FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File Number: 333-60991
AKI HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 74-2883163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Commission File Number: 333-60989
AKI, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3785856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1815 East Main Street
Chattanooga, TN 37404
(Address of principal executive offices) (Zip Code)
(423) 624-3301
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days (X) Yes ( ) No
As of May 14, 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 (unaudited)
AKI Holding Corp. and Subsidiaries
Consolidated Condensed Balance Sheet
- March 31, 2001
- June 30, 2000
Consolidated Condensed Statements of Operations
- Three months ended March 31, 2001
- Three months ended March 31, 2000
- Nine months ended March 31, 2001
- Nine months ended March 31, 2000
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Nine months ended March 31, 2001
Consolidated Condensed Statements of Cash Flows
- Nine months ended March 31, 2001
- Nine months ended March 31, 2000
Notes to Consolidated Condensed Financial Statements
Item 1. Financial Statements (unaudited) (continued)
AKI, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet
- March 31, 2001
- June 30, 2000
Consolidated Condensed Statements of Operations
- Three months ended March 31, 2001
- Three months ended March 31, 2000
- Nine months ended March 31, 2001
- Nine months ended March 31, 2000
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Nine months ended March 31, 2001
Consolidated Condensed Statements of Cash Flows
- Nine months ended March 31, 2001
- Nine months ended March 31, 2000
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)
March 31, June 30,
2001 2000
------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 2,046 $ 1,158
Accounts receivable, net................................................... 30,330 21,522
Inventory.................................................................. 7,311 7,757
Prepaid expenses........................................................... 472 92
Deferred income taxes...................................................... 396 396
------------- -------------
Total current assets.................................................... 40,555 30,925
Property, plant and equipment, net......................................... 16,290 17,097
Goodwill, net.............................................................. 158,867 162,472
Other intangible assets, net............................................... 6,455 7,174
Deferred charges, net...................................................... 4,679 5,461
Deferred income taxes...................................................... 340 720
Other assets............................................................... 91 88
------------- -------------
Total assets............................................................ $ 227,277 $ 223,937
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations............................... $ 509 $ 847
Accounts payable, trade.................................................... 3,906 3,565
Accrued income taxes....................................................... 1,793 310
Accrued compensation....................................................... 4,683 3,965
Accrued interest........................................................... 2,850 5,695
Accrued expenses........................................................... 2,412 2,370
------------- -------------
Total current liabilities............................................... 16,153 16,752
Long-term portion of capital lease obligations............................. - 502
Revolving credit line...................................................... 12,125 9,000
Senior notes............................................................... 103,510 107,510
Senior discount debentures................................................. 26,901 27,863
Promissory note to stockholder............................................. 2,904 -
Deferred income taxes...................................................... 240 1,077
Other non-current liabilities.............................................. 2,561 2,399
------------- -------------
Total liabilities....................................................... 164,394 165,103
Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
1,000 shares issued and outstanding.................................... - -
Additional paid-in capital................................................. 91,006 88,935
Accumulated deficit........................................................ (11,801) (13,829)
Accumulated other comprehensive loss....................................... (592) (542)
Carryover basis adjustment................................................. (15,730) (15,730)
------------- -------------
Total stockholder's equity.............................................. 62,883 58,834
------------- -------------
Total liabilities and stockholder's equity.............................. $ 227,277 $ 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 Nine months ended
------------------ -----------------
March 31, 2001 March 31, 2000 March 31, 2001 March 31, 2000
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales......................................... $ 32,601 $ 25,433 $ 89,690 $ 74,320
Cost of goods sold................................ 18,836 15,492 54,633 44,572
--------- --------- --------- ---------
Gross profit................................... 13,765 9,941 35,057 29,748
Selling, general and administrative expenses...... 5,021 3,630 13,954 12,285
Amortization of goodwill and other intangibles.... 1,446 1,373 4,311 3,928
Gain from settlement of litigation, net........... - 12 - (858)
--------- --------- --------- ---------
Income from operations......................... 7,298 4,926 16,792 14,393
Other expenses:
Interest expense to stockholder................ 91 - 272 -
Interest expense other, net.................... 4,178 4,382 12,645 13,049
Management fees and other, net................. 63 62 188 187
--------- --------- --------- ---------
Income before income taxes and extraordinary
