424B3 1 f8ka2cp424b3p1.txt Filed Pursuant to Rule 424(b)(3) Registration No. 333-60989 PROSPECTUS SUPPLEMENT DATED MARCH 5, 2002 To Prospectus dated December 23, 1998 10 1/2% SENIOR NOTES DUE 2008 OF AKI, INC. RECENT DEVELOPMENTS Attached hereto and incorporated by reference herein is the Form 8-K/A (Second Amendment) of AKI, Inc. filed March 5, 2002. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A (Second Amendment) Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): December 18, 2001 AKI HOLDING CORP. (Exact name of registrant as specified in its charter) Commission File Number: 333-60991 Delaware 74-2883163 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) AKI, INC. (Exact name of registrant as specified in its charter) Commission File Number: 333-60989 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) ------------------------------------------------- (Former name or former address, if changed since last report) The Registrants hereby amends Item 7 of their Current Report on Form 8-K dated December 26, 2001 to read in its entirety as follows: ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Business Acquired. Audited financial statements of Color Prelude for the year ended December 31, 2000. Unaudited financial statements of Color Prelude for the nine months ended September 30, 2001. Unaudited statements of operations and cash flows of Color Prelude for the nine months ended September 30, 2000. (b) Pro Forma Financial Information. AKI Holding Corp. Unaudited pro forma condensed consolidated balance sheet as of September 30, 2001. Unaudited pro forma condensed consolidated statement of operations for the three months ended September 30, 2001. Unaudited pro forma condensed consolidated statement of operations for the year ended June 30, 2001. AKI, Inc. Unaudited pro forma condensed consolidated balance sheet as of September 30, 2001. Unaudited pro forma condensed consolidated statement of operations for the three months ended September 30, 2001. Unaudited pro forma condensed consolidated statement of operations for the year ended June 30, 2001. (c) Exhibits 2.1 Asset Purchase Agreement dated as of December 18, 2001 by and among Heritage Marketing Corporation, Color Prelude, Inc. and IST, Corp. (filed with the Registrants' Form 8-K dated December 26, 2001). 10.1 Amended and Restated Credit Agreement dated as of December 18, 2001 by and among AKI, Inc. and Heller Financial, Inc. and Other Financial Institutions Party hereto (filed with the Registrants' Form 8-K dated December 26, 2001). 23.1 Consent of Independent Accountants (filed with the Registrants' Form 8-K/A (Second Amendment) dated March 5, 2002). 23.2 Consent of Independent Accountants (filed with the Registrants' Form 8-K/A (Second Amendment) dated March 5, 2002). 99.1 Press release issued on December 20, 2001 by AKI, Inc. (filed with the Registrants' Form 8-K dated December 26, 2001). REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of AKI Holding Corp. and Subsidiaries In our opinion, the accompanying balance sheet and the related statement of operations, divisional equity and cash flows present fairly, in all material respects, the financial position of Color Prelude at December 31, 2000 and the results of its operations and its cash flows for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Color Prelude's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion. PricewaterhouseCoopers LLP Knoxville, Tennessee January 25, 2002 COLOR PRELUDE BALANCE SHEETS (in thousands)
December 31, September 30, 2000 2001 ---- ---- (unaudited) ASSETS Current assets Cash and cash equivalents.............................................. $ 1 $ 1 Accounts receivable, net............................................... 2,521 2,039 Inventory.............................................................. 959 1,130 Prepaid expenses....................................................... 26 77 ----------- ----------- Total current assets............................................. 3,507 3,247 Plant and equipment, net............................................... 4,310 5,208 Goodwill, net ......................................................... 3,651 3,435 Other intangible assets, net........................................... 3,284 3,041 ----------- ----------- Total assets..................................................... $ 14,752 $ 14,931 =========== =========== LIABILITIES AND DIVISIONAL EQUITY Current liabilities Accounts payable, trade................................................ $ 930 $ 1,245 Accrued expenses....................................................... 950 857 ----------- ----------- Total current liabilities..................................... 1,880 2,102 Deferred income taxes.................................................. 509 548 ----------- ----------- Total liabilities............................................. 2,389 2,650 Commitments and contingencies Divisional equity...................................................... 12,363 12,281 ----------- ----------- Total liabilities and divisional equity.......................... $ 14,752 $ 14,931 =========== ===========
