Filed Pursuant to Rule 424(b)(3)
Registration No. 333-60989
PROSPECTUS SUPPLEMENT DATED SEPTEMBER 28, 2000
To Prospectus dated December 23, 1998
10 1/2% SENIOR NOTES DUE 2008
OF
AKI, INC.
RECENT DEVELOPMENTS
Attached hereto and incorporated by reference herein is the Form 10-K of
AKI, Inc. filed September 28, 2000.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 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 _____________
AKI HOLDING CORP.
(Exact name of registrant as specified in its charter)
Commission File Number: 333-60991
Delaware 74-288316
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AKI, INC.
(Exact name of registrant as specified in its charter)
Commission File Number: 333-60989
Delaware 13-3785856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1815 East Main Street
Chattanooga, TN 37404
(423) 624-3301
(Address, including zip code and telephone number, including area code, of
principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
None.
Securities Registered Pursuant to Section 12(b) of the Act:
None.
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Indicate by check mark whether the registrants (1) have 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) have been subject to such
filing requirements for the past 90 days. (X) Yes ( ) No
As of September 27, 2000, 1,000 shares of common stock of AKI Holding Corp.,
$0.01 par value, were outstanding and 1,000 shares of common stock of AKI, Inc.,
$0.01 par value, were outstanding.
Indicate by check mark if disclosure of delinquent filers is not contained
herein, and will not be contained, to the best of registrants' knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. (X)
AKI, Inc. meets the requirements set forth in General Instruction I 1(a) and (b)
of Form 10-K and is therefore filing this form with reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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As used within this report, the term "company" refers to AKI Holding Corp.,
a Delaware corporation, and its subsidiaries, including AKI, Inc., a Delaware
corporation ("AKI"). The term "Holding" refers solely to AKI Holding Corp.
PART I
Part I is presented with respect to both registrants submitting this
filing, Holding and AKI.
ITEM 1. BUSINESS
General
Our company is a leading global marketer and manufacturer of multi-sensory,
interactive advertising utilizing sampling systems that engage the senses of
touch, sight, sound and olfactory. Our sampling systems are widely recognized in
the fragrance, cosmetics and personal care industries, as well as the household
products and food and beverage industries. We offer an extensive portfolio of
proprietary, patented and patent-pending sampling systems that can be
incorporated into various advertising media which is designed to reach the
consumer at home or in-store, such as magazine inserts, catalog inserts,
remittance envelopes, statement enclosures, blow-ins and point-of-sale displays.
Our company is a fully integrated multi-sensory advertising company,
conducting its business under the Arcade Marketing Inc. name and is positioned
to provide complete, interactive advertising programs to our customers,
including creative content and product sample systems and distribution.
Product sampling is one of the most effective, widely used and fastest
growing forms of promotional activity. Product sampling is particularly crucial
to the fragrance and cosmetics industries where consumers traditionally "try
before they buy" due to the highly personal nature of the products. Our
company's introduction in 1979 of the ScentStrip(R) Sampler, the first
pull-apart, microencapsulated scent sampling system, transformed the fragrance
sampling industry. By combining advertising with a sampling system, marketers
were afforded the first cost-effective means to reach consumers in their homes
on a mass scale. Though the microencapsulated fragrance sampling system remains
the most widely used product throughout the fragrance industry, our company has
developed and/or acquired a portfolio of alternative scent sampling systems, all
designed for cost-effective mass distribution, and continues to be the leading
innovator in sampling system advertising.
In recent years, our company has expanded our sampling system business by
developing new technologies specifically for the skincare, makeup, food and
beverage and consumer products markets. Although product sampling is critical to
the success of these markets, sampling programs for these products historically
have been too costly for mass production and incapable of efficiently being
incorporated into magazines, catalogs, direct mail and other printed vehicles.
Our innovative sampling systems are designed to fill the needs of these
marketers by providing a cost-effective means of reaching consumers in their
homes on a mass scale with
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quality renditions of skincare products, foundation, lipstick and cosmetic
powders. Management believes that our innovative sampling systems have altered
the economics and efficiencies of product sampling in the cosmetics market.
In December 1997, DLJ Merchant Banking Partners II, L.P. and certain
related investors (collectively, "DLJMBII") and certain members of our company's
prior management organized AHC I Acquisition Corp., a Delaware corporation
("AHC"), to acquire all of the outstanding equity interests of AKI. Holding was
formed as a holding company in 1998 and its only significant asset is the
capital stock of AKI. Holding conducts all of its business through AKI. As of
September 27, 2000, DLJMBII owned approximately 98.8% of the outstanding common
stock of AHC. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Acquisition" and "Item 12. Security
Ownership of Certain Beneficial Owners and Management."
On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RetCom Holdings Ltd. ("RetCom"), a Delaware corporation, and
refinanced working capital indebtedness of RetCom and its subsidiaries. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--RetCom Acquisition." The acquired businesses of RetCom and its
subsidiaries include a portfolio of sampling systems catering to the fragrance,
cosmetics and personal care industries, as well as microencapsulation products
and processes. The acquired businesses also include a creative service division
that engages in marketing communications and catalogs, and a multi-media
division focused presently at merchandising at point-of-sale and through the
Internet. The acquired businesses offer proprietary, patented and patent-pending
sampling systems that include MicroSilk(TM), MicroDot(TM), Snap and Powder,
ColorDot(TM) and Ascent(TM).
Products
Our company offers a broad and diversified portfolio of innovative,
interactive sampling systems and advertising formats for the fragrance,
cosmetics and consumer products markets. Our major technologies are described
below, including a description of the patent protection of each product
technology. Each of our products is a cosmetic, fragrance or consumer product
sample system generally sold to the same category of manufacturers of the
product being advertised.
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Year of Patent
Product Introduction Origin Protection Target Market
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ScentStrip(R) 1979 Internally Proprietary Fragrance,
developed secret consumer products
--------------------------------------------------------------------------------
ScentStrip(R)Plus mid 1980's Internally Proprietary Fragrance
developed secret
--------------------------------------------------------------------------------
DiscCover(R) 1994 Licensed Patented Fragrance,
consumer products
--------------------------------------------------------------------------------
Scent Seal(R) 1995 Acquired Patented Fragrance
--------------------------------------------------------------------------------
LiquaTouch(R) 1997 Internally Patent Fragrance,
developed pending skin care
--------------------------------------------------------------------------------
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MicroDot(TM) 1993 Acquired Proprietary Fragrance
secret
--------------------------------------------------------------------------------
Aromalacquer 1997 Acquired Proprietary Fragrance,
secret consumer product
--------------------------------------------------------------------------------
Fragrance Burst and 1989 Acquired Patented Fragrance
Pearls
--------------------------------------------------------------------------------
Fragrance Burst 1984 Acquired Patented Fragrance
--------------------------------------------------------------------------------
Microfragrance Scratch Acquired Proprietary Fragrance,
`n Sniff 1978 secret consumer product
--------------------------------------------------------------------------------
BeautiSeal(R) 1997 Internally Patented Cosmetics, skin
developed care and personal
care
--------------------------------------------------------------------------------
PowdaTouch(R) 1997 Internally Patented Cosmetics
developed
--------------------------------------------------------------------------------
LipSeal(TM) 1998 Internally Patented Cosmetics
developed
--------------------------------------------------------------------------------
TouchDown(TM) 1999 Internally Patent Cosmetics
Nail Color Sampler developed application
pending
--------------------------------------------------------------------------------
BeautiTouch(R) 1999 Internally Patent Cosmetics, skin
Multi-well Sampler developed pending care and personal
care
--------------------------------------------------------------------------------
ColorDot(TM) 1999 Acquired Patented Cosmetics
--------------------------------------------------------------------------------
Olfactory Sampling Systems
Our diverse portfolio of fragrance sampling systems, which uses a variety
of proprietary chemistries and processes, historically has represented a
significant portion of our utilized sales. While ScentStrip continues to be the
most widely used technology for sampling products for the fragrance industry,
management believes that our new and recently acquired sampling systems have
helped us maintain a competitive advantage and our position as an innovator in
the sampling industry. Our products have been used in substantially all major
new fragrance launches in recent years that have utilized sampling systems.
o ScentStrip(R): Our company's original pull-apart, microencapsulated
fragrance sampling system continues to deliver the most cost-effective,
quality fragrance rendition.
o ScentStrip(R) Plus: The classic, pull-apart, microencapsulated fragrance
format with the added feature of silky-to-the-touch, powdery texture.
o DiscCover(R): A peel-and-reveal, non-encapsulated sampling system that
opens and reseals, delivering a quality aroma rendition up to 25 times.
This technology is color-printable, affixable to nearly any surface,
including plastic and glass, and can be die-cut in nearly any shape and
size.
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o Scent Seal(R): A heat-sealed, pouch-like, pressure-sensitive format that
peels open to reveal a moist, wearable gel rendition that offers both an
olfactory and on-skin experience.
o LiquaTouch(R): Delivers a rendition of finished fragrance product (e.g.,
eau de parfum, eau de toilette or after shave), any liquid treatment or
personal care product and contains an applicator. Available in a
pressure-sensitive format designed for U.S. Postal Service approval for
subscription magazine periodical rates, LiquaTouch(R) is also available in
a stand-alone version, which is a cost-effective alternative to fragrance
vials. In an independent study recently conducted among male consumers of
fragrance products, LiquaTouch(R) was shown to be preferred among sampling
systems and was also a finalist for the Fragrance Foundation's 1997
"Innovation of The Year" award.
o MicroDot(TM): A peel away resealable label, which reveals pressure
sensitive microencapsulated fragrance oil delivered in a Microsilk(TM)
powder. When applied to the skin, the Microsilk(TM) powder delivers a
superior fragrance rendition.
o Aramalacquer: Scented varnish that delivers a superior aroma rendition of
nearly any fragrance, personal care, household, food, beverage,
pharmaceutical, or novelty product. When rubbed or scratched, Aromalacquer
releases the aroma rendition.
o Fragrance Burst Perfume Pearls: A multi-sensory sampling system that
features silky-to-the-touch, pearlized perfume pearls. These pearls are
formulated of 85% liquid perfume oil and release a wearable fragrance
rendition when touched.
o Fragrance Burst and Pearls: Combines the wearable, visible and tangible
properties of Perfume Pearls with the classic, pull-apart fragrance burst
format, delivering an olfactory and on-skin experience.
o Microfragrance Scratch `n Sniff: Microfragrance capsules are applied to
paper or stickers which affix to nearly any surface, delivering an accurate
aroma rendition when the sampling system is scratched, then sniffed.
Other Sampling Systems
Our company also has in its portfolio non-fragrance sampling system
products which represent a growing percentage of our company's sales. All of
these sampling systems except ColorDot(TM) have been designed for U.S. Postal
Service approval for subscription magazine periodical rates.
o BeautiSeal(R): A heat-sealed, pouch-like, pressure-sensitive format peels
open to deliver quality renditions of cream and lotion treatments and
liquid foundations. BeautiSeal(R) is hygienic and spillproof and less
expensive and more versatile than existing skincare/foundation sampling
alternatives. For example, a two-sided, printed
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insert incorporating a BeautiSeal(R) sampling system generally costs less
than half that of the manufacture and magazine distribution of an
equivalent sample packet. BeautiSeal(R) was a finalist for the Fragrance
Foundation's 1998 "Marketing Innovation of The Year" award.
o PowdaTouch(R): Applies up to four different powders on a single carrier and
is ideal for trial of a single item shade range or a complete color story.
Delivers a superior rendition of the shade, texture, finish and application
of eye shadow, powder blush, face powder, bronzer or body powder.
Management estimates that PowdaTouch(R) sampling systems can be produced
approximately ten times faster than currently competing products and at a
reduced production rate.
o LipSeal(TM): A pressure-sensitive sampling system peels open to deliver a
superior rendition of lipstick shade, finish and texture in any formula
including volatile silicones.
o TouchDown(TM) Nail Color Sampler: A pressure-sensitive, die-cut sticker
that temporarily "touches down" on the nail, demonstrating superior
rendition of nail enamel shades without marring a manicure.
o BeautiTouch(R) Multi-Well Sampler: A pressure-sensitive technology
featuring multiple, individually-sealed wells on a common backing, which
peel open to deliver renditions of liquid foundations, cream and lotion
treatment and personal care items, lipstick and fragrance ancillaries.
o ColorDot(TM): A pressure sensitive label which peels away to reveal a
microencapsulated color cosmetic sampling system containing up to four
cosmetic colors laid down in parallel rows.
Formats
Our company produces a wide and versatile range of formats designed for
U.S. Postal Service approval for subscription magazine periodical rates and
which can be incorporated into almost any print media. The most common formats
for our company's products are described below.
Magazine Inserts: Magazine inserts are available in half-, full-, two- and
four-page formats, can be die-cut, can contain any of our company's sampling
systems and are the most commonly produced among our company's formats,
accounting for approximately 39% of fiscal 2000 sales.
Catalog Inserts: Full color formats can be produced in a variety of sizes
and inserted into retail or mail order catalogs. Catalog inserts can be produced
with or without an attached envelope, which may be provided to facilitate the
return of merchandise order forms to the store. Our company has the ability to
create and produce special formats, to custom imprint with store information and
to incorporate most of our company's sampling systems.
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Remittance Envelopes: Remittance envelopes, which are inserted into store
statement mailings, can be customized with a store logo and can accommodate many
of our company's sampling systems. Our company is the only company in the
sampling industry that can produce remittance envelopes in-house. Remittance
envelopes can be produced with or without our company's sampling systems.
Remittance envelope production, which is a highly customized service business,
reinforces our company's position as a fully-integrated enterprise.
Statement Enclosures: Statement enclosures are available in various formats
and sizes. Fragrance statement enclosures may contain a single scent in their
fold, one or two scents under the fragrance panel, or they may be die-cut so
that the fragrance can be sampled by removing the desired die shape. Enclosures
are normally imprinted with store logo and product pricing information. The
six-inch format is our company's design and has become the industry standard.
Blow-ins: Blow-ins, which are available in all formats and sizes, can
accommodate nearly all of our company's sampling systems and are loosely
inserted (blown in) rather than bound into store catalogues, newspapers and
magazines.
In-Store Handouts: Our company has made significant advances in replacing
and expanding current methods of in-store cosmetic and fragrance sampling. Due
to the lower cost and design flexibility of our company's products, marketers
have expanded the number and type of in-store vehicles. Working in partnership
with our customers, new and creative formats have been developed. These formats
incorporate many of our company's sampling systems and items such as postcards,
stickers, wrist bands, bookmarks and CD inserts. Our company is also
experiencing significant in-store business with the LiquaTouch(R) sampling
system, as an alternative to vials, and expects increases for the BeautiSeal(R)
and PowdaTouch(R) sampling systems for trial of shade ranges and formulae.
Patents and Proprietary Technology
Our company currently holds patents covering the proprietary processes used
to produce eight of its products and has submitted applications for three
additional manufacturing processes. Our company has six trademarks registered in
the United States and eight trademarks filed and awaiting registration. Our
company has also filed and registered trademarks in over 15 countries around the
world, including Europe, Australia, Japan and Brazil. See "--Products."
Our company has ongoing research efforts and expects to seek additional
patents in the future covering patentable results of such research. There can be
no assurance that any pending patent applications filed by our company:
o will result in patents being issued or that any patents now or hereafter
owned by our company will afford protection against competitors with
similar technology,
o will not be infringed upon or designed around by others or
o will not be challenged by others and held to be invalid or unenforceable.
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In addition, many of our company's manufacturing processes are not covered by
any patent or patent application. As a result, the business of our company may
be adversely affected by competitors who independently develop technologies
substantially equivalent to those employed by our company.
Customers
Our company sells its products to prestige and mass cosmetic, fragrance,
consumer products companies, department stores, home shopping retailers and
specialty retailers including Avon Products, Inc., Calvin Klein Cosmetics
(Unilever Plc), Chanel, Inc., Coty, Inc., Cosmair/L'Oreal S.A., Elizabeth Arden
(Unilever Plc), Estee Lauder, Inc., Giorgio Beverly Hills, Colgate, Victoria
Secret Beauty and The Procter & Gamble Company. Our company's top ten customers
accounted for approximately 58% of sales in fiscal 2000. None of our company's
customers, other than Estee Lauder, accounted for 10% or more of net sales in
fiscal 2000. Our company believes that its technical expertise, manufacturing
reliability and customer support capabilities have enabled it to develop strong
relationships with its customers. Our company employs sales and marketing
personnel who possess the requisite technical backgrounds to communicate
effectively with both prospective customers and our company's manufacturing
personnel. Historically, our company has had long-term relationships with its
major customers.
Sales and Marketing
Our company's sales and marketing efforts are organized geographically. Our
company currently has a total of twelve sales executives. The U.S. sales group
consists of seven sales executives who are supervised by the Senior Vice
President of Sales. The European sales executives are based in Paris, France and
London, England and are managed by the Senior Vice President, International, who
is based in Paris, France. Each sales executive is dedicated to a certain number
of identified customers. In addition, these sales efforts are supported by
eighteen production managers/customer service representatives, which are based
in Chattanooga, Tennessee and Paris, France. A portion of the compensation for
sales executives is commission-based.
Our company's marketing activities include direct contact with senior
executives in the cosmetic and fragrance industry, major support of industry
events, extensive joint marketing programs with magazines, retailers and oil
houses, press coverage in industry trade publications, tradeshows and seminars,
advertising in trade publications and promotional pieces. In addition, our
company focuses its sales efforts toward three principal groups within its
customers' organizations that management believes influence the customers'
purchasing decisions:
o marketing, which selects the sampling system technology and controls the
promotional budget;
o product development, which approves our company's sampling system rendition
and approves stability testing; and
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o purchasing, which buys the sampling system pieces and controls quality.
Management believes that as the pressure for creativity increases with each new
product introduction, fragrance marketers are increasingly looking for their
vendors to contribute to the overall strategy-building effort for a new
fragrance. Our company's executives routinely introduce new sampling system
formats and ideas based on our company's technologies to the marketing
departments of its customers. Our company's in-house creative and marketing
expertise and complete product line provides customers with maximum flexibility
in designing promotional programs.
Manufacturing
Our company's manufacturing processes are highly technical and largely
proprietary. Our company's sampling systems must meet demanding performance
specifications regarding fidelity to the product being sampled, shelf-life,
resistance to pressure and temperature variations and various other
requirements. The manufacturing processes can be divided into three phases:
o formulating cosmetic and fragrance product renditions in our company's
slurry laboratories for use in sampling systems;
o manufacturing the sampler, which consists of either applying an
encapsulated slurry onto paper or producing sampling labels that contain
fragrance or other cosmetic product renditions as well as printing the
advertising page; and
o labeling technologies (DiscCover(R), Scent Seal(R), BeautiSeal(R),
LiquaTouch(R)), affixing the labels onto a piece preprinted by our company
or a third-party contract supplier.
Management believes that our company's formulation capabilities are the
best in the cosmetics sampling industry. The formulation process is highly
complex because our company is trying to replicate the fragrance of a product in
a bottle containing an alcohol solution using primarily essential oils and
paper. Formulation approval is an interactive process between our company and
its customers. Our company has more than 125 different, proprietary formulations
that it utilizes in replicating different characteristics of over 500 fragrances
to obtain a customer-approved rendition. Certain of these formulations are
patented and the majority of the formulation process is based on unique and
proprietary methods. Formulation of the fragrance and cosmetic product rendition
is performed under very strict tolerances and in complete conformity to the
formula that the customer has pre-approved. Formulation is conducted in our
company's specially designed formulation laboratories by trained specialists.
The artwork for substantially all printed pieces has typically been
furnished by the customer or its advertising agency. Our company's prepress
department is currently being converted to state-of-the-art technology by
utilizing the receipt of customer-supplied computer disks and producing this
material directly on to plates. Our company has the capability to produce high
quality printed materials, including the covers of major fashion magazines, in
connection with fragrance sampling systems.
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Our company has two different sampling component manufacturing processes:
(1) for its formulated offset paper samplers (ScentStrip(R), ScentStrip(R) Plus,
PowdaTouch(R)) and (2) for its formulated letterpress or flexo label samplers
(DiscCover(R), Scent Seal(R), BeautiSeal(R), LiquaTouch(R)). Formulated paper
samplers are produced in our company's primary facility where our company
carefully applies microencapsulated slurry onto the paper during the printing
process and, in a continuous in-line operation, folds, cuts and trims the
samplers for packing. A 24-hour quality control function and hourly
accountability provide significant value to the product development personnel at
our company's customers, who are responsible for sample system quality.
All sampling systems in label form are produced on specially modified label
and finishing equipment in our company's second facility. In addition to the
patents pending on certain of its manufacturing processes, our company uses a
number of proprietary techniques in producing label samplers. Similar to the
formulated paper operation, sampling quality control personnel evaluate all
sample systems by roll and provide full accountability for our company's
production.
Our company also has agreements with certain European and Australian
printers and labelers, which produce some quantities for global customers that
require foreign distribution. Each of these arrangements is protected by
non-competition agreements.
Our company was recently awarded The Proctor & Gamble Pinnacle Award, which
is presented to companies as recognition for having met certain quality
requirements and having demonstrated outstanding quality assurance. Our company
is also registered with the Food and Drug Administration for the packaging of
regulated cosmetic products.
Sources and Availability of Raw Materials
Generally, the raw materials used by our company in the manufacturing of
its products have been readily available from numerous suppliers and have been
purchased by our company at prices that our company believes are competitive.
Our company's encapsulated paper products utilize specific grades of paper that
are subject to comprehensive evaluation and certification by our company for
quality, consistency and fit. Our company has not experienced any material
supply shortages in the past, nor are any anticipated.
Competition
Our company's competitors, some of whom have substantially greater capital
resources than our company, are actively engaged in manufacturing certain
products similar to, or in competition with, those of our company. Competition
in our company's markets is based upon product quality, product technologies,
customer relationships, price and customer service. Our company's principal
competitors in the printed fragrance sampler market are Webcraft, a subsidiary
of Big Flower Holdings, Inc., Orlandi, Inc., Nord'est, Marietta Corp., Klocke,
Color Prelude, Rotocon, Ascent and Appliquesence. Our company also competes with
numerous manufacturers of miniatures, vials, packets, sachets, blisterpacks and
scratch and sniff products.
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In addition, certain cosmetics companies produce sampling products for their own
cosmetic products. Our company also competes with numerous other marketing and
advertising venues for marketing dollars our customers allocate to various types
of advertising, marketing and promotional efforts such as print, television and
in-store promotions.
Environmental and Safety Regulation
Our company's operations are subject to extensive laws and regulations
relating to the storage, handling, emission, transportation and discharge of
materials into the environment and the maintenance of safe conditions in the
workplace. Our company's policy is to comply with all legal requirements of
applicable environmental, health and safety laws and regulations. Our company
believes that it is in general compliance with such requirements and has
adequate professional staff and systems in place to remain in compliance,
although there can be no assurances that this is the case. Our company considers
costs for environmental compliance to be a normal cost of doing business and
includes such costs in pricing decisions.
Employees
As of August 31, 2000, our company employed 403 persons, which included 237
hourly and 166 salaried and management personnel. Substantially all of our
company's hourly employees are represented by the Graphics Communications
International Union (GCIU) local 197-M. Management considers its relations with
the union to be good. The current union contract was signed in April 1999 and
will be in effect through March 31, 2003.
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RISK FACTORS
Our substantial indebtedness and restrictive covenants imposed by the terms of
our indebtedness could adversely affect our cash flow and prevent us from
fulfilling our obligations under our notes and debentures.
Our company has substantial indebtedness and debt service obligations. As
of June 30, 2000, Holding and AKI had total consolidated indebtedness of
approximately $145.7 million and $117.9 million, respectively. In addition,
Holding's deficiency of earnings available to cover fixed charges for fiscal
2000, was $0.8 million. As of September 20, 2000, AKI had letters of credit
outstanding in the amount of $0.6 million and outstanding borrowings of $9.5
million under its revolving credit agreement with Heller Financial, Inc. and
$4.8 million under promissory note with AHC. In addition, as of such date,
borrowings of up to approximately $9.9 million were available under the credit
agreement, subject to specified conditions. The indenture governing Holding's 13
1/2% Senior Discount Debentures due 2009 and the indenture governing AKI's 10
1/2% Senior Notes due 2008 and the credit agreement permit our company and its
Restricted Subsidiaries (as defined in the indentures), in each case, to incur
additional indebtedness if we meet specified requirements.
The level of our company's indebtedness could have negative consequences to
holders of the notes and the debentures, including, but not limited to, the
following:
o a substantial portion of cash flow from operations must be dedicated to
debt service and will not be available for other purposes;
o additional debt financing in the future for working capital, capital
expenditures or acquisitions may be limited;
o the level of indebtedness could limit flexibility in reacting to changes in
the operating environment and economic conditions generally;
o the level of indebtedness could restrict our company's ability to increase
manufacturing capacity;
o our company may face difficulties in satisfying its obligations with
respect to its indebtedness; and
o a portion of our company's borrowings bear interest at variable rates of
interest, which could result in higher interest expense in the event of an
increase in market interest rates.
The indentures and the credit agreement contain covenants that, among other
things, limit the ability of our company and its Restricted Subsidiaries to:
o pay dividends or make certain restricted payments;
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o incur additional indebtedness and issue preferred stock;
o create liens;
o incur dividend and other payment restrictions affecting subsidiaries;
o enter into mergers, consolidations or sales of all or substantially all of
the assets of our company;
o enter into certain transactions with affiliates; and
o sell certain assets.
In addition, the credit agreement requires our company to maintain specified
financial ratios and satisfy specified financial condition tests. Our company's
ability to meet those financial ratios and tests can be affected by events
beyond its control, and there can be no assurance that our company will meet
those tests.
To service our company's indebtedness we will require a significant amount of
cash. Our ability to generate cash depends on many factors beyond our control.
The ability of our company to pay principal and interest on the notes or
principal on the debentures and to satisfy its other debt obligations will
depend upon AKI's future operating performance. AKI's future operating
performance will be affected by prevailing economic conditions and financial,
business and other factors, which factors may be beyond our company's control,
as well as the availability of revolving credit borrowings under the credit
agreement. Our company anticipates that its operating cash flow, together with
borrowings under the credit agreement, will be sufficient to meet its operating
expenses and to service its debt requirements as they become due. However, if
our company is unable to service its indebtedness, our company may be required
to take action such as reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness or seeking additional
equity capital. There can be no assurance that any of these remedies can be
effected on satisfactory terms, if at all. If the company is unable to maintain
the specified financial ratios or generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, we would be in default under
the terms of our indebtedness, which would permit the holders of such
indebtedness to accelerate the maturity of the indebtedness.
