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.
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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.
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