-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JvPKqDRQRbH3AIIo5PxCaZkTln6KDo2aflvAoXrWRuZwLTTVwM7N93A0BkEy3e5E YOf9QXMOzJbSPRTv94WZmg== /in/edgar/work/0001067550-00-000002/0001067550-00-000002.txt : 20001115 0001067550-00-000002.hdr.sgml : 20001115 ACCESSION NUMBER: 0001067550-00-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AKI HOLDING CORP CENTRAL INDEX KEY: 0001067550 STANDARD INDUSTRIAL CLASSIFICATION: [2844 ] IRS NUMBER: 742883163 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-60991 FILM NUMBER: 763837 BUSINESS ADDRESS: STREET 1: 1815 EAST MAIN STREET CITY: CHATTANOOGA STATE: TN ZIP: 37404 BUSINESS PHONE: 4236243301 MAIL ADDRESS: STREET 1: 1815 EAST MAIN STREET CITY: CHATTANOOGA STATE: TN ZIP: 37404 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AKI INC CENTRAL INDEX KEY: 0001067549 STANDARD INDUSTRIAL CLASSIFICATION: [2844 ] IRS NUMBER: 133785856 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-60989 FILM NUMBER: 763838 BUSINESS ADDRESS: STREET 1: 1815 EAST MAIN STREET CITY: CHATTANOOGA STATE: TN ZIP: 37404 BUSINESS PHONE: 4236243301 MAIL ADDRESS: STREET 1: 1815 EAST MAIN STREET CITY: CHATTANOOGA STATE: TN ZIP: 37404 10-Q 1 0001.txt QUARTERLY REPORT FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 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: 333-60991 AKI HOLDING CORP. (Exact name of registrant as specified in its charter) Delaware 74-2883163 (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) Commission File Number: 333-60989 AKI, INC. (Exact name of registrant as specified in its charter) Delaware 13-3785856 (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 1815 East Main Street Chattanooga, TN 37404 (Address of principal executive offices) (Zip Code) (423) 624-3301 (Registrant's telephone number, including area code) 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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days (X) Yes ( ) No As of November 10, 2000, 1,000 shares of common stock of AKI Holding Corp., $.01 par value, were outstanding and 1,000 shares of common stock of AKI, Inc., $.01 par value, were outstanding. AKI, Inc. meets the requirements set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with reduced disclosure format. AKI HOLDING CORP. AND SUBSIDIARIES INDEX TO FORM 10-Q Part I. FINANCIAL INFORMATION Item 1. Financial Statements AKI Holding Corp. and Subsidiaries Consolidated Condensed Balance Sheet - September 30, 2000 (unaudited) - June 30, 2000 (unaudited) Consolidated Condensed Statements of Operations - Three months ended September 30, 2000 (unaudited) - Three months ended September 30, 1999 (unaudited) Consolidated Condensed Statement of Changes in Stockholder's Equity - Three months ended September 30, 2000 (unaudited) Consolidated Condensed Statements of Cash Flows - Three months ended September 30, 2000 (unaudited) - Three months ended September 30, 1999 (unaudited) Notes to Consolidated Condensed Financial Statements Item 1. Financial Statements (continued) AKI, Inc. and Subsidiaries Consolidated Condensed Balance Sheet - September 30, 2000 (unaudited) - June 30, 2000 (unaudited) Consolidated Condensed Statements of Operations - Three months ended September 30, 2000 (unaudited) - Three months ended September 30, 1999 (unaudited) Consolidated Condensed Statement of Changes in Stockholder's Equity - Three months ended September 30, 2000 (unaudited) Consolidated Condensed Statements of Cash Flows - Three months ended September 30, 2000 (unaudited) - Three months ended September 30, 1999 (unaudited) Notes to Consolidated Condensed Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K AKI HOLDING CORP. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.) CONSOLIDATED CONDENSED BALANCE SHEETS (dollars in thousands, except share information)
SEPTEMBER 30, JUNE 30, 2000 2000 ------------- ------------- (UNAUDITED) (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents.................................................. $ 802 $ 1,158 Accounts receivable, net................................................... 28,525 21,522 Inventory.................................................................. 9,555 7,757 Prepaid expenses........................................................... 589 92 Deferred income taxes...................................................... 396 396 ------------- ------------- TOTAL CURRENT ASSETS.................................................... 39,867 30,925 Property, plant and equipment, net......................................... 16,792 17,097 Goodwill, net.............................................................. 161,270 162,472 Other intangible assets, net............................................... 6,952 7,174 Deferred charges, net...................................................... 5,291 5,461 Deferred income taxes...................................................... 477 720 Other assets............................................................... 87 88 ------------- ------------- TOTAL ASSETS............................................................ $ 230,736 $ 223,937 ============= ============= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current portion of capital lease obligations............................... $ 731 $ 847 Accounts payable, trade.................................................... 5,949 3,565 Accrued income taxes....................................................... 2,415 724 Accrued compensation....................................................... 2,171 3,965 Accrued interest........................................................... 3,015 5,695 Accrued expenses........................................................... 2,841 2,370 ------------- ------------- TOTAL CURRENT LIABILITIES............................................... 17,122 17,166 Long-term portion of capital lease obligations............................. 495 502 Revolving credit line...................................................... 9,950 9,000 Senior notes............................................................... 107,510 107,510 Senior discount debentures................................................. 28,803 27,863 Promissory note to stockholder and affiliate............................... 4,745 - Deferred income taxes...................................................... 