Holding Company Structure - Holding's debentures are structurally subordinated
to indebtedness of its subsidiaries.
Holding is a holding company and does not have any material operations or
assets other than ownership of all of the capital stock of AKI. Accordingly, its
debentures are effectively subordinated to all existing and future liabilities
of Holding's subsidiaries, including indebtedness under the credit agreement and
AKI's notes. As of June 30, 2000, Holding's subsidiaries had $117.8 million of
indebtedness and $21.4 million of other outstanding liabilities (including trade
payables, accrued liabilities and deferred taxes). As of September 20, 2000, AKI
had letters of credit outstanding in the amount of $0.6 million and outstanding
borrowings
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of $9.5 million under the credit agreement and $4.8 million under a promissory
note with AHC. In addition, as of September 20,2000, borrowings of up to
approximately $9.9 million were available under the credit agreement, subject to
specified conditions. All such indebtedness effectively ranks senior to the
debentures. At June 30, 2000, Holding had $0.4 million of accrued liabilities
and no outstanding indebtedness other than the debentures. Holding and its
subsidiaries may incur additional indebtedness in the future, subject to the
limitations contained in the instruments governing their indebtedness.
Any right of Holding to participate in any distribution of assets of its
subsidiaries upon the liquidation, reorganization or insolvency of any such
subsidiary (and the consequent right of the holders of the debentures to
participate in the distribution of those assets) will be subject to the prior
claims of the respective subsidiary's creditors.
Holding's ability to repay its debentures may depend on its ability to raise
cash other than through its subsidiaries.
Holding's cash flow, and consequently its ability to service debt,
including its obligations under its debentures, is dependent upon the cash flows
of its subsidiaries and the payment of funds by such subsidiaries to Holding in
the form of loans, dividends or otherwise. Holding's subsidiaries have no
obligations, contingent or otherwise, to pay any amounts due pursuant to the
debentures or to make any funds available for payment of the debentures. In
addition, AKI's credit agreement and its note indenture impose, and agreements
entered into in the future may impose, significant restrictions on the payment
of dividends and the making of loans by AKI and its subsidiaries to Holding.
Accordingly, repayment of the debentures may depend upon the ability of Holding
to effect an equity offering or to refinance the debentures.
Your right to receive payments on the notes and debentures is junior to our
existing and future secured indebtedness.
Under the terms of our credit agreement, Heller Financial, Inc., the lender
under the credit agreement, has a security interest in substantially all of the
current and future assets of AKI. In the event of default under the credit
agreement, whether as a result of the failure to comply with a payment or other
covenant, a cross-default or otherwise, such lender will have a prior secured
claim on the capital stock of AKI and the encumbered assets of our company. As a
result, the encumbered assets of our company would be available to pay
obligations on the notes and the debentures only after borrowings under the
credit agreement and any other secured indebtedness have been paid in full. If
the lender should attempt to foreclose on its collateral, our company's
financial condition and the value of the debentures and the notes will be
materially adversely affected and could be eliminated. As of September 20, 2000,
AKI had letters of credit outstanding in the amount of $0.6 million and
outstanding borrowings of $9.5 million under the credit agreement and $4.8
million under promissory note with AHC. In addition, as of such date, borrowings
of up to approximately $9.9 million were available under the credit agreement,
subject to specified conditions.
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Our results of operations could be adversely affected if the U.S. Postal Service
reclassifies our sampling systems or the sampling products of our competitors.
Our company's sampling systems are approved by the U.S. Postal Service for
inclusion in subscription magazines mailed at periodical postage rates. Our
company's sampling systems have a significant cost advantage over certain
competing sampling products, such as miniatures, vials, packettes, sachets and
blisterpacks, because such competing products cause an increase from periodical
postage rates to the higher third-class rates for the magazine's entire
circulation. Subscription magazine sampling inserts delivered to consumers
through the U.S. Postal Service accounted for approximately 32% of our company's
net sales in fiscal 2000. There can be no assurance that the U.S. Postal Service
will not approve other competing types of sampling systems for use in
subscription magazines without requiring a postal surcharge, or that the U.S.
Postal Service will not reclassify our company's sampling systems such that they
would incur a postal surcharge. Any such action by the U.S. Postal Service could
have a material adverse effect on our company's results of operations and
financial condition.
Our company relies on a small number of customers for a large portion of its
revenues.
Our company's top ten customers by sales revenue accounted for
approximately 58% of our company's net sales in fiscal 2000. None of our
company's customers other than Estee Lauder accounted for 10% or more of net
sales in fiscal 2000. Although our company has long-established relationships
with most of its major customers, our company does not have long-term contracts
with any of its customers. Our company may be required by some customers to
qualify its manufacturing operations under certain supplier standards. There can
be no assurance that our company will be able to qualify under such supplier
standards or that such customers will continue to purchase sampling systems from
our company if our company's manufacturing operations are not so qualified. An
adverse change in its relationships with significant customers, including Estee
Lauder, could have a material adverse effect on our company's results of
operations and financial condition.
Our ability to compete with other companies depends, in part, on our ability to
meet customer needs on a cost-effective and timely basis and to protect our
proprietary technology.
Our company's competitors, some of whom have substantially greater
financial resources than our company, are actively engaged in manufacturing
certain products similar to those of our company. Our company's principal
competitors in the cosmetic sampling market are Webcraft, a subsidiary of Big
Flower Holdings, Inc., Orlandi Inc., Nord'est, Marietta Corp., Klocke, Color
Prelude, Rotocon, Ascent and Appliquessence. Our company also competes with
numerous manufacturers of miniatures, vials, packettes, sachets, blisterpacks,
and scratch and sniff products. In addition, certain cosmetic companies produce
sampling products for their own cosmetic products. Competition in our company's
market is primarily based upon product quality, product technologies, customer
relationships, price, and customer service. The future success of our company's
business will depend in large part upon its ability to market and manufacture
products and services that meet customer needs on a cost-effective and timely
basis. There can be no assurance that capital will be available for these
purposes, that investments in
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new technology will result in commercially viable products or that our company
will be successful in generating sales on commercially favorable terms, if at
all.
In addition, our company's success, competitive position and revenues will
depend, in part, upon its ability to protect its proprietary technologies and to
operate without infringing on the proprietary rights of others. Although our
company has certain patents and has filed, and expects to continue to file,
other patent applications, there can be no assurance that our company's issued
patents are enforceable or that its patent applications will mature into issued
patents. The expense involved in litigation regarding patent protection or a
challenge thereto has been and could be significant and any future expense, if
any, cannot be estimated by our company. A portion of our company's
manufacturing processes are not covered by any patent or patent application. As
a result, the business of our company may be adversely affected by competitors
who independently develop technologies substantially equivalent to those
employed by our company.
Our business is affected by the advertising budgets of our customers and is
seasonal in nature.
The advertising budgets of our company's customers, and therefore the
revenues of our company, are susceptible to prevailing economic and market
conditions that affect advertising expenditures, the performance of the products
of our company's customers in the marketplace and certain other factors. There
can be no assurance that reductions in advertising spending will not occur,
which could have a material adverse effect on our company's results of
operations and financial condition.
In addition, our company's sales and operating results have historically
reflected seasonal variations. These 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, respectively, 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.
Our results of operations and financial condition may be adversely affected by
an increase in paper prices or a decrease in paper supply.
Paper is the primary raw material utilized by our company in producing its
sampling systems. Paper costs represented approximately 28% of our company's
cost of goods sold in each of fiscal 1998, 1999 and 2000. Significant increases
in paper costs could have a material adverse effect on our company's results of
operations and financial condition to the extent that our company is unable to
price its products to reflect such increases. There can be no assurance that our
company's customers would accept such price increases or the extent to which
such price increases would impact their decision to utilize our company's
sampling systems.
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All of our company's encapsulated sampling systems, which accounted for
approximately 51% of our company's net sales in fiscal 2000, utilize specific
grades of paper that are subject to comprehensive evaluation and certification
by our company for quality, consistency and fit. These grades of paper are
produced exclusively for us by one domestic supplier. We do not have a purchase
agreement with the supplier and are not aware of any other suppliers of these
specific grades of paper. Although our products can be manufactured using other
grades of paper, we believe that the specific grades currently used provide us
with an advantage over our competitors. Our company continues to research
methods of replicating the advantages of these specific grades of paper with
other available grades of paper. Until such methods are developed, a loss of
such supply of paper and the resulting competitive advantage could have a
material adverse effect on our company's results of operations and financial
condition to the extent that our company is unable to obtain such paper
elsewhere.
Our company receives a portion of its revenue from foreign countries which is
subject to foreign laws and regulations and political and economic events.
Approximately 14% of our company's net sales in fiscal 2000 were generated
outside the United States. Foreign operations are subject to certain risks
inherent in conducting business abroad, including, among others, exposure to
foreign currency fluctuations and devaluations or restrictions on money
supplies, foreign and domestic export law and regulations, price controls,
taxation, tariffs, import restrictions, and other political and economic events
beyond our company's control. Our company has not experienced any material
effects of these risks as of yet, but there can be no assurance that they will
not have such an effect in the future.
Our company is controlled by DLJMBII whose interests may conflict with the
interests of the holders of the notes and debentures.
DLJMBII has the power to elect a majority of the directors of AHC and
generally exercises significant control over the business, policies and affairs
of AHC, Holding, AKI and its subsidiaries through its ownership of AHC. DLJMBII
currently owns approximately 98.8% of our outstanding common stock. DLJMBII may
have interests that could be in conflict with those of the holders of notes or
the debentures and may take actions that adversely affect the interests of the
holders of the notes and debentures.
Our company's business may be adversely affected by a labor dispute.
As of August 31, 2000, approximately 59% of our company's employees worked
under a collective bargaining agreement that expires on March 31, 2003. While
our company believes that its relations with its employees are good, there can
be no assurance that our company's collective bargaining agreement will be
renewed in the future. A prolonged labor dispute (which could include a work
stoppage) could have a material adverse effect on our company's business,
financial condition and results of operations.
ITEM 2. PROPERTIES
Our company owns land and buildings in Chattanooga, Tennessee, that are
used for production, administration and warehousing. Our company's executive
offices and primary facility at 1815 East Main Street are located on 2.55 acres
and encloses approximately 67,900
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square feet. A second facility housing product development and additional
manufacturing areas at 1600 East Main Street is located three blocks away on
2.49 acres and encloses approximately 36,700 square feet. Our company also
leases a third facility at 3501 St. Elmo Avenue in Chattanooga, Tennessee, which
is used for production and warehousing. This facility is located on 1.875 acres
and encloses approximately 29,500 square feet.
Our company currently has a number of web printing presses with multi-color
capability as well as envelope-converting machines and other ancillary
equipment. Our company operates a fully equipped production lab for the
manufacture of microcapsules and slurry and separate laboratories for our
company's Encapsulated Products Division and our company's research and
development facility. Our company also has a fully staffed and equipped label
manufacturing facility, which includes state-of-the-art label manufacturing
machines that have been specially modified to produce our company's products and
a complete label attaching operation. Our company also leases sales offices in
New York, New York, Paris, France and London, England.
ITEM 3. LEGAL PROCEEDINGS
Our company does not believe that there are any pending legal proceedings
that, if adversely determined, would have a material adverse effect on the
financial condition or results of operations of our company, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for Holding's or AKI's common
stock. As of September 27, 2000, AHC was the sole holder of record of Holding's
common stock and Holding was the sole holder of record of AKI's common stock.
Generally, neither Holding nor AKI pays dividends on its shares of common stock
and neither expects to pay dividends on its shares of common stock in the
foreseeable future. The debentures contain restrictions on Holding's ability to
pay dividends on its common stock. The notes and the credit agreement contain
restrictions on AKI's ability to pay dividends on its common stock. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial data presented below as of
June 30, 2000, 1999 and 1998 and the years ended June 30, 2000 and 1999 and for
the period from December 16, 1997 to June 30, 1998 have been derived from the
historical consolidated financial statements of our company. The selected
historical consolidated financial data presented below as of December 15, 1997,
June 30, 1997 and 1996, and for the period from July 1, 1997 to December 15,
1997 and the fiscal years ended June 30, 1997 and 1996 and have been derived
from the historical consolidated financial statements of Arcade Holding
Corporation, the predecessor to our company. The information contained in this
table should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations," and our company's
Consolidated Financial Statements and the notes thereto included elsewhere in
this report.
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<TABLE>
<CAPTION>
Holding Predecessor
------- -----------
December 16, July 1, 1997
1997 to to
June 30, June 30, June 30, December 15, June 30, June 30,
2000 1999 1998 1997 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales $ 98,563 $ 85,967 $ 36,066 $ 35,186 $ 77,723 $ 73,486
Cost of goods sold 60,304 55,199 24,518 22,809 49,467 49,862
--------- --------- --------- --------- --------- ---------
Gross profit 38,259 30,768 11,548 12,377 28,256 23,624
Selling, general and
administrative expenses 16,980 14,500 5,587 5,703 13,333 10,635
Amortization of goodwill 5,336 4,606 2,101 568 1,234 1,234
Gain from settlement, net (858) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Income from operations 16,801 11,662 3,860 6,106 13,689 11,755
Interest expense, net 17,401 16,740 11,327 2,646 6,203 6,762
Management fees 250 250 125 215 470 470
Other, net -- 128 (47) 11 (101) 244
Income tax expense (benefit) 1,596 (340) (2,052) 1,441 3,135 2,101
--------- --------- --------- --------- --------- ---------
Income (loss) (2,446) (5,116) (5,493) 1,793 3,982 2,178
Early retirement of debt, net 1,089 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (1,357) $ (5,116) $ (5,493) $ 1,793 $ 3,982 $ 2,178
========= ========= ========= ========= ========= =========
Balance Sheet Data (at end
of period):
Cash and cash equivalents $ 1,158 $ 7,015 $ 3,842 $ 4,481 $ 303 $ 626
Working capital (deficit) 13,759 14,853 15,046 (4,959) (36,957) (4,685)
Total Assets 223,937 210,386 214,521 77,399 77,142 82,395
Total debt and redeemable
preferred stock 145,722 146,688 144,448 55,408 54,964 60,736
Total stockholder's equity 58,834 49,797 57,084 12,716 11,225 7,932
Other Data:
Capital expenditures 2,782 2,856 514 807 2,462 2,051
Ratio of earnings to fixed
charges -- -- -- 2.2x 2.1x 1.6x
---------
</TABLE>
(1) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represent income (loss) before income taxes plus fixed charges.
"Fixed charges" consist of interest on all indebtedness and amortization of
deferred financing costs. Earnings were not sufficient to cover fixed
charges by $850, $5,456 and $7,545 for the years ended June 30, 2000 and
1999 and the period from December 16, 1997 to June 30, 1998, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The sales of our company are primarily derived from the sale of sampling
systems to cosmetics and consumer products companies. 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. The recent introduction of a number of our company's products, such as
BeautiSeal(R),
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PowdaTouch(R), and LiquaTouch(R), has affected our company's results of
operations for certain of the periods discussed below.
The Acquisition
DLJMBII and certain members of our company's prior management organized AHC
I Merger Corp. for purposes of acquiring Arcade Holding Corporation, our
predecessor. On December 15, 1997, the merger corporation acquired all of the
equity interests of the predecessor corporation (the "Acquisition") for $205.7
million (including related fees, expenses and cash for working capital).
Included in the total cost of the Acquisition were approximately $6.2 million in
non-cash costs comprised of (1) the assumption of a promissory note issued by
the predecessor corporation in connection with the 1995 acquisition of Scent
Seal, Inc., and certain capital lease obligations and (2) the exchange of stock
options to acquire common stock in the predecessor corporation by the
predecessor corporation's chief executive officer for an option to acquire
preferred stock in AHC.
To provide the $199.5 million of cash necessary to fund the Acquisition,
including the equity purchase price and the retirement of all previously
existing preferred stock and debt of the predecessor corporation not assumed,
(1) the merger corporation issued $123.5 million of its Senior Increasing Rate
Notes to Scratch & Sniff Funding, Inc., an affiliate of DLJMBII, and (2) AHC
received $76.0 million from debt and equity (common and preferred) financings,
including equity investments by certain stockholders of the predecessor
corporation, which was contributed to the merger corporation. Immediately
following the Acquisition, the merger corporation merged with and into the
predecessor corporation and the combined entity assumed the name AKI, Inc. AHC
then contributed $1 of cash and all of its ownership interest in AKI to Holding
for 1,000 shares of Holding's common stock.
The merger corporation's senior increasing rate notes were subsequently
repaid on June 25, 1998 from the proceeds of AKI's issuance of $115.0 million of
AKI's notes and from a capital contribution from Holding. On June 25, 1998,
Holding issued and sold its debentures totaling $50.0 million in aggregate
principal amount at maturity for gross proceeds of $26.0 million, the majority
of which were used to fund Holding's equity contribution to AKI.
The Acquisition was accounted for using the purchase method of accounting
and resulted in the recognition of $153.9 million of goodwill and a significant
increase in amortization expense.
3M Acquisition
On June 22, 1998, we acquired the fragrance sampling business of the
Industrial and Consumer Products division of Minnesota Mining and Manufacturing
Company (3M) for $7.25 million in cash and the assumption of a liability of
$182,000 to one of the customers of the business. Our company financed the 3M
acquisition with borrowings under the credit agreement. These borrowings were
subsequently repaid.
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RetCom Acquisition
On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RetCom at a purchase price of approximately $12.5 million
and refinanced working capital indebtedness of approximately $4.5 million of
RetCom and its subsidiaries. The purchase price and refinancing of indebtedness
were initially financed by borrowings under the credit agreement. See
"--Liquidity and Capital Resources."
Results of Operations
For purposes of the following discussion, the results of operations for the
year ended June 30, 1998 reflect the combination of the results of operations of
the predecessor corporation for the period July 1, 1997 through December 15,
1997, the date of the Acquisition, with the results of operations of our company
for the period December 16, 1997 through June 30, 1998. Due to the effects of
purchase accounting applied in the Acquisition and the additional interest
expense associated with the debt incurred to finance the Acquisition, the
results of operations of our company are not comparable in all respects to the
results of operations of the predecessor corporation.
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Net Sales. Net sales for the fiscal year ended June 30, 2000 increased
$12.6 million, or 14.7%, to $98.6 million as compared to $86.0 million for the
fiscal year ended June 30, 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, increases in international sales of sampling technologies for
advertising and marketing of fragrances and sales from the RetCom acquired
business, offset by changes in foreign exchange rates.
Gross Profit. Gross profit for the fiscal year ended June 30, 2000
increased $7.5 million, or 24.4%, to $38.3 million as compared to $30.8 million
for fiscal year ended June 30, 1999. Gross profit as a percentage of net sales
increased to 38.8% in the fiscal year ended June 30, 2000, from 35.8% in the
fiscal year ended June 30, 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 fiscal year ended June 30, 2000 increased $2.5
million, or 17.2% to $17.0 million as compared to $14.5 million for the fiscal
year ended June 30, 1999. The increase in selling, general and administrative
expenses was primarily due to an increase staffing levels and compensation and
additional expenses associated with the acquisition and operation of RetCom. As
a result of these factors, selling, general and administrative expenses as a
percent of net sales increased to 17.2% in the fiscal year ended June 30, 2000
from 16.9% in the fiscal year ended June 30, 1999.
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Income from Operations. Income from operations for the fiscal year ended
June 30, 2000 increased $5.1 million, or 43.6%, to $16.8 million as compared to
$11.7 million for the fiscal year ended June 30, 1999. Income from operations as
a percentage of net sales increased to 17.0% in the fiscal year ended June 30,
2000 from 13.6% in the fiscal year ended June 30, 1999, principally as a result
of the factors described above and an $0.8 million net gain from settlement of
litigation involving the Acquisition purchase price.
Interest Expense. Interest expense for the fiscal year ended June 30, 2000
increased $0.7 million, or 4.2% to $17.4 million, as compared to $16.7 million
for the fiscal year ended June 30, 1999. Interest expense as a percentage of net
sales decreased to 17.7% in the fiscal year ended June 30, 2000 from 19.4% in
the fiscal year ended June 30, 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 RetCom 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 fiscal year ended June 30, 2000 increased
$0.7 million, or 5.4%, to $13.7 million, as compared to $13.0 million for the
fiscal year ended June 30, 1999. Interest expense as a percentage of net sales
decreased to 13.9% in the fiscal year ended June 30, 2000 from 15.1% in the
fiscal year ended June 30, 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 RetCom acquisition, offset partially by a
decrease in interest expense related to the repurchased and retired Senior
Notes.
Income Tax Expense. The income tax expense for the fiscal year ended June
30, 2000 increased $1.9 million to $1.6 million as compared to a benefit of $0.3
million for the fiscal year ended June 30, 1999. The increase is due to the
increase in income before income taxes and extraordinary gain as a result of the
factors described above.
Income tax expense for AKI for the fiscal year ended June 30, 2000
increased $2.0 million to $2.8 million as compared to $0.8 million for the
fiscal year ended June 30, 1999. The increase is due to the increase in income
before income taxes and extraordinary gain as a result of the factors described
above.
Extraordinary gain from early retirement of debt. An extraordinary gain
from early retirement of debt of $1.1 million for the fiscal year ended June 30,
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.
An extraordinary gain from early retirement of debt for AKI of $0.4 million
for the fiscal year ended June 30, 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.
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EBITDA. EBITDA for the fiscal year ended June 30, 2000, increased $5.6
million, or 27.9%, to $25.7 million as compared to $20.1 million for the fiscal
year ended June 30, 1999. The increase principally reflects the increase in
income from operations discussed above. EBITDA as a percentage of net sales was
26.1% and 23.4% for the fiscal year ended June 30, 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.
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Net Sales. Net sales for the fiscal year ended June 30, 1999 increased
$14.7 million, or 20.6%, to $86.0 million as compared to $71.3 million for the
fiscal year ended June 30, 1998. The increase was primarily attributable to a
$9.1 million increase in domestic sales of cosmetic sampling products, the $5.7
million growth of our company's European revenues and increases in sales of
consumer product samples, offset by decreases in sales to the domestic fragrance
industry.
Gross Profit. Gross profit for the fiscal year ended June 30, 1999
increased $6.9 million, or 28.9%, to $30.8 million as compared to $23.9 million
for fiscal year ended June 30, 1998. Gross profit as a percentage of net sales
increased to 35.8% in the fiscal year ended June 30, 1999, from 33.5% in the
fiscal year ended June 30, 1998. The increase in gross profit and gross profit
as a percentage of net sales is primarily attributable to the increase in net
sales discussed above and reductions in raw material costs, offset by a decrease
in certain fragrance samples pricing, changes in product sales mix, increased
costs associated with the outsourcing of European production and increased costs
associated with the initial production runs of certain customer products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended June 30, 1999 increased $3.2
million, or 28.3% to $14.5 million as compared to $11.3 million for the fiscal
year ended June 30, 1998. The increase in selling, general and administrative
expenses was primarily due to severance charges related to former executive
officers, changes in executive compensation following the Acquisition and
increased sales staffing and commissions related to the increase in net sales
and costs associated with the transition of the 3M acquisition, offset partially
by reduced advertising expenditures and staff reductions. As a result of these
factors, selling, general and administrative expenses as a percent of net sales
increased to 16.9% in the fiscal year ended June 30, 1999 from 15.8% in the
fiscal year ended June 30, 1998.
Income from Operations. Income from operations for the fiscal year ended
June 30, 1999 increased $1.7 million, or 17.0%, to $11.7 million as compared to
$10.0 million for the fiscal year ended June
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30, 1998. Income from operations as a percentage of net sales decreased to 13.6%
in the fiscal year ended June 30, 1999 from 14.0% in the fiscal year ended June
30, 1998, principally as a result of the increase in amortization of goodwill
and other intangibles resulting from the Acquisition and the 3M acquisition and
the factors described above.
Interest Expense. Interest expense for the fiscal year ended June 30, 1999
increased $2.7 million, or 19.3% to $16.7 million, as compared to $14.0 million
for the fiscal year ended June 30, 1998. Interest expense as a percentage of net
sales decreased to 19.4% in the fiscal year ended June 30, 1999 from 19.6% in
the fiscal year ended June 30, 1998. The increase in interest expense is due to
the increased indebtedness as a result of the recapitalization of our company in
connection with the Acquisition, partially offset by the refinancing of the
merger corporation's senior increasing rate notes with the notes and debentures.
Interest expense for AKI for the fiscal year ended June 30, 1999 decreased
$0.9 million, or 6.5%, to $13.0 million, as compared to $13.9 million for the
fiscal year ended June 30, 1998. Interest expense as a percentage of net sales
decreased to 15.1% in the fiscal year ended June 30, 1999 from 19.5% in the
fiscal year ended June 30, 1998. The decrease in interest expense is due to the
decreased indebtedness as a result of the refinancing of the merger
corporation's senior increasing rate notes with the notes and Holding's equity
contribution to AKI partially offset by the recapitalization of AKI.
Income Tax Expense. The income tax benefit for the fiscal year ended June
30, 1999 decreased $0.3 million to a benefit of $0.3 million as compared to a
benefit of $0.6 million for the fiscal year ended June 30, 1998. The decrease is
due to the increase in non-deductible goodwill amortization and non-deductible
portion of the interest expense on the debentures, offset partially by the
increased net loss before income taxes as a result of the factors described
above.
Income tax expense for AKI for the fiscal year ended June 30, 1999
increased $1.4 million to $0.8 million as compared to a benefit of $0.6 million
for the fiscal year ended June 30, 1998. The increase is due to the decrease in
loss before income taxes as a result of the factors described above and increase
in non-deductible goodwill amortization.
EBITDA. EBITDA for the fiscal year ended June 30, 1999, increased $3.7
million, or 22.6%, to $20.1 million as compared to $16.4 million for the fiscal
year ended June 30, 1998, principally as a result of the factors described
above. 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 June 30, 2000, our company had consolidated indebtedness in
an aggregate amount of $145.7 million (excluding trade payables, accrued
liabilities and deferred taxes), of which (1) approximately $27.9 million was a
direct obligation of Holding relating to its debentures and (2) approximately
$117.8 million was a direct obligation of AKI relating to its notes, revolving
credit line and capital leases. At June 30, 2000, Holding had $0.4 million of
accrued liabilities and AKI also had $21.4 million in additional outstanding
liabilities (including trade payables, accrued liabilities and deferred taxes)
and letters of credit outstanding under the credit agreement in the amount of
$0.6 million. As of September 20, 2000, AKI had letters of credit outstanding in
the amount of $0.6 million and outstanding borrowings of $9.5 million under the
credit agreement.
