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, 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 May 12, 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
- March 31, 2000 (unaudited)
- June 30, 1999
Consolidated Condensed Statements of Operations
- Three months ended March 31, 2000 (unaudited)
- Three months ended March 31, 1999 (unaudited)
- Nine months ended March 31, 2000 (unaudited)
- Nine months ended March 31, 1999 (unaudited)
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Nine months ended March 31, 2000 (unaudited)
Consolidated Condensed Statements of Cash Flows
- Nine months ended March 31, 2000 (unaudited)
- Nine months ended March 31, 1999 (unaudited)
Notes to Consolidated Condensed Financial Statements
<PAGE>
Item 1. Financial Statements (continued)
AKI, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet
- March 31, 2000 (unaudited)
- June 30, 1999
Consolidated Condensed Statements of Operations
- Three months ended March 31, 2000 (unaudited)
- Three months ended March 31, 1999 (unaudited)
- Nine months ended March 31, 2000 (unaudited)
- Nine months ended March 31, 1999 (unaudited)
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Nine months ended March 31, 2000 (unaudited)
Consolidated Condensed Statements of Cash Flows
- Nine months ended March 31, 2000 (unaudited)
- Nine months ended March 31, 1999 (unaudited)
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
<CAPTION>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share information)
March 31, June 30,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ...................... $ 179 $ 7,015
Accounts receivable, net ....................... 22,677 16,287
Inventory ...................................... 8,278 5,109
Income tax refund receivable ................... 32 32
Prepaid expenses ............................... 223 452
Deferred income taxes .......................... 400 400
--------- ---------
Total current assets ........................ 31,789 29,295
Property, plant and equipment, net ............. 17,741 18,511
Goodwill, net .................................. 162,774 147,990
Other intangible assets, net ................... 6,013 6,560
Deferred charges, net .......................... 7,100 6,839
Deferred income taxes .......................... 2,568 4,338
Other assets ................................... 89 46
--------- ---------
Total assets ................................ $ 228,074 $ 213,579
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations ... $ 1,018 $ 688
Accounts payable, trade ........................ 3,877 3,400
Accrued income taxes ........................... 103 497
Accrued interest ............................... 2,987 6,047
Accrued expenses ............................... 5,238 3,810
--------- ---------
Total current liabilities ................... 13,223 14,442
Long-term portion of capital lease obligations . 509 1,349
Revolving credit line .......................... 14,200 --
Senior notes ................................... 110,510 115,000
Senior discount debentures ..................... 26,982 29,651
Deferred income taxes .......................... 2,980 3,340
Other non-current liabilities .................. 1,399 --
--------- ---------
Total liabilities ........................... 169,803 163,782
Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
1,000 shares issued and outstanding ........ -- --
Additional paid-in capital ..................... 86,444 78,364
Accumulated deficit ............................ (12,085) (12,472)
Accumulated other comprehensive loss ........... (358) (365)
Carryover basis adjustment ..................... (15,730) (15,730)
--------- ---------
Total stockholder's equity .................. 58,271 49,797
--------- ---------
Total liabilities and stockholder's equity .. $ 228,074 $ 213,579
========= =========
</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 Nine months ended
-------------------------------- -------------------------------
March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales ....................................... $ 25,433 $ 24,518 $ 74,320 $ 68,979
Cost of goods sold .............................. 15,492 14,827 44,572 43,908
-------- -------- -------- --------
Gross profit ................................ 9,941 9,691 29,748 25,071
Selling, general and
administrative expenses ..................... 3,630 3,924 12,285 10,333
Amortization of goodwill and
other intangibles ........................... 1,373 1,151 3,928 3,454
Loss (gain) from settlement of litigation,
net......................................... 12 -- (858) --
-------- -------- -------- --------
Income from operations ...................... 4,926 4,616 14,393 11,284
Other expenses:
Interest expense, net ....................... 4,382 4,258 13,049 12,503
Management fees and
other, net............................... 62 242 187 367
-------- -------- -------- --------
Income (loss) before income
taxes and extraordinary gain ................ 482 116 1,157 (1,586)
Income tax expense............................... 714 480 1,618 681
-------- -------- -------- --------
Loss before extraordinary gain .................. (232) (364) (461) (2,267)
Extraordinary gain from early
