-----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, Kuzz55tLG8Zp+jiUICdvLVxiVxhzQFa6JkwHSjRBowhBfUUC2hfcPy0BB5YKJv5T JQeOCVdHauWfX9kAGpujGQ== 0001067550-01-000005.txt : 20010214 0001067550-01-000005.hdr.sgml : 20010214 ACCESSION NUMBER: 0001067550-01-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AKI HOLDING CORP CENTRAL INDEX KEY: 0001067550 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [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: 1537005 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: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [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: 1537006 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 December 31, 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 February 12, 2001, 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 - December 31, 2000 (unaudited) - June 30, 2000 (unaudited) Consolidated Condensed Statements of Operations - Three months ended December 31, 2000 (unaudited) - Three months ended December 31, 1999 (unaudited) - Six months ended December 31, 2000 (unaudited) - Six months ended December 31, 1999 (unaudited) Consolidated Condensed Statement of Changes in Stockholder's Equity - Six months ended December 31, 2000 (unaudited) Consolidated Condensed Statements of Cash Flows - Six months ended December 31, 2000 (unaudited) - Six months ended December 31, 1999 (unaudited) Notes to Consolidated Condensed Financial Statements Item 1. Financial Statements (continued) AKI, Inc. and Subsidiaries Consolidated Condensed Balance Sheet - December 31, 2000 (unaudited) - June 30, 2000 (unaudited) Consolidated Condensed Statements of Operations - Three months ended December 31, 2000 (unaudited) - Three months ended December 31, 1999 (unaudited) - Six months ended December 31, 2000 (unaudited) - Six months ended December 31, 1999 (unaudited) Consolidated Condensed Statement of Changes in Stockholder's Equity - Six months ended December 31, 2000 (unaudited) Consolidated Condensed Statements of Cash Flows - Six months ended December 31, 2000 (unaudited) - Six months ended December 31, 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)
DECEMBER 31, JUNE 30, 2000 2000 ------------- ------------- (unaudited) (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents.................................................. $ 500 $ 1,158 Accounts receivable, net................................................... 23,418 21,522 Inventory.................................................................. 7,001 7,757 Prepaid expenses........................................................... 469 92 Deferred income taxes...................................................... 396 396 ------------- ------------- TOTAL CURRENT ASSETS.................................................... 31,784 30,925 Property, plant and equipment, net......................................... 17,047 17,097 Goodwill, net.............................................................. 160,069 162,472 Other intangible assets, net............................................... 6,702 7,174 Deferred charges, net...................................................... 4,891 5,461 Deferred income taxes...................................................... 498 720 Other assets............................................................... 89 88 ------------- ------------- TOTAL ASSETS............................................................ $ 221,080 $ 223,937 ============= ============= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current portion of capital lease obligations............................... $ 515 $ 847 Accounts payable, trade.................................................... 2,546 3,565 Accrued income taxes....................................................... 2,143 724 Accrued compensation....................................................... 3,294 3,965 Accrued interest........................................................... 5,514 5,695 Accrued expenses........................................................... 2,175 2,370 ------------- ------------- TOTAL CURRENT LIABILITIES............................................... 16,187 17,166 Long-term portion of capital lease obligations............................. - 502 Revolving credit line...................................................... 7,550 9,000 Senior notes............................................................... 103,510 107,510 Senior discount debentures................................................. 27,528 27,863 Promissory note to stockholder............................................. 3,661 - Deferred income taxes...................................................... 141 663 Other non-current liabilities.............................................. 2,509 2,399 ------------- ------------- TOTAL LIABILITIES....................................................... 161,086 165,103 STOCKHOLDER'S EQUITY Common stock, $0.01 par 1,000 shares authorized; 1,000 shares issued and outstanding.................................... - - Additional paid-in capital................................................. 90,194 88,935 Accumulated deficit........................................................ (13,513) (13,829) Accumulated other comprehensive loss....................................... (957) (542) Carryover basis adjustment................................................. (15,730) (15,730) ------------- ------------- TOTAL STOCKHOLDER'S EQUITY.............................................. 59,994 58,834 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.............................. $ 221,080 $ 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 SIX MONTHS ENDED ------------------ ---------------- DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 1999 ----------------- ----------------- ----------------- ----------------- (unaudited) (unaudited) (unaudited) (unaudited) Net sales................................... $ 25,459 $ 20,508 $ 57,089 $ 48,887 Cost of goods sold.......................... 16,972 13,288 35,797 29,080 --------- --------- --------- --------- Gross profit............................. 8,487 7,220 21,292 19,807 Selling, general and administrative expenses 4,415 4,497 8,933 8,655 Amortization of goodwill and other intangibles............................... 1,446 1,391 2,865 2,555 Gain from settlement of litigation, net..... - (870) - (870) --------- --------- --------- --------- Income from operations................... 2,626 2,202 9,494 9,467 Other expenses: Interest expense to stockholder.......... 68 - 181 - Interest expense other, net.............. 4,176 4,295 8,467 8,667 Management fees and other, net........... 63 62 125 125 --------- --------- --------- --------- Income (loss) before income taxes and extraordinary gain..................... (1,681) (2,155) 721 675 Income tax expense (benefit)................ (110) (645) 1,355 904 --------- --------- --------- --------- Loss before extraordinary gain........... (1,571) (1,510) (634) (229) Extraordinary gain from early retirement of debt, net of tax......................... 950 846 950 846 --------- --------- --------- --------- Net income (loss)........................ $ (621) $ (664) $ 316 $ 617 ========= ========= ========= =========
