-----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, DMAj+O0WO3FDZr+2ZTaFOpAxqRkCGSIhX4nEfRgtrDdYR34bF/QjwywlOV2TUzhr sXxN68G3qOiztMByiJ+DKw== 0001067550-01-500015.txt : 20020410 0001067550-01-500015.hdr.sgml : 20020410 ACCESSION NUMBER: 0001067550-01-500015 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20011113 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: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-60989 FILM NUMBER: 1783231 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 424B3 1 f424b3p1093001.txt Filed Pursuant to Rule 424(b)(3) Registration No. 333-60989 PROSPECTUS SUPPLEMENT DATED NOVEMBER 9, 2001 To Prospectus dated December 23, 1998 10 1/2% SENIOR NOTES DUE 2008 OF AKI, INC. RECENT DEVELOPMENTS Attached hereto and incorporated by reference herein is the Form 10-Q of AKI, Inc. filed November 9, 2001. 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, 2001 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 October 31, 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 (unaudited) AKI Holding Corp. and Subsidiaries Consolidated Condensed Balance Sheet - September 30, 2001 - June 30, 2001 Consolidated Condensed Statements of Operations - Three months ended September 30, 2001 - Three months ended September 30, 2000 Consolidated Condensed Statement of Changes in Stockholder's Equity - Three months ended September 30, 2001 Consolidated Condensed Statements of Cash Flows - Three months ended September 30, 2001 - Three months ended September 30, 2000 Notes to Consolidated Condensed Financial Statements Item 1. Financial Statements (unaudited) (continued) AKI, Inc. and Subsidiaries Consolidated Condensed Balance Sheet - September 30, 2001 - June 30, 2001 Consolidated Condensed Statements of Operations - Three months ended September 30, 2001 - Three months ended September 30, 2000 Consolidated Condensed Statement of Changes in Stockholder's Equity - Three months ended September 30, 2001 Consolidated Condensed Statements of Cash Flows - Three months ended September 30, 2001 - Three months ended September 30, 2000 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 CONSOLIDATED CONDENSED BALANCE SHEETS (dollars in thousands, except share and per share information)
September 30, June 30, 2001 2001 ------------- ------------- (unaudited) (unaudited) ASSETS Current assets Cash and cash equivalents.................................................. $ 449 $ 4,654 Accounts receivable, net................................................... 28,307 18,020 Inventory.................................................................. 7,090 6,330 Prepaid expenses........................................................... 624 492 Deferred income taxes...................................................... 770 770 ------------- ------------- Total current assets.................................................... 37,240 30,266 Property, plant and equipment, net......................................... 15,021 15,778 Goodwill, net.............................................................. 156,133 157,334 Other intangible assets, net............................................... 6,117 6,337 Deferred charges, net...................................................... 4,214 4,381 Deferred income taxes...................................................... 663 - Other assets............................................................... 88 88 ------------- ------------- Total assets............................................................ $ 219,476 $ 214,184 ============= ============= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Current portion of capital lease obligations............................... $ 496 $ 503 Accounts payable, trade.................................................... 4,985 3,886 Accrued income taxes....................................................... 2,564 1,642 Accrued compensation....................................................... 2,092 4,715 Accrued interest........................................................... 2,762 5,443 Accrued expenses........................................................... 4,281 3,908 ------------- ------------- Total current liabilities............................................... 17,180 20,097 Revolving credit line...................................................... 6,500 - Senior notes............................................................... 103,510 103,510 Senior discount debentures................................................. 24,733 23,926 Promissory note to stockholder............................................. 350 - Deferred income taxes...................................................... - 19 Other non-current liabilities.............................................. 1,915 1,863 ------------- ------------- Total liabilities....................................................... 154,188 149,415 Stockholder's equity Common stock, $0.01 par 1,000 shares authorized; 1,000 shares issued and outstanding.................................... - - Additional paid-in capital................................................. 93,656 93,656 Accumulated deficit........................................................ (12,174) (12,320) Accumulated other comprehensive loss....................................... (464) (837) Carryover basis adjustment................................................. (15,730) (15,730) -------------- ------------- Total stockholder's equity.............................................. 65,288 64,769 ------------- ------------- Total liabilities and stockholder's equity.............................. $ 219,476 $ 214,184 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. AKI HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (dollars in thousands)
Three months ended --------------------------------------------- September 30, 2001 September 30, 2000 ------------------ ------------------ (unaudited) (unaudited) Net sales................................................. $ 27,381 $ 32,353 Cost of goods sold........................................ 16,714 19,548 ----------- ----------- Gross profit........................................... 10,667 12,805 Selling, general and administrative expenses.............. 4,195 4,518 Amortization of goodwill and other intangibles............ 1,446 1,419 ----------- ----------- Income from operations................................. 5,026 6,868 Other expenses: Interest expense to stockholder ....................... 4 113 Interest expense, other................................ 3,867 4,291 Management fees and other, net......................... 63 62 ----------- ----------- Income before income taxes................................ 1,092 2,402 Income tax expense........................................ 946 1,465 ----------- ----------- Net income ............................................ $ 146 $ 937 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. AKI HOLDING CORP. AND SUBSIDIARIES 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, 2001 (unaudited)....... 1,000 $ - $ 93,656 $ (12,320) $ (837) $ (15,730) $ 64,769 Net income (unaudited).................... 146 146 Other comprehensive income, net of tax: Foreign currency translation adjustment (unaudited)............... 373 373 --------- Comprehensive income (unaudited).......... 519 ----- ------- --------- ---------- --------- ---------- --------- Balances, September 30, 2001 (unaudited).. 1,000 $ - $ 93,656 $ (12,174) $ (464) $ (15,730) $ 65,288 ===== ======= ========= ========== ========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements. AKI HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (dollars in thousands)