retirement of debt, net of tax............... 2 -- 848 --
-------- -------- -------- --------
Net income (loss) ........................... $ (230) $ (364) $ 387 $ (2,267)
======== ======== ======== ========
</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
Common Stock Additional Other Carryover
------------------- Paid-in Accumulated Comprehensive Basis
Shares Dollars Capital Deficit Loss Adjustment Total
------ ------- ---------- ----------- ------------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1999 ................ 1,000 $ -- $ 78,364 $(12,472) $(365) $(15,730) $49,797
Equity contribution by AHC I Acquistion
Corporation (unaudited).............. 8,080 8,080
Net income (unaudited) ................. 387 387
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited) .......... 7 7
-------
Comprehensive income (unaudited) ....... 394
----- ------ -------- ------- ----- -------- -------
Balances, March 31, 2000 (unaudited) ... 1,000 $ -- $ 86,444 $(12,085) $(358) $(15,730) $58,271
===== ====== ======== ======== ===== ======== =======
</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>
Nine months ended
---------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ............................... $ 387 $ (2,267)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization of goodwill
and other intangibles ................... 7,188 6,561
Amortization of debt discount ............... 2,760 2,693
Amortization of debt issuance costs ......... 573 528
Deferred income taxes ....................... 867 47
Net gain from early retirement of debt ...... (848) --
Other ....................................... (133) (248)
Changes in operating assets and liabilities:
Accounts receivable ..................... (3,731) (8,752)
Inventory ............................... (3,018) (3,897)
Prepaid expenses, deferred charges
and other assets ...................... 397 (595)
Income taxes ............................ (32) 5,587
Accounts payable and accrued expenses ... (6,474) 3,197
-------- --------
Net cash provided by (used in)
operating activities ................ (2,064) 2,854
-------- --------
Cash flows from investing activities
Purchases of equipment .......................... (2,300) (2,430)
Payments for acquisitions, net of cash
acquired .................................... (16,162) --
-------- ---------
Net cash used in investing activities ... (18,462) (2,430)
-------- --------
Cash flows from financing activities
Payments under capital leases for equipment ..... (510) (460)
Net proceeds on line of credit .................. 14,200 800
Repayment of other notes payable ................ -- (1,330)
Dividend paid to AHCI Acquisition Corp. ......... -- (1,863)
-------- --------
Net cash provided by (used in) financing
activities .......................... 13,690 (2,853)
-------- --------
Net (decrease) in cash and cash equivalents ......... (6,836) (2,429)
Cash and cash equivalents, beginning of period ...... 7,015 3,842
-------- --------
Cash and cash equivalents, end of period ............ $ 179 $ 1,413
======== ========
Supplemental information
Cash paid (received) during the period for:
Interest, other ............................. $ 12,724 $ 6,498
Income taxes ................................ 1,157 (4,953)
Significant non-cash activities
Assets acquired under capital lease ......... -- $ 561
Contribution of equity and retirement of
senior discount debentures and senior notes $ 8,080 --
</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 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. ("Acquisition Corp.") 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, Acquisition Corp. contributed $1 and all of its ownership
interest in AKI to AKI Holding Corp. ("Holding") for all of the outstanding
equity of Holding.
Acquisition of Retcom Holdings Ltd.
On September 15, 1999, AKI acquired all of the equity interests in
Retcom Holdings Ltd. and its subsidiaries ("RHL") for a total cost of
approximately $12 million and refinanced RHL's working capital indebtedness
of approximately $5 million. RHL businesses include a portfolio of sampling
systems catering to the fragrance, cosmetics and personal care industries,
as well as microencapsulation activities. The sampling systems and related
microencapsulation services and activities have been integrated into
Arcade's sampling technology group (named Arcade Sampling Technologies,
AST) and the microencapsulated products have been combined with Arcade's
product technology unit (named Arcade Product Technologies, APT). RHL also
has a creative services division (renamed Arcade Direct, AD) that handles
marketing communications, catalogs and database marketing and a multi-media
division (renamed Arcade Consumer Communications, ACC) for merchandising at
point-of-sale. The purchase price and refinancing of indebtedness were
financed by borrowings under the credit agreement. The purchase was
accounted for under the purchase method of accounting. Results of
operations for the nine months ended March 31, 2000 include the results of
RHL for the period from September 15, 1999 to March 31, 2000. The purchase
price allocation is not finalized at this time. Management has not
determined what impact, if any, that there would be on earnings.