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Borrowings under the credit agreement are limited to a maximum amount equal
to $20.0 million. At June 30, 2000 and September 20, 2000, AKI had borrowings of
approximately $10.4 million and $9.9 million, respectively, available, subject
to a borrowing base calculation and the achievement of specified financial
ratios and compliance with specified conditions. The interest rate for
borrowings under the credit agreement are determined from time to time based on
our company's choice of formulas, plus a margin. The credit agreement will
mature on December 31, 2002.
The indentures and the credit agreement permit Holding and its Restricted
Subsidiaries to incur additional indebtedness, subject to specified limitations.
In addition, the indentures contains restrictive covenants that, among other
things, limit the ability of Holding and its Restricted Subsidiaries to:
o pay dividends or make certain restricted payments;
o incur additional indebtedness and issue preferred stock;
o create liens;
o incur dividend and other payment restrictions affecting subsidiaries;
o enter into mergers, consolidations or sales of all or substantially
all of the assets of our company;
o enter into certain transactions with affiliates; and
o sell certain assets.
Payment of Holding's debentures is not guaranteed by AKI or any of its
subsidiaries. Because Holding is a holding company with no substantive
operations, it is dependent upon the cash flows of AKI and its subsidiaries and
the payment of funds by AKI and its subsidiaries to Holding in the form of
loans, dividends or otherwise to pay its obligations. See "Item 1. Business-Risk
Factors--Holding Company Structure."
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 $4.9 million and $9.8 million for fiscal 2000 and 1999, respectively,
together with borrowings under revolving credit facilities. Net cash provided by
operating activities during fiscal 2000 resulted from net income before
depreciation and amortization, partially offset by increased accounts receivable
and inventory levels and a decrease in accounts payable and accrued expenses.
In fiscal 2000 and fiscal 1999, our company had capital expenditures of
approximately $2.8 million and $2.9 million, respectively. These capital
expenditures consisted primarily of the
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purchase and maintenance of manufacturing equipment and furniture and fixtures
and maintaining and upgrading its computer systems.
On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RetCom at a purchase price of approximately $12.5 million
and refinanced working capital indebtedness of approximately $4.5 million of
RetCom and its subsidiaries. The purchase price and refinancing of indebtedness
were initially financed by borrowings under the credit agreement. 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.
At June 30, 2000, AHC had outstanding $35.5 million of Notes which bear
interest at approximately 16% per annum and mature on December 15, 2009, and
approximately $50.8 million of Senior Preferred Stock which accrue dividends at
15% per annum and must be redeemed by December 15, 2012. Interest on the notes
and dividends on the senior preferred stock may be settled through the issuance
of additional floating rate notes and senior preferred stock through maturity or
redemption, respectively. The floating rate notes are general, unsecured
obligations of AHC and are not obligations of, or guaranteed by Holding, AKI or
any of its subsidiaries. AHC is a holding company and is dependent upon the cash
flows of its subsidiaries and the payment to it of funds by its subsidiaries.
The indenture relating to the debentures restricts the payment of dividends or
the making of other restricted payments by Holding to AHC
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. A
portion of the proceeds were used in fiscal 2000 to reduce outstanding
indebtedness of Holding and AKI. The balance of the proceeds may become
available to the Company to reduce outstanding indebtedness of Holding or AKI or
for working capital or other general corporate purposes, but there is no
obligation on the part of AHC. to make any of these funds available.
Capital expenditures for the fiscal year ending June 30, 2001 are budgeted
to be approximately $3.5 million. Based on borrowings outstanding (other than
pursuant to the credit agreement) as of June 30, 2000 and borrowings outstanding
under the credit agreement as of September 20, 2000, our company expects total
cash payments for debt service in fiscal 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 and $1.0 million in interest and fees under the credit
agreement. Our company also expects to make royalty payments of approximately
$1.1 million during fiscal 2001.
Our company believes that, in the absence of future acquisitions, cash
flows from existing operations and available borrowings will be sufficient to
fund budgeted capital expenditures, working capital requirements and interest
and principal payments on its indebtedness, including the debentures and the
notes for fiscal 2001. In the event our company
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consummates any additional acquisitions it may seek additional debt or equity
financings subject to compliance with the terms of the indentures.
At June 30, 2000, Holding's cash and cash equivalents and net working
capital were $1.2 million and $13.8 million, respectively, representing a
decrease in cash and cash equivalents of $5.8 million and a decrease in net
working capital of $1.1 million from June 30, 1999. Account receivables, net, at
June 30, 2000 increased 32.1% or $5.2 million over the June 30, 1999 amount,
primarily due to increased sales.
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 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.
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. The Company does not
anticipate that the adoption of SAB 101 will have a material impact on the
consolidated financial statements and will continue to analyze the impact of SAB
101.
FASB Interpretation 44, Interpretation of APB Opinion 25 ("FIN 44"), was
issued in March 2000. FIN 44 provides an interpretation of APB Opinion 25 on
accounting for employee stock compensation and describes its application to
certain transactions. FIN 44 is effective on
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July 1, 2000. It applies on a prospective basis to events occurring after that
date, except for certain transactions involving options granted to
non-employees, repriced fixed options, and modifications to add reload option
features, which apply to awards granted after December 31, 1998. The provisions
of FIN 44 are not expected to have a material effect on transactions entered
into through June 30, 2000.
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:
o the competitive environment in the sampling industry in general and in
our company's specific market areas;
o changes in prevailing interest rates;
o inflation;
o changes in cost of goods and services;
o economic conditions in general and in our company's specific market
areas;
o changes in or failure to comply with postal regulations or other
federal, state and/or local government regulations;
o liability and other claims asserted against our company;
o changes in operating strategy or development plans;
o the ability to attract and retain qualified personnel;
o the significant indebtedness of our company;
o labor disturbances;
o changes in our company's capital expenditure plans;
o 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
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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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our company generates approximately 14% 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 June 30, 2000, our company's forward
exchange contracts consisted of forward contracts to sell Euros at an exchange
rate of .8853 per U.S. dollar and to buy British pound sterling at an exchange
rate of 1.497 per U.S. dollar. The notional principal amounts under these
foreign exchange contracts were $0.7 million and $0.2 million, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements of each of
Holding and AKI, the related notes and the Report of Independent Accountants for
each of Holding and AKI commencing at page F-1 of this report, which financial
statements, notes and reports are incorporated by reference into this report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of Holding as of September 1, 2000.
Name Age Position
---- --- --------
Thompson Dean 42 Chairman of the Board and Director
William J. Fox 44 President, Chief Executive Officer and Director
Kenneth A. Budde 51 Chief Financial Officer
Hugh R. Kirkpatrick 63 Director
David M. Wittels 36 Director
Thompson Dean has served as Chairman of the Board and a Director of Holding
since December 1997. Mr. Dean has been a Managing Partner of DLJ Merchant
Banking, Inc. ("DLJ Merchant Banking") since November 1996. Previously, Mr. Dean
was a Managing Director of DLJ Merchant Banking and its predecessor since
January 1992. Mr. Dean also serves as a director of Von Hoffman Press, Inc.,
Manufacturers' Services Limited, Phase Metrics, Inc., Amatek Ltd., DeCrane
Aircraft Holdings Inc., Insilco Holding Corporation, Formica Corporation,
Mueller Group, Inc. and Charles River Laboratories International, Inc.
William J. Fox has served as President, Chief Executive Officer and a
Director of Holding and as Chairman, President and Chief Executive Officer and a
Director of AKI, Inc. since February 1999. Mr. Fox was President, Strategic and
Corporate Development of Revlon Worldwide, Senior Executive Vice President of
Revlon, Inc. and Revlon Consumer Products Corporation ("RCPC") (collectively,
"Revlon") and Chief Executive Officer, Revlon Technologies, a division of
Revlon, from January 1998 through January 1999. He was Executive Vice President
from 1991 through January 1997 and Senior Executive Vice President from January
1997 through January 1999 and Chief Financial Officer of Revlon from 1991 to
1997. Mr. Fox served as a director from November 1995 of Revlon, Inc. and from
September 1994 of RCPC, until April 1999. He was Senior Vice President of
MacAndrews and Forbes Holding Inc., the indirect majority shareholder of Revlon,
from August 1990 through January 1999.
Kenneth A. Budde has served as Chief Financial Officer of Holding since
November 1994. From October 1988 to June 1994, Mr. Budde served as Controller
and Chief Financial Officer of Southwestern Publishing Company. Prior to that,
Mr. Budde spent 12 years with KPMG Peat Marwick.
Hugh R. Kirkpatrick has served as a director of Holding since June 1998.
Mr. Kirkpatrick is a former director of International Flavors & Fragrances, Inc.
where he served as Senior Vice President and President, Worldwide Fragrance
Division, from 1991 through his retirement in 1996.
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David M. Wittels has served as a director of Holding since December 1997.
Mr. Wittels has been a Principal of DLJ Merchant Banking since January 1997. For
the past five years, Mr. Wittels has served in various capacities with DLJ
Merchant Banking. Mr. Wittels also serves as a director of Mueller Holdings
(N.A.), Inc., Ziff Davis Holdings, Inc. and Wilson Greatbatch Technologies, Inc.
On September 8, 2000, Mr. James A. Quella was elected as a director of our
company. Mr. Quella is a Managing Director and Senior Operating Partner of DLJ
Merchant Banking since July, 2000. From January, 2000 to July, 2000 Mr. Quella
served as the Managing Director of GH Venture Partners. Mr. Quella served as the
Vice-Chairman: Market Development and Director of the Executive Committee of
Mercer Management Consulting from 1996 to 2000. Prior to that, Mr. Quella had
founded and managed the Financial Services Practice Group for four years.
Compensation of Directors
Except for Mr. Kirkpatrick, who receives an annual fee of $20,000,
directors of Holding will not receive compensation for services rendered but
will be reimbursed for out-of-pocket expenses incurred by them in connection
with their travel to and attendance at board meetings and committees of the
board. Mr. Kirkpatrick also received a grant of 5,000 stock options in fiscal
2000.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information for the three most
recently completed fiscal years with respect to the compensation of our
President and Chief Executive Officer and our other most highly compensated
executive officer whose total annual compensation exceeded $100,000. We refer to
these individuals as our named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------
Fiscal Securities All Other
Name and Principal Position Year Salary Bonus Underlying Options Compensation(1)
--------------------------- ---- ------ ----- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
William J. Fox 2000 $ 650,000 $1,214,000 888,000(2) 5,462
President, Chief Executive Officer 1999 242,308 250,000 -- --
And Director 1998 -- -- -- --
Kenneth A. Budde 2000 175,000 102,500 160,000 7,090
Chief Financial Officer 1999 154,327 80,625 -- 9,077
1998 120,000 75,000 -- --
</TABLE>
(1) Represents amounts contributed on behalf of the named executive to our
company's 401(k) retirement savings plan.
(2) Pursuant to the terms of his employment agreement, Mr. Fox is entitled to
receive options to acquire 5% of AHC's issued and outstanding common stock
on a fully diluted basis. As of June 30, 2000, 888,000 shares of common
stock represented 5% of AHC's issued and outstanding common stock on a
fully diluted basis. See "---Equity Based Compensation" and "---Fox
Employment Agreement."
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Option Grants in Last Fiscal Year
The following table sets forth information regarding stock options granted
during fiscal 2000 to each of the executive officers named in the "Summary
Compensation Table" above, including the potential realizable value over the
term of the options, based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. These assumed rates are mandated by the rules of the
Securities and Exchange Commission and do not represent our estimate of future
stock price performance. Actual gains, if any, on stock option exercises, will
be dependent on the future performance of our common stock.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
--------------------------------------------------------------------------------------------
Percent of
Number of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in Price
Name Granted (#) Fiscal Year ($/Share) Expiration Date 5% ($) 10% ($)
---- ----------- ----------- --------- --------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
William J. Fox 888,000 100% $ 1.00 December 15, 2009 $ 558,458 $ 1,415,243
President, Chief Executive Officer
And Director
Kenneth A. Budde 160,000 100% 1.00 December 15, 2009 100,623 254,999
Chief Financial Officer
</TABLE>
Fiscal Year End Option Values
The following table sets forth information about the number and value of
options held by the executive officers named in the "Summary Compensation Table"
above as of June 30, 2000. In the absence of a regular, active public market for
our common stock, and based in part on consideration of comparable companies,
our management estimated the fair value of the stock options granted in fiscal
2000 to have been $0.27 per share as determined by the Minimum Value option
pricing model. The values of the in-the-money options have been calculated on
the basis of $1.00 per share fair market value of our common stock as of that
date less the applicable exercise price.
<TABLE>
<CAPTION>
Year End Option Values
Number of securities
underlying unexercised options Value of unexercised in-the-money
at June 30, 2000 options at June 30, 2000
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William J. Fox 222,000 666,000 -- --
President, Chief Executive Officer
And Director
Kenneth A. Budde 50,001 109,999 -- --
Chief Financial Officer
</TABLE>
Equity-Based Compensation
AHC adopted the 1998 Stock Option Plan for certain employees and directors
of AHC and any parent or subsidiary corporation of AHC. The objectives of the
option plan are (1) to
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retain the services of persons holding key positions and to secure the services
of persons capable of filling such positions and (2) to provide persons
responsible for the future growth of AHC an opportunity to acquire a proprietary
interest in our company and thus create in such key employees an increased
interest in and a greater concern for the welfare of our company.
The option plan authorizes the issuance of options to acquire up to
1,650,000 shares of common stock of AHC. The option plan will be administered by
the board of directors or a compensation committee to be designated by the board
of directors. Pursuant to the option plan, AHC may grant options, including
options that become exercisable as performance standards determined by the
committee are met, to key employees and directors of AHC and any parent or
subsidiary corporation. The terms of any grant will be determined by the
committee and set forth in a separate grant agreement. The exercise price will
be at least equal to the fair market value per share of AHC common stock on the
date of grant, provided that the exercise price shall not be less than $1.00 per
share. Options may be exercisable for up to ten years. The committee has the
right to accelerate the right to exercise any option granted under the option
plan without effecting the expiration date thereof. Upon the occurrence of a
change in control (as defined in the option plan) of AHC, each option may, at
the discretion of the committee, be terminated upon notice to the holder and
each such holder will receive, in respect of each share of AHC common stock for
which such option is then exercisable, an amount equal to the excess of the then
fair market value of such share of AHC common stock over the per share exercise
price.
AHC granted 1,519,917 options for shares of capital stock in fiscal 2000
and no options for shares of capital stock of AHC were exercised in fiscal 2000.
These options vest over periods ranging from three to eight years. Certain
options are eligible for accelerated vesting based on targeted EBITDA.
Employment Agreements
Fox Agreement
On January 27, 1999, William J. Fox entered into an employment agreement
with our company effective February 1, 1999. The agreement will end on February
1, 2002, the third anniversary of the effective date, subject to extension for
one additional day each day after February 1, 2000, unless either party provides
notice not to extend.
Mr. Fox's base salary is $700,000 and he is eligible to receive a
performance-based bonus of 25%, 100% or 200% of his base salary upon achievement
of targeted goals, and other incentive payments.
Pursuant to the terms of his employment agreement, Mr. Fox is entitled to
receive options to acquire 5% of AHC's issued and outstanding common stock on a
fully diluted basis, subject to anti-dilution protection. Once granted, these
options will vest at specified dates and upon the occurrence of specified
conditions. In addition, upon a change in control (as defined in the employment
agreement), all time vested options vest and all performance vested options vest
if the DLJ Entities (as defined in the employment agreement) achieve certain
levels of return on their equity investments.
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If Mr. Fox's employment is terminated by our company without cause or by
Mr. Fox for good reason, our company will pay Mr. Fox two times his base salary,
50% of such amount on termination of employment and 50% paid in equal monthly
installments over a twelve-month period following the date of termination. In
addition, Mr. Fox will receive a pro-rata bonus for the year of termination if
he would have been entitled to such a bonus had he remained employed during the
year of termination. If such termination occurs within 6 months of a time where
a tranche of time-vested options would otherwise become exercisable, then a
pro-rata portion of such tranche will become exercisable.
The employment agreement contains confidentiality, noncompetition and
nonsolicitation provisions. The restricted period for the noncompetition
provisions upon termination of employment is two years if Mr. Fox's employment
is terminated by our company without cause or by our company for good reason,
and one year if Mr. Fox's employment is terminated for any other reason.
Budde Agreement
Mr. Budde is presently retained as Chief Financial Officer pursuant to an
employment agreement that provides for an annual base salary of $190,000 and
participation in our company's Salaried Employees Bonus Plan. The term of the
employment agreement with Mr. Budde, which expires on June 30, 2001,
automatically renews for additional twelve-month terms, unless either party
elects otherwise. If Mr. Budde is terminated by our company without cause or if
our company elects not to renew Mr. Budde's employment, our company will pay Mr.
Budde one times his base salary over a twelve-month period following the date of
termination.
Compensation Committee Interlocks and Insider Participation
None of AHC, Holding or AKI had a compensation committee during fiscal
2000. Certain members of our board of directors, other than Mr. Fox,
participated in deliberations regarding compensation to be paid to Mr. Fox.. Mr.
Fox determined the compensation to be paid to other executive officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of AKI's issued and outstanding capital stock is owned by Holding. All
of Holding's issued and outstanding capital stock is owned by AHC. The following
table sets forth certain information as of September 27, 2000 with respect to
the beneficial ownership of AHC common stock by (1) owners of more than 5% of
such AHC. common stock, (2) each director and named executive officer of Holding
and (3) all directors and executive officers of Holding, as a group.
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Percentage of
Shares Outstanding AHC
Beneficially Common Stock
Beneficial Owner Owned ------------
---------------- -----
DLJ Merchant Banking Partners, II, L.P. 15,921,111 98.8%
and affiliated entities (1)
William J. Fox -- --
Thompson Dean (2) -- --
Hugh R. Kirpatrick -- --
James Quella (2) -- --
David M. Wittels (2) -- --
Kenneth A. Budde -- --
All directors and executive officers
as a group (2) -- --
----------
* Less than one percent.
(1) Consists of shares held directly by the following affiliated investors: DLJ
Merchant Banking Partners II, L.P; DLJ Merchant Banking Partners II-A, LP
("DLJMBII-A); DLJ Offshore Partners II, C.V. ("Offshore Partners II"); DLJ
Diversified Partners, L.P. ("Diversified Partners"); DLJ Diversified
Partners-A, L.P ("Diversified Partners-A"); DLJMB Funding II, Inc. ("DLJ
Funding II"); DLJ Millennium Partners, L.P. ("Millennium Partners"); DLJ
Millennium Partners-A, L.P, ("Millennium Partners-A"); DLJ EAB Partners,
L.P ("EAB Partners"); UK Investment Plan 1997 Partners ("UK Partners"); DLJ
First ESC L.P ("First ESC"); and Scratch & Sniff Funding, Inc. ("Scratch &
Sniff"). See "Certain Relationships and Related Transactions-Transactions
with DLJMBII, and their Affiliates." The address of each of DLJMBII,
DLJMBII-A, Diversified Partners, Diversified Partners-A, DLJ Funding II,
Millennium Partners, Scratch & Sniff, Millennium Partners-A, EAB Partners
and First ESC is 277 Park Avenue, New York, New York 10172. The address of
Offshore Partners 11 is John B. Gorsiraweg 14, Willemstad, Curacao,
Netherlands Antilles. The address of UK Partners is 2121 Avenue of the
Stars, Fox Plaza, Suite 3000, Los Angeles, California 90067. Does not
include 18,000 shares of AHC Common Stock held directly by the Scratch &
Sniff Funding, Inc., an affiliate of DLJMBII.
(2) Messrs. Dean, Quella and Wittels are officers of DLJ Merchant Banking, an
affiliate of DLJMBII. Share data shown for such individuals excludes shares
shown as held by DLJMBII, as to which such individuals disclaim beneficial
ownership. The address of each of Messrs. Dean, Quella and Wittels is 277
Park Avenue, New York, New York 10172.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with DLJMBII and their Affiliates
Messrs. Dean and Wittels, who are directors of AKI and officers and
directors of Holding and AHC, are officers of DLJ Merchant Banking. DLJ Merchant
Banking, together with DLJMBII, beneficially own, in the aggregate,
approximately 98.8% of the outstanding common stock of AHC.
36
<PAGE>
Pursuant to an agreement between Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and AHC, DLJ receives an annual fee of $250,000 for acting
as the exclusive financial and investment banking advisor until December 31,
2002. Our company has agreed to indemnify DLJ in connection with its acting as
financial advisor.
Stockholders Agreement
In connection with the Acquisition, AHC, DLJMBII and certain investors in
our company prior to the Acquisition entered into a Stockholders Agreement,
dated as of December 15, 1997, that sets forth certain rights and restrictions
relating to the ownership of the capital stock of AHC (including securities
exercisable for or convertible or exchangeable into capital stock of AHC) and
agreements among the parties thereto as to the governance of AHC and,
indirectly, Holding and AKI.
Pursuant to the stockholders agreement, the board of directors of AHC
consists of six members, of which four may currently be nominated by DLJMBII.
The Chief Executive Officer of our company is also to be a member of the board.
The stockholders agreement contains (1) certain restrictions on the ability
of each holder of capital stock of AHC to transfer any capital stock of AHC, (2)
certain preemptive rights to the holders of capital stock of AHC, (3) "drag
along" rights to DLJMBII to require the remaining holders of capital stock of
AHC to sell a percentage of their ownership and (4) "tag along" rights to the
holders of capital stock of AHC, other than DLJMBII, with respect to sales of
capital stock of AHC by DLJMBII.
Pursuant to the stockholders agreement, DLJMBII was granted the right to
demand up to three registrations on Form S-1 or the equivalent to sell AHC
common stock (or if AHC is eligible to use Form S-3, the number of demand rights
is unlimited) and all holders of capital stock of AHC were granted certain
customary "piggyback" registration rights to register their common stock in any
registration statement filed by AHC.
Employment Arrangements
On February 1, 1999, Roger L. Barnett resigned as President and Chief
Executive Officer of our company. Under the terms of his employment agreement,
Mr. Barnett was entitled to receive payments aggregating $500,000 of which
$353,275 was paid in fiscal 1999 and the remainder of which was paid in fiscal
2000.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed on the accompanying index to such
financial statements are filed as part of this report.
2. Financial Statement Schedule
None.
3. Exhibits and Exhibit Index.
3.1 Certificate of Incorporation of Holding.*
3.2 Certificate of Incorporation of AKI.**
3.3 Bylaws of Holding.*
3.4 Bylaws of AKI.**
4.1 Indenture dated as of June 25, 1998 between Holding and State Street
Bank and Trust Company, as Trustee.*
4.2 Indenture dated as of June 25, 1998 between AKI and IBJ Schroder Trust
Company, as Trustee.**
4.3 Form of 13 1/2% Senior Discount Debentures due July 1, 2009 (included in
Exhibit 4.1(a)).
4.4 Form of 10 1/2% Senior Discount Debentures due July 1, 2008 (included in
Exhibit 4.1(b)).
4.5 Registration Rights Agreement of Holding, dated as of June 25, 1998
between Holding and Donaldson, Lufkin and Jenrette ("DLJ").*
4.6 Registration Rights Agreement of AKI, dated as of June 25, 1998, between
AKI and DLJ.**
10.1 Acquisition Corp. Stock Option Plan.*
10.2 Option Letter Agreement relating to the Time Vesting Options dated as of
June 17, 1998 between Acquisition Corp. and Roger L. Barnett.*
10.3 Option Letter Agreement relating to the Standard Option dated as of June
17, 1998 between Acquisition Corp. and Roger L. Barnett.*
10.4 Employment Agreement dated as of June 17, 1998 between Holding and Roger
L. Barnett.*
38
<PAGE>
10.5 Employment Agreement dated as of May 12, 1998 between Holding and Barry
Miller.*
10.6 Employment Agreement dated as of February 1, 1999 between Holding and
William J. Fox.***
10.7 Stockholders Agreement dated as of December 15, 1997 between Acquisition
Corp., DLJMBII and certain other investors including Roger L. Barnett.*
10.8 Credit Agreement, dated as of April 30, 1996, as amended by Amendment
No. 1, dated December 12, 1997, and as further amended by Amendment No.
2, dated October 30, 1998, between the Company and Heller Financial,
Inc.*
10.9 Amendment No. 3 to the Credit Agreement, dated August 30, 1999, between
the Company and Heller Financial.+
10.10 Amendment No. 4 to the Credit Agreement, dated September 21, 1999,
between the Company and Heller Financial, Inc.+
10.11 Securities Purchase Agreement dated as of December 15, 1997 between
Holding and Scratch & Sniff Funding, Inc.*
10.12 Asset Purchase Agreement dated as of May 28, 1998 between AKI and
Minnesota, Mining and Manufacturing Company.*
10.13 Stock Purchase Agreement dated as of November 14, 1997, as amended on
December 2, 1997 and December 12, 1997 among the Company and DLJMBII and
certain related investors.*
10.14 Financial Advisory Agreement dated as of December 12, 1997 between
Acquisition Corp. and DLJ.*
10.15 Replacement Stock Option Agreement dated as of December 15, 1997 between
Acquisition Corp. and Roger L. Barnett.*
10.16 Option Substitution Agreement dated as of December 15, 1997 among
Holding, Acquisition Corp., and Roger L. Barnett.*
10.17 Put and Call Agreement dated as of December 15, 1997, as amended on
February 2, 1998 and April 1, 1998, among Roger L. Barnett, Acquisition
Corp., and DLJMBII.*
10.18 Termination of Put and Call Agreement dated June 17, 1997 among DLJMBII,
Barnett, and Acquisition Corp.*
10.19 Stock Purchase Agreement, by and among AKI and each of Michael Berman,
Paul Pearl, Stuart Fleischer, Jay Gartlan, Retail TCA Corporation, a New
York corporation, Retail TCB Corporation, a New York corporation, and
Sleepeck Printing Company, an Illinois corporation, dated as of
September 2, 1999.+
10.20 Employment Agreement dated as of July 1, 2000, between Holding and
Kenneth A. Budde .+
12.1 Computation of Ratio of Earnings to Fixed Charges.+
21.1 Subsidiaries of Holding.+
39
<PAGE>
23.1 Consent of PricewaterhouseCoopers LLP.+
23.2 Consent of PricewaterhouseCoopers LLP.+
27.1 Financial Data Schedule.+
27.2 Financial Data Schedule.+
----------
* Incorporated by reference from Registrant's Registration Statement on Form
S-4, File No. 333-60991 filed with the Securities and Exchange Commission
on August 7, 1998.
** Incorporated by reference from Registrant's Registration Statement on Form
S-4, File No. 333-60989 filed with the Securities and Exchange Commission
on August 7, 1998.
*** Incorporated by reference from Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 4, 1999.
+ Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended June 30,
2000.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, AKI Holding Corp. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 28th day of
September, 2000.
