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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File Number: 333-60991
AKI HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 74-2883163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Commission File Number: 333-60989
AKI, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3785856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1815 East Main Street
Chattanooga, TN 37404
(Address of principal executive offices) (Zip Code)
(423) 624-3301
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days (X) Yes ( ) No
As of February 12, 2001, 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, 2000 (unaudited)
- June 30, 2000 (unaudited)
Consolidated Condensed Statements of Operations
- Three months ended December 31, 2000 (unaudited)
- Three months ended December 31, 1999 (unaudited)
- Six months ended December 31, 2000 (unaudited)
- Six months ended December 31, 1999 (unaudited)
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Six months ended December 31, 2000 (unaudited)
Consolidated Condensed Statements of Cash Flows
- Six months ended December 31, 2000 (unaudited)
- Six months ended December 31, 1999 (unaudited)
Notes to Consolidated Condensed Financial Statements
Item 1. Financial Statements (continued)
AKI, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet
- December 31, 2000 (unaudited)
- June 30, 2000 (unaudited)
Consolidated Condensed Statements of Operations
- Three months ended December 31, 2000 (unaudited)
- Three months ended December 31, 1999 (unaudited)
- Six months ended December 31, 2000 (unaudited)
- Six months ended December 31, 1999 (unaudited)
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Six months ended December 31, 2000 (unaudited)
Consolidated Condensed Statements of Cash Flows
- Six months ended December 31, 2000 (unaudited)
- Six months ended December 31, 1999 (unaudited)
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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,
2000 2000
------------- -------------
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................. $ 500 $ 1,158
Accounts receivable, net................................................... 23,418 21,522
Inventory.................................................................. 7,001 7,757
Prepaid expenses........................................................... 469 92
Deferred income taxes...................................................... 396 396
------------- -------------
TOTAL CURRENT ASSETS.................................................... 31,784 30,925
Property, plant and equipment, net......................................... 17,047 17,097
Goodwill, net.............................................................. 160,069 162,472
Other intangible assets, net............................................... 6,702 7,174
Deferred charges, net...................................................... 4,891 5,461
Deferred income taxes...................................................... 498 720
Other assets............................................................... 89 88
------------- -------------
TOTAL ASSETS............................................................ $ 221,080 $ 223,937
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations............................... $ 515 $ 847
Accounts payable, trade.................................................... 2,546 3,565
Accrued income taxes....................................................... 2,143 724
Accrued compensation....................................................... 3,294 3,965
Accrued interest........................................................... 5,514 5,695
Accrued expenses........................................................... 2,175 2,370
------------- -------------
TOTAL CURRENT LIABILITIES............................................... 16,187 17,166
Long-term portion of capital lease obligations............................. - 502
Revolving credit line...................................................... 7,550 9,000
Senior notes............................................................... 103,510 107,510
Senior discount debentures................................................. 27,528 27,863
Promissory note to stockholder............................................. 3,661 -
Deferred income taxes...................................................... 141 663
Other non-current liabilities.............................................. 2,509 2,399
------------- -------------
TOTAL LIABILITIES....................................................... 161,086 165,103
STOCKHOLDER'S EQUITY
Common stock, $0.01 par 1,000 shares authorized;
1,000 shares issued and outstanding.................................... - -
Additional paid-in capital................................................. 90,194 88,935
Accumulated deficit........................................................ (13,513) (13,829)
Accumulated other comprehensive loss....................................... (957) (542)
Carryover basis adjustment................................................. (15,730) (15,730)
------------- -------------
TOTAL STOCKHOLDER'S EQUITY.............................................. 59,994 58,834
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.............................. $ 221,080 $ 223,937
============= =============
The accompanying notes are an integral part of these consolidated
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, 2000 DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales................................... $ 25,459 $ 20,508 $ 57,089 $ 48,887
Cost of goods sold.......................... 16,972 13,288 35,797 29,080
--------- --------- --------- ---------
Gross profit............................. 8,487 7,220 21,292 19,807
Selling, general and administrative expenses 4,415 4,497 8,933 8,655
Amortization of goodwill and other
intangibles............................... 1,446 1,391 2,865 2,555
Gain from settlement of litigation, net..... - (870) - (870)
--------- --------- --------- ---------
Income from operations................... 2,626 2,202 9,494 9,467
Other expenses:
Interest expense to stockholder.......... 68 - 181 -
Interest expense other, net.............. 4,176 4,295 8,467 8,667
Management fees and other, net........... 63 62 125 125
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary gain..................... (1,681) (2,155) 721 675
Income tax expense (benefit)................ (110) (645) 1,355 904
--------- --------- --------- ---------
Loss before extraordinary gain........... (1,571) (1,510) (634) (229)
Extraordinary gain from early retirement of
debt, net of tax......................... 950 846 950 846
--------- --------- --------- ---------
Net income (loss)........................ $ (621) $ (664) $ 316 $ 617
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
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
ADDITIONAL OTHER CARRYOVER
COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE BASIS
