Advanced Accessory 10-Q 2006 Q2 Quarterly report

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, 2006

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 Number333-114547

______________

ADVANCED ACCESSORY HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	56-2426615
(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.

Yes ¨ No x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨Accelerated filer ¨Non-accelerated filer x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

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 18, 2006
Membership Units	100

ADVANCED ACCESSORY HOLDINGS CORPORATION

INDEX

	Page No.
Part I.Financial Information
Item 1.Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005		1
Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2006 and 2005 (unaudited)		2
Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)		3
Consolidated Condensed Statement of Changes in Members’ Equity for the six months ended June 30, 2006 (unaudited)		4
Notes to Consolidated Condensed Financial Statements (unaudited)		5
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.Quantitative and Qualitative Disclosures About Market Risk		16
Item 4.Controls and Procedures		16
Part II.Other Information and Signature
Item 1.Legal Proceedings		16
Item 1A.Risk Factors		16
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds		17
Item 3.Defaults Upon Senior Securities		17
Item 4.Submission of Matters to a Vote of Security-Holders		17
Item 5.Other Information		17
Item 6.Exhibits		17
Signature		18

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

ADVANCED ACCESSORY HOLDINGS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

As of June 30, 2006 and December 31, 2005

(Dollars in thousands)

	June 30,			December 31,
	2006			2005
ASSETS	(Unaudited)
Current assets
Cash	$	2,398		$	13,642
Accounts receivable, less reserves of $165 and $1,870, respectively		31,604			64,318
Inventories
Raw materials		6,542			21,740
Work-in-process		4,478			13,153
Finished goods		1,289			27,857
Reserves		(1,002	)		(4,437	)
Total inventories		11,307			58,313
Other current assets		4,200			6,554
Total assets of discontinued operations		206,066			—
Total current assets		255,575			142,827
Property and equipment, net		17,579			62,871
Intangible assets, net		66,093			89,268
Deferred income taxes		—			131
Other noncurrent assets		386			1,838
Total Assets	$	339,633		$	296,935
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	14		$	3,940
Accounts payable		20,528			40,037
Accrued liabilities		4,799			22,708
Deferred income taxes		—			1,513
Total liabilities of discontinued operations		239,416			—
Total current liabilities		264,757			68,198
Noncurrent liabilities
Deferred income taxes		1,797			5,119
Other noncurrent liabilities		32,290			4,558
Long-term debt, less current maturities		96,402			268,173
Total noncurrent liabilities		128,692			277,850
Members’ deficit
Units		58,582			58,582
Other comprehensive income		503			(1,352	)
Accumulated deficit		(112,901	)		(106,343	)
Total members’ deficit		(53,816	)		(49,113	)
Total Liabilities and Members’ Deficit	$	339,633		$	296,935

The accompanying notes are an integral part of the

consolidated condensed financial statements.

1

ADVANCED ACCESSORY HOLDINGS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Dollars in thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Net sales	$	46,950		$	52,353		$	92,312		$	102,334
Cost of sales		42,392			45,888			84,502			89,982
Gross profit		4,558			6,465			7,810			12,352
Selling, administrative and product development expenses		4,567			5,252			9,347			11,071
Amortization of intangible assets		1,797			1,797			3,591			3,597
Operating loss		(1,806	)		(584	)		(5,128	)		(2,316	)
Other expense
Interest expense		(2,915	)		(2,441	)		(5,741	)		(4,806	)
Foreign currency gain (loss), net		439			(440	)		637			(609	)
Other income (expense)		(16	)		75			(1	)		71
Loss from continuing operations before income taxes		(4,298	)		(3,390	)		(10,233	)		(7,660	)
Benefit from income taxes		(978	)		(149	)		(844	)		(282	)
Net loss from continuing operations		(3,320	)		(3,241	)		(9,389	)		(7,378	)
Discontinued operations:
Income (loss) from discontinued operations		5,989			2,124			4,996			(1,299	)
Provision for income taxes		1,944			1,166			2,165			1,275
Net income (loss) from discontinued operations		4,045			958			2,831			(2,574	)
Net income (loss)	$	725		$	(2,283	)	$	(6,558	)	$	(9,952	)

The accompanying notes are an integral part of the

consolidated condensed financial statements.

