SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 2003
-------------
Commission file number 0-4217
------
ACETO CORPORATION
-----------------
(Exact name of the registrant specified in its charter)
New York 11-1720520
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Hollow Lane, Lake Success, New York 11042
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 627-6000
Registrant's website address: www.aceto.com
-------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Name of each exchange on which registered: The Nasdaq National Market.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as define
in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
The aggregate market value of the voting stock of the Company held by
non-affiliates of the Company as of September 19, 2003 was approximately
$156,200,708.
The Registrant has 10,337,050 shares of common stock outstanding as of September
19, 2003.
Documents incorporated by reference: The information required in response to
Part III of this Annual Report on Form 10-K is hereby incorporated by reference
to the specified portions of the Registrant's definitive proxy statement for the
Annual Meeting of Shareholders to be held on December 4, 2003.
EXPLANATORY NOTE
This Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 2003 filed with the Commission on September 26, 2003 is being
filed for the sole purpose of correcting certain information contained in Item
6: Selected Financial Data that was not appropriately adjusted for the Company's
3-for-2 split in the form of a 50 percent common stock dividend declared in
December 2002. Specifically, our Form 10-K is hereby amended to state correctly
in Item 6 the number of common shares outstanding and the book value per common
share on June 30, 2001, June 30, 2000 and June 30, 1999. No other change has
been made to the Company's original Annual Report on Form 10-K, and the
information contained therein has not been updated.
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-K/A
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
PART III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
PART I
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
THIS ANNUAL REPORT ON FORM 10-K AND THE INFORMATION INCORPORATED BY REFERENCE
MAY INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THE COMPANY INTENDS THE
FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR
FORWARD-LOOKING STATEMENTS. ALL STATEMENTS REGARDING THE COMPANY'S EXPECTED
FINANCIAL POSITION AND OPERATING RESULTS, ITS BUSINESS STRATEGY, ITS FINANCING
PLANS AND THE OUTCOME OF ANY CONTINGENCIES ARE FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT ESTIMATES AND PROJECTIONS ABOUT
OUR INDUSTRY AND OUR BUSINESS. WORDS SUCH AS "ANTICIPATES," "EXPECTS,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," OR VARIATIONS OF SUCH
WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
SET FORTH OR IMPLIED BY ANY FORWARD LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS INCLUDE,
BUT ARE NOT LIMITED TO: UNFORESEEN ENVIRONMENTAL LIABILITIES AND THE UNCERTAIN
MILITARY, POLITICAL AND ECONOMIC CONDITIONS IN THE WORLD. THESE AND OTHER RISKS
ARE DETAILED IN PART I, ITEM 1 "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K.
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE PUBLICLY THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE, EXCEPT AS MAY BE REQUIRED BY LAW.
(Dollar and share amounts in thousands, except per share amounts)
ITEM 1. BUSINESS
GENERAL
Aceto Corporation (together with its consolidated subsidiaries, the "Company" or
"Registrant") was incorporated in 1947 in the State of New York. The Company is
engaged in the marketing, sale and distribution of pharmaceutical, fine and
industrial chemicals used principally in the agricultural, color producing,
pharmaceutical, nutraceutical and surface coating industries. The Company sells
approximately 1,000 chemicals used in these and other related industries.
REPORTABLE SEGMENTS
The Company, prior to fiscal 2002, was organized into six reportable segments,
organized by product and as defined by accounting principles generally accepted
in the United States of America. Effective for the fiscal year ended June 30,
2002, the two segments formerly known as Industrial Chemicals and Organic
Intermediates & Colorants were combined into a segment called Chemicals and
Colorants. Effective for the fiscal year ended June 30, 2003, the two segments
formerly known as Pharmaceuticals, Biochemicals & Nutritionals and
Pharmaceutical Intermediates & Custom Manufacturing were combined into a segment
called Health Sciences. The amounts previously reported for the former segments
have been combined accordingly. Therefore, the Company's four reportable
segments, organized by product are as follows:
(1) Agrochemicals, whose products include herbicides, fungicides and
insecticides, as well as a sprout inhibitor for potatoes, (2) Chemicals and
Colorants, whose products include a variety of specialty chemicals used in
plastics, resins, adhesives, coatings, food, flava, fragrance,
1
cosmetics, metal finishing, electronics and many other areas in addition to dye
and pigment intermediates used in the color-producing industries like textiles,
inks, paper and coatings, as well as intermediates used in the production of
agrochemicals; (3) Health Sciences, which include the active ingredients for
generic pharmaceuticals, vitamins and nutritional supplements, as well as
products used in preparation of pharmaceuticals, primarily by major innovative
drug companies and (4) Institutional Sanitary Supplies & Other, whose products
include cleaning solutions, fragrances and deodorants used by commercial and
industrial establishments. The Company does not allocate assets by segment. The
Company's chief decision maker evaluates performance of the segments based on
gross profit.
Information concerning revenue and gross profit attributable to each of the
Company's business segments is found in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Part IV, Item 16, Note 16 of "Notes to Consolidated Financial Statements," of
this Form 10-K, which information is incorporated by reference into this Part I,
Item 1.
PRODUCTS AND CUSTOMERS
During the fiscal years ended June 30, 2003 and 2002, approximately 59% and 60%,
respectively, of the Company's purchases of chemicals came from Asia and
approximately 29% and 25%, respectively, from Europe.
A majority of the Company's customers are located in the United States, though
sales are made worldwide. The customers include a wide range of companies in the
industrial chemical and pharmaceutical industries, and range from small trading
companies to Fortune 500 corporations. During fiscal 2003 and 2002, 59% and 64%
of sales, respectively, were in the United States. Sales made to customers
outside the United States totaled $110,298. Approximately 67% of these
international sales were to customers in Germany, France, Australia, The
Netherlands, the United Kingdom, Malaysia and Canada.
The chemical industry is highly competitive. The Company competes by offering
high quality products produced around the world by both large and small
manufacturers at attractive prices. The Company has the ability, based on its
long relationship with many suppliers as well as its sourcing offices in China
and India, to offer products manufactured at a facility that is appropriate for
that product. For the most part, the Company stores its inventory of chemicals
in public warehouses strategically located throughout the United States, Europe
and Asia, and can therefore fill orders rapidly from inventory. The Company has
developed ready access to key purchasing, research and technical executives of
both its customers and suppliers and has the ability to obtain quick decisions,
when necessary, because of such access. The Company does not consider itself to
be a significant factor in the chemical and pharmaceutical industries taken as a
whole.
Total long-lived assets (excluding goodwill and intangible assets) in the United
States were $1,457 and $1,731 as of June 30, 2003 and 2002, respectively. Total
long-lived assets outside the United States were $818 and $701 at June 30, 2003
and 2002, respectively.
No single product accounted for as much as 10% of net sales in fiscal 2003, 2002
or 2001. No single customer accounted for as much as 10% of net sales in fiscal
2003, 2002 or 2001. One supplier accounted for 10% of purchases in fiscal 2003.
No supplier accounted for as much as 10% of purchases in fiscal 2002 or 2001.
The Company holds no patents, trademarks, licenses, franchises or concessions
which it considers to be material to its operations.
2
For the most part, the Company warehouses the products that it sells and fills
orders from inventory.
A subsidiary of the Company, Aceto Agricultural Chemicals Corp., markets certain
agricultural chemicals and contracts for the manufacture of other agricultural
chemicals which are subject to the Federal Insecticide, Fungicide and
Rodenticide Act (FIFRA). FIFRA requires that test data be provided to the
Environmental Protection Agency (EPA) to register, obtain and maintain approved
labels for pesticide products. The EPA requires that follow-on registrants of
these products compensate the initial registrant for the cost of producing the
necessary test data on a basis prescribed in the FIFRA regulations. Follow-on
registrants do not themselves generate or contract for the data. However, when
FIFRA requirements mandate the generation of new test data to enable all
registrants to continue marketing a pesticide product, often both the initial
and follow-on registrants establish a task force to jointly undertake the
testing effort. The Company is presently a member of three such task force
groups. The Company may be required to make additional payments in the future.
Compliance with Federal, State and local regulations which have been enacted or
adopted regarding the discharge of materials into the environment has not had a
material effect on the capital expenditures and competitive position of the
Company. During fiscal 1993, the Company announced the closing of its
manufacturing subsidiary located in Carlstadt, New Jersey. At the same time an
environmental consultant was engaged by the Company to determine the extent of
contamination on the site and develop a plan of remediation. Based on the
initial estimates from the consultant a liability of $1,500 was recorded in
fiscal 1993. During fiscal 1997, after additional testing was completed, the
Company received a revised estimate from the consultant and an additional
liability of $800 was recorded. At June 30, 2002, the remaining liability was
$1,284.
During fiscal 2003, based on continued monitoring of the contamination on the
site and the current proposed plan of remediation, the Company received a
revised estimate from the consultant, which estimated that the remaining costs
of the remediation could be an amount between $1,550 and $3,200. During fiscal
2003, the Company recorded an additional liability in the amount of $266
resulting in a liability as of June 30, 2003 in the amount of $1,550. However,
these matters, if resolved in a manner different from those assumed in current
estimates could have a material adverse effect on financial condition, operating
results and cash flows when resolved in a future reporting period. Other than
the remediation associated with the Carlstadt, New Jersey facility, the Company
is not aware of any material environmental liabilities.
THE SCHWEIZERHALL PHARMA ACQUISITION
On March 26, 2001, the Company acquired (i)the distribution business of the
Schweizerhall Pharma division of Schweizerhall Holding AG, a Switzerland
corporation and (ii) certain assets relating to the Pharmaceutical Ingredients
business of Schweizerhall, Inc., a New Jersey corporation, and a wholly owned
subsidiary of Schweizerhall Holding AG (collectively, "Schweizerhall Pharma").
Schweizerhall Pharma's distribution business is an international pharmaceutical
distribution business with offices located in: Hamburg, Germany; Wormerveer, The
Netherlands (a suburb of Amsterdam); Paris, France; Piscataway, New Jersey;
Singapore; Mumbai, India; and Hong Kong. Its principal activities are the supply
of Active Pharmaceutical Ingredients and Advanced Intermediates.
3
The products sold by Schweizerhall Pharma are classified in the Company's Health
Sciences segment; therefore there is no change in the types of products sold or
the methods of distribution.
The total purchase price for the Schweizerhall Pharma acquisition was $25,980.
This amount consisted of 600 restricted shares of the Company's Common Stock,
the assumption of $8,966 of Schweizerhall Holding AG debt, $5,973 in cash, the
issuance of notes of $4,626 and acquisition costs of $1,240. The quoted market
price of the Common Stock on March 26, 2001 of $8.625 per share, was used to
approximate the fair value of the 600 shares issued, which amounted to $5,175.
The shares may not be sold unless registered or unless an exemption from
registration is available. In connection with the closing of the acquisition the
Company assumed certain debt of Schweizerhall Holding AG in excess of the amount
of the purchase price. As a result, at closing Schweizerhall Holding AG paid
$7,162 to the Company. Subsequent to March 31, 2001 the Company paid
Schweizerhall Holding AG $8,987 and was released from a portion of the debt
assumed at closing.
At June 30, 2003, the Company employed approximately 240 persons, none of whom
were covered by a collective bargaining agreement.
RISK FACTORS
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS, MANY OF WHOM HAVE
A GREATER MARKET PRESENCE AND GREATER RESOURCES THAN US, OUR FINANCIAL CONDITION
AND OPERATING RESULTS MAY BE ADVERSELY AFFECTED.
Our financial condition and operating results are directly related to our
ability to compete in the intensely competitive worldwide chemical market. We
face competition from global and regional distributors of chemical products,
many of who are large chemical manufacturers as well as distributors. Many of
these companies have substantially greater resources than us, including greater
financial, marketing and distribution resources.
UNFORESEEN ENVIRONMENTAL LIABILITIES AND/OR COSTS ASSOCIATED WITH COMPLIANCE
WITH ENVIRONMENTAL LAWS WOULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL
PERFORMANCE.
If existing environmental regulations are changed, or additional laws or
regulations are passed, the cost of complying with those laws may be
substantial. No assurance can be given that we will not incur material
environmental liabilities or that compliance with such laws will not require
material capital expenditures by us, negatively affecting our financial
performance. Our operations, the distribution of chemical products, are subject
to various federal, state, local and foreign environmental laws and regulations.
Many of these laws and regulations provide for substantial remediation costs in
the event of discharges of contaminants and fines and criminal sanctions for
violations. We believe that we are currently in substantial compliance with all
current environmental laws and regulations.
THE UNCERTAIN MILITARY, TERRORIST, POLITICAL AND ECONOMIC CONDITIONS IN THE
WORLD COULD MATERIALLY DISRUPT OUR OPERATIONS CONDUCTED ABROAD AND EXPORT SALES.
Military, terrorist, political and economic actions in other countries could
materially disrupt our overseas operations and export sales. In fiscal year
2003, approximately 41% of our revenues were attributable to operations
conducted abroad and to export sales. In addition, in fiscal 2003, approximately
29% and 59% of the Company's purchases came from Europe and Asia, respectively.
In addition, in certain countries where
4
we currently operate, export, intend to operate or intend to expand our
operations, we could be subject to other political, military and economic
uncertainties including labor unrest, restrictions on transfers of funds and
unexpected changes in regulatory environments.
WE MAY FACE UNINSURED LIABILITIES INHERENT IN THE CHEMICAL INDUSTRY.
It is possible that liabilities for pollution and other damages arising from a
major occurrence could exceed our insurance coverage or policy limits or that
such insurance may not be available at reasonable rates in the future. Any such
liabilities, which could arise due to injury and loss of life, severe damage to
and destruction of property and equipment, pollution and other environmental
damage could have a material adverse effect on us. The risks inherent in the
chemical industry include explosions, fires, chemical spills or releases,
pollution and other environmental risks. While we have considered and evaluated
these risks, we believe that they currently do not have a significant impact on
our operations.
BECAUSE OUR BUSINESS IS AFFECTED BY CHANGES IN CURRENCY MARKETS, FLUCTUATIONS IN
FOREIGN CURRENCY EXCHANGE RATES MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
Our results of operations and financial condition may be adversely affected by
fluctuations in the exchange rate between foreign currencies and the U.S.
dollar. A substantial portion of our revenue is denominated in currencies other
than the U.S. dollar because certain of our foreign subsidiaries operate in
their local currencies. Moreover, we may incur significant costs in connection
with conversions between currencies.
THE RECENT OUTBREAK OF SEVERE ACUTE RESPIRATORY SYNDROME (SARS) MAY ADVERSELY
AFFECT OUR BUSINESS AND FINANCIAL CONDITION
Although the recent SARS epidemic has seemingly been contained, a new sudden
outbreak of SARS, particularly in China, as well as concerns over its spread in
Asia and elsewhere, could adversely affect our business and financial condition
given the importance of our sales and production facilities in Asia.
Specifically, if a new sudden SARS outbreak resulted in quarantines or closures
of our suppliers' facilities in Asia, it would make it more difficult for us to
conduct our business operations in Asia. On the other hand, we view the risk of
any such quarantines or closures to be unlikely given that no such quarantines
or closures occurred in the recent SARS epidemic, our suppliers are located in
areas in China that are outside the metropolitan areas where SARS cases had been
most prevalent, and the use of protective masks, headgears, disinfectants and
cleaning solvents in the facilities substantially reduces the risk of such
quarantines or closures.