gain........................................... 2,966 482 3,687 1,157
Income tax expense................................ 1,665 714 3,020 1,618
--------- --------- --------- ---------
Income (loss) before extraordinary gain........ 1,301 (232) 667 (461)
Extraordinary gain from early retirement of
debt, net of tax.................................. 411 2 1,361 848
--------- --------- --------- ---------
Net income (loss).............................. $ 1,712 $ (230) $ 2,028 $ 387
========= ========= ========= =========
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
Acquisition Corp. (unaudited)....... 2,071 2,071
Net income (unaudited)................. 2,028 2,028
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............ (50) (50)
--------
Comprehensive income (unaudited)....... 1,978
-------- --------- --------- ---------- -------- ---------- --------
Balances, March 31, 2001 (unaudited)... 1,000 $ - $ 91,006 $ (11,801) $ (592) $ (15,730) $ 62,883
======== ========= ========= ========== ======== ========== ========
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)
Nine months ended
-----------------
March 31, 2001 March 31, 2000
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income.................................................................... $ 2,028 $ 387
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of goodwill and other intangibles............. 7,568 7,188
Amortization of debt discount............................................... 2,732 2,760
Amortization of debt issuance costs......................................... 497 573
Deferred income taxes....................................................... (879) 867
Gain from early retirement of debt.......................................... (1,361) (848)
Other....................................................................... 108 (133)
Changes in operating assets and liabilities:
Accounts receivable....................................................... (8,808) (3,731)
Inventory................................................................. 446 (3,018)
Prepaid expenses, deferred charges and other assets....................... (380) 397
Accounts payable and accrued expenses..................................... (1,744) (6,474)
Income taxes.............................................................. 1,038 (32)
----------- -----------
Net cash provided by (used in) operating activities..................... 1,245 (2,064)
----------- -----------
Cash flows from investing activities
Purchases of equipment........................................................ (2,436) (2,300)
Payments for acquisitions, net of cash acquired............................... - (16,162)
----------- -----------
Net cash used in investing activities................................... (2,436) (18,462)
----------- -----------
Cash flows from financing activities
Payments under capital leases for equipment................................... (840) (510)
Repurchase of long-term debt.................................................. (3,110) -
Net proceeds on line of credit................................................ 3,125 14,200
Net proceeds from promissory note to stockholder.............................. 2,904 -
----------- -----------
Net cash provided by financing activities............................... 2,079 13,690
----------- -----------
Net increase (decrease) in cash and cash equivalents............................. 888 (6,836)
Cash and cash equivalents, beginning of period................................... 1,158 7,015
----------- -----------
Cash and cash equivalents, end of period......................................... $ 2,046 $ 179
=========== ===========
Supplemental information
Cash paid during the period for:
Interest, other............................................................. $ 12,125 $ 12,724
Interest to stockholder..................................................... 230 -
Income taxes................................................................ 2,836 1,157
Significant non-cash activities
Contribution of equity and retirement of senior discount debentures
and senior notes............................................................ $ 2,071 $ 8,080
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 printed advertising for fragrance, cosmetics as well as
other consumer products companies and has a specialty in the design,
production and distribution of sampling systems. Arcade distributes its
product from its Chattanooga, Tennessee facilities as well as 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 March 31, 2001 and
the interim consolidated condensed statements of operations for the three
and nine months ended March 31, 2001 and 2000, the interim consolidated
condensed statements of cash flows for the nine months ended March 31, 2001
and 2000 and the interim consolidated condensed statement of changes in
stockholder's equity for the nine months ended March 31, 2001 are
unaudited, and certain information and footnote disclosure related thereto,
normally included in financial statements prepared in accordance with
generally accepted accounting principles, have been omitted. The June 30,
2000 consolidated condensed balance sheet was derived from the 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 the 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.
Reclassification
Certain prior period amounts have been reclassified to conform with
the current period presentation.
2. INVENTORY
The following table details the components of inventory:
March 31, 2001 June 30, 2000
-------------- -------------
(unaudited) (unaudited)
Raw materials
Paper...................... $ 2,661 $ 3,944
Other raw materials........ 2,307 2,541
----------- ----------
Total raw materials.... 4,968 6,485
Work in process................ 2,543 1,472
----------- ----------
Total inventory............ 7,511 7,957
Reserve for obsolescence....... (200) (200)
----------- ----------
Net inventory.............. $ 7,311 $ 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 $5,180 of Holding Senior Discount
Debentures for $2,071 and AKI purchased $4,000 of AKI Senior Notes for
$3,110. The debentures were contributed to Holding and the debentures
and notes were subsequently retired.