Three months ended ---------------------------------------- September 30, 2001 September 30, 2000 ------------------ ------------------ (unaudited) (unaudited) Cash flows from operating activities Net income........................................................ $ 146 $ 937 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization of goodwill and other intangibles. 2,600 2,506 Amortization of debt discount................................... 807 939 Amortization of debt issuance costs............................. 167 171 Deferred income taxes........................................... (682) (186) Other........................................................... 425 (292) Changes in operating assets and liabilities: Accounts receivable........................................... (10,287) (7,003) Inventory..................................................... (760) (1,798) Prepaid expenses, deferred charges and other assets........... (132) (497) Accounts payable and accrued expenses......................... (3,832) (1,620) Income taxes.................................................. 922 1,691 ----------- ----------- Net cash used in operating activities....................... (10,626) (5,152) ------------ ----------- Cash flows from investing activities Purchases of equipment............................................ (392) (776) Patents........................................................... (30) - ------------ ----------- Net cash used in investing activities....................... (422) (776) ------------ ----------- Cash flows from financing activities Payments under capital leases for equipment....................... (7) (123) Net proceeds on line of credit.................................... 6,500 950 Net proceeds from promissory note to stockholder.................. 350 4,745 ----------- ----------- Net cash provided by financing activities................... 6,843 5,572 ----------- ----------- Net decrease in cash and cash equivalents............................ (4,205) (356) Cash and cash equivalents, beginning of period....................... 4,654 1,158 ----------- ----------- Cash and cash equivalents, end of period............................. $ 449 $ 802 =========== =========== Supplemental information Cash paid during the period for: Interest, other................................................. $ 5,507 $ 5,919 Income taxes.................................................... 848 48
The accompanying notes are an integral part of these consolidated financial statements. AKI HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 1. BASIS OF PRESENTATION AKI, Inc. ("AKI") is the successor to Arcade Holding Corporation (the "Predecessor"), which was acquired by AHC I Acquisition, Corp. ("AHC") in December 1997. AHC was organized for the purpose of acquiring all of the equity interests of the Predecessor and subsequent to such acquisition, AHC contributed $1 and all of its ownership interest to AKI Holding, Corp. ("Holding") for all of the outstanding equity of Holding. Accordingly, AKI is a wholly owned subsidiary of Holding, which is a wholly owned subsidiary of AHC. AKI is engaged in interactive multi-sensory advertising for consumer product companies and has a specialty in the design, production and distribution of sampling systems from its Chattanooga, Tennessee facilities and distributes its products in Europe through its French subsidiary, Arcade Europe S.A.R.L. Interim financial statements The interim consolidated condensed balance sheet at September 30, 2001 and the interim consolidated condensed statements of operations for the three months ended September 30, 2001 and 2000, the interim consolidated condensed statements of cash flows for the three months ended September 30, 2001 and 2000 and the interim consolidated condensed statement of changes in stockholder's equity for the three months ended September 30, 2001 are unaudited, and certain information and footnote disclosure related thereto, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. The June 30, 2001 consolidated condensed balance sheet was derived from the 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 the 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. Reclassification Certain prior period amounts have been reclassified to conform with the current period presentation. 2. INVENTORY The following table details the components of inventory: September 30, 2001 June 30, 2001 ------------------ ------------- (unaudited) (unaudited) Raw materials Paper.................... $ 2,122 $ 1,796 Other raw materials...... 2,804 2,697 ----------- ---------- Total raw materials.. 4,926 4,493 Work in process.............. 2,164 1,837 ----------- ---------- Total inventory.............. $ 7,090 $ 6,330 =========== ========== AKI HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 3. PROMISSORY NOTE TO STOCKHOLDER In May 2000, AKI signed a promissory note payable to AHC, which allows AKI to borrow up to $10 million at such interest rates and due as agreed upon by AKI and AHC. At September 30, 2001, $350 was outstanding under this promissory note bearing interest at prime and is due December 31, 2002. 4. DERIVATIVE INSTRUMENTS Effective July 1, 2000, AKI 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 AKI's financial statements. AKI 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 AKI'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. AKI primarily utilizes foreign currency forward exchange contracts with maturities of less than six months, which do not meet hedge accounting criteria. At September 30, 2001 there were no forward exchange contracts outstanding. 5. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS The following condensed balance sheets at September 30, 2001 and June 30, 2001 and condensed statements of operations, changes in stockholder's equity and cash flows for the three months ended September 30, 2001 and 2000 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 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued) BALANCE SHEET
September 30, 2001 June 30, 2001 ------------------ ------------- (unaudited) (unaudited) Assets Investment in subsidiaries............................... $ 102,939 $ 102,237 Deferred charges......................................... 786 806 Deferred income taxes.................................... 2,609 2,338 ----------- ----------- Total assets......................................... $ 106,334 $ 105,381 =========== =========== Liabilities Accrued income taxes..................................... $ 119 $ 119 Senior discount debentures............................... 24,733 23,926 ----------- ----------- Total liabilities.................................... 24,852 24,045 ----------- ----------- Stockholder's equity Common Stock, $0.01 par value, 1,000 shares authorized 1,000 shares issued and outstanding.................... - - Additional paid-in capital............................... 93,656 93,656 Accumulated deficit...................................... (12,174) (12,320) ------------ ----------- Total stockholder's equity........................... 81,482 81,336 ----------- ----------- Total liabilities and stockholder's equity........... $ 106,334 $ 105,381 =========== ===========
STATEMENT OF OPERATIONS
Three months ended ---------------------------------------- September 30, 2001 September 30, 2000 ------------------ ------------------ (unaudited) (unaudited) Equity in net income of subsidiaries..................... $ 702 $ 1,584 Interest expense......................................... 827 962 ----------- ----------- Income (loss) before income taxes.................... (125) 622 Income tax benefit....................................... (271) (315) ------------ ----------- Net income .......................................... $ 146 $ 937 =========== ===========
AKI HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per 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, 2001 (unaudited)........... 1,000 $ - $ 93,656 $ (12,320) $ 81,336 Net income (unaudited)........................ 146 146 --------- --------- ---------- ----------- ----------- Balances, September 30, 2001 (unaudited)...... 1,000 $ - $ 93,656 $ (12,174) $ 81,482 ========= ========= ========== ============ ===========
STATEMENT OF CASH FLOWS
Three months ended ---------------------------------------- September 30, 2001 September 30, 2000 ------------------ ------------------ (unaudited) (unaudited) Cash flows from operating activities Net income..................................................... $ 146 $ 937 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net change in investment in subsidiaries................ (702) (1,584) Amortization of debt discount........................... 807 939 Amortization of debt issuance costs..................... 20 23 Deferred income taxes................................... (271) (315) ----------- ------------ 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 CONSOLIDATED CONDENSED BALANCE SHEETS (dollars in thousands, except share and per share information)
