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 September 30, 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 October 31, 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
- September 30, 2001
- June 30, 2001
Consolidated Condensed Statements of Operations
- Three months ended September 30, 2001
- Three months ended September 30, 2000
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Three months ended September 30, 2001
Consolidated Condensed Statements of Cash Flows
- Three months ended September 30, 2001
- Three months ended September 30, 2000
Notes to Consolidated Condensed Financial Statements
Item 1. Financial Statements (unaudited) (continued)
AKI, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet
- September 30, 2001
- June 30, 2001
Consolidated Condensed Statements of Operations
- Three months ended September 30, 2001
- Three months ended September 30, 2000
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Three months ended September 30, 2001
Consolidated Condensed Statements of Cash Flows
- Three months ended September 30, 2001
- Three months ended September 30, 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
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share and per share information)
September 30, June 30,
2001 2001
------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 449 $ 4,654
Accounts receivable, net................................................... 28,307 18,020
Inventory.................................................................. 7,090 6,330
Prepaid expenses........................................................... 624 492
Deferred income taxes...................................................... 770 770
------------- -------------
Total current assets.................................................... 37,240 30,266
Property, plant and equipment, net......................................... 15,021 15,778
Goodwill, net.............................................................. 156,133 157,334
Other intangible assets, net............................................... 6,117 6,337
Deferred charges, net...................................................... 4,214 4,381
Deferred income taxes...................................................... 663 -
Other assets............................................................... 88 88
------------- -------------
Total assets............................................................ $ 219,476 $ 214,184
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations............................... $ 496 $ 503
Accounts payable, trade.................................................... 4,985 3,886
Accrued income taxes....................................................... 2,564 1,642
Accrued compensation....................................................... 2,092 4,715
Accrued interest........................................................... 2,762 5,443
Accrued expenses........................................................... 4,281 3,908
------------- -------------
Total current liabilities............................................... 17,180 20,097
Revolving credit line...................................................... 6,500 -
Senior notes............................................................... 103,510 103,510
Senior discount debentures................................................. 24,733 23,926
Promissory note to stockholder............................................. 350 -
Deferred income taxes...................................................... - 19
Other non-current liabilities.............................................. 1,915 1,863
------------- -------------
Total liabilities....................................................... 154,188 149,415
Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
1,000 shares issued and outstanding.................................... - -
Additional paid-in capital................................................. 93,656 93,656
Accumulated deficit........................................................ (12,174) (12,320)
Accumulated other comprehensive loss....................................... (464) (837)
Carryover basis adjustment................................................. (15,730) (15,730)
-------------- -------------
Total stockholder's equity.............................................. 65,288 64,769
------------- -------------
Total liabilities and stockholder's equity.............................. $ 219,476 $ 214,184
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
AKI HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
Three months ended
---------------------------------------------
September 30, 2001 September 30, 2000
------------------ ------------------
(unaudited) (unaudited)
Net sales................................................. $ 27,381 $ 32,353
Cost of goods sold........................................ 16,714 19,548
----------- -----------
Gross profit........................................... 10,667 12,805
Selling, general and administrative expenses.............. 4,195 4,518
Amortization of goodwill and other intangibles............ 1,446 1,419
----------- -----------
Income from operations................................. 5,026 6,868
Other expenses:
Interest expense to stockholder ....................... 4 113
Interest expense, other................................ 3,867 4,291
Management fees and other, net......................... 63 62
----------- -----------
Income before income taxes................................ 1,092 2,402
Income tax expense........................................ 946 1,465
----------- -----------
Net income ............................................ $ 146 $ 937
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
AKI HOLDING CORP. AND SUBSIDIARIES
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, 2001 (unaudited)....... 1,000 $ - $ 93,656 $ (12,320) $ (837) $ (15,730) $ 64,769
Net income (unaudited).................... 146 146
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............... 373 373
---------
Comprehensive income (unaudited).......... 519
----- ------- --------- ---------- --------- ---------- ---------
Balances, September 30, 2001 (unaudited).. 1,000 $ - $ 93,656 $ (12,174) $ (464) $ (15,730) $ 65,288
===== ======= ========= ========== ========= ========== =========
The accompanying notes are an integral part of these
consolidated financial statements.
