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, 2004
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
Registrant's website address: www.aceto.com
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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]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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The aggregate market value of the voting stock of the Company held by
non-affiliates of the Company as of December 31, 2003 was approximately
$243,689,000.
The Registrant has 16,053,932 shares of common stock outstanding as of September
8, 2004.
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 2, 2004.
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
TABLE OF CONTENTS
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
Item 9A. Controls and Procedures
PART III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
PART I
CAUTIONARY STATEMENT RELATING TO THE 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
includes "forward-looking statements" within the meaning of section 27A of the
Securities Act and Section 21E of the Exchange Act. We intend those forward
looking-statements to be covered by the safe harbor provisions for
forward-looking statements. All statements regarding our expected financial
position and operating results, our business strategy, our financing plans and
the outcome of any contingencies are forward-looking statements. Any such
forward-looking statements are based on current expectations, estimates and
projections about our industry and our business. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," or variations
of those words and similar expressions are intended to identify such
forward-looking statements. 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 forward-looking statements include, but
are not limited to, unforeseen environmental liabilities, uncertain military,
political and economic conditions in the world, the mix of products sold and the
profit margins thereon, order cancellation or a reduction in orders from
customers, the nature and pricing of competing products, the availability and
pricing of key raw materials, dependence on key members of management, risks of
entering into new European markets, continued successful integration of
acquisitions, and economic and political conditions in the United States and
abroad.
NOTE REGARDING DOLLAR AMOUNTS
In this annual report, all dollar amounts are expressed in thousands, except for
share prices.
ITEM 1. BUSINESS
GENERAL
Aceto Corporation (together with its consolidated subsidiaries, "Aceto") was
incorporated in 1947 in the State of New York. We are a global distributor of
chemically-derived pharmaceuticals, biopharmaceuticals and specialty chemicals.
Our offices in China, Germany, France, the Netherlands, Singapore, India,
Poland, Hong Kong, the United Kingdom and the United States, along with
warehouses worldwide, enable us to respond quickly to global customer demands,
assuring that a consistent, high-quality supply of pharmaceutical,
biopharmaceutical and specialty chemicals is never far away. We are able to
offer our customers very competitive pricing, continuity of supply, and quality
control. Our 57 years of experience, our reputation for reliability and
stability, and our long-term relationships with our suppliers has fostered
loyalty among our customers.
We remain confident about our short- and long-term business prospects. In the
short-term, we anticipate continued organic growth, including growth resulting
from our launching four new active pharmaceutical ingredients (APIs) per year,
entering the developing biopharmaceutical market, globalization of our Chemicals
& Colorants business, expansion of our agrochemical segment by acquisition of
product lines, continued enhancement of our sourcing operations in China and
India, and steady improvement of our regulatory capabilities.
We believe new product launches and product introductions demonstrate that Aceto
has come to be recognized by the worldwide generic pharmaceutical industry as an
important, reliable supplier. Our long-term plans involve seeking strategic
acquisitions that
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enhance our earnings, forming alliances with partners that add to our
capabilities, and establishing significant business operations in Eastern
Europe. We believe Eastern Europe has great potential in the API business, given
that entry of Eastern European countries into the European Union will result in
their being subject to the same strict pharmaceutical regulations as their
Western European counterparts.
REPORTABLE SEGMENTS
Prior to fiscal 2003, Aceto was organized by product into five reportable
segments (as that term is defined by accounting principles generally accepted in
the United States of America). Effective for the fiscal year ended June 30,
2003, the two segments formerly known as Pharmaceuticals, Biochemicals &
Nutritionals and Pharmaceutical Intermediates & Custom Manufacturing were
combined into one segment called Health Sciences. The amounts previously
reported by the former segments have accordingly been combined.
Our four reportable segments, organized by product, are as follows:
o Health Sciences - includes the active ingredients for generic
pharmaceuticals, vitamins, and nutritional supplements, as well
as products used in preparing pharmaceuticals, primarily by
major innovative drug companies, and biopharmaceuticals.
o Chemicals & Colorants - products include a variety of specialty
chemicals used in plastics, resins, adhesives, coatings, food,
flavor additives, fragrances, cosmetics, metal finishing,
electronics and many other areas; dye and pigment intermediates
used in the color-producing industries like textiles, inks,
paper, and coatings; intermediates used in the production of
agrochemicals.
o Agrochemicals - products include herbicides, fungicides and
insecticides, as well as a sprout inhibitor for potatoes.
o Institutional Sanitary Supplies & Other - products include
cleaning solutions, fragrances, and deodorants for commercial
and industrial customers.
Information concerning revenue and gross profit attributable to each of our
reportable segments is found in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Part II, Item 8,
"Financial Statements and Supplementary Data," Note 20 to the Consolidated
Financial Statements.
PRODUCTS AND CUSTOMERS
During the fiscal years ended June 30, 2004 and 2003, approximately 59% of our
purchases were from Asia and approximately 29% were from Europe.
Our customers are located throughout the United States, Germany, France,
Australia, the Netherlands, the United Kingdom, Malaysia, Canada and other
countries. They include a wide range of companies in the industrial chemical,
agricultural, and health science industries, and range from small trading
companies to Fortune 500 companies. During fiscal 2004 and 2003, 50% and 59% of
our sales, respectively, were made to customers in the United States. Sales made
to customers outside the United States during fiscal 2004 and 2003 totaled
$147,977 and $110,298, respectively, and approximately 65% and 67%,
respectively, were to customers in Germany, France, Australia, the Netherlands,
the United Kingdom, Malaysia and Canada.
The chemical industry is highly competitive. We compete by offering high quality
products produced around the world by both large and small manufacturers at
attractive prices. Because of our long relationship with many suppliers as well
as our sourcing offices in China and India, we are able to offer products
manufactured at a facility that is appropriate for that product. For the most
part, we store our inventory of chemicals in public warehouses strategically
located throughout the United States, Europe, and Asia, and can therefore fill
orders rapidly from inventory. We have developed ready access to key purchasing,
research, and technical executives of our customers and suppliers. This allows
us to ensure that, when necessary, decisions are made quickly. We do not
consider ourselves to be a significant factor in the chemical, agricultural and
health science industries taken as a whole.
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Total long-lived assets (excluding goodwill and intangible assets) in the United
States were $1,748 and $1,783 as of June 30, 2004 and 2003, respectively. Total
long-lived assets outside the United States were $906 and $818 at June 30, 2004
and 2003, respectively.
No single product accounted for as much as 10% of net sales in fiscal 2004, 2003
or 2002. No single customer accounted for as much as 10% of net sales in fiscal
2004, 2003 or 2002. One supplier accounted for approximately 10% of purchases in
fiscal 2004 and another supplier accounted for approximately 10% of purchases in
fiscal 2003. No supplier accounted for as much as 10% of purchases in fiscal
2002.
We hold no patents, licenses, franchises or concessions that we consider
material to our operations.
For the most part, we warehouse the products we sell and fill orders from
inventory.
Our subsidiary Aceto Agricultural Chemicals Corp. markets, and contracts for the
manufacture of, certain agricultural chemicals that are subject to the Federal
Insecticide, Fungicide and Rodenticide Act (FIFRA). Under FIFRA, companies that
wish to market pesticides must provide test data to the Environmental Protection
Agency (EPA) to register, obtain and maintain approved labels for such pesticide
products. The EPA requires that follow-on registrants of these products, on a
basis prescribed in the FIFRA regulations, compensate the initial registrant for
the cost of producing the necessary test data. 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, and pay for, the testing effort. We
are currently a member of two such task force groups and may be required to make
such additional payments in the future.
Compliance with federal, state and local environmental regulations has not had a
material effect on our capital expenditures and competitive position. During
fiscal 1993, we announced that we were closing our manufacturing subsidiary
located in Carlstadt, New Jersey. At the same time, we engaged an environmental
consultant to determine the extent of contamination on the site and develop a
plan of remediation. Based on the consultant's initial estimates, we recorded a
liability of $1,500 in fiscal 1993. During fiscal 1997, after additional testing
was completed, we received a revised estimate from the consultant and recorded
an additional liability of $800. At June 30, 2002, the remaining liability was
$1,284.
During fiscal 2003, based on continued monitoring of contamination at the site
and the current proposed plan of remediation, we received a revised estimate
from the consultant stating that the remaining remediation costs could be
between $1,550 and $3,200. During fiscal 2003, we recorded an additional
liability in the amount of $266, resulting in a liability as of June 30, 2003 in
the amount of $1,550. At June 30, 2004, the remaining liability was $1,326. It
is, however, possible that the assumptions underlying the consultant's estimates
will be found to be incorrect, in which case our liability could be
significantly greater than currently estimated and could have a material adverse
effect on our financial condition, operating results and cash flows. Other than
the remediation associated with the Carlstadt, New Jersey facility, we are not
aware of any material environmental liabilities.
SIGNIFICANT TRANSACTIONS IN FISCAL 2004
We completed two significant transactions in fiscal 2004. These transactions are
consistent with our strategy of seeking strategic acquisitions that enhance
earnings and forming alliances with partners that add to our capabilities.
On December 31, 2003, through our wholly-owned subsidiary Aceto Holding GmbH
("Aceto Holding"), we acquired from Corange Deutschland Holding GmbH
("Corange"), all of the capital stock of Pharma Waldhof Beteiligungs GmbH
("Pharma Waldhof"), and all of the
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partnership interest of Pharma Waldhof GmbH & Co. KG. Pharma Waldhof is the
general partner of Pharma Waldhof GmbH & Co. KG.
Based in Dusseldorf, Germany, Pharma Waldhof GmbH & Co. KG distributes
biologically and chemically derived APIs used in therapeutic and diagnostic
products. It is a worldwide provider of a patent-protected, biologically derived
API used for a widely used diagnostic and therapeutic heart medication. Its
primary customers include worldwide ethical and generic pharmaceutical
companies.
Our acquisition of Pharma Waldhof added value for Aceto on several levels by:
o immediately enhancing our earnings
o spearheading our entry into the biopharmaceuticals market
o broadening our product offerings in chemically-derived APIs
o strengthening our stance as an early participant in the
developing generic biopharmaceutical business
o fostering a continuing relationship between Aceto and Roche
Diagnostic GmbH ("Roche"), whereby Roche will continue to
manufacture the principal biopharmaceutical APIs that Pharma
Waldhof distributes and provide certain other services.
We paid $30 for the capital stock of Pharma Waldhof and $2,970 for the
partnership interest of Pharma Waldhof GmbH & Co. KG. Additionally, the share
purchase agreement states that we are to pay the seller an amount equal to
certain acquired assets less certain acquired liabilities. We originally
estimated this additional payment to be $321. Further negotiations between Aceto
and Corange regarding this provision of the share purchase agreement took place
in April 2004, and as a result we agreed to pay Corange $1,844 for those assets
less those liabilities.
We continued the business of Pharma Waldhof and successfully integrated that
business into our business during the second half of fiscal 2004.
On November 25, 2003, our wholly owned subsidiary Aceto Agricultural Chemicals
Corp. ("Aceto Agricultural") formed a joint venture with Nufarm Americas Inc.
("Nufarm"), a subsidiary of Australia-based Nufarm Limited. Each company owns
50% of the joint venture, named S.R.F.A., LLC. Aceto Agricultural and Nufarm
have acquired an EPA label for Butoxone(R), an herbicide used on peanuts,
soybeans and alfalfa.
Aceto Agricultural previously marketed this herbicide under a different label
(2,4DB). Prospectively, Aceto Agricultural and Nufarm intend to market the
herbicide in the United States solely under the Butoxone(R) label, which has
greater market penetration than 2,4DB. Nufarm will continue to formulate the
product. S.R.F.A. commenced operations in April 2004. In accordance with FASB
Interpretation 46R, "Consolidation of Variable Interest Entities," (FIN 46R),
Aceto consolidated S.R.F.A. in fiscal 2004. The minority interest of $157 in the
earnings of S.R.F.A. is reflected in "interest and other income, net," in the
accompanying consolidated statement of income for the year ended June 30, 2004.
This joint venture should have little effect on our working capital requirements
as we previously sold this product under a different EPA label.
This joint venture reflects our strategy for expanding our agrochemical
business, which is to partner with large agrochemical manufacturers and
distributors to capitalize on the rapid consolidation of the industry. Due to
this consolidation, there remain a limited number of significant manufacturers
of crop-protection products. We believe this consolidation trend will continue,
forcing the large distributors to find alternative sources. We will look to
Asian producers to meet our needs in this area.
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OTHER BUSINESS ACQUISITIONS
On March 26, 2001, we acquired (1) the distribution business of the
Schweizerhall Pharma division of Schweizerhall Holding AG, a Switzerland
corporation, and (2) 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").
The purchase agreement detailed two possible additional payments to be made to
Schweizerhall Holding. The first additional payment was to be made if we sold
acquired inventory (within one year of the closing date) for more than 60% of
Schweizerhall's stated book value for that inventory as of the closing date. We
sold the inventory for more than the 60% book value, and as a result, the
resulting additional payment of $2,639 was made to Schweizerhall Holding in May
2002. We recorded this payment as an additional cost of the acquisition and
allocated it to the acquired inventory as such amounts were indicative of a more
accurate estimate of the fair value of the acquired inventory.
The second additional payment is to be made if we realize certain tax savings
from using tax benefits (e.g., net operating losses or credits) of Schweizerhall
Holding. That payment would equal 50% of the tax benefit we received and would
be recorded as additional goodwill.
At June 30, 2004, we had 256 employees, none of whom were covered by a
collective bargaining agreement.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND OTHER INFORMATION
INCLUDED IN THIS ANNUAL REPORT. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE
NOT THE ONLY ONES WE FACE. ADDITIONALLY, RISKS AND UNCERTAINTIES NOT CURRENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE FOLLOWING RISK FACTORS OCCUR, OUR BUSINESS, FINANCIAL
CONDITION, OPERATING RESULTS AND CASH FLOWS COULD BE MATERIALLY ADVERSELY
AFFECTED.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS, MANY OF WHICH HAVE
GREATER MARKET PRESENCE AND RESOURCES THAN US, OUR PROFITABILITY AND FINANCIAL
CONDITION WILL 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 intense competition from global and regional distributors of chemical
products, many of which 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. We cannot
assure you that we will be able to compete successfully with any of these
companies. In addition, increased competition could result in price reductions,
reduced margins and loss of market share for our services, all of which would
adversely affect our business, results of operations and financial condition.
WE MAY INCUR SIGNIFICANT UNINSURED ENVIRONMENTAL AND OTHER LIABILITIES INHERENT
IN THE CHEMICAL DISTRIBUTION INDUSTRY THAT WOULD HAVE A NEGATIVE EFFECT ON OUR
FINANCIAL CONDITION.
The business of distributing chemicals is subject to regulation by numerous
federal, state, local, and foreign governmental authorities. These regulations
impose liability for loss of life, damage to property and equipment, pollution
and other environmental damage that may occur in our business. Many of these
regulations provide for substantial fines and remediation costs in the event of
chemical spills, explosions and pollution. While we believe that we are in
substantial compliance with all current laws and regulations, we can give no
assurance that we will not incur material liabilities that exceed our insurance
coverage or that such insurance will remain available on terms and at rates
acceptable to us. Additionally, if existing environmental and other regulations
are changed, or additional laws or regulations are passed, the cost of complying
with those laws may be substantial, thereby adversely affecting our financial
performance.
ASSESSMENTS BY VARIOUS TAX AUTHORITIES MAY BE MATERIALLY DIFFERENT THAN WE HAVE
PROVIDED FOR.
We are regularly audited by federal, state, and foreign tax authorities. From
time to time, these audits may result in proposed assessments. While we believe
that we have adequately provided for any such assessments, future settlements
may be materially different than we have provided for and thereby adversely
affect our earnings.
OUR ACQUISITION STRATEGY IS SUBJECT TO A NUMBER OF INHERENT RISKS, INCLUDING THE
RISK THAT OUR ACQUISITIONS MAY NOT BE SUCCESSFUL.
We continually seek to expand our business through acquisitions of other
companies that complement our own and through joint ventures, licensing
agreements and other arrangements. Any decision regarding strategic alternatives
would be subject to inherent risks, and we cannot guarantee that we will be able
to identify the appropriate opportunities, successfully negotiate economically
beneficial terms, successfully integrate any acquired business, retain key
employees, or achieve the anticipated synergies or benefits of the strategic
alternative selected. Acquisitions can require significant capital resources and
divert our management's attention from our existing
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business. Additionally, we may issue additional shares in connection with a
strategic transaction, thereby diluting the holdings of our existing common
shareholders, incur debt or assume liabilities, become subject to litigation, or
consume cash, thereby reducing the amount of cash available for other purposes.