2

ADVANCED ACCESSORY HOLDINGS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six months Ended
	June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(6,558	)	$	(9,952	)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Depreciation and amortization		11,147			12,770
Deferred taxes		(781	)		(671	)
Foreign currency (gain)/loss		(2,632	)		3,478
Loss on disposal of assets		772			8
Interest accretion on notes		4,735			4,120
Changes in assets and liabilities, net:
Accounts receivable		(20,685	)		(23,718	)
Inventories		942			5
Other current assets		251			(3,341	)
Other noncurrent assets		(1,341	)		4,166
Accounts payable		9,606			3,876
Accrued liabilities		3,116			3,288
Other noncurrent liabilities		215			(573	)
Net cash used for operating activities		(1,213	)		(6,544	)
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Acquisition of property and equipment		(3,359	)		(6,766	)
Proceeds from disposals of property and equipment		143			—
Net cash used for investing activities		(3,216	)		(6,766	)
CASH FLOWS (USED FOR) PROVIDED BY FINANCING ACTIVITIES:
Net increase (decrease) in revolving loan		(675	)		6,182
Repayment of debt		(1,898	)		(1,045	)
Debt issuance costs		(9	)		(92	)
Net cash (used for) provided by financing activities		(2,582	)		5,045
Effect of exchange rate changes		533			(769	)
Net decrease in cash		(6,478	)		(9,034	)
Cash at beginning of period		13,642			14,960
Cash at end of period	$	7,164		$	5,926

The accompanying notes are an integral part of the

consolidated condensed financial statements.

3

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ADVANCED ACCESSORY HOLDINGS CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN MEMBERS’ EQUITY

For the Six Months Ended June 30, 2006

(Dollars in thousands)

(Unaudited)

			Other						Total
	Members’		comprehensive			Accumulated			members’
	capital		income			deficit			equity
Balance at December 31, 2005	$	58,582	$	(1,352	)	$	(106,343	)	$	(49,113	)
Currency translation adjustment		—		1,855			—			1,855
Net loss		—		—			(6,558	)		(6,558	)
Balance at June 30, 2006	$	58,582	$	503		$	(112,901	)	$	(53,816	)

The accompanying notes are an integral part of the

consolidated condensed financial statements.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN MEMBERS’ EQUITY

For the Six Months Ended June 30, 2006

(Dollars in thousands)

(Unaudited)

1.BASIS OF PRESENTATION

On April 15, 2003, substantially all of the equity interests of Advanced Accessory Systems, LLC (“AAS” or "Predecessor") were acquired by Castle Harlan Partners IV, L.P. (the "Acquisition"), a private equity investment fund organized and managed by Castle Harlan Inc. 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”) which was formed as an acquisition vehicle to acquire the Predecessor's equity interest from J.P. Morgan Partners (23 SBIC), LLC, directors and officers of the Predecessor, and other investors.

The aggregate consideration paid at or shortly after the closing of the Acquisition was approximately $266,000, approximately $168,000 of which was used to repay, assume or defease certain indebtedness at the time of the Acquisition and approximately $98,000 (inclusive of subordinated promissory notes and a subsequent working capital adjustment) of which was used for the closing purchase price of the equity interests of AAS.

In January 2004, Advanced Accessory Holdings Corporation (“AAHC” or “the Company”) was formed by our direct parent, CHAAS Holdings, LLC in connection with an offering of our $88,000 aggregate principal amount at maturity, 13¼% Senior Discount Notes due 2011 (the “Senior Discount Notes”). At that time, CHAAS Holdings made a contribution of all of its equity interests in CHAAS Acquisitions to the Company in exchange for all the outstanding membership units of the Company. Subsequent to this transaction, CHAAS Holdings is the direct parent of the Company and the Company 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 the Company 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 the estimated fair values at the acquisition date. The Company engaged an independent appraiser to assist in the determination of fair value at the acquisition date and such independent appraiser completed its work during the fourth quarter of 2003. The accompanying financial statements of the Company as of and for the periods ended June 30, 2005, December 31, 2005 and June 30, 2006 reflect the allocation of the purchase consideration to tangible assets, goodwill and other identifiable intangible assets.

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, 2005.

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, 2006 and the results of its operations for the three and six months ended June 30, 2006 and 2005.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

2. DISCONTINUED OPERATIONS

On May 17, 2006 the Company and certain of its affiliates signed a purchase agreement (the “Agreement”) with Thule AB (“Buyer”) to sell substantially all of the net assets of Valley Industries, LLC (“Valley”) and all of the issued and outstanding stock of CHAAS Holdings B.V. (“Brink”) and AAS (collectively, the “Discontinued Companies”). Pursuant to the Agreement, the Buyer will purchase the Automotive Accessories Business, consisting of Valley, Brink and SportRack Accessories, Inc. and their respective subsidiaries. In accordance with the Agreement, on May 12, 2006, AAS transferred 100% of the outstanding membership interest of SportRack, LLC to CHAAS Acquisitions, and SportRack, LLC transferred to AAS its ownership of 10% of the outstanding stock issued by SportRack Accessories, Inc. in order that SportRack Accessories, Inc. is a wholly-owned subsidiary of AAS. The proceeds of the sale will be $203,000.  The expected gain on the sale is in the range of $75,000 to $85,000 based on the current book values of the net assets sold and the retirement of all of the long-term debt of the Company, except for certain capital leases. On July 13, 2006 the Company, certain of its affiliates and the Buyer signed Amendment No. 1 to the Agreement, a copy of which is attached to this Form 10-Q as Exhibit 10.1. The Company expects the transaction contemplated by the Agreement, as amended, to be consummated in the third quarter. A copy of the Agreement was filed as an exhibit to Form 8-K dated May 12, 2006.