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 Equity contribution by AHC I Acquisiton Corp. (unaudited)........ 1,259 1,259 Net income (unaudited)................. 316 316 Other comprehensive income, net of tax: Foreign currency translation adjustment (unaudited)............ (415) (415) -------- Comprehensive income (unaudited)....... (99) ------- ------- --------- --------- -------- --------- -------- BALANCES, DECEMBER 31, 2000 (unaudited) 1,000 $ -- $ 90,194 $ (13,513) $ (957) $ (15,730) $ 59,994 ======= ======= ========= ========= ======== ========= ========
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)
SIX MONTHS ENDED ---------------- DECEMBER 31, 2000 DECEMBER 31, 1999 ----------------- ----------------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................................... $ 316 $ 617 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization of goodwill and other intangibles............ 5,036 4,734 Amortization of debt discount.............................................. 1,817 1,876 Amortization of debt issuance costs........................................ 342 401 Deferred income taxes...................................................... (615) 1,192 Gain from early retirement of debt......................................... (950) (846) Other...................................................................... (305) (19) Changes in operating assets and liabilities: Accounts receivable...................................................... (1,896) 1,167 Inventory................................................................ 756 (90) Prepaid expenses, deferred charges and other assets...................... (377) 213 Accounts payable and accrued expenses.................................... (2,065) (4,150) Income taxes............................................................. 1,128 (32) ----------- ----------- Net cash provided by operating activities.............................. 3,187 5,063 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment....................................................... (2,112) (1,125) Payments for acquisitions, net of cash acquired.............................. - (16,162) ----------- ----------- Net cash used in investing activities.................................. (2,112) (17,287) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Payments under capital leases for equipment.................................. (834) (336) Repurchase of long-term debt................................................. (3,110) - Net proceeds (repayments) on line of credit.................................. (1,450) 6,100 Net proceeds from promissory note to stockholder............................. 3,661 - ----------- ----------- Net cash provided by (used in) financing activities.................... (1,733) 5,764 ----------- ----------- Net (decrease) in cash and cash equivalents..................................... (658) (6,460) Cash and cash equivalents, beginning of period.................................. 1,158 7,015 ----------- ----------- Cash and cash equivalents, end of period........................................ $ 500 $ 555 =========== =========== SUPPLEMENTAL INFORMATION Cash paid during the period for: Interest, other............................................................ $ 6,388 $ 6,177 Interest to stockholder.................................................... 174 - Income taxes............................................................... 866 47 SIGNIFICANT NON-CASH ACTIVITIES Contribution of equity and retirement of senior discount debentures and senior notes........................................................... $ 1,259 $ 8,071
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 December 31, 2000 and the interim consolidated condensed statements of operations for the three and six months ended December 31, 2000 and 1999, the interim consolidated condensed statements of cash flows for the six months ended December 31, 2000 and 1999 and the interim consolidated condensed statement of changes in stockholder's equity for the six months ended December 31, 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 Company's audited balance sheet for the year then ended. In management's opinion, 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: DECEMBER 31, 2000 JUNE 30, 2000 ----------------- ------------- (unaudited) (unaudited) Raw materials Paper................... $ 2,477 $ 3,944 Other raw materials..... 2,496 2,541 ----------- ---------- Total raw materials......... 4,973 6,485 Work in process............. 2,028 1,272 ----------- ---------- Net inventory............... $ 7,001 $ 7,757 =========== ========== 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) 3. RETIREMENT OF DEBT In fiscal 2001, AHC purchased $3,070 of Holding Corp. Senior Discount Debentures and AKI purchased $4,000 of AKI, Inc. Senior Notes for $1,259 and $3,110, respectively. The debentures were contributed to Holding Corp. and the debentures and notes were subsequently retired. In fiscal 2000, AHC purchased $8,770 of Holding Corp. Senior Discount Debentures and $7,490 of AKI, Inc. Senior Notes for $4,084 and $6,486, respectively. The debentures and notes were contributed to Holding Corp. and subsequently retired. 4. PROMISSORY NOTE TO STOCKHOLDER 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 December 31, 2000, $3,661 was outstanding bearing interest at prime and is due December 31, 2002. 5. 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 its 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, which do not meet hedge accounting criteria. The fair value of these instruments at December 31, 2000 was not material and the net impact of the related gains and losses were not material. 6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS The following condensed balance sheets at December 31, 2000 and June 30, 2000 and condensed statements of operations, changes in stockholder's equity and cash flows for the six months ended December 31, 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. 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) 6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED) BALANCE SHEET
DECEMBER 31, 2000 JUNE 30, 2000 ----------------- ------------- (unaudited) (unaudited) ASSETS Investment in subsidiaries............................... $ 100,873 $ 99,798 Deferred charges......................................... 1,038 1,167 Deferred income taxes.................................... 2,721 2,427 ----------- ----------- TOTAL ASSETS......................................... $ 104,632 $ 103,392 =========== =========== LIABILITIES Accrued income taxes..................................... $ 423 $ 423 Senior discount debentures............................... 27,528 27,863 ----------- ----------- TOTAL LIABILITIES.................................... 27,951 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............................... 90,194 88,935 Accumulated deficit...................................... (13,513) (13,829) ----------- ----------- TOTAL STOCKHOLDER'S EQUITY........................... 76,681 75,106 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........... $ 104,632 $ 103,392 =========== ===========
