SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended DECEMBER 31, 1998 Commission file number 0-4217
ACETO CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 11-1720520
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE HOLLOW LANE, LAKE SUCCESS, NY 11042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(516) 627-6000
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
(Title of Class)
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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the close of the period covered by this report.
Common Stock - 6,543,451
Page 1 of 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
Dec. 31 June 30
1998 1998
ASSETS
Current assets:
Cash and cash equivalents $ 505 $ 9,178
Short-term investments 9,775 11,862
Receivables:
Trade, less allowance for doubtful accounts:
(Dec., $234; June, $219) 26,708 23,986
Other 1,038 1,502
27,746 25,488
Inventory 24,449 26,783
Prepaid expenses 270 233
Deferred income tax benefit 754 754
Property held for sale 464 493
Total current assets 63,963 74,791
Long-term investments 13,784 8,025
Long-term notes receivable 1,033 902
Property and equipment:
Machinery and equipment 750 -
Computers 1,061 812
Furniture and fixtures 825 599
Automobiles 158 158
2,794 1,569
Less accumulated depreciation 2,177 1,189
617 380
Goodwill, less accumulated amortization 2,582 -
(Dec., $8; June, $0)
Other assets 339 281
Total assets $ 82,318 $ 84,379
See accompanying notes to consolidated financial statements.
Page 2 of 16
<PAGE>
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
(Unaudited)
Dec. 31 June 30
1998 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts and acceptances payable $ 486 $ 549
Current installments on long-term debt - 250
Accounts payable 1,347 2,195
Accrued merchandise purchases 8,416 10,905
Accrued compensation 2,174 2,549
Accrued environmental remediation 1,357 1,378
Accrued income taxes 802 716
Other accrued expenses 2,515 1,826
Total current liabilities 17,097 20,368
Long-term liabilities 1,086 -
Redeemable preferred stock
$2.50 par value per share;
Authorized 2,000 shares;
issued and outstanding: 300 shares 750 750
Shareholders' equity:
Common stock,$.01 par value per share;
Authorized: Dec., 20,000 shares;
June, 10,000 shares
Issued: Dec., 9,001 shares; June, 90 90
9,001 shares; outstanding: Dec.,
6,543 shares; June, 6,699 shares
Capital in excess of par value 57,616 57,531
Retained earnings 28,948 26,888
86,654 84,509
Less:
Cost of common stock held in treasury;
Dec.,2,458 shares; June, 2,302 shares 23,269 21,248
Total shareholders' equity 63,385 63,261
Commitments and contingencies
Total liabilities and shareholders' equity $ 82,318 $ 84,379
See accompanying notes to consolidated financial statements.
Page 3 of 16
<PAGE>
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Six Months Ended
DEC. 31
1998 1997
Net sales $ 82,463 $ 84,435
Cost of sales 72,039 73,737
Gross profit 10,424 10,698
Selling, general and administrative
expenses 6,822 6,114
Operating profit 3,602 4,584
Other income (expense):
Interest expense (15) (35)
Interest and other income 1,263 936
1,248 901
Income before income taxes 4,850 5,485
Provision for income taxes 1,906 1,978
Net income $ 2,944 $ 3,507
Net income per common share:
Basic $ 0.44 $ 0.52
Diluted 0.43 0.50
Weighted average shares outstanding:
Basic 6,640 6,736
Diluted 6,905 6,974
See accompanying notes to consolidated financial statements.
Page 4 of 16
<PAGE>
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
DEC. 31
1998 1997
Net sales $ 46,098 $ 40,671
Cost of sales 40,026 35,143
Gross profit 6,072 5,528
Selling, general and administrative
expenses 3,541 2,974
Operating profit 2,531 2,554
Other income (expense):
Interest expense (8) (18)
Interest and other income 609 449
601 431
Income before income taxes 3,132 2,985
Provision for income taxes 1,206 1,011
Net income $ 1,926 $ 1,974
Net income per common share:
Basic $ 0.29 $ 0.29
Diluted 0.28 0.28
Weighted average shares outstanding:
Basic 6,590 6,712
Diluted 6,846 6,965
See accompanying notes to consolidated financial statements.
