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 31,1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File Number: 333-60991
AKI HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 74-2883163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Commission File Number: 333-60989
AKI, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3785856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1815 East Main Street
Chattanooga, TN 37404
(Address of principal executive offices) (Zip Code)
(423) 624-3301
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days (X) Yes ( ) No
As of February 11, 2000, 1,000 shares of common stock of AKI Holding Corp., $.01
par value, were outstanding and 1,000 shares of common stock of AKI, Inc., $.01
par value, were outstanding.
AKI Inc. meets the requirements set forth in General Instruction H(1)(a) and (b)
of Form 10-Q and is therefore filing this form with reduced disclosure format.
AKI HOLDING CORP. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
AKI Holding Corp. and Subsidiaries
Consolidated Condensed Balance Sheet
- December 31, 1999 (unaudited)
- June 30, 1999
Consolidated Condensed Statements of Operations
- Three months ended December 31, 1999 (unaudited)
- Three months ended December 31, 1998 (unaudited)
- Six months ended December 31, 1999 (unaudited)
- Six months ended December 31, 1998 (unaudited)
Consolidated Condensed Statement of Changes in Stockholder's
Equity
- Six months ended December 31, 1999 (unaudited)
Consolidated Condensed Statements of Cash Flows
- Six months ended December 31, 1999 (unaudited)
- Six months ended December 31, 1998 (unaudited)
Notes to Consolidated Condensed Financial Statements
Item 1. Financial Statements (continued)
AKI, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet
- December 31, 1999 (unaudited)
- June 30, 1999
Consolidated Condensed Statements of Operations
- Three months ended December 31, 1999 (unaudited)
- Three months ended December 31, 1998 (unaudited)
- Six months ended December 31, 1999 (unaudited)
- Six months ended December, 1998 (unaudited)
Consolidated Condensed Statement of Changes in Stockholder's
Equity
- Six months ended December 31, 1999 (unaudited)
Consolidated Condensed Statements of Cash Flows
- Six months ended December 31, 1999 (unaudited)
- Six months ended December 31, 1998 (unaudited)
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share information)
December 31, June 30,
1999 1999
--------- ---------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents .......................... $ 555 $ 7,015
Accounts receivable, net ........................... 17,779 16,287
Inventory .......................................... 5,350 5,109
Prepaid expenses ................................... 361 484
Deferred income taxes .............................. 400 400
--------- ---------
Total current assets ............................ 24,445 29,295
Property, plant and equipment, net ................. 17,647 18,511
Goodwill, net ...................................... 163,964 147,990
Other intangible assets, net ....................... 6,195 6,560
Deferred charges, net .............................. 7,136 6,839
Deferred income taxes and other assets 2,455 4,384
--------- ---------
Total assets .................................... $ 221,842 $ 213,579
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations ....... $ 1,186 $ 688
Accounts payable, trade ............................ 2,498 3,400
Accrued income taxes ............................... 162 497
Accrued interest ................................... 6,023 6,047
Accrued expenses ................................... 5,846 3,810
--------- ---------
Total current liabilities ....................... 15,715 14,442
Long-term portion of capital lease obligations ..... 515 1,349
Revolving credit line .............................. 6,100 --
Senior notes ....................................... 110,510 115,000
Senior discount debentures ......................... 26,113 29,651
Deferred income taxes and other
non-current liabilities ...................... 4,423 3,340
--------- ---------
Total liabilities ............................... 163,376 163,782
Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
1,000 shares issued and outstanding ............ -- --
Additional paid-in capital ......................... 86,435 78,364
Accumulated deficit ................................ (11,855) (12,472)
Accumulated other comprehensive loss ............... (384) (365)
Carryover basis adjustment ......................... (15,730) (15,730)
--------- ---------
Total stockholder's equity ...................... 58,466 49,797
--------- ---------
Total liabilities and stockholder's equity ...... $ 221,842 $ 213,579
========= =========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
Three months ended Six months ended
------------------------------------- -------------------------------------
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net Sales .......................................... $ 20,508 $ 20,437 $ 48,887 $ 44,461
Cost of goods sold ................................. 13,288 13,660 29,080 29,081
-------- -------- -------- --------
Gross profit ................................... 7,220 6,777 19,807 15,380
Selling, general and
administrative expenses ........................ 4,497 3,294 8,655 6,409
Amortization of goodwill and
other intangibles .............................. 1,391 1,152 2,555 2,303
Gain from settlement of
litigation, net ................................ (870) -- (870) --
-------- -------- -------- --------
Income from operations ......................... 2,202 2,331 9,467 6,668
Other expenses:
Interest expense, net .......................... 4,295 4,149 8,667 8,245
Management fees and
other, net ................................. 62 62 125 125
-------- -------- -------- --------
Income (loss) before income
taxes and extraordinary gain ................... (2,155) (1,880) 675 (1,702)
Income tax expense (benefit) ....................... (645) (301) 904 201
-------- -------- -------- --------
Loss before extraordinary gain ..................... (1,510) (1,579) (229) (1,903)
Extraordinary gain from early
retirement of debt, net of tax ................. 846 -- 846 --
-------- -------- -------- --------
Net income (loss) .............................. $ (664) $ (1,579) $ 617 $ (1,903)
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(dollars in thousands, except share information)
Accumulated
Common Stock Additional Other Carryover
---------------- Paid-in Accumulated Comprehensive Basis
Shares Dollars Capital Deficit Loss Adjustment Total
------- --------- --------- -------- -------- ---------- -------
Balances, June 30, 1999................... 1,000 $ -- $ 78,364 $ (12,472) $ (365) $(15,730) $49,797
Equity contribution by AHC I
Acquisition Corp. (unaudited).......... 8,071 8,071
Net income (unaudited)................... 617 617
Other comprehensive income, net of
tax:
Foreign currency translation
adjustment (unaudited)........... (19) (19)
-------
Comprehensive income (unaudited).......... 598
------- -------- --------- --------- -------- -------- -------
Balances, December 31, 1999 (unaudited) .. 1,000 $ -- $ 86,435 $ (11,855) $ (384) $(15,730) $58,466
======= ======== ========= ========= ======== ======== =======
The accompanying notes are an integral part of these
consolidated condensed financial statements.