Interim financial statements
The interim consolidated condensed balance sheet at March 31, 2000 and
the interim consolidated condensed statements of operations for the three
and nine months ended March 31, 2000 and 1999, the interim consolidated
condensed statements of cash flows for the nine months ended March 31, 2000
and 1999 and the interim consolidated condensed statement of changes in
stockholder's equity for the nine months ended March 31, 2000 are
unaudited, and certain information and footnote disclosure related thereto,
normally included in the financial statements prepared in accordance with
generally accepted accounting principles, have been omitted. 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)
BASIS OF PRESENTATION (Continued)
2. INVENTORY
The following table details the components of inventory:
March 31, 2000 June 30, 1999
(unaudited)
Raw materials
Paper $4,176 $1,088
Other raw materials 2,371 2,328
------ ------
Net raw materials 6,547 3,416
Work in process 1,731 1,693
------ ------
Net inventory $8,278 $5,109
====== ======
3. RETIREMENT OF DEBT
During the nine months ended March 31, 2000, Acquisition Corp.
purchased $8,770 of Holding Corp. Senior Discount Debentures and $4,490 of
AKI, Inc. Senior Notes for $4,084 and $3,996 respectively. The debentures
and notes were contributed to Holding Corp. and subsequently retired.
<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. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets at March 31, 2000 (unaudited) and
June 30, 1999 and condensed statements of operations, changes in
stockholder's equity and cash flows for the nine months ended March 31,
2000 (unaudited) and 1999 (unaudited) for Holding have been prepared on the
equity basis of accounting and should be read in conjunction with the
consolidated statements and notes thereto.
<TABLE>
<CAPTION>
BALANCE SHEET
March 31, 2000 June 30, 1999
-------------- -------------
(unaudited)
<S> <C> <C>
Assets
Cash .................................................. $ -- $ --
Investment in subsidiaries ............................ 98,445 92,817
Deferred charges ...................................... 1,189 1,520
Deferred income taxes ................................. 1,707 1,206
--------- --------
Total assets ...................................... $ 101,341 $ 95,543
========= ========
Liabilities
Senior discount debentures ............................ $ 26,982 $ 29,651
Stockholder's equity
Common Stock, $0.01 par value, 1,000 shares authorized;
1,000 shares issued and outstanding ............... -- --
Additional paid-in capital ............................ 86,444 78,364
Accumulated deficit ................................... (12,085) (12,472)
--------- --------
Total stockholder's equity ........................ 74,359 65,892
--------- --------
Total liabilities and stockholder's equity ........ $ 101,341 $ 95,543
========= ========
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
--------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Equity in net income (loss) of subsidiaries ....... $ 1,632 $ (416)
Interest expense .................................. 2,829 2,751
------- -------
Loss before income taxes and extraordinary gain (1,197) (3,167)
Income tax benefit ................................ (923) (900)
------- -------
Loss before extraordinary gain ................ (274) (2,267)
Extraordinary gain from early retirement of debt .. 661 --
------- -------
Net income (loss) ............................. $ 387 $(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)
4. 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, 1999 ........................ 1,000 $ -- $78,364 $(12,472) $65,892
Equity contribution by AHC I
Acquisition Corporation .................... 8,080 8,080
Net income (unaudited) ......................... 387 387
----- ------ ------- -------- -------
Balance, March 31, 2000 (unaudited) ............ 1,000 $ -- $86,444 $(12,085) $74,359
===== ====== ======= ======== =======
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
-------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ........................................................... $ 387 $(2,267)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Net change in investment in subsidiaries ............................. (1,632) 416
Amortization of debt discount ........................................ 2,760 2,693
Amortization of debt issuance costs .................................. 70 67
Deferred income taxes ................................................ (924) (900)
Gain from early retirement of debt ................................... (661) --
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 ...................................... $ -- $ --
======= =======
Significant non-cash activities
Contribution of equity and retirement of
senior discount debentures and senior note ................................ $ 8,080 --
Investment in subsidiaries .................................................. $ 3,996 --
</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>
March 31, June 30,
2000 1999
----------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ......................... $ 179 $ 7,015
Accounts receivable, net .......................... 22,677 16,287
Inventory ......................................... 8,278 5,109
Income tax refund receivable ...................... 32 32
Prepaid expenses .................................. 223 452
Deferred income taxes ............................. 400 400
--------- ---------
Total current assets ........................... 31,789 29,295
Property, plant and equipment, net ................ 17,741 18,511
Goodwill, net ..................................... 162,774 147,990
Other intangible assets, net ...................... 6,013 6,560
Deferred charges, net ............................. 5,911 5,319
Deferred income taxes ............................. 861 3,132
Other assets ...................................... 89 46
--------- ---------
Total assets ................................... $ 225,178 $ 210,853
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations ...... $ 1,018 $ 688
Accounts payable, trade ........................... 3,877 3,400
Accrued income taxes .............................. 103 497
Accrued interest .................................. 2,987 6,047
Accrued expenses .................................. 5,238 3,810
--------- ---------
Total current liabilities ...................... 13,223 14,442