SHARES DOLLARS CAPITAL DEFICIT LOSS ADJUSTMENT TOTAL
------ ------- ------- ------- ---- ---------- -----
BALANCES, JUNE 30, 2000 (unaudited) 1,000 $ -- $ 88,935 $ (13,829) $ (542) $ (15,730) $ 58,834
Equity contribution by AHC I
Acquisiton Corp. (unaudited)........ 1,259 1,259
Net income (unaudited)................. 316 316
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............ (415) (415)
--------
Comprehensive income (unaudited)....... (99)
------- ------- --------- --------- -------- --------- --------
BALANCES, DECEMBER 31, 2000 (unaudited) 1,000 $ -- $ 90,194 $ (13,513) $ (957) $ (15,730) $ 59,994
======= ======= ========= ========= ======== ========= ========
The accompanying notes are an integral part of these consolidated
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, 2000 DECEMBER 31, 1999
----------------- -----------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................... $ 316 $ 617
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of goodwill and other intangibles............ 5,036 4,734
Amortization of debt discount.............................................. 1,817 1,876
Amortization of debt issuance costs........................................ 342 401
Deferred income taxes...................................................... (615) 1,192
Gain from early retirement of debt......................................... (950) (846)
Other...................................................................... (305) (19)
Changes in operating assets and liabilities:
Accounts receivable...................................................... (1,896) 1,167
Inventory................................................................ 756 (90)
Prepaid expenses, deferred charges and other assets...................... (377) 213
Accounts payable and accrued expenses.................................... (2,065) (4,150)
Income taxes............................................................. 1,128 (32)
----------- -----------
Net cash provided by operating activities.............................. 3,187 5,063
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment....................................................... (2,112) (1,125)
Payments for acquisitions, net of cash acquired.............................. - (16,162)
----------- -----------
Net cash used in investing activities.................................. (2,112) (17,287)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments under capital leases for equipment.................................. (834) (336)
Repurchase of long-term debt................................................. (3,110) -
Net proceeds (repayments) on line of credit.................................. (1,450) 6,100
Net proceeds from promissory note to stockholder............................. 3,661 -
----------- -----------
Net cash provided by (used in) financing activities.................... (1,733) 5,764
----------- -----------
Net (decrease) in cash and cash equivalents..................................... (658) (6,460)
Cash and cash equivalents, beginning of period.................................. 1,158 7,015
----------- -----------
Cash and cash equivalents, end of period........................................ $ 500 $ 555
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Interest, other............................................................ $ 6,388 $ 6,177
Interest to stockholder.................................................... 174 -
Income taxes............................................................... 866 47
SIGNIFICANT NON-CASH ACTIVITIES
Contribution of equity and retirement of senior discount debentures
and senior notes........................................................... $ 1,259 $ 8,071
The accompanying notes are an integral part of these
consolidated 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 Corporation (the "Predecessor") was organized for the
purpose of acquiring all the issued and outstanding capital stock of
Arcade, Inc. ("Arcade") on November 4, 1993. Arcade is principally engaged
in interactive advertising for consumer products companies and has a
specialty in the design, production and distribution of sampling systems
from its Chattanooga, Tennessee facilities, and also distributes its
products in Europe through its French subsidiary, Arcade Europe S.A.R.L.
DLJ Merchant Banking Partners II, L.P. and certain related investors
(collectively, "DLJMBII") and certain members of the Predecessor organized
AHC I Acquisition Corp. ("AHC") and AHC I Merger Corp. ("Merger Corp.") for
purposes of acquiring the Predecessor. On December 15, 1997, Merger Corp.
acquired all of the equity interests of the Predecessor and then merged
with and into the Predecessor and the combined entity assumed the name of
AKI, Inc. and Subsidiaries ("AKI"). Subsequent to the acquisition, AHC
contributed $1 and all of its ownership interest in AKI to AKI Holding
Corp. ("Holding") for all of the outstanding equity of Holding.
INTERIM FINANCIAL STATEMENTS
The interim consolidated condensed balance sheet at December 31, 2000
and the interim consolidated condensed statements of operations for the
three and six months ended December 31, 2000 and 1999, the interim
consolidated condensed statements of cash flows for the six months ended
December 31, 2000 and 1999 and the interim consolidated condensed statement
of changes in stockholder's equity for the six months ended December 31,
2000 are unaudited, and certain information and footnote disclosure related
thereto, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been
omitted. The June 30, 2000 consolidated balance sheet was derived from the
Company's audited balance sheet for the year then ended. In management's
opinion, 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, 2000 JUNE 30, 2000
----------------- -------------
(unaudited) (unaudited)
Raw materials
Paper................... $ 2,477 $ 3,944
Other raw materials..... 2,496 2,541
----------- ----------
Total raw materials......... 4,973 6,485
Work in process............. 2,028 1,272
----------- ----------
Net inventory............... $ 7,001 $ 7,757
=========== ==========
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. RETIREMENT OF DEBT
In fiscal 2001, AHC purchased $3,070 of Holding Corp. Senior Discount
Debentures and AKI purchased $4,000 of AKI, Inc. Senior Notes for $1,259
and $3,110, respectively. The debentures were contributed to Holding Corp.
and the debentures and notes were subsequently retired.
In fiscal 2000, AHC purchased $8,770 of Holding Corp. Senior Discount
Debentures and $7,490 of AKI, Inc. Senior Notes for $4,084 and $6,486,
respectively. The debentures and notes were contributed to Holding Corp.
and subsequently retired.
4. PROMISSORY NOTE TO STOCKHOLDER
In May 2000, the Company signed a promissory note payable to AHC which
allows the Company to borrow up to $10 million at such interest rates and
due as agreed upon by the Company and AHC. At December 31, 2000, $3,661 was
outstanding bearing interest at prime and is due December 31, 2002.
