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, 2004
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: 333-60989
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, 2004, 1,000 shares of common stock of AKI, Inc., $.01 par value,
were outstanding.
AKI, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
AKI, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
- March 31, 2004
- June 30, 2003
Consolidated Condensed Statements of Operations
- Three months ended March 31, 2004
- Three months ended March 31, 2003
- Nine months ended March 31, 2004
- Nine months ended March 31, 2003
Consolidated Condensed Statements of Changes in
Stockholder's Equity
- Nine months ended March 31, 2004
Consolidated Condensed Statements of Cash Flows
- Nine months ended March 31, 2004
- Nine months ended March 31, 2003
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 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
AKI, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share and per share information)
March 31, June 30,
2004 2003
------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 3,647 $ 1,470
Accounts receivable, net................................................... 25,577 20,267
Inventory.................................................................. 9,112 7,265
Income tax receivable...................................................... - 1,011
Prepaid expenses........................................................... 1,232 671
Deferred income taxes...................................................... 808 808
------------- -------------
Total current assets.................................................... 40,376 31,492
Property, plant and equipment, net......................................... 13,412 16,584
Goodwill .................................................................. 152,994 152,994
Other intangible assets, net............................................... 9,958 11,307
Deferred charges, net...................................................... 2,564 3,032
Other assets............................................................... 148 138
------------- -------------
Total assets............................................................ $ 219,452 $ 215,547
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt.......................................... $ 2,063 $ 1,875
Accounts payable, trade.................................................... 6,542 5,444
Accrued income taxes....................................................... 1,132 -
Accrued compensation....................................................... 4,139 4,333
Accrued interest........................................................... 2,836 5,502
Accrued expenses........................................................... 4,804 3,661
------------- -------------
Total current liabilities............................................... 21,516 20,815
Revolving credit line...................................................... 4,800 10,000
Term loan.................................................................. 4,687 6,250
Senior notes............................................................... 103,510 103,510
Promissory note to affiliate............................................... 375 -
Deferred income taxes...................................................... 619 1,142
Other non-current liabilities.............................................. 1,111 1,740
------------- -------------
Total liabilities....................................................... 136,618 143,457
Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
1,000 shares issued and outstanding..................................... - -
Additional paid-in capital................................................. 85,667 82,512
Retained earnings.......................................................... 11,713 4,873
Accumulated other comprehensive income .................................... 1,184 435
Carryover basis adjustment................................................. (15,730) (15,730)
------------- -------------
Total stockholder's equity.............................................. 82,834 72,090
------------- -------------
Total liabilities and stockholder's equity.............................. $ 219,452 $ 215,547
============= =============
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, 2004 March 31, 2003 March 31, 2004 March 31, 2003
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales...................................... $ 35,803 $ 28,954 $ 105,677 $ 90,998
Cost of goods sold............................. 22,171 18,549 67,989 57,768
--------- --------- --------- ---------
Gross profit................................ 13,632 10,405 37,688 33,230
Selling, general and administrative expenses... 5,731 4,488 15,795 13,892
Amortization of other intangibles.............. 285 285 857 857
--------- --------- --------- ---------
Income from operations...................... 7,616 5,632 21,036 18,481
Other expenses:
Interest expense............................ 3,149 3,184 9,601 9,592
Management fees and other, net.............. 97 100 297 225
--------- --------- --------- ---------
Income before income taxes.................. 4,370 2,348 11,138 8,664
Income tax expense............................. 1,688 911 4,298 3,337
--------- --------- --------- ---------
Net income.................................. $ 2,682 $ 1,437 $ 6,840 $ 5,327
========= ========= ========= =========
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
Retained Other
Additional Earnings Comprehensive Carryover
Common Stock Paid-in (Accumulated Income Basis
Shares Dollars Capital Deficit) (Loss) Adjustment Total
