FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31,1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File Number: 333-60991
AKI HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 74-2883163
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1815 East Main Street
Chattanooga, TN 37404
(Address of principal executive offices) (Zip Code)
(423) 624-3301
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days (X) Yes ( ) No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. (X) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of February 10, 1999, 1,000
shares of common stock, $.01 par value, were outstanding.
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet
- June 30, 1998
- December 31, 1998 (unaudited)
Consolidated Condensed Statements of Operations
- October 1, 1997 through December 15, 1997
(Predecessor) (unaudited)
- December 16, 1997 through December 31, 1997
(Successor) (unaudited)
- Three months ended December 31, 1998
(Successor) (unaudited)
- July 1, 1997 through December 15, 1997
(Predecessor)
- December 16, 1997 through December 31, 1997
(Successor) (unaudited)
- Six months ended December 31, 1998
(Successor) (unaudited)
Consolidated Condensed Statements of Cash Flows
- July 1, 1997 through December 15, 1997
(Predecessor)
- December 16, 1997 through December 31, 1997
(Successor) (unaudited)
- Six months ended December 31, 1998
(Successor) (unaudited)
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Six months ended December 31, 1998
(unaudited)
Notes to Consolidated Condensed Financial Statements
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED BALANCE SHEET
(dollars in thousands, except share information)
June 30, December 31,
1998 1998
-------------- --------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents................... $ 3,842 $ 7,151
Accounts receivable, net.................... 13,577 17,557
Inventory................................... 2,078 4,738
Income tax refund receivable................ 5,155 -
Prepaid expenses............................ 378 145
Deferred income taxes....................... 827 827
------------- -----------
Total current assets.................... 25,857 30,418
Property, plant and equipment, net.......... 18,936 19,083
Goodwill, net............................... 151,842 149,916
Intangible assets, net...................... 7,289 6,925
Debt issuance costs, net.................... 6,535 7,197
Deferred income taxes....................... 3,888 3,905
Other assets................................ 200 202
------------- -----------
Total assets............................ 214,547 217,646
============= ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital
lease obligations.......................... $ 609 656
Current portion of other notes payable...... 1,330 -
Accounts payable, trade..................... 4,140 4,444
Accrued income taxes........................ 100 1,127
Accrued interest............................ 168 6,248
Accrued expenses............................ 4,464 4,017
------------ ----------
Total current liabilities............... 10,811 16,492
Long-term portion of capital
lease obligations.......................... 1,489 1,702
Revolving credit line....................... - -
Senior notes................................ 115,000 115,000
Senior discount debentures.................. 26,020 27,776
Deferred income taxes....................... 4,143 3,242
------------- ----------
Total liabilities....................... 157,463 164,212
------------- ----------
Stockholder's equity
Common stock, $0.01 par, 1,000 shares
authorized; 1,000 shares issued and
outstanding at June 30, 1998 and
December 31, 1998(unaudited)............... - -
Additional paid-in capital.................. 78,364 78,364
Accumulated deficit......................... (5,493) (9,259)
Accumulated other comprehensive income...... (57) 59
Carryover basis adjustment.................. (15,730) (15,730)
------------- ----------
Total stockholder's equity.............. 57,084 53,434
------------- ----------
Total liabilities and
stockholder's equity................... $ 214,547 $ 217,646
============= ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
Predecessor Successor Predecessor Successor
----------------- ------------------------------------ ----------------- --------------------------------------
October 1, 1997 December 16, 1997 Three Months July 1, 1997 December 16, 1997 Six Months
through through Ended through through Ended
December 15, 1997 December 31, 1997 December 31, 1998 December 15, 1997 December 31, 1997 December 31, 1998
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales...... $ 13,258 $ 2,791 $ 20,437 $ 35,186 $ 2,791 $ 44,461
Cost of goods
sold.......... 9,187 1,978 13,660 22,809 1,978 29,081
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Gross profit.. 4,071 813 6,777 12,377 813 15,380
Selling,
general and
administrative
expenses...... 2,387 483 3,294 5,703 483 6,409
Amortization of
goodwill and
other
intangibles... 258 177 1,152 568 177 2,303
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Income from
operations... 1,426 153 2,331 6,106 153 6,668
Other expenses
(income):
Interest
expense to
stockholder(s)
and affiliate 913 739 - 2,143 739 -
Interest
expense to
others,net... 282 20 4,149 503 20 8,245
Management
fees and
other,net.... 80 - 62 226 - 125
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Income (loss)
before
income taxes 151 (606) (1,880) 3,234 (606) (1,702)
Income tax
expense
(benefit)..... 154 (163) (301) 1,441 (163) 201
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Net income
(loss)....... $ (3) $ (443) $ (1,579) $ 1,793 $ (443) $ (1,903)
================= ================= ================= ================= ================= =================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Predecessor Successor
----------------- -------------------------------------
July 1, 1997 December 16, 1997 Six Months
through through Ended
December 15, 1997 December 31, 1997 December 31, 1998
----------------- ------------------ -----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ 1,793 $ (443) $ (1,903)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Depreciation and amortization of
