EX-99.1 2 file002.txt BICYCLE FINANCIALS INDEPENDENT AUDITORS' REPORT Board of Directors Bicycle Holding, Inc. We have audited the accompanying consolidated balance sheet of Bicycle Holding, Inc. and subsidiaries as of September 28, 2003 and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Bicycle Holding, Inc. and subsidiaries at September 28, 2003 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 12, the Company was sold on June 28, 2004. /s/ Deloitte & Touche LLP December 10, 2003 (June 28, 2004 as to Note 12) Cincinnati, Ohio BICYCLE HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 28, 2003 AND MARCH 28, 2004 (UNAUDITED) --------------------------------------------------------------------------------
MARCH 28, SEPTEMBER 28, 2004 ASSETS 2003 (Unaudited) ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,863,383 $ 1,703,695 Receivables (net of allowances of $1,664,143 and $1,856,149 at September 28, 2003 and March 28, 2004 (unaudited), respectively) 19,831,038 20,313,342 Inventories 17,134,888 18,178,762 Prepaid expenses and other current assets 568,481 728,457 Deferred income taxes 1,954,643 1,730,597 ------------ ------------ Total current assets 41,352,433 42,654,853 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT--Net 20,957,198 20,375,535 ------------ ------------ OTHER ASSETS: Goodwill and trademarks 89,019,384 89,132,865 Intangible assets--net 1,977,977 1,424,177 Debt issuance costs 2,674,345 2,535,321 Other 1,590,914 1,590,949 Deferred foreign income taxes 325,000 338,167 ------------ ------------ Total other assets 95,587,620 95,021,479 ------------ ------------ TOTAL $157,897,251 $158,051,867 ============ ============
MARCH 28, SEPTEMBER 28, 2004 LIABILITIES AND STOCKHOLDERS' EQUITY 2003 (Unaudited) ------------- ------------- CURRENT LIABILITIES: Current portion of long-term debt $ 11,447,000 $ 10,777,202 Short-term debt 2,100,000 1,800,000 Accounts payable 6,658,586 6,870,736 Accrued liabilities 13,896,993 15,204,670 ------------- ------------- Total current liabilities 34,102,579 34,652,608 ------------- ------------- LONG-TERM OBLIGATIONS (less current maturities): Long-term debt 83,187,920 80,590,332 Deferred income taxes 3,337,748 2,870,743 Unfunded post-retirement benefit obligation 10,176,441 10,971,211 ------------- ------------- Total long-term obligations 96,702,109 94,432,286 REDEEMABLE COMMON STOCK 1,217,079 1,217,079 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value; authorized--25,000 shares 22 22 Treasury stock (38,734,609) (38,734,609) Additional paid-in capital 27,869,202 27,869,202 Shareholder note receivable (50,006) Retained earnings 42,348,532 43,824,647 Accumulated other comprehensive loss (5,557,657) (5,209,368) ------------- ------------- Total stockholders' equity 25,875,484 27,749,894 ------------- ------------- TOTAL $ 157,897,251 $ 158,051,867 ============= =============
See notes to consolidated financial statements. -2- BICYCLE HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME YEAR ENDED SEPTEMBER 28, 2003 AND THE SIX MONTH PERIODS ENDED MARCH 28, 2004 AND MARCH 30, 2003 (UNAUDITED) --------------------------------------------------------------------------------
SIX MONTHS ENDED (UNAUDITED) YEAR ENDED ------------------------------ SEPTEMBER 28, MARCH 28, MARCH 30, 2003 2004 2003 ------------- ------------- ------------- NET SALES $ 123,934,160 $ 64,257,986 $ 59,680,052 COST OF GOODS SOLD 73,786,135 37,908,038 36,099,079 ------------- ------------- ------------- GROSS PROFIT 50,148,025 26,349,948 23,580,973 ------------- ------------- ------------- OPERATING EXPENSES: Selling, general and administrative 22,039,052 12,130,702 10,771,186 Amortization of intangible assets 1,375,747 553,800 717,127 ------------- ------------- ------------- Total operating expenses 23,414,799 12,684,502 11,488,313 ------------- ------------- ------------- OPERATING INCOME 26,733,226 13,665,446 12,092,660 ------------- ------------- ------------- OTHER CHARGES: Interest expense 9,623,990 3,916,616 5,288,805 Other--net 779,014 397,266 647,079 ------------- ------------- ------------- Total 10,403,004 4,313,882 5,935,884 ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 16,330,222 9,351,564 6,156,776 PROVISION FOR INCOME TAXES (5,667,842) (3,377,098) (2,320,798) ------------- ------------- ------------- NET INCOME 10,662,380 5,974,466 3,835,978 OTHER COMPREHENSIVE INCOME: Foreign currency translation adjustment--net of tax 1,413,701 348,289 1,401,754 Minimum pension liability adjustment--net of tax (477,738) --------------- ------------- ------------- COMPREHENSIVE INCOME $ 11,598,343 $ 6,322,755 $ 5,237,732 ============= ============= =============
See notes to consolidated financial statements. -3- BICYCLE HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEAR ENDED SEPTEMBER 28, 2003 --------------------------------------------------------------------------------
