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, 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 - 6,162,552
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
Dec. 31 June 30
1999 1999
ASSETS
Current assets:
Cash and cash equivalents $ 2,476 $ 3,991
Short-term investments 6,532 7,427
Receivables:
Trade, less allowance for doubtful accounts:
(Dec., $289; June, $219) 29,728 26,073
Other 2,753 942
32,481 27,015
Inventory 26,003 29,644
Prepaid expenses 206 240
Deferred income tax benefit, net 1,264 1,188
Property held for sale 456 456
Total current assets 69,418 69,961
Long-term investments 8,171 11,852
Long-term notes receivable 938 976
Property and equipment:
Machinery and equipment 667 639
Leasehold improvements 209 191
Computers 1,191 1,085
Furniture and fixtures 734 733
Automobiles 140 135
2,941 2,783
Less accumulated depreciation 2,377 2,238
564 545
Goodwill, less accumulated amortization 3,578 2,514
(Dec., $153; June, $76)
Other assets 284 311
Total assets $ 82,953 $ 86,159
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
Dec. 31 June 30
1999 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts and acceptances payable $ 935 $ 750
Current installments on long-term debt 517 125
Accounts payable 1,842 2,972
Accrued merchandise purchases 8,175 9,447
Accrued compensation 2,964 2,569
Accrued environmental remediation 1,314 1,323
Accrued income taxes 900 956
Other accrued expenses 2,524 2,360
Total current liabilities 19,171 20,502
Long-term liabilities, excluding current
installments 1,033 925
Redeemable preferred stock
$2.50 par value per share;
Authorized 2,000 shares;
issued and outstanding: - 750
Dec., 0; June, 300 shares
Shareholders' equity:
Common stock,$.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.,
6,163 shares; June, 6,416 shares
Capital in excess of par value 56,987 57,637
Retained earnings 33,739 31,224
90,816 88,951
Less:
Cost of common stock held in treasury;
Dec.,2,838 shares; June, 2,585 shares 28,067 24,969
Total shareholders' equity 62,749 63,982
Commitments and contingencies
Total liabilities and shareholders' equity $ 82,953 $ 86,159
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Six Months Ended
DEC. 31
1999 1998
Net sales $ 86,072 $ 82,463
Cost of sales 74,692 72,039
Gross profit 11,380 10,424
Selling, general and administrative
expenses 7,875 6,822
Operating profit 3,505 3,602
Other income (expense):
Interest expense (10) (15)
Interest and other income 721 1,263
711 1,248
Income before income taxes 4,216 4,850
Provision for income taxes 1,673 1,906
Net income $ 2,543 $ 2,944
Net income per common share:
Basic $ 0.40 $ 0.44
Diluted 0.40 0.43
Weighted average shares outstanding:
Basic 6,235 6,640
Diluted 6,422 6,905
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
DEC. 31
1999 1998
Net sales $ 48,254 $ 46,098
Cost of sales 42,429 40,026
Gross profit 5,825 6,072
Selling, general and administrative
expenses 4,041 3,541
Operating profit 1,784 2,531
Other income (expense):
Interest expense - (8)
Interest and other income 448 609
448 601
Income before income taxes 2,232 3,132
Provision for income taxes 903 1,206
Net income $ 1,329 $ 1,926
Net income per common share:
Basic $ 0.21 $ 0.29
Diluted 0.21 0.28
Weighted average shares outstanding:
Basic 6,163 6,590
Diluted 6,311 6,846
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
DEC. 31
1999 1998
Operating activities:
Net income $ 2,543 $ 2,944
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 245 105
Gain on sale of assets (10) (163)
Provision for doubtful accounts 67 15
Deferred tax benefit (76) -
Changes in assets and liabilities,
net of effects of the purchase of
acquisitions:
Investments - trading securities (12) (243)
Trade accounts receivable (3,722) (2,123)
Other receivables (1,811) 464
Inventory 3,695 2,334