Long-term portion of capital lease obligations .... 509 1,349
Revolving credit line ............................. 14,200 --
Senior notes ...................................... 110,510 115,000
Deferred income taxes ............................. 2,980 3,340
Other non-current liabilities ..................... 1,399 --
--------- ---------
Total liabilities .............................. 142,821 134,131
Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
1,000 shares issued and outstanding ............ -- --
Additional paid-in capital ........................ 104,858 100,862
Accumulated deficit ............................... (6,413) (8,045)
Accumulated other comprehensive loss .............. (358) (365)
Carryover basis adjustment ........................ (15,730) (15,730)
--------- ---------
Total stockholder's equity ..................... 82,357 76,722
--------- ---------
Total liabilities and stockholder's equity ..... $ 225,178 $ 210,853
========= =========
</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 Nine months ended
----------------------------------- -----------------------------------
March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales ............................... $25,433 $ 24,518 $74,320 $ 68,979
Cost of goods sold ...................... 15,492 14,827 44,572 43,908
------- -------- ------- --------
Gross profit ........................ 9,941 9,691 29,748 25,071
Selling, general and
administrative expenses ............. 3,631 3,924 12,286 10,333
Amortization of goodwill and
other intangibles ................... 1,373 1,151 3,928 3,454
Loss (gain) from settlement
of litigation, net .................. 12 -- (858) --
------- -------- ------- --------
Income from operations .............. 4,925 4,616 14,392 11,284
Other expenses:
Interest expense, net ............... 3,479 3,298 10,220 9,752
Management fees and
other, net ...................... 62 242 187 367
------- -------- ------- --------
Income before income taxes and
extraordinary gain .................. 1,384 1,076 3,985 1,165
Income tax expense ...................... 1,008 795 2,540 1,581
------- -------- ------- --------
Income (loss) before extraordinary
gain............................ 376 281 1,445 (416)
Extraordinary gain from early
retirement of debt, net of tax ...... -- -- 187 --
------- -------- ------- --------
Net income (loss) ................... $ 376 $ 281 $ 1,632 $ (416)
======= ======== ======= ========
</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
Common Stock Additional Other Carryover
------------------- Paid-in Accumulated Comprehensive Basis
Shares Dollars Capital Deficit Loss Adjustment Total
------ ------- ---------- ----------- ------------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1999 ................ 1,000 $ -- $100,862 $(8,045) $(365) $(15,730) $76,722
Equity contribution by AKI Holding Corp.
(unaudited) ......................... 3,996 3,996
Net income (unaudited) ................. 1,632 1,632
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited) .......... 7 7
-------
Comprehensive income (unaudited) ....... 1,639
----- ------ -------- ------- ----- -------- -------
Balances, March 31, 2000 (unaudited) ... 1,000 $ -- $104,858 $(6,413) $(358) $(15,730) $82,357
===== ====== ======== ======= ===== ======== =======
</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>
Nine months ended
--------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
(unaudited) (unaudited)
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ................................................. $ 1,632 $ (416)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of goodwill
and other intangibles ..................................... 7,188 6,561
Amortization of debt issuance cost ............................ 503 461
Deferred income taxes ......................................... 1,790 947
Net gain from early retirement of debt ........................ (187) --
Other ......................................................... (133) (248)
Changes in operating assets and liabilities:
Accounts receivable ........................................ (3,731) (8,752)
Inventory .................................................. (3,018) (3,897)
Prepaid expenses, deferred charges
and other assets ......................................... 398 (248)
Income taxes ............................................... (32) 5,587
Accounts payable and accrued expenses ...................... (6,474) 3,197
-------- -------
Net cash provided by (used in)
operating activities ............................... (2,064) 3,192
-------- -------
Cash flows from investing activities
Purchases of equipment ............................................ (2,300) (2,430)
Payments for acquisitions, net of cash
acquired ...................................................... (16,162) --
-------- -------
Net cash used in investing activities ..................... (18,462) (2,430)
-------- -------
Cash flows from financing activities
Payments under capital leases for equipment ....................... (510) (460)
Net proceeds on line of credit ................................... 14,200 800
Repayment of other notes payable .................................. -- (1,330)
-------- -------
Net cash provided by (used in) financing
activities ............................................. 13,690 (990)
-------- -------
Net (decrease) in cash and cash equivalents ........................... (6,836) (228)
Cash and cash equivalents, beginning of period ........................ 7,015 1,641
-------- -------
Cash and cash equivalents, end of period .............................. $ 179 $ 1,413
======== =======
Supplemental information
Cash paid (received) during the period for:
Interest, other ............................................... $ 12,724 $ 6,498
Income taxes .................................................. 1,157 (4,953)
Significant non-cash activities
Assets acquired under capital lease ........................... -- $ 561
Contribution of equity and retirement of
senior notes ............................................. $ 3,996 --
</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 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. ("Acquisition Corp.") 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, Acquisition Corp. contributed $1 and all of its ownership
interest in AKI to AKI Holding Corp. ("Holding") for all of the outstanding
equity of Holding.
