SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
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Commission file number 0-4217
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ACETO CORPORATION
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(Exact name of the registrant specified in its charter)
New York 11-1720520
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Hollow Lane, Lake Success, New York 11042
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(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 per share
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(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
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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]
The aggregate market value of the voting stock of the Company held by
non-affiliates of the Company as of September 20, 2002 was approximately
$45,816,280.
The Registrant has 6,539,709 shares of common stock outstanding as of September
20, 2002.
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 5, 2002.
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2002
TABLE OF CONTENTS
Description
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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
PART III.
Item 10. Directors and Executive Officers of the Company
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
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: THE INABILITY TO MANAGE OUR RECENT RAPID GROWTH,
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.
(Dollar and share amounts in thousands, except per share amounts)
ITEM 1. BUSINESS
Aceto Corporation (together with its consolidated subsidiaries, the "Company" or
"Registrant") was incorporated in 1947 in the State of New York. 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. 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. 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. The
amounts previously reported for the two former segments have been combined and
reported as Chemicals and Colorants. Therefore, the Company's five 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
adhesives, coatings, food, fragrance, cosmetics 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)
1
Pharmaceuticals, Biochemicals & Nutritionals products, which include the active
ingredients for generic pharmaceuticals, vitamins and nutritional supplements;
(4) Pharmaceutical Intermediates & Custom Manufacturing products, used in
preparation of pharmaceuticals, primarily by major ethical drug companies and
(5) 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 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
14, 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, 2002 and 2001, approximately 25% and 30%,
respectively, of the Company's purchases of chemicals came from Europe and
approximately 60% and 55%, respectively, from Asia.
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
chemical and pharmaceutical industries, and range from small trading companies
to Fortune 500 corporations. During fiscal 2002 and 2001, 64% and 75% of sales,
respectively, were in the United States. Sales made to customers outside the
United States totaled $82,669. Approximately 65% of these international sales
were to customers in Germany, France, The Netherlands, Malaysia, Brazil, Canada,
Mexico, Thailand and the United Kingdom.
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 industry taken as a whole.
Total long-lived assets in the United States were $1,731 and $1,986 as of June
30, 2002 and 2001, respectively. Total long-lived assets outside the United
States were $701 and $553 at June 30, 2002 and 2001, respectively.
No single product accounted for as much as 10% of net sales in fiscal 2002, 2001
or 2000. No single customer accounted for as much as 10% of net sales in fiscal
2002, 2001 or 2000. One of the Company's suppliers accounted for 21% of total
purchases in fiscal 2000. 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
Sales of certain of the Company's chemicals are higher in the last six months of
the fiscal year. 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, however, after additional testing was completed, the Company
received a revised estimate from the consultant. As a result, the Company
recorded an additional liability of $800. At June 30, 2002 and 2001, the
remaining liability was $1,284 and $1,292, respectively. The Company believes it
is possible that such amount may not be sufficient to cover future environmental
remediation but does not believe any additional amount will cause a material
adverse effect on the overall financial position or liquidity of the Company.
However, any remediation required above the liability established could
materially affect the Company's results in a particular reporting period. Other
than the remediation associated with the Carlstadt, New Jersey facility, the
Company is not aware of any material environmental liabilities.
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.
The products sold by Schweizerhall Pharma are classified in the Company's
Pharmaceuticals, Biochemicals & Nutritionals and Pharmaceutical Intermediates
and Custom Manufacturing segments;
3
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, 2002, the Company employed approximately 240 persons, none of whom
were covered by a collective bargaining agreement.
RISK FACTORS
IF WE ARE UNABLE TO MANAGE THE INTEGRATION OF OUR ACQUIRED BUSINESSES, OUR
FINANCIAL CONDITION AND OPERATING RESULTS MAY BE ADVERSELY AFFECTED
A failure to effectively manage the integration of the four acquisitions we have
made since November 1998, and any additional acquisitions we may decide to make,
may adversely affect our business and financial condition. Our acquisitions have
placed, and will continue to place, significant demands on our management,
technical and other resources. Additionally, the successful expansion of our
operations will depend on our ability to secure adequate sources of specialty
chemicals on commercially reasonable terms and attract and retain skilled
management.
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.
4
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
2002, approximately 36% of our revenues were attributable to operations
conducted abroad and to export sales. In addition, in certain countries where 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
the financial statements.
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.
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 is held for
sale.
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.
5
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
in the ordinary course of business. In the opinion of management, there are no
legal proceedings which 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 2002 and 2001 high and low
sales prices of the Company's common stock as reported on the Nasdaq National
Market for the periods indicated.
FISCAL 2002 HIGH LOW
First Quarter $ 9.87 $ 7.74
Second Quarter 10.34 8.86
Third Quarter 11.62 9.26
Fourth Quarter 11.55 9.90
FISCAL 2001 HIGH LOW
First Quarter $11.688 $ 9.125
Second Quarter 10.188 7.625
Third Quarter 9.063 8.063
Fourth Quarter 10.020 8.290
Cash dividends of $0.16 per common share were paid in January 2002, June 2002
and June 2001. A cash dividend of $0.15 per common share was paid in January
2001.
As of September 20, 2002, there were approximately 600 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 5,202 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.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Years Ended June 30 2002 2001 2000 1999 1998
- ------------------- ---- ---- ---- ---- ----
Net sales $229,329 $178,154 (1) $185,308 $169,725 $183,356
Net income 4,945 4,245 6,344 6,091 7,557
Net income per $ 0.75 $ 0.69 $ 1.01 $ 0.90 $ 1.08
common share -
diluted (2)
Total assets 115,703 105,173 88,081 86,159 84,379
Working capital 58,311 55,259 50,270 49,459 54,423
Long-term
liabilities - 671 908 925 -
Redeemable preferred
stock - - - 750 750
Shareholders' equity 73,290 69,203 63,604 63,982 63,261
Number of common
shares outstanding
at year end (2) 6,534 6,504 6,035 6,416 6,699
Book value per
common share (2) $ 11.22 $ 10.64 $ 10.54 $ 9.97 $ 9.44
Cash dividends per
common share (2) $ 0.32 $ 0.31 $ 0.30 $ 0.26 $ 0.25
(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 split and dividend, as appropriate.
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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: THE INABILITY TO MANAGE OUR RECENT RAPID GROWTH,
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 of America. 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, which could have
a significant impact on the financial statements.
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 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
8
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances would be
required.
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 and other intangible assets consist of assets arising from acquisitions
which are being amortized on a straight-line basis. The realizability and
amortization period of goodwill is evaluated whenever an indication of
impairment exists. The Company is required to adopt Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,
effective July 1, 2002. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed at least annually for
impairment. In assessing the recoverability of the Company's goodwill and other
intangible assets, the Company must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future,
the Company may be required to record impairment charges for these assets not
previously recorded.
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, we would recognize an additional
expense or benefit in income in the period such determination was made.
The Company determines a need for a valuation allowance to reduce its deferred
tax assets to the amount that it believes is more likely than not to be
realized. While the Company has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event the Company were to determine that it would
not be able to realize all or a part of its net deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged to income in
the period such determination was made.
