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 MARCH 31, 1999 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 - 6,449,008
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31, June 30,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 9,147 $ 9,178
Short-term investments 6,019 11,862
Receivables:
Trade, less allowance for doubtful accounts:
(March, $242; June, $219) 25,458 23,986
Other 1,069 1,502
26,527 25,488
Inventory 26,626 26,783
Prepaid expenses 534 233
Deferred income tax benefit 754 754
Property held for sale 460 493
Total current assets 70,067 74,791
Long-term investments 11,529 8,025
Long-term notes receivable 1,019 902
Property and equipment:
Machinery and equipment 832 -
Computers 968 812
Furniture and fixtures 818 599
Automobiles 158 158
2,776 1,569
Less accumulated depreciation 2,195 1,189
581 380
Goodwill, less accumulated amortization 2,614 -
(March, $43; June, $0)
Other assets 259 281
Total assets $ 86,069 $ 84,379
See accompanying notes to consolidated financial statements.
<PAGE>
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
(Unaudited)
March 31, June 30,
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts and acceptances payable $ 582 $ 549
Current installments on long-term debt 125 250
Accounts payable 2,963 2,195
Accrued merchandise purchases 10,299 10,905
Accrued compensation 2,592 2,549
Accrued environmental remediation 1,323 1,378
Accrued income taxes 678 716
Other accrued expenses 2,104 1,826
Total current liabilities 20,666 20,368
Long-term liabilities 925 -
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 20,000 shares;
Issued: March, 9,001 shares; June, 90 90
9,001 shares; outstanding: March,
6,449 shares; June, 6,699 shares
Capital in excess of par value 57,623 57,531
Retained earnings 30,593 26,888
88,306 84,509
Less:
Cost of common stock held in treasury;
March, 2,552 shares; June, 2,302 shares 24,578 21,248
Total shareholders' equity 63,728 63,261
Commitments and contingencies
Total liabilities and shareholders' equity $ 86,069 $ 84,379
See accompanying notes to consolidated financial statements.
<PAGE>
ACETO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For Nine Months Ended
MARCH 31
1999 1998
Net sales $127,883 $134,889
Cost of sales 110,755 118,501
Gross profit 17,128 16,388
Selling, general and administrative
expenses 11,501 9,286
Operating profit 5,627 7,102
Other income (expense):
Interest expense (33) (47)
Interest and other income 1,778 1,516
1,745 1,469
Income before income taxes 7,372 8,571
Provision for income taxes 2,782 2,952
Net income $ 4,590 $ 5,619
Net income per common share:
Basic $ 0.69 $ 0.83
Diluted 0.67 0.80
Weighted average shares outstanding:
Basic 6,580 6,735
Diluted 6,828 6,983
See accompanying notes to consolidated financial statements.
<PAGE>
ACETO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For Three Months Ended
MARCH 31
1999 1998
Net sales $ 45,420 $ 50,453
Cost of sales 38,716 44,763
Gross profit 6,704 5,690
Selling, general and administrative
expenses 4,679 3,172
Operating profit 2,025 2,518
Other income (expense):
Interest expense (19) (12)
Interest and other income 516 580
497 568
Income before income taxes 2,522 3,086
Provision for income taxes 876 974
Net income $ 1,646 $ 2,112
Net income per common share:
Basic $ 0.25 $ 0.31
Diluted 0.25 0.30
Weighted average shares outstanding:
Basic 6,456 6,731
Diluted 6,690 6,989
See accompanying notes to consolidated financial statements.
