-----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, FRP/o+iIfewW8dAhAwZvExnFddOZRq1VgHFEh+p8gftTEIeDQOEW3ViGi81ZixKD V0TRcjwCk2l9qeaI298EXg== 0001067550-03-000027.txt : 20031107 0001067550-03-000027.hdr.sgml : 20031107 20031107153121 ACCESSION NUMBER: 0001067550-03-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031107 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: 1934 Act SEC FILE NUMBER: 333-60991 FILM NUMBER: 03985017 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: 1934 Act SEC FILE NUMBER: 333-60989 FILM NUMBER: 03985018 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 f10q093003.txt 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, 2003 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) ( ) Yes (X) No As of October 31, 2003, 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, 2003 - June 30, 2003 Consolidated Condensed Statements of Operations - Three months ended September 30, 2003 - Three months ended September 30, 2002 Consolidated Condensed Statement of Changes in Stockholder's Equity - Three months ended September 30, 2003 Consolidated Condensed Statements of Cash Flows - Three months ended September 30, 2003 - Three months ended September 30, 2002 Notes to Consolidated Condensed Financial Statements Item 1. Financial Statements (unaudited) (continued) AKI, Inc. and Subsidiaries Consolidated Condensed Balance Sheet - September 30, 2003 - June 30, 2003 Consolidated Condensed Statements of Operations - Three months ended September 30, 2003 - Three months ended September 30, 2002 Consolidated Condensed Statement of Changes in Stockholder's Equity - Three months ended September 30, 2003 Consolidated Condensed Statements of Cash Flows - Three months ended September 30, 2003 - Three months ended September 30, 2002 Notes to Consolidated Condensed Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Discussions About Market Risk Item 4. Controls and Procedures Part II. OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders 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, 2003 2003 ------------- ------------- (unaudited) (unaudited) ASSETS Current assets Cash and cash equivalents.................................................. $ 5,323 $ 1,470 Accounts receivable, net................................................... 29,990 20,267 Inventory.................................................................. 8,766 7,265 Income tax receivable...................................................... - 4,166 Prepaid expenses........................................................... 1,358 671 Deferred income taxes...................................................... 808 808 ------------- ------------- Total current assets.................................................... 46,245 34,647 Property, plant and equipment, net......................................... 15,472 16,584 Goodwill .................................................................. 152,994 152,994 Other intangible assets, net............................................... 10,867 11,307 Deferred charges, net...................................................... 2,868 3,032 Other assets............................................................... 134 138 ------------- ------------- Total assets............................................................ $ 228,580 $ 218,702 ============= ============= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Current portion of long-term debt.......................................... $ 1,937 $ 1,875 Accounts payable, trade.................................................... 8,121 5,444 Accrued income taxes....................................................... 1,469 - Accrued compensation....................................................... 3,019 4,333 Accrued interest........................................................... 2,972 5,502 Accrued expenses........................................................... 3,031 3,661 ------------- ------------- Total current liabilities............................................... 20,549 20,815 Revolving credit line...................................................... 18,037 10,000 Term loan.................................................................. 5,750 6,250 Senior notes............................................................... 103,510 103,510 Promissory note to affiliate............................................... 375 - Deferred income taxes...................................................... 968 1,142 Other non-current liabilities.............................................. 1,012 1,740 ------------- ------------- Total liabilities....................................................... 150,201 143,457 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 Retained earnings (accumulated deficit).................................... 215 (3,116) Accumulated other comprehensive income..................................... 238 435 Carryover basis adjustment................................................. (15,730) (15,730) ------------- ------------- Total stockholder's equity.............................................. 78,379 75,245 ------------- ------------- Total liabilities and stockholder's equity.............................. $ 228,580 $ 218,702 ============= =============
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, 2003 September 30, 2002 ------------------ ------------------ (unaudited) (unaudited) Net sales................................................. $ 37,258 $ 30,400 Cost of goods sold........................................ 23,535 18,515 ----------- ----------- Gross profit....................................... 13,723 11,885 Selling, general and administrative expenses.............. 4,685 4,664 Amortization of other intangibles......................... 286 286 ----------- ----------- Income from operations............................. 8,752 6,935 Other expenses: Interest expense....................................... 3,214 3,738 Management fees and other, net......................... 100 63 ----------- ----------- Income before income taxes......................... 5,438 3,134 Income tax expense........................................ 2,107 1,247 ----------- ----------- Net income ........................................ $ 3,331 $ 1,887 =========== ===========