The accompanying notes are an integral part of these financial statements. COLOR PRELUDE STATEMENTS OF OPERATIONS (in thousands)
Nine Months Ended Year Ended September 30, December 31, ------------------------ 2000 2001 2000 ---- ---- ---- (unaudited) (unaudited) Net sales............................................ $ 13,390 $ 9,749 $ 9,580 Cost of goods sold................................... 7,769 6,352 5,719 ----------- ----------- ----------- Gross profit.................................. 5,621 3,397 3,861 Selling, general and administrative expenses......... 2,930 2,105 2,062 Amortization of goodwill and other intangible assets. 612 459 459 ----------- ----------- ----------- Income from operations........................ 2,079 833 1,340 Other expenses: Interest expense to affiliate.................... 908 714 681 Management fees to affiliate..................... 120 135 90 ----------- ----------- ----------- Income (loss) before income taxes............. 1,051 (16) 569 Income tax expense................................... 383 - 288 ----------- ----------- ----------- Net income (loss)............................. $ 668 $ (16) $ 281 =========== ============ ===========
The accompanying notes are an integral part of these financial statements. COLOR PRELUDE STATEMENTS OF DIVISIONAL EQUITY For the year ended December 31, 2000 and the nine months ended September 30, 2001 (in thousands)
Balance, December 31, 1999........................................... $ 13,530 Net capital contribution / (distribution) to parent.................. (1,835) Net income........................................................... 668 ----------- Balance, December 31, 2000........................................... 12,363 Net capital contribution / (distribution) to parent (unaudited)...... (66) Net loss (unaudited)................................................. (16) ----------- Balance, September 30, 2001 (unaudited).............................. $ 12,281 ===========
The accompanying notes are an integral part of these financial statements. COLOR PRELUDE STATEMENTS OF CASH FLOWS (in thousands)
Nine Months Ended Year Ended September 30, December 31, ------------------------ 2000 2001 2000 ---- ---- ---- (unaudited) (unaudited) Cash flows from operating activities: Net income (loss).......................................... $ 668 $ (16) $ 281 Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of goodwill and other intangibles....................................... 1,310 972 982 Deferred income taxes................................ 166 39 128 Changes in operating assets and liabilities: Accounts receivable............................. (822) 482 (84) Inventory....................................... (148) (171) (86) Prepaid expenses................................ 12 (51) 12 Accounts payable and accrued expenses........... 693 222 209 ----------- ----------- ----------- Net cash provided by operating activities............ 1,879 1,477 1,442 ----------- ----------- ----------- Cash flows from investing activities: Purchases of equipment..................................... (44) (1,411) (56) ----------- ----------- ----------- Net cash used in investing activities................ (44) (1,411) (56) ----------- ----------- ----------- Cash flows from financing activities: Net capital contribution / (distribution) to parent........ (1,835) (66) (1,386) ----------- ----------- ----------- Net cash used in financing activities................ (1,835) (66) (1,386) ----------- ----------- ----------- Net increase in cash and cash equivalents..................... - - - Cash and cash equivalents, beginning of period................ 1 1 1 ----------- ----------- ----------- Cash and cash equivalents, end of period...................... $ 1 $ 1 $ 1 =========== =========== =========== Supplemental information: Cash paid for income taxes................................. $ - $ 36 $ -
The accompanying notes are an integral part of these financial statements. COLOR PRELUDE NOTES TO FINANCIAL STATEMENTS (in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information The balance sheet at September 30, 2001, and the statements of operations, of changes in divisional equity and cash flows for the nine month periods ended September 30, 2001 and 2000 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. In the opinion of management, the unaudited interim financials 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 necessary to fairly present the financial position, results of operations and cash flows with respect to the interim financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. Basis of Presentation IST, Corp. ("IST") is a wholly owned subsidiary of AKI, INC. On December 18, 2001 ("Acquisition Date"), IST acquired the business, including substantially all of the assets and assumed certain liabilities of Color Prelude, Inc. (such