<PAGE>
ACETO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
March 31
1999 1998
Operating activities:
Net income $ 4,590 $ 5,619
Adjustments to reconcile net income to net
cash provided by operating activities,
net of effects of the purchase of CDC
Products Corp.:
Depreciation 248 149
Gain on sale of assets (178) -
Provision for doubtful accounts 23 79
Changes in:
Investments - trading securities (424) (91)
Trade accounts receivable (1,071) (5,395)
Other receivables 440 1,016
Inventory 536 3,557
Prepaid expenses (238) (18)
Other assets 6 22
Drafts and acceptances payable 33 (206)
Accounts payable 491 (432)
Accrued merchandise purchases (606) (3,459)
Accrued compensation 42 (974)
Accrued environmental remediation (55) (9)
Accrued income taxes 20 249
Other accrued expenses (51) (51)
Net cash provided by operating activities 3,806 56
Investing activities:
Purchases of investments - held-to-maturity (8,535) 5,828
Proceeds from investments - held-to-maturity 11,298 (1,683)
Issuance of notes receivable (159) -
Payments received on notes receivable 42 33
Purchases of property and equipment (109) (218)
Proceeds from sale of property 183 -
Payments for purchase of CDC Products Corp. (2,111) -
Net cash provided by investing activities 609 3,960
Financing activities:
Payments of long-term debt (250) (250)
Proceeds from exercise of stock options 135 390
Payments for purchases of treasury stock (3,775) (2,916)
Proceeds from issuance of treasury stock
to employees 329 -
Payments of cash dividends (885) (840)
Net cash used in financing activities (4,446) (3,616)
Net decrease in cash and cash equivalents (31) 400
Cash and cash equivalents at beginning of period 9,178 4,142
Cash and cash equivalents at end of period $ 9,147 $ 4,542
See accompanying notes to consolidated financial statements.
<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
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 assets acquired consisted primarily of
inventory, accounts receivable and fixed assets. 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.
Note 4: Supplemental Cash Flow Information
Cash paid for interest and income taxes during the nine months ended March 31,
1999 and 1998 was as follows:
1999 1998
Interest $ 16 $ 47
Income taxes 2,755 2,704
In connection with the acquisition of CDC (note 2), the Company recorded $1,050
of amounts due the previous owner as a long-term liability.
Note 5: Interest and Other Income
Nine Months Three Months
Ended Ended
MARCH 31 MARCH 31
1999 1998 1999 1998
Interest on investments $1,116 $1,006 $ 324 $ 325
Realized and unrealized net
gain (loss) on investments (21) 107 (42) 23
Miscellaneous other income 683 403 234 232
$1,778 $1,516 $ 516 $ 580
Note 6: Net Income per Common Share
A reconciliation between the numerators and denominators of the basic and
diluted income per share computation is as follows:
Nine Months Ended
MARCH 31, 1999
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNTS
Net income $4,590
Preferred stock dividends (35)
Basic income per share
Net income attributable
to common stock 4,555 6,580 $0.69
Effect of dilutive securities
Stock options - 109
Convertible preferred stock 35 139
Diluted income per share
Net income attributable to
common stock, assumed option
exercises and conversion of
preferred stock $4,590 6,828 $0.67
Nine Months Ended
MARCH 31, 1998
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNTS
Net income $5,619
Preferred stock dividends (35)
Basic income per share
Net income attributable
to common stock 5,584 6,735 $0.83
Effect of dilutive securities
Stock options - 109
Convertible preferred stock 35 139
Diluted income per share
Net income attributable to
common stock, assumed option
exercises and conversion of
preferred stock $5,619 6,983 $0.80
Three Months Ended
MARCH 31, 1999
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNTS
Net income $1,646
Preferred stock dividends -
Basic income per share
Net income attributable
to common stock 1,646 6,456 $0.25
Effect of dilutive securities
Stock options - 95
Convertible preferred stock - 139
Diluted income per share
Net income attributable to
common stock, assumed option
exercises and conversion of
preferred stock $1,646 6,690 $0.25
Three Months Ended
MARCH 31, 1998
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNTS
Net income $2,112
Preferred stock dividends -
Basic income per share
Net income attributable
to common stock 2,112 6,731 $0.31
Effect of dilutive securities
Stock options - 119
Convertible preferred stock - 139
Diluted income per share
Net income attributable to
common stock, assumed option
exercises and conversion of
preferred stock $2,112 6,989 $0.30
Note 7: Comprehensive Income
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income", effective July 1, 1998.
There is no difference between the Company's comprehensive income and net
income.
Note 8: Reclassifications
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 presentation.
<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 $26.7 million and
$29.1 million at March 31, 1999 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 $5.0 million to $49.4 million at March 31, 1999
from $54.4 million at June 30, 1998. The decrease of $5.9 million in cash and
cash equivalents and short-term investments was the result of the following two
initiatives: The Company continued its stock repurchase program and purchased
298,000 shares of common stock for $3.8 million. It also acquired 100% of the
outstanding stock of CDC Products Corp. ("CDC") which required an initial cash
outlay of $2.1 million. The increase in trade accounts receivable was due to
the timing of sales and accounts receivable collections.