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 Retained Other Additional Earnings Comprehensive Carryover Common Stock Paid-in (Accumulated Income Basis Shares Dollars Capital Deficit) (Loss) Adjustment Total ------ ------- ------- -------- ------ ---------- ----- Balances, June 30, 2003 (unaudited)....... 1,000 $ - $ 93,656 $ (3,116) $ 435 $ (15,730) $ 75,245 Net income (unaudited).................... 3,331 3,331 Other comprehensive loss, net of tax: Foreign currency translation adjustment (unaudited)............... (197) (197) --------- Comprehensive income (unaudited).......... 3,134 ----- ------ ---------- ---------- ------- ---------- --------- Balances, September 30, 2003 (unaudited).. 1,000 $ - $ 93,656 $ 215 $ 238 $ (15,730) $ 78,379 ===== ======= ========== ========== ======= ========== =========
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, 2003 September 30, 2002 ------------------ ------------------ (unaudited) (unaudited) Cash flows from operating activities Net income........................................................ $ 3,331 $ 1,887 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization of other intangibles.............. 1,844 1,855 Amortization of debt discount................................... - 537 Amortization of debt issuance costs............................. 164 174 Deferred income taxes........................................... (174) (340) Other........................................................... (921) (336) Changes in operating assets and liabilities: Accounts receivable........................................... (9,723) 235 Inventory..................................................... (1,501) (1,748) Prepaid expenses, deferred charges and other assets........... (687) (543) Accounts payable and accrued expenses......................... (1,799) (5,669) Income taxes.................................................. 5,635 446 ----------- ----------- Net cash used in operating activities....................... (3,831) (3,502) ----------- ----------- Cash flows from investing activities Purchases of equipment............................................ (243) (828) Patents........................................................... (48) (32) ----------- ----------- Net cash used in investing activities....................... (291) (860) ----------- ----------- Cash flows from financing activities Net proceeds on revolving loan.................................... 8,037 3,925 Net repayments on term loan....................................... (437) (250) Net proceeds from promissory note to stockholder.................. 375 355 ----------- ----------- Net cash provided by financing activities................... 7,975 4,030 ----------- ----------- Net increase (decrease) in cash and cash equivalents................. 3,853 (332) Cash and cash equivalents, beginning of period....................... 1,470 1,875 ----------- ----------- Cash and cash equivalents, end of period............................. $ 5,323 $ 1,543 =========== =========== Supplemental information Net cash paid (received) during the period for: Interest........................................................ $ 5,540 $ 5,706 Income taxes.................................................... (3,171) 1,179
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 multi-sensory, interactive marketing activities primarily from the sale of printed advertising materials with sampling systems and other sampling products to fragrance, cosmetics and consumer products companies, and creative services. Products are produced and distributed from Chattanooga, Tennessee and Baltimore, Maryland facilities and distributed in Europe through its French subsidiary, Arcade Europe S.A.R.L. Recently Issued Accounting Standards FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN 46") was issued in January 2003. FIN 46 requires an investor with a majority of the variable interests in a variable interest entity ("VIE") to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the equity investors do not have a controlling interest, or the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated financial support from the other parties. For arrangements entered into with VIEs created prior to February 1, 2003, the provisions of FIN 46 are required to be adopted at the beginning of the first interim or annual period ending after December 15, 2003. The Company is currently reviewing its investments and other arrangements to determine whether any of its investee companies are VIEs. The Company does not expect to identify any significant VIEs that would be consolidated, but may be required to make additional disclosures. The Company's maximum exposure related to any investment that may be determined to be in a VIE is limited to the amount invested. The provisions of FIN 46 are effective immediately for all arrangements entered into with new VIEs created after January 31, 2003. The Company has not invested in any new VIEs created after January 31, 2003. Interim financial statements The interim consolidated condensed balance sheet at September 30, 2003 and the interim consolidated condensed statements of operations for the three months ended September 30, 2003 and 2002, the interim consolidated condensed statements of cash flows for the three months ended September 30, 2003 and 2002 and the interim consolidated condensed statement of changes in stockholder's equity for the three months ended September 30, 2003 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, 2003 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. The interim consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto for the year ended June 30, 2003 as filed on Form 10-K. AKI HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 1. BASIS OF PRESENTATION (Continued) Stock Based Compensation The Company has elected to account for its stock based compensation with employees under the intrinsic value method of APB 25 as permitted under SFAS 123. Under the intrinsic value method, because the stock price of the Company's employee stock options equaled the fair value of the underlying stock on the date of grant, no compensation expense was recognized. If the Company had elected to recognize compensation expense based on the fair value of the options at grant date as prescribed by SFAS 123, the net income would have been as follows: Three months ended September 30, ------------- 2003 2002 ---- ---- Net income, as reported................. $ 3,331 $ 1,887 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects...... 8 9 --------- --------- Pro forma net income.................... $ 3,323 $ 1,878 ========= ========= 2. INVENTORY The following table details the components of inventory: September 30, 2003 June 30, 2003 ------------------ ------------- (unaudited) (unaudited) Raw materials Paper.......................... $ 1,926 $ 1,740 Other raw materials............ 