September 30, June 30, 2001 2001 ------------- ------------- (unaudited) (unaudited) ASSETS Current assets Cash and cash equivalents.................................................. $ 449 $ 4,654 Accounts receivable, net................................................... 28,307 18,020 Inventory.................................................................. 7,090 6,330 Prepaid expenses........................................................... 624 492 Deferred income taxes...................................................... 770 770 ------------- ------------- Total current assets.................................................... 37,240 30,266 Property, plant and equipment, net......................................... 15,021 15,778 Goodwill, net.............................................................. 156,133 157,334 Other intangible assets, net............................................... 6,117 6,337 Deferred charges, net .................................................... 3,428 3,575 Other assets............................................................... 88 88 ------------- ------------- Total assets............................................................ $ 218,027 $ 213,378 ============= ============== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Current portion of capital lease obligations............................... $ 496 $ 503 Accounts payable, trade.................................................... 4,985 3,886 Accrued income taxes....................................................... 2,445 1,523 Accrued compensation....................................................... 2,092 4,715 Accrued interest........................................................... 2,762 5,443 Accrued expenses........................................................... 4,281 3,908 ------------- ------------- Total current liabilities............................................... 17,061 19,978 Revolving credit line...................................................... 6,500 - Senior notes............................................................... 103,510 103,510 Promissory note to affiliate............................................... 350 - Deferred income taxes...................................................... 1,946 2,357 Other non-current liabilities.............................................. 1,915 1,863 ------------- ------------- Total liabilities....................................................... 131,282 127,708 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........................................................ (4,409) (5,111) Accumulated other comprehensive loss....................................... (464) (837) Carryover basis adjustment................................................. (15,730) (15,730) -------------- ------------- Total stockholder's equity.............................................. 86,745 85,670 ------------- ------------- Total liabilities and stockholder's equity.............................. $ 218,027 $ 213,378 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. AKI, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (dollars in thousands)
Three months ended --------------------------------------------- September 30, 2001 September 30, 2000 ------------------ ------------------ (unaudited) (unaudited) Net sales................................................. $ 27,381 $ 32,353 Cost of goods sold........................................ 16,714 19,548 ----------- ----------- Gross profit........................................... 10,667 12,805 Selling, general and administrative expenses.............. 4,195 4,518 Amortization of goodwill and other intangibles............ 1,446 1,419 ----------- ----------- Income from operations................................. 5,026 6,868 Other expenses: Interest expense to stockholder ....................... 4 113 Interest expense, other................................ 3,040 3,329 Management fees and other, net......................... 63 62 ----------- ----------- Income before income taxes................................ 1,919 3,364 Income tax expense........................................ 1,217 1,780 ----------- ----------- Net income ............................................ $ 702 $ 1,584 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. AKI, INC., AND SUBSIDIARIES 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, 2001 (unaudited)....... 1,000 $ - $ 107,348 $ (5,111) $ (837) $ (15,730) $ 85,670 Net income (unaudited).................... 702 702 Other comprehensive income, net of tax: Foreign currency translation adjustment (unaudited)............... 373 373 --------- Comprehensive income (unaudited).......... 1,075 ----- ------- --------- --------- --------- ---------- --------- Balances, September 30, 2001 (unaudited) 1,000 $ - $ 107,348 $ (4,409) $ (464) $ (15,730) $ 86,745 ===== ======= ========= ========= ========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements. AKI, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (dollars in thousands)
Three months ended ------------------------------------------ September 30, 2001 September 30, 2000 ------------------ ------------------ (unaudited) (unaudited) Cash flows from operating activities Net income ......................................................... $ 702 $ 1,584 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization of goodwill and other intangibles... 2,600 2,506 Amortization of debt issuance cost................................ 147 148 Deferred income taxes............................................. (411) 129 Other............................................................. 425 (292) Changes in operating assets and liabilities: Accounts receivable............................................. (10,287) (7,003) Inventory....................................................... (760) (1,798) Prepaid expenses, deferred charges and other assets............. (132) (497) Accounts payable and accrued expenses........................... (3,832) (1,620) Income taxes.................................................... 922 1,691 ----------- ----------- Net cash used in operating activities......................... (10,626) (5,152) ----------- ----------- Cash flows from investing activities Purchases of equipment.............................................. (392) (776) Patents............................................................. (30) - ------------ ----------- Net cash used in investing activities......................... (422) (776) ------------ ----------- Cash flows from financing activities Payments under capital leases for equipment......................... (7) (123) Net proceeds on line of credit...................................... 6,500 950 Net proceeds from promissory note to affiliate...................... 350 4,745 ----------- ----------- Net cash provided by financing activities..................... 6,843 5,572 ----------- ----------- Net decrease in cash and cash equivalents.............................. (4,205) (356) Cash and cash equivalents, beginning of period......................... 4,654 1,158 ----------- ----------- Cash and cash equivalents, end of period............................... $ 449 $ 802 =========== =========== Supplemental information Cash paid during the period for: Interest, other................................................... $ 5,507 $ 5,919 Income taxes...................................................... 848 48