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly-owned subsidiary of AHC I Acquisition Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Six months ended
------------------------------------
December 31, 1999 December 31, 1998
----------------- -----------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss) ................................. $ 617 $ (1,903)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization of goodwill
and other intangibles ..................... 4,734 4,374
Amortization of debt discount ................. 1,876 1,756
Amortization of debt issuance costs ........... 401 329
Deferred income taxes ......................... 1,192 (918)
Gain from early retirement of debt ............ (846) --
Other ......................................... (19) 116
Changes in operating assets and liabilities:
Accounts receivable ....................... 1,167 (3,980)
Inventory ................................. (90) (2,660)
Prepaid expenses, deferred charges
and other assets ........................ 213 (773)
Income taxes .............................. (32) 6,182
Accounts payable and accrued expenses ..... (4,150) 5,937
-------- --------
Net cash provided by
operating activities .................. 5,063 8,460
-------- --------
Cash flows from investing activities
Purchases of equipment ............................ (1,125) (1,657)
Payments for acquisitions, net of cash
acquired ...................................... (16,162) --
-------- --------
Net cash used in investing activities ..... (17,287) (1,657)
-------- --------
Cash flows from financing activities
Payments under capital leases for equipment ....... (336) (301)
Net proceeds on line of credit .................... 6,100 --
Repayment of other notes payable .............. -- (1,330)
Dividend paid to AHCI Acquisition Corp. ....... -- (1,863)
-------- --------
Net cash provided by (used in) financing
activities .................................. 5,764 (3,494)
-------- --------
Net increase (decrease) in cash and cash equivalents .. (6,460) 3,309
Cash and cash equivalents, beginning of period ........ 7,015 3,842
-------- --------
Cash and cash equivalents, end of period .............. $ 555 $ 7,151
======== ========
Supplemental information
Cash paid (received) during the period for:
Interest, other ............................... $ 6,177 $ 89
Income taxes .................................. 47 (5,062)
Significant non-cash activities
Assets acquired under capital lease ........... -- $ 561
Contribution of equity and retirement of
senior discount debentures and senior notes $ 8,071 --
The accompanying notes are an integral part of these
consolidated condensed financial statements.
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION
Arcade Holding Corp. (the "Predecessor") was organized for the purpose
of acquiring all the issued and outstanding capital stock of Arcade, Inc.
("Arcade") on November 4, 1993. Arcade is engaged in interactive
advertising for consumer products companies and has a specialty in the
design, production and distribution of sampling systems from its
Chattanooga, Tennessee facilities, and distributes its products in Europe
through its French subsidiary, Arcade Europe S.A.R.L. DLJ Merchant Banking
Partners II, L.P. and certain related investors (collectively, "DLJMBII")
and certain members of the Predecessor organized AHC I Acquisition Corp.
("Acquisition Corp.") and AHC I Merger Corp. ("Merger Corp.") for purposes
of acquiring the Predecessor. On December 15, 1997, Merger Corp. acquired
all of the equity interests of the Predecessor and then merged with and
into the Predecessor and the combined entity assumed the name of AKI, Inc.
and Subsidiaries ("AKI"). Subsequent to the acquisition, Acquisition Corp.
contributed $1 and all of its ownership interest in AKI to AKI Holding
Corp. ("Holding") for all of the outstanding equity of Holding.
Acquisition of Retcom Holdings Ltd.
On September 15, 1999, AKI acquired all of the equity interests in
Retcom Holdings Ltd. and its subsidiaries ("RHL") for a total cost of
approximately $12 million and refinanced RHL's working capital indebtedness
of approximately $5 million. RHL businesses include a portfolio of sampling
systems catering to the fragrance, cosmetics and personal care industries,
as well as microencapsulation activities. The sampling systems and related
microencapsulation services and activities have been integrated into
Arcade's sampling technology group (named Arcade Sampling Technologies,
AST) and the microencapsulated products have been combined with Arcade's
product technology unit (named Arcade Product Technologies, APT) . RHL also
has a creative services division (renamed Arcade Direct, AD) that handles
marketing communications, catalogs and database marketing and a multi-media
division (renamed Arcade Consumer Communications, ACC) for merchandising at
point-of-sale. The purchase price and refinancing of indebtedness were
financed by borrowings under the credit agreement. The purchase was
accounted for under the purchase method of accounting. Results of
operations for the six months ended December 31, 1999 include the results
of RHL for the period from September 15, 1999 to December 31, 1999. The
purchase price allocation is not finalized at this time. Management has not
determined what impact, if any, that there would be on earnings.