2,961 2,353 ----------- ----------- Total raw materials........ 4,887 4,093 Work in process.................... 4,586 3,857 Reserve for obsolescence........... (707) (685) ----------- ----------- Total inventory.................... $ 8,766 $ 7,265 =========== =========== AKI HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 3. COMPREHENSIVE INCOME Comprehensive income consists of net income, plus certain changes in assets and liabilities that are not included in net income but are instead reported within a separate component of shareholders' equity under generally accepted accounting principles. The Company's comprehensive income was as follows: Three months ended September 30, ------------- 2003 2002 ---- ---- Net income................................. $ 3,331 $ 1,887 Other comprehensive income (loss) , net of tax: Foreign currency translation adjustments.............................. (197) 373 --------- --------- Comprehensive income....................... $ 3,134 $ 2,260 ========= ========= 4. CONTINGENCIES The Beautiful Bouquet Company, Ltd. (the "Licensor") filed suit against the Company alleging breaches of a Patent and Know-How License agreement, as amended (the "License Agreement"). Under the License Agreement, the Company licenses certain intellectual property related to one of the Company's products for which the Company is obligated to pay the Licensor a royalty based on sales of the product and a minimum annual royalty. The Licensor alleges the Company committed a number of breaches, including a breach of the License Agreement and a breach of fiduciary duty owed to the Licensor, and is seeking to recover unspecified amounts under the terms of the License Agreement and all amounts due it under the Company's unjust enrichment of the Licensor's intellectual property rights. The Company believes that it has valid defenses to the Licensor's claims, that it did not breach any provision of the License Agreement, and that the License Agreement is valid and enforceable. The Company believes that Licensor 's claims are without merit, and intends to vigorously defend against its claims. AKI HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 5. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS The following condensed balance sheets at September 30, 2003 and June 30, 2003 and condensed statements of operations and cash flows for the three months ended September 30, 2003 and 2002 and the condensed statement of changes in stockholder's equity for the three months ended September 30, 2003 for Holding have been prepared on the equity basis of accounting and should be read in conjunction with the consolidated statements and notes thereto. BALANCE SHEET
September 30, 2003 June 30, 2003 ------------------ ------------- (unaudited) (unaudited) Assets Investment in subsidiaries............................... $ 93,871 $ 87,385 Income tax receivable.................................... - 3,155 ----------- ----------- Total assets......................................... $ 93,871 $ 90,540 =========== =========== Liabilities Total liabilities.................................... $ - $ - ---------- ---------- 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 Retained earnings (accumulated deficit).................. 215 (3,116) ----------- ----------- Total stockholder's equity........................... 93,871 90,540 ----------- ----------- Total liabilities and stockholder's equity........... $ 93,871 $ 90,540 =========== ===========
STATEMENT OF OPERATIONS
Three months ended ---------------------------------------- September 30, 2003 September 30, 2002 ------------------ ------------------ (unaudited) (unaudited) Equity in net income of subsidiaries..................... $ 3,331 $ 2,257 Interest expense......................................... - (550) ----------- ----------- Income before income taxes........................... 3,331 1,707 Income tax benefit....................................... - (180) ----------- ----------- Net income........................................... $ 3,331 $ 1,887 =========== ===========
AKI HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 5. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued) STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
Retained Additional Earnings Common Stock Paid-in (Accumulated Shares Amount Capital Deficit) Total ------ ------ ------- -------- ----- Balances, June 30, 2003 (unaudited)........... 1,000 $ - $ 93,656 $ (3,116) $ 90,540 Net income (unaudited)........................ 3,331 3,331 ----- -------- ---------- ----------- ----------- Balances, September 30, 2003 (unaudited)...... 1,000 $ - $ 93,656 $ 215 $ 93,871 ===== ======== ========== =========== ===========
STATEMENT OF CASH FLOWS
Three months ended ---------------------------------------- September 30, 2003 September 30, 2002 ------------------ ------------------ (unaudited) (unaudited) Cash flows from operating activities Net income.................................................... $ 3,331 $ 1,887 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net change in investment in subsidiaries............... (3,331) (2,257) Amortization of debt discount.......................... - 537 Amortization of debt issuance costs.................... - 13 Deferred income taxes.................................. - (180) Changes in operating assets and liabilities: Income tax receivable.............................. 3,155 - ----------- ----------- Net cash provided by (used in) operating activities... 3,155 - ----------- ----------- Cash flows from financing activities Repayment of long-term debt............................ - - Capital contribution to subsidiary..................... (3,155) - ----------- ----------- Net cash provided by (used in) financing activities (3,155) - ----------- ----------- 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, 2003 2003 ------------- ------------- (unaudited) (unaudited) ASSETS Current assets Cash and cash equivalents.................................................. $ 5,323 $ 1,470 Accounts receivable, net................................................... 29,990 20,267 Inventory.................................................................. 