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RESULTS OF OPERATIONS:
Net Sales By Segment
(Dollars in thousands)
Segment 2002 2001 2000
---- ---- ----
% of % of % of
Sales Total Sales Total Sales Total
----- ----- ----- ----- ----- -----
Agrochemicals $ 13,547 5.9% $ 13,133 7.4% $ 11,417 6.2%
Chemicals and Colorants 88,790 38.7 97,902 55.0 99,735 53.8
Pharmaceuticals,
Biochemicals & Nutritionals 98,263 42.9 47,736 26.8 35,448 19.1
Pharmaceutical
Intermediates & Custom Mfg. 23,456 10.2 13,401 7.5 33,202 17.9
Institutional Sanitary
Supplies & Other 5,273 2.3 5,982 3.3 5,506 3.0
-------- ----- -------- ----- -------- -----
TOTAL NET SALES $229,329 100.0% $178,154 100.0% $185,308 100.0%
======== ===== ======== ===== ======== =====
Gross Profit By Segment
(Dollars in thousands)
Segment 2002 2001 2000
---- ---- ----
Gross % of Gross % of Gross % of
Profit Total Profit Total Profit Total
------ ----- ------ ----- ------ -----
Agrochemicals $ 4,215 10.2% $ 4,943 14.5% $ 3,930 12.2%
Chemicals and Colorants 12,952 31.2 15,529 45.7 16,491 51.6
Pharmaceuticals,
Biochemicals & Nutritionals 17,912 43.2 9,270 27.3 6,336 19.7
Pharmaceutical
Intermediates & Custom Mfg. 4,123 9.9 2,678 7.9 2,657 8.4
Institutional Sanitary
Supplies & Other 2,294 5.5 1,562 4.6 2,602 8.1
------- ----- ------- ----- ------- -----
TOTAL GROSS PROFIT BY
SEGMENT $41,496 100.0% $33,982 100.0% $32,016 100.0%
UNALLOCATED COST OF SALES 4,215 5,365 4,812
------- ------- -------
NET GROSS PROFIT $37,281 $28,617 $27,204
======= ======= =======
10
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 two segments which have sales
contributions from the Schweizerhall Pharma business are Pharmaceuticals,
Biochemicals & Nutritionals and Pharmaceutical Intermediates & Custom
Manufacturing. 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 Pharmaceuticals, Biochemicals & Nutritionals segment sales were $98,263 in
fiscal 2002 and $47,736 in 2001, an increase of $50,527 or 105.8%. This segment
now represents the largest segment of the Company in both net sales and gross
profit. The acquisition in March 2001 contributed sales of $46,387 and $13,319
in fiscal 2002 and 2001, respectively. The segment's sales, excluding the
Schweizerhall Pharma portion, were $51,876 in 2002 versus $34,417 in 2001, an
increase of $17,459 or 50.7%. 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. 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 $9,112 or 9.3%, to
$88,790 in 2002 from $97,902 in 2001. This decrease reflects a general slowdown
in the economy and in the entire industrial chemical 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.
Pharmaceutical Intermediates & Custom Manufacturing reported sales of $23,456
for 2002 versus $13,401 last year, an increase of $10,055 or 75%. Schweizerhall
Pharma sales were $14,314 in 2002 and $4,479 in 2001, an increase of $9,835. The
segment's sales excluding the effect of the acquisition are $9,142 for 2002 and
$8,922 for 2001, an increase of $220 or 2.5%. This 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 this segment's
former primary supplier. That supplier terminated a supply agreement in October
2000.
Agrochemicals sales were $13,547 compared to $13,133, an increase of $414 or
3.2%. 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 $2,757 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 $5,273 for 2002 versus $5,982
last year, a decrease of $709 or 11.9%. 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 22.1%, to $41,496 from $33,982. The inclusion
of Schweizerhall Pharma, again in the Pharmaceuticals, Biochemicals and
Nutritionals segment, and to a lesser extent, the Pharmaceutical Intermediates
and Custom Manufacturing segment, accounted for $8,974 in 2002 and $2,808 in
2001. Gross profit on our continuing domestic and certain foreign sales
increased 4.3%, to $32,522 from $31,174 in 2001, comparable to the 5.2% increase
in those sales.
The gross margins resulting from the Schweizerhall Pharma business in the
Pharmaceuticals, Biochemicals and Nutritionals segment amounted to $6,724, or
11
14.5% versus $11,188 or 21.6% for the rest of this segment's business. For
fiscal 2001, the comparable gross margins were $1,976 or 14.8% for the
Schweizerhall Pharma business versus $7,294 or 21.2% 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.
In the Pharmaceutical Intermediates and Custom Manufacturing segment, the gross
margins attributable to the Schweizerhall Pharma business amounted to $2,250 or
15.7% in 2002 versus $832 or 18.6% in 2001. Traditional business yielded gross
margins of $1,873 or 20.5% in 2002 versus $1,846 or 20.7% in 2001. Overall gross
margins in 2002 are 17.6% compared to 16.1% last year if we adjust for the
terminated supply agreement commission recorded in fiscal 2001.
The Agrochemicals segment showed a decline in gross profit of 14.7%, which was
in contrast to the 3.2% 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 16.6%, which was
significantly higher than the 9.3% 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 $4,215 from $5,365, or
21.4%. The results were achieved by lower amounts of inventory in warehouses,
lower 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
12
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 rate for the year ended June 30, 2002 was 33.0% compared to
last year's 37.4%. The decrease in the effective tax rate is primarily a
reflection of earnings in lower tax jurisdictions due to the Schweizerhall
Pharma acquisition.
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000
SALES AND GROSS PROFIT
Net sales for fiscal 2001 decreased $7,154, or 3.9%, to $178,154 from $185,308
for fiscal 2000. Although the overall sales decrease was relatively small,
several of the segments showed significant changes.
The acquisition of Schweizerhall Pharma, which closed March 26, 2001, accounted
for $17,798 or 10.0% of net sales for 2001 of which $13,319 was in the
Pharmaceuticals, Biochemicals & Nutritionals segment. The contribution of this
acquisition, offset somewhat by the loss of sales resulting from the termination
of a supply agreement with a major supplier, resulted in this segment's 34.7%
increase, to $47,736 from $35,448. Sales under the supply agreement with the
major supplier that was terminated accounted for approximately $15.0 million of
sales in 2000.
The balance of the sales resulting from that acquisition, $4,479, were in the
Pharmaceutical Intermediates & Custom Manufacturing segment. This segment had an
overall decrease of $19,801 to $13,401, or 59.6%. The major supplier referred to
earlier was the principal supplier to this segment and the sales decrease
excluding the new sales from the Schweizerhall Pharma acquisition is directly
related.
The Chemicals & Colorants segment experienced a 1.9% decrease in sales, to
$97,902 from $99,735. Dyes and pigment intermediates showed across the board
decreases due to a general weakening of demand. This was offset somewhat by
higher industrial chemical sales as well as sales of pigments and agricultural
intermediates, two relatively new areas, which showed significant growth from
the continuing development of new products.
Sales of the Agrochemicals segment also increased to $13,133 from $11,417, or
15.0%. This was due primarily to increased sales of two products, with all other
products remaining relatively flat.
The Institutional Sanitary Supplies & Other segment increased $476 or 8.6%,
mainly due to a full year of activity in fiscal 2001 for its Magnum line which
was acquired in October 1999, which amounted to 9 months of sales.
Gross profit by segment before freight and storage costs for the entire
corporation for the year increased 6.1% for the year to $33,982 from $32,016.
Unallocated cost of sales, primarily storage and certain freight costs,
increased 11.5% to $5,365 from $4,812. The inclusion of Schweizerhall Pharma for
the fourth quarter, fuel surcharges on domestic freight and increased goods in
warehouses as a result of the acquisitions accounted for the increase.