ANY ACQUISITION THAT WE MAKE COULD RESULT IN A SUBSTANTIAL CHARGE TO OUR
EARNINGS.
We have previously incurred charges to our earnings in connection with acquired
assets, and may continue to experience charges to our earnings for any
acquisitions that we make, including large and immediate write-offs of acquired
assets, or impairment charges. These costs may also include substantial
severance and other closure costs associated with eliminating duplicate or
discontinued products, employees, operations and facilities. These charges could
have a material adverse effect on our results of operations for particular
quarterly periods and they could possibly have an adverse impact on the market
price of our common stock.
OUR REVENUE IS DIFFICULT TO PREDICT.
Our revenue is difficult to predict because it is primarily generated on a
contract-by-contract or purchase order basis, and customers can change their
requirements or cancel orders. Many of our contracts are short-term and may be
cancelled at any time. As a result, much of our revenue is not recurring from
period to period, which contributes to the variability of results from period to
period. We believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance.
OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE QUARTERS, WHICH MAY ADVERSELY
AFFECT THE TRADING PRICE OF OUR COMMON STOCK.
Our operating results will fluctuate on a quarterly basis as a result of a
number of factors, including the timing of contracts, the delay or cancellation
of a contract, and changes in government regulations. Any one of these factors
could have a significant impact on our quarterly results. In some quarters, our
revenue and operating results may fall below the expectations of securities
analysts and investors, which would likely cause the trading price of our common
stock to decline.
OUR POTENTIAL LIABILITY ARISING FROM OUR COMMITMENT TO INDEMNIFY OUR DIRECTORS,
OFFICERS AND EMPLOYEES COULD ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL
CONDITION.
We have committed in our by-laws to indemnify our directors, officers and
employees against the reasonable expenses incurred by these persons in
connection with an action brought against him or her in such capacity, except in
matters as to which he or she is adjudged to have breached a duty to us. The
maximum potential amount of future payments we could be required to make under
this provision is unlimited. While we have a "director and officer" insurance
policy that covers a portion of this potential exposure, we may be adversely
affected if we are required to pay damages or incur legal costs in connection
with a claim above our insurance limits.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY TERRORIST ACTIVITIES.
Our business depends on the free flow of products and services through the
channels of commerce. Instability due to military, terrorist, political and
economic actions in other countries could materially disrupt our overseas
operations and export sales. In fiscal year 2004, approximately 50% of our
revenues were attributable to operations conducted abroad and to export sales.
In addition, in fiscal 2004, approximately 29% and 59% of our purchases came
from Europe and Asia, respectively. 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
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including labor unrest, restrictions on transfers of funds and unexpected
changes in regulatory environments.
FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES MAY ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
A substantial portion of our revenue is denominated in currencies other than the
United States dollar because certain of our foreign subsidiaries operate in
their local currencies. Our results of operations and financial condition may
therefore be adversely affected by fluctuations in the exchange rate between
foreign currencies and the United States dollar. Moreover, we may incur
significant costs in connection with conversions between currencies.
WE RELY ON KEY EXECUTIVES IN LARGE PART FOR OUR FINANCIAL PERFORMANCE.
Our financial performance is highly dependent upon the efforts and abilities of
our key executives. The loss of the services of any of our key executives could
therefore have a material adverse effect upon our financial position and
operating results. None of our key executives has an employment agreement with
us and we do not maintain "key-man" insurance on any of our key executives.
THERE ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND
ASSUMPTIONS USED IN PREPARING FINANCIAL STATEMENTS IN ACCORDANCE WITH ACCOUNTING
PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. ANY CHANGES IN
THE ESTIMATES, JUDGMENTS AND ASSUMPTIONS WE USE COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS.
The consolidated financial statements included in the periodic reports we file
with the SEC are prepared in accordance with accounting principles generally
accepted in the United States ("GAAP"). The preparation of financial statements
in accordance with GAAP involves making estimates, judgments and assumptions
that affect reported amounts of assets, liabilities, revenues, expenses and
income. Estimates, judgments and assumptions are inherently subject to change,
and any such changes could result in corresponding changes to the reported
amounts.
AVAILABLE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other
information with the United States Securities and Exchange Commission. You may
read and copy any document we file at the SEC's public reference room at Room
1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information on the public reference room. The SEC maintains a
website that contains annual, quarterly, and current reports, proxy statements,
and other information that issuers (including Aceto) file electronically with
the SEC. The SEC's website is WWW.SEC.GOV.
Our website is WWW.ACETO.COM. We make available free of charge through our
Internet site, via a link to the SEC's website at WWW.SEC.GOV, our annual
reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form
8-K; Forms 3, 4 and 5 filed on behalf of our directors and executive officers;
and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934. We make these filings available as soon as
reasonably practicable after they are electronically filed with, or furnished
to, the SEC. The information on our website is not incorporated by reference
into this annual report.
ITEM 2. PROPERTIES
Our 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.
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Two of the subsidiaries in our Institutional Sanitary Supplies & Other segment
occupy 44,000 square feet of leased space in an industrial park in New Hyde
Park, New York. The lease expires in November 2009.
Our former manufacturing facility is located on an 11-acre parcel in Carlstadt,
New Jersey, that we own. This parcel contains one building with approximately
5,000 square feet of office space.
We also lease office space in Waldshut, Germany; Hamburg, Germany; Dusseldorf,
Germany; Wormerveer, the Netherlands; Paris, France; Lyon, France; Singapore;
Shanghai, China; Warsaw, Poland and Mumbai, India. These offices are used for
sales and administrative purposes.
We believe that our properties are generally well maintained, in good condition
and adequate for our present needs.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in a number of pending or threatened legal proceedings
incidental to our business. We do not believe that any of the pending or
threatened legal proceedings will have a material adverse effect on our
financial position or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a formal vote of our shareholders during the
fourth quarter of the fiscal year covered by this annual report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on the Nasdaq National Market using the symbol
"ACET." The following table sets forth the 2004 and 2003 high and low sales
prices of our common stock as reported on the Nasdaq National Market for the
periods indicated, adjusted for 3-for-2 stock dividends paid in January 2004 and
2003.
FISCAL 2004 HIGH LOW
First Quarter $14.67 $ 8.93
Second Quarter 17.56 8.93
Third Quarter 21.00 14.01
Fourth Quarter 17.81 13.00
FISCAL 2003 HIGH LOW
First Quarter $ 5.21 $ 3.55
Second Quarter 7.99 3.74
Third Quarter 9.75 5.97
Fourth Quarter 15.32 8.35
Cash dividends of $0.085 per common share were paid in January 2004 and June
2004. Cash dividends of $0.077 per common share were paid in January and June
2003, adjusted for the 3-for-2 stock dividend paid in January 2004. The
Company's revolving credit facility restricts the amount of cash dividends to
$4,500 per year.
As of September 8, 2004, there were 521 holders of record of our common stock.
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13,283,542 shares were held by the nominee of the Depository Trust Company, the
country's principal central depository. For purposes of determining the number
of owners of our common stock, those shares are considered to be owned by one
holder. Additional individual holdings in street name result in a sizable number
of beneficial owners being represented on our records as owned by various banks
and stockbrokers.
The following table sets forth certain information with respect to our equity
compensation plans at June 30, 2004:
- ----------------------------------------------------------------------------------------
Number of
securities to be Number of securities
issued upon Weighted-average remaining available
exercise of exercise price of for future issuance
Plan Category outstanding outstanding options under equity
options compensation plans
- ----------------------------------------------------------------------------------------
Equity
compensation plans
approved by
security holders 1,088 $7.08 1,281
- ----------------------------------------------------------------------------------------
Equity
compensation plans
not approved by
security holders - - -
- ----------------------------------------------------------------------------------------
Total 1,088 $7.08 1,281
- ----------------------------------------------------------------------------------------
13
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Years Ended June 30 2004(1) 2003 2002 2001(2) 2000
- ------------------- ---- ---- ---- ---- ----
Net sales $297,718 $271,276 $229,329 $178,154 $185,308
Income before
cumulative effect of
accounting change 13,067 9,468 4,945 4,245 6,344
Net income 13,067 7,595 4,945 4,245 6,344
Income before
cumulative effect of
accounting change per share -
diluted (3) $ 0.81 $ 0.62 $ 0.34 $ 0.31 $ 0.45
Net income per
common share -
diluted (3) $ 0.81 $ 0.50 $ 0.34 $ 0.31 $ 0.45
Total assets 149,697 123,519 115,703 105,173 88,081
Working capital 84,129 71,165 58,311 55,259 50,270
Long-term
liabilities 586 - - 671 908
Shareholders' equity 100,266 84,569 73,290 69,203 63,604
Number of common
shares outstanding
at year end (3) 16,045 15,564 15,104 15,073 14,604
Book value per
common share (3) $ 6.25 $ 5.43 $4.85 $ 4.59 $ 4.36
Cash dividends per
common share (3) $ 0.17 $ 0.15 $ 0.14 $ 0.13 $ 0.13
(1) Includes the acquisition of Pharma Waldhof on December 31, 2003, as more
fully described in Item 1.
(2) Includes the acquisition of Schweizerhall Pharma distribution business
on March 26, 2001, as more fully described in Item 1.
(3) Adjusted for stock dividends, as appropriate.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
We are a global distributor of chemically-derived pharmaceuticals,
biopharmaceuticals and specialty chemicals. Our offices in China, Germany,
France, the Netherlands, Singapore, India, Poland, Hong Kong, the United Kingdom
and the United States, along with warehouses worldwide, enable us to respond
quickly to global customer demands, assuring that a consistent, high-quality
supply of pharmaceutical, biopharmaceutical and specialty chemicals is never far
away. We are able to offer our customers very competitive pricing, continuity of
supply, and quality control. Our 57 years of experience, our reputation for
reliability and stability, and our long-term relationships with our suppliers
has fostered loyalty among our customers.
We remain confident about our short- and long-term business prospects. In the
short-term, we anticipate continued organic growth, including growth resulting
from our launching four new active pharmaceutical ingredients (APIs) per year,
entering the developing biopharmaceutical market, globalization of our Chemicals
& Colorants business, expansion of our agrochemical segment by acquisition of
product lines, continued enhancement of our sourcing operations in China and
India, and steady improvement of our regulatory capabilities.
We believe new product launches and product introductions demonstrate that Aceto
has come to be recognized by the worldwide generic pharmaceutical industry as a
reliable supplier. Our long-term plans involve seeking strategic acquisitions
that enhance our earnings, forming alliances with partners that add to our
capabilities, and establishing significant business operations in Eastern
Europe. We believe Eastern Europe has great potential in the API business, given
that entry of Eastern European countries into the European Union will result in
their being subject to the same strict pharmaceutical regulations as their
Western European counterparts.
We are reporting net sales of $297,718 for the year ended June 30, 2004, which
represents a 9.7% increase over the $271,276 reported in fiscal 2003. The gross
profit margin of 17.8% for the year represents the highest gross profit margin
ever recorded by Aceto. The strong sales and gross profit margin caused our net
income to increase to $13,067, or $0.81 per diluted share, which is 62% higher
than fiscal 2003. For the year ended June 30, 2002, we reported net sales of
$229,329 resulting in net income of $4,945, or $0.34 per diluted share.
Our financial position as of June 30, 2004 remains strong, as we had cash of
$32,330, working capital of $84,129, no long-term debt and shareholders' equity
of $100,266.
Aceto's business is separated into four principal segments: Health Sciences,
Chemicals & Colorants, Agrochemicals, and Institutional Sanitary Supplies &
Other.
The Health Sciences segment is Aceto's largest and fastest growing segment both
in sales and gross profits. This segment is comprised of APIs, pharmaceutical
intermediates, diagnostic chemicals and nutritional supplements. APIs comprise
about 70% of this segment's revenues. We typically partner with both customers
and suppliers years in advance of a drug coming off patent to provide the
generic equivalent.
15
We have an extensive pipeline of new generic products poised to reach commercial
levels over the coming years as the patents on existing drugs expire, both in
the United States and Europe and expect to launch a minimum of four each year.
In addition, as new members join the European Union, primarily from Eastern
Europe, they become subject to the same regulatory standards as their Western
Europe counterparts. With the opening of our office in Poland in January 2004,
we are well positioned to take advantage of that opportunity.
The Chemicals & Colorants segment supplies chemicals used in the color-producing
industries such as textiles, ink, paper and coatings, as well as chemicals used
in plastic, resins, adhesives, coatings, food, flavor additives, and the
production of agrochemicals. Our sales of these products are predominantly in
the United States and purchases are primarily from China and Western Europe.
The Agrochemicals segment, while relatively small in terms of sales, is our most
profitable in terms of gross margin percentages. Our revenues are derived from
sales of herbicides, pesticides, etc., primarily in the United States and
Western Europe. Our joint venture with Nufarm, which will market Butoxone(R) to
increase our market share of the peanut, soybean and alfalfa herbicide commenced
operations in April 2004. We believe this will have a marginally positive effect
on the gross margins contribution in this segment.
Value Added/Core Competencies
Aceto's main strengths are sourcing, regulatory support and quality control. We
are currently the largest buyer of pharmaceutical and specialty chemicals for
export from China, purchasing from over 400 different factories.
Among Aceto's greatest strengths are our people and the ability they have to
meet the individual needs of customers. Eighty-five of Aceto's approximately 256
employees have technical degrees and Aceto has eighteen employees whose
exclusive responsibility is regulatory compliance. This enables Aceto to
dispatch highly skilled professionals whenever they might be needed.
In this section, we explain our general financial condition and results of
operations, including the following:
o factors that affect our business
o our earnings and costs in the periods presented
o changes in earnings and costs between periods
o sources of earnings
o the impact of these factors on our overall financial condition
As you read this section, refer to the accompanying consolidated statements of
income, which present the results of our operations for the three years ended
June 30, 2004. We analyze and explain the differences between periods in the
specific line items of the consolidated statements of income.
SIGNIFICANT TRANSACTIONS IN FISCAL 2004
We completed two significant transactions in fiscal 2004. These transactions are
consistent with our strategy of seeking strategic acquisitions that enhance
earnings and forming alliances with partners that add to our capabilities.
On December 31, 2003, through our wholly-owned subsidiary Aceto Holding GmbH
("Aceto Holding"), we acquired from Corange Deutschland Holding GmbH
("Corange"), all of the capital stock of Pharma Waldhof Beteiligungs GmbH
("Pharma Waldhof"), and all of the partnership interest of Pharma Waldhof GmbH
16
& Co. KG. Pharma Waldhof is the general partner of Pharma Waldhof GmbH & Co. KG.
Based in Dusseldorf, Germany, Pharma Waldhof GmbH & Co. KG distributes
biologically and chemically derived APIs used in therapeutic and diagnostic
products. It is a worldwide provider of a patent-protected, biologically derived
API used for a widely used diagnostic and therapeutic heart medication. Its
primary customers include worldwide ethical and generic pharmaceutical
companies.
Our acquisition of Pharma Waldhof added value for Aceto on several levels by:
o immediately enhancing our earnings
o spearheading our entry into the biopharmaceuticals market
o broadening our product offerings in chemically-derived APIs
o strengthening our stance as an early participant in the
developing generic biopharmaceutical business
o fostering a continuing relationship between Aceto and Roche
Diagnostic GmbH ("Roche"), whereby Roche will continue to
manufacture the principal biopharmaceutical APIs that Pharma
Waldhof distributes and provide certain other services.
We paid $30 for the capital stock of Pharma Waldhof and $2,970 for the
partnership interest of Pharma Waldhof GmbH & Co. KG. Additionally, the share
purchase agreement states that we are to pay the seller an amount equal to
certain acquired assets less certain acquired liabilities. We originally
estimated this additional payment to be $321. Further negotiations between Aceto
and Corange regarding this provision of the share purchase agreement took place
in April 2004, and as a result we agreed to pay Corange $1,844 for those assets
less those liabilities.
We continued the business of Pharma Waldhof and successfully integrated that
business into our business during the second half of fiscal 2004.
On November 25, 2003, our wholly owned subsidiary Aceto Agricultural Chemicals
Corp. ("Aceto Agricultural") formed a joint venture with Nufarm Americas Inc.
("Nufarm"), a subsidiary of Australia-based Nufarm Limited with each party
owning 50%. The joint venture entity is named S.R.F.A., LLC. Aceto Agricultural
and Nufarm have acquired an EPA label for Butoxone(R), an herbicide used on
peanuts, soybeans and alfalfa.