business referred to as the "CP" or "Color Prelude"). Historically, separate financial statements were not prepared for CP. These financial statements have been carved out from the historical books and records of the former parent. The divisional equity balance includes (1) the original investment in CP, (2) the results of all subsequent operations, (3) the difference between all costs and expenses paid by the former parent or allocated to CP by its former parent, (4) the interest on debt of the former parent allocated to CP, and (5) all cash transferred to or from its former parent since inception. CP manufactures cosmetic samples using proprietary and patented technology. While its products are not limited to a specific segment of the manufacturing industry, substantially all business is derived from companies in the international cosmetic industry. The only allocations from the parent related to interest expense and group medical insurance costs. All of the allocations and estimates in the financial statements are based on assumptions that management believes are reasonable under the circumstances. These allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if CP had been operated as a separate entity. Cash and Cash Equivalents CP considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Concentration of Credit Risk CP grants credit terms in the normal course of business to its customers, and as part of its ongoing procedures, CP monitors the credit worthiness of its customers. CP does not believe that it is subject to any unusual credit risk beyond the normal credit risk attendant in its business. COLOR PRELUDE NOTES TO FINANCIAL STATEMENTS (in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Three customers accounted for 76% of net sales during the year ended December 31, 2000. Revenue Recognition and Accounts Receivable Product sales are recognized at the time the risk of ownership transfers, net of estimated discounts. Accounts receivable is accounted for net of allowances for doubtful accounts of $10 at December 31, 2000. Inventory Inventory is stated at the lower of cost or market using the first-in, first-out (FIFO) method. Plant and Equipment Plant and equipment are stated at cost. Expenditures that extend the economic lives or improve the efficiency of equipment are capitalized. The costs of maintenance and repairs are expensed as incurred. Upon retirement or disposal, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recorded. Depreciation is computed using the straight-line method based on the estimated useful lives, ranging from three to ten years, of the assets for financial reporting purposes and accelerated methods for tax purposes. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the lease term. Goodwill Goodwill, which represents the excess purchase price paid over the fair value of net identifiable assets as of the Acquisition Date, is amortized over a period of fifteen years using the straight-line method. Accumulated amortization was $673 at December 31, 2000. Management periodically reviews the value of its goodwill and other long-lived assets to determine if an impairment has occurred. The potential impairment of recorded goodwill and other long-lived assets is measured by the undiscounted value of expected future operating cash flows in relation to its net capital investment. Based on its review, management does not believe that an impairment of its goodwill or other long-lived assets has occurred. Other Intangible Assets Other intangible assets include patents and trademarks and are being amortized over their estimated lives using the straight-line method. Accumulated amortization related to these intangible assets was $756 at December 31, 2000. COLOR PRELUDE NOTES TO FINANCIAL STATEMENTS (in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Research and Development Expenses Research and development expenditures are charged to cost of goods sold in the period incurred. Research and development expenses totaled $339 for the year ended December 31, 2000. Income Taxes Income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Accordingly, deferred tax assets and liabilities are recognized at the applicable income tax rates based upon future tax consequences of temporary differences between the tax bases and financial reporting bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recently Issued Accounting Standards FASB Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141") was issued in June 2001. SFAS 141 changes the accounting and reporting for business combinations. SFAS 141 is effective for all business combinations initiated after June 30, 2001. FASB Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142") was issued in June 2001. SFAS 142 changes the accounting and reporting for acquired goodwill and other intangible assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001, and must be applied at the beginning of an entity's fiscal year. SFAS 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment at least annually and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. COLOR PRELUDE NOTES TO FINANCIAL STATEMENTS (in thousands) 2. INVENTORY The following table details the components of inventory:
December 31, September 30, 2000 2001 ---- ---- (unaudited) Raw materials.......................... $ 339 $ 687 Work in process........................ 302 247 Finished goods......................... 368 246 Reserve for obsolescence............... (50) (50) ---------- ---------- Total inventory.................... $ 959 $ 1,130 ========== ==========
3. PLANT AND EQUIPMENT The following table details the components of plant and equipment as of December 31, 2000: Cost: Leasehold improvements............... $ 253 Machinery and equipment.............. 5,322 Furniture and fixtures............... 179 Construction in progress............. 66 -------- 5,820 Accumulated depreciation.................. (1,510) -------- $ 4,310 ======== Depreciation expense amounted to $696 for the year ended December 31, 2000. 4. COMMITMENTS AND CONTINGENCIES Operating Leases Equipment and office, warehouse and production space under operating leases expire at various dates. Rent expense was $344 for the year ended December 31, 2000. Future minimum lease payments under the leases as of December 31, 2000 are as follows: 2001 $ 350 2002 93 2003 29 2004 16 -------- $ 488 ======== Litigation CP is a party to litigation arising in the ordinary course of business, which in the opinion of management, will not have a material adverse effect on CP's financial condition, results of operations or cash flows. COLOR PRELUDE NOTES TO FINANCIAL STATEMENTS (in thousands) 5. RETIREMENT PLANS A 401(k) defined contribution retirement savings plan (the "Plan") is maintained for substantially all full-time salaried employees. Applicable employees who have three months of service and have attained age 21 are eligible to participate in the Plan. Employees may elect to contribute a percentage of their earnings to the Plan in accordance with limits prescribed by law. The parent made contributions to the Plan by matching a percentage of employee contributions. Contributions to the Plan totaled $68 for the year ended December 31, 2000. 6. INCOME TAXES The income tax provision (primarily federal) for the year ended December 31, 2000 consists of the following: Current............................. $ 217 Deferred............................ 166 ------- $ 383 ======= The income tax provision recognized by CP for the year ended December 31, 2000 differs from the amount determined by applying the applicable U.S. statutory federal income tax rate to pretax income primarily as a result of nondeductible expenses and state income taxes, net of the federal income tax effect. The net deferred tax liability at December 31, 2000 is composed of the tax effect of differences in depreciation for tax and book purposes. 7. GEOGRAPHIC INFORMATION The following table illustrates geographic information for revenues and long-lived assets. Revenues are attributed to countries based on the receipt of sales orders and long-lived assets are based upon the country of domicile.
United States Japan Europe Total ------------- ----- ------ ----- Net sales: Year ended December 31, 2000................ $ 11,705 $ 1,390 $ 295 $ 13,390 Long-lived assets: December 31, 2000........................... 11,245 - - 11,245
AKI HOLDING CORP. AND SUBSIDIARIES INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA AKI Holding Corp. ("Holding") through it subsidiary AKI, Inc. ("AKI") organized IST, Corp. ("IST") for purposes of acquiring the business including substantially all of the assets and assumption of certain liabilities of Color Prelude, Inc. (such business referred to as "CP" or "Color Prelude"). IST was capitalized by an equity contribution from AKI; and on December 18, 2001, IST acquired CP. The following unaudited pro forma condensed consolidated financial data of Holding are based upon historical financial statements of Holding as adjusted to give effect to the CP acquisition. The accompanying unaudited pro forma condensed consolidated balance sheet as of September 30, 2001 gives effect to the CP acquisition as if it had occurred on September 30, 2001. The accompanying unaudited pro forma condensed consolidated statements of operations for the year ended June 30, 2001 and for the three months ended September 30, 2001 give effect to the CP acquisition as if it had occurred at the beginning of the period presented. Pro forma adjustments are described in the accompanying notes and are applied to the historical condensed consolidated balance sheet and condensed consolidated statements of operations of Holding to account for the CP acquisition under the purchase method of accounting. The CP acquisition purchase price has been allocated to assets purchased and liabilities assumed based upon estimates of their respective fair value as of September 30, 2001 as determined by management. The pro forma adjustments are