234 663 Other non-current liabilities.............................................. 2,457 2,399 ------------- ------------- TOTAL LIABILITIES....................................................... 171,316 165,103 STOCKHOLDER'S EQUITY Common stock, $0.01 par 1,000 shares authorized; 1,000 shares issued and outstanding.................................... - - Additional paid-in capital................................................. 88,935 88,935 Accumulated deficit........................................................ (12,892) (13,829) Accumulated other comprehensive loss....................................... (893) (542) Carryover basis adjustment................................................. (15,730) (15,730) -------------- ------------- TOTAL STOCKHOLDER'S EQUITY.............................................. 59,420 58,834 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.............................. $ 230,736 $ 223,937 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. AKI HOLDING CORP. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.) CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (dollars in thousands)
THREE MONTHS ENDED ------------------ SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 ------------------ ------------------ (UNAUDITED) (UNAUDITED) Net sales................................................. $ 31,630 $ 28,379 Cost of goods sold........................................ 18,825 15,792 ----------- ----------- Gross profit........................................... 12,805 12,587 Selling, general and administrative expenses.............. 4,518 4,158 Amortization of goodwill and other intangibles............ 1,419 1,164 ----------- ----------- Income from operations................................. 6,868 7,265 Other expenses: Interest expense to stockholder and affiliate.......... 113 - Interest expense, other................................ 4,291 4,372 Management fees and other, net......................... 62 63 ----------- ----------- Income before income taxes................................ 2,402 2,830 Income tax expense........................................ 1,465 1,549 ----------- ----------- Net income ............................................ $ 937 $ 1,281 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. AKI HOLDING CORP. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.) CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (dollars in thousands, except share information)
ACCUMULATED ADDITIONAL OTHER CARRYOVER COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE BASIS SHARES DOLLARS CAPITAL DEFICIT LOSS ADJUSTMENT TOTAL ------ ------- ------- ------- ---- ---------- ----- BALANCES, JUNE 30, 2000 (UNAUDITED) ....... 1,000 $ -- $ 88,935 $(13,829) $ (542) $(15,730) $ 58,834 Net income (unaudited) .................... 937 937 Other comprehensive income, net of tax: Foreign currency translation adjustment (unaudited) ............... (351) (351) -------- Comprehensive income (unaudited) .......... 586 -------- -------- -------- -------- -------- -------- -------- BALANCES, SEPTEMBER 30, 2000 (UNAUDITED) .. 1,000 $ -- $ 88,935 $(12,892) $ (893) $(15,730) $ 59,420 ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. AKI HOLDING CORP. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.) CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (dollars in thousands)
THREE MONTHS ENDED ------------------ SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 ------------------ ------------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income ....................................................... $ 937 $ 1,281 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization of goodwill and other intangibles. 2,506 2,212 Amortization of debt discount................................... 939 1,001 Amortization of debt issuance costs............................. 171 199 Deferred income taxes........................................... (186) 1,925 Other........................................................... (292) 152 Changes in operating assets and liabilities: Accounts receivable........................................... (7,003) (6,654) Inventory..................................................... (1,798) (174) Prepaid expenses, deferred charges and other assets........... (497) 30 Accounts payable and accrued expenses......................... (1,620) (3,992) Income taxes.................................................. 1,691 (333) ----------- ------------ Net cash used in operating activities....................... (5,152) (4,353) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment............................................ (776) (609) Payments for acquisitions, net of cash acquired................... - (16,163) ----------- ------------ Net cash used in investing activities....................... (776) (16,772) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Payments under capital leases for equipment....................... (123) (167) Net proceeds on line of credit.................................... 950 14,750 Net proceeds from promissory note to stockholder and affiliate.... 4,745 - ----------- ----------- Net cash provided by financing activities................... 5,572 14,583 ----------- ----------- Net (decrease) in cash and cash equivalents.......................... (356) (6,542) Cash and cash equivalents, beginning of period....................... 1,158 7,015 ----------- ----------- Cash and cash equivalents, end of period............................. $ 802 $ 473 =========== =========== SUPPLEMENTAL INFORMATION Cash paid during the period for: Interest, other................................................. $ 5,919 $ 6,130 Income taxes.................................................... 48 89