------ ------- ------- -------- ------ ---------- -----
Balances, June 30, 2003 (unaudited)..... 1,000 $ - $ 82,512 $ 4,873 $ 435 $ (15,730) $ 72,090
Capital contribution from AKI Holding
Corp................................ 3,155 3,155
Net income (unaudited).................. 6,840 6,840
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............. 749 749
---------
Comprehensive income (unaudited)........ 7,589
----- ----- --------- --------- -------- ---------- ---------
Balances, March 31, 2004 (unaudited).... 1,000 $ - $ 85,667 $ 11,713 $ 1,184 $ (15,730) $ 82,834
===== ===== ========= ========= ======== ========== =========
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, 2004 March 31, 2003
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income.......................................................... $ 6,840 $ 5,327
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of other intangibles................ 5,549 5,579
Amortization of debt issuance cost................................ 493 487
Deferred income taxes............................................. 523) (481)
Other............................................................. 110 119
Changes in operating assets and liabilities:
Accounts receivable............................................. (5,310) 1,966
Inventory....................................................... (1,847) 73
Prepaid expenses, deferred charges and other assets............. (561) (167)
Accounts payable and accrued expenses........................... (619) (6,312)
Income taxes.................................................... 2,143 (2,452)
----------- -----------
Net cash provided by operating activities..................... 6,275 4,139
----------- -----------
Cash flows from investing activities
Purchases of equipment.............................................. (912) (1,904)
Patents............................................................. (116) (95)
----------- -----------
Net cash used in investing activities......................... (1,028) (1,999)
----------- -----------
Cash flows from financing activities
Net proceeds (repayments) on revolving loan......................... (5,200) 6,150
Net repayments on term loan......................................... (1,375) (938)
Net proceeds from promissory note to affiliate...................... 375 355
Capital contribution from parent.................................... 3,155 -
Payments of loan closing costs...................................... (25) (44)
Distribution to parent.............................................. - (8,285)
----------- -----------
Net cash used in financing activities......................... (3,070) (2,762)
----------- -----------
Net increase (decrease) in cash and cash equivalents................... 2,177 (622)
Cash and cash equivalents, beginning of period......................... 1,470 1,875
----------- -----------
Cash and cash equivalents, end of period............................... $ 3,647 $ 1,253
=========== ===========
Supplemental information
Net cash paid during the period for:
Interest.......................................................... $ 11,632 $ 11,496
Income taxes...................................................... 2,974 6,421
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 multi-sensory, interactive marketing activities
primarily from the sale of printed advertising materials with sampling
systems and other sampling products to fragrance, cosmetics and consumer
products companies, and creative services. Products are produced and
distributed from Chattanooga, Tennessee and Baltimore, Maryland facilities
and distributed in Europe through its French subsidiary, Arcade Europe
S.A.R.L.
Recently Issued Accounting Standards
On January 1, 2004, AKI adopted FASB Interpretation No. 46 (revised
December, 2003), "Consolidation of Variable Interest Entities," (FIN 46R)
which 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. FIN 46R
requires consolidation where there is a controlling financial interest in a
variable interest entity or where the variable interest entity does not
have sufficient equity at risk to finance its activities without additional
subordinated financial support from other parties. The adoption of FIN 46R
had no impact on AKI's results of operations, financial position or
statements of cash flows.
Interim financial statements
The interim consolidated condensed balance sheet at March 31, 2004 and
the interim consolidated condensed statements of operations for the three
and nine months ended March 31, 2004 and 2003, the interim consolidated
condensed statements of cash flows for the nine months ended March 31, 2004
and 2003 and the interim consolidated condensed statement of changes in
stockholder's equity for the nine months ended March 31, 2004 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,
2003 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, 2003 as filed on Form 10-K.
AKI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
1. BASIS OF PRESENTATION (continued)
Stock Based Compensation
The Company has elected to account for its stock based compensation
with employees under the intrinsic value method of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", as
permitted under SFAS No. 123, "Accounting for Stock-Based Compensation".
Under the intrinsic value method, because the stock price of the Company's
employee stock options equaled the fair value of the underlying stock on
the date of grant, no compensation expense was recognized. The Company
adopted the disclosure provision of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", an amendment of SFAS
No. 123, effective for interim periods beginning after December 15, 2002.