goodwill and other intangibles........ 2,456 349 4,374
Amortization of debt discount........... 233 6 1,756
Amortization of debt issuance costs..... 101 157 329
Deferred income taxes................... (460) (163) (918)
Other................................... (18) (19) 116
Changes in operating assets and
liabilities:
Accounts receivable................... 1,153 (366) (3,980)
Inventory............................. 69 189 (2,660)
Prepaid expenses, deferred charges
and other assets.................... (62) (273) (773)
Income taxes.......................... 699 - 6,182
Accounts payable and accrued expenses. (1,036) (6,472) 5,937
----------------- ------------------ -----------------
Net cash provided by (used in)
operating activities................ 4,928 (7,035) 8,460
----------------- ------------------ -----------------
Cash flows from investing activities:
Purchases of equipment.................... (807) (91) (1,657)
Payments for acquisitions, net of cash
acquired................................ - (134,153) -
----------------- ------------------ -----------------
Net cash used in investing
activities.......................... (807) (134,244) (1,657)
----------------- ------------------ -----------------
Cash flows from financing activities:
Payments under capital leases
for equipment........................... (249) (24) (301)
Net proceeds (repayments) on
line of credit.......................... 2,362 (6,700) -
Proceeds from issuance of senior increasing
rate notes, net of offering costs........ - 119,735 -
Proceeds from issuance of common stock..... - 76,000 -
Redemption of preferred stock.............. - (8,678) -
Repayment of loans payable to stockholder.. (1,851) (36,649) -
Repayment of other notes payable........... (50) - (1,330)
Dividends paid on preferred stock.......... (155) (128) -
Dividend paid to AHC I Acquisition Corp.... - - (1,863)
----------------- ------------------ -----------------
Net cash provided by (used in)
financing activities.................. 57 143,556 (3,494)
----------------- ------------------ -----------------
Net increase in cash and cash
equivalents.................................. 4,178 2,277 3,309
Cash and cash equivalents, beginning of period. 303 - 3,842
----------------- ------------------ -----------------
Cash and cash equivalents, end of period....... $ 4,481 $ 2,277 $ 7,151
================= ================== =================
The accompanying notes are an integral part of these financial statements.
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
Predecessor Successor
----------------- -------------------------------------
July 1, 1997 December 16, 1997 Six Months
through through Ended
December 15, 1997 December 31, 1997 December 31, 1998
----------------- ------------------ -----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Supplemental information:
Cash paid (received) during the period for:
Interest to stockholder(s)................ $ 1,146 $ - $ -
Interest, other........................... 459 3 89
Income taxes.............................. 1,222 - (5,062)
Significant non-cash activities:
Assets acquired under capital lease......... $ - $ - $ 561
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(dollars in thousands)
Accumulated
Common Stock Additional Other Carryover
-------------------- Paid-in Retained Comprehensive Basis
Shares Dollars Capital Earnings Income Adjustment Total
------- ------- ------------ ---------- --------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1998................ 1,000 $ - $ 78,364 $ (5,493) $ (57) $ (15,730) $57,084
Dividend to AHC I Acquisition Corp
(unaudited).......................... (1,863) (1,863)
Net income (unaudited)................. (1,903) (1,903)
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited).............. 116 116
--------
Comprehensive income (unaudited)....... (1,787)
------- ------- ------------ ---------- --------------- ----------- --------
Balances, December 31, 1998 (unaudited) 1,000 $ - $ 78,364 $ (9,259) $ 59 $ (15,730) $53,434
======= ======= ============ ========== =============== =========== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION
On November 4, 1993, Arcade Holding Corporation (the "Predecessor") was
organized for the purpose of acquiring all the issued and outstanding
capital stock of Arcade, Inc. Arcade, Inc. manufacturers and distributes
cosmetics sampling products from its Chattanooga, Tennessee facilities, and
distributes products in Europe through its French subsidiary, Arcade Europe
S.A.R.L. This acquisition was accounted for as a purchase transaction
whereby the purchase cost was allocated to the fair value of the net assets
acquired.
Acquisition of Arcade Holding Corporation
DLJ Merchant Banking Partners II, L.P. and certain related investors
(collectively, "DLJMBII") and certain members of the Predecessor organized
AHC I Acquisition Corp. ("Acquisition Corp.") and AHC I Merger Corp.
("Merger Corp.") for purposes of acquiring the Predecessor. Merger Corp.
was organized as a wholly-owned subsidiary of Acquisition Corp. and was
initially capitalized by Acquisition Corp. with an equity contribution of
$78,363, comprised of $76,000 of cash and $2,363 of non-cash consideration
in the form of an option to purchase Senior Preferred Stock of Acquisition
Corp. Immediately following this equity contribution, Merger Corp. issued
$123,500 of senior increasing rate notes ("Bridge Loans") to an entity that
has an ownership interest in Acquisition Corp. The Bridge Loans had a
stated maturity of December 15, 1998 and had an interest rate equal to the
greater of (i) 10% per annum and (ii) a daily floating rate of prime plus
2.25% plus an additional percentage amount equal to (a) 1.0% from and
including the interest payment date on June 15, 1998 or (b) 1.5% from and
including the interest payment date on September 15, 1998. Merger Corp.
received cash proceeds from the issuance of the Bridge Loans of $119,735,
net of $3,765 of associated debt issuance costs paid to an entity that has
an ownership interest in Acquisition Corp.