Interim financial statements
The interim consolidated condensed balance sheet at December 31, 1999
and the interim consolidated condensed statements of operations for the
three and six months ended December 31, 1999 and 1998, the interim
consolidated condensed statements of cash flows for the six months ended
December 31, 1999 and 1998 and the interim consolidated condensed statement
of changes in stockholder's equity for the six months ended December 31,
1999 are unaudited, and certain information and footnote disclosure related
thereto, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, the unaudited interim consolidated
condensed financial statements were prepared following the same policies
and procedures used in preparation of the audited financial statements and
all adjustments, consisting only of normal recurring adjustments to fairly
present the financial position, results of operations and cash flows with
respect to the interim consolidated condensed financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
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)
2. INVENTORY
The following table details the components of inventory:
December 31, 1999 June 30, 1999
----------------- -------------
(unaudited)
Raw materials
Paper .................. $2,200 $1,088
Other raw materials .... 1,813 2,328
------ ------
Net raw materials .......... 4,013 3,416
Work in process ............ 1,337 1,693
------ ------
Net inventory .............. $5,350 $5,109
====== ======
3. RETIREMENT OF DEBT
Acquisition Corp. purchased $8,750 of Holding Corp. Senior Discount
Debentures and $4,490 of AKI, Inc. Senior Notes for $4,075 and $3,996,
respectively. The debentures and notes were contributed to Holding Corp.
and subsequently retired.
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
4. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets at December 31, 1999 (unaudited) and
June 30, 1999 and condensed statements of operations, changes in
stockholder's equity and cash flows for the six months ended December 31,
1999 (unaudited) and 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.
BALANCE SHEETS
December 31, 1999 June 30, 1999
----------------- -------------
(unaudited)
Assets
Cash .................................................. $ -- $ --
Investment in subsidiaries ............................ 98,069 92,817
Deferred charges ...................................... 1,212 1,520
Deferred income taxes ................................. 1,412 1,206
--------- ---------
Total assets ...................................... $ 100,693 $ 95,543
========= =========
Liabilities
Senior discount debentures ............................ $ 26,113 $ 29,651
Stockholder's equity
Common Stock, $0.01 par value, 1,000 shares authorized;
1,000 shares issued and outstanding ............... -- --
Additional paid-in capital ............................ 86,435 78,364
Accumulated deficit ................................... (11,855) (12,472)
--------- ---------
Total stockholder's equity ........................ 74,580 65,892
--------- ---------
Total liabilities and stockholder's equity ........ $ 100,693 $ 95,543
========= =========
STATEMENTS OF OPERATIONS
Six months ended
-----------------------------------
December 31, 1999 December 31, 1998
----------------- -----------------
(unaudited) (unaudited)
Equity in net income (loss) of subsidiaries ....... $ 1,256 $ (697)
Interest expense .................................. 1,926 1,791
------- -------
Loss before income taxes and extraordinary gain (670) (2,488)
Income tax benefit ................................ (628) (585)
------- -------
Loss before extraordinary gain ................ (42) (1,903)
Extraordinary gain from early retirement of debt .. 659 --
------- -------
Net income (loss) ............................. $ 617 $(1,903)
======= =======
AKI HOLDING CORP. AND SUBSIDIARIES
(a wholly owned subsidiary of AHC I Acquisition Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
4. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
Common Stock Additional
--------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
-------- -------- -------- -------- --------
Balances, June 30, 1999 .............. 1,000 $ -- $ 78,364 $(12,472) $ 65,892
Equity contribution by AHC I
Acquisition Corp. ................ 8,071 8,071
Net income (unaudited) ............... 617 617
-------- -------- -------- -------- --------
Balance, December 31, 1999 (unaudited) 1,000 $ -- $ 86,435 $(11,855) $ 74,580
======== ======== ======== ======== ========
STATEMENT OF CASH FLOWS
Six months ended
-----------------------------------------
December 31, 1999 December 31, 1998
----------------- -----------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss) ............................. $ 617 $(1,903)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Net change in investment in subsidiaries .. (1,256) 697
Amortization of debt discount ............. 1,876 1,756
Amortization of debt issuance costs ....... 50 44
Deferred income taxes ..................... (628) (585)
Gain from early retirement of debt ........ (659) --
Increase in debt issuance costs ........... -- (347)
------- -------
Net cash used by operating activities . -- (338)
------- -------
Cash flows from financing activities
Dividend to AHC I Acquisition Corp. ........... -- (1,863)
------- -------
Net decrease in cash and cash equivalents ....... -- (2,201)
Cash and cash equivalents, beginning of period .. -- 2,201
------- -------
Cash and cash equivalents, end of period ........ $ -- $ --
======= =======
Significant non-cash activities
Contribution of equity and retirement
of senior discount debentures and senior notes $ 8,071 --
Investment in subsidiaries $(3,996) --
AKI, INC., AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share information)
December 31, June 30,
1999 1999
--------- ---------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents ........................ $ 555 $ 7,015
Accounts receivable, net ......................... 17,779 16,287
Inventory ........................................ 5,350 5,109
Prepaid expenses ................................. 361 484
Deferred income taxes ............................ 400 400
--------- ---------
Total current assets .......................... 24,445 29,295
Property, plant and equipment, net ............... 17,647 18,511
Goodwill, net .................................... 163,964 147,990
Other intangible assets, net ..................... 6,195 6,560
Deferred charges, net ............................ 5,924 5,319
Deferred income taxes and other assets 1,043 3,178
--------- ---------
Total assets .................................. $ 219,218 $ 210,853
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations ..... $ 1,186 $ 688
Accounts payable, trade .......................... 2,498 3,400
Accrued income taxes ............................. 162 497
Accrued interest ................................. 6,023 6,047