8,766 7,265 Income tax receivable...................................................... - 1,011 Prepaid expenses........................................................... 1,358 671 Deferred income taxes...................................................... 808 808 ------------- ------------- Total current assets.................................................... 46,245 31,492 Property, plant and equipment, net......................................... 15,472 16,584 Goodwill .................................................................. 152,994 152,994 Other intangible assets, net............................................... 10,867 11,307 Deferred charges, net...................................................... 2,868 3,032 Other assets............................................................... 134 138 ------------- ------------- Total assets............................................................ $ 228,580 $ 215,547 ============= ============= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Current portion of long-term debt.......................................... $ 1,937 $ 1,875 Accounts payable, trade.................................................... 8,121 5,444 Accrued income taxes....................................................... 1,469 - Accrued compensation....................................................... 3,019 4,333 Accrued interest........................................................... 2,972 5,502 Accrued expenses........................................................... 3,031 3,661 ------------- ------------- Total current liabilities............................................... 20,549 20,815 Revolving credit line...................................................... 18,037 10,000 Term loan.................................................................. 5,750 6,250 Senior notes............................................................... 103,510 103,510 Promissory note to affiliate............................................... 375 - Deferred income taxes...................................................... 968 1,142 Other non-current liabilities.............................................. 1,012 1,740 ------------- ------------- Total liabilities....................................................... 150,201 143,457 Stockholder's equity Common stock, $0.01 par 100,000 shares authorized; 1,000 shares issued and outstanding..................................... - - Additional paid-in capital................................................. 85,667 82,512 Retained earnings.......................................................... 8,204 4,873 Accumulated other comprehensive income .................................... 238 435 Carryover basis adjustment................................................. (15,730) (15,730) -------------- ------------- Total stockholder's equity.............................................. 78,379 72,090 ------------- ------------- Total liabilities and stockholder's equity.............................. $ 228,580 $ 215,547 ============= =============
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, 2003 September 30, 2002 ------------------ ------------------ (unaudited) (unaudited) Net sales................................................. $ 37,258 $ 30,400 Cost of goods sold........................................ 23,535 18,515 ----------- ---------- Gross profit....................................... 13,723 11,885 Selling, general and administrative expenses.............. 4,685 4,664 Amortization of other intangibles......................... 286 286 ----------- ---------- Income from operations............................. 8,752 6,935 Other expenses: Interest expense....................................... 3,214 3,188 Management fees and other, net......................... 100 63 ----------- ---------- Income before income taxes......................... 5,438 3,684 Income tax expense........................................ 2,107 1,427 ----------- ---------- Net income ........................................ $ 3,331 $ 2,257 =========== ==========
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 Retained Other Additional Earnings Comprehensive Carryover Common Stock Paid-in (Accumulated Income Basis Shares Dollars Capital Deficit) (Loss) Adjustment Total ------ ------- ------- -------- ------ ---------- ----- Balances, June 30, 2003 (unaudited)....... 1,000 $ - $ 82,512 $ 4,873 $ 435 $ (15,730) $ 72,090 Capital contribution from AKI Holding Corp.................................. 3,155 3,155 Net income (unaudited).................... 3,331 3,331 Other comprehensive loss, net of tax: Foreign currency translation adjustment (unaudited)............... (197) (197) --------- Comprehensive income (unaudited).......... 3,134 ----- ------ ---------- ---------- ------- ---------- --------- Balances, September 30, 2003 (unaudited).. 1,000 $ - $ 85,667 $ 8,204 $ 238 $ (15,730) $ 78,379 ===== ====== ========== ========== ======= ========== =========
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, 2003 September 30, 2002 ------------------ ------------------ (unaudited) (unaudited) Cash flows from operating activities Net income........................................................ $ 3,331 $ 2,257 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization of other intangibles.............. 1,844 1,855 Amortization of debt issuance cost.............................. 164 161 Deferred income taxes........................................... (174) (160) Other........................................................... (921) (336) Changes in operating assets and liabilities: Accounts receivable........................................... (9,723) 235 Inventory..................................................... (1,501) (1,748) Prepaid expenses, deferred charges and other assets........... (687) (543) Accounts payable and accrued expenses......................... (1,799) (5,669) Income taxes.................................................. 2,480 446 ----------- ----------- Net cash used in operating activities..................... (6,986) (3,502) ----------- ----------- Cash flows from investing activities Purchases of equipment............................................ (243) (828) Patents........................................................... (48) (32) ----------- ----------- Net cash used in investing activities....................... (291) (860) ----------- ----------- Cash flows from financing activities Net proceeds on revolving loan.................................... 8,037 3,925 Net repayments on term loan....................................... (437) (250) Net proceeds from promissory note to affiliate.................... 375 355 Capital contribution from parent.................................. 3,155 - ----------- ----------- Net cash provided by financing activities................... 11,130 4,030 ----------- ----------- Net increase (decrease) in cash and cash equivalents................. 3,853 (332) Cash and cash equivalents, beginning of period....................... 1,470 1,875 ----------- ----------- Cash and cash equivalents, end of period............................. $ 5,323 $ 1,543 =========== =========== Supplemental information Net cash paid (received) during the period for: Interest.......................................................... $ 5,540 $ 5,706 Income taxes...................................................... (3,171) 1,179