The accompanying notes are an integral part of these consolidated financial statements. AKI, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 1. BASIS OF PRESENTATION AKI, Inc. ("AKI") is the successor to Arcade Holding Corporation (the "Predecessor"), which was acquired by AHC I Acquisition, Corp. ("AHC") in December 1997. AHC was organized for the purpose of acquiring all of the equity interests of the Predecessor and subsequent to such acquisition, AHC contributed $1 and all of its ownership interest to AKI Holding, Corp. ("Holding") for all of the outstanding equity of Holding. Accordingly, AKI is a wholly owned subsidiary of Holding, which is a wholly owned subsidiary of AHC. AKI is engaged in interactive multi-sensory advertising for consumer product companies and has a specialty in the design, production and distribution of sampling systems from its Chattanooga, Tennessee facilities and distributes its products in Europe through its French subsidiary, Arcade Europe S.A.R.L. Interim financial statements The interim consolidated condensed balance sheet at September 30, 2001 and the interim consolidated condensed statements of operations for the three months ended September 30, 2001 and 2000, the interim consolidated condensed statements of cash flows for the three months ended September 30, 2001 and 2000 and the interim consolidated condensed statement of changes in stockholder's equity for the three months ended September 30, 2001 are unaudited, and certain information and footnote disclosure related thereto, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. The June 30, 2001 consolidated condensed balance sheet was derived from the 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 the 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. Reclassification Certain prior period amounts have been reclassified to conform with the current period presentation. 2. INVENTORY The following table details the components of inventory: September 30, 2001 June 30, 2001 ------------------ ------------- (unaudited) (unaudited) Raw materials Paper.................... $ 2,122 $ 1,796 Other raw materials...... 2,804 2,697 ----------- ---------- Total raw materials.. 4,926 4,493 Work in process.............. 2,164 1,837 ----------- ---------- Total inventory.............. $ 7,090 $ 6,330 =========== ========== AKI, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 3. PROMISSORY NOTE TO AFFILIATE In May 2000, AKI signed a promissory note payable to AHC, which allows AKI to borrow up to $10 million at such interest rates and due as agreed upon by AKI and AHC. At September 30, 2001, $350 was outstanding under this promissory note bearing interest at prime and is due December 31, 2002. 4. DERIVATIVE INSTRUMENTS Effective July 1, 2000, AKI 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 AKI's financial statements. AKI 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 AKI'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. AKI primarily utilizes foreign currency forward exchange contracts with maturities of less than six months, which do not meet hedge accounting criteria. At September 30, 2001 there were no forward exchange contracts outstanding. 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. General Our sales are derived primarily through our multi-sensory, interactive marketing activities primarily from the sale of printed advertising materials with sampling systems and products to fragrance, cosmetics and consumer products companies, and also from creative services. Substantially all of our sales are made directly to our customers while a small portion are made through advertising agencies. Each of our customer's marketing programs 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, we have had long-standing relationships with the majority of our customer base. Results of Operations Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 Net Sales. Net sales for the three months ended September 30, 2001 decreased $5.0 million, or 15.4%, to $27.4 million, as compared to $32.4 million for the three months ended September 30, 2000. The decrease in net sales was primarily attributable to decreases in volume of domestic sales of sampling technologies for advertising and marketing of consumer products and cosmetics products and international sales of sampling technologies for advertising and marketing of fragrance products. We believe the decline of domestic sales is partially attributable to the weak economic conditions in the United States, particularly in the advertising industry. We expect the significant decline in sales experienced in our first fiscal quarter to continue in our second fiscal quarter. We cannot predict if this trend will worsen or continue through the remainder of our fiscal year. Gross Profit. Gross profit for the three months ended September 30, 2001 decreased $2.1 million, or 16.4%, to $10.7 million, as compared to $12.8 million for three months ended September 30, 2000. Gross profit as a percentage of net sales decreased to 39.1% in the three months ended September 30, 2001, from 39.5% in the three months ended September 30, 2000. The decrease in gross profit as a percentage of net sales is substantially due to the decrease in sales volume and changes in product mix partially offset by reduced premium labor costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2001 decreased $0.3 million, or 6.7%, to $4.2 million, as compared to $4.5 million for the three months ended September 30, 2000. Selling, general and administrative expenses as a percent of net sales increased to 15.3% in the three months ended September 30, 2001, from 13.9% in the three months ended September 30, 2000. The decrease in selling, general and administrative expenses is primarily due to a one-time severance charge in 2000 and a decrease in personnel in 2001. The increase in selling, general and administrative expenses as a percent of net sales was primarily due to the decrease in net sales described above. Income from Operations. Income from operations for the three months ended September 30, 2001 decreased $1.9 million, or 27.5%, to $5.0 million, as compared to $6.9 million for the three months ended September 30, 2000. Income from operations as a percentage of net sales decreased to 18.3% in the three months ended September 30, 2001, from 21.3% in the three months ended September 30, 2000, principally as a result of the factors described above. Interest Expense. Interest expense for the three months ended September 30, 2001 decreased $0.5 million, or 11.4%, to $3.9 million, as compared to $4.4 million for the three months ended September 30, 2000. Interest expense as a percentage of net sales increased to 14.2% in the three months ended September 30, 2001, from 13.6% in the three months ended September 30, 2000. The decrease in interest expense, including the amortization of deferred financing costs, is primarily due to repurchased and retired Senior Discount Debentures and Senior Notes, reduced borrowings under the revolving credit line and promissory note to stockholder. Interest expense for AKI for the three months ended September 30, 2001 decreased $0.4 million, or 11.8%, to $3.0 million, as compared to $3.4 million for the three months ended September 30, 2000. Interest expense as a percentage of net sales increased to 11.0% in the three months ended September 30, 2001, from 10.5% in the three months ended September 30, 2000. The decrease in interest expense, including the amortization of deferred financing costs, is primarily due to repurchased and retired Senior Notes, and reduced borrowings under the revolving credit line and promissory note to affiliate. Income Tax Expense. Income tax expense for the three months ended September 30, 2001 decreased $0.6 million to $0.9 million. The Company's effective tax rate, after consideration of non-deductible goodwill amortization, was 41.2% in the three months ended September 30, 2001, and 40.6% in the three months ended September 30, 2000. Income tax expense for AKI for the three months ended September 30, 2001 decreased $0.6 million to $1.2 million. AKI's effective tax rate, after consideration of non-deductible goodwill amortization, was 39% in the three months ended September 30, 2001 and 2000. EBITDA. EBITDA for the three months ended September 30, 2001 decreased $1.8 million, or 19.2%, to $7.6 million, as compared to $9.4 million for the three months ended September 30, 2000. The decrease in EBITDA principally reflects the decrease in gross profit partially offset by the decrease in selling, general and administrative expenses discussed above. EBITDA as a percentage of net sales was 27.7% and 29.0% in the three months ended September 30, 2001 and 2000, respectively. EBITDA is income from operations plus depreciation and amortization of goodwill and other intangibles. Liquidity and Capital Resources We have substantial indebtedness and significant debt service obligations. As of September 30, 2001, we had consolidated indebtedness in an aggregate amount of $135.6 million (excluding trade payables, accrued liabilities, deferred taxes and other non-current liabilities), of which approximately $24.7 million was a direct obligation of Holding relating to its debentures and approximately $110.9 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, 2001 included $6.5 million under the revolving credit line and $0.4 million on the promissory note to affiliate that was incurred to provide working capital. At September 30, 2001 we had $13.5 million available under the revolving credit line. At September 30, 2001, AKI also had $20.4 million in additional outstanding liabilities (including trade payables, accrued liabilities, deferred taxes and other non-current liabilities). 