Acquisition of Retcom Holdings Ltd.
On September 15, 1999, AKI acquired all of the equity interests in
Retcom Holdings Ltd. and its subsidiaries ("RHL") for a total cost of
approximately $12 million and refinanced RHL's working capital indebtedness
of approximately $5 million. RHL businesses include a portfolio of sampling
systems catering to the fragrance, cosmetics and personal care industries,
as well as microencapsulation activities. The sampling systems and related
microencapsulation services and activities have been integrated into
Arcade's sampling technology group (named Arcade Sampling Technologies,
AST) and the microencapsulated products have been combined with Arcade's
product technology unit (named Arcade Product Technologies, APT). RHL also
has a creative services division (renamed Arcade Direct, AD) that handles
marketing communications, catalogs and database marketing and a multi-media
division (renamed Arcade Consumer Communications, ACC) for merchandising at
point-of-sale. The purchase price and refinancing of indebtedness were
financed by borrowings under the credit agreement. The purchase was
accounted for under the purchase method of accounting. Results of
operations for the nine months ended March 31, 2000 include the results of
RHL for the period from September 15, 1999 to March 31, 2000. The purchase
price allocation is not finalized at this time. Management has not
determined what impact, if any, that there would be on earnings.
Interim financial statements
The interim consolidated condensed balance sheet at March 31, 2000 and
the interim consolidated condensed statements of operations for the three
and nine months ended March 31, 2000 and 1999, the interim consolidated
condensed statements of cash flows for the nine months ended March 31, 2000
and 1999 and the interim consolidated condensed statement of changes in
stockholder's equity for the nine months ended March 31, 2000 are
unaudited, and certain information and footnote disclosure related thereto,
normally included in the financial statements prepared in accordance with
generally accepted accounting principles, have been omitted. 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>
2. INVENTORY
The following table details the components of inventory:
March 31, 2000 June 30, 1999
-------------- -------------
(unaudited)
Raw materials
Paper ........................ $4,176 $1,088
Other raw materials .......... 2,371 2,328
------ ------
Net raw materials ................ 6,547 3,416
Work in process .................. 1,731 1,693
------ ------
Net inventory .................... $8,278 $5,109
====== ======
3. RETIREMENT OF DEBT
During the nine months ended March 31, 2000, Acquisition Corp.
purchased $4,490 of AKI, Inc. Senior Notes for $3,996. The notes were
contributed to Holding Corp. and Holding Corp contributed the notes to AKI,
Inc. The notes were subsequently retired.
<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 March 31, 2000 Compared to Three Months Ended March 31,
1999
Net Sales. Net sales for the three months ended March 31, 2000, increased
$0.9 million, or 3.7%, to $25.4 million, as compared to $24.5 million for the
three months ended March 31, 1999. The increase was primarily attributable to
increases in domestic and international sales of sampling technologies for
advertising and marketing of fragrance products and sales from the RHL acquired
businesses, offset by decreases in domestic sales of sampling technologies for
advertising and marketing of cosmetics and consumer products and changes in
foreign exchange rates.
Gross Profit. Gross profit for the three months ended March 31, 2000,
increased $0.2 million, or 2.1%, to $9.9 million, as compared to $9.7 million
for three months ended March 31, 1999. Gross profit as a percentage of net sales
decreased to 39.0% in the three months ended March 31, 2000, from 39.6% in the
three months ended March 31, 1999. The increase in gross profit is primarily
attributable to the increase in net sales discussed above, offset by changes in
product mix and changes in foreign exchange rates. The decrease in gross profit
as a percentage of net sales is primarily attributable to changes in product
mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2000, decreased
$0.3 million, or 7.7% to $3.6 million, as compared to $3.9 million for the three
months ended March 31, 1999. The decrease in selling, general and administrative
expenses was primarily due to a 1999 severance charge related to a former
executive, a decrease in sales commissions and legal expense, offset partially
by increased sales staffing and additional expenses associated with the
operation of RHL. As a result of these factors, selling, general and
administrative expenses as a percent of net sales decreased to 14.2% in the
three months ended March 31, 2000, from 15.9% in the three months ended March
31, 1999.