AKI HOLDING CORP.
(Registrant)
By: /S/ William J. Fox
------------------------------------------
William J. Fox
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
the 28th day of September, 2000.
SIGNATURE TITLE
--------- -----
/S/ Thompson Dean Chairman and Director
---------------------------
Thompson Dean
/S/ William J. Fox President, Chief Executive Officer and
--------------------------- Director (Principal Executive Officer)
William J. Fox
/S/ Kenneth Budde Chief Financial Officer (Principal Financial
--------------------------- and Accounting Officer)
Kenneth Budde
/S/ David Wittels Director
---------------------------
David Wittels
/S/ Hugh Kirkpatrick Director
---------------------------
Hugh Kirkpatrick
/S/ James A. Quella Director
---------------------------
James A. Quella
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, AKI, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 28th day of
September, 2000.
AKI, INC.
(Registrant)
By: /S/ William J. Fox
--------------------------------
William J. Fox
President, Chief Executive Officer
and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
the 28th day of September, 2000.
SIGNATURE TITLE
--------- -----
/S/ William J. Fox President, Chief Executive Officer, Chairman
--------------------------- and Director (Principal Executive Officer)
William J. Fox
/S/ Kenneth Budde Chief Financial Officer (Principal Financial
--------------------------- and Accounting Officer)
Kenneth Budde
/S/ David Wittels Director
---------------------------
David Wittels
/S/ Thompson Dean Director
---------------------------
Thompson Dean
/S/ Hugh Kirkpatrick Director
---------------------------
Hugh Kirkpatrick
/S/ James A. Quella Director
---------------------------
James A. Quella
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been or is expected to be sent to
security holders of the registrants.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF AKI HOLDING CORP.:
Report of Independent Accountants..................................... F-2
Report of Independent Accountants..................................... F-3
Consolidated Balance Sheets at June 30, 2000 and 1999................. F-4
Consolidated Statements of Operations for the year ended
June 30, 2000, for the year ended June 30, 1999, for the
period from December 16, 1997 through June 30, 1998 and
for the period from July 1, 1997 through December 15, 1997........ F-5
Consolidated Statements of Changes in Stockholder(s) Equity
for the year ended June 30, 2000, for the year ended
June 30, 1999, for the period from December 16, 1997
through June 30, 1998 and for the period from July 1, 1997
through December 15, 1997......................................... F-6
Consolidated Statements of Cash Flows for the year ended
June 30, 2000, for the year ended June 30, 1999, for the
period from December 16, 1997 through June 30, 1998 and
for the period from July 1, 1997 through December 15, 1997........ F-7
Notes to Consolidated Financial Statements............................ F-8
CONSOLIDATED FINANCIAL STATEMENTS OF AKI, INC.:
Report of Independent Accountants..................................... F-31
Report of Independent Accountants..................................... F-32
Consolidated Balance Sheets at June 30, 2000 and 1999................. F-33
Consolidated Statements of Operations for the year ended
June 30, 2000, for the year ended June 30, 1999, for the
period from December 16, 1997 through June 30, 1998 and
for the period from July 1, 1997 through December 15, 1997........ F-34
Consolidated Statements of Changes in Stockholder(s) Equity
for the year ended June 30, 2000, for the year ended
June 30, 1999, for the period from December 16, 1997
through June 30, 1998 and for the period from July 1, 1997
through December 15, 1997......................................... F-35
Consolidated Statements of Cash Flows for the year ended
June 30, 2000, for the year ended June 30, 1999, for the
period from December 16, 1997 through June 30, 1998 and
for the period from July 1, 1997 through December 15, 1997........ F-36
Notes to Consolidated Financial Statements............................ F-37
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
AKI Holding Corp. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholder's
equity and of cash flows present fairly, in all material respects, the financial
position of AKI Holding Corp. (a wholly-owned subsidiary of AHC I Acquisition
Corp.) and Subsidiaries (the "Successor"), at June 30, 2000 and 1999, and the
results of their operations and their cash flows for the years ended June 30,
2000 and 1999 and for the period from December 16, 1997 through June 30, 1998 in
conformity with generally accepted accounting principles in the United States.
These financial statements are the responsibility of management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
August 3, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
AKI Holding Corp. and Subsidiaries
In our opinion, the accompanying consolidated statements of operations, of
changes in stockholders' equity and of cash flows of Arcade Holding Corporation
and Subsidiaries (the "Predecessor") present fairly, in all material respects,
the results of their operations and their cash flows for the period from July 1,
1997 through December 15, 1997 in conformity with generally accepted accounting
principles in the United States. These financial statements are the
responsibility of management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
July 31, 1998
F-3
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
Successor
---------
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............................. $ 1,158 $ 7,015
Accounts receivable, net .............................. 21,522 16,287
Inventory ............................................. 7,757 5,109
Income tax refund receivable .......................... -- 32
Prepaid expenses ...................................... 92 452
Deferred income taxes ................................. 396 400
--------- ---------
Total current assets ............................ 30,925 29,295
Property, plant and equipment, net .................... 17,097 18,511
Goodwill, net ......................................... 162,472 147,990
Other intangible assets, net .......................... 7,174 6,577
Deferred charges, net ................................. 5,461 6,822
Deferred income taxes ................................. 720 1,145
Other assets .......................................... 88 46
--------- ---------
Total assets .................................... $ 223,937 $ 210,386
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations .......... $ 847 $ 688
Accounts payable, trade ............................... 3,565 3,400
Accrued income taxes .................................. 724 497
Accrued compensation .................................. 3,965 2,527
Accrued interest ...................................... 5,695 6,047
Accrued expenses ...................................... 2,370 1,283
--------- ---------
Total current liabilities ....................... 17,166 14,442
Long-term portion of capital lease obligations ........ 502 1,349
Revolving credit line ................................. 9,000 --
Senior notes .......................................... 107,510 115,000
Senior discount debentures ............................ 27,863 29,651
Deferred income taxes ................................. 663 147
Other non-current liabilities ......................... 2,399 --
--------- ---------
Total liabilities ............................... 165,103 160,589
Commitments and contingencies (see Note 14)
Stockholder's equity
Common stock, $0.01 par, 1,000 shares authorized; 1,000
shares issued and outstanding ..................... -- --
Additional paid-in capital ............................ 88,935 78,364
Accumulated deficit ................................... (13,829) (12,472)
Accumulated other comprehensive loss .................. (542) (365)
Carryover basis adjustment ............................ (15,730) (15,730)
--------- ---------
Total stockholder's equity ...................... 58,834 49,797
--------- ---------
Total liabilities and stockholder's equity ...... $ 223,937 $ 210,386
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
Successor Predecessor
--------------------------------------------------------------
December 16, July 1,
1997 1997
Year Ended Year Ended through through
June 30, June 30, June 30, December 15,
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ............................... $ 98,563 $ 85,967 $ 36,066 $ 35,186
Cost of goods sold ...................... 60,304 55,199 24,518 22,809
-------- -------- -------- --------
Gross profit ....................... 38,259 30,768 11,548 12,377
Selling, general and
administrative expenses .............. 16,980 14,500 5,587 5,703
Amortization of goodwill
and other intangible assets .......... 5,336 4,606 2,101 568
Gain from settlement of
litigation, net ...................... (858) -- -- --
-------- -------- -------- --------
Income from operations ............. 16,801 11,662 3,860 6,106
Other expenses (income):
Interest expense to stockholder(s) and
affiliate ......................... 22 -- 10,785 2,143
Interest expense, other .............. 17,379 16,740 542 503
Management fees to stockholders
and affiliate ...................... 250 250 125 215
Other, net ........................... -- 128 (47) 11
-------- -------- -------- --------
Income (loss) before income taxes
and extraordinary gain ........... (850) (5,456) (7,545) 3,234
Income tax expense (benefit) ............ 1,596 (340) (2,052) 1,441
-------- -------- -------- --------
Income (loss) before
extraordinary gain ............... (2,446) (5,116) (5,493) 1,793
Extraordinary gain from early
retirement of debt, net of tax ....... 1,089 -- -- --
-------- -------- -------- --------
Net income (loss) .................... $ (1,357) $ (5,116) $ (5,493) $ 1,793
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
Retained Accumulated
Additional Stock Earnings Other Carryover
Common Stock Paid-in Purchase (Accumulated Comprehensive Basis
Shares Amount Capital Warrants Deficit) Loss Adjustment Total
------ ------ ------- -------- -------- ---- ---------- -----
Predecessor
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1997 ....... 48,000 $ 1 $ 4,889 $ 1,923 $ 4,565 $ (153) $ -- $ 11,225
Net income .................... -- -- -- -- 1,793 -- -- 1,793
Other comprehensive income, net
of tax:
Foreign currency
translation adjustment ... -- -- -- -- -- (19) -- (19)
--------
Comprehensive income .......... 1,774
Preferred stock dividend ...... -- -- -- -- (283) -- -- (283)
-------- -------- -------- -------- -------- -------- -------- --------
Balances, December 15, 1997 ... 48,000 $ 1 $ 4,889 $ 1,923 $ 6,075 $ (172) $ -- $ 12,716
======== ======== ======== ======== ======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------------------
Successor
---------
Balances, December 16, 1997 ... -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Initial capitalization
(see Note 13) ............... 1,000 -- 78,364 -- -- -- -- 78,364
Carryover basis adjustment .... -- -- -- -- -- -- (15,730) (15,730)
Net loss ...................... -- -- -- -- (5,493) -- -- (5,493)
Other comprehensive loss,
net of tax:
Foreign currency translation
adjustment ............... -- -- -- -- -- (57) -- (57)
--------
Comprehensive loss ............ (5,550)
-------- -------- -------- -------- -------- -------- -------- --------
Balances, June 30, 1998 ....... 1,000 -- 78,364 -- (5,493) (57) (15,730) 57,084
Net loss ...................... -- -- -- -- (5,116) -- -- (5,116)
Other comprehensive loss, net
of tax:
Foreign currency
translation adjustment ... -- -- -- -- -- (308) -- (308)
--------
Comprehensive loss ............ (5,424)
Dividend to AHC I Acquisition
Corp ........................ -- -- -- -- (1,863) -- -- (1,863)
-------- -------- -------- -------- -------- -------- -------- --------
Balances, June 30, 1999 ....... 1,000 -- 78,364 -- (12,472) (365) (15,730) 49,797
Equity contribution by AHC I
Acquisition Corp. ........... -- -- 10,571 -- -- -- -- 10,571
Net loss ...................... -- -- -- -- (1,357) -- -- (1,357)
Other comprehensive loss, net
of tax:
Foreign currency
translation adjustment ... -- -- -- -- -- (177) -- (177)
--------
Comprehensive loss ............ (1,534)
-------- -------- -------- -------- -------- -------- -------- --------
Balances, June 30, 2000 ....... 1,000 $ -- $ 88,935 $ -- $(13,829) $ (542) $(15,730) $ 58,834
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------------------------------------------------
December 16, July 1,
Year Year 1997 1997
ended ended through through
June 30, June 30, June 30, December 15,
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $ (1,357) $ (5,116) $ (5,493) $ 1,793
Adjustment to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization of goodwill
and other intangibles ............................ 9,738 8,487 3,954 2,456
Amortization of debt discount ...................... 3,638 3,631 139 233
Amortization of loan closing costs ................. 1,309 727 3,808 101
Deferred income taxes .............................. 945 (544) (2,035) (460)
Gain on sale of equipment .......................... -- (50) -- --
Gain from early retirement of debt ................. (2,345) -- -- --
Other .............................................. (1) (308) (57) (18)
Changes in operating assets and liabilities:
Accounts receivable .............................. (2,576) (2,737) (4,562) 1,153
Inventory ........................................ (2,496) (3,031) 543 69
Prepaid expenses, deferred charges and
other assets ................................... 450 (975) (453) (62)
Accounts payable and accrued expenses ............ (2,637) 4,511 (5,432) (1,036)
Income taxes ..................................... 259 5,238 767 699
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities ..................................... 4,927 9,833 (8,821) 4,928
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of equipment ............................... (2,782) (2,856) (514) (807)
Proceeds from sale of equipment ...................... -- 50 -- --
Payments for acquisitions, net of cash acquired ...... (16,164) -- (141,403) --
Patents .............................................. (150) -- --
--------- --------- --------- ---------
Net cash used in investing activities .......... (19,096) (2,806) (141,917) (807)
--------- --------- --------- ---------
Cash flows from financing activities:
Payments under capital leases for equipment .......... (688) (661) (308) (249)
Net proceeds (repayments) on line of credit .......... 9,000 -- (6,700) 2,362
Proceeds from issuance of senior increasing rate
notes, net of offering costs ...................... -- -- 119,735 --
Payments on senior increasing rate notes ............. -- -- (123,500) --
Proceeds from issuance of senior notes, net
of offering costs .................................. -- -- 110,158 --
Proceeds from issuance of senior discount
debentures, net of offering costs .................. -- -- 24,699 --
Proceeds from issuance of common stock ............... -- -- 76,001 --
Redemption of preferred stock ........................ -- -- (8,678) --
Repayment of loans payable to stockholder ............ -- -- (36,649) (1,851)
Repayment of other notes payable ..................... -- (1,330) (50) (50)
Dividends paid on preferred stock .................... -- -- (128) (155)
Dividend paid to AHC I Acquisition Corp. ............. -- (1,863) -- --
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities ............................. 8,312 (3,854) 154,580 57
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents .... (5,857) 3,173 3,842 4,178
Cash and cash equivalents, beginning of period .......... 7,015 3,842 -- 303
--------- --------- --------- ---------
Cash and cash equivalents, end of period ................ $ 1,158 $ 7,015 $ 3,842 $ 4,481
========= ========= ========= =========
Supplemental information:
Cash paid (received) during the period for:
Interest to stockholder(s) and affiliate ........... $ 22 $ -- $ 11,503 $ 1,146
Interest, other .................................... 13,188 6,512 214 459
Income taxes ....................................... 1,264 (5,123) (784) 1,222
Significant non-cash activities:
Assets acquired under capital lease .................. $ -- $ 600 $ -- $ --
Contribution of equity and retirement of
senior discount debentures and senior notes ........ 10,571 -- -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
1. ORGANIZATION AND BUSINESS
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. As more fully described in
Note 3, 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 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," the "Successor" or the "Company") for all of the
outstanding equity of Holding. AKI 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 distributes its products in Europe through its
French subsidiary, Arcade Europe S.A.R.L.
Unless otherwise indicated, all references to years refer to the
Predecessor's, AKI's and Holding's fiscal year, June 30.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less at the time of purchase to be cash equivalents.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts; in addition, the Company believes it is not
exposed to any significant credit risk on cash and cash equivalents. The
Company grants credit terms in the normal course of business to its
customers and as part of its ongoing procedures, the Company monitors the
credit worthiness of its customers. The Company does not believe that it is
subject to any unusual credit risk beyond the normal credit risk attendant
in its business.
F-8
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
One customer accounted for 15.3% of net sales during the year ended
June 30, 2000. Two customers accounted for 26.8% of net sales during the
year ended June 30, 1999. One customer accounted for 13.3% of net sales
during the period from December 16, 1997 through June 30, 1998. Two
customers accounted for 35.3% of the Predecessor's net sales during the
period from July 1, 1997 through December 15, 1997.
Concentration of Purchasing
Products accounting for a majority of the Company's net sales utilize
specific grades of paper that are produced exclusively for the Company by
one domestic supplier. The Company does not have a purchase agreement with
the supplier and is not aware of any other suppliers of these specific
grades of paper. These products can be manufactured using other grades of
paper; however, the Company believes the specific grades of paper utilized
by the Company provide the Company with an advantage over its competitors.
The Company is currently researching methods of replicating the advantages
of these specific grades of paper with other grades of paper available from
multiple suppliers. Until such methods are developed, a loss of supply of
these specific grades of paper and the resulting competitive advantage
could cause a possible loss of sales, which could adversely affect
operating results.
Revenue Recognition and Accounts Receivable
Product sales are recognized upon shipment, net of estimated
discounts. Accounts receivable is accounted for net of allowances for
doubtful accounts. Under arrangements with certain customers, custom
product which is stored for future delivery is recognized as revenue when
title has passed to the customer.
Inventory
Paper inventory is stated at the lower of cost or market using the
last-in, first-out (LIFO) method; all other inventories are stated at the
lower of cost or market using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures that
extend the economic lives or improve the efficiency of equipment are
capitalized. The costs of maintenance and repairs are expensed as incurred.
Upon retirement or disposal, the related cost and accumulated depreciation
are removed from the respective accounts and any gain or loss is recorded.
Depreciation is computed using the straight-line method based on the
estimated useful lives of the assets as indicated in Note 6 for financial
reporting purposes and accelerated methods for tax purposes. Leasehold
improvements are depreciated over the shorter of their estimated useful
lives or the lease term.
F-9
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill
The aggregate purchase price of business acquisitions was allocated to
the assets and liabilities of the acquired companies based on their
respective fair values as of the acquisition dates. Goodwill represents the
excess purchase price paid over the fair value of net identifiable assets
acquired and is amortized over a period of up to forty years using the
straight-line method. Accumulated amortization was $10,546 and $5,939 at
June 30, 2000 and June 30, 1999, respectively.
Management periodically reviews the value of its goodwill and other
long-lived assets to determine if an impairment has occurred. The potential
impairment of recorded goodwill and other long-lived assets is measured by
the undiscounted value of expected future operating cash flows in relation
to its net capital investment. Based on its review, management does not
believe that an impairment of its goodwill or its other long-lived assets
has occurred.
Deferred Charges
Deferred charges are primarily comprised of debt issuance costs which
are being amortized using the effective interest method over the terms of
the related debt. Such costs are included in the accompanying consolidated
balance sheets, net of accumulated amortization.
Other Intangible Assets
Other intangible assets include covenants not to compete, patents and
other intangible assets and are being amortized over their estimated lives
using the straight-line method. Accumulated amortization related to these
intangibles assets was $1,479 and $754 at June 30, 2000 and June 30, 1999,
respectively.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Values of Financial
Instruments," requires the disclosure of the fair value of financial
instruments, for assets and liabilities recognized and not recognized on
the balance sheet, for which it is practicable to estimate fair value. The
fair value of the Company's Senior Notes and Senior Discount Debentures, as
determined from quoted market prices, was $85,470 and $19,687,
respectively, at June 30, 2000 compared to a carrying value of $107,510 and
$27,863, respectively, as of the same date. The fair value of the Company's
Senior Notes and Senior Discount Debentures, as determined from quoted
market prices, was $112,000 and $22,508, respectively, at June 30, 1999
compared to a carrying value of $115,000 and $29,651, respectively, as of
the same date. The carrying value of all other financial instruments
approximated fair value at June 30, 2000 and June 30, 1999.
F-10
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Transactions
Gains and losses on foreign currency transactions with third parties
have been included in the determination of net income in accordance with
SFAS No. 52, "Foreign Currency Translation." Foreign currency losses and
(gains) amounted to $51, $91, ($52) and ($44) for the year ended June 30,
2000, the year ended June 30, 1999, the period from December 16, 1997
through June 30, 1998 and the period from July 1, 1997 through December 15,
1997, respectively.
At June 30, 2000, short term forward exchange contracts existed to
sell Euros at an exchange rate of .8853 per U.S. dollar and to buy British
pound sterling at an exchange rate of 1.497 per U.S. dollar. These
contracts have been entered into for the purpose of mitigating short term
foreign exchange risk for customer orders and receivables denominated in
foreign currencies. The notional principle amounts under these foreign
exchange contracts were $700 and $200, respectively. The fair value of
these foreign exchange contracts as of June 30, 2000 was not significant.
Research and Development Expenses
Research and development expenditures are charged to selling, general
and administrative expenses in the period incurred. Research and
development expenses totaled $1,309, $1,136, $717 and $664 for the year
ended June 30, 2000, the year ended June 30, 1999, the period from December
16, 1997 through June 30, 1998 and the period from July 1, 1997 through
December 15, 1997, respectively.
Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly,
deferred tax assets and liabilities are recognized at the applicable income
tax rates based upon future tax consequences of temporary differences
between the tax bases and financial reporting bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are reduced, if
necessary, by the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Comprehensive Income (Loss)
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130") on July 1, 1998. This
statement establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. This statement also
F-11
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
requires that comparative information for earlier periods be reclassified.
As the Company only has two items of comprehensive income, net income and
foreign currency translations, adoption of this statement did not have a
material effect upon the Company's financial position or results of
operations.
3. SIGNIFICANT ACQUISITIONS
DLJMBII and certain members of the Predecessor organized AHC and
Merger Corp. for purposes of acquiring the Predecessor. Merger Corp. was a
wholly-owned subsidiary of AHC and was initially capitalized by AHC with an
equity contribution of $78,363, comprised of $76,000 of cash (see Note 12)
and $2,363 of non-cash consideration in the form of an option to purchase
Senior Preferred Stock of AHC. (see Note 17). Immediately following this
equity contribution, Merger Corp. issued $123,500 of senior increasing rate
notes (the "Bridge Loans") to an entity with an ownership interest in AHC.
The Bridge Loans had a stated maturity of December 15, 1998 and had an
interest rate equal to the greater of (i) 10.0% per annum and (ii) a daily
floating rate of prime plus 2.25% plus an additional percentage amount
equal to (a) 1.0% from and including the interest payment date on June 15,
1998 or (b) 1.5% from and including the interest payment date on September
15, 1998. Merger Corp. received cash proceeds from the issuance of the
Bridge Loans of $119,735, net of $3,765 of associated debt issuance costs.
On December 15, 1997, Merger Corp. acquired all of the equity
interests of the Predecessor (the "Acquisition") for a total cost of
$197,730 which consisted of $138,634 cash paid for equity interests and
direct acquisitions cost, $2,363 in non-cash consideration in the form of
an option to purchase Senior Preferred Stock of AHC (see Note 17) and the
assumption of $56,733 in debt, preferred stock and related interest and
dividends, including a capital lease obligation. Included in the amount of
direct acquisition costs was approximately $2,022 paid to an entity that
has an ownership interest in AHC. Merger Corp. then merged with and into
the Predecessor and the combined entity assumed the name AKI. Subsequent to
the Acquisition, AHC contributed $1 of cash and all of its ownership
interest in AKI to Holding for all of the outstanding equity of Holding.
Since all companies are under common control and since Holding and AHC have
no operations other than those related to AKI, the contribution was
accounted for as if it were a pooling of interests.
The Acquisition was accounted for using the purchase method of
accounting. In accordance with the consensus reached by the Emerging Issues
Task Force of the Financial Accounting Standards Board in Issue 88-16,
"Basis in Leveraged Buyout Transactions," the purchase price allocation
required an adjustment for the continuing interest attributable to
management's ownership interest in the Predecessor carried over in
connection with the Acquisition. As a result, a reduction in stockholders'
equity of $15,730 was recorded which represents the difference between the
fair value of the Company's assets and the related book value attributable
to the interest of the continuing shareholders' investment in the
Predecessor. The remaining purchase price has been allocated to assets and
liabilities based upon estimates of their respective fair value as
determined by management and third-party appraisals with respect to
property, plant and equipment.
F-12
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
3. SIGNIFICANT ACQUISITIONS (Continued)
In connection with the Acquisition, the Company repaid the outstanding
balance and related interest of the Predecessor's loans payable to a
shareholder of $37,374, the outstanding balance and related interest of the
Predecessor's line of credit of $6,278 and the outstanding balance and
related dividends on the Predecessor's preferred stock of $8,806.
The following shows the acquisition costs and the allocation of the
purchase price:
Acquisition costs
Cash paid for stock ........................................... $ 134,403
Direct acquisition costs ...................................... 4,231
---------
138,634
Non-cash consideration for stock in the form of an option to
purchase Senior Preferred Stock of AHC (see Note 17) ........ 2,363
---------
Total ......................................................... 140,997
Less--Carryover basis adjustment .............................. (15,730)
---------
Purchase price to be allocated ................................ $ 125,267
=========
Summary allocation of purchase price
Cash .......................................................... $ 4,481
Other current assets .......................................... 17,782
Property, plant and equipment ................................. 20,132
Deferred income taxes ......................................... 2,953
Other assets .................................................. 329
Goodwill ...................................................... 153,929
---------
Total allocation to assets .................................... $ 199,606
=========
Current liabilities ........................................... $ 13,190
Long-term debt (including current portion) and related interest 47,927
Deferred income taxes ......................................... 4,416
Preferred stock and related dividends ......................... 8,806
---------
Total liabilities assumed ..................................... $ 74,339
=========
Included in cash paid for stock of $134,403 is $19,342 related to the
purchase and retirement of 11,201 options of the Predecessor. In addition,
the non-cash consideration for stock of $2,363 was incurred to acquire and
retire the remaining 1,370 options of the Predecessor (see Note 17).
F-13
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
3. SIGNIFICANT ACQUISITIONS (Continued)
In December, 1999 the Company settled a dispute with the former owners
of the Predecessor. In connection with the settlement the Company received
approximately $1.2 million and has included the settlement amount net of
related expenses in income from operations.
On September 15, 1999, the Company acquired all of the equity
interests in RetCom Holdings Ltd. and its subsidiaries ("RetCom") for
approximately $12,500 and refinanced working capital indebtedness of
approximately $4,500 of RetCom. The acquisition was accounted for using the
purchase method of accounting. The purchase price has been allocated to the
assets and liabilities acquired using estimated fair values at the date of
acquisition and resulted in assigning value to goodwill totaling
approximately $19,100 which is being amortized on a straight line basis
over a period of twenty years. The fair values assigned are preliminary and
may be revalued at a later date but the change is not expected to be
material. The results of the acquired operations are included in the
financial statements since the date of acquisition. Pro forma results had
RetCom been acquired at the beginning of fiscal 1999 and 2000 are not
determinable.
On June 25, 1998, the Bridge Loans were repaid, without penalty, with
the proceeds from the Senior Note offering (see Note 9) and the Senior
Discount Debenture offering (see Note 10) (collectively, the
"Refinancing"). Contemporaneous with the repayment of the Bridge Loans, the
Company wrote-off the unamortized balance of debt issuance costs associated
with the Bridge Loans of $1,795 to interest expense.
4. ACCOUNTS RECEIVABLE
The following table details the components of accounts receivable:
June 30, June 30,
2000 1999
---- ----
Trade accounts receivable ..... $ 22,314 $ 16,349
Allowance for doubtful accounts (963) (251)
-------- --------
21,351 16,098
Other accounts receivable ..... 171 189
-------- --------
$ 21,522 $ 16,287
======== ========
F-14
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
5. INVENTORY
The following table details the components of inventory:
June 30, June 30,
2000 1999
---- ----
Raw materials
Paper ................ $3,944 $1,088
Other raw materials .. 2,541 2,328
------ ------
Total raw materials 6,485 3,416
Work in process ........ 1,272 1,693
------ ------
Total inventory ........ $7,757 $5,109
====== ======
The difference between the carrying value of paper inventory using the
FIFO method as compared to the LIFO method was not significant at June 30,
2000 or June 30, 1999.