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 line. Historically, we have funded our 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, 2001, cash totaling $10.6 million was used by operating activities primarily due to the increase in accounts receivable and a decrease in accrued compensation and accrued interest, offset partially by an increase in accounts payable and accrued income taxes. 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. In the three months ended September 30, 2001 and 2000, we had capital expenditures of approximately $0.4 million and $0.8 million, respectively. These capital expenditures consisted primarily of the purchase of manufacturing equipment and upgrading our computer systems. We may from time to time evaluate additional potential acquisitions. There can be no assurance that additional capital sources will be available to us to fund additional acquisitions on terms that we find acceptable, or at all. Additional capital resources, if available, may be on terms generally less favorable and/or more restricted than the terms of our current credit facilities. As of September 30, 2001, AKI had purchased and retired $4.0 million of AKI Senior Notes originally issued in 1998. Capital expenditures for the twelve months ending June 30, 2002 are currently estimated to be approximately $2.5 million. Based on borrowings outstanding as of September 30, 2001, we expect total cash payments for debt service for the twelve months ending June 30, 2002 to be approximately $11.8 million, consisting of $10.9 million in interest payments of the notes, $0.5 million in capital lease obligations and $0.4 million in interest and fees under the revolving credit line. We also expect to make royalty payments of approximately $1.1 million during the twelve months ending June 30, 2002. At September 30, 2001, Holding's cash and cash equivalents and net working capital were $0.4 million and $20.1 million, respectively, representing a decrease in cash and cash equivalents of $4.3 million and an increase in net working capital of $9.9 million from June 30, 2001. Account receivables, net, at September 30, 2001 increased 57.2% or $10.3 million over the June 30, 2001 amount, primarily due to increased sales volume and the seasonality of those sales. Seasonality Our sales and operating results have historically reflected seasonal variations. Such seasonal variations are based on the timing of our 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 first and third fiscal quarters ended September 30 and March 31 when sales from such advertising campaigns are principally recognized. These seasonal fluctuations require us to accurately allocate our resources to manage our manufacturing capacity, which often operates at full capacity during peak seasonal demand periods. Recently Issued Accounting Standards 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 was effective for the Company no later than the fourth quarter of the fiscal year ending June 30, 2001, and accordingly, amounts billed to customers related to shipping and handling have been reclassified from cost of goods sold to net sales. FASB Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") was issued in June 2001. SFAS 141 changes the accounting and reporting for business combinations. SFAS 141 is effective for all business combinations initiated after June 30, 2001. FASB Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") was issued in June 2001. SFAS 142 changes the accounting and reporting for acquired goodwill and other intangible assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001 and must be applied at the beginning of an entity's fiscal year. The Company is currently assessing the effect on its financial statements of implementing SFAS 142. 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 possible trend of customers decreasing their use of our products; economic conditions in general and in our market areas, specifically the advertising market; the competitive environment in the sampling industry in general and in our specific market areas; changes in prevailing interest rates; inflation; changes in cost of goods and services; changes in or failure to comply with postal regulations or other federal, state and/or local government regulations; liability and other claims asserted against us; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; our significant indebtedness; labor disturbances; changes in our capital expenditure plans; and other factors. We also advise you to read the section entitled "Risk Factors" in the Company's annual report on Form 10K filed with the SEC on September 18, 2001. 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. We disclaim 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 We generate approximately 21% of our sales from customers outside the United States, principally in Europe. International sales are made mostly from our foreign subsidiary located in France and are primarily denominated in the local currency. Our foreign subsidiary also incurs the majority of its expenses in the local currency and uses the local currency as its functional currency. Our 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. We periodically enter 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, 2001, there were no forward exchange contracts outstanding. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.17 Salary Continuation Agreement dated October 1, 2001, between AKI and Alan Bruce Prashker (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 9, 2001 By: /s/ Kenneth A. Budde ------------------------------- Kenneth A. Budde Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) AKI, INC. Date: November 9, 2001 By: /s/ Kenneth A. Budde ------------------------------- Kenneth A. Budde Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit Description - ------- ----------- 10.17 Salary Continuation Agreement dated as of October 1, 2001 between AKI and Alan Bruce Prashker EX-10 3 f10q093001ex1017.txt EXHIBIT 10.17 SALARY CONTINUATION AGREEMENT THIS SALARY CONTINUATION AGREEMENT (the "Agreement") entered into as of October 1, 2001, by and between ARCADE MARKETING, INC. (the "Company"), a Delaware corporation, and Alan Bruce Prashker (the "Employee"), an individual residing at 78 Tennyson Drive, Short Hills, New Jersey 07078; W I T N E S S E T H: WHEREAS, the Company is engaged in the business of, among other things, manufacturing, marketing and distributing olfactory, cosmetic/skincare/beauty care (including but not limited to treatment, makeup and lipstick) and flavor sampling and interactive advertising products and encapsulated ingredients and printed materials as they relate to sampling and is in the process of developing single dosage products and is engaged in manufacturing, marketing and distributing nail and hair care sampling products, scented greeting card products and also engages in, or provides, creative services, sales promotion services, marketing communications services, direct mail and response services, data base marketing services, point of sale merchandising and sampling and multimedia in-store advertising and/or merchandising; and WHEREAS, the Company desires to employ the Employee, and the Employee desires to be employed by the Company, on the terms and conditions of this Agreement; and WHEREAS, the Employee is not a party to any other contract or subject to the terms of any other agreement, which contract or agreement would prohibit him from being a party to this Agreement or otherwise being employed by the Company; NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Effective Date. The Effective Date of this Agreement shall be October 1, 2001 (the "Effective Date). 