5. DERIVATIVE INSTRUMENTS
Effective July 1, 2000, the Company adopted Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), as amended, which requires that all derivative
instruments be reported on the balance sheet at fair value and establishes
criteria for designation and effectiveness of hedging relationships. The
cumulative effect of adopting FAS 133 as of July 1, 2000 was not material
to the Company's financial statements.
The Company purchases and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in certain
foreign currency exchange rates. The primary purpose of the Company's
foreign currency hedging activities is to manage the short-term volatility
associated with foreign currency purchases and sales in the normal course
of business. The Company primarily utilizes foreign currency forward
exchange contracts with maturities of less than six months, which do not
meet hedge accounting criteria. The fair value of these instruments at
December 31, 2000 was not material and the net impact of the related gains
and losses were not material.
6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets at December 31, 2000 and June
30, 2000 and condensed statements of operations, changes in stockholder's
equity and cash flows for the six months ended December 31, 2000 and 1999
for Holding have been prepared on the equity basis of accounting and should
be read in conjunction with the consolidated statements and notes thereto.
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)
6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
BALANCE SHEET
DECEMBER 31, 2000 JUNE 30, 2000
----------------- -------------
(unaudited) (unaudited)
ASSETS
Investment in subsidiaries............................... $ 100,873 $ 99,798
Deferred charges......................................... 1,038 1,167
Deferred income taxes.................................... 2,721 2,427
----------- -----------
TOTAL ASSETS......................................... $ 104,632 $ 103,392
=========== ===========
LIABILITIES
Accrued income taxes..................................... $ 423 $ 423
Senior discount debentures............................... 27,528 27,863
----------- -----------
TOTAL LIABILITIES.................................... 27,951 28,286
----------- -----------
STOCKHOLDER'S EQUITY
Common Stock, $0.01 par value, 1,000 shares authorized;
1,000 shares issued and outstanding.................... - -
Additional paid-in capital............................... 90,194 88,935
Accumulated deficit...................................... (13,513) (13,829)
----------- -----------
TOTAL STOCKHOLDER'S EQUITY........................... 76,681 75,106
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........... $ 104,632 $ 103,392
=========== ===========
STATEMENT OF OPERATIONS
SIX MONTHS ENDED
----------------
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
(unaudited) (unaudited)
Equity in net income of subsidiaries..................... $ 1,075 $ 1,256
Interest expense......................................... 1,862 1,926
----------- -----------
Loss before income taxes and extraordinary gain...... (787) (670)
Income tax benefit....................................... (609) (628)
----------- -----------
Loss before extraordinary gain....................... (178) (42)
Extraordinary gain from early retirement of debt......... 494 659
----------- -----------
Net income .......................................... $ 316 $ 617
=========== ===========
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)
6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
BALANCES, JUNE 30, 2000 (unaudited)........... 1,000 $ - $ 88,935 $ (13,829) $ 75,106
Equity contribution by AHC I Acquisition Corp.
(unaudited)................................. 1,259 1,259
Net income (unaudited)........................ 316 316
--------- --------- ---------- ----------- -----------
BALANCES, DECEMBER 31, 2000 (unaudited)....... 1,000 $ - $ 90,194 $ (13,513) $ 76,681
========= ========= ========== =========== ===========
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
----------------
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 316 $ 617
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:........
Net change in investment in subsidiaries........ (1,075) (1,256)
Amortization of debt discount................... 1,817 1,876
Amortization of debt issuance costs............. 45 50
Deferred income taxes........................... (609) (628)
Gain from early retirement of debt.............. (494) (659)
----------- -----------
Net cash provided by (used in) operating
activities................................... - -
----------- -----------
Net increase (decrease) in cash and cash equivalents..... - -
Cash and cash equivalents, beginning of period........... - -
----------- -----------
Cash and cash equivalents, end of period................. $ - $ -
=========== ===========
SIGNIFICANT NON-CASH ACTIVITIES
Contribution of equity and retirement of senior
discount debentures and senior notes................. $ 1,259 $ 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,
2000 2000
------------- -------------
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................. $ 500 $ 1,158
Accounts receivable, net................................................... 23,418 21,522
Inventory.................................................................. 7,001 7,757
Prepaid expenses........................................................... 469 92
Deferred income taxes...................................................... 396 396
------------- -------------
TOTAL CURRENT ASSETS.................................................... 31,784 30,925
Property, plant and equipment, net......................................... 17,047 17,097
Goodwill, net.............................................................. 160,069 162,472
Other intangible assets, net............................................... 6,702 7,174
Deferred charges, net .................................................... 3,853 4,294
Deferred income taxes...................................................... 498 720
Other assets............................................................... 89 88
------------- --------------
TOTAL ASSETS............................................................ $ 220,042 $ 222,770
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations............................... $ 515 $ 847
Accounts payable, trade.................................................... 2,546 3,565
Accrued income taxes....................................................... 1,720 301
Accrued compensation....................................................... 3,294 3,965
Accrued interest........................................................... 5,514 5,695
Accrued expenses........................................................... 2,175 2,370
------------- --------------
TOTAL CURRENT LIABILITIES............................................... 15,764 16,743
