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