Page 5 of 16
<PAGE>
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
DEC. 31
1998 1997
Operating activities:
Net income $ 2,944 $ 3,507
Adjustments to reconcile net income to net
cash provided by (used in) operating activities,
net of effects from the purchase of CDC Products Corp.:
Depreciation 105 94
Gain on sale of assets (163) -
Effect of market value over original
option price for options exercised 61 77
Provision for doubtful accounts 15 40
Changes in:
Investments - trading securities (243) (169)
Trade accounts receivable (2,123) 1,076
Other receivables 464 465
Inventory 2,334 1,513
Prepaid expenses (37) 17
Other assets (58) 15
Drafts and acceptances payable (63) (368)
Accounts payable (848) (474)
Accrued merchandise purchases (2,489) (5,287)
Accrued compensation (375) (451)
Accrued environmental remediation (21) (9)
Accrued income taxes 86 (324)
Other accrued expenses 689 (89)
Net cash provided by (used in) operating activities 278 (367)
Investing activities:
Purchases of investments - held-to-maturity (8,535) (1,351)
Proceeds from investments - held-to-maturity 5,105 4,085
Issuance of notes receivable (159) -
Payments received on notes receivable 28 22
Purchases of property and equipment (331) (164)
Proceeds from sale of property 183 -
Payments for purchase of CDC Products Corp. (2,111) -
Net cash provided by (used in) investing activities (5,820) 2,592
Financing activities:
Payments of long-term debt (250) (250)
Proceeds from exercise of stock options 115 173
Payments for purchases of treasury stock (2,384) (2,916)
Issuance of treasury stock to employees 273 -
Payments of cash dividends (885) (840)
Net cash used in financing activities (3,131) (3,833)
Net decrease in cash and cash equivalents (8,673) (1,608)
Cash and cash equivalents at beginning of period 9,178 4,142
Cash and cash equivalents at end of period $ 505 $ 2,534
See accompanying notes to consolidated financial statements.
Page 6 of 16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except amounts and par value per share)
Note 1: Basis of Presentation
The consolidated financial statements of Aceto Corporation and subsidiaries
(the Company) included herein have been prepared by the Company and are
unaudited; however, such information reflects all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows for all periods presented. Interim results are not
necessarily indicative of results which may be achieved for the full year.
These consolidated financial statements do not include all disclosures
associated with consolidated financial statements prepared in accordance with
generally accepted accounting principles. Accordingly, these statements should
be read in conjunction with the Company's consolidated financial statements and
notes thereto contained in the Company's Form 10-K for the year ended June 30,
1998.
Note 2: Business Acquisition
On November 24, 1998 the Company purchased all the capital stock of CDC
Products Corp. ("CDC") for a purchase price of $3,161. Of the purchase price,
$2,111 was payable at closing, the balance of $1,050 will be paid in equal
consecutive installments of $125 in January 2000, 2001 and 2002 and $225 in
August 2000, 2001 and 2002. The payments to be made in August 2000, 2001 and
2002 are subject to downward adjustment in the event certain earnings, as
defined in the purchase agreement, are not achieved. In the event the August
payments are adjusted downward such adjustments will be recorded as reductions
to goodwill.
The acquisition was accounted for as a purchase and, accordingly, the cost of
the acquisition was allocated to the net assets acquired, based upon their
estimated fair values. The excess of cost over the fair value of net assets
acquired amounted to $2,590 and is being amortized on a straight-line basis
over a twenty-year period. The results of operations of CDC have been included
in the accompanying consolidated statements of income from the date of
acquisition. Proforma results of operations have not been provided as their
effect on the consolidated results of operations would not be material.
In connection with the acquisition the Company entered into a non-competition
agreement, which value was estimated to be $75. The non-competition agreement
is being amortized on a straight-line basis over three years.
Note 3: Capital Stock
On December 10, 1998, the shareholders approved a proposal to amend the
Company's Certificate of Incorporation to increase the amount of authorized
common stock to 20,000,000.
Page 7 of 16
Note 4: Supplemental Cash Flow Information
Cash paid for interest and income taxes during the six months ended December
31, 1998 and 1997 was as follows:
1998 1997
Interest $ 15 $ 35
Income taxes 1,780 2,249
Note 5: Interest and Other Income
Six Months Three Months
Ended Ended
DECEMBER 31 DECEMBER 31
1998 1997 1998 1997
Interest on investments $ 792 $ 681 $ 401 $ 317
Net gain (loss)on investments 21 84 (26) 10
Miscellaneous other income 450 171 234 122
$1,263 $ 936 $ 609 $ 449
Note 6: Net Income per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("Statement 128").
