FINANCIAL STATEMENTS OF FOUR PAWS
Published on April 3, 1997
EXHIBIT 1.3
INDEPENDENT AUDITORS' REPORT
To the Stockholder of Four Paws
Products, Ltd. and subsidiaries:
We have audited the accompanying consolidated balance sheet of Four Paws
Products, Ltd. and subsidiaries ("Four Paws") as of December 31, 1996, and the
related consolidated statements of income, stockholder's equity, and cash flows
for the year then ended. These financial statements are the responsibility of
Four Paws' management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 Four Paws Products, Ltd. and
subsidiaries as of December 31, 1996 and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
January 20, 1997
FOUR PAWS PRODUCTS, LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 (IN THOUSANDS)
________________________________________________________________________________
See notes to consolidated financial statements.
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FOUR PAWS PRODUCTS, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
________________________________________________________________________________
See notes to consolidated financial statements.
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FOUR PAWS PRODUCTS, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
________________________________________________________________________________
See notes to consolidated financial statements.
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FOUR PAWS PRODUCTS, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
________________________________________________________________________________
See notes to consolidated financial statements.
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FOUR PAWS PRODUCTS, LTD.
AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
________________________________________________________________________________
1. ORGANIZATION AND OPERATIONS
Four Paws Products, Ltd. and subsidiaries ("Four Paws" or the "Company") is a
manufacturer and distributor of branded pet supply products based in
Hauppauge, New York. Four Paws manufactures and/or distributes dog, cat,
reptile and small animal products in New York and Ohio, under brand names
which include Magic Coat, Four Paws and Wee-Wee Pads. Four Paws products are
distributed throughout the United States, Canada, Europe and Asia.
Approximately 5% of sales are to foreign customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS - The accompanying consolidated financial
statements include Four Paws Products, Ltd. and its two wholly owned
consolidated subsidiaries, Cynal Corporation and Mustang Products, Inc.
("Mustang") as well as Pet Life, Inc. ("Pet Life"). The sole shareholder of
Four Paws Products, Ltd. is also the sole shareholder of Pet Life.
MARKETABLE SECURITIES consist primarily of U.S. government debt securities
which are valued at amortized cost (which approximates market at December 31,
1996). These securities mature in January 1997. Four Paws intends to hold
these securities to maturity.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-
out) or market.
BUILDING, IMPROVEMENTS AND EQUIPMENT are recorded at cost. Depreciation is
provided using a straight line method over the estimated useful lives of the
assets. The carrying amount of long-lived assets is evaluated annually to
determine if adjustment to the depreciation period or to the unamortized
balance is warranted. Ranges of estimated useful lives for computing
depreciation are as follows:
Building 39 years
Machinery and equipment 5-12 years
Furniture and fixtures 7 years
Leasehold improvements and other 5-12 years
REVENUE RECOGNITION - Sales are recorded at the date of shipment.
INCOME TAXES are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this
method, deferred income taxes are recognized for temporary differences by
applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
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 disclosure of contingent assets and liabilities and reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
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3. ACQUISITION OF MUSTANG PRODUCTS, INC.
Effective June 1, 1996, Four Paws acquired Mustang, a manufacturer and
distributor of pet collars and leashes located in Ohio. The purchase price
of $2,322 consisted of cash of $1,222 and two notes payable totaling $1,100
bearing interest at 8.25%. The acquisition was accounted for as a purchase.
The results of Four Paws include the results of Mustang for the seven months
ended December 31, 1996. The allocation of the total purchase price to the
net assets of Mustang is based upon the estimated fair values of the net
assets acquired, and is summarized as follows:
The goodwill was initially being amortized over a three year period.
However, in November 1996, Four Paws management determined that the goodwill
would not be recoverable from future operations and should be written off.
This is primarily due to a failed major product line, the loss of Mustang's
largest customer in July 1996, and future projected losses from the Mustang
business. The unamortized balance of goodwill written off was $1,402.
For the year ended December 31, 1996, the pro forma unaudited revenues and
net income for Four Paws would have been approximately $30,098 and $1,649,
respectively, if Mustang had been acquired as of January 1, 1996.
4. BUILDING, IMPROVEMENTS AND EQUIPMENT
Building, improvements and equipment at December 31, 1996 includes the
following:
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5. NOTES PAYABLE
Notes payable at December 31, 1996 consist of the following:
The mortgage note is secured by a building.
In addition, the Company has a $500 note payable to an officer of the Company
incurred in connection with a Class B common stock buyback, bearing interest
at 4.6%, which was repaid in January 1997.
Notes payable at December 31, 1996 mature as follows:
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6. INCOME TAXES
The provision for income taxes for the year ended December 31, 1996 consists
of:
The deferred income tax benefit reflects the tax effect of changes in the
amounts of temporary differences during the year ended December 31, 1996. As
of December 31, 1996, Four Paws had gross deferred temporary differences of
$1,048. Deferred tax assets primarily consist of bad debt reserves, inventory
reserves, other nondeductible reserves, and depreciation.
A reconciliation of the federal statutory income tax rate with Four Paws
effective income tax rate is as follows:
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7. LEASE COMMITMENTS
Four Paws has long-term noncancellable operating leases for the use of two
buildings. One of the buildings is leased from a Four Paws employee who is
the former owner of Mustang. The other building is leased from the Company's
sole shareholder and has a five year renewal option. Total rent expense
under such agreements amounted to $922 for the year ended December 31, 1996.
At December 31, 1996, the future minimum lease payments under such leases are
as follows:
8. EMPLOYEE BENEFIT PLANS
Eligible employees participate in a defined benefit pension plan sponsored by
Four Paws. The following table sets forth the funded status of the plan and
amounts recognized in Four Paws' financial statements as of and for the year
ended December 31, 1996:
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Four Paws' policy is to contribute amounts required by applicable ERISA
regulations. Plan assets are primarily invested in money market funds,
stocks and bonds. The actuarial cost method used for determining the benefit
obligations is the projected unit credit method. Assumptions underlying the
actuarial valuation of the plan included the following:
Discount rate 7.5%
Long-term rate of return 8.0%
Increase in future compensation levels 3.0%
Four Paws also sponsors a noncontributory 401(k) plan for all eligible
employees.
9. CONTINGENCIES
The Company is party to various legal actions in the normal course of
business. Although the ultimate outcome of these matters is not presently
determinable, management believes that the resolution of all such pending
matters will not have a material adverse effect on the Company's financial
position or results of operations.
10. SALE OF FOUR PAWS
On January 20, 1997, Four Paws was acquired by Central Garden & Pet Company
("Central") for $55,000; $45,000 in cash and $10,000 in Central common
stock. In connection with the acquisition, Allen Simon, the shareholder of
Four Paws, entered into a five year employment agreement with Central and
entered into an operating lease agreement with Central to lease his building
in New York presently used by Four Paws through January 2002 (see Note 7).
This lease contains a five year renewal option. Four Paws recognized sales
of $5,943 (21% of total sales) to Central for the year ended December 31,
1996.
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