Accrued expenses ................................. 5,866 3,810
--------- ---------
Total current liabilities ..................... 15,715 14,442
Long-term portion of capital lease obligations ... 515 1,349
Revolving credit line ............................ 6,100 --
Senior notes ..................................... 110,510 115,000
Deferred income taxes and other
non-current liabilities........................ 4,423 3,340
--------- ---------
Total liabilities ............................. 137,263 134,131
Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
1,000 shares issued and outstanding ........... -- --
Additional paid-in capital ....................... 104,858 100,862
Accumulated deficit .............................. (6,789) (8,045)
Accumulated other comprehensive loss ............. (384) (365)
Carryover basis adjustment ....................... (15,730) (15,730)
--------- ---------
Total stockholder's equity .................... 81,955 76,722
--------- ---------
Total liabilities and stockholder's equity .... $ 219,218 $ 210,853
========= =========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
AKI, INC., AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
Three months ended Six months ended
------------------------------------- -------------------------------------
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales .......................................... $ 20,508 $ 20,437 $ 48,887 $ 44,461
Cost of goods sold ................................. 13,288 13,660 29,080 29,081
-------- -------- -------- --------
Gross profit ................................... 7,220 6,777 19,807 15,380
Selling, general and
administrative expenses ........................ 4,497 3,294 8,655 6,409
Amortization of goodwill and
other intangibles .............................. 1,391 1,152 2,555 2,303
Gain from settlement of
litigation, net ................................ (870) -- (870) --
-------- -------- -------- --------
Income from operations ......................... 2,202 2,331 9,467 6,668
Other expenses:
Interest expense to others, net ................ 3,393 3,244 6,741 6,454
Management fees and
other, net ................................. 62 62 125 125
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary gain ............................. (1,253) (975) 2,601 89
Income tax expense (benefit) ....................... (353) (5) 1,532 786
-------- -------- -------- --------
Income (loss) before
extraordinary ...................................... (900) (970) 1,069 (697)
gain
Extraordinary gain from early
retirement of debt, net of tax ................. 187 -- 187 --
-------- -------- -------- --------
Net income (loss) .............................. $ (713) $ (970) $ 1,256 $ (697)
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
AKI, INC., AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(dollars in thousands, except share information)
Accumulated
Common Stock Additional Other Carryover
-------------------- Paid-in Accumulated Comprehensive Basis
Shares Dollars Capital Deficit Loss Adjustment Total
-------- -------- -------- -------- -------- -------- --------
Balances, June 30, 1999 .................... 1,000 $ -- $100,862 $ (8,045) $ (365) $(15,730) $ 76,722
Equity contribution by AKI Holding
Corp. (unaudited) ..................... 3,996 3,996
Net income (unaudited) ..................... 1,256 1,256
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited) .............. (19) (19)
--------
Comprehensive income (unaudited) ........... 1,237
-------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1999 (unaudited) .... 1,000 $ -- $104,858 $ (6,789) $ (384) $(15,730) $ 81,955
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
AKI, INC., AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Six months ended
-----------------------------------
December 31, 1999 December 31, 1998
----------------- -----------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss) .............................. 1,256 (697)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of goodwill
and other intangibles .................. 4,734 4,374
Amortization of debt issuance cost ......... 351 285
Deferred income taxes ...................... 1,820 (334)
Gain from early retirement of debt ......... (187) --
Other ...................................... (19) 116
Changes in operating assets and liabilities:
Accounts receivable ..................... 1,167 (3,980)
Inventory ............................... (90) (2,660)
Prepaid expenses, deferred charges
and other assets ...................... 213 (425)
Income taxes ............................ (32) 6,182
Accounts payable and accrued expenses ... (4,150) 5,937
-------- --------
Net cash provided by
operating activities ............ 5,063 8,798
-------- --------
Cash flows from investing activities
Purchases of equipment ......................... (1,125) (1,657)
Payments for acquisitions, net of cash
acquired ................................... (16,162) --
-------- --------
Net cash used in investing activities .. (17,287) (1,657)
-------- --------
Cash flows from financing activities
Payments under capital leases for equipment .... (336) (301)
Net proceeds on line of credit ................. 6,100 --
Repayment of other notes payable ............... -- (1,330)
-------- --------
Net cash provided by (used in) financing
activities .............................. 5,764 (1,631)
-------- --------
Net increase (decrease) in cash and cash equivalents (6,460) 5,510
Cash and cash equivalents, beginning of period ..... 7,015 1,641
-------- --------
Cash and cash equivalents, end of period ........... $ 555 $ 7,151
======== ========
Supplemental information
Cash paid (received) during the period for:
Interest, other............................. 6,177 $ 89
Income taxes................................ 47 (5,062)
Significant non-cash activities:
Assets acquired under capital lease......... $ -- $ 561
Contribution of equity and retirement
of senior notes.......................... $ 3,996 $ --
The accompanying notes are an integral part of
these consolidated condensed financial statements.
AKI, INC., AND SUBSIDIARIES
(a wholly-owned subsidiary of AKI Holding Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. BASIS OF PRESENTATION
Arcade Holding Corp. (the "Predecessor") was organized for the purpose
of acquiring all the issued and outstanding capital stock of Arcade, Inc.
("Arcade") on November 4, 1993. Arcade is engaged in interactive
advertising for consumer products companies and has a specialty in the
design, production and distribution of sampling systems from its
Chattanooga, Tennessee facilities, and distributes its products in Europe
through its French subsidiary, Arcade Europe S.A.R.L. DLJ Merchant Banking
Partners II, L.P. and certain related investors (collectively, "DLJMBII")
and certain members of the Predecessor organized AHC I Acquisition Corp.