AKI HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three months ended
----------------------------------------
September 30, 2001 September 30, 2000
------------------ ------------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income........................................................ $ 146 $ 937
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of goodwill and other intangibles. 2,600 2,506
Amortization of debt discount................................... 807 939
Amortization of debt issuance costs............................. 167 171
Deferred income taxes........................................... (682) (186)
Other........................................................... 425 (292)
Changes in operating assets and liabilities:
Accounts receivable........................................... (10,287) (7,003)
Inventory..................................................... (760) (1,798)
Prepaid expenses, deferred charges and other assets........... (132) (497)
Accounts payable and accrued expenses......................... (3,832) (1,620)
Income taxes.................................................. 922 1,691
----------- -----------
Net cash used in operating activities....................... (10,626) (5,152)
------------ -----------
Cash flows from investing activities
Purchases of equipment............................................ (392) (776)
Patents........................................................... (30) -
------------ -----------
Net cash used in investing activities....................... (422) (776)
------------ -----------
Cash flows from financing activities
Payments under capital leases for equipment....................... (7) (123)
Net proceeds on line of credit.................................... 6,500 950
Net proceeds from promissory note to stockholder.................. 350 4,745
----------- -----------
Net cash provided by financing activities................... 6,843 5,572
----------- -----------
Net decrease in cash and cash equivalents............................ (4,205) (356)
Cash and cash equivalents, beginning of period....................... 4,654 1,158
----------- -----------
Cash and cash equivalents, end of period............................. $ 449 $ 802
=========== ===========
Supplemental information
Cash paid during the period for:
Interest, other................................................. $ 5,507 $ 5,919
Income taxes.................................................... 848 48
The accompanying notes are an integral part of
these consolidated financial statements.
AKI HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
1. BASIS OF PRESENTATION
AKI, Inc. ("AKI") is the successor to Arcade Holding Corporation (the
"Predecessor"), which was acquired by AHC I Acquisition, Corp. ("AHC") in
December 1997. AHC was organized for the purpose of acquiring all of the
equity interests of the Predecessor and subsequent to such acquisition, AHC
contributed $1 and all of its ownership interest to AKI Holding, Corp.
("Holding") for all of the outstanding equity of Holding. Accordingly, AKI
is a wholly owned subsidiary of Holding, which is a wholly owned subsidiary
of AHC.
AKI is engaged in interactive multi-sensory advertising for consumer
product companies and has a specialty in the design, production and
distribution of sampling systems from its Chattanooga, Tennessee facilities
and distributes its products in Europe through its French subsidiary,
Arcade Europe S.A.R.L.
Interim financial statements
The interim consolidated condensed balance sheet at September 30, 2001
and the interim consolidated condensed statements of operations for the
three months ended September 30, 2001 and 2000, the interim consolidated
condensed statements of cash flows for the three months ended September 30,
2001 and 2000 and the interim consolidated condensed statement of changes
in stockholder's equity for the three months ended September 30, 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,
2001 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:
September 30, 2001 June 30, 2001
------------------ -------------
(unaudited) (unaudited)
Raw materials
Paper.................... $ 2,122 $ 1,796
Other raw materials...... 2,804 2,697
----------- ----------
Total raw materials.. 4,926 4,493
Work in process.............. 2,164 1,837
----------- ----------
Total inventory.............. $ 7,090 $ 6,330
=========== ==========
AKI HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
3. PROMISSORY NOTE TO STOCKHOLDER
In May 2000, AKI signed a promissory note payable to AHC, which allows
AKI to borrow up to $10 million at such interest rates and due as agreed
upon by AKI and AHC. At September 30, 2001, $350 was outstanding under this
promissory note bearing interest at prime and is due December 31, 2002.
