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).