EXHIBIT 1.3
INDEPENDENT AUDITORS' REPORT
Sandoz Agro, Inc.
Des Plaines, Illinois:
We have audited the accompanying statements of net assets to be acquired of the
Sandoz Flea and Tick Protection Business (the "Business"), a line of business
owned by Sandoz Agro, Inc. ("Sandoz Agro"), a wholly owned subsidiary of Sandoz
Ltd., as of September 30, 1996 and December 31, 1995 and the related statements
of revenues, direct expenses and identified corporate expenses before interest
and taxes for the nine months ended September 30, 1996 and the years ended
December 31, 1995 and 1994. These financial statements are the responsibility of
Sandoz Agro's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the net assets to be acquired of the Sandoz Flea and Tick Protection
Business as of September 30, 1996 and December 31, 1995 and the results of its
revenues, direct expenses and identified corporate expenses before interest and
taxes for the nine months ended September 30, 1996 and the years ended December
31, 1995 and 1994 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Sandoz Flea and Tick
Protection Business is a line of business owned by Sandoz Agro. The Business
receives managerial and administrative support from Sandoz Agro. Certain
expenses included in the financial statements represent allocations of amounts
applicable to Sandoz Agro. As a result, the Business' net assets to be acquired
and the results of its revenues, direct expenses and identified corporate
expenses before interest and taxes may not be indicative of conditions that
would have existed or results that would have occurred had the Business operated
as an unaffiliated entity.
DELOITTE & TOUCHE LLP
San Francisco, California
December 20, 1996
(May 23, 1997 as to Note 9)
SANDOZ FLEA AND TICK PROTECTION BUSINESS
(A LINE OF BUSINESS OWNED BY SANDOZ AGRO, INC.)
STATEMENTS OF NET ASSETS TO BE ACQUIRED
MARCH 31, 1997 (UNAUDITED), SEPTEMBER 30, 1996
AND DECEMBER 31, 1995 (IN THOUSANDS)
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MARCH 31, SEPTEMBER 30, DECEMBER 31,
1997 1996 1995
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Inventories $10,051 $19,271 $16,121
Prepaid expenses and other assets 515 292 549
------- ------- -------
Total current assets 10,566 19,563 16,670
PROPERTY, PLANT AND EQUIPMENT - Net 10,439 10,826 11,473
------- ------- -------
TOTAL ASSETS 21,005 30,389 28,143
------- ------- -------
LIABILITIES
CURRENT LIABILITIES:
Accounts payable 1,961 764 1,883
Accrued expenses 3,261 3,722 4,375
------- ------- -------
Total current liabilities 5,222 4,486 6,258
------- ------- -------
NET ASSETS TO BE ACQUIRED $15,783 $25,903 $21,885
======= ======= =======
See notes to financial statements.
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SANDOZ FLEA AND TICK PROTECTION BUSINESS
(A LINE OF BUSINESS OWNED BY SANDOZ AGRO, INC.)
STATEMENTS OF REVENUES, DIRECT EXPENSES AND IDENTIFIED
CORPORATE EXPENSES BEFORE INTEREST AND TAXES
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED),
NINE MONTHS ENDED SEPTEMBER 30, 1996
AND YEARS ENDED DECEMBER 31, 1995 AND 1994 (IN THOUSANDS)
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SIX MONTHS NINE MONTHS YEARS ENDED
ENDED ENDED DECEMBER 31,
MARCH 31, SEPTEMBER 30, ------------------
1997 1996 1995 1994
(UNAUDITED)
NET SALES $25,107 $54,866 $95,426 $87,808
COST OF SALES 17,803 21,266 35,587 33,194
------- ------- ------- -------
GROSS MARGIN 7,304 33,600 59,839 54,614
EXPENSES:
Selling, general and administrative 11,797 22,000 32,059 30,733
Research and development 1,711 2,891 4,287 5,106
------- ------- ------- -------
INCOME (LOSS) BEFORE INTEREST
AND TAXES $(6,204) $ 8,709 $23,493 $18,775
======= ======= ======= =======
See notes to financial statements.
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SANDOZ FLEA AND TICK PROTECTION BUSINESS
(A LINE OF BUSINESS OWNED BY SANDOZ AGRO, INC.)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (DOLLARS IN THOUSANDS)
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1. ORGANIZATION AND OPERATIONS
Sandoz Flea and Tick Protection Business (the "Business"), a line of business
owned by Sandoz Agro, Inc. ("Sandoz Agro"), a wholly owned subsidiary of
Sandoz Ltd., manufactures, packages, markets and distributes pest protection
products for consumer, veterinary and professional pest management markets in
the United States and Canada. The Business includes manufacturing, research
and administrative personnel in its manufacturing facility in Dallas, Texas
as well as certain sales, marketing and administrative personnel located at
the Sandoz Agro corporate headquarters in Des Plaines, Illinois. Most of the
customers of the Business are distributors.