The accompanying notes are an integral part of these consolidated financial statements. AKI HOLDING CORP. AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share information) 1. BASIS OF PRESENTATION Arcade Holding Corporation (the "Predecessor") was organized for the purpose of acquiring all the issued and outstanding capital stock of Arcade, Inc. ("Arcade") on November 4, 1993. Arcade is principally engaged in interactive advertising for consumer products companies and has a specialty in the design, production and distribution of sampling systems from its Chattanooga, Tennessee facilities, and also distributes its products in Europe through its French subsidiary, Arcade Europe S.A.R.L. DLJ Merchant Banking Partners II, L.P. and certain related investors (collectively, "DLJMBII") and certain members of the Predecessor organized AHC I Acquisition Corp. ("AHC") and AHC I Merger Corp. ("Merger Corp.") for purposes of acquiring the Predecessor. On December 15, 1997, Merger Corp. acquired all of the equity interests of the Predecessor and then merged with and into the Predecessor and the combined entity assumed the name of AKI, Inc. and Subsidiaries ("AKI"). Subsequent to the acquisition, AHC contributed $1 and all of its ownership interest in AKI to AKI Holding Corp. ("Holding") for all of the outstanding equity of Holding. INTERIM FINANCIAL STATEMENTS The interim consolidated condensed balance sheet at September 30, 2000 and the interim consolidated condensed statements of operations for the three months ended September 30, 2000 and 1999, the interim consolidated condensed statements of cash flows for the three months ended September 30, 2000 and 1999 and the interim consolidated condensed statement of changes in stockholder's equity for the three months ended September 30, 2000 are unaudited, and certain information and footnote disclosure related thereto, normally included in the financial statements prepared in accordance with generally accepted accounting principles, have been omitted. The June 30, 2000 consolidated balance sheet was derived from the audited balance sheet of the Company for the year then ended. In the opinion of management, the unaudited interim consolidated condensed financial statements were prepared following the same policies and procedures used in preparation of the audited financial statements and all adjustments, consisting only of normal recurring adjustments to fairly present the financial position, results of operations and cash flows with respect to the interim consolidated condensed financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. 2. INVENTORY The following table details the components of inventory: SEPTEMBER 30, 2000 JUNE 30, 2000 ------------------ ------------- (unaudited) (unaudited) Raw materials Paper..................... $ 3,589 $ 3,944 Other raw materials....... 2,659 2,541 ----------- ---------- Total raw materials........... 6,248 6,485 Work in process............... 3,307 1,272 ----------- ---------- Net inventory................. $ 9,555 $ 7,757 =========== ========== 3. PROMISSORY NOTE TO STOCKHOLDER AND AFFILIATE In May 2000, the Company signed a promissory note payable to AHC which allows the Company to borrow up to $10 million at such interest rates and due as agreed upon by the Company and AHC. At September 30, 2000 $4,745 was outstanding bearing interest at prime and is due December 31, 2002. AKI HOLDING CORP. AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share information) 4. DERIVATIVE INSTRUMENTS Effective July 1, 2000, the Company adopted Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting FAS 133 as of July 1, 2000 was not material to the Company's financial statements. The Company purchases and sells it products in a number of countries throughout the world and, as a result, is exposed to movements in certain foreign currency exchange rates. The primary purpose of the Company's foreign currency hedging activities is to manage the short-term volatility associated with foreign currency purchases and sales in the normal course of business. The Company primarily utilizes foreign currency forward exchange contracts with maturities of less than six months. The Company enters into certain foreign currency derivative instruments which do not meet hedge accounting criteria. These primarily are intended to protect against exposure related to purchases and sales in certain foreign countries. The fair value of these instruments at September 30, 2000 was not material and the net impact of the related gains and losses were not material. 5. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS The following condensed balance sheets at September 30, 2000 and June 30, 2000 and condensed statements of operations, changes in stockholder's equity and cash flows for the three months ended September 30, 2000 and 1999 for Holding have been prepared on the equity basis of accounting and should be read in conjunction with the consolidated statements and notes thereto. BALANCE SHEET
SEPTEMBER 30, 2000 JUNE 30, 2000 ------------------ ------------- (unaudited) (unaudited) ASSETS Investment in subsidiaries............................... $ 101,382 $ 99,798 Deferred charges......................................... 1,145 1,167 Deferred income taxes.................................... 2,742 2,427 ----------- ----------- TOTAL ASSETS......................................... $ 105,269 $ 103,392 =========== =========== LIABILITIES Accrued income taxes..................................... $ 423 $ 423 Senior discount debentures............................... 28,803 27,863 ----------- ----------- TOTAL LIABILITIES.................................... 29,226 28,286 ----------- ----------- STOCKHOLDER'S EQUITY Common Stock, $0.01 par value, 1,000 shares authorized; 1,000 shares issued and outstanding.................... - - Additional paid-in capital............................... 88,935 88,935 Accumulated deficit...................................... (12,892) (13,829) ------------ ----------- TOTAL STOCKHOLDER'S EQUITY........................... 76,043 75,106 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........... $ 105,269 $ 103,392 =========== ===========
AKI HOLDING CORP. AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share information) 5. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS
THREE MONTHS ENDED ------------------ SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 ------------------ ------------------ (unaudited) (unaudited) Equity in net income of subsidiaries..................... $ 1,584 $ 1,969 Interest expense......................................... 962 1,024 ----------- ----------- Income before income taxes........................... 622 945 Income tax benefit....................................... (315) (336) ------------ ----------- Net income .......................................... $ 937 $ 1,281 =========== ===========