based on estimated, available information and certain assumptions and may be revised as additional information becomes available. The unaudited pro forma condensed consolidated financial data do not purport to represent what Holding's results of operations or financial position that would actually have resulted if the CP acquisition had occurred on the dates indicated and are not necessarily representative of Holding's results of operations for any future period. The unaudited pro forma condensed consolidated balance sheet and consolidated statements of operations should be read in conjunction with the Consolidated Financial Statements and the notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information appearing in Holding's annual report Form 10-K and quarterly report Form 10-Q filed with the Securities and Exchange Commission on September 18, 2001 and November 9, 2001, respectively. AKI HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 (UNAUDITED) (in thousands)
AKI Holding Color Prelude Pro forma AKI Holding Historical Historical Adjustments Pro forma ---------- ---------- ----------- --------- ASSETS Current Assets Cash and cash equivalents...................... $ 449 $ 1 $ - $ 450 Accounts receivable, net....................... 28,307 2,039 - 30,346 Inventory, net................................. 7,090 1,130 - 8,220 Prepaid expenses............................... 624 77 - 701 Deferred income taxes.......................... 770 - - 770 -------- -------- ------ -------- Total current assets......................... 37,240 3,247 - 40,487 Property, plant and equipment, net.................. 15,021 5,208 2,069 (a) 22,298 Goodwill, net....................................... 156,133 3,435 4,432 (a) 164,000 Other intangible assets, net........................ 6,117 3,041 375 (a) 9,533 Deferred charges, net............................... 4,214 - - 4,214 Deferred income taxes............................... 663 - - 663 Other assets........................................ 88 - - 88 -------- -------- ------ -------- Total assets................................. $219,476 $ 14,931 $6,876 $241,283 ======== ======== ====== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Current portion of capital lease............... $ 496 $ - $ - $ 496 Current portion of long-term debt.............. - - 1,000 (a) 1,000 Accounts payable and accrued expenses.......... 16,684 2,102 - 18,786 -------- -------- ------ -------- Total current liabilities.................... 17,180 2,102 1,000 20,282 Revolving loan...................................... 6,500 - 9,705 (a) 16,205 Term loan........................................... - - 9,000 (a) 9,000 Senior notes........................................ 103,510 - - 103,510 Senior discount debentures.......................... 24,733 - - 24,733 Promissory note to stockholder...................... 350 - - 350 Deferred income taxes............................... - 548 (548) (a) - Other non-current liabilities....................... 1,915 - - 1,915 -------- -------- ------ -------- Total liabilities............................ 154,188 2,650 19,157 175,995 Stockholder's Equity Common stock................................... - - - - Additional paid-in capital..................... 93,656 - - 93,656 Accumulated deficit............................ (12,174) - - (12,174) Accumulated other comprehensive loss........... (464) - - (464) Carryover basis adjustment..................... (15,730) - - (15,730) Divisional equity.............................. - 12,281 (12,281) (a) - -------- -------- ------- -------- Total liabilities and stockholder's equity... $219,476 $ 14,931 $ 6,876 $241,283 ======== ======== ======= ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Balance Sheets. AKI HOLDING CORP. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 (in thousands) (a) Reflects the purchase of CP for $19,705, including transaction expenses, funded through cash of $2,005 and borrowings of $17,700 under the revolving loan ($7,700) and term loan ($10,000) and the elimination of CP divisional equity of $12,281. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of September 30, 2001:
Property and equipment................................. $ 7,277 Current assets......................................... 3,247 Other intangible assets................................ 3,416 Goodwill ............................................. 7,867 Accounts payable and accrued expenses.................. (2,102) -------- Purchase price, including transaction expenses.... $ 19,705 ========
For purposes of the pro forma balance sheet at September 30, 2001, the $2,005 cash portion of the purchase price has been reflected as an additional borrowing under the revolving loan. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at December 18, 2001, the Acquisition Date. AKI is in the process of obtaining valuations of certain assets and making certain claims against the sellers of CP; thus the allocation of the purchase price is subject to refinement.