In fiscal 2000, AHC purchased $8,770 of Holding Senior Discount
Debentures for $4,084 and $7,490 of AKI Senior Notes for $6,486. The
debentures and notes were contributed to Holding 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 March 31,
2001, $2,904 was outstanding under this promissory note 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 March 31, 2001 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 March 31, 2001 and June
30, 2000 and condensed statements of operations, changes in
stockholder's equity and cash flows for the nine months ended March
31, 2001 and 2000 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
March 31, 2001 June 30, 2000
-------------- -------------
(unaudited) (unaudited)
Assets
Investment in subsidiaries............................... $ 102,805 $ 99,798
Deferred charges......................................... 958 1,167
Deferred income taxes.................................... 2,507 2,013
----------- -----------
Total assets......................................... $ 106,270 $ 102,978
=========== ===========
Liabilities
Accrued income taxes..................................... $ 164 $ 9
Senior discount debentures............................... 26,901 27,863
----------- -----------
Total liabilities.................................... 27,065 27,872
----------- -----------
Stockholder's equity
Common Stock, $0.01 par value, 1,000 shares authorized
1,000 shares issued and outstanding.................... - -
Additional paid-in capital............................... 91,006 88,935
Accumulated deficit...................................... (11,801) (13,829)
----------- -----------
Total stockholder's equity........................... 79,205 75,106
----------- -----------
Total liabilities and stockholder's equity........... $ 106,270 $ 102,978
=========== ===========
STATEMENT OF OPERATIONS
Nine months ended
-----------------
March 31, 2001 March 31, 2000
-------------- --------------
(unaudited) (unaudited)
Equity in net income of subsidiaries.......................... $ 3,007 $ 1,632
Interest expense.............................................. 2,800 2,829
----------- -----------
Income (loss) before income taxes and extraordinary gain.. 207 (1,197)
Income tax benefit............................................ (916) (923)
----------- -----------
Income (loss) before extraordinary gain................... 1,123 (274)
Extraordinary gain from early retirement of debt, net of tax.. 905 661
----------- -----------
Net income ............................................... $ 2,028 $ 387
=========== ===========
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)................................ 2,071 2,071
Net income (unaudited).......................... 2,028 2,028
------- ------- ---------- ---------- ---------
Balances, March 31, 2001 (unaudited)............ 1,000 $ - $ 91,006 $ (11,801) $ 79,205
======= ======= ========== ========== =========
STATEMENT OF CASH FLOWS
Nine months ended
-----------------
March 31, 2001 March 31, 2000
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income..................................................... $ 2,028 $ 387
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Net change in investment in subsidiaries................ (3,007) (1,632)
Amortization of debt discount........................... 2,732 2,760
Amortization of debt issuance costs..................... 68 70
Deferred income taxes................................... (916) (924)
Gain from early retirement of debt...................... (905) (661)
----------- -----------
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................................. $ 2,071 $ 8,080
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)
March 31, June 30,
2001 2000
------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 2,046 $ 1,158
Accounts receivable, net................................................... 30,330 21,522
Inventory.................................................................. 7,311 7,757
Prepaid expenses........................................................... 472 92
Deferred income taxes...................................................... 396 396
------------- -------------
Total current assets.................................................... 40,555 30,925
Property, plant and equipment, net......................................... 16,290 17,097
Goodwill, net.............................................................. 158,867 162,472
Other intangible assets, net............................................... 6,455 7,174
Deferred charges, net .................................................... 3,721 4,294
Deferred income taxes...................................................... 340 720
Other assets............................................................... 91 88
------------- -------------
Total assets............................................................ $ 226,319 $ 222,770
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations............................... $ 509 $ 847
Accounts payable, trade.................................................... 3,906 3,565
Accrued income taxes....................................................... 1,629 301
Accrued compensation....................................................... 4,683 3,965
Accrued interest........................................................... 2,850 5,695
Accrued expenses........................................................... 2,412 2,370
------------- -------------
Total current liabilities............................................... 15,989 16,743
Long-term portion of capital lease obligations............................. - 502
Revolving credit line...................................................... 12,125 9,000
Senior notes............................................................... 103,510 107,510
Promissory note to affiliate............................................... 2,904 -
Deferred income taxes...................................................... 2,747 3,090
Other non-current liabilities.............................................. 2,561 2,399
------------- -------------
Total liabilities....................................................... 139,836 139,244
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........................................................ (4,543) (7,550)
Accumulated other comprehensive loss....................................... (592) (542)
Carryover basis adjustment................................................. (15,730) (15,730)
-------------- -------------
Total stockholder's equity.............................................. 86,483 83,526
------------- -------------