If the Company had elected to recognize compensation expense based on the
fair value of the options at grant date as prescribed by SFAS 123, the net
income would have been as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported................ $ 2,682 $ 1,437 $ 6,840 $ 5,327
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects..... 7 8 23 26
--------- --------- --------- ---------
Pro forma net income................... $ 2,675 $ 1,429 $ 6,817 $ 5,301
========= ========= ========= =========
2. INVENTORY
The following table details the components of inventory:
March 31, 2004 June 30, 2003
-------------- -------------
(unaudited) (unaudited)
Raw materials
Paper.......................... $ 3,028 $ 1,740
Other raw materials............ 3,640 2,353
----------- -----------
Total raw materials........ 6,668 4,093
Work in process.................... 3,320 3,857
Reserve for obsolescence........... (876) (685)
----------- -----------
Total inventory.................... $ 9,112 $ 7,265
=========== ===========
AKI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share information)
3. 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,
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
Net income................................. $ 2,682 $ 1,437 $ 6,840 $ 5,327
Other comprehensive income, net of tax:
Foreign currency translation
adjustments............................ 287 392 749 758
--------- --------- --------- ---------
Comprehensive income....................... $ 2,969 $ 1,829 $ 7,589 $ 6,085
========= ========= ========= =========
4. CONTINGENCIES
The Beautiful Bouquet Company, Ltd. (the "Licensor") filed suit
against the Company alleging breaches of a Patent and Know-How License
agreement, as amended (the "License Agreement"). The Licensor alleges the
Company committed a number of breaches, including a breach of fiduciary
duty owed to the Licensor, and is seeking to recover unspecified amounts.
The Company believes that it did not breach any provision of the License
Agreement, and intends to vigorously defend against such claims.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 other sampling 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 and promotional agencies. Each
of our customer's marketing programs is unique and pricing is negotiated
based on estimated costs plus a margin. While we generally do not enter
into long-term contracts with our customers, we have long-standing
relationships with the majority of our customer base.
Results of Operations
Three Months Ended March 31, 2004 Compared to Three Months
Ended March 31, 2003
Net Sales. Net sales for the three months ended March 31, 2004
increased $6.8 million, or 23.4%, to $35.8 million, as compared to $29.0
million for the three months ended March 31, 2003. The increase in net
sales was primarily attributable to increased sales of sampling
technologies for advertising and marketing of domestic fragrance and
cosmetic products and international cosmetic products and impact of foreign
exchange rates.
Gross Profit. Gross profit for the three months ended March 31, 2004
increased $3.2 million, or 30.8%, to $13.6 million, as compared to $10.4
million for the three months ended March 31, 2003. Gross profit as a
percentage of net sales increased to 38.0% in the three months ended March
31, 2004, from 35.9% in the three months ended March 31, 2003. The increase
in gross profit and the increase in gross profit as a percentage of net
sales is due to the increase in sales volume and changes in product and
format mix partially offset by the reduction in prices of certain fragrance
sampling products in response to competitive pressures.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2004 increased
$1.2 million, or 26.7%, to $5.7 million, as compared to $4.5 million for
the three months ended March 31, 2003. Selling, general and administrative
expenses as a percent of net sales increased to 15.9% in the three months
ended March 31, 2004, from 15.5% in the three months ended March 31, 2003.
The increase in selling, general and administrative expenses and the
increase in selling, general and administrative expenses as a percent of
net sales is primarily due to increases in incentive compensation and
consulting fees and the impact of foreign exchange rates.
Income from Operations. Income from operations for the three months
ended March 31, 2004 increased $2.0 million, or 35.7%, to $7.6 million, as
compared to $5.6 million for the three months ended March 31, 2003. Income
from operations as a percentage of net sales increased to 21.2% in the
three months ended March 31, 2004, from 19.3% in the three months ended
March 31, 2003. 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 (which includes the amortization of
deferred financing costs) for the three months ended March 31, 2004
decreased $0.1 million, or 3.1%, to $3.1 million, as compared to $3.2
million for the three months ended March 31, 2003. Outstanding borrowings
and related interest rates during the three months ended March 31, 2004 and
2003 were relatively consistent.
Income Tax Expense. Income tax expense for the three months ended
March 31, 2004 increased $0.8 million to $1.7 million. Our effective tax
rate was 39% in the three months ended March 31, 2004 and 2003.