Therefore, since the percent increase in unallocated cost of sales was greater
that the increase in total gross profit by segment, net gross profit increased
by a slightly lesser percentage.
The profit margins on sales from the Schweizerhall Pharma acquisition in the
Pharmaceuticals, Biochemicals and Nutritional segment of $1,976 were within that
segment's normal range. This segment also benefited from the sales commission
earned relating to the previously mentioned major supplier. This accounts for
the somewhat larger percentage increase in gross profit than sales.
The Pharmaceutical Intermediates & Custom Manufacturing segment benefited from a
sales commission earned with the aforementioned major supplier relating to
profits on open orders at the time of termination. This, coupled with the gross
profit of
13
$832 relating to sales of this segment resulting from the Schweizerhall Pharma
acquisition, at substantially higher gross margins than the lost sales, resulted
in gross margins being virtually unchanged, in spite of the sales decrease.
The Chemicals & Colorants sector showed a 5.8% decrease in gross profit
reflecting a greater percentage decrease in gross profit than sales. This was
caused by increased competition.
Gross profits in the Agrochemicals sector increased 25.8%, greater than the
15.0% increase in sales. Increased sales of higher profit products, combined
with a decrease in certain product reregistration costs, caused this.
Lastly, gross profits in the Institutional Sanitary Supplies and Other segment
fell 40% caused by a shift in product mix towards lower profit products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses increased by $4,730 to $22,761 in
fiscal 2001 compared to $18,031 in fiscal 2000. The acquisition and inclusion of
the Schweizerhall Pharma business as of March 26, 2001 accounted for $1,920 of
the increase. Costs related to the acquisition and assimilation of the acquired
business in addition to the related amortization of goodwill and intangible
assets also contributed to the overall increase. Fiscal 2001 includes a
non-recurring employee separation charge of $994. Selling expenses increased due
to an increased presence in China and the promotional expenses related to our
recent acquisitions. Compensation related costs also increased as new positions
were added to support the growth and expansion of the Company.
INTEREST AND OTHER INCOME
Interest expense of $296 in fiscal 2001 reflected an increase of $285 from the
$11 of interest expense for 2000. The increase is a direct result of the short
term loans assumed in connection with the acquisition of the Schweizerhall
Pharma business.
Interest and other income increased by $157 to $1,226 in fiscal 2001 compared to
$1,069 in fiscal 2000. The increase in income was attributable to the
incremental amounts realized by the Schweizerhall Pharma business during the
fourth quarter of fiscal 2001.
TAX RATES
The effective tax rates were 37.4% and 38.0% in fiscal 2001 and 2000,
respectively. The effective tax rates differ from the federal statutory tax rate
at 34% primarily due to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 2002, the Company had $14,255 in cash, $1,320 in short-term
investments and $7,336 of short-term bank loans. Working capital was $58,311 at
June 30, 2002 versus $55,259 at June 30, 2001.
The Company's cash position at June 30, 2002 increased $6,945 from the June 30,
2001 level. Operating activities provided cash of $15,480, primarily from net
income of $4,945 and increases in other accrued expenses and long-term
liabilities, accounts payable, drafts and acceptances payable and accrued
merchandise purchases totaling $12,861, partially offset by an increase in
accounts receivable of $4,698.
Investing activities used cash of $2,171, primarily from a payment of $2,639 for
additional inventory related to the Schweizerhall Pharma acquisition as well as
additional acquisition costs related to the Schweizerhall Pharma acquisition of
$563 and capital expenditures of $640. These cash outlays were partially offset
by a settlement of certain acquired accounts receivable balances of $1,571.
Financing activities used cash of $6,364 primarily as a result of payments of
long-term liabilities, bank loans and notes payable related to the Schweizerhall
Pharma acquisition totaling $4,637 as well as cash dividends of $2,088.
14
On March 26, 2001 the Company acquired the distribution business of the
Schweizerhall Pharma division of Schweizerhall Holding AG. To date, the Company
has invested $25,980,which included 600 shares of restricted common stock from
treasury valued at $5,175, $4,626 in notes, $5,973 in cash, the assumption of
debt for $8,966 and acquisition costs of $1,240. In connection with this
acquisition the Company liquidated certain of its investments. 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 (approximately $14,385) of which $7,336 was utilized as of June 30,
2002. 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,
2002, the Company utilized $1,544 in letters of credit leaving an unused
facility of $13,456. 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 covenants requiring, among other
things, minimum levels of debt service and tangible net worth. The Company was
in compliance with all covenants at June 30, 2002.
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,
2002, the Company has no significant obligations for capital expenditures. At
June 30, 2002, 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 $ 7,608 $ 7,608 $ - $ - $ -
Operating leases 10,347 1,374 2,595 2,306 4,072
Commercial letters of credit 1,544 1,272 272 - -
Standby letters of credit 105 105 - - -
Unconditional purchase
obligations 19,935 12,305 7,630 - -
------- ------- ------- ------ ------
Total $39,539 $22,664 $10,497 $2,306 $4,072
======= ======= ======= ====== ======
15
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
(a) In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations", SFAS 142, "Goodwill and Other Intangible
Assets" and in August 2001 the FASB issued SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 141 requires that the
purchase method of accounting be used for all future business combinations and
specifies criteria intangible assets acquired in a business combination must
meet to be recognized and reported apart from goodwill. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS 142. Amortization expense relating to goodwill was
$542, $275 and $193 for the years ended June 30, 2002, 2001 and 2000,
respectively. SFAS 142 will also require that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives, and
reviewed for impairment in accordance with SFAS 144. The Company has adopted the
provisions of SFAS 141 and SFAS 142 effective July 1, 2002.
Upon adoption the Company will evaluate its existing intangible assets and
goodwill that were acquired in prior purchase business combinations, and make
any necessary reclassifications in order to conform with the new criteria in
SFAS 141 for recognition apart from goodwill. The Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments. In addition, the Company
will be required to test goodwill and, to the extent an intangible asset is
identified as having an indefinite useful life, the intangible asset for
impairment in accordance with SFAS 142. Any impairment loss will be measured as
of the date of adoption and recognized as the cumulative effect of a change in
accounting principle.
As of June 30, 2002 the Company had unamortized goodwill in the amount of $9,821
and unamortized identifiable intangible assets in the amount of $702. The
Company has evaluated the remaining useful lives of its intangible assets that
will continue to be amortized and has determined that no revision to the useful
lives will be required. The Company expects to complete its initial impairment
review of goodwill by the end of the second quarter fiscal 2003. Because of the
extensive effort needed to comply with adopting SFAS 142, it is not practicable
to reasonably estimate whether any transitional impairment losses associated
with the Company's goodwill will be required to be recognized.
(b) In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes an accounting standard requiring
the recording of the fair value of liabilities associated with the retirement of
long-lived assets in the period in which they are incurred. The Company has
adopted the provisions of SFAS 143 effective July 1, 2002. The adoption of SFAS
143 did not have a significant effect on the Company's results of operations or
its financial position.
(c) SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
However, SFAS 144 retains the fundamental provisions of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale.
