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, 2006
Commission file number 000-04217
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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
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock, Par Value $.01 Per Share The NASDAQ Stock Market LLC
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(Title of Class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 of Section 15(d) of the Act.
Yes [ ] No [X]
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer
---- ---- ----
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the voting stock of the Company held by
non-affiliates of the Company as of December 31, 2005 was approximately
$157,431,224.
The Registrant has 24,281,239 shares of common stock outstanding as of
September 1, 2006.
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 7, 2006.
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
TABLE OF CONTENTS
PART I.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II.
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
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
Item 9B. Other Information
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
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV.
Item 15. Exhibits and Financial Statement Schedules
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, 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
share prices and per-share amounts.
ITEM 1. BUSINESS
GENERAL
Aceto Corporation, together with its consolidated subsidiaries, are referred to
herein collectively as "Aceto" "Company", "we", "us", and "our" unless the
content indicates otherwise. 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 business is
organized along product lines into three segments: Health Sciences, Chemicals &
Colorants and Agrochemicals.
Our Health Sciences division includes 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.
The products in our Chemicals & Colorants division include a variety of
specialty chemicals used in plastics, resins, adhesives, coatings, food, flavor
additives, fragrances, cosmetics, metal finishing, electronics, air-conditioning
systems 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.
Our Agrochemicals division includes herbicides, fungicides and insecticides, as
well as a sprout inhibitor for potatoes.
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, specialty chemicals and agrochemicals is readily accessible.
We are able to offer our customers competitive pricing, continuity of supply,
and quality control. Our 59 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 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
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strategic acquisitions that enhance our earnings, forming alliances with
partners that add to our capabilities, and establishing significant business
operations in Eastern Europe.
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 Operation", and in Note 20 to the
Consolidated Financial Statements, Part II, Item 8, "Financial Statements and
Supplementary Data."
PRODUCTS AND CUSTOMERS
During the fiscal years ended June 30, 2006 and 2005, approximately 67% and 68%,
respectively, of our purchases were from Asia and approximately 21% and 22%,
respectively, were from Europe.
Our customers are located throughout the United States, Europe and Asia. 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 2006 and 2005, sales made to customers in the
United States totaled $157,329 and $160,123, respectively. Sales made to
customers outside the United States during fiscal years 2006 and 2005 totaled
$139,801 and $153,258, respectively, of which, approximately 53% and 65%,
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, sourcing decisions can
be made quickly.
No single product or customer accounted for as much as 10% of net sales in
fiscal years 2006, 2005 or 2004. No single supplier accounted for as much as 10%
of purchases in fiscal 2006. 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.
We hold no patents, licenses, franchises or concessions that we consider
material to our operations.
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 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. Our
subsidiary, Arsynco, Inc., a New Jersey corporation ("Arsynco") has
environmental remediation obligations in connection with its former
manufacturing facility in Carlstadt, New Jersey, which was closed in 1993 and is
currently held for sale. During fiscal 2006, based on continued monitoring of
the contamination at the site and the current proposed plan of remediation,
Arsynco received an estimate from an environmental consultant stating that the
costs of remediation could be between $5,400 and $6,900. As of June 30, 2006 a
liability of $5,400 is included in the accompanying consolidated balance sheet.
In accordance with Emerging Issues Task Force (EITF) Issue 90-8, "Capitalization
of Costs to Treat Environmental Contamination" management believes that the
majority of costs incurred to remediate the site will be capitalized in
preparing the property which is currently classified as held for sale. An
appraisal of the fair value of the property by a third-party appraiser supports
this assumption. As of June 30, 2005, a liability of $1,195 was included in the
accompanying consolidated balance sheet. It is possible that the assumptions
underlying our estimates will be found to be incorrect, in which case the
liability could be significantly greater than currently estimated and could have
a material adverse effect on our financial condition, operating results and cash
flows.
In March 2006, also related to the former manufacturing facility in Carlstadt,
New Jersey, Arsynco received notice from the Environmental Protection Agency
(EPA) of its status as a potentially responsible party ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
for a site described as the Berry's
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Creek Study Area. Arsynco is one of over 150 PRP's which have potential
liability for the required investigation and remediation of the site. The
estimate of the potential liability is not quantifiable for a number of reasons,
including the difficulty in determining the extent of contamination and the
length of time remediation may require. In addition, any estimate of liability
must also consider the number of other PRP's and their financial strength. Since
an amount of the liability can not be reasonably estimated at this time, no
accrual is recorded for these potential future costs. The impact of the
resolution of this matter on the Company's results of operations in a particular
reporting period is not known. Management currently believes, however, that the
ultimate outcome of this matter will not have a material adverse effect on the
Company's financial condition or liquidity.
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
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.
EMPLOYEES
At June 30, 2006, we had 216 employees, none of whom were covered by a
collective bargaining agreement.
ITEM 1A. 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
6
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.
Our subsidiary, Arsynco, has environmental remediation obligations in connection
with its 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. 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.
In March 2006, also related to its former manufacturing facility in Carlstadt,
New Jersey, Arsynco received notice from the Environmental Protection Agency
(EPA) of its status as a potentially responsible party ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
for a site described as the Berry's Creek Study Area. Arsynco is one of over 150
PRP's which have potential liability for the required investigation and
remediation of the site. The estimate of the potential liability is not
quantifiable for a number of reasons, including the difficulty in determining
the extent of contamination and the length of time remediation may require. In
addition, any estimate of liability must also consider the number of other
potentially responsible parties and their financial strength. Since an amount of
the liability can not be reasonably estimated at this time, no accrual is
recorded for these potential future costs. The impact of the resolution of this
matter on the Company's results of operations in a particular reporting period
is not known. However, management believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's financial
condition or liquidity.
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 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.
7
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
acquisitions, 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 STREAM IS DIFFICULT TO PREDICT.
Our revenue stream 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 our 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 2006 and 2005, approximately 47%
and 49%, respectively, of our revenues were attributable to operations conducted
abroad and to export sales. In addition, in fiscal year 2006, approximately 67%
and 21% 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.
8
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 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 security 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
9
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 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. You may 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 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our general headquarters and main sales office occupy approximately 26,000 gross
square feet of leased space in an office building in Lake Success, New York. The
lease expires in April 2011.
Arsynco's former manufacturing facility is located on a 12-acre parcel in
Carlstadt, New Jersey, that it owns. This parcel contains one building with
approximately 5,000 gross 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 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.
In March 2006, Arsynco received notice from the Environmental
Protection Agency (EPA) of its status as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability Act
10
(CERCLA) for a site described as the Berry's Creek Study Area. Arsynco is one of
over 150 PRP's which have potential liability for the required investigation and
remediation of the site. The estimate of the potential liability is not
quantifiable for a number of reasons, including the difficulty in determining
the extent of contamination and the length of time remediation may require. In
addition, any estimate of liability must also consider the number of other
potentially responsible parties and their financial strength. Since an amount of
the liability can not be reasonably estimated at this time, no accrual is
recorded for these potential future costs. The impact of the resolution of this
matter on the Company's results of operations in a particular reporting period
is not known. However, management currently believes that the ultimate outcome
of this matter will not have a material adverse effect on the Company's
financial condition or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this Annual Report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the NASDAQ Stock Market LLC using the symbol
"ACET." The following table states the fiscal year 2006 and 2005 high and low
sales prices of our common stock as reported by the NASDAQ Stock Market LLC for
the periods indicated, adjusted for a 3-for-2 stock split, effected in the form
of a dividend, paid in January 2005.
HIGH LOW
FISCAL YEAR 2006
First Quarter $ 8.20 $ 5.49
Second Quarter 6.96 5.64
Third Quarter 7.70 6.44
Fourth Quarter 8.36 6.33
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
Cash dividends of $0.075 per common share were paid in January and June of
fiscal years 2006 and 2005. Cash dividends of $0.056 per common share were paid
in January and June of fiscal year 2004. Our revolving credit facility restricts
the payment of cash dividends to $4,500 per year.
As of September 1, 2006, there were 530 holders of record of our common stock.