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 multi-sensory, interactive marketing activities primarily from the sale of printed advertising materials with sampling systems and other sampling products to fragrance, cosmetics and consumer products companies, and creative services. Products are produced and distributed from Chattanooga, Tennessee and Baltimore, Maryland facilities and distributed in Europe through its French subsidiary, Arcade Europe S.A.R.L. Recently Issued Accounting Standards FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN 46") was issued in January 2003. FIN 46 requires an investor with a majority of the variable interests in a variable interest entity ("VIE") to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the equity investors do not have a controlling interest, or the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated financial support from the other parties. For arrangements entered into with VIEs created prior to February 1, 2003, the provisions of FIN 46 are required to be adopted at the beginning of the first interim or annual period ending after December 15, 2003. The Company is currently reviewing its investments and other arrangements to determine whether any of its investee companies are VIEs. The Company does not expect to identify any significant VIEs that would be consolidated, but may be required to make additional disclosures. The Company's maximum exposure related to any investment that may be determined to be in a VIE is limited to the amount invested. The provisions of FIN 46 are effective immediately for all arrangements entered into with new VIEs created after January 31, 2003. The Company has not invested in any new VIEs created after January 31, 2003. Interim financial statements The interim consolidated condensed balance sheet at September 30, 2003 and the interim consolidated condensed statements of operations for the three months ended September 30, 2003 and 2002, the interim consolidated condensed statements of cash flows for the three months ended September 30, 2003 and 2002 and the interim consolidated condensed statement of changes in stockholder's equity for the three months ended September 30, 2003 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, 2003 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. The interim consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto for the year ended June 30, 2003 as filed on Form 10-K. AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 1. BASIS OF PRESENTATION (continued) Stock Based Compensation The Company has elected to account for its stock based compensation with employees under the intrinsic value method of APB 25 as permitted under SFAS 123. Under the intrinsic value method, because the stock price of the Company's employee stock options equaled the fair value of the underlying stock on the date of grant, no compensation expense was recognized. If the Company had elected to recognize compensation expense based on the fair value of the options at grant date as prescribed by SFAS 123, the net income would have been as follows: Three months ended September 30, ------------- 2003 2002 ---- ---- Net income, as reported................ $ 3,331 $ 2,257 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects..... 8 9 --------- --------- Pro forma net income................... $ 3,323 $ 2,248 ========= ========= 2. INVENTORY The following table details the components of inventory: September 30, 2003 June 30, 2003 ------------------ ------------- (unaudited) (unaudited) Raw materials Paper........................... $ 1,926 $ 1,740 Other raw materials............. 2,961 2,353 ----------- ----------- Total raw materials......... 4,887 4,093 Work in process..................... 4,586 3,857 Reserve for obsolescence............ (707) (685) ----------- ----------- Total inventory..................... $ 8,766 $ 7,265 =========== =========== AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (dollars in thousands, except share and per share information) 3. COMPREHENSIVE INCOME Comprehensive income consists of net income, plus certain changes in assets and liabilities that are not included in net income but are instead reported within a separate component of shareholders' equity under generally accepted accounting principles. The Company's comprehensive income was as follows: Three months ended September 30, ------------- 2003 2002 ---- ---- Net income................................. $ 3,331 $ 2,257 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments.............................. (197) 373 --------- --------- Comprehensive income....................... $ 3,134 $ 2,630 ========= ========= 4. CONTINGENCIES The Beautiful Bouquet Company, Ltd. (the "Licensor") filed suit against the Company alleging breaches of a Patent and Know-How License agreement, as amended (the "License Agreement"). Under the License Agreement, the Company licenses certain intellectual property related to one of the Company's products for which the Company is obligated to pay the Licensor a royalty based on sales of the product and a minimum annual royalty. The Licensor alleges the Company committed a number of breaches, including a breach of the License Agreement and a breach of fiduciary duty owed to the Licensor, and is seeking to recover unspecified amounts under the terms of the License Agreement and all amounts due it under the Company's unjust enrichment of the Licensor's intellectual property rights. The Company believes that it has valid defenses to the Licensor's claims, that it did not breach any provision of the License Agreement, and that the License Agreement is valid and enforceable. The Company believes that Licensor 's claims are without merit, and intends to vigorously defend against its claims. 