STATEMENT OF OPERATIONS
SIX MONTHS ENDED ---------------- DECEMBER 31, 2000 DECEMBER 31, 1999 ----------------- ----------------- (unaudited) (unaudited) Equity in net income of subsidiaries..................... $ 1,075 $ 1,256 Interest expense......................................... 1,862 1,926 ----------- ----------- Loss before income taxes and extraordinary gain...... (787) (670) Income tax benefit....................................... (609) (628) ----------- ----------- Loss before extraordinary gain....................... (178) (42) Extraordinary gain from early retirement of debt......... 494 659 ----------- ----------- Net income .......................................... $ 316 $ 617 =========== ===========
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) 6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED) 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 Equity contribution by AHC I Acquisition Corp. (unaudited)................................. 1,259 1,259 Net income (unaudited)........................ 316 316 --------- --------- ---------- ----------- ----------- BALANCES, DECEMBER 31, 2000 (unaudited)....... 1,000 $ - $ 90,194 $ (13,513) $ 76,681 ========= ========= ========== =========== ===========
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED ---------------- DECEMBER 31, 2000 DECEMBER 31, 1999 ----------------- ----------------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................. $ 316 $ 617 Adjustments to reconcile net income to net cash provided by (used in) operating activities:........ Net change in investment in subsidiaries........ (1,075) (1,256) Amortization of debt discount................... 1,817 1,876 Amortization of debt issuance costs............. 45 50 Deferred income taxes........................... (609) (628) Gain from early retirement of debt.............. (494) (659) ----------- ----------- 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................. $ - $ - =========== =========== SIGNIFICANT NON-CASH ACTIVITIES Contribution of equity and retirement of senior discount debentures and senior notes................. $ 1,259 $ 8,071 Investment in subsidiaries............................. - (3,996)
AKI, INC., AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) CONSOLIDATED CONDENSED BALANCE SHEETS (dollars in thousands, except share information)
DECEMBER 31, JUNE 30, 2000 2000 ------------- ------------- (unaudited) (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents.................................................. $ 500 $ 1,158 Accounts receivable, net................................................... 23,418 21,522 Inventory.................................................................. 7,001 7,757 Prepaid expenses........................................................... 469 92 Deferred income taxes...................................................... 396 396 ------------- ------------- TOTAL CURRENT ASSETS.................................................... 31,784 30,925 Property, plant and equipment, net......................................... 17,047 17,097 Goodwill, net.............................................................. 160,069 162,472 Other intangible assets, net............................................... 6,702 7,174 Deferred charges, net .................................................... 3,853 4,294 Deferred income taxes...................................................... 498 720 Other assets............................................................... 89 88 ------------- -------------- TOTAL ASSETS............................................................ $ 220,042 $ 222,770 ============= ============== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current portion of capital lease obligations............................... $ 515 $ 847 Accounts payable, trade.................................................... 2,546 3,565 Accrued income taxes....................................................... 1,720 301 Accrued compensation....................................................... 3,294 3,965 Accrued interest........................................................... 5,514 5,695 Accrued expenses........................................................... 2,175 2,370 ------------- -------------- TOTAL CURRENT LIABILITIES............................................... 15,764 16,743 Long-term portion of capital lease obligations............................. - 502 Revolving credit line...................................................... 7,550 9,000 Senior notes............................................................... 103,510 107,510 Promissory note to affiliate............................................... 3,661 - Deferred income taxes...................................................... 2,862 3,090 Other non-current liabilities.............................................. 2,509 2,399 ------------- -------------- TOTAL LIABILITIES....................................................... 135,856 139,244 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........................................................ (6,475) (7,550) Accumulated other comprehensive loss....................................... (957) (542) Carryover basis adjustment................................................. (15,730) (15,730) ------------- -------------- TOTAL STOCKHOLDER'S EQUITY.............................................. 84,186 83,526 ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.............................. $ 220,042 $ 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 SIX MONTHS ENDED ------------------ ---------------- DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 1999 ----------------- ----------------- ----------------- ----------------- (unaudited) (unaudited) (unaudited) (unaudited) Net sales................................... $ 25,459 $ 20,508 $ 57,089 $ 48,887 Cost of goods sold.......................... 16,972 13,288 35,797 29,080 --------- --------- --------- --------- Gross profit............................. 8,487 7,220 21,292 19,807 Selling, general and administrative expenses 4,415 4,497 8,933 8,655 Amortization of goodwill and other intangibles............................... 1,446 1,391 2,865 2,555 Gain from settlement of litigation, net..... - (870) - (870) --------- --------- --------- --------- Income from operations................... 2,626 2,202 9,494 9,467 Other expenses: Interest expense to affiliate............ 68 - 181 - Interest expense other, net.............. 3,276 3,393 6,605 6,741 Management fees and other, net........... 63 62 125 125 --------- --------- --------- --------- Income (loss) before income taxes and extraordinary gain..................... (781) (1,253) 2,583 2,601 Income tax expense (benefit)................ 184 (353) 1,964 1,532 --------- --------- --------- --------- Income (loss) before extraordinary gain.. (965) (900) 619 1,069 Extraordinary gain from early retirement of debt, net of tax......................... 456 187 456 187 --------- --------- --------- --------- Net income (loss)........................ $ (509) $ (713) $ 1,075 $ 1,256 ========= ========= ========= =========