Long-term portion of capital lease obligations............................. - 502
Revolving credit line...................................................... 7,550 9,000
Senior notes............................................................... 103,510 107,510
Promissory note to affiliate............................................... 3,661 -
Deferred income taxes...................................................... 2,862 3,090
Other non-current liabilities.............................................. 2,509 2,399
------------- --------------
TOTAL LIABILITIES....................................................... 135,856 139,244
STOCKHOLDER'S EQUITY
Common stock, $0.01 par 100,000 shares authorized;
1,000 shares issued and outstanding..................................... - -
Additional paid-in capital................................................. 107,348 107,348
Accumulated deficit........................................................ (6,475) (7,550)
Accumulated other comprehensive loss....................................... (957) (542)
Carryover basis adjustment................................................. (15,730) (15,730)
------------- --------------
TOTAL STOCKHOLDER'S EQUITY.............................................. 84,186 83,526
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.............................. $ 220,042 $ 222,770
============= ==============
The accompanying notes are an integral part of these consolidated
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, 2000 DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales................................... $ 25,459 $ 20,508 $ 57,089 $ 48,887
Cost of goods sold.......................... 16,972 13,288 35,797 29,080
--------- --------- --------- ---------
Gross profit............................. 8,487 7,220 21,292 19,807
Selling, general and administrative expenses 4,415 4,497 8,933 8,655
Amortization of goodwill and other
intangibles............................... 1,446 1,391 2,865 2,555
Gain from settlement of litigation, net..... - (870) - (870)
--------- --------- --------- ---------
Income from operations................... 2,626 2,202 9,494 9,467
Other expenses:
Interest expense to affiliate............ 68 - 181 -
Interest expense other, net.............. 3,276 3,393 6,605 6,741
Management fees and other, net........... 63 62 125 125
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary gain..................... (781) (1,253) 2,583 2,601
Income tax expense (benefit)................ 184 (353) 1,964 1,532
--------- --------- --------- ---------
Income (loss) before extraordinary gain.. (965) (900) 619 1,069
Extraordinary gain from early retirement of
debt, net of tax......................... 456 187 456 187
--------- --------- --------- ---------
Net income (loss)........................ $ (509) $ (713) $ 1,075 $ 1,256
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
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
ADDITIONAL OTHER CARRYOVER
COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE BASIS
SHARES DOLLARS CAPITAL DEFICIT LOSS ADJUSTMENT TOTAL
------ ------- ------- ------- ---- ---------- -----
BALANCES, JUNE 30, 2000 (unaudited) 1,000 $ -- $ 107,348 $ (7,550) $ (542) $ (15,730) $ 83,526
Net income (unaudited)................. 1,075 1,075
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............ (415) (415)
--------
Comprehensive income (unaudited)....... 660
-------- ------- --------- --------- -------- --------- --------
BALANCES, DECEMBER 31, 2000 (unaudited) 1,000 $ -- $ 107,348 $ (6,475) $ (957) $ (15,730) $ 84,186
======== ======= ========= ========= ======== ========= ========
The accompanying notes are an integral part of these consolidated
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, 2000 DECEMBER 31, 1999
----------------- -----------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 1,075 $ 1,256
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of goodwill and other intangibles... 5,036 4,734
Amortization of debt issuance cost................................ 297 351
Deferred income taxes............................................. (6) 1,820
Gain from early retirement of debt................................ (456) (187)
Other............................................................. (305) (19)
Changes in operating assets and liabilities:
Accounts receivable............................................. (1,896) 1,167
Inventory....................................................... 756 (90)
Prepaid expenses, deferred charges and other assets............. (377) 213
Accounts payable and accrued expenses........................... (2,065) (4,150)
Income taxes.................................................... 1,128 (32)
----------- -----------
Net cash provided by operating activities..................... 3,187 5,063
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment.............................................. (2,112) (1,125)
Payments for acquisitions, net of cash acquired..................... - (16,162)
----------- -----------
Net cash used in investing activities......................... (2,112) (17,287)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments under capital leases for equipment......................... (834) (336)
Repurchase of long-term debt........................................ (3,110) -
Net proceeds (repayments) on line of credit......................... (1,450) 6,100
Net proceeds from promissory note to affiliate...................... 3,661 -
----------- -----------
Net cash provided by (used in) financing activities........... (1,733) 5,764
----------- -----------
Net (decrease) in cash and cash equivalents............................ (658) (6,460)
Cash and cash equivalents, beginning of period......................... 1,158 7,015
----------- -----------
Cash and cash equivalents, end of period............................... $ 500 $ 555
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Interest, other................................................... $ 6,388 $ 6,177
Interest to affiliate............................................. 174 -
Income taxes...................................................... 866 47
SIGNIFICANT NON-CASH ACTIVITIES
Contribution of equity and retirement of senior notes............... $ - $ 3,996
The accompanying notes are an integral part of these
consolidated 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 Corporation (the "Predecessor") was organized for the
purpose of acquiring all the issued and outstanding capital stock of
Arcade, Inc. ("Arcade") on November 4, 1993. Arcade is principally engaged
in interactive advertising for consumer products companies and has a
specialty in the design, production and distribution of sampling systems
from its Chattanooga, Tennessee facilities, and also distributes its
products in Europe through its French subsidiary, Arcade Europe S.A.R.L.