22,006 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, 2006:
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 2,743 $ 7.62 226
--------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders - - -
--------------------------------------------------------------------------------
Total 2,743 $ 7.62 226
================================================================================
11
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per-share amounts)
Fiscal Years Ended June 30, 2006 2005 2004(1) 2003 2002
--------------------------- ---- ---- ---- ---- ----
Net sales $297,130 $313,381 $296,359 $269,961 $228,012
Operating income 11,973 11,540 16,118 13,027 7,331
Income from continuing operations 9,264 10,625 13,111 9,522 4,942
Net income(2) 9,237 10,015 13,067 7,595 4,945
At Year End
-----------
Working capital $104,707 $ 94,249 $ 86,420 $ 72,208 $ 58,811
Total assets 166,592 149,028 149,697 123,519 115,703
Long-term liabilities 15,140 3,982 2,877 1,043 983
Shareholders' equity 115,053 107,655 100,266 84,569 73,290
Per Diluted Common Share(3)
---------------------------
Income from continuing operations $ 0.38 $ 0.43 $ 0.53 $ 0.40 $ 0.21
Net income $ 0.38 $ 0.41 $ 0.53 $ 0.32 $ 0.21
Cash dividends $ 0.15 $ 0.15 $ 0.11 $ 0.10 $ 0.09
(1) Includes the acquisition of Pharma Waldhof on December 31, 2003, as more
fully described in Item 1.
(2) 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.
(3) 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 OPERATION
EXECUTIVE SUMMARY
We are reporting a $433 increase in operating profit to $11,973 for the year
ended June 30, 2006 as compared to $11,540 for the prior year. This increase in
operating profit was achieved, despite a highly competitive environment,
primarily through maintaining our profit margin and our successful management of
selling, general and administrative costs, which decreased $2,775 in fiscal 2006
as compared to fiscal 2005. Net sales for fiscal 2006 were $297,130, a decrease
of $16,251 from fiscal 2005. This decline in net sales also negatively impacted
our gross profit, which decreased $2,342 to $50,759 for fiscal 2006. Our net
income decreased to $9,237, or $0.38 per diluted share, a decrease of $778
compared to fiscal year 2005.
Our financial position as of June 30, 2006, remains strong, as we had cash and
short-term investments of $37,041, working capital of $104,707, no long-term
debt and shareholders' equity of $115,053.
Our business is separated into three principal segments: Health Sciences,
Chemicals & Colorants and Agrochemicals.
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. We
typically partner with both customers and suppliers years in advance of a drug
coming off patent to provide the generic equivalent.
We have a pipeline of new and second source 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 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.
12
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.
We formerly also reported under the Institutional Sanitary Supplies segment,
which included cleaning solutions, fragrances and deodorants for commercial and
industrial customers. This former segment was successfully divested from our
ongoing business during fiscal 2006.
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 500 different factories.
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, 2006. 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 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
13
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, EPA registration, patent license
and covenants not to compete. Goodwill and other intangible assets that have an
indefinite life are not amortized.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," 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 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, 2006, we had current net deferred tax assets of $2,533 and
non-current net deferred tax assets of $4,027. 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
STOCK-BASED COMPENSATION
With the adoption of SFAS No. 123(R) on July 1, 2005, we are required to record
the fair value of stock-based compensation awards as an expense. In order to
determine the fair value of stock options on the date of grant, we apply the
Black-Scholes option-pricing model, including an estimate of forfeitures.
Inherent in this model are assumptions related to expected stock-price
volatility, option term, risk-free interest rate and dividend yield. While the
risk-free interest rate and dividend yield are less subjective assumptions that
are based on factual data derived from public sources, the expected stock-price
volatility and option term assumptions require a greater level of judgment which
makes them critical accounting estimates.
We use an expected stock-price volatility assumption that is based on the
historical daily price changes of the underlying stock which are obtained from
public data sources. For stock option grants issued during fiscal 2006, we used
an expected stock-price volatility of 50% based upon the historical volatility
at the time of issuance. With regard to the weighted-average option term
assumption, for stock option grants issued during fiscal 2006, we used an
expected option term assumption of 5.5 years as determined under the
"simplified" method prescribed in SEC Staff Accounting Bulletin ("SAB") No. 107.
15
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2006 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2005
NET SALES BY SEGMENT
Year ended June 30,
Comparison 2006
2006 2005 Over/(Under) 2005
--------------------- --------------------- ------------------------
% of % of $ %
Segment Net Sales Total Net Sales Total Change Change
------- --------- ----- --------- ----- -------- --------
Health Sciences $166,695 56.1% $184,560 58.9% $(17,865) (9.7)%
Chemicals & Colorants 110,701 37.3 104,744 33.4 5,957 5.7
Agrochemicals 19,734 6.6 20,031 6.4 (297) (1.5)
Institutional Sanitary Supplies - - 4,046 1.3 (4,046) (100.0)
-------- ----- -------- ----- -------- ------
Net sales $297,130 100.0% $313,381 100.0% $(16,251) (5.2)%
======== ===== ======== ===== ======== ======
GROSS PROFIT BY SEGMENT
Year ended June 30,
Comparison 2006
2006 2005 Over/(Under) 2005
---------------------- ---------------------- ------------------------
Gross % of Gross % of $ %
Segment Profit Sales Profit Sales Change Change
------- -------- ------ --------- ------ -------- --------
Health Sciences $ 32,283 19.4% $ 32,869 17.8% $ (586) (1.8)%
Chemicals & Colorants 16,975 15.3 17,224 16.4 (249) (1.4)
Agrochemicals 4,760 24.1 6,719 33.5 (1,959) (29.2)
Institutional Sanitary Supplies - - 696 17.2 (696) (100.0)
-------- ----- -------- ----- -------- ------
Segment gross profit 54,018 18.2 57,508 18.3 (3,490) (6.1)
Freight and storage costs (1) (3,259) (1.1) (4,407) (1.4) 1,148 26.0
-------- ----- -------- ----- -------- ------
Gross profit $ 50,759 17.1% $ 53,101 16.9% $ (2,342) (4.4)%
======== ===== ======== ===== ======== ======
(1) Represents certain freight and storage costs that are not allocated to a
segment.
16
NET SALES
Net sales decreased $16,251, or 5.2%, to $297,130 for the year ended June 30,
2006, compared with $313,381 for the prior year. We reported sales decreases in
our Health Sciences and Agrochemicals segments, which were partially offset by a
sales increase in our Chemicals & Colorants segment.
HEALTH SCIENCES
Net sales for the Health Sciences segment decreased by $17,865 for the year
ended June 30, 2006, to $166,695, which represents a 9.7% decrease over net
sales of $184,560 for the prior year. The sales decrease from the prior period
is directly attributable to the loss of foreign business of $16,716 from two
previously launched APIs due to increased competition. The fiscal 2006 results,
net of the two lost APIs, include a sales reduction of $2,243 from our foreign
operations which was partially offset by a sales increase of $1,162 from our
domestic operations over the prior fiscal year.
CHEMICALS & COLORANTS
Net sales for the Chemicals & Colorants segment were $110,701 for the year ended
June 30, 2006, compared to $104,744 for the prior year. This increase of $5,957,
or 5.7%, over the prior period is primarily attributable to an increase in the
agricultural intermediate, food, beverage and cosmetics and coatings product
groups of $7,650 as compared to fiscal 2005. Our chemical business is diverse in
terms of products, customers and consuming markets. One customer within our
color-pigment and pigment-intermediate business purchased $3,515 less product
during fiscal 2006 as their contract had expired. This reduction was more than
offset by an increase over the prior period in domestic sales of our diverse
chemical and colorants offerings. In addition, net sales includes a $1,783
increase relating to our former CDC business, primarily from sales of the
Anti-Clog product we retained.
AGROCHEMICALS
Net sales for the Agrochemicals segment decreased to $19,734 for the year ended
June 30, 2006, a decrease of $297, or 1.5%, over net sales of $20,031 for the
prior year. This decline over the prior year was primarily due to dry weather
conditions shortening the agricultural selling season, for our second largest
product.
GROSS PROFIT
Gross profit by segment before unallocated cost of sales (primarily storage and
certain freight costs) decreased $3,490 to $54,018 (18.2% of net sales) for the
year ended June 30, 2006, as compared to $57,508 (18.3% of net sales) for the
prior year.