On December 15, 1997, Merger Corp. acquired all of the equity interests
of the Predecessor (the "Acquisition") for a total cost of $197,730 which
consisted of $138,634 cash paid for equity interests and direct acquisition
costs, $2,363 in non-cash consideration in the form of an option to
purchase Senior Preferred Stock of Acquisition Corp. used to retire 1,370
options of the Predecessor and the assumption of $56,733 in debt, preferred
stock and related accrued interest and dividends, including a capital lease
obligation. Included in the cost of the acquisition was $19,342 related to
the purchase and retirement of 11,201 options of the Predecessor and $2,022
paid for acquisition expenses to an entity that has an ownership interest
in Acquisition Corp. Merger Corp. then merged with and into the Predecessor
and the combined entity assumed the name AKI, Inc. ("AKI," the "Successor"
or the "Company)". Subsequent to the Acquisition, Acquisition Corp.
contributed $1 of cash and all of its ownership interest in AKI to AKI
Holding Corp. ("Holding").
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION (Continued)
The Acquisition was accounted for using the purchase method of
accounting. In accordance with the consensus reached by the Emerging Issues
Task Force of the Financial Accounting Standards Board in Issue 88-16,
"Basis of Leveraged Buyout Transactions," the purchase price allocation
required an adjustment for the continuing interest attributable to
management's ownership interest in the Predecessor carried over in
connection with the Acquisition. As a result, a reduction in stockholder's
equity of $15,730 was recorded which represents the difference between the
fair value of the 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 and goodwill of
approximately $153,929. Goodwill is being amortized on a straight-line
basis over 40 years.
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.
Acquisition of fragrance sampling business of Minnesota Mining and
Manufacturing Company
On June 22, 1998, the Company acquired the fragrance sampling business
of Minnesota Mining and Manufacturing Company ("3M") for approximately
$7,250 in cash and the assumption of liabilities totaling $182 (the "3M
Acquisition"). The only tangible assets acquired were approximately $143 of
equipment. The acquisition was accounted for using the purchase method of
accounting and result in the recognition of intangible assets, primarily a
non-compete agreement, totaling $7,289 which are being amortized on a
straight-line basis over a period of 10 years.
Refinancing of Bridge Loans
On June 25, 1998, the Company completed a private placement of $115,000
of Senior Notes (the "Notes.") The 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 Notes mature on July 1, 2008. The placement of
the Notes yielded the Company net proceeds of $109,502 after deducting
offering expenses of $5,498, including certain costs that were incurred
subsequent to June 30, 1998. These offering expense also include $3,450 of
underwriting fees paid to an affiliate of the stockholder. The Notes
contain customary covenants including restrictions on the declaration and
payment of dividends and limitations on the incurrence of additional
indebtedness.
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION (Continued)
Contemporaneous with the Notes offering, Holding completed a private
offering of $50,000 of Senior Discount Debentures (the "Debentures"). The
Debentures do not accrue or pay interest until July 1, 2003 and were issued
with an original issuance discount of $24,038. The original issuance
discount is being accreted from issuance through July 1, 2003 at an
effective rate of 13.5% per annum. After July 1, 2003, the Debentures will
accrue interest at a rate of 13.5% per annum, payable semi-annually,
commencing January 1, 2004. The Debentures are general, unsecured
obligations of Holding.
With the proceeds of the Debentures offering, Holding contributed
$22,499 of cash to the Company. No additional shares were issued to Holding
as a result of this contribution. On June 25, 1998, the Company used the
proceeds from the contribution from Holding, together with the proceeds of
the Notes offering, to repay the Bridge Loans, without penalty
(collectively, the "Refinancing"). In conjunction with the Refinancing, the
Company recorded a non-cash interest charge of $1,795 for the unamortized
portion of the debt issuances costs associated with the Bridge Loans.
Interim financial statements
The interim consolidated condensed balance sheet at December 31, 1998,
the interim consolidated condensed statement of operations for the period
from October 1, 1997 through December 15, 1997, the interim consolidated
condensed statement of operations for the period from December 16, 1997
through December 31, 1997, the interim consolidated condensed statements of
operations for the three and six months ended December 31, 1998, the
interim consolidated condensed statement of cash flows for the period from
October 1, 1997 through December 15, 1997, the interim consolidated
condensed statement of cash flows for the period from December 16, 1997
through December 31, 1997, the interim consolidated condensed statement of
cash flows for the six months ended December 31, 1998 and the interim
consolidated condensed statement of changes in stockholder's equity for the
six months ended December 31, 1998 are unaudited, and certain information
and footnote disclosure related thereto, normally included in the financial
statements prepared in accordance with generally accepted accounting
principles, have been omitted. In the opinion of management, the unaudited
interim consolidated condensed financial statements were prepared following
the same policies and procedures used in preparation of the audited
financial statements and all adjustments, consisting only of normal
recurring adjustments to fairly present the financial position, results of
operations and cash flows with respect to the interim consolidated
condensed financial statements, have been included. The results of
operations for the interim periods are not necessarily indicative of the
results for the entire year.
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION (Continued)
The accompanying unaudited interim consolidated condensed financial
statements as of December 31, 1998 and for the three and six months then
ended and for the period from December 16, 1997 through December 31, 1997,
present the financial position and results of operations of the Company on
the basis of accounting described above and, accordingly, are not
comparable with the audited financial statements for the period from July
1, 1997 through December 15, 1997, nor with the unaudited consolidated
condensed financial statements for the period from October 1, 1997 through
December 15, 1997.