4. DERIVATIVE INSTRUMENTS
Effective July 1, 2000, AKI 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 AKI's
financial statements.
AKI 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 AKI'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. AKI primarily utilizes foreign currency forward exchange
contracts with maturities of less than six months, which do not meet hedge
accounting criteria. At September 30, 2001 there were no forward exchange
contracts outstanding.
5. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets at September 30, 2001 and June
30, 2001 and condensed statements of operations, changes in stockholder's
equity and cash flows for the three months ended September 30, 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
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)
BALANCE SHEET
September 30, 2001 June 30, 2001
------------------ -------------
(unaudited) (unaudited)
Assets
Investment in subsidiaries............................... $ 102,939 $ 102,237
Deferred charges......................................... 786 806
Deferred income taxes.................................... 2,609 2,338
----------- -----------
Total assets......................................... $ 106,334 $ 105,381
=========== ===========
Liabilities
Accrued income taxes..................................... $ 119 $ 119
Senior discount debentures............................... 24,733 23,926
----------- -----------
Total liabilities.................................... 24,852 24,045
----------- -----------
Stockholder's equity
Common Stock, $0.01 par value, 1,000 shares authorized
1,000 shares issued and outstanding.................... - -
Additional paid-in capital............................... 93,656 93,656
Accumulated deficit...................................... (12,174) (12,320)
------------ -----------
Total stockholder's equity........................... 81,482 81,336
----------- -----------
Total liabilities and stockholder's equity........... $ 106,334 $ 105,381
=========== ===========
STATEMENT OF OPERATIONS
Three months ended
----------------------------------------
September 30, 2001 September 30, 2000
------------------ ------------------
(unaudited) (unaudited)
Equity in net income of subsidiaries..................... $ 702 $ 1,584
Interest expense......................................... 827 962
----------- -----------
Income (loss) before income taxes.................... (125) 622
Income tax benefit....................................... (271) (315)
------------ -----------
Net income .......................................... $ 146 $ 937
=========== ===========
AKI HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per 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, 2001 (unaudited)........... 1,000 $ - $ 93,656 $ (12,320) $ 81,336
Net income (unaudited)........................ 146 146
--------- --------- ---------- ----------- -----------
Balances, September 30, 2001 (unaudited)...... 1,000 $ - $ 93,656 $ (12,174) $ 81,482
========= ========= ========== ============ ===========
STATEMENT OF CASH FLOWS
Three months ended
----------------------------------------
September 30, 2001 September 30, 2000
------------------ ------------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income..................................................... $ 146 $ 937
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net change in investment in subsidiaries................ (702) (1,584)
Amortization of debt discount........................... 807 939
Amortization of debt issuance costs..................... 20 23
Deferred income taxes................................... (271) (315)
----------- ------------
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......................... $ - $ -
=========== ============
AKI, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share and per share information)
September 30, June 30,
2001 2001
------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 449 $ 4,654
Accounts receivable, net................................................... 28,307 18,020
Inventory.................................................................. 7,090 6,330
Prepaid expenses........................................................... 624 492
Deferred income taxes...................................................... 770 770
------------- -------------
Total current assets.................................................... 37,240 30,266
Property, plant and equipment, net......................................... 15,021 15,778
Goodwill, net.............................................................. 156,133 157,334
Other intangible assets, net............................................... 6,117 6,337
Deferred charges, net .................................................... 3,428 3,575
Other assets............................................................... 88 88
------------- -------------
Total assets............................................................ $ 218,027 $ 213,378
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations............................... $ 496 $ 503
Accounts payable, trade.................................................... 4,985 3,886
Accrued income taxes....................................................... 2,445 1,523
Accrued compensation....................................................... 2,092 4,715
Accrued interest........................................................... 2,762 5,443
Accrued expenses........................................................... 4,281 3,908
------------- -------------
Total current liabilities............................................... 17,061 19,978
Revolving credit line...................................................... 6,500 -
Senior notes............................................................... 103,510 103,510