AVAILABLE INFORMATION
---------------------
We file annual, quarterly and current reports, proxy statements and other
information with the United States Securities and Exchange Commission. You may
read and copy any document we file at the SEC's public reference room at Room
1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information on the public reference room. The SEC maintains a
website that contains annual, quarterly and current reports, proxy statements
and other information that issuers (including Aceto) file electronically with
the SEC. The SEC's website is WWW.SEC.GOV.
Our website is WWW.ACETO.COM. We make available free of charge through our
Internet site, via a link to the SEC's website at WWW.SEC.GOV, our
5
annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on
Form 8-K; Forms 3, 4 and 5 filed on behalf of our directors and executive
officers; and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC. The information
on our website is not incorporated by reference into this report.
ITEM 2. PROPERTIES
The Company's general headquarters and main sales office occupy approximately
26,000 square feet of leased space in an office building in Lake Success, New
York. The lease expires in April 2011.
Two of the Company's subsidiaries, in the sanitary supply business, occupy
44,000 square feet of leased space in an industrial park in New Hyde Park, New
York. The lease expires in November 2009.
The Company's former manufacturing facility is located on an 11-acre parcel in
Carlstadt, New Jersey, owned by the Company. This parcel contains one building
with approximately 5,000 square feet of office space. The property consisting of
land and land improvements, is classified as held for sale on the Consolidated
Balance Sheets.
The Company also has leases for office space in Waldshut, Germany; Hamburg,
Germany; Wormerveer, The Netherlands; Paris, France; Lyon, France; Singapore;
Shanghai, China and Mumbai, India. The offices are used for sales and
administrative purposes.
The Company believes that its properties are generally well maintained, in good
condition and adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in a number of pending or threatened legal proceedings
incidental to the business. We do not believe that any of the pending or
threatened legal proceedings will have a material adverse effect on the
financial position or operating results of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a formal vote of the shareholders during the
fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq National Market using the
symbol "ACET." The following table sets forth the 2003 and 2002 high and low
sales prices of the Company's common stock as reported on the Nasdaq National
Market for the periods indicated, adjusted for a 3-for-2 split of the common
stock in the form of a 50% stock dividend paid in January 2003.
6
FISCAL 2003 HIGH LOW
First Quarter $ 7.82 $ 5.33
Second Quarter 11.99 5.61
Third Quarter 14.63 8.96
Fourth Quarter 22.98 12.53
FISCAL 2002 HIGH LOW
First Quarter $ 6.58 $ 5.16
Second Quarter 6.89 5.91
Third Quarter 7.75 6.17
Fourth Quarter 7.70 6.60
Cash dividends of $0.115 per common share were paid in January 2003 and June
2003. Cash dividends of $0.1067 per common share were paid in January and June
2002, adjusted for the 50% stock dividend paid in January 2003.
As of September 19, 2003, there were approximately 563 holders of record of the
Company's common stock.
Shares held by the nominee of the Depository Trust Company, the country's
principal central depository, were approximately 8,442 shares and counted as
owned by one holder. Additional individual holdings in street name result in a
sizable number of beneficial owners represented on our records as owned by
various banks and stockbrokers.
The following table sets forth certain information with respect to our equity
compensation plans at June 30, 2003 (shares in thousands):
---------------------------------------------------------------------------------------------
Number of
securities to be Weighted-average Number of securities
Plan Category issued upon exercise price of remaining available
exercise of outstanding options for future issuance
outstanding under equity
options compensation plans
--------------------------- ------------------- ---------------------- -----------------------
Equity compensation
plans approved by
security holders 963 $7.96 1,016
--------------------------- ------------------- ---------------------- -----------------------
Equity compensation
plans not approved by
security holders - - -
--------------------------- ------------------- ---------------------- -----------------------
Total 963 $7.96 1,016
--------------------------- ------------------- ---------------------- -----------------------
7
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
(In thousands, except per share amounts)
Years Ended June 30 2003 2002 2001 2000 1999
------------------- ---- ---- ---- ---- ----
Net sales $271,276 $229,329 $178,154 (1) $185,308 $169,725
Income before
cumulative effect of
accounting change 9,468 4,945 4,245 6,344 6,091
Net income 7,595 4,945 4,245 6,344 6,091
Income before
cumulative effect of
accounting change per
share - diluted (2) $ 0.94 $ 0.50 $ 0.46 $ 0.67 $ 0.60
Net income per
common share -
diluted (2) $ 0.75 $ 0.50 $ 0.46 $ 0.67 $ 0.60
Total assets 123,519 115,703 105,173 88,081 86,159
Working capital 71,628 58,311 55,259 50,270 49,459
Long-term
liabilities - - 671 908 925
Redeemable preferred
Stock - - - - 750
Shareholders' equity 84,569 73,290 69,203 63,604 63,982
Number of common
shares outstanding
at year end (2) 10,286 9,825 9,795 9,326 9,708
Book value per
common share (2) $ 8.22 $ 7.46 $ 7.07 $ 6.82 $ 6.59
Cash dividends per
common share (2) $ 0.23 $ 0.21 $ 0.21 $ 0.20 $ 0.17
(1) Includes the acquisition of the Schweizerhall Pharma distribution business
on March 26, 2001 as more fully described in Item 1.
(2) Adjusted for stock splits as appropriate.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
THIS ANNUAL REPORT ON FORM 10-K AND THE INFORMATION INCORPORATED BY REFERENCE
MAY INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THE COMPANY INTENDS THE
FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR
FORWARD-LOOKING STATEMENTS. ALL STATEMENTS REGARDING THE COMPANY'S EXPECTED
FINANCIAL POSITION AND OPERATING RESULTS, ITS BUSINESS STRATEGY, ITS FINANCING
PLANS AND THE OUTCOME OF ANY CONTINGENCIES ARE FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT ESTIMATES AND PROJECTIONS ABOUT
OUR INDUSTRY AND OUR BUSINESS. WORDS SUCH AS "ANTICIPATES," "EXPECTS,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS OF SUCH WORDS
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
SET FORTH OR IMPLIED BY ANY FORWARD LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS INCLUDE,
BUT ARE NOT LIMITED TO: UNFORESEEN ENVIRONMENTAL LIABILITIES AND THE UNCERTAIN
MILITARY, POLITICAL AND ECONOMIC CONDITIONS IN THE WORLD. THESE RISKS ARE
DETAILED IN PART I, ITEM 1 "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K. THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE PUBLICLY THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE, EXCEPT AS MAY BE REQUIRED BY LAW.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations is based on its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and assumptions that affect the amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. The Company evaluates its estimates on a regular basis,
including those related to bad debts, inventories, goodwill and intangible
assets, and environmental contingencies. The Company bases its estimates on
various factors including historical experience, consultation and advice from
third party subject matter experts and on various assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions and circumstances.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
The Company recognizes revenue from product sales at the time of shipment and
passage of title and risk of loss to the customer. Such revenues do not involve
difficult, subjective, or complex judgments. The Company does not offer product
warranties to its customers.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Allowances for doubtful accounts are based on historical experience and known
factors regarding specific customers and industries in which the customers
operate. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances would be required.
9
The Company writes down its inventories for estimated slow moving and obsolete
goods equal to the difference between the carrying cost of the inventory and the
estimated market value based upon assumptions about future demand and market
conditions. A significant sudden increase in the demand for the Company's
products could result in a short-term increase in the cost of inventory
purchases while a significant decrease in demand could result in an increase in
the amount of excess inventory quantities on-hand. Additionally, the Company's
estimates of future product demand may prove to be inaccurate, in which case the
Company may have understated or overstated the write-down required for excess
and obsolete inventory. In the future, if the Company's inventory is determined
to be overvalued, it would be required to recognize such costs in its cost of
goods sold at the time of such determination. Likewise, if the Company does not
properly estimate the lower of cost or market of its inventory and it is
therefore determined to be undervalued, it may have over-reported its cost of
goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale. Therefore, although the Company
makes every effort to ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand could have a significant
impact on the value of the Company's inventory and its reported operating
results.
Goodwill is calculated as the excess of the cost of purchased businesses over
the value of their underlying net assets. Other intangible assets principally
consist of purchased customer lists and covenants not to compete. Goodwill and
other intangible assets that have an indefinite life are not amortized.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), effective July 1, 2002. As
required by SFAS 142, the Company upon adoption performed impairment tests on
goodwill as of July 1, 2002. As a result of the impairment tests, the Company
recorded a goodwill impairment charge of $1,873, which has been included as a
cumulative effect of an accounting change in the accompanying consolidated
statement of income for the year ended June 30, 2003. Also required by SFAS 142,
on an annual basis, the Company tests goodwill and other intangible assets for
impairment. To determine the fair value of these intangible assets, there are
many assumptions and estimates used that directly impact the results of the
testing. In making these assumptions and estimates, the Company uses industry
accepted valuation models and set criteria that are reviewed and approved by
various levels of management. Additionally, the Company utilizes the assistance
of a third-party valuation firm, as necessary, to help evaluate recorded
goodwill. If the estimates or their related assumptions used by the Company
change in the future, the Company may be required to record impairment charges
for these assets.
The Company establishes reserves for environmental matters and other
contingencies when it is probable that a liability has been incurred and the
amount of the liability is reasonably estimable. If the contingency is resolved
for an amount greater or less than has been accrued, or the Company's share of
the contingency increases or decreases, or other assumptions relevant to the
development of the estimate were to change, the Company would recognize an
additional expense or benefit in income in the period such determination was
made.
The Company has accounted for, and currently accounts for, income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." This Statement
establishes financial accounting and reporting standards for the effects of
income taxes that result from an enterprise's activities during the current and
preceding years. It requires an asset and liability approach for financial
accounting and reporting of income taxes.
As of June 30, 2003, the Company has current net deferred tax assets of $301 and
non-current net deferred tax assets of $1,107. These net deferred tax assets
have been recorded based on the Company having sufficient future earnings in
order to realize these assets, and the net deferred tax assets have been
provided for at currently enacted income tax rates. Included in net deferred tax
assets is a valuation allowance of approximately $5,537, which relates to
foreign tax loss carryforwards not utilized to date. Management believes it is
more likely than not
10
that the deferred tax assets will not be realized in the relevant jurisdiction.
Based on the Company's assessments, no additional valuation allowance is
required. If the Company determines that a deferred tax asset will not be
realizable, an adjustment to the deferred tax asset will result in a reduction
of earnings at that time.
Furthermore, the Company provides reserves for Federal, state and international
tax exposures relating to audits, planning initiatives, and compliance
responsibilities. The development of these reserves requires judgments about tax
issues, potential outcomes and timing, and is a subjective critical estimate.
RESULTS OF OPERATIONS:
Net Sales By Segment
Fiscal Year Ended June 30,
(Dollars in thousands)
Segment 2003 2002 2001
---- ---- ----
% of % of % of
Sales total Sales total Sales total
----- ----- ----- ----- ----- -----
Agrochemicals $ 14,356 5.3% $ 13,540 5.9% $ 13,133 7.4%
Chemicals and Colorants 91,579 33.8 90,494 39.5 97,902 55.0
Health Sciences 159,858 58.9 120,021 52.3 61,137 34.3
Institutional Sanitary
Supplies & Other 5,483 2.0 5,274 2.3 5,982 3.3
-------- ----- -------- ----- -------- -----
TOTAL NET SALES $271,276 100.0% $229,329 100.0% $178,154 100.0%
======== ===== ======== ===== ======== =====
11
Gross Profit By Segment
Fiscal Year Ended June 30,
(Dollars in thousands)
Segment 2003 2002 2001
---- ---- ----
Gross % of Gross % of Gross % of
Profit total Profit total Profit total
------ ----- ------ ----- ------ -----
Agrochemicals $ 4,123 8.5% $ 4,215 10.5% $ 4,943 14.5%
Chemicals and Colorants 12,673 26.0 13,502 33.5 15,529 45.7
Health Sciences 29,569 60.6 20,240 50.3 11,948 35.2
Institutional Sanitary
Supplies & Other 2,418 4.9 2,294 5.7 1,562 4.6
------- ----- ------- ----- ------- -----
TOTAL GROSS PROFIT
BY SEGMENT $48,783 100.0% $40,251 100.0% $33,982 100.0%
UNALLOCATED COST
OF SALES (1) 3,487 2,970 5,365
------- ------- -------
NET GROSS PROFIT $45,296 $37,281 $28,617
======= ======= =======
(1)Represents freight and storage costs that are not allocated to a segment.
FISCAL YEAR ENDED JUNE 30, 2003 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2002
SALES AND GROSS PROFIT
Net sales increased $41,947 or 18.3%, to $271,276 for the fiscal year ended June
30, 2003 compared with $229,329 for the prior year. The Company reported
particularly strong sales and gross profit for the year ended June 30, 2003 from
its Health Sciences segment as explained below. Net sales for the other three
segments combined were up $2,110 or 1.9% in fiscal 2003.
The Health Sciences segment reported a significant increase in sales and
accounted for 95.0% of the overall increase. This segment has achieved gains in
market share and experienced strong demand for certain Active Pharmaceutical
Ingredients of products launched during the fourth quarter of fiscal 2002 and
the four quarters of fiscal 2003. This segment's sales were $159,858 for the
year ended June 30, 2003 versus $120,021 last year, an increase of $39,837 or
33.2%. A majority of the increase resulted from the initial and follow up
shipments of several generic pharmaceutical products which are sold to companies
who have received recent approval to market these products. In addition, the
increase was attributable to increased sales volume from an expanded
distribution agreement with a major supplier which allows for the sale of
additional products into new markets. The nutritionals business showed a 10.6%
increase in volume this year due to increased demand for products such as
nutritional supplements.
The Chemicals & Colorants segment achieved an increase of $1,085 or 1.2%, to
$91,579 in 2003 compared to $90,494 last year. The increase is attributable to
an increase in volume with one large customer and some improved pricing in color
intermediates which was somewhat offset by lost sales from two former customers
and continuing declines in sales volume related to the pigment and dyestuff
industries.
Agrochemicals sales were $14,356 for 2003 compared to $13,540 last year, an
increase of $816 or 6.0%. A restructuring of the Company's arrangement with a
third party, effective October 1, 2001, resulted in additional sales of $739
during the quarter
12
ended September 30, 2002. Excluding this, sales increased by $77 or 0.5%. Sales
were flat due to a one-time sale of offgrade material to one customer recorded
in 2002 offset by an overall increase in volume in fiscal 2003 for the segment's
main products.
Institutional Sanitary Supplies & Other sales were $5,483 for 2003 compared to
$5,274 last year, an increase of $209 or 4.0%. The improved sales were
attributable to price increases and identifying better sources of supply that
have improved our competitive position regarding pricing. During 2002, this
segment was also specifically disrupted by the after effects on the economy from
the terrorist attacks of September 11, 2001. Over 30% of this segment's customer
base is in the New York metropolitan area.
Gross profit by segment before unallocated cost of sales (primarily storage and
certain freight costs) increased 21.2%, to $48,783 from $40,251. The Health
Sciences segment made the largest contribution to the overall improvement as it
accounted for $9,329 or 109.3% of the overall increase.
The gross profit resulting from the Health Sciences segment amounted to $29,569,
or 18.5% in fiscal 2003 versus $20,240 or 16.9% in the prior year. Gross profit
improvement was mainly attributable to the sales of several generic
pharmaceutical products as described above in the sales comments. These products
provided substantial increases in gross profit dollars at a slightly higher
gross margin rate. Gross profit improvement was also attributable to the
increased volume from an expanded distribution agreement with a major supplier
for new products in both existing and new markets. In addition, nutritionals
also achieved a gross profit increase this year in dollars as a result of
increased demand at similar margin rates.
