ITEM 2.
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 March 31,1999
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 74-288316
(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 13-3785855
(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 May 14, 1999, 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.
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
AKI Holding Corp. and Subsidiaries
Consolidated Condensed Balance Sheet
- March 31, 1999 (unaudited)
- June 30, 1998
Consolidated Condensed Statements of Operations
- Three months ended March 31, 1999 (unaudited)
- Three months ended March 31,1998 (unaudited)
- Nine months ended March 31, 1999 (unaudited)
- December 16, 1997 through March 31, 1998
(unaudited)
- July 1, 1997 through December 15, 1997
(Predecessor)
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Nine months ended March 31, 1999 (unaudited)
Consolidated Condensed Statements of Cash Flows
- Nine months ended March 31, 1999 (unaudited)
- December 16, 1997 through March 31, 1998
(unaudited)
- July 1, 1997 through December 15, 1997
(Predecessor)
Notes to Consolidated Condensed Financial Statements
<PAGE>
Item 1. Financial Statements (continued)
AKI, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet
- March 31, 1999 (unaudited)
- June 30, 1998
Consolidated Condensed Statements of Operations
- Three months ended March 31, 1999 (unaudited)
- Three months ended March 31, 1998 (unaudited)
- Nine months ended March 31, 1999 (unaudited)
- December 16, 1997 through March 31, 1998
(unaudited)
- July 1, 1997 through December 15, 1997
(Predecessor)
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Nine months ended March 31, 1999 (unaudited)
Consolidated Condensed Statements of Cash Flows
- Nine months ended March 31, 1999 (unaudited)
- December 16, 1997 through March 31, 1998
(unaudited)
- July 1, 1997 through December 15, 1997
(Predecessor)
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
<PAGE>
<TABLE>
<CAPTION>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED BALANCE SHEET
(dollars in thousands, except share information)
<S> <C> <C>
March 31, June 30,
1999 1998
------------- -------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 1,413 $ 3,842
Accounts receivable, net................................................... 22,329 13,577
Inventory.................................................................. 5,975 2,078
Income tax refund receivable............................................... - 5,155
Prepaid expenses........................................................... 71 378
Deferred income taxes...................................................... 827 827
------------- -------------
Total current assets.................................................... 30,615 25,857
Property, plant and equipment.............................................. 18,821 18,936
Goodwill, net.............................................................. 148,953 151,842
Intangible assets.......................................................... 6,742 7,289
Debt issuance costs........................................................ 7,043 6,535
Deferred income taxes...................................................... 2,490 3,888
Other assets............................................................... 47 200
------------- --------------
Total assets............................................................ $ 214,711 $ 214,547
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations............................... $ 672 $ 609
Current portion of other notes payable..................................... - 1,330
Accounts payable, trade.................................................... 5,330 4,140
Accrued income taxes....................................................... 532 100
Accrued interest........................................................... 3,041 168
Accrued expenses........................................................... 3,598 4,464
------------- --------------
Total current liabilities............................................... 13,173 10,811
Long-term portion of capital lease obligations............................. 1,527 1,489
Revolving credit line...................................................... 800 -
Senior notes............................................................... 115,000 115,000
Senior discount debentures................................................. 28,713 26,020
Deferred income taxes...................................................... 2,792 4,143
------------- --------------
Total liabilities....................................................... 162,005 157,463
Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
1,000 shares issued and outstanding at
March 31, 1999 (unaudited) and June 30, 1998............................ - -
Additional paid-in capital................................................. 78,364 78,364
Accumulated deficit........................................................ (9,623) (5,493)
Accumulated other comprehensive loss....................................... (305) (57)
Carryover basis adjustment................................................. (15,730) (15,730)
------------- --------------
Total stockholder's equity.............................................. 52,706 57,084
------------- --------------
Total liabilities and stockholder's equity.............................. $ 214,711 $ 214,547
============= ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
Holding Holding Predecessor
----------------------------- --------------------------------- -----------------
Three months Three Months Nine Months December 16, 1997 July 1, 1997
Ended Ended Ended Through Through
March 31, 1999 March 31, 1998 March 31, 1999 March 31, 1998 December 15, 1997
-------------- -------------- -------------- -------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales.................. $ 24,518 $ 19,191 $ 68,979 $ 21,982 $ 35,186
Cost of goods sold......... 14,827 11,935 43,908 13,913 22,809
--------- -------- --------- --------- ---------
Gross profit............ 9,691 7,256 25,071 8,069 12,377
Selling, general and.......
administrative expenses. 3,924 2,699 10,333 3,182 5,703
Amortization of goodwill and
other intangibles....... 1,151 954 3,454 1,131 568
--------- -------- --------- --------- ---------
Income from operations.. 4,616 3,603 11,284 3,756 6,106
Other expenses (income):...
Interest expense to.....
stockholder(s) and affiliate - 4,293 - 5,032 2,143
Interest expense to others, net 4,258 111 12,503 131 503
Management fees and.....
other, net........... 242 48 367 48 226
--------- -------- --------- --------- ---------
Income (loss) before.......
income taxes............ 116 (849) (1,586) (1,455) 3,234
Income tax expense (benefit) 480 38 681 (125) 1,441
---------- ------------- ------------ ------------------ --------
Net income (loss)....... $ (364) $ (887) $ (2,267) $ (1,330) $ 1,793
========== ======== ========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY (dollars in thousands,
except share information)
Accumulated
Additional Other Carryover
Common Stock Paid-in Accumulated Comprehensive Basis
---------------
Shares Dollars Capital Deficit Loss Adjustment Total
------ ------- ------- ------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1998......... 1,000 $ - $ 78,364 $ (5,493) $ (57) $ (15,730) $ 57,084
Dividend to AHC I Acquisition Corp.
(unaudited)................. (1,863) (1,863)
Net loss (unaudited)............ (2,267) (2,267)
Other comprehensive loss, net of tax:
Foreign currency translation
adjusted (unaudited)..... (248) (248)
--------
Comprehensive loss (unaudited).. (2,515)
------- ------- --------- -------- -------- ---------- ---------
Balances, March 31, 1999 (unaudited) 1,000 $ - $ 78,364 $ (9,623) $ (305) $ (15,730) $ 52,706
======= ======= ========= ======== ======== ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Holding Holding Predecessor
-------------- -------------- -----------------
Nine Months December 16, 1997 July 1, 1997
Ended Through Through
March 31, 1999 March 31, 1998 December 15, 1997
-------------- -------------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................. $ (2,267) $ (1,330) $ 1,793
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization of goodwill...