Promissory note to affiliate............................................... 350 -
Deferred income taxes...................................................... 1,946 2,357
Other non-current liabilities.............................................. 1,915 1,863
------------- -------------
Total liabilities....................................................... 131,282 127,708
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........................................................ (4,409) (5,111)
Accumulated other comprehensive loss....................................... (464) (837)
Carryover basis adjustment................................................. (15,730) (15,730)
-------------- -------------
Total stockholder's equity.............................................. 86,745 85,670
------------- -------------
Total liabilities and stockholder's equity.............................. $ 218,027 $ 213,378
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
AKI, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
Three months ended
---------------------------------------------
September 30, 2001 September 30, 2000
------------------ ------------------
(unaudited) (unaudited)
Net sales................................................. $ 27,381 $ 32,353
Cost of goods sold........................................ 16,714 19,548
----------- -----------
Gross profit........................................... 10,667 12,805
Selling, general and administrative expenses.............. 4,195 4,518
Amortization of goodwill and other intangibles............ 1,446 1,419
----------- -----------
Income from operations................................. 5,026 6,868
Other expenses:
Interest expense to stockholder ....................... 4 113
Interest expense, other................................ 3,040 3,329
Management fees and other, net......................... 63 62
----------- -----------
Income before income taxes................................ 1,919 3,364
Income tax expense........................................ 1,217 1,780
----------- -----------
Net income ............................................ $ 702 $ 1,584
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
AKI, INC., AND SUBSIDIARIES
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, 2001 (unaudited)....... 1,000 $ - $ 107,348 $ (5,111) $ (837) $ (15,730) $ 85,670
Net income (unaudited).................... 702 702
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............... 373 373
---------
Comprehensive income (unaudited).......... 1,075
----- ------- --------- --------- --------- ---------- ---------
Balances, September 30, 2001 (unaudited) 1,000 $ - $ 107,348 $ (4,409) $ (464) $ (15,730) $ 86,745
===== ======= ========= ========= ========= ========== =========
The accompanying notes are an integral part of these
consolidated financial statements.
AKI, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three months ended
------------------------------------------
September 30, 2001 September 30, 2000
------------------ ------------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income ......................................................... $ 702 $ 1,584
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of goodwill and other intangibles... 2,600 2,506
Amortization of debt issuance cost................................ 147 148
Deferred income taxes............................................. (411) 129
Other............................................................. 425 (292)
Changes in operating assets and liabilities:
Accounts receivable............................................. (10,287) (7,003)
Inventory....................................................... (760) (1,798)
Prepaid expenses, deferred charges and other assets............. (132) (497)
Accounts payable and accrued expenses........................... (3,832) (1,620)
Income taxes.................................................... 922 1,691
----------- -----------
Net cash used in operating activities......................... (10,626) (5,152)
----------- -----------
Cash flows from investing activities
Purchases of equipment.............................................. (392) (776)
Patents............................................................. (30) -
------------ -----------
Net cash used in investing activities......................... (422) (776)
------------ -----------
Cash flows from financing activities
Payments under capital leases for equipment......................... (7) (123)
Net proceeds on line of credit...................................... 6,500 950
Net proceeds from promissory note to affiliate...................... 350 4,745
----------- -----------
Net cash provided by financing activities..................... 6,843 5,572
----------- -----------
Net decrease in cash and cash equivalents.............................. (4,205) (356)
Cash and cash equivalents, beginning of period......................... 4,654 1,158
----------- -----------
Cash and cash equivalents, end of period............................... $ 449 $ 802
=========== ===========
Supplemental information
Cash paid during the period for:
Interest, other................................................... $ 5,507 $ 5,919
Income taxes...................................................... 848 48
The accompanying notes are an integral part of
these consolidated financial statements.
AKI, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
1. BASIS OF PRESENTATION
AKI, Inc. ("AKI") is the successor to Arcade Holding Corporation (the
"Predecessor"), which was acquired by AHC I Acquisition, Corp. ("AHC") in
December 1997. AHC was organized for the purpose of acquiring all of the
equity interests of the Predecessor and subsequent to such acquisition, AHC
contributed $1 and all of its ownership interest to AKI Holding, Corp.