Nine Months Ended March 31, 2004 Compared to Nine Months
Ended March 31, 2003
Net Sales. Net sales for the nine months ended March 31, 2004
increased $14.7 million, or 16.2%, to $105.7 million, as compared to $91.0
million for the nine months ended March 31, 2003. The increase in net sales
was primarily attributable to increased sales of sampling technologies for
advertising and marketing of domestic fragrance and consumer products,
international cosmetic products and impact of foreign exchange rates. These
increases were partially offset by decreased sales of 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, 2004
increased $4.5 million, or 13.6%, to $37.7 million, as compared to $33.2
million for the nine months ended March 31, 2003. Gross profit as a
percentage of net sales decreased to 35.7% in the nine months ended March
31, 2004, from 36.5% in the nine months ended March 31, 2003. The increase
in gross profit is primarily due to the increase in sales volume. The
decrease in gross profit as a percentage of net sales is due to increased
premium labor costs and outsourcing costs during peak production periods,
changes in product and format mix and the reduction in prices of certain
fragrance sampling products in response to competitive pressures.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended March 31, 2004 increased
$1.9, or 13.7%, to $15.8 million, as compared to $13.9 million for the nine
months ended March 31, 2003. The increase in selling, general and
administrative expenses is primarily due to increases in incentive
compensation and consulting fees and the impact of foreign exchange rates.
Selling, general and administrative expenses as a percent of net sales
decreased to 14.9% in the nine months ended March 31, 2004, from 15.3% in
the nine months ended March 31, 2003 primarily because these costs are
largely fixed.
Income from Operations. Income from operations for the nine months
ended March 31, 2004 increased $2.5 million, or 13.5%, to $21.0 million, as
compared to $18.5 million for the nine months ended March 31, 2003. Income
from operations as a percentage of net sales decreased to 19.9% in the nine
months ended March 31, 2004, from 20.3% in the nine months ended March 31,
2003. The increase in income from operations and decrease in income from
operations as a percentage of net sales is principally the result of the
factors described above.
Interest Expense. Interest expense (which includes the amortization of
deferred financing costs) for the nine months ended March 31, 2004 was $9.6
million consistent with the $9.6 million for the nine months ended March
31, 2003. Outstanding borrowings and related interest rates during the nine
months ended March 31, 2004 and 2002 were relatively consistent.
Income Tax Expense. Income tax expense for the nine months ended March
31, 2004 increased $1.0 million to $4.3 million. Our effective tax rate was
39% in the nine months ended March 31, 2004 and 2003.
Liquidity and Capital Resources
We have substantial indebtedness and significant debt service
obligations. As of March 31, 2004, we had consolidated indebtedness in an
aggregate amount of $115.4 million (excluding trade payables, accrued
liabilities, deferred taxes and other non-current liabilities) relating to
our notes, term loan, revolving loan and promissory note to affiliate.
Borrowings at March 31, 2004 included $4.8 million under the revolving loan
and $6.8 million under the term loan and $0.4 million on a promissory note
held by an affiliate. At March 31, 2004 we had $14.9 million available
under the revolving loan. At March 31, 2004, we also had $21.5 million in
additional outstanding liabilities (including trade payables, accrued
liabilities, deferred taxes and other non-current liabilities).
Our 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 held by an
affiliate. During the nine months ended March 31, 2004, cash totaling $6.3
million was provided by operating activities resulting from net income
before depreciation and amortization and a decrease in income tax
receivable, partially offset by an increase in accounts receivable,
inventory, prepaid insurance and foreign value added tax receivable. 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.
We define Adjusted EBITDA (also referred to as EBITDA in our credit
agreement) as net income or loss plus income taxes, interest expense, loss
from early retirement of debt, depreciation, amortization and impairment
loss of goodwill and amortization of other intangibles less gain from early
retirement of debt. Adjusted EBITDA is not a measure of financial or
operating performance, cash flow or liquidity 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 financial or liquidity measure.
We use Adjusted EBITDA to manage and evaluate our business operations.
Our management evaluates Adjusted EBITDA because it excludes certain cash
and non-cash items that are either beyond our immediate control or that we
believe are not characteristic of our underlying business operation for the
period in which they are recorded, or both. We believe the presentation of
Adjusted EBITDA is relevant because Adjusted EBITDA is a measurement that
we and our lenders use to comply with our debt covenants and establish our
interest rate on a portion of our debt. Investors should be aware that the
way by which we calculate Adjusted 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 Adjusted EBITDA for AKI is as follows (dollars in
millions):
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
Net income........................ $ 2.7 $ 1.4 $ 6.8 $ 5.3
Income tax expense................ 1.7 0.9 4.3 3.4
Interest expense.................. 3.1 3.2 9.6 9.6
Depreciation and amortization
of other intangibles........... 1.8 1.9 5.5 5.6
-------- -------- -------- --------
Adjusted EBITDA................... $ 9.3 $ 7.4 $ 26.2 $ 23.9
======== ======== ======== ========
In the nine months ended March 31, 2004 and 2003, we had capital
expenditures of approximately $0.9 million and $1.9 million, respectively.