Unaudited pro forma results for the Company assuming the Acquisition,
the 3M Acquisition and the Refinancing had occurred as of July 1, 1997 are
presented below:
Unaudited Pro Forma Results for the
_______________________________________________
Three Months Ended Six Months Ended
December 31, 1997 December 31, 1997
_________________ _________________
Net sales $ 18,383 $ 43,099
Income from operations 197 3,558
Interest expense 4,188 8,357
Net loss 2,916 3,897
2. INVENTORY
The following table details the components of inventory:
June 30, 1998 December 31, 1998
_____________ _________________
(unaudited)
Raw materials
Paper $ 556 $ 1,069
Other raw materials 786 2,098
------------ -----------------
Net raw materials 1,342 3,167
Work in process 736 1,571
------------ -----------------
Net inventory $ 2,078 $ 4,738
============= ===============
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
3. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet at June 30, 1998 and December 31,
1998 (unaudited) and condensed statements of operations, changes in
stockholder equity and cash flows for the six months ended December 31,
1998 (unaudited) for Holding have been prepared on the equity basis of
accounting and should be read in conjunction with the consolidated
statements and notes thereto. Comparative statements of operations and cash
flows for the prior year have not been provided as Holding was not
effectively formed until December 15, 1997.
BALANCE SHEET
June 30, 1998 December 31, 1998
_____________ _________________
(unaudited)
Assets
Cash.............................. $ 2,201 $ -
Investment in subsidiaries........ 95,408 $ 94,711
Deferred charges.................. 1,263 1,597
Deferred income taxes............. 19 $ 603
_____________ ________________
Total assets.................. 98,891 96,881
============= ================
Liabilities
Senior Discount Debentures........ $ 26,020 $ 27,776
Stockholder's equity
Common Stock, $0.01 par value, 1,000
shares authorized; 1,000 shares
issued and outstanding......... - -
Additional paid-in capital........ 78,364 78,364
Accumulated deficit............... (5,493) (9,259)
_____________ ________________
Total stockholder's equity.... 72,871 69,105
============= ================
Total liabilities and
stockholder's equity....... $ 98,891 $ 96,881
============= ================
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
3. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
(Continued)
STATEMENT OF OPERATIONS
Six Months
Ended
December 31, 1998
_________________
(unaudited)
Equity in losses of subsidiaries.................... $ (697)
Interest expense.................................... (1,791)
_________________
Loss before income taxes..................... (2,488)
Income tax benefit.................................. (585)
_________________
Net loss..................................... $ (1,903)
=================
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
Dividend to AHC I Acquisition Corp.
(unaudited).............................. - - - (1,863) (1,863)
Net loss (unaudited).......................... - - - (1,903) (1,903)
------ ------ -------- -------- ----------
Balance, December 31, 1998 (unaudited) 1,000 $ - $ 78,364 (9,259) $69,105
====== ====== ======== ======== ==========
</TABLE>
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
3. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
(Continued)
STATEMENT OF CASH FLOWS
Six Months
Ended
December 31, 1998
_________________
(unaudited)
Cash flows from operating activities:
Net loss............................................ $ (1,903)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Net change in investment in subsidiaries......... 697
Amortization of debt discount.................... 1,756
Amortization of debt issuance costs.............. 44
Deferred income taxes............................ (585)
Increase in debt issuance costs.................. (347)
_________________
Net cash used by operating activities............... (338)
_________________
Cash flows from financing activities:
Dividend to AHC I Acquisition Corp. ................ (1,863)
Net decrease in cash and cash equivalents.............. (2,201)
Cash and cash equivalents, beginning of period......... 2,201
_________________
Cash and cash equivalents, end of period............... $ -
=================
4. SUBSEQUENT EVENTS
On February 1, 1999, the former president and chief executive officer
terminated his employment with the Company. Under the terms of his
employment agreement, the Company is required to pay $500 as severance. The
Company will record a charge in this amount during its fiscal third quarter
of 1999.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
As of December 31, 1998, the capital stock of AKI, Inc. (the "Company")
accounts for all of the assets of AKI Holding Corp. ("Holding"). Holding
conducts all of its business through the Company. The sales of the Company are
derived from the sale of sampling products to cosmetics and consumer products
companies. Substantially all of the Company's sales are made directly to its
customers while a small portion are made through advertising agencies. Each
customer's sampling program is unique and pricing is negotiated based on
estimated costs plus a margin. While the Company and its customers generally do
not enter into long-term contracts, the Company has had long-standing
relationships with the majority of its customer base. The introduction of the
Company's new products, such as BeautiSeal, PowdaTouch and LiquaTouch, has
affected the Company's results of operations for certain of the periods
discussed below.
The Acquisition
DLJ Merchant Banking Partners II, L.P. and certain related investors
(collectively, "DLJMBII") and certain members of the Company's management
organized AHC I Acquisition Corp. ("Acquisition Corp.") and AHC I Merger Corp.