DLJ Merchant Banking Partners II, L.P. and certain related investors
(collectively, "DLJMBII") and certain members of the Predecessor organized
AHC I Acquisition Corp. ("AHC") and AHC I Merger Corp. ("Merger Corp.") for
purposes of acquiring the Predecessor. On December 15, 1997, Merger Corp.
acquired all of the equity interests of the Predecessor and then merged
with and into the Predecessor and the combined entity assumed the name of
AKI, Inc. and Subsidiaries ("AKI"). Subsequent to the acquisition, AHC
contributed $1 and all of its ownership interest in AKI to AKI Holding
Corp. ("Holding") for all of the outstanding equity of Holding.
INTERIM FINANCIAL STATEMENTS
The interim consolidated condensed balance sheet at December 31, 2000
and the interim consolidated condensed statements of operations for the
three and six months ended December 31, 2000 and 1999, the interim
consolidated condensed statements of cash flows for the six months ended
December 31, 2000 and 1999 and the interim consolidated condensed statement
of changes in stockholder's equity for the six months ended December 31,
2000 are unaudited, and certain information and footnote disclosure related
thereto, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been
omitted. The June 30, 2000 consolidated balance sheet was derived from the
Company's audited balance sheet for the year then ended. In management's
opinion, 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, 2000 JUNE 30, 2000
----------------- -------------
(unaudited) (unaudited)
Raw materials
Paper................... $ 2,477 $ 3,944
Other raw materials..... 2,496 2,541
----------- ----------
Total raw materials......... 4,973 6,485
Work in process............. 2,028 1,272
----------- ----------
Net inventory............... $ 7,001 $ 7,757
=========== ==========
AKI, INC., AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
3. RETIREMENT OF DEBT
In fiscal 2001, AKI purchased $4,000 of AKI, Inc. Senior Notes for
$3,110. The notes were subsequently retired.
In fiscal 2000, AHC purchased $7,490 of AKI, Inc. Senior Notes for
$6,486. The notes were contributed to Holding Corp. and Holding Corp.
contributed the notes to AKI, Inc. The notes were subsequently retired.
4. PROMISSORY NOTE TO AFFILIATE
In May 2000, the Company signed a promissory note payable to AHC which
allows the Company to borrow up to $10 million at such interest rates and
due as agreed upon by the Company and AHC. At December 31, 2000, $3,661 was
outstanding bearing interest at prime and is due December 31, 2002.
5. DERIVATIVE INSTRUMENTS
Effective July 1, 2000, the Company adopted Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), as amended, which requires that all derivative
instruments be reported on the balance sheet at fair value and establishes
criteria for designation and effectiveness of hedging relationships. The
cumulative effect of adopting FAS 133 as of July 1, 2000 was not material
to the Company's financial statements.
The Company purchases and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in certain
foreign currency exchange rates. The primary purpose of the Company's
foreign currency hedging activities is to manage the short-term volatility
associated with foreign currency purchases and sales in the normal course
of business. The Company primarily utilizes foreign currency forward
exchange contracts with maturities of less than six months, which do not
meet hedge accounting criteria. The fair value of these instruments at
December 31, 2000 was not material and the net impact of the related gains
and losses were not material.
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"), 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 advertising materials with
sampling systems and products to fragrance, cosmetics and consumer products
companies, and also from creative services. Substantially all of our company's
sales are made directly to its customers while a small portion are made through
advertising agencies. Each customer's sampling program is unique and pricing is
negotiated based on estimated costs plus a margin. While our company and its
customers generally do not enter into long-term contracts, our company has had
long-standing relationships with the majority of its customer base.
RETCOM HOLDINGS LTD. ACQUISITION
On September 15, 1999, we acquired all of the issued and outstanding
shares of capital stock of RHL at a purchase price of approximately $12 million
and refinanced RHL's working capital indebtedness of approximately $5 million.
The purchase price and refinancing of indebtedness were financed by borrowings
under the revolving credit agreement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1999
NET SALES. Net sales for the three months ended December 31, 2000
increased $5.0 million, or 24.4%, to $25.5 million, as compared to $20.5 million
for the three months ended December 31, 1999. The increase was primarily
attributable to increases in volume of domestic and international sales of
sampling technologies to existing customers for advertising and marketing of
fragrances, partially offset by decreases in volume of domestic sales of
sampling technologies for advertising and marketing of cosmetics and consumer
products and foreign exchange rates.
GROSS PROFIT. Gross profit for the three months ended December 31, 2000
increased $1.3 million, or 18.1%, to $8.5 million, as compared to $7.2 million
for three months ended December 31, 1999. Gross profit as a percentage of net
sales decreased to 33.3% in the three months ended December 31, 2000, from 35.1%
in the three months ended December 31, 1999. The decrease in gross profit as a
percentage of net sales is primarily due to increased raw material costs,
additional premium labor costs, product mix, increased overhead costs and
foreign exchange rates. The increase in raw material costs was primarily due to
an increase in paper commodity prices, which management expects will remain at
current levels for the remainder of the fiscal year ending June 30, 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended December 31, 2000 decreased
$0.1 million, or 2.2%, to $4.4 million, as compared to $4.5 million for the
three months ended December 31, 1999. Selling, general and administrative
expenses as a percent of net sales decreased to 17.3% in the three months ended
December 31, 2000, from 22.0% in the three months ended December 31, 1999,
primarily due to the increase in net sales.