ACCUMULATED ADDITIONAL SHAREHOLDER OTHER COMMON TREASURY PAID-IN NOTE RETAINED COMPREHENSIVE STOCK STOCK CAPITAL RECEIVABLE EARNINGS INCOME (LOSS) TOTAL --------------- --------------------- AMOUNT SHARES AMOUNT SHARES BALANCE--September 29, 2002 $ 22 1,608 $(38,734,609) 1,708 $26,499,978 $ - $31,686,152 $(6,493,620) $12,957,923 Tax benefit of exercised stock warrants and shares issued 583 1,369,224 1,369,224 Net income 10,662,380 10,662,380 Shareholder note receivable (50,006) (50,006) Translation adjustments-- net of tax 1,413,701 1,413,701 Minimum pension liability adjustment--net of tax (477,738) (477,738) ------ ----- ------------ ----- ----------- -------- ----------- ----------- ----------- BALANCE--September 28, 2003 $ 22 2,191 $(38,734,609) 1,708 $27,869,202 $(50,006) $42,348,532 $(5,557,657) $25,875,484 ====== ===== ============ ===== =========== ======== =========== =========== ===========
See notes to consolidated financial statements. -4- BICYCLE HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED SEPTEMBER 28, 2003 AND THE SIX MONTH PERIODS ENDED MARCH 28, 2004 AND MARCH 30, 2003 (UNAUDITED) --------------------------------------------------------------------------------
SIX MONTH PERIOD ENDED (UNAUDITED) YEAR ENDED ---------------------------- SEPTEMBER 28, MARCH 28, MARCH 30, 2003 2004 2003 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,662,380 $ 5,974,466 $ 3,835,978 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,270,638 2,174,990 2,103,279 Amortization of intangible assets 1,375,747 553,800 717,127 Deferred income taxes 1,033,902 (256,126) (450,775) Amortization of debt discount and issue costs 1,208,997 498,120 576,203 Loss on sale of equipment--net 60,237 491,302 44,712 Non-cash interest expense 874,268 208,698 473,181 Changes in assets and liabilities, excluding effects of acquisition: Receivables 912,825 (482,304) 1,685,144 Inventories (178,053) (1,043,874) 11,248 Prepaid expenses and other current assets 29,900 (159,976) 35,806 Other assets 7,369 (35) 7,503 Accounts payable and accrued liabilities 519,805 1,519,827 1,998,436 Other liabilities (363,795) 794,770 372,283 ------------ ------------ ------------ Net cash provided by operating activities 20,414,220 10,273,658 11,410,125 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,680,962) (1,834,378) (528,504) Payment for purchase of trademarks and other assets (390,249) (31,670) (390,249) ------------ ------------ ------------ Net cash used in investing activities (2,071,211) (1,866,048) (918,753) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Changes in short-term debt 1,369,000 (300,000) (548,923) Fees paid for debt modification (378,631) (359,096) (378,631) Repayment of long-term debt (21,690,447) (4,004,642) (9,847,558) Issuance of long-term debt 249,000 388,595 684,216 Payment of dividend (4,498,351) Other (50,006) 50,006 ------------ ------------ ------------ Net cash used in financing activities (20,501,084) (8,723,488) (10,090,896) ------------ ------------ ------------ EFFECT OF EXCHANGE RATES ON CASH 960,363 156,190 176,575 ------------ ------------ ------------ DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS (1,197,712) (159,688) 577,051 CASH AND CASH EQUIVALENTS: Beginning of period 3,061,095 1,863,383 3,061,095 ------------ ------------ ------------ End of period $ 1,863,383 $ 1,703,695 $ 3,638,146 ============ ============ ============ SUPPLEMENTAL DISCLOSURES-- Cash paid during the period for: Interest $ 8,171,648 $ 2,855,801 $ 4,437,028 ============ ============ ============ Income taxes $ 4,020,447 $ 840,112 $ 890,033 ============ ============ ============
See notes to consolidated financial statements. -5- BICYCLE HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED SEPTEMBER 28, 2003 AND THE SIX MONTH PERIODS ENDED MARCH 28, 2004 AND MARCH 30, 2003 (UNAUDITED) -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION--The consolidated financial statements include the accounts of Bicycle Holding, Inc. (the "Company"); its wholly-owned subsidiary, the United States Playing Card Company ("USPC"); USPC's wholly-owned subsidiary, International Playing Card Company Limited ("IPC"); the Company's 89% owned subsidiary, Naipes Heraclio Fournier, S.A. ("Naipes"); and Naipes' wholly-and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The minority interest in Naipes was not material. The unaudited consolidated interim financial statements include all adjustments which are, in the opinion of management, necessary to present fairly the financial position and results of operations and cash flows for the periods presented. FISCAL YEAR--The Company's fiscal year ends the Sunday nearest to the end of September. OPERATIONS--The Company and its subsidiaries' activities consist primarily of the manufacture and sale of playing cards. Approximately 18.3% of the Company's net sales for year ended September 28, 2003, and 8.5% of accounts receivable as of September 28, 2003 were with the casino and gaming industries. REVENUE RECOGNITION--The Company recognizes revenue at the point in which title transfers. Allowances and other incentives provided to the customer are reflected as a reduction of sales. CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist primarily of cash in banks and overnight euro dollars. INVENTORIES--Inventories are valued generally at the lower of cost or market, with cost determined by the first-in, first-out ("FIFO") or average methods. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are valued at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets which range from 3 to 25 years. The Company analyzes long-lived assets for potential impairment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144. There has been no impairment charges recorded in the consolidated statements of operations and comprehensive income. GOODWILL AND INTANGIBLES--Intangible assets include indefinite lived trademarks and non-compete agreements. The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on September 30, 2002 and has since discontinued the amortization of goodwill and trademarks. During the current year, the Company assessed the carrying value of goodwill and trademarks and determined that there was no impairment as of September 28, 2003. Non-compete agreements previously entered into with former executives are being amortized on a straight-line basis over the agreement terms, which range from two to five years. -6- The carrying value of goodwill and indefinite lived intangibles is evaluated at least annually using a discounted cash flow model or as events and circumstances indicate a possible inability to recover its carrying amount. Historically, the Company has generated returns sufficient to recover the cost of its intangible assets. DEBT ISSUANCE COSTS--Unamortized debt issuance costs of $2,674,345 at September 28, 2003 are being amortized over the term of the related debt under a method which approximates the effective interest method. During the year ended September 28, 2003 the Company incurred $378,631 of additional debt issuance costs related to the modification of its debt. USE OF ESTIMATES--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)--The Company's accumulated other comprehensive loss includes a foreign currency translation loss and an additional minimum pension liability of approximately $820,000 (net of tax) and $4,738,000 (net of tax), respectively, at September 28, 2003. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at year-end exchange rates and income and expenses are translated at the average exchange rates prevailing during the period. Gains or losses from these translations are excluded from income and reflected in accumulated other comprehensive income (loss). NEW ACCOUNTING PRONOUNCEMENTS--During 2003, the Company adopted the provisions of Emerging Issue Task Force 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products), which became effective for financial statements presenting annual periods beginning after December 15, 2001. In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. Subsequent to its issuance, certain provisions of SFAS No. 150 were indefinitely deferred for private companies. The Company believes that this statement when adopted will not have a material impact on its consolidated financial statements. In November 2002, the FASB issued Financial Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which expands on the accounting guidances of Statement Nos. 5, 57, and 107 and incorporates without change the provisions of FIN No. 34, which is being superseded. FIN No. 45 requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. It also provides additional guidance on the disclosure of guarantees. The recognition and measurement provisions are effective for guarantees made or modified after December 31, 2002. The disclosure provisions are effective for fiscal periods ending after December 15, 2002 and have been implemented herein. The adoption of this statement did not have an effect on the consolidated financial statements. -7- In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, which was replaced by FIN No. 46 (Revised December 2003), Consolidation of Variable Interest Entities ("FIN No. 46R"). FIN No. 46 requires consolidation by business enterprises of variable interest entities that meet certain requirements. FIN No. 46(R) changes the effective date of FIN No. 46 for certain entities. The Company's adoption of FIN No. 46 and FIN No. 46(R) did not have a significant impact on the consolidated financial statements. STOCK COMPENSATION--The Company continues to account for its stock based compensation under the provisions of Accounting Principle Opinion No. 25, Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. As a result of the exercise price being equal to the estimated fair value at the date of grant, no compensation expense was recognized for any of the options granted. The table below illustrates the pro forma results reflecting the stock option compensation costs.