Total liabilities and stockholder's equity.............................. $ 226,319 $ 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 Nine months ended
------------------ -----------------
March 31, 2001 March 31,2000 March 31, 2001 March 31, 2000
-------------- ------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales......................................... $ 32,601 $ 25,433 $ 89,690 $ 74,320
Cost of goods sold................................ 18,836 15,492 54,633 44,572
--------- --------- --------- ---------
Gross profit................................... 13,765 9,941 35,057 29,748
Selling, general and administrative expenses...... 5,021 3,631 13,954 12,286
Amortization of goodwill and other intangibles.... 1,446 1,373 4,311 3,928
Gain from settlement of litigation, net........... - 12 - (858)
--------- --------- --------- ---------
Income from operations......................... 7,298 4,925 16,792 14,392
Other expenses:
Interest expense to affiliate.................. 91 - 272 -
Interest expense other, net.................... 3,240 3,479 9,845 10,220
Management fees and other, net................. 63 62 188 187
--------- --------- --------- ---------
Income before income taxes and extraordinary
gain........................................... 3,904 1,384 6,487 3,985
Income tax expense................................ 1,972 1,008 3,936 2,540
--------- --------- --------- ---------
Income before extraordinary gain............... 1,932 376 2,551 1,445
Extraordinary gain from early retirement of
debt, net of tax.................................. - - 456 187
--------- --------- --------- ---------
Net income..................................... $ 1,932 $ 376 $ 3,007 $ 1,632
========= ========= ========= =========
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)................. 3,007 3,007
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............ (50) (50)
--------
Comprehensive income (unaudited)....... 2,957
-------- --------- ---------- --------- -------- ---------- --------
Balances, March 31, 2001 (unaudited)... 1,000 $ - $ 107,348 $ (4,543) $ (592) $ (15,730) $ 86,483
======== ========= ========== ========= ======== ========== ========
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)
Nine months ended
-----------------
March 31, 2001 March 31, 2000
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income ................................................................... $ 3,007 $ 1,632
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of goodwill and other intangibles............. 7,568 7,188
Amortization of debt issuance cost.......................................... 429 503
Deferred income taxes....................................................... 37 1,790
Gain from early retirement of debt.......................................... (456) (187)
Other....................................................................... 108 (133)
Changes in operating assets and liabilities:
Accounts receivable....................................................... (8,808) (3,731)
Inventory................................................................. 446 (3,018)
Prepaid expenses, deferred charges and other assets....................... (380) 398
Accounts payable and accrued expenses..................................... (1,744) (6,474)
Income taxes.............................................................. 1,038 (32)
----------- -----------
Net cash provided by (used in) operating activities..................... 1,245 (2,064)
----------- ------------
Cash flows from investing activities
Purchases of equipment........................................................ (2,436) (2,300)
Payments for acquisitions, net of cash acquired............................... - (16,162)
----------- -----------
Net cash used in investing activities................................... (2,436) (18,462)
----------- -----------
Cash flows from financing activities
Payments under capital leases for equipment................................... (840) (510)
Repurchase of long-term debt.................................................. (3,110) -
Net proceeds on line of credit................................................ 3,125 14,200
Net proceeds from promissory note to affiliate................................ 2,904 -
----------- -----------
Net cash provided by financing activities............................... 2,079 13,690
----------- -----------
Net increase (decrease) in cash and cash equivalents............................. 888 (6,836)
Cash and cash equivalents, beginning of period................................... 1,158 7,015
----------- -----------
Cash and cash equivalents, end of period......................................... $ 2,046 $ 179
=========== ===========
Supplemental information
Cash paid during the period for:
Interest, other............................................................. $ 12,125 $ 12,724
Interest to affiliate....................................................... 230 -
Income taxes................................................................ 2,836 1,157
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 printed advertising for fragrance, cosmetics as
well as other consumer products companies and has a specialty in the
design, production and distribution of sampling systems. Arcade
distributes its product from its Chattanooga, Tennessee facilities as
well as 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 March 31,
2001 and the interim consolidated condensed statements of operations
for the three and nine months ended March 31, 2001 and 2000, the
interim consolidated condensed statements of cash flows for the nine
months ended March 31, 2001 and 2000 and the interim consolidated
condensed statement of changes in stockholder's equity for the nine
months ended March 31, 2001 are unaudited, and certain information and
footnote disclosure related thereto, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been omitted. The June 30, 2000 consolidated
condensed balance sheet was derived from the 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 the 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:
March 31, 2001 June 30, 2000
-------------- -------------
(unaudited) (unaudited)
Raw materials
Paper.................... $ 2,661 $ 3,944
Other raw materials...... 2,307 2,541
----------- ----------
Total raw materials.. 4,968 6,485
Work in process.............. 2,543 1,472
----------- ----------
Total inventory.......... 7,511 7,957
Reserve for obsolescence..... (200) (200)
----------- ----------
Net inventory............ $ 7,311 $ 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 Senior Notes for
$3,110. The notes were subsequently retired.