Aceto Agricultural previously marketed this herbicide under a different label
(2,4DB). Going forward, Aceto Agricultural and Nufarm intend to market the
herbicide in the United States solely under the Butoxone(R) label, which has
greater market penetration than 2,4DB. Nufarm will continue to formulate the
product. S.R.F.A. commenced operations in April 2004. In accordance with FASB
Interpretation 46R (FIN 46R), Aceto consolidated S.R.F.A. in fiscal 2004. The
minority interest of $157 in the earnings of S.R.F.A. is reflected in "interest
and other income, net," in the accompanying consolidated statement of income for
the year ended June 30, 2004. This joint venture should have little effect on
our working capital requirements as we previously sold this product under a
different EPA label.
This joint venture reflects our strategy for expanding our agrochemical
business, which is to partner with large agrochemical manufacturers and
distributors to capitalize on the rapid consolidation of the industry. Due to
this consolidation, there remain a limited number of significant manufacturers
of crop-protection products. We believe this consolidation trend will continue,
forcing the large distributors to find alternative sources. We will look to
Asian producers to meet our needs in this area.
17
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
is based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
In preparing these financial statements, we were required to make estimates and
assumptions that affect the amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates on a regular basis, including those related to bad debts,
inventories, goodwill and intangible assets, environmental and other
contingencies, pension benefits and income taxes. We base our 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.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of these
consolidated financial statements.
REVENUE RECOGNITION
We recognize revenue from product sales at the time of shipment and passage of
title and risk of loss to the customer. We have no acceptance or other
post-shipment obligations and we do not offer product warranties or services to
our customers.
Sales are recorded net of returns of damaged goods from customers, which
historically have been immaterial, and sales incentives offered to customers.
Sales incentives consist primarily of volume incentive rebates. We record such
volume incentive rebates as the underlying revenue transactions that result in
progress by the customer in earning the rebate are recorded, in accordance with
Emerging Issues Task Force (EITF) 01-09, "ACCOUNTING FOR CONSIDERATION GIVEN BY
A VENDOR TO A CUSTOMER (INCLUDING A RESELLER OF THE VENDOR'S PRODUCTS)."
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our 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 condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances would be
required.
INVENTORIES
Inventories, which consist principally of finished goods, are stated at the
lower of cost (first-in first-out method) or market. We write down our
inventories for estimated excess and obsolete goods by an amount 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 our 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, our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or overstated the
write-down required for excess and obsolete inventory. Although we make every
effort to ensure the accuracy of our forecasts of future product demand, any
significant unanticipated changes in demand could have a significant impact on
the value of our inventory and reported operating results.
18
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is calculated as the excess of the cost of purchased businesses over
the value of their underlying net assets. Other intangible assets principally
consist of customer relationships, trademarks, purchased customer lists, and
covenants not to compete. Goodwill and other intangible assets that have an
indefinite life are not amortized.
We adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142), effective July 1, 2002. As required by
SFAS 142, upon adoption we performed impairment tests on goodwill as of July 1,
2002. As a result of the impairment tests, we recorded a goodwill impairment
charge of $1,873, which has been included as a cumulative effect of an
accounting change in the accompanying consolidated statement of income for the
year ended June 30, 2003. Also required by SFAS 142, we test goodwill and other
intangible assets for impairment on at least an annual basis. To determine the
fair value of these intangible assets, there are many assumptions and estimates
used that directly impact the results of the testing. In making these
assumptions and estimates, we use industry-accepted valuation models and set
criteria that are reviewed and approved by various levels of management.
Additionally, a third-party valuation firm is used, as necessary, to help us
evaluate recorded goodwill. If our estimates or their related assumptions change
in the future, we may be required to record impairment charges for these assets.
The recoverability of long-lived assets aggregating $1,678 (including goodwill
of $945) at June 30, 2004 in the Institutional Sanitary Supplies & Other segment
is predicated on the market acceptance of the launch of new products. If the
actual revenue and profit results of these product launches are less than
anticipated, we may be required to record an impairment on the goodwill and/or
other long-lived assets of this segment.
ENVIRONMENTAL AND OTHER CONTINGENCIES
We establish accrued liabilities 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 the accrual, or our 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.
PENSION BENEFITS
In addition to our defined contribution plan in the United States, we sponsor
pension plans outside the United States covering fourteen employees who meet
eligibility requirements. Several statistical and other factors that attempt to
estimate the probability and magnitude of future events are used in calculating
the expense and liability related to the plans. These factors include
assumptions about the discount rate, expected return on plan assets and rate of
future compensation increases, within certain guidelines. In addition, our
actuarial consultants also use subjective factors such as withdrawal and
mortality rates to estimate these variables. The actuarial assumptions that we
use may differ materially from actual results due to changing market and
economic conditions, higher or lower withdrawal rates or longer or shorter life
spans of participants, among other things. Differences from these assumptions
may significantly affect the amount of pension expense and liability that we
record.
TAXES
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 establishes financial accounting and reporting
standards for the effects of income taxes that result from an enterprise's
19
activities during the current and preceding years. It requires an asset and
liability approach for financial accounting and reporting of income taxes.
As of June 30, 2004, we had current net deferred tax assets of $1,613 and
non-current net deferred tax assets of $4,579. These net deferred tax assets
have been recorded based on our projecting to have sufficient future earnings in
order to realize these assets, and the net deferred tax assets have been
provided for at currently enacted income tax rates. If we determine that a
deferred tax asset will not be realizable, an adjustment to the deferred tax
asset will result in a reduction of net earnings at that time.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries since substantially all of these earnings are expected to be
permanently reinvested in our foreign operations. A deferred tax liability will
be recognized when we expect that it will recover those undistributed earnings
in a taxable manner, such as through receipt of dividends or sale of the
investments. Determination of the amount of the unrecognized U.S. income tax
liability is not practical because of the complexities of the hypothetical
calculation. In addition, unrecognized foreign tax credit carryforwards would be
available to reduce a portion of such U.S. tax liability.
20
RESULTS OF OPERATIONS
Net Sales by Segment
Fiscal Year Ended June 30,
(Dollars in Thousands)
Comparison 2004 Comparison 2003
2004 2003 2002 Over/(Under) 2003 Over/(Under) 2002
---- ---- ---- ----------------- -----------------
% % %
$ of total $ of total $ of total $ % $ %
----- -------- ----- -------- ----- -------- ----- ----- ----- -----
Segment
- -------
Health Sciences $180,701 60.7% $159,858 58.9% $120,021 52.3% $20,843 13.0% $39,837 33.2%
Chemicals &
Colorants 94,395 31.7 91,579 33.8 90,494 39.5 2,816 3.1 1,085 1.2
Agrochemicals 16,898 5.7 14,356 5.3 13,540 5.9 2,542 17.7 816 6.0
Institutional
Sanitary
Supplies & Other 5,724 1.9 5,483 2.0 5,274 2.3 241 4.4 209 4.0
-------- ------ -------- ------ -------- ------ ------- ----- ------- -----
TOTAL NET SALES $297,718 100.0% $271,276 100.0% $229,329 100.0% $26,442 9.7% $41,947 18.3%
======== ====== ======== ====== ======== ====== ======= ===== ======= =====
21
Gross Profit by Segment
Fiscal Year Ended June 30,
(Dollars in Thousands)
Comparison 2004 Comparison 2003
2004 2003 2002 Over/(Under) 2003 Over/Under 2002
---- ---- ---- ----------------- ---------------
% % %
$ of sales $ of sales $ of sales $ % $ %
----- -------- ----- -------- ----- -------- ----- ----- ----- -----
Segment
- -------
Health Sciences $ 33,780 18.7% $ 28,779 18.0% $ 19,733 16.4% $ 5,001 17.4% $ 9,046 45.8%
Chemicals &
Colorants 14,931 15.8 12,673 13.8 13,502 14.9 2,258 17.8 (829) (6.1)
Agrochemicals 5,503 32.6 4,123 28.7 4,215 31.1 1,380 33.5 (92) (2.2)
Institutional
Sanitary
Supplies & Other 2,207 38.6 2,418 44.1 2,294 43.5 (211) (8.7) 124 5.4
-------- ------ -------- ------ -------- ------ ------- ----- ------- -----
Segment gross profit 56,421 19.0 47,993 17.7 39,744 17.3 8,428 17.6 8,249 20.8
Freight & storage
costs (1) (3,503) (1.2) (3,487) (1.3) (2,970) (1.3) (16) (0.5) (517) (17.4)
-------- ------ -------- ------ -------- ------ ------- ----- ------- -----
Gross Profit $ 52,918 17.8% $ 44,506 16.4% $ 36,774 16.0% $ 8,412 18.9% $ 7,732 21.0%
======== ====== ======== ====== ======== ====== ======= ===== ======= =====
(1) Represents certain freight and storage costs that are not allocated to a segment.
22
FISCAL YEAR ENDED JUNE 30, 2004 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2003
NET SALES
Net sales increased $26,442 or 9.7%, to $297,718 for the fiscal year ended June
30, 2004 compared with $271,276 for the prior year. We reported particularly
strong sales and gross profit for the year ended June 30, 2004 for the Health
Sciences segment, as explained below. Net sales for the other three segments
combined increased $5,599 or 5.0% in fiscal 2004.
HEALTH SCIENCES
The Health Sciences segment reported a significant increase in sales and
accounted for 78.8% of the overall increase in 2004. This segment has achieved
gains in market share and experienced strong demand for certain active
pharmaceutical ingredients (APIs) launched during fiscal 2003 and 2004. This
segment's sales were $180,701 for fiscal 2004 versus $159,858 in fiscal 2003, an
increase of $20,843 or 13.0%. The primary reason for the improvement in revenue
was an increase of $15,576 attributable to follow-up shipments of several APIs
that were launched in fiscal 2003 and sold to companies that had received
approval to market these products. Some of these increases were offset, however,
by a decrease in sales volume of one API, which had sales of $7,839 in fiscal
2004 compared to $22,781 during fiscal 2003. This represents an example of the
possible life cycle of a generic pharmaceutical product: the product launch
period can be followed by a reduction in volume once the initial distribution
channels are filled. The segment increase can also be attributed to the overall
increase in sales volume from our foreign subsidiaries of $16,887, net of the
increase in follow-up API sales mentioned above. The foreign subsidiaries
increased sales is attributed to the acquisition of Pharma Waldhof (which
contributed $4,958 of the increase), the effect of foreign currency rate changes
due to the strengthening of the Euro, an expanded distribution agreement with a
major supplier, sales from new products and improved market penetration.
The nutritionals product line within this segment reported an increase of $2,869
or 14.2% over fiscal 2003, primarily due to increased demand for two products
within our nutritional supplements offering. We expect continued strong demand
for these two products in the near term.
CHEMICALS & COLORANTS
In fiscal 2004, the Chemicals & Colorants segment achieved an increase of $2,816
or 3.1%, to $94,395 compared to $91,579 in fiscal 2003. Last year's sales
included a $900 favorable adjustment from a negotiated settlement for the lost
gross margin regarding non-performance of a sales contract. Sales were up $3,716
or 4.1% when this adjustment is excluded from last year's sales. The segment's
increase is primarily attributable to increased sales of $4,244 from our foreign
subsidiaries. One large customer within our color pigment and pigment
intermediates business purchased $4,316 less product in fiscal 2004 than in
fiscal 2003. This loss was offset by increases of $5,617 within the aroma
chemicals, food and beverage, miscellaneous intermediates and solvents
categories.
AGROCHEMICALS
Agrochemicals sales were $16,898 for 2004 compared to $14,356 in the prior year,
an increase of $2,542 or 17.7%. The increase in sales was due primarily to the
introduction of three new products totaling $1,297 and increased sales of
Butoxone(R) from our joint venture with Nufarm Americas of $759.
INSTITUTIONAL SANITARY SUPPLIES & OTHER
Institutional Sanitary Supplies & Other sales were $5,724 for fiscal 2004
compared to $5,483 in fiscal 2003, an increase of $241 or 4.4%.
23
GROSS PROFIT
Gross profit by segment before unallocated cost of sales (primarily storage and
certain freight costs) increased 17.6% in fiscal 2004, to $56,421 from $47,993
reported in fiscal 2003. The Health Sciences segment made the largest
contribution to this increase as it accounted for $5,001 or 59.3% of the overall
increase.
HEALTH SCIENCES
In fiscal 2004, the Health Science segment's gross profit was $33,780, or 18.7%
of net sales in fiscal 2004 versus $28,779, or 18.0% of net sales, in the prior
year. The increase in gross profit was largely attributable to follow-up
shipments of several APIs that were launched in fiscal 2003 and provided a
$2,197 or 48.7% increase over last year at gross margin rates that were slightly
lower than in the previous year. Additionally, our European operations
contributed $5,268 additional gross profit, net of the increase of follow-up
APIs mentioned in "Net Sales", due to increased volume of new and existing
products, improved market penetration and an expanded distribution agreement
with a major supplier for new products in existing and new markets. These
increases in gross profit were substantially offset by lower sales and gross
profit ($2,178 decrease) attributable to our highest sales volume API during the
prior year. Gross profit for the nutritional products was $447 or 11.1% higher
than the prior year, with slightly lower gross margin rates.
CHEMICALS & COLORANTS
The Chemicals & Colorants segment's gross profit of $14,931 in fiscal 2004
represents an increase of $2,258 or 17.8% over last year's gross profit of
$12,673. Gross margin increased to 15.8% this year versus 13.8% in the prior
year. The gross profit realized from initial sales from our foreign subsidiaries
contributed $1,491 of the segment's overall increase. The increased sales of
$5,617 in the categories mentioned in "Net Sales" accounted for additional gross
profit of $714. Gross margin rates increased due to a $4,316 decrease in sales
to one major customer whose sales have generated lower than normal margins,
along with an overall improvement in margins across other categories due to
changes in product mix and some instances of improved pricing.
AGROCHEMICALS
The Agrochemicals segment's gross profit of $5,503 in fiscal 2004 represents an
increase of $1,380 or 33.5%, versus gross profit of $4,123 in the prior year.
Gross margin increased to 32.6% for fiscal 2004 as compared to 28.7% in the
prior year. The increase in gross profit resulted from the introduction of three
new products ($409), the increased contribution from Butoxone(R) ($204), and the
recovery of cost on the sale of previously marked-down inventory ($131). In
addition, last year's gross profit was reduced by an unusually large increase in
packaging costs due to a change in the way a specific product was applied. Such
costs did not recur in fiscal 2004.
INSTITUTIONAL SANITARY SUPPLIES AND OTHER
Institutional Sanitary Supplies and Other gross profits were $2,207 or 38.6% in
2004 versus $2,418 or 44.1% in 2003.
Unallocated cost of sales remained flat at $3,503 in fiscal 2004, compared to
$3,487 in the prior year, representing a less than 1% increase. The higher costs
were mainly a result of higher freight costs due to rising fuel surcharges and
increased sales and shipments to customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $5,305 or 16.8%
to $36,874 for fiscal 2004 from $31,569 for fiscal 2003. As a percentage of
sales, SG&A increased to 12.4% for fiscal 2004 versus 11.6% for
24
fiscal 2003. SG&A increased primarily due to the effect of changes in foreign
currency exchange rates resulting from the strengthening of the Euro in our
Euro-zone operations ($1,116), the acquisition of Pharma Waldhof ($1,505),
increases in professional fees, including internal control documentation and
assessment as mandated by the Sarbanes-Oxley legislation ($867), and legal fees
related to recent business agreements, product registration fees and the
dismissal of a lawsuit related to a former supplier and ongoing litigation
($596). We sold certain real estate in fiscal 2003 and realized a net gain of
$291 on the sale. This gain reduced overall SG&A and lowered SG&A as a
percentage of sales. Excluding this transaction, SG&A as a percentage of sales
would have been 11.7% last year.
OPERATING INCOME
In fiscal 2004 operating income was $16,044 compared to $12,937 in fiscal 2003,
an increase of $3,107 or 24.0%. This increase was primarily due to the overall
increase in gross profit of $8,412, which was partially offset by the $5,305
increase in SG&A expenses.
INTEREST AND OTHER INCOME (EXPENSE)
Interest expense for fiscal 2004 was $101 versus $284 in the prior year. The
decrease was due to lower average borrowings.