The Chemicals & Colorants segment's gross profit of $12,673 decreased $829 or
6.1% over last year's $13,502. Gross profit, as a percentage of sales, declined
to 13.8% this year versus 14.9%. The current year's gross profit includes the
net benefit of a negotiated settlement for lost gross profit regarding
non-performance of a sales contract and an estimate of a loss on the related
purchase contract in the amount of $450. The decrease in gross profit excluding
this favorable settlement would have been $1,279 or 9.5%. The gross profit rate
for this year would have been 13.5% excluding the settlement which is lower than
the gross profit rate in the prior year of 14.9%. The decrease in gross profit
rate is primarily a result of increased sales volume from one large customer at
lower than usual gross profit rates which has been combined with continued
erosion of margins and gross profit dollars in various business sectors due to
competitive pressures and economic sluggishness. The loss of several large
customers in early fiscal 2003 also contributed to the decrease in gross profit
dollars.
The Agrochemicals segment showed a decrease in gross profit of $92 or 2.2% from
$4,123 in fiscal 2003 versus $4,215 last year. The decrease in gross profit
dollars resulted from increased packaging costs and overall product mix offset
by an increase in sales volume. Gross margin was 28.7% in fiscal 2003 versus
31.1% last year.
Institutional Sanitary Supplies and Other gross profits were $2,418 or 44.1% in
2003 versus $2,294 or 43.5% in 2002. The 5.4% increase in gross profit dollars
is mainly a result of a 4.0% increase in sales. Overall product mix and price
increases were the main reasons for the higher margins this year.
Unallocated cost of sales increased to $3,487 from $2,970 or 17.4%. The higher
costs were mainly a result of higher freight costs due to rising fuel
surcharges, increased sales and shipments to customers and higher amounts of
inventory in warehouses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $2,414 or 8.1%
to $32,359 for fiscal 2003 from $29,945 for fiscal 2002. As a percentage of
sales,
13
SG&A decreased to 11.9% for fiscal 2003 versus 13.1% for fiscal 2002. SG&A
increased primarily due to rising business insurance costs, increased selling
expenses and overall increases in employee wages, incentive compensation and
fringe benefit costs. The Company sold property held for sale in July 2002 and
realized a net gain on the sale of $291. This gain reduced the overall SG&A
expenses and lowered its SG&A as a percentage of sales. SG&A, as a percentage of
sales, excluding this transaction would have been 12.0% versus 13.1% last year.
SG&A grew 8.1% which was a slower rate than the sales increase of 18.3% which
resulted in the decrease in SG&A as a percentage of sales.
OPERATING PROFIT
For the year ended June 30, 2003 the operating income was $12,937 compared to
$7,336, an increase of $5,601 or 76.3%. This increase was primarily due to the
overall increase in gross profit of $8,015, with the main contribution of $9,329
coming from the Health Sciences segment, which was partially offset by higher
SG&A expenses of $2,414.
INTEREST AND OTHER INCOME
Interest expense for fiscal 2003 was $284 versus $368 in the prior year. The
decrease of $84 or 22.8% was attributable to the lower levels of short-term bank
loans and acquisition-related debt from the Schweizerhall Pharma acquisition and
lower average interest rates. Short-term bank loans was $7,336 at June 30, 2002
versus $3,286 at June 30, 2003. There was no acquisition-related debt remaining
as of June 30, 2002 and 2003.
Interest and other income increased to $713 for fiscal 2003 compared to $410
last year. Interest income increased $246 this year due to higher average
balances in interest bearing accounts and increased finance charges received
from a major customer. Miscellaneous sources of other income realized an
increase of $151 in 2003 versus the prior year. This was offset by a reduction
in dividend income of $57 and a loss on marketable securities of $74 this year
compared to a loss of $37 in the prior year.
TAX RATES
The effective tax rate for the year ended June 30, 2003 decreased to 29.2% from
33.0% last year. The decrease in the effective tax rate is primarily a
reflection of increased earnings in lower foreign tax jurisdictions compared to
the prior year.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
The year ended June 30, 2003 includes a one-time charge of $1,873, or $0.19 per
diluted share, attributable to the cumulative effect of adopting SFAS No. 142,
"Goodwill and Other Intangible Assets". The Company's $1,873 one-time charge was
related to the impairment of the goodwill associated with CDC Products Corp.
("CDC") which is part of our Institutional Sanitary Supply segment. The one-time
charge for CDC was primarily due to recent operating profits and cash flows
being lower than expected due to increased competition from local sanitary
supply companies in the markets CDC operates.
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001
SALES AND GROSS PROFIT
Net sales increased $51,175 or 28.7%, to $229,329 for the fiscal year ended June
30, 2002 compared with $178,154 for the prior year. Fiscal 2002 sales
attributable to the acquisition of Schweizerhall Pharma, which closed on March
26, 2001, were $60,701 compared to $17,798, which were all recorded in the
fourth quarter of fiscal 2001. The increase in these sales of $42,903 accounts
for 83.8% of the Company's overall increase. The only segment which had sales
contributions from the Schweizerhall Pharma business is the Health Sciences
segment. Sales excluding the Schweizerhall Pharma business were $168,628 for
2002 versus $160,356 for 2001, an increase of $8,272 or 5.2%.
The Health Sciences segment sales were $120,021 in fiscal 2002 and $61,137 in
2001, an increase of $58,884 or 96.3%. This segment now represents the largest
segment of the Company in both net sales and gross profit. The acquisition in
March 2001
14
contributed sales of $60,701 and $17,798 in fiscal 2002 and 2001, respectively.
The segment's sales, excluding the Schweizerhall Pharma portion, were $59,320 in
2002 versus $43,339 in 2001, an increase of $15,981 or 36.9%. This increase was
a direct result of increased volume in one generic pharmaceutical product and
the initial shipments of several generic pharmaceutical products which have been
in development for the past several years. In addition, the increase is
attributable to increased sales volume from the introduction of new products,
especially in the fourth quarter, which was somewhat offset by lost sales from
customers who purchased chemicals provided by this segment's former primary
supplier. That supplier terminated a supply agreement in October 2000. The
nutritionals business showed a slight decline in 2002 versus 2001 due to softer
demand for nutritional supplements.
The Chemicals & Colorants segment saw an overall decrease of $7,408 or 7.6%, to
$90,494 in 2002 from $97,902 in 2001. This decrease reflects a general slowdown
in the economy and in the entire industrial chemicals market. Also, the
shrinking dye stuff industry in the United States caused sales to decline. In
addition, the pigment industry has had economic difficulties, with the
advertising sector in particular, resulting in decreased demand.
Agrochemicals sales were $13,540 compared to $13,133, an increase of $407 or
3.1%. A restructuring of the Company's arrangement with a third party resulted
in additional sales of $3,171 during the year ended June 30, 2002. Excluding
this, sales decreased by $2,764 or 21.0%. The primary causes were a reduction of
sales to one large customer as well as an overall decline in demand.
Institutional Sanitary Supplies & Other sales were $5,274 for 2002 versus $5,982
last year, a decrease of $708 or 11.8%. The decline was attributable to an
overall decline in demand due to the general economic slowdown in the United
States during this past year. This segment was also specifically disrupted by
the after effects on the economy from the terrorist attacks of September 11,
2001. Over 30% of this segment's customer base is in the New York metropolitan
area.
Gross profit by segment before unallocated cost of sales (primarily storage and
certain freight costs) increased 18.4%, to $40,251 from $33,982. The inclusion
of Schweizerhall Pharma, again in the Health Sciences segment, accounted for
$8,974 in 2002 and $2,808 in 2001. Gross profit on our continuing domestic and
certain foreign sales increased 0.3%, to $31,277 from $31,174 in 2001.
The gross margins in 2002 resulting from the Schweizerhall Pharma business in
the Health Sciences segment amounted to $8,974, or 14.8% versus $11,266 or 19.0%
for the rest of this segment's business. For fiscal 2001, the comparable gross
margins were $4,226 or 23.7% for the Schweizerhall Pharma business versus $7,722
or 17.8% for all other business in the segment. The gross margins realized from
the Schweizerhall Pharma business in this segment are generally lower than the
margins earned by our traditional business due to a different pricing and
product mix.
The Agrochemicals segment showed a decline in gross profit of 14.7%, which was
in contrast to the 3.1% increase in sales. The restructuring of the Company's
arrangement referred to earlier led to an increase in sales, but the same gross
profit contribution. This is the primary cause of this discrepancy between sales
and gross profit percentages for the period.
The Chemicals & Colorants segment's gross profit declined 13.1%, which was
significantly higher than the 7.6% decline in sales. Continued erosion of
margins due to competitive pressures in many areas, particularly printing inks
and electronic chemicals, caused this higher percentage decrease in margins than
sales.
Institutional Sanitary Supplies and Other gross margins were 43.5% in 2002
versus 26.1% in 2001. The increased gross margins are a direct result of changes
from a pricing review, lower costs and product mix.
Unallocated cost of sales declined significantly to $2,970 from $5,365, or
44.6%. The results were achieved by lower amounts of inventory in warehouses,
lower
15
quantity sold and a negotiated reduction of storage rates paid as part of a
corporate initiative.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $7,184 or 31.6%
to $29,945 for fiscal 2002 from $22,761 for fiscal 2001. As a percentage of
sales, SG&A increased to 13.1% for fiscal 2002 versus 12.8% for fiscal 2001.
SG&A increased primarily due to the acquisition of the distribution business of
Schweizerhall Pharma in March 2001. SG&A costs for this business increased
$6,243 to $8,163 in fiscal 2002 versus $1,920, which were all recorded in the
fourth quarter of fiscal 2001. Other factors contributing to the increase were:
rising employee health insurance costs, additional professional fees related to
the Company's tax strategy and global restructuring projects, higher office
rental costs due to additional space taken, a higher bad debt provision and
increased business insurance premiums.
OPERATING PROFIT
For the year ended June 30, 2002 the operating profit was $7,336 compared to
$5,856, an increase of $1,480 or 25.3%. This increase was primarily due to a
full year's positive contribution to operating profits from the Schweizerhall
Pharma business, acquired on March 26, 2001, which was offset by higher SG&A
expenses.
INTEREST AND OTHER INCOME
Interest and other income decreased to $410 for 2002 from $1,226 last year. The
reduction in income of $816 was mainly attributable to a reduction in interest
on investments of $311 due to the holding of long-term investments during last
year of over $6,000 which were subsequently sold in the second half of fiscal
2001 to help finance the acquisition of Schweizerhall Pharma in March 2001.
Interest expense for 2002 was $368 versus $296 in the prior year. The increase
of $72 or 24.3% was entirely attributable to the short-term bank loans and
acquisition related debt arising from the Schweizerhall Pharma acquisition. The
total balance of this debt was reduced from $11,177 at June 30, 2001 to $7,336
at June 30, 2002 through debt payments totaling $3,841.
TAX RATES
The effective tax rates were 33.0% and 37.4% in fiscal 2002 and 2001,
respectively. The decrease in the effective tax rate is primarily a reflection
of earnings in lower tax jurisdictions due to the Schweizerhall Pharma
acquisition.
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 2003, the Company had $20,263 in cash, $877 in short-term
investments and $3,286 of short-term bank loans. Working capital was $71,628 at
June 30, 2003 versus $58,311 at June 30, 2002.
The Company's cash position at June 30, 2003 increased $6,008 from the June 30,
2002 level. Operating activities provided cash of $9,132, primarily from net
income of $7,595, a reduction in other receivables of $2,937 and increases in
accrued compensation and accounts payable totaling $4,364, partially offset by
increases in inventory of $5,425 due primarily to an increase in sales volume
and trade accounts receivable of $1,870, as well as a decrease in drafts and
acceptances payable of $2,758 and a decrease in accrued income taxes of $1,582.
Investing activities provided cash of $48, primarily from $173 of net cash
proceeds from the sale of property and proceeds from an investment held to
maturity of $369 which was partially offset by capital expenditures of $590.
Financing activities used cash of $3,172 primarily as a result of payments of
cash dividends of $2,316 and payments of current installments of long-term
liabilities of $272 and short-term bank loans of $4,050, which were partially
offset by proceeds from the exercise of stock options of $3,269.
16
In connection with the acquisition of Schweizerhall Pharma in March 2001, the
acquired companies had existing credit facilities with two European financial
institutions. These facilities provide the Company with a line of credit of
14,500 Euros ($16,588) of which $3,286 was utilized as of June 30, 2003. The
Company is not subject to any financial covenants under these arrangements.
Additionally, in May 2002, the Company entered into a $15,000 revolving credit
agreement with a financial institution, which expires June 30, 2004. At June 30,
2003, the Company utilized $1,199 in letters of credit leaving an unused
facility of $13,801. Under the credit agreement, the Company may obtain credit
through direct borrowings and letters of credit. The obligations of the Company
under the credit agreement are guaranteed by certain of the Company's
subsidiaries and is secured by sixty-five percent of the capital of certain
non-domestic subsidiaries which the Company owns. There is no borrowing base on
the credit agreement. Interest under the credit agreement is at LIBOR plus
1.50%. The credit agreement contains several financial covenants requiring,
among other things, minimum levels of debt service and tangible net worth. The
Company is also subject to certain restrictive debt covenants including liens,
limitations on indebtedness, guarantees, sale of assets, sales of receivables,
and loans and investments. In March 2003, the Company obtained a waiver to its
credit agreement which allowed it to guarantee an obligation of one of its
wholly-owned subsidiaries to a vendor under a distribution agreement. The
Company was in compliance with all covenants at June 30, 2003.
The Company has no material financial commitments other than those under
operating lease agreements, letters of credit and unconditional purchase
obligations. The Company continually evaluates possible acquisitions of or
investments in businesses that are complementary to those of the Company, which
transactions may require the use of cash. The Company believes that its cash,
other liquid assets, operating cash flows, borrowing capacity and access to the
equity capital markets, taken together, provide adequate resources to fund
ongoing operating expenditures and the anticipated continuation of semi-annual
cash dividends. Further, the Company may obtain additional credit facilities to
enhance its liquidity.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At June 30,
2003, the Company has no significant obligations for capital expenditures. At
June 30, 2003, contractual cash obligations and other commercial commitments are
as follows:
Payments Due and/or
Amount of Commitment
Expiration Per Period
---------------------
Less Than 1-3 4-5 After
Total 1 Year Years Years 5 Years
----- ------ ----- ----- -------
Long-term liabilities/
bank loans $ 3,286 $ 3,286 $ - $ - $ -
Operating leases 9,373 1,418 2,665 2,349 2,941
Commercial letters of credit 1,199 1,199 - - -
Standby letters of credit 122 122 - - -
Unconditional purchase
obligations 23,193 22,358 835 - -
------- ------- ------- ------ ------
Total $37,173 $28,383 $ 3,500 $2,349 $2,941
======= ======= ======= ====== ======
17
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 will spread out the reporting of expenses
related to restructurings initiated after 2002, because commitment to a plan to
exit an activity or dispose of long-lived assets will no longer be enough to
record a liability for the anticipated costs. Instead, companies will record
exit and disposal costs when they are "incurred" and can be measured at fair
value, and they will subsequently adjust the recorded liability for changes in
estimated cash flows. The Company adopted the provisions of SFAS 146 as of
January 1, 2003. The adoption of this statement did not have a significant
impact on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS 148). SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally defined
by SFAS No. 123, "Accounting for Stock-Based Compensation." Additionally, SFAS
148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both the annual and interim financial statements about the method
of accounting for stock-based compensation and the effect of the method used on
reported results. The transitional requirements of SFAS 148 are effective for
all financial statements for fiscal years ending after December 15, 2002. The
Company adopted the disclosure portion of this statement for the fiscal quarter
ended March 31, 2003. The application of the disclosure portion of this standard
had no impact on the Company's consolidated financial position or results of
operations. The FASB recently indicated that it will require stock-based
employee compensation to be recorded as a charge to earnings pursuant to a
standard on which it is currently deliberating. The FASB anticipates issuing an
Exposure Draft in the fourth quarter of 2003 and a final statement in the second
quarter of 2004. The Company will continue to monitor the FASB's progress on the
issuance of this standard as well as evaluate the Company's position with
respect to current guidance.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The Company does
not believe that the adoption of SFAS No. 149 will have a material impact on its
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity", which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity in its
statement of financial position. SFAS No. 150 is effective for new or modified
financial instruments beginning July 1, 2003 and for existing instruments
beginning August 1, 2003. The Company does not believe that the adoption of SFAS
No. 150 will have a material impact on its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" ("Int. No. 45"), which addresses the disclosure to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees. Int. No. 45 also requires the guarantor to
recognize a liability for the non-contingent component of the guarantee, which
is the obligation to stand ready to perform in the event that specified
triggering events or conditions occur. The recognition and measurement
provisions of Int. No. 45 are effective for all guarantees entered into or
modified after December 31, 2002. The Company has not entered into any such
guarantees and therefore the adoption of this standard did not impact the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("Int. No. 46") an interpretation of ARB No. 51.