and other intangibles..................... 6,561 2,007 2,456
Amortization of debt discount............... 2,693 44 233
Amortization of debt issuance costs......... 528 1,119 101
Deferred income taxes....................... 47 (141) (460)
Other....................................... (248) (76) (18)
Changes in operating assets and liabilities:
Accounts receivable....................... (8,752) (6,329) 1,153
Inventory................................. (3,897) 350 69
Prepaid expenses, deferred charges
and other assets........................ (595) (429) (62)
Income taxes.............................. 5,587 - 699
Accounts payable and accrued expenses..... 3,197 (4,809) (1,036)
--------- --------- ---------
Net cash provided by (used in)
operating activities.................. 2,854 (9,594) 4,928
--------- ---------- ---------
Cash flows from investing activities
Purchases of equipment...................... (2,430) (255) (807)
Payments for acquisitions, net of cash
acquired.................................. - (134,153) -
--------- ---------- ---------
Net cash used in investing activities... (2,430) (134,408) (807)
--------- --------- ---------
Cash flows from financing activities
Payments under capital leases for equipment (460) (165) (249)
Net proceeds (repayments) on line of credit. 800 (5,100) 2,362
Proceeds from issuance of senior increasing
rate notes, net of offering costs......... - 119,735 -
Proceeds from issuance of common stock..... - 76,000 -
Redemption of preferred stock............... - (8,678) -
Repayment of loans payable to stockholder... - (36,649) (1,851)
Repayment of other notes payable............ (1,330) (25) (50)
Dividends paid on preferred stock........... - (128) (155)
Dividend paid to AHC I Acquisition Corp..... (1,863) - -
---------- --------- ---------
Net cash provided by (used in) financing
activities.............................. (2,853) 144,990 57
--------- --------- ---------
Net increases (decrease) in cash and cash
equivalents............................. (2,429) 988 4,178
Cash and cash equivalents, beginning of period 3,842 - 303
--------- --------- ---------
Cash and cash equivalents, end of period...... $ 1,413 $ 988 $ 4,481
========= ========= =========
Supplemental information
Cash paid (received) during the period for:
Interest to stockholder(s)................ $ - $ 3,296 $ 1,146
Interest, other........................... 6,498 68 459
Income taxes.............................. (4,953) 15 1,222
Significant non-cash activities
Assets acquired under capital lease......... $ 561 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION
On November 4, 1993, Arcade Holding Corporation (the "Predecessor") was
organized for the purpose of acquiring all the issued and outstanding
capital stock of Arcade, Inc. Arcade, Inc. manufacturers and distributes
cosmetics sampling products from its Chattanooga, Tennessee facilities, and
distributes products in Europe through its French subsidiary, Arcade Europe
S.A.R.L. This acquisition was accounted for as a purchase transaction
whereby the purchase cost was allocated to the fair value of the net assets
acquired.
Acquisition of Arcade Holding Corporation
DLJ Merchant Banking Partners II, L.P. and certain related investors
(collectively, "DLJMBII") and certain members of the Predecessor organized
AHC I Acquisition Corp. ("Acquisition Corp.") and AHC I Merger Corp.
("Merger Corp.") for purposes of acquiring the Predecessor. Merger Corp.
was organized as a wholly-owned subsidiary of Acquisition Corp. and was
initially capitalized by Acquisition Corp. with an equity contribution of
$78,363, comprised of $76,000 of cash and $2,363 of non-cash consideration
in the form of an option to purchase Senior Preferred Stock of Acquisition
Corp. Immediately following this equity contribution, Merger Corp. issued
$123,500 of Senior Increasing Rate Notes ("Bridge Notes") to an entity that
has an ownership interest in Acquisition Corp. The Bridge Notes had a
stated maturity of December 15, 1998 and had an interest rate equal to the
greater of (i) 10% per annum and (ii) a daily floating rate of prime plus
2.25% plus an additional percentage amount equal to (a) 1.0% from and
including the interest payment date on June 15, 1998 or (b) 1.5% from and
including the interest payment date on September 15, 1998. Merger Corp.
received cash proceeds from the issuance of the Bridge Notes of $119,735,
net of $3,765 of associated debt issuance costs paid to an entity that has
an ownership interest in Acquisition Corp.
On December 15, 1997, Merger Corp. acquired all of the equity interests
of the Predecessor (the "Acquisition") for a total cost of $197,730 which
consisted of $138,634 cash paid for equity interests and direct acquisition
costs, $2,363 in non-cash consideration in the form of an option to
purchase Senior Preferred Stock of Acquisition Corp. used to retire 1,370
options of the Predecessor and the assumption of $56,733 in debt, preferred
stock and related accrued interest and dividends, including a capital lease
obligation. Included in the cost of the acquisition was $19,342 related to
the purchase and retirement of 11,201 options of the Predecessor and $2,022
paid for acquisition expenses to an entity that has an ownership interest
in Acquisition Corp. Merger Corp. then merged with and into the Predecessor
and the combined entity assumed the name AKI, Inc. ("AKI"). Subsequent to
the Acquisition, Acquisition Corp. contributed $1 of cash and all of its
ownership interest in AKI to AKI Holding Corp. ("Holding").
The Acquisition was accounted for using the purchase method of
accounting. In accordance with the consensus reached by the Emerging Issues
Task Force of the Financial Accounting Standards Board in Issue 88-16,
"Basis of Leveraged Buyout Transactions," the purchase price allocation
required an adjustment for the continuing interest attributable to
management's ownership interest in the Predecessor carried over in
connection with the Acquisition. As a result, a reduction in stockholder's
equity of $15,730 was recorded which represents the difference between the
fair value of the Predecessor's assets and the related book value
attributable to the interest of the continuing shareholders' investment in
the Predecessor. The remaining purchase price has been allocated to assets
and liabilities based upon estimates of their respective fair value as
determined by management and third-party appraisals and goodwill of
approximately $153,929. Goodwill is being amortized on a straight-line
basis over 40 years.
In connection with the Acquisition, AKI repaid the outstanding balance
and related interest of the Predecessor's loans payable to a shareholder of
$37,374, the outstanding balance and related interest of the Predecessor's
line of credit of $6,278 and the outstanding balance and related dividends
on the Predecessor's preferred stock of $8,806.
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION (Continued)
Acquisition of fragrance sampling business of Minnesota Mining and
Manufacturing Company
On June 22, 1998, AKI acquired the fragrance sampling business of
Minnesota Mining and Manufacturing Company ("3M") for approximately $7,250
in cash and the assumption of liabilities totaling $182 (the "3M
Acquisition"). The only tangible assets acquired were approximately $143 of
equipment. The acquisition was accounted for using the purchase method of
accounting and result in the recognition of intangible assets, primarily a
non-compete agreement, totaling $7,289 which are being amortized on a
straight-line basis over a period of 10 years.
Refinancing of Bridge Notes
On June 25, 1998, AKI completed a private placement of $115,000 of
Senior Notes (the "Notes"). The Notes are general, unsecured obligations of
AKI and bear interest at 10.5% per annum, payable semi-annually on January
1 and July 1. The Notes mature on July 1, 2008. The placement of the Notes
yielded AKI net proceeds of $109,502 after deducting offering expenses of
$5,498, including certain costs that were incurred subsequent to June 30,
1998. These offering expenses also include $3,450 of underwriting fees paid
to an affiliate of the stockholder. The Notes contain customary covenants
including restrictions on the declaration and payment of dividends and
limitations on the incurrence of additional indebtedness.
Contemporaneous with the Notes offering, Holding completed a private
offering of $50,000 of Senior Discount Debentures (the "Debentures"). The
Debentures do not accrue or pay interest until July 1, 2003 and were issued
with an original issuance discount of $24,038. The original issuance
discount is being accreted from issuance through July 1, 2003 at an
effective rate of 13.5% per annum. After July 1, 2003, the Debentures will
accrue interest at a rate of 13.5% per annum, payable semi-annually,
commencing January 1, 2004. The Debentures are general, unsecured
obligations of Holding and mature on July 1, 2009.