SFAS 144 supersedes the accounting and reporting provisions of APB Opinion 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business. However,
SFAS 144 retains the requirement of Opinion 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment, or in
distribution to owners) or is classified as held for sale. SFAS 144 also amends
ARB No. 51, "Consolidated Financial Statements", to
16
eliminate the exception to consolidation for a temporarily controlled
subsidiary. The Company has adopted SFAS 144 effective July 1, 2002. The
adoption of SFAS 144 for long-lived assets held for sale did not have a material
impact on the consolidated financial statements because the impairment
assessment under SFAS 144 is largely unchanged from SFAS 121. The provisions of
this statement for assets held for sale or other disposal generally are required
to be applied prospectively after the adoption date to newly initiated disposal
activities and therefore, will depend on future actions initiated by management.
As a result, the Company cannot determine the potential effects that adoption of
SFAS 144 will have on the consolidated financial statements with respect to
future disposal decisions, if any.
(d) In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements
No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections". SFAS 145
updates, clarifies and simplifies existing accounting pronouncements by
rescinding Statement 4, which required all gains and losses from extinguishments
of debt to be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. As a result, the criteria in Opinion 30 will
now be used to classify those gains and losses. Additionally, the Statement
requires that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The Company has adopted the provisions of SFAS No.
145 as of July 1, 2002. The adoption of SFAS 145 did not have any impact on the
Company's consolidated financial statements.
(e) In July 2002, the FASB issued SFAS 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 is required to adopt the provisions of SFAS
146 as of January 1, 2003. The Company does not believe that the adoption of
this statement will have any impact on the Company's consolidated financial
statements as no planned restructuring charges currently exist.
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
Investments at June 30, 2002, which consist of corporate securities and are
recorded at fair value of $951, 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 $95 as of June
30, 2002. 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,
2002, the Company had foreign currency contracts outstanding. The difference
between the fair market
17
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, 2002 was $42. Intercompany transactions with foreign subsidiaries are
typically not hedged. Therefore, the potential loss in fair value for a net
currency position resulting from a 10% adverse change in quoted foreign currency
exchange rates as of June 30, 2002 is not applicable.
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, 2002, 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, 2002, amounts to $1,245. 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.
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, 2002 and 2001.
QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands except per share amounts)
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 0.08 0.19 0.23 0.25
Year Ended June 30, 2001
Quarter Ended
Sept.30,2000 Dec.31,2000 Mar.31,2001 June 30,2001
------------ ----------- ----------- ------------
Net sales $41,051 $37,750 $43,317 $56,036
Gross profit 5,869 6,323 7,436 8,989
Net income 929 1,141 1,953 222
Net income per
common share
- diluted 0.15 0.19 0.33 0.03
18
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.
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 5, 2002.
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 5, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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 5, 2002.
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 5, 2002.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Annual Report on
Form 10-K, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act") are effective to
ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation. There
were no significant deficiencies or material weaknesses, and therefore
there were no corrective actions taken.
19
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.
During the fourth quarter of fiscal 2002, the Company did not file a
current report on Form 8-K.
(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
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).
20
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, 2002..
10.14* Credit Agreement between Aceto Corporation and subsidiaries and
JPMorgan Chase Bank dated May 10, 2002.
21* Subsidiaries of the Company.
23* Consent of KPMG LLP.
99.1* Certification of the Chief Executive Officer
99.2* Certification of the Chief Financial Officer
- ------------------
*Filed herewith
21
ACETO CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Report
Consolidated financial statements:
Consolidated balance sheets as of June 30, 2002 and 2001
Consolidated statements of income for the years ended June 30,
2002, 2001 and 2000
Consolidated statements of cash flows for the years ended June
30, 2002, 2001 and 2000
Consolidated statements of shareholders' equity and comprehensive
income (loss) for the years ended June 30, 2002, 2001 and 2000
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.
22
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2002 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.
Melville, New York /s/KPMG LLP
August 27, 2002
23
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
2002 2001
---- ----
ASSETS
Current assets:
Cash $14,255 $ 7,310
Short-term investments 1,320 988
Receivables:
Trade, less allowance for
doubtful accounts:
2002, $657; 2001, $316 42,417 38,285
Other 4,266 3,215
------- -------
46,683 41,500
Inventory 36,271 37,818
Prepaid expenses 1,191 686
Deferred income tax benefit, net 521 1,773
Property held for sale 483 483
------- -------
Total current assets 100,724 90,558
Long-term investments - 369
Long-term notes receivable 691 794
Property and equipment:
Machinery and equipment 1,069 953
Leasehold improvements 1,143 1,093
Computer equipment 1,680 1,378
Furniture and fixtures 593 983
Automobiles 293 264
------- -------
4,778 4,671
Less accumulated depreciation and
amortization 2,346 2,132
------- -------
2,432 2,539
Goodwill, less accumulated amortization:
2002, $1,086; 2001, $544 9,821 10,367
Deferred income tax benefit, net 1,083 -
Other assets 952 546
------- -------
Total Assets $115,703 $105,173
======== ========
See accompanying notes to consolidated financial statements.
24
2002 2001
---- ----
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts and acceptances payable $ 4,073 $ 1,533
Short-term bank loans 7,336 8,864
Notes payable - acquisition - 2,313
Current installments
on long-term liabilities 272 397
Accounts payable 14,326 10,529
Accrued merchandise purchases 4,196 1,626
Accrued compensation 2,799 2,913
Accrued environmental remediation 1,284 1,292
Accrued income taxes 1,582 519
Other accrued expenses 6,545 5,313
------- -------
Total current liabilities 42,413 35,299
Long-term liabilities, excluding
current installments - 671
Shareholders' equity:
Common stock, $.01 par value;
authorized 20,000,000 shares;
issued 9,001,290 shares;
outstanding 2002, 6,533,969 shares;
outstanding 2001, 6,503,707 shares 90 90
Capital in excess of par value 56,494 56,416
Retained earnings 40,863 38,006
Treasury stock, at cost:
2002, 2,467,321 shares;
2001, 2,497,583 shares (24,252) (24,545)
Accumulated other comprehensive income(loss) 95 (764)
------- -------
Total shareholders' equity 73,290 69,203
------- -------
Commitments and contingencies (Note 18)
Total Liabilities and Shareholders' Equity $115,703 $105,173
======== ========
See accompanying notes to consolidated financial statements.
25
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001 2000
---- ---- ----
Net sales $ 229,329 $ 178,154 $ 185,308
Cost of sales 192,048 149,537 158,104
--------- --------- ---------
Gross profit 37,281 28,617 27,204
Selling, general and
administrative expenses 29,945 22,761 18,031
--------- --------- ---------
Operating profit 7,336 5,856 9,173
Other income (expense):
Interest expense (368) (296) (11)
Interest and other income 410 1,226 1,069
--------- --------- ---------
42 930 1,058
--------- --------- ---------
Income before income taxes 7,378 6,786 10,231
Income taxes:
Federal:
Current 1,436 2,417 3,544
Deferred 220 (287) (212)
State and local:
Current 337 332 592
Deferred (50) (50) (37)
Foreign:
Current 490 129 --
--------- --------- ---------
2,433 2,541 3,887
--------- --------- ---------
Net income $ 4,945 $ 4,245 $ 6,344
========= ========= =========
Net income per common share:
Basic $ 0.76 $ 0.69 $ 1.02
Diluted 0.75 0.69 1.01
Weighted average shares outstanding:
Basic 6,519 6,122 6,188
Diluted 6,555 6,148 6,308
See accompanying notes to consolidated financial statements.