The Discontinued Companies manufacture towing systems for the Original Equipment Manufacturer’s (OEM) market and aftermarket in North America and Europe and lifestyle accessories for both the automotive and sporting accessory aftermarkets. These accessories typically attach to towing or rack systems and are used for carrying items such as bicycles, skis, luggage, surfboards and sailboards.

On June 5, 2006, in connection with the sale of the Discontinued Companies, the Company, AAS and AAS Capital Corporation, a wholly-owned subsidiary of AAS, commenced a combined tender offer and consent solicitation in respect of the 13 ¼% Senior Discount Notes due 2011, issued by the Company pursuant to the indenture dated February 4, 2004 and the 10 ¾% Senior Notes due 2011, issued by AAS and AAS Capital Corporation, pursuant to the indenture dated May 23, 2003. A copy of the press release announcing the combined tender offer and consent solicitation was filed as an exhibit to Form 8-K dated June 5, 2006.

In accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” (“SFAS No. 144”) the net assets of the Discontinued Companies were accounted for as held for sale subsequent to the signing of the Agreement on May 17, 2006. Accordingly, the Statement of Operations reports the results of the Discontinued Companies in a separate component of income after net loss from continuing operations for both current and prior periods. The assets and liabilities of the Discontinued Companies are presented separately as one line item each for total assets and liabilities for the current period only.

SFAS No. 144 also requires long lived assets classified as held for sale to be recorded at the lower of their carrying value or fair value less cost to sell and that depreciation and amortization not be recorded on the long lived assets while classified as held for sale. Based on the expected gain on the sale of the Discontinued Companies, the Company believes that the book value of their net assets is fairly stated and no write-down to fair value was required.

Revenue and pre-tax income (loss) of the Discontinued Companies are as follows:

	Three Months Ended				Six Months Ended
	June 30, 2006		June 30, 2005		June 30, 2006		June 30, 2005
Revenues	$	78,583	$	76,069	$	139,748	$	137,358
Pre-tax income (loss)		5,989		2,124		4,996		(1,299	)

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ADVANCED ACCESSORY HOLDINGS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

2. DISCONTINUED OPERATIONS (continued)

The assets and liabilities of the Discontinued Companies are as follows:

	June 30, 2006
Cash	$	4,766
Accounts Receivable		55,576
Inventory		48,619
Property and equipment, net		43,315
Intangible Assets, net		20,970
Other assets		32,820
Total assets of Discontinued Companies	$	206,066
Current maturities of long-term debt	$	4,565
Accounts payable		29,982
Accrued liabilities		22,061
Deferred income taxes		4,436
Long-term debt		175,001
Other liabilities		3,371
Total liabilities of Discontinued Companies	$	239,416

3. COMPREHENSIVE INCOME (LOSS)

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

	Three months ended					Six months ended
	June 30, 2006		June 30, 2005			June 30, 2006			June 30, 2005
Net income (loss)	$	725	$	(2,283	)	$	(6,558	)	$	(9,952	)
Change in the cumulative translation adjustment, net of tax		1,248		(2,108	)		1,855			(3,798	)
Comprehensive income (loss)	$	1,973	$	(4,391	)	$	(4,703	)	$	(13,750	)

4. CURRENCY CONTRACTS

The Company has significant operations in Europe where the functional currency is the Euro. In February and May 2004, 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. 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. The final option contracts expired during the second quarter of 2005. For the three and six months ended June 30, 2005, the Company recorded an unrealized gain on foreign currency options of $26 and $164, respectively.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

5.INTANGIBLE ASSETS

A summary of intangible assets identified by the Company follows:

	Customer Contracts			Customer Relationships			Technology			Intangible Pension Asset		Tradename / Trademark			Deferred Financing Costs			Deferred Selling Costs		Total
Amortization period in years	8 - 10			15 - 21			10			15		Indefinite			7 - 8			Indefinite
Balance at December 31, 2005	$	30,989		$	30,643		$	13,183		$	466	$	7,070		$	6,917		$	—	$	89,268
Less discontinued operations at December 31, 2005		(68	)		(12,819	)		(58	)		—		(2,876	)		(4,783	)		—		(20,604	)
Balance at December 31, 2005 from continuing operations		30,921			17,824			13,125			466		4,194			2,134			—		68,664
Additions		—			—			—			—		—			287			732		1,019
Foreign currency translation		76			117						—		25			—			—		218
Amortization		(2,150	)		(543	)		(900	)		—		—			(215	)		—		(3,808	)
Balance at June 30, 2006	$	28,847		$	17,398		$	12,225		$	466	$	4,219		$	2,206		$	732	$	66,093

Amortization expense of identifiable intangible assets for the three and six months ended June 30, 2006 was $1,906 and $3,808, respectively, which included $108 and $215 of amortization of deferred financing costs included in interest expense.