SIX MONTH ENDED (UNAUDITED) YEAR ENDED ----------------------- SEPTEMBER 28, MARCH 28, MARCH 30, 2003 2004 2003 ----------- ----------- ----------- Reported consolidated net income $10,662,380 $ 5,974,466 $ 3,835,978 Stock option compensation expense--net of tax 92,759 74,252 43,334 ----------- ----------- ----------- Adjusted consolidated net income $10,569,621 $ 5,900,214 $ 3,792,644 =========== =========== ===========
The estimated fair value used to calculate compensation expense in the table above was determined using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 4%, expected life of seven years, and no dividends. 2. INVENTORIES Inventories at September 28, 2003 and March 28, 2004 (unaudited) consisted of the following:
MARCH 28, SEPTEMBER 28, 2004 2003 (UNAUDITED) ------------- ------------- Raw materials and supplies $ 3,235,593 $ 3,134,719 Work in process 4,772,457 4,357,513 Finished goods 9,728,455 11,995,629 ------------- ------------- Total 17,736,505 19,487,861 Less reserves 601,617 1,309,099 ------------- ------------- Total $ 17,134,888 $ 18,178,762 ============= =============
-8- 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at September 28, 2003 consisted of the following: Land and land improvements $ 1,353,463 Buildings 9,601,635 Machinery and equipment 41,581,874 Construction work in progress 973,696 ------------ Total 53,510,668 Less accumulated depreciation 32,553,470 ------------ Property, plant and equipment--net $ 20,957,198 ============ 4. GOODWILL AND INTANGIBLE ASSETS Finite lived intangible assets at September 28, 2003 consisted of the following: Non-compete agreements $ 6,094,769 Less accumulated amortization 4,116,792 ------------ Intangible assets--net $ 1,977,977 ============ The following illustrates future estimated amortization expense for fiscal years: 2004 $ 1,107,600 2005 694,833 2006 175,544 5. ACCRUED LIABILITIES Accrued liabilities at September 28, 2003 consisted of the following: Accrued payroll $ 4,195,775 Accrued taxes 1,453,627 Accrued interest 355,630 Advances from customers 1,189,725 Accrued advertising and rebates 3,751,375 Naipes severance accrual 751,000 Other payables and accruals 2,199,861 ------------ Total $ 13,896,993 ============ -9- 6. LONG-TERM DEBT Long-term debt at September 28, 2003 consisted of the following: USPC: Term Loan $ 57,028,000 Revolving Credit Loan 2,100,000 14% Senior Subordinated Notes 26,803,384 7% Senior Subordinated Note 7,315,536 Naipes-- Bank notes payable in equal quarterly, semiannual, or annual installments through 2005 with varying rates of interest ranging from 2.88% to 3.29% 3,488,000 ------------ Total $ 96,734,920 ============ On September 25, 2002, the Company amended its Term and Revolving credit agreements which provide for a six year $85,409,651 facility (approximately $4,550,000 available and unused at September 28, 2003). Rates of interest for the facility are based on the LIBOR rate (1.118% at September 28, 2003) plus an applicable margin (ranging from 2.25%) or the bank's prime lending rate (4.00% at September 28, 2003) plus an applicable margin (ranging from 0% to 4%). The Term Loan is payable in varying quarterly installments. Both the Term and Revolving Credit Loans mature on various dates during 2006. The credit agreement restricts certain corporate acts and includes financial ratios and other covenants. The Company has entered into an interest rate cap agreement on $23,207,800 of the term debt in which the LIBOR rate is capped at 6% through December 23, 2005. Principal maturities of long-term debt outstanding at September 28, 2003 are as follows: 2004 $ 13,547,000 2005 10,751,000 2006 37,688,000 2007 27,433,384 2008 and thereafter 7,315,536 ------------ Total $ 96,734,920 ============ USPC's borrowings outstanding under both the Term Loan and the Revolving Credit Loan are collateralized by substantially all assets of the Company and USPC. Borrowings under the revolving credit loan, ($2,100,000 at September 28, 2003; average of $1,050,000 during the year ended September 28, 2003) are limited generally based on percentages of accounts receivable and inventory. The Company is required to make additional principal payments each year on the Term Loan equal to a percentage of its excess cash flow (as defined in the financing agreement encompassing the Company's Term Loan and Revolving