("Merger Corp.") for purposes of acquiring Arcade Holding Corporation (the
"Predecessor"). On December 15, 1997, Merger Corp. acquired all of the equity
interests of the Predecessor (the "Acquisition") for $205.7 million (including
related fees, expenses and cash for working capital). Included in the total cost
of the Acquisition were approximately $6.2 million in non-cash costs comprised
of (i) the assumption of a promissory note issued by the Predecessor in
connection with the 1995 acquisition of Scent Seal, Inc. and certain capital
lease obligations and (ii) the exchange of stock options to acquire common stock
in the Predecessor by the Predecessor's chief executive officer for an option to
acquire preferred stock in Acquisition Corp. To provide the $199.5 million of
cash necessary to fund the Acquisition, including the equity purchase price and
the retirement of all previously existing preferred stock and debt of the
Predecessor not assumed, (i) Merger Corp. issued $123.5 million Senior
Increasing Rate Notes (the "Bridge Notes") to Scratch & Sniff Funding, Inc., an
affiliate of DLJMBII and Acquisition Corp. and (ii) Acquisition Corp. received
$76.0 million from debt and equity (common and preferred) financings, including
<PAGE>
equity investments by certain prior stockholders, which was contributed to
Merger Corp. Immediately following the Acquisition, Merger Corp. merged with and
into the Predecessor and the combined entity assumed the name AKI, Inc.
Acquisition Corp. then contributed its $1 of cash and all of its ownership
interest in AKI, Inc. to Holding for 1,000 shares of Holding's common stock.
The Bridge Notes were subsequently repaid on June 25, 1998 from the
proceeds of the Company's issuance of $115.0 million of Senior Notes (the
"Notes") and from a capital contribution (the "Equity Contribution") from
Holding. On June 25, 1998, Holding issued and sold Senior Discount Debentures
(the "Debentures") totaling $50.0 million in aggregate principal amount at
maturity for gross proceeds of $26.0 million, the majority of which were used to
fund a capital contribution to the Company.
The Acquisition was accounted for using the purchase method of
accounting and resulted in the recognition of $153.9 million of goodwill and a
significant increase in amortization expense.
Results of Operations
The discussion of results of operations for the three months ended
December 31, 1998 compared to the three months ended December 31, 1997 compares
the results of operations of Holding for the three months ended December 31,
1998 with the combination of the results of operations of the Predecessor for
the period October 1, 1997 through December 15, 1997, the date of Acquisition,
with the results of operations of Holding for the period December 16, 1997 to
December 31, 1997. For purposes of the following discussion, the results of
operations for the six months ended December 31, 1997 reflect the combination of
the results of operations of the Predecessor for the period July 1, 1997 through
December 15, 1997, the date of the Acquisition, with the results of operations
of Holding for the period December 16, 1997 through December 31, 1997. Because
of the effects of purchase accounting applied in the Acquisition and the
additional interest expense associated with the debt incurred to finance the
Acquisition, the results of operations of Holding are not comparable in all
respects to the results of operations of the Predecessor.
<PAGE>
Three Months Ended December 31, 1998 Compared to Three Months Ended December 31,
1997
Net Sales. Net sales for the three months ended December 31, 1998,
increased $4.4 million , or 27.5%, to $20.4 million as compared to $16.0 million
for the three months ended December 31, 1997. The increases were primarily
attributable to the $2.9 million growth of the Company's European revenues and
the addition of business in connection with the 3M Acquisition (as defined).
Other increases were attributable to increases in domestic sales of cosmetic
sampling products and sales of consumer product samples, partially offset by
decreases in certain fragrance industry sampling.
Gross Profit. Gross profit for the three months ended December 31,
1998, increased $1.9 million, or 38.8%, to $6.8 million as compared to $4.9
million for three months ended December 31, 1997. Gross profit as a percentage
of net sales increased to 33.3% in the three months ended December 31, 1998,
from 30.6% in the three months ended December 31, 1997. The increase in gross
profit and gross profit as a percentage of net sales is primarily attributable
to the increase in net sales discussed above and reductions in raw materials
costs, offset by a decrease in certain fragrance samples volume and pricing and
increased costs associated with the outsourcing of European production.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended December 31, 1998, increased
$0.4 million, or 13.8% to $3.3 million as compared to $2.9 million for the three
months ended December 31, 1997. The increase in selling, general and
administrative expenses was primarily due to changes in executive compensation
following the Acquisition and increased sales commissions related to the
increase in net sales 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 decreased to 16.2% in the
three months ended December 31, 1998 from 18.1% in the three months ended
December 31, 1997.
Income from Operations. Income from operations for the three months
ended December 31, 1998 increased $0.7 million, or 43.8%, to $2.3 million as
<PAGE>
compared to $1.6 million for the three months ended December 31, 1997. Income
from operations as a percentage of net sales increased to 11.3% in the three
months ended December 31, 1998, from 10.0% in the three months ended December
31, 1997, principally as a result of the factors described above, offset by the
increase in amortization of goodwill and other intangibles resulting from the
Acquisition and the 3M Acquisition.
Interest Expense. Interest expense for the three months ended December
31, 1998, increased $2.1 million, or 105.0% to $4.1 million, as compared to $2.0
million for the three months ended December 31, 1997. Interest expense as a
percentage of net sales increased to 20.1% in the three months ended December
31, 1998 from 12.5% in the three months ended December 31, 1997. The increase in
interest expense is a result of the capitalization of Holding and the
recapitalization of the Company in connection with the Acquisition.