6. PROPERTY, PLANT AND EQUIPMENT
The following table details the components of property, plant and
equipment as well as their estimated useful lives:
Estimated June 30, June 30,
Useful Lives 2000 1999
------------ ---- ----
Land ...................... $ 258 $ 258
Building .................. 7 - 15 years 1,719 1,648
Leasehold improvements .... 1 - 3 years 635 579
Machinery and equipment ... 5 - 7 years 21,348 19,483
Furniture and fixtures .... 3 - 5 years 3,081 2,084
Construction in progress... 101 183
-------- --------
27,142 24,235
Accumulated depreciation... (10,045) (5,724)
-------- --------
$ 17,097 $ 18,511
======== ========
Depreciation expense amounted to $4,381, $3,881, $1,853 and $1,888 for
the year ended June 30, 2000, the year ended June 30, 1999, the period from
December 16, 1997 through June 30, 1998 and the period from July 1, 1997
through December 15, 1997, respectively.
F-15
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
6. PROPERTY, PLANT AND EQUIPMENT (Continued)
Property held under capital lease is included in the respective
property, plant and equipment category as follows:
June 30, June 30,
2000 1999
---- ----
Machinery and equipment ................. $ 3,000 $ 3,000
Building ................................ 600 600
------- -------
3,600 3,600
Less accumulated depreciation ........... (1,390) (790)
------- -------
$ 2,210 $ 2,810
======= =======
Depreciation of assets under capital lease totaled $600, $515, $275
and $232 for the year ended June 30, 2000, the year ended June 30, 1999,
the period from December 16, 1997 through June 30, 1998 and the period from
July 1, 1997 through December 15, 1997, respectively. Future minimum lease
payments under the remaining lease are as follows:
Payment Interest
2001 .................. 948 100
2002 .................. 529 27
------- -------
$ 1,477 $ 127
======= =======
7. LINE OF CREDIT
The Credit Agreement provides for a revolving loan commitment up to a
maximum of $20,000 and expires on December 31, 2002. Borrowings are limited
to a borrowing base consisting of accounts receivable, inventory and
property, plant and equipment which serve as collateral for the borrowings.
As of June 30, 2000, the Company's borrowing base was approximately
$24,128. Interest on amounts borrowed accrue at a floating rate based upon
either prime or LIBOR (10.25% and 8.50% at June 30, 2000 and June 30, 1999,
respectively). The weighted average interest rate on the outstanding
balance under the Credit Agreement was 9.12%, 8.51%, 9.25% and 9.50% for
the year ended June 30, 2000, the year ended June 30, 1999, the period from
December 16, 1997 through June 30, 1998 and the period from July 1, 1997
through December 15, 1997, respectively.
The Company is required to pay commitment fees on the unused portion
of the revolving loan commitment at a rate of approximately 0.5% per annum.
In addition, the Company is required to pay fees equal to 2.5% of the
average daily outstanding amount of lender guarantees. The Company had $600
of lender guarantees outstanding at June 30, 2000 and June 30, 1999. These
fees totaled $69, $111, $59 and $30 for the year ended
F-16
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
7. LINE OF CREDIT (Continued)
June 30, 2000, the year ended June 30, 1999, the period from December 16,
1997 through June 30, 1998 and the period from July 1, 1997 through
December 15, 1997, respectively. The Credit Agreement contains certain
financial covenants and other restrictions including restrictions on
additional indebtedness and restrictions on the payment of dividends. As of
June 30, 2000, the Company was in compliance with all debt covenants.
8. LOANS PAYABLE TO STOCKHOLDER
The Predecessor entered into a Senior Loan Agreement and two
Subordinated Loan Agreements (collectively, the "Loan Agreements") with a
party that had owned the Predecessor's preferred stock and a significant
portion of its common stock. The Loan Agreements were collateralized by
substantially all the assets of the Predecessor. The Loan Agreements
limited the Predecessor's ability to incur additional indebtedness, pay
dividends and purchase fixed assets. Additionally, the Loan Agreements
required that certain financial covenants be maintained. This debt was
subsequently retired upon the acquisition of the Predecessor as discussed
in Note 3. All amounts borrowed under the Senior Loan Agreement bore
interest at prime plus 1.50%.
The Predecessor borrowed $30,000 under the Subordinated Loan
Agreements, of which $23,000 was designated as Loan I and $7,000 was
designated as Loan II. Loan I bore interest, payable quarterly, at 12%
until November 4, 1998, and then would have converted to prime plus 4%.
Loan II bore interest, payable quarterly, at 7%. The outstanding amount of
the subordinated loans was net of unamortized debt discounts, which were
being amortized over the term of the related loan. The amounts due under
the Subordinated Loan Agreements were subsequently retired upon the
acquisition of the Predecessor as discussed in Note 3.
In connection with Loan II, the Predecessor issued a warrant to
purchase 19,233 shares of common stock at $0.05 per share. The warrant was
exercisable until November 4, 2003. The Predecessor valued the warrants at
$100 each based on the fair market value of a share of the underlying
common stock resulting from a sale with a third party. In connection with
the warrant issued, the Predecessor recorded a debt discount of $1,923. In
connection with the sale of the Predecessor on December 15, 1997 (see Note
3), all outstanding warrants were purchased from the holder by the buyer of
the Predecessor and retired.
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 June 30, 2000, no amounts
were outstanding under the promissory note.
9. SENIOR NOTES
On June 25, 1998, AKI completed a private placement of $115,000 of
Senior Notes (the "Senior Notes"). The Senior Notes are general unsecured
obligations of AKI and bear interest at 10.5% per annum, payable
semi-annually on January 1 and July 1. The Senior Notes mature on July 1,
2008 and may be redeemed at the option of AKI, in whole or in part, at any
time on or after July 1, 2003 at a price equal to 105.25% of the
F-17
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
9. SENIOR NOTES (Continued)
outstanding principal balance plus accrued and unpaid interest. The
placement of the Senior Notes yielded AKI net proceeds of $110,158 after
deducting offering expenses of $4,842, including $3,450 of underwriting
fees paid to an affiliate of the stockholder. The Senior Notes are
redeemable at the option of the Company, in whole or part, at any time
after July 1, 2003 at a price of up to 105.25% of the outstanding principal
balance plus accrued and unpaid interest. Prior to July 1, 2003, AKI is
permitted to repurchase up to 35% of the Senior Notes at a redemption price
equal to 110.5% of the aggregate principal amount plus accrued and unpaid
interest with the net proceeds of one or more public equity offerings. The
Senior Notes contain certain customary covenants including restrictions on
the declaration and payment of dividends by AKI to Holding and limitations
on the incurrence of additional indebtedness. On December 22, 1998, AKI
completed the registration of its Senior Notes with the Securities and
Exchange Commission. During fiscal 2000, AHC purchased $7,490 of the Senior
Notes for $6,486 and recognized a gain, net of income taxes, of
approximately $429. The notes were contributed to Holding and Holding
contributed the notes to AKI. The notes were subsequently retired.
10. SENIOR DISCOUNT DEBENTURES
On June 25, 1998, Holding completed a private placement of Senior
Discount Debentures (the "Debentures") with a stated value of $50,000. The
Debentures are general unsecured obligations of Holding and mature on July
1, 2009. The Debentures do not accrue or pay interest until July 1, 2003
and were issued with an original issuance discount of $24,038. The
placement of the Debentures yielded the Company net proceeds of $24,699
after deducting offering expenses of $1,263, including $1,038 of
underwriting fees paid to an affiliate of the stockholder. The original
issuance discount of $24,038 on the Debentures is being accreted from
issuance through July 1, 2003 at an effective rate of 13.5% per annum. The
unamortized balance of the original issuance discount was $13,368 and
$20,349 at June 30, 2000 and June 30, 1999, respectively. After July 1,
2003, the Debentures will accrue interest at a rate of 13.5% per annum,
payable semi-annually, commencing January 1, 2004. The Debentures are
redeemable at the option of Holding, in whole or in part, at any time on or
after July 1, 2003 at a price up to 106.75% of the outstanding principal
balance plus accrued and unpaid interest. Prior to July 1, 2003, Holding is
permitted to repurchase up to 35% of the aggregate principal amount at
maturity of the Debentures originally issued at a redemption price equal to
113.5% of the accreted value of the Debentures with the net proceeds of one
or more public equity offerings. The Debentures contain certain customary
covenants including restrictions on the declaration and payment of
dividends and limitations on the incurrence of additional indebtedness. On
December 22, 1998, the Company completed the registration of its Senior
Discount Debentures with the Securities and Exchange Commission. During
fiscal 2000, AHC purchased Senior Discount Debentures with a carrying value
of $5,426 for $4,084 and recognized a gain, net of income taxes, of
approximately $660. The debentures were contributed to Holding and
subsequently retired.
F-18
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
11. OTHER NOTES PAYABLE
On June 9, 1995, the Predecessor acquired all of the issued and
outstanding stock of Scent Seal Inc. ("Scent Seal"). The acquisition of
Scent Seal did not have a material impact on the financial position or
results of operations of the Predecessor and was accounted for as a
purchase transaction whereby the purchase cost was allocated to the fair
value of the net assets acquired. In connection with the acquisition of
Scent Seal, the Predecessor issued $3,627 in noninterest bearing promissory
notes (the "Notes") to an employee of the Predecessor who was previously a
Scent Seal stockholder. The Predecessor recorded a debt discount of $649 in
connection with the issuance of the Notes to reflect an effective interest
rate of 10%. The discount was being amortized over the term of the Notes.
Under certain provisions of the Scent Seal acquisition agreement, the
Company was permitted to reduce the outstanding principal balance of the
Notes based upon the ultimate realization of assets acquired and settlement
of liabilities assumed. In June 1998, the Company reached a settlement with
the holder of the Notes under these provisions, which resulted in the
reduction of the outstanding principal balance of the Notes of $120. The
remaining principal balance of the Notes of $1,330 was repaid in July 1998
in accordance with the terms of the Notes.
12. REDEEMABLE PREFERRED STOCK OF THE PREDECESSOR
In connection with the 1993 acquisition of Arcade, the Predecessor
authorized and issued 8,000 shares of 7% cumulative, $1 par value
redeemable preferred stock at $1,000 per share. In conjunction with the
sale of the Predecessor on December 15, 1997 (see Note 3), all outstanding
redeemable preferred stock was redeemed at $1,000 per share plus accrued
and unpaid dividends.
13. INITIAL CAPITALIZATION
In conjunction with the Acquisition, AHC issued $30,000 of Floating
Rate Notes, $50,279 of Mandatorily Redeemable Senior Preferred Stock (the
"Senior Preferred Stock") and $1,111 of its Common Stock. The Floating Rate
Notes were issued with an original issuance discount of $5,389 and bear
interest at a rate equal to the rate in effect on the Bridge Loans (see
Note 3) plus 2.50%. Interest was payable quarterly and could be settled
through the issuance of additional Floating Rate Notes through December 15,
2009, the maturity date, at the discretion of AHC. The original issuance
discount of $5,389 was being amortized using the effective interest method
over the life of the Floating Rate Notes. The unamortized balance of the
original issuance discount at June 30, 1999 was $4,740. On November 1, 1999
AHC issued Amended and Restated Notes totaling $35,500 in exchange for the
Floating Rate Notes. The Amended and Restated Notes bear a fixed interest
rate of approximately 16% per annum and mature on December 15, 2009 and
provide for the payment of stipulated early redemption premiums. In
connection with the exchange the unamortized original issue discount was
expensed by AHC. The Senior Preferred Stock accretes in value at 15% per
annum and must be redeemed by December 15, 2012. The Amended and Restated
Notes and Senior Preferred Stock are general unsecured obligations of AHC.
F-19
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
13. INITIAL CAPITALIZATION (Continued)
The cash proceeds from the issuance of the Floating Rate Notes, Senior
Preferred Stock and Common Stock of approximately $76,000 and a Mandatorily
Redeemable Senior Preferred Stock Option of $2,363 (see Note 17) were
contributed by AHC to AKI in exchange for 1,000 shares of AKI's Common
Stock. Subsequent to the capitalization of AKI, AHC contributed $1 of cash
and all of its ownership interest in AKI to Holding for all of the
outstanding equity of Holding.
AHC has no other operations other than the Company. Absent additional
financing by AHC, the Company's operations represent the only current
source of funds available to service the Floating Rate Notes and
Mandatorily Redeemable Senior Preferred Stock; however, the Company is not
obligated to pay or otherwise guarantee the Floating Rate Notes and
Mandatorily Redeemable Senior Preferred Stock.
14. COMMITMENTS AND CONTINGENCIES
Operating Leases
Equipment and office, warehouse and production space under operating
leases expire at various dates. Rent expense was $589, $338, $198 and $192
for the year ended June 30, 2000, the year ended June 30, 1999, the period
from December 16, 1997 through June 30, 1998 and the period from July 1,
1997 through December 15, 1997, respectively. Future minimum lease payments
under the leases total $256 in 2001 and none thereafter.
Royalty Agreements
Royalty agreements are maintained for certain technologies used in the
manufacture of certain products. Under the terms of one royalty agreement,
payments are required based on a percentage of net sales of those products
manufactured with the specific technology, or a minimum of $500 per year.
This agreement expires in 2003 or when a total of $12,500 in cumulative
royalty payments has been paid. The Company expensed $500, $500, $516 and
$437 under this agreement for the year ended June 30, 2000, the year ended
June 30, 1999, the period from December 16, 1997 through June 30, 1998 and
the period from July 1, 1997 through December 15, 1997, respectively. The
Company has paid $5,076 in cumulative royalty payments under this agreement
through June 30, 2000.
Under the terms of another agreement, royalty payments are required
based on the number of products sold that were manufactured with the
specific licensed technology, or a minimum payment per year. These minimum
payments for years after fiscal 1999 are $625 through the expiration of the
agreement in 2012. The Company expensed $625, $575, $284 and $241 under
this agreement for the year ended June 30, 2000, the year ended June 30,
1999, the period from December 16, 1997 through June 30, 1998 and the
period from July 1, 1997 through December 15, 1997, respectively.
F-20
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
14. COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements
The Company has employment agreements with certain executive officers
with terms through June 30, 2001 and 2002. Such agreements provide for base
salaries totaling $890 per year. One officer has an incentive bonus of up
to 200% of base salary which is payable if certain financial and management
goals are attained and certain other incentive payments. The employment
agreements also provide severance benefits of up to two years of base
salary if the officers' services are terminated under certain conditions.
During fiscal 1999, two executive officer's employment was terminated
with the Company. In accordance with the terms of the former officers'
employment agreements, the Company was obligated for severance benefits of
approximately $610. The Company had paid approximately $457 of these
benefits by June 30, 1999. The remaining balance of $153 is included in
accrued compensation at June 30, 1999 and subsequently paid in fiscal 2000.
Litigation
The Company is a party to litigation arising in the ordinary course of
business which, in the opinion of management, will not have a material
adverse effect on the Company's financial condition, results of operations
or cash flows.
Printing Services Agreement
In connection with the RetCom acquisition, AKI entered into a five
year Printing Services Agreement with a former shareholder of RetCom. The
Printing Services Agreement requires annual purchases of printing services
totaling $5,000 and a 15% charge on the amount of any shortfall. The
present value of the costs related to the estimated shortfall over the life
of the Printing Services Agreement was recorded as a liability in the
RetCom purchase accounting.
15. RETIREMENT PLANS
A 401(k) defined contribution plan (the "Plan") is maintained for
substantially all full-time salaried employees. Applicable employees who
have six months of service and have attained age 21 are eligible to
participate in the Plan. Employees may elect to contribute a percentage of
their earnings to the Plan in accordance with limits prescribed by law.
Contributions to the Plan are determined annually by the Company and
generally are a matching percentage of employee contributions. Costs
associated with the Plan totaled $251, $201, $113 and $95 for the year
ended June 30, 2000, the year ended June 30, 1999, the period from December
16, 1997 through June 30, 1998 and the period from July 1, 1997 through
December 15, 1997, respectively.
F-21
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
15. RETIREMENT PLANS (Continued)
Certain hourly employees are covered under a multiemployer defined
benefit plan administered under a collective bargaining agreement. Costs
(determined by union contract) under the defined benefit plan were $215,
$204, $81 and $80 for the year ended June 30, 2000, the year ended June 30,
1999, the period from December 16, 1997 through June 30, 1998 and the
period from July 1, 1997 through December 15, 1997, respectively.
16. INCOME TAXES
The Company is included in the consolidated federal income tax return
filed by AHC for periods subsequent to December 15, 1997. Income taxes
related to the Company for the period from December 16, 1997 through June
30, 2000 were determined on a separate entity basis. The Company files
separate state income tax returns and calculates its state tax provision on
a separate company basis. Any income taxes payable or receivable by the
consolidated group are settled or received by AKI. The Predecessor was not
part of a consolidated group.
For financial reporting purposes, income (loss) before income taxes
and extraordinary gain includes the following components:
<TABLE>
<CAPTION>
December 16, July 1,
1997 1997
Year Ended Year Ended through through
June 30, June 30, June 30, December 15,
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (loss) before income taxes
and extraordinary gain:
United States ................ $(1,305) $(5,978) $(8,227) $ 3,298
Foreign ...................... 455 522 682 (64)
------- ------- ------- -------
$ (850) $(5,456) $(7,545) $ 3,234
======= ======= ======= =======
</TABLE>
F-22
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
16. INCOME TAXES (Continued)
Significant components of the provision (benefit) for income taxes are
as follows:
<TABLE>
<CAPTION>
December 16, July 1,
1997 1997
Year Ended Year Ended through through
June 30, June 30, June 30, December 15,
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current expense (benefit):
Federal ................. $ 480 $ -- $ -- $ 1,623
Foreign ................. 171 204 104 --
State ................... -- -- (121) 278
------- ------- ------- -------
651 204 (17) 1,901
------- ------- ------- -------
Deferred expense (benefit):
Federal ................. 519 (481) (1,916) (376)
Foreign ................. -- -- 162 (25)
State ................... 426 (63) (281) (59)
------- ------- ------- -------
945 (544) (2,035) (460)
------- ------- ------- -------
$ 1,596 $ (340) $(2,052) $ 1,441
======= ======= ======= =======
</TABLE>
The significant components of deferred tax assets and deferred tax
liability at June 30, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Deferred income tax assets:
Accrued expenses .................. $ 215 $2,427 $ 308 $1,206
Allowance for doubtful accounts.... 181 -- 92 --
Net operating loss carryforwards... -- 720 -- 3,132
------ ------ ------ ------
396 3,147 400 4,338
Deferred income tax liability:
Property, plant and equipment.... -- 3,090 -- 3,340
------ ------ ------ ------
$ 396 $ 57 $ 400 $ 998
====== ====== ====== ======
</TABLE>
F-23
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
16. INCOME TAXES (Continued)
The income tax provision recognized by the Company for the years ended
June 30, 2000 and 1999 and for the period from December 16, 1997 through
June 30, 1998 and by the Predecessor for the period from July 1, 1997
through December 15, 1997 differs from the amount determined by applying
the applicable U.S. statutory federal income tax rate to pretax income as a
result of the following:
<TABLE>
<CAPTION>
December 16, July 1,
1997 1997
Year Ended Year Ended through through
June 30, June 30, June 30, December 15,
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computed tax provision (benefit)
at the statutory rate ............. $ (289) $(1,855) $(2,565) $ 1,100
State income tax provision (benefit),
net of federal effect ............. 281 (42) (265) 145
Nondeductible expenses .............. 1,588 1,530 723 193
Other, net .......................... 16 27 55 3
------- ------- ------- -------
$ 1,596 $ (340) $(2,052) $ 1,441
======= ======= ======= =======
</TABLE>
In conjunction with the Acquisition, the Company recognized an income
tax benefit of $7,327 related to the excess of the redemption price over
the strike price of certain non-qualified options of the Predecessor
redeemed and retired by the Company. This benefit was recorded as a
reduction to goodwill.
Due to the Company's losses in prior years the Company has recorded a
long-term deferred tax asset of $720 reflecting cumulative net operating
loss carryforwards available to offset future state taxable income of
approximately $10,996 at June 30, 2000. These cumulative net operating loss
carryforwards expire in varying amounts through 2019. Realization is
dependent on generating sufficient state taxable income prior to expiration
of the loss carryforwards. Although realization is not assured, management
believes that it is more likely than not that all of the deferred tax asset
will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
17. STOCK OPTIONS
The Predecessor sponsored a key employee stock option plan under which
a maximum of 12,571 shares of the Predecessor's common stock could be
reserved for nonqualified options; all stock options were granted with an
exercise price equal to the fair market value of $100 per share. All
options vested ratably over five years and would have expired ten years
from the grant date.
F-24
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
17. STOCK OPTIONS (Continued)
The Predecessor accounted for its employee stock options under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). Under APB 25, because the exercise price of the
Predecessor's employee stock options equaled the market value of the
underlying stock on the date of grant, no compensation expense was
recognized.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), requires disclosure of pro forma
information regarding net income for option grants subsequent to December
15, 1995. Because all of the Predecessor's options were granted prior to
that date, no pro forma adjustments to net income or disclosure of
information would apply under SFAS 123.
As a result of the sale of the Predecessor on December 15, 1997 (see
Note 3), all outstanding options became immediately vested and exercisable
under the terms of the original individual stock option agreements. In
connection with the Acquisition, the Company purchased and retired 11,201
options of the Predecessor for $19,342. The remaining 1,370 options of the
Predecessor, which had a cumulative exercise price of $137, were exchanged
at fair value for an option to purchase 100,000 shares of AHC Senior
Preferred Stock with a cumulative stated valued of $2,500 ("the Preferred
Stock Option"). The 1,370 options were subsequently retired. The Preferred
Stock Option had an exercise price of $137. The total consideration of
$21,705 used to purchase and retire the outstanding options of the
Predecessor was included in the cost of the Acquisition (see Note 3).
The Preferred Stock Option was issued with a Put and Call Option (the
"Put and Call Option") which granted the officer the right to compel
DLJMBII to purchase the 100,000 shares of Senior Preferred Stock obtainable
under the Preferred Stock Option, together with certain common equity
interests in AHC held by the officer, for $2,590. The Put and Call Option
also granted DLJMBII the right to purchase the equity interests, both
common and preferred, of the officer for the same amount. The Put and Call
Option had a stated termination of June 30, 1998. The officer agreed to
terminate the Put and Call Option and enter into a new put option (the "Put
Option") dated June 17, 1998. The Put Option granted the officer an
irrevocable option to require AHC to purchase 80,000 shares of the Senior
Preferred Stock obtainable under the Preferred Stock Option, for $2,000 in
cash. As the terms of the Put Option were generally more restrictive than
the Put and Call Option, no compensation expense was recognized as a result
of the transaction. On July 30, 1998, the officer exercised the Preferred
Stock Option and Put Option. To provide AHC the funds to redeem the 80,000
shares of Senior Preferred Stock, Holding issued AHC a dividend of $1,863
in cash on such date.
Subsequent to the Acquisition, AHC adopted the 1998 Stock Option Plan
("Option Plan") for certain employees and directors of AHC and any parent
or subsidiary of AHC. The Option Plan authorizes the issuance of options to
acquire up to 1,650,000 shares of AHC Common Stock. The Board of Directors
determines the terms of each individual options grant. The exercise price
for each grant is required to be set at least equal to the fair market
value per share of AHC provided that the exercise price shall not be less
than $1.00 per share. Options vest over periods ranging from three to eight
years. Certain options are eligible for accelerated vesting based on
targeted EBITDA. Options may be exercisable for up to ten years.
F-25
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
17. STOCK OPTIONS (Continued)
On June 17, 1998, AHC granted an officer of the Company options to
purchase 32,500 shares of AHC Common Stock at an exercise price of $1.00
per share and a term of 10 years. These options were forfeited during 1999
upon the resignation of the officer.
A summary of AHC stock option activity and related information for the
year ended June 30, 2000 follows:
Weighted
Average
Exercise
Options Price
------- -----
Outstanding, beginning of year... -- $ --
Granted .................... 1,519,917 1.00
Exercised .................. -- --
Forfeited .................. (10,467) 1.00
---------- -----
Outstanding, end of year ........ 1,509,450 $1.00
========== =====
Exercisable, end of year ........ 273,668 $1.00
========== =====
Weighted average remaining
contractual life ........... 9.5 years
The Company has elected to account for its stock based compensation
with employees under the intrinsic value method as permitted under FAS 123.
Under the intrinsic value method, because the stock price of the Company's
employee stock options equaled the fair value of the underlying stock on
the date of grant, no compensation expense was recognized. If the Company
had elected to recognize compensation expense based on the fair value of
the options at grant date as prescribed by FAS 123, the net loss for the
years ended June 30, 2000 and 1999 would have been $(1,408) and $(5,119),
respectively. In making this determination, fair value was estimated on the
date of grant using the minimum value method and a risk-free interest rate
ranging from 6.3% to 6.9%, estimated life of five years and dividend rate
of 0.0%. The weighted average fair value at date of grant of options
granted during 2000 was approximately $0.27 per option.
18. RELATED PARTY TRANSACTIONS
The Successor made payments to an affiliate of DLJMBII for management
fees of $250, $250 and $125 for the year ended June 30, 2000, the year
ended June 30, 1999 and the period from December 16, 1997 through June 30,
1998, respectively.
The Predecessor made payments to a company controlled by a stockholder
of the Predecessor of $160 for the period from July 1, 1997 through
December 15, 1997 for management fees, bonuses and expense reimbursements.
The Predecessor made payments to another stockholder of $55 for the period
from July 1, 1997 through December 15, 1997 for management fees.
F-26
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
19. GEOGRAPHIC INFORMATION
The following table illustrates geographic information for revenues
and long-lived assets. Revenues are attributed to countries based on the
receipt of sales orders, and long-lived assets are based upon the country
of domicile.
United
States France Total
Predecessor
-----------
Net sales:
Period from July 1, 1997
through December 15, 1997 ............... $ 32,600 $ 2,586 $ 35,186
-------------------------------------------------------------------------------
Successor
---------
Net sales:
Period from December 16, 1997
through June 30, 1998 ................... $ 29,162 $ 6,904 $ 36,066
Year ended June 30, 1999 .................. 71,056 14,911 85,967
Year ended June 30, 2000 .................. 84,379 14,184 98,563
Long-lived assets:
June 30, 1999 ............................. 180,984 107 181,091
June 30, 2000 ............................. 192,925 87 193,012
F-27
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
20. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet at June 30, 2000 and June 30,
1999 and condensed statement of operations, changes in stockholder's equity
and cash flows for the years ended June 30, 2000 and June 30, 1999 for
Holding should be read in conjunction with the consolidated financial
statements and notes thereto.