A reconciliation between the numerators and denominators of the basic and
diluted earnings per share computation is as follows:
Six Months Ended
DECEMBER 31, 1998
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNTS
Net income $2,944
Preferred stock dividends (35)
Basic earnings per share
Net earnings attributable
to common stock 2,909 6,640 $0.44
Effect of dilutive securities
Stock options - 126
Convertible preferred stock 35 139
Diluted earnings per share
Net earnings attributable to
common stock, assumed option
exercises and conversion of
preferred stock $2,944 6,905 $0.43
Page 8 of 16
Six Months Ended
DECEMBER 31, 1997
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNTS
Net income $3,507
Preferred stock dividends (35)
Basic earnings per share
Net earnings attributable
to common stock 3,472 6,736 $0.52
Effect of dilutive securities
Stock options - 99
Convertible preferred stock 35 139
Diluted earnings per share
Net earnings attributable to
common stock, assumed option
exercises and conversion of
preferred stock $3,507 6,974 $0.50
Three Months Ended
DECEMBER 31, 1998
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNTS
Net income $1,926
Preferred stock dividends (35)
Basoc earmomgs per share
Net earnings attributable
to common stock 1,891 6,590 $0.29
Effect of dilutive securities
Stock options - 117
Convertible preferred stock 35 139
Diluted earnings per share
Net earnings attributable to
common stock, assumed option
exercises and conversion of
preferred stock $1,926 6,846 $0.28
Page 9 of 16
Three Months Ended
DECEMBER 31, 1997
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNTS
Net income $1,974
Preferred stock dividends (35)
Basic earnings per share
Net earnings attributable
to common stock 1,939 6,712 $0.29
Effect of dilutive securities
Stock options - 114
Convertible preferred stock 35 139
Diluted earnings per share
Net earnings attributable to
common stock, assumed option
exercises and conversion of
preferred stock $1,974 6,965 $0.28
Page 10 of 16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
The Company's ability to generate cash from operations is considered adequate
to cover both short-term and long-term liquidity. In addition, the Company had
cash and both short and long term investments which totaled $24.1 million and
$29.1 million at December 31 and June 30, 1998, respectively. All of these
investments are highly liquid. The Company also has sufficient lines of credit
available should any additional funds be required.
Working capital decreased by $7.5 million to $46.9 million at December 31, 1998
from $54.4 million at June 30, 1998. The decrease of $10.8 million in cash and
cash equivalents and short term investments was the result of the following
three initiatives: The Company continued its stock repurchase program and
purchased 195,000 shares of common stock for $2.4 million. It also acquired
100% of the outstanding stock of CDC Products Corp. which required an initial
cash outlay of $2.1 million. Lastly, long-term investments increased by $5.8
million, taking advantage of more beneficial investment rates. The increase in
trade accounts receivable was due to the timing of sales and accounts
receivable collections. The decrease in inventory of $2.3 million was a result
of an increase in direct shipments to customers and an attempt to reduce
inventory levels because of a general decrease in chemical prices. Drafts and
acceptances, accounts payable and accrued purchases payable decreased by $3.4
million at December 31, 1998 compared to June 30, 1998. This decrease was due
primarily to the timing of merchandise purchases and the aforementioned
reduction in inventory.
RESULTS OF OPERATIONS:
Net sales decreased by 2% for the six months and increased by 13% for the three
months ended December 31, 1998 compared to the same periods last year. For the
six months, strong sales of a pharmaceutical product introduced in 1997
partially offset decreases in sales of intermediates to the color producing
industries and the discontinuation of sales of two relatively high volume, low
profit items. For the three months, the increase can be attributed to the
sales of the aforementioned pharmaceutical product.
Volume decreased by 10% for the six month period; reduced sales of colorants
which tend to be lower priced, offset by increased sales of pharmaceuticals,
which are higher priced, accounted for the greater decrease in volume than
sales. For the three month period, volume decreased 6%. The same factors as
the six months caused the disparity between sales and volume, but the effect
was magnified during the shorter period.
Gross profit margins for both the six and three months decreased slightly; from
12.7% to 12.6% for the six months and 13.6% to 13.2% for the three months.
This can be attributed to the increased sales of
certain low margin pharmaceutical products and increased competition in
nutritional supplements, offset somewhat by savings in freight and warehousing
costs and improved margins in agricultural chemicals.
Page 11 of 16
Selling, general and administrative expenses for the six months ended December
31, 1998 increased by $708,000 or 12% compared to the same
period last year. The inclusion of CDC Products Corp. in the consolidated
financial statements accounted for $200,000 of this increase. Compensation and
fringe benefit increases and a significant increase in legal fees accounted for
a majority of the balance. For the three months there was an increase of
$566,000, or 19%, compared to the same period last year. The same factors as
the six months caused the increase but the effects were more pronounced as the
aforementioned $200,000 of CDC expenses were all in the second quarter. These
increases were somewhat offset by decreases in telephone, selling expenses and
consulting fees.
Interest and other income increased to $1,263,000 and $609,000 for the six and
three months ended December 31, 1998 from $936,000 and $449,000 for the same
periods last year. During both periods, interest on investments increased
significantly due to the increase in funds available for investment along with
a slight increase in dividend income. Royalty income increased $300,000 and
$150,000 for the six and three months ended December 31, 1998, respectively,
compared to the same periods last year, due to the timing of the recording of
this income by one of the Company's subsidiaries. Partially offsetting these
gains was a decrease in gains on marketable securities.