26
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(IN THOUSANDS)
2002 2001 2000
---- ---- ----
Operating activities:
Net income $ 4,945 $ 4,245 $ 6,344
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,629 909 574
Gain on sale of assets (3) -- (24)
Provision for doubtful accounts 566 307 19
Foreign currency translation adjustment 859 (764) --
Deferred tax provision (benefit) 169 (337) (248)
Income tax benefit on exercise of stock options 10 -- --
Changes in assets and liabilities,
net of effect of the acquisitions:
Investments 37 (53) 3,399
Trade accounts receivable (4,698) 575 797
Other receivables (1,036) 143 (1,709)
Inventory (137) 6,280 (3,505)
Prepaid expenses (505) 383 (382)
Other assets (158) (29) 73
Drafts & acceptances payable 2,540 1,069 (285)
Accounts payable 3,797 1,455 (184)
Accrued merchandise purchases 2,570 (10,395) 2,575
Accrued compensation (114) (298) 602
Accrued environmental remediation (8) (20) (11)
Accrued income taxes 1,063 (840) 253
Other accrued expenses and long
term liabilities 3,954 (222) (308)
-------- -------- --------
Net cash provided by operating activities 15,480 2,408 7,980
-------- -------- --------
Investing activities:
Purchases of investments--held-to-maturity -- -- (8,337)
Proceeds from investments--held-to-maturity -- 8,112 14,802
Payments received on notes receivable 88 82 81
Purchases of property and equipment (640) (1,305) (1,091)
Proceeds from sale of property 12 -- 10
Acquisition of businesses, net of
cash acquired (563) 1,205 (6,996)
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 (2,171) 8,094 (1,531)
-------- -------- --------
Financing activities:
Payments of long-term liabilities (796) (531) --
Proceeds from exercise of stock options 239 332 204
Payments for purchases of treasury stock (121) (1,642) (6,088)
Issuance of treasury stock to employees 243 189 127
Payments of cash dividends (2,088) (1,936) (1,872)
Payments of bank loans (1,528) (102) --
Payments of notes payable - acquisition (2,313) (2,313) --
-------- -------- --------
Net cash used in financing activities (6,364) (6,003) (7,629)
-------- -------- --------
Net increase (decrease) in cash 6,945 4,499 (1,180)
Cash at beginning of year 7,310 2,811 3,991
-------- -------- --------
Cash at end of year $ 14,255 $ 7,310 $ 2,811
======== ======== ========
See accompanying notes to consolidated financial statements.
27
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated
COMMON STOCK 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, 1999 9,001,290 $ 90 $ 57,637 $ 31,224 (2,585,331) $ (24,969) $ -- $ 63,982
Net income -- -- -- 6,344 -- -- -- 6,344
Stock issued pursuant to employee
incentive plans -- 6 -- 12,371 121 -- 127
Cash dividends:
Common stock ($0.30 per share) -- -- -- (1,842) -- -- -- (1,842)
Preferred stock -- -- -- (29) -- -- -- (29)
Conversion of preferred stock
to common stock -- (616) -- 139,314 1,367 -- 751
Exercise of stock options -- (99) -- 33,572 331 -- 232
Tax benefit from exercise of
stock options -- -- 61 -- -- -- -- 61
Treasury stock purchases -- -- -- -- (566,499) (6,087) -- (6,087)
Lapsed stock options 65 65
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 9,001,290 90 57,054 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 (loss) 3,481
---------
Stock issued pursuant to employee
incentive plans -- -- (12) -- 20,479 201 -- 189
Cash dividends:
Common stock ($0.31 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 9,001,290 90 56,416 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 (loss) 5,804
Stock issued pursuant to employee
incentive plans -- -- 9 -- 23,762 234 -- 243
Cash dividends:
Common stock ($0.32 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 9,001,290 $ 90 $ 56,494 $ 40,863 (2,467,321) $ (24,252) $ 95 $ 73,290
See accompanying notes to consolidated financial statements.
28
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(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, Singapore, Thailand, Canada, Germany, France, 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. There were no cash
equivalents at June 30, 2002 or 2001.
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.
STOCK OPTIONS
On July 1, 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation", which permits
entities to
29
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS 123 also allows entities to
continue to apply the provisions of Accounting Principles Board (APB) 25 and
provide pro forma net income and pro forma net income per share disclosures for
employee stock option grants as if the fair-value-based method defined in SFAS
123 had been applied. The Company has elected to continue to apply the
provisions of APB 25 and provide the pro forma disclosure provisions of SFAS
123.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment and
passage of title 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 $269 and $121 for the years ended June
30, 2002 and 2001, respectively. There were no such costs incurred during the
year ended June 30, 2000.
NET INCOME PER COMMON SHARE
Net income per common share amounts (basic EPS) were computed by dividing net
income after deducting preferred stock dividends on the Company's $2.50
cumulative redeemable preferred stock 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 and conversion of
preferred stock.
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 5
Furniture and fixtures 10
Automobiles 3
Leasehold improvements are amortized over the shorter of the life of the asset
or the lease term.
GOODWILL
Goodwill is amortized on a straight-line basis over a twenty-year period. The
recoverability of goodwill is assessed by determining whether the carrying
amount can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on the
difference between projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds and the carrying
value of goodwill. The assessment of the recoverability of the goodwill acquired
will be impacted if estimated future operating cash flows are not achieved.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
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 net cash flows
30
expected to be generated by the asset. 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 buildings, 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 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, 2002 in the amount of $42.
The hedge contracts flow through cost of goods sold in the consolidated
statement of income. 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.
31
RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 consolidated financial
statements to conform to the 2001 presentation.
In fiscal 2001, the Company adopted the provisions of the Financial Accounting
Standards Board's Emerging Issue Task Force (EITF) Issue No. 00-10. "Accounting
for Shipping and Handling Fees and Costs," which requires the Company to report
all amounts billed to a customer related to shipping and handling as revenue.
The Company includes all costs incurred for shipping and handling as cost of
sales. The Company has reclassified such billed amounts, which were previously
netted in cost of sales, to net sales. As a result of this reclassification, net
sales and cost of goods sold were increased by $519 for the year ended June 30,
2000.
(3) BUSINESS ACQUISITIONS
(a) 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.
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.
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. Any
unpaid amounts are due in full on March 31, 2002. Amounts outstanding under the
notes were $2,313 as of June 30, 2001. 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.
The excess of cost over the fair value of assets acquired (goodwill) amounted to
$6,558. The goodwill is being amortized on a straight-line basis over a period
of twenty years. Amortization of goodwill amounted to $326 and $84 for the years
ended June 30, 2002 and June 30, 2001, respectively. 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.
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
32
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 Company does not anticipate
that additional provisions will be required, as the Company has finalized its
exit plans. The operating lease payment relates to equipment and facilities
leases assumed by the Company. Amounts accrued represent management's estimate
of the cost to exit the equipment and facilities leases, including lease
payments and termination costs, net of recoverable amounts.
The changes in exit plan liabilities during the year ended June 30, 2002 are as
follows:
Severance Lease
Liability Liability Total
--------- --------- -----
Balance July 1, 2001 $ 106 $ 39 $ 145
Reserve established in 2002 413 5 418
Utilized in 2002 (paid) (519) (44) (563)
---- ---- ----
Balance June 30, 2002 $ - $ - $ -
==== ==== ====
The following unaudited condensed pro forma financial information of the Company
for the years ended June 30, 2001 and 2000 includes the consolidated results of
operations of the Company as if the acquisition of Schweizerhall had occurred on
July 1, 1999:
(unaudited)
2001 2000
---- ----
Net revenue $238,963 $282,019
Net earnings 1,334 1,201
Net earnings per diluted share 0.20 0.17
The pro forma information for the period ended June 30, 2000 includes the
historical results of Schweizerhall Pharma for the twelve months ended September
30, 2000.