Interest and other income increased to $1,334 for fiscal 2004 compared to $713
in fiscal 2003. This was partly attributable to the $361 increase (to $395 in
fiscal 2004 from $34 in fiscal 2003) in the annual government subsidy we receive
for doing business in a free-trade zone in Shanghai, China. Also, we recognized
an unrealized gain on marketable securities of $111 in fiscal 2004 versus an
unrealized loss of $74 in fiscal 2003. In addition, we recognized gains on
foreign currency of $143 in fiscal 2004 versus $39 in fiscal 2003.
PROVISION FOR INCOME TAXES
The effective tax rate for fiscal 2004 decreased to 24.4% from 29.2% for fiscal
2003. The decrease in the effective tax rate is primarily due to increased
earnings in lower foreign tax jurisdictions as compared to the prior year.
FISCAL YEAR ENDED JUNE 30, 2003 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2002
NET SALES
Net sales increased $41,947 or 18.3%, to $271,276 for the fiscal year ended June
30, 2003 compared with $229,329 for the prior year. We reported particularly
strong sales and gross profit for the year ended June 30, 2003 by our Health
Sciences segment as explained below. Net sales for the other three segments
combined were up $2,110 or 1.9% in fiscal 2003.
HEALTH SCIENCES
The Health Sciences segment reported a significant increase in sales and
accounted for 95.0% of the overall increase. This segment has achieved gains in
market share and experienced strong demand for certain active pharmaceutical
ingredients ("APIs") of products launched during the fourth quarter of fiscal
2002 and the four quarters of fiscal 2003. This segment's sales were $159,858
for the year ended June 30, 2003 versus $120,021 last year, an increase of
$39,837 or 33.2%. The majority of the increase or $41,370, resulted from the
initial and/or follow-up shipments of five APIs launched during the period from
the fall of 2001 through June 2003. These generic pharmaceutical products are
sold to companies that have received recent approval to market these products.
The heavy sales volume for one generic pharmaceutical product during fiscal 2002
resulted in sales of $12,643. The demand for the product was related to a
stockpiling of certain products by the U.S. Government in connection with the
threat of terrorist
25
attacks after the tragic events of September 11, 2001. These sales were not
repeated in fiscal 2003.
The Health Sciences segment's European operations achieved an increase in sales
of $8,769 which was attributable to two new major customers, several new
products and an expanded distribution agreement with a major supplier in Europe
which allows for the sale of additional products into new markets.
The nutritionals product line within this segment showed an increase of $1,935
or 10.6% over fiscal 2002 due to increased demand for products such as
nutritional supplements.
CHEMICALS & COLORANTS
The Chemicals & Colorants segment achieved an increase of $1,085 or 1.2%, to
$91,579 in 2003 compared to $90,494 last year. The segment's increase is
attributable to an increase in volume of $8,883 with one large customer and some
improved volume and pricing in dye intermediates which accounted for an increase
of sales of $1,030. These increases were substantially offset by a decrease in
volume of $2,422 in pigments and pigment intermediates due to decreased demand
and competitive pricing pressures, the loss of a large volume customer and a
significant decrease in volume of two products which caused sales in our organic
chemicals category to decline by $3,997 from fiscal 2002 to 2003. The
termination of a distribution relationship with a major supplier was the primary
cause for sales to decline by $1,181 in products such as foundry chemicals, and
aroma and flavor chemicals. Our food products reported sales declines of $340
due to competitive pricing pressures.
AGROCHEMICALS
Agrochemicals sales were $14,356 for 2003 compared to $13,540 last year, an
increase of $816 or 6.0%. A restructuring of the Company's arrangement with a
third party, effective October 1, 2001, resulted in additional sales of $739
during the quarter ended September 30, 2002. Excluding this, sales increased by
$77 or 0.6%. Sales were flat due to a one-time sale of off grade material to one
customer recorded in 2002 of $331 offset by an overall increase in volume in
fiscal 2003 for the segment's main products.
INSTITUTIONAL SANITARY SUPPLIES & OTHER
Institutional Sanitary Supplies & Other sales were $5,483 for 2003 compared to
$5,274 last year, an increase of $209 or 4.0%. The improved sales were
attributable to price increases and identifying better sources of supply that
have improved our competitive position regarding pricing. During 2002, 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
Gross profit by segment before unallocated cost of sales (primarily storage and
certain freight costs) increased 20.8%, to $47,993 from $39,744. The Health
Sciences segment made the largest contribution to the overall improvement as it
accounted for $9,046 or 109.7% of the overall increase.
HEALTH SCIENCES
The gross profit resulting from the Health Sciences segment amounted to $28,779,
or 18.0% in fiscal 2003 versus $19,733, or 16.4%, in the prior year. Gross
profit improvement was mainly attributable to the sales of the five APIs as
described above in the sales comments. These products provided $7,308 or 78% of
the segment's increase in gross profit dollars. The blended gross margin rates
for the five APIs was 18.3% in fiscal 2003 versus 20.7% in fiscal 2002. The
reduction in the margin rates is due to price erosion as these products mature
during the later stages of their launch period. The
26
positive impact of the five APIs was partially offset by a $1,661 reduction in
gross profit from the segment's highest volume product in fiscal 2002. This
product generated a $1,671 gross profit in 2002 at a 13.2% rate. Since this
product saw only minimal sales in 2003, its lower than usual margin rate helped
to reflect an improved margin rate in fiscal 2003 as these sales were replaced
with higher margin sales.
Another factor contributing to the gross profit improvement in the Health
Sciences segment was the gross profit dollars generated from the increased sales
volume from the expanded distribution agreement in Europe in addition to new
products and new customers were the primary factors that contributed to an
increase of $2,511 in fiscal 2003 in the segment's European market. Gross
margins improved in fiscal 2003 to 17.2% of sales versus 15.0% in 2002 due to
contributions from new products and overall product mix.
Our nutritionals products generated an additional $323 in gross profit over
fiscal 2002 while its gross margin rates remained constant at 20.0% in 2003
versus 20.3% in 2002.
CHEMICALS & COLORANTS
The Chemicals & Colorants segment's gross profit of $12,673 decreased $829 or
6.1% over last year's $13,502. Gross profit, as a percentage of sales, declined
to 13.8% this year versus 14.9% in the prior year. The current year's gross
profit includes the net benefit of a negotiated settlement for lost gross profit
regarding non-performance of a sales contract and an estimate of a loss on the
related purchase contract in the amount of $450. The decrease in gross profit
excluding this favorable settlement would have been $1,279 or 9.5%. The gross
profit rate for this year would have been 13.5% excluding the settlement versus
a 14.9% rate in the prior year. The decrease in gross profit rate is primarily a
result of increased sales volume of $8,883 from one large customer at
substantially lower than usual gross profit rates for this segment combined with
continued erosion of margins and gross profit dollars in various business
sectors due to competitive pricing pressures, a strengthening Euro which
increased product costs, and economic sluggishness. The loss of a large sales
volume customer in addition to the loss of a major supplier and its negative
impact on our related customers in early fiscal 2003 also contributed to the
decrease in gross profit dollars.
AGROCHEMICALS
The Agrochemicals segment showed a decrease in gross profit of $92 or 2.2% from
$4,123 in fiscal 2003 versus $4,215 last year. The decrease in gross profit
dollars resulted from increased packaging costs of $500 and overall product mix
offset by an increase in sales volume. Gross margin was 28.7% in fiscal 2003
versus 31.1% last year. Gross margin decreased in fiscal 2003 due to the
increased packaging costs and the blend of the product mix over the two periods.
INSTITUTIONAL SANITARY SUPPLIES AND OTHER
Institutional Sanitary Supplies and Other gross profits were $2,418 or 44.1% in
2003 versus $2,294 or 43.5% in 2002. The 5.4% increase in gross profit dollars
is mainly a result of a 4.0% increase in sales. Overall product mix and price
increases were the main reasons for the higher margins this year.
Unallocated cost of sales increased to $3,487 from $2,970 or 17.4%. The higher
costs were mainly a result of higher freight costs due to rising fuel
surcharges, increased sales and shipments to customers and higher amounts of
inventory in warehouses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $2,131 or 7.2%
to $31,569 for fiscal 2003 from $29,438 for fiscal 2002. As a
27
percentage of sales, SG&A decreased to 11.6% for fiscal 2003 versus 12.8% for
fiscal 2002. SG&A increased primarily due to rising business insurance costs
($173), increased selling expenses ($225), increased development and quality
assurance expenses ($277), an increase in an environmental remediation accrual
($266), overall increases in employee wages and incentive compensation ($1,736)
and increased fringe benefit costs ($278). These increases were partially offset
by the reduction in amortization expense of goodwill of $539 as goodwill is no
longer amortized in accordance with SFAS 142. The Company sold property held for
sale in July 2002 and realized a net gain on the sale of $291. This gain reduced
SG&A expenses and lowered its SG&A as a percentage of sales. SG&A, as a
percentage of sales, excluding this transaction, would have been 11.7% versus
12.8% last year.
OPERATING INCOME
For the year ended June 30, 2003 operating income was $12,937 compared to
$7,336, an increase of $5,601 or 76.3%. This increase was primarily due to the
overall increase in gross profit of $7,732, with the main contribution of $9,046
coming from the Health Sciences segment, which was partially offset by higher
SG&A expenses of $2,131.
INTEREST AND OTHER INCOME (EXPENSE)
Interest expense for fiscal 2003 was $284 versus $368 in the prior year. The
decrease of $84 or 22.8% was attributable to the lower levels of short-term bank
loans and acquisition-related debt from the Schweizerhall Pharma acquisition and
lower average interest rates. Short-term bank loans was $7,336 at June 30, 2002
versus $3,286 at June 30, 2003. There was no acquisition-related debt remaining
as of June 30, 2002 and 2003.
Interest and other income increased to $713 for fiscal 2003 compared to $410
last year. Interest income increased $246 this year due to higher average
balances in interest bearing accounts and increased finance charges received
from a major customer. Miscellaneous sources of other income realized an
increase of $151 in 2003 versus the prior year. This was offset by a reduction
in dividend income of $57 and a loss on marketable securities of $74 this year
compared to a loss of $37 in the prior year.
PROVISION FOR INCOME TAXES
The effective tax rate for the year ended June 30, 2003 decreased to 29.2% from
33.0% last year. The decrease in the effective tax rate is primarily a
reflection of increased earnings in lower foreign tax jurisdictions compared to
the prior year.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
The year ended June 30, 2003 includes a one-time charge of $1,873, or $0.12 per
diluted share, attributable to the cumulative effect of adopting SFAS No. 142,
"Goodwill and Other Intangible Assets". The Company's $1,873 one-time charge was
related to the impairment of the goodwill associated with CDC Products Corp.
("CDC") which is part of our Institutional Sanitary Supply segment. The one-time
charge for CDC was due to the change in methodologies used to evaluate the
recoverability of goodwill as required under SFAS 142.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
At June 30, 2004, we had $32,330 in cash, $888 in short-term investments and no
short-term bank loans. Working capital was $84,129 at June 30, 2004 versus
$71,165 at June 30, 2003.
Our cash position at June 30, 2004 increased $12,067 from the June 30, 2003
level. Operating activities provided cash of $19,690, primarily from net income
of $13,067, increases in drafts and acceptances payable of $4,243 and
28
accounts payable and accrued purchases totaling $9,568, partially offset by
increases in trade accounts receivable of $8,312.
Investing activities used cash of $4,961, of which $4,632 was used for the
acquisition of Pharma Waldhof. Financing activities used cash of $3,053
primarily as a result of payments of cash dividends of $2,719 and payments of
short-term bank loans of $3,413, which were partially offset by proceeds from
the exercise of stock options of $3,079.
CREDIT FACILITIES
We have credit facilities with two European financial institutions. These
facilities provide us with a line of credit of 14,500 Euros (approximately
$17,523), which was not utilized as of June 30, 2004. We are not subject to any
financial covenants under these arrangements.
In June 2004, we amended our revolving credit agreement with a financial
institution so that it expires June 30, 2007 and provides for available credit
of $10,000. At June 30, 2004, we had utilized $1,161 in letters of credit,
leaving $8,839 of this facility unused. Under the credit agreement, we may
obtain credit through direct borrowings and letters of credit. Our obligations
under the credit agreement are guaranteed by certain of our subsidiaries and are
secured by 65% of the capital of certain of our non-domestic subsidiaries. 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. We are also subject to certain restrictive debt covenants,
including covenants governing liens, limitations on indebtedness, limitations on
cash dividends, guarantees, sale of assets, sales of receivables, and loans and
investments. We were not in compliance with certain restrictive covenants at
June 30, 2004, for which we received waivers.
WORKING CAPITAL OUTLOOK
Working capital was $84,129 at June 30, 2004 versus $71,165 at June 30, 2003.
The increase in working capital was primarily attributable to cash generated
from operations. We continually evaluate possible acquisitions of or investments
in businesses that are complementary to our own, and such transactions may
require the use of cash. We believe that our 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, we may obtain additional credit facilities to enhance our liquidity.
OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS AND CONTINGENCIES
We have no material financial commitments other than those under operating lease
agreements, letters of credit and unconditional purchase obligations. We have
certain contractual cash obligations and other commercial commitments which will
impact our short and long-term liquidity. At June 30, 2004, we had no
significant obligations for capital expenditures. At June 30, 2004, 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
----- ------ ----- ----- -------
Operating leases $ 9,079 $ 1,734 $3,098 $2,461 $1,786
Commercial letters
of credit 1,161 1,161 - - -
Standby letters
of credit 128 128 - - -
Unconditional
purchase
obligations (a) 7,823 7,823 - - -
------- ------- ------ ------ ------
Total $18,191 $10,846 $3,098 $2,461 $1,786
======= ======= ====== ====== ======
29
(a) As of June 30, 2004, we had outstanding purchase obligations totaling $7,823
with suppliers to our Germany, Netherlands and Singapore operations to acquire
certain products for resale to customers. Such purchase obligations are based on
anticipated sales to specific customers through March 31, 2005.
Other significant commitments and contingencies include the following:
1. Effective December 2003, we modified our non-qualified
Supplemental Executive Retirement Plan. The plan is a deferred
compensation plan intended to provide certain executives with
supplemental retirement benefits beyond our 401(k) plan, as well
as to permit additional deferral of a portion of their
compensation. All compensation deferred under the Plan is held
by us in a grantor trust, which is considered an asset of the
Company. We had a liability under the Plan of $1,711 and the
funds held by the grantor trust amounted to $1,371 as of June
30, 2004.
2. One of our subsidiaries 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. We are presently
a member of two such task force groups and may be required to
make additional payments in the future.
3. We, together with our subsidiaries, are subject to pending and
threatened legal proceedings that have arisen in the normal
course of business. We do not know the impact the final
resolution of these matters will have on our results of
operations or liquidity in a particular reporting period. Our
management is of the opinion, however, that the ultimate outcome
of such matters will not have a material adverse effect upon our
financial condition or liquidity.
4. In June 2004, we entered into a software license and support
agreement that provides a non-exclusive license to use the
vendor's software for a fully integrated "Enterprise Resource
Planning" system. We are obligated to make aggregate payments of
approximately $270. Such payments are expected to be made in
fiscal 2005.
RELATED PARTY TRANSACTIONS
Certain directors of the Company are affiliated with law firms which serve as
counsel to the Company on various corporate matters. During fiscal 2004, 2003
and 2002, the Company incurred legal fees of $458, $435 and $405, respectively,
for services rendered to the Company. The fees charged by such firms were at
rates comparable to rates obtainable from other firms for similar services.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standard Board ("FASB") issued an
exposure draft entitled "SHARE-BASED PAYMENT, AN AMENDMENT OF FASB STATEMENTS
30
NO. 123 AND 95." This exposure draft would require stock-based compensation to
employees to be recognized as a cost in the financial statements and that such
cost be measured according to the fair value of the stock options. In the
absence of an observable market price for the stock awards, the fair value of
the stock options would be based upon a valuation methodology that takes into
consideration various factors, including the exercise price of the option, the
expected term of the option, the current price of the underlying shares, the
expected volatility of the underlying share price, the expected dividends on the
underlying shares and the risk-free interest rate. The proposed requirements in
the exposure draft would be effective for the first fiscal year beginning after
December 15, 2004. The FASB intends to issue a final Statement in late 2004. We
will continue to monitor communications on this subject from the FASB in order
to determine the impact on our consolidated financial statements.
In December 2003, the FASB issued Interpretation 46R (FIN 46R), a revision to
Interpretation 46 (FIN 46), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN
46R, which clarifies some of the provisions of FIN 46 and exempts certain
entities from its requirements, sets forth criteria to be used in determining
whether an investment in a variable interest entity should be consolidated.
These provisions are based on the general premise that if a company controls
another entity through interests other than voting interests, that company
should consolidate the controlled entity. The provisions of FIN 46R were
effective on March 31, 2004. We have evaluated whether the provisions of FIN 46R
are applicable to our investments, as well as other arrangements, which may meet
the criteria of the interpretation, and concluded that S.R.F.A., a 50% owned
joint venture that commenced operations in April 2004, meets the definition of a
variable interest entity and based on the provisions of FIN 46R, has been
included in the our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS
The market risk inherent in our 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
We had short-term investments at June 30, 2004 of $888. They consisted solely of
corporate securities, were recorded at fair value, and had exposure to price
risk. If this risk is estimated as the potential loss in fair value resulting
from a hypothetical 10% adverse change in prices quoted by stock exchanges, the
effect of that risk would not be material as of June 30, 2004. Actual results
may differ.
FOREIGN CURRENCY EXCHANGE RISK
In order to reduce the risk of foreign currency exchange rate fluctuations, we
hedge some of our transactions denominated in a currency other than the
functional currencies applicable to each of our 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,
2004, we had foreign currency contracts outstanding that had a notional amount
of $1,543. The difference between the fair market 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, 2004 was not material.
In addition, we also enter into cross currency interest rate swaps to reduce
foreign currency exposure on inter-company transactions. In June 2004 we entered
into a one-year cross currency interest rate swap transaction and in May 2003 we
entered into a five-year cross currency interest rate swap
31
transaction, both for the purpose of hedging fixed interest rate, foreign
currency denominated cash flows under inter-company loans. Under the terms of
these derivative financial instruments, U.S. dollar fixed principal and interest
payments to be received under inter-company loans will be swapped for EURO
denominated fixed principal and interest payments. The change in fair value of
the swaps from date of purchase to June 30, 2004 was $(509). The gains or losses
on the inter-company loans due to changes in foreign currency rates will be
offset by the gains or losses on the swap in the accompanying consolidated
statements of income. Since our interest rate swaps qualify as hedging
activities, the change in their fair value amounting to $(392) and $(117) in
2004 and 2003, respectively, is recorded in accumulated other comprehensive
income (loss) included in the accompanying consolidated balance sheets.
We are subject to risk from changes in foreign exchange rates for our
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, 2004, we had translation exposure to various foreign currencies,
with the most significant being the Euro and the Singapore dollars. The
potential loss as of June 30, 2004, resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rates amounted to $3,132. Actual
results may differ.
INTEREST RATE RISK
Due to our financing, investing and cash management activities, we are subject
to market risk from exposure to changes in interest rates. We utilize a balanced
mix of debt maturities along with both fixed-rate and variable-rate debt to
manage our exposure to changes in interest rates. Our financial instrument
holdings at year-end were analyzed to determine their sensitivity to interest
rate changes. In this sensitivity analysis, we 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 our results of
operations.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this Item
8 are set forth at the end of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission rules, we have
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered
by this annual report. This evaluation was carried out under the
supervision and with the participation of our management, including
our principal executive officer and principal financial officer. Based
on this evaluation, these officers have concluded that the design and
operation of our disclosure controls and procedures are effective.
There were no significant changes to our internal controls or in other
factors that could significantly affect internal controls subsequent
to the date of their evaluation.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
We are working closely with our corporate and securities lawyers to
ensure that we maintain compliance with the Sarbanes-Oxley Act of
2002, the SEC regulations promulgated pursuant to that Act, and any
related NASDAQ Stock Market rules.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to our definitive proxy statement
with respect to our annual meeting of shareholders scheduled to be
held on December 2, 2004.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to our definitive proxy statement
with respect to our annual meeting of shareholders scheduled to be
held on December 2, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated herein by reference to our definitive proxy statement
with respect to our annual meeting of shareholders scheduled to be
held on December 2, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
33
Incorporated herein by reference to our definitive proxy statement
with respect to our annual meeting of shareholders scheduled to be
held on December 2, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference to our definitive proxy statement
with respect to our annual meeting of shareholders scheduled to be
held on December 2, 2004.
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 annual report.
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on May 7, 2004
furnishing its earnings release in connection with its third
quarter.
(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* Aceto Corporation 401(k) Retirement Plan, effective August 1,
1997, (as amended and restated as of July 1, 2002).
10.2* Supplemental Executive Retirement Plan, as amended and
restated, effective June 30, 2004.
10.3 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).
10.4 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).
10.5 Aceto Corporation 2002 Stock Option Plan (incorporated by
reference to Exhibit 4(i) to Registration Statement No.
333-110653 on Form S-8).
34
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 on
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).
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 current 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 annual 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 (incorporated by
reference to Exhibit 10.13 to the Company's annual report on
Form 10-K for the year ended June 30, 2002).
10.15* Amendment and Waiver to Credit Agreement between Aceto
Corporation and subsidiaries and JPMorgan Chase Bank dated
June 29, 2004.
35
10.16* Waiver to Credit Agreement between Aceto Corporation and
subsidiaries and JPMorgan Chase Bank dated August 31, 2004.
10.17 Share Purchase Agreement dated as of December 12, 2003 between
Aceto Holding GmbH and Corange Deutschland Holding GmbH
(incorporated by reference to Exhibit 2.1 to the Company's
current report on Form 8-K dated December 31, 2003).
21* Subsidiaries of the Company.
23* Consent of KPMG LLP.
31.1* Certification by President and CEO Leonard S. Schwartz
pursuant to U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification by CFO Douglas Roth pursuant to U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1* Certification by President and CEO Leonard S. Schwartz
pursuant to U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification by CFO Douglas Roth pursuant to U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
- ----------
*Filed herewith
36
ACETO CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated financial statements:
Consolidated balance sheets as of June 30, 2004 and 2003
Consolidated statements of income for the years ended June 30,
2004, 2003 and 2002
Consolidated statements of cash flows for the years ended June
30, 2004, 2003 and 2002
Consolidated statements of shareholders' equity and comprehensive
income (loss) for the years ended June 30, 2004, 2003 and 2002
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.
37
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
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, 2004 and 2003, 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, 2004. 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 and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2004, 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.
As discussed in note 2, effective July 1, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standard (Statement) No. 141,
"Business Combinations" and Statement No. 142, "Goodwill and Other Intangible
Assets".
/s/ KPMG LLP
Melville, New York
September 9, 2004
38
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, JUNE 30,
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents $32,330 $20,263
Short-term investments 888 877
Receivables:
Trade, less allowance for doubtful accounts:
2004, $1,033; 2003, $939 53,084 43,704
Other 1,504 1,320
------ ------
54,588 45,024
Inventory 41,784 41,696
Prepaid expenses and other current assets 1,165 1,015
Income taxes receivable 606 939
Deferred income tax benefit, net 1,613 301
------- -------
Total current assets 132,974 110,115
Long-term notes receivable 747 1,017
Property and equipment:
Machinery and equipment 1,460 1,244
Leasehold improvements 1,163 1,143
Computer equipment and software 2,903 2,540
Furniture and fixtures 734 667
Automobiles 458 362
Land and land improvements 326 326
----- -----
7,044 6,282
Less accumulated depreciation and amortization 4,390 3,681
----- -----
2,654 2,601
Goodwill 3,179 7,783
Intangible assets, net 3,701 412
Deferred income tax benefit 4,579 1,107
Other assets 1,863 484
----- -----
Total Assets $149,697 $123,519
======== ========
See accompanying notes to consolidated financial statements.
39
JUNE 30, JUNE 30,
2004 2003
---- ----
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts and acceptances payable $ 4,610 $ 1,315
Short-term bank loans - 3,286
Accounts payable 23,174 17,372
Note payable - related party 1,000 -
Accrued merchandise purchases 8,118 4,048
Accrued compensation 4,547 4,117
Accrued environmental remediation 1,326 1,550
Other accrued expenses 6,070 7,262
------ ------
Total current liabilities 48,845 38,950
Long-term liabilities 429 -
Minority interest 157 -
------ ------
Total liabilities 49,431 38,950
Commitments and contingencies (Note 17)
Shareholders' equity:
Common stock, $.01 par value:
Authorized: 2004, 40,000,000 shares
2003, 20,000,000 shares
Issued: 2004, 17,570,579 shares
2003, 17,570,579 shares
Outstanding: 2004, 16,044,607 shares
2003, 15,564,070 shares 176 176
Capital in excess of par value 57,191 57,047
Retained earnings 56,490 46,142
Treasury stock, at cost:
2004, 1,525,972 shares
2003, 2,006,509 shares (15,135) (19,836)
Accumulated other comprehensive income 1,544 1,040
------ ------
Total shareholders' equity 100,266 84,569
------- ------
Total liabilities and shareholders' equity $149,697 $123,519
======= =======
See accompanying notes to consolidated financial statements.
40
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004 2003 2002
---- ---- ----
Net sales $297,718 $271,276 $229,329
Cost of sales 244,800 226,770 192,555
------- ------- -------
Gross profit 52,918 44,506 36,774
Selling, general and
administrative expenses 36,874 31,569 29,438
------- ------- -------
Operating income 16,044 12,937 7,336
Other income (expense):
Interest expense (101) (284) (368)
Interest and other income, net 1,334 713 410
------- ------- -------
1,233 429 42
------- ------- -------
Income before income taxes and cumulative
effect of accounting change 17,277 13,366 7,378
Income taxes:
Federal:
Current 1,329 1,798 1,436
Deferred (22) 103 220
State and local:
Current 115 348 337
Deferred (4) 93 (50)
Foreign:
Current 2,792 1,556 490
------- ------- -------
4,210 3,898 2,433
Income before cumulative effect of
accounting change 13,067 9,468 4,945
Cumulative effect of accounting change(a) - 1,873 -
------- ------- -------
Net income $13,067 $ 7,595 $ 4,945
======= ======= =======
Basic income per common share (b):
Income before accounting change $ 0.83 $ 0.64 $ 0.34
Cumulative effect of accounting change - 0.13 -
------- ------- -------
Net income $ 0.83 $ 0.51 $ 0.34
======= ======= =======
Diluted income per common share (b):
Income before accounting change $ 0.81 $ 0.62 $ 0.34
Cumulative effect of accounting change - 0.12 -
------- ------- -------
Net income $ 0.81 $ 0.50 $ 0.34
======= ======= =======
Weighted average shares outstanding (b):
Basic 15,799 14,864 14,669
Diluted 16,202 15,175 14,749
(a) Goodwill impairment loss recognized as a cumulative effect of an accounting
change (note 2).
(b) The number of shares outstanding and the per share information have been
adjusted for 3-for-2 stock dividends, paid January 2, 2004 and 2003.
See accompanying notes to consolidated financial statements.
41
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
(IN THOUSANDS) 2004 2003 2002
---- ---- ----
Operating activities:
Net income $13,067 $7,595 $4,945
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting change - 1,873 -
Depreciation and amortization 1,119 1,036 1,629
Gain on sale of assets - (291) (3)
Provision for doubtful accounts 520 446 566
Deferred tax provision (benefit) (26) 196 170
Income tax benefit on exercise of stock
options 1,532 1,589 10
Non-cash stock compensation 190 225 214
Changes in assets and liabilities,
net of effect of the acquisitions:
Investments - trading securities (111) 74 37
Trade accounts receivable (8,312) (593) (3,313)
Other receivables 63 3,042 (931)
Income taxes receivable (58) (939) -
Inventory 2,118 (4,597) 694
Prepaid expenses and other current assets (242) 291 (488)
Other assets (557) 46 (143)
Drafts & acceptances payable 4,243 (3,516) 1,638
Accounts payable 5,697 2,907 4,174
Accrued merchandise purchases 3,871 (409) 2,526
Accrued compensation 457 1,244 72
Accrued environmental remediation (224) 266 (8)
Accrued income taxes - (1,417) 1,240
Other accrued expenses and long
term liabilities (3,657) (90) 3,190
------- ------- -------
Net cash provided by operating activities 19,690 8,978 16,219
------- ------- -------
Investing activities:
Proceeds from sale of trading securities 100 - -
Proceeds from maturity of investments - 369 -
Payments received on notes receivable 277 96 88
Purchases of property and equipment (706) (629) (555)
Proceeds from sale of property, net of
closing costs - 173 12
Acquisition of businesses, net of
cash acquired (4,632) - (2,876)
Additional payments for inventory
acquired from Schweizerhall Pharma - - (2,639)
Proceeds from settlement of certain acquired
balances, principally accounts receivable - - 1,571
------- ------- -------
Net cash (used in) provided by
investing activities (4,961) 9 (4,399)
------- ------- -------
Financing activities:
Payments of short-term bank loans (3,413) (4,020) (2,333)
Payments of current installments on long-term
liabilities - (272) -
Payments of cash dividends (2,719) (2,316) (2,088)
Payments of long-term liabilities - - (796)
Proceeds from exercise of stock options 3,079 3,240 158
Payments for purchases of treasury stock - (39) (121)
------- ------- -------
Net cash used in financing activities (3,053) (3,407) (5,180)
------- ------- -------
Effect of exchange rate changes on cash 391 428 305
------- ------- -------
Net increase in cash and cash equivalents 12,067 6,008 6,945
Cash and cash equivalents at beginning of year 20,263 14,255 7,310
------- ------- -------
Cash and cash equivalents at end of year $32,330 $20,263 $14,255
======= ======= =======
See accompanying notes to consolidated financial statements.
42
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK Capital in
Shares Par Value Excess of Retained
Issued ($.01) Par Value Earnings
------ ------ --------- --------
Balance at June 30, 2001 17,570,579 $176 $56,330 $38,006
Net income - - - 4,945
Other comprehensive income (loss):
Foreign currency translation
adjustments - - - -
Comprehensive income
Stock issued pursuant to employee
incentive plans - - 9 -
Cash dividends ($0.14 per share) - - - (2,088)
Exercise of stock options - - (22) -
Tax benefit from exercise of
stock options - - 10 -
Treasury stock purchases - - - -
Lapsed stock options - - 81 -
- -------------------------------------------------------------------------------------------------
Balance at June 30, 2002 17,570,579 176 56,408 40,863
Net income - - - 7,595
Other comprehensive income (loss):
Change in fair value of cross
currency interest rate swap - - - -
Foreign currency translation
adjustments - - - -
Comprehensive income
Stock issued pursuant to employee
incentive plans - - 61 -
Cash dividends ($0.15 per share) - - - (2,316)
Exercise of stock options - - (1,040) -
Tax benefit from exercise of
stock options - - 1,589 -
Treasury stock purchases - - - -
Lapsed stock options - - 29 -
- -------------------------------------------------------------------------------------------------
Balance at June 30, 2003 17,570,579 176 57,047 46,142
Net income - - - 13,067
Other comprehensive income (loss):
Foreign currency translation
adjustments - - - -
Change in fair value of cross
currency interest rate swaps - - - -
Comprehensive income
Stock issued pursuant to employee
incentive plans - - 50 -
Cash dividends ($0.17 per share) - - - (2,719)
Exercise of stock options - - (1,438) -
Tax benefit from exercise of
stock options - - 1,532 -
Treasury stock purchases - - - -
- -------------------------------------------------------------------------------------------------
Balance at June 30, 2004 17,570,579 $ 176 $ 57,191 $ 56,490
(CONTINUED)
Accumulated
Other
TREASURY STOCK Comprehensive
Shares Amount Income (Loss) Total
------ ------ ------------- -----
Balance at June 30, 2001 (2,497,583) $(24,545) $(764) $69,203
Net income - - - 4,945
Other comprehensive income (loss):
Foreign currency translation
adjustments - - 859 859
-------
Comprehensive income 5,804
Stock issued pursuant to employee
incentive plans 23,762 234 - 243
Cash dividends ($0.14 per share) - - - (2,088)
Exercise of stock options 18,300 180 - 158
Tax benefit from exercise of
stock options - - - 10
Treasury stock purchases (11,800) (121) (121)
Lapsed stock options - - - 81
- ------------------------------------------------------------------------------------------
Balance at June 30, 2002 (2,467,321) (24,252) 95 73,290
Net income - - - 7,595
Other comprehensive income (loss):
Change in fair value of cross
currency interest rate swap - - (117) (117)
Foreign currency translation
adjustments - - 1,062 1,062
-------
Comprehensive income 8,540
Stock issued pursuant to employee
incentive plans 17,733 175 - 236
Cash dividends ($0.15 per share) - - - (2,316)
Exercise of stock options 446,879 4,280 - 3,240
Tax benefit from exercise of
stock options - - - 1,589
Treasury stock purchases (3,800) (39) (39)
Lapsed stock options - - - 29
- ------------------------------------------------------------------------------------------
Balance at June 30, 2003 (2,006,509) (19,836) 1,040 84,569
Net income - - - 13,067
Other comprehensive income (loss):
Foreign currency translation
adjustments - - 896 896
Change in fair value of cross
currency interest rate swaps - - (392) (392)
-------
Comprehensive income 13,571
Stock issued pursuant to employee
incentive plans 18,577 184 - 234
Cash dividends ($0.17 per share) - - - (2,719)
Exercise of stock options 461,973 4,517 - 3,079
Tax benefit from exercise of
stock options - - - 1,532
Treasury stock purchases (13) - -
- -----------------------------------------------------------------------------------------
Balance at June 30, 2004 (1,525,972) $(15,135) $1,544 $100,266
See accompanying notes to consolidated financial statements.
43
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS
Aceto Corporation and subsidiaries ("Aceto" or 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 from companies located
outside the United States. The Company's customers are primarily located
throughout the United States, Germany, France, Australia, the Netherlands, the
United Kingdom, Malaysia and Canada.
(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. In addition, the financial statements
of S.R.F.A. LLC, a joint-venture entity which is 50% owned by the Company and
commenced operations in April 2004, are included in the consolidated financial
statements in accordance with FASB Interpretation 46R, "Consolidation of
Variable Interest Entities." All significant inter-company 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,
liabilities, revenues and expenses reported in those financial statements and
the disclosure of contingent assets and liabilities at the date of the financial
statements. These judgments can be subjective and complex, and consequently
actual results could differ from those estimates and assumptions. The Company's
most critical accounting policies relate to revenue recognition; allowance for
doubtful accounts; inventory; goodwill and other intangible assets;
environmental matters; pension benefits; income taxes; and other contingencies.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities at the time of purchase of three months or less to be cash
equivalents. The Company had no cash equivalents at June 30, 2004. Cash and cash
equivalents at June 30, 2003 include U.S. Treasury bills in the amount of
$2,996.
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. As of June 30, 2004 and 2003 all investments were classified as
trading securities.
INVENTORIES
Inventories, which consist principally of finished goods, are stated at the
lower of cost (first-in first-out method) or market. The Company writes down its
inventories for estimated excess and obsolete goods by an amount 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.
44
ENVIRONMENTAL AND OTHER CONTINGENCIES
The Company establishes accrued liabilities 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 the accrual, or the Company's share of the
contingency increases or decreases, or other assumptions relevant to the
development of the estimate were to change, the Company would recognize an
additional expense or benefit in income in the period such determination was
made.
PENSION BENEFITS
In connection with the acquisition of Pharma Waldhof in December 2003 and other
entities in Germany, the Company assumed defined benefit pension plans covering
fourteen employees who meet the plan's eligibility requirements. The net pension
benefit obligations recorded and the related periodic costs are based on, among
other things, assumptions of the discount rate, estimated return on plan assets,
salary increases and the mortality of participants. The obligation for these
claims and the related periodic costs are measured using actuarial techniques
and assumptions. Actuarial gains and losses are deferred and amortized over
future periods. The Company's plans are funded in conformity with the funding
requirements of applicable government regulations.
ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income as of June 30, 2004 and
2003 are as follows:
June 30, June 30,
2004 2003
Cumulative foreign currency translation adjustments $ 2,053 $ 1,157
Fair value of cross currency interest rate swaps (509) (117)
------- -------
$ 1,544 $ 1,040
======= =======
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-US subsidiaries.
COMMON STOCK DIVIDEND
On December 4, 2003, the shareholders of the Company approved an increase in the
Company's authorized common stock to 40,000 shares. In addition, the Board of
Directors of the Company declared a 3-for-2 stock dividend that was paid January
2, 2004, to shareholders of record on December 17, 2003. The Company transferred
$53 to common stock from capital in excess of par value, representing the
aggregate par value of the shares issued.
On December 5, 2002, the Board of Directors of the Company declared a 3-for-2
stock dividend that was paid January 2, 2003, to shareholders of record on
December 18, 2002. The Company transferred $33 to common stock from capital in
excess of par value, representing the aggregate par value of the shares issued.
All references to the number of common shares and the per common share amounts
have been restated to give retroactive effect to the above stock dividends for
all periods presented.
STOCK OPTIONS
The Company applies the intrinsic value method as outlined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and related interpretations for stock options and other stock-based awards
while disclosing pro forma net income and earnings per share as if the fair
value method had been applied in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Under the intrinsic value method, no compensation expense is recognized if the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant. Since the Company has issued all
stock option grants with exercise prices equal to the market value of the common
stock, no compensation cost has been recognized. Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation",
requires that the
45
Company provide pro forma information regarding net income and net income per
common share as if compensation cost for the Company's stock option programs had
been determined in accordance with the fair value method prescribed therein. The
following table illustrates the effect on net income and net income per common
share as if the Company had measured the compensation cost for the Company's
stock option programs under the fair value method in each period presented:
2004 2003 2002
---- ---- ----
Net income, as reported $13,067 $7,595 $4,945
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects (1,176) (761) (213)
------ ----- -----
Net income - pro forma $11,891 $6,834 $4,732
====== ===== =====
Net income per common share:
Basic - as reported $ 0.83 $ 0.51 $ 0.34
Basic - pro forma $ 0.75 $ 0.46 $ 0.32
Diluted - as reported $ 0.81 $ 0.50 $ 0.34
Diluted - pro forma $ 0.73 $ 0.45 $ 0.32
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment and
passage of title and risk of loss to the customer. The Company has no acceptance
or other post-shipment obligations and does not offer product warranties or
services to its customers.
Sales are recorded net of returns of damaged goods from customers, which
historically have been immaterial, and sales incentives offered to customers.
The Company's sales incentives consist primarily of volume incentive rebates.
The Company records such volume incentive rebates as the underlying revenue
transactions that result in progress by the customer in earning the rebate are
recorded, in accordance with Emerging Issues Task Force (EITF) 01-09,
"ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER (INCLUDING A
RESELLER OF THE VENDOR'S PRODUCTS)".
SHIPPING AND HANDLING FEES AND COSTS
All amounts billed to a customer in a sales transaction related to shipping and
handling represent revenues earned and are included in net sales. The costs
incurred by the Company for shipping and handling are reported as a component of
cost of sales. Cost of sales also includes inbound freight, receiving,
inspection, warehousing, distribution network, sales agents commissions, and
customs and duty costs.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are included in cost
of sales. Such costs were approximately $208, $71 and $269 for the years ended
June 30, 2004, 2003 and 2002, respectively.
NET INCOME PER COMMON SHARE
Net income per common share (basic EPS) is computed by dividing net income by
the weighted average number of common shares outstanding and excluded any
potential dilution. Net income per common share, assuming dilution (diluted
EPS), is computed by reflecting potential dilution from the exercise of stock
options.
The net income per common share for each of the periods presented are based on
the weighted average number of common shares outstanding, adjusted to reflect
the 3-for-2 common stock dividends paid on January 2, 2004 and 2003.
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
46
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 the straight
line method. The estimated useful lives are as follows:
Years
-----
Machinery and equipment 10
Computer equipment and software 3-5
Furniture and fixtures 10
Automobiles 3
Leasehold improvements are amortized over the shorter of the life of the asset
or the lease term.
Depreciation and amortization of property and equipment amounted to $706, $795,
and $738 for the years ended June 30, 2004, 2003, and 2002, respectively.
GOODWILL AND OTHER INTANGIBLES
Goodwill is calculated as the excess of the cost of purchased businesses over
the value of their underlying net assets. Other intangible assets principally
consist of customer relationships, trademarks, purchased customer lists and
covenants not to compete. Goodwill and other intangible assets that have an
indefinite life are not amortized.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), effective July 1, 2002. As
required by SFAS 142, the Company upon adoption performed impairment tests on
goodwill as of July 1, 2002. As a result of the impairment tests, the Company
recorded a goodwill impairment charge of $1,873, which has been included as a
cumulative effect of an accounting change in the accompanying consolidated
statement of income for the year ended June 30, 2003. Also required by SFAS 142,
on at least an annual basis, the Company tests goodwill and other intangible
assets for impairment. Goodwill impairment exists if the net book value of a
reporting unit exceeds its estimated fair value. The impairment testing is
performed in two steps: (i) the Company determines impairment by comparing the
fair value of a reporting unit with its carrying value, and (ii) if there is an
impairment, the Company measures the amount of impairment loss by comparing the
implied fair value of goodwill with the carrying amount of that goodwill. To
determine the fair value of these intangible assets, there are many assumptions
and estimates used that directly impact the results of the testing. In making
these assumptions and estimates, the Company uses industry accepted valuation
models and set criteria that are reviewed and approved by various levels of
management. Additionally, the Company utilizes the assistance of a third-party
valuation firm, as necessary, to help evaluate recorded goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Effective July 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which establishes accounting and
reporting standards for the impairment or disposal of long-lived assets. SFAS
No. 144 removes goodwill from its scope and retains the requirements of SFAS No.
121 regarding the recognition of impairment losses on long-lived assets held for
use.
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 undiscounted net cash flows expected to be generated by the asset.
Recoverability of assets held for sale is measured by comparing the carrying
amount of the assets to their estimated fair market value. If such assets are
considered to be impaired, the
47
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.
Land and land improvements of $326 at June 30, 2004 and 2003, represents
property held for sale and 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 also enters into cross currency interest rate swaps to reduce
foreign currency exposure on inter-company transactions. Since the Company's
interest rate swaps qualify as hedging activities, the change in their fair
value is recorded in accumulated other comprehensive income (loss).
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
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 believes 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, 2004 and 2003 in the amount
of $25 and $99, respectively. The hedge contracts flow through cost of sales in
the consolidated statement of income as the related inventory is sold. 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
48
translation of foreign currency financial statements are accumulated in a
separate component of stockholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current presentation.
(3) BUSINESS ACQUISITIONS AND JOINT VENTURE
PHARMA WALDHOF
On December 31, 2003, the Company, through its wholly owned subsidiary Aceto
Holding GmbH ("Aceto Holding"), acquired from Corange Deutschland Holding GmbH
("Corange"), all of the capital stock of Pharma Waldhof Beteiligungs GmbH
("Pharma Waldhof"), and all of the partnership interest of Pharma Waldhof GmbH &
Co. KG. Pharma Waldhof is the general partner of Pharma Waldhof GmbH & Co. KG.
Based in Dusseldorf, Germany, Pharma Waldhof GmbH & Co. KG distributes
biologically and chemically derived active pharmaceutical ingredients (APIs)
used in therapeutic and diagnostic products. It is a worldwide provider of a
patent-protected, biologically derived API used for a widely used diagnostic and
therapeutic heart medication. Its primary customers include worldwide ethical
and generic pharmaceutical companies.
The Company paid $30 for the capital stock of Pharma Waldhof and $2,970 for the
partnership interest of Pharma Waldhof GmbH & Co. KG. Additionally, the share
purchase agreement states that the Company is required to pay Corange an amount
equal to certain acquired assets less certain acquired liabilities, originally
estimated to be $321. Further negotiations between Aceto and Corange regarding
this provision of the share purchase agreement took place in April 2004, and as
a result the Company paid Corange $1,844 for those assets less those
liabilities.
The Company has accounted for the transaction under the purchase method of
accounting for business combinations. The purchase price was allocated to the
acquired assets and assumed liabilities based on the fair values as of the date
of the acquisition. The excess of the purchase price paid, including acquisition
costs, over the fair value of the net identifiable assets acquired represented
goodwill.
The purchase price was allocated as follows:
Goodwill ................................................... $ 806
Accounts receivable ........................................ 937
Inventory................................................... 1,961
Identifiable intangible assets.............................. 3,847
Cash........................................................ 387
Other receivables........................................... 308
Fixed assets................................................ 11
-----
Total assets................................................ 8,257
Less liabilities assumed.................................... (3,238)
-----
Purchase price, including acquisition costs................. $5,019
=====
The following unaudited pro forma financial information presents a summary of
the Company's consolidated results of operations for the year ended June 30,
2004 and 2003, assuming the Pharma Waldhof acquisition had taken place as of
July 1, 2003 and 2002, respectively:
49
Year Ended
June 30,
2004 2003
---- ----
Revenues $302,272 $280,384
Income before cumulative
effect of accounting change $ 14,032 $ 11,791
Net income $ 14,032 $ 9,918
Basic income per common share:
Income before cumulative
effect of accounting change $ 0.89 $ 0.80
Cumulative effect of
accounting change $ - 0.13
------- -------
Net income $ 0.89 $ 0.67
======= =======
Diluted income per common
share:
Income before cumulative
effect of accounting change $ 0.87 $ 0.77
Cumulative effect of
accounting change $ - 0.12
------- -------
Net income $ 0.87 $ 0.65
======= =======
The unaudited condensed pro forma financial information has been prepared for
comparative purposes only and reflects the addition of the historical unaudited
results of Pharma Waldhof through the date of acquisition. The pro forma
financial information includes adjustments to the Company's historical results
to reflect reduced interest income generated from cash that was used for the
acquisition, depreciation and amortization expenses and related income tax
adjustments. The pro forma information does not purport to be indicative of
operating results that would have been achieved had the acquisition taken place
on the dates indicated or the results that may be obtained in the future.
SCHWEIZERHALL PHARMA
On March 26, 2001, the Company acquired (i) the distribution business of the
Schweizerhall Pharma division of Schweizerhall Holding AG ("Schweizerhall
Holding"), 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").
The Schweizerhall Pharma purchase agreement detailed two possible additional
payments to be made to Schweizerhall Holding. The first additional payment was
to be made if the Company sold acquired inventory (within one year of the
closing date) above 60% of Schweizerhall's stated book value of such inventory
as of the closing date. The inventory was sold by the Company above the 60% book
value and the resulting additional $2,639 payment was made to the Seller in May
2002. Accordingly, the Company recorded this payment as an additional cost of
the acquisition. Such additional cost was allocated to the acquired inventory as
such amounts were indicative of a more accurate estimate of the fair value of
the acquired inventory.
The second additional payment is to be made if the Company realizes certain tax
savings due to the utilization of tax benefits (e.g., net operating losses or
credits) of Schweizerhall Holding. Such payment would be 50% of the tax benefit
received by the Company and would be recorded as additional goodwill (Note 12).
In fiscal 2002, the Company received $1,571 from Schweizerhall Holding in
settlement of certain accounts receivable balances, which was recorded as a
reduction to goodwill. Also in fiscal 2002, the Company made payments of $2,876
in connection with the Schweizerhall Pharma acquisition, consisting $2,313 for
the payment of notes issued as a portion of the acquisition price and $563 for
severance and operating lease costs as a result of exit plans formulated as of
the acquisition date.
S.R.F.A
In November 2003, the Company formed a joint venture with Nufarm Americas, Inc.
(Nufarm), a subsidiary of Australian-based Nufarm Limited. Each company owns 50%
of the joint venture, named S.R.F.A., LLC, which was established to distribute
Butoxone,
50
a herbicide product for which the Company and Nufarm have acquired an EPA label.
Nufarm will continue to formulate the Butoxone for the joint venture. S.R.F.A.
commenced operations in April 2004. Through June 30, 2004, approximately 90% of
the joint venture's product sales were to customers solicited by the Company,
with the remainder solicited by Nufarm. Since S.R.F.A. is a variable interest
entity, the Company and Nufarm are de facto agents of the joint venture and the
Company is most closely associated with the joint venture, its results have been
consolidated with those of the Company. In June 2004, Nufarm and the Company
each loaned $1,000 to S.R.F.A. evidenced by demand notes that bear interest at
3.0% per annum. Such amount due Nufarm is included as a note payable in the
accompanying consolidated balance sheet. Minority interest in the net earnings
of S.R.F.A. of $157 was included in interest and other income, net in the
accompanying consolidated statement of income for fiscal 2004.
(4) INVESTMENTS
A summary of trading securities, classified as short-term, follows:
June 30, 2004 June 30, 2003
------------- -------------
Cost Cost
Fair Value Basis Fair Value Basis
---------- ----- ---------- -----
Corporate equity securities $ 888 $ 494 $ 877 $ 594
The gains (losses) on trading securities were $111, $(74) and $(37) for fiscal
2004, 2003 and 2002, respectively.
(5) NOTES RECEIVABLE
The Company has six notes receivable with outstanding balances aggregating $841
at June 30, 2004 and seven notes receivable with outstanding balances
aggregating $1,129 at June 30, 2003 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 four to eighteen years and pay interest at a fixed rate. The range
of fixed rates on the notes is 4.0% to 9.5%. Included in current assets are
notes receivable due within one year totaling $94 and $112 at June 30, 2004 and
2003, respectively.
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted the provisions of SFAS 141 and 142 as of July 1, 2002. The
Company had evaluated its existing goodwill that was acquired in prior purchase
business combinations and determined that no adjustment or reclassification to
intangible assets at July 1, 2002 was required in order to conform to the new
criteria in SFAS 141 for recognition apart from goodwill.
The year ended June 30, 2003 includes a one-time charge of $1,873, or $0.12 per
diluted share, attributable to the cumulative effect of adopting SFAS No. 142,
"Goodwill and Other Intangible Assets". The Company's $1,873 one-time charge was
related to the impairment of the goodwill associated with CDC Products Corp.
("CDC") which is part of our Institutional Sanitary Supply segment. The one-time
charge for CDC was due to the change in methodologies used to evaluate the
recoverability of goodwill as required under SFAS 142.
Intangible assets subject to amortization as of June 30, 2004 and 2003 were as
follows:
June 30, 2004
Gross Carrying Accumulated Net Book
Value Amortization Value
-------------- ------------ --------
Customer relationships $ 2,644 $ 189 $ 2,455
Customer lists 600 390 210
Non-compete agreements 643 442 201
---------- --------- -------
$ 3,887 $ 1,021 $ 2,866
========== ========= =======
51
June 30, 2003
Gross Carrying Accumulated Net Book
Value Amortization Value
-------------- ------------ --------
Customer lists $ 600 $ 270 $ 330
Non-compete agreements 420 338 82
---------- --------- -------
$ 1,020 $ 608 $ 412
========== ========= =======
The estimated useful lives of customer relationships, customer lists and
non-compete agreements are 7 years, 5 years and 3-5 years, respectively.
As of June 30, 2004 and June 30, 2003, the Company also had $835 and $0,
respectively, of intangible assets pertaining to trademarks which have
indefinite lives and are not subject to amortization. Amortization expense for
intangible assets subject to amortization amounted to $413, $241 and $352 for
the years ended June 30, 2004, 2003 and 2002, respectively. The estimated
aggregate amortization expense for intangible assets subject to amortization for
each of the succeeding years ended June 30, 2005 through June 30, 2009 are as
follows: 2005: $548; 2006: $518; 2007: $428; 2008: $428; 2009: $409
The balances of goodwill by segment as of June 30, 2004 and 2003 and changes
therein are as follows:
Institutional
Sanitary
Supplies & Consolidated
Health Sciences Other Totals
--------------- ----- ------
Balance at 6/30/03 $6,838 $945 $7,783
Acquisition of Pharma
Waldhof 806 - 806
Foreign currency
translation adjustments 59 - 59
Recognition of acquired
tax benefits,
net of payments to
Schweizerhall Pharma (5,469) - (5,469)
----- ---- ------
Balance at 6/30/04
$2,234 $ 945 $ 3,179
===== ==== ======
Goodwill amortization for the year ended June 30, 2002 was $539. Had SFAS 142
been retroactively applied, net income in fiscal 2002 would have increased $400
net of tax and diluted earnings per share would have increased by $0.03.
(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, after additional testing was completed, the Company received a
revised estimate from the
52
consultant and an additional liability of $800 was recorded. At June 30, 2002,
the remaining liability was $1,284.
During fiscal 2003, based on continued monitoring of the contamination on the
site and the current proposed plan of remediation, the Company received a
revised estimate from the consultant, which estimated that the remaining costs
of the remediation could be an amount between $1,550 and $3,200. During fiscal
2003, the Company recorded an additional liability in the amount of $266
resulting in a liability as of June 30, 2003 of $1,550. The liability as of June
30, 2004 is $1,326. However, these matters, if resolved in a manner different
from those assumed in current estimates could have a material adverse effect on
financial condition, operating results and cash flows when resolved in a future
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 June 2004, the Company amended its revolving credit agreement with a
financial institution so that it expires June 30, 2007 and provides for
available credit of $10,000. 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%, which was 2.86% and 2.62% at June 30, 2004 and 2003, respectively. The
credit agreement contains several financial covenants requiring, among other
things, minimum levels of debt service and tangible net worth. The Company is
also subject to certain restrictive debt covenants including liens, limitations
on indebtedness, limitations on cash dividends, guarantees, sale of assets,
sales of receivables, and loans and investments. In March 2003, the Company
obtained a waiver to its credit agreement which allowed it to guarantee an
obligation of one of its wholly-owned subsidiaries to a vendor under a
distribution agreement. The Company was not in compliance with certain
restrictive covenants at June 30, 2004, for which the Company received waivers.
At June 30, 2004 and 2003, the Company had available lines of credit with
foreign financial institutions totaling $17,523 and $16,588, respectively. 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 2.11% and 1.87% at June 30, 2004 and
2003, respectively. The Company is not subject to any financial covenants under
these arrangements.
Under the above financing arrangements, the Company had no short-term bank loans
outstanding and $1,161 in letters of credit leaving an unused facility of
$26,362 at June 30, 2004. At June 30, 2003 the Company utilized $3,286 in
short-term loans and $1,199 in letters of credit leaving an unused facility of
$27,103. The weighted average interest rate on short-term loans outstanding for
the years ended June 30, 2004 and 2003, was 4.18% and 4.80% respectively.
53
(9) NET INCOME PER COMMON SHARE
A reconciliation between the numerators and denominators of the basic and
diluted income per common share computation follows:
2004 2003 2002
---- ---- ----
Income before cumulative effect
of accounting change $13,067 $ 9,468 $ 4,945
Cumulative effect of accounting
change - 1,873 -
------ ------ ------
Net income available for common
shareholders $13,067 $ 7,595 $ 4,945
====== ====== ======
Weighted average common shares
outstanding(basic)(a) 15,799 14,864 14,669
Effect of dilutive securities:
Stock options (a) 403 311 80
------ ------ ------
Weighted average common and
potential common shares
outstanding (diluted)(a) 16,202 15,175 14,749
====== ====== ======
Basic income per common share(a):
Income before cumulative effect
of accounting change $ 0.83 $ 0.64 $ 0.34
Cumulative effect of accounting
change (b) - 0.13 -
------ ------ ------
Net income $ 0.83 $ 0.51 $ 0.34
====== ====== ======
Diluted income per common share(a):
Income before cumulative effect
of accounting change $ 0.81 $ 0.62 $ 0.34
Cumulative effect of accounting
change (b) - 0.12 -
------ ------ ------
Net income $ 0.81 $ 0.50 $ 0.34
====== ====== ======
(a) The number of shares outstanding and the per share information have been
adjusted for 3-for-2 stock dividends, paid January 2, 2004 and 2003.
(b) Goodwill impairment loss recognized as a cumulative effect of an
accounting change (note 2).
In fiscal 2004, 2003, and 2002, employee stock options of 4, 360, and 530,
respectively, were not included in the diluted income per common share
calculation because their effect would have been anti-dilutive.
(10) STOCK BASED COMPENSATION PLANS
In September 2002, the Company adopted the Aceto Corporation 2002 Stock Option
Plan (2002 Plan), which was ratified by the Company's shareholders in December
2002. Under the 2002 Plan, options or restricted stock to purchase up to 1,125
shares of the Company's common stock may be granted by the Company to officers,
directors, employees and agents of the Company. The exercise price per share
shall not be less than the market value of Aceto common stock on the date of
grant and each option may not become exercisable less than six months from the
date it is granted. 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 include additional shares of restricted stock (premium shares) greater
than the portion of bonus paid in restricted stock. The restricted stock award
is vested at issuance and the restrictions lapse ratably over a period of years
as determined by the Board, generally three years. The premium shares vest when
the restrictions lapse, provided that the participant remains employed by the
Company at that time.
In August 2003, the Company granted 245 options to employees and directors under
the 2002 Plan at an exercise price of $12.33. 134 of these options vest in five
equal annual increments beginning December 15, 2004 subject, however, to
acceleration of vesting if the publicly traded price of the Company's stock
exceeds specified levels
54
for a certain number of consecutive trading days beginning on December 15, 2004.
The remaining 111 options vest on December 15, 2004.
In December 2003, the Company granted 14 options to employees under the 2002
Plan at an exercise price of $13.60. During the remainder of fiscal 2004, the
Company granted 13 options to employees at prices ranging from $14.62 to $16.01.
These options vest on the first anniversary of the date of grant.
All options granted during fiscal 2004 were at exercise prices equal to the
market value of the common stock on the date of grant and expire no later than
ten years from the date of grant. As of June 30, 2004, there were 174 shares of
common stock available for grant as either options or restricted stock under the
2002 Plan.
In December 2002, the Company granted 705 options to employees and directors
under the 2002 Plan at an exercise price of $6.42 which was equal to the market
value of the common stock on the date of grant. All of these options vested in
December 2003. The options expire no later than ten years from the date of
grant.
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 1,125 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
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 restricted stock award
may include premium shares greater than the portion of bonus paid in restricted
stock. The restricted stock award is vested at issuance and the restrictions
lapse ratably over a period of years as determined by the Board. The premium
shares vest when the restrictions lapse, provided that the participant remains
employed by the Company at that time. Under the 1998 Plan, there were 121 shares
of common stock available for grant as either options or restricted stock at
June 30, 2004.
Under the terms of the Company's 1980 Stock Option Plan, as amended (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 original date they are fully vested. Under the 1980 Plan, options to
purchase 1,002 shares of common stock were available for grant at June 30, 2004.
The 1980 Plan expires September 2005.
In September 2004, in light of the continuing uncertainty regarding the future
tax and accounting treatment for stock option grants by U.S. public companies
generally, the Company reconsidered its prior policy of not utilizing shares
available for grant under the 1980 Plan. The Company thereupon granted 873
options under the 1980 Plan to employees and 41 options under the 1998 Plan to
directors at an exercise price of $16.42 which was equal to the market value of
the common stock on the date of grant. These options were vested as of their
date of grant and will expire ten years from such date.
The following tabulations summarize the shares of common stock under option for
all plans at June 30, 2004, 2003 and 2002, 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, 2001 1,454 $ 4.44
Granted 273 4.37
Exercised (41) 3.51
Forfeited (140) 4.22
- ----------------------------------------------------------------
Balance at June 30, 2002 1,546 $ 4.48
Granted 705 6.42
Exercised (728) 4.65
Forfeited/lapsed (78) 4.44
- ----------------------------------------------------------------
Balance at June 30, 2003 1,445 $ 5.31
Granted 272 12.53
Exercised (593) 5.19
Forfeited/lapsed (36) 8.20
- ----------------------------------------------------------------
Balance at June 30, 2004 1,088 $ 7.08
55
Options exercisable at June 30, 2004, 2003 and 2002 were 831, 539 and 1,011,
respectively. The weighted average exercise price for options exercisable at
June 30, 2004, 2003 and 2002 was $5.39, $4.32 and $4.62, respectively. At June
30, 2004, outstanding options had expiration dates ranging from December 10,
2008 to December 31, 2015.
Under the 1980 Plan, during the period options become exercisable, compensation
is charged to operations for the excess of the market value of the common stock
over the option exercise price at the date of grant. No such charges to
operations were incurred for the three years ended June 30, 2004. Under the 2002
Plan and the 1998 Plan, compensation is recorded for the market value of the
restricted stock awards in the year the related bonus is earned and over the
vesting period for the market value at the date of grant of the premium shares
granted. There were 22, 29 and 53 shares of restricted stock granted during
fiscal 2004, 2003 and 2002, respectively of which 9, 6, and 16 for fiscal 2004,
2003 and 2002, respectively are premium shares that are issuable only when fully
vested. In fiscal 2004, 2003 and 2002, 19, 18 and 24 common shares were issued
from treasury stock under employee incentive plans, for restricted stock awarded
and premium shares vested in each of those years, which increased stockholders'
equity by $234, $236 and $243, respectively. The related non-cash compensation
expense was $190, $225 and $214 in fiscal 2004, 2003 and 2002, respectively.
Summarized information about stock options outstanding and exercisable at June
30, 2004 was as follows:
Number of Number of
Exercise Outstanding Average Average Exercisable Average
Price Range Options Life(1) Price(2) Options Price(2)
----------- ------- ------- -------- ------- --------
$ 4.00 - 5.99 373 9.15 $ 4.14 373 $4.14
6.00 -11.99 458 8.44 6.42 458 6.42
12.00 -16.01 257 9.17 12.54 - -
----- -----
1,088 831
===== =====
(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 2004,
2003 and 2002 was $5.44, $5.51 and $2.18, 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(%)
---------------------------------------------------------------
2004
- ----
08/2003 40 7.5 4.12 1.24
12/2003 40 7.5 4.02 1.69
02/2004 40 7.5 4.29 1.12
03/2004 40 7.5 4.29 1.16
06/2004 40 6.0 4.00 1.06
2003
- ----
12/2002 40 7.5 3.79 2.22
2002
- ----
12/2001 20 7.5 5.46 3.25
(11) INTEREST AND OTHER INCOME
Interest and other income during fiscal 2004, 2003 and 2002 was comprised of the
following:
2004 2003 2002
---- ---- ----
Dividends $ 83 $ 139 $ 196
Interest 491 458 212
Net gain (loss) on investments 111 (74) (37)
Foreign government subsidies received 395 34 -
Minority interest (157) - -
Miscellaneous 268 117 16
Foreign currency gain (loss) 143 39 23
----- ----- -----
$1,334 $ 713 $ 410
===== ===== =====
56
(12) INCOME TAXES
The components of income before the provision for income taxes are as follows:
2004 2003 2002
---- ---- ----
Domestic operations $ 4,132 $ 4,912 $ 4,922
Foreign operations 13,145 8,454 2,456
------ ------ ------
$17,277 $13,366 $ 7,378
====== ====== ======
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at June 30, 2004 and 2003 are presented below:
2004 2003
---- ----
Deferred tax assets:
Accrued environmental remediation
liabilities not currently
deductible $ 503 $ 588
Accrued deferred compensation 686 529
Additional costs inventoried for
tax purposes 106 101
Allowance for doubtful accounts
receivable 241 219
Differences in depreciation of
property and equipment 96 92
Differences in amortization of
intangible assets 78 64
Accrued professional services and other 271 15
Foreign net operating loss carryforwards 8,065 5,537
------ ------
Total gross deferred tax assets 10,046 7,145
Valuation allowances (3,512) (5,537)
------ ------
Total net deferred tax assets 6,534 1,608
------ ------
Deferred tax liabilities:
Unrealized gain on investments (149) (107)
Goodwill (193) (93)
------ ------
Total gross deferred tax
liabilities (342) (200)
------ ------
Net deferred tax assets $ 6,192 $ 1,408
====== ======
The net change in the total valuation allowance for the year ended June 30, 2004
was a decrease of $2,025 resulting primarily from the projected utilization of
certain foreign net operating loss carryforwards for which a full valuation
allowance was previously established, partially offset by a valuation allowance
recorded for net operating loss carryforwards generated in fiscal 2004 in
certain other foreign jurisdictions. 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, 2004, the Company will need to
generate future taxable income of approximately $15,600.
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
57
term if estimates of future taxable income during the carryforward period are
reduced.
Primarily as a result of the acquisition of Pharma Waldhof, the Company
recognized certain tax benefits acquired in a prior business acquisition that
were previously unrecognized by the Company in the amount of $1,310 in fiscal
2004. In addition, in fiscal 2004, the Company has recorded a deferred tax
asset, included in foreign net operating loss carryforwards, of $4,712 for the
tax savings expected to be realized in future years. The recognition of these
tax benefits resulted in a reduction of goodwill of $5,469 and a liability to
the seller of $553 of which $429 is included in long-term liabilities at June
30, 2004.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries amounting to approximately $21,500 at June 30, 2004 since
substantially all of these earnings are expected to be permanently reinvested in
foreign operations. A deferred tax liability will be recognized when the Company
expects that it will recover these undistributed earnings in a taxable manner,
such as through the receipt of dividends or sale of the investments.
Determination of the amount of unrecognized deferred U.S. income tax liabilities
is not practical to calculate because of the complexity of this hypothetical
calculation. In addition, unrecognized foreign tax credit carryforwards would be
available to reduce a portion of such U.S. tax liability.