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)................. 1,075 1,075 Other comprehensive income, net of tax: Foreign currency translation adjustment (unaudited)............ (415) (415) -------- Comprehensive income (unaudited)....... 660 -------- ------- --------- --------- -------- --------- -------- BALANCES, DECEMBER 31, 2000 (unaudited) 1,000 $ -- $ 107,348 $ (6,475) $ (957) $ (15,730) $ 84,186 ======== ======= ========= ========= ======== ========= ========
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)
SIX MONTHS ENDED ---------------- DECEMBER 31, 2000 DECEMBER 31, 1999 ----------------- ----------------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income ......................................................... $ 1,075 $ 1,256 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of goodwill and other intangibles... 5,036 4,734 Amortization of debt issuance cost................................ 297 351 Deferred income taxes............................................. (6) 1,820 Gain from early retirement of debt................................ (456) (187) Other............................................................. (305) (19) Changes in operating assets and liabilities: Accounts receivable............................................. (1,896) 1,167 Inventory....................................................... 756 (90) Prepaid expenses, deferred charges and other assets............. (377) 213 Accounts payable and accrued expenses........................... (2,065) (4,150) Income taxes.................................................... 1,128 (32) ----------- ----------- Net cash provided by operating activities..................... 3,187 5,063 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment.............................................. (2,112) (1,125) Payments for acquisitions, net of cash acquired..................... - (16,162) ----------- ----------- Net cash used in investing activities......................... (2,112) (17,287) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Payments under capital leases for equipment......................... (834) (336) Repurchase of long-term debt........................................ (3,110) - Net proceeds (repayments) on line of credit......................... (1,450) 6,100 Net proceeds from promissory note to affiliate...................... 3,661 - ----------- ----------- Net cash provided by (used in) financing activities........... (1,733) 5,764 ----------- ----------- Net (decrease) in cash and cash equivalents............................ (658) (6,460) Cash and cash equivalents, beginning of period......................... 1,158 7,015 ----------- ----------- Cash and cash equivalents, end of period............................... $ 500 $ 555 =========== =========== SUPPLEMENTAL INFORMATION Cash paid during the period for: Interest, other................................................... $ 6,388 $ 6,177 Interest to affiliate............................................. 174 - Income taxes...................................................... 866 47 SIGNIFICANT NON-CASH ACTIVITIES Contribution of equity and retirement of senior notes............... $ - $ 3,996
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 December 31, 2000 and the interim consolidated condensed statements of operations for the three and six months ended December 31, 2000 and 1999, the interim consolidated condensed statements of cash flows for the six months ended December 31, 2000 and 1999 and the interim consolidated condensed statement of changes in stockholder's equity for the six months ended December 31, 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 Company's audited balance sheet for the year then ended. In management's opinion, 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: DECEMBER 31, 2000 JUNE 30, 2000 ----------------- ------------- (unaudited) (unaudited) Raw materials Paper................... $ 2,477 $ 3,944 Other raw materials..... 2,496 2,541 ----------- ---------- Total raw materials......... 4,973 6,485 Work in process............. 2,028 1,272 ----------- ---------- Net inventory............... $ 7,001 $ 7,757 =========== ========== AKI, INC., AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share information) 3. RETIREMENT OF DEBT In fiscal 2001, AKI purchased $4,000 of AKI, Inc. Senior Notes for $3,110. The notes were subsequently retired. In fiscal 2000, AHC purchased $7,490 of AKI, Inc. Senior Notes for $6,486. The notes were contributed to Holding Corp. and Holding Corp. contributed the notes to AKI, Inc. The notes were subsequently retired. 4. 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 December 31, 2000, $3,661 was outstanding bearing interest at prime and is due December 31, 2002. 5. 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 its 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, which do not meet hedge accounting criteria. The fair value of these instruments at December 31, 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"), 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 advertising materials with 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 revolving credit agreement. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1999 NET SALES. Net sales for the three months ended December 31, 2000 increased $5.0 million, or 24.4%, to $25.5 million, as compared to $20.5 million for the three months ended December 31, 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, partially offset by decreases in volume of domestic sales of sampling technologies for advertising and marketing of cosmetics and consumer products and foreign exchange rates. GROSS PROFIT. Gross profit for the three months ended December 31, 2000 increased $1.3 million, or 18.1%, to $8.5 million, as compared to $7.2 million for three months ended December 31, 1999. Gross profit as a percentage of net sales decreased to 33.3% in the three months ended December 31, 2000, from 35.1% in the three months ended December 31, 1999. The decrease in gross profit as a percentage of net sales is primarily due to increased raw material costs, additional premium labor costs, product mix, increased overhead costs and foreign exchange rates. 