Int. No. 46 addresses consolidation by business enterprises of variable interest
entities. Int.
18
No. 46 applies immediately to variable interest entities created after January
31, 2003 and to variable interest entities in which an enterprise obtains an
interest after that date. Int. No. 46 applies in the first year or interim
period beginning after June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company is in the process of determining the impact of implementing Int. No.
46 on its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitive Instruments
The market risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in market price,
foreign currency exchange rates and interest rates.
Market Price Risk
Short-term investments at June 30, 2003 of $877 which consists solely of
corporate securities and are recorded at fair value have exposure to price risk.
This risk is estimated as the potential loss in fair value resulting from a
hypothetical 10% adverse change in prices quoted by stock exchanges and amounts
to $88 as of June 30, 2003. Actual results may differ.
Foreign Currency Exchange Risk
In order to reduce the risk of foreign currency exchange rate fluctuations, the
Company hedges some of its transactions denominated in a currency other than the
functional currencies applicable to each of its various entities. The
instruments used for hedging are short term foreign currency contracts
(futures). The changes in market value of such contracts have a high correlation
to price changes in the currency of the related hedged transactions. At June 30,
2003, the Company had foreign currency contracts outstanding that have a
notional amount of $3,431. The difference between the fair market value of the
foreign currency contracts and the related commitments at inception and the fair
market value of the contracts and the related commitments at June 30, 2003 was
$99.
In addition, the Company also enters into cross currency interest rate swaps to
reduce foreign currency exposure on intercompany transactions. In May 2003, the
Company entered into a five-year cross currency interest rate swap transaction
for the purpose of hedging fixed interst rate, foreign currency denominated cash
flows under an inter-company loan receivable. Under the terms of this derivative
financial instrument, U.S. dollar-fixed principal and interest payments to be
received under an intercompany loan will be swapped for EURO denominated fixed
principal and interest payments. The fair market value of the swap at June 30,
2003 was $(131). The gains or losses on the foreign currency loan receivable
will be offset by the gains or losses on the swap. Because the Company is
receiving fixed interest payments under the swap, it is still subject to
fluctuations in value due to changes in Euro and U.S. dollar foreign currency
rates and U.S. dollar interest rates. As of June 30, 2003 the impact of these
fluctuations was not significant. This hedge was deemed to be highly effective
as of June 30, 2003.
The Company is subject to risk from changes in foreign exchange rates for its
subsidiaries that use a foreign currency as their functional currency and are
translated into U.S. dollars. These changes result in cumulative translation
adjustments which are included in accumulated other comprehensive income (loss).
On June 30, 2003, the Company had translation exposure to various foreign
currencies with the most significant being the Euro and Singapore Dollars. The
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates, as of June 30, 2003, amounts to $2,046. Actual
results may differ.
Interest Rate Risk
The Company is subject to market risk from exposure to changes in interest rates
based upon its financing, investing and cash management activities. The Company
utilizes a balanced mix of debt maturities along with both fixed-rate and
variable-rate debt to manage its exposure to changes in interest rates. The
Company's financial instrument holdings at year-end were analyzed to determine
their sensitivity to interest rate changes. In this sensitivity analysis, the
Company used the same change in interest rate for all maturities. All other
factors were held constant. If there were an adverse change in interest rates of
10%, the expected effect on net income related to our financial instruments
would be immaterial. However, there can be no assurances that interest rates
will not significantly affect its results of operations.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item 8 are set forth at the end of
this report. The following is the applicable supplementary data:
The following is a summary of the unaudited quarterly results of operations for
the years ended June 30, 2003 and 2002.
QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands except per share amounts)
Year Ended June 30, 2003
Quarter Ended
Sept.30,2002 Dec.31,2002 Mar.31,2003 June 30,2003
------------ ----------- ----------- ------------
Net sales $68,022 $64,633 $70,561 $68,060
Gross profit 11,245 11,006 11,794 11,251
Income before
cumulative
effect of
accounting
change 2,323 2,328 2,411 2,406
Net income 450(2) 2,328 2,411 2,406
Income before
cumulative
effect of
accounting
change per
common share
- diluted (1) 0.24 0.23 0.24 0.23
Net income per
common share
- diluted (1)(2) 0.05(2) 0.23 0.24 0.23
Year Ended June 30, 2002
Quarter Ended
Sept.30,2001 Dec.31,2001 Mar.31,2002 June 30,2002
------------ ----------- ----------- ------------
Net sales $47,641 $55,365 $61,594 $64,729
Gross profit 7,246 9,466 9,757 10,812
Net income 535 1,243 1,523 1,644
Net income per
common share
- diluted (1) 0.05 0.13 0.15 0.17
(1) Adjusted for a 3-for-2 stock split of the common stock, paid January 2,
2003.
(2) Reflects a charge of $1,873 for a cumulative effect of an accounting change
resulting from an impairment of goodwill which was determined to be
required upon the Company's adoption of SFAS 142.
Net income per common share calculation for each of the quarters is based on
weighted average number of shares outstanding in each period. Therefore, the sum
of the quarters in a year does not necessarily equal the year's net income per
common share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
20
ITEM 9A. CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission rules, we have evaluated
the effectiveness of the design and operation of our disclosure controls
and procedures as of the end of the period covered by this Annual Report.
This evaluation was carried out under the supervision and with the
participation of our management, including our principal executive officer
and principal financial officer. Based on this evaluation, these officers
have concluded that the design and operation of our disclosure controls and
procedures are effective. There were no significant changes to our internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us
in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file
under the Exchange Act is accumulated and communicated to our management,
including principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
The Company is working closely with its corporate and securities lawyers to
ensure that it maintains compliance with the Sarbanes-Oxley Act of 2002,
the SEC regulations promulgated pursuant to that Act, and any related
NASDAQ Stock Market rules.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders
scheduled to be held on December 4, 2003.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders
scheduled to be held on December 4, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders
scheduled to be held on December 4, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders
scheduled to be held on December 4, 2003.
21
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders
scheduled to be held on December 4, 2003.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The Financial Statements listed in the Index to Consolidated
Financial Statements are filed as part of this report.
(b) Reports on Form 8-K.
The Company filed a Form 8-K on May 8, 2003 furnishing its earnings
release in connection with its third quarter.
(c) Exhibits
3.1 Restated Certificate of Incorporation (incorporated by reference
to Exhibit 4(a)(iii) to Registration Statement No. 2-70623 on
Form S-8 (S-8 2-70623)).
3.2 Certificate of Amendment dated November 21, 1985 to Restated
Certificate of Incorporation (incorporated by reference to
Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1986).
3.3 By-laws(incorporated by reference to Exhibit 3(iii)(c) to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998).
10.1 Profit Sharing Plan, as amended and restated effective July 1,
1989 (incorporated by reference to Exhibit 10(iii)(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995).
10.2 401(k) Plan, effective August 1, 1997, (incorporated by reference
to Exhibit 10 (iii) to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998).
10.3 Supplemental Executive Retirement Plan, effective June 30, 1985,
as amended and restated, effective July 1, 1992 (incorporated by
reference to Exhibit 10(iv)(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993).
10.4 Aceto Corporation Stock Option Plan (as Amended and Restated
effective as of September 19, 1990) (and as further Amended
effective June 9, 1992) (incorporated by reference to Exhibit
10(v)(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992).
10.5 1998 Aceto Corporation Omnibus Equity Award Plan (incorporated by
22
reference to Exhibit 10(v) to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1999).
10.6 Lease between Aceto Corporation and M. Parisi & Son Construction
Co., Inc. for office space at One Hollow Lane, Lake Success, NY
dated April 28, 2000 (incorporated by reference to Exhibit 10(vi)
to the Company's Annual Report Form 10-K for the fiscal year
ended June 30, 2000).
10.7 Lease between Aceto Corporation and M. Parisi & Son Construction
Co., Inc. for office space at One Hollow Lane, Lake Success, NY
dated April 28, 2000 (incorporated by reference to Exhibit
10(vi)(b) to the Company's Annual Report on Form 10-K for the
year ended June 30, 2000).
10.8 Lease between CDC Products Corp. and Seaboard Estates for
manufacturing and office space at 1801 Falmouth Avenue, New Hyde
Park, NY dated October 31, 1999 (incorporated by reference to
Exhibit 10(vi)(c) to the Company's Annual Report on Form 10-K for
the year ended June 30, 2000).
10.9 Stock Purchase Agreement among Windham Family Limited
Partnership, Peter H. Kliegman, CDC Products Corp. and Aceto
Corporation (incorporated by reference to Exhibit 10(vii) to the
Company's Annual Report on Form 10-K for the year ended June 30,
1999).
10.10 Asset Purchase Agreement among Magnum Research Corporation, CDC
Products Corp., Roy Gross and Aceto Corporation (incorporated by
reference to Exhibit 10 (viii) to the Company's Annual Report on
Form 10-K for the year ended June 30, 2000).
10.11 Asset Purchase Agreement between Schweizerhall, Inc. and Aceto
Corporation (incorporated by reference to Exhibit 10(ix) to the
Company's Annual Report on Form 10-K for the year ended June 30,
2000).
10.12 Purchase and Sale Agreement among Schweizerhall Holding AG,
Chemische Fabrik Schweizerhall, Schweizerhall, Inc., Aceto
Corporation and Aceto Holding B.V., I.O. (incorporated by
reference to Exhibit 2.1 to the Company's report on Form 8-K
dated April 4, 2001).
10.13 Loan Guarantee between Aceto Corporation and subsidiaries and
Deutsche Bank AG dated March 22, 2001 (incorporated by reference
to Exhibit 10.13 to the Company's report on Form 10-K for the
year ended June 30, 2001).
10.14 Credit Agreement between Aceto Corporation and subsidiaries and
JPMorgan Chase Bank dated May 10, 2002 (incorporated by reference
to Exhibit 10.14 to the Company's report on Form 10-K for the
year ended June 30, 2002).
21* Subsidiaries of the Company.
23* Consent of KPMG LLP.
23
31.1** Certification by CEO Leonard S. Schwartz pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2** Certification by CFO Douglas Roth pursuant to U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1** Certification by CEO Leonard S. Schwartz pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2** Certification by CFO Douglas Roth pursuant to U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
----------------
* Incorporated by reference to the Company's Form 10-K filed on September 26,
2003.
** Filed herewith
24
ACETO CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Report
Consolidated financial statements:
Consolidated balance sheets as of June 30, 2003 and 2002
Consolidated statements of income for the years ended June 30, 2003, 2002
and 2001
Consolidated statements of cash flows for the years ended June 30, 2003,
2002 and 2001
Consolidated statements of shareholders' equity and comprehensive income
(loss) for the years ended June 30, 2003, 2002 and 2001
Notes to consolidated financial statements
Schedules:
II - Valuation and qualifying accounts
All other schedules are omitted because they are not required or the
information required is given in the consolidated financial statements or
notes thereto.
25
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Aceto Corporation:
We have audited the accompanying consolidated balance sheets of Aceto
Corporation and subsidiaries as of June 30, 2003 and 2002, and the related
consolidated statements of income, shareholders' equity and comprehensive income
(loss), and cash flows for each of the years in the three-year period ended June
30, 2003. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aceto Corporation
and subsidiaries as of June 30, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2003 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in note 7, effective July 1, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standard (Statement) No. 141,
"Business Combinations" and Statement No. 142, "Goodwill and Other Intangible
Assets".
/s/ KPMG LLP
Melville, New York
August 26, 2003
26
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, JUNE 30,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 20,263 $ 14,255
Short-term investments 877 1,320
Receivables:
Trade, less allowance for doubtful accounts:
2003, $939; 2002, $657 43,841 42,417
Other 1,320 4,266
------- -------
45,161 46,683
Inventory 41,696 36,271
Prepaid expenses and other current assets 1,015 1,191
Income taxes receivable 939 -
Deferred income tax benefit, net 301 521
Property held for sale 326 483
------- -------
Total current assets 110,578 100,724
Long-term notes receivable 1,017 691
Property and equipment:
Machinery and equipment 1,244 1,069
Leasehold improvements 1,143 1,143
Computer equipment and software 2,540 1,680
Furniture and fixtures 667 593
Automobiles 362 293
------- -------
5,956 4,778
Less accumulated depreciation and amortization 3,681 2,346
------- -------
2,275 2,432
Goodwill, less accumulated amortization:
2003, $677; 2002, $1,086 7,783 9,821
Deferred income tax benefit 1,107 1,083
Other assets 759 952
------- -------
Total Assets $123,519 $115,703
======= =======
See accompanying notes to consolidated financial statements.
27
June 30, June 30,
2003 2002
---- ----
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts and acceptances payable $ 1,315 $ 4,073
Short-term bank loans 3,286 7,336
Current installments
on long-term liabilities - 272
Accounts payable 17,372 14,326
Accrued merchandise purchases 4,048 4,196
Accrued compensation 4,117 2,799
Accrued environmental remediation 1,550 1,284
Accrued income taxes - 1,582
Other accrued expenses 7,262 6,545
------- -------
Total current liabilities 38,950 42,413
Shareholders' equity:
Common stock, $.01 par value;
Authorized: 20,000,000 shares
Issued: 2003, 12,292,684 shares
2002, 12,292,684 shares
Outstanding: 2003, 10,286,175 shares
2002, 9,825,363 shares 123 123
Capital in excess of par value 57,100 56,461
Retained earnings 46,142 40,863
Treasury stock, at cost:
2003, 2,006,509 shares
2002, 2,467,321 shares (19,836) (24,252)
Accumulated other comprehensive income 1,040 95
------- -------
Total shareholders' equity 84,569 73,290
------- -------
Commitments and contingencies (Note 18)
Total liabilities and shareholders' equity $123,519 $115,703
======= =======
See accompanying notes to consolidated financial statements.