Management Fees and Other, Net. Management fees and other, net for the
three months ended December 31, 1998, were approximately $63,000, substantially
unchanged from the three months ended December 31, 1997.
Income Tax Benefit. The income tax benefit for the three months ended
December 31, 1998 increased $0.3 million to $0.3 million as compared to $0.0
million for the three months ended December 31, 1997 due to the increase in the
loss before taxes, partially offset by an increase in non-deductible goodwill
amortization. Holding's effective tax rate, after consideration of
non-deductible goodwill was 32.8% in the three months ended December 31, 1998,
and 45.0% in the three months ended December 31, 1997. The decrease in the
effective tax rate is due to the portion of the interest expense on the
Debentures which is non-deductible for income tax purposes.
EBITDA. EBITDA for the three months ended December 31, 1998, increased
$1.5 million, or 50.0%, to $4.5 million as compared to $3.0 million for the
three months ended December 31, 1997, principally as a result of the factors
described above. EBITDA is income from operations plus depreciation and
amortization of goodwill and other intangibles.
<PAGE>
Six Months Ended December 31, 1998 Compared to Six Months Ended December 31,1997
Net Sales. Net sales for the six months ended December 31, 1998,
increased $6.5 million, or 17.1%, to $44.5 million as compared to $38.0 million
for the six months ended December 31, 1997. The increases were primarily
attributable to the $4.3 million growth of the Company's European revenues and
the addition of business in connection with the 3M Acquisition. Other increases
were attributable to increases in domestic sales of cosmetic sampling products,
partially offset by decreases in certain fragrance industry sampling.
Gross Profit. Gross profit for the six months ended December 31, 1998,
increased $2.2 million, or 16.7%, to $15.4 million as compared to $13.2 million
for the six months ended December 31, 1997. Gross profit as a percentage of net
sales decreased to 34.6% in the six months ended December 31, 1998, from 34.7%
in the six months ended December 31, 1997. The increase in gross profit is
primarily attributable to the increase in net sales discussed above. The
decrease in gross profit as a percentage of net sales is due to a decrease in
certain fragrance samples volume and 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, offset by reductions in raw materials costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended December 31, 1998, increased
$0.2 million, or 3.2% to $6.4 million as compared to $6.2 million for the six
months ended December 31, 1997. The increase in selling, general and
administrative expenses was primarily due to changes in executive compensation
following the Acquisition and costs associated with the transition of the 3M
Acquisition offset partially be reduced advertising expenditures, staff
reductions and realized gains from foreign currency transactions in Europe. As a
result of these factors, selling, general and administrative expenses as a
percent of net sales decreased to 14.4% in the six months ended December 31,
1998 from 16.3% in the six months ended December 31, 1997.
Income from Operations. Income from operations for the six months ended
December 31, 1998, increased $0.4 million, or 6.3%, to $6.7 million as compared
<PAGE>
to $6.3 million for the six months ended December 31, 1997. Income from
operations as a percentage of net sales decreased to 15.1% in the six months
ended December 31, 1998, from 16.6% in the six months ended December 31, 1997,
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 six months ended December
31, 1998, increased $4.8 million, or 141.2% to $8.2 million as compared to $3.4
million for the six months ended December 31, 1997. Interest expense as a
percentage of net sales increased to 18.4% in the six months ended December 31,
1998 from 8.9% in the six months ended December 31, 1997. The increase in
interest expense is a result of the recapitalization of the Company in
connection with the Acquisition.
Management Fees and Other, Net. Management fees and other, net for the
six months ended December 31, 1998, were $0.1 million as compared to $0.2
million for the six months ended December 31, 1997. Management fees and other,
net as a percentage of net sales were relatively constant in the six months
ended December 31, 1998 and 1997.
Income Tax Expense. Income tax expense for the six months ended
December 31, 1998, decreased $1.1 million or 84.6% to $0.2 million as compared
to $1.3 million for the six months ended December 31, 1997 due to the decrease
in income before income taxes, partially offset by an increase in non-deductible
goodwill amortization. Holding's effective tax rate, after consideration of
non-deductible goodwill amortization, was 89.7% in the six months ended December
31, 1998, and 37.9% in the six months ended December 31, 1997. The increase in
the effective tax rate is due to the portion of the interest expense on the
Debentures which is non-deductible for income tax purposes.
EBITDA. EBITDA for the six months ended December 31, 1998, increased
$1.9 million, or 20.9%, to $11.0 million as compared to $9.1 million for the six
months ended December 31, 1997, principally as a result of the factors described
above. EBITDA is income form operations plus depreciation and amortization of
goodwill and other intangibles.
<PAGE>
Liquidity and Capital Resources
At December 31, 1998, Holding's cash and cash equivalents and net
working capital were $7.2 million and $13.9 million, respectively, representing
an increase in cash and cash equivalents of $5.5 million and an increase in net
working capital of $1.1 million from June 30, 1998. Account receivables, net, at
December 31, 1998 increased 29.3% or $4.0 million over the June 30, 1998 amount,
primarily due to increased sales.