Prepaid expenses 34 (37)
Other assets 27 (58)
Drafts and acceptances payable 185 (63)
Accounts payable (1,130) (848)
Accrued merchandise purchases (1,272) (2,489)
Accrued compensation 395 (375)
Accrued environmental remediation (9) (21)
Accrued income taxes 6 86
Other accrued expenses 193 689
Net cash provided by (used in) operating activities (652) 278
Investing activities:
Purchases of investments - held-to-maturity (2) (8,535)
Proceeds from investments - held-to-maturity 4,589 5,105
Issuance of notes receivable - (159)
Payments received on notes receivable 37 28
Purchases of property and equipment (232) (331)
Proceeds from sale of property 10 183
Payments for purchase of acquisitions (650) (2,111)
Net cash provided by (used in) investing activities 3,752 (5,820)
Financing activities:
Payments of long-term debt - (250)
Proceeds from exercise of stock options 204 115
Payments for purchases of treasury stock (4,843) (2,384)
Issuance of treasury stock to employees 53 273
Payments of cash dividends (29) (885)
Net cash used in financing activities (4,615) (3,131)
Net decrease in cash and cash equivalents (1,515) (8,673)
Cash and cash equivalents at beginning of period 3,991 9,178
Cash and cash equivalents at end of period $ 2,476 $ 505
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
Unaudited
Note 1: Basis of Presentation
The consolidated financial statements of Aceto Corporation and subsidiaries
included herein have been prepared by the Company and reflect all adjustments
(consisting solely of normal recurring adjustments) 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,
1999.
Note 2: Business Acquisition
On October 19, 1999 the Company purchased certain assets of Magnum Research
Corp. (Magnum) for a purchase price of $1,150. Of the purchase price $650 was
paid at closing and the balance is scheduled to be paid in equal installments
of $167 in October 2000, 2001 and 2002 (the October payments). The October
payments are subject to downward adjustment in the event Magnum's net sales, as
defined in the purchase agreement, are less than a specified amount. In the
event the October 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 assets acquired, based upon their
estimated fair values. The excess of cost over the fair value of assets
acquired amounted to $1,093 and is being treated as goodwill. The goodwill is
being amortized on a straight line basis over a period of twenty years. The
assets acquired consisted primarily of inventory and fixed assets. The results
of operations of Magnum have been included in the accompanying consolidated
statements of income from the date of acquisition. Proforma results of
operations were not provided as their effect on the consolidated results of
operations were not material.
Note 3: Redeemable Preferred Stock
On November 15, 1999 the Aceto Corporation Profit Sharing Plan (the holder of
the redeemable preferred stock) converted all of the preferred stock to 139,341
shares of common stock. The Company purchased the common shares on November
15, 1999, at $11.1562 per share which was the market price of the common stock
on such date. The total amount paid to the Aceto Corporation Profit Sharing
Plan amounted to approximately $1,555.
Note 4: Supplemental Cash Flow Information
Cash paid for interest and income taxes during the six months ended December
31, 1999 and 1998 was as follows:
1999 1998
Interest $ 2 $ 15
Income taxes 1,941 1,780
NON-CASH TRANSACTIONS:
In November 1999, the redeemable preferred stock was converted into shares of
common stock.
In connection with the acquisition of Magnum, the Company recorded $500 of
amounts due the previous owner as a liability.
In July 1998, the Company received a note in the amount of $170 in connection
with the sale of a building and land.