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, 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.
b) On January 18, 2000, the Company purchased certain assets of Schweizerhall,
Inc. (Schweizerhall) for $6,345 in cash. The acquisition was accounted for as a
purchase and, accordingly, the cost of the acquisition was initially allocated
to the assets acquired, based upon their estimated fair values at the date of
acquisition. The allocation of the purchase price has been completed. The excess
of cost over the fair value of assets acquired amounted to $975 and is being
treated as goodwill. Amortization of goodwill amounted to $49, $49 and $22 for
the years ended June 30, 2002, 2001 and 2000, respectively. The assets acquired
consisted of inventory and a non-competition agreement. The non-competition
agreement valued at $120 is being amortized on a straight-line basis over three
years. The results of operations of Schweizerhall have been included in the
accompanying consolidated statement of income from the date of acquisition. Pro
forma results of operations were not provided as their effect on the
consolidated results of operations were not material.
c) 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
33
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 October 2000 and 2001 payments were made as scheduled without
an adjustment.
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. Amortization of goodwill amounted to
$55, $55 and $39 for the years ended June 30, 2002, 2001 and 2000, respectively.
The assets acquired consisted primarily of inventory. The results of operations
of Magnum have been included in the accompanying consolidated statements of
income from the date of acquisition. Pro forma results of operations were not
provided as their effect on the consolidated results of operations were not
material.
d) On November 24, 1998 the Company purchased all the capital stock of CDC
Products Corp. (CDC) for a purchase price of $2,801. Of the purchase price,
$2,111 was paid at closing and the balance of $690 was scheduled to be paid in
semi-annual installments through August 2002. The amounts owed to the previous
owner were subject to a dispute between the Company and the previous owner (see
note 19). The dispute was brought before the American Arbitration Association
which resulted in a $360 reduction in the outstanding liability owed to the
previous owner. The Company recorded as a liability on the consolidated balance
sheet as of June 30, 2001, three remaining payments totaling $335 due through
August 2002. All three payments were made as scheduled as of August 2002. The
adjustment arising from the dispute was recorded as a reduction 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 $2,282, after the aforementioned arbitration settlement,
and is being treated as goodwill. Amortization of goodwill amounted to $114, $87
and $132 for the years ended June 30, 2002, 2001 and 2000, respectively. 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. Pro forma
results of operations were not provided as their effect on the consolidated
results of operations were not material. In connection with the acquisition, the
Company entered into a three year 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.
(4) INVESTMENTS
A summary of trading securities, classified as short-term, follows:
June 30, 2002 June 30, 2001
------------- -------------
Cost Cost
Fair Value Basis Fair Value Basis
---------- ----- ---------- -----
Corporate securities $ 951 $ 594 $ 988 $ 593
The change in the net unrealized holding gains (losses) on trading securities
was $(37), $53 and $(92)for fiscal 2002, 2001 and 2000, respectively.
34
A summary of held-to-maturity securities as of June 30, 2002 and 2001 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
June 30, 2001
Gross Gross
Amortized Unrealized Unrealized Fair
Cost or Cost Gains Losses Value
------------ ----- ------ -----
Held-to-maturity securities:
Long-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 (see note 3).
(5) INVENTORY
Inventory consists of the following:
June 30
-------
2002 2001
---- ----
Finished goods $35,897 $37,287
Work in process 134 180
Raw materials 240 351
------- -------
Total $36,271 $37,818
======= =======
(6) NOTES RECEIVABLE
The Company currently holds four notes receivable with outstanding balances
aggregating $813 and $901 at June 30, 2002 and 2001, 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 seven to twenty-five years and pay interest
at either a fixed or variable rate. The fixed rates on three notes are 8.00%,
9.25% and 9.50%. The variable rate on the other note, which is based on 1% over
prime, was 5.75% at June 30, 2002 and 7.75% at June 30, 2001. Included in
current assets are notes receivable due within one year totaling $122 and $107
at June 30, 2002 and 2001, respectively.
(7) 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, however, after additional testing was completed, the Company
received a revised estimate from the consultant. As a result, the Company
recorded an additional liability of $800. At June 30, 2002 and 2001, the
remaining liability was $1,284 and $1,292, respectively. The Company believes it
is possible that such amount may not be sufficient to cover future environmental
remediation but does not believe any additional amount will cause a material
adverse effect on the overall financial position or liquidity of the Company.
However, any remediation required above the liability established could
materially affect the Company's results in a particular reporting period. Other
than the remediation associated with the Carlstadt, New Jersey facility, the
Company is not aware of any material environmental liabilities.
(8) 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
35
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% (3.34% at June 30, 2002). The credit agreement contains several
covenants requiring, among other things, minimum levels of debt service and
tangible net worth. The Company was in compliance with all covenants at June 30,
2002.
At June 30, 2002, the Company had available lines of credit with foreign
financial institutions totaling $14,385. 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 2.59% at
June 30, 2002 and 4.59% at June 30, 2001. 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
$7,336 and $1,544 in letters of credit leaving an unused facility of $20,505 at
June 30, 2002. For June 30, 2001 the Company utilized $8,864 in short-term loans
and $6,943 in letters of credit leaving an unused facility of $6,293. The
weighted average interest rate on short-term loans outstanding as of June 30,
2002 was 3.64% and 6.1% as of June 30, 2001.
(9) 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:
2002 2001 2000
---- ---- ----
Net income $ 4,945 $ 4,245 $ 6,344
Preferred stock dividends -- -- (29)
------- ------- -------
Net income available for common
shareholders 4,945 4,245 6,315
======= ======= =======
Weighted average common shares (basic) 6,519 6,122 6,188
Effect of dilutive securities:
Stock options 36 26 68
Convertible preferred stock -- -- 52
------- ------- -------
Weighted average common and
potential common shares
outstanding (diluted) 6,555 6,148 6,308
======= ======= =======
Basic income per common share $ 0.76 $ 0.69 $ 1.02
Diluted income per common share 0.75 0.69 1.01
In fiscal 2002, 2001, and 2000, employee stock options of 235, 400, and 232,
respectively, were not included in the diluted income per common share
calculation because their effect would have been anti-dilutive.
(10) 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
shares of common stock. The Company purchased the 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.
(11) STOCK BASED COMPENSATION PLANS
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 500 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
36
1998 Plan, there were 48 and 167 shares of common stock available for grant as
either options or restricted stock at June 30, 2002 and 2001, 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 421 and 382 shares of
common stock were available for grant at June 30, 2002 and 2001, 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
both plans at June 30, 2002, 2001 and 2000, 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, 1999 718 $ 9.65
Granted 20 11.75
Exercised (33) 6.06
Forfeited (37) 8.58
- ---------------------------------------------------------------------
Balance at June 30, 2000 668 $ 9.95
Granted 70 9.63
Exercised (23) 7.81
Forfeited/Lapsed (69) 10.04
- ---------------------------------------------------------------------
Balance at June 30, 2001 646 $ 9.99
Granted 121 9.84
Exercised (18) 7.90
Forfeited (62) 9.50
- ---------------------------------------------------------------------
Balance at June 30, 2002 687 $10.07
Options exercisable at June 30, 2002, 2001 and 2000 were 449, 375 and 358,
respectively. The weighted average exercise price for options exercisable at
June 30, 2002, 2001 and 2000 was $10.39, $10.08 and $9.47, respectively. At June
30, 2002, outstanding options had expiration dates ranging from December 31,
2002 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-, $13 and $91 in
fiscal 2002, 2001 and 2000, respectively. Under the 1998 Plan, compensation is
recorded for the value of restricted stock granted. There were 23, 20 and 12
shares of restricted stock granted during fiscal 2002, 2001 and 2000,
respectively. Such charges to operations were $214, $199 and $181 in fiscal
2002, 2001 and 2000, respectively.