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 December 31, 2000 decreased $0.1 million, or 2.2%, to $4.4 million, as compared to $4.5 million for the three months ended December 31, 1999. Selling, general and administrative expenses as a percent of net sales decreased to 17.3% in the three months ended December 31, 2000, from 22.0% in the three months ended December 31, 1999, primarily due to the increase in net sales. INCOME FROM OPERATIONS. Income from operations for the three months ended December 31, 2000 increased $0.4 million, or 18.2%, to $2.6 million, as compared to $2.2 million for the three months ended December 31, 1999. Income from operations as a percentage of net sales decreased to 10.2% in the three months ended December 31, 2000, from 10.7% in the three months ended December 31, 1999, principally as a result of the factors described above. INTEREST EXPENSE. Interest expense for the three months ended December 31, 2000 decreased $0.1 million, or 2.3%, to $4.2 million, as compared to $4.3 million for the three months ended December 31, 1999. Interest expense as a percentage of net sales decreased to 16.5% in the three months ended December 31, 2000, from 21.0% in the three months ended December 31, 1999. The decrease in interest expense, including the amortization of deferred financing costs, is primarily due to the repurchased and retired Senior Discount Debentures and Senior Notes. Interest expense for AKI for the three months ended December 31, 2000 decreased $0.1 million, or 2.9%, to $3.3 million, as compared to $3.4 million for the three months ended December 31, 1999. Interest expense as a percentage of net sales decreased to 12.9% in the three months ended December 31, 2000, from 16.6% in the three months ended December 31, 1999. The decrease in interest expense, including the amortization of deferred financing costs, is primarily due to the repurchased and retired Senior Notes. INCOME TAX BENEFIT AND EXPENSE. Income tax benefit for the three months ended December 31, 2000 decreased $0.5 million to $0.1 million, as compared to a benefit of $0.6 million for the three months ended December 31, 1999. The Company's effective tax rate, after consideration of non-deductible goodwill amortization and non-taxable gain from settlement of litigation, was 23.0% in the three months ended December 31, 2000, and 35.6% in the three months ended December 31, 1999. Income tax expense for AKI for the three months ended December 31, 2000 increased $0.6 million to $0.2 million, as compared to a benefit of $0.4 million for the three months ended December 31, 1999. AKI's effective tax rate, after consideration of non-deductible goodwill amortization, was 39% in the three months ended December 31, 2000 and 1999. EXTRAORDINARY GAIN FROM EARLY RETIREMENT OF DEBT. Extraordinary gain from early retirement of debt of $1.0 million for the three months ended December 31, 2000 and $0.8 million for the three months ended December 31, 1999 resulted from the purchase and subsequent contribution of Senior Notes and Senior Discount Debentures by AHC I Acquisition Corp. The contributed securities were subsequently retired. Extraordinary gain from early retirement of debt for AKI of $0.5 million for the three months ended December 31, 2000 and $0.2 million for the three months ended December 31, 1999 resulted from the purchase in 2000 of Senior Notes by AKI and in 1999 the purchase of Senior Notes by AHC I Acquisition Corp. and subsequent contribution by AKI Holding Corp. The purchased and contributed securities were subsequently retired. EBITDA. EBITDA for the three months ended December 31, 2000 increased $1.4 million, or 36.8%, to $5.2 million, as compared to $3.8 million for the three months ended December 31, 1999. The increase principally reflects the increase in gross profit discussed above. EBITDA as a percentage of net sales was 20.4% and 18.5% in the three months ended December 31, 2000 and 1999, respectively. EBITDA is income from operations plus depreciation and amortization of goodwill and other intangibles less net gain from settlement of litigation. SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1999 NET SALES. Net sales for the six months ended December 31, 2000 increased $8.2 million, or 16.8%, to $57.1 million as compared to $48.9 million for the six months ended December 31, 1999. The increase was primarily attributable to increases in domestic and international sales of sampling technologies for advertising and marketing of fragrance products, partially offset by decreases in domestic sales of sampling technologies for advertising and marketing of cosmetics. GROSS PROFIT. Gross profit for the six months ended December 31, 2000 increased $1.5 million, or 7.6%, to $21.3 million as compared to $19.8 million for six months ended December 31, 1999. Gross profit as a percentage of net sales decreased to 37.3% in the six months ended December 31, 2000, from 40.5% in the six months ended December 31, 1999. The decrease in gross profit as a percentage of net sales is primarily attributable to increased raw material costs, additional premium labor costs, product mix, increased overhead costs and foreign exchange rates. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the six months ended December 31, 2000 increased $0.2 million, or 2.3%, to $8.9 million as compared to $8.7 million for the six months ended December 31, 1999. The increase in selling, general and administrative expenses was primarily due to increased staffing levels and compensation. Selling, general and administrative expenses as a percent of net sales decreased to 15.6% in the six months ended December 31, 2000 from 17.8% in the six months ended December 31, 1999, primarily due to the increase in net sales. INCOME FROM OPERATIONS. Income from operations for the six months ended December 31, 2000 and 1999 was $9.5 million. Income from operations for 1999 included a net gain of $0.9 million resulting from a favorable litigation settlement with the sellers of Arcade Holding Corp. Income from operations as a percentage of net sales decreased to 16.6% in the six months ended December 31, 2000, from 19.4% in six months ended December 31, 1999, principally as a result of the factors described above. INTEREST EXPENSE. Interest expense for the six months ended December 31, 2000 decreased $0.1 million, or 1.1%, to $8.6 million, as compared to $8.7 million for the six months ended December 31, 1999. Interest expense as a percentage of net sales decreased to 15.1% in the six months ended December 31, 2000 from 17.8% in the six months ended December 31, 1999. The decrease in interest expense, including the amortization of deferred financing costs, is primarily due to a decrease in interest expense related to the repurchased and retired Senior Discount Debentures and Senior Notes, partially offset by an increase in interest expense related to use of the credit line and the promissory note to AHC I Acquisition Corp. for working capital and the RHL acquisition. Interest expense for AKI for the six months ended December 31, 2000 increased $0.1 million, or 1.5%, to $6.8 million, as compared to $6.7 million for the six months ended December 31, 1999. Interest expense as a percentage of net sales decreased to 11.9% in the six months ended December 31, 2000, from 13.7% in the six months ended December 31, 1999. The increase in interest expense, including the amortization of deferred financing costs, is primarily due to use of the credit line and the promissory note to AHC I Acquisition Corp. for working capital and the RHL acquisition, partially offset by a decrease in interest expense related to the repurchased and retired Senior Notes. INCOME TAX EXPENSE. Income tax expense for the six months ended December 31, 2000 increased $0.5 million to $1.4 million. The increase is due to the increase in income before income taxes and extraordinary gain as a result of the factors described above. The Company's effective tax rate, after consideration of non-deductible goodwill amortization and non-taxable gain from settlement of litigation, was 43.4% in the six