6.RESTRUCTURING COSTS

On March 8, 2006 the Company announced its intention to close the Greenwood, Mississippi facility. Current production is being transferred to other locations. The costs to close the facility will include severance, cost to move equipment and ongoing lease costs and are estimated to be approximately $2,200.

During the three and six months ended June 30, 2006 the Company accrued $133 and $191, respectively, as a ratable portion of the employee termination costs. No payments were made against this accrual and the liability at June 30, 2006 was $191. The Company anticipates that the closure will be complete during the third quarter of 2006.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

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

Company Background

We believe that 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 original equipment manufacturers (“OEMs”) as standard accessories or options for a variety of light vehicles and to the aftermarket.

Discontinued Operations

On May 17, 2006 Advanced Accessory Holdings Corporation (“AAHC” or the “Company”) and certain of its affiliates signed a purchase agreement (the “Agreement”) with Thule AB (“Buyer”) to sell substantially all of the net assets of Valley Industries, LLC (“Valley”) and all of the issued and outstanding stock of CHAAS Holdings B.V. (“Brink”) and Advanced Accessory Systems, LLC (“AAS” or “Predecessor”, together with Valley and Brink, the “Discontinued Companies”). Pursuant to the Agreement, the Buyer will purchase the Automotive Accessories Business, consisting of Valley, Brink and SportRack Accessories, Inc. and their respective subsidiaries. In accordance with the Agreement, on May 12, 2006, AAS transferred 100% of the outstanding membership interest of SportRack, LLC to CHAAS Acquisitions, and SportRack, LLC transferred to AAS its ownership of 10% of the outstanding stock issued by SportRack Accessories, Inc. in order that SportRack Accessories, Inc. is a wholly-owned subsidiary of AAS. On July 13, 2006 the Company, certain of its affiliates and the Buyer signed Amendment No. 1 to the Agreement, a copy of which is attached to this Form 10-Q as Exhibit 10.1. The Company expects the transaction contemplated by the Agreement, as amended, to be consummated in the third quarter. A copy of the Agreement was filed as an exhibit to Form 8-K dated May 12, 2006.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

On June 5, 2006, in connection with the sale of the Discontinued Companies, the Company, AAS and AAS Capital Corporation, a wholly-owned subsidiary of AAS, commenced a combined tender offer and consent solicitation in respect of the 13 ¼% Senior Discount Notes due 2011, issued by the Company pursuant to the indenture dated February 4, 2004 and the 10 ¾% Senior Notes due 2011, issued by AAS and AAS Capital Corporation, pursuant to the indenture dated May 23, 2003. A copy of the press release announcing the combined tender offer and consent solicitation was filed as an exhibit to Form 8-K dated June 5, 2006.

Industry Trends and Competition

Several trends are affecting the already highly competitive automotive industry, including a decline in the US domestic market share with its accompanying price pressures, worldwide increases in steel, aluminum and resin demand and prices and the ongoing financial distress of the US domestic OEMs and supply base.

US Domestic Market Share

The US market share for General Motors and Ford has declined and their US domestic vehicle production levels continue to decrease. This affects us in lower sales volumes to these customers and in increased pressure to lower our selling prices. Year-to-year price reductions are common in the industry, and the long-term contracts that we use to sell our products often include annual price reductions. We do not believe that these price reductions will have a material adverse impact on our results because we intend to offset such price reductions through cost reductions and other productivity increases.

Increases in Raw Materials Costs

Worldwide market conditions, including the growth of demand from China and other Asian countries, and the tensions in the Mid-East have resulted in higher steel, aluminum and resin prices in recent years. These increases in demand are seen as long-term and we do not expect prices to go down in the short term. We are focused on mitigating the impact of this trend through commercial agreements with our customers, competitive sourcing arrangements, technology advancements and improvements in the efficiency of our production processes.