("Acquisition Corp.") and AHC I Merger Corp. ("Merger Corp.") for purposes
of acquiring the Predecessor. On December 15, 1997, Merger Corp. acquired
all of the equity interests of the Predecessor and then merged with and
into the Predecessor and the combined entity assumed the name of AKI, Inc.
and Subsidiaries ("AKI"). Subsequent to the acquisition, Acquisition Corp.
contributed $1 and all of its ownership interest in AKI to AKI Holding
Corp. ("Holding") for all of the outstanding equity of Holding.
Acquisition of Retcom Holdings Ltd.
On September 15, 1999, AKI acquired all of the equity interests in
Retcom Holdings Ltd. and its subsidiaries ("RHL") for a total cost of
approximately $12 million and refinanced RHL's working capital indebtedness
of approximately $5 million. RHL businesses include a portfolio of sampling
systems catering to the fragrance, cosmetics and personal care industries,
as well as microencapsulation activities. The sampling systems and related
microencapsulation services and activities have been integrated into
Arcade's sampling technology group (named Arcade Sampling Technologies,
AST) and the microencapsulated products have been combined with Arcade's
product technology unit (named Arcade Product Technologies, APT) . RHL also
has a creative services division (renamed Arcade Direct, AD) that handles
marketing communications, catalogs and database marketing and a multi-media
division (renamed Arcade Consumer Communications, ACC) for merchandising at
point-of-sale. The purchase price and refinancing of indebtedness were
financed by borrowings under the credit agreement. The purchase was
accounted for under the purchase method of accounting. Results of
operations for the six months ended December 31, 1999 include the results
of RHL for the period from September 15, 1999 to December 31, 1999. The
purchase price allocation is not finalized at this time. Management has not
determined what impact, if any, that there would be on earnings.
Interim financial statements
The interim consolidated condensed balance sheet at December 31, 1999
and the interim consolidated condensed statements of operations for the
three and six months ended December 31, 1999 and 1998, the interim
consolidated condensed statements of cash flows for the six months ended
December 31, 1999 and 1998 and the interim consolidated condensed statement
of changes in stockholder's equity for the six months ended December 31,
1999 are unaudited, and certain information and footnote disclosure related
thereto, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, the unaudited interim consolidated
condensed financial statements were prepared following the same policies
and procedures used in preparation of the audited financial statements and
all adjustments, consisting only of normal recurring adjustments to fairly
present the financial position, results of operations and cash flows with
respect to the interim consolidated condensed financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
2. INVENTORY
The following table details the components of inventory:
December 31, 1999 June 30, 1999
----------------- -------------
(unaudited)
Raw materials
Paper ............. $2,200 $1,088
Other raw materials 1,813 2,328
------ ------
Net raw materials ..... 4,013 3,416
Work in process ....... 1,337 1,693
------ ------
Net inventory ......... $5,350 $5,109
====== ======
3. RETIREMENT OF DEBT
Acquisition Corp. purchased $4,490 of AKI, Inc., Senior Notes for
$3,996. The notes were contributed to Holding Corp. and Holding Corp.
contributed the notes to AKI, Inc. The notes were subsequently retired.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2 is presented with respect to both AKI Holding Corp. and AKI, Inc. As
used within Item 2 the term "Company" refers to AKI Holding Corp. and its
subsidiaries including AKI, Inc. ("AKI") and the term "Holding" refers to AKI
Holding Corp. and the term "RHL" refers to Retcom Holdings Ltd. and
subsidiaries.
General
The sales of our company are derived through its multi-sensory marketing
activities primarily from the sale of sampling products and 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.
Retcom Holdings Ltd. Acquisition
On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RHL at a purchase price of approximately $12 million and
refinanced RHL's working capital indebtedness of approximately $5 million. The
purchase price and refinancing of indebtedness were financed by borrowings under
the credit agreement.
Results of Operations
Three Months Ended December 31, 1999 Compared to Three Months Ended
December 31, 1998
Net Sales. Net sales for the three months ended December 31, 1999,
increased $0.1 million, or 0.5%, to $20.5 million as compared to $20.4 million
for the three months ended December 31, 1998. The increase was primarily
attributable to increases in domestic sales of sampling technologies for
advertising and marketing of cosmetics and consumer products and sales from the
RHL acquired businesses offset by decreases in domestic and international sales
of sampling technologies for advertising and marketing of fragrance products.
Gross Profit. Gross profit for the three months ended December 31, 1999,
increased $0.4 million, or 5.9%, to $7.2 million as compared to $6.8 million for
three months ended December 31, 1998. Gross profit as a percentage of net sales
increased to 35.1% in the three months ended December 31, 1999, from 33.3% in
the three months ended December 31, 1998. The increase in gross profit and gross
profit as a percentage of net sales is primarily attributable to the increase in
net sales discussed above, changes in product mix and more efficient production
levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended December 31, 1999, increased
$1.2 million, or 36.4% to $4.5 million as compared to $3.3 million for the three
months ended December 31, 1998. The increase in selling, general and
administrative expenses was primarily due to increased compensation costs
including additional personnel associated with the operation of RHL. As a result
of these factors, selling, general and administrative expenses as a percent of
net sales increased to 22.0% in the three months ended December 31, 1999 from
16.2% in the three months ended December 31, 1998.