In fiscal 2000, AHC purchased $7,490 of AKI Senior Notes for
$6,486. The notes were contributed to Holding and Holding contributed
the notes to AKI. 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 March 31,
2001, $2,904 was outstanding under this promissory note 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 March 31, 2001 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 primarily through its multi-sensory,
interactive marketing activities primarily from the sale of printed 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 of our customer's marketing programs
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 RHL's indebtedness were financed by borrowings
under a revolving credit line with Heller Financial, Inc.
Results of Operations
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Net Sales. Net sales for the three months ended March 31, 2001 increased
$7.2 million, or 28.3%, to $32.6 million, as compared to $25.4 million for the
three months ended March 31, 2000. The increase in net sales was primarily
attributable to increases in volume and favorable product pricing mix of
domestic and international sales of sampling technologies to existing customers
for advertising and marketing of fragrances and cosmetics products.
Gross Profit. Gross profit for the three months ended March 31, 2001
increased $3.9 million, or 39.4%, to $13.8 million, as compared to $9.9 million
for three months ended March 31, 2000. Gross profit as a percentage of net sales
increased to 42.3% in the three months ended March 31, 2001, from 39.0% in the
three months ended March 31, 2000. The increase in gross profit as a percentage
of net sales is primarily due to product volume and pricing mix offset by
increased raw material costs, additional premium labor costs and increased
overhead costs. The increase in raw material costs was primarily due to an
increase in paper commodity prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2001 increased $1.4
million, or 38.9%, to $5.0 million, as compared to $3.6 million for the three
months ended March 31, 2000. Selling, general and administrative expenses as a
percent of net sales increased to 15.3% in the three months ended March 31,
2001, from 14.2% in the three months ended March 31, 2000. The increase in
selling, general and administrative expenses and the increase as a percent of
net sales was primarily due to increased sales commissions and incentive bonuses
primarily as a result of the increase in sales volume and other quantitative
incentive measures.
Income from Operations. Income from operations for the three months ended
March 31, 2001 increased $2.4 million, or 49.0%, to $7.3 million, as compared to
$4.9 million for the three months ended March 31, 2000. Income from operations
as a percentage of net sales increased to 22.4% in the three months ended March
31, 2001, from 19.3% in the three months ended March 31, 2000, principally as a
result of the factors described above.
Interest Expense. Interest expense for the three months ended March 31,
2001 decreased $0.1 million, or 2.3%, to $4.3 million, as compared to $4.4
million for the three months ended March 31, 2000. Interest expense as a
percentage of net sales decreased to 13.2% in the three months ended March 31,
2001, from 17.3% in the three months ended March 31, 2000. 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 March 31, 2001
decreased $0.2 million, or 5.7%, to $3.3 million, as compared to $3.5 million
for the three months ended March 31, 2000. Interest expense as a percentage of
net sales decreased to 10.1% in the three months ended March 31, 2001, from
13.8% in the three months ended March 31, 2000. The decrease in interest
expense, including the amortization of deferred financing costs, is primarily
due to the repurchased and retired Senior Notes.
Income Tax Expense. Income tax expense for the three months ended March 31,
2001 increased $1.0 million to $1.7 million. The Company's effective tax rate,
after consideration of non-deductible goodwill amortization and non-taxable gain
from settlement of litigation, was 39.9% in the three months ended March 31,
2001, and 42.7% in the three months ended March 31, 2000.