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ------- ------- ----- BALANCES, JUNE 30, 2000 (UNAUDITED)........... 1,000 $ - $ 88,935 $ (13,829) $ 75,106 Net income (unaudited)........................ 937 937 --------- --------- ---------- ----------- ----------- BALANCES, SEPTEMBER 30, 2000 (UNAUDITED)...... 1,000 $ - $ 88,935 $ (12,892) $ 76,043 ========= ========= ========== ============ ===========
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED ------------------ SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 ------------------ ------------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................. $ 937 $ 1,281 Adjustments to reconcile net income to net cash provided by (used in) operating activities:......... Net change in investment in subsidiaries........ (1,584) (1,969) Amortization of debt discount................... 939 1,001 Amortization of debt issuance costs............. 23 23 Deferred income taxes........................... (315) (336) ----------- ----------- Net cash provided by (used in) operating activities - - ----------- ----------- Net increase (decrease) in cash and cash equivalents..... - - Cash and cash equivalents, beginning of period........... - - ----------- ----------- Cash and cash equivalents, end of period................. $ - $ - =========== ===========
AKI, INC., AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) CONSOLIDATED CONDENSED BALANCE SHEETS (dollars in thousands, except share information)
SEPTEMBER 30, JUNE 30, 2000 2000 ------------- ------------- (UNAUDITED) (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents.................................................. $ 802 $ 1,158 Accounts receivable, net................................................... 28,525 21,522 Inventory.................................................................. 9,555 7,757 Prepaid expenses........................................................... 589 92 Deferred income taxes...................................................... 396 396 ------------- ------------- TOTAL CURRENT ASSETS.................................................... 39,867 30,925 Property, plant and equipment, net......................................... 16,792 17,097 Goodwill, net.............................................................. 161,270 162,472 Other intangible assets, net............................................... 6,952 7,174 Deferred charges, net .................................................... 4,146 4,294 Deferred income taxes...................................................... 477 720 Other assets............................................................... 87 88 ------------- ------------- TOTAL ASSETS............................................................ $ 229,591 $ 222,770 ============= ============= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current portion of capital lease obligations............................... $ 731 $ 847 Accounts payable, trade.................................................... 5,949 3,565 Accrued income taxes....................................................... 1,992 301 Accrued compensation....................................................... 2,171 3,965 Accrued interest........................................................... 3,015 5,695 Accrued expenses........................................................... 2,841 2,370 ------------- ------------- TOTAL CURRENT LIABILITIES............................................... 16,699 16,743 Long-term portion of capital lease obligations............................. 495 502 Revolving credit line...................................................... 9,950 9,000 Senior notes............................................................... 107,510 107,510 Promissory note to affiliate............................................... 4,745 - Deferred income taxes...................................................... 2,976 3,090 Other non-current liabilities.............................................. 2,457 2,399 ------------- ------------- TOTAL LIABILITIES....................................................... 144,832 139,244 STOCKHOLDER'S EQUITY Common stock, $0.01 par 100,000 shares authorized; 1,000 shares issued and outstanding..................................... - - Additional paid-in capital................................................. 107,348 107,348 Accumulated deficit........................................................ (5,966) (7,550) Accumulated other comprehensive loss....................................... (893) (542) Carryover basis adjustment................................................. (15,730) (15,730) -------------- ------------- TOTAL STOCKHOLDER'S EQUITY.............................................. 84,759 83,526 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.............................. $ 229,591 $ 222,770 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. AKI, INC., AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (dollars in thousands)
THREE MONTHS ENDED ------------------ SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 ------------------ ------------------ (UNAUDITED) (UNAUDITED) Net sales................................................. $ 31,630 $ 28,379 Cost of goods sold........................................ 18,825 15,792 ----------- ----------- Gross profit........................................... 12,805 12,587 Selling, general and administrative expenses.............. 4,518 4,158 Amortization of goodwill and other intangibles............ 1,419 1,164 ----------- ----------- Income from operations................................. 6,868 7,265 Other expenses: Interest expense to affiliate.......................... 113 - Interest expense, net.................................. 3,329 3,348 Management fees and other, net......................... 62 63 ----------- ----------- Income before income taxes................................ 3,364 3,854 Income tax expense........................................ 1,780 1,885 ----------- ----------- Net income............................................. $ 1,584 $ 1,969 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. AKI, INC., AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (dollars in thousands, except share information)
