FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 January 31, 2002, 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
- December 31, 2001
- June 30, 2001
Consolidated Condensed Statements of Operations
- Three months ended December 31, 2001
- Three months ended December 31, 2000
- Six months ended December 31, 2001
- Six months ended December 31, 2000
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Six months ended December 31, 2001
Consolidated Condensed Statements of Cash Flows
- Six months ended December 31, 2001
- Six months ended December 31, 2000
Notes to Consolidated Condensed Financial Statements
Item 1. Financial Statements (unaudited) (continued)
AKI, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet
- December 31, 2001
- June 30, 2001
Consolidated Condensed Statements of Operations
- Three months ended December 31, 2001
- Three months ended December 31, 2000
- Six months ended December 31, 2001
- Six months ended December 31, 2000
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Six months ended December 31, 2001
Consolidated Condensed Statements of Cash Flows
- Six months ended December 31, 2001
- Six months ended December 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
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share and per share information)
December 31, June 30,
2001 2001
------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 1,894 $ 4,654
Accounts receivable, net................................................... 19,930 18,020
Inventory.................................................................. 8,434 6,330
Income tax refund receivable............................................... 1,247 -
Prepaid expenses........................................................... 494 492
Deferred income taxes...................................................... 770 770
------------- -------------
Total current assets.................................................... 32,769 30,266
Property, plant and equipment, net......................................... 21,788 15,778
Goodwill, net.............................................................. 161,170 157,334
Other intangible assets, net............................................... 9,216 6,337
Deferred charges, net...................................................... 4,651 4,381
Deferred income taxes...................................................... 737 -
Other assets............................................................... 116 88
------------- -------------
Total assets............................................................ $ 230,447 $ 214,184
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations............................... $ - $ 503
Current portion of long-term debt.......................................... 1,000 -
Accounts payable, trade.................................................... 4,637 3,886
Accrued income taxes....................................................... - 1,642
Accrued compensation....................................................... 4,404 4,715
Accrued interest........................................................... 5,491 5,443
Accrued expenses........................................................... 4,681 3,908
------------- -------------
Total current liabilities............................................... 20,213 20,097
Revolving loan............................................................. 7,700 -
Term loan.................................................................. 9,000 -
Senior notes............................................................... 103,510 103,510
Senior discount debentures................................................. 25,540 23,926
Deferred income taxes...................................................... - 19
Other non-current liabilities.............................................. 1,968 1,863
------------- -------------
Total liabilities....................................................... 167,931 149,415
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........................................................ (14,871) (12,320)
Accumulated other comprehensive loss....................................... (539) (837)
Carryover basis adjustment................................................. (15,730) (15,730)
-------------- -------------
Total stockholder's equity.............................................. 62,516 64,769
------------- -------------
Total liabilities and stockholder's equity.............................. $ 230,447 $ 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 Six months ended
------------------------------------- -------------------------------------
December 31, 2001 December 31, 2000 December 31, 2001 December 31, 2000
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales....................................... $ 22,329 $ 26,180 $ 49,710 $ 58,533
Cost of goods sold.............................. 15,929 17,693 32,643 37,241
--------- --------- --------- ---------
Gross profit................................. 6,400 8,487 17,067 21,292
Selling, general and administrative expenses.... 4,569 4,415 8,764 8,933
Amortization of goodwill and other intangibles.. 1,470 1,446 2,916 2,865
--------- --------- --------- ---------
Income from operations....................... 361 2,626 5,387 9,494
Other expenses:
Interest expense to stockholder.............. 4 68 8 181
Interest expense other, net.................. 3,861 4,176 7,728 8,467
Management fees and other, net............... 62 63 125 125
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary gain......................... (3,566) (1,681) (2,474) 721
Income tax expense (benefit).................... (869) (110) 77 1,355
--------- --------- --------- ---------
Loss before extraordinary gain............... (2,697) (1,571) (2,551) (634)
Extraordinary gain from early retirement of
debt, net of tax............................. - 950 - 950
--------- --------- --------- ---------
Net income (loss)............................ $ (2,697) $ (621) $ (2,551) $ 316
========= ========= ========= =========
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 loss (unaudited)...................... (2,551) (2,551)
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............... 298 298
---------
Comprehensive loss (unaudited)............ (2,253)
------ ------- ---------- --------- -------- ---------- ---------
Balances, December 31, 2001 (unaudited)... 1,000 $ - $ 93,656 $ (14,871) $ (539) $ (15,730) $ 62,516
====== ======= ========== ========= ======== ========== =========
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)