28
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2003 2002 2001
---- ---- ----
Net sales $271,276 $229,329 $178,154
Cost of sales 225,980 192,048 149,537
------- ------- -------
Gross profit 45,296 37,281 28,617
Selling, general and
administrative expenses 32,359 29,945 22,761
------- ------- -------
Operating income 12,937 7,336 5,856
Other income (expense):
Interest expense (284) (368) (296)
Interest and other income 713 410 1,226
------- ------- -------
429 42 930
------- ------- -------
Income before income taxes and cumulative
effect of accounting change 13,366 7,378 6,786
Income taxes:
Federal:
Current 1,798 1,436 2,417
Deferred 103 220 (287)
State and local:
Current 348 337 332
Deferred 93 (50) (50)
Foreign:
Current 1,556 490 129
------- ------- -------
3,898 2,433 2,541
------- ------- -------
Income before cumulative effect of
accounting change 9,468 4,945 4,245
Cumulative effect of accounting change 1,873 - -
------- ------- -------
Net income $ 7,595 $ 4,945 $ 4,245
======= ======= =======
Basic income per common share (a):
Income before accounting change $ 0.96 $ 0.51 $ 0.46
Cumulative effect of accounting change 0.19 - -
------- ------- -------
Net income $ 0.77 $ 0.51 $ 0.46
======= ======= =======
Diluted income per common share (a):
Income before accounting change $ 0.94 $ 0.50 $ 0.46
Cumulative effect of accounting change 0.19 - -
------- ------- -------
Net income $ 0.75 $ 0.50 $ 0.46
======= ======= =======
Weighted average shares outstanding (a):
Basic 9,909 9,779 9,184
Diluted 10,117 9,833 9,222
(a) The number of shares outstanding and the per share information have been
adjusted for a 3-for-2 split of the common stock, paid January 2, 2003.
See accompanying notes to consolidated financial statements.
29
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS) 2003 2002 2001
---- ---- ----
Operating activities:
Net income $ 7,595 $ 4,945 $4,245
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting change 1,873 - -
Depreciation and amortization 1,038 1,629 909
Gain on sale of assets (291) (3) -
Provision for doubtful accounts 446 566 307
Foreign currency translation adjustment 945 859 (764)
Deferred tax provision (benefit) 196 170 (337)
Income tax benefit on exercise of stock
options 1,589 10 -
Changes in assets and liabilities,
net of effect of the acquisitions:
Investments - trading securities 74 37 (53)
Trade accounts receivable (1,870) (4,698) 575
Other receivables 2,937 (1,036) 143
Income taxes receivable (939) - -
Inventory (5,425) (137) 6,280
Prepaid expenses and other current assets 176 (505) 383
Other assets 69 (158) (29)
Drafts & acceptances payable (2,758) 2,540 1,069
Accounts payable 3,046 3,797 1,455
Accrued merchandise purchases (148) 2,570 (10,395)
Accrued compensation 1,318 (114) (298)
Accrued environmental remediation 266 (8) (20)
Accrued income taxes (1,582) 1,063 (840)
Other accrued expenses and long
term liabilities 577 3,953 (222)
------ ------ -----
Net cash provided by operating activities 9,132 15,480 2,408
------ ------ -----
Investing activities:
Proceeds from maturation of held-to-maturity
investments 369 - 8,112
Payments received on notes receivable 96 88 82
Purchases of property and equipment (590) (640) (1,305)
Proceeds from sale of property, net of
closing costs 173 12 -
Acquisition of businesses, net of
cash acquired - (563) 1,205
Payments for additional inventory recorded
in goodwill - (2,639) -
Proceeds from settlement of certain acquired
accounts receivable balances recorded in goodwill - 1,571 -
------ ------ -----
Net cash provided by (used in)
investing activities 48 (2,171) 8,094
------ ------ -----
Financing activities:
Payments of short-term bank loans (4,050) (1,528) (102)
Payments of current installments on long-term
liabilities (272) - -
Payments of cash dividends (2,316) (2,088) (1,936)
Payments of long-term liabilities - (796) (531)
Payments of notes payable - acquisition - (2,313) (2,313)
Proceeds from exercise of stock options 3,269 239 332
Payments for purchases of treasury stock (39) (121) (1,642)
Issuance of treasury stock to employees 236 243 189
------ ------ -----
Net cash used in financing activities (3,172) (6,364) (6,003)
------ ------ -----
Net increase in cash 6,008 6,945 4,499
Cash at beginning of year 14,255 7,310 2,811
------ ------ -----
Cash at end of year $20,263 $14,255 $7,310
====== ====== =====
See accompanying notes to consolidated financial statements.
30
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
Common Stock Accumulated
------------ Capital in Other
Shares Par Value Excess of Retained Treasury Stock Comprehensive
Issued ($.01) Par Value Earnings Shares Amount Income (Loss) Total
------ ------ --------- -------- ------ ------ ------------- -----
Balance at June 30, 2000 12,292,684 $123 $57,021 $35,697 (2,966,573) $(29,237) $ - $63,604
Net income - - - 4,245 - - - 4,245
Other comprehensive income (loss):
Foreign currency translation
adjustments - - - - - - (764) (764)
-------
Comprehensive income 3,481
-------
Stock issued pursuant to employee
incentive plans - - (12) - 20,479 201 - 189
Cash dividends:
Common stock ($0.21 per share) - - - (1,936) - - - (1,936)
Exercise of stock options - - 14 - 23,250 229 - 243
Tax benefit from exercise of
stock option plans - - 9 - - - - 9
Treasury stock purchases - - - - (174,739) (1,642) - (1,642)
Lapsed stock options - - 80 - - - - 80
Shares issued in connection with
acquisition - - (729) - 600,000 5,904 - 5,175
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 12,292,684 123 56,383 38,006 (2,497,583) (24,545) (764) 69,203
Net income - - - 4,945 - - - 4,945
Other comprehensive income (loss):
Foreign currency translation
adjustments - - - - - - 859 859
-------
Comprehensive income 5,804
-------
Stock issued pursuant to employee
incentive plans - - 9 - 23,762 234 - 243
Cash dividends:
Common stock ($0.21 per share) - - - (2,088) - - - (2,088)
Exercise of stock options - - (22) - 18,300 180 - 158
Tax benefit from exercise of
stock option plans - - 10 - - - - 10
Treasury stock purchases - - - - (11,800) (121) (121)
Lapsed stock options - - 81 - - - - 81
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 12,292,684 123 56,461 40,863 (2,467,321) (24,252) 95 73,290
Net income - - - 7,595 - - - 7,595
Other comprehensive income (loss):
Foreign currency translation
adjustments - - - - - - 945 945
-------
Comprehensive income 8,540
-------
Stock issued pursuant to employee
incentive plans - - 61 - 17,733 175 - 236
Cash dividends:
Common stock ($0.23 per share) - - - (2,316) - - - (2,316)
Exercise of stock options - - (1,040) - 446,879 4,280 - 3,240
Tax benefit from exercise of
stock option plans - - 1,589 - - - - 1,589
Treasury stock purchases - - - - (3,800) (39) (39)
Lapsed stock options - - 29 - - - - 29
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 12,292,684 $123 $57,100 $46,142 (2,006,509) $(19,836) $1,040 $84,569
See accompanying notes to consolidated financial statements.
31
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(In thousands, except per share amounts)
(1) DESCRIPTION OF BUSINESS
Aceto Corporation and subsidiaries (the Company) is primarily engaged in the
marketing, sale and distribution of pharmaceutical, fine and industrial
chemicals used principally in the agricultural, color producing, pharmaceutical,
nutraceutical and surface coating industries. Most of the chemicals distributed
by the Company are purchased abroad. The Company's customers are located
throughout the United States and other countries including Mexico, Brazil,
Malaysia, Australia, Singapore, Thailand, Canada, Germany, France, the United
Kingdom and The Netherlands.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents at June 30, 2003 include U.S. Treasury bills in the amount of
$2,996. There were no cash equivalents at June 30, 2002.
INVESTMENTS
The Company classifies investments in marketable securities as trading,
available-for-sale or held-to-maturity at the time of purchase and periodically
re-evaluates such classifications. Trading securities are carried at fair value,
with unrealized holding gains and losses included in earnings. Held-to-maturity
securities are recorded at cost and are adjusted for the amortization or
accretion of premiums or discounts over the life of the related security.
Unrealized holding gains and losses on available-for-sale securities are
excluded from earnings and are reported as a separate component of accumulated
other comprehensive income (loss) until realized. In determining realized gains
and losses, the cost of securities sold is based on the specific identification
method. Interest and dividends on the investments are accrued at the balance
sheet date.
INVENTORY
Inventories are valued at the lower of cost or market. Cost is determined using
the first in, first out (FIFO) basis.
ENVIRONMENTAL REMEDIATION
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and can be reasonably estimated. Such
accruals are adjusted as further information develops or circumstances change.
COMMON STOCK SPLIT
On December 5, 2002, the Board of Directors of the Company declared a 3-for-2
split of the Company's common stock in the form of a 50 percent common stock
dividend that was paid January 2, 2003, to shareholders of record on December
18, 2002. The
32
Company transferred $33 to common stock from capital in excess of par value,
representing the aggregate par value of the shares issued under the stock split.
All references to the number of common shares and the per common share amounts
have been restated to give retroactive effect to the above stock split for all
periods presented.
STOCK OPTIONS
The Company applies Accounting Principles Board Opinion, "Accounting for Stock
Issued to Employees" (APB 25), and related interpretations for stock options and
other stock-based awards while disclosing pro forma net income and earnings per
share as if the fair value method had been applied in accordance with Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation."
The Company applies the intrinsic value method as outlined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations in accounting for stock options and share units granted
under these programs. Under the intrinsic value method, no compensation expense
is recognized if the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant. Since the
Company has issued all stock grants at market value, no compensation cost has
been recognized. Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", requires that the Company provide pro
forma information regarding net income and net income per common share as if
compensation cost for the Company's stock option programs had been determined in
accordance with the fair value method prescribed therein. The Company adopted
the disclosure portion of SFAS No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure" requiring quarterly SFAS No. 123 pro forma
disclosure. The following table illustrates the effect on net income and income
per common share as if the Company had measured the compensation cost for the
Company's stock option programs under the fair value method in each period
presented.
2003 2002 2001
---- ---- ----
Net income, as reported $7,595 $4,945 $4,245
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects (761) (213) (226)
----- ----- -----
Net income - pro forma $6,834 $4,732 $4,019
===== ===== =====
Net income per common share:
Basic - as reported (a): $ 0.77 $ 0.51 $ 0.46
Basic - pro forma $ 0.69 $ 0.48 $ 0.44
Diluted - as reported (a): $ 0.75 $ 0.50 $ 0.46
Diluted - pro forma $ 0.68 $ 0.48 $ 0.44
(a) Retroactively adjusted to reflect a 3-for-2 stock dividend distributed on
January 2, 2003 to common stockholders of records as of the close of
business December 18, 2002.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment and
passage of title and risk of loss to the customer. Such revenues do not involve
difficult, subjective, or complex judgments. The Company does not offer product
warranties to its customers.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are included in cost
of sales. Such costs were approximately $71, $269 and $121 for the years ended
June 30, 2003, 2002 and 2001, respectively.
33
NET INCOME PER COMMON SHARE
Net income per common share amounts (basic EPS) were computed by dividing net
income by the weighted average number of common shares outstanding and excluded
any potential dilution. Net income per common share amounts, assuming dilution
(diluted EPS), were computed by reflecting potential dilution from the exercise
of stock options.
The net income per common share amounts for each of the periods presented are
based on the weighted average number of common shares outstanding, adjusted to
reflect the 3-for-2 common stock split paid on January 2, 2003.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using straight
line, sum-of-the-years digits and declining balance methods. The estimated
useful lives are as follows:
Years
-----
Machinery and equipment 10
Computer equipment and software 3-5
Furniture and fixtures 10
Automobiles 3
Leasehold improvements are amortized over the shorter of the life of the asset
or the lease term.
Depreciation and amortization of property and equipment amounted to $795, $738,
and $550 for the years ended June 30, 2003, 2002, and 2001, respectively.
GOODWILL
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" (SFAS 141), and SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The Company adopted the provisions
of SFAS 141 and SFAS 142 as of July 1, 2002.
As required by SFAS 142, the Company completed its transitional impairment
testing of intangible assets. Under SFAS 142, goodwill impairment exists if the
net book value of a reporting unit exceeds its estimated fair value. The
impairment testing is performed in two steps: (i) the Company determines
impairment by comparing the fair value of a reporting unit with its carrying
value, and (ii) if there is an impairment, the Company measures the amount of
impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill.
As of July 1, 2002, with the assistance of a third-party valuation firm, the
Company finalized the testing of goodwill. The Company estimated the fair value
of its reporting units by using a combination of discounted cash flow analyses
and comparisons with the market values of similar publicly-traded companies. As
a result of the impairment tests, the Company recorded a goodwill impairment
charge of $1,873 related to a business in the Institutional Sanitary Supply
segment, which has been included as a cumulative effect of an accounting change
in the accompanying consolidated statement of income for the year ended June 30,
2003 (note 7).
34
Also required by SFAS 142, on an annual basis, the Company tests goodwill and
other intangible assets for impairment. To determine the fair value of these
intangible assets, there are many assumptions and estimates used that directly
impact the results of testing. In making these assumptions and estimates, the
Company uses industry accepted valuation models and set criteria that are
reviewed and approved by various levels of management, and the Company estimates
the fair value of its reporting units by using a combination of discounted cash
flow analyses and comparisons with the market values of similar publicly-traded
companies. Additionally, the Company utilizes the assistance of a third-party
valuation firm, as necessary, to help evaluate recorded goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Effective July 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which establishes accounting and
reporting standards for the impairment or disposal of long-lived assets. SFAS
No. 144 removes goodwill from its scope and retains the requirements of SFAS No.
121 regarding the recognition of impairment losses on long-lived assets held for
use.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset.
Recoverability of assets held for sale is measured by comparing the carrying
amount of the assets to their estimated fair market value. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Property held for sale, which includes land and land improvements, is stated at
cost. Impairment, if any, is recognized if the estimated fair value less costs
to sell is lower than the carrying value.
ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
The Company accounts for derivatives and hedging activities under the provisions
of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting guidelines for derivative instruments
and hedging activities. SFAS 133 requires the recognition of all derivative
financial instruments as either assets or liabilities in the statement of
financial condition and measurement of those instruments at fair value. Changes
in the fair values of those derivatives are reported in earnings or other
comprehensive income depending on the designation of the derivative and whether
it qualifies for hedge accounting. The accounting for gains and losses
associated with changes in the fair value of a derivative and the effect on the
consolidated financial statements depends on its hedge designation and whether
the hedge is highly effective in achieving offsetting changes in the fair value
or cash flows of the asset or liability hedged. Under the provisions of SFAS
133, the method that is used for assessing the effectiveness of a hedging
derivative, as well as the measurement approach for determining the ineffective
aspects of the hedge, is established at the inception of the hedged instrument.
Designation is established at the inception of a derivative, but redesignation
is permitted. For derivatives designated as fair value hedges, changes in fair
value are recognized in earnings. If the fair value hedge is fully effective,
the change in fair value of the hedged item attributable to the hedged risk, is
adjusted to fair value and is recognized in earnings.