Summarized information about stock options outstanding and exercisable at June
30, 2002 was as follows:
Outstanding Exercisable
Exercise Number of Average Average Number of Average
Price Range Shares Life(1) Price(2) Shares Price(2)
----------- ------ ------- -------- ------ --------
$ 7.00- 8.99 60 2.35 $ 7.87 60 $ 7.87
9.00-11.99 450 9.22 9.39 212 9.37
12.00-13.00 177 5.83 12.54 177 12.54
(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 2002,
2001 and 2000 was $2.18, $2.22 and $3.13, 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(%)
----- ------------- ----------- ------- --------
2002
12/06/01 20 7.5 5.46 3.25
2001
10/25/00 20 7.5 5.681 3.08
12/17/00 20 7.5 5.307 3.29
3/27/01 20 7.5 5.009 3.48
4/05/01 20 7.5 4.971 3.53
5/08/01 20 7.5 5.242 3.45
2000
12/2/99 20 7.5 6.25 2.67
37
The Company applies Accounting Principles Board No. 25 in accounting for its
stock option grants and, accordingly, no compensation cost has been recognized
in the financial statements for its stock options which have an exercise price
equal to or greater than the fair value of the stock on the date of the grant.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS 123, the Company's net income and
income per share would have been reduced to the pro forma amounts indicated
below:
2002 2001 2000
---- ---- ----
Net income:
As reported $4,945 $4,245 $6,344
Pro forma 4,732 4,019 6,043
Income per share-basic:
As reported $ 0.76 $ 0.69 $ 1.02
Pro forma 0.73 0.66 0.97
Income per share-diluted:
As reported $ 0.75 $ 0.69 $ 1.01
Pro forma 0.72 0.65 0.96
(12) INTEREST AND OTHER INCOME
Interest and other income earned during fiscal 2002, 2001 and 2000 were
comprised of the following:
2002 2001 2000
---- ---- ----
Dividends $ 196 $ 128 $ 152
Interest 157 468 889
Net gain (loss) on investments (37) 53 (290)
Net gain on sale of assets 3 - 20
Royalty income - 354 224
Miscellaneous 91 223 74
------ ------ ------
$ 410 $1,226 $1,069
====== ====== =====
(13) INCOME TAXES
The components of income before the provision for income taxes are as follows:
2002 2001 2000
---- ---- ----
Domestic operations $ 4,922 $ 6,503 $10,231
Foreign operations 2,456 283 -
------- ------- -------
$ 7,378 $ 6,786 $10,231
======= ======= =======
38
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at June 30, 2002 and 2001 are presented below:
2002 2001
---- ----
Deferred tax assets:
Accrued environmental remediation
liabilities not currently
deductible $ 502 $ 517
Accrued retirement plan 384 339
Accrued compensation 391 573
Additional costs inventoried for
tax purposes 120 211
Allowance for doubtful accounts
receivable 235 129
Differences in depreciation of
property and equipment 73 52
Differences in amortization of
intangible assets 45 -
Accrued professional services 39 -
Net operating loss carry forwards 1,870 1,825
------ ------
Total gross deferred tax assets 3,659 3,646
Valuation allowances (1,870) (1,809)
------ ------
Total net deferred tax assets 1,789 1,837
------ ------
Deferred tax liabilities:
Unrealized gain on investments 139 21
Goodwill 46 27
Other - 16
------ ------
Total gross deferred tax
liabilities 185 64
------ ------
Net deferred tax assets $1,604 $1,773
====== ======
The net change in the total valuation allowance for the year ended June 30, 2002
was an increase of $61. 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, 2002, the Company will need to generate future
domestic taxable income of approximately $4,860. Domestic taxable income for
fiscal 2002 and 2001 was approximately $ 4,734 and $7,111, 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.
Reconciliation of the statutory Federal income tax rate and the effective tax
rate for the fiscal years ended June 30, 2002, 2001 and 2000 follows:
2002 2001 2000
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State and local taxes, net
of Federal income tax
benefit 2.6 2.7 3.6
Foreign tax rate differential (4.9) 0.5 -
Other 1.3 0.2 0.4
---- ---- ----
Effective tax rate 33.0% 37.4% 38.0%
==== ==== ====
At June 30, 2002, the Company had net operating loss carry forwards for foreign
income tax purposes of approximately $5,400 which are available to offset future
foreign taxable income, if any, of which $1,364 will expire from the year 2004
through the year 2007 and others which have no expiration date.
39
(14) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during fiscal 2002, 2001 and 2000 was as
follows:
2002 2001 2000
---- ---- ----
Interest paid $ 586 $ 248 $ 21
Income taxes paid 1,405 3,642 3,920
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.
In connection with the acquisition of Magnum in October 1999, the Company
recorded a liability of $500 due to the previous owners.
(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 $895, $864 and $789 in fiscal
2002, 2001 and 2000, 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. The
amounts previously reported for the two former segments have been combined and
reported as Chemicals and Colorants. Therefore, the Company's five 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
adhesives, coatings, food, fragrance, cosmetics 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) Pharmaceuticals, Biochemicals & Nutritionals
products, which include the active ingredients for generic pharmaceuticals,
vitamins and nutritional supplements; (4) Pharmaceutical Intermediates & Custom
Manufacturing products, used in preparation of pharmaceuticals, primarily by
major ethical drug companies and (5) 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.
40
Net sales and long-lived assets by location as of and for the years ended June
30, 2002, 2001 and 2000 were as follows:
Net Sales Gross Profit Long-lived Assets
--------- ------------ -----------------
2002 2001 2000 2002 2001 2000 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
United States $163,886 $161,741 $185,308 $26,798 $26,356 $27,204 $1,731 $1,986
Germany 25,729 6,103 - 4,494 1,005 - 445 318
The Netherlands 5,876 1,576 - 1,194 359 - 130 126
France 12,323 3,685 - 1,612 357 - 91 71
Asia-Pacific 21,515 5,266 - 3,183 540 - 35 38
Intersegment - (217) - - - - - -
-------- -------- -------- ------- ------- ------- ------ ------
Total $229,329 $178,154 $185,308 $37,281 $28,617 $27,204 $2,432 $2,539
======== ======== ======== ======= ======= ======= ====== ======
41
Institutional
Pharmaceuticals, Pharmaceutical Sanitary
Agro- Chemicals Biochemicals & Intermediates & Supplies Consolidated
chemicals & Colorants Nutritionals Custom Mfg & Other Totals
2002
- ----
Net sales $13,547 88,790 98,263 23,456 5,273 $229,329
Gross Profit $ 4,215 12,952 17,912 4,123 2,294 $ 41,496
Unallocated
cost of sales(1) 4,215
--------
Net gross
profit $ 37,281
========
2001
- ----
Net sales $13,133 97,902 47,736 13,401 5,982 $178,154
Gross Profit $ 4,943 15,529 9,270 2,678 1,562 $ 33,982
Unallocated
cost of sales(1) 5,365
--------
Net gross
profit $ 28,617
========
2000
- ----
Net sales $11,417 99,735 35,448 33,202 5,506 $185,308
Gross Profit $ 3,930 16,491 6,336 2,657 2,602 $ 32,016
Unallocated
cost of sales(1) 4,812
--------
Net gross
profit $ 27,204
========
(1) Represents freight and storage costs that are not allocated to a segment.