INCOME FROM OPERATIONS. Income from operations for the three months
ended December 31, 2000 increased $0.4 million, or 18.2%, to $2.6 million, as
compared to $2.2 million for the three months ended December 31, 1999. Income
from operations as a percentage of net sales decreased to 10.2% in the three
months ended December 31, 2000, from 10.7% in the three months ended December
31, 1999, principally as a result of the factors described above.
INTEREST EXPENSE. Interest expense for the three months ended December
31, 2000 decreased $0.1 million, or 2.3%, to $4.2 million, as compared to $4.3
million for the three months ended December 31, 1999. Interest expense as a
percentage of net sales decreased to 16.5% in the three months ended December
31, 2000, from 21.0% in the three months ended December 31, 1999. The decrease
in interest expense, including the amortization of deferred financing costs, is
primarily due to the repurchased and retired Senior Discount Debentures and
Senior Notes.
Interest expense for AKI for the three months ended December 31, 2000
decreased $0.1 million, or 2.9%, to $3.3 million, as compared to $3.4 million
for the three months ended December 31, 1999. Interest expense as a percentage
of net sales decreased to 12.9% in the three months ended December 31, 2000,
from 16.6% in the three months ended December 31, 1999. The decrease in interest
expense, including the amortization of deferred financing costs, is primarily
due to the repurchased and retired Senior Notes.
INCOME TAX BENEFIT AND EXPENSE. Income tax benefit for the three months
ended December 31, 2000 decreased $0.5 million to $0.1 million, as compared to a
benefit of $0.6 million for the three months ended December 31, 1999. The
Company's effective tax rate, after consideration of non-deductible goodwill
amortization and non-taxable gain from settlement of litigation, was 23.0% in
the three months ended December 31, 2000, and 35.6% in the three months ended
December 31, 1999.
Income tax expense for AKI for the three months ended December 31, 2000
increased $0.6 million to $0.2 million, as compared to a benefit of $0.4 million
for the three months ended December 31, 1999. AKI's effective tax rate, after
consideration of non-deductible goodwill amortization, was 39% in the three
months ended December 31, 2000 and 1999.
EXTRAORDINARY GAIN FROM EARLY RETIREMENT OF DEBT. Extraordinary gain
from early retirement of debt of $1.0 million for the three months ended
December 31, 2000 and $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 $0.5
million for the three months ended December 31, 2000 and $0.2 million for the
three months ended December 31, 1999 resulted from the purchase in 2000 of
Senior Notes by AKI and in 1999 the purchase of Senior Notes by AHC I
Acquisition Corp. and subsequent contribution by AKI Holding Corp. The purchased
and contributed securities were subsequently retired.
EBITDA. EBITDA for the three months ended December 31, 2000 increased
$1.4 million, or 36.8%, to $5.2 million, as compared to $3.8 million for the
three months ended December 31, 1999. The increase principally reflects the
increase in gross profit discussed above. EBITDA as a percentage of net sales
was 20.4% and 18.5% in the three months ended December 31, 2000 and 1999,
respectively. EBITDA is income from operations plus depreciation and
amortization of goodwill and other intangibles less net gain from settlement of
litigation.
SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1999
NET SALES. Net sales for the six months ended December 31, 2000
increased $8.2 million, or 16.8%, to $57.1 million as compared to $48.9 million
for the six months ended December 31, 1999. The increase was primarily
attributable to increases in domestic and international sales of sampling
technologies for advertising and marketing of fragrance products, partially
offset by decreases in domestic sales of sampling technologies for advertising
and marketing of cosmetics.
GROSS PROFIT. Gross profit for the six months ended December 31, 2000
increased $1.5 million, or 7.6%, to $21.3 million as compared to $19.8 million
for six months ended December 31, 1999. Gross profit as a percentage of net
sales decreased to 37.3% in the six months ended December 31, 2000, from 40.5%
in the six months ended December 31, 1999. The decrease in gross profit as a
percentage of net sales is primarily attributable to increased raw material
costs, additional premium labor costs, product mix, increased overhead costs and
foreign exchange rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended December 31, 2000 increased
$0.2 million, or 2.3%, to $8.9 million as compared to $8.7 million for the six
months ended December 31, 1999. The increase in selling, general and
administrative expenses was primarily due to increased staffing levels and
compensation. Selling, general and administrative expenses as a percent of net
sales decreased to 15.6% in the six months ended December 31, 2000 from 17.8% in
the six months ended December 31, 1999, primarily due to the increase in net
sales.
INCOME FROM OPERATIONS. Income from operations for the six months ended
December 31, 2000 and 1999 was $9.5 million. Income from operations for 1999
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 16.6% in the six months ended December 31,
2000, from 19.4% in six months ended December 31, 1999, principally as a result
of the factors described above.
INTEREST EXPENSE. Interest expense for the six months ended December
31, 2000 decreased $0.1 million, or 1.1%, to $8.6 million, as compared to $8.7
million for the six months ended December 31, 1999. Interest expense as a
percentage of net sales decreased to 15.1% in the six months ended December 31,
2000 from 17.8% in the six months ended December 31, 1999. The decrease in
interest expense, including the amortization of deferred financing costs, is
primarily due to a decrease in interest expense related to the repurchased and
retired Senior Discount Debentures and Senior Notes, partially offset by an
increase in interest expense related to use of the credit line and the
promissory note to AHC I Acquisition Corp. for working capital and the RHL
acquisition.