<TABLE>
<CAPTION>
BALANCE SHEETS
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
Assets
Investment in subsidiaries ............................ $ 99,798 $ 92,817
Deferred charges ...................................... 1,167 1,520
Deferred income taxes ................................. 2,427 1,206
--------- ---------
Total assets ........................................ $ 103,392 $ 95,543
========= =========
Liabilities
Accrued Income Taxes .................................. $ 423 $ --
Senior Discount Debentures ............................ 27,863 29,651
--------- ---------
Total liabilities ................................... 28,286 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 ............................ 88,935 78,364
Accumulated deficit ................................... (13,829) (12,472)
--------- ---------
Total stockholder's equity .......................... 75,106 65,892
--------- ---------
Total liabilities and stockholder's equity .......... $ 103,392 $ 95,543
========= =========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended Year ended
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
Equity in net income (loss) of subsidiaries ................ $ 495 $(2,591)
Interest expense, net ...................................... (3,733) (3,712)
------- -------
Loss before income taxes and extraordinary gain .......... (3,238) (6,303)
Income tax benefit ......................................... (1,221) (1,187)
------- -------
Loss before extraordinary gain ........................... (2,017) (5,116)
Extraordinary gain from early retirement of debt, net of tax 660 --
------- -------
Net loss ................................................. $(1,357) $(5,116)
======= =======
</TABLE>
F-28
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
20. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balances, June 30, 1998 .... 1,000 $ -- $ 78,364 $ (5,493) $ 72,871
Net loss ................... -- -- -- (5,116) (5,116)
Dividend to AHC I
Acquisition Corp. ........ -- -- -- (1,863) (1,863)
-------- -------- -------- -------- --------
Balances, June 30, 1999 .... 1,000 -- 78,364 (12,472) 65,892
Equity contribution by AHC I
Acquisition Corp. ........ -- -- 10,571 -- 10,571
Net loss ................... -- -- -- (1,357) (1,357)
-------- -------- -------- -------- --------
Balances, June 30, 2000 .... 1,000 $ -- $ 88,935 $(13,829) $ 75,106
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Year ended Year ended
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................... $(1,357) $(5,116)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Net change in investment in subsidiaries ......................... (495) 2,591
Amortization of original issuance discount and loan closing costs 3,992 3,722
Deferred income taxes ............................................ (1,221) (1,187)
Increase in deferred charges ..................................... -- (348)
Gain from early retirement of debt ............................... (1,342) --
Changes in operating assets and liabilities:
Income taxes ..................................................... 423 --
------- -------
Net cash provided by (used in) operating activities ............ -- (338)
------- -------
Cash flows from financing activities:
Dividend paid to AHC I Acquisition Corp. ........................... -- (1,863)
------- -------
Net cash provided by (used in) financing activities ............ -- (1,863)
------- -------
Net increase (decrease) in cash and cash equivalents ................. -- (2,201)
Cash and cash equivalents, beginning of period ....................... -- 2,201
------- -------
Cash and cash equivalents, end of period ............................. $ -- $ --
======= =======
</TABLE>
F-29
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
21. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the unaudited quarterly results of
operations for Fiscal 2000 and Fiscal 1999.
<TABLE>
<CAPTION>
Successor
-----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
September 30, December 31, March 31, June 30, Full
Fiscal 2000 1999 1999 2000 2000 Year
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ............ $ 28,379 $ 20,508 $ 25,433 $ 24,243 $ 98,563
Gross profit ......... 12,587 7,220 9,941 8,511 38,259
Income from operations 7,265 2,202 4,926 2,408 16,801
Interest expense, net 4,372 4,295 4,382 4,352 17,401
Net loss ............. 1,281 (664) (230) (1,744) (1,357)
Successor
-----------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
September 30, December 31, March 31, June 30, Full
Fiscal 1999 1998 1998 1999 1999 Year
---- ---- ---- ---- ----
Net sales ............ $ 24,024 $ 20,437 $ 24,518 $ 16,988 $ 85,967
Gross profit ......... 8,603 6,777 9,691 5,697 30,768
Income from operations 4,337 2,331 4,616 378 11,662
Interest expense, net 4,096 4,149 4,258 4,237 16,740
Net loss ............. (324) (1,579) (364) (2,849) (5,116)
</TABLE>
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
AKI, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholder's
equity and of cash flows present fairly, in all material respects, the financial
position of AKI, Inc. (a wholly-owned subsidiary of AKI Holding Corp.) and
Subsidiaries (the "Successor"), formerly known as Arcade Holding Corporation
(the "Predecessor"), at June 30, 2000 and 1999 and the results of their
operations and their cash flows for the years ended June 30, 2000 and 1999 and
the period from December 16, 1997 through June 30, 1998 in conformity with
generally accepted accounting principles in the United States. These financial
statements are the responsibility of management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
August 3, 2000
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
AKI, Inc. and Subsidiaries
In our opinion, the accompanying consolidated statements of operations, of
changes in stockholders' equity and of cash flows of Arcade Holding Corporation
and Subsidiaries (the "Predecessor")present fairly, in all material respects,
the results of their operations and their cash flows for the period from July 1,
1997 through December 15, 1997 in conformity with generally accepted accounting
principles in the United States. These financial statements are the
responsibility of management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
July 31, 1998
F-32
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share
information)
<TABLE>
<CAPTION>
Successor
---------
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................... $ 1,158 $ 7,015
Accounts receivable, net ..................................... 21,522 16,287
Inventory .................................................... 7,757 5,109
Income tax refund receivable ................................. -- 32
Prepaid expenses ............................................. 92 452
Deferred income taxes ........................................ 396 400
--------- ---------
Total current assets ................................... 30,925 29,295
Property, plant and equipment, net ........................... 17,097 18,511
Goodwill, net ................................................ 162,472 147,990
Other intangible assets, net ................................. 7,174 6,577
Deferred charges, net ........................................ 4,294 5,302
Deferred income taxes ........................................ 720 1,145
Other assets ................................................. 88 46
--------- ---------
Total assets ........................................... $ 222,770 $ 208,866
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligation .................. $ 847 $ 688
Accounts payable, trade ...................................... 3,565 3,400
Accrued income taxes ......................................... 301 497
Accrued compensation ......................................... 3,965 2,527
Accrued interest ............................................. 5,695 6,047
Accrued expenses ............................................. 2,370 1,283
--------- ---------
Total current liabilities .............................. 16,743 14,442
Long-term portion of capital lease obligation ................ 502 1,349
Revolving credit line ........................................ 9,000 --
Senior notes ................................................. 107,510 115,000
Deferred income taxes ........................................ 3,090 1,353
Other non-current liabilities ................................ 2,399 --
--------- ---------
Total liabilities ...................................... 139,244 132,144
Commitments and contingencies (see Note 13)
Stockholder's equity
Preferred stock, $0.01 par, 8,700 shares authorized; no shares
issued or outstanding .................................... -- --
Common stock, $0.01 par, 100,000 shares authorized; 1,000
shares issued and outstanding ............................ -- --
Additional paid-in capital ................................... 107,348 100,862
Accumulated deficit .......................................... (7,550) (8,045)
Accumulated other comprehensive loss ......................... (542) (365)
Carryover basis adjustment ................................... (15,730) (15,730)
--------- ---------
Total stockholder's equity ............................. 83,526 76,722
--------- ---------
Total liabilities and stockholder's equity ............. $ 222,770 $ 208,866
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
Successor Predecessor
--------------------------------------------------------------
December 16, July 1,
1997 1997
Year Ended Year Ended through through
June 30, June 30, June 30, December 15,
2000 1999 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............................... $ 98,563 $ 85,967 $ 36,066 $ 35,186
Cost of goods sold ...................... 60,304 55,199 24,518 22,809
-------- -------- -------- --------
Gross profit ....................... 38,259 30,768 11,548 12,377
Selling, general and
administrative expenses .............. 16,980 14,500 5,587 5,703
Amortization of goodwill
and other intangible assets .......... 5,336 4,606 2,101 568
Gain from settlement of
litigation, net ...................... (858) -- -- --
-------- -------- -------- --------
Income from operations ............. 16,801 11,662 3,860 6,106
Other expenses (income):
Interest expense to stockholder(s) and
affiliate ......................... 22 -- 10,785 2,143
Interest expense, other .............. 13,646 13,028 484 503
Management fees to stockholders
and affiliate ...................... 250 250 125 215
Other, net ........................... -- 128 (47) 11
-------- -------- -------- --------
Income (loss) before income taxes
and extraordinary gain ........... 2,883 (1,744) (7,487) 3,234
Income tax expense (benefit) ............ 2,817 847 (2,033) 1,441
-------- -------- -------- --------
Income (loss) before
extraordinary gain ............... 66 (2,591) (5,454) 1,793
Extraordinary gain from early
retirement of debt, net of tax ....... 429 -- -- --
-------- -------- -------- --------
Net income (loss) .................... $ 495 $ (2,591) $ (5,454) $ 1,793
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
Retained Accumulated
Additional Stock Earnings Other Carryover
Common Stock Paid-in Purchase (Accumulated Comprehensive Basis
Shares Amount Capital Warrants Deficit) Loss Adjustment Total
------ ------ ------- -------- -------- ------------- ---------- -----
Predecessor
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1997 ............... 48,000 $ 1 $ 4,889 $ 1,923 $ 4,565 $ (153) $ -- $ 11,225
Net income ............................ -- -- -- -- 1,793 -- -- 1,793
Other comprehensive income, net
of tax:
Foreign currency translation
adjustment ....................... -- -- -- -- -- (19) -- (19)
--------
Comprehensive income .................. 1,774
Preferred stock dividend .............. -- -- -- -- (283) -- -- (283)
------- -------- -------- -------- -------- -------- -------- --------
Balances, December 15, 1997 ........... 48,000 $ 1 $ 4,889 $ 1,923 $ 6,075 $ (172) $ -- $ 12,716
======= ======== ======== ======== ======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------------------
Successor
---------
Balances, December 16, 1997 ........... -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Initial capitalization (see Note 12) .. 1,000 -- 78,363 -- -- -- -- 78,363
Carryover basis adjustment ............ -- -- -- -- -- -- (15,730) (15,730)
Equity contribution by Holding ........ -- -- 22,499 -- -- -- -- 22,499
Net loss .............................. -- -- -- -- (5,454) -- -- (5,454)
Other comprehensive loss, net of tax:
Foreign currency translation
adjustment ....................... -- -- -- -- -- (57) -- (57)
--------
Comprehensive loss .................... (5,511)
------- -------- -------- -------- -------- -------- -------- --------
Balances, June 30, 1998 ............... 1,000 -- 100,862 -- (5,454) (57) (15,730) 79,621
Net loss .............................. -- -- -- -- (2,591) -- -- (2,591)
Other comprehensive loss, net
of tax:
Foreign currency translation
adjustment ....................... -- -- -- -- -- (308) -- (308)
--------
Comprehensive loss .................... (2,899)
------- -------- -------- -------- -------- -------- -------- --------
Balances, June 30, 1999 ............... 1,000 -- 100,862 -- (8,045) (365) (15,730) 76,722
Equity contribution by AKI
Holding Corp. ....................... -- -- 6,486 -- -- -- -- 6,486
Net income ............................ -- -- -- -- 495 -- -- 495
Other comprehensive loss, net
of tax:
Foreign currency translation
adjustment ....................... -- -- -- -- -- (177) -- (177)
--------
Comprehensive income .................. 318
------- -------- -------- -------- -------- -------- -------- --------
Balances, June 30, 2000 ............... 1,000 $ -- $107,348 $ -- $ (7,550) $ (542) $(15,730) $ 83,526
======= ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
Successor Predecessor
--------------------------------------------------------------
December 16, July 1,
1997 1997
Year Ended Year Ended through through
June 30, June 30, June 30, December 15,
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ 495 $ (2,591) $ (5,454) $ 1,793
Adjustment to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization of goodwill
and other intangibles ........................ 9,738 8,487 3,954 2,456
Amortization of debt discount .................. -- -- 81 233
Amortization of loan closing costs ............. 956 636 3,808 101
Deferred income taxes .......................... 2,166 643 (2,016) (460)
Gain on sale of equipment ...................... -- (50) -- --
Gain from early retirement of debt ............. (1,004) -- -- --
Other .......................................... (1) (308) (57) (18)
Changes in operating assets and liabilities:
Accounts receivable .......................... (2,576) (2,737) (4,562) 1,153
Inventory .................................... (2,496) (3,031) 543 69
Prepaid expenses, deferred charges and
other assets ............................... 450 (627) (453) (62)
Accounts payable and accrued expenses ........ (2,637) 4,511 (5,432) (1,036)
Income taxes ................................. (164) 5,238 767 699
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities ................................. 4,927 10,171 (8,821) 4,928
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of equipment ........................... (2,782) (2,856) (514) (807)
Proceeds from sale of equipment .................. -- 50 -- --
Payments for acquisitions, net of cash acquired .. (16,164) -- (141,403) --
Patents .......................................... (150) -- -- --
--------- --------- --------- ---------
Net cash used in investing activities ........ (19,096) (2,806) (141,917) (807)
--------- --------- --------- ---------
Cash flows from financing activities:
Payments under capital leases for equipment ...... (688) (661) (308) (249)
Net proceeds (repayments) on line of credit ...... 9,000 -- (6,700) 2,362
Proceeds from issuance of senior increasing rate
notes, net of offering costs .................. -- -- 119,735 --
Payments on senior increasing rate notes ......... -- -- (123,500) --
Proceeds from issuance of senior notes, net
of offering costs .............................. -- -- 110,158 --
Proceeds from issuance of common stock ........... -- -- 98,499 --
Redemption of preferred stock .................... -- -- (8,678) --
Repayment of loans payable to stockholder ........ -- -- (36,649) (1,851)
Repayment of other notes payable ................. -- (1,330) (50) (50)
Dividends paid on preferred stock ................ -- -- (128) (155)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities ......................... 8,312 (1,991) 152,379 57
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents (5,857) 5,374 1,641 4,178
Cash and cash equivalents, beginning of period ..... 7,015 1,641 -- 303
--------- --------- --------- ---------
Cash and cash equivalents, end of period ........... $ 1,158 $ 7,015 $ 1,641 $ 4,481
========= ========= ========= =========
Supplemental information:
Cash paid (received) during the period for:
Interest to stockholder(s) ..................... $ 22 $ -- $ 11,503 $ 1,146
Interest, other ................................ 13,188 6,512 214 459
Income taxes ................................... 1,264 (5,123) (784) 1,222
Significant non-cash activities:
Assets acquired under capital lease .............. $ -- $ 600 $ -- $ --
Contribution of equity and retirement
of senior notes ................................ 6,486 -- -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
1. ORGANIZATION AND BUSINESS
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. As more fully described in
Note 3, 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 AKI, Inc. and Subsidiaries ("AKI," the "Successor" or the
"Company"). Subsequent to the Acquisition, AHC contributed $1 of cash and
all of its ownership interest in AKI to AKI Holding Corporation ("Holding")
for all of the outstanding equity of Holding. AKI 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 distributes its products in Europe
through its French subsidiary, Arcade Europe S.A.R.L.
Unless otherwise indicated, all references to years refer to the
Predecessor's and AKI's fiscal year, June 30.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less at the time of purchase to be cash equivalents.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts; in addition, the Company believes it is not
exposed to any significant credit risk on cash and cash equivalents. The
Company grants credit terms in the normal course of business to its
customers and as part of its ongoing procedures, the Company monitors the
credit worthiness of its customers. The Company does not believe that it is
subject to any unusual credit risk beyond the normal credit risk attendant
in its business.
F-37
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
One customer accounted for 15.3% of net sales during the year ended
June 30, 2000. Two customers accounted for 26.8% of net sales during the
year ended June 30, 1999. One customer accounted for 13.3% of net sales
during the period from December 16, 1997 through June 30, 1998. Two
customers accounted for 35.3% of the Predecessor's net sales during the
period from July 1, 1997 through December 15, 1997.
Concentration of Purchasing
Products accounting for a majority of the Company's net sales utilize
specific grades of paper that are produced exclusively for the Company by
one domestic supplier. The Company does not have a purchase agreement with
the supplier and is not aware of any other suppliers of these specific
grades of paper. These products can be manufactured using other grades of
paper; however, the Company believes the specific grades of paper utilized
by the Company provide the Company with an advantage over its competitors.
The Company is currently researching methods of replicating the advantages
of these specific grades of paper with other grades of paper available from
multiple suppliers. Until such methods are developed, a loss of supply of
these specific grades of paper and the resulting competitive advantage
could cause a possible loss of sales, which could adversely affect
operating results.
Revenue Recognition and Accounts Receivable
Product sales are recognized upon shipment, net of estimated
discounts. Accounts receivable is accounted for net of allowances for
doubtful accounts. Under arrangements with certain customers, custom
product which is stored for future delivery is recognized as revenue when
title has passed to the customer.
Inventory
Paper inventory is stated at the lower of cost or market using the
last-in, first-out (LIFO) method; all other inventories are stated at the
lower of cost or market using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures that
extend the economic lives or improve the efficiency of equipment are
capitalized. The costs of maintenance and repairs are expensed as incurred.
Upon retirement or disposal, the related cost and accumulated depreciation
are removed from the respective accounts and any gain or loss is recorded.
Depreciation is computed using the straight-line method based on the
estimated useful lives of the assets as indicated in Note 6 for financial
reporting purposes and accelerated methods for tax purposes. Leasehold
improvements are depreciated over the shorter of their estimated useful
lives or the lease term.
F-38
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill
The aggregate purchase price of business acquisitions was allocated to
the assets and liabilities of the acquired companies based on their
respective fair values as of the acquisition dates. Goodwill represents the
excess purchase price paid over the fair value of net identifiable assets
acquired and is amortized over a period of up to forty years using the
straight-line method. Accumulated amortization was $10,546 and $5,939 at
June 30, 2000 and June 30, 1999, respectively.
Management periodically reviews the value of its goodwill and other
long-lived assets to determine if an impairment has occurred. The potential
impairment of recorded goodwill and other long-lived assets is measured by
the undiscounted value of expected future operating cash flows in relation
to its net capital investment. Based on its review, management does not
believe that an impairment of its goodwill or other long-lived assets has
occurred.
Deferred Charges
Deferred charges are primarily comprised of debt issuance costs, which
are being amortized using the effective interest method over the terms of
the related debt. Such costs are included in the accompanying consolidated
balance sheets, net of accumulated amortization.
Other Intangible Assets
Other intangible assets include covenants not to compete, patents and
other intangible assets and are being amortized over their estimated lives
using the straight-line method. Accumulated amortization related to these
intangible assets was $1,479 and $754 at June 30, 2000 and June 30, 1999,
respectively.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Values of Financial
Instruments," requires the disclosure of the fair value of financial
instruments, for assets and liabilities recognized and not recognized on
the balance sheet, for which it is practicable to estimate fair value. The
fair value of the Company's Senior Notes, as determined from quoted market
prices, was $85,470 and $112,000 at June 30, 2000 and June 30, 1999,
respectively, compared to a carrying value of $107,510 and $115,000 as of
the same dates respectively. The carrying value of all other financial
instruments approximates fair value at June 30, 2000 and June 30, 1999.
F-39
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Transactions
Gains and losses on foreign currency transactions with third parties
have been included in the determination of net income in accordance with
SFAS No. 52, "Foreign Currency Translation." Foreign currency losses and
(gains) amounted to $51, $91, ($52) and ($44) for the year ended June 30,
2000, the year ended June 30, 1999, the period from December 16, 1997
through June 30, 1998 and the period from July 1, 1997 through December 15,
1997, respectively.
At June 30, 2000, short term forward exchange contracts existed to
sell Euros at an exchange rate of .8853 per U.S. dollar and to buy British
pound sterling at an exchange rate of 1.497 per U.S. dollar. These
contracts have been entered into for the purpose of mitigating short term
foreign exchange risk for customer orders and receivables denominated in
foreign currencies. The notional principle amounts under these foreign
exchange contracts were $700 and $200, respectively. The fair value of
these foreign exchange contracts as of June 30, 2000 was not significant.
Research and Development Expenses
Research and development expenditures are charged to selling, general
and administrative expenses in the period incurred. Research and
development expenses totaled $1,309, $1,136, $717 and $664 for the year
ended June 30, 2000, the year ended June 30, 1999, the period from December
16, 1997 through June 30, 1998 and the period from July 1, 1997 through
December 15, 1997, respectively.
Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly,
deferred tax assets and liabilities are recognized at the applicable income
tax rates based upon future tax consequences of temporary differences
between the tax bases and financial reporting bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are reduced, if
necessary, by the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-40
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss)
The Company adopted the provision of Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130") on July 1, 1998. This Statement
establishes standards for reporting and displaying comprehensive income and
its components in the financial statements. This Statement also requires
that comparative information for earlier periods be reclassified. As the
Company only has two items of comprehensive income, net income and foreign
currency translations, adoption of this statement did not have a material
effect upon the Company's financial position or results of operations.
3. SIGNIFICANT ACQUISITIONS
DLJMBII and certain members of the Predecessor organized AHC and
Merger Corp. for purposes of acquiring the Predecessor. Merger Corp. was a
wholly-owned subsidiary of AHC and was initially capitalized by AHC with an
equity contribution of $78,363, comprised of $76,000 of cash (see Note 12)
and $2,363 of non-cash consideration in the form of an option to purchase
Senior Preferred Stock of AHC (see Note 16). Immediately following this
equity contribution, Merger Corp. issued $123,500 of senior increasing rate
notes (the "Bridge Loans") to an entity with an ownership interest in AHC.
The Bridge Loans had a stated maturity of December 15, 1998 and had an
interest rate equal to the greater of (i) 10.0% per annum and (ii) a daily
floating rate of prime plus 2.25% plus an additional percentage amount
equal to (a) 1.0% from and including the interest payment date on June 15,
1998 or (b) 1.5% from and including the interest payment date on September
15, 1998. Merger Corp. received cash proceeds from the issuance of the
Bridge Loans of $119,735, net of $3,765 of associated debt issuance costs.
On December 15, 1997, Merger Corp. acquired all of the equity
interests of the Predecessor (the "Acquisition") for a total cost of
$197,730 which consisted of $138,634 cash paid for equity interests and
direct acquisition cost, $2,363 in non-cash consideration in the form of an
option to purchase Senior Preferred Stock of AHC (see Note 16) and the
assumption of $56,733 in debt, preferred stock and related interest and
dividends, including a capital lease obligation. Included in the amount of
direct acquisition costs was approximately $2,022 paid to an entity that
has an ownership interest in AHC. Merger Corp. then merged with and into
the Predecessor and the combined entity assumed the name AKI. Subsequent to
the Acquisition, AHC contributed $1 of cash and all of its ownership
interest in AKI to Holding for all of the outstanding equity of Holding.
Since all companies are under common control and since Holding and AHC have
no operations other than those related to the Company, the contribution was
accounted for as if it were a pooling of interests.
The Acquisition was accounted for using the purchase method of
accounting. In accordance with the consensus reached by the Emerging Issues
Task Force of the Financial Accounting Standards Board in Issue 88-16,
"Basis in Leveraged Buyout Transactions," the purchase price allocation
required an adjustment for the continuing interest attributable to
management's ownership interest in the Predecessor carried over in
connection with the Acquisition. As a result, a reduction in stockholders'
equity of $15,730 was recorded
F-41
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
3. SIGNIFICANT ACQUISITIONS (Continued)
which represents the difference between the fair value of the Company's
assets and the related book value attributable to the interest of the
continuing shareholders' investment in the Predecessor. The remaining
purchase price has been allocated to assets and liabilities based upon
estimates of their respective fair value as determined by management and
third-party appraisals with respect to property, plant and equipment.
In connection with the Acquisition, the Company repaid the outstanding
balance and related interest of the Predecessor's loans payable to a
shareholder of $37,374, the outstanding balance and related interest of the
Predecessor's line of credit of $6,278 and the outstanding balance and
related dividends on the Predecessor's preferred stock of $8,806.
The following shows the acquisition costs and the allocation of the
purchase price:
Acquisition costs
Cash paid for stock ................................ $ 134,403
Direct acquisition costs ........................... 4,231
---------
138,634
Non-cash consideration for stock in the form of an
option to purchase Senior Preferred Stock of AHC
(see Note 16) .................................... 2,363
---------
Total .............................................. 140,997
Less--Carryover basis adjustment ................... (15,730)
---------
Purchase price to be allocated ..................... $ 125,267
=========
Summry allocation of purchase price
Cash ............................................... $ 4,481
Other current assets ............................... 17,782
Property, plant and equipment ...................... 20,132
Deferred income taxes .............................. 2,953
Other assets ....................................... 329
Goodwill ........................................... 153,929
---------
Total allocation to assets ......................... $ 199,606
=========
Current liabilities ................................ $ 13,190
Long-term debt (including current portion) and
related interest ................................. 47,927
Deferred income taxes .............................. 4,416
Preferred stock and related dividends .............. 8,806
---------
Total liabilities assumed .......................... $ 74,339
=========
Included in cash paid for stock of $134,403 is $19,342 related to the
purchase and retirement of 11,201 options of the Predecessor. In addition,
the non-cash consideration for stock of $2,363 was incurred to acquire and
retire the remaining 1,370 options of the Predecessor (see Note 16).
F-42
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
3. SIGNIFICANT ACQUISITIONS (Continued)
In December, 1999 the Company settled a dispute with the former owners
of the Predecessor. In connection with the settlement the Company received
approximately $1.2 million and has included the settlement amount net of
related expenses in income from operations.
On September 15, 1999, the Company acquired all of the equity
interests in RetCom Holdings Ltd. and its subsidiaries ("RetCom") for
approximately $12,500 and refinanced working captial indebtedness of
approximately $4,500 of RetCom. The acquisition was accounted for using the
purchase method of accounting. The purchase price has been allocated to the
assets and liabilities acquired using estimated fair values at the date of
acquisition and resulted in assigning value to goodwill totaling
approximately $19,100 which is being amortized on a straight line basis
over a period of twenty years. The fair values assigned are preliminary and
may be revalued at a later date but the change is not expected to be
material. The results of the acquired operations are included in the
financial statements since the date of acquisition. Pro forma results had
RetCom been acquired at the beginning of fiscal 1999 and 2000 are not
determinable.