ACCUMULATED ADDITIONAL OTHER CARRYOVER COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE BASIS SHARES DOLLARS CAPITAL DEFICIT LOSS ADJUSTMENT TOTAL ------ ------- ------- ------- ---- ---------- ----- BALANCES, JUNE 30, 2000 (UNAUDITED) ....... 1,000 $ -- $ 107,348 $ (7,550) $ (542) $(15,730) $ 83,526 Net income (unaudited) .................... 1,584 1,584 Other comprehensive income, net of tax: Foreign currency translation adjustment (unaudited) ............... (351) (351) -------- Comprehensive income (unaudited) .......... 1,233 -------- -------- --------- -------- -------- -------- -------- BALANCES, SEPTEMBER 30, 2000 (UNAUDITED) .. 1,000 $ -- $ 107,348 $ (5,966) $ (893) $(15,730) $ 84,759 ======== ======== ========= ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. AKI, INC., AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (dollars in thousands)
THREE MONTHS ENDED ------------------ SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 ------------------ ------------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income ......................................................... $ 1,584 $ 1,969 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization of goodwill and other intangibles... 2,506 2,212 Amortization of debt issuance cost................................ 148 176 Deferred income taxes............................................. 129 2,261 Other............................................................. (292) 152 Changes in operating assets and liabilities: Accounts receivable............................................. (7,003) (6,654) Inventory....................................................... (1,798) (174) Prepaid expenses, deferred charges and other assets............. (497) 30 Accounts payable and accrued expenses........................... (1,620) (3,992) Income taxes.................................................... 1,691 (333) ----------- ----------- Net cash used in operating activities......................... (5,152) (4,353) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment.............................................. (776) (609) Payments for acquisitions, net of cash acquired..................... - (16,163) ----------- ----------- Net cash used in investing activities......................... (776) (16,772) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Payments under capital leases for equipment......................... (123) (167) Net proceeds on line of credit...................................... 950 14,750 Net proceeds from promissory note to affiliate...................... 4,745 - ----------- ----------- Net cash provided by financing activities..................... 5,572 14,583 ----------- ----------- Net (decrease) in cash and cash equivalents............................ (356) (6,542) Cash and cash equivalents, beginning of period......................... 1,158 7,015 ----------- ----------- Cash and cash equivalents, end of period............................... $ 802 $ 473 =========== =========== SUPPLEMENTAL INFORMATION Cash paid during the period for: Interest, other................................................... $ 5,919 $ 6,130 Income taxes...................................................... 48 89
The accompanying notes are an integral part of these consolidated financial statements. AKI, INC., AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share information) 1. BASIS OF PRESENTATION Arcade Holding Corporation (the "Predecessor") was organized for the purpose of acquiring all the issued and outstanding capital stock of Arcade, Inc. ("Arcade") on November 4, 1993. Arcade is principally engaged in interactive advertising for consumer products companies and has a specialty in the design, production and distribution of sampling systems from its Chattanooga, Tennessee facilities, and also distributes its products in Europe through its French subsidiary, Arcade Europe S.A.R.L. DLJ Merchant Banking Partners II, L.P. and certain related investors (collectively, "DLJMBII") and certain members of the Predecessor organized AHC I Acquisition Corp. ("AHC") and AHC I Merger Corp. ("Merger Corp.") for purposes of acquiring the Predecessor. On December 15, 1997, Merger Corp. acquired all of the equity interests of the Predecessor and then merged with and into the Predecessor and the combined entity assumed the name of AKI, Inc. and Subsidiaries ("AKI"). Subsequent to the acquisition, AHC contributed $1 and all of its ownership interest in AKI to AKI Holding Corp. ("Holding") for all of the outstanding equity of Holding. INTERIM FINANCIAL STATEMENTS The interim consolidated condensed balance sheet at September 30, 2000 and the interim consolidated condensed statements of operations for the three months ended September 30, 2000 and 1999, the interim consolidated condensed statements of cash flows for the three months ended September 30, 2000 and 1999 and the interim consolidated condensed statement of changes in stockholder's equity for the three months ended September 30, 2000 are unaudited, and certain information and footnote disclosure related thereto, normally included in the financial statements prepared in accordance with generally accepted accounting principles, have been omitted. The June 30, 2000 consolidated balance sheet was derived from the audited balance sheet of the Company for the year then ended. In the opinion of management, the unaudited interim consolidated condensed financial statements were prepared following the same policies and procedures used in preparation of the audited financial statements and all adjustments, consisting only of normal recurring adjustments to fairly present the financial position, results of operations and cash flows with respect to the interim consolidated condensed financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. 2. INVENTORY The following table details the components of inventory: SEPTEMBER 30, 2000 JUNE 30, 2000 ------------------ ------------- (unaudited) (unaudited) Raw materials Paper..................... $ 3,589 $ 3,944 Other raw materials....... 2,659 2,541 ----------- ---------- Total raw materials........... 6,248 6,485 Work in process............... 