Property and equipment................................. $ 7,871 Current assets......................................... 5,731 Other intangible assets................................ 3,347 Goodwill ............................................. 6,250 Accounts payable and accrued expenses.................. (3,494) -------- Purchase price, including transaction expenses..... $ 19,705 ========
AKI HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) (in thousands)
AKI Holding Color Prelude Pro forma AKI Holding Historical Historical Adjustments Pro forma --------- ---------- ----------- --------- Net sales....................................... $ 27,381 $ 2,447 $ - $ 29,828 Cost of goods sold.............................. 16,714 1,944 - 18,658 -------- -------- ------ -------- Gross profit............................. 10,667 503 - 11,170 Selling, general and administrative expenses.... 4,195 563 (113) (a) 4,645 Amortization of goodwill and other intangibles.. 1,446 153 (72) (b) 1,527 -------- -------- ------ -------- Income (loss) from operations............ 5,026 (213) 185 4,998 Other expense (income): Interest expense to stockholder............ 4 - - 4 Interest expense, other.................... 3,867 132 178 (c) 4,177 Management fees and other, net............. 63 45 (45) (d) 63 -------- -------- ------ -------- Income (loss) before income taxes........ 1,092 (390) 52 754 Income tax expense (benefit).................... 946 (144) 19 (e) 821 -------- -------- ------ -------- Net income (loss).......................... $ 146 $ (246) $ 33 $ (67) ======== ======== ====== ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. AKI HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2001 (UNAUDITED) (in thousands)
AKI Holding Color Prelude Pro forma AKI Holding Historical Historical Adjustments Pro forma ---------- ---------- ----------- --------- Net sales....................................... $115,395 $ 13,727 $ - $129,122 Cost of goods sold.............................. 71,336 8,303 - 79,639 -------- -------- ------ -------- Gross profit............................. 44,059 5,424 - 49,483 Selling, general and administrative expenses.... 18,199 3,045 (452) (a) 20,792 Amortization of goodwill and other intangibles.. 5,757 612 (288) (b) 6,081 -------- -------- ------ -------- Income from operations................... 20,103 1,767 740 22,610 Other expense (income): Interest expense to stockholder............ 320 - - 320 Interest expense, other.................... 16,591 746 493 (c) 17,830 Management fees and other, net............. 250 150 (150) (d) 250 -------- -------- ------ -------- Income before income taxes and extraordinary item.................... 2,942 871 397 4,210 Income tax expense ............................. 3,449 323 147 (e) 3,919 -------- -------- ------ -------- Income (loss) before extraordinary item.... (507) 548 250 291 Extraordinary gain from early retirement of debt, net of tax............................. 2,016 - - 2,016 -------- -------- ------ -------- Net income ................................ $ 1,509 $ 548 $ 250 $ 2,307 ======== ======== ====== ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. AKI HOLDING CORP. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (a) Reflects the decrease in selling, general and administrative expenses ($113 in the three months ended September 30, 2001 and $452 in the year ended June 30, 2001) due to the elimination of certain CP selling and administrative personnel for actual terminations which occurred concurrent with the transaction. (b) Represents the elimination of CP's historical amortization of goodwill ($72 in the three months ended September 30, 2001 and $288 in the year ended June 30, 2001). Under SFAS 142, CP's goodwill will not be amortized but will be reviewed at least annually for impairment. (c) Reflects incremental interest expense ($178 in the three months ended September 30, 2001 and $493 in the year ended June 30, 2001) on the incremental net debt of $17,700 at an interest rate of 7%. (d) Reflects the elimination of CP's management fees to former affiliate ($45 in the three months ended September 30, 2001 and $150 in the year ended June 30, 2001). (e) Reflects incremental income tax benefit ($19 in the three months ended September 30, 2001 and $147 in the year ended June 30, 2001) relating to the pro forma condensed consolidated statements of operations' adjustments in (a), (b), (c) and (d) above. AKI, INC. AND SUBSIDIARIES INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA AKI, Inc. ("AKI") organized IST, Corp. ("IST") for purposes of acquiring the business including substantially all of the assets and assumption of certain liabilities of Color Prelude, Inc. (such business referred to as "CP" or "Color Prelude"). IST was capitalized by an equity contribution from AKI; and on December 18, 2001, IST acquired CP. The following unaudited pro forma condensed consolidated financial data of AKI are based upon historical financial statements of AKI as adjusted to give effect to the CP acquisition. The accompanying unaudited pro forma condensed consolidated balance sheet as of September 30, 2001 gives effect to the CP acquisition as if it had occurred on September 30, 2001. The accompanying unaudited pro forma condensed consolidated statements of operations for the year ended June 30, 2001 and for the three months ended September 30, 2001 give effect to the CP acquisition