The Company operates internationally, therefore its earnings, cash flows and
financial positions are exposed to foreign currency risk from foreign currency
denominated receivables and payables. These items are denominated in various
foreign currencies, including Euros, British Pounds, Japanese Yen, Singapore
Dollars and Chinese Yuan Renminbi.
Management believes it is prudent to minimize the risk caused by foreign
currency fluctuation. Management minimizes the risk by hedging the majority of
all foreign currency obligations by purchasing future foreign currency contracts
(futures) with one of its financial institutions. Futures are traded on
regulated U.S. and
35
international exchanges and represent commitments to purchase or sell a
particular foreign currency at a future date and at a specific price. Since
futures are purchased for the exact amount of foreign currency needed to pay for
specific purchase orders, the Company feels that it eliminates all risks
relating to foreign currency fluctuation. The Company takes delivery of all
futures, which have been designated as fair value hedges under SFAS 133, to pay
suppliers in the appropriate currency. The difference between the fair value and
nominal amounts of the foreign currency contracts and the related commitments
have been recorded as an asset with a corresponding liability in the
accompanying consolidated balance sheet at June 30, 2003 in the amount of $99.
The hedge contracts flow through cost of goods sold in the consolidated
statement of income as inventory is sold. Senior management and members of the
financial department continually monitor foreign currency risks and the use of
this derivative instrument.
FOREIGN CURRENCY
The functional currency of the Company's foreign subsidiaries is the applicable
local currency. The translation of the applicable foreign currencies into U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts and cash
flows using average rates of exchange prevailing during the year. Adjustments
resulting from the translation of foreign currency financial statements are
accumulated in a separate component of stockholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior consolidated financial
statements to conform to the current presentation.
(3) BUSINESS ACQUISITIONS
On March 26, 2001, the Company acquired (i)the distribution business of the
Schweizerhall Pharma division of Schweizerhall Holding AG, a Switzerland
corporation and (ii) certain assets relating to the Pharmaceutical Ingredients
business of Schweizerhall, Inc., a New Jersey corporation, and a wholly owned
subsidiary of Schweizerhall Holding AG (collectively, "Schweizerhall Pharma").
Schweizerhall Pharma's distribution business is an international pharmaceutical
distribution business with offices located in: Hamburg, Germany; Wormerveer, The
Netherlands (a suburb of Amsterdam); Paris, France; Piscataway, New Jersey;
Singapore; Mumbai, India; and Hong Kong. Its principal activities are the supply
of Active Pharmaceutical Ingredients and Advanced Intermediates.
The total purchase price for the Schweizerhall Pharma acquisition was $25,980.
This amount consisted of 600 restricted shares of the Company's Common Stock,
the assumption of $8,966 of Schweizerhall Holding AG debt, $5,973 in cash, the
issuance of notes of $4,626 and acquisition costs of $1,240. The quoted market
price of the Common Stock on March 26, 2001 of $8.625 per share, was used to
approximate the fair value of the 600 shares issued, which amounted to $5,175.
In connection with the closing of the acquisition the Company assumed certain
debt of Schweizerhall Holding AG in excess of the amount of the purchase price.
As a result, at closing Schweizerhall Holding AG paid $7,162 to the Company.
Subsequent to March 31, 2001 the Company paid Schweizerhall Holding AG $8,987
and was released from a portion of the debt assumed at closing.
The notes payable of $4,626 issued at closing bear interest at 3%. Principal and
interest are payable monthly. Monthly principal payments are determined by the
lesser of the outstanding principal balance or the book value of certain
inventory (as defined in the note agreement) sold in the preceding month. These
notes were paid in full during the year ended June 30, 2002.
The acquisition was accounted for as a purchase and, accordingly, the cost of
the acquisition was allocated to the assets acquired, based upon their estimated
fair values at the date of acquisition. The results of operations of
Schweizerhall Pharma have been included in the accompanying consolidated
statement of income from the date of acquisition. During the quarter ended
September 30, 2001, the Company received $1,571 from the previous owners of
Schweizerhall Pharma in settlement of certain accounts receivable balances,
which was recorded as a reduction to goodwill.
36
The excess of cost over the fair value of assets acquired (goodwill) amounted to
$6,393. Prior to the adoption of SFAS 142 (Note 7) effective July 1, 2002,
goodwill was amortized on a straight-line basis over a period of twenty years.
Amortization of goodwill related to the Schweizerhall Pharma acquisition
amounted to $326 for the year ended June 30, 2002. In accordance with SFAS 142,
there was no amortization of goodwill for the year ended June 30, 2003. The
non-competition agreements are valued at $300 and are being amortized over three
years, the term of the non-competition agreements. An intangible asset related
to customer contracts is valued at $600 and is being amortized over five years.
The allocation of the purchase price has been completed. During fiscal 2003, the
Company reduced goodwill in the amount of $165 as a result of the utilization of
certain net operating loss carry-forwards that were previously reserved for in
purchase accounting.
The purchase agreement provides for two additional payments pertaining to
inventory and tax savings. An additional payment for $2,639 was made in May 2002
in connection with inventory which has been allocated to the additional
inventory purchased and which has been included in the cash paid of $5,973. Any
payments made in connection with the tax savings adjustment will be recorded as
additional goodwill.
In connection with the March 26, 2001 Schweizerhall Pharma acquisition, the
Company recorded liabilities for employee severance and for operating lease
payments as a result of exit plans formulated as of the acquisition date. The
severance accrual relates to involuntary termination of administration and
middle management personnel from the acquired operations. During fiscal 2002,
the Company refined its estimation of severance to include certain additional
administrative and middle management employees. The operating lease payment
relates to equipment and facilities leases assumed by the Company. Additional
goodwill recorded by the Company amounted to $519 and $44 for employee severance
and operating lease payments, respectively, as a result of the Company's exit
plans. Amounts accrued represent management's best estimate of the cost to exit
the equipment and facilities leases, including lease payments and termination
costs, net of recoverable amounts. All exit plan liabilities were paid during
fiscal 2002.
The following unaudited condensed pro forma financial information of the Company
for the year ended June 30, 2001 includes the consolidated results of operations
of the Company as if the acquisition of Schweizerhall had occurred on July 1,
2000:
(unaudited)
2001
----
Net revenue $238,963
Net earnings 1,334
Net earnings per diluted share (1) 0.14
(1) The per share information has been adjusted for a 3-for-2 split of the
common stock, paid January 2, 2003.
The unaudited condensed pro forma financial information includes adjustments to
the Company's historical results to reflect incremental amortization of goodwill
and the non-competition agreement and customer contracts, reduced interest
income generated from cash that was used for acquisition, additional interest
expense and income tax adjustments. The unaudited pro forma consolidated
financial statements do not purport to be indicative of the operating results of
financial position that would have been achieved had the acquisition taken place
on the date indicated or the results that may be obtained in the future.
(4) INVESTMENTS
A summary of trading securities, classified as short-term, follows:
June 30, 2003 June 30, 2002
------------- -------------
Cost Cost
Fair Value Basis Fair Value Basis
---------- ----- ---------- -----
Corporate securities $ 877 $ 594 $ 951 $ 594
The change in the net unrealized holding gains (losses) on trading securities
was $(74), $(37) and $ 53 for fiscal 2003, 2002 and 2001, respectively.
37
There were no held-to-maturity securities as of June 30, 2003, as the Company's
held-to-maturity securities matured in March 2003 resulting in proceeds of $369.
A summary of held-to-maturity securities as of June 30, 2002 follows:
June 30, 2002
-------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost or Cost Gains Losses Value
------------ ----- ------ -----
Held-to-maturity securities:
Short-term investments:
Municipal obligations $369 $ - $ - $369
During fiscal 2001, the Company sold $7,900 of held-to-maturity securities
before their maturity date and realized a gain of $40. The proceeds from the
sale of these securities were used in the acquisition of the Schweizerhall
Pharma business (note 3).
(5) INVENTORY
Inventory consists of the following:
June 30
-------
2003 2002
---- ----
Finished goods $41,221 $35,897
Work in process 157 134
Raw materials 318 240
------ -------
Total $41,696 $36,271
====== ======
(6) NOTES RECEIVABLE
The Company currently holds seven notes receivable with outstanding balances
aggregating $1,129 and $813 at June 30, 2003 and 2002, respectively, which have
arisen from sales of property. The notes are either secured by a first mortgage
on the real property sold or collateralized by a security interest in the asset
sold. The notes range in length from four to nineteen years and pay interest at
a fixed rate. The range of fixed rates on the notes is 4.0% to 9.5%. Included in
current assets are notes receivable due within one year totaling $113 and $122
at June 30, 2003 and 2002, respectively.
(7) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has adopted the provisions of SFAS 141 and 142 as of July 1, 2002
(note 2). The Company has evaluated its existing goodwill that was acquired in
prior purchase business combinations and has determined that no adjustment or
reclassification to intangible assets at July 1, 2002 is required in order to
conform to the new criteria in SFAS 141 for recognition apart from goodwill.
As of June 30, 2003 and June 30, 2002, the Company had intangible assets subject
to amortization of $1,020 and $1,287, respectively, and related accumulated
amortization of $608 and $586, respectively, which pertained to customer lists
and covenants not to compete and have been included in other assets on the
accompanying consolidated balance sheets. Amortization expense for intangible
assets subject to amortization amounted to $241 and $352 for the year ended June
30, 2003 and 2002, respectively. The estimated aggregate amortization expense
for intangible assets subject to amortization for each of the succeeding years
ended June 30, 2004 through June 30, 2006 are as follows: 2004: $202; 2005:
$120; 2006: $90.
As required by SFAS 142, the Company performed impairment tests on goodwill as
of July 1, 2002. As a result of the impairment tests, the Company recorded a
goodwill impairment charge of $1,873 which has been included as a cumulative
effect of an accounting change in the accompanying consolidated statement of
income for the year ended June 30, 2003. Under SFAS 142, goodwill impairment
exists if the net book value of a reporting unit exceeds its estimated fair
value. The Company estimated the fair value of its reporting units by using a
combination of discounted cash flow analyses and comparisons with the market
values of similar publicly-traded companies.
The Company's $1,873 impairment charge was related to the impairment of the
goodwill associated with CDC Products Corp. ("CDC"). CDC was acquired by the
Company during
38
fiscal 1999. Due to an increase in competition from local sanitary supply
companies in the markets CDC operates in, recent operating profits and cash
flows were lower than expected. Based on that trend, the earnings forecast for
the next five years was revised. During the year ended June 30, 2003, a goodwill
impairment charge of $1,873 was recognized in the CDC reporting unit. The fair
value of that reporting unit was determined by using a combination of discounted
cash flow analyses and comparisons with the market values of similar
publicly-traded companies. The revised fair value of this unit was allocated to
the assets and liabilities of the business unit to arrive at an implied fair
value of goodwill, based upon known facts and circumstances, as if the
acquisition occurred currently.
The following table displays a roll forward of the carrying amount of goodwill
for the year ended June 30, 2003, by business segment:
Institutional
Sanitary
Supplies & Consolidated
Health Sciences Other Totals
--------------- ----- ------
Balance at
6/30/02 $7,003 $2,818 $9,821
Adjustment for tax
savings from
acquired NOL (165) - (165)
Impairment losses - (1,873) (1,873)
----- ------ -----
Balance at 6/30/03
$6,838 $ 945 $7,783
===== ===== =====
39
Goodwill amortization for the years ended June 30, 2002 and 2001 was $539 and
$275, respectively. The following table shows the results of operations as if
SFAS No. 142 was applied to prior periods:
Year Ended
June 30,
2003 2002 2001
---- ---- ----
Income before cumulative effect
of accounting change, as reported $9,468 $4,945 $4,245
Add back: Goodwill amortization,
net of tax - 400 205
----- ----- -----
Adjusted income before cumulative
effect of accounting change $9,468 $5,345 $4,450
===== ===== =====
Basic income per common share:
Income before cumulative effect
of accounting change, as reported $ 0.96 $ 0.51 $ 0.46
Goodwill amortization,
net of tax - 0.04 0.02
----- ----- -----
Adjusted income before cumulative
effect of accounting change $ 0.96 $ 0.55 $ 0.48
===== ===== =====
Diluted income per common share:
Income before cumulative effect
of accounting change, as reported $ 0.94 $ 0.50 $ 0.46
Goodwill amortization,
net of tax - 0.04 0.02
----- ----- -----
Adjusted income before cumulative
effect accounting change $ 0.94 $ 0.54 $ 0.48
===== ===== =====
(8) ENVIRONMENTAL REMEDIATION
During fiscal 1993 the Company announced the closing of its manufacturing
subsidiary located in Carlstadt, New Jersey. At the same time an environmental
consultant was engaged by the Company to determine the extent of contamination
on the site and develop a plan of remediation. Based on the initial estimates
from the consultant a liability of $1,500 was established in fiscal 1993. During
fiscal 1997, after additional testing was completed, the Company received a
revised estimate from the consultant and an additional liability of $800 was
recorded. At June 30, 2002, the remaining liability was $1,284.
During fiscal 2003, based on continued monitoring of the contamination on the
site and the current proposed plan of remediation, the Company received a
revised estimate from the consultant, which estimated that the remaining costs
of the remediation could be an amount between $1,550 and $3,200. During fiscal
2003, the Company recorded an additional liability in the amount of $266
resulting in a liability as of June 30, 2003 in the amount of $1,550. However,
these matters, if resolved in a manner different from those assumed in current
estimates could have a material adverse effect on financial condition, operating
results and cash flows when resolved in a future reporting period. Other than
the remediation associated with the Carlstadt, New Jersey facility, the Company
is not aware of any material environmental liabilities.
(9) FINANCING ARRANGEMENTS
In May 2002, the Company entered into a $15,000 revolving credit agreement with
a financial institution which expires June 30, 2004. Under the credit agreement,
the Company may obtain credit through direct borrowings and letters of credit.
The obligations of the Company under the credit agreement are guaranteed by
certain of the Company's subsidiaries and is secured by sixty-five percent of
the capital of certain non-domestic subsidiaries which the Company owns. There
is no borrowing base on the credit agreement. Interest under the credit
agreement is at LIBOR plus 1.50%, which was 2.62% and 3.34% at June 30, 2003 and
2002, respectively. The credit agreement contains several financial covenants
requiring, among other things, minimum levels of debt service and tangible net
worth. The Company is also subject to certain restrictive debt covenants
including liens, limitations on indebtedness, guarantees, sale of assets, sales
of receivables, and loans and investments. In March 2003, the Company obtained a
waiver to its credit agreement which allowed it to guarantee an obligation of
one of its wholly-owned subsidiaries to a vendor under a distribution agreement.
The Company was in compliance with all covenants at June 30, 2003.
40
At June 30, 2003 and 2002, the Company had available lines of credit with
foreign financial institutions totaling $16,588 and $14,385, respectively. The
Company entered into the agreements with foreign banks as part of the
Schweizerhall Pharma acquisition. The Company has issued a cross corporate
guarantee to the foreign banks. Short term loans under these agreements bear
interest at LIBOR plus 0.75%, which was 1.87% and 2.59% at June 30, 2003 and
2002, respectively. The Company is not subject to any financial covenants under
these arrangements.
Under the above financing arrangements, the Company had short-term bank loans of
$3,286 and $1,199 in letters of credit leaving an unused facility of $27,103 at
June 30, 2003. For June 30, 2002 the Company utilized $7,336 in short-term loans
and $1,544 in letters of credit leaving an unused facility of $20,505. The
weighted average interest rate on short-term loans outstanding for the years
ended June 30, 2003 and 2002, was 4.80% and 4.70% respectively.
