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 SEPTEMBER 30, 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 - 6,185,658
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
Sept. 30, June 30,
1999 1999
ASSETS
Current assets:
Cash and cash equivalents $ 4,057 $ 3,991
Short-term investments 10,811 7,427
Receivables:
Trade, less allowance for doubtful accounts:
(Sept. $256, June $219) 23,726 26,073
Other 1,820 942
25,546 27,015
Inventory 27,870 29,644
Prepaid expenses 271 240
Deferred income tax benefit 1,276 1,188
Property held for sale 456 456
Total current assets 70,287 69,961
Long-term investments 8,232 11,852
Long-term notes receivable 961 976
Property and equipment:
Machinery and equipment 653 639
Leasehold improvements 191 191
Computers 1,097 1,085
Furniture and fixtures 734 733
Automobiles 140 135
2,815 2,783
Less accumulated depreciation 2,285 2,238
530 545
Goodwill, less accumulated amortization:
(Sept. $108, June $76) 2,529 2,514
Other assets 297 311
Total assets $ 82,836 $ 86,159
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
Sept. 30, June 30,
1999 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts and acceptances payable $ 709 $ 750
Current installments on long-term liability 350 125
Accounts payable 2,532 2,972
Accrued merchandise purchases 7,032 9,447
Accrued compensation 2,859 2,569
Accrued environmental remediation 1,314 1,323
Accrued income taxes 1,601 956
Other accrued expenses 2,414 2,360
Total current liabilities 18,811 20,502
Long-term liability, excluding
current installments 700 925
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 9,001 shares; 90 90
Outstanding: Sept. 6,186 shares;
June 6,416 shares
Capital in excess of par value 57,622 57,637
Retained earnings 32,439 31,224
90,151 88,951
Less:
Cost of common stock held in treasury;
Sept. 2,815 shares; June 2,585 shares 27,576 24,969
Total shareholders' equity 62,575 63,982
Commitments and contingencies
Total liabilities and shareholders' equity $ 82,836 $ 86,159
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
SEPT. 30,
1999 1998
Net sales $ 37,818 $36,365
Cost of sales 32,263 32,013
Gross profit 5,555 4,352
Selling, general and administrative
expenses 3,834 3,281
Operating profit 1,721 1,071
Other income (expense):
Interest expense (12) (7)
Interest and other income 275 654
263 647
Income before income taxes 1,984 1,718
Provision for income taxes 770 700
Net income $ 1,214 $ 1,018
Net income per common share:
Basic $ 0.19 $ 0.15
Diluted 0.19 0.15
Weighted average shares outstanding:
Basic 6,306 6,690
Diluted 6,533 6,959
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
September 30,
1999 1998
Operating activities:
Net income $ 1,214 $ 1,018
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 108 54
Gain on sale of assets (10) (163)
Provision for doubtful accounts 19 8
Deferred tax provision (88) -
Changes in assets and liabilities:
Investments - trading securities 220 (164)
Trade accounts receivable 2,310 1,566
Other receivables (878) 217
Inventory 1,774 1,298
Prepaid expenses (31) (26)
Other assets 14 7
Drafts and acceptances payable (41) (221)
Accounts payable (440) 399
Accrued merchandise purchases (2,415) (2,724)
Accrued compensation 260 (319)
Accrued environmental remediation (9) (7)
Accrued income taxes 659 178
Other accrued expenses 55 556
Net cash provided by operating activities 2,721 1,677
Investing activities:
Purchases of investments - held-to-maturity - (8,534)
Proceeds from investments - held-to-maturity 17 4,098
Issuance of notes receivable - (146)
Payments received on notes receivable 15 -
Purchases of property and equipment (61) (43)
Proceeds from sale of property 10 183
Net cash used in investing activities (19) (4,442)
Financing activities:
Proceeds from exercise of stock options 30 -
Payments for purchases of treasury stock (2,719) (245)
Proceeds from issuance of treasury stock
to employees 53 273
Net cash provided by (used in) financing
activities (2,636) 28
Net increase (decrease) in cash and cash equivalents 66 (2,737)
Cash and cash equivalents at beginning of period 3,991 9,178
Cash and cash equivalents at end of period $ 4,057 $ 6,441
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: Supplemental Cash Flow Information
Cash paid for interest and income taxes during the three months ended September
30, 1999 and 1998 was as follows:
1999 1998
Interest $ 0 $ 8
Income taxes 198 522
In July 1998, the Company received a note in the amount of $170 in connection
with the sale of a building and land.
Note 3: 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.
Summarized financial information for each of the segments for the three months
ended September 30, 1999 and 1998 follows:
Pharma- Pharma-
Organic ceutical ceutical
Indust- Inter- Bio- Inter-
Agro- rial Mediates chemicals & mediates Consoli-
chemicals Chemicals & Color- Nutri- & Custom dated
ants tionals Mfging. Other Totals
1999
Net
sales $1,412 12,386 11,682 8,453 2,788 1,097 $ 37,818
Gross
profit 479 2,029 1,726 1,623 338 312 $ 6,507
Unallocated
cost of sales(1) 952
Net gross profit $ 5,555
1998
Net
sales $ 690 11,397 9,311 6,752 8,111 104 $ 36,365
Gross
profit 246 1,883 1,325 1,106 626 23 $ 5,209
Unallocated
cost of sales(1) 857
Net gross profit $ 4,352
(1) Represents freight and storage costs that are not allocated to a segment.