Income from Operations. Income from operations for the three months ended
December 31, 1999 decreased $0.1 million, or 4.4%, to $2.2 million as compared
to $2.3 million for the three months ended December 31, 1998. Income from
operations included a net gain of $0.9 million resulting from a favorable
litigation settlement with the sellers of Arcade Holding Corp. Income from
operations as a percentage of net sales decreased to 10.7% in the three months
ended December 31, 1999, from 11.3% in three months ended December 31, 1998,
principally as a result of increased selling, general and administrative
expenses.
Interest Expense. Interest expense for the three months ended December 31,
1999 increased $0.2 million, or 4.9% to $4.3 million, as compared to $4.1
million for the three months ended December 31, 1998. Interest
expense as a percentage of net sales increased to 21.0% in the three months
ended December 31, 1999 from 20.1% in the three months ended December 31, 1998.
The increase in interest expense, including the amortization of deferred
financing costs, is primarily due to use of the credit line for working capital
and the RHL acquisition offset partially by a decrease in interest expense
related to the repurchase and retirement of certain Senior Discount Debentures
and Senior Notes.
Interest expense for AKI for the three months ended December 31, 1999
increased $0.2 million, or 6.3% to $3.4 million, as compared to $3.2 million for
the three months ended December 31, 1998. Interest expense as a percentage of
net sales increased to 16.6% in the three months ended December 31, 1999 from
15.7% in the three months ended December 31, 1998. The increase in interest
expense, including the amortization of deferred financing costs, is primarily
due to use of the credit line for working capital and the RHL acquisition offset
partially by a decrease in interest expense related to the repurchase and
retirement of certain Senior Notes.
Income Tax Benefit. Income tax benefit for the three months ended December
31, 1999 increased $0.3 million to $0.6 million. The increase is due to the
decrease in income before income taxes and extraordinary gain as a result of the
factors described above. The Company's effective tax rate, after consideration
of non-deductible goodwill amortization and non-taxable gain from settlement of
litigation, was 35.6% in the three months ended December 31, 1999 and 32.8% in
the three months ended December 31, 1998.
Income tax benefit for AKI for the three months ended December 31, 1999
increased $0.4 million to $0.4 million. The increase is due to the decrease in
income before income taxes and extraordinary gain as a result of the factors
described above. AKI's effective tax rate, after consideration of non-deductible
goodwill amortization and non-taxable gain from settlement of litigation, was
39.0% in the three months ended December 31, 1999 and 1998.
Extraordinary Gain from Early Retirement of Debt. Extraordinary gain from
early retirement of debt of $0.8 million for the three months ended December 31,
1999 resulted from the purchase and subsequent contribution of Senior Notes and
Senior Discount Debentures by AHC I Acquisition Corp. The contributed securities
were subsequently retired.
Extraordinary gain from early retirement of debt for AKI of $0.2 million
for the three months ended December 31, 1999 resulted from the purchase of
Senior Notes by AHC I Acquisition Corp. and subsequent contribution by AKI
Holding Corp. The contributed securities were subsequently retired.
EBITDA. EBITDA for the three months ended December 31, 1999, increased $0.2
million, or 4.4%, to $4.7 million as compared to $4.5 million for the three
months ended December 31, 1998. The increase principally reflects the increase
in income from operations discussed above. EBITDA as a percentage of net sales
was 22.9% and 22.1% in the three months ended December 31, 1999 and 1998,
respectively. EBITDA is income from operations plus depreciation and
amortization of goodwill and other intangibles.
Six Months Ended December 31, 1999 Compared to Six Months Ended December
31, 1998
Net Sales. Net sales for the six months ended December 31, 1999, increased
$4.4 million, or 9.9%, to $48.9 million as compared to $44.5 million for the six
months ended December 31, 1998. The increase was primarily attributable to
increases in domestic sales of sampling technologies for advertising and
marketing of cosmetics and consumer products, due partially to the timing of
completion and delivery of certain substantial orders which remained in process
at June 30, 1999, and sales from the RHL acquired businesses offset by decreases
in domestic and international sales of sampling technologies for advertising and
marketing of fragrance products.
Gross Profit. Gross profit for the six months ended December 31, 1999,
increased $4.4 million, or 28.6%, to $19.8 million as compared to $15.4 million
for six months ended December 31, 1998. Gross profit as a percentage of net
sales increased to 40.5% in the six months ended December 31, 1999, from 34.6%
in the six months ended December 31, 1998. The increase in gross profit and
gross profit as a percentage of net sales is primarily attributable to the
increase in net sales discussed above, changes in product mix and more efficient
production levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended December 31, 1999, increased
$2.3 million, or 35.9% to $8.7 million as compared to $6.4 million for the six
months ended December 31, 1998. The increase in selling, general and
administrative expenses was primarily due to increased compensation costs
including personnel expenses associated with the operation and acquisition of
RHL, increased sales commissions related to the increase in net sales, a
severance charge related to a former executive, and an increase in the allowance
for doubtful accounts. As a result of these factors, selling, general and
administrative expenses as a percent of net sales increased to 17.8% in the six
months ended December 31, 1999 from 14.4% in the six months ended December 31,
1998.
Income from Operations. Income from operations for the six months ended
December 31, 1999 increased $2.8 million, or 41.8%, to $9.5 million as compared
to $6.7 million for the six months ended December 31, 1998. Income from
operations included a net gain of $0.9 million resulting from a favorable
litigation settlement with the sellers of Arcade Holding Corp. Income from
operations as a percentage of net sales increased to 19.4% in the six months
ended December 31, 1999, from 15.1% in six months ended December 31, 1998,
principally as a result of the factors described above.