3,307 1,272 ----------- ---------- Net inventory................. $ 9,555 $ 7,757 =========== ========== 3. PROMISSORY NOTE TO AFFILIATE In May 2000, the Company signed a promissory note payable to AHC which allows the Company to borrow up to $10 million at such interest rates and due as agreed upon by the Company and AHC. At September 30, 2000 $4,745 was outstanding bearing interest at prime and is due December 31, 2002. AKI, INC., AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share information) 4. DERIVATIVE INSTRUMENTS Effective July 1, 2000, the Company adopted Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting FAS 133 as of July 1, 2000 was not material to the Company's financial statements. The Company purchases and sells it products in a number of countries throughout the world and, as a result, is exposed to movements in certain foreign currency exchange rates. The primary purpose of the Company's foreign currency hedging activities is to manage the short-term volatility associated with foreign currency purchases and sales in the normal course of business. The Company primarily utilizes foreign currency forward exchange contracts with maturities of less than six months. The Company enters into certain foreign currency derivative instruments which do not meet hedge accounting criteria. These primarily are intended to protect against exposure related to purchases and sales in certain foreign countries. The fair value of these instruments at September 30, 2000 was not material and the net impact of the related gains and losses were not material. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2 is presented with respect to both AKI Holding Corp. and AKI, Inc. As used within Item 2 the term "Company" refers to AKI Holding Corp. and its subsidiaries including AKI, Inc. ("AKI") and the term "Holding" refers to AKI Holding Corp. and the term "RHL" refers to Retcom Holdings Ltd. and subsidiaries. GENERAL The sales of our company are derived through its multi-sensory marketing activities primarily from the sale of sampling systems and products to fragrance, cosmetics and consumer products companies, and also from creative services. Substantially all of our company's sales are made directly to its customers while a small portion are made through advertising agencies. Each customer's sampling program is unique and pricing is negotiated based on estimated costs plus a margin. While our company and its customers generally do not enter into long-term contracts, our company has had long-standing relationships with the majority of its customer base. RETCOM HOLDINGS LTD. ACQUISITION On September 15, 1999, we acquired all of the issued and outstanding shares of capital stock of RHL at a purchase price of approximately $12 million and refinanced RHL's working capital indebtedness of approximately $5 million. The purchase price and refinancing of indebtedness were financed by borrowings under the credit agreement. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 NET SALES. Net sales for the three months ended September 30, 2000, increased $3.2 million, or 11.3%, to $31.6 million, as compared to $28.4 million for the three months ended September 30, 1999. The increase was primarily attributable to increases in volume of domestic and international sales of sampling technologies to existing customers for advertising and marketing of fragrances. GROSS PROFIT. Gross profit for the three months ended September 30, 2000, increased $0.2 million, or 1.6%, to $12.8 million, as compared to $12.6 million for three months ended September 30, 1999. Gross profit as a percentage of net sales decreased to 40.5% in the three months ended September 30, 2000, from 44.4% in the three months ended September 30, 1999. The decrease in gross profit as a percentage of net sales is primarily due to competitive pricing pressures, increased raw material costs, additional premium labor costs and increased overhead costs. The increase in raw material costs was primarily due to an increase in paper commodity prices, which management expects will remain at current levels for the remainder of the fiscal year ending June 30, 2001. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three months ended September 30, 2000, increased $0.3 million, or 7.1% to $4.5 million, as compared to $4.2 million for the three months ended September 30, 1999. The increase in selling, general and administrative expenses was primarily due to an increase in staffing levels and compensation and additional expenses associated with the operation of RHL. Selling, general and administrative expenses as a percent of net sales decreased to 14.2% in the three months ended September 30, 2000, from 14.8% in the three months ended September 30, 1999. INCOME FROM OPERATIONS. Income from operations for the three months ended September 30, 2000 decreased $0.4 million, or 5.5%, to $6.9 million, as compared to $7.3 million for the three months ended September 30, 1999. Income from operations as a percentage of net sales decreased to 21.8% in the three months ended September 30, 2000, from 25.7% in the three months ended September 30, 1999, principally as a result of the factors described above. INTEREST EXPENSE. Interest expense for the three months ended September 30, 2000 and 1999 was $4.4 million. Interest expense as a percentage of net sales decreased to 13.9% in the three months ended September 30, 2000, from 15.5% in the three months ended September 30, 1999. Increased interest expense due to the use of the credit line and promissory note to stockholder and affiliate for working capital and the RHL acquisition was offset by a decrease in interest expense related to the repurchased and retired Senior Discount Debentures and Senior Notes. Interest expense for AKI for the three months ended September 30, 2000 increased $0.1 million, or 3.0% to $3.4 million, as compared to $3.3 million for the three months ended September 30, 1999. Interest expense as a percentage of net sales decreased to 10.8% in the three months ended September 30, 2000, from 11.6% in the three months ended September 30, 1999. The increase in interest expense, including the amortization of deferred financing costs, is primarily due to use of the credit line and promissory note to affiliate for working capital and the RHL acquisition offset partially by the decrease in interest expense related to the