Interest expense for AKI for the six months ended December 31, 2000
increased $0.1 million, or 1.5%, to $6.8 million, as compared to $6.7 million
for the six months ended December 31, 1999. Interest expense as a percentage of
net sales decreased to 11.9% in the six months ended December 31, 2000, from
13.7% in the six months ended December 31, 1999. The increase in interest
expense, including the amortization of deferred financing costs, is primarily
due to use of the credit line and the promissory note to AHC I Acquisition Corp.
for working capital and the RHL acquisition, partially offset 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, 2000 increased $0.5 million to $1.4 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 43.4% in the six months ended December 31, 2000
and 45.3% in the six months ended December 31, 1999.
Income tax expense for AKI for the six months ended December 31, 2000
increased $0.5 million to $2.0 million. The increase is due to the increase in
income before income taxes and extraordinary gain as a result of the factors
described above. AKI's effective tax rate, after consideration of non-deductible
goodwill amortization and non-taxable gain from settlement of litigation, was
39.0% in the six months ended December 31, 2000 and 1999.
EXTRAORDINARY GAIN FROM EARLY RETIREMENT OF DEBT. Extraordinary gain
from early retirement of debt of $1.0 million for the six months ended December
31, 2000 and $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 $0.5
million for the six months ended December 31, 2000 and $0.2 million for the six
months ended December 31, 1999 resulted from the purchase in 2000 of Senior
Notes by AKI and in 1999 the purchase of Senior Notes by AHC I Acquisition Corp.
and the subsequent contribution by AKI Holding Corp. The purchased and
contributed securities were subsequently retired.
EBITDA. EBITDA for the six months ended December 31, 2000 increased
$1.2 million, or 9.0%, to $14.5 million as compared to $13.3 million for the six
months ended December 31, 1999. The increase principally reflects the increase
in gross profit discussed above. EBITDA as a percentage of net sales was 25.4%
and 27.2% in the six months ended December 31, 2000 and 1999 respectively.
EBITDA is income from operations plus depreciation and amortization of goodwill
and other intangibles less net gain from settlement of litigation.
LIQUIDITY AND CAPITAL RESOURCES
Our company has substantial indebtedness and significant debt service
obligations. As of December 31, 2000, our company had consolidated indebtedness
in an aggregate amount of $142.8 million (excluding trade payables, accrued
liabilities, deferred taxes and other non-current liabilities), of which (1)
approximately $27.5 million was a direct obligation of Holding relating to its
debentures and (2) approximately $115.3 million was a direct obligation of AKI
relating to its notes, revolving credit line, promissory note to affiliate and
capital leases. Borrowings at December 31, 2000 included $7.6 million under the
revolving credit agreement that was incurred to finance the acquisition of RHL
and provide working capital and $3.7 million on the promissory note to affiliate
that was used to reduce other existing debt. At December 31, 2000 our company
had available $12.4 million under the revolving credit agreement. At December
31, 2000, AKI also had $20.6 million in additional outstanding liabilities
(including trade payables, accrued liabilities, deferred taxes and other
non-current liabilities).
In May 2000, AKI signed a promissory note payable to AHC I Acquisition
Corp. ("AHC"), the sole stockholder of Holding, which allows AKI to borrow up to
$10 million at such interest rates and due as agreed upon by AKI and AHC. At
December 31, 2000, $3.7 million was outstanding under the promissory note at
prime and is due December 31, 2002. Proceeds from the promissory note were used
to reduce other existing debt. AKI does not currently anticipate borrowings
under the promissory note will exceed this amount.
Holding's principal liquidity requirements are for debt service
requirements under the debentures. AKI's principal liquidity requirements are
for debt service requirements and fees under the notes and the credit agreement.
Historically, our company has funded its capital, debt service and operating
requirements with a combination of net cash provided by operating activities,
together with borrowings under revolving credit facilities. During the six
months ended December 31, 2000, cash totaling $3.2 million was provided by
operating activities resulting from net income before depreciation and
amortization, a decrease in inventory and an increase in accrued income tax,
partially offset by an increase in accounts receivable and decreases in accounts
payable and accrued expenses. During the six months ended December 31, 1999,
cash totaling $5.1 million was provided by operating activities resulting from
net income before depreciation and amortization and decreases in accounts
receivable and inventory offset partially by decreases in accounts payable and
accrued expenses.
In the six months ended December 31, 2000 and 1999, our company had capital
expenditures of approximately $2.1 million and $1.1 million, respectively. These
capital expenditures consisted primarily of the purchase of manufacturing
equipment, furniture and fixtures and upgrading our computer systems.
On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RHL at a purchase price of approximately $12.2 million and
refinanced RHL's working capital indebtedness of approximately $5 million. The
purchase price and refinancing of indebtedness were financed by borrowings under
the credit agreement, a portion of which was subsequently repaid with cash flows
from operating activities.
Our company may from time to time evaluate additional potential
acquisitions. There can be no assurance that additional capital sources will be
available to our company to fund additional acquisitions on terms that our
company finds acceptable, or at all.
In September 1999, AHC consummated a private placement to DLJMBII of
15,000,000 shares of its common stock at a purchase price of $1.00 per share. As
of December 31, 2000, AHC had purchased $11.8 million of Holding Corp. Senior
Discount Debentures and $7.5 million of AKI, Inc. Senior Notes. The debentures
and notes were contributed to Holding Corp. and subsequently retired.