As of December 31, 1998, Holding had consolidated indebtedness,
including accrued interest, in an aggregate amount of $151.4 million, consisting
primarily of Holding's $27.8 million (net of unamortized original issue discount
of $22.2 million) of 13 1/2% Senior Discount Debentures and the Company's $115.0
million principal amount of 10 1/2% Senior Notes due 2008. At December 31, 1998,
the Company's revolving credit facility (the "Credit Agreement") provided for
additional borrowings of approximately $19.4 million, subject to a borrowing
base calculation and the achievement of certain financial ratios and compliance
with certain conditions.
Holding's cash flow, and consequently its ability to service debt,
including its obligations under the Debentures, is dependent upon the cash flows
of the Company and the payment of funds by the Company to Holding in the form of
loans, dividends or otherwise. The Company has no obligations, contingent or
otherwise, to pay any amounts due pursuant to the Debentures or to make any
funds available therefor.
Capital expenditures for the twelve months ending December 31, 1999 are
expected to be approximately $3.0 million. Based on borrowings outstanding as of
December 31, 1998, the Company expects total cash payments for debt service for
the twelve months ending December 31, 1999 to be approximately $14.1 million,
consisting of $12.1 million in interest payments on the Notes, $0.9 million in
capital lease payments, and $0.1 million in fees under the Credit Agreement. The
Company also expects to make royalty payments of approximately $1.0 million
during the twelve months ending December 31, 1999. The Company believes its
liquidity, capital resources and cash flows from existing operations will be
<PAGE>
sufficient to fund budgeted capital expenditures, working capital requirements
and interest payments on its indebtedness, including the Notes, for the twelve
months ending December 31, 1999.
The Company may from time to time evaluate potential acquisitions. The
Company expects that funding for future acquisitions may come from a variety of
sources, depending on the size and nature of any such acquisition. Potential
sources of capital include cash generated from operations, borrowings under the
Credit Agreement, additional equity investments or other external debt or equity
financings, subject to compliance with the terms of the Notes and Debentures.
There can be no assurance that such additional capital sources will be available
to the Company on terms that the Company finds acceptable, or at all.
3M Acquistion
On June 22, 1998, the Company acquired the fragrance sampling business
of the Industrial and Consumer Products division of Minnesota Mining and
Manufacturing Company ("3M") for $7.25 million in cash and assumption of a
liability of $182,000 to one of the customers of the business (the "3M
Acquisition"). 3M's fragrance sampling business was predominantly a sales and
distribution business as it outsourced the manufacturing of the products it
sold. The company did not assume such outsourcing arrangements and relocated
such operations to its existing facilities in Chattanooga to utilize the then
excess manufacturing capacity at such facilities. Except for several sales and
technical employees, the Company did not extend employment to any employees from
3M.
Cost Reduction Program
The Company has implemented a comprehensive program designed to reduce
annual operating costs. The comprehensive cost reduction program was developed
by the Company in connection with an evaluation of its operations conducted by
manufacturing consultants with significant experience in the printing industry
and is designed to improve the Company's operating efficiency through (i)
reduced materials cost derived from scrap/waste reduction and from more
effective purchasing (savings of approximately $1.2 million annually), (ii)
streamlined manufacturing processes that reduce the amount of time required to
<PAGE>
prepare for successive production runs utilizing the same equipment and that
reduce the amount of time equipment is under utilized by improved scheduling of
production runs (savings of approximately $2.2 million annually), and (iii)
rationalized staffing in the product support area (savings of approximately $0.6
million annually). Management expects the benefit of the materials cost
reductions and rationalized staffing which were implemented in July 1998 will be
realized in Fiscal 1999, while the streamlined manufacturing process is not
expected to be implemented and realized until the fiscal year ended June 30,
2000. Approximately fifty percent of the estimated annual savings for reduced
materials costs (partially as the result of reduced paper pricing) and reduced
staffing levels have been realized as of December 31, 1998. The amount of
operational savings ultimately realized may be affected by changes in product
mix that may take place.
Seasonality
The Company's sales are seasonal due to the timing of its customers'
major advertising campaigns, which have traditionally been concentrated prior to
the Christmas and spring holiday seasons. Sales are recognized when products are
shipped. As a result, a higher level of sales are reflected in the Company's
first two fiscal quarters ended December 31 when sales from such advertising
campaigns are principally recognized while the Company's fourth fiscal quarter
ended June 30 typically reflects the lowest sales level of the fiscal year.
Sales seasonality may be affected from time to time as the Company's new product
technologies are introduced and gain acceptance by its customers.
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities" which is effective for fiscal years beginning after June 15,
1999. SFAS No. 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Company has only utilized derivative
financial instruments to hedge the Company's exposure to certain foreign
currencies. Such hedging activity has historically been minor and, as a result,
adoption of this Statement is not expected to have a material impact on the
Company's financial condition or results of operations. The Company will adopt
the provisions of this Statement on July 1, 1999.
<PAGE>
Year 2000 Issues
The Company is currently working to resolve the potential impact of the
Year 2000 on its information technology systems and its non-information
technology systems so they will properly recognize and utilize dates beyond
December 31, 1999.