Income tax expense for AKI for the three months ended March 31, 2001
increased $1.0 million to $2.0 million. AKI's effective tax rate, after
consideration of non-deductible goodwill amortization, was 39% in the three
months ended March 31, 2001 and 2000.
Extraordinary Gain from Early Retirement of Debt. Extraordinary gain from
early retirement of debt of $0.4 million for the three months ended March 31,
2001 resulted from the purchase and subsequent contribution of Senior Discount
Debentures by AHC I Acquisition Corp. The contributed securities were
subsequently retired.
EBITDA. EBITDA for the three months ended March 31, 2001 increased $2.4
million, or 32.4%, to $9.8 million, as compared to $7.4 million for the three
months ended March 31, 2000. The increase in EBITDA principally reflects the
increase in gross profit partially offset by the increase in selling, general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was 30.1% and 29.1% in the three months ended March 31, 2001 and 2000,
respectively. EBITDA is income from operations plus depreciation and
amortization of goodwill and other intangibles less net gain from settlement of
litigation.
Nine Months Ended March 31, 2001 Compared to Nine Months Ended March 31, 2000
Net Sales. Net sales for the nine months ended March 31, 2001 increased
$15.4 million, or 20.7%, to $89.7 million as compared to $74.3 million for the
nine months ended March 31, 2000. The increase in net sales was primarily
attributable to volume and favorable pricing mix in domestic and international
sales of sampling technologies for advertising and marketing of fragrance
products, partially offset by the unfavorable effect of a stronger U.S. dollar
against primarily the French Franc.
Gross Profit. Gross profit for the nine months ended March 31, 2001
increased $5.4 million, or 18.2%, to $35.1 million as compared to $29.7 million
for the nine months ended March 31, 2000. Gross profit as a percentage of net
sales decreased to 39.1% in the nine months ended March 31, 2001, from 40.0% in
the nine months ended March 31, 2000. The decrease in gross profit as a
percentage of net sales is primarily attributable to increased raw material
costs, additional premium labor costs, increased overhead costs and foreign
exchange rates offset by product mix and increased selling prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended March 31, 2001 increased $1.7
million, or 13.8%, to $14.0 million as compared to $12.3 million for the nine
months ended March 31, 2000. The increase in selling, general and administrative
expenses was primarily due to increased staffing levels and compensation,
including increased sales commissions and incentive bonuses as a result of the
increase in sales volume and other quantitative incentive measures. Selling,
general and administrative expenses as a percent of net sales decreased to 15.6%
in the nine months ended March 31, 2001 from 16.6% in the nine months ended
March 31, 2000, primarily due to the increase in net sales.
Income from Operations. Income from operations for the nine months ended
March 31, 2001 increased $2.4 million, or 16.7%, to $16.8 million, as compared
to $14.4 million for the nine months ended March 31, 2000. Income from
operations for 2000 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 18.7% in the nine months ended March 31, 2001, from
19.4% in the nine months ended March 31, 2000, principally as a result of the
factors described above.
Interest Expense. Interest expense for the nine months ended March 31, 2001
decreased $0.1 million, or 0.8%, to $12.9 million, as compared to $13.0 million
for the nine months ended March 31, 2000. Interest expense as a percentage of
net sales decreased to 14.4% in the nine months ended March 31, 2001 from 17.5%
in the nine months ended March 31, 2000. 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 nine months ended March 31, 2001 decreased
$0.1 million, or 1.0%, to $10.1 million, as compared to $10.2 million for the
nine months ended March 31, 2000. Interest expense as a percentage of net sales
decreased to 11.3% in the nine months ended March 31, 2001, from 13.7% in the
nine months ended March 31, 2000. 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 Notes, partially
offset by use of the revolving credit line and the promissory note to AHC I
Acquisition Corp. for working capital and the RHL acquisition.
Income Tax Expense. Income tax expense for the nine months ended March 31,
2001 increased $1.4 million to $3.0 million. The increase is due to the increase
in income before income taxes and extraordinary gain as a result of the factors
described above. The Company's effective tax rate, after consideration of
non-deductible goodwill amortization and non-taxable gain from settlement of
litigation, was 41.4% in the nine months ended March 31, 2001 and 44.0% in the
nine months ended March 31, 2000.
Income tax expense for AKI for the nine months ended March 31, 2001
increased $1.4 million to $3.9 million. The increase is due to the increase in
income before income taxes and extraordinary gain as a result of the factors
described above. AKI's effective tax rate, after consideration of non-deductible
goodwill amortization and non-taxable gain from settlement of litigation, was
39.0% in the nine months ended March 31, 2001 and 2000.