HEALTH SCIENCES
Health Sciences' gross profit of $32,283 for the year ended June 30, 2006, was
$586 or 1.8% lower than the prior year. This decrease in gross profit was
directly attributable to the loss of business on two larger previously-launched
APIs in Asia of $2,373 due to significant competitive pressures as well as a
decrease in our foreign business, net of the two APIs, of $499. This lost gross
profit was partially offset by an increase in gross profit from sales increases
from our domestic business of $1,087 over the prior fiscal year. The gross
margin increased to 19.4% in fiscal 2006 compared to a gross margin of 17.8% for
the prior fiscal year due primarily to a shift in the product mix of net sales
to higher margin products during the 2006 fiscal year.
CHEMICALS & COLORANTS
Gross profit for the year ended June 30, 2006, decreased by $249, or 1.4%, over
the prior year. Gross margin decreased from 16.4% in fiscal 2005 to 15.3% in
fiscal 2006. Decreases in categories such as organic chemicals and chemical
intermediates in terms of both volume and margins were the primary reasons for
these decreases. In addition, the decrease in gross margin percentage was partly
attributable to an increased allocation of certain freight and storage costs.
AGROCHEMICALS
Gross profit for the Agrochemicals segment decreased to $4,760 for the year
ended June 30, 2006, versus $6,719 for the prior year, a decrease of $1,959 or
29.2%. Gross margin decreased from 33.5% in fiscal 2005 to 24.1% in fiscal 2006.
The primary cause of the decrease was lower royalty payments from our foreign
customers of $652 and lower gross margins on
17
our second highest volume product compared to the prior fiscal year of $416. The
gross profits and margins were also negatively affected by higher costs
associated with maintaining our EPA registered products and increased rebate
expenses of $339.
UNALLOCATED FREIGHT AND STORAGE COSTS
Unallocated cost of sales decreased $1,148, to $3,259 in fiscal 2006, compared
to $4,407 in the prior year, representing a 26.0% decrease. The lower costs were
mainly a result of decreased sales and shipments to customers. In addition,
certain system improvements allow previously unallocated costs to be
identifiable and included in a particular segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") decreased $2,775, or 6.7%,
to $38,786 for the year ended June 30, 2006 compared to $41,561 for the prior
year. As a percentage of sales, SG&A remained stable at 13.1% for fiscal 2006
versus 13.3% for fiscal 2005. The decrease in SG&A was primarily due to a $1,405
decrease in expenses for our former CDC business, reduced legal fees of $878, a
reduction in audit and Sarbanes-Oxley compliance costs of $428 and reduced sales
and marketing related expenses of $638. These expense reductions were partially
offset by a $537 charge for a settlement of legal claims against one of our
subsidiaries.
OPERATING INCOME
Fiscal 2006 operating income was $11,973 compared to $11,540 in the prior year,
an increase of $433 or 3.8%. This increase was due to the $2,775 decrease in
SG&A expenses, which was partially offset by the overall decrease in gross
profit of $2,342.
INTEREST AND OTHER INCOME (EXPENSE)
Interest and other income was $1,412 for fiscal 2006, which represents a 6.9%
increase from $1,321 in fiscal 2005. The increase is primarily attributable to
an increase of $208 in interest income, a government subsidy paid annually for
doing business in a free trade zone in Shanghai, China of $104, proceeds from
credit insurance of $211 and the sale of distribution rights for a particular
product in certain European countries of $133, partially offset by a net loss on
foreign currency of $537.
PROVISION FOR INCOME TAXES
The effective tax rate for fiscal 2006 increased to 30.1% from 16.9% for fiscal
2005. The effective tax rate for fiscal 2005 included the 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.
Excluding the recognition of the deferred tax assets, the effective tax rate for
fiscal 2005 would have been 26.8%. The increase in the effective tax rate
relates primarily to 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 $27, $610 and $44 for the
fiscal years ended 2006, 2005 and 2004, 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.
18
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.
19
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
20
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 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.
21
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
At June 30, 2006, we had $33,732 in cash, $3,309 in short-term investments and
no outstanding bank loans. Working capital was $104,907 at June 30, 2006, versus
$94,249 at June 30, 2005.
Our cash position at June 30, 2006, increased $13,782 from the amount at June
30, 2005. Operating activities provided cash of $16,154, primarily from net
income of $9,237 and a decrease in inventory of $4,909.
Investing activities provided cash of $1,261, primarily as a result of proceeds
from the sale of investments of $1,739. This was partially offset by $551 of
expenditures for property and equipment. We expect capital expenditures will be
between $1,000 and $1,500 during fiscal 2007.
Financing activities used cash of $4,009 primarily as a result of payments of
cash dividends of $3,637 and payments for purchases of treasury stock of $581.
CREDIT FACILITIES
We have available credit facilities with certain foreign financial institutions.
These facilities provide us with a line of credit of $18,512, which was not
utilized as of June 30, 2006. 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, 2006,
we had utilized $1,349 in letters of credit, leaving $8,651 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, 2006.
WORKING CAPITAL OUTLOOK
Working capital was $104,707 at June 30, 2006, versus $94,249 at June 30, 2005.
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.
22
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, 2006, we had no
significant obligations for capital expenditures. At June 30, 2006, 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 $ 6,159 $ 1,550 $ 2,641 $ 1,897 $ 71
Commercial letters of credit
1,349 1,349 - - -
Standby letters of credit 153 153 - - -
Unconditional purchase
obligations 58,137 58,137 - - -
------- ------- ------- ------- -------
Total $65,798 $61,189 $ 2,641 $ 1,897 $ 71
======= ======= ======= ======= =======
Other significant commitments and contingencies include the following:
1. 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.
2. 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.
In March 2006, our subsidiary, Arsynco, received notice from the
Environmental Protection Agency (EPA) of its status as a
potentially responsible party ("PRP") under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA)
for a site described as the Berry's Creek Study Area. Arsynco is
one of over 150 PRP's which have potential liability for the
required investigation and remediation of the site. The estimate
of the potential liability is not quantifiable for a number of
reasons, including the difficulty in determining the extent of
contamination and the length of time remediation may require. In
addition, any estimate of liability must also consider the
number of other PRP's and their financial strength. Since an
amount of the liability can not be reasonably estimated at this
time, no accrual is recorded for these potential future costs.
The impact of the resolution of this matter on the Company's
results of operations in a particular reporting period is not
known. However, management believes that the ultimate outcome of
this matter will not have a material adverse effect on the
Company's financial condition or liquidity.
23
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 2006, 2005 and 2004,
we incurred legal fees of $315, $215 and $310, respectively, for services
rendered to the Company by those law firms. We believe that the fees charged by
those firms were at rates comparable to rates obtainable from other firms for
similar services.
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 June 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109." This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109 "Accounting for
Income Taxes." It prescribes a recognition threshold and measurement attribute
for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. This interpretation is effective for fiscal years
beginning after December 15, 2006. The cumulative effect of applying the
provisions of this interpretation are required to be reported separately as an
adjustment to the opening balance of retained earnings in the year of adoption.
The Company will be required to adopt this interpretation in the first quarter
of fiscal 2008. Management is currently evaluating the requirements of FIN No.
48 and has not yet determined the impact on the consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS
The market risk inherent in our market-risk-sensitive instruments and positions
is the potential loss arising from adverse changes in investment market prices,
foreign currency exchange-rates and interest rates.
INVESTMENT MARKET PRICE RISK
We had short-term investments of $3,309 at June 30, 2006. 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 $331 as of June 30, 2006. 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,
2006, we had foreign currency contracts outstanding that had a notional amount
of $12,389. 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, 2006, was not material.
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
24
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, 2006, was
$(236). 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 $42
and $49 in fiscal 2006 and 2005, 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, 2006, we had translation exposure to various foreign
currencies, with the most significant being the Euro and the Chinese Renminbi.
The potential loss as of June 30, 2006, resulting from a hypothetical 10%
adverse change in quoted foreign currency exchange rates amounted to $7,941.
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.
As previously reported on Form 8-K dated November 29, 2005, the Company decided
to change accountants. There were no disagreements with predecessor accountants.
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
management, including our principal executive and principal financial officers,
we assessed, as of June 30, 2006, the effectiveness of our internal control over
financial reporting. This assessment was based on criteria established in the
25
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, 2006, was effective.
Our assessment of the effectiveness of our internal control over financial
reporting as of June 30, 2006, has been audited by BDO Seidman LLP, an
independent registered public accounting firm, as stated in their report, which
is included herein.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During fiscal 2006, our U.S. operations successfully implemented a new
Enterprise Resource Planning ("ERP") system. We expect this ERP system to
further advance our control environment by automating manual processes,
improving management visibility and standardizing processes as its full
capabilities are utilized. Compensating internal controls were strengthened and
additional management reviews were established during the transitional period to
ensure the overall system of internal control continued to operate effectively.
There were no other changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three
months ended June 30, 2006 that materially affected, or are 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.
Our management, including our chief executive officer and chief financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in any control system, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected. 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Shareholders
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, 2006, 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
26
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, 2006, 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, 2006, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Aceto Corporation as of June 30, 2006 and the related consolidated statements of
income, shareholders' equity and comprehensive income, and cash flows for the
year then ended, and our report dated September 6, 2006, expressed an
unqualified opinion on those consolidated financial statements.
/s/ BDO Seidman, LLP
Melville, New York
September 6, 2006
ITEM 9B. OTHER INFORMATION
None.
27
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 7, 2006.
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 7, 2006.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to our definitive proxy statement with respect
to our annual meeting of shareholders scheduled to be held on December 7, 2006.
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 7, 2006.
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 7, 2006.
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.
28
ACETO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms
Consolidated financial statements:
Consolidated balance sheets as of June 30, 2006 and 2005
Consolidated statements of income for the years ended June 30, 2006,
2005 and 2004
Consolidated statements of cash flows for the years ended June 30, 2006,
2005 and 2004
Consolidated statements of shareholders' equity and comprehensive income
for the years ended June 30, 2006, 2005 and 2004
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.
29
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
Aceto Corporation:
We have audited the accompanying consolidated balance sheet of Aceto Corporation
and subsidiaries as of June 30, 2006 and the related consolidated statements of
income, shareholders' equity and comprehensive income, and cash flows for the
year then ended. In connection with our audit 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 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 the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial presentation of the
financial statements and the financial statement schedule. We believe that our
audit provides 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 at June 30, 2006, and the results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
financial statement schedule presents fairly, in all material respects, the
information set forth therein.
We also have audited, in accordance with 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, 2006, 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 6, 2006 expressed an
unqualified opinion.
/s/ BDO Seidman, LLP
Melville, New York
September 6, 2006
30
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Aceto Corporation:
We have audited the accompanying consolidated balance sheet of Aceto Corporation
and subsidiaries as of June 30, 2005 and the related consolidated statements of
income, shareholders' equity and comprehensive income, and cash flows for each
of the years in the two-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 for each of the
years in the two-year period ended June 30, 2005. 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 the results of their operations and
their cash flows for each of the years in the two-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.
/s/ KPMG LLP
Melville, New York
September 8, 2005
31
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2006 AND 2005
(in thousands, except per-share amounts)
2006 2005
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 33,732 $ 19,950
Investments 3,309 5,068
Trade receivables: less allowance for doubtful accounts (2006, $416;
2005, $427) 50,993 49,636
Other receivables 1,406 1,421
Inventory 47,259 51,722
Prepaid expenses and other current assets 1,011 821
Assets held for sale - 242
Deferred income tax asset, net 3,396 2,780
--------- ---------
Total current assets 141,106 131,640
Long-term notes receivable 557 624
Property and equipment, net 4,808 5,217
Property held for sale 4,531 326
Goodwill 1,755 1,720
Intangible assets, net 3,789 3,153
Deferred income tax asset, net 7,356 3,626
Other assets 2,690 2,722
--------- ---------
TOTAL ASSETS $ 166,592 $ 149,028
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,424 $ 27,245
Short term bank loans - 126
Note payable - related party 500 500
Accrued expenses 10,612 9,474
Deferred income tax liability 863 -
Liabilities relating to assets held for sale - 46
--------- ---------
Total current liabilities 36,399 37,391
Long-term liabilities 6,379 3,811
Environmental remediation liability 5,200 -
Deferred income tax liability 3,329 -
Minority interest 232 171
--------- ---------
Total liabilities 51,539 41,373
Commitments and contingencies (Note 17)
Shareholders' equity:
Common stock, $.01 par value, 40,000 shares authorized; 25,644 shares
issued; 24,278 and 24,282 shares outstanding at June 30, 2006 and 2005, 256 256
respectively
Capital in excess of par value 56,691 56,903
Retained earnings 68,464 62,864
Treasury stock, at cost, 1,366 and 1,362 shares at June 30, 2006 and
2005, respectively (13,198) (13,505)
Accumulated other comprehensive income 2,840 1,137
--------- ---------
Total shareholders' equity 115,053 107,655
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 166,592 $ 149,028
========= =========
See accompanying notes to consolidated financial statements.
32
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(in thousands, except per-share amounts)
2006 2005 2004
--------- --------- ---------
Net sales $ 297,130 $ 313,381 $ 296,359
Cost of sales 246,371 260,280 243,947
--------- --------- ---------
Gross profit 50,759 53,101 52,412
Selling, general and administrative expenses 38,786 41,561 36,294
--------- --------- ---------
Operating income 11,973 11,540 16,118
Other income (expense):
Interest expense (127) (73) (101)
Interest and other income, net 1,412 1,321 1,334
--------- --------- ---------
1,285 1,248 1,233
--------- --------- ---------
Income from continuing operations before income taxes 13,258 12,788 17,351
Provision for income taxes 3,994 2,163 4,240
--------- --------- ---------
Income from continuing operations 9,264 10,625 13,111
Loss from discontinued operations, net of income taxes (Note 3) (27) (610) (44)
--------- --------- ---------
Net income $ 9,237 $ 10,015 $ 13,067
========= ========= =========
Basic income per common share:
Income from continuing operations $ 0.38 $ 0.44 $ 0.55
Loss from discontinued operations - (0.03) -
--------- --------- ---------
Net income $ 0.38 $ 0.41 $ 0.55
Diluted income per common share:
Income from continuing operations $ 0.38 $ 0.43 $ 0.53
Loss from discontinued operations - (0.02) -
--------- --------- ---------
Net income $ 0.38 $ 0.41 $ 0.53
Weighted average shares outstanding:
Basic 24,267 24,198 23,873
Diluted 24,590 24,670 24,477
See accompanying notes to consolidated financial statements.
33
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(in thousands)
2006 2005 2004
-------- -------- --------
(Revised - Note 2)
Operating activities:
Net income $ 9,237 $ 10,015 $ 13,067
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,558 1,291 1,119
Goodwill impairment charge relating to discontinued operations - 920 -
Gain on sale of assets - (10) -
Provision for doubtful accounts 38 352 520
Non-cash stock compensation 278 329 190
Income tax benefit on exercise of stock options - 142 1,532
Deferred income taxes 1,134 650 (26)
Changes in assets and liabilities:
Investments - trading securities 20 231 (111)
Trade accounts receivable (227) 3,110 (8,312)
Other receivables 129 80 63
Income taxes receivable - 232 (26)
Inventory 4,909 (10,188) 2,119
Prepaid expenses and other current assets (182) 401 (242)
Other assets (719) (363) (557)
Accounts payable (3,962) (8,681) 13,811
Accrued expenses and other liabilities 3,941 99 (3,457)
-------- -------- --------
Net cash provided by (used in) operating activities 16,154 (1,390) 19,690
-------- -------- --------
Investing activities:
Purchases of investments - (4,463) (9,000)
Proceeds from sale of investments 1,739 9,000 100
Payments received on notes receivable 73 144 277
Acquisition of Pharma Waldhof, net of cash acquired - - (4,632)
Purchases of property and equipment (551) (3,576) (706)
-------- -------- --------
Net cash provided by (used in) investing activities 1,261 1,105 (13,961)
-------- -------- --------
Financing activities:
Proceeds from exercise of stock options 250 946 3,079
Excess income tax benefit on exercise of stock options 85 - -
Payment of note payable - related party - (500) -
Payment of cash dividends (3,637) (3,641) (2,719)
Payments for purchases of treasury stock (581) - -
Borrowings (repayments) of short-term bank loans (126) 126 (3,413)
-------- -------- --------
Net cash used in financing activities (4,009) (3,069) (3,053)
-------- -------- --------
Effect of foreign exchange rate changes on cash 376 (26) 391
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 13,782 (3,380) 3,067
Cash and cash equivalents at beginning of period 19,950 23,330 20,263
-------- -------- --------
Cash and cash equivalents at end of period $ 33,732 $ 19,950 $ 23,330
======== ======== ========
See accompanying notes to consolidated financial statements.
34
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(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, 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
Net income - - - 9,237 - - - 9,237
Other comprehensive income:
Change in fair value of cross
currency interest rate swap - - - - - - 42 42
Foreign currency translation
adjustments - - - - - - 1,682 1,682
Unrealized loss on available for
sale investments - - - - - - (42) (42)
Additional minimum pension
liability - - - - - - 21 21
--------
Comprehensive income 10,940
--------
Stock issued pursuant to employee
stock incentive plans - - (66) - 20 219 - 153
Cash dividends ($0.15 per share) - - - (3,637) - - - (3,637)
Amortization of unearned compensation - - 188 - - - - 188
Purchases of treasury stock - - - - (96) (581) - (581)
Exercise of stock options - - (419) - 72 669 - 250
Tax benefit from exercise of stock
options - - 85 - - - - 85
-----------------------------------------------------------------------------------------
Balance at June 30, 2006 25,644 $ 256 $ 56,691 $ 68,464 (1,366) $ (13,198) $ 2,840 $115,053
See accompanying notes to consolidated financial statements.
35
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(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 biopharmaceuticals,
chemically-derived pharmaceuticals, agrochemicals and specialty chemicals used
principally as raw materials in the agricultural, color, pharmaceutical, surface
coating/ink and general chemical consuming 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, Europe and Asia.
(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" (FIN 46R). 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.
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
36
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(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 certain historical acquisitions 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, 2006 and
2005 are as follows:
2006 2005
------- -------
Fair value of cross currency interest rate swaps $ (236) $ (278)
Cumulative foreign currency translation adjustments 3,170 1,488
Unrealized loss on available for sale investments (94) (52)
Additional minimum pension liability - (21)
------- -------
Total $ 2,840 $ 1,137
======= =======
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 to 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.
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
Prior to July 1, 2005, the Company accounted for stock-based employee
compensation under the intrinsic value method as outlined in the provisions of
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations while disclosing pro-forma net income and net income per share
as if the fair value method had been applied in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Under the intrinsic value method, no compensation expense was
recognized if the exercise price of the Company's employee stock options equaled
or exceeded the market price of the underlying stock on the date of grant. Since
the Company had issued all stock option grants with exercise prices equal to, or
greater than, the market value of the common stock on the date of grant, through
June 30, 2005 no compensation cost was recognized in the consolidated statements
of income.
37
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Effective July 1, 2005, the Company adopted SFAS No. 123(R), "Share-based
Payment." SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion No.
25. SFAS 123(R) requires that all stock-based compensation be recognized as an
expense in the financial statements and that such costs be measured at the fair
value of the award. This statement was adopted using the modified prospective
method, which requires the Company to recognize compensation expense on a
prospective basis. Therefore, prior period financial statements have not been
restated. Under this method, in addition to reflecting compensation expense for
new share-based payment awards, expense is also recognized to reflect the cost
associated with the remaining vesting period of awards that had been included in
pro-forma disclosures in prior periods. Since all options outstanding as of June
30, 2005 were fully vested, there was no compensation expense recognized for
those options in the consolidated statements of income for the three years ended
June 30, 2006. In addition, the Company elected to use the "short-cut" method to
calculate the historical pool of windfall tax benefits upon adoption of SFAS
123(R), which resulted in no historical pool of windfall tax benefits.
In order to determine the fair value of stock options on the date of grant, the
Company uses the Black-Scholes option-pricing model, including an estimate of
forfeiture rates. Inherent in this model are assumptions related to expected
stock-price volatility, option term, risk-free interest rate and dividend yield.
While the risk-free interest rate and dividend yield are less subjective
assumptions that are based on factual data derived from public sources, the
expected stock-price volatility and option term assumptions require a greater
level of judgment.
The Company uses an expected stock-price volatility assumption that is based on
the historical daily price changes of the underlying stock which are obtained
from public data sources. For stock option grants issued during fiscal 2006, an
expected stock-price volatility of 50% was used based upon the historical
volatility at the time of issuance. With regard to the weighted-average option
term assumption, for stock option grants issued during fiscal 2006, an expected
option term assumption of 5.5 years was used as determined under the
"simplified" method prescribed in SEC Staff Accounting Bulletin ("SAB") No. 107.
SFAS 123(R) also requires that excess tax benefits related to stock option
exercises be reflected as financing cash inflows. Prior to the adoption of SFAS
123(R), the Company presented all tax benefits related to stock-based
compensation as an operating cash inflow. The Company's policy is to satisfy
stock-based compensation awards with treasury shares.
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 for the fiscal years
ended June 30, 2005 and 2004:
2005 2004
---------- ----------
Net income - as reported $ 10,015 $ 13,067
Add: Stock-based compensation included
in reported net income 329 190
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (4,643) (1,366)
---------- ----------
Net income - pro forma $ 5,701 $ 11,891
========== ==========
Net income per share:
Basic - as reported $ 0.41 $ 0.55
Basic - pro forma $ 0.24 $ 0.50
Diluted - as reported $ 0.41 $ 0.53
Diluted - pro forma $ 0.23 $ 0.49
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
38
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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.
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.
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 323, 472 and 604 shares for the years ended June 30, 2006,
2005 and 2004, respectively. There were 986, 1,651 and 6 stock options
outstanding as of June 30, 2006, 2005 and 2004, respectively, that were not
included in the calculation of diluted income per common share for the years
ended June 30, 2006, 2005 and 2004, 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.
39
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
The components of property and equipment were as follows:
Estimated Useful
June 30, 2006 June 30, 2005 Life (Years)
------------- ------------- ------------
Machinery and equipment $ 741 $ 1,412 10
Shorter of asset
Leasehold improvements 322 787 life or lease term
Computer equipment and software 3,523 3,312 3-5
Furniture and fixtures 952 1,010 10
Automobiles 423 425 3
Building 3,015 3,015 20
------- --------
$ 8,976 $ 9,961
Accumulated depreciation and amortization 4,168 4,744
------- --------
$ 4,808 $ 5,217
======= ========
Property held for sale represents land and land improvements of $4,531 and $326
at June 30, 2006 and 2005, respectively. During fiscal 2006 the Company recorded
an additional $4,205 to partially recognize the increase in the fair value of
the land and land improvements to the extent of additional environmental
remediation cost estimates in accordance with EITF 90-8 "Capitalization of Costs
to Treat Environmental Contamination".
Depreciation and amortization of property and equipment amounted to $731, $749,
and $706 for the years ended June 30, 2006, 2005, and 2004, 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.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," the Company tests goodwill and other
intangible assets for impairment on at least an annual basis. 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
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," 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
40
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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.
Management believes it is prudent to minimize the risk caused by foreign
currency fluctuation. Management minimizes the currency risk on 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 to pay suppliers in the appropriate
currency. 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.
REVISION TO STATEMENT OF CASH FLOWS AND RECLASSIFICATIONS
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current year presentation. In addition,
the Company has revised its statement of cash flows for the years ended June 30,
2005 and 2004 to combine cash flows from discontinued operations of $6 and $34,
respectively, with cash flows from continuing operations within each major
category. The Company previously reported cash flows from discontinued
operations as a single line item in the statement of cash flows.
41
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(3) SALE OF 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 the Institutional Sanitary
Supplies segment. The sale of certain product lines of CDC was completed on
August 24, 2005 for $75 and a note receivable of $44 due in April 2006, which
resulted in a pre-tax gain of $66, included in other income in the statement of
income for the year ended June 30, 2006. The Company recorded an asset
impairment charge relating to CDC of $619 included in selling, general and
administrative expenses in the consolidated statement of income for the year
ended June 30, 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. Beginning in July 2005, the
operating results of the Anti-Clog product, which are not material, are included
in the Chemicals & Colorants segment.
On September 6, 2005, the Company completed the sale of certain assets of Magnum
Research Corp. for $81, the remaining subsidiary forming part of the
Institutional Sanitary Supplies segment, the operating results of which are
included in discontinued operations in the consolidated statements of income. In
December 2005, the Company exited the leased space previously occupied by CDC
and Magnum Research Corp. In June 2006, the Company negotiated a lease
termination with its landlord which resulted in a pre-tax charge of $378
included in selling, general and administrative expenses for the year ended June
30, 2006.
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.
Operating results of discontinued operations for the fiscal years ended June 30,
2006, 2005 and 2004 were as follows:
2006 2005 2004
------- ------- -------
Net sales $ 154 $ 1,314 $ 1,359
------- ------- -------
Loss from operations of
discontinued business (44) (64) (74)
Benefit for income taxes 17 24 30
Non-cash impairment charge - (920) -
Benefit for income taxes - 350 -
------- ------- -------
Loss from discontinued operations $ (27) $ (610) $ (44)
======= ======= =======
(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 stated that the Company is required to pay Corange an
42
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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 accounted for the transaction under the purchase method of
accounting for business combinations. The purchase price was allocated to the
acquired assets and assumed liabilities based on the fair values as of the date
of the acquisition. The excess of the purchase price paid, including acquisition
costs, over the fair value of the net identifiable assets acquired represented
goodwill.
The purchase price was allocated as follows:
Goodwill $ 806
Accounts receivable 937
Inventory 1,961
Identifiable intangible assets 3,847
Cash 387
Other receivables 308
Fixed assets 11
--------
Total assets 8,257
Less liabilities assumed (3,238)
--------
Purchase price, including acquisition costs $ 5,019
========
The following unaudited pro forma financial information presents a summary of
the Company's consolidated results of operations for the year ended June 30,
2004, assuming the Pharma Waldhof acquisition had taken place as of July 1,
2003:
2004
---------
Net sales $ 300,913
Net income $ 14,032
Net income per common share:
Basic $ 0.59
Diluted $ 0.57
The unaudited 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 date
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
should the Company realize certain tax savings due to the utilization of certain
tax benefits of Schweizerhall Holding GmbH. Such payment would be 50% of the net
tax savings received by the Company.
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. In accordance with
43
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
FIN 46R, the Company determined that it is the primary beneficiary of the joint
venture since it has assumed the majority of the economic risks and rewards of
the entity. 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, 2006 and 2005 are included
as a note payable in the accompanying consolidated balance sheets. Minority
interest in the net earnings of S.R.F.A. of $61, $14 and $157 was included in
interest and other income, net in the accompanying consolidated statements of
income for fiscal 2006, 2005 and 2004, respectively.
(5) INVESTMENTS
A summary of short-term investments were as follows:
June 30, 2006 June 30, 2005
--------------------------- ----------------------------
Fair Value Cost Basis Fair Value Cost Basis
---------- ---------- ---------- ----------
Trading Securities
------------------
Corporate equity securities $ 697 $ 152 $ 657 $ 152
Available for Sale Securities
-----------------------------
Corporate bonds $ 1,167 $ 1,210 $ 1,194 $ 1,210
Government and agency securities $ 1,445 $ 1,501 $ 3,217 $ 3,253
------- -------
$ 3,309 $ 5,068
======= =======
The gains on trading securities were $40, $110 and $111 for fiscal 2006, 2005
and 2004, respectively.
(6) NOTES RECEIVABLE
The Company has five notes receivable with outstanding balances aggregating $624
and $697 at June 30, 2006 and June 30, 2005, respectively, which have arisen
from sales of property. The notes are either secured by a first mortgage on the
real property sold or collateralized by a security interest in the asset sold.
The notes range in length from four to eighteen years and earn interest at a
fixed rate. The range of fixed rates on the notes is 4.0% to 9.0%. Included in
current assets are notes receivable due within one year totaling $67 and $73 at
June 30, 2006 and 2005, respectively.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $1,755 and $1,720 as of June 30, 2006 and June 30, 2005,
respectively, relates to the Health Sciences segment. Goodwill at June 30, 2005
also includes $25 related to the subsidiary included in the discontinued
institutional sanitary supplies segment, 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, 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
Intangible assets subject to amortization as of June 30, 2006 and 2005 were as
follows:
Gross Carrying Accumulated Net Book
Value Amortization Value
----- ------------ -----
June 30, 2006
-------------
Customer relationships $ 2,755 $ 984 $ 1,771
Customer lists 600 600 -
Patent license 838 57 781
EPA registrations 265 3 262
Non-compete agreements 230 115 115
------- -------- -------
$ 4,688 $ 1,759 $ 2,929
======= ======== =======
44
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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
======= ======== =======
The estimated useful lives of customer relationships, customer lists, patent
license, EPA registrations and non-compete agreements are 7 years, 5 years, 11
years, 10 years and 3-5 years, respectively.
As of June 30, 2006 and June 30, 2005, the Company also had $860 and $827,
respectively, of intangible assets pertaining to trademarks which have
indefinite lives and are not subject to amortization.
In fiscal 2006, changes in goodwill and trademarks are attributable to foreign
currency exchange rates used to translate the financial statements of foreign
subsidiaries
Amortization expense for intangible assets subject to amortization amounted to
$615, $542 and $413 for the years ended June 30, 2006, 2005 and 2004,
respectively. The estimated aggregate amortization expense for intangible assets
subject to amortization for each of the succeeding years ended June 30, 2007
through June 30, 2012 are as follows: 2007: $525; 2008: $525; 2009: $498; 2010:
$489; 2011: $258 and 2012 and thereafter: $634.
(8) ACCRUED EXPENSES
The components of accrued expenses as of June 30, 2006 and 2005 were as follows:
2006 2005
------- ------
Accrued compensation $ 2,691 $2,566
Accrued environmental remediation costs 200 1,195
Accrued income taxes payable 2,019 425
Other accrued expenses 5,702 5,288
------- ------
$10,612 $9,474
======= ======
(9) ENVIRONMENTAL REMEDIATION
The Company has environmental remediation obligations in connection with
Arsynco, Inc. ("Arsynco"), a subsidiary formerly involved in manufacturing
chemicals located in Carlstadt, New Jersey, which was closed in 1993 and is
currently held for sale. During fiscal 2003, the Company received an estimate
that the remaining costs of the remediation could be an amount between $1,550
and $3,200. The remaining liability as of June 30, 2005 is $1,195 in the
accompanying consolidated balance sheet. During fiscal 2006, based on continued
monitoring of the contamination at the site and the current proposed plan of
remediation, the Company received an estimate from an environmental consultant
stating that the costs of remediation could be between $5,400 and $6,900 . As of
June 30, 2006 a liability of $5,400 is included in the accompanying consolidated
balance sheet. In accordance with Emerging Issues Task Force (EITF) Issue 90-8,
"Capitalization of Costs to Treat Environmental Contamination" management
believes that the majority of costs incurred to remediate the site will be
capitalized in preparing the property which is currently classified as held for
sale. An appraisal of the fair value of the property by a third-party appraiser
supports this assumption. 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.
In March 2006, Arsynco received notice from the Environmental Protection Agency
(EPA) of its status as a potentially responsible party ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
for a site described as the Berry's Creek Study Area. Arsynco is one of over 150
PRP's which have potential liability for the required investigation and
remediation of the site. The estimate of the potential liability is not
quantifiable for a number of reasons, including the difficulty in determining
the extent of contamination and the length of time remediation may require. In
addition, any estimate of liability must also consider the number of other PRP's
and their financial strength. Since an amount of the liability can not be
reasonably
45
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
estimated at this time, no accrual is recorded for these potential future costs.
The impact of the resolution of this matter on the Company's results of
operations in a particular reporting period is not known. However, management
believes that the ultimate outcome of this matter will not have a material
adverse effect on the Company's financial condition or liquidity.
(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 7.19%, 4.93% and 2.86% at June 30,
2006, 2005 and 2004, 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, 2006.
At June 30, 2006 and 2005, the Company had available lines of credit with
foreign financial institutions totaling $18,512 and $17,792, 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 6.44%,
4.18% and 2.11% at June 30, 2006, 2005 and 2004, respectively. The Company is
not subject to any financial covenants under these arrangements.
Under the above financing arrangements, the Company had no short-term bank loans
outstanding and $1,349 in letters of credit leaving an unused facility of
$27,163 at June 30, 2006. At June 30, 2005 the Company had $126 in short-term
bank borrowings and had utilized $1,783 in letters of credit leaving an unused
facility of $25,883. The weighted average interest rate on short-term loans
outstanding for the year ended June 30, 2005 was 5.24%.
(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 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.
In January 2006, the Company granted 131 options to certain employees and
directors at an exercise price of 6.82 per share. The options vest on the first
anniversary of the date of grant and expire ten years from the date of grant.
All options granted 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, 2006, there were 145 shares of common stock
available for grant as either options or restricted stock under the 2002 Plan.
46
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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 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 81 shares
of common stock available for grant as either options or restricted stock at
June 30, 2006.
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. The 1980 Plan expired 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, 2006, 2005 and 2004, 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, 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
Granted 131 6.82
Exercised (72) 3.88
Forfeited (80) 10.65
-------------------------------------------------------------------------------------------------
Balance at June 30, 2006 2,743 $ 7.62
Options exercisable at June 30, 2006, 2005 and 2004 were 2,613, 2,764 and 1,247,
respectively. The weighted average exercise price per share for options
exercisable at June 30, 2006, 2005 and 2004 was $7.65, $7.65 and $3.59,
respectively. At June 30, 2006, outstanding options had expiration dates ranging
from December 10, 2008 to January 31, 2016.
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 2006, 2005 and 2004, restricted stock
awarded and premium shares vested of 20, 41 and 19 common shares, respectively,
were issued from treasury stock under employee incentive plans, which increased
stockholders' equity by $153, $334 and $234, 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
$90, $329 and $190 in fiscal 2006, 2005 and 2004, respectively. Additionally,
non-cash compensation expense of $188 was recorded in fiscal 2006 relating to
stock option grants.
47
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Summarized information about stock options outstanding and exercisable at
June 30, 2006, is as follows:
Exercise Number of Number of
Price Options Average Life Average Options Average
Range Outstanding (1) Price (2) Exercisable Price (2)
-------------------------------------------------------------------------------------------------------
$2.67 - 4.28 1,038 6.86 $3.52 1,038 $ 3.52
6.82 130 9.50 6.82 - -
8.21 - 10.81 348 7.18 8.39 348 8.39
10.95 1,227 8.20 10.95 1,227 10.95
----- ---- ----- ----- ------
2,743 7.63 $7.62 2,613 $ 7.65
===== =====
(1) Weighted-average contractual life remaining, in years.
(2) Weighted-average exercise price.
The following summarizes the non-vested stock options at June 30, 2006 and the
activity with respect to non-vested options for the year ended June 30, 2006:
Shares Weighted
subject to average grant
option date fair value
--------------------------------
Non-vested at June 30, 2005 - -
Granted 131 $2.87
Vested - -
Forfeited (1) -
--------------------------------
Non-vested at June 30, 2006 130 $2.87
Non-cash compensation expense for non-vested options at June 30, 2006 of $188
will be expensed during fiscal 2007. The per-share weighted-average fair value
of stock options granted during 2006, 2005 and 2004 was $2.87, $4.38 and $3.63,
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 2006:
------------
January 2006 50 5.5 4.36 2.22
Fiscal 2005:
------------
September 2004 40 6.0 3.76 1.04
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
48
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(12) INTEREST AND OTHER INCOME
Interest and other income during fiscal 2006, 2005 and 2004 was comprised of the
following:
2006 2005 2004
-------- -------- --------
Dividends $ 133 $ 86 $ 83
Interest 590 459 491
Net gain (loss) on investments 29 117 111
Foreign government subsidies received 561 457 395
Minority interest (61) (14) (157)
Foreign currency gains (losses) (354) 182 143
Insurance recovery 191 - -
Miscellaneous 323 34 268
-------- -------- --------
$ 1,412 $ 1,321 $ 1,334
======== ======== ========
(13) INCOME TAXES
The components of income from continuing operations before the provision for
income taxes are as follows:
2006 2005 2004
-------- -------- --------
Domestic operations $ 1,981 $ (332) $ 4,015
Foreign operations 11,277 13,120 13,336
-------- -------- --------
$ 13,258 $ 12,788 $ 17,351
======== ======== ========
The components of the provision for income taxes are as follows:
2006 2005 2004
-------- -------- --------
Federal:
Current $ 105 $ 293 $ 1,355
Deferred 335 (692) (22)
State and local:
Current 187 126 119
Deferred 126 (184) (4)
Foreign:
Current 2,568 1,023 1,399
Deferred 673 1,597 1,393
-------- -------- --------
$ 3,994 $ 2,163 $ 4,240
======== ======== ========
Income taxes payable, which is included in accrued expenses, was $2,019 and $425
at June 30, 2006 and 2005, respectively.
49
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at June 30, 2006 and 2005 are presented below:
2006 2005
-------- --------
Deferred tax assets:
Accrued environmental remediation liabilities not
currently deductible $ 461 $ 473
Accrued deferred compensation 1,159 969
Additional inventoried costs for tax purposes 124 162
Allowance for doubtful accounts receivable 116 125
Depreciation and amortization 223 89
Other 53 48
Impairment charges 585 556
Domestic net operating loss carryforwards 376 961
Foreign net operating loss carryforwards 10,695 5,280
-------- --------
Total gross deferred tax assets 13,792 8,663
Valuation allowances (2,450) (1,753)
-------- --------
11,342 6,910
-------- --------
Deferred tax liabilities:
Foreign deferred tax liabilities (4,192) -
Unrealized gain on investments (207) (192)
Goodwill (383) (312)
-------- --------
Total gross deferred tax liabilities (4,782) (504)
-------- --------
Net deferred tax assets $ 6,560 $ 6,406
======== ========
The following table shows the current and non current deferred tax assets
(liabilities) at June 30, 2006 and 2005:
2006 2005
------- -------
Current deferred tax assets, net $ 3,396 $ 2,780
Non-current deferred tax assets, net 7,356 3,626
Current deferred tax liabilities (863) -
Non current deferred tax liabilities (3,329) -
------- -------
Net deferred tax assets $ 6,560 $ 6,406
======= =======
The net change in the total valuation allowance for the year ended June 30, 2006
was an increase of $697. This increase was primarily attributable to an
additional valuation allowance recorded for net operating loss carryforwards
generated in certain foreign jurisdictions. The net change in the total
valuation allowance for the year ended June 30, 2005 was a decrease of $1,712,
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, 2006, the Company will need
to generate future taxable income of approximately $15,500.
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
50
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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 2006, the Company recorded a net tax benefit of $199 for certain
foreign net operating loss carryforwards, acquired in a prior business
acquisition, which were previously offset by a valuation allowance. This amount
is net of a liability to the seller. 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. In fiscal
2004, primarily as a result of the acquisition of Pharma Waldhof, the Company
recognized certain tax benefits that were previously unrecognized in the amount
of $1,310.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries amounting to approximately $49,640 at June 30, 2006 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, 2006, 2005
and 2004 follows:
2006 2005 2004
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State and local taxes, net of federal income tax
benefit 1.0 (0.5) 0.7
Increase (reduction) in valuation allowance 5.3 (9.9) -
Foreign tax rate differential (9.1) (5.6) (9.7)
Other (1.1) (1.1) (0.6)
----- ----- -----
Effective tax rate 30.1% 16.9% 24.4%
===== ==== =====
At June 30, 2006, the Company had U.S. federal net operating loss carryforwards
of $334 which are available to offset future U.S. federal taxable income and
which expire in 2025 . In addition, at June 30, 2006, the Company had foreign
net operating loss carryforwards of approximately $23,000 which are available to
offset future foreign taxable income and which have no expiration date.
(14) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during fiscal 2006, 2005 and 2004 was as
follows:
2006 2005 2004
------ ------ ------
Interest $ 129 $ 151 $ 101
Income taxes, net of refunds $ 797 $ 195 $1,135
(15) RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS
The Company has defined contribution retirement plans in which certain 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
51
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
employee's compensation. The Company's provisions for contributions amounted to
$1,148, $1,161 and $1,101 in fiscal 2006, 2005 and 2004, 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 as of June 30, 2006 was $755. The
accrued pension liability recorded as of June 30, 2005 amounted to $679, which
includes $21 of an additional minimum pension liability, net of unrecognized
prior service cost and tax recorded in other comprehensive income. Net periodic
pension costs, which consists principally of interest cost and service cost was
$87 in fiscal 2006, $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
4.2%, 4.6% and 5.5% and a compensation increase rate of 3.3%, 3.0% and 3.3% were
used in determining the actuarial present value of benefit obligations as of
June 30, 2006, 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, 2006 and 2005, the Company recorded a liability under the Plans
of $2,937 and $2,430, respectively, (included in long-term liabilities) and an
asset (included in other assets) of $2,556 and $2,087, respectively, primarily
representing the cash surrender value of policies owned by the Company.