Six months ended
---------------------------------------
December 31, 2001 December 31, 2000
----------------- -----------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss).................................................... $ (2,551) $ 316
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of goodwill and other intangibles.... 5,258 5,036
Amortization of debt discount...................................... 1,614 1,817
Amortization of debt issuance costs................................ 335 342
Deferred income taxes.............................................. (756) (615)
Gain from early retirement of debt................................. - (950)
Other.............................................................. 403 (305)
Changes in operating assets and liabilities:
Accounts receivable.............................................. 1,325 (1,896)
Inventory........................................................ 320 756
Prepaid expenses, deferred charges and other assets.............. 43 (377)
Accounts payable and accrued expenses............................ (2,885) (2,065)
Income taxes..................................................... (2,889) 1,128
----------- -----------
Net cash provided by operating activities...................... 217 3,187
----------- -----------
Cash flows from investing activities
Purchases of equipment............................................... (470) (2,112)
Patents.............................................................. (46) -
Payments for acquisition, net of cash acquired....................... (19,053) -
----------- -----------
Net cash used in investing activities.......................... (19,569) (2,112)
----------- -----------
Cash flows from financing activities
Payments under capital leases ....................................... (503) (834)
Repurchase of long-term debt......................................... - (3,110)
Net proceeds (repayments) on revolving loan.......................... 7,700 (1,450)
Net proceeds on term loan............................................ 10,000 -
Payments of loan closing costs....................................... (605) -
Net proceeds from promissory note to stockholder..................... - 3,661
----------- -----------
Net cash provided by (used in) financing activities............ 16,592 (1,733)
----------- -----------
Net decrease in cash and cash equivalents............................... (2,760) (658)
Cash and cash equivalents, beginning of period.......................... 4,654 1,158
----------- -----------
Cash and cash equivalents, end of period................................ $ 1,894 $ 500
=========== ===========
Supplemental information
Cash paid during the period for:
Interest, other.................................................... $ 5,609 $ 6,388
Interest to stockholder............................................ 8 174
Income taxes....................................................... 3,763 866
Significant non-cash activities
Contribution of equity and retirement of senior discount debentures.. $ - $ 1,259
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 and
Baltimore, Maryland facilities and distributes its products in Europe
through its French subsidiary, Arcade Europe S.A.R.L.
Acquisition of Color Prelude business
On December 18, 2001, the Company, through a newly formed subsidiary,
IST, Corp., acquired the business including certain assets and assumed
certain liabilities of Color Prelude, Inc. (such business referred to
hereafter as "CP"). CP manufactures interactive advertising and sampling
products for cosmetic and consumer products companies. The acquisition
complements the Company's product lines and the Company expects to increase
domestic and international product sales through broader distribution and
to reduce costs through certain economies of scale.
The aggregate purchase price of CP was $19.1 million which was funded
through cash and borrowings of approximately $18.0 million under the
restated credit agreement. The following table summarizes the estimated
fair value of the assets acquired and liabilities assumed at the date of
acquisition. The Company is in the process of obtaining valuations of
certain assets; thus the allocation of purchase price is subject to
refinement.
Property and equipment.......................... $ 7,871
Current assets.................................. 5,731
Intangible assets............................... 8,946
Accounts payable and accrued expenses........... 3,494
Goodwill totaling approximately $6,250 million will not be amortized
in accordance with Statement of Financial Accounting Standards (SFAS) No.
142 - Goodwill and Other Intangible Assets. The results of operations are
included in the financial statements since the date of acquisition. Pro
forma results had CP been acquired at the beginning of fiscal 2001 are as
follows:
Three months ended Six months ended
December 31, December 31,
------------ -----------
2001 2000 2001 2000
---- ---- ---- ----
Revenue............................................ $ 26,215 $ 29,990 $ 56,043 $ 64,958
Income (loss) before extraordinary items........... (2,446) (1,339) (2,592) (643)
Net income (loss).................................. (2,446) (389) (2,592) 307
Interim financial statements
The interim consolidated condensed balance sheet at December 31, 2001
and the interim consolidated condensed statements of operations for the
three and six months ended December 31, 2001 and 2000, the interim
consolidated condensed statements of cash flows for the six months ended
December 31, 2001 and 2000
AKI HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
1. BASIS OF PRESENTATION (continued)
and the interim consolidated condensed statement of changes in
stockholder's equity for the six months ended December 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,
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:
December 31, 2001 June 30, 2001
----------------- -------------
(unaudited) (unaudited)
Raw materials
Paper.......................... $ 2,490 $ 1,796
Other raw materials............ 4,069 2,697
---------- ----------
Total raw materials........ 6,559 4,493
Work in process.................... 1,875 1,837
---------- ----------
Total inventory.................... $ 8,434 $ 6,330
========== ==========
3. RETIREMENT OF DEBT
In fiscal 2001, AHC purchased $3,070 of Holding Senior Discount
Debentures and AKI purchased $4,000 of AKI Senior Notes for $1,259 and
$3,110, respectively. The debentures were contributed to Holding and the
debentures and notes were subsequently retired.
4. AMENDED AND RESTATED CREDIT AGREEMENT
On December 18, 2001, AKI amended and restated its credit agreement
with Heller Financial, Inc. ("restated credit agreement"). The restated
credit agreement provides for: (1) a $10.0 million term loan which matures
on December 31, 2006 with varying quarterly principal installments
beginning March 31, 2002 and (2) a revolving loan commitment up to a
maximum of $20.0 million which expires December 31, 2006. Borrowings are
limited to a borrowing base consisting of accounts receivable, inventory
and property, plant and equipment which serve as collateral for the
borrowings. Interest on amounts borrowed under the term loan and revolving
loan accrue at a floating rate based upon either prime or LIBOR as elected
by the Company. The initial rate of interest under the restated credit
agreement was 125 basis points higher than the interest rate of the
previous credit agreement. The Company is required to pay commitment fees
on the unused portion of the revolving loan commitment.
AKI HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
5. 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 December 31, 2001 there were no forward exchange
contracts outstanding.
6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets at December 31, 2001 and June
30, 2001 and condensed statements of operations, changes in stockholder's
equity and cash flows for the six months ended December 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
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
December 31, 2001 June 30, 2001
----------------- -------------
(unaudited) (unaudited)
Assets
Investment in subsidiaries............................... $ 100,799 $ 102,237
Deferred charges......................................... 766 806
Deferred income taxes.................................... 2,879 2,338
----------- -----------
Total assets......................................... $ 104,444 $ 105,381
=========== ===========
Liabilities
Accrued income taxes..................................... $ 119 $ 119
Senior discount debentures............................... 25,540 23,926
----------- -----------
Total liabilities.................................... 25,659 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...................................... (14,871) (12,320)
----------- -----------
Total stockholder's equity........................... 78,785 81,336
----------- -----------
Total liabilities and stockholder's equity........... $ 104,444 $ 105,381
=========== ===========
STATEMENT OF OPERATIONS
Six months ended
---------------------------------------
December 31, 2001 December 31, 2000
----------------- -----------------
(unaudited) (unaudited)
Equity in net income (loss) of subsidiaries.............. $ (1,438) $ 1,075
Interest expense......................................... 1,654 1,862
----------- -----------
Loss before income taxes and extraordinary gain...... (3,092) (787)
Income tax benefit....................................... (541) (609)
----------- -----------
Loss before extraordinary gain....................... (2,551) (178)
Extraordinary gain from early retirement of debt......... - 494
----------- -----------
Net income (loss) ................................... $ (2,551) $ 316
=========== ===========
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 loss (unaudited).......................... (2,551) (2,551)
------- -------- ---------- ----------- -----------
Balances, December 31, 2001 (unaudited)....... 1,000 $ - $ 93,656 $ (14,871) $ (78,785)
======= ======== ========== =========== ===========
STATEMENT OF CASH FLOWS
Six months ended
-----------------------------------------
December 31, 2001 December 31, 2000
----------------- -----------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss)................................................ $ (2,551) $ 316
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Net change in investment in subsidiaries.................. 1,438 (1,075)
Amortization of debt discount............................. 1,614 1,817
Amortization of debt issuance costs....................... 40 45
Deferred income taxes..................................... (541) (609)
Gain from early retirement of debt........................ - (494)
----------- -----------
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..................................................... $ - $ 1,259
AKI, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share and per share information)
December 31, June 30,
2001 2001
------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 1,894 $ 4,654
Accounts receivable, net................................................... 19,930 18,020
Inventory.................................................................. 8,434 6,330
Income tax refund receivable............................................... 1,366 -
Prepaid expenses........................................................... 494 492
Deferred income taxes...................................................... 770 770
------------- -------------
Total current assets.................................................... 32,888 30,266
Property, plant and equipment, net......................................... 21,788 15,778
Goodwill, net.............................................................. 161,170 157,334
Other intangible assets, net............................................... 9,216 6,337
Deferred charges, net...................................................... 3,885 3,575
Other assets............................................................... 116 88
------------- -------------
Total assets............................................................ $ 229,063 $ 213,378
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations............................... $ - $ 503
Current portion of long-term debt.......................................... 1,000 -
Accounts payable, trade.................................................... 4,637 3,886
Accrued income taxes....................................................... - 1,523
Accrued compensation....................................................... 4,404 4,715
Accrued interest........................................................... 5,491 5,443
Accrued expenses........................................................... 4,681 3,908
------------- -------------
Total current liabilities............................................... 20,213 19,978
Revolving loan............................................................. 7,700 -
Term loan.................................................................. 9,000 -
Senior notes............................................................... 103,510 103,510
Deferred income taxes...................................................... 2,142 2,357
Other non-current liabilities.............................................. 1,968 1,863
------------- -------------
Total liabilities....................................................... 144,533 127,708
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........................................................ (6,549) (5,111)
Accumulated other comprehensive loss....................................... (539) (837)
Carryover basis adjustment................................................. (15,730) (15,730)
-------------- -------------
Total stockholder's equity.............................................. 84,530 85,670
------------- -------------
Total liabilities and stockholder's equity.............................. $ 229,063 $ 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 Six months ended
------------------------------------- -------------------------------------
December 31, 2001 December 31, 2000 December 31, 2001 December 31, 2000
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales....................................... $ 22,329 $ 26,180 $ 49,710 $ 58,533
Cost of goods sold.............................. 15,929 17,693 32,643 37,241
--------- --------- --------- ---------
Gross profit................................. 6,400 8,487 17,067 21,292
Selling, general and administrative expenses.... 4,569 4,415 8,764 8,933
Amortization of goodwill and other intangibles.. 1,470 1,446 2,916 2,865
--------- --------- --------- ---------
Income from operations....................... 361 2,626 5,387 9,494
Other expenses:
Interest expense to affiliate................ 4 68 8 181
Interest expense other, net.................. 3,034 3,276 6,074 6,605
Management fees and other, net............... 62 63 125 125
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary gain......................... (2,739) (781) (820) 2,583
Income tax expense (benefit).................... (599) 184 618 1,964
---------- --------- --------- ---------
Income (loss) before extraordinary gain...... (2,140) (965) (1,438) 619
Extraordinary gain from early retirement of
debt, net of tax............................. - 456 - 456
--------- --------- --------- ---------
Net income (loss)............................ $ (2,140) $ (509) $ (1,438) $ 1,075
========= ========= ========= =========
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 loss (unaudited)...................... (1,438) (1,438)
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............... 298 298
---------
Comprehensive loss (unaudited)............ (1,140)
------ ------- ----------- -------- -------- ---------- ---------
Balances, December 31, 2001 (unaudited)... 1,000 $ - $ 107,348 $ (6,549) $ (539) $ (15,730) $ 84,530
====== ======= =========== ======== ======== ========== =========
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)
Six months ended
---------------------------------------
December 31, 2001 December 31, 2000
----------------- -----------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss).................................................... $ (1,438) $ 1,075
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of goodwill and other intangibles.... 5,258 5,036
Amortization of debt issuance cost................................. 295 297
Deferred income taxes.............................................. (215) (6)
Gain from early retirement of debt................................. - (456)
Other.............................................................. 403 (305)
Changes in operating assets and liabilities:
Accounts receivable.............................................. 1,325 (1,896)
Inventory........................................................ 320 756
Prepaid expenses, deferred charges and other assets.............. 43 (377)
Accounts payable and accrued expenses............................ (2,885) (2,065)
Income taxes..................................................... (2,889) 1,128
----------- -----------
Net cash provided by operating activities...................... 217 3,187
----------- -----------
Cash flows from investing activities
Purchases of equipment............................................... (470) (2,112)
Patents.............................................................. (46) -
Payments for acquisition, net of cash acquired....................... (19,053) -
----------- -----------
Net cash used in investing activities.......................... (19,569) (2,112)
----------- -----------
Cash flows from financing activities
Payments under capital leases........................................ (503) (834)
Repurchase of long-term debt......................................... - (3,110)
Net proceeds (repayments) on revolving loan.......................... 7,700 (1,450)
Net proceeds on term loan............................................ 10,000 -
Payments of loan closing costs....................................... (605) -
Net proceeds from promissory note to affiliate....................... - 3,661
----------- -----------
Net cash provided by (used in) financing activities............ 16,592 (1,733)
----------- -----------
Net decrease in cash and cash equivalents............................... (2,760) (658)
Cash and cash equivalents, beginning of period.......................... 4,654 1,158
----------- -----------
Cash and cash equivalents, end of period................................ $ 1,894 $ 500
=========== ===========
Supplemental information
Cash paid during the period for:
Interest, other.................................................... $ 5,609 $ 6,388
Interest to affiliate.............................................. 8 174
Income taxes....................................................... 3,763 866
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 and
Baltimore, Maryland facilities and distributes its products in Europe
through its French subsidiary, Arcade Europe S.A.R.L.
Acquisition of Color Prelude business
On December 18, 2001, the Company, through a newly formed subsidiary,
IST, Corp., acquired the business including certain assets and assumed
certain liabilities of Color Prelude, Inc. (such business referred to
hereafter as "CP"). CP manufactures interactive advertising and sampling
products for cosmetic and consumer products companies. The acquisition
complements the Company's product lines and the Company expects to increase
domestic and international product sales through broader distribution and
to reduce costs through certain economies of scale.
The aggregate purchase price of CP was $19.1 million which was funded
through cash and borrowings of approximately $18.0 million under the
restated credit agreement. The following table summarizes the estimated
fair value of the assets acquired and liabilities assumed at the date of
acquisition. The Company is in the process of obtaining valuations of
certain assets; thus the allocation of purchase price is subject to
refinement.
Property and equipment.......................... $ 7,871
Current assets.................................. 5,731
Intangible assets............................... 8,946
Accounts payable and accrued expenses........... 3,494
Goodwill totaling approximately $6,250 million will not be amortized
in accordance with Statement of Financial Accounting Standards (SFAS) No.
142 - Goodwill and Other Intangible Assets. The results of operations are
included in the financial statements since the date of acquisition. Pro
forma results had CP been acquired at the beginning of fiscal 2001 are as
follows:
Three months ended Six months ended
December 31, December 31,
------------ -----------
2001 2000 2001 2000
---- ---- ---- ----
Revenue............................................ $ 26,215 $ 29,990 $ 56,043 $ 64,958
Income (loss) before extraordinary items........... (1,889) (733) (1,479) 610
Net income (loss).................................. (1,889) (277) (1,479) 1,066
Interim financial statements
The interim consolidated condensed balance sheet at December 31, 2001
and the interim consolidated condensed statements of operations for the
three and six months ended December 31, 2001 and 2000, the interim
consolidated condensed statements of cash flows for the six months ended
December 31, 2001 and 2000
AKI, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
1. BASIS OF PRESENTATION (continued)
and the interim consolidated condensed statement of changes in
stockholder's equity for the six months ended December 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,
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:
December 31, 2001 June 30, 2001
----------------- -------------
(unaudited) (unaudited)
Raw materials
Paper.......................... $ 2,490 $ 1,796
Other raw materials............ 4,069 2,697
---------- ----------
Total raw materials........ 6,559 4,493
Work in process.................... 1,875 1,837
---------- ----------
Total inventory.................... $ 8,434 $ 6,330
========== ==========
3. RETIREMENT OF DEBT
In fiscal 2001, AKI purchased $4,000 of AKI Senior Notes for $3,110.
The notes were subsequently retired.
4. AMENDED AND RESTATED CREDIT AGREEMENT
On December 18, 2001, AKI amended and restated its credit agreement
with Heller Financial, Inc. ("restated credit agreement"). The restated
credit agreement provides for: (1) a $10.0 million term loan which matures
on December 31, 2006 with varying quarterly principal installments
beginning March 31, 2002 and (2) a revolving loan commitment up to a
maximum of $20.0 million which expires December 31, 2006. Borrowings are
limited to a borrowing base consisting of accounts receivable, inventory
and property, plant and equipment which serve as collateral for the
borrowings. Interest on amounts borrowed under the term loan and revolving
loan accrue at a floating rate based upon either prime or LIBOR as elected
by the Company. The initial rate of interest under the restated credit
agreement was 125 basis points higher than the interest rate of the
previous credit agreement. The Company is required to pay commitment fees
on the unused portion of the revolving loan commitment.
AKI, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
5. 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 December 31, 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. and the term "CP" refers to the business acquired from Color
Prelude, Inc.
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
long-standing relationships with the majority of our customer base.
Results of Operations
Three Months Ended December 31, 2001 Compared to Three Months
Ended December 31, 2000
Net Sales. Net sales for the three months ended December 31, 2001 decreased
$3.9 million, or 14.9%, to $22.3 million, as compared to $26.2 million for the
three months ended December 31, 2000. The decrease in net sales was primarily
attributable to decreases in volume of domestic sales of sampling technologies
for advertising and marketing of fragrance, cosmetic and consumer products
partially offset by sales of sampling technologies for advertising and marketing
of cosmetics by CP. We believe the decline of domestic sales is predominately
attributable to the weak economic conditions in the United States, particularly
in the advertising industry. We expect the significant decline in sales of our
core products, experienced in our second fiscal quarter, to continue through the
remainder of our fiscal year. We cannot predict if this trend will worsen or
when sales may increase in the future. We believe, however, that the continuing
decline in core product sales may be partially offset by sales of the CP
products.
Gross Profit. Gross profit for the three months ended December 31, 2001
decreased $2.1 million, or 24.7%, to $6.4 million, as compared to $8.5 million
for three months ended December 31, 2000. Gross profit as a percentage of net
sales decreased to 28.7% in the three months ended December 31, 2001, from 32.4%
in the three months ended December 31, 2000. The decrease in gross profit and
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 and paper costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended December 31, 2001 increased
$0.2 million, or 4.6%, to $4.6 million, as compared to $4.4 million for the
three months ended December 31, 2000. Selling, general and administrative
expenses as a percent of net sales increased to 20.6% in the three months ended
December 30, 2001, from 16.8% in the three months ended December 31, 2000. The
increase in selling, general and administrative expenses is primarily due to an
increase in legal fees related to a patent infringement lawsuit brought by AKI
and a bonus compensation payment related to the CP acquisition. These increased
expenses were partially offset by a decrease in sales commissions. 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
December 31, 2001 decreased $2.2 million, or 84.6%, to $0.4 million, as compared
to $2.6 million for the three months ended December 31, 2000. Income from
operations as a percentage of net sales decreased to 1.8% in the three months
ended December 30, 2001, from 9.9% in the three months ended December 31, 2000.
The decrease in income from operations and income from operations as a
percentage of net sales is principally the result of the factors described
above.
Interest Expense. Interest expense for the three months ended December 31,
2001 decreased $0.3 million, or 7.1%, to $3.9 million, as compared to $4.2
million for the three months ended December 31, 2000. Interest expense as a
percentage of net sales increased to 17.5% in the three months ended December
30, 2001, from 16.0% in the three months ended December 31, 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 average borrowings under the revolving loan and the promissory
note to a stockholder.
Interest expense for AKI for the three months ended December 31, 2001
decreased $0.3 million, or 9.1%, to $3.0 million, as compared to $3.3 million
for the three months ended December 31, 2000. Interest expense as a percentage
of net sales increased to 13.5% in the three months ended December 31, 2001,
from 12.6% in the three months ended December 31, 2000. The decrease in interest
expense, including the amortization of deferred financing costs, is primarily
due to repurchased and retired Senior Notes, and reduced average borrowings
under the revolving loan and a promissory note to an affiliate.
Income Tax Benefit. Income tax benefit for the three months ended December
31, 2001 increased $0.8 million to $0.9 million. The Company's effective tax
rate, after consideration of non-deductible goodwill amortization, was 38.5% in
the three months ended December 31, 2001, and 23.0% in the three months ended
December 31, 2000.
Income tax benefit for AKI for the three months ended December 31, 2001
increased $0.8 million to $0.6 million. AKI's effective tax rate, after
consideration of non-deductible goodwill amortization, was 39% in the three
months ended December 31, 2001 and 2000.
Extraordinary Gain from Early Retirement of Debt. Extraordinary gain from
early retirement of debt of $1.0 million for the three months ended December 31,
2000 resulted from the purchase and subsequent contribution of Senior Discount
Debentures by AHC I Acquisition Corp. The contributed securities were
subsequently retired.
Extraordinary gain from early retirement of debt for AKI of $0.5 million
for the three months ended December 31, 2000 resulted from the purchase of
Senior Notes by AKI. The purchased securities were subsequently retired.
EBITDA. EBITDA for the three months ended December 31, 2001 decreased $2.1
million, or 41.2%, to $3.0 million, as compared to $5.1 million for the three
months ended December 31, 2000. The decrease in EBITDA principally reflects the
decrease in gross profit and the increase in selling, general and administrative
expenses discussed above. EBITDA as a percentage of net sales was 13.5% and
19.5% in the three months ended December 31, 2001 and 2000, respectively. EBITDA
is income from operations plus depreciation and amortization of goodwill and
other intangibles.
Six Months Ended December 31, 2001 Compared to Six Months
Ended December 31, 2000
Net Sales. Net sales for the six months ended December 31, 2001 decreased
$8.8 million, or 15.0%, to $49.7 million as compared to $58.5 million for the
six months ended December 31, 2000. The decrease was primarily attributable to
decreases in volume of domestic sales of sampling technologies for advertising
and marketing of fragrance, cosmetic and consumer products, partially offset by
sales of sampling technologies for advertising and marketing of cosmetics by CP.
We believe the decline in domestic sales is predominately attributable to the
weak economic conditions in the United States, particularly in the advertising
industry. We expect the significant decline in sales of our core products,
experienced in our first and second fiscal quarters, to continue through the
remainder of our fiscal year. We cannot predict if this trend will worsen or
when sales may increase in the future. We believe, however, that the continuing
decline in core product sales may be partially offset by sales of the CP
products.
Gross Profit. Gross profit for the six months ended December 31, 2001
decreased $4.2 million, or 19.7%, to $17.1 million as compared to $21.3 million
for six months ended December 31, 2000. Gross profit as a percentage of net
sales decreased to 34.4% in the six months ended December 31, 2001, from 36.4%
in the six months ended December 31, 2000. The decrease in gross profit and
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 and paper costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended December 31, 2001 decreased
$0.1 million, or 1.1%, to $8.8 million as compared to $8.9 million for the six
months ended December 31, 2000. The decrease in selling, general and
administrative expenses was primarily due to a one-time severance charge in
2000, a decrease in personnel in 2001 and a decrease in sales commissions
partially offset by an increase in legal fees related to a patent infringement
lawsuit brought by AKI and a bonus compensation payment related to the CP
acquisition. Selling, general and administrative expenses as a percent of net
sales increased to 17.7% in the six months ended December 31, 2001 from 15.2% in
the six months ended December 31, 2000, primarily due to the decrease in net
sales.
Income from Operations. Income from operations for the six months ended
December 31, 2001 decreased $4.1 million, or 43.2%, to $5.4 million, as compared
to $9.5 million for the six months ended December 31, 2000. Income from
operations as a percentage of net sales decreased to 10.9% in the six months
ended December 31, 2001, from 16.2% in six months ended December 31, 2000. The
decrease in income from operations and income from operations as a percentage of
net sales is principally the result of the factors described above.
Interest Expense. Interest expense for the six months ended December 31,
2001 decreased $0.9 million, or 10.5%, to $7.7 million, as compared to $8.6
million for the six months ended December 31, 2000. Interest expense as a
percentage of net sales increased to 15.5% in the six months ended December 31,
2001 from 14.7% in the six months ended December 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 and reduced average
borrowings under the revolving loan and the promissory note to a stockholder.
Interest expense for AKI for the six months ended December 31, 2001
decreased $0.7 million, or 10.3%, to $6.1 million, as compared to $6.8 million
for the six months ended December 31, 2000. Interest expense as a percentage of
net sales increased to 12.3% in the six months ended December 31, 2001, from
11.6% in the six months ended December 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 and reduced average borrowings under the revolving loan and a
promissory note to an affiliate.
Income Tax Expense. Income tax expense for the six months ended December
31, 2001 decreased $1.3 million to $0.1 million. The Company's effective tax
rate, after consideration of non-deductible goodwill amortization, was 53.1% in
the six months ended December 31, 2001 and 43.4% in the six months ended
December 31, 2000.
Income tax expense for AKI for the six months ended December 31, 2001
decreased $1.4 million to $0.6 million. AKI's effective tax rate, after
consideration of non-deductible goodwill amortization, was 39.0% in the six
months ended December 31, 2001 and 2000.
Extraordinary Gain from Early Retirement of Debt. Extraordinary gain from
early retirement of debt of $1.0 million for the six months ended December 31,
2000 resulted from the purchase and subsequent contribution of Senior Discount
Debentures by AHC I Acquisition Corp. The contributed securities were
subsequently retired.
Extraordinary gain from early retirement of debt for AKI of $0.5 million
for the six months ended December 31, 2000 resulted from the purchase of Senior
Notes by AKI. The purchased securities were subsequently retired.
EBITDA. EBITDA for the six months ended December 31, 2001 decreased $3.9
million, or 26.9%, to $10.6 million as compared to $14.5 million for the six
months ended December 31, 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 21.3% and 24.8% in the six months ended December 31, 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 December 31, 2001, we had consolidated indebtedness in an aggregate amount
of $146.7 million (excluding trade payables, accrued liabilities, deferred taxes
and other non-current liabilities), of which approximately $25.5 million was a
direct obligation of Holding relating to its debentures and approximately $121.2
million was a direct obligation of AKI relating to its notes, term loan and
revolving loan. Borrowings at December 31, 2001 included $7.7 million under the
revolving loan and $10.0 million under the term loan that were incurred to
acquire CP. At December 31, 2001 we had $12.3 million available under the
revolving loan. At December 31, 2001, AKI also had $23.3 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, term loan and revolving
loan. 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 the revolving loan and promissory note to
affiliate. During the six months ended December 31, 2001, cash totaling $0.2
million was provided by operating activities resulting from net income before
depreciation and amortization and a decrease in accounts receivable, partially
offset by decreases in accounts payable and accrued expenses and accrued income
taxes. During the six months ended December 31, 2000, cash totaling $3.2 million
was provided by operating activities resulting from net income before
depreciation and amortization, a decrease in inventory and an increase in
accrued income tax, partially offset by an increase in accounts receivable and
decreases in accounts payable and accrued expenses.
On December 18, 2001 we amended and restated our credit agreement with
Heller Financial, Inc. ("restated credit agreement"). The restated credit
agreement provides for: (1) a $10.0 million term loan which matures on December
31, 2006 with varying quarterly principal installments beginning March 31, 2002
and (2) a revolving loan commitment up to a maximum of $20.0 million which
expires December 31, 2006. Borrowings are limited to a borrowing base consisting
of accounts receivable, inventory and property, plant and equipment which serve
as collateral for the borrowings. Interest on amounts borrowed under the term
loan and revolving loan accrue at a floating rate based upon either prime or
LIBOR. The initial rate of interest under the restated credit agreement was 125
basis points higher than the interest rate of the previous credit agreement. The
Company is required to pay commitment fees on the unused portion of the
revolving loan commitment.
In the six months ended December 31, 2001 and 2000, we had capital
expenditures of approximately $0.5 million and $2.1 million, respectively. These
capital expenditures consisted primarily of the purchase of manufacturing
equipment and upgrading our computer systems.
On December 18, 2001, we acquired, through a newly formed subsidiary, IST,
Corp., CP for an aggregate purchase price of approximately $19.1 million. The
purchase price was financed by borrowings under the restated credit agreement.
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 December 31, 2001, AKI had purchased and retired $4.0 million of AKI
Senior Notes originally issued in 1998.
Capital expenditures for the six months ending June 30, 2002 are currently
estimated to be approximately $2.0 million. Based on borrowings outstanding as
of December 31, 2001, we expect total cash payments for debt service for the six
months ending June 30, 2002 to be approximately $6.5 million, consisting of $5.4
million in interest payments of the notes, $0.5 million in principal payments
under the term loan, $0.3 million in interest payments under the term loan and
$0.3 million in interest and fees under the revolving loan. We also expect to
make royalty payments of approximately $0.3 million during the six months ending
June 30, 2002.
At December 31, 2001, Holding's cash and cash equivalents and net working
capital were $1.9 million and $12.6 million, respectively, representing a
decrease in cash and cash equivalents of $2.8 million and an increase in net
working capital of $2.4 million from June 30, 2001. Account receivables, net, at
December 31, 2001 increased 10.6% or $1.9 million over the June 30, 2001 amount
as a result of the CP acquisition.
Seasonality
Our sales and operating results have historically reflected seasonal
variations. Such seasonal variations are based on the timing of our customers'
advertising campaigns and product launches, 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; our significant indebtedness;
integration of the CP acquisition; 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; 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 to 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 December 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
On December 26, 2001, AKI Holding Corp. filed a Form 8-K
reporting the acquisition of substantially all of the assets and
the assumption of certain liabilities of Color Prelude, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AKI HOLDING CORP.
Date: February 14, 2002 By: /s/ Kenneth A. Budde
-----------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
AKI, INC.
Date: February 14, 2002 By: /s/ Kenneth A. Budde
-----------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)