2. Employment. (a) Subject to the provisions of Section 7 hereof, the Company agrees to employ the Employee as a Senior Vice President of the Company or in such other management capacity as may later be decided by the Chief Executive Officer of the Company (the "CEO"). During such employment, Employee shall perform such management services as the CEO may from time to time designate. The Employee shall report to the CEO of the Company. The Employee's primary place of employment shall be the Company's office in New York City; however, the Employee shall undertake such travel as is reasonable and customary in the execution of the Employee's duties hereunder. (b) During his employment, excluding periods of vacation, sick leave and disability to which the Employee is entitled, the Employee agrees to devote his full business time, attention, knowledge and skills, faithfully and diligently to the best of his ability, to the business and affairs of the Company and its affiliates. 3. Compensation. (a) Base Salary. During his employment, the Company agrees to pay, or to cause to be paid to the Employee, an annual base salary of two hundred and five thousand dollars ($205,000.00) or as may be increased from time to time at the sole discretion of the CEO (hereinafter referred to as the "Base Salary"). Such Base Salary shall be earned and accrued on a per day basis and be payable in accordance with the Company's customary practices applicable to its executive employees. (b) Annual Bonus. The Employee shall be eligible to participate in the Salaried Employees Bonus Plan adopted by the Company for each fiscal year ending during his employment (each, a "Bonus Plan") pursuant to which the Employee may earn an annual bonus (the "Annual Bonus"). If the Company's financial goals as set forth in the Bonus Plan are met and if the other criteria set forth in the Bonus Plan are met, the amount of the Annual Bonus for which the Employee may be eligible during any fiscal year may be up to a target as determined for each year's Bonus Plan (the "Target Amount"). Under certain circumstances as set forth in the Bonus Plan for the applicable fiscal year, the Employee may be eligible for an Annual Bonus in an amount in excess of the Target Amount. The Annual Bonus shall be payable to the Employee on the later of ten (10) days after the Company's auditors deliver their audit opinion/certification report of the relevant fiscal year's annual financial statements of the Company or sixty (60) days after the end of the relevant fiscal year, beginning with the fiscal year ending June 30, 2000; provided, however, that for any such fiscal year, the amount of the Annual Bonus shall be prorated based on the number of weeks within such fiscal year during which the Employee is employed by the Company. The Employee acknowledges that the performance of his duties are subject to the direction of the CEO and that his entitlement to an Annual Bonus as set forth herein shall have no impact on the discretion of the CEO in delegating authority and duties to him. If the Employee's employment is terminated, the Employee shall only be entitled to receive an Annual Bonus for the fiscal year of the Company during which the Termination Date (as defined in Section 9(b) ) occurs to the extent specified in Section 8. To the extent that an Annual Bonus is payable under Section 8, such Annual Bonus shall be payable notwithstanding any provision of the Bonus Plan requiring an employee to be employed by the Company on the date a bonus is payable. (c) Stock Option Plan. During his employment, the Employee shall be entitled to participate as an executive employee in the stock option plan of AHC I Acquisition Corp., the remote parent corporation of the Company, in accordance with the terms of such plan, as it may be amended from time to time. 4. Employee Benefits. During his employment, the Employee shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company and made available to employees of the same or similar position at the Company, generally, including, without limitation, any retirement, profit sharing, savings, medical, hospitalization, disability, dental, life or travel accident insurance benefit plans, but only to the extent maintained by the Company and only to the extent that the Employee qualifies under the terms of such plans. Unless otherwise provided herein, the compensation and benefits under, and the Employee's participation in, such plans, practices and programs shall be on the same basis and terms as are applicable to employees of the same or similar position at the Company. 2 5. Expenses. The Employee shall be entitled to receive,in accordance with normal Company practices, prompt reimbursement of all expenses reasonably incurred by him in connection with the performance of his duties hereunder or for promoting, pursuing or otherwise furthering the business or interests of the Company. 6. Vacation and Sick Leave. (a) The Employee shall be entitled to annual vacation in accordance with the policies periodically established for similarly situated employees of the Company, provided that the Employee must schedule such vacation at times approved by the CEO so that it does not interfere with the performance of his duties under this Agreement. (b) The Employee shall be entitled to sick leave and personal days (without loss of pay) in accordance with the Company's policies in effect from time to time. 7. Termination.The Employee's employment hereunder may be terminated under the following circumstances: (a) Cause. The Company may terminate the Employee's employment at any time for "Cause." For purposes of this Agreement, "Cause" means: (i) the material failure or neglect by the Employee to perform his duties hereunder or any other material breach or violation of any of the terms and conditions of this Agreement; or (ii) if the Employee should be convicted of a violation of the laws of the United States or any state thereof, that violation involving personal dishonesty or being punishable as a felony. (b) Disability. If the Employee fails, because of physical or mental illness or other incapacity, for a period of sixty (60) days in the aggregate during any twelve-month period to substantially perform his duties under this Agreement ("Disability"), the Company may terminate the Employee's employment (c) Death. The Employee's employment shall terminate immediately upon the death of the Employee. (d) Upon Notice by Company. The Company may terminate the Employee's employment at any time without Cause by giving a Notice of Termination. (e) Upon Notice by Employee. The Employee may terminate his employment at any time by giving a Notice of Termination not less than sixty (60) days prior to the Termination Date. 8. Compensation Upon Termination. Upon termination of the Employee's employment, the Employee shall be entitled to the following benefits: (a) If the Employee's employment with the Company shall be terminated by reason of death or disability or by the Company pursuant to Section 7(d), the Company shall pay 3 the Employee (i) only that portion of his Base Salary which has been earned and is accrued but unpaid through the Termination Date, (ii) if, but only if, the Termination Date is after the end of the ninth full month of the Company's fiscal year, his Annual Bonus prorated for the number of weeks in such fiscal year during which the Employee has been employed by the Company under this Agreement, provided that such Annual Bonus has been earned in accordance with the Bonus Plan for the fiscal year during which the Termination Date occurs, (iii) reimbursement for reasonable and necessary expenses incurred by the Employee on behalf of the Company during the period ending on the Termination Date, and (iv) accrued vacation pay. If the Employee's employment is terminated by the Company pursuant to Section 7(d), the Company shall make available such COBRA benefits as are required under applicable law and (i) the employee shall be entitled to severance benefits in accordance with company policy and practices or (ii) if such termination occurs pursuant to or