("Holding") for all of the outstanding equity of Holding. Accordingly, AKI
is a wholly owned subsidiary of Holding, which is a wholly owned subsidiary
of AHC.
AKI is engaged in interactive multi-sensory advertising for consumer
product companies and has a specialty in the design, production and
distribution of sampling systems from its Chattanooga, Tennessee facilities
and distributes its products in Europe through its French subsidiary,
Arcade Europe S.A.R.L.
Interim financial statements
The interim consolidated condensed balance sheet at September 30, 2001
and the interim consolidated condensed statements of operations for the
three months ended September 30, 2001 and 2000, the interim consolidated
condensed statements of cash flows for the three months ended September 30,
2001 and 2000 and the interim consolidated condensed statement of changes
in stockholder's equity for the three months ended September 30, 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,
2001 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:
September 30, 2001 June 30, 2001
------------------ -------------
(unaudited) (unaudited)
Raw materials
Paper.................... $ 2,122 $ 1,796
Other raw materials...... 2,804 2,697
----------- ----------
Total raw materials.. 4,926 4,493
Work in process.............. 2,164 1,837
----------- ----------
Total inventory.............. $ 7,090 $ 6,330
=========== ==========
AKI, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
3. PROMISSORY NOTE TO AFFILIATE
In May 2000, AKI signed a promissory note payable to AHC, which allows
AKI to borrow up to $10 million at such interest rates and due as agreed
upon by AKI and AHC. At September 30, 2001, $350 was outstanding under this
promissory note bearing interest at prime and is due December 31, 2002.
4. DERIVATIVE INSTRUMENTS
Effective July 1, 2000, AKI 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 AKI's
financial statements.
AKI 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 AKI'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. AKI primarily utilizes foreign currency forward exchange
contracts with maturities of less than six months, which do not meet hedge
accounting criteria. At September 30, 2001 there were no forward exchange
contracts outstanding.
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.
General
Our sales are derived primarily through our 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 sales are
made directly to our 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, we have had
long-standing relationships with the majority of our customer base.
Results of Operations
Three Months Ended September 30, 2001 Compared to Three Months Ended
September 30, 2000
Net Sales. Net sales for the three months ended September 30, 2001
decreased $5.0 million, or 15.4%, to $27.4 million, as compared to $32.4 million
for the three months ended September 30, 2000. The decrease in net sales was
primarily attributable to decreases in volume of domestic sales of sampling
technologies for advertising and marketing of consumer products and cosmetics
products and international sales of sampling technologies for advertising and
marketing of fragrance products. We believe the decline of domestic sales is
partially attributable to the weak economic conditions in the United States,
particularly in the advertising industry. We expect the significant decline in
sales experienced in our first fiscal quarter to continue in our second fiscal
quarter. We cannot predict if this trend will worsen or continue through the
remainder of our fiscal year.
Gross Profit. Gross profit for the three months ended September 30, 2001
decreased $2.1 million, or 16.4%, to $10.7 million, as compared to $12.8 million
for three months ended September 30, 2000. Gross profit as a percentage of net
sales decreased to 39.1% in the three months ended September 30, 2001, from
39.5% in the three months ended September 30, 2000. The decrease in gross profit
as a percentage of net sales is substantially due to the decrease in sales
volume and changes in product mix partially offset by reduced premium labor
costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2001 decreased
$0.3 million, or 6.7%, to $4.2 million, as compared to $4.5 million for the
three months ended September 30, 2000. Selling, general and administrative
expenses as a percent of net sales increased to 15.3% in the three months ended
September 30, 2001, from 13.9% in the three months ended September 30, 2000. The
decrease in selling, general and administrative expenses is primarily due to a
one-time severance charge in 2000 and a decrease in personnel in 2001. The
increase in selling, general and administrative expenses as a percent of net
sales was primarily due to the decrease in net sales described above.