The Company has in place a Year 2000 program which is being executed by
an internal project team. The objective of the Year 2000 program is to determine
and assess the risks of the Year 2000 issue and to plan and institute mitigating
actions to minimize those risks to acceptable levels. To date, all of the
Company's systems have been assessed for Year 2000 compliance. The Company
relies on five computerized systems all of which required remediation, two of
which are maintained internally and the others are maintained by third party
vendors. The Company believes that all of these systems are currently Year 2000
compliant. Upon review of the Company's non-information technology systems the
Company believes that none of its manufacturing equipment is date sensitive. Of
the remaining non-information technology systems, the Company believes all such
systems are Year 2000 compliant. If, however, all necessary actions are not
taken on a timely basis to ensure Year 2000 compliance, the Year 2000 issue
could have a material adverse effect on the Company.
To date, the Company has spent $11,000 on Year 2000 compliance and
expects additional expenditures of approximately $40,000 during Fiscal 1999.
Although the Company expects the above referenced expenditures will be
sufficient to ensure the Company is Year 2000 compliant, the Company anticipates
budgeting an additional $49,000 for any unforeseen problems arising with respect
to Year 2000 compliance between July 1, 1999 and the Year 2000. All expenditures
with respect to Year 2000 compliance will be funded from working capital.
The Company is communicating with its significant customers and vendors
to understand their Year 2000 issues and how they might prepare themselves to
manage those issues as they relate to the Company. To date, no significant
customers or vendors have informed the Company that a material Year 2000 issue
exists which will have a material effect on the Company.
<PAGE>
The Company has not formulated a contingency plan in the event it or
its significant customers or vendors are not Year 2000 compliant.
Subsequent Event
On February 1, 1999, Roger Barnett terminated his employment as
president and chief executive officer and the Company engaged William J. Fox as
chairman of the board of directors, president and chief executive officer.
Forward-Looking Statements
The information provided herein contains forward-looking statements
that involve a number of risks and uncertainties. A number of factors could
cause actual results, performance, achievements of the Company or industry
results to be materially difference from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, but are not limited to: the competitive environment in the
sampling industry in general and in the Company's specific market areas; changes
in prevailing interest rates; inflation; changes in cost of goods and services;
economic conditions in general and in the Company's specific market areas;
changes in or failure to comply with postal regulations or other federal, state
and/or local government regulations; liability and other claims asserted against
the Company; changes in operating strategy or development plans; the ability of
the Company to effectively implement its cost reduction program; the ability to
attract and retain qualified personnel; the significant indebtedness of the
Company; labor disturbances; changes in the Company's capital expenditure plans;
and other factors. In addition, such forward-looking statements are necessarily
dependent upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risk, uncertainties and other factors.
Accordingly, any forward-looking statements included herein do not purport to be
predictions of future events or circumstances and may not be realized.
Forward-looking statements can be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "may," "should,"
"seeks," "pro forma," "anticipates," "intends" or the negative of any thereof,
or other variations thereon or comparable terminology, or by discussions of
strategy or intentions. Given these uncertainties, readers are cautioned not
<PAGE>
place undue reliance on such forward-looking statements. The Company disclaims
any obligations to update any such factors or to publicly announce the results
of any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
27.2 Financial Data Schedule
(a) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AKI HOLDING CORP.
By: /s/ Kenneth A. Budde
_______________________
Kenneth A. Budde
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AKI HOLDING CORP. FOR THE THREE AND SIX MONTHS ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-START> OCT-01-1998 JUL-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 7,151 7,151
<SECURITIES> 0 0
<RECEIVABLES> 17,855 17,855
<ALLOWANCES> 298 298
<INVENTORY> 4,738 4,738
<CURRENT-ASSETS> 30,418 30,418
<PP&E> 23,014 23,014
<DEPRECIATION> 3,931 3,931
<TOTAL-ASSETS> 217,646 217,646
<CURRENT-LIABILITIES> 16,492 16,492
<BONDS> 144,478 144,478
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 53,434 53,434
<TOTAL-LIABILITY-AND-EQUITY> 217,646 217,646
<SALES> 20,437 44,461
<TOTAL-REVENUES> 20,437 44,461
<CGS> 13,660 29,081
<TOTAL-COSTS> 13,660 29,081
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 20 20
<INTEREST-EXPENSE> 4,149 8,245
<INCOME-PRETAX> (1,880) (1,702)
<INCOME-TAX> (301) 201
<INCOME-CONTINUING> (1,579) (1,903)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,579) (1,903)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AKI HOLDING CORP. (OR ITS PREDECESSOR) FOR THE THREE AND
SIX MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> OCT-01-1997 JUL-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 2,277 2,277
<SECURITIES> 0 0
<RECEIVABLES> 9,790 9,790
<ALLOWANCES> 377 377
<INVENTORY> 2,439 2,439
<CURRENT-ASSETS> 21,043 21,043
<PP&E> 20,198 20,198
<DEPRECIATION> 147 147
<TOTAL-ASSETS> 201,364 201,364
<CURRENT-LIABILITIES> 132,997 132,997
<BONDS> 1,780 1,780
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 62,171 62,171
<TOTAL-LIABILITY-AND-EQUITY> 201,364 201,364
<SALES> 16,049 37,977
<TOTAL-REVENUES> 16,049 37,977
<CGS> 11,165 24,787
<TOTAL-COSTS> 11,165 24,787
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,954 3,405
<INCOME-PRETAX> (455) 2,628
<INCOME-TAX> (9) 1,278
<INCOME-CONTINUING> (446) 1,350
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (446) 1,350
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