Financial Distress of US Domestic OEMs and Suppliers

The declining market share of US domestic OEMs, their high legacy costs, and increased raw material prices and higher energy costs have resulted in financial losses for them. As well, several large automotive suppliers have filed for Chapter 11 bankruptcy protection. A result of these issues is that the US domestic automotive industry is experiencing a major structural change. The Company is not able to predict how long these industry trends will continue, but a sustained downturn could have a material adverse effect on the Company's results of operations, cash flows and financial position.

The Acquisition

On April 15, 2003, substantially all of the equity interests of AAS 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”) which was also formed pursuant to the Acquisition.

In January 2004, the Company was formed by CHAAS Holdings. At that time, CHAAS Holdings made a contribution of all of its equity interests in CHAAS Acquisitions to the Company in exchange for all of the outstanding membership units of the Company. CHAAS Holdings is the direct parent of the Company and the Company 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 the Company and its subsidiaries.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

RESULTS OF OPERATIONS

Three Months Ended June 30, 2006 Compared to the Three Months Ended June 30, 2005

Net sales. Net sales for the second quarter of 2006 were $47.0 million, representing a decrease of $5.4 million, or 10.3%, compared with net sales of $52.4 million for the second quarter of 2005. North American OEM sales decreased approximately $6.3 million, primarily as a result of a general overall volume decline in sport utility vehicles linked to higher fuel prices. This decline is partially offset by new product replacement programs such as the General Motors 900 series sport utility vehicles (“SUVs”) and new product offerings such as the Jeep Commander and GM’s HHR. European OEM sales increased by $0.9 million due to new business awards at Ford and Volkswagen. The European sales increase includes an increase of approximately $0.3 million due primarily to the increase of the average exchange rates between the US Dollar and primarily the Czech Koruna.

Gross profit. Gross profit for the second quarter of 2006 was $4.6 million, which represents a decrease of $1.9 million, or 29.2%, compared with gross profit of $6.5 million for the second quarter of 2005. Gross profit as a percentage of net sales was 9.8% for the second quarter of 2006 and 12.4% for the second quarter of 2005. The decrease in gross profit and margin reflects the impact of lower volume and product mix and increases in raw material costs, partially offset by improved plant operating performance.

Selling, administrative and product development expenses. Selling, administrative and product development expenses for the second quarter of 2006 were $4.6 million, representing a decrease of $0.7 million, or 13.2%, compared with $5.3 million for the second quarter of 2005. The net decrease is due to lower engineering and selling expenses, the results of restructuring actions, cost improvements on tooling programs and lower sales commissions in line with volume levels. These decreases are partially offset by the cost of restructuring actions included in the closing of the Greenwood, Mississippi plant.

Operating loss. The operating loss for the second quarter of 2006 was $1.8 million and $0.6 million for the second quarter of 2005. The increase in operating loss resulted from decreased gross profit partially offset by lower selling, administrative and product development expenses, as discussed above.

Interest expense. Interest expense for the second quarter of 2006 was $2.9 million and for the second quarter of 2005 was $2.4 million. This increase reflects higher interest rates and slightly higher debt levels in the second quarter of 2006 relative to 2005.

Foreign currency gain (loss). Foreign currency gain in the second quarter of 2006 was $0.4 million compared to a foreign currency loss of $0.4 million in the second quarter of 2005. Both the gain and loss were primarily attributable to the US Dollar-denominated intercompany indebtedness of SportRack Automotive GmbH and its subsidiaries (collectively, “SportRack Europe”), whose functional currency is the Euro.

Benefit from income taxes. During the second quarter of 2006 we recorded a loss from continuing operations before income taxes of $4.3 million and recorded an income tax benefit 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 (including current net operating losses) of all North American operations and differences in the tax rates of foreign operations.  During the second quarter of 2005 we had a net loss from continuing operations before taxes of $3.4 million and recorded an income tax benefit of $0.1 million.

Net loss from continuing operations. We recorded a net loss from continuing operations of $3.3 million in the second quarter of 2006 and $3.2 million in the second quarter of 2005. The increase in the net loss was a result of the items discussed above related to net sales, gross profit and foreign currency.

Net income (loss) from discontinued operations. We recorded income from discontinued operations of $6.0 million in the second quarter of 2006 and an income tax provision of $2.0 million, resulting in net income from discontinued operations of $4.0 million. In the second quarter of 2005 we recorded income from discontinued operations of $2.1 million and an income tax provision of $1.2 million, resulting in net income from discontinued operations of $1.0 million. Gross profit in the second quarter of 2006 was $23.0 million which represents an increase of $3.0 million or 15.0%, compared with gross profit of $20.0 million for the same period in 2005. The increase in gross profit is attributable to volume, pricing and discontinued depreciation partially offset by manufacturing performance. Foreign currency gain in the second quarter of 2006 was $0.7 million compared to a loss of $1.8 million in the second quarter of 2005. Both the foreign currency gain and the loss were primarily attributable to the US Dollar-denominated intercompany indebtedness of Brink, whose functional currency is the Euro.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