as if it had occurred at the beginning of the period presented. Pro forma adjustments are described in the accompanying notes and are applied to the historical condensed consolidated balance sheet and condensed consolidated statements of operations of AKI to account for the CP acquisition under the purchase method of accounting. The CP acquisition purchase price has been allocated to assets purchased and liabilities assumed based upon estimates of their respective fair value as of September 30, 2001 as determined by management. The pro forma adjustments are based on estimated, available information and certain assumptions and may be revised as additional information becomes available. The unaudited pro forma condensed consolidated financial data do not purport to represent what AKI's results of operations or financial position that would actually have resulted if the CP acquisition had occurred on the dates indicated and are not necessarily representative of AKI's results of operations for any future period. The unaudited pro forma condensed consolidated balance sheet and condensed consolidated statements of operations should be read in conjunction with the Consolidated Financial Statements and the notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information appearing in AKI's annual report Form 10-K and quarterly report Form 10-Q filed with the Securities and Exchange Commission on September 18, 2001 and November 9, 2001, respectively. AKI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 (UNAUDITED) (in thousands)
AKI, Inc. Color Prelude Pro forma AKI, Inc. Historical Historical Adjustments Pro forma ---------- ---------- ----------- --------- ASSETS Current Assets Cash and cash equivalents...................... $ 449 $ 1 $ - $ 450 Accounts receivable, net....................... 28,307 2,039 - 30,346 Inventory, net................................. 7,090 1,130 - 8,220 Prepaid expenses............................... 624 77 - 701 Deferred income taxes.......................... 770 - - 770 -------- -------- ------ -------- Total current assets......................... 37,240 3,247 - 40,487 Property, plant and equipment, net.................. 15,021 5,208 2,069 (a) 22,298 Goodwill, net....................................... 156,133 3,435 4,432 (a) 164,000 Other intangible assets, net........................ 6,117 3,041 375 (a) 9,533 Deferred charges, net............................... 3,428 - - 3,428 Other assets........................................ 88 - - 88 -------- -------- ------ -------- Total assets................................. $218,027 $ 14,931 $6,876 $239,834 ======== ======== ====== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Current portion of capital lease............... $ 496 $ - $ - $ 496 Current portion of long-term debt.............. - - 1,000 (a) 1,000 Accounts payable and accrued expenses.......... 16,565 2,102 - 18,667 -------- -------- ------ -------- Total current liabilities.................... 17,061 2,102 1,000 20,163 Revolving loan...................................... 6,500 - 9,705 (a) 16,205 Term loan........................................... - - 9,000 (a) 9,000 Senior notes........................................ 103,510 - - 103,510 Promissory note to stockholder...................... 350 - - 350 Deferred income taxes............................... 1,946 548 (548) (a) 1,946 Other non-current liabilities....................... 1,915 - - 1,915 -------- -------- ------ -------- Total liabilities............................ 131,282 2,650 19,157 153,089 Stockholder's Equity Common stock................................... - - - - Additional paid-in capital..................... 107,348 - - 107,348 Accumulated deficit............................ (4,409) - - (4,409) Accumulated other comprehensive loss........... (464) - - (464) Carryover basis adjustment..................... (15,730) - - (15,730) Divisional equity.............................. - 12,281 (12,281) (a) - -------- -------- ------- -------- Total liabilities and stockholder's equity... $218,027 $ 14,931 $ 6,876 $239,834 ======== ======== ======= ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Balance Sheets. AKI, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2001 (in thousands) (a) Reflects the purchase of CP for $19,705, including transaction expenses, funded through cash of $2,005 and borrowings of $17,700 under the revolving loan ($7,700) and term loan ($10,000) and the elimination of CP divisional equity of $12,281. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of September 30, 2001:
Property and equipment................................. $ 7,277 Current assets......................................... 3,247 Other intangible assets................................ 3,416 Goodwill ............................................. 7,867 Accounts payable and accrued expenses.................. (2,102) --------- Purchase price, including transaction expenses.... $ 19,705 ========
For purposes of the pro forma balance sheet at September 30, 2001, the $2,005 cash portion of the purchase price has been reflected as an additional borrowing under the revolving loan. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at December 18, 2001, the Acquisition Date. AKI is in the process of obtaining valuations of certain assets and making certain claims against the sellers of CP; thus the allocation of the purchase price is subject to refinement.