Note 5: Segment Information
The Company has five reportable segments which are organized by products: (1)
Agrochemicals, whose products include herbicides, fungicides and insecticides,
as well as a sprout inhibitor for potatoes, (2) Industrial Chemicals, whose
products include a variety of specialty chemicals used in adhesives, coatings,
food, fragrance, cosmetics and many other areas, (3) Organic Intermediates and
Colorants, whose products include dye and pigment intermediates used in the
color-producing industries like textiles, inks, paper and coatings, as well as
intermediates used in production of agrochemicals, (4) Pharmaceutical
Biochemicals and Nutritionals products, which include the active ingredients
for generic pharmaceuticals, vitamins and nutritional supplements, and (5)
Pharmaceutical Intermediates and Custom Manufacturing products, used in
preparation of pharmaceuticals, primarily by major ethical drug companies. The
Company evaluates performance of the segments based on gross profit. The
Company does not allocate assets by segments as they are not provided to the
chief operating decision maker. Summarized financial information for each of
the segments for the six and three months ended December 31, 1999 and 1998
follows:
Six Months Ended December 31, 1999 and 1998
Organic Pharma- Pharma-
Indus- Inter- ceutical ceutical Consoli-
Agro- trial mediates Biochemicals Inter- dated
chemicals Chemicals & Colorants & Nutri- mediates & Totals
tionals Custom Mfg. Other
1999
Net sales $ 2,889 24,553 23,396 15,039 18,081 2,114 $ 86,072
Gross
profit $ 893 4,275 3,451 2,812 1,316 537 $ 13,284
Unallo-
cated
cost of
sales(1) 1,904
Net gross profit $ 11,380
1998
Net sales $ 4,214 21,504 18,925 13,298 23,974 548 $ 82,463
Gross
profit $ 1,899 3,673 2,569 2,136 1,492 348 $ 12,117
Unallo-
cated
cost of
sales(1) 1,693
Net gross profit $ 10,424
Three Months Ended December 31, 1999 and 1998
Pharma- Pharma-
Indus- Organic ceutical ceutical
Agro- trial Inter- Bio- Inter- Consol-
chemicals Chemicals mediates & chemicals mediates & idated
Colorants & Nutri- Custom Other Totals
tionals Mfg.
1999
Net
sales $ 1,477 12,167 11,714 6,586 15,293 1,017 $ 48,254
Gross
profit $ 414 2,246 1,725 1,189 978 225 $ 6,777
Unallo-
cated
cost
of sales(1) 952
Net gross profit $ 5,825
1998
Net
sales $ 3,524 10,107 9,614 6,546 15,863 444 $ 46,098
Gross
profit $ 1,653 1,790 1,244 1,030 866 325 $ 6,908
Unallocated
cost of sales(1) 836
Net gross profit $ 6,072
(1) Represents freight and storage costs that are not allocated to a segment.
Note 6: Interest and Other Income
Interest and other income earned during the six and three months ended December
31, 1999 and 1998 was comprised of the following:
Six Months Three Months
Ended Ended
December 31, December 31,
1999 1998 1999 1998
Dividends $ 28 $ 48 $ 11 $ 41
Interest 533 791 238 400
Net gain (loss) on investments (144) 21 (71) (26)
Net gain on sale of assets 10 - - -
Royalty income 258 298 245 148
Miscellaneous 36 105 25 46
$ 721 $1,263 $ 448 $ 609
Note 7: 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:
Six Months Three Months
Ended Ended
December 31, December 31,
1999 1998 1999 1998
Net income $ 2,543 $ 2,944 $ 1,329 $ 1,926
Preferred stock dividend (29) (35) (29) (35)
Net income available for common
shareholders 2,514 2,909 1,300 1,891
Weighted average common shares 6,235 6,640 6,163 6,590
Effect of dilutive securities:
Stock options 81 126 76 117
Convertible preferred stock 106 139 72 139
Weighted average common and
potential common shares
outstanding 6,422 6,905 6,311 6,846
Basic income per share $ 0.40 $ 0.44 $ 0.21 $ 0.29
Diluted income per share 0.40 0.43 0.21 0.28
For the three months ended December 31, 1999, December 31, 1998 and September
30, 1999, employee stock options of 240, 232 and 220 were not included in the
net income per share calculation because their effect would have been anti-
dilutive. For the three months ended September 30, 1998, all employee stock
options were included.