With the proceeds of the Debentures offering, Holding contributed
$22,499 of cash to AKI. No additional shares were issued to Holding as a
result of this contribution. On June 25, 1998, AKI used the proceeds from
the contribution from Holding, together with the proceeds of the Notes
offering, to repay the Bridge Notes, without penalty (collectively, the
"Refinancing"). In conjunction with the Refinancing, AKI recorded a
non-cash interest charge of $1,795 for the unamortized portion of the debt
issuance costs associated with the Bridge Notes.
Interim financial statements
The interim consolidated condensed balance sheet at March 31, 1999, the
interim consolidated condensed statement of operations for the period from
December 16, 1997 through March 31, 1998, the interim consolidated
condensed statement of operations for the period from January 1, 1998
through March 31, 1998, the interim consolidated condensed statements of
operations for the three and nine months ended March 31, 1999, the interim
consolidated condensed statement of cash flows for the period from December
16, 1997 through March 31, 1998, the interim consolidated condensed
statement of cash flows for the nine months ended March 31, 1999 and the
interim consolidated condensed statement of changes in stockholder's equity
for the nine months ended March 31, 1999 are unaudited, and certain
information and footnote disclosure related thereto, normally included in
the financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, the
unaudited interim consolidated condensed financial statements were prepared
following the same policies and procedures used in preparation of the
audited financial statements and all adjustments, consisting only of normal
recurring adjustments to fairly present the financial position, results of
operations and cash flows with respect to the interim consolidated
condensed financial statements, have been included. The results of
operations for the interim periods are not necessarily indicative of the
results for the entire year.
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION (Continued)
The accompanying unaudited interim consolidated condensed financial
statements as of March 31, 1999 and for the three and nine months then
ended and for the period from January 1, 1998 through March 31, 1998,
present the financial position and results of operations of Holding on the
basis of accounting described above and, accordingly, are not comparable
with the audited financial statements for the period from July 1, 1997
through December 15, 1997.
Unaudited pro forma results for Holding assuming the Acquisition, the
3M Acquisition and the Refinancing had occurred as of July 1, 1997 are
presented below:
<TABLE>
<CAPTION>
Unaudited Pro Forma Results for the
-----------------------------------
Three Months Nine Months
Ended Ended
March 31, 1998 March 31, 1998
-------------- --------------
<S> <C> <C>
Net sales......................... $ 22,374 $ 65,473
Income from operations............ 3,010 6,568
Interest expense.................. 4,200 12,557
Net loss.......................... 1,174 5,071
</TABLE>
2. INVENTORY
The following table details the components of inventory:
<TABLE>
<CAPTION>
March 31,1999 June 30, 1998
(unaudited)
<S> <C> <C>
Raw materials
Paper.......................... $ 580 $ 556
Other raw materials............ 3,437 786
----------- -----------
Net raw materials.................. 4,017 1,342
Work in process.................... 1,958 736
----------- -----------
Net inventory...................... $ 5,975 $ 2,078
=========== ===========
</TABLE>
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
3. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet at March 31, 1999 (unaudited) and
June 30, 1998 and condensed statements of operations, changes in
stockholder equity and cash flows for the nine months ended March 31, 1999
(unaudited) for Holding have been prepared on the equity basis of
accounting and should be read in conjunction on with the consolidated
statements and notes thereto. Comparative statements of operations and cash
flows for the prior year have not been provided as Holding was not
effectively formed until December 15, 1997.
BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
-------------- -------------
(unaudited)
<S> <C> <C>
Assets
Cash.............................................................. $ - $ 2,201
Investment in subsidiaries........................................ 94,992 95,408
Deferred charges.................................................. 1,543 1,263
Deferred income taxes............................................. 919 19
---------- -----------
Total assets.................................................. $ 97,454 $ 98,891
========== ===========
Liabilities
Senior discount debentures........................................ $ 28,713 $ 26,020
Stockholder's equity
Common Stock, $0.01 par value, 1,000 shares authorized; 1,000 shares issued
and outstanding at March 31, 1999 (unaudited)
and June 30, 1998............................................... - -
Additional paid-in capital........................................ 78,364 78,364
Accumulated deficit............................................... (9,623) (5,493)
---------- -----------
Total stockholder's equity.................................... 68,741 72,871
---------- -----------
Total liabilities and stockholder's equity.................... $ 97,454 $ 98,891
========== ===========
STATEMENT OF OPERATIONS
Nine Months
Ended
March 31, 1999
--------------
(unaudited)
Equity in losses of subsidiaries.................................. $ (416)
Interest expense.................................................. (2,751)
-----------
Loss before income taxes...................................... (3,167)
Income tax benefit................................................ (900)
-----------
Net loss...................................................... $ (2,267)
===========
</TABLE>
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
3. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
-------------------
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balances, June 30, 1998....................... 1,000 $ - $ 78,364 $ (5,493) $ 72,871
Dividend to AHC I Acquisition
Corp. (unaudited)........................... - - - (1,863) (1,863)
Net loss (unaudited).......................... - - - (2,267) (2,267)
--------- --------- ---------- ----------- -----------
Balance, March 31, 1999 (unaudited)........... 1,000 $ - $ 78,364 $ (9,623) $ 68,741
========= ========= ========== =========== ===========
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended
March 31, 1999
--------------
(unaudited)
<S> <C>
Cash flows from operating activities
Net loss........................................................ $ (2,267)
Adjustments to reconcile net loss to net cash.................
provided by operating activities............................