within one year following a Change of Control of the Company (hereinafter defined), the Company shall also pay to the Employee severance pay equal to one hundred percent (100%) of the Employee's Base Salary as at the Termination Date ("Severance Pay Amount"). The Severance Pay Amount shall be payable in accordance with the normal payroll frequency practices beginning in the month following the month in which the Termination Date occurs, until the Severance Pay Amount is paid in full. The prorated Annual Bonus shall be payable not later than ninety (90) days following the end of the Company's fiscal year; provided, however, that notwithstanding anything in this Agreement to the contrary, the Employee shall not be entitled to receive any portion of the Annual Bonus for the fiscal year in which the Termination Date occurs if the Termination Date occurs prior to the end of the ninth full month of such fiscal year. (b) If the Employee's employment with the Company shall be terminated (1) by the Company for Cause, or (2) by the Employee, the Company shall pay the Employee (i) only that portion of his Base Salary which has been earned and is accrued but unpaid through the Termination Date, and (ii) reimbursement for reasonable and necessary expenses incurred by the Employee on behalf of the Company during the period ending on the Termination Date. The Employee shall not be entitled to receive any other benefits or compensation, including without limitation all or any part of any Annual Bonus for the Company's fiscal year during which the Termination Date occurs. (c) For purposes of this Agreement, a "Change in Control" of the Company occurs if (i) any "Person" (as such term is used in Sections 13(d) and 14 of the Securities Exchange Act of 1934, as amended ("Exchange Act")), other than (A) DLJ Merchant Banking II, Inc. or any of its affiliates or any combination thereof (collectively, the "DLJ Entities"), (B) William J. Fox or any of his affiliates or any combination thereof (collectively, the "Fox Parties"), or (C) any combination of DLJ Entities and/or the Fox Parties, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total combined voting power of all classes of capital stock of the Company normally entitled vote for the election of directors of the Company or (ii) the Board shall approve a sale of all or substantially all of the assets of the Company, in one transaction or a series of related transactions, other than to an entity owned or controlled by the DLJ Entities or the Fox Parties or any combination thereof. 9. Definitions. (a) Notice of Termination. For purposes of the Agreement, a "Notice of Termination" shall mean a written notice of termination of the Employee's employment, signed by the CEO if from the Company and by the Employee if from the Employee, which indicates the specific termination provision in this Agreement, if any, relied upon. 4 (b) Termination Date, Etc. For purposes of this Agreement, Termination Date shall mean (i) in the case of the Employee's death, his date of death, (ii) if the Employee's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination for Cause under Section 7(a)(ii) shall not be less than seven (7) days from the date such Notice of Termination is given and in the case of a termination by the Employee under Section 7(e) shall not be less than sixty (60) days from the date such Notice of Termination is given). 10. Restrictive Covenants. (a) Covenants Against Competition. The Employee acknowledges that (i) the Company is currently engaged in the business of manufacturing, marketing and distributing, directly and through licensees (collectively, the "Activities"), olfactory, cosmetic/skin care/beauty care (including but not limited to treatment, makeup, and lipstick) and flavor sampling and interactive advertising products and encapsulated ingredients and printed materials as they relate to sampling, and is in the process of developing single dosage products and is currently engaged in the Activities with respect to nail and hair care sampling products and scented greeting card products, and also engages in, or provides, creative services, sales promotion services, marketing communications services, direct mail and response services, data base marketing services, point of sale merchandising and sampling, multimedia in-store advertising and/or merchandising (each a "Business Line" and collectively, the "Company Business"); (ii) the Company Business is conducted throughout North America, Europe (including the United Kingdom), South America, Asia and Australia (the "Restricted Area"); (iii) the Employee's work for the Company will give the Employee access to trade secrets of, and confidential information concerning, the Company; and (iv) the agreements and covenants contained in this Agreement are essential to protect the business and good will of the Company. Accordingly, the Employee covenants and agrees as follows: (i) Non-Compete. During the period of the Employee's employment hereunder and for a period of one (1) year thereafter or for a period of one year following the payment in full of any Severance Pay Amount to which the Employee is entitled, whichever is the longer period (the "Restricted Period"), the Employee shall not (except by reason of and in the Employee's capacity as an employee of the Company), and shall not permit any of his affiliates to, either themselves, or as a stockholder, partner, associate, employee, director, officer, advisor, consultant, owner, agent, creditor, coventurer or any person, or otherwise, directly or indirectly, establish, engage in, become employed by or associated with, any business, trade or occupation which is competitive with the Company Business in the Restricted Area or which involves the development, design, licensing, sale, distribution or manufacture of any products or services which are competitive with the Company Business in the Restricted Area. (ii) Interference with Employment Relationships. The Employee shall not, and will not permit his affiliates to, during the Restricted Period, hire, solicit or cause others to hire or solicit, or take any action which is calculated to persuade, or have the effect of persuading, any employees, representatives or agents of the Company or its affiliates (i) who are engaged in the Company Business, or (ii) whom the Employee has become aware of, or has come in contact with, including during the course of the negotiation of this Agreement and the consummation of the transactions contemplated hereby, to terminate their employment or other relationship with the Company or its affiliates. 5 (iii) Interference with Business Relationships. The Employee shall not and will not permit any of his affiliates to, during the Restrictive Period, interfere in any way with the relationship (or prospective relationship which is under cultivation) between the Company or its affiliates and any customer, supplier, licensee or prospect of the Company or its affiliates. Without limiting the foregoing, the Employee shall not request, encourage, advise or attempt to persuade in any manner (including by making unfavorable or negative comments with respect to the Company, or its affiliates, products or conduct of business) any customers, suppliers or licensees of the Company or its affiliates to curtail or cancel such customer's, supplier's or licensees business relationship with the Company or its affiliates. (iv) Confidential Information. The Employee acknowledges that the Company has a legitimate and continuing proprietary interest in the protection of its confidential information and that it has invested substantial sums and will continue to invest substantial sums to develop, maintain and protect confidential information. The Employee agrees that, during and after the Restricted Period, the Employee shall, and shall cause his affiliates to, keep secret and retain in strictest confidence, and shall not use or disclose to any person whatsoever for their benefit or the benefit of others any proprietary, confidential or secret matters used in, associated with or related to the Company or the Company Business ("Confidential Information") including know-how, technology, financial information, trade secrets, customer lists, names or identities, details of client or consultant contracts, pricing policies, operational methods, marketing plans or strategies, product development techniques or plan, business acquisition plans, new personnel acquisition plans, methods of manufacture, processes, formulas, designs and design projects, computer programs, inventions and research projects of the Company, its affiliates, or any other entity which may hereafter become an affiliate thereof, learned, acquired or developed by the Employee while employed by the Company. Notwithstanding the foregoing, Confidential Information shall not include information which (i) is already in the public domain through no breach of the Employee or his affiliates of this Agreement or any other agreement with the Company, (ii) the Employee can provide evidence reasonably satisfactory to the Company that such information was legally in his possession without restriction prior to the Effective Date, or (iii) is disclosed in any printed patent or other publications without breach of any duty of confidentiality. (v) Property of the Company. All memoranda, notes, lists, records, engineering drawings, technical specifications and related documents and other documents or papers (and all copies thereof) relating to the Company or the Company Business, including such items stored in computer memories, microfiche or by any other means, made or compiled by or on behalf of the Employee during the course of the Employee's employment by the Company, or made available to the Employee during the course of the Employee's employment by the Company relating to the Company, its affiliates or any entity which may hereafter become an affiliate thereof (collectively, "Company Property"), shall be the property of the Company. The Employee shall promptly deliver to the Company all Company Property upon the termination of the Employee's employment with the Company, or at any other time upon request, and shall not retain any Company Property in any form whatsoever. (vi) Original Material. The Employee acknowledges that the compensation paid to the Employee by the Company during the Employee's employment by the Company is intended to and does compensate the Employee for the Employee's originality, innovativeness and inventiveness as it relates to the Company Business. The Employee agrees that any inventions, discoveries, improvements, ideas, concepts or original works of authorship relating to the Company Business, including computer apparatus, programs and manufacturing techniques, 6 whether or not protectable by patent or copyright, that have been originated, developed, make conceived, authored or reduced to practice by the Employee alone or jointly with others during the Employee's employment with the Company shall be the property of and belong exclusively to the Company. The Employee shall promptly and fully disclose to the Company the origination or development by the Employee of any such material and shall provide the Company with any information that it may reasonably request about such material. (vii) Post-Employment Property. The Employee agrees that any and all intellectual property which the Employee invents, discovers, originates, makes, conceives, creates or authorizes either solely or jointly with others and which is the result of or is substantially derived from Confidential Information is reduced to writing, drawings or practice after the termination of the Employee's employment by the Company for any reason, with or without cause, shall be the sole and exclusive property of the Company. The Employee shall promptly and fully disclose all such property to the Company. (b) Rights and Remedies Upon Breach. If the Employee breaches, or threatens to commit a breach of, any of the provisions contained in Section 10 of this Agreement (the "Restrictive Covenants"), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity: (i) Specific Performance. Recognizing that the remedy at law for any breach or threatened breach of the covenants contained in this Section 10 may be inadequate, in the event of any breach or threatened breach of such covenants by the Employee, in addition to any and all other legal and equitable remedies which may be available, the Company, or its successors or assigns, may obtain temporary and permanent injunctive relief, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such breach and without notice. (ii) Accounting. The Company shall have the right and remedy to require the Employee to account for and pay over to the Company all compensation, profits, moneys, accruals, increments or other benefits derived or received by the Employee as the result of any action constituting a breach of the Restrictive Covenants. (iii) Tolling. If the Employee engages in any business in violation of the Restrictive Covenants, the running of the periods of limitation referred to in this Section 10 shall be tolled until such violation shall cease and shall begin to run again only when the Employee shall be in compliance with the provisions of such covenants, whether voluntarily or pursuant to an order of a court. (c) Independence of Covenants. The covenants contained in this Section 10 shall be construed as independent of any other provisions of this Agreement, and the existence of any other claim or cause of action by the Employee against the Company shall not constitute a defense to the enforcement of the Restrictive Covenants. (d) Severability of Covenants. The Employee acknowledges and agrees that the Restrictive Covenants are reasonable and valid in duration and geographical scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is 7 invalid or unenforceable, (i) the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect without regard to the invalid portions, or (ii) such Restrictive Covenants may be reduced or limited by such court so as to make such Restrictive Covenants valid and the remainder of the Restrictive Covenants shall not thereby be affected. 11. Successors and Assigns. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns. The term "Company" as used herein shall include such Successors and Assigns. The term "Successors and Assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company, as the case may be (including this Agreement), whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Employee, his beneficiaries or legal representative, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Employee's legal personal representative. 12. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be sent by nationally-recognized overnight delivery service or certified, registered or express mail, postage prepaid, return receipt requested, addressed as set forth below; receipt shall be deemed to occur on the earlier of the date of actual receipt or receipt by the sender of confirmation that the delivery or transmission was completed or that the addressee has refused to accept such delivery or has changed its address without giving notice of such change as set forth herein. (a) if to the Company, to: Arcade Marketing, Inc. 120 East 56th Street New York, New York 10022 Attention: Chairman & CEO with a copy to counsel for the Company: Baker, Donelson, Bearman & Caldwell 1800 Republic Centre 633 Chestnut Street Chattanooga, Tennessee 37450 Attention: Thomas O. Helton, Esquire (b) if to the Employee, to: Mr. Alan Bruce Prashker 78 Tennyson Drive Short Hills, New Jersey 07078 Either party may change its address for notice hereunder by notice to the other party hereto in accordance with the terms of this Section. 8 13. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Employee and the company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a wavier of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 14. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Tennessee without giving effect to the conflict of law principles thereof. 15. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 9 16. Entire Agreement. This Agreement constitute the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has executed this Agreement as of the day and year first above written. ARCADE MARKETING, INC. By: /S/ William J. Fox ---------------------------- Title: President and CEO ------------------------- /S/ Alan Bruce Prashker -------------------------------- Alan Bruce Prashker 10 -----END PRIVACY-ENHANCED MESSAGE-----