Note 8: Comprehensive Income
The Company has no items of other comprehensive income, therefore there is no
difference between the Company's comprehensive income and net income.
Note 9: Reclassifications
Certain reclassifications have been made to the prior consolidated financial
statements to conform to the current presentation.
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 usually 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 $17.2 million and
$23.3 million at December 31 and June 30, 1999, 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 increased slightly to $50.2 million at December 31, 1999 from
$49.5 million at June 30, 1999. The decrease of $2.4 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
431,000 shares of common stock for $4.8 million. The Company acquired certain
assets of Magnum Research Corp. which required an initial cash outlay of
$650,000. The increase in trade accounts receivable of $3.7 million was due to
the timing of sales and accounts receivable collections. Other receivables
increased by $1.8 million due to the timing of payments from a joint venture.
The decrease in inventory of $3.6 million was a result of an increase in direct
shipments to customers. Drafts and acceptances, accounts payable and accrued
purchases payable decreased a total of $2.2 million at December 31, 1999
compared to June 30, 1999. This decrease was due primarily to the timing of
merchandise purchases and the aforementioned reduction in inventory.
RESULTS OF OPERATIONS:
Net sales increased 4% and 5% for the six month and three month periods ended
December 31, 1999 compared with the same periods last year. The inclusion of
two acquisitions, CDC Products Corp., acquired in November 1998 and Magnum
Research Corp., acquired in October 1999, accounted for approximately half the
increase. For our traditional lines of business, overall sales increased
slightly while certain segments had significant differences. Sales of
intermediates to the color producing industries continued their rebound from
depressed levels and industrial chemicals sales increased by 14% and 20% for
the six and three month periods ended December 31, 1999 compared to the same
period last year. Sales to the generic pharmaceutical industry also increased
significantly for the six months due to the introduction of several new
products in the first quarter. Sales in the second quarter were basically
flat. These increases were offset by reduced sales of several products in our
pharmaceutical and custom manufacturing segment. In addition, there were lower
sales of agrochemicals, which we expect to regain during the rest of this
fiscal year.
Volume increased 20% and 18% for the six and three months ended December 31,
1999 compared to the same periods in the prior year. The aforementioned shift
in the mix of products sold during each period towards lower priced products
caused the greater increase in volume than sales.
Gross profit margins increased to 13.2% for the six months against 12.6% for
the comparable period a year earlier. This was caused by a general
strengthening of prices in the industrial and intermediates areas and a
reduction in sales of pharmaceutical intermediates, which tend to be lower
margin. For the three months, gross margins decreased to 12.1% from 13.2% for
the same period in the prior year. The reduced sales of agrochemicals, which
have very high margins, accounted for the reduction.
Selling, general and administrative expenses for the six months ended December
31, 1999 increased by $1,053,000 or 15% compared to the same
period last year. The inclusion of CDC Products Corp. as of November 1998 and
Magnum Research Corp. as of October 1999 in the consolidated financial
statements accounted for $740,000 of this increase. Higher compensation
expense due to additional staff and routine annual raises accounted for most of
the balance of the increase. Total selling expenses increased slightly, due to
an increase in expenses in our China office which continues its successful
growth. Offsetting some of these increases, was a decrease in fringe benefits
due to lower payments of major medical claims and a significant decrease in
consulting fees relating to expired contracts with retired senior executives.
For the three months there was an increase of $500,000, or 14% in selling,
general and administrative expenses, compared to the same period last year.
The same factors as the six months caused the increase, with only slight
differences in the impact on each period.
Interest and other income decreased to $721,000 and $446,000 for the six and
three months ended December 31, 1999 from $1,263,000 and $609,000 for the same
periods last year. During both periods, interest on investments decreased
significantly due to a decrease in funds available for investment. The
decrease in cash available for investments was primarily due to the Company's
ongoing stock repuchase program, recent acquisitions and working capital to
support these new acquisitions. In addition, a loss on marketable securities
of $144,000 and $71,000 was recorded during the six and three months ended
December 31, 1999 compared to a gain of $21,000 and a loss of $26,000 during
the same periods last year.