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 "CP" refers to the business acquired from Color Prelude, Inc. 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 other sampling 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 long-standing relationships with the majority of our customer base. Results of Operations Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002 Net Sales. Net sales for the three months ended September 30, 2003 increased $6.9 million, or 22.7%, to $37.3 million, as compared to $30.4 million for the three months ended September 30, 2002. The increase in net sales was primarily attributable to increased sales of sampling technologies for advertising and marketing of domestic cosmetic and consumer products. Gross Profit. Gross profit for the three months ended September 30, 2003 increased $1.8 million, or 15.1%, to $13.7 million, as compared to $11.9 million for three months ended September 30, 2002. Gross profit as a percentage of net sales decreased to 36.7% in the three months ended September 30, 2003, from 39.1% in the three months ended September 30, 2002. The increase in gross profit is primarily due to the increase in sales volume. The decrease in gross profit as a percentage of net sales is due to changes in product and format mix and reduction in prices of certain fragrance sampling products in response to competitive pressures. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2003 was $4.7 million consistent with the $4.7 million for the three months ended September 30, 2002. Selling, general and administrative expenses as a percent of net sales decreased to 12.6% in the three months ended September 30, 2003, from 15.5% in the three months ended September 30, 2002 primarily because these costs are largely fixed. Income from Operations. Income from operations for the three months ended September 30, 2003 increased $1.9 million, or 27.5%, to $8.8 million, as compared to $6.9 million for the three months ended September 30, 2002. Income from operations as a percentage of net sales increased to 23.6% in the three months ended September 30, 2003, from 22.7% in the three months ended September 30, 2002. The increase in income from operations and income from operations as a percentage of net sales is principally the result of the factors described above. Interest Expense. Interest expense (which includes the amortization of deferred financing costs) for the three months ended September 30, 2003 decreased $0.5 million, or 13.5%, to $3.2 million, as compared to $3.7 million for the three months ended September 30, 2002. The decrease in interest expense is primarily due to a decrease in interest expense related to retired Senior Discount Debentures, the remaining outstanding of which were repurchased in the quarter ending June 30, 2003. Interest expense as a percentage of net sales decreased to 8.6% in the three months ended September 30, 2003, from 12.2% in the three months ended September 30, 2002. Interest expense for AKI for the three months ended September 30, 2003 was $3.2 million consistent with the $3.2 million for the three months ended September 30, 2002. Interest expense as a percentage of net sales decreased to 8.6% in the three months ended September 30, 2003, from 10.5% in the three months ended September 30, 2002. Income Tax Expense. Income tax expense for the three months ended September 30, 2003 increased $0.9 million to $2.1 million. The Company's effective tax rate was 39% in the three months ended September 30, 2003 and 2002. Income tax expense for AKI for the three months ended September 30, 2003 increased $0.7 million to $2.1 million. AKI's effective tax rate was 39% in the three months ended September 30, 2003 and 2002. Liquidity and Capital Resources We have substantial indebtedness and significant debt service obligations. As of September 30, 2003, we had consolidated indebtedness in an aggregate amount of $129.6 million (excluding trade payables, accrued liabilities, deferred taxes and other non-current liabilities), of which approximately $129.6 million was a direct obligation of AKI relating to its notes, term loan, revolving loan and promissory note to affiliate. Borrowings at September 30, 2003 included $18.0 million under the revolving loan and $7.7 million under the term loan and $0.4 million on the promissory note to affiliate. At September 30, 2003 we had $1.7 million available under the revolving loan. At September 30, 2003, we also had $20.6 million in additional outstanding liabilities (including trade payables, accrued liabilities, deferred taxes and other non-current liabilities). AKI's principal liquidity requirements are for debt service requirements and fees under the notes, term loan and revolving loan. 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 the revolving loan and promissory note to affiliate. During the three months ended September 30, 2003, cash totaling $7.0 million was used by operating activities primarily due to the increase in accounts receivable and inventory and the decrease in accrued expenses, partially offset by net income before depreciation and amortization and the increase in accounts payable and income taxes payable. During the three months ended September 30, 2002, cash totaling $3.5 million was used by operating activities primarily due to the increase in inventory and a decrease in accrued interest, accrued compensation and accounts payable, offset partially by an increase in accrued expenses. We define Adjusted EBITDA (also referred to as EBITDA in our credit agreement) as net income or loss plus income taxes; interest expense; loss from early retirement of debt, depreciation, amortization and impairment loss of goodwill and amortization of other intangibles less gain from early retirement of debt. Adjusted EBITDA is not a measure of financial or operating performance, cash flow or liquidity under generally accepted accounting principles, and should not be used by itself or in the place of net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with generally accepted accounting principles as a financial or liquidity measure. We use Adjusted EBITDA to manage and evaluate our business operations. Our management evaluates Adjusted EBITDA because it excludes certain cash and non-cash items that are either beyond our immediate control or that we believe are not characteristic of our underlying business operation for the period in which they are recorded, or both. We believe the presentation of Adjusted EBITDA is relevant because Adjusted EBITDA is a measurement that we and our lenders use to comply with our debt covenants and establish our interest rate on a portion of our debt. Investors should be aware that the way by which we calculate Adjusted EBITDA may not be comparable with similarly titled measures presented by other companies and comparisons of such amounts could be misleading unless all companies and analysts calculate such measures in the same manner. The calculation of Adjusted EBITDA for Holding is as follows (dollars in millions): Three months ended September 30, ------------- 2003 2002 ---- ---- Net income ............................ $ 3.3 $ 1.9 Income tax expense..................... 2.1 1.2 Interest expense....................... 3.2 3.7 Depreciation and amortization of other intangibles.................... 1.8 1.9 --------- --------- Adjusted EBITDA........................ $ 10.4 $ 8.7 ========= ========= The calculation of Adjusted EBITDA for AKI is as follows (dollars in millions): Three months ended September 30, ------------- 2003 2002 ---- ---- Net income............................... $ 3.3 $ 2.2 Income tax expense....................... 2.1 1.4 Interest expense......................... 3.2 3.2 Depreciation and amortization of other intangibles...................... 1.8 1.9 ---------- --------- Adjusted EBITDA.......................... $ 10.4 $ 8.7 ========== ========= In the three months ended September 30, 2003 and 2002, we had capital expenditures of approximatelyz $0.2 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 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. Capital expenditures for the twelve months ending June 30, 2004 are currently estimated to be between $3.0 million and $4.0 million. Based on borrowings outstanding as of September 30, 2003, we expect total cash payments for debt service for the twelve months ending June 30, 2004 to be approximately $14.1 million, consisting of $1.9 million in principal payments under the term loan, $10.9 million in interest payments on the Notes and $1.3 million in interest and fees under the credit agreement. We also expect to make royalty payments of approximately $1.2 million during the twelve months ending June 30, 2004. At September 30, 2003, AKI's cash and cash equivalents and net working capital were $5.3 million and $25.7 million, respectively, representing an increase in cash and cash equivalents of $3.8 million and an increase in net working capital of $15.0 million from June 30, 2003. The increase in working capital is primarily due to the increase in cash and cash equivalents, accounts receivable and inventory. Seasonality Our sales of sampling technologies for advertising and marketing of fragrance products 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 generally 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 allocate our resources to manage our manufacturing capacity, which often operates at full capacity during peak seasonal demand periods. The severity of our seasonal sales variations has decreased over time as we have developed and acquired other sampling technologies for advertising and marketing of cosmetic and consumer products. Contingencies The Beautiful Bouquet Company, Ltd. (the "Licensor") filed suit against the Company alleging breaches of a Patent and Know-How License agreement, as amended (the "License Agreement"). Under the License Agreement, the Company licenses certain intellectual property related to one of the Company's products for which the Company is obligated to pay the Licensor a royalty based on sales of the product and a minimum annual royalty. The Licensor alleges the Company committed a number of breaches, including a breach of the License Agreement and a breach of fiduciary duty owed to the Licensor, and is seeking to recover unspecified amounts under the terms of the License Agreement and all amounts due it under the Company's unjust enrichment of the Licensor's intellectual property rights. The Company believes that it has valid defenses to the Licensor's claims, that it did not breach any provision of the License Agreement, and that the License Agreement is valid and enforceable. The Company believes that Licensor 's claims are without merit, and intends to vigorously defend against its claims. However, if Licensor were to prevail in this lawsuit, the Company's financial condition, results of operations and cash flows could be materially adversely affected. Recently Issued Accounting Standards FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN 46") was issued in January 2003. FIN 46 requires an investor with a majority of the variable interests in a variable interest entity ("VIE") to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the equity investors do not have a controlling interest, or the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated financial support from the other parties. For arrangements entered into with VIEs created prior to February 1, 2003, the provisions of FIN 46 are required to be adopted at the beginning of the first interim or annual period ending after December 15, 2003. The Company is currently reviewing its investments and other arrangements to determine whether any of its investee companies are VIEs. The Company does not expect to identify any significant VIEs that would be consolidated, but may be required to make additional disclosures. The Company's maximum exposure related to any investment that may be determined to be in a VIE is limited to the amount invested. The provisions of FIN 46 are effective immediately for all arrangements entered into with new VIEs created after January 31, 2003. The Company has not invested in any new VIEs created after January 31, 2003. 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: (1) economic conditions in general and in our specific market areas; (2) the significant indebtedness of our company; (3) changes in operating strategy or development plans; (4) the competitive environment in the sampling industry in general and in our specific market areas; (5) changes in prevailing interest rates; (6) changes in or failure to comply with postal regulations or other federal, state and/or local government regulations; (7) changes in cost of goods and services; (8) changes in our capital expenditure plans; (9) the ability to attract and retain qualified personnel; (10) inflation; (11) liability and other claims asserted against us; (12) labor disturbances 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 26, 2003. 