These capital expenditures consisted primarily of the purchase of
manufacturing equipment and upgrading our computer systems.
We may from time to time evaluate 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.
Capital expenditures for the twelve months ending June 30, 2004 are
currently estimated to be between $1.0 million and $1.5 million. Based on
borrowings outstanding as of March 31, 2004, we expect total cash payments
for debt service for the twelve months ending June 30, 2004 to be
approximately $14.0 million, consisting of $1.9 million in principal
payments under the term loan, $10.9 million in interest payments on the
Notes and $1.2 million in interest and fees under the credit agreement. We
also expect to make royalty payments of approximately $1.2 million during
the twelve months ending June 30, 2004.
At March 31, 2004, AKI's cash and cash equivalents and net working
capital were $3.6 million and $18.9 million, respectively, representing an
increase in cash and cash equivalents of $2.2 million and an increase in
net working capital of $8.2 million from June 30, 2003. The increase in
working capital is primarily due to the increase in cash and cash
equivalents, inventory and prepaid expenses.
Seasonality
Our sales of sampling technologies for advertising and marketing of
fragrance products have historically reflected seasonal variations. Such
seasonal variations are based on the timing of our customers' advertising
campaigns, which have traditionally been concentrated prior to the
Christmas and spring holiday seasons. As a result, a higher level of sales
are generally reflected in our first and third fiscal quarters ended
September 30 and March 31 when sales from such advertising campaigns are
principally recognized. These seasonal fluctuations require us to allocate
our resources to manage our manufacturing capacity, which often operates at
full capacity during peak seasonal 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.
Contingencies
The Beautiful Bouquet Company, Ltd. (the "Licensor") filed suit
against the Company alleging breaches of a Patent and Know-How License
agreement, as amended (the "License Agreement"). The Licensor alleges the
Company committed a number of breaches, including a breach of fiduciary
duty owed to the Licensor, and is seeking to recover unspecified amounts.
The Company believes that it did not breach any provision of the
License Agreement, and intends to vigorously defend against its claims.
However, if Licensor were to prevail in this lawsuit, the Company's
financial condition, results of operations and cash flows could be
materially adversely affected.
Recently Issued Accounting Standards
On January 1, 2004, AKI adopted FASB Interpretation No. 46 (revised
December, 2003), "Consolidation of Variable Interest Entities," (FIN 46R)
which 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. FIN 46R
requires consolidation where there is a controlling financial interest in a
variable interest entity or where the variable interest entity does not
have sufficient equity at risk to finance its activities without additional
subordinated financial support from other parties. The adoption of FIN 46R
had no impact on AKI's results of operations, financial position or
statements of cash flows.
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 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 Securities and Exchange Commission on September 26,
2003.
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 obligation to update any such
factors or to publicly announce any revisions to any of the forward-looking
statements contained in this document.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We generate approximately 24% 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, 2004, there were no forward exchange contracts outstanding.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our principal
executive and financial officers have evaluated our disclosure controls and
procedures and, based on such evaluation, have determined that such
disclosure controls and procedures were effective as of March 31, 2004, the
end of the period covered by the Quarterly Report on Form 10-Q.
(b) Changes in Internal Controls. During our fiscal quarter ended
March 31, 2004, no change occurred in our internal control over financial
reporting that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 1 of Part II of our quarterly report on Form 10-Q for the
period ended September 30, 2003 for discussion of litigation that has been
commenced against us regarding allegation of breaches of an agreement.
We are not currently a party to any other legal proceedings the
adverse outcome of which, individually or in the aggregate, we believe
could have a material adverse effect on our business, financial condition,
results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Amendment to Amended and Restated Credit Agreement
dated as of March 17, 2004 between the Company and Heller
Financial, Inc.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 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, INC.
Date: May 7, 2004 By: /s/ Kenneth A. Budde
---------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)