repurchased and retired Senior Notes. INCOME TAX EXPENSE. Income tax expense for the three months ended September 30, 2000 and 1999 was $1.5 million. The Company's effective tax rate, after consideration of non-deductible goodwill amortization, was 40.6% in the three months ended September 30, 2000, and 40.7% in the three months ended September 30, 1999. Income tax expense for AKI for the three months ended September 30, 2000 decreased $0.1 million to $1.8 million. AKI's effective tax rate, after consideration of non-deductible goodwill amortization, was 39% in the three months ended September 30, 2000 and 1999. EBITDA. EBITDA for the three months ended September 30, 2000, decreased $0.1 million, or 1.1%, to $9.4 million, as compared to $9.5 million for the three months ended September 30, 1999. The decrease principally reflects the decrease in income from operations discussed above. EBITDA as a percentage of net sales was 29.8% and 33.5% in the three months ended September 30, 2000 and 1999, respectively. EBITDA is income from operations plus depreciation and amortization of goodwill and other intangibles. LIQUIDITY AND CAPITAL RESOURCES Our company has substantial indebtedness and significant debt service obligations. As of September 30, 2000, our company had consolidated indebtedness in an aggregate amount of $152.2 million (excluding trade payables, accrued liabilities, deferred taxes and other non-current liabilities), of which (1) approximately $28.8 million was a direct obligation of Holding relating to its debentures and (2) approximately $123.4 million was a direct obligation of AKI relating to its notes, revolving credit line, promissory note to affiliate and capital leases. Borrowings at September 30, 2000 included $10.0 million under the revolving credit agreement and $4.7 million on the promissory note to affiliate that were incurred to finance the acquisition of RHL and provide working capital. At September 30, 2000 our company had available $9.4 million under the revolving credit agreement. At September 30, 2000, AKI also had $21.4 million in additional outstanding liabilities (including trade payables, accrued liabilities, deferred taxes and other non-current liabilities) and letters of credit outstanding under the credit agreement in the amount of $0.6 million. In May 2000, AKI signed a promissory note payable to AHC I Acquisition Corp. ("AHC"), the sole stockholder of Holding, which allows AKI to borrow up to $10 million at such interest rates and due as agreed upon by AKI and AHC. In July 2000, AKI borrowed $4.7 million under the promissory note at prime and is due December 31, 2002. Proceeds from the promissory note were used to fund working capital requirements. AKI does not currently anticipate borrowings under the promissory note will exceed this amount. Holding's principal liquidity requirements are for debt service requirements under the debentures. AKI's principal liquidity requirements are for debt service requirements and fees under the notes and the credit agreement. Historically, our company has funded its capital, debt service and operating requirements with a combination of net cash provided by operating activities together with borrowings under revolving credit facilities. During the three months ended September 30, 2000, cash totaling $5.2 million was used by operating activities primarily due to the increase in accounts receivable and inventory and a decrease in accrued interest and accrued compensation, offset partially by an increase in accounts payable and accrued expenses. During the three months ended September 30, 1999, cash totaling $4.4 million was used by operating activities primarily due to the increase in accounts receivable and a decrease in accrued interest, offset partially by increases in accounts payable and accrued expenses. In the three months ended September 30, 2000 and 1999, our company had capital expenditures of approximately $0.8 million and $0.6 million, respectively. These capital expenditures consisted primarily of the purchase of manufacturing equipment, furniture and fixtures and upgrading its computer systems. On September 15, 1999, we acquired all of the issued and outstanding shares of capital stock of RHL at a purchase price of approximately $12.2 million and refinanced RHL's working capital indebtedness of approximately $5 million. The purchase price and refinancing of indebtedness were financed by borrowings under the credit agreement, a portion of which was subsequently repaid with cash flows from operating activities. Our company may from time to time evaluate additional potential acquisitions. There can be no assurance that additional capital sources will be available to our company to fund additional acquisitions on terms that our company finds acceptable, or at all. In September 1999, AHC consummated a private placement to DLJMBII of 15,000,000 shares of its common stock at a purchase price of $1.00 per share. As of October 31, 2000, AHC had purchased $11.8 million of Holding Corp. Senior Discount Debentures and $7.5 million of AKI, Inc., Senior Notes. The debentures and notes were contributed to Holding Corp. and subsequently retired. Capital expenditures for the twelve months ending June 30, 2001 are currently estimated to be approximately $3.5 million. Based on borrowings outstanding (other than pursuant to the credit agreement and promissory note to stockholder and affiliate) as of September 30, 2000 and borrowings outstanding under the credit agreement and promissory note to stockholder and affiliate as of October 31, 2000, our company expects total cash payments for debt service for the twelve months ending June 30, 2001 to be approximately $13.2 million, consisting of $11.3 million in interest payments on the notes, $0.9 million in capital lease obligations, $1.0 million in interest and fees under the credit agreement and $0.5 million in interest on the promissory note to stockholder and affiliate. Our company also expects to make royalty payments of approximately $1.1 million during the twelve months ending June 30, 2001. At September 30, 2000, Holding's cash and cash equivalents and net working capital were $0.8 million and $22.7 million, respectively, representing a decrease in cash and cash equivalents of $0.4 million and an increase in