As of December 31, 2000, AKI purchased and retired $4.0 million of AKI,
Inc. Senior Notes.
Capital expenditures for the six months ending June 30, 2001 are currently
estimated to be approximately $1.5 million. Based on borrowings outstanding as
of December 31, 2000, our company expects total cash payments for debt service
for the six months ending June 30, 2001 to be approximately $6.2 million,
consisting of $5.4 million in interest payments on the notes, $0.1 million in
capital lease obligations, $0.6 million in interest and fees under the
credit agreement and $0.1 million in interest on the promissory note to
stockholder and affiliate. Our company also expects to make royalty payments of
approximately $0.3 million during the six months ending June 30, 2001.
At December 31, 2000, Holding's cash and cash equivalents and net working
capital were $0.5 million and $15.6 million, respectively, representing a
decrease in cash and cash equivalents of $0.7 million and an increase in net
working capital of $1.8 million from June 30, 2000. Account receivables, net, at
December 31, 2000 increased 8.8% or $1.9 million over the June 30, 2000 amount,
primarily due to increased sales.
SEASONALITY
Our company's sales and operating results have historically reflected
seasonal variations. Such seasonal variations are based on the timing of our
company's customers' advertising campaigns, which have traditionally been
concentrated prior to the Christmas and spring holiday seasons. As a result, a
higher level of sales are reflected in our company's first and third fiscal
quarters ended September 30 and March 31 when sales from such advertising
campaigns are principally recognized, while our company's fourth fiscal quarter
ended June 30 typically reflects the lowest sales level of the fiscal year.
These seasonal fluctuations require our company to accurately allocate its
resources to manage our company's manufacturing capacity, which often operates
at full capacity during peak seasonal demand periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"), which provides the Staff's views on applying generally accepted
accounting principles to revenue recognition issues. SAB 101, as amended by SAB
101A and SAB 101B, outlines the criteria that must be met to recognize revenue
and provide guidance for disclosures related to revenue recognition policies.
The Company must implement any applicable provisions of SAB 101 no later than
the fourth quarter of the fiscal year ending June 30, 2001. The Company does not
anticipate that the adoption of SAB 101 will have a material impact on the
Company's consolidated financial statements and will continue to analyze the
impact of SAB 101.
In September 2000, the Emerging Issues Task Force reached a consensus on
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" ("Issue
00-10"). Issue 00-10 requires that all amounts billed to customers related to
shipping and handling should be classified as revenues. Issue 00-10 will be
effective for the Company no later than the fourth quarter of the fiscal year
ended June 30, 2001. The Company is currently assessing the effect, if any, on
its financial statements of implementing Issue 00-10.
FORWARD-LOOKING STATEMENTS
The information provided in this document contains forward-looking
statements that involve a number of risks and uncertainties. A number of factors
could cause actual results, performance or achievements of our company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. These
factors include, but are not limited to: the competitive environment in the
sampling industry in general and in our company's specific market areas; changes
in prevailing interest rates; inflation; changes in cost of goods and services;
economic conditions in general and in our company's specific market areas;
changes in or failure to comply with postal regulations or other federal, state
and/or local government regulations; liability and other claims asserted against
our company; changes in operating strategy or development plans; the ability to
attract and retain qualified personnel; the significant indebtedness of our
company; labor disturbances; changes in our company's capital expenditure plans;
and other factors.
In addition, such forward-looking statements are necessarily dependent upon
assumptions, estimates and dates that may be incorrect or imprecise and involve
known and unknown risk, uncertainties and other factors. Accordingly, any
forward-looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. Forward-looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "should," "seeks," "pro
forma," "anticipates," "intends" or the negative of any such word, or other
variations or comparable terminology, or by discussions of strategy or
intentions. Given these uncertainties, readers are cautioned not place undue
reliance on
such forward-looking statements. Our company disclaims any obligations to update
any such factors or to publicly announce the results of any revisions to any of
the forward-looking statements contained in this document to reflect future
events or developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our company generates approximately 20% of its sales from customers outside
the United States, principally in Europe. International sales are made mostly
from our company's foreign subsidiary located in France and are primarily
denominated in the local currency. Our company's foreign subsidiary also incurs
the majority of its expenses in the local currency and uses the local currency
as its functional currency.
Our company's major principal cash balances are held in U.S. dollars. Cash
balances in foreign currencies are held to minimum balances for working capital
purposes and therefore have a minimum risk to currency fluctuations.
Our company periodically enters into forward foreign currency exchange
contracts to hedge certain exposures related to selected transactions that are
relatively certain as to both timing and amount and to hedge a portion of the
production costs expected to be denominated in foreign currencies. The purpose
of entering into these hedge transactions is to minimize the impact of foreign
currency fluctuations on the results of operations and cash flows. Gains and
losses on the hedging activities are recognized concurrently with the gains and
losses from the underlying transactions. At December 31, 2000, there were no
forward exchange contracts outstanding.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fifth Amendment to Credit Agreement
10.2 Sixth Amendment to Credit Agreement
(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 13, 2001 By: /S/ KENNETH A. BUDDE
-----------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
AKI, INC.
Date: February 13, 2001 By: /S/ KENNETH A. BUDDE
-----------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer