Filed Pursuant to Rule 424(b)(3)
Registration No. 333-60991
PROSPECTUS SUPPLEMENT DATED MAY 14, 2003
To Prospectus dated December 23, 1998
13 1/2% SENIOR DEBENTURES DUE 2009
OF
AKI HOLDING CORP.
RECENT DEVELOPMENTS
Attached hereto and incorporated by reference herein is the Form 10-Q of
AKI Holding Corp. filed May 14, 2003.
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) ( ) Yes (X) No
As of April 30, 2003, 1,000 shares of common stock of AKI Holding Corp., $.01
par value, were outstanding and 1,000 shares of common stock of AKI, Inc., $.01
par value, were outstanding.
AKI, Inc. meets the requirements set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this form with reduced disclosure
format.
AKI HOLDING CORP. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
AKI Holding Corp. and Subsidiaries
Consolidated Condensed Balance Sheet
- March 31, 2003
- June 30, 2002
Consolidated Condensed Statements of Operations
- Three months ended March 31, 2003
- Three months ended March 31, 2002
- Nine months ended March 31, 2003
- Nine months ended March 31, 2002
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Nine months ended March 31, 2003
Consolidated Condensed Statements of Cash Flows
- Nine months ended March 31, 2003
- Nine months ended March 31, 2002
Notes to Consolidated Condensed Financial Statements
Item 1. Financial Statements (unaudited) (continued)
AKI, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet
- March 31, 2003
- June 30, 2002
Consolidated Condensed Statements of Operations
- Three months ended March 31, 2003
- Three months ended March 31, 2002
- Nine months ended March 31, 2003
- Nine months ended March 31, 2002
Consolidated Condensed Statement of Changes in
Stockholder's Equity
- Nine months ended March 31, 2003
Consolidated Condensed Statements of Cash Flows
- Nine months ended March 31, 2003
- Nine months ended March 31, 2002
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Discussions About Market Risk
Item 4. Controls and Procedures
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
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)
March 31, June 30,
2003 2002
------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 1,253 $ 1,875
Accounts receivable, net................................................... 21,830 23,796
Inventory.................................................................. 7,941 8,014
Prepaid expenses........................................................... 834 667
Income tax receivable...................................................... 1,892 -
Deferred income taxes...................................................... 977 977
------------- -------------
Total current assets.................................................... 34,727 35,329
Property, plant and equipment, net......................................... 17,406 19,616
Goodwill .................................................................. 153,277 153,277
Other intangible assets, net............................................... 11,772 13,142
Deferred charges, net...................................................... 3,386 4,059
Deferred income taxes...................................................... 392 692
Other assets............................................................... 177 164
------------- -------------
Total assets............................................................ $ 221,137 $ 226,279
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt.......................................... $ 1,812 $ 1,375
Accounts payable, trade.................................................... 3,400 5,826
Accrued income taxes....................................................... - 2,007
Accrued compensation....................................................... 3,767 5,338
Accrued interest........................................................... 3,046 5,570
Accrued expenses........................................................... 3,851 3,642
------------- -------------
Total current liabilities............................................... 15,876 23,758
Revolving credit line...................................................... 8,900 2,750
Term loan.................................................................. 6,750 8,125
Senior notes............................................................... 103,510 103,510
Promissory note to affiliate............................................... 355 -
Senior discount debentures................................................. 8,832 15,901
Other non-current liabilities.............................................. 1,712 2,338
------------- -------------
Total liabilities....................................................... 145,935 156,382
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........................................................ (3,036) (7,583)
Accumulated other comprehensive income (loss).............................. 312 (446)
Carryover basis adjustment................................................. (15,730) (15,730)
-------------- -------------
Total stockholder's equity.............................................. 75,202 69,897
------------- -------------
Total liabilities and stockholder's equity.............................. $ 221,137 $ 226,279
============= =============
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 Nine months ended
--------------------------------- ---------------------------------
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales...................................... $ 28,954 $ 35,472 $ 90,998 $ 85,182
Cost of goods sold............................. 18,549 20,357 57,768 53,000
--------- --------- --------- ---------
Gross profit................................ 10,405 15,115 33,230 32,182
Selling, general and administrative expenses... 4,488 5,018 13,892 13,782
Amortization of goodwill....................... - 1,202 - 3,605
Amortization of other intangibles.............. 285 477 857 990
--------- --------- --------- ---------
Income from operations...................... 5,632 8,418 18,481 13,805
Other expenses:
Interest expense............................ 3,565 4,182 10,978 11,918
Management fees and other, net.............. 100 57 225 182
Loss from early retirement of debt.......... 204 - 60 -
--------- --------- --------- ---------
Income before income taxes.................. 1,763 4,179 7,218 1,705
Income tax expense............................. 594 2,150 2,671 2,227
--------- --------- --------- ---------
Net income (loss)........................... $ 1,169 $ 2,029 $ 4,547 $ (522)
========= ========= ========= =========
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
Common Stock Additional Other Carryover
------------ Paid-in Accumulated Comprehensive Basis
Shares Dollars Capital Deficit Loss Adjustment Total
------ ------- ------- ------- ---- ---------- -----
Balances, June 30, 2002 (unaudited)..... 1,000 $ - $ 93,656 $ (7,583) $ (446) $ (15,730) $ 69,897
Net income (unaudited).................. 4,547 4,547
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............. 758 758
---------
Comprehensive income (unaudited)........ 5,305
----- ------ --------- --------- -------- --------- ---------
Balances, March 31, 2003 (unaudited).... 1,000 $ - $ 93,656 $ (3,036) $ 312 $ (15,730) $ 75,202
===== ====== ========= ========= ======== ========= =========
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)
Nine months ended
------------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss)..................................................... $ 4,547 $ (522)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization of goodwill and other intangibles..... 5,579 8,378
Amortization of debt discount....................................... 1,352 2,468
Amortization of debt issuance costs................................. 477 433
Deferred income taxes............................................... 300 (1,153)
Loss from early retirement of debt.................................. 60 -
Other............................................................... 119 180
Changes in operating assets and liabilities:
Accounts receivable............................................... 1,966 (8,339)
Inventory......................................................... 73 (465)
Prepaid expenses, deferred charges and other assets............... (167) (152)
Accounts payable and accrued expenses............................. (6,312) (3,571)
Income taxes...................................................... (3,899) (1,006)
------------ ------------
Net cash provided by (used in) operating activities............. 4,095 (3,749)
------------ ------------
Cash flows from investing activities
Purchases of equipment................................................ (1,904) (888)
Patents............................................................... (95) (62)
Payments for acquisition, net of cash acquired...................... - (19,053)
------------ ------------
Net cash used in investing activities........................... (1,999) (20,003)
------------ ------------
Cash flows from financing activities
Payments under capital leases ........................................ - (503)
Repayment of long-term debt........................................... (8,285) -
Net proceeds on revolving loan........................................ 6,150 11,450
Net proceeds (repayments) on term loan................................ (938) 9,750
Payments of loan closing costs........................................ - (605)
Net proceeds from promissory note to stockholder...................... 355 350
------------ ------------
Net cash (used in) provided by financing activities............. (2,718) 20,442
------------ ------------
Net decrease in cash and cash equivalents................................ (622) (3,310)
Cash and cash equivalents, beginning of period........................... 1,875 4,654
------------ ------------
Cash and cash equivalents, end of period................................. $ 1,253 $ 1,344
============ ============
Supplemental information
Cash paid during the period for:
Interest............................................................ $ 11,496 $ 11,305
Income taxes........................................................ 6,421 4,479
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.
Recently Issued Accounting Standards
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 adoption of SFAS 142 eliminates the amortization of
goodwill, approximately $4,800 in the fiscal year ended June 30, 2002,
while requiring an initial test and subsequent annual tests for impairment
of goodwill. The Company completed its initial test of the carrying value
of goodwill which resulted in no impairment.
FASB Statement of Financial Accounting Standards No. 145 "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections" ("SFAS 145") was issued in April 2002. The most
significant aspects of this pronouncement, with respect to the Company, is
the elimination of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt". As a result of the elimination of SFAS No. 4,
gains and losses from extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in APB No. 30,
"Reporting the Results of Operations - Discontinued Events and
Extraordinary Items". The implementation of SFAS No. 145 will require gains
or losses resulting from future early retirements of debt to be included in
other income and expenses which could materially affect income before
income taxes. In the nine month period ended March 31, 2003, the Company
reported an approximate $60 loss from early retirement of debt.
FASB Statement of Financial Standards No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") was issued in
June 2002. SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
anticipate that the provisions of this statement will have a material
impact on the Company's reported results of operations, financial positions
or cash flows.
FASB Statement of Financial Standards No. 149 "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149") was
issued in April 2003. FASB Statements No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" establish accounting
and reporting standards for derivative instruments including derivatives
embedded in other contracts (collectively referred to as derivatives) and
for hedging activities. SFAS 149 amends SFAS 133 for certain decisions made
by the Board as part of the Derivatives Implementation Group ("DIG")
process. SFAS 149 contains amendments relating to FASB Concepts Statement
No. 7, "Using Cash Flow Information and Present Value in Accounting
Measurements", and FASB
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)
Statements No. 65, "Accounting for Certain Mortgage Banking Activities, No.
91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases", No. 95,
"Statement of Cash Flows", and No. 126, "Exemption from Certain Required
Disclosures about Financial Instruments for Certain Nonpublic Entities".
The Company is presently evaluating the effect of this pronouncement.
FASB Interpretation No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45") was issued in November 2002. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also requires the guarantor to recognize, at the inception of
the guarantee, a liability for the fair value of obligation undertaken in
issuing the guarantee. The disclosure requirements are effective for
quarters ending after December 15, 2002 and the liability recognition is in
effect for guarantees initiated after December 31, 2002. The Company does
not anticipate that the provisions of this statement will have a material
impact on the Company's reported results of operations, financial positions
or cash flows.
FASB Interpretation No. 46 "Consolidation of Variable Interest
Entities" ("FIN 46") was issued in January 2003. FIN 46 requires an
investor with a majority of the variable interests in a variable interest
entity ("VIE") to consolidate the entity and also requires majority and
significant variable interest investors to provide certain disclosures. A
VIE is an entity in which the equity investors do not have a controlling
interest, or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial
support from the other parties. For arrangements entered into with VIEs
created prior to January 31, 2003, the provisions of FIN 46 are required to
be adopted at the beginning of the first interim or annual period beginning
after June 15, 2003. The Company is currently reviewing its investments and
other arrangements to determine whether any of its investee companies are
VIEs. The Company does not expect to identify any significant VIEs that
would be consolidated, but may be required to make additional disclosures.
The Company's maximum exposure related to any investment that may be
determined to be in a VIE is limited to the amount invested. The provisions
of FIN 46 are effective immediately for all arrangements entered into with
new VIEs created after January 31, 2003. The Company has not invested in
any new VIEs created after January 31, 2003.
FASB Statement of Financial Standards No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123" ("SFAS 148") was issued in December 2002. FASB 148
amends FASB Statement of Financial Standards No. 123 "Accounting for
Stock-Based Compensation" ("FASB 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, FASB 148
amends the disclosure requirements of FASB 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The Company does not anticipate
that the provisions of this statement will have a material impact on the
reported results of operations, financial positions or cash flows.
If the Company had elected to recognize compensation expense based on
the fair value of the options at grant date as prescribed by FASB 123, the
net income (loss) would have been as follows:
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)
Three months ended Nine months ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported.......... $ 1,169 $ 2,029 $ 4,547 $ (522)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects...... 5 16 16 48
-------- -------- -------- --------
Pro forma net income (loss)............. $ 1,164 $ 2,013 $ 4,531 $ (570)
======== ======== ======== ========
Acquisition of Color Prelude business
On December 18, 2001, the Company acquired the business including
certain assets and assumed certain liabilities of Color Prelude, Inc.
("CP") for $19,423 including direct acquisition costs of $540. The
acquisition was accounted for using the purchase method of accounting in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations". The purchase price has been allocated to the
assets and liabilities acquired using estimated fair values at the date of
acquisition and resulted in assigning value to goodwill totaling $407 which
will not be amortized in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". The
following shows the allocation of the purchase price.
Cash...................................... $ 1
Other current assets...................... 5,680
Property, plant and equipment............. 7,695
Patents................................... 7,750
Other intangible assets................... 1,069
Goodwill.................................. 407
--------
Total allocation to assets................ $ 22,602
========
Current liabilities....................... $ 3,179
========
Patents are being amortized over a ten year period and other
intangible assets are being amortized over periods ranging from one to four
years.
Interim financial statements
The interim consolidated condensed balance sheet at March 31, 2003 and
the interim consolidated condensed statements of operations for the three
and nine months ended March 31, 2003 and 2002, the interim consolidated
condensed statements of cash flows for the nine months ended March 31, 2003
and 2002 and the interim consolidated condensed statement of changes in
stockholder's equity for the nine months ended March 31, 2003 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,
2002 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
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)
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. The interim
consolidated condensed financial statements should be read in conjunction
with the financial statements and notes thereto for the year ended June 30,
2002 as filed on Form 10-K.
Reclassification
Certain prior period amounts have been reclassified to conform with
the current period presentation.
2. INVENTORY
The following table details the components of inventory:
March 31, 2003 June 30, 2002
-------------- -------------
(unaudited) (unaudited)
Raw materials
Paper.......................... $ 2,177 $ 2,027
Other raw materials............ 3,620 4,369
----------- -----------
Total raw materials........ 5,797 6,396
Work in process.................... 2,827 2,468
Reserve for obsolescence........... (683) (850)
------------ -----------
Total inventory.................... $ 7,941 $ 8,014
=========== ===========
3. RETIREMENT OF DEBT
In fiscal 2003, Holding purchased, with proceeds from distributions
from AKI, it's Senior Discount Debentures with a carrying value of $8,422
and unamortized debt issuance cost of $197 for $8,285. The distribution
from AKI was funded through borrowings under AKI's credit agreement. In
accordance with SFAS 145, the loss from early retirement of debt, including
write-off of debt issuance costs, is included in other income.
4. AMORTIZATION OF GOODWILL
In accordance with SFAS 142 goodwill is no longer being amortized. The
following pro forma amounts reflect goodwill amortization and net income
had SFAS 142 been implemented at the beginning of fiscal 2002:
Three months ended Nine months ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) as reported.............. $ 1,169 $ 2,029 $ 4,547 $ (522)
Goodwill amortization...................... - 1,202 - 3,605
--------- --------- --------- ---------
Pro forma net income....................... $ 1,169 $ 3,231 $ 4,547 $ 3,083
========= ========= ========= =========
AKI HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
5. COMPREHENSIVE INCOME
Comprehensive income consists of net income, plus certain changes in
assets and liabilities that are not included in net income but are instead
reported within a separate component of shareholders' equity under
generally accepted accounting principles. The Company's comprehensive
income (loss) was as follows:
Three months ended Nine months ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss)............................... $ 1,169 $ 2,029 $ 4,547 $ (522)
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments................................. 392 (213) 758 85
--------- ---------- --------- ---------
Comprehensive income (loss)..................... $ 1,561 $ 1,816 $ 5,305 $ (437)
========= ========= ========= =========
6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets at March 31, 2003 and June 30,
2002 and condensed statements of operations and cash flows for the nine
months ended March 31, 2003 and 2002 and the condensed statement of changes
in stockholder's equity for the nine months ended December 31, 2002 for
Holding have been prepared on the equity basis of accounting and should be
read in conjunction with the consolidated statements and notes thereto.
BALANCE SHEET
March 31, 2003 June 30, 2002
-------------- -------------
(unaudited) (unaudited)
Assets
Investment in subsidiaries............................... $ 96,625 $ 99,583
Income tax receivable.................................... 1,493 46
Deferred charges......................................... 192 422
Deferred income taxes.................................... 1,142 1,923
----------- -----------
Total assets......................................... $ 99,452 $ 101,974
=========== ===========
Liabilities
Senior discount debentures............................... $ 8,832 $ 15,901
---------- ----------
Total liabilities.................................... 8,832 15,901
----------- -----------
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...................................... (3,036) (7,583)
----------- -----------
Total stockholder's equity........................... 90,620 86,073
----------- -----------
Total liabilities and stockholder's equity........... $ 99,452 $ 101,974
=========== ===========
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 OPERATIONS
Nine months ended
------------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
(unaudited) (unaudited)
Equity in net income of subsidiaries..................... $ 5,327 $ 1,178
Interest expense......................................... 1,386 2,530
Loss from early retirement of debt....................... 60 -
----------- -----------
Income (loss) before income taxes.................... 3,881 (1,352)
Income tax benefit....................................... (666) (830)
----------- -----------
Net income (loss).................................... $ 4,547 $ (522)
=========== ===========
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
Common Stock Additional
------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balances, June 30, 2002 (unaudited)........... 1,000 $ - $ 93,656 $ (7,583) $ 86,073
Net income (unaudited)........................ 4,547 4,547
--------- --------- ---------- ----------- -----------
Balances, March 31, 2003 (unaudited).......... 1,000 $ - $ 93,656 $ (3,036) $ 90,620
========= ========= ========== =========== ===========
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 CASH FLOWS
Nine months ended
------------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss)........................................... $ 4,547 $ (522)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Net change in investment in subsidiaries............. (5,327) (1,178)
Amortization of debt discount........................ 1,352 2,468
Amortization of debt issuance costs.................. 34 62
Income tax receivable................................ (1,447) -
Deferred income taxes................................ 781 (830)
Loss from early retirement of debt................... 60 -
----------- -----------
Net cash provided by (used in) operating activities - -
----------- -----------
Cash flows from financing activities
Repayment of long-term debt................................. (8,285) -
Distribution from subsidiary................................ 8,285 -
----------- -----------
Net cash provided by (used in) financing 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)
March 31, June 30,
2003 2002
------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 1,253 $ 1,875
Accounts receivable, net................................................... 21,830 23,796
Inventory.................................................................. 7,941 8,014
Prepaid expenses........................................................... 834 667
Income tax receivable...................................................... 399 -
Deferred income taxes...................................................... 977 977
------------- -------------
Total current assets.................................................... 33,234 35,329
Property, plant and equipment, net......................................... 17,406 19,616
Goodwill .................................................................. 153,277 153,277
Other intangible assets, net............................................... 11,772 13,142
Deferred charges, net...................................................... 3,194 3,637
Other assets............................................................... 177 164
------------- -------------
Total assets............................................................ $ 219,060 $ 225,165
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt.......................................... $ 1,812 $ 1,375
Accounts payable, trade.................................................... 3,400 5,826
Accrued income taxes....................................................... - 2,053
Accrued compensation....................................................... 3,767 5,338
Accrued interest........................................................... 3,046 5,570
Accrued expenses........................................................... 3,851 3,642
------------- -------------
Total current liabilities............................................... 15,876 23,804
Revolving credit line...................................................... 8,900 2,750
Term loan.................................................................. 6,750 8,125
Senior notes............................................................... 103,510 103,510
Promissory note to affiliate............................................... 355 -
Deferred income taxes...................................................... 750 1,231
Other non-current liabilities.............................................. 1,712 2,338
------------- -------------
Total liabilities....................................................... 137,853 141,758
Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
1,000 shares issued and outstanding..................................... - -
Additional paid-in capital................................................. 92,258 100,543
Accumulated deficit........................................................ 4,367 (960)
Accumulated other comprehensive income (loss).............................. 312 (446)
Carryover basis adjustment................................................. (15,730) (15,730)
------------- -------------
Total stockholder's equity.............................................. 81,207 83,407
------------- -------------
Total liabilities and stockholder's equity.............................. $ 219,060 $ 225,165
============= =============
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 Nine months ended
--------------------------------- ---------------------------------
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales...................................... $ 28,954 $ 35,472 $ 90,998 $ 85,182
Cost of goods sold............................. 18,549 20,357 57,768 53,000
--------- --------- --------- ---------
Gross profit................................ 10,405 15,115 33,230 32,182
Selling, general and administrative expenses... 4,488 5,018 13,892 13,782
Amortization of goodwill....................... - 1,202 - 3,605
Amortization of other intangibles.............. 285 477 857 990
--------- --------- --------- ---------
Income from operations...................... 5,632 8,418 18,481 13,805
Other expenses:
Interest expense............................ 3,184 3,306 9,592 9,388
Management fees and other, net.............. 100 57 225 182
--------- --------- --------- ---------
Income before income taxes.................. 2,348 5,055 8,664 4,235
Income tax expense............................. 911 2,439 3,337 3,057
--------- --------- --------- ---------
Net income.................................. $ 1,437 $ 2,616 $ 5,327 $ 1,178
========= ========= ========= =========
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
Common Stock Additional Other Carryover
------------ Paid-in Accumulated Comprehensive Basis
Shares Dollars Capital Deficit Loss Adjustment Total
------ ------- ------- ------- ---- ---------- -----
Balances, June 30, 2002 (unaudited)..... 1,000 $ - $ 100,543 $ (960) $ (446) $ (15,730) $ 83,407
Distribution to AKI Holding Corp........ (8,285) (8,285)
Net income (unaudited).................. 5,327 5,327
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............. 758 758
---------
Comprehensive income (unaudited)........ 6,085
----- ------ --------- --------- -------- --------- ---------
Balances, March 31, 2003 (unaudited).... 1,000 $ - $ 92,258 $ 4,367 $ 312 $ (15,730) $ 81,207
===== ====== ========= ========= ======== ========= =========
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)
Nine months ended
------------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income............................................................ $ 5,327 $ 1,178
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization of goodwill and other intangibles..... 5,579 8,378
Amortization of debt issuance cost.................................. 443 371
Deferred income taxes............................................... (481) (323)
Other............................................................... 119 180
Changes in operating assets and liabilities:
Accounts receivable............................................... 1,966 (8,339)
Inventory......................................................... 73 (465)
Prepaid expenses, deferred charges and other assets............... (167) (152)
Accounts payable and accrued expenses............................. (6,312) (3,571)
Income taxes...................................................... (2,452) (1,006)
------------ ------------
Net cash provided by (used in) operating activities............. 4,095 (3,749)
------------ ------------
Cash flows from investing activities
Purchases of equipment................................................ (1,904) (888)
Patents............................................................... (95) (62)
Payments for acquisition, net of cash acquired........................ - (19,053)
------------ ------------
Net cash used in investing activities........................... (1,999) (20,003)
------------ ------------
Cash flows from financing activities
Payments under capital leases......................................... - (503)
Net proceeds on revolving loan........................................ 6,150 11,450
Net proceeds (repayments) on term loan................................ (938) 9,750
Payments of loan closing costs........................................ - (605)
Net proceeds from promissory note to affiliate........................ 355 350
Distribution to parent................................................ (8,285) -
------------ ------------
Net cash (used in) provided by financing activities............. (2,718) 20,442
------------ ------------
Net decrease in cash and cash equivalents................................ (622) (3,310)
Cash and cash equivalents, beginning of period........................... 1,875 4,654
------------ ------------
Cash and cash equivalents, end of period................................. $ 1,253 $ 1,344
============ ============
Supplemental information
Cash paid during the period for:
Interest............................................................ $ 11,496 $ 11,305
Income taxes........................................................ 6,421 4,479
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.
Recently Issued Accounting Standards
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 adoption of SFAS 142 eliminates the amortization of
goodwill, approximately $4,800 in the fiscal year ended June 30, 2002,
while requiring an initial test and subsequent annual tests for impairment
of goodwill. The Company completed its initial test of the carrying value
of goodwill which resulted in no impairment.
FASB Statement of Financial Accounting Standards No. 145 "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections" ("SFAS 145") was issued in April 2002. The most
significant aspects of this pronouncement, with respect to the Company, is
the elimination of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt". As a result of the elimination of SFAS No. 4,
gains and losses from extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in APB No. 30,
"Reporting the Results of Operations - Discontinued Events and
Extraordinary Items". The implementation of SFAS No. 145 will require gains
or losses resulting from future early retirements of debt to be included in
other income and expenses which could materially affect income before
income taxes.
FASB Statement of Financial Standards No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") was issued in
June 2002. SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
anticipate that the provisions of this statement will have a material
impact on the Company's reported results of operations, financial positions
or cash flows.
FASB Statement of Financial Standards No. 149 "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149") was
issued in April 2003. FASB Statements No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" establish accounting
and reporting standards for derivative instruments including derivatives
embedded in other contracts (collectively referred to as derivatives) and
for hedging activities. SFAS 149 amends SFAS 133 for certain decisions made
by the Board as part of the Derivatives Implementation Group ("DIG")
process. SFAS 149 contains amendments relating to FASB Concepts Statement
No. 7, "Using Cash Flow Information and Present Value in Accounting
Measurements", and FASB Statements No. 65, "Accounting for Certain Mortgage
Banking Activities, No. 91, "Accounting for
AKI, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
1. BASIS OF PRESENTATION (continued)
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases", No. 95, "Statement of Cash Flows", and
No. 126, "Exemption from Certain Required Disclosures about Financial
Instruments for Certain Nonpublic Entities". The Company is presently
evaluating the effect of this pronouncement.
FASB Interpretation No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45") was issued in November 2002. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also requires the guarantor to recognize, at the inception of
the guarantee, a liability for the fair value of obligation undertaken in
issuing the guarantee. The disclosure requirements are effective for
quarters ending after December 15, 2002 and the liability recognition is in
effect for guarantees initiated after December 31, 2002. The Company does
not anticipate that the provisions of this statement will have a material
impact on the Company's reported results of operations, financial positions
or cash flows.
FASB Interpretation No. 46 "Consolidation of Variable Interest
Entities" ("FIN 46") was issued in January 2003. FIN 46 requires an
investor with a majority of the variable interests in a variable interest
entity ("VIE") to consolidate the entity and also requires majority and
significant variable interest investors to provide certain disclosures. A
VIE is an entity in which the equity investors do not have a controlling
interest, or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial
support from the other parties. For arrangements entered into with VIEs
created prior to January 31, 2003, the provisions of FIN 46 are required to
be adopted at the beginning of the first interim or annual period beginning
after June 15, 2003. The Company is currently reviewing its investments and
other arrangements to determine whether any of its investee companies are
VIEs. The Company does not expect to identify any significant VIEs that
would be consolidated, but may be required to make additional disclosures.
The Company's maximum exposure related to any investment that may be
determined to be in a VIE is limited to the amount invested. The provisions
of FIN 46 are effective immediately for all arrangements entered into with
new VIEs created after January 31, 2003. The Company has not invested in
any new VIEs created after January 31, 2003.
FASB Statement of Financial Standards No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123" ("SFAS 148") was issued in December 2002. FASB 148
amends FASB Statement of Financial Standards No. 123 "Accounting for
Stock-Based Compensation" ("FASB 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, FASB 148
amends the disclosure requirements of FASB 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The Company does not anticipate
that the provisions of this statement will have a material impact on the
reported results of operations, financial positions or cash flows.
If the Company had elected to recognize compensation expense based on
the fair value of the options at grant date as prescribed by FASB 123, the
net income would have been as follows:
AKI, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
1. BASIS OF PRESENTATION (continued)
Three months ended Nine months ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported................. $ 1,437 $ 2,616 $ 5,327 $ 1,178
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects...... 5 16 16 48
-------- -------- -------- --------
Pro forma net income.................... $ 1,432 $ 2,600 $ 5,311 $ 1,130
======== ======== ======== ========
Acquisition of Color Prelude business
On December 18, 2001, the Company acquired the business including
certain assets and assumed certain liabilities of Color Prelude, Inc.
("CP") for $19,423 including direct acquisition costs of $540. The
acquisition was accounted for using the purchase method of accounting in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations". The purchase price has been allocated to the
assets and liabilities acquired using estimated fair values at the date of
acquisition and resulted in assigning value to goodwill totaling $407 which
will not be amortized in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". The
following shows the allocation of the purchase price.
Cash...................................... $ 1
Other current assets...................... 5,680
Property, plant and equipment............. 7,695
Patents................................... 7,750
Other intangible assets................... 1,069
Goodwill.................................. 407
--------
Total allocation to assets................ $ 22,602
========
Current liabilities....................... $ 3,179
========
Patents are being amortized over a ten year period and other
intangible assets are being amortized over periods ranging from one to four
years.
Interim financial statements
The interim consolidated condensed balance sheet at March 31, 2003 and
the interim consolidated condensed statements of operations for the three
and nine months ended March 31, 2003 and 2002, the interim consolidated
condensed statements of cash flows for the nine months ended March 31, 2003
and 2002 and the interim consolidated condensed statement of changes in
stockholder's equity for the nine months ended March 31, 2003 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.
AKI, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information
1. BASIS OF PRESENTATION (continued)
The June 30, 2002 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. The interim consolidated condensed financial
statements should be read in conjunction with the financial statements and
notes thereto for the year ended June 30, 2002 as filed on Form 10-K.
Reclassification:
Certain prior period amounts have been reclassified to conform with
the current period presentation.
2. INVENTORY
The following table details the components of inventory:
March 31, 2003 June 30, 2002
-------------- -------------
(unaudited) (unaudited)
Raw materials
Paper.......................... $ 2,177 $ 2,027
Other raw materials............ 3,620 4,369
----------- ----------
Total raw materials........ 5,797 6,396
Work in process.................... 2,827 2,468
Reserve for obsolescence........... (683) (850)
----------- ----------
Total inventory.................... $ 7,941 $ 8,014
=========== ==========
3. DISTRIBUTION
In fiscal 2003, AKI paid distributions of $8,285 to Holding to fund
the purchase of Holding Senior Discount Debentures. The distribution was
funded through borrowings under the amended and restated credit agreement.
4. AMORTIZATION OF GOODWILL
In accordance with SFAS 142 goodwill is no longer being amortized. The
following pro forma amounts reflect goodwill amortization and net income
had SFAS 142 been implemented at the beginning of fiscal 2002:
Three months ended Nine months ended
March 31, March 31,
---------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported..................... $ 1,437 $ 2,616 $ 5,327 $ 1,178
Goodwill amortization...................... - 1,202 - 3,605
--------- --------- --------- ---------
Pro forma net income....................... $ 1,437 $ 3,818 $ 5,327 $ 4,783
========= ========= ========= =========
AKI, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information
5. COMPREHENSIVE INCOME
Comprehensive income consists of net income, plus certain changes in
assets and liabilities that are not included in net income but are instead
reported within a separate component of shareholders' equity under
generally accepted accounting principles. The Company's comprehensive
income was as follows:
Three months ended Nine months ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net income...................................... $ 1,437 $ 2,616 $ 5,327 $ 1,178
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments................................. 392 (213) 758 85
--------- --------- --------- ---------
Comprehensive income............................ $ 1,829 $ 2,403 $ 6,085 $ 1,263
========= ========= ========= =========
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 March 31, 2003 Compared to Three Months Ended March 31, 2002
Net Sales. Net sales for the three months ended March 31, 2003 decreased
$6.5 million, or 18.3%, to $29.0 million, as compared to $35.5 million for the
three months ended March 31, 2002. The decrease in net sales was primarily
attributable to sales of sampling technologies for advertising and marketing of
cosmetics by CP and a decrease in the sales of our core sampling technologies
for advertising and marketing of domestic cosmetic products and international
fragrance products partially offset by an increase in the sales of our core
sampling technologies for advertising and marketing of domestic consumer
products.
Gross Profit. Gross profit for the three months ended March 31, 2003
decreased $4.7 million, or 31.1%, to $10.4 million, as compared to $15.1 million
for three months ended March 31, 2002. Gross profit as a percentage of net sales
decreased to 35.9% in the three months ended March 31, 2003, from 42.5% in the
three months ended March 31, 2002. The decrease in gross profit and gross profit
as a percentage of net sales is primarily due to the decrease in sales volume
and changes in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2003 decreased $0.5
million, or 10.0%, to $4.5 million, as compared to $5.0 million for the three
months ended March 31, 2002. Selling, general and administrative expenses as a
percent of net sales increased to 15.5% in the three months ended March 31,
2003, from 14.1% in the three months ended March 31, 2002. The decrease in
selling, general and administrative expenses is primarily related to the
decrease in legal fees and incentive compensation expense partially offset by an
increase in office rent expense.
Amortization of Goodwill. Amortization of goodwill for the three months
ended March 31, 2003 decreased $1.2 million, or 100%, to $0, as compared to $1.2
million for the three months ended March 31, 2002. The decrease in amortization
of goodwill resulted from the adoption of FASB Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets". We completed our
initial test of the carrying value of goodwill which resulted in no impairment.
Income from Operations. Income from operations for the three months ended
March 31, 2003 decreased $2.8 million, or 33.3%, to $5.6 million, as compared to
$8.4 million for the three months ended March 31, 2002. Income from operations
as a percentage of net sales decreased to 19.3% in the three months ended March
31, 2003, from 23.7% in the three months ended March 31, 2002. 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 March 31,
2003 decreased $0.6 million, or 14.3%, to $3.6 million, as compared to $4.2
million for the three months ended March 31, 2002. The decrease in interest
expense, including the amortization of deferred financing costs, is primarily
due to a decrease in interest
expense related to retired Senior Discount Debentures and a reduction in the
outstanding amounts of our credit facility. Interest expense as a percentage of
net sales increased to 12.4% in the three months ended March 31, 2003, from
11.0% in the three months ended March 31, 2002.
Interest expense for AKI for the three months ended March 31, 2003
decreased $0.1 million, or 3.0%, to $3.2 million, as compared to $3.3 million
for the three months ended March 31, 2002. The decrease in interest expense,
including the amortization of deferred financing costs, is primarily due to a
reduction in the outstanding amounts of our credit facility. Interest expense as
a percentage of net sales increased to 10.8% in the three months ended March 31,
2003, from 9.3% in the three months ended March 31, 2002.
Income Tax Expense. Income tax expense for the three months ended March 31,
2003 decreased $1.6 million to $0.6 million. The Company's effective tax rate,
after consideration of non-deductible goodwill amortization in 2002, was 32.8%
in the three months ended March 31, 2003, and 39.1% in the three months ended
March 31, 2002.
Income tax expense for AKI for the three months ended March 31, 2003
decreased $1.5 million to $0.9 million. AKI's effective tax rate, after
consideration of non-deductible goodwill amortization, was 39% in the three
months ended March 31, 2003 and 2002.
Nine Months Ended March 31, 2003 Compared to Nine Months Ended March 31, 2002
Net Sales. Net sales for the nine months ended March 31, 2003 increased
$5.8 million, or 6.8%, to $91.0 million as compared to $85.2 million for the
nine months ended March 31, 2002. The increase in net sales was primarily
attributable to sales of sampling technologies for advertising and marketing of
cosmetics by CP and an increase in the sales of our core sampling technologies
for advertising and marketing of domestic fragrance and consumer products and
international cosmetic products partially offset by a decrease in the sales of
our core sampling technologies for advertising and marketing of domestic
cosmetic products and international fragrance products.
Gross Profit. Gross profit for the nine months ended March 31, 2003
increased $1.0 million, or 3.1%, to $33.2 million as compared to $32.2 million
for nine months ended March 31, 2002. Gross profit as a percentage of net sales
decreased to 36.5% in the nine months ended March 31, 2003, from 37.8% in the
nine months ended March 31, 2002. The increase in gross profit and decrease in
gross profit as a percentage of net sales is primarily due to the increase in
sales volume and changes in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended March 31, 2003 increased $0.1
million, or 0.7%, to $13.9 million as compared to $13.8 million for the nine
months ended March 31, 2002. Selling, general and administrative expenses as a
percent of net sales decreased to 15.3% in the nine months ended March 31, 2003
from 16.2% in the nine months ended March 31, 2002. The increase in selling,
general and administrative expenses is primarily related to the CP operations,
an increase in office rent expense and foreign exchange losses partially offset
by a decrease in legal fees and incentive compensation expense.
Amortization of Goodwill. Amortization of goodwill for the nine months
ended March 31, 2003 decreased $3.6 million, or 100%, to $0, as compared to $3.6
million for the nine months ended March 31, 2002. The decrease in amortization
of goodwill resulted from the adoption of FASB Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets". We completed our
initial test of the carrying value of goodwill which resulted in no impairment.
Income from Operations. Income from operations for the nine months ended
March 31, 2003 increased $4.7 million, or 34.1%, to $18.5 million, as compared
to $13.8 million for the nine months ended March 31, 2002. Income from
operations as a percentage of net sales increased to 20.3% in the nine months
ended March 31, 2003, from 16.2% in nine months ended March 31, 2002. The
increase 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 nine months ended March 31, 2003
decreased $0.9 million, or 7.6%, to $11.0 million, as compared to $11.9 million
for the nine months ended March 31, 2002. The decrease in interest expense,
including the amortization of deferred financing costs, is primarily due to a
decrease in interest expense related to retired Senior Discount Debentures
partially offset by interest payable on the term loan incurred in connection
with the CP acquisition. Interest expense as a percentage of net sales decreased
to 12.1% in the nine months ended March 31, 2003 from 14.0% in the six months
ended March 31, 2002.
Interest expense for AKI for the nine months ended March 31, 2003 increased
$0.2 million, or 2.1%, to $9.6 million, as compared to $9.4 million for the nine
months ended March 31, 2002. The increase in interest expense, including the
amortization of deferred financing costs, is primarily due to interest payable
on the term loan incurred in connection with the CP acquisition. Interest
expense as a percentage of net sales decreased to 10.6% in the nine months ended
March 31, 2003, from 11.0% in the nine months ended March 31, 2002.
Income Tax Expense. Income tax expense for the nine months ended March 31,
2003 increased $0.5 million to $2.7 million. The Company's effective tax rate,
after consideration of non-deductible goodwill amortization, was 36.1% in the
nine months ended March 31, 2003 and 39.5% in the nine months ended March 31,
2002.
Income tax expense for AKI for the nine months ended March 31, 2003
increased $0.2 million to $3.3 million. AKI's effective tax rate, after
consideration of non-deductible goodwill amortization, was 39.0% in the nine
months ended March 31, 2003 and 2002.
Liquidity and Capital Resources
We have substantial indebtedness and significant debt service obligations.
As of March 31, 2003, we had consolidated indebtedness in an aggregate amount of
$130.2 million (excluding trade payables, accrued liabilities, deferred taxes
and other non-current liabilities), of which approximately $8.8 million was a
direct obligation of Holding relating to its debentures and approximately $121.3
million was a direct obligation of AKI relating to its notes, term loan,
revolving loan and promissory note to affiliate. Borrowings at March 31, 2003
included $8.9 million under the revolving loan and $8.6 million under the term
loan and $0.4 million on the promissory note to affiliate. At March 31, 2003 we
had $10.8 million available under the revolving loan. At March 31, 2003, AKI
also had $15.8 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 nine months ended March 31, 2003, cash totaling $4.1
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, accrued compensation, accrued interest
and accrued income taxes. During the nine months ended March 31, 2002, cash
totaling $3.7 million was used by operating activities primarily due to the
increase in accounts receivable and a decrease in accrued interest and accrued
income taxes, offset partially by an increase in accounts payable and accrued
expenses.
We define EBITDA as net income or loss plus income taxes; interest expense;
management fees and other, net; and depreciation, amortization and impairment
loss of goodwill and amortization of other intangibles. EBITDA is not a measure
of financial performance under generally accepted accounting principles, and
should not be used by itself or in the place of net income, cash flows from
operating activities or other income or cash flow statement data prepared in
accordance with generally accepted accounting principles as a measure of
profitability or liquidity. We believe the presentation of EBITDA is relevant
because EBITDA is a measurement that we and our lenders use when evaluating
liquidity and establishing our interest rate on a portion of our debt. Investors
should be aware that EBITDA may not be comparable with similarly titled measures
presented by other companies and comparisons of such amounts could be misleading
unless all companies and analysts calculate such measures in the same manner.
The calculation of EBITDA for Holding is as follows (dollars in millions):
Three months ended Nine months ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss)........................ $ 1.2 $ 2.0 $ 4.5 $ (0.5)
Income tax expense....................... 0.6 2.1 2.7 2.2
Interest expense......................... 3.5 4.2 11.0 11.9
Management fees and other, net........... 0.1 0.1 0.2 0.2
Loss from early retirement of debt....... 0.2 - 0.1 -
Depreciation and amortization of
goodwill and other intangibles........ 1.9 3.1 5.6 8.4
-------- -------- -------- --------
EBITDA................................... $ 7.5 $ 11.5 $ 24.1 $ 22.2
======== ======== ======== ========
The calculation of EBITDA for AKI is as follows (dollars in millions):
Three months ended Nine months ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net income............................... $ 1.4 $ 2.6 $ 5.3 $ 1.2
Income tax expense....................... 0.9 2.4 3.4 3.0
Interest expense......................... 3.2 3.3 9.6 9.4
Management fees and other, net........... 0.1 0.1 0.2 0.2
Depreciation and amortization of
goodwill and other intangibles........ 1.9 3.1 5.6 8.4
-------- -------- -------- --------
EBITDA................................... $ 7.5 $ 11.5 $ 24.1 $ 22.2
======== ======== ======== ========
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 under the revolving loan commitment 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 plus a margin of 1.75% to 2.5%
(outstanding borrowings averaged 6.0% at March 31, 2003) or LIBOR plus a margin
of 3.0% to 3.75% (outstanding borrowings averaged 5.69% at March 31, 2003). The
Company is required to pay commitment fees on the unused portion of the
revolving loan commitment. In addition, the Company is required to pay fees
equal to 2.5% of the average daily outstanding amount of lender guarantees. On
November 15, 2002 we amended our restated credit agreement with Heller
Financial, Inc. The amendment delayed mandatory prepayments of the term loan
from excess cash flow from fiscal years commencing with the year ending June 30,
2003 to fiscal years commencing with the year ending June 30, 2004; increased
the aggregate cost of permitted restricted junior payments for the purpose of
purchasing or repurchasing our Senior Notes and Senior Discount Debentures from
$10.0 million to $25.0 million; and increased the permitted payment of a
management, advisory, consulting or other similar fee to an affiliate in the
aggregate from $0.25 million to $0.4 million per year. The Company had $0.3
million of lender guarantees outstanding at March 31, 2003.
In the nine months ended March 31, 2003 and 2002, we had capital
expenditures of approximately $1.9 million and $0.9 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 primarily 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.
On October 15, 2002 and February 18, 2003, Holding purchased, with proceeds
from distributions from AKI, its 13.5% Senior Discount Debentures due 2009 with
an accreted value of $3.4 and $5.0 million for $3.2 and $5.1 million,
respectively. AKI funded the distribution through borrowings under its credit
agreement.
Capital expenditures for the three months ending June 30, 2003 are
currently estimated to be approximately $0.6 million. Based on borrowings
outstanding as of March 31, 2003, we expect total cash payments for debt service
for the three months ending June 30, 2003 to be approximately $0.6 million,
consisting of $0.4 million in principal payments under the term loan and $0.2
million in interest and fees under the credit agreement. We also expect to make
royalty payments of approximately $0.5 million during the three months ending
June 30, 2003.
At March 31, 2003, Holding's cash and cash equivalents and net working
capital were $1.3 million and $18.8 million, respectively, representing a
decrease in cash and cash equivalents of $0.6 million and an increase in net
working capital of $7.3 million from June 30, 2002. The increase in working
capital is primarily due to the reduction of current liabilities and the
increase in income tax receivable partially offset by a decrease in accounts
receivable.
Seasonality / Cyclicality
Our sales and operating results have historically reflected seasonal
variations. Such seasonal and cyclical 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, generally, 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 fluctuations require us to
accurately allocate our resources to manage our manufacturing capacity, which
often operates at full capacity during peak demand periods. The severity of our
seasonal sales variations has decreased over time as we have developed and
acquired other sampling technologies for advertising and marketing of cosmetic
and consumer products. Sales of the CP products subsequent to our acquisition
totaled $14.7 million in the three months ended June 30, 2002, a significant
increase compared to CP's historical levels due to sales related to a new
sampling technology and the major introduction of new products by Mary Kay.
Sales of this magnitude will not occur in the three months ending June 30, 2003.
Recently Issued Accounting Standards
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 adoption of
SFAS 142 eliminates the amortization of goodwill, approximately $4.8 million in
fiscal 2002 and requires annual tests for impairment of goodwill.
FASB Statement of Financial Accounting Standards No. 144 "Accounting for
the Impairment of Disposal of Long-Lived Assets" ("SFAS 144") was issued in
August 2001. SFAS 144 requires that long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value less cost to sell.
SFAS 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. The Company does not expect a material impact in
implementing SFAS 144 on its future financial statements.
FASB Statement of Financial Accounting Standards No. 145 "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145") was issued in April 2002. The most
significant aspects of this pronouncement, with respect to the Company, is the
elimination of SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt". As a result of the elimination of SFAS No. 4, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB No. 30, "Reporting the Results of Operations -
Discontinued Events and Extraordinary Items". The implementation of SFAS No. 145
will require early retirements of debt to be included in income from continuing
operations which could materially affect our income from continuing operations.
FASB Statement of Financial Standards No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") was issued in June
2002. SFAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity. SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not anticipate that the provisions of this statement will
have a material impact on the Company's reported results of operations,
financial positions or cash flows.
FASB Statement of Financial Standards No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149") was issued in
April 2003. FASB Statements No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and No. 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities" establish accounting and reporting standards for
derivative instruments including derivatives embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 149
amends SFAS 133 for certain decisions made by the Board as part of the
Derivatives Implementation Group ("DIG") process. SFAS 149 contains amendments
relating to FASB Concepts Statement No. 7, "Using Cash Flow Information and
Present Value in Accounting Measurements", and FASB Statements No. 65,
"Accounting for Certain Mortgage Banking Activities, No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases", No. 95, "Statement of Cash Flows", and No. 126,
"Exemption from Certain Required Disclosures about Financial Instruments for
Certain Nonpublic Entities". The Company is presently evaluating the effect of
this pronouncement.
FASB Interpretation No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45") was issued in November 2002. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires the guarantor to recognize, at the inception of the guarantee, a
liability for the fair value of obligation undertaken in issuing the guarantee.
The disclosure requirements are effective for quarters ending after December 15,
2002 and the liability recognition is in effect for guarantees initiated after
December 31, 2002. The Company does not anticipate that the provisions of this
statement will have a material impact on the Company's reported results of
operations, financial positions or cash flows.
FASB Interpretation No. 46 "Consolidation of Variable Interest Entities"
("FIN 46") was issued in January 2003. FIN 46 requires an investor with a
majority of the variable interests in a variable interest entity ("VIE") to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A VIE is an entity in which
the equity investors do not have a controlling interest, or the equity
investment at risk is insufficient to finance the entity's activities without
receiving additional subordinated financial support from the other parties. For
arrangements entered into with VIEs created prior to January 31, 2003, the
provisions of FIN 46 are required to be adopted at the beginning of the first
interim or annual period beginning after June 15, 2003. The Company is currently
reviewing its investments and other arrangements to determine whether any of its
investee companies are VIEs. The Company does not expect to identify any
significant VIEs that would be consolidated, but may be required to make
additional disclosures. The Company's maximum exposure related to any investment
that may be determined to be in a VIE is limited to the amount invested. The
provisions of FIN 46 are effective immediately for all arrangements entered into
with new VIEs created after January 31, 2003. The Company has not invested in
any new VIEs created after January 31, 2003.
FASB Statement of Financial Standards No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123" ("SFAS 148") was issued in December 2002. FASB 148 amends FASB Statement of
Financial Standards No. 123 "Accounting for Stock-Based Compensation" ("FASB
123"), to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, FASB 148 amends the disclosure requirements of FASB 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company does not anticipate that the
provisions of this statement will have a material impact on the reported results
of operations, financial positions or cash flows.
Critical Accounting Policies
We have chosen accounting policies that we believe are appropriate to
accurately and fairly report our operating results and financial position, and
we apply those accounting policies in a consistent manner.
The preparation of financial statements in conformity with generally
accepted accounting principles requires that we make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
These estimates and assumptions are based on historical and other factors
believed to be reasonable under the circumstances. We evaluate these estimates
and assumptions on an ongoing basis and may retain outside professional advisors
to assist in our evaluation. We believe the following accounting policies are
the most critical because they involve the most significant judgments and
estimates used in preparation of our consolidated financial statements:
o Allowance for doubtful accounts. We maintain an allowance for doubtful
receivables for estimated losses resulting from the inability of our
trade customers to make required payments. We provide an allowance for
specific customer accounts where collection is doubtful and also
provide a general allowance for other accounts based on historical
collection and write-off experience. Judgment is necessary and if the
financial condition of our customers were to worsen, additional
allowances may be required.
o Inventories. Our inventories, which consist of raw materials and
work-in-process, are valued at the lower of cost or market value.
Paper inventory uses the last-in, first-out (LIFO) method and all
other inventories use the first-in, first-out (FIFO) method. We
evaluate all of our raw material inventory for slow moving product
based on recent usage, projections of future demand and market
conditions. For those units in inventory that are so identified, we
estimate their market value based on current realization trends. If
the projected net realizable value is less than cost, we provide a
provision to reflect the lower value of that inventory. This
methodology recognizes projected inventory losses at the time such
losses are evident.
o Intangible assets. When we acquire other companies or businesses we
allocate the purchase price, including expenses and assumed
liabilities, to the assets and liabilities acquired including
intangible assets and goodwill. We estimate the useful lives of the
intangible assets by factoring in the characteristics of the related
products such as: existing sales contracts, patent protection,
estimated future introductions of competing products and other issues.
The factors that drive the estimate of the life of the asset are
inherently uncertain.
o Long-lived assets. We review our property, intangible assets and
goodwill for possible impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable.
Assumptions and estimates used in the evaluation of impairment may
affect the carrying value of long-lived assets, which could result in
impairment charges in future periods. Such assumptions include
projections of future cash flows and, in some cases, the current fair
value of the asset. In addition, our depreciation and amortization
policies reflect judgments on the estimated useful lives of assets.
o Revenue recognition. We recognize revenue when the risks and reward of
ownership are assumed by the buyer. This generally occurs upon
delivery of product to the buyer.
o Deferred income tax assets. We have recorded deferred income tax
assets related to the temporary differences between the tax bases and
financial reporting bases of assets and liabilities. An adjustment to
income tax expense would be required in a future period if we
determine that the amount of deferred tax assets to be realized
differs from the net recorded amount.
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: (1) economic conditions in general and
in our specific market areas; (2) the significant indebtedness of our company;
(3) changes in operating strategy or development plans; (4) the competitive
environment in the sampling industry in general and in our specific market
areas; (5) changes in prevailing interest rates; (6) changes in or failure to
comply with postal regulations or other federal, state and/or local government
regulations; (7) changes in cost of goods and services; (8) changes in our
capital expenditure plans; (9) the ability to attract and retain qualified
personnel; (10) inflation; (11) liability and other claims asserted against us;
(12) labor disturbances 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 24, 2002.
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 20% 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 March 31, 2003, there were no forward
exchange contracts outstanding.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's chief
executive officer and chief financial officer have evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days of the
filing date of this quarterly report. Based on that evaluation, the chief
executive officer and chief financial officer have concluded that the Company's
disclosure controls and procedures are effective to ensure that material
information relating to the Company and the Company's consolidated subsidiaries
is made known to such officers by others within these entities, particularly
during the period this quarterly report was prepared, in order to allow timely
decisions regarding required disclosure.
(b) Changes in Internal Controls. There have not been any significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AKI HOLDING CORP.
Date: May 14, 2003 By: /s/ Kenneth A. Budde
-----------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
(Principal Financial and Accounting
Officer)
CERTIFICATIONS
I, William J. Fox, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AKI Holding Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date May 14, 2003
/s/ William J. Fox
- ------------------------
William J. Fox
Chief Executive Officer
I, Kenneth A. Budde, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AKI Holding Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date May 14, 2003
/s/ Kenneth A. Budde
- ------------------------
Kenneth A. Budde
Chief Financial Officer
AKI, INC.
Date: May 14, 2003 By: /s/ Kenneth A. Budde
-----------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
(Principal Financial and Accounting
Officer)
CERTIFICATIONS
I, William J. Fox, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AKI, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date May 14, 2003
/s/ William J. Fox
- ------------------------
William J. Fox
Chief Executive Officer
I, Kenneth A. Budde, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AKI, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date May 14, 2003
/s/ Kenneth A. Budde
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Kenneth A. Budde
Chief Financial Officer