(10) NET INCOME PER COMMON SHARE
A reconciliation between the numerators and denominators of the basic and
diluted income per share computation for net income follows:
2003 2002 2001
---- ---- ----
Income before cumulative effect
of accounting change $9,468 $4,945 $4,245
Cumulative effect of accounting
change 1,873 - -
----- ----- -----
Net income available for common
shareholders $7,595 $4,945 $4,245
===== ===== =====
Weighted average common shares
(basic)(a) 9,909 9,779 9,184
Effect of dilutive securities:
Stock options (a) 208 54 38
----- ----- -----
Weighted average common and
potential common shares
outstanding (diluted)(a) 10,117 9,833 9,222
====== ===== =====
Basic income per common share(a):
Income before cumulative effect
of accounting change $ 0.96 $ 0.51 $ 0.46
Cumulative effect of accounting
change 0.19 - -
----- ----- -----
Net income $ 0.77 $ 0.51 $ 0.46
===== ===== =====
Diluted income per common share(a):
Income before cumulative effect
of accounting change $ 0.94 $ 0.50 $ 0.46
Cumulative effect of accounting
change 0.19 - -
----- ----- -----
Net income $ 0.75 $ 0.50 $ 0.46
===== ===== =====
(a) Share and per share information have been adjusted for a 3-for-2 split of
the common stock, paid January 2, 2003.
In fiscal 2003, 2002, and 2001, employee stock options of 240, 353, and 600,
respectively, were not included in the diluted income per common share
calculation because their effect would have been anti-dilutive.
(11) STOCK BASED COMPENSATION PLANS
In September 2002, the Company adopted the Aceto Corporation 2002 Stock Option
Plan (2002 Plan), which was ratified by the Company's shareholders at the
December 2002 Annual Meeting. Under the 2002 Plan, options or restricted stock
to purchase up to 750 shares of the Company's common stock may be granted by the
Company to officers, directors, employees and agents of the Company. The
exercise price per share shall be not less than the fair market value of Aceto
common stock on the date of grant and
41
each option may not become exercisable less than six months from the date it is
granted. Restricted stock may be granted to an eligible participant in lieu of a
portion of any annual cash bonus earned by such participant. Such award may have
a premium in shares greater than the portion of bonus paid in restricted stock.
The award vests ratably over a period of years as determined by the Board. The
premium vests when the award is fully vested, provided that the participant is
in the employ of the Company when vesting occurs.
In December 2002, the Company granted 470 options to employees and directors
under the Plan at an exercise price of $9.63 which was equal to the fair market
value of the common stock on the date of grant. 397 of these options vest in
full on the fifth anniversary of the date of grant subject, however, to
acceleration beginning after one year from the date of grant, if the publicly
traded price of the Company's common stock exceeds certain levels for a certain
number of trading days. The remaining 73 options vest on the first anniversary
of the date of grant. The options expire no later than ten years from the date
of grant. As of June 30, 2003, there were 281 shares of common stock available
for grant as either options or restricted stock under the 2002 Plan.
In December 1998, the Company adopted the Aceto Corporation 1998 Omnibus Equity
Award Plan (1998 Plan). In accordance with the 1998 Plan the Company's Board of
Directors (Board) may grant up to 750 shares of common stock in the form of
stock options or restricted stock to eligible participants. The exercise price
per share, determined by the Board, for options granted cannot be less than the
fair market value of the stock on the date of grant. The options vest as
determined by the Board and expire no later than ten years from the date of
grant. Restricted stock may be granted to an eligible participant in lieu of a
portion of any annual cash bonus earned by such participant. Such award may have
a premium in shares greater than the portion of bonus paid in restricted stock.
The award vests ratably over a period of years as determined by the Board. The
premium vests when the award is fully vested, provided that the participant is
in the employ of the Company when vesting occurs. Under the 1998 Plan, there
were 67 and 72 shares of common stock available for grant as either options or
restricted stock at June 30, 2003 and 2002, respectively.
Under the terms of the Company's 1980 Stock Option Plan (1980 Plan), options may
be issued to officers and key employees. The exercise price per share can be
greater or less than the market value of the stock on the date of grant. The
options vest either immediately or over a period of years as determined by the
Board of Directors and expire no later than five or ten years from the date they
are fully vested. Under the 1980 Plan, options to purchase 668 and 632 shares of
common stock were available for grant at June 30, 2003 and 2002, respectively.
The Board does not intend to issue additional options from this Plan.
The following tabulations summarize the shares of common stock under option for
all plans at June 30, 2003, 2002 and 2001, and the activity with respect to
options for the respective years then ended:
Shares Weighted average
subject to exercise price
option per share
------ ---------
Balance at June 30, 2000 1,002 $ 6.63
Granted 106 6.42
Exercised (35) 5.21
Forfeited/lapsed (104) 6.69
-------------------------------------------------------------
Balance at June 30, 2001 969 $ 6.66
Granted 182 6.56
Exercised (27) 5.27
Forfeited (93) 6.33
-------------------------------------------------------------
Balance at June 30, 2002 1,031 $ 6.71
Granted 470 9.63
Exercised (485) 6.98
Forfeited/lapsed (53) 6.66
-------------------------------------------------------------
Balance at June 30, 2003 963 $ 7.96
Options exercisable at June 30, 2003, 2002 and 2001 were 359, 674 and 537,
respectively. The weighted average exercise price for options exercisable at
June 30, 2003, 2002 and 2001 was $6.48, $6.93 and $6.72, respectively. At June
30, 2003,
42
outstanding options had expiration dates ranging from December 10, 2008 to
December 31, 2015.
Under the 1980 Plan, during the period options become exercisable, compensation
is charged to operations for the excess of fair market value over the option
price at the date of grant. Such charges to operations were $-0-, $-0- and $13
in fiscal 2003, 2002 and 2001, respectively. Under the 2002 Plan and the 1998
Plan, compensation is recorded for the value of restricted stock granted. There
were 19, 36 and 29 shares of restricted stock granted during fiscal 2003, 2002
and 2001, respectively. Such charges to operations were $225, $214 and $199 in
fiscal 2003, 2002 and 2001, respectively.
Summarized information about stock options outstanding and exercisable at June
30, 2003 was as follows:
Outstanding Exercisable
Exercise Number of Average Average Number of Average
Price Range Shares Life(1) Price(2) Shares Price(2)
----------- ------ ------- -------- ------ --------
$6.00 - 6.99 439 9.0 $6.14 304 $6.20
7.00 - 8.50 55 5.6 8.28 55 8.28
8.51 - 9.63 469 9.5 9.63 - -
(1) Weighted average contractual life remaining, in years.
(2) Weighted average exercise price.
The per share weighted average fair value of stock options granted during 2003,
2002 and 2001 was $5.51, $2.18 and $2.22, respectively, on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
Risk-free
Date of Expected Expected interest Dividend
Grant volatility(%) life(years) rate(%) yield(%)
-----------------------------------------------------------------------
2003
12/05/02 40 7.5 3.79 2.22
2002
12/06/01 20 7.5 5.46 3.25
2001
10/25/00 20 7.5 5.68 3.08
12/17/00 20 7.5 5.31 3.29
3/27/01 20 7.5 5.01 3.48
4/05/01 20 7.5 4.97 3.53
5/08/01 20 7.5 5.24 3.45
(12) INTEREST AND OTHER INCOME
Interest and other income earned during fiscal 2003, 2002 and 2001 were
comprised of the following:
2003 2002 2001
---- ---- ----
Dividends $ 139 $ 196 $ 128
Interest 458 212 468
Net gain (loss) on investments (74) (37) 53
Royalty income - - 354
Miscellaneous 190 39 223
------ ------ ------
$ 713 $ 410 $ 1,226
====== ====== ======
(13) INCOME TAXES
The components of income before the provision for income taxes are as follows:
2003 2002 2001
---- ---- ----
Domestic operations $ 4,912 $ 4,922 $ 6,503
Foreign operations 8,454 2,456 283
------ ------ ------
$13,366 $ 7,378 $ 6,786
====== ====== ======
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at June 30, 2003 and 2002 are presented below:
43
2003 2002
----- -----
Deferred tax assets:
Accrued environmental remediation
liabilities not currently
deductible $ 588 $ 502
Accrued retirement plan 396 384
Accrued compensation 133 391
Additional costs inventoried for
tax purposes 101 120
Allowance for doubtful accounts
receivable 219 235
Differences in depreciation of
property and equipment 92 73
Differences in amortization of
intangible assets 64 45
Accrued professional services 15 39
Net operating loss carry forwards 5,537 1,870
----- -----
Total gross deferred tax assets 7,145 3,659
Valuation allowances (5,537) (1,870)
----- -----
Total net deferred tax assets 1,608 1,789
----- -----
Deferred tax liabilities:
Unrealized gain on investments (107) (139)
Goodwill (93) (46)
----- -----
Total gross deferred tax
liabilities (200) (185)
----- -----
Net deferred tax assets $1,408 $1,604
===== =====
The net change in the total valuation allowance for the year ended June 30, 2003
was an increase of $3,667 resulting from a valuation allowance recorded for net
operating losses in certain foreign jurisdictions. A valuation allowance is
provided when it is more likely than not that some portion, or all, of the
deferred tax assets will not be realized. The Company has established valuation
allowances primarily for net operating loss carryforwards in certain foreign
countries. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. In order
to fully realize the net deferred tax assets recognized at June 30, 2003, the
Company will need to generate future domestic taxable income of approximately
$4,819. Domestic taxable income for fiscal 2003 and 2002 was approximately
$5,288 and $4,734, respectively.
Based upon the level of historical taxable income and projections for taxable
income over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. There can be no assurance, however, that the
Company will generate any earnings or any specific level of continuing earnings
in the future. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries since substantially all of these earnings are expected to be
permanently reinvested in foreign operations. Determination of the amount of
unrecognized deferred U.S. income tax liabilities and potential foreign tax
credits is not practical to calculate because of the complexity of this
hypothetical calculation.
Reconciliation of the statutory Federal income tax rate and the effective tax
rate for the fiscal years ended June 30, 2003, 2002 and 2001 follows:
44
2003 2002 2001
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State and local taxes, net
of Federal income tax
benefit 2.2 2.6 2.7
Foreign tax rate differential (9.9) (4.9) 0.5
Other 2.9 1.3 0.2
---- ---- ----
Effective tax rate 29.2% 33.0% 37.4%
==== ==== ====
At June 30, 2003, the Company had net operating loss carry forwards for foreign
income tax purposes of approximately $19,500 which are available to offset
future foreign taxable income, if any, of which $4,767 will expire from the year
2004 through the year 2007 and others which have no expiration date.
(14) Supplemental Cash Flow Information
Cash paid for interest and income taxes during fiscal 2003, 2002 and 2001 was as
follows:
2003 2002 2001
---- ---- ----
Interest paid $ 560 $ 586 $ 248
Income taxes paid 4,234 1,405 3,642
In connection with the acquisition of Schweizerhall Pharma in March 2001, the
Company assumed debt of $8,966, issued $4,626 of notes payable and issued 600
common shares from treasury stock at an average cost of $9.84 each.
In connection with the settlement of arbitration (note 19) in the fourth quarter
of fiscal 2001, the Company recorded a reduction to long term liabilities and
goodwill for $360.
(15) RETIREMENT PLANS
The Company has retirement plans in which employees are eligible to participate.
The Company's annual contribution per employee, which is at management's
discretion, is based on a percentage of the employee's compensation. The
Company's provisions for contributions amounted to $1,017, $895 and $864 in
fiscal 2003, 2002 and 2001, respectively.
(16) SEGMENT INFORMATION
The Company, prior to fiscal 2002, was organized into six reportable segments,
organized by product. Effective for the fiscal year ended June 30, 2002, the two
segments formerly known as Industrial Chemicals and Organic Intermediates &
Colorants have been combined into a segment called Chemicals and Colorants.
Effective for the fiscal year ended June 30, 2003, the two segments formerly
known as Pharmaceuticals, Biochemicals & Nutritionals and Pharmaceutical
Intermediates & Custom Manufacturing have been combined into a segment called
Health Sciences. The amounts previously reported for the former segments have
been combined accordingly.
Therefore, the Company's four reportable segments, organized by product are as
follows:
(1) Agrochemicals, whose products include herbicides, fungicides and
insecticides, as well as a sprout inhibitor for potatoes, (2) Chemicals and
Colorants, whose products include a variety of specialty chemicals used in
plastics, resins, adhesives, coatings, food, flava, fragrance, cosmetics, metal
finishing, electronics and many other areas in addition to dye and pigment
intermediates used in the color-producing industries like textiles, inks, paper
and coatings, as well as intermediates used in the production of agrochemicals;
(3) Health Sciences, which include the active ingredients for generic
pharmaceuticals, vitamins and nutritional supplements, as well as products used
in preparation of pharmaceuticals, primarily by major innovative drug companies
and (4) Institutional Sanitary Supplies & Other, whose products include cleaning
solutions, fragrances and deodorants used by commercial and industrial
establishments. The Company does not allocate assets by segment. The Company's
chief decision maker evaluates performance of the segments based on gross
profit.
45
Institutional
Sanitary
Agro- Chemicals Supplies Consolidated
chemicals & Colorants Health Sciences & Other Totals
2003
----
Net sales $14,356 91,579 159,858 5,483 $271,276
Gross Profit $ 4,123 12,673 29,569 2,418 $ 48,783
Unallocated
cost of sales(1) 3,487
-------
Net gross
profit $ 45,296
=======
2002
----
Net sales $13,540 90,494 120,021 5,274 $229,329
Gross Profit $ 4,215 13,502 20,240 2,294 $ 40,251
Unallocated
cost of sales(1) 2,970
-------
Net gross
profit $ 37,281
=======
2001
----
Net sales $13,133 97,902 61,137 5,982 $178,154
Gross Profit $ 4,943 15,529 11,948 1,562 $ 33,982
Unallocated
cost of sales(1) 5,365
-------
Net gross
profit $ 28,617
=======
(1) Represents freight and storage costs that are not allocated to a segment.
46
Net sales and long-lived assets by location as of and for the years ended June
30, 2003, 2002 and 2001 were as follows:
Net Sales Gross Profit Long-Lived Assets
--------- ------------ -----------------
2003 2002 2001 2003 2002 2001 2003 2002
---- ---- ---- ---- ---- ---- ---- ----
United States $178,597 $163,886 $161,741 $30,030 $26,798 $26,356 $1,457 $1,731
Germany 35,219 25,729 5,926 5,671 4,494 1,005 556 445
The Netherlands 7,568 5,876 1,576 1,955 1,194 359 113 130
France 10,032 12,323 3,645 1,558 1,612 357 61 91
Asia-Pacific 39,860 21,515 5,266 6,082 3,183 540 88 35
------- ------- ------- ------ ------ ------ ----- -----
Total $271,276 $229,329 $178,154 $45,296 $37,281 $28,617 $2,275 $2,432
======= ======= ======= ====== ====== ====== ===== =====
47
(17) FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2003 and 2002 the Company had future foreign exchange contracts that
have a notional amount of $3,431 and $28, respectively. The contracts have
varying maturities extending to November 2003. At June 30, 2003 and 2002 the
Company had not hedged open purchase commitments of approximately $51 and
$1,185, respectively. For fiscal 2003, 2002 and 2001, gains and losses on
foreign currency transactions, including terminated hedges that occurred prior
to the transaction date, were not material.