Extraordinary Gain from Early Retirement of Debt. Extraordinary gain from
early retirement of debt of $1.4 million for the nine months ended March 31,
2001 and $0.8 million for the nine months ended March 31, 2000 resulted from the
purchase and subsequent contribution of Senior Notes and Senior Discount
Debentures by AHC I Acquisition Corp. The contributed securities were
subsequently retired.
Extraordinary gain from early retirement of debt for AKI of $0.5 million
for the nine months ended March 31, 2001 and $0.2 million for the nine months
ended March 31, 2000 resulted from the purchase in fiscal year 2001 of Senior
Notes by AKI and the purchase in fiscal year 2000 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 nine months ended March 31, 2001 increased $3.7
million, or 17.9%, to $24.4 million as compared to $20.7 million for the nine
months ended March 31, 2000. The increase in EBITDA principally reflects the
increase in gross profit partially offset by the increase in selling, general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was 27.2% and 27.9% in the nine months ended March 31, 2001 and 2000,
respectively. EBITDA is income from operations plus depreciation and
amortization of goodwill and other intangibles less net gain from settlement of
litigation.
Liquidity and Capital Resources
Our company has substantial indebtedness and significant debt service
obligations. As of March 31, 2001, our company had consolidated indebtedness in
an aggregate amount of $145.9 million (excluding trade payables, accrued
liabilities, deferred taxes and other non-current liabilities), of which
approximately $26.9 million was a direct obligation of Holding relating to its
debentures and approximately $119.0 million was a direct obligation of AKI
relating to its notes, revolving credit line, promissory note to affiliate and
capital leases. Borrowings at March 31, 2001 included $12.1 million under the
revolving credit line that was incurred to finance the acquisition of RHL
and provide working capital and $2.9 million on the promissory note to affiliate
that was used to reduce other existing debt. At March 31, 2001 our company had
$7.9 million available under the revolving credit line. At March 31, 2001, AKI
also had $20.7 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
March 31, 2001, $2.9 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 line.
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 nine
months ended March 31, 2001, cash totaling $1.2 million was provided by
operating activities resulting from net income before depreciation and
amortization 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 nine months ended March 31, 2000, cash totaling $2.1
million was used by operating activities primarily due to the increase in
accounts receivable and inventory and a decrease in accounts payable and accrued
expenses.
In the nine months ended March 31, 2001 and 2000, our company had capital
expenditures of approximately $2.4 million and $2.3 million, respectively. These
capital expenditures consisted primarily of the purchase of manufacturing
equipment 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 revolving credit line, 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 DLJ Merchant
Banking Partners II, L.P. of 15,000,000 shares of its common stock at a purchase
price of $1.00 per share. As of March 31, 2001, AHC had purchased $13.9 million
of Holding Senior Discount Debentures and $7.5 million of AKI Senior Notes. The
debentures and notes were contributed to Holding and subsequently retired.
As of March 31, 2001, AKI purchased and retired $4.0 million of AKI Senior
Notes.
Capital expenditures for the three months ending June 30, 2001 are
currently estimated to be approximately $0.7 million. Based on borrowings
outstanding as of March 31, 2001, our company expects total cash payments for
debt service for the three months ending June 30, 2001 to be approximately $0.3
million, consisting of $0.2 million in interest and fees under the revolving
credit line and $0.1 million in interest on the promissory note to AHC. Our
company also expects to make royalty payments of approximately $0.2 million
during the three months ending June 30, 2001.
At March 31, 2001, Holding's cash and cash equivalents and net working
capital were $2.0 million and $24.4 million, respectively, representing an
increase in cash and cash equivalents of $0.8 million and an increase in net
working capital of $10.6 million from June 30, 2000. Account receivables, net,
at March 31, 2001 increased 40.9% or $8.8 million over the June 30, 2000 amount,
primarily due to increased sales volume and the seasonality of those sales.
Seasonality
Our company's sales and operating results have historically reflected
seasonal variations. Such seasonal variations are based on the timing of our
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. We do 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
ending 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; our company's significant indebtedness;
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 March 31, 2001, there were no
forward exchange contracts outstanding.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(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: May 14, 2001 By: /s/ Kenneth A. Budde
-----------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
AKI, INC.
Date: May 14, 2001 By: /s/ Kenneth A. Budde
-----------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer