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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2005
Commission file number 000-04217
ACETO CORPORATION
(Exact name of registrant as specified in its charter)
New York 11-1720520
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Hollow Lane, Lake Success, NY 11042
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(Address of principal executive offices)
(516) 627-6000
(Registrant's telephone number, including area code)
www.aceto.com
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(Registrant's website address)
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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate 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 [ ]
The aggregate market value of the voting stock of the Company held by
non-affiliates of the Company as of December 31, 2004 was approximately
$280,051,871.
The Registrant has 24,286,874 shares of common stock outstanding as of September
2, 2005.
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 1, 2005.
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ACETO CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
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 of 1933 and Section 21E of the Securities Exchange Act of 1934.
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 stated in 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,
international military conflicts, the mix of products sold and their profit
margins, 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 and per-share amounts.
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, specialty chemicals and
agrochemicals. Our presence 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 demands from
customers worldwide, 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 58 years of experience, our reputation for reliability
and stability, and our long-term relationships with our suppliers have 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, 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 that our track record of continuous new product introductions
demonstrates 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 enhance our earnings, forming
alliances with partners that add to our capabilities, and establishing
significant business operations in Eastern Europe.
REPORTABLE SEGMENTS
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 are used in the
color-producing industries such as textiles, inks, paper, and
coatings. Organic intermediates are used in the production of
agrochemicals.
o Agrochemicals - Products include herbicides, fungicides and
insecticides, as well as a sprout inhibitor for potatoes.
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o Institutional Sanitary Supplies - Products include cleaning solutions,
fragrances and deodorants for commercial and industrial customers.
On December 31, 2004, our management committed to a plan to sell the entire
Institutional Sanitary Supplies segment. Accordingly, for the six and nine
months ended December 31, 2004 and March 31, 2005, respectively, the quarterly
results of this segment were included in "loss from discontinued operations" in
the consolidated statements of income. During June 2005, we entered into an
agreement to sell the majority of the product lines formulated and marketed by
CDC Products Corp. ("CDC"), which is one of the two subsidiaries forming this
segment. The sale of certain product lines of CDC was completed on August 24,
2005. Excluded from the sale of CDC's product lines was Anti-Clog, an
EPA-registered biocide that has a unique delivery system and is used in
commercial air-conditioning systems. Three factors influenced our decision to
retain this product: (1) we did not receive any offers that we felt adequately
valued the Anti-Clog business; (2) we believe that Anti-Clog has significant
growth potential; and (3) production of Anti-Clog can be easily outsourced and
its product management can be merged into our Chemicals and Colorants segment.
As a result of our decision to retain the Anti-Clog product, we have
reclassified all of CDC's operating results from "discontinued operations" to
"continuing operations" in the consolidated statements of income. On September
6, 2005, we completed the sale of certain assets of Magnum Research Corp., the
remaining subsidiary forming part of the Institutional Sanitary Supplies
segment, the operating results of which continue to be included in discontinued
operations in the consolidated statements of income. We plan to discontinue the
use of the leased space previously occupied by CDC and Magnum Research Corp. and
may incur a related charge for the lease, which expires in November 2009.
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, 2005 and 2004, approximately 68% and 59%,
respectively, of our purchases were from Asia and approximately 22% and 29%,
respectively, were from Europe.
Our customers are located throughout the United States as well as in 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 years 2005 and 2004,
51% and 50%, respectively, of our sales were made to customers in the United
States. Sales made to customers outside the United States during fiscal years
2005 and 2004 totaled $153,258 and $147,977, respectively, of which,
approximately 65% and 61%, respectively, were to customers located in Europe.
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 ensure that any given
product is 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 we 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 can be made
quickly.
No single product or customer accounted for as much as 10% of net sales in
fiscal years 2005, 2004 or 2003. Two suppliers accounted for approximately 13%
and 12% of purchases in fiscal year 2005, one supplier accounted for
approximately 10% of purchases in fiscal year 2004 and another supplier
accounted for approximately 10% of purchases in fiscal year 2003.
We hold no patents, licenses, franchises or concessions that we consider
material to our operations. We have patents pending for our landfill odor
control product, Landfill Odorend, which abates odors emitted from landfills.
Our subsidiary Aceto Agricultural Chemicals Corp. ("Aceto Agricultural")
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 those pesticides. 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 that new test data be generated 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
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currently a member of two such task force groups and historically, our payments
have been in the range of $250 - $500 per year. We 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. We have
environmental remediation obligations in connection with our former
manufacturing facility in Carlstadt, New Jersey, which was closed in 1993.
During fiscal year 2003, based on continued monitoring of contamination at the
site and the current proposed plan of remediation, we received an estimate from
an environmental consultant stating that the remaining remediation costs could
be between $1,550 and $3,200. Accordingly, as of June 30, 2003, our liability
was $1,550. As of June 30, 2005 and 2004, the remaining liability was $1,195 and
$1,326, respectively, which is included in accrued expenses in the accompanying
consolidated balance sheets. There have been no significant changes to the
estimate of remediation costs since fiscal 2003. 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.
HISTORICAL BUSINESS ACQUISITIONS
We completed two significant transactions in fiscal year 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 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 distributes biologically and
chemically derived Active Pharmaceutical Ingredients, or "APIs," used in
therapeutic and diagnostic products. It is a worldwide provider of a
patent-protected, biologically derived API used in a widely used diagnostic and
therapeutic heart medication. Its primary customers include worldwide ethical
and generic pharmaceutical companies.
We continued the business of Pharma Waldhof and successfully integrated that
business into our business during the second half of fiscal year 2004.
On November 25, 2003, our wholly owned subsidiary 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,
which is named S.R.F.A., LLC.
Aceto Agricultural and Nufarm have been issued 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). Aceto Agricultural and
Nufarm now market the herbicide in the United States solely under the
Butoxone(R) label, which has greater market penetration than 2,4DB. Nufarm
continues to formulate the product for the joint venture. S.R.F.A. commenced
operations in April 2004. In accordance with FASB Interpretation 46R,
"Consolidation of Variable Interest Entities" (FIN 46R), the financial
statements of S.R.F.A. are included in the consolidated financial statements of
Aceto.
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.
In fiscal year 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").
EMPLOYEES
At June 30, 2005, we had 242 employees, none of whom were covered by a
collective bargaining agreement.
5
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.
We currently have environmental remediation obligations in connection with our
former manufacturing facility in Carlstadt, New Jersey. Estimates of how much it
would cost to remediate environmental contamination at this site have increased
since the facility was closed in 1993, and our environmental consultants
estimated in June 2003 that completing remediation would cost between $1,550 and
$3,200. There have been no significant changes to the estimate of remediation
costs since fiscal 2003. If the actual costs are significantly greater than
estimated, it could have a material adverse effect on our financial condition,
operating results and cash flows.
ASSESSMENTS BY VARIOUS TAX AUTHORITIES MAY BE MATERIALLY DIFFERENT THAN THE
AMOUNTS WE HAVE PROVIDED FOR IN OUR CONSOLIDATED FINANCIAL STATEMENTS.
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 and cash flows.
We operate in various tax jurisdictions, and although we believe that we have
provided for income and other taxes in accordance with the relevant regulations,
if the applicable regulations were ultimately interpreted differently by a
taxing authority, we may be exposed to additional tax liabilities.
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 business. Additionally, we
may issue additional shares in connection
6
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 as
customers place orders and customers can change their requirements or cancel
orders. Many of our sales orders 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.
FAILURE TO OBTAIN PRODUCTS FROM OUTSIDE MANUFACTURERS COULD ADVERSELY AFFECT OUR
ABILITY TO FULFILL SALES ORDERS TO OUR CUSTOMERS.
We rely on outside manufacturers to supply products for resale to our customers.
Manufacturing problems may occur with these and other outside sources. If such
problems occur, we cannot ensure that we will be able to deliver our products to
our customers profitably or on time.
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 bylaws 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 years 2005 and 2004, approximately 49%
and 50%, respectively, of our revenues were attributable to operations conducted
abroad and to export sales. In addition, in fiscal year 2005, approximately 22%
and 68% of our purchases came from Europe and Asia, respectively. In addition,
in certain countries where we currently operate or export, intend to operate or
export, or intend to expand our operations, we could be subject to other
political, military and economic uncertainties, including labor unrest,
restrictions on transfers of funds and unexpected changes in regulatory
environments.
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
U.S. 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 U.S. dollar.
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WE RELY HEAVILY ON KEY EXECUTIVES 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.
VIOLATIONS OF CGMP AND OTHER GOVERNMENT REGULATIONS COULD HAVE A MATERIAL
ADVERSE AFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
All facilities and manufacturing techniques used to manufacture products for
clinical use or for commercial sale in the United States must be operated in
conformity with current Good Manufacturing Practices ("cGMP") regulations as
required by the FDA. Our facilities are subject to scheduled periodic regulatory
and customer inspections to ensure compliance with cGMP and other requirements
applicable to such products. A finding that we had materially violated these
requirements could result in one or more of regulatory sanctions, loss of a
customer contract, disqualification of data for client submissions to regulatory
authorities and a mandated closing of our facilities, which in turn could have a
material adverse effect on our business, financial condition and results of
operations.
LITIGATION MAY HARM OUR BUSINESS AND OUR MANAGEMENT AND FINANCIAL RESOURCES.
Substantial, complex or extended litigation could cause us to incur large
expenditures and could distract our management. For example, lawsuits by
employees, stockholders, collaborators, distributors, customers, or end-users of
our products or services could be very costly and substantially disrupt our
business. Disputes from time to time with such companies or individuals are not
uncommon, and we cannot assure you that we will always be able to resolve such
disputes out of court or on favorable terms.
THE MARKET PRICE OF OUR STOCK COULD BE VOLATILE.
The market price of our common stock has been subject to volatility and may
continue to be volatile in the future, due to a variety of factors, including:
o quarterly fluctuations in our operating income and earnings per share
results
o technological innovations or new product introductions by us or our
competitors
o economic conditions
o disputes concerning patents or proprietary rights
o changes in earnings estimates and market growth rate projections by
market research analysts
o sales of common stock by existing holders
o loss of key personnel
o securities class actions or other litigation
The market price for our common stock may also be affected by our ability to
meet analysts' expectations. Any failure to meet such expectations, even
slightly, could have an adverse effect on the market price of our common stock.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of these companies.
INCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS.
Portions of our operations require the controlled use of hazardous materials.
Although we are diligent in designing and implementing safety procedures to
comply with the standards prescribed by federal, state, and local regulations,
the risk of accidental contamination of property or injury to individuals from
these materials cannot be completely eliminated. In the event of such an
incident, we could be liable for any damages that result, which could adversely
affect our business.
THERE ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND
ASSUMPTIONS USED IN PREPARING FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. 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 U.S. generally accepted accounting
principles ("GAAP"). Preparing financial statements in accordance with GAAP
involves
8
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.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH
SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS AND STOCK PRICE.
Section 404 of the Sarbanes-Oxley Act requires us to evaluate annually the
effectiveness of our internal controls over financial reporting as of the end of
each fiscal year and to include a management report assessing the effectiveness
of our internal controls over financial reporting in our annual report. Section
404 also requires our independent registered public accounting firm to attest
to, and report on, management's assessment of our internal controls over
financial reporting. If we fail to maintain the adequacy of our internal
controls, we cannot assure you that we will be able to conclude in the future
that we have effective internal controls over financial reporting. If we fail to
maintain effective internal controls, we might be subject to sanctions or
investigation by regulatory authorities, such as the Securities and Exchange
Commission or NASDAQ. Any such action could adversely affect our financial
results and the market price of our common stock and may also result in delayed
filings with the Securities and Exchange Commission.
AVAILABLE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other
information with the U.S. 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 and forms. 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.
The two subsidiaries in our Institutional Sanitary Supplies 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.
In November 2004, we purchased approximately 1,300 gross square meters of office
space located in Shanghai, China for our sales offices and investment purposes.
We also lease office space in Waldshut, Germany; Hamburg, Germany; Dusseldorf,
Germany; Heemskerk, the Netherlands; Paris, France; Lyon, France; Singapore;
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 subject to various claims that have arisen in the normal course of
business. We do not know what impact the final resolution of these matters will
have on our results of operations in a particular reporting period. We believe,
however, that the ultimate outcome of such matters will not have a material
adverse effect on our financial condition or liquidity.
One of our subsidiaries is a defendant in a legal action alleging patent
infringement. The patents in question cover a particular method of applying one
of the products in our Agrochemicals segment. The plaintiff in this action is
seeking
9
damages for lost profits and/or royalties, plus treble damages, prejudgment
interest and attorney's fees. We have denied liability and asserted various
defenses, including non-infringement, patent invalidity, and patent
unenforceability due to inequitable conduct. A trial is expected to begin later
this calendar year. We believe there is no merit to this claim and intend to
vigorously contest it. As the ultimate outcome of this action is unknown, we
have no provision recorded for it in the accompanying consolidated financial
statements as of June 30, 2005.
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 states the 2005 and 2004 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 splits effected in the form of dividends
paid in January 2005 and 2004.
HIGH LOW
----------------------
FISCAL YEAR 2005
First Quarter $11.84 $ 8.99
Second Quarter 13.33 8.79
Third Quarter 13.19 7.36
Fourth Quarter 8.05 6.53
FISCAL YEAR 2004
First Quarter $ 9.78 $ 5.95
Second Quarter 11.71 5.95
Third Quarter 14.00 9.34
Fourth Quarter 11.87 8.67
Cash dividends of $0.075 per common share were paid in January and June 2005.
Cash dividends of $0.056 per common share were paid in January and June 2004.
Cash dividends of $0.051 per common share were paid in January and June 2003.
Our revolving credit facility restricts the amount of cash dividends to $4,500
per year.
As of September 2, 2005, there were 515 holders of record of our common stock.
20,398,566 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 states certain information with respect to our equity
compensation plans at June 30, 2005:
- -------------------------------------- -------------------------- ----------------------- -----------------------------
Number of securities
Number of securities to Weighted-average remaining available for
be issued upon exercise exercise price of future issuance under
Plan category of outstanding options outstanding options equity compensation plans
- -------------------------------------- -------------------------- ----------------------- -----------------------------
Equity compensation plans approved
by security holders 2,764 $7.65 599
- -------------------------------------- -------------------------- ----------------------- -----------------------------
Equity compensation plans not
approved by security holders - - -
- -------------------------------------- -------------------------- ----------------------- -----------------------------
Total 2,764 $7.65 599
- -------------------------------------- -------------------------- ----------------------- -----------------------------
10
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per-share amounts)
Fiscal years ended June 30, 2005 2004(1) 2003 2002 2001(2)
- --------------------------- ---- ---- ---- ---- ----
Net sales $313,381 $296,359 $269,961 $228,012 $176,792
Operating income 11,540 16,118 13,027 7,331 5,517
Income from continuing operations 10,625 13,111 9,522 4,942 4,042
Net income(3) 10,015 13,067 7,595 4,945 4,245
At year end
- -----------
Working capital $94,249 $86,420 $72,208 $58,811 $55,624
Total assets 149,028 149,697 123,519 115,703 105,173
Long-term liabilities 3,982 2,877 1,043 983 1,519
Shareholders' equity 107,655 100,266 84,569 73,290 69,203
Per diluted common share(4)
- ---------------------------
Income from continuing operations $0.43 $0.53 $0.40 $0.21 $0.18
Net income $0.41 $0.53 $0.32 $0.21 $0.19
Cash dividends $0.15 $0.11 $0.10 $0.09 $0.09
(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 full described in Item 1.
(3) Fiscal 2003 net income includes a $1,873 ($0.08 per diluted common share)
charge for a cumulative effect of an accounting change resulting from an
impairment of goodwill.
(4) Adjusted for stock splits, effected in the form of dividends, as
appropriate.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
We are reporting net sales of $313,381 for the year ended June 30, 2005. This
represents a 5.7% increase over the $296,359 reported in fiscal year 2004. Gross
profit for the year was $53,101 which represents the highest gross profit ever
recorded by Aceto despite a decline in the gross margin to 16.9% from 17.7% in
the prior year. Our selling, general and administrative costs increased to
$41,561, an increase of 14.5% over the $36,294 we reported in fiscal 2004. This
increase was due to the inclusion of a full year of results for Pharma Waldhof,
which was acquired in December 2003, as well as professional fees associated
with our compliance with the Sarbanes-Oxley Act. Our net income decreased to
$10,015, or $0.41 per diluted share, a decrease of 23.4% compared to fiscal year
2004.
Our financial position as of June 30, 2005, remains strong, as we had cash of
$19,950, working capital of $94,249, no long-term debt and shareholders' equity
of $107,655.
Our business is separated into four principal segments: Health Sciences,
Chemicals & Colorants, Agrochemicals and Institutional Sanitary Supplies.
The Health Sciences segment is our largest segment both in sales and gross
profits. This segment is comprised of APIs, pharmaceutical intermediates,
diagnostic chemicals, biopharmaceuticals 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.
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. In addition, as new members join the European
Union, primarily from Eastern Europe, they become subject to the same regulatory
standards as their Western European
11
counterparts. Given our regulatory expertise, we believe that this represents an
opportunity for us, and we believe we are well positioned to take advantage of
that opportunity.
The Chemicals & Colorants segment supplies chemicals used in the color-producing
industries such as the textiles, ink, paper and coatings industries, as well as
chemicals used in plastic, resins, adhesives, coatings, food, flavor additives,
and the production of agrochemicals. Our customers for these products are
predominantly located in the United States, and we purchase the products
primarily from manufacturers located in China and Western Europe.
The Agrochemicals segment, while relatively small in terms of sales, is our most
profitable in terms of gross margin percentages. This segment sells herbicides,
pesticides, and other agricultural chemicals to customers primarily located in
the United States and Western Europe. Our joint venture with Nufarm, which
markets Butoxone (R), is expected to increase our market share of the peanut,
soybean and alfalfa herbicide markets.
On December 31, 2004, our management committed to a plan to sell the entire
Institutional Sanitary Supplies segment. Accordingly, for the six and nine
months ended December 31, 2004 and March 31, 2005, respectively, the quarterly
results of this segment were included in "loss from discontinued operations" in
the consolidated statements of income. During June 2005, we entered into an
agreement to sell the majority of the product lines formulated and marketed by
CDC Products Corp. ("CDC"), which is one of the two subsidiaries forming this
segment. The sale of certain product lines of CDC was completed on August 24,
2005. Excluded from the sale of CDC's product lines was Anti-Clog, an
EPA-registered biocide that has a unique delivery system and is used in
commercial air-conditioning systems. Three factors influenced our decision to
retain this product: (1) we did not receive any offers that we felt adequately
valued the Anti-Clog business; (2) we believe that Anti-Clog has significant
growth potential; and (3) production of Anti-Clog can be easily outsourced and
its product management can be merged into our Chemicals and Colorants segment.
As a result of our decision to retain the Anti-Clog product, we have
reclassified all of CDC's operating results from "discontinued operations" to
"continuing operations" in the consolidated statements of income. On September
6, 2005, we completed the sale of certain assets of Magnum Research Corp., the
remaining subsidiary forming part of the Institutional Sanitary Supplies
segment, the operating results of which continue to be included in discontinued
operations in the consolidated statements of income. We plan to discontinue the
use of the leased space previously occupied by CDC and Magnum Research Corp. and
may incur a related charge for the lease, which expires in November 2009.
Our 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.
Also among our greatest strengths are our people and their ability to meet the
individual needs of customers. Approximately 85 of our 242 employees have
technical degrees, and we have approximately 20 employees whose exclusive
responsibility is regulatory compliance. This enables us 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, 2005. We analyze and explain the differences between periods in the
specific line items of the consolidated statements of income.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
This 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 U.S. generally accepted accounting principles. 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
regularly evaluate our estimates including those related to allowances for bad
debts, inventories, goodwill and intangible assets, environmental and other
contingencies, and income taxes. We base our estimates on various factors,
including historical experience, advice from outside subject-matter experts, and
various assumptions that we believe to be reasonable under the circumstances,
which
12
together form the basis for our 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.
We believe the following critical accounting policies affected our more
significant judgments and estimates used in preparing these consolidated
financial statements.
REVENUE RECOGNITION
We recognize revenue from sales of any product when it is shipped and title and
risk of loss pass 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 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 relating to estimated losses
resulting from customers being unable to make required payments. Allowances for
doubtful accounts are based on historical experience and known factors regarding
specific customers and the industries in which those customers operate. If the
financial condition of our customers were to deteriorate, resulting in their
ability to make payments being impaired, 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 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 excess inventory
quantities on-hand. Additionally, we may overestimate or underestimate the
demand for our products which would result in our understating or overstating,
respectively, 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.
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.
Effective July 1, 2002, we adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." As required by SFAS
No. 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. As also required by SFAS No. 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, we use many assumptions and estimates
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, we use as
necessary, an outside valuation firm 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.
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 can reasonably be estimated. 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
13
of the estimate were to change, we would recognize an additional expense or
benefit in income in the period that the determination was made.
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
activities during the current and preceding years. It requires an
asset-and-liability approach to financial accounting and reporting of income
taxes.
As of June 30, 2005, we had current net deferred tax assets of $2,780 and
non-current net deferred tax assets of $3,626. These net deferred tax assets
have been recorded based on our projecting that we will have sufficient future
earnings to realize these assets, and the net deferred tax assets have been
provided for at currently enacted income tax rates. If we determine that we will
not be able to realize a deferred tax asset, an adjustment to the deferred tax
asset will result in a reduction of net income 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 we 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.
14
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2005 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2004
NET SALES BY SEGMENT
Year ended June 30,
Comparison 2005
2005 2004 Over/(under) 2004
---- ---- -----------------
% of % of $ %
Segment Net sales total Net sales total change change
- ------- --------- ----- --------- ----- ------ ------
Health Sciences $184,560 58.9% $180,701 61.0% $ 3,859 2.1%
Chemicals & Colorants 104,744 33.4 94,395 31.8 10,349 11.0
Agrochemicals 20,031 6.4 16,898 5.7 3,133 18.5
Institutional Sanitary Supplies 4,046 1.3 4,365 1.5 (319) (7.3)
-------- ----- -------- ----- -------- --------
Net sales $313,381 100.0% $296,359 100.0% $ 17,022 5.7%
======== ===== ======== ===== ======== ========
GROSS PROFIT BY SEGMENT
Year ended June 30,
Comparison 2005
2005 2004 Over/(under) 2004
---- ---- -----------------
Gross % of Gross % of $ %
Segment profit sales profit sales change change
- ------- --------- ----- --------- ----- ------ ------
Health Sciences $32,869 17.8% $33,821 18.7% $ (952) (2.8)%
Chemicals & Colorants 17,224 16.4 15,303 16.2 1,921 12.6
Agrochemicals 6,719 33.5 5,503 32.6 1,216 22.1
Institutional Sanitary Supplies 696 17.2 1,288 29.5 (592) (46.0)
-------- ----- -------- ----- -------- --------
Segment gross profit 57,508 18.3 55,915 18.9 1,593 2.8
Freight and storage costs (1) (4,407) (1.4) (3,503) (1.2) (904) (25.8)
-------- ----- -------- ----- -------- --------
Gross profit $53,101 16.9% $ 52,412 17.7% $ 689 1.3%
======== ===== ======== ===== ======== ========
(1) Represents certain freight and storage costs that are not allocated to a
segment.
15
NET SALES
Net sales increased $17,022, or 5.7%, to $313,381 for the year ended June 30,
2005, compared with $296,359 for the prior year. We reported sales increases in
our three largest segments, as explained below.
HEALTH SCIENCES
Net sales for the Health Sciences segment increased by $3,859 for the year ended
June 30, 2005, to $184,560, which represents a 2.1% increase over net sales of
$180,701 for the prior year. Several factors contributed to the net increase in
net sales in the Health Sciences segment. The Pharma Waldhof business, which we
acquired on December 31, 2003, contributed $5,354 towards the sales increase.
Domestic sales of Health Science products increased $7,942 during fiscal year
2005 as compared to the prior year, partly due to sales of pharmaceutical
intermediates increasing by $4,649, or 75.1% compared to the prior year. The
large increase in sales of pharmaceutical intermediates reflects the change in
attitude by some of the larger pharmaceutical companies towards securing a
second, lower-cost supplier in Asia. We believe that sales of this product line
will continue to increase. The European and Asian market (excluding Pharma
Waldhof) recorded a net decrease in sales of $9,437 as compared to the prior
year. Contributing to the net decline in Asian sales was the $16,923 decrease in
sales of two previously launched APIs due to increased competition. This
decrease was partially offset by a $5,867 increase in sales of two relatively
new products over last year.
CHEMICALS & COLORANTS
Net sales for the Chemicals & Colorants segment was $104,744 for the year ended
June 30, 2005, compared to $94,395 for the prior year. This increase of $10,349,
or 11.0%, over the prior year is partially attributable to a steady increase in
the number of products being offered by our foreign subsidiaries. Sales of
Chemicals & Colorants products by our foreign subsidiaries for the year ended
June 30, 2005, showed an increase of $4,681 over the prior year. Our chemical
business is diverse in terms of products, customers and consuming markets. One
customer within our color-pigment and pigment-intermediate business purchased
$5,010 less product during fiscal year 2005. This reduction was more than offset
by a $10,678 increase over the prior year in domestic sales of our industrial
chemical offerings, in particular products with increased sales were polymer
additives, agricultural intermediates, and coatings.
AGROCHEMICALS
Net sales for the Agrochemical segment increased to $20,031 for the year ended
June 30, 2005, an increase of $3,133, or 18.5%, over net sales of $16,898 for
the prior year. The increase in net sales was attributable to higher sales of
our two highest-volume products.
GROSS PROFIT
Gross profit by segment before unallocated cost of sales (primarily storage and
certain freight costs) increased $1,593 to $57,508 (18.3% of net sales) for the
year ended June 30, 2005, as compared to $55,915 (18.9% of net sales) for the
prior year.
HEALTH SCIENCES
Health Sciences' gross profit of $32,869 for the year ended June 30, 2005, was
$952 or 2.8% lower than the prior year. The gross margin decreased to 17.8%
compared to a gross margin of 18.7% for the prior year. This decrease is
primarily attributed to the lower-than-normal API gross margin of 8% realized on
a relaunched antibiotic and a shift in product mix to pharmaceutical
intermediates, which generally have lower margins than APIs. Additionally, two
of our larger previously-launched APIs in Europe and Asia have experienced
significant pricing pressures, which further affected our gross profit and gross
margin. We expect pricing pressures on previously launched APIs to continue in
the short-term.
CHEMICALS & COLORANTS
Gross profit for the year ended June 30, 2005, increased by $1,921, or 12.6%,
over the prior year. Gross profit for fiscal year 2004 included a favorable
adjustment of $450 due to the reversal of an accrual for the estimated loss of a
purchase contract. Excluding this adjustment, gross profit would have increased
by $2,371, or 16.0%. Excluding the adjustment, the segment would have shown
improved margins of 16.4% versus 15.7% for the prior year. Contributions from
categories such as polymer additives, agricultural intermediates and coatings,
in addition to improved sales volume and margins in the European markets, were
the primary reasons for this improvement. The increase in gross margin
percentage was caused by a decrease
16
in sales to one major customer whose sales had generated lower margins than
usual, along with an improvement in margins across other categories due to
changes in product mix and, in some cases, improved product pricing.
AGROCHEMICALS
Gross profit for the Agrochemicals segment increased to $6,719 for the year
ended June 30, 2005, versus $5,503 for the prior year, an increase of $1,216 or
22.1%. This increase resulted from a large increase in sales of our two highest
volume products, improved royalty income of one existing product, and a price
increase in another product.
Unallocated cost of sales increased $904, to $4,407 in fiscal 2005, compared to
$3,503 in the prior year, representing a 25.8% 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 $5,267, or
14.5%, to $41,561 for the year ended June 30, 2005 compared to $36,294 for the
prior year. As a percentage of sales, SG&A increased to 13.3% for fiscal 2005
versus 12.2% for fiscal 2004. This increase was primarily due to the inclusion
of $1,131 of expenses of Pharma Waldhof, which was acquired in December 2003,
additional increases in costs of $762 for new business-development initiatives
(including new personnel), an asset impairment charge of $619 relating to our
Institutional Sanitary Supplies segment, additional legal fees in our
Agricultural business of $322, increased fees associated with the planning and
pre-implementation efforts of a new enterprise-resource-planning, or "ERP,"
system of $382, an increase in fees relating to our audit services and
compliance with our obligations under section 404 of the Sarbanes-Oxley Act of
$754, and increased compensation and related fringe-benefit costs of $1,242.
OPERATING INCOME
In fiscal year 2005 operating income was $11,540 compared to $16,118 in the
prior year, a decrease of $4,578 or 28.4%. This decrease was due to the $5,267
increase in SG&A expenses, which was partially offset by the overall increase in
gross profit of $689.
INTEREST AND OTHER INCOME (EXPENSE)
Interest and other income of $1,321 for fiscal year 2005 represents a slight
decrease from $1,334 in fiscal 2004. The decrease is primarily attributable to a
reduction in miscellaneous income of $234, which was partially offset by a
decrease of $143 for minority interest and an increase in the government subsidy
we receive for doing business in a free-trade zone in Shanghai, China in the
amount of $62.
PROVISION FOR INCOME TAXES
The effective tax rate for fiscal year 2005 decreased to 16.9% from 24.4% for
fiscal year 2004. The decrease in the effective tax rate was primarily due to
recognition of certain deferred tax assets for foreign net operating loss
carryforwards, which previously were fully offset by a valuation allowance in
the amount of $1,263, partially offset by increased earnings in foreign tax
jurisdictions with higher tax rates, primarily Germany.
DISCONTINUED OPERATIONS
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets," the results of operations for one of the subsidiaries
forming part of the Institutional Sanitary Supplies segment have been recorded
as discontinued operations in the accompanying consolidated statements of
income. The net loss from discontinued operations was $610, $44 and $54 for the
fiscal years ended 2005, 2004 and 2003, respectively. The net loss from
discontinued operations for the fiscal year ended 2005 includes a non-cash
write-down of goodwill, net of an income tax benefit, of $570.
17
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2004 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2003
NET SALES BY SEGMENT
Year ended June 30,
Comparison 2004
2004 2003 Over/(under) 2003
---- ---- -----------------
% of % of $ %
Segment Net sales total Net sales total change change
- ------- --------- ----- --------- ----- ------ ------
Health Sciences $180,701 61.0% $159,858 59.2% $ 20,843 13.0%
Chemicals & Colorants 94,395 31.8 91,579 33.9 2,816 3.1
Agrochemicals 16,898 5.7 14,356 5.3 2,542 17.7
Institutional Sanitary Supplies 4,365 1.5 4,168 1.6 197 4.7
-------- ----- -------- ----- -------- --------
Net sales $296,359 100.0% $269,961 100.0% $ 26,398 9.8%
======== ===== ======== ===== ======== ========
GROSS PROFIT BY SEGMENT
Year ended June 30,
Comparison 2004
2004 2003 OVER/(UNDER) 2003
---- ----- -----------------
Gross % of Gross % of $ %
Segment profit sales profit sales change change
- ------- --------- ----- --------- ----- ------ ------
Health Sciences $33,821 18.7% $28,815 18.0% $5,006 17.4%
Chemicals & Colorants 15,303 16.2 12,999 14.2 2,304 17.7
Agrochemicals 5,503 32.6 4,123 28.7 1,380 33.5
Institutional Sanitary Supplies 1,288 29.5 1,465 35.1 (177) (12.1)
-------- ----- -------- ----- -------- --------
Segment gross profit 55,915 18.9 47,402 17.6 8,513 18.0
Freight and storage costs (1) (3,503) (1.2) (3,447) (1.3) (56) (1.6)
-------- ----- -------- ----- -------- --------
Gross profit $52,412 17.7% $43,955 16.3% $8,457 19.2%
======== ===== ======== ===== ======== ========
(1) Represents certain freight and storage costs that are not allocated to a
segment.
18
NET SALES
Net sales increased $26,398 or 9.8%, to $296,359 for the fiscal year ended June
30, 2004 compared with $269,961 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 $5,555 or 5.0% in fiscal 2004.
HEALTH SCIENCES
The Health Sciences segment reported a significant increase in sales and
accounted for 79.0% 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.
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
Institutional Sanitary Supplies sales were $4,365 for fiscal 2004 compared to
$4,168 in fiscal 2003, an increase of $197 or 4.7%.
GROSS PROFIT
Gross profit by segment before unallocated cost of sales (primarily storage and
certain freight costs) increased 18.0% in fiscal 2004, to $55,915 from $47,402
reported in fiscal 2003. The Health Sciences segment made the largest
contribution to this increase as it accounted for $5,006 or 58.8% of the overall
increase.
HEALTH SCIENCES
In fiscal 2004, the Health Science segment's gross profit was $33,821, or 18.7%
of net sales in fiscal 2004 versus $28,815, 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,
19
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 $15,303 in fiscal 2004
represents an increase of $2,304 or 17.7% over last year's gross profit of
$12,999. Gross margin increased to 16.2% this year versus 14.2% 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
Institutional Sanitary Supplies gross profits were $1,288 or 29.5% in 2004
versus $1,465 or 35.1% in 2003.
Unallocated cost of sales remained flat at $3,503 in fiscal 2004, compared to
$3,447 in the prior year, representing a 1.6% 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 $5,366 or 17.3%
to $36,294 for fiscal 2004 from $30,928 for fiscal 2003. As a percentage of
sales, SG&A increased to 12.2% for fiscal 2004 versus 11.5% for 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 11.6%
last year.
OPERATING INCOME
In fiscal 2004 operating income was $16,118 compared to $13,027 in fiscal 2003,
an increase of $3,091 or 23.7%. This increase was primarily due to the overall
increase in gross profit of $8,457, which was partially offset by the $5,366
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.
20
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 was primarily due to increased
earnings in lower foreign tax jurisdictions as compared to the prior year.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
For fiscal year 2003, we recorded a one-time charge of $1,873, or $0.08 per
diluted share, attributable to the cumulative effect of adopting SFAS No. 142,
"Goodwill and Other Intangible Assets." This charge was related to impairment of
the goodwill associated with CDC Products Corp., one of the two subsidiaries
forming our Institutional Sanitary Supply segment and was due to the change in
methodologies used to evaluate the recoverability of goodwill as required under
SFAS No. 142.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
At June 30, 2005, we had $19,950 in cash, $5,068 in short-term investments and
$126 in short-term bank loans. Working capital was $94,249 at June 30, 2005,
versus $86,420 at June 30, 2004.
Our cash position at June 30, 2005, decreased $3,380 from the amount at June 30,
2004. Operating activities used cash of $1,396, primarily due to inventories
having been increased by $10,245 in order to take advantage of current prices in
an environment of rising prices and the anticipated revaluation of the Chinese
currency which may increase future product costs. This was partially offset by
net income of $10,015.
Investing activities provided cash of $1,105, primarily as a result of net
proceeds from investments of $4,537. This was partially offset by $3,576 of
expenditures for property and equipment, including the purchase of office space
located in Shanghai, China in the amount of $3,015.
Financing activities used cash of $3,069 primarily as a result of payments of
cash dividends of $3,641 and payment of a related party note of $500, which were
partially offset by proceeds from the exercise of stock options of $946.
CREDIT FACILITIES
We have available credit facilities with certain foreign financial institutions.
These facilities provide us with a line of credit of $17,792, of which, $126 in
short-term bank loans were outstanding and $450 in letters of credit were
utilized as of June 30, 2005. We are not subject to any financial covenants
under these arrangements.
We have a revolving credit agreement with a financial institution that expires
June 30, 2007, and provides for available credit of $10,000. At June 30, 2005,
we had utilized $1,333 in letters of credit, leaving $8,667 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 in compliance
with all covenants at June 30, 2005.
WORKING CAPITAL OUTLOOK
Working capital was $94,249 at June 30, 2005, versus $86,420 at June 30, 2004.
The increase in working capital was primarily attributable to net income during
the year. 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 for the next twelve
months. We may obtain additional credit facilities to enhance our liquidity.
21
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 that will
affect our short and long-term liquidity. At June 30, 2005, we had no
significant obligations for capital expenditures. At June 30, 2005, contractual
cash obligations and other commercial commitments were 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 $ 9,448 $ 1,984 $ 3,615 $ 3,017 $ 832
Short-term bank loans 126 126 - - -
Commercial letters of credit 1,783 1,783 - - -
Standby letters of credit 78 78 - - -
Unconditional purchase
obligations 24,303 24,303 - - -
-------- -------- ------- ------- -------
Total $ 35,738 $ 28,274 $ 3,615 $ 3,017 $ 832
======== ======== ======= ======= =======
Other significant commitments and contingencies include the following:
1. Our non-qualified deferred compensation plans are 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 plans is held
by us in a grantor trust, which is considered our asset. We had a
liability under the plan of $2,430 and the assets held by the grantor
trust amounted to $2,087 as of June 30, 2005.
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 that new test data be generated 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 historically, our payments have been in the
range of $250 - $500 per year. We 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 how the final resolution of these matters
will affect our results of operations 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.
RELATED PARTY TRANSACTIONS
Certain of our directors are affiliated with law firms that serve as our legal
counsel on various corporate matters. During fiscal years 2005, 2004 and 2003,
we incurred legal fees of $215, $310 and $291, respectively, for services
rendered to the Company by those law firms. The fees charged by those firms were
at rates comparable to rates obtainable from other firms for similar services.
22
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections", a replacement of APB Opinion
No. 20, Accounting Changes, and FASB SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements. SFAS No. 154 applies to all voluntary changes in
accounting principles and changes the requirements for accounting for and
reporting of a change in accounting principle. SFAS No. 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principle unless it is impracticable. SFAS No. 154 also
requires that a change in method of depreciation, amortization, or depletion for
long-lived, non-financial assets be accounted for as a change in accounting
estimate that is affected by a change in accounting principle. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Earlier application is permitted for
accounting changes and corrections of errors occurring in fiscal years beginning
after June 1, 2005. SFAS No. 154 does not change the transition provisions of
any existing accounting pronouncements, including those that are in a transition
phase as of the date of SFAS No. 154. We do not believe that adoption of SFAS
No. 154 will have a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
addresses accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R eliminates the ability to account for
share-based compensation transactions using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and instead requires
that such transactions be accounted for using a fair-value-based method. This
statement is effective for annual periods beginning after June 15, 2005 (our
2006 fiscal year), as if all share-based compensation awards granted, modified
or settled after December 15, 1994 had been accounted for using the
fair-value-based method of accounting. We will use the modified prospective
approach in adopting the provisions of SFAS No. 123R. Our adoption of SFAS No.
123R on July 1, 2005 will not have a material effect on our financial statements
since all prior grants of stock options are fully vested as of June 30, 2005.
Future grants of stock options will result in compensation expense.
On October 22, 2004, the President of the United States signed the American Jobs
Creation Act of 2004. This law creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an 85%
dividends-received deduction for certain dividends from controlled foreign
corporations. The deduction is subject to a number of limitations, and the FASB
issued two Staff Positions to provide guidance on how companies should account
for the effects of the American Jobs Creation Act. We evaluated what effect the
repatriation provision would have on us, and we decided not to repatriate
extraordinary dividends.
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 investment market prices,
foreign currency exchange-rates and interest rates.
INVESTMENT MARKET PRICE RISK
We had short-term investments of $5,068 at June 30, 2005. Those short-term
investments consisted of government and agency securities, corporate bonds and
corporate equity securities, and they 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 be $507 as of June 30, 2005. 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,
2005, we had foreign currency contracts outstanding that had a notional amount
of $11,456. 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, 2005, was not material.
23
In addition, we 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, which expired in June
2005 when the underlying inter-company loan was repaid, and in May 2003 we
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 date of
purchase to June 30, 2005, was $(278). 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 $49 and $(210) in 2005 and 2004, 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, 2005, we had translation exposure to various foreign
currencies, with the most significant being the Euro, the Chinese Renminbi and
the Singapore dollar. The potential loss as of June 30, 2005, resulting from a
hypothetical 10% adverse change in quoted foreign currency exchange rates
amounted to $4,194. 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.
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
EVALUATION OF DISCLOSURE 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.
Our disclosure controls and procedures 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.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as that term is defined in Rule 13a-15(f)
under the Exchange Act. Under the supervision and with the participation of our
24
management, including our principal executive and principal financial officers,
we assessed, as of June 30, 2005, the effectiveness of our internal control over
financial reporting. This assessment was based on criteria established in the
framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our assessment
using those criteria, management concluded that our internal control over
financial reporting as of June 30, 2005, was effective.
Our assessment of the effectiveness of our internal control over financial
reporting as of June 30, 2005, has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report, which is included
herein.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In connection with the evaluation by our principal executive and principal
financial officers of changes in internal control over financial reporting that
occurred during our last quarter of fiscal 2005, no change in Aceto's internal
control over financial reporting was identified that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
LIMITATIONS ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal control over financial reporting is defined as a process designed by,
or under the supervision of, our principal executive and principal financial
officers and effected by our board of directors, management and other personnel
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles, and includes those policies and
procedures that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
o provide reasonable assurance that transactions are recorded as
necessary to permit the preparation of financial statements in
accordance with U.S. generally accepted accounting principles and that
our receipts and expenditures are being made only in accordance with
authorization of our management and directors; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projecting any evaluation of
effectiveness to future periods is subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
25
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 1, 2005.
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 1, 2005.
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 1, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to our definitive proxy statement with respect
to our annual meeting of shareholders scheduled to be held on December 1, 2005.
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 1, 2005.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The financial statements listed in the Index to Consolidated Financial
Statements are filed as part of this annual report.
(b) Exhibits
The Exhibits required by this Item 15 are listed in the Exhibit Index set
forth at the end of this annual report.
26
ACETO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated financial statements:
Consolidated balance sheets as of June 30, 2005 and 2004
Consolidated statements of income for the years ended June 30, 2005,
2004 and 2003
Consolidated statements of cash flows for the years ended June 30, 2005,
2004 and 2003
Consolidated statements of shareholders' equity and comprehensive income
for the years ended June 30, 2005, 2004 and 2003
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.
27
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, 2005 and 2004, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended June
30, 2005. 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2005, in conformity with U.S. generally accepted accounting
principles. 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.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Aceto
Corporation and subsidiaries internal control over financial reporting as of
June 30, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated September 8, 2005 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
/s/ KPMG LLP
Melville, New York
September 8, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Aceto Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Aceto
Corporation and subsidiaries maintained effective internal control over
financial reporting as of June 30, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Aceto Corporation's management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Aceto Corporation maintained
effective internal control over financial reporting as of June 30, 2005, is
fairly stated, in all material respects, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, Aceto
Corporation maintained, in all material respects, effective internal control
over financial reporting as of June 30, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Aceto Corporation and subsidiaries as of June 30, 2005 and 2004, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended June
30, 2005, and our report dated September 8, 2005 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Melville, New York
September 8, 2005
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 AND 2004
(in thousands, except per-share amounts)
2005 2004
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 19,950 $ 23,330
Investments 5,068 9,888
Receivables:
Trade, less allowance for doubtful accounts (2005, $427;
2004, $1,033) 49,636 53,084
Other 1,421 1,504
-------- --------
51,057 54,588
Inventory 51,722 41,784
Prepaid expenses and other current assets 821 1,165
Assets held for sale 242 -
Income taxes receivable - 606
Deferred income tax benefit, net 2,780 1,613
-------- --------
Total current assets 131,640 132,974
Long-term notes receivable 624 747
Property and equipment, net 5,543 2,654
Goodwill 1,720 3,179
Intangible assets, net 3,153 3,701
Deferred income tax benefit, net 3,626 4,579
Other assets 2,722 1,863
-------- --------
TOTAL ASSETS $149,028 $149,697
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts and acceptances payable $ 2,462 $ 4,610
Short term bank loans 126 -
Accounts payable 24,783 31,292
Note payable - related party 500 1,000
Accrued expenses 9,474 9,652
Liabilities relating to assets held for sale 46 -
-------- --------
Total current liabilities 37,391 46,554
Long-term liabilities 3,811 2,720
Minority interest 171 157
-------- --------
Total liabilities 41,373 49,431
Commitments and contingencies (Note 17)
Shareholders' equity:
Common stock, $.01 par value, 40,000 shares authorized; 25,644 shares
issued; 24,282 and 24,118 shares outstanding at June 30, 2005 and 2004, 256 256
respectively
Capital in excess of par value 56,903 57,111
Retained earnings 62,864 56,490
Treasury stock, at cost, 1,362 and 1,526 shares at June 30, 2005 and 2004,
respectively (13,505) (15,135)
Accumulated other comprehensive income 1,137 1,544
-------- --------
Total shareholders' equity 107,655 100,266
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $149,028 $149,697
======== =======
See accompanying notes to consolidated financial statements.
30
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(in thousands, except per-share amounts)
2005 2004 2003
---------- ---------- ----------
Net sales $ 313,381 $ 296,359 $ 269,961
Cost of sales 260,280 243,947 226,006
---------- ---------- ----------
Gross profit 53,101 52,412 43,955
Selling, general and administrative expenses 41,561 36,294 30,928
---------- ---------- ----------
Operating income 11,540 16,118 13,027
Other income (expense):
Interest expense (73) (101) (284)
Interest and other income, net 1,321 1,334 713
---------- ---------- ----------
1,248 1,233 429
---------- ---------- ----------
Income from continuing operations before income taxes 12,788 17,351 13,456
Provision for income taxes 2,163 4,240 3,934
---------- ---------- ----------
Income from continuing operations 10,625 13,111 9,522
Loss from discontinued operations, net of income taxes (Note 3) (610) (44) (54)
---------- ---------- ----------
Income before cumulative effect of accounting change 10,015 13,067 9,468
Cumulative effect of accounting change - - (1,873)
---------- ---------- ----------
Net income $ 10,015 $ 13,067 $ 7,595
========== ========== ==========
Basic income per common share:
Income from continuing operations $ 0.44 $ 0.55 $ 0.41
Loss from discontinued operations (0.03) - -
Cumulative effect of accounting change - - $ (0.08)
---------- ---------- ----------
Net income $ 0.41 $ 0.55 $ 0.33
Diluted income per common share:
Income from continuing operations $ 0.43 $ 0.53 $ 0.40
Loss from discontinued operations (0.02) - -
Cumulative effect of accounting change - - $ (0.08)
---------- ---------- ----------
Net income $ 0.41 $ 0.53 $ 0.32
Weighted average shares outstanding:
Basic 24,198 23,873 23,260
Diluted 24,670 24,477 23,727
See accompanying notes to consolidated financial statements.
31
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(in thousands, except per-share amounts)
2005 2004 2003
---------- ---------- ----------
Operating activities:
Net income $ 10,015 $ 13,067 $ 7,595
Loss from discontinued operations 610 44 54
---------- ---------- ----------
Net income from continuing operations, before cumulative effect of
accounting change 10,625 13,111 7,649
Adjustments to reconcile net income to net cash (used in) provided
by continuing operations:
Cumulative effect of accounting change - - 1,873
Depreciation and amortization 1,291 1,119 1,036
Gain on sale of assets (10) - (291)
Provision for doubtful accounts 343 520 446
Non-cash stock compensation 329 190 225
Deferred income taxes 650 (26) 196
Income tax benefit on exercise of stock options 142 1,532 1,589
Changes in assets and liabilities:
Investments - trading securities 231 (111) 74
Trade accounts receivable 3,061 (8,289) (593)
Other receivables 83 63 3,042
Income taxes receivable 606 (26) (903)
Inventory (10,245) 2,166 (4,607)
Prepaid expenses and other current assets 351 (242) 281
Other assets (279) (721) 31
Drafts and acceptances payable (2,148) 4,243 (3,516)
Accounts payable (6,518) 9,563 2,502
Accrued expenses and other liabilities 92 (3,436) (4)
---------- ---------- ----------
Net cash (used in) provided by operating activities (1,396) 19,656 9,030
---------- ---------- ----------
Investing activities:
Purchases of investments (4,463) (9,000) -
Proceeds on maturity of investments - - 369
Proceeds from sale of investments 9,000 100 -
Payments received on notes receivable 144 277 96
Acquisition of Pharma Waldhof, net of cash acquired - (4,632) -
Proceeds from sale of property, net of closing costs - - 173
Purchases of property and equipment (3,576) (706) (629)
---------- ---------- ----------
Net cash provided by (used in) investing activities 1,105 (13,961) 9
---------- ---------- ----------
Financing activities:
Proceeds from exercise of stock options 946 3,079 3,240
Payment of current installments of long-term liabilities - - (272)
Payment of note payable - related party (500) -
Payment of cash dividends (3,641) (2,719) (2,316)
Payments for purchases of treasury stock - - (39)
Borrowings (repayments) of short-term bank loans 126 (3,413) (4,020)
---------- ---------- ----------
Net cash used in financing activities (3,069) (3,053) (3,407)
---------- ---------- ----------
Net cash provided by (used in) discontinued operations 6 34 (52)
---------- ---------- ----------
Effect of foreign exchange rate changes on cash (26) 391 428
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (3,380) 3,067 6,008
Cash and cash equivalents at beginning of period 23,330 20,263 14,255
---------- ---------- ----------
Cash and cash equivalents at end of period $ 19,950 $ 23,330 $ 20,263
========== ========== ==========
See accompanying notes to consolidated financial statements.
32
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(in thousands, except per-share amounts)
ACCUMULATED
CAPITAL IN OTHER
COMMON STOCK EXCESS OF RETAINED TREASURY STOCK COMPREHENSIVE
SHARES AMOUNT PAR VALUE EARNINGS SHARES AMOUNT INCOME TOTAL
--------------------------------------------------------------------------------------------
Balance at June 30, 2002 25,644 $256 $56,328 $40,863 (2,467) $(24,252) $95 $73,290
Net income - - - 7,595 - - - 7,595
Other comprehensive income:
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
stock incentive plans - - 61 - 17 175 - 236
Cash dividends ($0.10 per share) - - - (2,316) - - - (2,316)
Exercise of stock options - - (1,040) - 447 4,280 - 3,240
Tax benefit from exercise of stock - - 1,589 - - - - 1,589
options
Purchases of treasury stock - - - - (4) (39) - (39)
Lapsed stock options - - 29 - - - - 29
--------------------------------------------------------------------------------------------
Balance at June 30, 2003 25,644 256 56,967 46,142 (2,007) (19,836) 1,040 84,569
Net income - - - 13,067 - - - 13,067
Other comprehensive income:
Change in fair value of cross
currency interest rate swaps - - - - - - (210) (210)
Foreign currency translation
adjustments - - - - - - 714 714
-------
Comprehensive income: 13,571
-------
Stock issued pursuant to employee
stock incentive plans - - 50 - 19 184 - 234
Cash dividends ($0.11 per share) - - - (2,719) - - - (2,719)
Exercise of stock options - - (1,438) - 462 4,517 - 3,079
Tax benefit from exercise of stock
options - - 1,532 - - - - 1,532
--------------------------------------------------------------------------------------------
Balance at June 30, 2004 25,644 256 57,111 56,490 (1,526) (15,135) 1,544 100,266
Net income - - - 10,015 - - - 10,015
Other comprehensive income:
Change in fair value of cross
currency interest rate swap - - - - - - 49 49
Foreign currency translation
adjustments - - - - - - (383) (383)
Unrealized loss on available for
sale investments - - - - - - (52) (52)
Additional minimum pension
liability - - - - - - (21) (21)
-------
Comprehensive income 9,608
-------
Stock issued pursuant to employee
stock incentive plans - - (74) - 41 408 - 334
Cash dividends ($0.15 per share) - - - (3,641) - - - (3,641)
Exercise of stock options - - (276) - 123 1,222 - 946
Tax benefit from exercise of stock
options - - 142 - - - - 142
--------------------------------------------------------------------------------------------
Balance at June 30, 2005 25,644 256 56,903 62,864 (1,362) (13,505) 1,137 107,655
See accompanying notes to consolidated financial statements.
33
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(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,
biopharmaceutical, specialty 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 U.S. generally
accepted accounting principles 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, 2005 and 2004.
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.
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.
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
34
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
assumptions relevant to the development of the estimate were to change, the
Company would recognize an additional expense or benefit in the consolidated
statements of 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
certain employees who meet certain 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, 2005 and
2004 are as follows:
2005 2004
---- ----
Fair value of cross currency interest rate swaps $(278) $(327)
Cumulative foreign currency translation adjustments 1,488 1,871
Unrealized loss on available for sale investments (52) -
Additional minimum pension liability (21) -
------ ------
Total $1,137 $1,544
====== ======
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-US subsidiaries.
COMMON STOCK
On May 4, 2005, the Board of Directors of the Company authorized the extension
of the Company's stock repurchase program for an additional three years,
expiring in May 2008. Under the stock repurchase program, the Company is
authorized to purchase up to an additional 4,147 shares of common stock, in open
market or private transactions, at prices not the exceed the market value of the
common stock at the time of such purchase.
On December 2, 2004, the Board of Directors of the Company declared a 3-for-2
stock split, effected in the form of a dividend, that was paid January 10, 2005
to shareholders of record on December 24, 2004. The Company transferred $80 to
common stock from capital in excess of par value, representing the aggregate par
value of the 8,073 shares issued.
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 split, effected in the form of
a 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 split, effected in the form of a 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 splits 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 net income per common share as if the
fair value method had been applied in
35
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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 or exceeds 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, or greater than,
the market value of the common stock, no compensation cost has been recognized.
SFAS No. 123 requires that the 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:
2005 2004 2003
---- ---- ----
Net income - as reported $10,015 $13,067 $ 7,595
Add: Stock-based compensation included
in reported net income 329 190 225
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (4,643) (1,366) (986)
------- ------- -------
Net income - pro forma $ 5,701 $11,891 $ 6,834
======= ======= =======
Net income per share:
Basic - as reported $ 0.41 $ 0.55 $ 0.33
Basic - pro forma $ 0.24 $ 0.50 $ 0.29
Diluted - as reported $ 0.41 $ 0.53 $ 0.32
Diluted - pro forma $ 0.23 $ 0.49 $ 0.29
Stock-based employee compensation expense under the fair value method for the
fiscal year ended June 30, 2005, includes $6,046, which represents the entire
fair value of 1,322 options granted to employees and 61 options granted to
directors in September 2004, all of which had an exercise price equal to or
greater than the market value of the common stock on the date of grant, as those
options were vested as of their date of grant. All 2,764 stock options
outstanding at June 30, 2005 are fully vested and, accordingly, there will be no
stock-based employee compensation expense related to those options commencing
July 1, 2005.
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, and customs and duty costs.
36
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
NET INCOME PER COMMON SHARE
Basic income per common share is based on the weighted average number of common
shares outstanding during the period. Diluted income per common share includes
the dilutive effect of potential common shares outstanding. The Company's only
potential common shares outstanding are stock options, which resulted in a
dilutive effect of 472, 604 and 467 shares for the years ended June 30, 2005,
2004 and 2003, respectively. There were 1,651, 6 and 540 stock options
outstanding as of June 30, 2005, 2004 and 2003, respectively, that were not
included in the calculation of diluted income per common share for the years
ended June 30, 2005, 2004 and 2003, respectively because their effect would have
been anti-dilutive.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the straight
line method over the estimated useful lives of the related asset. Expenditures
for improvements that extend the useful life of an asset are capitalized.
Ordinary repairs and maintenance are expensed as incurred. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any related gains or losses are included in
income. The components of property and equipment were as follows:
Estimated useful
June 30, 2005 June 30, 2004 life (years)
------------- ------------- ------------
Machinery and equipment $1,412 $ 1,460 10
Shorter of asset
Leasehold improvements 787 1,163 life or lease term
Computer equipment and software 3,312 2,903 3-5
Furniture and fixtures 1,010 734 10
Automobiles 425 458 3
Building 3,015 - 20
Land and land improvements 326 326 -
------- -------
$10,287 7,044
Accumulated depreciation and amortization 4,744 4,390
------- -------
$ 5,543 $ 2,654
======= =======
Land and land improvements of $326 at June 30, 2005 and 2004, represents
property held for sale and is stated at cost.
Depreciation and amortization of property and equipment amounted to $749, $706,
and $795 for the years ended June 30, 2005, 2004, and 2003, respectively.
GOODWILL AND OTHER INTANGIBLES
Goodwill is calculated as the excess of the cost of purchased businesses over
the fair 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.
Effective July 1 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". As required
by SFAS No. 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
37
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
$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. As also required by SFAS No. 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, the Company uses many assumptions and estimates 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 an outside 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 value. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
The Company accounts for derivatives and hedging activities under the provisions
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
as amended, which establishes accounting and reporting guidelines for derivative
instruments and hedging activities. SFAS No. 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 No.
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.
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 also recognized in earnings. Changes in the fair value of a
derivative that is highly effective and that is designated and qualifies as a
cash flow hedge are recorded in other comprehensive income to the extent that
the derivative is effective as a hedge, until earnings are affected by the
variability in cash flows of the designated hedged item.
The Company enters into cross currency interest rate swaps to reduce foreign
currency exposure on inter-company transactions. 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 cash flow hedging activities, the change in their
fair value is recorded in accumulated other comprehensive income.
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, which, in the U.S., have
been denominated in various foreign currencies, including Euros, British Pounds,
Japanese Yen, Singapore Dollars and Chinese Renminbi and at certain foreign
subsidiaries in U.S. dollars and other non-local currencies.
38
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Management believes it is prudent to minimize the risk caused by foreign
currency fluctuation. Management minimizes the risk by hedging the majority of
its foreign currency receivables and payables 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 the foreign
currency receivable or for the exact amount of foreign currency needed to pay
for specific purchase orders, and the futures mature on the due date of the
related foreign currency vendor invoices or customer receivables, 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 No. 133, to pay suppliers in the appropriate currency.
The difference between the fair value and notional amounts of the foreign
currency contracts and the related commitments are recorded as an asset with a
corresponding liability and were not material at June 30, 2005 and 2004. The
gains or losses for the changes in the fair value of the foreign currency
contracts are recorded in cost of sales (sales) and offset the gains or losses
associated with the impact of changes in foreign exchange rates on trade
payables (receivables) denominated in foreign currencies. Senior management and
members of the financial department continually monitor foreign currency risks
and the use of this derivative instrument.
FOREIGN CURRENCY
The functional currency of the Company's foreign subsidiaries is the applicable
local currency. The translation of the applicable foreign currencies into U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts and cash
flows using average rates of exchange prevailing during the year. Adjustments
resulting from the translation of foreign currency financial statements are
accumulated in a separate component of stockholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current presentation. Auction rate notes
of $9,000 were reclassified from cash and cash equivalents to available for sale
investments at June 30, 2004.
(3) ASSETS HELD FOR SALE
On December 31, 2004, management committed to a plan to sell the entire
Institutional Sanitary Supplies segment. During June 2005, the Company entered
into an agreement to sell the majority of the product lines formulated and
marketed by CDC Products Corp. ("CDC"), which is one of the two subsidiaries
forming part of this segment. The sale of certain product lines of CDC was
completed on August 24, 2005. Excluded from the sale of CDC's product lines was
Anti-Clog, an EPA-registered biocide that has a unique delivery system and is
used in commercial air-conditioning systems. As a result of management's
decision to retain the Anti-Clog product, the Company has reclassified all of
CDC's operating results previously reported as "discontinued operations" for the
periods ended December 31, 2004 and March 31, 2005 to "continuing operations" in
the consolidated statement of income for the year ended June 30, 2005, which
included a $619 asset impairment charge included in selling, general and
administrative expenses. On September 6, 2005, the Company completed the sale of
certain assets of Magnum Research Corp., the remaining subsidiary forming part
of the Institutional Sanitary Supplies segment, the operating results of which
continue to be included in discontinued operations in the consolidated
statements of income. The Company plans to discontinue the use of the leased
space previously occupied by CDC and Magnum Research Corp. and may incur a
related charge for the lease, which expires in November 2009.
Assets held for sale of the disposal group included in the accompanying
consolidated balance sheet as of June 30, 2005, consist of current assets
(primarily accounts receivable and inventory) of $217, and goodwill of $25.
Liabilities related to the assets held for sale reported in the accompanying
consolidated balance sheet as of June 30, 2005, consist of accounts payable and
accrued expenses of $46.
39
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Operating results of discontinued operations for the fiscal years ended June 30,
2005, 2004 and 2003 were as follows:
2005 2004 2003
---- ---- ----
Net sales $ 1,314 $ 1,359 $ 1,315
------- ------- -------
Loss from operations of discontinued
business (64) (74) (90)
Benefit for income taxes 24 30 36
Non-cash impairment charge (920) - -
Benefit for income taxes 350 - -
------- ------- -------
Loss from discontinued operations $ (610) $ (44) $ (54)
======= ======= =======
The presentation in the consolidated statements of income and the statements of
cash flows for the years ended June 30, 2004 and 2003 have been reclassified to
reflect the discontinued operations. The consolidated balance sheet as of June
30, 2004 has not been reclassified to reflect the discontinued operations.
(4) 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 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.
40
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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 years ended June 30,
2004 and 2003, assuming the Pharma Waldhof acquisition had taken place as of
July 1, 2003 and 2002, respectively:
2004 2003
---- ----
Net sales $ 300,913 $ 279,069
Net income $ 14,032 $ 9,918
Net income per common share:
Basic $ 0.59 $ 0.43
Diluted $ 0.57 $ 0.42
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 an additional payment to be made to Schweizerhall Holding if
the Company realizes certain tax savings due to the utilization of tax benefits
(e.g., net operating losses or credits) of Schweizerhall Holding GmbH. Such
payment would be 50% of the tax benefit received by the Company and would be
recorded as additional goodwill (Note 13).
S.R.F.A.
In November 2003, the Company 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, that was established to distribute
Butoxone(R), an herbicide product for which the Company and Nufarm have acquired
an EPA label. Nufarm will continue to formulate Butoxone(R) for the joint
venture. S.R.F.A. commenced operations in April 2004. For the fiscal years ended
June 30, 2005 and 2004, approximately 78% and 90%, respectively, 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., with those loans being evidenced by demand notes
that bear interest at 3.0% per annum. During fiscal 2005, S.R.F.A. repaid $500
of principal to each of Nufarm and the Company. The amounts due Nufarm at June
30, 2005 and 2004 are included as a note payable in the accompanying
consolidated balance sheets. Minority interest in the net earnings of
41
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
S.R.F.A. of $14 and $157 was included in interest and other income, net in the
accompanying consolidated statements of income for fiscal 2005 and 2004,
respectively.
(5) INVESTMENTS
A summary of short-term investments were as follows:
June 30, 2005 June 30, 2004
------------- -------------
Fair Value Cost Basis Fair Value Cost Basis
---------- ---------- ---------- ----------
Trading securities
- ------------------
Corporate equity securities $ 657 $ 152 $ 888 $ 494
Available for sale securities
- -----------------------------
Corporate bonds $ 1,194 $ 1,210 - -
Government and agency securities $ 3,217 $ 3,253 $ 9,000 $ 9,000
------- -------
$ 5,068 $ 9,888
======= =======
The gains (losses) on trading securities were $110, $111 and $(74) for fiscal
2005, 2004 and 2003, respectively.
(6) NOTES RECEIVABLE
The Company has five notes receivable with outstanding balances aggregating $697
at June 30, 2005 and six notes receivable with outstanding balances aggregating
$841 at June 30, 2004, 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 earn interest at a fixed rate. The range of fixed rates on
the notes is 4.0% to 7.0%. Included in current assets are notes receivable due
within one year totaling $73 and $94 at June 30, 2005 and 2004, respectively.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted the provisions of SFAS No.'s 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.
Goodwill of $1,720 and $2,234 as of June 30, 2005 and June 30, 2004,
respectively, relates to the Health Sciences segment. Goodwill at June 30, 2004,
also includes $945 related to the subsidiary included in the discontinued
institutional sanitary supplies segment which, in fiscal 2005, was written down
to its fair value of $25 in accordance with SFAS No. 142, and is included in
assets held for sale at June 30, 2005.
Goodwill in the Health Sciences segment was $6,838 at June 30, 2003, which
during fiscal 2004 was increased by $806 for the acquisition of Pharma Waldhof
and $59 for foreign currency translation adjustments and decreased by $5,469 for
the recognition of acquired tax benefits, net of related accrued liabilities to
Schweizerhall Pharma, resulting in goodwill of $2,234 at June 30, 2004, which
during fiscal 2005 decreased by $514 for the utilization and recognition of
deferred tax assets for acquired foreign net operating loss carryforwards,
resulting in goodwill of $1,720 at June 30, 2005.
The year ended June 30, 2003 includes a one-time charge of $1,873, or $0.08 per
diluted share, attributable to the cumulative effect of adopting SFAS No. 142.
The Company's $1,873 one-time charge was related to the impairment of the
goodwill associated with CDC, which is part of the Company's 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 No. 142.
42
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Intangible assets subject to amortization as of June 30, 2005 and 2004 were as
follows:
Gross Carrying Accumulated Net Book
Value Amortization Value
----- ------------ -----
June 30, 2005
-------------
Customer relationships $ 2,648 $ 567 $ 2,081
Customer lists 600 510 90
Non-compete agreements 641 486 155
-------- -------- --------
$ 3,889 $ 1,563 $ 2,326
======== ======== ========
June 30, 2004
-------------
Customer relationships $ 2,644 $ 189 $ 2,455
Customer lists 600 390 210
Non-compete agreements 643 442 201
-------- -------- --------
$ 3,887 $ 1,021 $ 2,866
======== ======== ========
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, 2005 and June 30, 2004, the Company also had $827 and $835,
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 $542, $413 and $241 for
the years ended June 30, 2005, 2004 and 2003, respectively. The estimated
aggregate amortization expense for intangible assets subject to amortization for
each of the succeeding years ended June 30, 2006 through June 30, 2011 are as
follows: 2006: $513; 2007: $423; 2008: $423; 2009: $400; 2010: $378 and 2011:
$189.
(8) ACCRUED EXPENSES
The components of accrued expenses as of June 30, 2005 and 2004 were as follows:
2005 2004
---- ----
Accrued compensation $2,566 $2,836
Accrued environmental remediation costs 1,195 1,326
Other accrued expenses 5,713 5,490
------ ------
$9,474 $9,652
====== ======
(9) 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. During fiscal 2003, based on
continued monitoring of the contamination on the site and the current proposed
plan of remediation, the Company received an estimate from the consultant, which
estimated that the remaining costs of the remediation could be an amount between
$1,550 and $3,200. Accordingly, the Company had a liability of $1,550 as of June
30, 2003. The remaining liability as of June 30, 2005 and 2004 is $1,195 and
$1,326, respectively, and is included in accrued expenses in the accompanying
consolidated balance sheets. However, these matters, if resolved in a manner
different from those assumed in current estimates, could have a material adverse
effect on the Company's 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.
43
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(10) FINANCING ARRANGEMENTS
The Company has a revolving credit agreement with a financial institution that
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 are secured by 65% 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 4.93%, 2.86% and 2.62% at June 30,
2005, 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. The Company was in compliance with all covenants at
June 30, 2005.
At June 30, 2005 and 2004, the Company had available lines of credit with
foreign financial institutions totaling $17,792 and $17,523, respectively. 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 4.18%,
2.11% and 1.87% at June 30, 2005, 2004 and 2003, respectively. The Company is
not subject to any financial covenants under these arrangements.
Under the above financing arrangements, the Company had $126 in short-term bank
loans outstanding and $1,783 in letters of credit leaving an unused facility of
$25,883 at June 30, 2005. At June 30, 2004 the Company had no short-term bank
borrowings and had utilized $1,161 in letters of credit leaving an unused
facility of $26,362. The weighted average interest rate on short-term loans
outstanding for the years ended June 30, 2005 and 2004 was 5.24% and 4.18%
respectively.
(11) 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 1,688
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 of Directors, generally three years. The premium
shares vest when all the restrictions lapse, provided that the participant
remains employed by the Company at that time.
In December 2002, the Company granted 1,058 options to employees and directors
under the 2002 Plan at an exercise price of $4.28 per share, 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 August 2003, the Company granted 368 options to employees and directors under
the 2002 Plan at an exercise price of $8.22 per share. All of these options
vested in December 2004.
In December 2003, the Company granted 21 options to employees under the 2002
Plan at an exercise price of $9.07 per share. During the remainder of fiscal
2004, the Company granted 20 options to employees at prices ranging from $9.75
to $10.67 per share. These options vested 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, 2005, there were 272 shares of
common stock available for grant as either options or restricted stock under the
2002 Plan.
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 1,688 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
44
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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 94 shares of common stock available for grant as either options or
restricted stock at June 30, 2005.
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, there were
233 options to purchase shares of common stock available for grant at June 30,
2005. The 1980 Plan expires September 2005. Outstanding options survive the
expiration of the 1980 Plan.
In September 2004, the Company granted 1,317 options under the 1980 Plan to
employees, 64 options under the 1998 Plan to directors and employees and 2
options under the 2002 Plan to employees at an exercise price of $10.95 per
share 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 summarizes the shares of common stock under option for all plans
at June 30, 2005, 2004 and 2003, and the activity with respect to options for
the respective years then ended:
Weighted average
Shares subject to exercise price per
option share
----------------------------------------
Balance at June 30, 2002 2,319 $ 2.98
Granted 1,058 4.28
Exercised (1,091) 3.10
Forfeited ( 119) 2.96
- -----------------------------------------------------------------------------
Balance at June 30, 2003 2,167 3.54
Granted 408 8.35
Exercised (890) 3.46
Forfeited (53) 5.46
- -----------------------------------------------------------------------------
Balance at June 30, 2004 1,632 4.72
Granted 1,383 10.95
Exercised (171) 5.18
Forfeited (80) 9.62
- -----------------------------------------------------------------------------
Balance at June 30, 2005 2,764 $ 7.65
Options exercisable at June 30, 2005, 2004 and 2003 were 2,764, 1,247 and 809,
respectively. The weighted average exercise price per share for options
exercisable at June 30, 2005, 2004 and 2003 was $7.65, $3.59 and $2.88,
respectively. At June 30, 2005, 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, 2005. Under the 2002
Plan and the 1998 Plan, compensation expense 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. In fiscal 2005, 2004 and 2003, restricted stock awarded and premium
shares vested of 41, 19 and 17 common shares, respectively, were issued from
treasury stock under employee incentive plans, which increased stockholders'
equity by $334, $234 and $236, respectively. The related non-cash compensation
expense related to the restricted stock granted and the vesting of premium
shares during the year, which are issuable only when fully vested, was $329,
$190 and $225 in fiscal 2005, 2004 and 2003, respectively.
45
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Summarized information about stock options outstanding and exercisable at June
30, 2005, is as follows:
Number of
Exercise Price Range Options Average Life Average
Outstanding (1) Price (2)
and Exercisable
- -----------------------------------------------------------------------
$2.67 - 4.28 1,113 7.86 $3.56
8.21 - 10.81 348 8.18 8.39
10.95 1,303 9.20 10.95
-----
2,764
(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 2005,
2004 and 2003 was $4.38, $3.63 and $3.67, respectively, on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
Expected Expected Risk-free
Date of Grant Volatility (%) Life (years) interest rate Dividend yield
- ------------------------------------------------------------------------------------------
Fiscal 2003:
------------
December 2002 40 7.5 3.79 2.22
Fiscal 2004:
------------
August 2003 40 7.5 4.12 1.24
December 2003 40 7.5 4.02 1.69
February 2004 40 7.5 4.29 1.12
March 2004 40 7.5 4.29 1.16
June 2004 40 6.0 4.00 1.06
Fiscal 2005:
------------
September 2004 40 6.0 3.76 1.04
(12) INTEREST AND OTHER INCOME
Interest and other income during fiscal 2005, 2004 and 2003 was comprised of the
following:
2005 2004 2003
---- ---- ----
Dividends $ 86 $ 83 $ 139
Interest 459 491 458
Net gain (loss) on investments 117 111 (74)
Foreign government subsidies received 457 395 34
Minority interest (14) (157) -
Foreign currency gains 182 143 117
Miscellaneous 34 268 39
------- ------- -------
$ 1,321 $ 1,334 $ 713
======= ======= =======
46
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(13) INCOME TAXES
The components of income from continuing operations before the provision for
income taxes are as follows:
2005 2004 2003
----------------------------------------
Domestic operations $ (332) $ 4,015 $ 5,862
Foreign operations 13,120 13,336 7,594
-------- -------- --------
$ 12,788 $ 17,351 $ 13,456
======== ======== ========
The components of the provision for income taxes are as follows:
2005 2004 2003
----------------------------------------
Federal:
Current $ 293 $ 1,355 $ 1,829
Deferred (692) (22) 103
State and local:
Current 126 119 353
Deferred (184) (4) 93
Foreign:
Current 1,023 1,399 1,556
Deferred 1,597 1,393 -
-------- -------- --------
$ 2,163 $ 4,240 $ 3,934
======== ======== ========
Income taxes payable, which is included in accrued expenses, was $425 at June
30, 2005 and income taxes receivable was $606 at June 30, 2004.
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at June 30, 2005 and 2004 are presented below:
2005 2004
---- ----
Deferred tax assets:
Accrued environmental remediation liabilities
not currently deductible $ 473 $ 531
Accrued deferred compensation 969 686
Additional inventoried costs for tax purposes 162 106
Allowance for doubtful accounts receivable 125 241
Depreciation and amortization 89 174
Other 48 37
Impairment charges 556 -
Domestic net operating loss carryforwards 961 159
Foreign net operating loss carryforwards 5,280 8,065
-------- --------
Total gross deferred tax assets 8,663 9,999
Valuation allowances (1,753) (3,465)
-------- --------
Total net deferred tax assets 6,910 6,534
-------- --------
Deferred tax liabilities:
Unrealized gain on investments (192) (149)
Goodwill (312) (193)
-------- --------
Total gross deferred tax liabilities (504) (342)
-------- --------
Net deferred tax assets $ 6,406 $ 6,192
======== ========
47
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
The net change in the total valuation allowance for the year ended June 30, 2005
and 2004 was a decrease of $1,712 and $2,072, respectively, resulting primarily
from the utilization of, or establishing deferred tax assets for 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
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 are not
expected to be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which net operating loss carryforwards are utilizable and 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, 2005, the Company will need to generate future taxable
income of approximately $17,000.
Based upon the level of historical taxable income and projections for taxable
income over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. There can be no assurance, however, that the
Company will generate any earnings or any specific level of continuing earnings
in the future. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
In fiscal 2005, the Company recorded a tax benefit of $1,777 for certain foreign
net operating loss carryforwards which were previously offset by a valuation
allowance, of which $514 eliminated the remaining related goodwill and $1,263
reduced income tax expense. 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, the Company recorded a deferred
tax asset, included in foreign net operating loss carryforwards as of June 30,
2004, 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, 2005 and 2004.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries amounting to approximately $13,900 at June 30, 2005 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.
We operate in various tax jurisdictions, and although we believe that we have
provided for income and other taxes in accordance with the relevant regulations,
if the applicable regulations were ultimately interpreted differently by a
taxing authority, we may be exposed to additional tax liabilities.
A reconciliation of the statutory federal income tax rate and the effective tax
rate for continuing operations for the fiscal years ended June 30, 2005, 2004
and 2003 follows:
2005 2004 2003
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State and local taxes, net of federal income tax
benefit (0.5) 0.7 2.2
Reduction in valuation allowance (9.9) - -
Foreign tax rate differential (5.6) (9.7) (9.9)
Other (1.1) (0.6) 2.9
----- ----- -----
Effective tax rate 16.9% 24.4% 29.2%
===== ===== =====
At June 30, 2005, the Company had U.S. federal net operating loss carryforwards
of $1,630 which are available to offset future U.S. federal taxable income and
which expire in 2024 and 2025. In addition, at June 30, 2005, the Company had
foreign net operating loss carryforwards of approximately $15,270 which are
available to offset future foreign taxable income and which have no expiration
date.
48
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(14) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during fiscal 2005, 2004 and 2003 was as
follows:
2005 2004 2003
---- ---- ----
Interest $ 151 $ 101 $ 560
Income taxes, net of refunds $ 195 $ 1,135 $ 4,234
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.
(15) RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS
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 $1,161,
$1,101 and $1,017 in fiscal 2005, 2004 and 2003, respectively.
DEFINED BENEFIT PLANS
The Company sponsors certain defined benefit pension plans covering certain
employees of its German subsidiaries who meet the plan's eligibility
requirements. The accrued pension liability recorded as of June 30, 2005
amounted to $679, which includes $21 of an additional minimum pension liability
recorded in other comprehensive income. The accrued pension liability as of June
30, 2004 was $580. Net periodic pension costs, which consists principally of
interest cost and service cost was $84 in fiscal 2005 and 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 4.6% and 5.5% and a compensation increase rate of 3.0%
and 3.3% were used in determining the actuarial present value of benefit
obligations as of June 30, 2005 and 2004, respectively.
DEFERRED COMPENSATION PLANS
To comply with the requirements of the American Jobs Creation Act of 2004, as of
December 2004, the Company froze its non-qualified Supplemental Executive
Retirement Plan (the "Frozen Plan") and has not allowed any further deferrals or
contributions to the Frozen Plan after December 31, 2004. All of the earned
benefits of the participants in the Frozen Plan as of December 31, 2004, will be
preserved under the existing plan provisions.
On March 14, 2005, the Company's Board of Directors adopted the Aceto
Corporation Supplemental Executive Deferred Compensation Plan (the "Plan"). The
Plan is a non-qualified deferred compensation plan intended to provide certain
qualified executives with supplemental benefits beyond the Company's 401(k)
plan, as well as to permit additional deferrals of a portion of their
compensation. The Plan is intended to comply with the provisions of section 409A
of the Internal Revenue Code of 1986, as amended, and is designed to provide
comparable benefits to those under the Frozen Plan. 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 assets held by the grantor trust are in life insurance policies. As of June
30, 2005 and 2004, the Company recorded a liability under the Plan of $2,430 and
$1,711, respectively, (included in long-term liabilities) and an asset (included
in other assets) of $2,087 and $1,371, respectively, primarily representing the
cash surrender value of policies owned by the Company.
49
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(16) FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2005 and 2004 the Company had future foreign currency contracts that
have a notional amount of $11,456 and $10,733, respectively. The contracts have
varying maturities of less than one year. At June 30, 2005 and 2004, the Company
had not hedged open purchase commitments denominated in foreign currencies of
approximately $125 and $343, respectively.
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 institutions.
In addition, the Company enters into cross currency interest rate swaps to
reduce foreign currency exposure on inter-company transactions. In June 2004, a
foreign subsidiary of the Company entered into a one-year cross currency
interest rate swap transaction, which expired in June 2005 when the underlying
inter-company loan was repaid, and in May 2003 the foreign subsidiary 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, 2005, was $(278). 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 $49, $(210) and $(117) in 2005, 2004 and 2003, respectively, is
recorded in accumulated other comprehensive income.
OFF-BALANCE SHEET RISK
Commercial letters of credit are issued by the Company during the ordinary
course of business through major banks as requested by certain suppliers. The
Company had open letters of credit of approximately $1,783 and $1,161 as of June
30, 2005 and 2004, respectively. The terms of these letters of credit are all
less than one year. No material loss is anticipated due to non-performance by
the counter parties to these agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of all financial instruments classified as a current asset
or current liability are deemed to approximate fair value because of the short
maturity of these instruments. The fair value of foreign currency contracts
(used for hedging purposes) was estimated by obtaining quotes from brokers and
the difference between the fair value and contract value as of June 30, 2005 and
2004 was not material. The difference between the fair value of long-term notes
receivable and their carrying value at both June 30, 2005 and 2004 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, 2005 and 2004, no single customer accounted for as much as 10% of net trade
accounts receivable.
No single product or customer accounted for as much as 10% of net sales in
fiscal 2005, 2004 or 2003. Two suppliers accounted for 13% and 12% of purchases
in fiscal 2005, one supplier accounted for approximately 10% in fiscal 2004 and
a different supplier accounted for approximately 10% in fiscal 2003.
50
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
During the fiscal years ended June 30, 2005, 2004 and 2003, approximately 68%,
59% and 59%, respectively, of the Company's purchases came from Asia and
approximately 22%, 29% and 29%, respectively, came from Europe.
The Company maintains operations located outside of the United States. Net
assets located in Europe and Asia approximate $18,120 and $24,700, respectively
at June 30, 2005.
(17) COMMITMENTS AND CONTINGENCIES
As of June 30, 2005, the Company has outstanding purchase obligations totaling
$24,303 with suppliers to the Company's domestic and foreign operations to
acquire certain products for resale to third party customers.
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 that
new test data be generated 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 historically, our payments have been in
the range of $250 - $500 per year. We may be required to make additional
payments in the future.
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 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.
One of the Company's subsidiaries is a defendant in a legal action alleging
patent infringement. The patent in question covers a particular method of
applying one of the products in the Company's Agrochemicals segment. The
plaintiff in this action is seeking damages for lost profits and/or royalties,
plus treble damages, prejudgment interest and attorney fees. The Company has
denied liability and asserted various defenses, including non-infringement,
patent invalidity, and patent unenforceability due to inequitable conduct. A
trial is expected to begin later this calendar year. The Company believes there
is no merit to the claim and intends to vigorously contest it. The Company is
unable to determine the ultimate outcome of this action and accordingly, no
provision has been recorded in the consolidated financial statements as of June
30, 2005.
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.
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 November 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
-------------------------------------------
2006 $1,984
2007 1,860
2008 1,755
2009 1,653
2010 1,364
Thereafter 832
------
$9,448
======
Total rental expense amounted to $1,665, $1,673 and $1,444 for fiscal 2005, 2004
and 2003, respectively.
51
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(18) RELATED PARTY TRANSACTIONS
Certain directors of the Company are affiliated with law firms that serve as
legal counsel to the Company on various corporate matters. During fiscal 2005,
2004 and 2003, the Company incurred legal fees of $215, $310 and $291,
respectively, for services rendered to the Company by those law firms.
(19) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections," a replacement of APB Opinion
No. 20, Accounting Changes, and FASB SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements. SFAS No. 154 applies to all voluntary changes in
accounting principles, and changes the requirements for accounting for and
reporting of a change in accounting principle. SFAS No. 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principle unless it is impracticable. SFAS No. 154 also
requires that a change in method of depreciation, amortization, or depletion for
long-lived, non-financial assets be accounted for as a change in accounting
estimate that is affected by a change in accounting principle. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Earlier application is permitted for
accounting changes and corrections of errors occurring in fiscal years beginning
after June 1, 2005. SFAS No. 154 does not change the transition provisions of
any existing accounting pronouncements, including those that are in a transition
phase as of the date of SFAS No. 154. The Company does not believe that adoption
of SFAS No. 154 will have a material impact on its financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
addresses accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R eliminates the ability to account for
share-based compensation transactions using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and instead requires
that such transactions be accounted for using a fair-value-based method. This
statement is effective for annual periods beginning after June 15, 2005 (the
Company's 2006 fiscal year), as if all share-based compensation awards granted,
modified or settled after December 15, 1994 had been accounted for using the
fair-value-based method of accounting. The Company will use the modified
prospective approach in adopting the provisions of FASB Statement No. 123R. The
adoption of SFAS 123R on July 1, 2005 will not have a material effect on the
Company's financial statements since all prior grants of stock options are fully
vested as of June 30, 2005. Future grants of stock options will result in
compensation expense.
On October 22, 2004, the President of the United States signed the American Jobs
Creation Act of 2004. This law creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an 85%
dividends-received deduction for certain dividends from controlled foreign
corporations. The deduction is subject to a number of limitations, and the FASB
issued two Staff Positions to provide guidance on how companies should account
for the effects of the American Jobs Creation Act. The Company determined that
the repatriation provision would have no effect on the Company since it decided
not to repatriate any extraordinary dividends.
(20) SEGMENT INFORMATION
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 such as 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 - products include cleaning
solutions, fragrances, and deodorants for commercial and
industrial customers.
52
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
On December 31, 2004, management committed to a plan to sell the entire
Institutional Sanitary Supplies segment. Accordingly, for the six and nine
months ended December 31, 2004 and March 31, 2005, respectively, the quarterly
results of this segment were included in "loss from discontinued operations" in
the consolidated statements of income. During June 2005, the Company entered
into an agreement to sell the majority of the product lines formulated and
marketed by CDC Products Corp. ("CDC"), which is one of the two subsidiaries
forming part of this segment. The sale of CDC was completed on August 24, 2005.
Excluded from the sale of CDC's product lines was Anti-Clog, an EPA-registered
biocide that has a unique delivery system and is used in commercial
air-conditioning systems. As a result of management's decision to retain the
Anti-Clog product, the Company has reclassified all of CDC's operating results
from "discontinued operations" to "continuing operations" in the consolidated
statements of income for the year ended June 30, 2005. On September 6, 2005, the
Company completed the sale of certain assets of Magnum Research Corp., the
remaining subsidiary forming part of the Institutional Sanitary Supplies
segment, the operating results of which continue to be included in discontinued
operations in the consolidated statements of income.
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.
Health Chemicals & Institutional Consolidated
Sciences Colorants Agrochemicals Sanitary Supplies Totals
-------- --------- ------------- ----------------- ------
2005
- ----
Net sales $184,560 $104,744 $ 20,031 $ 4,046 $313,381
Gross profit 32,869 17,224 6,719 696 57,508
Unallocated cost of sales (1) (4,407)
--------
Net gross profit $ 53,101
========
2004
- ----
Net sales $180,701 $ 94,395 $ 16,898 $ 4,365 $296,359
Gross profit 33,821 15,303 5,503 1,288 55,915
Unallocated cost of sales (1) (3,503)
--------
Net gross profit $ 52,412
========
2003
- ----
Net sales $159,858 $ 91,579 $ 14,356 $ 4,168 $269,961
Gross profit 28,815 12,999 4,123 1,465 47,402
Unallocated cost of sales (1) (3,447)
--------
Net gross profit $ 43,955
========
(1) Represents certain freight and storage costs that are not allocated to a
segment.
53
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Net sales by source country for the years ended June 30, 2005, 2004 and 2003 and
long-lived assets by location as of June 30, 2005 and 2004 were as follows:
Net Sales Gross Profit Long-lived Assets
--------- ------------ -----------------
2005 2004 2003 2005 2004 2003 2005 2004
---- ---- ---- ---- ---- ---- ---- ----
United States $183,397 $166,973 $177,282 $ 29,129 $ 30,122 $ 29,479 $ 1,469 $ 1,748
Germany 63,518 51,659 35,219 13,041 11,147 5,300 509 585
Netherlands 8,018 9,127 7,568 1,686 1,586 1,829 285 129
France 12,609 11,522 10,032 1,561 1,368 1,351 90 119
Asia-Pacific 45,839 57,078 39,860 7,684 8,189 5,996 3,190 73
-------- -------- -------- -------- -------- -------- --------- ---------
Total $313,381 $296,359 $269,961 $ 53,101 $ 52,412 $ 43,955 $ 5,543 $ 2,654
======== ======== ======== ======== ======== ======== ========= =========
Export sales from the United States to foreign countries amounted to $26,111,
$20,487 and $17,792 for the fiscal years ended June 30, 2005, 2004 and 2003,
respectively.
In November 2004, the Company purchased office space located in Shanghai, China
for approximately $3,015.
(21) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of the unaudited quarterly results of operations for
the years ended June 30, 2005 and 2004.
For the quarter ended
------------------------------------------------------------------
September 30, December 31, March 31, June 30,
FISCAL YEAR ENDED JUNE 30, 2005 2004 2004 2005 2005
------------------------------------------------------------------
Net sales (1) $ 80,449 $ 76,738 $ 82,512 $ 73,682
Gross profit (1) 13,515 13,282 14,249 12,055
Net income (2) 3,375 1,952 1,895 2,793
Net income per diluted share $ 0.14 $ 0.08 $ 0.08 $ 0.11
For the quarter ended
------------------------------------------------------------------
September 30, December 31, March 31, June 30,
FISCAL YEAR ENDED JUNE 30, 2004 2003 2003 2004 2004
------------------------------------------------------------------
Net sales $ 71,988 $ 68,878 $ 79,363 $ 76,130
Gross profit 11,997 12,576 14,850 12,989
Net income 3,119 2,963 3,710 3,275
Net income per diluted share $ 0.13 $ 0.12 $ 0.15 $ 0.13
(1) Net sales and gross profit for the quarters ended December 31, 2004 and
March 31, 2005 as previously reported, have been adjusted to reflect the
reclassification of CDC's operating results from "discontinued operations" to
"continuing operations" (see Note 3).
(2) Net income for the quarter ended June 30, 2005 includes a benefit for income
taxes of $1,263 relating to the reduction of valuation allowances for the
utilization of and establishment of deferred tax assets for foreign net
operating loss carryforwards (see note 13).
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.
54
Schedule II
ACETO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 2005, 2004 and 200
(dollars in thousands
Balance at Charged to Charged to
beginning of costs and other Balance at
Description year expenses accounts Deductions end of year
- -----------------------------------------------------------------------------------------------------------------
Year ended June 30, 2005
Allowance for doubtful accounts $ 1,033 $ 343 - $ 949(a) $ 427
========= ======= ===== ======
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
========= ======= ===== ======
(a) Specific accounts written off as uncollectible, net of recoveries.
55
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation (incorporated by reference
to Exhibit 4(a)(iii) to Registration Statement No. 2-70623 on
Form S-8 (S-8 2-70623)).
3.2 Certificate of Amendment dated November 21, 1985 to Restated
Certificate of Incorporation (incorporated by reference to
Exhibit 3(ii) to the Company's annual report on Form 10-K for
the fiscal year ended June 30, 1986).
3.3 Amended and restated by-laws of Aceto Corporation, effective as
of February 2, 2005 (incorporated by reference to Exhibit 3.1 to
the Company's current report on Form 8-K dated February 2,
2005).
10.1 Aceto Corporation 401(k) Retirement Plan, effective August 1,
1997, as amended and restated as of July 1, 2002 (incorporated
by reference to Exhibit 10.1 to the Company's annual report on
Form 10-K for the fiscal year ended June 30, 2004).
10.2 Supplemental Executive Retirement Plan, as amended and restated,
effective June 30, 2004 and frozen as of December 31, 2004
(incorporated by reference to Exhibit 10.2 to the Company's
annual report on Form 10-K for the fiscal year ended 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
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).
56
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 (incorporated by reference to Exhibit 10.15 to the
Company's annual report on Form 10-K for the year ended June 30,
2004).
10.16 Waiver to Credit Agreement between Aceto Corporation and
subsidiaries and JPMorgan Chase Bank dated August 31, 2004
(incorporated by reference to Exhibit 10.16 to the Company's
annual report on Form 10-K for the year ended June 30, 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).
10.18 Aceto Corporation Supplemental Executive Deferred Compensation
Plan, effective March 14, 2005 (incorporated by reference to
Exhibit 10.1 to the Company's current report on Form 8-K dated
March 14, 2005).
10.19 Form of purchase agreement between Shanghai Zhongjin Real Estate
Development Company Limited and Aceto (Hong Kong) Limited dated
November 10, 2004 (incorporated by reference to Exhibit 10.1 to
the Company's quarterly report on Form 10-Q for the quarter
ended December 31, 2004).
21.1* Subsidiaries of the Company.
23.1* 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
57
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 8, 2005
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 09-08-05
- ----------------------- Chief Executive Officer
Leonard S. Schwartz (Principal Executive Officer)
/s/ Douglas Roth Secretary/Treasurer and 09-08-05
- ----------------------- Chief Financial Officer
Douglas Roth (Principal Financial and
Accounting Officer)
/s/ Stanley Fischer Director 09-08-05
- -----------------------
Stanley Fischer
/s/ Robert Wiesen Director 09-08-05
- -----------------------
Robert Wiesen
/s/ Ira S. Kallem Director 09-08-05
- -----------------------
Ira S. Kallem
/s/ Albert L. Eilender Director 09-08-05
- -----------------------
Albert L. Eilender
/s/ Hans C. Noetzli Director 09-08-05
- -----------------------
Hans C. Noetzli
58