Interest Expense. Interest expense for the six months ended December 31,
1999, increased $0.5 million, or 6.1% to $8.7 million, as compared to $8.2
million for the six months ended December 31, 1998. Interest expense as a
percentage of net sales decreased to 17.8% in the six months ended December 31,
1999 from 18.4% in the six months ended December 31, 1998. The increase in
interest expense, including the amortization of deferred financing costs, is
primarily due to use of the credit line for working capital and the RHL
acquisition offset partially by a decrease in interest expense related to the
repurchased and retired Senior Discount Debentures and Senior Notes.
Interest expense for AKI for the six months ended December 31, 1999,
increased $0.2 million, or 3.1% to $6.7 million, as compared to $6.5 million for
the six months ended December 31, 1998. Interest expense as a percentage of net
sales decreased to 13.7% in the six months ended December 31, 1999, from 14.6%
in the six months ended December 31, 1998. The increase in interest expense,
including the amortization of deferred financing costs, is primarily due to use
of the credit line for working capital and the RHL acquisition offset partially
by a decrease in interest expense related to the repurchased and retired Senior
Notes.
Income Tax Expense. Income tax expense for the six months ended December
31, 1999 increased $0.7 million to $0.9 million. The increase is due to the
increase in income before income taxes and extraordinary gain as a result of the
factors described above. The Company's effective tax rate, after consideration
of non-deductible goodwill amortization and non-taxable gain from settlement of
litigation, was 45.3% in the six months ended December 31, 1999 and 89.7% in the
six months ended December 31, 1998.
Income tax expense for AKI for the six months ended December 31, 1999
increased $0.7 million to $1.5 million. The increase is due to the increase in
income before income taxes and extraordinary gain as a result of the factors
described above. AKI's effective tax rate, after consideration of non-deductible
goodwill amortization and non-taxable gain from settlement of litigation, was
39.0% in the six months ended December 31, 1999 and 1998.
Extraordinary Gain from Early Retirement of Debt. Extraordinary gain from
early retirement of debt of $0.8 million for the six months ended December 31,
1999 resulted from the purchase and subsequent contribution of Senior Notes and
Senior Discount Debentures by AHC I Acquisition Corp. The contributed securities
were subsequently retired.
Extraordinary gain from early retirement of debt for AKI of $0.2 million
for the six months ended December 31, 1999 resulted from the purchase of Senior
Notes by AHC I Acquisition Corp. and subsequent contribution by AKI Holding
Corp. The contributed securities were subsequently retired.
EBITDA. EBITDA for the six months ended December 31, 1999, increased $3.2
million, or 29.1%, to $14.2 million as compared to $11.0 million for the six
months ended December 31, 1998. The increase principally reflects the increase
in income from operations discussed above. EBITDA as a percentage of net sales
was 29.0% and 24.7% in the six months ended December 31, 1999 and 1998,
respectively. EBITDA is income from operations plus depreciation and
amortization of goodwill and other intangibles.
Liquidity and Capital Resources
Our company has substantial indebtedness and significant debt service
obligations. As of December 31, 1999, our company had consolidated indebtedness
in an aggregate amount of $144.4 million (excluding trade payables, accrued
liabilities, deferred taxes and other non-current liabilities), of which (1)
approximately $26.1 million was a direct obligation of Holding relating to its
debentures and (2) approximately $118.3 million was a direct obligation of AKI
relating to its notes, revolving credit line and capital leases. Borrowings at
December 31, 1999 included $6.1 million under the revolving credit agreement
that was incurred to finance the acquisition of RHL. At December 31, 1999 our
company had available $13.3 million under the credit line facility. At December
31, 1999, AKI also had $19.0 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.
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 $5.1 million and $8.5 million for the six months ended December 31,
1999 and 1998, respectively, together with borrowings under revolving credit
facilities. During the six months ended December 31, 1999, net cash provided by
operating activities resulted from net income before depreciation and
amortization and decreases in accounts receivable and inventory offset partially
by decreases in accounts payable and accrued expenses. Net cash provided by
operating activities during the six months ended December 31, 1998 resulted from
net income before depreciation and amortization, the collection of an income tax
refund receivable and increases in accounts payable and accrued expenses. These
factors were partially offset by increased accounts receivable and inventory
levels.
In the six months ended December 31, 1999 and 1998, our company had capital
expenditures of approximately $1.1 million and $1.7 million, respectively. These
capital expenditures consisted primarily of the purchase 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 RHL at a purchase price of approximately $12.2 million and
refinanced RHL's working capital indebtedness of approximately $5 million . The
purchase price and refinancing of indebtedness were financed by borrowings under
the credit agreement, a portion of which was subsequently repaid with cash flows
from operating activities. Our company is exploring options for the longer-term
financing of a portion of the borrowings incurred in connection with the
acquisition.
Our company may from time to time evaluate additional potential
acquisitions. There can be no assurance that additional capital sources will be
available to our company to fund additional acquisitions on terms that our
company finds acceptable, or at all.
In September 1999, Acquisition Corp. consummated a private placement to
DLJMBII of 15,000,000 shares of its common stock at a purchase price of $1.00
per share. In October 1999, Acquisition Corp. purchased $8.8 million of Holding
Corp. Senior Discount Debentures and $4.5 million of AKI, Inc. Senior Notes. The
debentures and notes were contributed to Holding Corp. and subsequently retired.
Capital expenditures for the six months ending June 30, 2000 are currently
estimated to be approximately $2.9 million. Based on borrowings outstanding
(other than pursuant to the credit agreement) as of December 31, 1999 and
borrowings outstanding under the credit agreement as of February 11, 2000, our
company expects total cash payments for debt service for the six months ending
June 30, 2000 to be approximately $6.8 million, consisting of $5.8 million in
interest payments on the notes, $0.4 million in capital lease obligations and
$0.6 million in interest and fees under the credit agreement. Our company also
expects to make royalty payments of approximately $0.8 million during the six
months ending June 30, 2000.