The effective tax rate increased to 39.7% and 40.5% for the six months and
three months ended December 31, 1999 from 39.3% and 38.5% for the same periods
last year.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133." SFAS 137 amends SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which was issued in June 1998. SFAS 137
defers the effective date of SFAS 133 to all fiscal quarters of fiscal years
beginning after June 15, 2000. Earlier application is permitted. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measures those instruments at fair value. While management has not determined
the impact of the new standard, it is not expected to be material.
YEAR 2000
We are not aware of any year 2000 issues that have affected our business. In
preparation for the year 2000, we incurred internal staff costs as well as
consulting and other expenses. Year 2000 expenses totaled approximately
$100,000.
It is possible that the computerized systems could be affected in the future by
the year 2000 issue. We have computerized interfaces with third parties that
are possibly vulnerable to failure if those third parties have not adequately
addressed their year 2000 issues. System failures resulting from these
issues could cause significant disruption to our operations.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements relating
to such matters as anticipated financial performance and business prospects.
When used in this Quarterly Report, the words "anticipates," "expects," "may,"
"intend" and similar expressions are intended to be among the statements that
identify forward-looking statements. From time to time, the Company may also
publish forward-looking statements. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors, including, but not limited to, foreign currency risks, political
instability, changes in foreign laws, regulations and tariffs, new
technologies, competition, customer and vendor relationships, seasonality,
inventory obsolenscence and inventory availability, could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
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 2, 1999, the matter of the election of eight directors to hold
office until the next annual meeting of stockholders or until their successors
are elected and qualified, was submitted to a vote of security-holders, through
the solicitation of proxies pursuant to Regulation 14 under the Securities Act
of 1933, as amended.
The nominees for directors were: Leonard Schwartz; Donald Horowitz; Samuel I.
Hendler; Anthony Baldi; Thomas Brunner; Richard Amitrano; Stephen M. Goldstein;
and Robert A. Wiesen. The election of said nominees was uncontested.
The following tabulation shows with respect to each such nominee the number of
votes cast for, against or withheld, the number of abstentions and broker non-
votes:
VOTES
VOTES AGAINST OR BROKER
NOMINEE FOR WITHHELD ABSTENTIONS NON-VOTES
Leonard Schwartz 5,573,480 244,795 - -
Donald Horowitz 5,614,225 205,050 - -
Samuel I. Hendler 5,612,420 205,855 - -
Anthony Baldi 5,612,896 205,379 - -
Thomas Brunner 5,612,896 205,379 - -
Richard Amitrano 5,574,925 243,350 - -
Stephen M. Goldstein 5,569,648 248,627 - -
Robert A. Wiesen 5,607,748 210,527 - -
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits - Exhibit 27. Financial Data Schedule
(a) Reports on Form 8-K. A report on Form 8-K was filed during
the quarter for which this report is filed, reporting under
Item 6. Resignation of Registrant's Directors, that
registrant received a letter dated December 6, 1999 from Mr.
Stephen M. Goldstein (Goldstein) wherein he resigned as a
director of registrant, effective December 15, 1999.
Goldstein's letter of resignation did not describe or refer
to any matter relating to the registrant's operations,
policies or practices. A copy of Goldstein's letter of
resignation was filed under Item 7, Financial Statements,
Pro Forma Financial Information and Exhibits as Exhibit
17(b).
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, 2000 BY (SIGNED)/ BY DONALD HOROWITZ
Donald Horowitz, Chief Financial
Officer
DATE: FEBRUARY 10, 2000 BY (SIGNED)/ BY LEONARD S. SCHWARTZ
Leonard S. Schwartz, Chief Executive
Officer
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