Income from Operations. Income from operations for the three months ended
March 31, 2000 increased $0.3 million, or 6.5%, to $4.9 million, as compared to
$4.6 million for the three months ended March 31, 1999. Income from operations
as a percentage of net sales increased to 19.3% in the three months ended March
31, 2000, from 18.8% in three months ended March 31, 1999, principally as a
result of the factors described above.
Interest Expense. Interest expense for the three months ended March 31,
2000 increased $0.1 million, or 2.3% to $4.4 million, as compared to $4.3
million for the three months ended March 31, 1999. Interest expense as a
<PAGE>
percentage of net sales decreased to 17.3% in the three months ended March 31,
2000, from 17.6% in the three months ended March 31, 1999. The increase in
interest expense, including the amortization of deferred financing costs, is
primarily due to use of the credit line for working capital and the RHL
acquisition, offset partially 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 March 31, 2000
increased $0.2 million, or 6.1% to $3.5 million, as compared to $3.3 million for
the three months ended March 31, 1999. Interest expense as a percentage of net
sales increased to 13.8% in the three months ended March 31, 2000, from 13.5% in
the three months ended March 31, 1999. The increase in interest expense,
including the amortization of deferred financing costs, is primarily due to use
of the credit line for working capital and the RHL acquisition, offset partially
by a decrease in interest expense related to the repurchased and retired Senior
Notes.
Income Tax Expense. Income tax expense for the three months ended March 31,
2000 increased $0.2 million to $0.7 million. The increase is due to the increase
in income before income taxes and extraordinary gain as a result of the factors
described above. The Company's effective tax rate, after consideration of
non-deductible goodwill amortization, was 42.7% in the three months ended March
31, 2000, and 44.5% in the three months ended March 31, 1999.
Income tax expense for AKI for the three months ended March 31, 2000
increased $0.2 million to $1.0 million. The increase is due to the increase in
income before income taxes and extraordinary gain as a result of the factors
described above. AKI's effective tax rate, after consideration of non-deductible
goodwill amortization, was 39.0% in the three months ended March 31, 2000 and
1999.
EBITDA. EBITDA for the three months ended March 31, 2000, increased $0.6
million, or 8.8%, to $7.4 million, as compared to $6.8 million for the three
months ended March 31, 1999. The increase principally reflects the increase in
income from operations discussed above. EBITDA as a percentage of net sales was
29.1% and 27.8% in the three months ended March 31, 2000 and 1999, respectively.
EBITDA is income from operations plus depreciation and amortization of goodwill
and other intangibles.
Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31,
1999
Net Sales. Net sales for the nine months ended March 31, 2000, increased
$5.3 million, or 7.7%, to $74.3 million, as compared to $69.0 million for the
nine months ended March 31, 1999. The increase was primarily attributable to
increases in domestic sales of sampling technologies for advertising and
marketing of cosmetics and consumer products, due partially to the timing of
completion and delivery of certain substantial orders which remained in process
at June 30, 1999, and sales from the RHL acquired business, offset by decreases
in domestic sales of sampling technologies for advertising and marketing of
fragrance products and international sales of sampling technologies for
advertising and marketing of consumer products and changes in foreign exchange
rates.
Gross Profit. Gross profit for the nine months ended March 31, 2000,
increased $4.6 million, or 18.3%, to $29.7 million, as compared to $25.1 million
for nine months ended March 31, 1999. Gross profit as a percentage of net sales
increased to 40.0% in the nine months ended March 31, 2000, from 36.4% in the
nine months ended March 31, 1999. 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, changes in product mix and more efficient production
levels, offset partially by changes in foreign exchange rates.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended March 31, 2000, increased $2.0
million, or 19.4% to $12.3 million, as compared to $10.3 million for the nine
months ended March 31, 1999. The increase in selling, general and administrative
expenses was primarily due to an increase in sales and customer service staffing
levels and compensation and additional expenses associated with the acquisition
and operation of RHL. As a result of these factors, selling, general and
administrative expenses as a percent of net sales increased to 16.6% in the nine
months ended March 31, 2000, from 14.9% in the nine months ended March 31, 1999.
<PAGE>
Income from Operations. Income from operations for the nine months ended
March 31, 2000 increased $3.1 million, or 27.4%, to $14.4 million, as compared
to $11.3 million for the nine months ended March 31, 1999. Income from
operations as a percentage of net sales increased to 19.4% in the nine months
ended March 31, 2000, from 16.4% in nine months ended March 31, 1999,
principally as a result of the factors described above.
