 million. This amount was accrued at June 30, 2005 and was paid subsequent to that date.
Because of the expiration of the option contracts, the $1,900 letter of credit described above expired during the second quarter of 2005.
Recently Issued Accounting Standards
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies that a conditional asset retirement obligation, as used in SFAS 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of the settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN 47 is effective January 1, 2006, with early adoption allowed. We have not yet determined the impact, if any, FIN 47 will have on the Company's consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In May 2004, we executed several foreign currency option contracts. See " - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Sources - Currency Contracts".
Item 4. Controls and Procedures
Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of June 30, 2005 and, based on their evaluation, the principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in internal controls or in other factors that could significantly affect these controls during the quarter.
Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION AND SIGNATURE
Item 1. Legal Proceedings
From time to time, we are subject to routine legal proceedings incidental to the operation of our business. The outcome of any threatened or pending proceedings is not expected to have a material adverse effect on our financial condition, operating results or cash flows, based on our current understanding of the relevant facts. The Company maintains insurance coverage against claims in an amount that it believes to be adequate.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Security
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security-Holders
None
Item 5. Other Information
None
| | 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 |
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 the undersigned thereunto duly authorized.
| | CHAAS ACQUISITIONS, LLC |
| | |
| | |
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| Date: August 15, 2005 | /s/ Ronald J. Gardhouse |
| | Ronald J. Gardhouse |
| | Chief Financial Officer |
| | (Principal Financial Officer |
| | and Authorized Signatory) |
CHAAS ACQUISITIONS, LLC
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