Income from Operations. Income from operations for the three months ended
September 30, 2001 decreased $1.9 million, or 27.5%, to $5.0 million, as
compared to $6.9 million for the three months ended September 30, 2000. Income
from operations as a percentage of net sales decreased to 18.3% in the three
months ended September 30, 2001, from 21.3% in the three months ended September
30, 2000, principally as a result of the factors described above.
Interest Expense. Interest expense for the three months ended September 30,
2001 decreased $0.5 million, or 11.4%, to $3.9 million, as compared to $4.4
million for the three months ended September 30, 2000. Interest expense as a
percentage of net sales increased to 14.2% in the three months ended September
30, 2001, from 13.6% in the three months ended September 30, 2000. The decrease
in interest expense, including the amortization of
deferred financing costs, is primarily due to repurchased and retired Senior
Discount Debentures and Senior Notes, reduced borrowings under the revolving
credit line and promissory note to stockholder.
Interest expense for AKI for the three months ended September 30, 2001
decreased $0.4 million, or 11.8%, to $3.0 million, as compared to $3.4 million
for the three months ended September 30, 2000. Interest expense as a percentage
of net sales increased to 11.0% in the three months ended September 30, 2001,
from 10.5% in the three months ended September 30, 2000. The decrease in
interest expense, including the amortization of deferred financing costs, is
primarily due to repurchased and retired Senior Notes, and reduced borrowings
under the revolving credit line and promissory note to affiliate.
Income Tax Expense. Income tax expense for the three months ended September
30, 2001 decreased $0.6 million to $0.9 million. The Company's effective tax
rate, after consideration of non-deductible goodwill amortization, was 41.2% in
the three months ended September 30, 2001, and 40.6% in the three months ended
September 30, 2000.
Income tax expense for AKI for the three months ended September 30, 2001
decreased $0.6 million to $1.2 million. AKI's effective tax rate, after
consideration of non-deductible goodwill amortization, was 39% in the three
months ended September 30, 2001 and 2000.
EBITDA. EBITDA for the three months ended September 30, 2001 decreased $1.8
million, or 19.2%, to $7.6 million, as compared to $9.4 million for the three
months ended September 30, 2000. The decrease in EBITDA principally reflects the
decrease in gross profit partially offset by the decrease in selling, general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was 27.7% and 29.0% in the three months ended September 30, 2001 and 2000,
respectively. EBITDA is income from operations plus depreciation and
amortization of goodwill and other intangibles.
Liquidity and Capital Resources
We have substantial indebtedness and significant debt service obligations.
As of September 30, 2001, we had consolidated indebtedness in an aggregate
amount of $135.6 million (excluding trade payables, accrued liabilities,
deferred taxes and other non-current liabilities), of which approximately $24.7
million was a direct obligation of Holding relating to its debentures and
approximately $110.9 million was a direct obligation of AKI relating to its
notes, revolving credit line, promissory note to affiliate and capital leases.
Borrowings at September 30, 2001 included $6.5 million under the revolving
credit line and $0.4 million on the promissory note to affiliate that was
incurred to provide working capital. At September 30, 2001 we had $13.5 million
available under the revolving credit line. At September 30, 2001, AKI also had
$20.4 million in additional outstanding liabilities (including trade payables,
accrued liabilities, deferred taxes and other non-current liabilities).
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, we have funded our 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 three
months ended September 30, 2001, cash totaling $10.6 million was used by
operating activities primarily due to the increase in accounts receivable and a
decrease in accrued compensation and accrued interest, offset partially by an
increase in accounts payable and accrued income taxes. During the three months
ended September 30, 2000, cash totaling $5.2 million was used by operating
activities primarily due to the increase in accounts receivable and inventory
and a decrease in accrued interest and accrued compensation, offset partially by
an increase in accounts payable and accrued expenses.
In the three months ended September 30, 2001 and 2000, we had capital
expenditures of approximately $0.4 million and $0.8 million, respectively. These
capital expenditures consisted primarily of the purchase of manufacturing
equipment and upgrading our computer systems.
We may from time to time evaluate additional potential acquisitions. There
can be no assurance that additional capital sources will be available to us to
fund additional acquisitions on terms that we find acceptable, or
at all. Additional capital resources, if available, may be on terms generally
less favorable and/or more restricted than the terms of our current credit
facilities.
As of September 30, 2001, AKI had purchased and retired $4.0 million of AKI
Senior Notes originally issued in 1998.
Capital expenditures for the twelve months ending June 30, 2002 are
currently estimated to be approximately $2.5 million. Based on borrowings
outstanding as of September 30, 2001, we expect total cash payments for debt
service for the twelve months ending June 30, 2002 to be approximately $11.8
million, consisting of $10.9 million in interest payments of the notes, $0.5
million in capital lease obligations and $0.4 million in interest and fees under
the revolving credit line. We also expect to make royalty payments of
approximately $1.1 million during the twelve months ending June 30, 2002.
At September 30, 2001, Holding's cash and cash equivalents and net working
capital were $0.4 million and $20.1 million, respectively, representing a
decrease in cash and cash equivalents of $4.3 million and an increase in net
working capital of $9.9 million from June 30, 2001. Account receivables, net, at
September 30, 2001 increased 57.2% or $10.3 million over the June 30, 2001
amount, primarily due to increased sales volume and the seasonality of those
sales.
Seasonality
Our 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 first and third fiscal quarters ended September 30 and March 31
when sales from such advertising campaigns are principally recognized. These
seasonal fluctuations require us to accurately allocate our resources to manage
our manufacturing capacity, which often operates at full capacity during peak
seasonal demand periods.
Recently Issued Accounting Standards
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 was
effective for the Company no later than the fourth quarter of the fiscal year
ending June 30, 2001, and accordingly, amounts billed to customers related to
shipping and handling have been reclassified from cost of goods sold to net
sales.
FASB Statement of Financial Accounting Standards No. 141 "Business
Combinations" ("SFAS 141") was issued in June 2001. SFAS 141 changes the
accounting and reporting for business combinations. SFAS 141 is effective for
all business combinations initiated after June 30, 2001.
FASB Statement of Financial Accounting Standards No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142") was issued in June 2001. SFAS 142 changes
the accounting and reporting for acquired goodwill and other intangible assets.
SFAS 142 is effective for fiscal years beginning after December 15, 2001 and
must be applied at the beginning of an entity's fiscal year. The Company is
currently assessing the effect on its financial statements of implementing SFAS
142.
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 possible trend of customers
decreasing their use of our products; economic conditions in general and in our
market areas, specifically the advertising market; the competitive environment
in the sampling industry in general and in our specific market areas; changes in
prevailing interest rates; inflation; changes in cost of goods and services;
changes in or failure to comply with postal regulations or other federal, state
and/or local government regulations; liability
and other claims asserted against us; changes in operating strategy or
development plans; the ability to attract and retain qualified personnel; our
significant indebtedness; labor disturbances; changes in our capital expenditure
plans; and other factors. We also advise you to read the section entitled "Risk
Factors" in the Company's annual report on Form 10K filed with the SEC on
September 18, 2001.
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. We disclaim 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
We generate approximately 21% of our sales from customers outside the
United States, principally in Europe. International sales are made mostly from
our foreign subsidiary located in France and are primarily denominated in the
local currency. Our foreign subsidiary also incurs the majority of its expenses
in the local currency and uses the local currency as its functional currency.
Our 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.
We periodically enter 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 September 30, 2001, there were no forward
exchange contracts outstanding.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.17 Salary Continuation Agreement dated October 1, 2001,
between AKI and Alan Bruce Prashker
(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: November 9, 2001 By: /s/ Kenneth A. Budde
-------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
AKI, INC.
Date: November 9, 2001 By: /s/ Kenneth A. Budde
-------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.17 Salary Continuation Agreement dated as of October 1, 2001 between
AKI and Alan Bruce Prashker