Net change in investment in subsidiaries.................... 416
Amortization of debt discount............................... 2,693
Amortization of debt issuance costs......................... 67
Deferred income taxes....................................... (900)
Increase in debt issuance costs............................. (347)
-----------
Net cash used by operating activities........................... (338)
-----------
Cash flows from financing activities
Dividend to AHC I Acquisition Corp.............................. (1,863)
-----------
Net decrease in cash and cash equivalents......................... (2,201)
Cash and cash equivalents, beginning of period.................... 2,201
-----------
Cash and cash equivalents, end of period.......................... $ -
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AKI, INC., AND SUBSIDIARIES (a
wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED CONDENSED BALANCE SHEET
(dollars in thousands, except share information)
March 31, June 30,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 1,413 $ 1,641
Accounts receivable, net................................................... 22,329 13,577
Inventory.................................................................. 5,975 2,078
Income tax refund receivable............................................... - 5,155
Prepaid expenses........................................................... 71 378
Deferred income taxes...................................................... 827 827
------------- -------------
Total current assets.................................................... 30,615 23,656
Property, plant and equipment.............................................. 18,821 18,936
Goodwill, net.............................................................. 148,953 151,842
Intangible assets.......................................................... 6,742 7,289
Debt issuance costs........................................................ 5,500 5,272
Deferred income taxes...................................................... 1,571 3,869
Other assets............................................................... 47 200
------------- --------------
Total assets............................................................ $ 212,249 $ 211,064
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations............................... $ 672 $ 609
Current portion of other notes payable..................................... - 1,330
Accounts payable, trade.................................................... 5,330 4,140
Accrued income taxes....................................................... 532 100
Accrued interest........................................................... 3,041 168
Accrued expenses........................................................... 3,598 4,464
------------- --------------
Total current liabilities............................................... 13,173 10,811
Long-term portion of capital lease obligations............................. 1,527 1,489
Revolving credit line...................................................... 800 -
Senior notes............................................................... 115,000 115,000
Deferred income taxes...................................................... 2,792 4,143
------------- --------------
Total liabilities....................................................... 133,292 131,443
Stockholder's equity
Preferred stock, $0.01 par, 8,700 shares authorized; No shares issued or
outstanding at June 30, 1998 and
March 31, 1999 (unaudited).............................................. - -
Common stock, $0.01 par 100,000 shares authorized;
1,000 shares issued and outstanding at June 30, 1998 and
March 31, 1999 (unaudited).............................................. - -
Addition paid-in capital................................................... 100,862 100,862
Accumulated deficit........................................................ (5,870) (5,454)
Accumulated other comprehensive loss....................................... (305) (57)
Carryover basis adjustment................................................. (15,730) (15,730)
------------- --------------
Total stockholder's equity.............................................. 78,957 79,621
------------- --------------
Total liabilities and stockholder's equity.............................. $ 212,249 $ 211,064
============= ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AKI, INC., AND SUBSIDIARIES (a
wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
AKI AKI Predecessor
----------------------------- ------------------------------ -----------------
Three months Three Months Nine Months December 16, 1997 July 1, 1997
Ended Ended Ended Through Through
March 31, 1999 March 31, 1998 March 31, 1999 March 31, 1998 December 15, 1997
-------------- -------------- -------------- -------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales.................. $ 24,518 $ 19,191 $ 68,979 $ 21,982 $ 35,186
Cost of goods sold......... 14,827 11,935 43,908 13,913 22,809
--------- -------- --------- --------- ---------
Gross profit............ 9,691 7,256 25,071 8,069 12,377
Selling, general and.......
administrative expenses. 3,924 2,699 10,333 3,182 5,703
Amortization of goodwill and
other intangibles....... 1,151 954 3,454 1,131 568
--------- -------- --------- --------- ---------
Income from operations.. 4,616 3,603 11,284 3,756 6,106
Other expenses (income):...
Interest expense to.....
stockholder(s) and affiliate - 4,293 - 5,032 2,143
Interest expense to others,net 3,298 111 9,752 131 503
Management fees and.....
other, net........... 242 48 367 48 226
--------- -------- --------- --------- ---------
Income (loss) before.......
income taxes............ 1,076 (849) 1,165 (1,455) 3,234
Income tax expense (benefit) 795 38 1,581 (125) 1,441
---------- ------------- -------------- --------- --------
Net income (loss)....... $ 281 $ (887) $ (416) $ (1,330) $ 1,793
========= ======== ========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AKI, INC., AND SUBSIDIARIES (a
wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY (dollars in thousands,
except share information)
Accumulated
Additional Other Carryover
Common Stock Paid-in Accumulated Comprehensive Basis
Shares Dollars Capital Deficit Loss Adjustment Total
------ ------- ------- ------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1998......... 1,000 $ - $ 100,862 $(5,454) $ (57) $(15,730) $ 79,621
Net loss (unaudited)............ (416) (416)
Other comprehensive loss, net of tax:
Foreign currency translation
adjusted (unaudited)..... (248) (248)
---------
Comprehensive loss (unaudited).. (664)
------- --------- --------- -------- -------- -------- ---------
Balances, March 31, 1999 (unaudited) 1,000 $ - $ 100,862 $(5,870) $ (305) $(15,730) $ 78,957
======= ========= ========= ======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AKI, INC., AND SUBSIDIARIES (a
wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
AKI AKI Predecessor
-------------- -------------- -----------------
Nine Months December 16, 1997 July 1, 1997
Ended Through Through
March 31, 1999 March 31, 1998 December 15, 1997
-------------- -------------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................. $ (416) $ (1,330) $ 1,793
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization of goodwill...
and other intangibles..................... 6,561 2,007 2,456
Amortization of debt discount............... - 44 233
Amortization of debt issuance costs......... 461 1,119 101
Deferred income taxes....................... 947 (141) (460)
Other....................................... (248) (76) (18)
Changes in operating assets and liabilities:
Accounts receivable....................... (8,752) (6,329) 1,153
Inventory................................. (3,897) 350 69
Prepaid expenses, deferred charges
and other assets........................ (248) (429) (62)
Income taxes.............................. 5,587 - 699
Accounts payable and accrued expenses..... 3,197 (4,809) (1,036)
--------- --------- ---------
Net cash provided by (used in)
operating activities.................. 3,192 (9,594) 4,928
--------- --------- ---------
Cash flows from investing activities
Purchases of equipment...................... (2,430) (255) (807)
Payments for acquisitions, net of cash
acquired.................................. - (134,153) -
--------- --------- ---------
Net cash used in investing activities... (2,430) (134,408) (807)
--------- --------- ---------
Cash flows from financing activities
Payments under capital leases for equipment (460) (165) (249)
Net proceeds (repayments) on line of credit. 800 (5,100) 2,362
Proceeds from issuance of senior increasing
rate notes, net of offering costs......... - 119,735 -
Proceeds from issuance of common stock..... - 76,000 -
Redemption of preferred stock............... - (8,678) -
Repayment of loans payable to stockholder... - (36,649) (1,851)
Repayment of other notes payable............ (1,330) (25) (50)
Dividends paid on preferred stock........... - (128) (155)
--------- --------- ---------
Net cash provided by (used in) financing
activities.............................. (990) 144,990 57
--------- --------- ---------
Net increases (decrease) in cash and cash equivalents (228) 988 4,178
Cash and cash equivalents, beginning of period 1,641 - 303
--------- --------- ---------
Cash and cash equivalents, end of period...... $ 1,413 $ 988 $ 4,481
========= ========= =========
Supplemental information
Cash paid (received) during the period for:
Interest to stockholder(s)................ $ - $ 3,296 $ 1,146
Interest, other........................... 6,498 68 459
Income taxes.............................. (4,953) 15 1,222
Significant non-cash activities
Assets acquired under capital lease......... $ 561 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
1. BASIS OF PRESENTATION
On November 4, 1993, Arcade Holding Corporation (the "Predecessor") was
organized for the purpose of acquiring all the issued and outstanding
capital stock of Arcade, Inc. Arcade, Inc. manufacturers and distributes
cosmetics sampling products from its Chattanooga, Tennessee facilities, and
distributes products in Europe through its French subsidiary, Arcade Europe
S.A.R.L. This acquisition was accounted for as a purchase transaction
whereby the purchase cost was allocated to the fair value of the net assets
acquired.
Acquisition of Arcade Holding Corporation
DLJ Merchant Banking Partners II, L.P. and certain related investors
(collectively, "DLJMBII") and certain members of the Predecessor organized
AHC I Acquisition Corp. ("Acquisition Corp.") and AHC I Merger Corp.
("Merger Corp.") for purposes of acquiring the Predecessor. Merger Corp.
was organized as a wholly-owned subsidiary of Acquisition Corp. and was
initially capitalized by Acquisition Corp. with an equity contribution of
$78,363, comprised of $76,000 of cash and $2,363 of non-cash consideration
in the form of an option to purchase Senior Preferred Stock of Acquisition
Corp. Immediately following this equity contribution, Merger Corp. issued
$123,500 of Senior Increasing Rate Notes ("Bridge Notes") to an entity that
has an ownership interest in Acquisition Corp. The Bridge Notes had a
stated maturity of December 15, 1998 and had an interest rate equal to the
greater of (i) 10% per annum and (ii) a daily floating rate of prime plus
2.25% plus an additional percentage amount equal to (a) 1.0% from and
including the interest payment date on June 15, 1998 or (b) 1.5% from and
including the interest payment date on September 15, 1998. Merger Corp.
received cash proceeds from the issuance of the Bridge Notes of $119,735,
net of $3,765 of associated debt issuance costs paid to an entity that has
an ownership interest in Acquisition Corp.
On December 15, 1997, Merger Corp. acquired all of the equity interests
of the Predecessor (the "Acquisition") for a total cost of $197,730 which
consisted of $138,634 cash paid for equity interests and direct acquisition
costs, $2,363 in non-cash consideration in the form of an option to
purchase Senior Preferred Stock of Acquisition Corp. used to retire 1,370
options of the Predecessor and the assumption of $56,733 in debt, preferred
stock and related accrued interest and dividends, including a capital lease
obligation. Included in the cost of the acquisition was $19,342 related to
the purchase and retirement of 11,201 options of the Predecessor and $2,022
paid for acquisition expenses to an entity that has an ownership interest
in Acquisition Corp. Merger Corp. then merged with and into the Predecessor
and the combined entity assumed the name AKI, Inc. ("AKI"). Subsequent to
the Acquisition, Acquisition Corp. contributed $1 of cash and all of its
ownership interest in AKI to AKI Holding Corp. ("Holding").
The Acquisition was accounted for using the purchase method of
accounting. In accordance with the consensus reached by the Emerging Issues
Task Force of the Financial Accounting Standards Board in Issue 88-16,
"Basis of Leveraged Buyout Transactions," the purchase price allocation
required an adjustment for the continuing interest attributable to
management's ownership interest in the Predecessor carried over in
connection with the Acquisition. As a result, a reduction in stockholder's
equity of $15,730 was recorded which represents the difference between the
fair value of Predecessor's assets and the related book value attributable
to the interest of the continuing shareholders' investment in the
Predecessor. The remaining purchase price has been allocated to assets and
liabilities based upon estimates of their respective fair value as
determined by management and third-party appraisals and goodwill of
approximately $153,929.Goodwill is being amortized on a straight-line basis
over 40 years.
In connection with the Acquisition, AKI repaid the outstanding balance
and related interest of the Predecessor's loans payable to a shareholder of
$37,374, the outstanding balance and related interest of the Predecessor's
line of credit of $6,278 and the outstanding balance and related dividends
on the Predecessor's preferred stock of $8,806.
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION (Continued)
Acquisition of fragrance sampling business of Minnesota Mining and
Manufacturing Company
On June 22, 1998, AKI acquired the fragrance sampling business of
Minnesota Mining and Manufacturing Company ("3M") for approximately $7,250
in cash and the assumption of liabilities totaling $182 (the "3M
Acquisition"). The only tangible assets acquired were approximately $143 of
equipment. The acquisition was accounted for using the purchase method of
accounting and result in the recognition of intangible assets, primarily a
non-compete agreement, totaling $7,289 which are being amortized on a
straight-line basis over a period of 10 years.
Refinancing of Bridge Notes
On June 25, 1998, AKI completed a private placement of $115,000 of
Senior Notes (the "Notes"). The Notes are general, unsecured obligations of
AKI and bear interest at 10.5% per annum, payable semi-annually on January
1 and July 1. The Notes mature on July 1, 2008. The placement of the Notes
yielded AKI net proceeds of $109,502 after deducting offering expenses of
$5,498, including certain costs that were incurred subsequent to June 30,
1998. These offering expenses also include $3,450 of underwriting fees paid
to an affiliate of the stockholder. The Notes contain customary covenants
including restrictions on the declaration and payment of dividends and
limitations on the incurrence of additional indebtedness.
Contemporaneous with the Notes offering, Holding completed a private
offering of $50,000 of Senior Discount Debentures (the "Debentures"). The
Debentures do not accrue or pay interest until July 1, 2003 and were issued
with an original issuance discount of $24,038. The original issuance
discount is being accreted from issuance through July 1, 2003 at an
effective rate of 13.5% per annum. After July 1, 2003, the Debentures will
accrue interest at a rate of 13.5% per annum, payable semi-annually,
commencing January 1, 2004. The Debentures are general, unsecured
obligations of Holding and mature on July 1, 2009.
With the proceeds of the Debentures offering, Holding contributed
$22,499 of cash to AKI. No additional shares were issued to Holding as a
result of this contribution. On June 25, 1998, AKI used the proceeds from
the contribution from Holding, together with the proceeds of the Notes
offering, to repay the Bridge Notes, without penalty (collectively, the
"Refinancing"). In conjunction with the Refinancing, AKI recorded a
non-cash interest charge of $1,795 for the unamortized portion of the debt
issuance costs associated with the Bridge Notes.
Interim financial statements
The interim consolidated condensed balance sheet at March 31, 1999, the
interim consolidated condensed statement of operations for the period from
December 16, 1997 through March 31, 1998, the interim consolidated
condensed statement of operations for the period from January 1, 1998
through March 31, 1998, the interim consolidated condensed statements of
operations for the three and nine months ended March 31, 1999, the interim
consolidated condensed statement of cash flows for the period from December
16, 1997 through March 31, 1998, the interim consolidated condensed
statement of cash flows for the nine months ended March 31, 1999 and the
interim consolidated condensed statement of changes in stockholder's equity
for the nine months ended March 31, 1999 are unaudited, and certain
information and footnote disclosure related thereto, normally included in
the financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, the
unaudited interim consolidated condensed financial statements were prepared
following the same policies and procedures used in preparation of the
audited financial statements and all adjustments, consisting only of normal
recurring adjustments to fairly present the financial position, results of
operations and cash flows with respect to the interim consolidated
condensed financial statements, have been included. The results of
operations for the interim periods are not necessarily indicative of the
results for the entire year.
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION (Continued)
The accompanying unaudited interim consolidated condensed financial
statements as of March 31, 1999 and for the three and nine months then
ended and for the period from January 1, 1998 through March 31, 1998,
present the financial position and results of operations of AKI on the
basis of accounting described above and, accordingly, are not comparable
with the audited financial statements for the period from July 1, 1997
through December 15, 1997.
Unaudited pro forma results for AKI assuming the Acquisition, the 3M
Acquisition and the Refinancing had occurred as of July 1, 1997 are
presented below:
<TABLE>
<CAPTION>
Unaudited Pro Forma Results for the
-----------------------------------
Three Months Nine Months
Ended Ended
March 31, 1998 March 31, 1998
-------------- --------------
<S> <C> <C>
Net sales......................... $ 22,374 $ 65,473
Income from operations............ 3,010 6,568
Interest expense.................. 3,300 9,816
Net loss.......................... 570 3,228
</TABLE>
2. INVENTORY
The following table details the components of inventory:
<TABLE>
<CAPTION>
March 31,1999 June 30, 1998
------------- -------------
(unaudited)
<S> <C> <C>
Raw materials
Paper.......................... $ 580 $ 556
Other raw materials............ 3,437 786
----------- -----------
Net raw materials.................. 4,017 1,342
Work in process.................... 1,958 736
----------- -----------
Net inventory...................... $ 5,975 $ 2,078
=========== ===========
</TABLE>
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2 is presented with respect to both AKI Holding Corp. and AKI,
Inc. As used within Item 2 the term "Company" refers to AKI Holding Corp. and
its subsidiaries including AKI, Inc. ("AKI") and the term "Holding" refers to
AKI Holding Corp.
General
The sales of the Company are derived from the sale of sampling products
to cosmetics and consumer products companies. Substantially all of the Company's
sales are made directly to its customers while a small portion are made through
advertising agencies. Each customer's sampling program is unique and pricing is
negotiated based on estimated costs plus a margin. While the Company and its
customers generally do not enter into long-term contracts, the Company has had
long-standing relationships with the majority of its customer base. The
introduction of the Company's new products, such as BeautiSeal, PowdaTouch and
LiquaTouch, has affected the Company's results of operations for certain of the
periods discussed below.
The Acquisition
DLJ Merchant Banking Partners II, L.P. and certain related investors
(collectively, "DLJMBII") and certain members of the Company's management
organized AHC I Acquisition Corp. ("Acquisition Corp.") and AHC I Merger Corp.
("Merger Corp.") for purposes of acquiring Arcade Holding Corporation (the
"Predecessor"). On December 15, 1997, Merger Corp. acquired all of the equity
interests of the Predecessor (the "Acquisition") for $205.7 million (including
related fees, expenses and cash for working capital). Included in the total cost
of the Acquisition were approximately $6.2 million in non-cash costs comprised
of (i) the assumption of a promissory note issued by the Predecessor in
connection with the 1995 acquisition of Scent Seal, Inc. and certain capital
lease obligations and (ii) the exchange of stock options to acquire common stock
in the Predecessor by the Predecessor's chief executive officer for an option to
acquire preferred stock in Acquisition Corp. To provide the $199.5 million of
cash necessary to fund the Acquisition, including the equity purchase price and
the retirement of all previously existing preferred stock and debt of the
Predecessor not assumed, (i) the Merger Corp. issued $123.5 million Senior
Increasing Rate Notes (the "Bridge Notes") to Scratch & Sniff Funding, Inc., an
affiliate of DLJMBII and Acquisition Corp. and (ii) Acquisition Corp. received
$76.0 million from debt and equity (common and preferred) financings, including
equity investments by certain stockholders of the Predecessor, which was
contributed to Merger Corp. Immediately following the Acquisition, Merger Corp.
merged with and into the Predecessor and the combined entity assumed the name
AKI, Inc. Acquisition Corp. then contributed its $1 of cash and all of its
ownership interest in AKI to Holding for 1,000 shares of Holding's common stock.
The Bridge Notes were subsequently repaid on June 25, 1998 from the
proceeds of AKI's issuance of $115.0 million of Senior Notes (the "Notes") and
from a capital contribution (the "Equity Contribution") from Holding. On June
25, 1998, Holding issued and sold Senior Discount Debentures (the "Debentures")
totaling $50.0 million in aggregate principal amount at maturity for gross
proceeds of $26.0 million, the majority of which were used to fund a capital
contribution to AKI.
The Acquisition was accounted for using the purchase method of
accounting and resulted in the recognition of $153.9 million of goodwill and a
significant increase in amortization expense.
Results of Operations
For purposes of the following discussion, the results of operations for
the nine months ended March 31, 1998 reflect the combination of the results of
operations of the Predecessor for the period July 1, 1997 through December 15,
1997, the date of the Acquisition, with the results of operations of the Company
for the period December 16, 1997 through March 31, 1998. Because of the effects
of purchase accounting applied in the Acquisition and the additional interest
expense associated with the debt incurred to finance the Acquisition, the
results of operations of the Company are not comparable in all respects to the
results of operations of the Predecessor.
<PAGE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net Sales. Net sales for the three months ended March 31, 1999,
increased $5.3 million, or 27.6%, to $24.5 million as compared to $19.2 million
for the three months ended March 31, 1998. The increases were primarily
attributable to a $4.4 million increase in domestic sales of cosmetic sampling
products and an increase in sales of consumer product samples, partially offset
by decreases in certain fragrance industry sampling.
Gross Profit. Gross profit for the three months ended March 31, 1999,
increased $2.4 million, or 32.9%, to $9.7 million as compared to $7.3 million
for three months ended March 31, 1998. Gross profit as a percentage of net sales
increased to 39.6% in the three months ended March 31, 1999, from 38.0% in the
three months ended March 31, 1998. The increase in gross profit and gross profit
as a percentage of net sales is primarily attributable to the increase in net
sales discussed above and reductions in raw materials costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 1999, increased
$1.2 million, or 44.4% to $3.9 million as compared to $2.7 million for the three
months ended March 31, 1998. The increase in selling, general and administrative
expenses was primarily due to a severance charge related to the former president
and chief executive officer, changes in executive compensation following the
Acquisition and increased sales commissions related to the increase in net
sales. As a result of these factors, selling, general and administrative
expenses as a percent of net sales increased to 15.9% in the three months ended
March 31, 1999 from 14.1% in the three months ended March 31, 1998.
Income from Operations. Income from operations for the three months
ended March 31, 1999 increased $1.0 million, or 27.8%, to $4.6 million as
compared to $3.6 million for the three months ended March 31, 1998. Income from
operations as a percentage of net sales was 18.8% in the three months ended
March 31, 1999, unchanged from the three months ended March 31, 1998,
principally as a result of the factors described above, offset by the increase
in amortization of other intangibles resulting from the 3M Acquisition.
Interest Expense. Interest expense for the three months ended March 31,
1999, decreased $0.1 million, or 2.3% to $4.3 million, as compared to $4.4
million for the three months ended March 31, 1998. Interest expense as a
percentage of net sales decreased to 17.6% in the three months ended March 31,
1999 from 22.9% in the three months ended March 31, 1998. The decrease in
interest expense, including the amortization of deferred financing costs, is a
result of the refinancing in June 1998 of the Bridge Notes, incurred in
connection with the Acquisition, with the Notes and Debentures.
Interest expense for AKI for the three months ended March 31, 1999,
decreased $1.1 million, or 25.0% to $3.3 million, as compared to $4.4 million
for the three months ended March 31, 1998. Interest expense as a percentage of
net sales decreased to 13.5% in the three months ended March 31, 1999 from 22.9%
in the three months ended March 31, 1998. The decrease in interest expense,
including the amortization of deferred financing costs, is a result of the
refinancing in June 1998 of the Bridge Notes, incurred in connection with the
Acquisition, with the Notes and the Equity Contribution.
Management Fees and Other, Net. Management fees and other, net for the
three months ended March 31, 1999, increased $0.2 million to $0.2 million. The
increase is primarily due to the write off of failed acquisition costs.
Income Tax Expense. Income tax expense for the three months ended March
31, 1999 increased $0.5 million to $0.5 million. The increase is due to the
increase in income before income taxes as a result of the factors described
above. The Company's effective tax rate, after consideration of non-deductible
goodwill amortization, was 44.5% in the three months ended March 31, 1999 and
38.2% in the three months ended March 31, 1998. The increase in the effective
tax rate is due to the portion of the interest expense on the Debentures which
is non-deductible for income tax purposes.
Income tax expense for AKI for the three months ended March 31, 1999
increased $0.8 million to $0.8 million. The increase is due to the increase in
income before income taxes as a result of the factors described above. AKI's
effective tax rate, after consideration of non-deductible goodwill amortization,
was 39.0% in the three months ended March 31, 1999 and 38.2% in the three months
ended March 31, 1998.
<PAGE>
EBITDA. EBITDA for the three months ended March 31, 1999, increased
$1.5 million, or 28.3%, to $6.8 million as compared to $5.3 million for the
three months ended March 31, 1998, principally as a result of the factors
described above. EBITDA is income from operations plus depreciation and
amortization of goodwill and other intangibles.
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998
Net Sales. Net sales for the nine months ended March 31, 1999,
increased $11.8 million, or 20.6%, to $69.0 million as compared to $57.2 million
for the nine months ended March 31, 1998. The increases were primarily
attributable to a $6.7 million increase in domestic sales of cosmetic sampling
products and the $3.8 million growth of the Company's European revenues. Other
increases were attributable to increases in sales of consumer product samples,
partially offset by decreases in certain fragrance industry sampling.
Gross Profit. Gross profit for the nine months ended March 31, 1999,
increased $4.7 million, or 23.0%, to $25.1 million as compared to $20.4 million
for the nine months ended March 31, 1998. Gross profit as a percentage of net
sales increased to 36.4% in the nine months ended March 31, 1999, from 35.7% in
the nine months ended March 31, 1998. The increase in gross profit and gross
profit as a percentage of net sales is primarily attributable to the increase in
net sales discussed above and reduction in raw material costs offset by a
decrease in certain fragrance samples pricing, changes in product sales mix,
increased costs associated with the outsourcing of European production and
increased costs associated with the initial production runs of certain customer
products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended March 31, 1999, increased $1.4
million, or 15.7% to $10.3 million as compared to $8.9 million for the nine
months ended March 31, 1998. The increase in selling, general and administrative
expenses was primarily due to a severance charge related to the former president
and chief executive officer, changes in executive compensation following the
Acquisition, increased sales commissions related to the increase in net sales
and costs associated with the transition of the 3M Acquisition, offset partially
by reduced advertising expenditures, staff reductions and realized gains from
foreign currency transactions in Europe. As a result of these factors, selling,
general and administrative expenses as a percent of net sales decreased to 14.9%
in the nine months ended March 31, 1999 from 15.6% in the nine months ended
March 31, 1998.
Income from Operations. Income from operations for the nine months
ended March 31, 1999, increased $1.4 million, or 14.1%, to $11.3 million as
compared to $9.9 million for the nine months ended March 31, 1998. Income from
operations as a percentage of net sales decreased to 16.4% in the nine months
ended March 31, 1999, from 17.3% in the nine months ended March 31, 1998,
principally as a result of the increase in amortization of goodwill and other
intangibles resulting from the Acquisition and the 3M Acquisition and the
factors described above.
Interest Expense. Interest expense for the nine months ended March 31,
1999, increased $4.7 million, or 60.3% to $12.5 million as compared to $7.8
million for the nine months ended March 31, 1998. Interest expense as a
percentage of net sales increased to 18.1% in the nine months ended March 31,
1999 from 13.6% in the nine months ended March 31, 1998. The increase in
interest expense is due to the increased indebtedness as a result of the
recapitalization of the Company in connection with the Acquisition, partially
offset by the refinancing of the Bridge Notes with the Notes and Debentures.
Interest expense for AKI for the nine months ended March 31, 1999,
increased $2.0 million, or 25.6% to $9.8 million as compared to $7.8 million for
the nine months ended March 31, 1998. Interest expense as a percentage of net
sales increased to 14.2% in the nine months ended March 31, 1999 from 13.6% in
the nine months ended March 31, 1998. The increase in interest expense is due to
the increased indebtedness as a result of the recapitalization of the Company in
connection with the Acquisition, partially offset by the refinancing of the
Bridge Notes with the Notes and the Equity Contribution.
Management Fees and Other, Net. Management fees and other, net for the
nine months ended March 31, 1999, were $0.4 million as compared to $0.3 million
for the nine months ended March 31, 1998. Management fees and other, net as a
percentage of net sales were relatively constant in the nine months ended March
31, 1999 and 1998.
<PAGE>
Income Tax Expense. Income tax expense for the nine months ended March
31, 1999, decreased $0.6 million or 46.2% to $0.7 million as compared to $1.3
million for the nine months ended March 31, 1998 due to the decrease in income
before income taxes partially offset by the increase in non-deductible goodwill
amortization. The Company's effective tax rate, after consideration of
non-deductible goodwill amortization, was 52.3% in the nine months ended March
31, 1999, and 38.0% in the nine months ended March 31, 1998. The increase in the
effective tax rate is due to the portion of the interest expense on the
Debentures which is non-deductible for income tax purposes.
Income tax expense for AKI for the nine months ended March 31, 1999,
increased $0.3 million or 23.1% to $1.6 million as compared to $1.3 million for
the nine months ended March 31, 1998 due to the increase in taxable income
resulting from the increase in non-deductible goodwill, partially offset by a
decrease in income before taxes. The Company's effective tax rate, after
consideration of non-deductible goodwill amortization, was 39.0% in the nine
months ended March 31, 1999, and 38.0% in the nine months ended March 31, 1998.
EBITDA. EBITDA for the nine months ended March 31, 1999, increased $3.5
million, or 24.5%, to $17.8 million as compared to $14.3 million for the nine
months ended March 31, 1998, principally as a result of the factors described
above. EBITDA is income form operations plus depreciation and amortization of
goodwill and other intangibles.
Liquidity and Capital Resources
At March 31, 1999, the Company's cash and cash equivalents and net
working capital were $1.4 million and $17.4 million, respectively, representing
a decrease in cash and cash equivalents of $2.4 million and an increase in net
working capital of $2.4 million from June 30, 1998. Account receivables, net, at
March 31, 1999 increased 64.5% or $8.8 million over the June 30, 1998 amount,
primarily due to increased sales and an increase in days sales outstanding.
As of March 31, 1999, the Company had consolidated indebtedness,
including accrued interest, in an aggregate amount of $149.8 million, consisting
primarily of AKI's $115.0 million principal amount of Notes due 2008 and
Holding's $28.7 million of Debentures, net of unamortized original issuance
discount, due 2009 and AKI had consolidated indebtedness, including accrued
interest, in an aggregate amount of $121.0 million. At March 31, 1999, the
Company's revolving credit facility (the "Credit Agreement") provided for
additional borrowings of approximately $18.6 million, subject to a borrowing
base calculation and the achievement of certain financial ratios and compliance
with certain conditions.
Capital expenditures for the twelve months ending March 31, 2000 are
expected to be approximately $3.0 million. Based on borrowings outstanding as of
March 31, 1999, the Company expects total cash payments for debt service for the
twelve months ending March 31, 2000 to be approximately $13.1 million,
consisting of $12.1 million in interest payments on the Notes, $0.9 million in
capital lease payments, and $0.1 million in fees under the Credit Agreement. The
Company also expects to make royalty payments of approximately $1.0 million
during the twelve months ending March 31, 2000. The Company believes that its
liquidity, capital resources and cash flows from existing operations will be
sufficient to fund budgeted capital expenditures, working capital requirements
and interest payments on its indebtedness, including the Notes, for the twelve
months ending March 31, 2000.
The Company may from time to time evaluate potential acquisitions. The
Company expects that funding for future acquisitions may come from a variety of
sources, depending on the size and nature of any such acquisition. Potential
sources of capital include cash generated from operations, borrowings under the
Credit Agreement, additional equity investments or other external debt or equity
financing, subject to compliance with the terms of the Notes and Debentures.
There can be no assurance that such additional capital sources will be available
to the Company on terms that the Company finds acceptable, or at all.
<PAGE>
3M Acquisition
On June 22, 1998, the Company acquired the fragrance sampling business
of the Industrial and Consumer Products division of Minnesota Mining and
Manufacturing Company ("3M") for $7.25 million in cash and assumption of a
liability of $182,000 to one of the customers of the business (the "3M
Acquisition"). 3M's fragrance sampling business was predominantly a sales and
distribution business as it outsourced the manufacturing of the products it
sold. The company did not assume such outsourcing arrangements and relocated
such operations to its existing facilities in Chattanooga to utilize the then
excess manufacturing capacity at such facilities. Except for several sales and
technical employees, the Company did not extend employment to any employees from
3M.
Cost Reduction Program
The Company has implemented a comprehensive program designed to reduce
annual operating costs. The comprehensive cost reduction program was developed
by the Company in connection with an evaluation of its operations conducted by
manufacturing consultants with significant experience in the printing industry
and is designed to improve the Company's operating efficiency through (i)
reduced materials cost derived from scrap/waste reduction and from more
effective purchasing (savings of approximately $1.2 million annually), (ii)
streamlined manufacturing processes that reduce the amount of time required to
prepare for successive production runs utilizing the same equipment and that
reduce the amount of time equipment is under utilized by improved scheduling of
production runs (savings of approximately $2.2 million annually), and (iii)
rationalized staffing in the product support area (savings of approximately $0.6
million annually). Management expects the benefit of the materials cost
reductions and rationalized staffing which were implemented in July 1998 to be
realized in Fiscal 1999, while manufacturing process improvements are being
reviewed to determine which improvements are best suited to be implemented.
Realization from such implemented improvements is expected to be in the fiscal
year ended June 30, 2000. Approximately ninety percent and seventy-five of the
estimated annual savings for reduced materials costs (partially as the result of
reduced paper pricing) and reduced staffing levels, respectfully have been
realized as of March 31, 1999. The amount of operational savings ultimately
realized may also be affected by changes in product mix that may take place.
Seasonality
The Company's sales are seasonal due to the timing of its customers'
major advertising campaigns, which have traditionally been concentrated prior to
the Christmas and spring holiday seasons. Sales are recognized when products are
shipped. As a result, a higher level of sales are reflected in the Company's
first two fiscal quarters ended December 31 when sales from such advertising
campaigns are principally recognized while the Company's fourth fiscal quarter
ended June 30 typically reflects the lowest sales level of the fiscal year.
Sales seasonality may be affected from time to time as the Company's new product
technologies are introduced and gain acceptance by its customers.
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities" which is effective for fiscal years beginning after June 15,
1999. SFAS No. 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Company has only utilized derivative
financial instruments to hedge the Company's exposure to certain foreign
currencies. Such hedging activity has historically been minor and, as a result,
adoption of this Statement is not expected to have a material impact on the
Company's financial condition or results of operations. The Company will adopt
the provisions of this Statement on July 1, 1999.
Year 2000 Issues
The Company is currently working to resolve the potential impact of the
Year 2000 on its information technology systems and its non-information
technology systems so they will properly recognize and utilize dates beyond
December 31, 1999.
<PAGE>
The Company has in place a Year 2000 program which is being executed by
an internal project team. The objective of the Year 2000 program is to determine
and assess the risks of the Year 2000 issue and to plan and institute mitigating
actions to minimize those risks to acceptable levels. To date, all of the
Company's systems have been assessed for Year 2000 compliance. The Company
relies on five computerized systems all of which required remediation, two of
which are maintained internally and the others are maintained by third party
vendors. The Company believes that all of these systems are currently Year 2000
compliant. Upon review of the Company's non-information technology systems the
Company believes that none of its manufacturing equipment is date sensitive. Of
the remaining non-information technology systems, the Company believes all such
systems are Year 2000 compliant. If, however, all necessary actions are not
taken on a timely basis to ensure Year 2000 compliance, the Year 2000 issue
could have a material adverse effect on the Company.
To date, the Company has spent $76,000 on Year 2000 compliance.
Although the Company expects the above referenced expenditures will be
sufficient to ensure the Company is Year 2000 compliant, the Company anticipates
budgeting an additional $49,000 for any unforeseen problems arising with respect
to Year 2000 compliance between July 1, 1999 and the Year 2000. All expenditures
with respect to Year 2000 compliance will be funded from working capital.
The Company is communicating with its significant customers and vendors
to understand their Year 2000 issues and how they might prepare themselves to
manage those issues as they relate to the Company. To date, no significant
customers or vendors have informed the Company that a material Year 2000 issue
exists which will have a material effect on the Company.
The Company has not formulated a contingency plan in the event it or
its significant customers or vendors are not Year 2000 compliant.
Management Change
On February 1, 1999, Roger Barnett terminated his employment as
president and chief executive officer and the Company engaged William J. Fox as
president and chief executive officer.
Forward-Looking Statements
The information provided herein contains forward-looking statements
that involve a number of risks and uncertainties. A number of factors could
cause actual results, performance, achievements of the Company or industry
results to be materially difference from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, but are not limited to: the competitive environment in the
sampling industry in general and in the Company's specific market areas; changes
in prevailing interest rates; inflation; changes in cost of goods and services;
economic conditions in general and in the Company's specific market areas;
changes in or failure to comply with postal regulations or other federal, state
and/or local government regulations; liability and other claims asserted against
the Company; changes in operating strategy or development plans; the ability of
the Company to effectively implement its cost reduction program; the ability to
attract and retain qualified personnel; the significant indebtedness of the
Company; labor disturbances; changes in the Company's capital expenditure plans;
and other factors. In addition, such forward-looking statements are necessarily
dependent upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risk, uncertainties and other factors.
Accordingly, any forward-looking statements included herein do not purport to be
predictions of future events or circumstances and may not be realized.
Forward-looking statements can be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "may," "should,"
"seeks," "pro forma," "anticipates," "intends" or the negative of any thereof,
or other variations thereon 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. The Company disclaims
any obligations to update any such factors or to publicly announce the results
of any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
(b) Reports on Form 8-K
On February 11, 1999, AKI Holding Corp. filed a Form 8-K, reporting the
appointment of William J. Fox as Chief Executive Officer.
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.
By: /s/ Kenneth A. Budde
----------------------------------
Kenneth A. Budde
Chief Financial Officer
AKI, INC.
By: /s/ Kenneth A. Budde
----------------------------------
Kenneth A. Budde
Chief Financial Officer
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