Six Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005

Net sales. Net sales for the first six months of 2006 were $92.3 million, representing a decrease of $10.0 million, or 9.8%, compared with net sales of $102.3 million for the first six months of 2005. North American OEM sales decreased by approximately $11.6 million, primarily as a result of a general trend away from sport utility vehicles due to high operating costs at current fuel prices. This decrease is partially offset by the launch of replacement programs such as the General Motors 900 series line of SUVs and new product entries such as the Jeep Commander and GM’s HHR. This net decrease was offset by increased European OEM sales of $1.6 million which was driven by new business awards at Ford and Volkswagen.

Gross profit. Gross profit for the first six months of 2006 was $7.8 million, which represents a decrease of $4.6 million, or 37.1%, compared with gross profit of $12.4 million for the first six months of 2005. Gross profit as a percentage of net sales was 8.5% for the first six months of 2006 versus 12.1% for the first six months of 2005. The overall decrease in gross profit reflects volume and mix as well as increases in raw material costs.

Selling, administrative and product development expenses. Selling, administrative and product development expenses for the first six months of 2006 were $9.3 million representing a decrease of $1.8 million, or 16.2%, compared with $11.1 million for the first six months of 2005. The net decrease is due to lower engineering and selling expenses, results from restructuring actions, cost improvements on tooling programs and lower sales commissions in line with volume levels. These decreases are partially offset by the cost of restructuring actions included in the closing of the Greenwood, Mississippi plant.

Operating loss. The operating loss for the first six months of 2006 was $5.1 million representing a decrease of $2.8 million compared with an operating loss of $2.3 million for the first six months of 2005. The decrease resulted from decreased gross profit partially offset by lower selling, administrative and product development expenses, as discussed above.

Interest expense. Interest expense for the first six months of 2006 was $5.7 million representing an increase of $0.9 million or 18.8%, compared with interest expense of $4.8 million for the first six months of 2005. This increase reflects higher interest rates and debt levels in the first six months of 2006 relative to 2005.

Foreign currency gain (loss). Foreign currency gain in the first six months of 2006 was $0.6 million compared to a loss of $0.6 million in the first six months of 2005. Both the gain and loss were primarily attributable to the US Dollar-denominated intercompany indebtedness of SportRack Europe, whose functional currency is the Euro.

Benefit from income taxes. During the first six months of 2006 we recorded a loss from continuing operations before income taxes of $10.2 million and recorded an income tax benefit of $0.8 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 2005 we had a net loss from continuing operations before taxes of $7.7 million and recorded an income tax benefit of $0.3 million.

Net loss from continuing operations. We recorded a net loss from continuing operations of $9.4 million in the first six months of 2006 and $7.4 million in the first six months of 2005. 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.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

Net income (loss) from discontinued operations. We recorded income from discontinued operations of $5.0 million in the second quarter of 2006 and an income tax provision of $2.2 million, resulting in net income from discontinued operations of $2.8 million. In the second quarter of 2005 we recorded a loss from discontinued operations of $1.3 million and an income tax provision of $1.3 million, resulting in a net loss from discontinued operations of $2.6 million. Gross profit for the first six months of the 2006 was $37.3 million which represents an increase of $3.4 million, or 10.0% compared with gross profit of $33.9 for the same period in 2005. The increase is attributable to volume, pricing and discontinued depreciation partially offset by manufacturing performance and foreign exchange. Foreign currency gain in the first six months of 2006 was $1.2 million compared with a loss of $2.9 million in the first six months of 2005. Both the foreign currency gain and the loss were primarily attributable to the US Dollar-denominated intercompany indebtedness of Brink, whose functional currency is the Euro.

LIQUIDITY AND CAPITAL RESOURCES

Our principal liquidity requirements are to service our debt and meet our working capital and capital expenditure needs. The indebtedness of our continuing operations at June 30, 2006 was $96.4 million including current maturities of $14,000.

On May 12, 2006, we entered into a Consent and Eighth Amendment to the Amended and Restated Credit Agreement (the “Eighth Amendment”) with General Electric Capital Corporation (“GECC”) individually as a lender and as agent for the lenders referred to therein. Under the Eighth Amendment, GECC and the lenders consented to the transfer (i) by AAS to CHAAS of 100% of the outstanding membership interests of SportRack, LLC and (ii) by SportRack, LLC to AAS of 10% of the outstanding stock issued by SportRack Accessories, Inc., such that SportRack Accessories, Inc. is a wholly-owned subsidiary of AAS, in each case in accordance with certain documents set forth in the Eighth Amendment. A copy of the Eighth Amendment was attached as an Exhibit to Form 8-K dated May 12, 2006.