2. BASIS OF PRESENTATION
The Business is not a "stand-alone" division or subsidiary of Sandoz Agro and
was not generally accounted for separately. As a result, the distinct and
separate accounts necessary to present individual balance sheets and income
statements of the Business as of September 30, 1996 and December 31, 1995 and
for the nine months ended September 30, 1996 and the years ended December 31,
1995 and 1994 have not been maintained.
The Business does not maintain stand-alone corporate treasury, legal, tax and
other similar corporate support functions. Corporate general and
administrative expenses have not been previously allocated to the Business.
For purposes of preparing the financial statements, certain of these
corporate costs along with other Sandoz Agro expenses were allocated using
allocation methods (see Note 8). However, Sandoz Agro's systems and
procedures do not provide sufficient information to develop a reasonable cost
allocation for income taxes, corporate debt and interest expense.
With respect to cash flows, purchases of inventory, payroll, capital and
other expenditures are funded by Sandoz Agro. Sales are billed and collected
by Sandoz Agro. Accordingly, the Business maintains only a minimal petty
cash balance.
FINANCIAL STATEMENT PRESENTATION - Due to the limitations noted above, the
following financial information is presented:
. Statements of Net Assets to be Acquired. These statements include
only the net assets of the Business being purchased by Central Garden
& Pet Company ("Central") (see Note 9).
. Statements of Revenues, Direct Expenses and Identified Corporate
Expenses before Interest and Taxes, including all corporate cost
allocations for which a reasonable method of allocating the costs to
the operations can be developed.
Statements of Cash Flows are not presented as the Business has essentially no
cash flow.
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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-
out) or market.
PROPERTY, PLANT AND EQUIPMENT is 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:
Buildings and improvements 3-40 years
Machinery and equipment 1-10 years
Furniture and fixtures 1-7 years
REVENUE RECOGNITION - Sales are recorded at the date of shipment.
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. Inventory reserves and corporate cost
allocations of certain selling, general and administrative expenses represent
significant estimates.
INTERIM FINANCIAL STATEMENTS - The condensed financial statements as of and
for the six months ended March 31, 1997 are unaudited. These financial
statements, in the opinion of Sandoz Agro, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results for those interim periods. The results of
operations for the six months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the full year.
4. INVENTORIES
Inventories include the following:
MARCH 31, SEPTEMBER 30, DECEMBER 31,
1997 1996 1995
(UNAUDITED)
Raw materials and work in process $ 6,238 $ 9,347 $ 7,962
Finished goods 3,813 9,924 8,159
------- ------- -------
Total $10,051 $19,271 $16,121
======= ======= =======
Inventories were written down by approximately $6.5 million during the six
months ended March 31, 1997 as the Business discontinued certain products.
These writedowns occurred in certain product lines such as Zodiac, Nature
Signature, Quick Strike, Starbar, and Specialty as a result of changes within
the industry and significant increased competitive pressure from competing
products such as Program, Frontline and Advantage. Additionally, the Quick
Strike product did not perform as intended.
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5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
Land $ 1,947 $ 1,947
Buildings and improvements 14,299 14,166
Machinery and equipment 15,352 14,513
Furniture and fixtures 1,600 1,600
Construction in progress 725 1,303
-------- --------
Total 33,923 33,529
Less accumulated depreciation (23,097) (22,056)
-------- --------
Net property, plant and equipment $ 10,826 $ 11,473
======== ========
Purchases of property, plant and equipment for the nine months ended
September 30, 1996 and the years ended December 31, 1995 and 1994 were $401,
$1,486 and $844, respectively. Depreciation expense for the nine months
ended September 30, 1996 and the years ended December 31, 1995 and 1994 was
$1,041, $1,591 and $2,054, respectively.
6. ACCRUED EXPENSES
Accrued expenses includes the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
Accrued marketing allowances $1,259 $2,152
Accrued property taxes 559 597
Other 1,904 1,626
------ ------
Total $3,722 $4,375
====== ======
Other is primarily comprised of royalties, employee payroll and benefits,
freight and other plant accruals, and sales tax.
7. EMPLOYEE BENEFIT PLANS
Employees of the Business are participants in the Sandoz Agro sponsored
defined benefit pension and postretirement health care benefit programs.
Sandoz Agro allocates postretirement benefit costs to the Business as part of
their corporate cost allocations. The Sandoz Agro, Inc. Pension Plan is
noncontributory with benefits related to an employee's length of service and
compensation rate. Postretirement health care benefits call for 50% cost
sharing between Sandoz Agro and the participants. Participants are eligible
to receive these benefits through age 65.
Pursuant to the terms of the Amended and Restated Asset Purchase Agreement
(see Note 9) employees of Sandoz Agro that become employees of Central will
be transferred from the Sandoz Agro defined
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benefit pension plan, into a newly established Central defined benefit
pension plan or a defined contribution plan that provides substantially
equivalent benefits to the Sandoz Agro defined benefit plan. If the pension
plan participants are transferred to a new defined benefit plan, Sandoz Agro
is required to contribute assets to the new plan equivalent to the average of
the accumulated benefit obligation and the projected benefit obligation at
the closing date.
Sandoz Agro employees are also eligible to participate in the Sandoz Agro,
Inc. Savings Plan. Sandoz Agro matches 100% of employee contributions up to
6% of the employee's salary. Pursuant to the terms of the Amended and
Restated Asset Purchase Agreement (see Note 9) participants in the savings
plan that transfer to Central will have their company matching contributions
fully vested as of the closing date.
Based upon the number of participants and their respective demographic data,
the costs of postretirement benefits for the Business were as follows:
NINE
MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------
1996 1995 1994
Pension expense:
Defined benefit plan $216 $316 $253
Defined contribution plan 234 293 291
Postretirement health care benefits 59 100 101
As of September 30, 1996, the estimated accumulated benefit obligation and
projected benefit obligation related to the participants of the Business in
the Sandoz Agro defined benefit pension plan was $2,987 and $4,691,
respectively. The discount rate assumption used to determine the accumulated
benefit obligation and the projected benefit obligation as of September 30,
1996 was 7.75%. The salary increase assumption used to determine the
projected benefit obligation as of September 30, 1996 was 4.5%.
As of September 30, 1996, the estimated accumulated postretirement benefit
obligation for the participants of the Business in the Sandoz Agro
postretirement health care benefit program was $377. The discount rate used
to determine the accumulated postretirement benefit obligation as of
September 30, 1996 was 7.75%.
8. CORPORATE ALLOCATIONS
The Business does not maintain stand-alone corporate treasury, legal, tax and
other similar corporate support functions. The Business does record certain
corporate expenses related primarily to employee payroll and benefits,
insurance and corporate facilities costs. For purposes of preparing the
financial information for the Business, certain expenses of Sandoz Agro were
allocated based upon a variety of factors which include sales of the
Business, the number of employees of the Business, and the identification of
costs specifically attributable to the Business. Management believes that
these allocations are based on assumptions that are reasonable under the
circumstances; however, the Business' net assets to be acquired and the
results of revenues, direct expenses and identified corporate expenses before
interest and taxes may not be indicative of conditions that would have
existed or results that would have occurred had the Business operated as an
unaffiliated entity.
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The following represents a summary of the corporate costs allocated to the
Business which were included in the Statements of Revenues, Direct Expenses
and Identified Corporate Expenses before Interest and Taxes:
NINE
MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-----------------
1996 1995 1994
Selling, general and administrative $8,070 $12,417 $13,074
9. SALE OF THE SANDOZ FLEA AND TICK PROTECTION BUSINESS
On February 3, 1997, Novartis Inc. ("Novartis") (successor by merger to
Sandoz Ltd.), the parent company of Sandoz Agro, entered into an Amended and
Restated Asset Purchase Agreement (which was amended on April 22, 1997 and
May 23, 1997) with Central whereby Central agreed to purchase certain assets
and intellectual properties and assume certain liabilities of the Business
for $31,000. The sale of the Business closed on May 23, 1997.
In connection with the Amended and Restated Asset Purchase Agreement,
Novartis and Central entered into a Toll Manufacturing Agreement. Under the
terms of the Toll Manufacturing Agreement, for up to two years, Novartis will
purchase from Central, and Central will sell to Novartis certain products
historically manufactured by the Business and sold to other Sandoz Ltd.
affiliates. No minimum quantities of annual production of products or
minimum purchase quantities are set forth or implied in the Toll
Manufacturing Agreement, and no penalties will be imposed on Novartis for not
purchasing such products.
Under the terms of a Transition Services Agreement, Novartis will provide
management information systems, customer service, and financial and other
administrative services support to Central for up to three months at fees
based upon actual hours incurred, the cost of Novartis personnel, actual
travel expenses, and any costs to Novartis in providing such services.
Pursuant to the terms of the Amended and Restated Asset Purchase Agreement,
Novartis is liable for all product claims on products manufactured prior to
the closing date of the acquisition. Additionally, Central is indemnified
for a period of 25 years for any environmental contingencies associated with
the Business that existed as of the closing date.
10. TRANSACTIONS WITH RELATED PARTIES
Sales to affiliates of Sandoz Ltd. for the nine months ended September 30,
1996 and the years ended December 31, 1995 and 1994 were $2,110, $3,826 and
$1,408, respectively. Purchases of inventory from Sandoz Ltd. affiliates for
the nine months ended September 30, 1996 and the years ended December 31,
1995 and 1994 were $4,037, $6,555 and $6,425, respectively.
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