Note 4: Interest and Other Income
Interest and other income earned during the three months ended September 30,
1999 and 1998 was comprised of the following:
Three Months
Ended
September 30,
1999 1998
Dividends $ 17 $ 7
Interest 295 391
Net gain (loss) on investments (73) 47
Net gain on sale of assets 10 -
Royalty income 13 150
Miscellaneous 13 59
$ 275 $ 654
Note 5: 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:
Three Months
Ended
September 30,
1999 1998
Net income available for common
shareholders $ 1,214 $ 1,018
Weighted average common shares 6,306 6,690
Effect of dilutive securities:
Stock options 88 130
Convertible preferred stock 139 139
Weighted average common and
potential common shares
outstanding 6,533 6,959
Basic income per share $ 0.19 $ 0.15
Diluted income per share 0.19 0.15
For the three months ended September 30, 1999, 220 employee stock options 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 6: 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 7: 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 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 $23.1 million and
$23.3 million at September 30 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 increased to $51.5 million at September 30, 1999 from $49.5
million at June 30, 1999. The increase in short-term investments to $10.8
million at September 30, 1999 from $7.4 million at June 30, 1999 was due to a
shift of funds from long-term investments. Receivables decreased to $25.5
million at September 30, 1999 from $27.0 million at June 30, 1999, this was the
result of the timing of cash receipts along with a higher sales level for the
quarter ending June 30, 1999 compared to the quarter ending September 30, 1999.
Inventory decreased to $27.9 million from $29.6 million, and the total of
drafts payable, accounts payable and accrued merchandise purchases decreased
$2.9 million comparing the same periods. This was primarily due to the timing
of merchandise purchases and was not the result of a change in the trend of
business.
RESULTS OF OPERATIONS:
Net sales remained virtually the same for the three months ended September 30,
1999, compared with the same period in the prior year, excluding the minor
effect of the sales from CDC Products Corp. (CDC) acquired on November 19,
1998. While sales were flat, there were some significant changes in several of
our segments. Increased demand led to a 25% increase in sales of organic
intermediates and colorants. Sales to the generic pharmaceutical industry, a
major component of the pharmaceutical biochemicals and nutritionals segment,
more than doubled due primarily to sales of one product occurring in the first
quarter of this year compared to later quarters last year, and the introduction
of several new products. These increases were offset by a reduction of sales
of a product in our pharmaceutical intermediates and custom manufacturing
segment. We anticipate these sales to occur in the second and third quarters
of this year.
Volume increased 27%. The greater increase in volume than in sales is the
result of the change in mix of business. The pharmaceutical product whose
sales decreased is a higher priced product, while the products whose sales
increased are lower priced, causing the differential.
Gross margins increased significantly in 1999 to 14.3% (net of the impact of
CDC) from 12.0% in 1998. The aforementioned change in mix of business,
especially relating to the reduction in sales of the pharmaceutical product
(which are lower margin sales) caused the increase.
Selling, general and administrative expenses increased $553,000, or 17%
compared to the same period last year. The inclusion of CDC in the
consolidated financial statements accounted for $370,000 or 67% of this
increase, and a significant legal bill relating to the successful defense of a
patent infringement case accounted for $240,000. In addition there were slight
increases in compensation and selling expenses. Offsetting some of the above
increases was a decrease in consulting fees.
Other income decreased to $275,000 for the three months ended September 30,
1999 from $654,000 for the same period last year. Interest on investments
decreased approximately $100,000 due to a significant decrease in the total of
cash and cash equivalents, short-term investments and long-term investments.
The decrease in cash available for investment was primarily due to the
Company's ongoing stock repurchase program and the acquisition of CDC. Royalty
income, for sales to European customers, from one of the Company's subsidiaries
totaled $150,000 in the quarter ended September 30, 1998 compared to $13,000
for the current period. The subsidiary is now selling products directly to
most of its European customers and consequently the royalties will continue to
decrease considerably. In addition, a loss on marketable securities of $73,000
was recorded during the three months ended September 30, 1999 compared to a
gain of $47,000 during the same period last year.
The effective tax rate decreased to 38.8% for the three months ended September
30, 1999 from 40.7% for the same period last year. In comparing these periods,
the effective tax rates are within the range of the Company's traditional
levels.
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 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
would function properly with respect to dates in the year 2000 and beyond. In
addition, the Company has assessed 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 continuing to monitor 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 completed implementation of
its Year 2000 initiative. All significant computer and business systems are
now compliant. 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 total cost of the Company's Year 2000 initiative was approximately
$100,000.
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.
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
September 30, 1999 the Company did not file any reports
on Form 8-K.
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 NOVEMBER 12, 1999 BY (SIGNED) / BY DONALD HOROWITZ
Donald Horowitz, Chief Financial
Officer
DATE NOVEMBER 12, 1999 BY (SIGNED) / BY LEONARD S. SCHWARTZ
Leonard S. Schwartz,Chief Executive
Officer