On March 29, 2006, we entered into the Seventh Amendment to the Amended and Restated Credit Agreement (the "Seventh 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 covenant and the senior secured leverage ratio covenant. Although we were able to meet our senior leverage covenant for the quarter ended December 31, 2005, the agreement was amended because we anticipated that we would be unable to meet our fixed charge coverage ratio covenant for the quarter ended December 31, 2005 and future quarters.

Prior to this modification, the required minimum fixed charge coverage ratios for all borrowers and their subsidiaries were 1.05 to 1.00 for the fiscal quarter ended December 31, 2005 and 1.15 to 1.00 for each fiscal quarter ending thereafter. The required minimum fixed charge coverage ratios for the European borrowers and their subsidiaries were 1.25 to 1.00 for the fiscal quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. Under the modified fixed charge coverage ratio covenant, the required minimum fixed charge coverage ratio for all borrowers and their subsidiaries range from 1.15 to 1.00 for the fiscal quarter ending June 30, 2007 and for each fiscal quarter ending thereafter. The required minimum fixed charge coverage ratios for European borrowers and their subsidiaries are 1.25 to 1.00 for the fiscal quarter ended December 31, 2005 and 1.15 to 1.00 for the following fiscal quarters through December 31, 2006. The actual fixed charge coverage ratio for the fiscal quarter ended June 30, 2006 was 1.78 to 1.00 and we were in compliance with the modified covenant as of June 30, 2006.

Prior to the modification of the senior secured leverage ratio covenant, the required maximum leverage ratios for all borrowers and their subsidiaries were 1.75 to 1.00 for the fiscal quarters ended March 31, 2005 and June 30, 2005; 1.50 to 1.00 for the fiscal quarter ended September 30, 2005; and 1.25 to 1.00 for each fiscal quarter ending thereafter. Under the modified senior secured leverage ratio covenant, the required maximum leverage ratios for all borrowers and their subsidiaries range from 2.00 to 1.00 for fiscal quarters ended June 30, 2006 and June 30, 2006; 1.75 to 1.00 for the fiscal quarter ending September 30, 2006; 1.50 to 1.00 for the fiscal quarter ending December 31, 2006; and 1.25 to 1.00 for each fiscal quarter ending thereafter. The actual leverage ratio for the quarter ended June 30, 2006 was 1.55 to 1.00 and we were in compliance with the modified covenant as of June 30, 2006.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

In addition, the Seventh Amendment modified the definition of “Obligations” under the credit agreement to include obligations of any credit party in favor of any lender party to the credit agreement arising under (i) certain bank products offered by such lender or (ii) any agreement with such lender to fix or hedge foreign currency risk of up to an aggregate maximum amount of $2.4 million. A copy of the Seventh Amendment was attached as an exhibit to the Annual Report filed on Form 10-K as of December 31, 2005.

Working Capital and Cash Flows

Working capital and key elements of the consolidated statement of cash flows are:

	June 30, 2006			December 31, 2005
	(in thousands)
Working Capital	$	(9,182	)	$	74,629

	Six months ended June 30,
	2006			2005
	(in thousands)
Cash flows used for operating activities	$	(1,213	)	$	(6,544	)
Cash flows used for investing activities	$	(3,216	)	$	(6,766	)
Cash flows provided by (used) for financing activities	$	(2,582	)	$	5,045

Working capital

Working capital decreased by $83.8 million to $(9.2) million at June 30, 2006 from $74.6 million at December 31, 2005 primarily due to the reclassification of the Discontinued Companies. Working capital before the reclassification of the Discontinued Companies increased by $1.2 million to $77.4 million at June 30, 2006 from $74.6 million at December 31, 2005. This increase is primarily due to increased accounts receivable and inventory of $22.9 million and $1.6 million, respectively. These increases were partially offset by increases in accounts payable ($10.5 million), accrued liabilities ($4.2 million) and current maturities of long-term debt ($0.6 million) and a decrease in cash of $6.5 million. The net working capital decrease was favorably impacted by the increased exchange rate between the US Dollar and local currencies, especially the Euro, as of June 30, 2006 as compared with the exchange rate as of December 31, 2005.

The major components of the working capital change were accounts receivable, accounts payable and accrued liabilities. The increase in these three components was attributable to increased sales and production levels prior to June 30 as compared with the normal year-end shutdown period in December.

Investing activities

Cash flow used for investing activities for the first six months of 2006 and 2005 represented acquisitions of property and equipment of $3.4 million and $6.8 million, respectively, and were primarily for the expansion of capacity, productivity, process improvements and maintenance.