Interest Expense. Interest expense for the nine months ended March 31,
2000, increased $0.5 million, or 4.0% to $13.0 million, as compared to $12.5
million for the nine months ended March 31, 1999. Interest expense as a
percentage of net sales decreased to 17.5% in the nine months ended March 31,
2000, from 18.1% in the nine months ended March 31, 1999. The increase in
interest expense, including the amortization of deferred financing costs, is
primarily due to use of the credit line for working capital and the RHL
acquisition, offset partially by a decrease in interest expense related to the
repurchased and retired Senior Discount Debentures and Senior Notes.
Interest expense for AKI for the nine months ended March 31, 2000,
increased $0.4 million, or 4.1% to $10.2 million, as compared to $9.8 million
for the nine months ended March 31, 1999. Interest expense as a percentage of
net sales decreased to 13.7% in the nine months ended March 31, 2000, from 14.2%
in the nine months ended March 31, 1999. The increase in interest expense,
including the amortization of deferred financing costs, is primarily due to use
of the credit line for working capital and the RHL acquisition, offset partially
by a decrease in interest expense related to the repurchased and retired Senior
Notes.
Income Tax Expense. Income tax expense for the nine months ended March 31,
2000 increased $0.9 million to $1.6 million. The increase is due to the increase
in income before income taxes and extraordinary gain as a result of the factors
described above. The Company's effective tax rate, after consideration of
non-deductible goodwill amortization and non-taxable gain from settlement of
litigation, was 44.0% in the nine months ended March 31, 2000 and 52.3% in the
nine months ended March 31, 1999.
Income tax expense for AKI for the nine months ended March 31, 2000
increased $0.9 million to $2.5 million. The increase is due to the increase in
income before income taxes and extraordinary gain as a result of the factors
described above. AKI's effective tax rate, after consideration of non-deductible
goodwill amortization and non-taxable gain from settlement of litigation, was
39.0% in the nine months ended March 31, 2000 and 1999.
Extraordinary gain from early retirement of debt. Extraordinary gain from
early retirement of debt of $0.8 million for the nine months ended March 31,
2000 resulted from the purchase and subsequent contribution of Senior Notes and
Senior Discount Debentures by AHC I Acquisition Corporation. The contributed
securities were subsequently retired.
Extraordinary gain from early retirement of debt for AKI of $0.2 million
for the nine months ended March 31, 2000 resulted from the purchase of Senior
Notes by AHC I Acquisition Corporation and subsequent contribution by AKI
Holding Corp. The contributed securities were subsequently retired.
EBITDA. EBITDA for the nine months ended March 31, 2000, increased $2.9
million, or 16.3%, to $20.7 million, as compared to $17.8 million for the nine
months ended March 31, 1999. The increase principally reflects the increase in
income from operations discussed above. EBITDA as a percentage of net sales was
27.9% and 25.8% in the nine months ended March 31, 2000 and 1999, respectively.
EBITDA is income from operations plus depreciation and amortization of goodwill
and other intangibles less net gain from settlement of litigation.
Liquidity and Capital Resources
Our company has substantial indebtedness and significant debt service
obligations. As of March 31, 2000, our company had consolidated indebtedness in
an aggregate amount of $153.2 million (excluding trade payables, accrued
liabilities, deferred taxes and other non-current liabilities), of which (1)
approximately $27.0 million was a direct obligation of Holding relating to its
debentures and (2) approximately $126.2 million was a direct obligation of AKI
relating to its notes, revolving credit line and capital leases. Borrowings at
March 31, 2000 included $14.2 million under the revolving credit agreement that
was incurred to finance the acquisition of RHL. At March 31, 2000 our company
had available $5.2 million under the credit line facility. At March 31, 2000,
AKI also had $16.5 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.
<PAGE>
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,
which was $2.9 million for the nine months ended March 31, 1999, together with
borrowings under revolving credit facilities. During the nine months ended March
31, 2000, cash totaling $2.1 million was used by operating activities primarily
due to the increase in accounts receivable and inventory and a decrease in
accrued interest, accounts payable and accrued expenses. Net cash provided by
operating activities during the nine months ended March 31, 1999 resulted from
net income before depreciation and amortization, the collection of an income tax
refund receivable and increases in accounts payable and accrued expenses. These
factors were partially offset by increased accounts receivable and inventory
levels.
In the nine months ended March 31, 2000 and 1999, our company had capital
expenditures of approximately $2.3 million and $2.4 million, respectively. These
capital expenditures consisted primarily of the purchase of an electronic
prepress system, 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 is exploring options for the longer-term
financing of a portion of the borrowings incurred in connection with the
acquisition.