42
(17) FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2002 and 2001 the Company had future foreign exchange contracts that
have a notional amount of $28 and $679, respectively. The contracts have varying
maturities extending to January 2003. At June 30, 2002 and 2001 the Company had
not hedged open purchase commitments of approximately $1,185 and $271,
respectively. For fiscal 2002, 2001 and 2000, 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 $1,544 and
$6,493 as of June 30, 2002 and 2001, 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 $42. The difference
between the fair value of long-term financial instruments and their carrying
value at both June 30, 2002 and 2001 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,
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, 2002, five customers
accounted for 18% of net trade accounts receivable. At June 30, 2001, there was
no significant net trade accounts receivables concentration. At June 30, 2002
and 2001, the top five customers accounted for 16% and 14%, respectively, of net
sales.
No single product accounted for as much as 10% of net sales in fiscal 2002, 2001
or 2000. One of the Company's suppliers accounted for 21% of total purchases in
fiscal 2000. No supplier accounted for as much as 10% of total purchases in
fiscal 2001 or 2002.
During the fiscal years ended June 30, 2002 and 2001, approximately 25% and 30%,
respectively, of the Company's purchases of chemicals came from Europe and
approximately 60% and 55%, respectively, from Asia.
43
The Company maintains operations located outside of the United States. Net
assets located in Europe and Asia approximate $8,700 and $3,800, respectively at
June 30, 2002.
(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 three 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. The ultimate legal and financial liability of the Company with respect
to this claim cannot be estimated with any certainty. However, 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, 2002, the future minimum lease payments in the
aggregate and for each of the five succeeding years are as follows:
Fiscal Year Amount
----------- ------
2003 $ 1,374
2004 1,307
2005 1,288
2006 1,202
2007 1,104
Thereafter 4,072
-------
$10,347
=======
Total rental expense amounted to approximately $1,471, $983 and $871 for fiscal
2002, 2001 and 2000, 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,
2002, future minimum purchases required to be made under the contract in the
aggregate and for each of the five succeeding years are as follows:
Fiscal Year Amount
----------- ------
2003 $ 7,438
2004 5,053
2005 835
2006 -
2007 -
Thereafter -
-------
$13,326
=======
Total purchases under the contract amounted to approximately $ 3,024 for fiscal
2002. There were no purchases made under the contract during fiscal 2001 and
2000.
(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
has been paid in full as of August 2002.
44
(20) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
(a) In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations", SFAS 142, "Goodwill and Other Intangible
Assets" and in August 2001 the FASB issued SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 141 requires that the
purchase method of accounting be used for all future business combinations and
specifies criteria intangible assets acquired in a business combination must
meet to be recognized and reported apart from goodwill. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS 142. Amortization expense relating to goodwill was
$542, $275 and $193 for the years ended June 30, 2002, 2001 and 2000,
respectively. SFAS 142 will also require that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives, and
reviewed for impairment in accordance with SFAS 144. The Company has adopted the
provisions of SFAS 141 and SFAS 142 effective July 1, 2002.
Upon adoption the Company will evaluate its existing intangible assets and
goodwill that were acquired in prior purchase business combinations, and make
any necessary reclassifications in order to conform with the new criteria in
SFAS 141 for recognition apart from goodwill. The Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments. In addition, the Company
will be required to test goodwill and, to the extent an intangible asset is
identified as having an indefinite useful life, the intangible asset for
impairment in accordance with SFAS 142. Any impairment loss will be measured as
of the date of adoption and recognized as the cumulative effect of a change in
accounting principle.
As of June 30, 2002 the Company had unamortized goodwill in the amount of $9,821
and unamortized identifiable intangible assets in the amount of $702. The
Company has evaluated the remaining useful lives of its intangible assets that
will continue to be amortized and has determined that no revision to the useful
lives will be required. The Company expects to complete its initial impairment
review of goodwill by the end of the second quarter fiscal 2003. Because of the
extensive effort needed to comply with adopting SFAS 142, it is not practicable
to reasonably estimate whether any transitional impairment losses associated
with the Company's goodwill will be required to be recognized.
(b) In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes an accounting standard requiring
the recording of the fair value of liabilities associated with the retirement of
long-lived assets in the period in which they are incurred. The Company has
adopted the provisions of SFAS 143 effective July 1, 2002. The adoption of SFAS
143 did not have a significant effect on the Company's results of operations or
its financial position.
(c) SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
However, SFAS 144 retains the fundamental provisions of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale.
SFAS 144 supersedes the accounting and reporting provisions of APB Opinion 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business. However,
SFAS 144 retains the requirement of Opinion 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment, or in
distribution to owners) or is classified as held for sale. SFAS 144 also amends
ARB No. 51, "Consolidated Financial Statements", to eliminate the exception to
45
consolidation for a temporarily controlled subsidiary. The Company has adopted
SFAS 144 effective July 1, 2002. The adoption of SFAS 144 for long-lived assets
held for sale did not have a material impact on the consolidated financial
statements because the impairment assessment under SFAS 144 is largely unchanged
from SFAS 121. The provisions of this statement for assets held for sale or
other disposal generally are required to be applied prospectively after the
adoption date to newly initiated disposal activities and therefore, will depend
on future actions initiated by management. As a result, the Company cannot
determine the potential effects that adoption of SFAS 144 will have on the
consolidated financial statements with respect to future disposal decisions, if
any.
(d) In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements
No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections". SFAS 145
updates, clarifies and simplifies existing accounting pronouncements by
rescinding Statement 4, which required all gains and losses from extinguishments
of debt to be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. As a result, the criteria in Opinion 30 will
now be used to classify those gains and losses. Additionally, the Statement
requires that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The Company has adopted the provisions of SFAS No.
145 as of July 1, 2002. The adoption of SFAS No. 145 did not have any impact on
the Company's consolidated financial statements.
(e) In July 2002, the FASB issued SFAS 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 is required to adopt the provisions of SFAS
146 as of January 1, 2003. The Company does not believe that the adoption of
this statement will have any impact on the Company's consolidated financial
statements as no planned restructuring charges currently exist.
46
Schedule II
ACETO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 2002, 2001 and 2000
(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, 2002:
Allowance for doubtful
accounts $ 316 $ 566 - $ 225(a) $ 657
=== === === ===
Year ended June 30, 2001:
Allowance for doubtful
accounts $ 239 $ 307 - $ 230(a) $ 316
=== === === ===
Year ended June 30, 2000:
Allowance for doubtful
accounts $ 219 141 - 121(a) $ 239
=== === === ===
(a) Specific accounts written off as uncollectible, net of recoveries.
47
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
10(vi)(b) to the Company's Annual Report on Form 10-K for the
year ended June 30, 2000).
48
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.
21* Subsidiaries of the Company.
23* Consent of KPMG LLP.
99.1* Certification of the Chief Executive Officer
99.2* Certification of the Chief Financial Officer
- ------------------
*Filed herewith
50