The effective tax rate increased to 39.3% and 38.5% for the six months and
three months ended December 31, 1998 from 36.1% and 33.9% for the same periods
last year. A significant payment from the Company's non-qualified retirement
plan, which was deducted for tax purposes on the date of distribution, caused
an unusually low tax rate for the six and three months ended December 31, 1997.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("Statement
130"), which is effective for fiscal years beginning after December 15, 1997.
Statement 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Effective July 1, 1998, the Company has adopted the
provisions of Statement 130. The adoption of this statement did not have any
impact on its financial position or results of operations.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("Statement 131"). Statement 131 established standards to
report information about operating segments and
related discussions about products and services, geographic areas and major
customers. Statement 131 is effective for financial statements for fiscal
years beginning after December 15, 1997. This statement permits early
application and requires restatement for all prior periods. Statement 131 is
not required to be applied to interim
financial statements in the initial year of adoption. Management
believes that the adoption of this statement will not have a material impact on
previously reported information.
Page 12 of 16
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("Statement 133"). Statement 133 established accounting
and reporting standards for derivative instruments embedded in other contracts,
and for hedging activities. Statement 133 is effective for all quarters of
fiscal years beginning after June 15, 1999. Early application of all the
provisions of this statement is encouraged but is permitted only as of the
beginning of any fiscal quarter that begins after issuance of this statement.
Management of the Company does not believe that the implementation of Statement
133 will have a significant impact on its financial position or results of
operations.
YEAR 2000 DISCLOSURE
During fiscal 1998, the Company determined that it needed to modify or replace
significant portions of its customized software so that its information systems
will function properly with respect to dates in the year 2000 and beyond. In
addition, the Company is in the process of assessing all the third party
hardware and software it uses for Year 2000 compliance. The Company also has
initiated discussions with its significant suppliers, customers, and financial
institutions to ascertain that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
properly remediate their computer systems. The Company's Year 2000 team
includes both internal and external staff. The team's activities are designed
to ensure that there is no adverse effect on the Company's core
business operations and that transactions with customers, suppliers, and
financial institutions are fully supported. The Company has commenced testing
its major computer systems and anticipates its information systems
transformation for Year 2000 compliance will be completed in early calendar
1999. While the Company believes its planning efforts are adequate to address
its Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis. The Company believes it unlikely that there will be a
material effect on the Company.
The Company estimates that its total cost of its Year 2000 initiative will be
approximately $100,000.
MARKET RISK
The Company maintains foreign currency contracts solely to hedge open purchase
commitments. It has established policies, procedures and internal processes
governing the management of this hedging to reduce market risks inherent in
foreign exchange. As of December 31, 1998, the exposure to these market risks
is not considered material.
Page 13 of 16
Item 4: Submission of Matters to a Vote of Security Holders
During the period covered by this report, at an annual meeting of stockholders
held on December 10, 1998, stockholders were asked to vote on three proposals
through the solicitation of proxies pursuant to Regulation 14 under the
Securities Act of 1933, as amended. The results of those votes are printed
below.
Proposal 1: Election of Directors
At the meeting, eight directors were elected, each to serve until the next
Annual Meeting of Stockholders or until their successors are elected and
qualified.
VOTES
VOTES AGAINST OR BROKER
NOMINEE FOR WITHHELD ABSTENTIONS NON-VOTES
Samuel I. Hendler 5,843,533 10,250 38,334 -
Anthony Baldi 5,731,258 122,525 38,334 -
Thomas Brunner 5,841,705 12,078 38,334 -
Donald Horowitz 5,844,258 9,525 38,334 -
Leonard Schwartz 5,843,140 10,643 38,334 -
Stephen M. Goldstein 5,838,028 15,755 38,334 -
Robert A. Wiesen 5,837,961 15,822 38,334 -
Richard Amitrano 5,811,660 42,123 38,334 -
Proposal 2. Approve Amendment to the Company's Certificate of Incorporation to
Increase the Number of Authorized Shares of Common Stock to 20 Million.
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
5,646,288 184,045 0 530 0
Proposal 3. Approve the Aceto Corporation 1998 Omnibus Equity Award Plan.
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
3,376,292 1,098,388 0 225,996 1,191,441
All three proposals were approved.
Page 14 of 16
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits - Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K. During the three months ended
December 31, 1998 the Company did not file any reports
on Form 8-K.
Page 15 of 16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACETO CORPORATION
DATE: FEBRUARY 10, 1999 BY (SIGNED)/ BY DONALD HOROWITZ
Donald Horowitz, Chief Financial
Officer
DATE: FEBRUARY 10, 1999 BY (SIGNED)/ BY LEONARD S. SCHWARTZ
Leonard S. Schwartz, Chief Executive
Officer
Page 16 of 16
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