On June 25, 1998, the Bridge Loans were repaid, without penalty, with
the proceeds from the Senior Note offering (see Note 9) and the equity
contribution from Holding (see Note 12) (collectively, the "Refinancing").
Contemporaneous with the repayment of the Bridge Loans, the Company
wrote-off the unamortized balance of debt issuance costs associated with
the Bridge Loans of $1,795 to interest expense.
4. ACCOUNTS RECEIVABLE
The following table details the components of accounts receivable:
June 30, June 30,
2000 1999
---- ----
Trade accounts receivable ..... $ 22,314 $ 16,349
Allowance for doubtful accounts (963) (251)
-------- --------
21,351 16,098
Other accounts receivable ..... 171 189
-------- --------
$ 21,522 $ 16,287
======== ========
F-43
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
5. INVENTORY
The following table details the components of inventory:
June 30, June 30,
2000 1999
------ ------
Raw materials
Paper ................ $3,944 $1,088
Other raw materials .. 2,541 2,328
------ ------
Total raw materials 6,485 3,416
Work in process ........ 1,272 1,693
------ ------
Total inventory ........ $7,757 $5,109
====== ======
The difference between the carrying value of paper inventory using the
FIFO method as compared to the LIFO method was not significant at June 30,
2000 or June 30, 1999.
6. PROPERTY, PLANT AND EQUIPMENT
The following table details the components of property, plant and
equipment as well as their estimated useful lives:
Estimated June 30, June 30,
Useful Lives 2000 1999
------------ ---- ----
Land ..................... $ 258 $ 258
Buildings ................ 7 - 15 years 1,719 1,648
Leasehold improvements ... 1 - 3 years 635 579
Machinery and equipment... 5 - 7 years 21,348 19,483
Furniture and fixtures ... 3 - 5 years 3,081 2,084
Construction in progress.. 101 183
-------- --------
27,142 24,235
Accumulated depreciation.. (10,045) (5,724)
-------- --------
$ 17,097 $ 18,511
======== ========
Depreciation expense amounted to $4,381, $3,881, $1,853 and $1,888 for
the year ended June 30, 2000, the year ended June 30, 1999, the period from
December 16, 1997 through June 30, 1998 and the period from July 1, 1997
through December 15, 1997, respectively.
F-44
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
6. PROPERTY, PLANT AND EQUIPMENT (Continued)
Property held under capital lease is included in the respective
property, plant and equipment category as follows:
June 30, June 30,
2000 1999
------- -------
Machinery and equipment ................. $ 3,000 $ 3,000
Building ................................ 600 600
------- -------
3,600 3,600
Less accumulated depreciation ........... (1,390) (790)
------- -------
$ 2,210 $ 2,810
======= =======
Depreciation of the assets under capital lease totaled $600, $515, $275
and $232 for the year ended June 30, 2000, the year ended June 30, 1999,
the period from December 16, 1997 through June 30, 1998 and the period from
July 1, 1997 through December 15, 1997, respectively. Future minimum lease
payments under the remaining leases are as follows:
Payment Interest
------- -------
2001...................... $ 948 $ 100
2002...................... 529 27
------- -------
$ 1,477 $ 127
======= =======
7. LINE OF CREDIT
The Credit Agreement provides for a revolving loan commitment up to a
maximum of $20,000 and expires on December 31, 2002. Borrowings are limited
to a borrowing base consisting of accounts receivable, inventory and
property, plant and equipment which serve as collateral for the borrowings.
As of June 30, 2000, the Company's borrowing base was approximately
$24,128. Interest on amounts borrowed accrue at a floating rate based upon
either prime or LIBOR (10.25% and 8.50% at June 30, 2000 and June 30, 1999,
respectively). The weighted average interest rate on the outstanding
balance under the Credit Agreement was 9.12%, 8.51%, 9.25% and 9.50% for
the year ended June 30, 2000, the year ended June 30, 1999, the period from
December 16, 1997 through June 30, 1998 and the period from July 1, 1997
through December 15, 1997, respectively.
F-45
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
7. LINE OF CREDIT (Continued)
The Company is required to pay commitment fees on the unused portion
of the revolving loan commitment at a rate of approximately 0.5% per annum.
In addition, the Company is required to pay fees equal to 2.5% of the
average daily outstanding amount of lender guarantees. The Company had $600
of lender guarantees outstanding at June 30, 2000 and June 30, 1999. These
fees totaled $69, $111, $59 and $30 for the year ended June 30, 2000, the
year ended June 30, 1999, the period from December 16, 1997 through June
30, 1998 and the period from July 1, 1997 through December 15, 1997,
respectively. The Credit Agreement contains certain financial covenants and
other restrictions including restrictions on additional indebtedness and
restrictions on the payment of dividends. As of June 30, 2000, the Company
was in compliance with all debt covenants.
8. LOANS PAYABLE TO STOCKHOLDER
The Predecessor entered into a Senior Loan Agreement and two
Subordinated Loan Agreements (collectively, the "Loan Agreements") with a
party that had owned the Predecessor's preferred stock and a significant
portion of its common stock. The Loan Agreements were collateralized by
substantially all the assets of the Predecessor. The Loan Agreements
limited the Predecessor's ability to incur additional indebtedness, pay
dividends and purchase fixed assets. Additionally, the Loan Agreements
required that certain financial covenants be maintained. This debt was
subsequently retired upon the acquisition of the Predecessor as discussed
in Note 3. All amounts borrowed under the Senior Loan Agreement bore
interest at prime plus 1.50%.
The Predecessor borrowed $30,000 under the Subordinated Loan
Agreements, of which $23,000 was designated as Loan I and $7,000 was
designated as Loan II. Loan I bore interest, payable quarterly, at 12%
until November 4, 1998, and then would have converted to prime plus 4%.
Loan II bore interest, payable quarterly, at 7%. The outstanding amount of
the subordinated loans was net of unamortized debt discounts, which were
being amortized over the term of the related loan. The amounts due under
the Subordinated Loan Agreements were subsequently retired upon the
acquisition of the Predecessor as discussed in Note 3.
In connection with Loan II, the Predecessor issued a warrant to
purchase 19,233 shares of common stock at $0.05 per share. The warrant was
exercisable until November 4, 2003. The Predecessor valued the warrants at
$100 each based on the fair market value of a share of the underlying
common stock resulting from a sale with a third party. In connection with
the warrant issued, the Predecessor recorded a debt discount of $1,923. In
connection with the sale of the Predecessor on December 15, 1997 (see Note
3), all outstanding warrants were purchased from the holder by the buyer of
the Predecessor and retired.
F-46
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
8. LOANS PAYABLE TO STOCKHOLDER (Continued)
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 June 30, 2000, no amounts
were outstanding under the promissory note.
9. SENIOR NOTES
On June 25, 1998, the Company completed a private placement of
$115,000 of Senior Notes (the "Senior Notes"). The Senior Notes are general
unsecured obligations of the Company and bear interest at 10.5% per annum,
payable semi-annually on January 1 and July 1. The Senior Notes mature on
July 1, 2008 and may be redeemed at the option of the Company, in whole or
in part, at any time on or after July 1, 2003 at a price equal to 105.25%
of the outstanding principal balance plus accrued and unpaid interest. The
placement of the Senior Notes yielded the Company net proceeds of $110,158
after deducting offering expenses of $4,842, including $3,450 of
underwriting fees paid to an affiliate of the stockholder. The Senior Notes
are redeemable at the option of the Company, in whole or part, at any time
after July 1, 2003 at a price of up to 105.25% of the outstanding principal
balance plus accrued and unpaid interest. Prior to July 1, 2003, the
Company is permitted to repurchase up to 35% of the Senior Notes at a
redemption price of up to 110.5% of the aggregate principal amount plus
accrued and unpaid interest with the net proceeds of one or more public
equity offerings. The Senior Notes contain certain customary covenants
including restrictions on the declaration and payment of dividends by the
Company to Holding and limitations on the incurrence of additional
indebtedness. On December 22, 1998, the Company completed the registration
of its Senior Notes with the Securities and Exchange Commission. During
fiscal 2000, AHC purchased $7,490 of the Senior Notes for $6,486 and
recognized a gain, net of income taxes, of approximately $429. The notes
were contributed to Holding and Holding contributed the notes to AKI. The
notes were subsequently retired.
10. OTHER NOTES PAYABLE
On June 9, 1995, the Predecessor acquired all of the issued and
outstanding stock of Scent Seal Inc. ("Scent Seal"). The acquisition of
Scent Seal did not have a material impact on the financial position or
results of operations of the Predecessor and was accounted for as a
purchase transaction whereby the purchase cost was allocated to the fair
value of the net assets acquired. In connection with the acquisition of
Scent Seal, the Predecessor issued $3,627 in noninterest bearing promissory
notes (the "Notes") to an employee of the Predecessor who was previously a
Scent Seal stockholder. The Predecessor recorded a debt discount of $649 in
connection with the issuance of the Notes to reflect an effective interest
rate of 10%. The discount was being amortized over the term of the Notes.
Under certain provisions of the Scent Seal acquisition agreement, the
Company was permitted to reduce the outstanding principal balance of the
Notes based upon the ultimate realization of assets acquired and settlement
of liabilities assumed. In June 1998, the Company reached a settlement with
the holder of the Notes under these provisions, which resulted in the
reduction of the outstanding principal balance of the Notes of $120. The
remaining principal balance of the Notes of $1,330 was repaid in July 1998
in accordance with the terms of the Notes.
F-47
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
11. REDEEMABLE PREFERRED STOCK OF PREDECESSOR
In connection with the 1993 acquisition of Arcade, the Predecessor
authorized and issued 8,000 shares of 7% cumulative, $1 par value
redeemable preferred stock at $1,000 per share. In conjunction with the
sale of Predecessor on December 15, 1997 (see Note 3), all outstanding
redeemable preferred stock was redeemed at $1,000 per share plus accrued
and unpaid dividends.
12. INITIAL CAPITALIZATION
In conjunction with the Acquisition, AHC issued $30,000 of Floating
Rate Notes, $50,279 of Mandatorily Redeemable Senior Preferred Stock (the
"Senior Preferred Stock") and $1,111 of its Common Stock. The Floating Rate
Notes were issued with an original issuance discount of $5,389 and bear
interest at a rate equal to the rate in effect on the Bridge Loans (see
Note 3) plus 2.50%. Interest was payable quarterly and could be settled
through the issuance of additional Floating Rate Notes through December 15,
2009, the maturity date, at the discretion of AHC. The original issuance
discount of $5,389 was being amortized using the effective interest method
over the life of the Floating Rate Notes. The unamortized balance of the
original issue discount at June 30, 1999 was $4,740. On November 1, 1999
AHC issued Amended and Restated Notes totaling $35,500 in exchange for the
Floating Rate Notes. The Amended and Restated Notes bear a fixed interest
rate of approximately 16% per annum and mature on December 15, 2009 and
provide for the payment of stipulated early redemption premiums. In
connection with the exchange the unamortized original issue discount was
expensed by AHC. The Senior Preferred Stock accretes in value at 15% per
annum and must be redeemed by December 15, 2012. The Amended and Restated
Notes and Senior Preferred Stock are general unsecured obligations of AHC.
The cash proceeds from the issuance of the Floating Rate Notes, Senior
Preferred Stock and Common Stock of approximately $76,000 and a Senior
Preferred Stock option of $2,363 (see Note 16) were contributed by AHC to
the Company in exchange for 1,000 shares of the Company's Common Stock.
Subsequent to the initial capitalization of the Company, AHC contributed $1
and all of its ownership interest in the Company to Holding for all of the
outstanding equity of Holding.
On June 25, 1998, Holding completed a private placement of Senior
Discount Debentures (the "Debentures") with a stated value of $50,000. The
Debentures are general unsecured obligations of Holding and mature on July
1, 2009. The Debentures do not accrue or pay interest until July 1, 2003
and were issued with an original issuance discount of $24,038. The
placement of the Debentures yielded the Company net proceeds of $24,699
after deducting offering expenses of $1,263, including $1,038 of
underwriting fees paid to an affiliate of the stockholder. The original
issuance discount of $24,038 on the Debentures is being accreted from
issuance through July 1, 2003 at an effective rate of 13.5% per annum. The
unamortized balance of the original issuance discount was $13,368 and
$20,349 at June 30, 2000 and June 30, 1999, respectively. After July 1,
2003, the Debentures will accrue interest at a rate of 13.5% per annum,
payable semi-annually, commencing January 1, 2004. The Debentures are
redeemable at the option of Holding, in whole or in part, at
F-48
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
12. INITIAL CAPITALIZATION (Continued)
any time on or after July 1, 2003 at a price of up to 106.75% of the
outstanding principal balance plus accrued and unpaid interest. Prior to
July 1, 2003, Holding is permitted to repurchase up to 35% of the aggregate
principal amount at maturity of the Debentures originally issued at a
redemption price equal to 113.5% of the accreted value of the Debentures
with the net proceeds of one or more public equity offerings. The
Debentures contain certain customary convenants including restrictions on
the declaration and payment of dividends and limitations on the incurrence
of additional indebtedness. With the proceeds of the Debenture offering,
Holding contributed $22,499 of cash to the Company. No additional shares
were issued to Holding as a result of this contribution. On December 22,
1998, Holding completed the registration of its Senior Discount Debentures
with the Securities and Exchange Commission.
AHC and Holding have no other operations other than the Company.
Absent additional financing by AHC or Holding, the Company's operations
represent the only current source of funds available to service the
Floating Rate Notes, Senior Preferred Stock and Debentures; however, the
Company is not obligated to pay or otherwise guarantee the Floating Rate
Notes, Senior Preferred Stock and Debentures.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
Equipment and office, warehouse and production space under operating
leases expire at various dates. Rent expense was $589, $338, $198 and $192
for the year ended June 30, 2000, the year ended June 30, 1999, the period
from December 16, 1997 through June 30, 1998 and the period from July 1,
1997 through December 15, 1997, respectively. Future minimum lease payments
under the leases total $256 in 2001 and none thereafter.
Royalty Agreements
Royalty agreements are maintained for certain technologies used in the
manufacture of certain products. Under the terms of one royalty agreement,
payments are required based on a percentage of net sales of those products
manufactured with the specific technology, or a minimum of $500 per year.
This agreement expires in 2003 or when a total of $12,500 in cumulative
royalty payments has been paid. The Company expensed $500, $500, $516 and
$437 under this agreement for the year ended June 30, 2000, the year ended
June 30, 1999, the period from December 16, 1997 through June 30, 1998 and
the period from July 1, 1997 through December 15, 1997, respectively. The
Company has paid $5,076 in cumulative royalty payments under this agreement
through June 30, 2000.
F-49
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
13. COMMITMENTS AND CONTINGENCIES (Continued)
Under the terms of another agreement, royalty payments are required
based on the number of products sold that were manufactured with the
specific licensed technology, or a minimum payment per year. These minimum
payments for years after fiscal 1999 are $625 per year through the
expiration of the agreement in 2012. The Company expensed $625, $575, $284
and $241 under this agreement for the year ended June 30, 2000, the year
ended June 30, 1999, the period from December 16, 1997 through June 30,
1998 and the period from July 1, 1997 through December 15, 1997,
respectively.
Employment Agreements
The Company has employment agreements with certain executive officers
with terms through June 30, 2001 and 2002. Such agreements provide for base
salaries totaling $890 per year. One officer has an incentive bonus of up
to 200% of base salary which is payable if certain financial and management
goals are attained and certain other incentive payments. The employment
agreements also provide severance benefits of up to two years of base
salary if the officers' services are terminated under certain conditions.
During fiscal 1999, two executive officer's employment was terminated
with the Company. In accordance with the terms of the former officers'
employment agreements, the Company was obligated for severance benefits of
approximately $610. The Company had paid approximately $457 of these
benefits by June 30, 1999. The remaining balance of $153 is included in
accrued compensation at June 30, 1999 and subsequently paid in fiscal 2000.
Litigation
The Company is a party to litigation arising in the ordinary course of
business which, in the opinion of management, will not have a material
adverse effect on the Company's financial condition, results of operations
or cash flows.
Printing Services Agreement
In connection with the RetCom acquisition, AKI entered into a five
year Printing Services Agreement with a former shareholder of RetCom. The
Printing Services Agreement requires annual purchases of printing services
totaling $5,000 and a 15% charge on the amount of any shortfall. The
present value of the costs related to the estimated shortfall over the life
of the Printing Services Agreement was recorded as a liability in the
RetCom purchase accounting.
F-50
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
14. RETIREMENT PLANS
A 401(k) defined contribution plan (the "Plan") is maintained for
substantially all full-time salaried employees. Applicable employees who
have six months of service and have attained age 21 are eligible to
participate in the Plan. Employees may elect to contribute a percentage of
their earnings to the Plan in accordance with limits prescribed by law.
Contributions to the Plan are determined annually by the Company and
generally are a matching percentage of employee contributions. Costs
associated with the Plan totaled $251, $201, $113 and $95 for the year
ended June 30, 2000, the year ended June 30, 1999, the period from December
16, 1997 through June 30, 1998 and the period from July 1, 1997 through
December 15, 1997, respectively.
Certain hourly employees are covered under a multiemployer defined
benefit plan administered under a collective bargaining agreement. Costs
(determined by union contract) under the defined benefit plan were $215,
$204, $81 and $80 for the year ended June 30, 2000, the year ended June 30,
1999, the period from December 16, 1997 through June 30, 1998 and the
period from July 1, 1997 through December 15, 1997, respectively.
15. INCOME TAXES
The Company is included in the consolidated federal income tax return
filed by AHC for periods subsequent to December 15, 1997. Income taxes
related to the Company for the period from December 16, 1997 through June
30, 2000 were determined on a separate entity basis. The Company files
separate state income tax returns and calculates its state tax provision on
a separate company basis. Any income taxes payable or receivable by the
consolidated group are settled or received by the Company. The Predecessor
was not part of a consolidated group.
For financial reporting purposes, income (loss) before income taxes
and extraordinary gain includes the following components:
<TABLE>
<CAPTION>
December 16, July 1,
1997 1997
Year Ended Year Ended through through
June 30, June 30, June 30, December 15,
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (loss) before income taxes
and extraordinary gain:
United States ................. $ 2,428 $(2,266) $(8,169) $ 3,298
Foreign ....................... 455 522 682 (64)
------- ------- ------- -------
$ 2,883 $(1,744) $(7,487) $ 3,234
======= ======= ======= =======
</TABLE>
F-51
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
15. INCOME TAXES (Continued)
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
December 16, July 1,
1997 1997
Year Ended Year Ended through through
June 30, June 30, June 30, December 15,
2000 1999 1998 1997
---- ---- ---- ----
Current expense (benefit):
<S> <C> <C> <C> <C>
Federal ................. $ 480 $ -- $ -- $ 1,623
Foreign ................. 171 204 104 --
State ................... -- -- (121) 278
------- ------- ------- -------
651 204 (17) 1,901
------- ------- ------- -------
Deferred expense (benefit):
Federal ................. 1,740 569 (1,900) (376)
Foreign ................. -- -- 162 (25)
State ................... 426 74 (278) (59)
------- ------- ------- -------
2,166 643 (2,016) (460)
------- ------- ------- -------
$ 2,817 $ 847 $(2,033) $ 1,441
======= ======= ======= =======
</TABLE>
The significant components of deferred tax assets and deferred tax
liability at June 30, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Deferred income tax assets:
Accrued expenses ................. $ 215 $ -- $ 308 $ --
Allowance for doubtful accounts... 181 -- 92 --
Net operating loss carryforwards.. -- 720 -- 3,132
------- ------- ------- -------
396 720 400 3,132
Deferred income tax liability:
Property, plant and equipment .... -- 3,090 -- 3,340
------- ------- ------- -------
$ 396 $(2,370) $ 400 $ (208)
======= ======= ======= =======
</TABLE>
F-52
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
15. INCOME TAXES (Continued)
The income tax provision recognized by the Company for the years ended
June 30, 2000 and 1999 and for the period from December 16, 1997 through
June 30, 1998 and by the Predecessor for the period from July 1, 1997
through December 15, 1997 differs from the amount determined by applying
the applicable U.S. statutory federal income tax rate to pretax income as a
result of the following:
<TABLE>
<CAPTION>
December 16, July 1,
1997 1997
Year Ended Year Ended through through
June 30, June 30, June 30, December 15,
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computed tax provision (benefit)
at the statutory rate ............. $ 980 $ (593) $(2,546) $ 1,100
State income tax provision (benefit),
net of federal effect ............. 281 49 (263) 145
Nondeductible expenses .............. 1,540 1,364 720 193
Other, net .......................... 16 27 56 3
------- ------- ------- -------
$ 2,817 $ 847 $(2,033) $ 1,441
======= ======= ======= =======
</TABLE>
In conjunction with the Acquisition, the Company recognized an income
tax benefit of $7,327 related to the excess of the redemption price over
the strike price of certain non-qualified options of the Predecessor
redeemed and retired by the Company. This benefit was recorded as a
reduction to goodwill.
Due to the Company's losses in prior years the Company has recorded a
long-term deferred tax asset of $720 reflecting cumulative net operating
loss carryforwards available to offset future state taxable income of
approximately $10,996 at June 30, 2000. These cumulative net operating loss
carryforwards expire in varying amounts through 2019. Realization is
dependent on generating sufficient state taxable income prior to expiration
of the loss carryforwards. Although realization is not assured, management
believes that it is more likely than not that all of the deferred tax asset
will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
16. STOCK OPTIONS
The Predecessor sponsored a key employee stock option plan under which
a maximum of 12,571 shares of the Predecessor's common stock could be
reserved for nonqualified options; all stock options were granted with an
exercise price equal to the fair market value of $100 per share. All
options vested ratably over five years and would have expired ten years
from the grant date.
F-53
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
16. STOCK OPTIONS (Continued)
The Predecessor accounted for its employee stock options under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"). Under APB 25, because the exercise price of the Predecessor's employee
stock options equaled the market value of the underlying stock on the date of
grant, no compensation expense was recognized.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), requires disclosure of pro forma
information regarding net income for option grants subsequent to December 15,
1995. Because all of the Predecessor's options were granted prior to that date,
no pro forma adjustments to net income or disclosure of information would apply
under SFAS 123.
As a result of the sale of the Predecessor on December 15, 1997 (see Note
3), all outstanding options became immediately vested and exercisable under the
terms of the original individual stock option agreements. In connection with the
Acquisition, the Company purchased and retired 11,201 options of the Predecessor
for $19,342. The remaining 1,370 options of the Predecessor, which had a
cumulative exercise price of $137, were exchanged at fair value for an option to
purchase 100,000 shares of AHC Senior Preferred Stock with a cumulative stated
value of $2,500 (the "Preferred Stock Option"). The 1,370 options were
subsequently retired. The Preferred Stock Option had an exercise price of $137.
The total consideration of $21,705 used to purchase and retire the outstanding
options of the Predecessor was included in the cost of the Acquisition (see Note
3).
The Preferred Stock Option was issued with a Put and Call Option (the "Put
and Call Option") which granted the officer the right to compel DLJMBII to
purchase the 100,000 shares of Senior Preferred Stock obtainable under the
Preferred Stock Option, together with certain common equity interests in AHC
held by the officer, for $2,590. The Put and Call Option also granted DLJMBII
the right to purchase the equity interests, both common and preferred, of the
officer for the same amount. The Put and Call Option had a stated termination on
June 30, 1998. The officer agreed to terminate the Put and Call Option and enter
into a new put option (the "Put Option") dated June 17, 1998. The Put Option
granted the officer an irrevocable option to require AHC to purchase 80,000
shares of the Senior Preferred Stock obtainable under the Preferred Stock Option
for $2,000 in cash. As the terms of the Put Option were generally more
restrictive than the Put and Call Option, no compensation expense was recognized
as a result of the transaction. On July 30, 1998, the officer exercised the
Preferred Stock Option and Put Option. To provide AHC the funds to redeem the
80,000 shares of Senior Preferred Stock, Holding issued AHC a dividend of $1,863
in cash on such date.
Subsequent to the Acquisition, AHC adopted the 1998 Stock Option Plan
("Option Plan") for certain employees and directors of AHC and any parent or
subsidiary of AHC. The Option Plan authorizes the issuance of options to acquire
up to 1,650,000 shares of AHC Common Stock. The Board of Directors determines
the terms of each individual options grant. The exercise price for each grant is
required to be set at least equal to the fair market value per share of AHC
provided that the exercise price shall not be less than $1.00 per share. Options
vest over periods ranging from three to eight years. Certain options are
eligible for accelerated vesting based on targeted EBITDA. Options may be
exercisable for up to ten years.
F-54
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
16. STOCK OPTIONS (Continued)
On June 17, 1998, AHC granted an officer of the Company options to
purchase 32,500 shares of AHC Common Stock at an exercise price of $1.00
per share and a term of 10 years. These options were forfeited during 1999
upon the resignation of the officer.
A summary of AHC stock option activity and related information for the
year ended June 30, 2000 follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
------- -----
<S> <C> <C>
Outstanding, beginning of year..................... - $ -
Granted....................................... 1,519,917 1.00
Exercised..................................... - -
Forfeited..................................... (10,467) 1.00
----------- -------
Outstanding, end of year........................... 1,509,450 $ 1.00
========== =======
Exercisable, end of year........................... 273,668 $ 1.00
========== =======
Weighted average remaining
contractual life.............................. 9.5 years
</TABLE>
The Company has elected to account for its stock based compensation
with employees under the intrinsic value method as permitted under SFAS
123. Under the intrinsic value method, because the stock price of the
Company's employee stock options equaled the fair value of the underlying
stock on the date of grant, no compensation expense was recognized. If the
Company had elected to recognize compensation expense based on the fair
value of the options at grant date as prescribed by SFAS 123, the net
income (loss) for the years ended June 30, 2000 and 1999 would have been
$444 and $(2,593), respectively. In making this determination, fair value
was estimated on the date of grant using the minimum value method and a
risk-free interest rate ranging from 6.3% to 6.9%, estimated life of five
years and dividend rate of 0.0%. The weighted average fair value at date of
grant of options granted during 2000 was approximately $0.27 per option.
17. RELATED PARTY TRANSACTIONS
The Successor made payments to an affiliate of DLJMBII for management
fees of $250, $250 and $125 for the year ended June 30, 2000, the year
ended June 30, 1999 and the period from December 16, 1997 through June 30,
1998, respectively.
The Predecessor made payments to a company controlled by a stockholder
of the Predecessor of $160 for the period from July 1, 1997 through
December 15, 1997 for management fees, bonuses and expense reimbursements.
The Predecessor made payments to another stockholder of $55 for the period
from July 1, 1997 through December 15, 1997 for management fees.