A reconciliation of the statutory Federal income tax rate and the effective tax
rate for the fiscal years ended June 30, 2004, 2003 and 2002 follows:
2004 2003 2002
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State and local taxes, net
of Federal income tax
benefit 0.7 2.2 2.6
Foreign tax rate differential (9.7) (9.9) (4.9)
Other (0.6) 2.9 1.3
----- ----- -----
Effective tax rate 24.4% 29.2% 33.0%
===== ===== =====
At June 30, 2004, the Company had foreign net operating loss carryforwards for
income tax purposes of approximately $21,690 which are available to offset
future foreign taxable income, if any, and which have no expiration date.
(13) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during fiscal 2004, 2003 and 2002 was as
follows:
2004 2003 2002
---- ---- ----
Interest paid $ 101 $ 560 $ 586
Income taxes paid $2,875 $4,234 $1,405
Non-cash transactions:
During the year ended June 30, 2003, the Company entered into a mortgage note
receivable in the amount of $412 for the sale of property.
(14) RETIREMENT PLANS
DEFINED CONTRIBUTION
The Company has defined contribution 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 $1,101,
$1,017 and $895 in fiscal 2004, 2003 and 2002, respectively.
DEFINED BENEFIT
In connection with the acquisition of Pharma Waldhof in December 2003 and other
entities in Germany, the Company assumed defined benefit pension plans covering
fourteen employees who meet the plan's eligibility requirements. The pension
58
benefit obligations recorded as of June 30, 2004 amounted to $580. Net periodic
pension costs, which consists principally of interest cost and service cost was
insignificant in fiscal 2004. The Company's plans are funded in conformity with
the funding requirements of the applicable government regulations. An assumed
weighted average discount rate of 5.5% and a compensation increase rate of 3.3%
was used in determining the actuarial present value of benefit obligations as of
June 30, 2004.
(15) DEFERRED COMPENSATION
Effective December 2003, the Company modified its non-qualified Supplemental
Executive Retirement Plan ("the Plan"). The Plan is a deferred compensation plan
intended to provide certain qualified executives with supplemental retirement
benefits beyond the Company's 401(k) Plan, as well as to permit additional
deferral of a portion of their compensation. Substantially, all compensation
deferred under the Plan, as well as Company contributions, is held by the
Company in a grantor trust, which is considered an asset of the Company. The
funds held by the grantor trust are in life insurance policies. As of June 30,
2004, the Company has recorded a liability under the Plan of $1,711 (included in
accrued compensation) and an asset (included in other assets) of $1,371
primarily representing the cash surrender value of policies owned by the
Company.
(16) FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2004 and 2003 the Company had future foreign exchange contracts that
have a notional amount of $1,543 and $3,431, respectively. The contracts have
varying maturities of less than one year. At June 30, 2004 and 2003 the Company
had not hedged open purchase commitments of approximately $343 and $51,
respectively. For fiscal 2004, 2003 and 2002, 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.
In addition, the Company also enters into cross currency interest rate swaps to
reduce foreign currency exposure on inter-company transactions. In June 2004 the
Company entered into a one-year cross currency interest rate swap transaction
and in May 2003 the Company entered into a five-year cross currency interest
rate swap transaction, both for the purpose of hedging fixed interest rate,
foreign currency denominated cash flows under inter-company loans. Under the
terms of these derivative financial instruments, U.S. dollar fixed principal and
interest payments to be received under inter-company loans will be swapped for
EURO denominated fixed principal and interest payments. The change in fair value
of the swaps from the date of purchase to June 30, 2004 was $(509). The gains or
losses on the inter-company loans due to changes in foreign currency rates will
be offset by the gains or losses on the swap in the statements of income. Since
the Company's interest rate swaps qualify as hedging activities, the change in
their fair value amounting to $(392) and $(117) in 2004 and 2003, respectively,
is recorded in accumulated other comprehensive income (loss).
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 $1,161 and
$1,199 as of June 30, 2004 and 2003, 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.
59
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 $25 and $99 as of
June 30, 2004 and 2003, respectively. The difference between the fair value of
long-term notes receivable and their carrying value at both June 30, 2004 and
2003 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,
Australia, the United Kingdom, the Netherlands and other countries. 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, 2004, five customers accounted for 16% of net trade accounts receivable. At
June 30, 2003, five customers accounted for 17% of net trade accounts
receivable. For fiscal 2004, 2003 and 2002, the Company's top five customers
accounted for 18%, 20% and 16%, respectively, of net sales.
No single product accounted for as much as 10% of net sales in fiscal 2004, 2003
or 2002. One supplier accounted for 10% of purchases in fiscal 2004 and another
supplier accounted for approximately 10% in fiscal 2003. No supplier accounted
for as much as 10% of total purchases in fiscal 2002.
During the fiscal years ended June 30, 2004 and 2003, approximately 59% of the
Company's purchases came from Asia and 29% came from Europe.
The Company maintains operations located outside of the United States. Net
assets located in Europe and Asia approximate $13,117 and $19,530, respectively
at June 30, 2004.
(17) COMMITMENTS AND CONTINGENCIES
(a) As of June 30, 2004, the Company has outstanding purchase obligations
totaling $7,823 with suppliers to the Company's Germany, Netherlands and
Singapore operations to acquire certain products for resale to third party
customers. Such purchase obligations are based on anticipated sales to specific
customers through December 31, 2004.
(b) 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 two such task force groups and may be required to make additional
payments in the future.
(c) 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.
(d) In fiscal 2002 a vendor made allegations that the Company breached a
purchase contract. As a result, the Company recorded a liability during fiscal
2003 of $450. During fiscal 2004, the Company received a favorable court ruling
and the liability was reversed accordingly.
60
(e) The Company 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, 2004, the future minimum lease payments for each of the five succeeding
years and in the aggregate are as follows:
Fiscal year Amount
----------- ------
2005 $ 1,734
2006 1,616
2007 1,482
2008 1,303
2009 1,158
Thereafter 1,786
------
$ 9,079
======
Total rental expense amounted to $1,673, $1,444 and $1,471 for fiscal 2004, 2003
and 2002, respectively.
(f) In June 2004, the Company entered into a software license and support
agreement that provides it a non-exclusive license to use the vendor's software
for a fully integrated Enterprise Resource Planning system. The Company is
obligated to make aggregate payments of approximately $270. Such payments are
expected to be made in fiscal 2005.
(18) RELATED PARTY TRANSACTIONS
Certain directors of the Company are affiliated with law firms which serve as
counsel to the Company on various corporate matters. During fiscal 2004, 2003
and 2002, the Company incurred legal fees of $458, $435 and $405, respectively,
for services rendered to the Company. The fees charged by such firms were at
rates comparable to rates obtainable from other firms for similar services.
(19) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In March 2004 the Financial Accounting Standard Board ("FASB") issued an
exposure draft entitled "SHARE-BASED PAYMENT, AN AMENDMENT OF FASB STATEMENTS
NO. 123 AND 95." This exposure draft would require stock-based compensation to
employees to be recognized as a cost in the financial statements and that such
cost be measured according to the fair value of the stock options. In the
absence of an observable market price for the stock awards, the fair value of
the stock options would be based upon a valuation methodology that takes into
consideration various factors, including the exercise price of the option, the
expected term of the option, the current price of the underlying shares, the
expected volatility of the underlying share price, the expected dividends on the
underlying shares and the risk-free interest rate. The proposed requirements in
the exposure draft would be effective for the first fiscal year beginning after
December 15, 2004. The FASB intends to issue a final Statement in late 2004. The
Company will continue to monitor communications on this subject from the FASB in
order to determine the impact on the Company's consolidated financial
statements.
In December 2003, the FASB issued Interpretation 46R (FIN 46R), a revision to
Interpretation 46 (FIN 46), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN
46R, which clarifies some of the provisions of FIN 46 and exempts certain
entities from its requirements, sets forth criteria to be used in determining
whether an investment in a variable interest entity should be consolidated.
These provisions are based on the general premise that if a company controls
another entity through interests other than voting interests, that company
should consolidate the controlled entity. The provisions of FIN 46R were
effective on March 31, 2004. The Company has evaluated whether the provisions of
FIN 46R are applicable to its investment, as well as other arrangements, which
may meet the criteria of the interpretation, and concluded that S.R.F.A., a
joint venture owned 50% by the Company that commenced operations in April 2004,
meets the definition of a variable interest entity and, based on the provisions
of FIN 46R, has been included in the Company's consolidated financial
statements.
61
(20) SEGMENT INFORMATION
Prior to fiscal 2003, the Company was organized into five reportable segments,
organized by product. Effective for the fiscal year ended June 30, 2003, the two
segments formerly known as Pharmaceuticals, Biochemicals & Nutritionals and
Pharmaceutical Intermediates & Custom Manufacturing have been combined into a
segment called Health Sciences. The amounts previously reported for the former
segments have accordingly been combined.
The Company's four reportable segments, organized by product, are as follows:
o Health Sciences - includes the active ingredients for generic
pharmaceuticals, vitamins, and nutritional supplements, as well
as products used in preparing pharmaceuticals, primarily by
major innovative drug companies, and biopharmaceuticals.
o Chemicals & Colorants - products include a variety of specialty
chemicals used in plastics, resins, adhesives, coatings, food,
flavor additives, fragrances, cosmetics, metal finishing,
electronics and many other areas; dye and pigment intermediates
used in the color-producing industries like textiles, inks,
paper, and coatings; intermediates used in the production of
agrochemicals.
o Agrochemicals - products include herbicides, fungicides and
insecticides, as well as a sprout inhibitor for potatoes.
o Institutional Sanitary Supplies & Other - products include
cleaning solutions, fragrances, and deodorants for commercial
and industrial customers.
Certain freight and storage costs are not allocated to the
segments as such costs are managed on an entity-wide basis, and
the information to reasonably allocate such costs is not readily
available.
The Company does not allocate assets by segment. The Company's
chief operating decision maker evaluates performance of the
segments based on net sales and gross profit. The Company does
not allocate assets by segment because the chief operating
decision maker does not review the assets by segment to assess
the segments' performance, as the assets are managed on an
entity-wide basis.
62
Institutional
Sanitary
Chemicals Agro- Supplies Consolidated
Health Sciences & Colorants chemicals & Other Totals
2004
- ----
Net sales $180,701 94,395 16,898 5,724 $297,718
Gross profit $ 33,780 14,931 5,503 2,207 $ 56,421
Unallocated
Cost of sales(1) 3,503
-------
Net gross
profit $ 52,918
=======
2003
- ----
Net sales $159,858 91,579 14,356 5,483 $271,276
Gross profit $ 28,779 12,673 4,123 2,418 $ 47,993
Unallocated
Cost of sales(1) 3,487
-------
Net gross
profit $ 44,506
=======
2002
- ----
Net sales $120,021 90,494 13,540 5,274 $229,329
Gross profit $ 19,733 13,502 4,215 2,294 $ 39,744
Unallocated
Cost of sales(1) 2,970
-------
Net gross
profit $ 36,774
=======
(1) Represents certain freight and storage costs that are not allocated to a segment.
63
Net sales by source country and long-lived assets by location as of June 30,
2004 and 2003 and for the years ended June 30, 2004, 2003 and 2002 were as
follows:
Net Sales Gross Profit Long-Lived Assets, Net
--------- ------------ ----------------------
2004 2003 2002 2004 2003 2002 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
United States $168,332 $178,597 $163,886 $30,628 $30,030 $26,798 $1,748 $1,783
Germany 51,659 35,219 25,729 11,147 5,300 4,218 585 556
The Netherlands 9,127 7,568 5,876 1,586 1,829 1,189 129 113
France 11,522 10,032 12,323 1,368 1,351 1,424 119 61
Asia-Pacific 57,078 39,860 21,515 8,189 5,996 3,145 73 88
------- ------- ------- ------ ------ ------ ----- -----
Total $297,718 $271,276 $229,329 $52,918 $44,506 $36,774 $2,654 $2,601
======= ======= ======= ====== ====== ====== ===== =====
64
(21) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of the unaudited quarterly results of operations for
the years ended June 30, 2004 and 2003.
QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands except per share amounts)
Year Ended June 30, 2004
Quarter Ended
Sept.30,2003 Dec.31,2003 Mar.31,2004 June 30,2004
------------ ----------- ----------- ------------
Net sales $72,337 $69,202 $79,690 $76,489
Gross profit 12,170 12,709 14,979 13,060
Net income 3,119 2,963 3,710 3,275
Net income per
common share
- diluted (1) 0.20 0.19 0.23 0.20
Year Ended June 30, 2003
Quarter Ended
Sept.30,2002 Dec.31,2002 Mar.31,2003 June 30,2003
------------ ----------- ----------- ------------
Net sales $68,022 $64,633 $70,561 $68,060
Gross profit 11,035 10,834 11,586 11,051
Income before
cumulative
effect of
accounting
change 2,323 2,328 2,411 2,406
Net income 450(2) 2,328 2,411 2,406
Income before
cumulative
effect of
accounting
change per
common share
- diluted (1) 0.16 0.16 0.16 0.15
Net income per
common share
- diluted (1) 0.03(2) 0.16 0.16 0.15
(1) Adjusted for 3-for-2 stock dividends, paid January 2, 2004 and 2003.
(2) Reflects a charge of $1,873 for a cumulative effect of an accounting change
resulting from an impairment of goodwill which was determined to be required
upon the Company's adoption of SFAS 142.
The net income per common share calculation for each of the quarters is based on
the 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.
65
Schedule II
ACETO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 2004, 2003 and 2002
(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, 2004:
Allowance for doubtful
accounts $ 939 $ 520 - $426(a) $1,033
=== === === =====
Year ended June 30, 2003:
Allowance for doubtful
accounts $ 657 $ 446 - $164(a) $ 939
=== === === ===
Year ended June 30, 2002:
Allowance for doubtful
accounts $ 316 $ 566 - $225(a) $ 657
=== === === ===
(a) Specific accounts written off as uncollectible, net of recoveries.
66
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).
3.4 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* Aceto Corporation 401(k) Retirement Plan, effective August 1, 1997, (as
amended and restated as of July 1, 2002).
10.2* Supplemental Executive Retirement Plan, as amended and restated,
effective June 30, 2004.
10.3 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).
10.4 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).
10.5 Aceto Corporation 2002 Stock Option Plan (incorporated by reference to
Exhibit 4(i) to Registration Statement No. 333-110653 on Form S-8).
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 on 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).
10.8 Lease between CDC Products Corp. and Seaboard Estates for
67
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 current 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 annual 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 (incorporated by reference to Exhibit
10.13 to the Company's annual report on Form 10-K for the year ended
June 30, 2002).
10.15* Amendment and Waiver to Credit Agreement between Aceto Corporation and
subsidiaries and JPMorgan Chase Bank dated June 29, 2004.
10.16* Waiver to Credit Agreement between Aceto Corporation and subsidiaries
and JPMorgan Chase Bank dated August 31, 2004.
10.17 Share Purchase Agreement dated as of December 12, 2003 between Aceto
Holding GmbH and Corange Deutschland Holding GmbH (incorporated by
reference to Exhibit 2.1 to the Company's current report on Form 8-K
dated December 31, 2003).
21* Subsidiaries of the Company.
23* Consent of KPMG LLP.
31.1* Certification by President and CEO Leonard S. Schwartz pursuant to
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
68
31.2* Certification by CFO Douglas Roth pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification by President and CEO Leonard S. Schwartz pursuant to
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Certification by CFO Douglas Roth pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
*Filed herewith
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ACETO CORPORATION
By /s/ Leonard S. Schwartz
-----------------------
Leonard S. Schwartz
Chairman, President
and Chief Executive Officer
Date: September 10, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Leonard S. Schwartz Chairman, President and 09-10-04
- ------------------------- Chief Executive Officer
Leonard S. Schwartz (Principal Executive Officer)
/s/ Douglas Roth Secretary/Treasurer and 09-10-04
- ------------------------- Chief Financial Officer
Douglas Roth (Principal Financial and
Accounting Officer)
/s/ Stanley Fischer Director 09-10-04
- -------------------------
Stanley Fischer
/s/ Samuel I. Hendler Director 09-10-04
- -------------------------
Samuel I. Hendler
/s/ Robert Wiesen Director 09-10-04
- -------------------------
Robert Wiesen
/s/ Ira S. Kallem Director 09-10-04
- -------------------------
IRA S. KALLEM
/s/ Albert L. Eilender Director 09-10-04
- -------------------------
ALBERT L. EILENDER
/s/ Hans C. Noetzli Director 09-10-04
- -------------------------
HANS C. NOETZLI
70