months ended December 31, 2000 and 45.3% in the six months ended December 31, 1999. Income tax expense for AKI for the six months ended December 31, 2000 increased $0.5 million to $2.0 million. The increase is due to the increase in income before income taxes and extraordinary gain as a result of the factors described above. AKI's effective tax rate, after consideration of non-deductible goodwill amortization and non-taxable gain from settlement of litigation, was 39.0% in the six months ended December 31, 2000 and 1999. EXTRAORDINARY GAIN FROM EARLY RETIREMENT OF DEBT. Extraordinary gain from early retirement of debt of $1.0 million for the six months ended December 31, 2000 and $0.8 million for the six months ended December 31, 1999 resulted from the purchase and subsequent contribution of Senior Notes and Senior Discount Debentures by AHC I Acquisition Corp. The contributed securities were subsequently retired. Extraordinary gain from early retirement of debt for AKI of $0.5 million for the six months ended December 31, 2000 and $0.2 million for the six months ended December 31, 1999 resulted from the purchase in 2000 of Senior Notes by AKI and in 1999 the purchase of Senior Notes by AHC I Acquisition Corp. and the subsequent contribution by AKI Holding Corp. The purchased and contributed securities were subsequently retired. EBITDA. EBITDA for the six months ended December 31, 2000 increased $1.2 million, or 9.0%, to $14.5 million as compared to $13.3 million for the six months ended December 31, 1999. The increase principally reflects the increase in gross profit discussed above. EBITDA as a percentage of net sales was 25.4% and 27.2% in the six months ended December 31, 2000 and 1999 respectively. EBITDA is income from operations plus depreciation and amortization of goodwill and other intangibles less net gain from settlement of litigation. LIQUIDITY AND CAPITAL RESOURCES Our company has substantial indebtedness and significant debt service obligations. As of December 31, 2000, our company had consolidated indebtedness in an aggregate amount of $142.8 million (excluding trade payables, accrued liabilities, deferred taxes and other non-current liabilities), of which (1) approximately $27.5 million was a direct obligation of Holding relating to its debentures and (2) approximately $115.3 million was a direct obligation of AKI relating to its notes, revolving credit line, promissory note to affiliate and capital leases. Borrowings at December 31, 2000 included $7.6 million under the revolving credit agreement that was incurred to finance the acquisition of RHL and provide working capital and $3.7 million on the promissory note to affiliate that was used to reduce other existing debt. At December 31, 2000 our company had available $12.4 million under the revolving credit agreement. At December 31, 2000, AKI also had $20.6 million in additional outstanding liabilities (including trade payables, accrued liabilities, deferred taxes and other non-current liabilities). 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. At December 31, 2000, $3.7 million was outstanding under the promissory note at prime and is due December 31, 2002. Proceeds from the promissory note were used to reduce other existing debt. 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 six months ended December 31, 2000, cash totaling $3.2 million was provided by operating activities resulting from net income before depreciation and amortization, a decrease in inventory and an increase in accrued income tax, partially offset by an increase in accounts receivable and decreases in accounts payable and accrued expenses. During the six months ended December 31, 1999, cash totaling $5.1 million was provided by operating activities resulting from net income before depreciation and amortization and decreases in accounts receivable and inventory offset partially by decreases in accounts payable and accrued expenses. In the six months ended December 31, 2000 and 1999, our company had capital expenditures of approximately $2.1 million and $1.1 million, respectively. These capital expenditures consisted primarily of the purchase of manufacturing equipment, furniture and fixtures and upgrading our 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 December 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. As of December 31, 2000, AKI purchased and retired $4.0 million of AKI, Inc. Senior Notes. Capital expenditures for the six months ending June 30, 2001 are currently estimated to be approximately $1.5 million. Based on borrowings outstanding as of December 31, 2000, our company expects total cash payments for debt service for the six months ending June 30, 2001 to be approximately $6.2 million, consisting of $5.4 million in interest payments on the notes, $0.1 million in capital lease obligations, $0.6 million in interest and fees under the credit agreement and $0.1 million in interest on the promissory note to stockholder and affiliate. Our company also expects to make royalty payments of approximately $0.3 million during the six months ending June 30, 2001. At December 31, 2000, Holding's cash and cash equivalents and net working capital were $0.5 million and $15.6 million, respectively, representing a decrease in cash and cash equivalents of $0.7 million and an increase in net working capital of $1.8 million from June 30, 2000. Account receivables, net, at December 31, 2000 increased 8.8% or $1.9 million over the June 30, 2000 amount, primarily due to increased sales. 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 Company's 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 December 31, 2000, there were no forward exchange contracts outstanding. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Fifth Amendment to Credit Agreement 10.2 Sixth Amendment to Credit Agreement (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: February 13, 2001 By: /S/ KENNETH A. BUDDE ----------------------------------- Kenneth A. Budde Senior Vice President & Chief Financial Officer AKI, INC. Date: February 13, 2001 By: /S/ KENNETH A. BUDDE ----------------------------------- Kenneth A. Budde Senior Vice President & Chief Financial Officer EX-10.1 2 0002.txt FIFTH AMENDMENT TO CREDIT AGREEMENT FIFTH AMENDMENT TO CREDIT AGREEMENT This FIFTH AMENDMENT TO CREDIT AGREEMENT dated as of May 17, 2000 (this "Amendment"), is by and between AKI, INC., a Delaware corporation, formerly known as Arcade, Inc. ("Borrower") and HELLER FINANCIAL, INC., a Delaware corporation ("Lender"). R E C I T A L S: A. Borrower and Lender are parties to that certain Credit Agreement dated as of April 30, 1996 (as the same has been and hereafter may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"). B. Borrower and Lender wish to amend the Credit Agreement as provided herein. NOW, THEREFORE, the parties agree as follows: 1. Definitions. Capitalized terms used in this Amendment, unless otherwise defined herein, shall have the meanings ascribed to such terms in the Credit Agreement. 