net working capital of $8.9 million from June 30, 2000. Account receivables, net, at September 30, 2000 increased 32.6% or $7.0 million over the June 30, 2000 amount, primarily due to increased sales. Inventory increased as a result of increased work-in-process related to production activities. SEASONALITY Our company's sales and operating results have historically reflected seasonal variations. Such seasonal variations are based on the timing of our company's customers' advertising campaigns, which have traditionally been concentrated prior to the Christmas and spring holiday seasons. As a result, a higher level of sales are reflected in our company's first and third fiscal quarters ended September 30 and March 31 when sales from such advertising campaigns are principally recognized while our company's fourth fiscal quarter ended June 30 typically reflects the lowest sales level of the fiscal year. These seasonal fluctuations require our company to accurately allocate its resources to manage our company's manufacturing capacity, which often operates at full capacity during peak seasonal demand periods. RECENTLY ISSUED ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"), which provides the Staff's views on applying generally accepted accounting principles to revenue recognition issues. SAB 101, as amended by SAB 101A and SAB 101B, outlines the criteria that must be met to recognize revenue and provide guidance for disclosures related to revenue recognition policies. The Company must implement any applicable provisions of SAB 101 no later than the fourth quarter of the fiscal year ending June 30, 2001. The Company does not anticipate that the adoption of SAB 101 will have a material impact on the consolidated financial statements and will continue to analyze the impact of SAB 101. In September 2000, the Emerging Issues Task Force reached a consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" ("Issue 00-10"). Issue 00-10 requires that all amounts billed to customers related to shipping and handling should be classified as revenues. Issue 00-10 will be effective for the Company no later than the fourth quarter of the fiscal year ended June 30, 2001. The Company is currently assessing the effect, if any, on its financial statements of implementing Issue 00-10. FORWARD-LOOKING STATEMENTS The information provided in this document contains forward-looking statements that involve a number of risks and uncertainties. A number of factors could cause actual results, performance or achievements of our company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to: the competitive environment in the sampling industry in general and in our company's specific market areas; changes in prevailing interest rates; inflation; changes in cost of goods and services; economic conditions in general and in our company's specific market areas; changes in or failure to comply with postal regulations or other federal, state and/or local government regulations; liability and other claims asserted against our company; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; the significant indebtedness of our company; labor disturbances; changes in our company's capital expenditure plans; and other factors. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risk, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "should," "seeks," "pro forma," "anticipates," "intends" or the negative of any such word, or other variations or comparable terminology, or by discussions of strategy or intentions. Given these uncertainties, readers are cautioned not place undue reliance on such forward-looking statements. Our company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this document to reflect future events or developments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our company generates approximately 20% of its sales from customers outside the United States, principally in Europe. International sales are made mostly from our company's foreign subsidiary located in France and are primarily denominated in the local currency. Our company's foreign subsidiary also incurs the majority of its expenses in the local currency and uses the local currency as its functional currency. Our company's major principal cash balances are held in U.S. dollars. Cash balances in foreign currencies are held to minimum balances for working capital purposes and therefore have a minimum risk to currency fluctuations. Our company periodically enters into forward foreign currency exchange contracts to hedge certain exposures related to selected transactions that are relatively certain as to both timing and amount and to hedge a portion of the production costs expected to be denominated in foreign currencies. The purpose of entering into these hedge transactions is to minimize the impact of foreign currency fluctuations on the results of operations and cash flows. Gains and losses on the hedging activities are recognized concurrently with the gains and losses from the underlying transactions. At September 30, 2000, there were no forward exchange contracts outstanding. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule 27.2 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURES 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. AKI HOLDING CORP. Date: November 14, 2000 By: /S/ KENNETH A. BUDDE --------------------------------- Kenneth A. Budde Senior Vice President & Chief Financial Officer AKI, INC. Date: November 14, 2000 By: /S/ KENNETH A. BUDDE --------------------------------- Kenneth A. Budde Senior Vice President & Chief Financial Officer EX-27.1 2 0002.txt FDS -- WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AKI HOLDING CORP. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-2001 JUL-1-2000 SEP-30-2000 802 0 29,530 1,005 9,555 39,867 27,918 11,126 230,736 17,122 151,503 0 0 0 59,420 230,736 31,630 31,630 18,825 18,825 0 45 4,404 2,402 1,465 937 0 0 0 937 0 0
EX-27.2 3 0003.txt FDS -- WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AKI, INC. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-2001 JUL-1-2000 SEP-30-2000 802 0 29,530 1,005 9,555 39,867 27,918 11,126 229,591 16,699 122,700 0 0 0 84,759 229,591 31,630 31,630 18,825 18,825 0 45 3,442 3,364 1,780 1,584 0 0 0 1,584 0 0
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