At December 31, 1999, our company's cash and cash equivalents and net
working capital were $0.6 million and $8.7 million, respectively, representing a
decrease in cash and cash equivalents of $6.4 million and a decrease in net
working capital of $6.2 million from June 30, 1999. Account receivables, net, at
December 31, 1999 increased 9.2% or $1.5 million over the June 30, 1999 amount,
primarily due to increased sales and the acquisition of RHL.
Seasonality
Our company's sales and operating results have historically reflected
seasonal variations. Such seasonal variations are based on the timing of our
company's customers' advertising campaigns, which have traditionally been
concentrated prior to the Christmas and spring holiday seasons. As a result, a
higher level of sales are reflected in our company's first two fiscal quarters
ended December 31 when sales from such advertising campaigns are principally
recognized while our company's fourth fiscal quarter ended June 30 typically
reflects the lowest sales level of the fiscal year. These seasonal fluctuations
require our company to accurately allocate its resources to manage our company's
manufacturing capacity, which often operates at full capacity during peak
seasonal demand periods.
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 1999. SFAS No. 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities Deferral of Effective Date" which is effective for fiscal years
beginning after June 15, 2000. Our company has only utilized derivative
financial instruments to hedge our company's exposure to certain foreign
currencies. Such hedging activity has historically been minor and, as a result,
adoption of this Statement is not expected to have a material impact on our
company's financial condition or results of operations. Our company will adopt
the provisions of this Statement on July 1, 2000.
Year 2000 Issues
Our company worked to resolve the potential impact of the Year 2000 on its
information technology systems and its non-information technology systems so
they would properly recognize and utilize dates beyond December 31, 1999.
Our company had in place a Year 2000 program which was executed by an
internal project team. The objective of the Year 2000 program was to determine
and assess the risks of the Year 2000 issue and to plan and institute mitigating
actions to minimize those risks to acceptable levels. To date, none of our
company's systems have been adversely affected by the Year 2000. Our company
relies on five computerized systems all of which required remediation, two of
which are maintained internally and the others are maintained by third party
vendors. Our company believes that all of these systems are Year 2000 compliant.
Upon review of our company's non-information technology systems our company
believes that none of its manufacturing equipment is date sensitive. Of the
remaining non-information technology systems, our company believes all such
systems are Year 2000 compliant.
Our company has spent approximately $100,000 on Year 2000 compliance. All
expenditures with respect to Year 2000 compliance were funded from working
capital.
Our company communicated with its significant customers and vendors to
understand their Year 2000 issues and how they prepared themselves to manage
those issues as they relate to our company. To date, no significant customers or
vendors have informed our company that a material Year 2000 issue exists which
will have a material effect on our company.
Forward-Looking Statements
The information provided in this document contains forward-looking
statements that involve a number of risks and uncertainties. A number of factors
could cause actual results, performance, achievements of our company or industry
results to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, but are not limited to: the competitive environment in the
sampling industry in general and in our company's specific market areas; changes
in prevailing interest rates; inflation; changes in cost of goods and services;
economic conditions in general and in our company's specific market areas;
changes in or failure to comply with postal regulations or other federal, state
and/or local government regulations; liability and other claims asserted against
our company; changes in operating strategy or development plans; the ability to
attract and retain qualified personnel; the significant indebtedness of our
company; labor disturbances; changes in our company's capital expenditure plans;
and other factors.
In addition, such forward-looking statements are necessarily dependent upon
assumptions, estimates and dates that may be incorrect or imprecise and involve
known and unknown risk, uncertainties and other factors. Accordingly, any
forward-looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. Forward-looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "should," "seeks," "pro
forma," "anticipates," "intends" or the negative of any such word, or other
variations or comparable terminology, or by discussions of strategy or
intentions. Given these uncertainties, readers are cautioned not place undue
reliance on such forward-looking statements. Our company disclaims any
obligations to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements contained in this
document to reflect future events or developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our company generates approximately 20% of its sales from customers outside
the United States, principally in Europe. International sales are made mostly
from our company's foreign subsidiary located in France and are primarily
denominated in the local currency. Our company's foreign subsidiary also incurs
the majority of its expenses in the local currency and uses the local currency
as its functional currency.
Our company's major principal cash balances are held in U.S. dollars. Cash
balances in foreign currencies are held to minimum balances for working capital
purposes and therefore have a minimum risk to currency fluctuations.
Our company periodically enters into forward foreign currency exchange
contracts to hedge certain exposures related to selected transactions that are
relatively certain as to both timing and amount and to hedge a portion of the
production costs expected to be denominated in foreign currencies. The purpose
of entering into these hedge transactions is to minimize the impact of foreign
currency fluctuations on the results of operations and cash flows. Gains and
losses on the hedging activities are recognized concurrently with the gains and
losses from the underlying transactions. At December 31, 1999, there were no
forward exchange contracts outstanding.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
27.2 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AKI HOLDING CORP.
Date: February 14, 2000 By: /s/ Kenneth A. Budde
--------------------------------------
Kenneth A. Budde
Senior Vice President & Chief Financial
Officer
AKI, INC.
Date: February 14, 2000 By: /s/ Kenneth A. Budde
--------------------------------------
Kenneth A. Budde
Senior Vice President & Chief Financial
Officer