RESULTS OF OPERATIONS:
Net sales decreased by 5.2% and 10.0% for the nine and three months ended March
31, 1999, respectively, compared with the same periods last year. For the nine
months, the decline was caused by a significant decrease in sales of
intermediates to the color producing industries and loss of sales caused by the
discontinuance of two relatively high volume, low profit items, partially
offset by strong sales of certain pharmaceuticals and pharmaceutical
intermediates. For the three months, continuing weakness in sales to the color
producing industries accounted for a majority of the decline.
Volume decreased 9% for the nine month period. Reduced sales of colorants,
which tend to be lower priced, offset by increased sales of pharmaceuticals and
pharmaceutical intermediates, which tend to be higher priced, accounted for the
somewhat greater decrease in volume than sales. For the three month period,
volume decreased by 7%. A general decline in selling prices to the color
producing industries resulted in the greater decline in sales than volume.
Gross profit margins increased to 13.4% for the nine months ended March 31,
1999 compared to 12.1% for the same period in the prior year. There are
several factors that accounted for this increase. First, we experienced
continued savings in freight and warehousing costs. Second, there were some
general improvements in margins across a range of our traditional product
lines. Lastly, sales by our new subsidiary, CDC, are at margins significantly
higher than our traditional lines. For the three months, margins increased to
14.8% from 11.3%. The same factors as the nine months caused the increase, but
their effect was amplified during the shorter period.
Selling, general and administrative expenses for the nine months ended March
31, 1999 increased by $2,215,000 or 23.9% compared to the same
period last year. The inclusion of CDC in the consolidated financial
statements accounted for half of this increase. A customer claim
in the amount of $237,000 was recorded in March 1999. Finally, significant
increases in compensation and fringe benefits, partially caused by an increase
in staff, along with higher legal fees and bad debt expense accounted for a
majority of the remaining increase. For the three months there was an increase
of $1,507,000, or 47.5%, compared to the same period last year. The same
factors as the nine months, excluding legal fees, caused the increase but the
effects were more pronounced as $900,000 of $1,100,000 of CDC expenses, and the
$237,000 claim were recorded in the third quarter. These increases were
somewhat offset by decreases in bank fees and consulting fees.
Interest and other income increased to $1,778,000 for the nine months ended
March 31, 1999 from $1,516,000 for the same period last year. Interest on
investments increased by $110,000 due to an increase in funds available for
investment. Royalty income increased $260,000 due to the timing of the
realization of this income by one of the Company's subsidiaries. Partially
offsetting these increases was a net realized and unrealized loss on the
Company's trading securities compared to a gain in the prior year.
For the three months ended March 31, 1999 interest and other income
decreased to $516,000 from $580,000 for the same period last year. Again, a
net realized and unrealized loss on the Company's trading securities compared
to a gain in the prior year and a decrease in royalty income accounted for
most of this decrease. Partially offsetting this decrease was an increase
in interest on investments.
The effective tax rate increased to 37.7% and 34.7% for the nine months and
three months ended March 31, 1999 from 34.4% and 31.6% 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 in the prior periods.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
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 of the Company believes that the adoption of this statement will
not have a material impact on previously reported information.
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, including those embedded
in other contracts, and for hedging activities. Statement 133 is effective
for all quarters of fiscal years beginning after June 15, 1999. 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 completed testing its
major computer systems and its information systems transformation for Year 2000
compliance. While the Company believes its 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.
To date, the Company's total cost of its Year 2000 initiative has been
approximately $100,000. Any further costs are not expected to be material.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 March 31, 1999, the exposure to these market risks is
not considered material.
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
March 31, 1999 the Company did not file any reports
on Form 8-K.
<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 MAY 10, 1999 BY (SIGNED) / BY DONALD HOROWITZ
Donald Horowitz, Chief Financial
Officer
DATE MAY 10, 1999 BY (SIGNED) / BY LEONARD S. SCHWARTZ
Leonard S. Schwartz, President
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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