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 to 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 24% 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, 2003, there were no forward exchange contracts outstanding. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's chief executive officer and chief financial officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and chief financial officer have concluded as of the end of the period covered by this report that the Company's disclosure controls and procedures are effective. (b) Changes in Internal Controls. There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 31, 2003, The Beautiful Bouquet Company, Ltd. ("BBCo") filed suit in the circuit court of Hamilton County, Tennessee against the Company alleging breaches of a Patent and Know-How License agreement, as amended (the "License Agreement"). Under the License Agreement, the Company licenses certain intellectual property related to the Company's DiscCover(R) product for which the Company is obligated to pay BBCo a royalty based on sales of the DiscCover(R) product and a minimum annual royalty. BBCo alleges in its complaint that during negotiations in 1997 of an Amendment to the License Agreement (the "1997 Amendment") the Company committed a number of breaches, including a breach of the License Agreement, a breach of fiduciary duty owed to BBCo, unjust enrichment and breach of the Amendment to the License Agreement. BBCo seeks to recover unspecified amounts under the terms of the original License Agreement and all amounts due it under the Company's unjust enrichment of BBCo's intellectual property rights. In addition, BBCo seeks to void and/or rescind the 1997 Amendment and restore the License Agreement to its original term, including its expiration on October 21, 2003 unless the required provisions are met. The Company believes that it has valid defenses to BBCo's claims, that it did not breach any provision of the License Agreement, and that the License Agreement is valid and enforceable. The Company believes that BBCo's claims are without merit, and intends to vigorously defend against its claims. However, if BBCo were to prevail in this lawsuit, the Company's financial condition, results of operations and cash flows could be materially adversely affected. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 9, 2003, by unanimous written consent, each of Holding and AKI held its respective annual meeting of stockholders to vote upon the election of directors. The stockholder in each case voted to elect William Fox, David Wittels, High Kirkpatrick, Douglas Fox and David Durkin to serve as directors of each of Holding and AKI until the next annual meeting or until their successors are elected and duly qualified. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.3 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.4 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.* 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.* (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 5, 2003 By: /s/ Kenneth A. Budde ----------------------------------- Kenneth A. Budde Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) AKI, INC. Date: November 5, 2003 By: /s/ Kenneth A. Budde ----------------------------------- Kenneth A. Budde Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) EX-31 3 exhibit31_1for093003.txt Exhibit 31.1 AKI HOLDING CORP. SECTION 302 CERTIFICATIONS (QUARTERLY REPORT) CERTIFICATIONS I, William J. Fox, the President and Chief Executive Officer of AKI Holding Corp., certify that: 1. I have reviewed this quarterly report on Form 10-Q of AKI Holding Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date November 5, 2003 /s/ William J. Fox - ------------------------ William J. Fox President and Chief Executive Officer EX-31 4 exhibit31_2for093003.txt Exhibit 31.2 AKI HOLDING CORP. SECTION 302 CERTIFICATIONS (QUARTERLY REPORT) CERTIFICATIONS I, Kenneth A. Budde, the Chief Financial Officer of AKI Holding Corp., certify that: 1. I have reviewed this quarterly report on Form 10-K of AKI Holding Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date November 5, 2003 /s/ Kenneth A. Budde - ------------------------ Kenneth A. Budde Chief Financial Officer EX-31 5 exhibit31_3for093003.txt Exhibit 31.3 AKI, INC. SECTION 302 CERTIFICATIONS (QUARTERLY REPORT) CERTIFICATIONS I, William J. Fox, the President and Chief Executive Officer of AKI, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-K of AKI, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date November 5, 2003 /s/ William J. Fox - ------------------------ William J. Fox President and Chief Executive Officer EX-31 6 exhibit31_4for093003.txt Exhibit 31.4 AKI, INC. SECTION 302 CERTIFICATIONS (QUARTERLY REPORT) CERTIFICATIONS I, Kenneth A. Budde, the Chief Financial Officer of AKI, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-K of AKI, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date November 5, 2003 /s/ Kenneth A. Budde - ------------------------ Kenneth A. Budde Chief Financial Officer EX-32 7 exhibit32_1for093003.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of AKI Holding Corp. on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, William J. Fox and Kenneth A. Budde, the Chief Executive Officer and Chief Financial Officer, respectively, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of AKI Holding Corp. /s/ William J. Fox - ------------------------ William J. Fox Chief Executive Officer November 5, 2003 /s/ Kenneth A. Budde - ------------------------ Kenneth A. Budde Chief Financial Officer November 5, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 8 exhibit32_2for093003.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of AKI, Inc. on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, William J. Fox and Kenneth A. Budde, the Chief Executive Officer and Chief Financial Officer, respectively, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of AKI, Inc. /s/ William J. Fox - ------------------------ William J. Fox Chief Executive Officer November 5, 2003 /s/ Kenneth A. Budde - ------------------------ Kenneth A. Budde Chief Financial Officer November 5, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----