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, Acquisition Corp. consummated a private placement to
DLJMBII of 15,000,000 shares of its common stock at a purchase price of $1.00
per share. In October 1999, Acquisition Corp. purchased $8.8 million of Holding
Corp. Senior Discount Debentures and $4.5 million of AKI, Inc., Senior Notes.
The debentures and notes were contributed to Holding Corp. and subsequently
retired.
Capital expenditures for the three months ending June 30, 2000 are
currently estimated to be approximately $1.2 million. Based on borrowings
outstanding (other than pursuant to the credit agreement) as of March 31, 2000
and borrowings outstanding under the credit agreement as of May 11, 2000, our
company expects total cash payments for debt service for the three months ending
June 30, 2000 to be approximately $0.5 million, consisting of $0.2 million in
capital lease obligations and $0.3 million in interest and fees under the credit
agreement. Our company also expects to make royalty payments of approximately
$0.2 million during the three months ending June 30, 2000.
At March 31, 2000, our company's cash and cash equivalents and net working
capital were $0.2 million and $18.6 million, respectively, representing a
decrease in cash and cash equivalents of $6.8 million and an increase in net
working capital of $3.7 million from June 30, 1999. Account receivables, net, at
March 31, 2000 increased 39.3% or $6.4 million over the June 30, 1999 amount,
primarily due to increased sales. Inventory increased in anticipation of price
increases and changes in paper composition.
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 two fiscal quarters
ended December 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
<PAGE>
manufacturing capacity, which often operates at full capacity during peak
seasonal demand periods.
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards
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. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities Deferral of Effective Date" which is effective for fiscal years
beginning after June 15, 2000. Our company has only utilized derivative
financial instruments to hedge our 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 our
company's financial condition or results of operations. Our company will adopt
the provisions of this Statement on July 1, 2000.
Year 2000 Issues
Our company worked to resolve the potential impact of the Year 2000 on its
information technology systems and its non-information technology systems so
they would properly recognize and utilize dates beyond December 31, 1999.
Our company had in place a Year 2000 program which was executed by an
internal project team. The objective of the Year 2000 program was 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, none of our
company's systems have been adversely affected by the Year 2000. Our 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. Our company believes that all of these systems are Year 2000 compliant.
Upon review of our company's non-information technology systems our company
believes that none of its manufacturing equipment is date sensitive. Of the
remaining non-information technology systems, our company believes all such
systems are Year 2000 compliant.
Our company has spent approximately $100,000 on Year 2000 compliance. All
expenditures with respect to Year 2000 compliance were funded from working
capital.
Our company communicated with its significant customers and vendors to
understand their Year 2000 issues and how they prepared themselves to manage
those issues as they relate to our company. To date, no significant customers or
vendors have informed our company that a material Year 2000 issue exists which
will have a material effect on our company.
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, 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,
<PAGE>
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 March 31, 2000, there were no
forward exchange contracts outstanding.
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: May 15, 2000 By: /s/ Kenneth A. Budde
--------------------
Kenneth A. Budde
Senior Vice President and
Chief Financial Officer
AKI, INC.
Date: May 15, 2000 By: /s/ Kenneth A. Budde
--------------------
Kenneth A. Budde
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AKI HOLDING CORP. FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<NAME> AKI HOLDING CORP.
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AKI, INC. FOR THE THREE AND NINE MONTHS ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001067549
<NAME> AKI, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-START> JAN-1-2000 JUL-1-1999
<PERIOD-END> MAR-31-2000 MAR-31-2000
<CASH> 179 179
<SECURITIES> 0 0
<RECEIVABLES> 23,225 23,225
<ALLOWANCES> 548 548
<INVENTORY> 8,278 8,278
<CURRENT-ASSETS> 31,789 31,789
<PP&E> 26,694 26,694
<DEPRECIATION> 8,953 8,953
<TOTAL-ASSETS> 225,178 225,178
<CURRENT-LIABILITIES> 13,223 13,223
<BONDS> 125,219 125,219
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 82,357 82,357
<TOTAL-LIABILITY-AND-EQUITY> 225,178 225,178
<SALES> 25,433 74,320
<TOTAL-REVENUES> 25,433 74,320
<CGS> 15,492 44,572
<TOTAL-COSTS> 15,492 44,572
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,479 10,220
<INCOME-PRETAX> 1,384 3,985
<INCOME-TAX> 1,008 2,540
<INCOME-CONTINUING> 376 1,445
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 187
<CHANGES> 0 0
<NET-INCOME> 376 1,632
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