Credit Loan). No additional payments were required to be made for 2003. The financing agreement encompassing USPC's 14% Senior Subordinated Notes, due on March 1, 2007, prohibits USPC from paying dividends or making certain other specified distributions and requires USPC to meet certain financial covenants regarding net worth, interest coverage and others. The Company's 7% Senior Subordinated Note is due March 1, 2010 and bears interest at 7% per annum plus an indexed rate tied to the Company's stock performance. The 7% and 14% Senior -10- Subordinated Notes contain features whereby 2% of the interest due on the 14% Notes can be converted to principal and 100% of the 7% Senior Subordinated Note's interest is automatically converted into principal. Amounts converted to principal debt outstanding on Senior Subordinated Notes were approximately $874,000 for the year ended September 28, 2003. At September 28, 2003, the carrying value of the Company's long-term debt approximates fair value based on discounting of expected cash flows at the rates currently offered for debt of the same maturity and credit risk. The fair value of the Company's interest rate cap agreement is not material. In connection with certain stock transactions during 2003, the Company has guaranteed loans made to an officer and an employee of the Company with a bank totaling $611,523. 7. INCOME TAXES Deferred tax assets and liabilities at September 28, 2003 consisted of the following: Net current deferred tax asset--Reserves not currently deductible $ 1,954,643 =========== Net noncurrent deferred tax liability: Pension liabilities $(3,203,729) Fixed asset depreciation 2,749,899 Intangible amortization 3,946,955 Other (480,377) ----------- Total $ 3,012,748 =========== The provision (benefit) for income taxes for the year ended September 28, 2003 consists of the following: U.S.: Current $ 5,377,554 Deferred (547,947) ----------- Total U.S. 4,829,607 Foreign--Current and deferred 82,519 State and local--current and deferred 755,716 ----------- Total tax provision on continuing operations $ 5,667,842 =========== The difference between the income tax provision recorded and the amount computed using the U.S. statutory rate is due primarily to state and local income taxes, foreign sales corporation tax benefits, and Naipes' investment tax credits. For tax purposes, Naipes has approximately $619,000 of investment tax credit carryforwards which expire in the years 2012 through 2016. These carryforwards have been fully reserved for through a valuation allowance established under SFAS 109. -11- 8. RETIREMENT BENEFITS PENSION PLANS AND POSTRETIREMENT BENEFITS OTHER THAN PENSION PLANS--USPC has noncontributory defined benefit pension plans covering its salaried employees and certain hourly employees. Benefits are based on years of service and, in certain plans, rates of pay. The Company provides life insurance and health care benefits to certain U.S. salaried and hourly employees after retirement. The estimated cost of postretirement benefits is accrued by the Company during the years the employee provides services. The following table sets forth the required disclosures as of September 28, 2003: OTHER POSTRETIREMENT PENSION BENEFITS Benefit obligation $ 27,784,334 $ 3,491,143 Fair value of plan assets 19,207,731 ------------ ------------ Funded status $ (8,576,603) $ (3,491,143) ============ ============ Accrued benefit cost recognized in the consolidated balance sheets $ (7,243,664) $ (2,791,199) ============ ============ Amounts recognized in the statement of financial position consist of: Prepaid (accrued) benefit cost $ 344,941 $ (2,791,199) Additional minimum liability (7,643,314) Intangible asset 54,709 ------------ ------------ $ (7,243,664) $ (2,791,199) ============ ============ Weighted-average assumptions as of September 28, 2003: OTHER POSTRETIREMENT PENSION BENEFITS Discount rate 6.00% 6.00% Expected return on plan assets 8.75% N/A Rate of compensation increase 3.00% -12- For measurement purposes, 9% annual rate of increase in the per capita cost of covered health care benefits were assumed for 2003. OTHER POSTRETIREMENT PENSION BENEFITS Benefit cost $ 1,491,245 $ 272,170 Employer contributions 2,000,000 136,397 Plan participants' contributions 46,787 Benefits paid 1,357,086 183,184 DEFINED CONTRIBUTION PLANS--The Company's contributions to the defined contribution plans aggregated approximately $126,000 for the year ended September 28, 2003. The Company's contributions to the profit sharing plan aggregated approximately $589,000 for the year ended September 28, 2003. 