F-55
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
18. GEOGRAPHIC INFORMATION
The following table illustrates geographic information for revenues
and long-lived assets. Revenues are attributed to countries based on the
receipt of sales orders, and long-lived assets are based upon the country
of domicile.
United
States France Total
Predecessor
-----------
Net sales:
Period from July 1, 1997
through December 15, 1997 .................. $ 32,600 $ 2,586 $ 35,186
--------------------------------------------------------------------------------
Successor
---------
Net sales:
Period from December 16, 1997
through June 30, 1998 ...................... $ 29,162 $ 6,904 $ 36,066
Year ended June 30, 1999 ..................... 71,056 14,911 85,967
Year ended June 30, 2000 ..................... 84,379 14,184 98,563
Long-lived assets:
June 30, 1999 ................................ 179,464 107 179,571
June 30, 2000 ................................ 198,100 87 198,187
F-56
<PAGE>
AKI, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
19. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the unaudited quarterly results of operations
for Fiscal 2000 and Fiscal 1999.
<TABLE>
<CAPTION>
Successor
---------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
September 30, December 31, March 31, June 30, Full
Fiscal 2000 1999 1999 2000 2000 Year
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ............ $ 28,379 $ 20,508 $ 25,433 $ 24,243 $ 98,563
Gross profit ......... 12,587 7,220 9,941 8,511 38,259
Income from operations 7,265 2,202 4,925 2,409 16,801
Interest expense, net 3,348 3,393 3,479 3,448 13,668
Net income (loss) .... 1,969 (713) 376 (1,137) 495
</TABLE>
<TABLE>
<CAPTION>
Successor
---------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
September 30, December 31, March 31, June 30, Full
Fiscal 1999 1998 1998 1999 1999 Year
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ............ $ 24,024 $ 20,437 $ 24,518 $ 16,988 $ 85,967
Gross profit ......... 8,603 6,777 9,691 5,697 30,768
Income from operations 4,337 2,331 4,616 378 11,662
Interest expense, net 3,210 3,244 3,298 3,276 13,028
Net income (loss) .... 273 (970) 281 (2,175) (2,591)
</TABLE>
F-57
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") entered into as of July 1,
2000, by and between ARCADE MARKETING, INC. (the "Company"), a Delaware
corporation, and KENNETH A. BUDDE (the "Employee"), an individual residing at
5611 Mountain Breeze Drive, Chattanooga, Tennessee 37421;
W I T N E S S E T H:
WHEREAS, the Company is engaged in the business of, among other things,
manufacturing, marketing and distributing olfactory, cosmetic/skincare/beauty
care (including but not limited to treatment, makeup and lipstick) and flavor
sampling and interactive advertising products and encapsulated ingredients and
printed materials as they relate to sampling and is in the process of developing
single dosage products and is engaged in manufacturing, marketing and
distributing nail and hair care sampling products, scented greeting card
products and also engages in, or provides, creative services, sales promotion
services, marketing communications services, direct mail and response services,
data base marketing services, point of sale merchandising and sampling and
multimedia in-store advertising and/or merchandising; and
WHEREAS, the Company desires to employ the Employee, and the Employee
desires to be employed by the Company, on the terms and conditions of this
Agreement; and
WHEREAS, the Employee is not a party to any other contract or subject to
the terms of any other agreement, which contract or agreement would prohibit him
from being a party to this Agreement or otherwise being employed by the Company;
NOW, THEREFORE, in consideration of the respective agreements of the
parties contained herein, it is agreed as follows:
1. Employment Term. The term of this Agreement shall commence on July 1,
2000 (the "Effective Date") and shall expire on June 30, 2001. Thereafter, this
Agreement shall automatically renew for successive additional terms of twelve
months each unless either party shall give the other written notice of
nonrenewal at least sixty (60) days prior to the end of the then current term.
Any notice of nonrenewal by the Company shall be treated as a Notice of
Termination given pursuant to Section 7(d). Any notice of nonrenewal by the
Employee shall be treated as a Notice of Termination given pursuant to Section
7(e). The initial term and all such renewal terms are hereinafter collectively
called the "Employment Term."
2. Employment. (a) Subject to the provisions of Section 7 hereof, the
Company agrees to employ the Employee during the Employment Term. During the
Employment Term, the Employee shall be employed as a Senior Vice President and
the Chief Financial Officer of the Company or in such other management capacity
as may later be decided by the Chief Executive Officer of the Company (the
"CEO"). During the Employment Term, Employee shall perform such management
services as the CEO may from time to time designate. The Employee shall report
to the President of the Company or the parent company CFO as may be designated
by the CEO. The Employee's primary place of employment shall be the Company's
facility in
1
<PAGE>
Chattanooga, Tennessee; however, the Employee shall undertake such travel as is
reasonable and customary in the execution of the Employee's duties hereunder.
(b) During the Employment Term, excluding periods of vacation, sick leave
and disability to which the Employee is entitled, the Employee agrees to devote
his full business time, attention, knowledge and skills, faithfully and
diligently to the best of his ability, to the business and affairs of the
Company and its affiliates.
3. Compensation.
(a) Base Salary. During the Employment Term, the Company agrees to pay, or
to cause to be paid to the Employee, an annual base salary of one hundred ninety
thousand dollars ($190,000.00) or as may be increased from time to time in the
sole discretion of the CEO (hereinafter referred to as the "Base Salary." Such
Base Salary shall be earned and accrued on a per day basis and be payable in
accordance with the Company's customary practices applicable to its executive
employees.
(b) Annual Bonus. The Employee shall be eligible to participate in the
Salaried Employees Bonus Plan adopted by the Company for each fiscal year ending
during the Employment Term (each, a "Bonus Plan") pursuant to which the Employee
may earn an annual bonus (the "Annual Bonus"). If the Company's financial goals
as set forth in the Bonus Plan are met and if the other criteria set forth in
the Bonus Plan are met, the amount of the Annual Bonus for which the Employee
may be eligible during any fiscal year may be up to a target as determined for
each year's Bonus Plan (the "Target Amount"). Under certain circumstances as set
forth in the Bonus Plan for the applicable fiscal year, the Employee may be
eligible for an Annual Bonus in an amount in excess of the Target Amount. The
Annual Bonus shall be payable to the Employee on the later of ten (10) days
after the Company's auditors deliver their audit opinion/certification report of
the relevant fiscal year's annual financial statements of the Company or sixty
(60) days after the end of the relevant fiscal year, beginning with the fiscal
year ending June 30, 2000; provided, however, that for any such fiscal year, the
amount of the Annual Bonus shall be prorated based on the number of weeks within
such fiscal year during which the Employee is employed by the Company. The
Employee acknowledges that the performance of his duties are subject to the
direction of the President (or parent company CFO) and that his entitlement to
an Annual Bonus as set forth herein shall have no impact on the discretion of
the President (or parent company CFO) in delegating authority and duties to him.
If the Employee's employment is terminated, the Employee shall only be entitled
to receive an Annual Bonus for the fiscal year of the Company during which the
Termination Date (as defined in Section 9(b) ) occurs to the extent specified in
Section 8. To the extent that an Annual Bonus is payable under Section 8, such
Annual Bonus shall be payable notwithstanding any provision of the Bonus Plan
requiring an employee to be employed by the Company on the date a bonus is
payable.
(c) Stock Option Plan. During the Employment Term, the Employee shall be
entitled to participate as an executive employee in the stock option plan of AHC
I Acquisition Corp., the remote parent corporation of the Company, in accordance
with the terms of such plan, as it may be amended from time to time.
2
<PAGE>
4. Employee Benefits. During the Employment Term, the Employee shall be
entitled to participate in all employee benefit plans, practices and programs
maintained by the Company and made available to employees of the same or similar
position at the Company, generally, including, without limitation, any
retirement, profit sharing, savings, medical, hospitalization, disability,
dental, life or travel accident insurance benefit plans, but only to the extent
maintained by the Company and only to the extent that the Employee qualifies
under the terms of such plans. Unless otherwise provided herein, the
compensation and benefits under, and the Employee's participation in, such
plans, practices and programs shall be on the same basis and terms as are
applicable to employees of the same or similar position at the Company.
5. Expenses. The Employee shall be entitled to receive, in accordance with
normal Company practices, prompt reimbursement of all expenses reasonably
incurred by him in connection with the performance of his duties hereunder or
for promoting, pursuing or otherwise furthering the business or interests of the
Company.
6. Vacation and Sick Leave.
(a) The Employee shall be entitled to annual vacation in accordance with
the policies periodically established for similarly situated employees of the
Company; provided, however, that in no event shall the Employee's annual
vacation entitlement be less than four (4) weeks during each twelve-month period
of the Employment Term, provided that the Employee must schedule such vacation
at times approved by the President so that it does not interfere with the
performance of his duties under this Agreement.
(b) The Employee shall be entitled to sick leave and personal days (without
loss of pay) in accordance with the Company's policies in effect from time to
time.
7. Termination. During the Employment Term, the Employee's employment
hereunder may be terminated under the following circumstances:
(a) Cause. The Company may terminate the Employee's employment at any time
for "Cause." For purposes of this Agreement, "Cause" means:
(i) the material failure or neglect by the Employee to perform his duties
hereunder or any other material breach or violation of any of the terms and
conditions of this Agreement; or
(ii) if the Employee should be convicted of a violation of the laws of the
United States or any state thereof, that violation involving personal dishonesty
or being punishable as a felony.
(b) Disability. If the Employee fails, because of physical or mental
illness or other incapacity, for a period of sixty (60) days in the aggregate
during any twelve-month period to substantially perform his duties under this
Agreement ("Disability"), the Company may terminate the Employee's employment
3
<PAGE>
(c) Death. The Employee's employment shall terminate immediately upon the
death of the Employee.
(d) Upon Notice by Company. The Company may terminate the Employee's
employment at any time without Cause by giving a Notice of Termination.
(e) Upon Notice by Employee. The Employee may terminate his employment at
any time by giving a Notice of Termination not less than sixty (60) days prior
to the Termination Date.
8. Compensation Upon Termination. Upon termination of the Employee's
employment during the Employment Term, the Employee shall be entitled to the
following benefits:
(a) If the Employee's employment with the Company shall be terminated by
reason of death or disability or by the Company pursuant to Section 7(d), the
Company shall pay the Employee (i) only that portion of his Base Salary which
has been earned and is accrued but unpaid through the Termination Date, (ii) if,
but only if, the Termination Date is after the end of the ninth full month of
the Company's fiscal year, his Annual Bonus prorated for the number of weeks in
such fiscal year during which the Employee has been employed by the Company
under this Agreement, provided that such Annual Bonus has been earned in
accordance with the Bonus Plan for the fiscal year during which the Termination
Date occurs, (iii) reimbursement for reasonable and necessary expenses incurred
by the Employee on behalf of the Company during the period ending on the
Termination Date, and (iv) accrued vacation pay. If the Employee's employment is
terminated by the Company pursuant to Section 7(d), the Company shall also pay
to the Employee severance pay equal to one hundred percent (100%) of the
Employee's Base Salary as at the Termination Date ("Severance Pay Amount") and
shall provide such COBRA benefits as are required under applicable law. The
Severance Pay Amount shall be payable in accordance with the normal payroll
frequency practices beginning in the month following the month in which the
Termination Date occurs, until the Severance Pay Amount is paid in full. The
prorated Annual Bonus shall be payable not later than ninety (90) days following
the end of the Company's fiscal year; provided, however, that notwithstanding
anything in this Agreement to the contrary, the Employee shall not be entitled
to receive any portion of the Annual Bonus for the fiscal year in which the
Termination Date occurs if the Termination Date occurs prior to the end of the
ninth full month of such fiscal year.
(b) If the Employee's employment with the Company shall be terminated (1)
by the Company for Cause, or (2) by the Employee, the Company shall pay the
Employee (i) only that portion of his Base Salary which has been earned and is
accrued but unpaid through the Termination Date, and (ii) reimbursement for
reasonable and necessary expenses incurred by the Employee on behalf of the
Company during the period ending on the Termination Date. The Employee shall not
be entitled to receive any other benefits or compensation, including without
limitation all or any part of any Annual Bonus for the Company's fiscal year
during which the Termination Date occurs.
9. Definitions.
4
<PAGE>
(a) Notice of Termination. For purposes of the Agreement, a "Notice of
Termination" shall mean a written notice of termination of the Employee's
employment, signed by the CEO if from the Company and by the Employee if from
the Employee, which indicates the specific termination provision in this
Agreement, if any, relied upon.
(b) Termination Date, Etc. For purposes of this Agreement, Termination Date
shall mean (i) in the case of the Employee's death, his date of death, (ii) if
the Employee's employment is terminated for any other reason, the date specified
in the Notice of Termination (which, in the case of a termination for Cause
under Section 7(a)(ii) shall not be less than seven (7) days from the date such
Notice of Termination is given and in the case of a termination by the Employee
under Section 7(e) shall not be less than sixty (60) days from the date such
Notice of Termination is given).
10. Restrictive Covenants.
(a) Covenants Against Competition. The Employee acknowledges that (i) the
Company is currently engaged in the business of manufacturing, marketing and
distributing, directly and through licensees (collectively, the "Activities"),
olfactory, cosmetic/skin care/beauty care (including but not limited to
treatment, makeup, and lipstick) and flavor sampling and interactive advertising
products and encapsulated ingredients and printed materials as they relate to
sampling, and is in the process of developing single dosage products and is
currently engaged in the Activities with respect to nail and hair care sampling
products and scented greeting card products, and also engages in, or provides,
creative services, sales promotion services, marketing communications services,
direct mail and response services, data base marketing services, point of sale
merchandising and sampling, multimedia in-store advertising and/or merchandising
(each a "Business Line" and collectively, the "Company Business"); (ii) the
Company Business is conducted throughout North America, Europe (including the
United Kingdom), South America, Asia and Australia (the "Restricted Area");
(iii) the Employee's work for the Company will give the Employee access to trade
secrets of, and confidential information concerning, the Company; and (iv) the
agreements and covenants contained in this Agreement are essential to protect
the business and good will of the Company. Accordingly, the Employee covenants
and agrees as follows:
(i) Non-Compete. During the period of the Employee's employment hereunder
and for a period of one (1) year thereafter or for a period of one year
following the payment in full of any Severance Pay Amount to which the Employee
is entitled, whichever is the longer period (the "Restricted Period"), the
Employee shall not (except by reason of and in the Employee's capacity as an
employee of the Company), and shall not permit any of his affiliates to, either
themselves, or as a stockholder, partner, associate, employee, director,
officer, advisor, consultant, owner, agent, creditor, coventurer or any person,
or otherwise, directly or indirectly, establish, engage in, become employed by
or associated with, any business, trade or occupation which is competitive with
the Company Business in the Restricted Area or which involves the development,
design, licensing, sale, distribution or manufacture of any products or services
which are competitive with the Company Business in the Restricted Area.
5
<PAGE>
(ii) Interference with Employment Relationships. The Employee shall not,
and will not permit his affiliates to, during the Restricted Period, hire,
solicit or cause others to hire or solicit, or take any action which is
calculated to persuade, or have the effect of persuading, any employees,
representatives or agents of the Company or its affiliates (i) who are engaged
in the Company Business, or (ii) whom the Employee has become aware of, or has
come in contact with, including during the course of the negotiation of this
Agreement and the consummation of the transactions contemplated hereby, to
terminate their employment or other relationship with the Company or its
affiliates.
(iii) Interference with Business Relationships. The Employee shall not and
will not permit any of his affiliates to, during the Restrictive Period,
interfere in any way with the relationship (or prospective relationship which is
under cultivation) between the Company or its affiliates and any customer,
supplier, licensee or prospect of the Company or its affiliates. Without
limiting the foregoing, the Employee shall not request, encourage, advise or
attempt to persuade in any manner (including by making unfavorable or negative
comments with respect to the Company, or its affiliates, products or conduct of
business) any customers, suppliers or licensees of the Company or its affiliates
to curtail or cancel such customer's, supplier's or licensees business
relationship with the Company or its affiliates.
(iv) Confidential Information. The Employee acknowledges that the Company
has a legitimate and continuing proprietary interest in the protection of its
confidential information and that it has invested substantial sums and will
continue to invest substantial sums to develop, maintain and protect
confidential information. The Employee agrees that, during and after the
Restricted Period, the Employee shall, and shall cause his affiliates to, keep
secret and retain in strictest confidence, and shall not use or disclose to any
person whatsoever for their benefit or the benefit of others any proprietary,
confidential or secret matters used in, associated with or related to the
Company or the Company Business ("Confidential Information") including know-how,
technology, financial information, trade secrets, customer lists, names or
identities, details of client or consultant contracts, pricing policies,
operational methods, marketing plans or strategies, product development
techniques or plan, business acquisition plans, new personnel acquisition plans,
methods of manufacture, processes, formulas, designs and design projects,
computer programs, inventions and research projects of the Company, its
affiliates, or any other entity which may hereafter become an affiliate thereof,
learned, acquired or developed by the Employee while employed by the Company.
Notwithstanding the foregoing, Confidential Information shall not include
information which (i) is already in the public domain through no breach of the
Employee or his affiliates of this Agreement or any other agreement with the
Company, (ii) the Employee can provide evidence reasonably satisfactory to the
Company that such information was legally in his possession without restriction
prior to the Effective Date, or (iii) is disclosed in any printed patent or
other publications without breach of any duty of confidentiality.
(v) Property of the Company. All memoranda, notes, lists, records,
engineering drawings, technical specifications and related documents and other
documents or papers (and all copies thereof) relating to the Company or the
Company Business, including such items stored in computer memories, microfiche
or by any other means, made or compiled by or on behalf of the Employee during
the course of the Employee's employment by the Company, or made available to the
Employee during the course of the Employee's employment by the Company
6
<PAGE>
relating to the Company, its affiliates or any entity which may hereafter become
an affiliate thereof (collectively, "Company Property"), shall be the property
of the Company. The Employee shall promptly deliver to the Company all Company
Property upon the termination of the Employee's employment with the Company, or
at any other time upon request, and shall not retain any Company Property in any
form whatsoever.
(vi) Original Material. The Employee acknowledges that the compensation
paid to the Employee by the Company during the Employee's employment by the
Company is intended to and does compensate the Employee for the Employee's
originality, innovativeness and inventiveness as it relates to the Company
Business. The Employee agrees that any inventions, discoveries, improvements,
ideas, concepts or original works of authorship relating to the Company
Business, including computer apparatus, programs and manufacturing techniques,
whether or not protectable by patent or copyright, that have been originated,
developed, make conceived, authored or reduced to practice by the Employee alone
or jointly with others during the Employee's employment with the Company shall
be the property of and belong exclusively to the Company. The Employee shall
promptly and fully disclose to the Company the origination or development by the
Employee of any such material and shall provide the Company with any information
that it may reasonably request about such material.
(vii) Post-Employment Property. The Employee agrees that any and all
intellectual property which the Employee invents, discovers, originates, makes,
conceives, creates or authorizes either solely or jointly with others and which
is the result of or is substantially derived from Confidential Information is
reduced to writing, drawings or practice after the termination of the Employee's
employment by the Company for any reason, with or without cause, shall be the
sole and exclusive property of the Company. The Employee shall promptly and
fully disclose all such property to the Company.
(b) Rights and Remedies Upon Breach. If the Employee breaches, or threatens
to commit a breach of, any of the provisions contained in Section 10 of this
Agreement (the "Restrictive Covenants"), the Company shall have the following
rights and remedies, each of which rights and remedies shall be independent of
the others and severally enforceable, and each of which is in addition to, and
not in lieu of, any other rights and remedies available to the Company under law
or in equity:
(i) Specific Performance. Recognizing that the remedy at law for any breach
or threatened breach of the covenants contained in this Section 10 may be
inadequate, in the event of any breach or threatened breach of such covenants by
the Employee, in addition to any and all other legal and equitable remedies
which may be available, the Company, or its successors or assigns, may obtain
temporary and permanent injunctive relief, and, to the extent permissible under
the applicable statutes and rules of procedure, a temporary injunction may be
granted immediately upon the commencement of any such breach and without notice.
(ii) Accounting. The Company shall have the right and remedy to require the
Employee to account for and pay over to the Company all compensation, profits,
moneys, accruals, increments or other benefits derived or received by the
Employee as the result of any action constituting a breach of the Restrictive
Covenants.
7
<PAGE>
(iii) Tolling. If the Employee engages in any business in violation of the
Restrictive Covenants, the running of the periods of limitation referred to in
this Section 10 shall be tolled until such violation shall cease and shall begin
to run again only when the Employee shall be in compliance with the provisions
of such covenants, whether voluntarily or pursuant to an order of a court.
(c) Independence of Covenants. The covenants contained in this Section 10
shall be construed as independent of any other provisions of this Agreement, and
the existence of any other claim or cause of action by the Employee against the
Company shall not constitute a defense to the enforcement of the Restrictive
Covenants.
(d) Severability of Covenants. The Employee acknowledges and agrees that
the Restrictive Covenants are reasonable and valid in duration and geographical
scope and in all other respects. If any court determines that any of the
Restrictive Covenants, or any part thereof, is invalid or unenforceable, (i) the
remainder of the Restrictive Covenants shall not thereby be affected and shall
be given full effect without regard to the invalid portions, or (ii) such
Restrictive Covenants may be reduced or limited by such court so as to make such
Restrictive Covenants valid and the remainder of the Restrictive Covenants shall
not thereby be affected.
11. Successors and Assigns.
(a) This Agreement shall be binding upon and shall inure to the benefit of
the Company, its Successors and Assigns. The term "Company" as used herein shall
include such Successors and Assigns. The term "Successors and Assigns" as used
herein shall mean a corporation or other entity acquiring all or substantially
all the assets and business of the Company, as the case may be (including this
Agreement), whether by operation of law or otherwise.
(b) Neither this Agreement nor any right or interest hereunder shall be
assignable or transferable by the Employee, his beneficiaries or legal
representative, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Employee's
legal personal representative.
12. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be sent by nationally-recognized
overnight delivery service or certified, registered or express mail, postage
prepaid, return receipt requested, addressed as set forth below; receipt shall
be deemed to occur on the earlier of the date of actual receipt or receipt by
the sender of confirmation that the delivery or transmission was completed or
that the addressee has refused to accept such delivery or has changed its
address without giving notice of such change as set forth herein.
(a) if to the Company, to:
Arcade Marketing, Inc.
120 East 56th Street
New York, New York 10022
Attention: Chairman & CEO
8
<PAGE>
with a copy to counsel for the Company:
Baker, Donelson, Bearman & Caldwell
1800 Republic Centre
633 Chestnut Street
Chattanooga, Tennessee 37450
Attention: Thomas O. Helton, Esquire
(b) if to the Employee, to:
Mr. Kenneth A. Budde
5611 Mountain Breeze Drive
Chattanooga, Tennessee 37421
Either party may change its address for notice hereunder by notice to the
other party hereto in accordance with the terms of this Section.
13. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Employee and the company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a wavier of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreement or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement.
14. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Tennessee without giving
effect to the conflict of law principles thereof.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
9
<PAGE>
16. Entire Agreement. This Agreement constitute the entire agreement
between the parties hereto and supersedes all prior agreements, if any,
understandings and arrangements, oral or written, between the parties hereto
with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Employee has executed this Agreement as of
the day and year first above written.
ARCADE MARKETING, INC.
By
--------------------------------
Title:
----------------------------
----------------------------------
Kenneth A. Budde
10
<PAGE>
[CIK] 0001067550
[NAME] AKI HOLDING CORP.
[MULTIPLIER] 1,000
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 3-MOS 12-MOS
[FISCAL-YEAR-END] JUN-30-2000 JUN-30-2000
[PERIOD-START] APR-1-2000 JUL-1-1999
[PERIOD-END] JUN-30-2000 JUN-30-2000
[CASH] 1,158 1,158
[SECURITIES] 0 0
[RECEIVABLES] 22,485 22,485
[ALLOWANCES] 963 963
[INVENTORY] 7,757 7,757
[CURRENT-ASSETS] 30,925 30,925
[PP&E] 27,142 27,142
[DEPRECIATION] 10,045 10,045
[TOTAL-ASSETS] 223,937 223,937
[CURRENT-LIABILITIES] 17,166 17,166
[BONDS] 144,875 144,875
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 0 0
[OTHER-SE] 58,834 58,834
[TOTAL-LIABILITY-AND-EQUITY] 223,937 223,937
[SALES] 24,243 98,563
[TOTAL-REVENUES] 24,243 98,563
[CGS] 15,732 60,304
[TOTAL-COSTS] 15,732 60,304
[OTHER-EXPENSES] 0 0
[LOSS-PROVISION] 30 240
[INTEREST-EXPENSE] 4,352 17,401
[INCOME-PRETAX] (2,007) (850)
[INCOME-TAX] (22) 1,596
[INCOME-CONTINUING] (1,985) (2,446)
[DISCONTINUED] 0 0
[EXTRAORDINARY] 241 1,089
[CHANGES] 0 0
[NET-INCOME] (1,744) (1,357)
[EPS-BASIC] 0 0
[EPS-DILUTED] 0 0
</TABLE>
<PAGE>
[CIK] 0001067549
[NAME] AKI, INC.
[MULTIPLIER] 1,000
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 3-MOS 12-MOS
[FISCAL-YEAR-END] JUN-30-2000 JUN-30-2000
[PERIOD-START] APR-1-2000 JUL-1-1999
[PERIOD-END] JUN-30-2000 JUN-30-2000
[CASH] 1,158 1,158
[SECURITIES] 0 0
[RECEIVABLES] 22,485 22,485
[ALLOWANCES] 963 963
[INVENTORY] 7,757 7,757
[CURRENT-ASSETS] 30,925 30,925
[PP&E] 27,142 27,142
[DEPRECIATION] 10,045 10,045
[TOTAL-ASSETS] 222,770 222,770
[CURRENT-LIABILITIES] 16,743 16,743
[BONDS] 117,012 117,012
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 0 0
[OTHER-SE] 83,526 83,526
[TOTAL-LIABILITY-AND-EQUITY] 222,770 222,770
[SALES] 24,243 98,563
[TOTAL-REVENUES] 24,243 98,563
[CGS] 15,732 60,304
[TOTAL-COSTS] 15,732 60,304
[OTHER-EXPENSES] 0 0
[LOSS-PROVISION] 30 240
[INTEREST-EXPENSE] 3,448 13,668
[INCOME-PRETAX] (1,102) 2,883
[INCOME-TAX] 277 2,817
[INCOME-CONTINUING] (1,379) 66
[DISCONTINUED] 0 0
[EXTRAORDINARY] 242 429
[CHANGES] 0 0
[NET-INCOME] (1,137) 495
[EPS-BASIC] 0 0
[EPS-DILUTED] 0 0
</TABLE>