Capital expenditures

Our capital expenditures for 2005 were $9.3 million. Approximately $8.0 million was spent in connection with the expansion of capacity, productivity and process improvements and maintenance of machinery, equipment and tooling, $0.9 million was spent on furniture, fixtures and computers, $0.4 million on uncompleted construction in process and $0.1 million on repairs and improvements to land and buildings. These capital expenditures were paid for from cash flows provided by operating activities or borrowings against our revolving credit facilities. We estimate that capital expenditures for 2006 will be approximately $11.1 million, primarily for productivity and process improvements and maintenance. Our 2006 capital expenditures are anticipated to be paid for from our current cash and cash provided by operating activities.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

Financing activities

During the first six months of 2006, financing cash flows included a decrease in borrowings under the revolving line of credit of $0.7 million and repayment of debt of $1.9 million. For the same period in 2005 the financing cash flows included an increase in the revolving line of credit of $6.2 million and repayment of debt of $1.0 million.

Off-balance sheet arrangements

The Company is not party to off-balance sheet arrangements as defined in SEC Regulation SK, Item 303(a).

Contractual Obligations

The following table represents our contractual commitments associated with our debt and other obligations disclosed above as of December 31, 2005.

	Payments due by year
	Total		Year 1		Years 2-3		Years 4-5		Thereafter
Long-term debt obligations - fixed rate	$	243,339	$	—	$	—	$	31,000	$	212,339
Long-term debt obligations - variable rate		43,189		3,256		39,933		—		—
Interest on long-term fixed rate debt obligations		129,487		16,125		38,080		49,408		25,8742
Capital lease obligations (including interest)		7,927		917		1,786		1,699		3,525
Operating lease obligations		41,201		7,258		12,997		6,688		14,258
Total	$	465,143	$	27,556	$	92,796	$	88,795	$	255,996

In addition to the above, our senior credit facility includes obligations subject to variable interest rates. Borrowings under the credit facility, at the Company’s election, may be made as “index rate” loans or LIBOR rate loans, plus an applicable margin. As both the interest rate and the relative balances of the variable rate debt are not determinable, the interest related to the variable rate debt is not reflected in the above table. At December 31, 2005 the outstanding variable rate obligations were $43.2 million and the weighted average interest rate for those obligations was 7.65%.

Debt and Credit Sources

Our indebtedness at June 30, 2006 before the reclassification of the Discontinued Companies was $276.0 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, 2006, we had borrowings under the revolving credit facilities totaling $35.1 million and had $16.1 million of available borrowing capacity. Standby letters of credit totaling $2.9 million providing security for our US workers compensation program reduced borrowing availability.

On May 12, 2006 we entered into the Eighth Amendment to the Amended and Restated Credit Agreement, and on March 29, 2006 we entered into the Seventh Amendment to the Amended and Restated Credit Agreement. See the discussion of the amendments to the credit facility in “- Liquidity and Capital Resources”.

International operations

Our continuing companies conduct operations in the Czech Republic, Germany and Spain. Net sales from international operations during the first six months of 2006 were $10.1 million, or 10.9% of our net sales. At June 30, 2006, assets associated with these operations were approximately 18.8% of total assets, and we had no indebtedness denominated in currencies other than the US Dollar.

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ADVANCED ACCESSORY HOLDINGS CORPORATION

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. In February and May 2004, we entered into a series of foreign currency forward option contracts related to the Euro (“Euro Collar”), which matured quarterly on a staggered basis. 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. The final option contracts expired during the second quarter of 2005. For the three and six months ended June 30, 2005, the Company recorded an unrealized gain on foreign currency options of $26,000 and $164,000, respectively.

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, 2006 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 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 1A. Risk Factors

Not Applicable

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ADVANCED ACCESSORY HOLDINGS CORPORATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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

Item 6.Exhibits

Exhibit 10.1 Amendment No. 1 to the Purchase Agreement, dated July 13, 2006, by and among CHAAS Acquisitions, LLC, Advanced Accessory Holdings Corporation, AAS Acquisitions, LLC, Valley Industries, LLC and Thule AB.

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

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ADVANCED ACCESSORY 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 the undersigned thereunto duly authorized.

	ADVANCED ACCESSORY HOLDINGS CORPORATION
Date: August 18, 2006	/s/ Ronald J. Gardhouse
	Ronald J. Gardhouse
	Chief Financial Officer
	(Principal Financial Officer
	and Authorized Signatory)

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ADVANCED ACCESSORY HOLDINGS CORPORATION

EXHIBIT INDEX

Exhibit	Description
10.1	Amendment No. 1 to the Purchase Agreement, dated July 13, 2006, by and among CHAAS Acquisitions, LLC, Advanced Accessory Holdings Corporation, AAS Acquisitions, LLC, Valley Industries, LLC and Thule AB.
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