2. Amendments to the Credit Agreement. (a) Subsection 3.1 of the Credit Agreement is amended by adding the following as clause (H) thereto: "(H) the AHC Subordinated Indebtedness." (b) Subsection 3.5 of the Credit Agreement is amended by adding the following as clause (J) thereto: "(J) Borrower may make scheduled interest and principal payments on account of the AHC Subordinated Indebtedness provided all of the following conditions are satisfied: (i) no Default or Event of Default has occurred and is continuing or would arise as a result of any such payment; (ii) after giving effect to any such payment, Borrower is in compliance on a pro forma basis with the covenants set forth in subsections 4.3, 4.4 and 4.5, recomputed for the most recent month for which financial statements have been delivered; and (iii) after giving effect to any such payment, the Maximum Revolving Loan Balance exceeds the aggregate outstanding principal balance of Revolving Loans by not less than $3,000,000." (c) Subsection 10.1 of the Credit Agreement is amended by adding the following definition thereto: "AHC Subordinated Indebtedness" means Subordinated Indebtedness of Borrower owing to AHC I Acquisition Corp. a Delaware corporation ("AHC"), evidenced by that certain Subordinated Promissory Note dated as of May 17, 2000, made by Borrower to the order of AHC, up to an aggregate principal amount not to exceed $10,000,000. 3. Representations and Warranties. To induce Lender to enter into this Amendment, Borrower represents and warrants to Lender that: (a) the execution, delivery and performance by Borrower of this Amendment are within its corporate power, have been duly authorized by all necessary corporate action and do not and will not contravene or conflict with any provision of law applicable to Borrower, the Certificate of Incorporation or By-laws of Borrower, or any order, judgment or decree of any court or other agency of government or any contractual obligation binding upon Borrower; (b) the Credit Agreement as amended as of the date hereof is the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms; (c) each of the representations and warranties set forth in Section 5 of the Credit Agreement (other that those which, by their terms, specifically are made as of a certain date prior to the date hereof) are true and correct in all material respects as of the date hereof; and (d) no Default or Event of Default has occurred and is continuing. 4. Conditions. The effectiveness of the amendments stated in this Amendment is subject to each of the following conditions precedent or concurrent: (a) No Default or Event of Default under the Credit Agreement, as amended hereby, shall have occurred and be continuing; (b) Borrower shall have executed and delivered this Amendment, the Subordination and Intercreditor Agreement by and among, Borrower, AHC and Heller (which AHC also shall have executed and delivered), and such other documents and instruments as Lender may require shall have been executed and/or delivered to Lender; and (c) All legal matters incident to this Amendment shall be satisfactory to Lender and its legal counsel. 5. Miscellaneous. (a) Captions. Section captions used in this Amendment are for convenience only, and shall not affect the construction of this Amendment. (b) Governing Law. This Amendment shall be a contract made under and governed by the laws of the State of New York, without regard to conflict of laws principals. Whenever possible each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. (c) Counterparts. This Amendment may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constituted but one and the same Agreement. (d) Successors and Assigns. This Amendment shall be binding upon Borrower and Lender and their respective successors and assigns, and shall inure to the sole benefit of Borrower and Lender and their respective successors and assigns. (e) References. Any reference to the Credit Agreement contained in any notice, request, certificate, or other document executed concurrently with or after the execution and delivery of this Amendment shall be deemed to include this Amendment unless the context shall otherwise require. (f) Continued Effectiveness. The Credit Agreement, as amended hereby, and each of the other Loan Documents, remain in full force and effect. (g) Costs, Expenses and Taxes. Borrower affirms and acknowledges that subsection 1.3(B) of the Credit Agreement applies to this Amendment and the transactions and Agreements and document contemplated hereunder. [remainder of this page intentionally left blank] Delivered at Chicago, Illinois, as of the day and year first above written. AKI, INC., a Delaware corporation, formerly know as Arcade, Inc. By: /s/ Kenneth A. Budde ----------------------------- Print Name: Kenneth A. Budde Title: Chief Financial Officer HELLER FINANCIAL, INC., a Delaware corporation By: /s/ Susan Koehnlein ----------------------------- Print Name: Susan Koehnlein Title: Assistant Vice President EX-10.2 3 0003.txt SIXTH AMENDMENT TO CREDIT AGREEMENT SIXTH AMENDMENT TO CREDIT AGREEMENT This SIXTH AMENDMENT TO CREDIT AGREEMENT dated as of December 1, 2000 (this "Amendment"), is by and between AKI, INC., a Delaware corporation, formerly known as Arcade, Inc. ("Borrower") and HELLER FINANCIAL, INC., a Delaware corporation ("Lender"). R E C I T A L S: A. Borrower and Lender are parties to that certain Credit Agreement dated as of April 30, 1996 (as the same has been and hereafter may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"). B. Borrower and Lender wish to amend the Credit Agreement as provided herein. NOW, THEREFORE, the parties agree as follows: 1. Definitions. Capitalized terms used in this Amendment, unless otherwise defined herein, shall have the meanings ascribed to such terms in the Credit Agreement. 2. Amendments to the Credit Agreement. (a) Subsection 1.2(A) of the Credit Agreement is amended by deleting the first sentence thereto and substituting therefor the following two sentences: "(A) Interest. From the date the Loans are made and the other Obligations become due and payable in accordance with the terms of this Agreement and the other Loan Documents, the Obligations shall bear interest at the sum of the Base Rate plus three-quarters of one percent (0.75%) per annum and/or, with respect to any LIBOR Rate Loan, the sum of the LIBOR Rate plus two and one-half percent (2.50%) per annum. Notwithstanding the foregoing, commencing February 1, 2001, the Loans and the other Obligations as they become due and payable in accordance with the terms of this Agreement and the other Loan Documents, shall bear interest at the sum of the Base Rate plus one percent (1.00%) per annum and/or, with respect to any LIBOR Rate Loan, the sum of the LIBOR Rate plus two and three-quarters percent (2.75%) per annum." (b) Subsection 1.2(C) of the Credit Agreement is amended by deleting the phrase "two and one-half percent (2.50%)" and substituting therefor the phrase "two and three-quarters percent (2.75%)." (c) Clause (E) of subsection 3.1 of the Credit Agreement is deleted and the following clause (E) of subsection 3.1(E) is substituted therefor: "(E) the Refinanced Bridge Indebtedness;" (d) Subsection 3.5 of the Credit Agreement is amended by adding the following as clauses (J) and (K) thereto: "(J) Borrower may use proceeds of Revolving Loans to (1) repurchase certain notes evidencing the Refinanced Bridge Indebtedness and (2) make dividend payments or distributions to Holdings solely to permit Holdings to repurchase certain 13 1/2% senior discount debentures due 2009 issued pursuant to that certain Indenture dated June 25, 1998 between Holdings and State Street Bank and Trust Company, provided that, in each case, all of the following conditions are satisfied: (i) Borrower shall provide written notice to Heller that the proceeds of a Revolving Loan are to be used to repurchase, directly or indirectly, any of the notes or debentures referred to in this clause (J) of subsection 3.5, and the aggregate amount of all such repurchases under this clause (J) of subsection 3.5 shall not exceed $4,000,000; (ii) no Default or Event of Default has occurred and is continuing or would arise as a result of any such repurchase; (iii) after giving effect to any such repurchase, Borrower is in compliance on a pro forma basis with the covenants set forth in subsections 4.3, 4.4 and 4.5, recomputed for the most recent month for which financial statements have been delivered; and (iv) after giving effect to any such repurchase, the Maximum Revolving Loan Balance exceeds the aggregate outstanding principal balance of Revolving Loans by not less than $3,000,000; and (K) upon Borrower's repurchase of notes and debentures in the aggregate amount permitted under the foregoing clause (J), Borrower may use proceeds of Revolving Loans to (1) repurchase certain notes evidencing the Refinanced Bridge Indebtedness and (2) make dividend payments or distributions to Holdings solely to permit Holdings to repurchase certain 13 1/2% senior discount debentures due 2009 issued pursuant to that certain Indenture dated June 25, 1998 between Holdings and State Street Bank and Trust Company, provided that, in each case, all of the following conditions are satisfied: (i) Borrower shall provide written notice to Heller that the proceeds of a Revolving Loan are to be used to repurchase, directly or indirectly, any of the notes or debentures referred to in this clause (K) of subsection 3.5; (ii) Borrower shall provide Heller with a twelve (12) month forecast of Borrower's balance sheet, income statement and statement of cash flows on a monthly basis after giving effect to the proposed Revolving Loan draw pursuant to this clause (K) of subsection 3.5, which forecast shall demonstrate that the Maximum Revolving Loan Balance shall exceed the aggregate outstanding principal balance of Revolving Loans by not less than $3,000,000 during each of the twelve (12) months listed in the forecast; (iii) no Default or Event of Default has occurred and is continuing or would arise as a result of any such repurchase; (iv) after giving effect to any such repurchase, Borrower is in compliance on a pro forma basis with the covenants set forth in subsections 4.3, 4.4 and 4.5, recomputed for the most recent month for which financial statements have been delivered; and (v) after giving effect to any such repurchase, the Maximum Revolving Loan Balance exceeds the aggregate outstanding principal balance of Revolving Loans by not less than $3,000,000." (e) Subsection 10.1 of the Credit Agreement is amended by deleting the definition of "Refinanced Bridge Indebtedness" contained therein and substituting therefor the following definition: "Refinanced Bridge Indebtedness" means those certain 10 1/2% senior notes due 2008 in the aggregate principal amount of $115,000,000 issued pursuant to that certain Debenture dated June 25, 1998, between Borrower and IBJ Schroder Bank & Trust Company, as trustee. 3. Representations and Warranties. To induce Lender to enter into this Amendment, Borrower represents and warrants to Lender that: (a) the execution, delivery and performance by Borrower of this Amendment are within its corporate power, have been duly authorized by all necessary corporate action and do not and will not contravene or conflict with any provision of law applicable to Borrower, the Certificate of Incorporation or By-laws of Borrower, or any order, judgment or decree of any court or other agency of government or any contractual obligation binding upon Borrower; (b) the Credit Agreement as amended as of the date hereof is the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms; (c) each of the representations and warranties set forth in Section 5 of the Credit Agreement (other that those which, by their terms, specifically are made as of a certain date prior to the date hereof) are true and correct in all material respects as of the date hereof; and (d) no Default or Event of Default has occurred and is continuing. 4. Conditions. The effectiveness of the amendments stated in this Amendment is subject to each of the following conditions precedent or concurrent: (a) No Default or Event of Default under the Credit Agreement, as amended hereby, shall have occurred and be continuing; (b) Borrower shall have executed and delivered this Amendment and such other documents and instruments as Lender may require shall have been executed and/or delivered to Lender; and (c) All legal matters incident to this Amendment shall be satisfactory to Lender and its legal counsel. 5. Miscellaneous. (a) Captions. Section captions used in this Amendment are for convenience only, and shall not affect the construction of this Amendment. (b) Governing Law. This Amendment shall be a contract made under and governed by the laws of the State of New York, without regard to conflict of laws principals. Whenever possible each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. (c) Counterparts. This Amendment may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constituted but one and the same Agreement. (d) Successors and Assigns. This Amendment shall be binding upon Borrower and Lender and their respective successors and assigns, and shall inure to the sole benefit of Borrower and Lender and their respective successors and assigns. (e) References. Any reference to the Credit Agreement contained in any notice, request, certificate, or other document executed concurrently with or after the execution and delivery of this Amendment shall be deemed to include this Amendment unless the context shall otherwise require. (f) Continued Effectiveness. The Credit Agreement, as amended hereby, and each of the other Loan Documents, remain in full force and effect. (g) Costs, Expenses and Taxes. Borrower affirms and acknowledges that subsection 1.3(B) of the Credit Agreement applies to this Amendment and the transactions and Agreements and document contemplated hereunder. [remainder of this page intentionally left blank] Delivered at Chicago, Illinois, as of the day and year first above written. AKI, INC., a Delaware corporation, formerly known as Arcade, Inc. By: /s/ Kenneth A. Budde -------------------------- Kenneth A. Budde Chief Financial Officer HELLER FINANCIAL, INC., a Delaware corporation By: /s/ Susan Koehnlein -------------------------- Susan Koehnlein Assistant Vice President AKI HOLDING CORP., a Delaware corporation By: /s/ Kenneth A. Budde -------------------------- Kenneth A. Budde Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----