The Company is exposed to credit losses in the event of non-performance by the
financial institutions, who are the counter parties, on its future foreign
currency contracts. The Company anticipates, however, that the financial
institutions will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral to support financial
instruments, but monitors the credit standing of the financial institution.
OFF-BALANCE SHEET RISK
Commercial letters of credit are issued by the Company during the ordinary
course of business through major domestic banks as requested by certain
suppliers. The Company had open letters of credit of approximately $1,199 and
$1,544 as of June 30, 2003 and 2002, respectively. The terms of these letters of
credit are all less than one year. No material loss is anticipated due to
non-performance by the counter parties to these agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of all financial instruments classified as a current asset
or current liability are deemed to approximate fair value because of the short
maturity of these instruments. The fair value of foreign currency contracts
(used for hedging purposes) was estimated by obtaining quotes from brokers and
the difference between the fair value and contract value was $99. The difference
between the fair value of long-term notes receivable and their carrying value at
both June 30, 2003 and 2002 was not material. The fair value of the Company's
notes receivable was based upon current rates offered for similar financial
instruments to the Company.
BUSINESS AND CREDIT CONCENTRATION
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of trade receivables. The Company's
customers are dispersed across many industries and are located throughout the
United States as well as in Mexico, Brazil, Malaysia, France, Canada, Germany,
Australia, the United Kingdom, The Netherlands and others. The Company estimates
an allowance for doubtful accounts based upon the credit worthiness of its
customers as well as general economic conditions. Consequently, an adverse
change in those factors could affect the Company's estimate of this allowance.
The Company as a policy does not require collateral from its customers. At June
30, 2003, five customers accounted for 17% of net trade accounts receivable. At
June 30, 2002, five customers accounted for 18% of net trade accounts receivable
concentration. At June 30, 2003 and 2002, the top five customers accounted for
20% and 16%, respectively, of net sales.
No single product accounted for as much as 10% of net sales in fiscal 2003, 2002
or 2001. One supplier accounted for 10% of purchases in fiscal 2003. No supplier
accounted for as much as 10% of total purchases in fiscal 2002 or 2001.
48
During the fiscal years ended June 30, 2003 and 2002, approximately 59% and 60%,
respectively, of the Company's purchases of chemicals came from Asia and
approximately 29% and 25%, respectively, from Europe.
The Company maintains operations located outside of the United States. Net
assets located in Europe and Asia approximate $10,238 and $10,378, respectively
at June 30, 2003.
(18) COMMITMENTS AND CONTINGENCIES
(a) A subsidiary of the Company markets certain agricultural chemicals which are
subject to the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA). FIFRA
requires that test data be provided to the Environmental Protection Agency (EPA)
to register, obtain and maintain approved labels for pesticide products. The EPA
requires that follow-on registrants of these products compensate the initial
registrant for the cost of producing the necessary test data on a basis
prescribed in the FIFRA regulations. Follow-on registrants do not themselves
generate or contract for the data. However, when FIFRA requirements mandate the
generation of new test data to enable all registrants to continue marketing a
pesticide product, often both the initial and follow-on registrants establish a
task force to jointly undertake the testing effort. The Company is presently a
member of two such task force groups and may be required to make additional
payments in the future.
(b) The Company and its subsidiaries are subject to various claims which have
arisen in the normal course of business. The impact of the final resolution of
these matters on the Company's results of operations or liquidity in a
particular reporting period is not known. Management is of the opinion, however,
that the ultimate outcome of such matters will not have a material adverse
effect upon the Company's financial condition or liquidity.
(c) In 2002 a vendor made allegations that the Company breached a purchase
contract. As a result, the Company recorded a liability during fiscal 2003 of
$450. At June 30, 2003 the remaining liability is $450. In the opinion
of management, based on its knowledge of the facts and discussions with counsel,
the ultimate outcome of this allegation is not expected to have a material
adverse effect on the Company's consolidated financial position, although the
resolution in any reporting period of this matter could have a significant
impact on the Company's results of operations for that period.
(d) The Company currently leases office facilities in the United States, The
Netherlands, Germany, France, China and Singapore. In addition, a domestic
subsidiary leases a manufacturing facility under an operating lease expiring
December 2009. At June 30, 2003, the future minimum lease payments in the
aggregate and for each of the five succeeding years are as follows:
Fiscal year Amount
----------- ------
2004 $ 1,418
2005 1,350
2006 1,316
2007 1,212
2008 1,136
Thereafter 2,941
------
$ 9,373
======
Total rental expense amounted to approximately $1,444, $1,471 and $983 for
fiscal 2003, 2002 and 2001, respectively.
(e) In February 2001, the Company entered into a three-year contract with a
vendor, commencing September 1, 2001, to purchase specified amounts of a certain
product to be sold to a customer during the life of the contract. At June 30,
2003, future minimum purchases required to be
49
made under the contract in the aggregate and for each of the five succeeding
years are as follows:
Fiscal Year Amount
2004 $12,491
2005 835
2006 -
2007 -
2008 -
Thereafter -
------
$13,326
=======
Total purchases under the contract amounted to approximately $0, $3,024 and $0
for fiscal 2003, 2002 and 2001, respectively.
(19) SETTLEMENT OF ARBITRATION
During the fourth quarter of fiscal 2001, the Company received a decision from
the arbitrators regarding the claims made by the Company and previous owner of
CDC. The decision denied all claims made against the Company by the previous
owner and reduced the purchase price of CDC by $360. As a result the Company
recorded the reduction of the outstanding liability owed to the previous owner
by $360 and recorded a reduction to goodwill for the same amount. The liability
was paid in full as of August 2002.
(20) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 will spread out the reporting of expenses
related to restructurings initiated after 2002, because commitment to a plan to
exit an activity or dispose of long-lived assets will no longer be enough to
record a liability for the anticipated costs. Instead, companies will record
exit and disposal costs when they are "incurred" and can be measured at fair
value, and they will subsequently adjust the recorded liability for changes in
estimated cash flows. The Company adopted the provisions of SFAS 146 as of
January 1, 2003. The adoption of this statement did not have a significant
impact on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS 148). SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally defined
by SFAS No. 123, "Accounting for Stock-Based Compensation." Additionally, SFAS
148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both the annual and interim financial statements about the method
of accounting for stock-based compensation and the effect of the method used on
reported results. The transitional requirements of SFAS 148 are effective for
all financial statements for fiscal years ending after December 15, 2002. The
Company adopted the disclosure portion of this statement for the fiscal quarter
ended March 31, 2003. The application of the disclosure portion of this standard
had no impact on the Company's consolidated financial position or results of
operations. The FASB recently indicated that it will require stock-based
employee compensation to be recorded as a charge to earnings pursuant to a
standard on which it is currently deliberating. The FASB anticipates issuing an
Exposure Draft in the fourth quarter of 2003 and a final statement in the second
quarter of 2004. The Company will continue to monitor the FASB's progress on the
issuance of this standard as well as evaluate the Company's position with
respect to current guidance.
50
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The Company does
not believe that the adoption of SFAS No. 149 will have a material impact on its
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity", which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity in its
statement of financial position. SFAS No. 150 is effective for new or modified
financial instruments beginning July 1, 2003 and for existing instruments
beginning August 1, 2003. The Company does not believe that the adoption of SFAS
No. 150 will have a material impact on its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" ("Int. No. 45"), which addresses the disclosure to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees. Int. No. 45 also requires the guarantor to
recognize a liability for the non-contingent component of the guarantee, which
is the obligation to stand ready to perform in the event that specified
triggering events or conditions occur. The recognition and measurement
provisions of Int. No. 45 are effective for all guarantees entered into or
modified after December 31, 2002. The Company has not entered into any such
guarantees and therefore the adoption of this standard did not impact the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("Int. No. 46") an interpretation of ARB No. 51.
Int. No. 46 addresses consolidation by business enterprises of variable interest
entities. Int. No. 46 applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. Int. No. 46 applies in the first year or
interim period beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. The Company is in the process of determining the impact of implementing
Int. No. 46 on its consolidated financial statements.
(21) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of the unaudited quarterly results of operations for
the years ended June 30, 2003 and 2002.
QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands except per share amounts)
Year Ended June 30, 2003
Quarter Ended
Sept.30,2002 Dec.31,2002 Mar.31,2003 June 30,2003
------------ ----------- ----------- ------------
Net sales $68,022 $64,633 $70,561 $68,060
Gross profit 11,245 11,006 11,794 11,251
Income before
cumulative
effect of
accounting
change 2,323 2,328 2,411 2,406
Net income 450(2) 2,328 2,411 2,406
Income before
cumulative
effect of
accounting
change per
common share
- diluted (1) 0.24 0.23 0.24 0.23
Net income per
common share
- diluted (1)(2) 0.05(2) 0.23 0.24 0.23
51
Year Ended June 30, 2002
Quarter Ended
Sept.30,2001 Dec.31,2001 Mar.31,2002 June 30,2002
------------ ----------- ----------- ------------
Net sales $47,641 $55,365 $61,594 $64,729
Gross profit 7,246 9,466 9,757 10,812
Net income 535 1,243 1,523 1,644
Net income per
common share
- diluted (1) 0.05 0.13 0.15 0.17
(1) Adjusted for a 3-for-2 stock split of the common stock, paid January 2,
2003.
(2) Reflects a charge of $1,873 for a cumulative effect of an accounting change
resulting from an impairment of goodwill which was determined to be required
upon the Company's adoption of SFAS 142.
Net income per common share calculation for each of the quarters is based on
weighted average number of shares outstanding in each period. Therefore, the sum
of the quarters in a year does not necessarily equal the year's net income per
common share.
52
Schedule II
ACETO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 2003, 2002 and 2001
(dollars in thousands)
Charged
Balance at to costs Charged Balance
beginning and to other at end
Description of year expenses accounts Deductions of year
----------- ---------- -------- -------- ---------- -------
Year ended June 30, 2003:
Allowance for doubtful
accounts $ 657 $ 446 - $ 164(a) $ 939
=== === === ===
Year ended June 30, 2002:
Allowance for doubtful
accounts $ 316 $ 566 - $ 225(a) $ 657
=== === === ===
Year ended June 30, 2001:
Allowance for doubtful
accounts $ 239 $ 307 - $ 230(a) $ 316
=== === === ===
(a) Specific accounts written off as uncollectible, net of recoveries.
53
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 4(a)(iii) to Registration Statement No. 2-70623 on Form S-8
(S-8 2-70623)).
3.2 Certificate of Amendment dated November 21, 1985 to Restated
Certificate of Incorporation (incorporated by reference to Exhibit
3(ii) to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1986).
3.3 By-laws(incorporated by reference to Exhibit 3(iii)(c) to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1998).
10.1 Profit Sharing Plan, as amended and restated effective July 1, 1989
(incorporated by reference to Exhibit 10(iii)(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1995).
10.2 401(k) Plan, effective August 1, 1997, (incorporated by reference to
Exhibit 10 (iii) to the Company's Annual Report on Form 10-K for the
year ended June 30, 1998).
10.3 Supplemental Executive Retirement Plan, effective June 30, 1985, as
amended and restated, effective July 1, 1992 (incorporated by
reference to Exhibit 10(iv)(a) to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1993).
10.4 Aceto Corporation Stock Option Plan (as Amended and Restated effective
as of September 19, 1990) (and as further Amended effective June 9,
1992) (incorporated by reference to Exhibit 10(v)(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1992).
10.5 1998 Aceto Corporation Omnibus Equity Award Plan (incorporated by
reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999).
10.6 Lease between Aceto Corporation and M. Parisi & Son Construction Co.,
Inc. for office space at One Hollow Lane, Lake Success, NY dated April
28, 2000 (incorporated by reference to Exhibit 10(vi) to the Company's
Annual Report Form 10-K for the fiscal year ended June 30, 2000).
10.7 Lease between Aceto Corporation and M. Parisi & Son Construction Co.,
Inc. for office space at One Hollow Lane, Lake Success, NY dated April
28, 2000 (incorporated by reference to Exhibit
54
10(vi)(b) to the Company's Annual Report on Form 10-K for the year
ended June 30, 2000).
10.8 Lease between CDC Products Corp. and Seaboard Estates for
manufacturing and office space at 1801 Falmouth Avenue, New Hyde Park,
NY dated October 31, 1999 (incorporated by reference to Exhibit
10(vi)(c) to the Company's Annual Report on Form 10-K for the year
ended June 30, 2000).
10.9 Stock Purchase Agreement among Windham Family Limited Partnership,
Peter H. Kliegman, CDC Products Corp. and Aceto Corporation
(incorporated by reference to Exhibit 10(vii) to the Company's Annual
Report on Form 10-K for the year ended June 30, 1999).
10.10 Asset Purchase Agreement among Magnum Research Corporation, CDC
Products Corp., Roy Gross and Aceto Corporation (incorporated by
reference to Exhibit 10 (viii) to the Company's Annual Report on Form
10-K for the year ended June 30, 2000).
10.11 Asset Purchase Agreement between Schweizerhall, Inc. and Aceto
Corporation (incorporated by reference to Exhibit 10(ix) to the
Company's Annual Report on Form 10-K for the year ended June 30,
2000).
10.12 Purchase and Sale Agreement among Schweizerhall Holding AG, Chemische
Fabrik Schweizerhall, Schweizerhall, Inc., Aceto Corporation and Aceto
Holding B.V., I.O. (incorporated by reference to Exhibit 2.1 to the
Company's report on Form 8-K dated April 4, 2001).
10.13 Loan Guarantee between Aceto Corporation and subsidiaries and
Deutsche Bank AG dated March 22, 2001 (incorporated by reference to
Exhibit 10.13 to the Company's report on Form 10-K for the year ended
June 30, 2001).
10.14 Credit Agreement between Aceto Corporation and Subsidiaries and
JPMorgan Chase Bank dated May 10, 2002 (incorporated by reference to
Exhibit 10.14 to the Company's report on Form 10-K for the year ended
June 30, 2002).
21* Subsidiaries of the Company.
23* Consent of KPMG LLP.
31.1** Certification by CEO Leonard S. Schwartz pursuant to U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of
2002.
31.2** Certification by CFO Douglas Roth pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification by CEO Leonard S. Schwartz pursuant to U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of
2002.
55
32.2** Certification by CFO Douglas Roth pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to the Company's Form 10-K filed on September 26,
2003.
** Filed herewith
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ACETO CORPORATION
By /s/ Leonard S. Schwartz
-----------------------
Leonard S. Schwartz
Chairman, President
and Chief Executive Officer
Date: October 21, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Leonard S. Schwartz Chairman, President and 10-21-03
----------------------- Chief Executive Officer
Leonard S. Schwartz (Principal Executive Officer)
/s/ Douglas Roth Secretary/Treasurer and 10-21-03
----------------------- Chief Financial Officer
Douglas Roth (Principal Financial and
Accounting Officer)
/s/ Stanley Fischer Director 10-21-03
-----------------------
Stanley Fischer
/s/ Samuel I. Hendler Director 10-21-03
-----------------------
Samuel I. Hendler
/s/ Robert Wiesen Director 10-21-03
-----------------------
Robert Wiesen
/s/ Ira S. Kallem Director 10-21-03
-----------------------
Ira S. Kallem
/s/ Albert L. Eilender Director 10-21-03
-----------------------
Albert L. Eilender
/s/ Hans C. Noetzli Director 10-21-03
-----------------------
Hans C. Noetzli
57