Property and equipment................................. $ 7,871 Current assets......................................... 5,731 Other intangible assets................................ 3,347 Goodwill ............................................. 6,250 Accounts payable and accrued expenses.................. (3,494) -------- Purchase price, including transaction expenses..... $ 19,705 ========
AKI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) (in thousands)
AKI, Inc. Color Prelude Pro forma AKI, Inc. Historical Historical Adjustments Pro forma ---------- ---------- ----------- --------- Net sales....................................... $ 27,381 $ 2,447 $ - $ 29,828 Cost of goods sold.............................. 16,714 1,944 - 18,658 -------- -------- ------ -------- Gross profit............................. 10,667 503 - 11,170 Selling, general and administrative expenses... 4,195 563 (113) (a) 4,645 Amortization of goodwill and other intangibles.. 1,446 153 (72) (b) 1,527 -------- -------- ------ -------- Income (loss) from operations............ 5,026 (213) 185 4,998 Other expense (income): Interest expense to stockholder............ 4 - - 4 Interest expense, other.................... 3,040 132 178 (c) 3,350 Management fees and other, net............. 63 45 (45) (d) 63 -------- -------- ------ -------- Income (loss) before income taxes........ 1,919 (390) 52 1,581 Income tax expense (benefit).................... 1,217 (144) 19 (e) 1,092 -------- -------- ------ -------- Net income (loss).......................... $ 702 $ (246) $ 33 $ 489 ======== ======== ====== ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. AKI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2001 (UNAUDITED) (in thousands)
AKI, Inc. Color Prelude Pro forma AKI, Inc. Historical Historical Adjustments Pro forma ---------- ---------- ----------- --------- Net sales....................................... $115,395 $ 13,727 $ - $129,122 Cost of goods sold.............................. 71,336 8,303 - 79,639 -------- -------- ------ -------- Gross profit............................. 44,059 5,424 - 49,483 Selling, general and administrative expenses.... 18,199 3,045 (452) (a) 20,792 Amortization of goodwill and other intangibles.. 5,757 612 (288) (b) 6,081 -------- -------- ------ -------- Income from operations................... 20,103 1,767 740 22,610 Other expense (income): Interest expense to stockholder............ 320 - - 320 Interest expense, other.................... 12,892 746 493 (c) 14,131 Management fees and other, net............. 250 150 (150) (d) 250 -------- -------- ------ -------- Income before income taxes and extraordinary item.................... 6,641 871 397 7,909 Income tax expense (benefit)................... 4,659 323 147 (e) 5,129 -------- -------- ------ -------- Income before extraordinary item........... 1,982 548 250 2,780 Extraordinary gain from early retirement of debt, net of tax............................. 457 - - 457 -------- -------- ------ -------- Net income ................................ $ 2,439 $ 548 $ 250 $ 3,237 ======== ======== ====== ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. AKI, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (a) Reflects the decrease in selling, general and administrative expenses ($113 in the three months ended September 30, 2001 and $452 in the year ended June 30, 2001) due to the elimination of certain CP selling and administrative personnel for actual terminations which occurred concurrent with the transaction. (b) Represents the elimination of CP's historical amortization of goodwill ($72 in the three months ended September 30, 2001 and $288 in the year ended June 30, 2001). Under SFAS 142, CP's goodwill will not be amortized but will be reviewed at least annually for impairment. (c) Reflects incremental interest expense ($178 in the three months ended September 30, 2001 and $493 in the year ended June 30, 2001) on the incremental net debt of $17,700 at an interest rate of 7%. (d) Reflects the elimination of management fees to former affiliate ($45 in the three months ended September 30, 2001 and $150 in the year ended June 30, 2001). (e) Reflects incremental income tax benefi t ($19 in the three months ended September 30, 2001 and $147 in the year ended June 30, 2001) relating to the pro forma condensed consolidated statements of operations' adjustments in (a), (b), (c) and (d) above. 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: March 5, 2002 By: /s/ Kenneth A. Budde ------------------------------ Kenneth A. Budde Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) AKI, INC. Date: March 5, 2002 By: /s/ Kenneth A. Budde ------------------------------ Kenneth A. Budde Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit Description ------- ----------- 2.1 Asset Purchase Agreement dated as of December 18, 2001 by and among Heritage Marketing Corporation, Color Prelude, Inc. and IST, Corp. (filed with the Registrants' Form 8-K dated December 26, 2001). 10.1 Amended and Restated Credit Agreement dated as of December 18, 2001 by and among AKI, Inc. and Heller Financial, Inc. and Other Financial Institutions Party hereto (filed with the Registrants' Form 8-K dated December 26, 2001). 23.1 Consent of Independent Accountants (filed with the Registrants' Form 8-K/A dated March 5, 2002). 23.2 Consent of Independent Accountants (filed with the Registrants' Form 8-K/A dated March 5, 2002). 99.1 Press release issued on December 20, 2001 by AKI, Inc. (filed with the Registrants' Form 8-K dated December 26, 2001).