9. STOCKHOLDERS' EQUITY AND REDEEMABLE COMMON STOCK Management of the Company has been issued warrants to acquire approximately 1,729 shares of common stock on or before April 30, 2004 at a price of $.001, of which 583.471 were exercised during 2003. At September 28, 2003, no warrants remained outstanding. The holders of the 14% Senior Subordinated Notes own 194.951 shares of common stock of the Company. The holders of these shares have the right on or after March 1, 2005 to require the Company to purchase such stock owned by the holder (put option). Such shares of common stock owned by the holder may be purchased by the Company at its option (call option) at any time after March 1, 2006. The consideration payable upon the exercise of these put and call options is at fair value based upon the application of appraisal procedures set forth in the stock purchase agreement as provided by an independent professional appraiser. The Company recognizes the change in the redemption value of its redeemable common stock immediately at the end of each reporting period. At September 28, 2003, the fair value assigned to this common stock, based on a recent independent appraisal, was $6,243 per share. Such amount has been classified as redeemable common stock on the accompanying balance sheet. As of September 28, 2003, the Company had granted stock options pursuant to the 1999 Stock Option Plan to one officer of the Company. The options were granted on October 15, 2001, and allow for the purchase of 114.2335 common shares at a strike price of $15,000 per share as they become vested. The vesting period is three years, whereas one third of the shares are vested each year beginning on October 15, 2002. These outstanding options expire on October 15, 2008. All 114.2335 options were outstanding at September 28, 2003, of which 38.07 shares were exercisable. On September 24, 2003, the Company repurchased 41.64 shares of common stock for $259,959, and simultaneously issued stock options to specific employees and board members totaling the same number of shares at the same price per share of $6,243. These options were exercised during 2003. -13- 10. GEOGRAPHIC SEGMENTS The Company's foreign operations are conducted in Canada and Spain. Geographic segment reporting of net sales, net income (loss) and assets for 2003 are shown below. ADJUSTMENTS UNITED AND STATES FOREIGN ELIMINATIONS TOTAL ------------ ----------- ------------ ------------ Net sales $101,887,669 $23,439,491 $ (1,393,000) $123,934,160 Net income (loss) 9,622,527 1,309,284 (269,431) 10,662,380 Assets 173,751,957 17,814,124 (33,668,830) 157,897,251 11. COMMITMENTS AND CONTINGENCIES There are certain claims pending against the Company and its subsidiaries. Based on a review of such litigation with legal counsel, management believes that any liability which may result there from would not have a material effect upon the Company's consolidated financial position, results of operations or cash flows. Naipes is a guarantor of a loan made to Artes Graficas, a related company, which has filed for bankruptcy. The amount of the loan at September 28, 2003 was approximately $930,000. The related company has pledged assets which are believed to exceed the loan. During 2002, Naipes recorded a provision of approximately $1,324,000 for legal claims imposed by the Courts against Naipes by former employees of Artes Graficas for past salaries and severance as a result of the bankruptcy. Such provision is included in other in the accompanying consolidated statement of operations. During 2003, Naipes paid approximately $925,000 of the above-mentioned balance. 12. SUBSEQUENT EVENT On June 28, 2004, the Company was sold to Jarden Corporation in a stock purchase transaction. The accompanying consolidated financial statements do not reflect any adjustment which may be required as a result of this transaction; however, in connection with the presentation of these financial statements in accordance with SEC reporting requirements, the Company reclassified the fair value of its redeemable common stock outside of permanent equity. ****** -14-