(16) FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2006 and 2005 the Company had future foreign currency contracts that
have a notional amount of $12,389 and $11,456, respectively. Unrealized gains on
hedging activities at the end of fiscal 2006 amounted to $171 and are included
in the consolidated statement of income. The contracts have varying maturities
of less than one year. At June 30, 2006 and 2005, the Company had not hedged
open purchase commitments denominated in foreign currencies of approximately $21
and $125, 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
52
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
of purchase to June 30, 2006, was $(236). 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 $42, $49 and $(210) in 2006, 2005 and 2004, 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 $1,349 and $1,783 as of June
30, 2006 and 2005, 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 was
not material. The difference between the fair value of long-term notes
receivable and their carrying value at both June 30, 2006 and 2005 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, 2006 and 2005, 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 2006, 2005 or 2004. Two suppliers accounted for 13% and 12% of purchases
in fiscal 2005 and one supplier accounted for approximately 10% in fiscal 2004.
During the fiscal years ended June 30, 2006, 2005 and 2004, approximately 67%,
68% and 59%, respectively, of the Company's purchases came from Asia and
approximately 21%, 22% and 29%, respectively, came from Europe.
The Company maintains operations located outside of the United States. Net
assets located in Europe and Asia approximated $23,444 and $28,165, respectively
at June 30, 2006. Net assets located in Europe and Asia approximated $18,120 and
$24,700, respectively at June 30, 2005.
(17) COMMITMENTS AND CONTINGENCIES
As of June 30, 2006, the Company has outstanding purchase obligations totaling
$58,137 with suppliers to the Company's domestic and foreign operations to
acquire certain products for resale to third party customers.
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.
The Company has environmental remediation obligations in connection with
Arsynco's former manufacturing facility located in Carlstadt, New Jersey, which
was closed in 1993 and is currently held for sale. During fiscal 2006, based on
continued monitoring of the contamination at the site and the current proposed
plan of remediation, the Company received an estimate from an environmental
consultant stating that the costs of remediation could be between $5,400 and
$6,900 . As of June 30, 2006 a liability of $5,400 is included in the
accompanying consolidated balance sheet. However, these matters, if resolved in
a
53
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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.
In March 2006, Arsynco received notice from the Environmental Protection Agency
(EPA) of its status as a potentially responsible party ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
for a site described as the Berry's Creek Study Area. Arsynco is one of over 150
PRP's which have potential liability for the required investigation and
remediation of the site. The estimate of the potential liability is not
quantifiable for a number of reasons, including the difficulty in determining
the extent of contamination and the length of time remediation may require. In
addition, any estimate of liability must also consider the number of other PRP's
and their financial strength. Since an amount of the liability can not be
reasonably estimated at this time, no accrual is recorded for these potential
future costs. The impact of the resolution of this matter on the Company's
results of operations in a particular reporting period is not known. However,
management believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's financial condition or liquidity.
One of the Company's subsidiaries was a defendant in a legal action alleging
patent infringement. The patent in question covered a particular method of
applying one of the products in the Company's Agrochemicals segment. In
September 2005, shortly before a trial was expected to begin, the parties agreed
to a settlement. Under the terms of the settlement agreement, the Company was
obligated to pay $1,375, of which $625 was paid in December 2005 and the
remaining $750 will be paid in equal installments over the next five years. As a
result of the settlement, the company recorded an intangible asset of $838 for
the patent license, which will be amortized over its remaining life of 11 years,
and a charge of $537, included in SG&A expense, for the fiscal year ended June
30, 2006.
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. The Company may be required to make
additional payments in the future.
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 expiring at various dates between December
2006 and April 2011. In addition, a domestic subsidiary leases a manufacturing
facility under an operating lease expiring November 2009.
At June 30, 2006, the future minimum lease payments for each of the five
succeeding years and in the aggregate are as follows:
Fiscal year Amount
--------------------------------------------
2007 $1,550
2008 1,376
2009 1,265
2010 1,070
2011 827
Thereafter 71
------
$6,159
======
Total rental expense amounted to $1,354, $1,665 and $1,673 for fiscal 2006, 2005
and 2004, respectively.
54
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
In June 2006, The Company negotiated a lease termination with its landlord for
the facility previously occupied by CDC and Magnum. In connection with the lease
termination, the landlord and a third party entered into a long-term lease for
which the Company guaranteed the rental payments by the third party through
September 30, 2009. The aggregate future rental payments of the third party that
are guaranteed by the Company are $925 and the fair value of this guarantee is
deemed to be insignificant.
(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 2006,
2005 and 2004, the Company incurred legal fees of $315, $215 and $310,
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. The cumulative effect of applying the
provisions of this interpretation are required to be reported separately as an
adjustment to the opening balance of retained earnings in the year of adoption.
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 June 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109." This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109 "Accounting for
Income Taxes." It prescribes a recognition threshold and measurement attribute
for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company will be required to adopt this
interpretation in the first quarter of fiscal 2008. Management is currently
evaluating the requirements of FIN No. 48 and has not yet determined the impact
on the consolidated financial statements.
(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.
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 the Institutional Sanitary
Supplies segment. The sale of CDC was completed on August 24, 2005. Excluded
from the sale of CDC's product lines was Anti-
55
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Clog, an EPA-registered biocide that has a unique delivery system and is used in
commercial air-conditioning systems. Beginning in July 2005, the operating
results of the Anti-Clog product, which are not material, are included in the
Chemicals & Colorants segment. 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 are 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
-------- --------- ------------- ----------------- ------
2006
----
Net sales $ 166,695 $ 110,701 $ 19,734 - $ 297,130
Gross profit 32,283 16,975 4,760 - 54,018
Unallocated cost of sales (1) (3,259)
---------
Net gross profit $ 50,759
=========
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
=========
(1) Represents certain freight and storage costs that are not allocated to a
segment.
Net sales by source country for the years ended June 30, 2006, 2005 and 2004 and
long-lived assets by location as of June 30, 2006 and 2005 were as follows:
Net Sales Gross Profit Long-lived Assets
------------------------------------ ------------------------------------ ---------------------
2006 2005 2004 2006 2005 2004 2006 2005
-------- -------- -------- -------- -------- -------- -------- --------
United States $184,197 $183,397 $166,973 $ 30,149 $ 29,129 $ 30,122 $ 3,033 $ 1,143
Germany 56,464 63,518 51,659 14,311 13,041 11,147 4,061 509
Netherlands 10,095 8,018 9,127 1,791 1,686 1,586 179 285
France 15,543 12,609 11,522 1,808 1,561 1,368 80 90
Asia-Pacific 30,831 45,839 57,078 2,700 7,684 8,189 2,999 3,190
-------- -------- -------- -------- -------- -------- -------- --------
Total $297,130 $313,381 $296,359 $ 50,759 $ 53,101 $ 52,412 $ 10,352 $ 5,217
======== ======== ======== ======== ======== ======== ======== ========
Export sales from the United States to foreign countries amounted to $29,152,
$26,111 and $20,487 for the fiscal years ended June 30, 2006, 2005 and 2004,
respectively.
56
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(21) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of the unaudited quarterly results of operations for
the years ended June 30, 2006 and 2005.
For the quarter ended
-------------------------------------------------------------------
September 30, December 31, March 31, June 30,
FISCAL YEAR ENDED JUNE 30, 2006 2005 2005 2006 2006
-------------------------------------------------------------------
Net sales $74,993 $69,467 $80,846 $71,824
Gross profit 12,503 11,468 13,444 13,344
Net income 1,974 1,547 2,751 2,965
Net income per diluted share $ 0.08 $ 0.06 $ 0.11 $ 0.12
For the quarter ended
-------------------------------------------------------------------
September 30, December 31, March 31, June 30,
FISCAL YEAR ENDED JUNE 30, 2005 2004 2004 2005 2005
-------------------------------------------------------------------
Net sales $80,449 $76,738 $82,512 $73,682
Gross profit 13,515 13,282 14,249 12,055
Net income (1) 3,375 1,952 1,895 2,793
Net income per diluted share $ 0.14 $ 0.08 $ 0.08 $ 0.11
(1) 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.
57
Schedule II
ACETO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 2006, 2005 and 2004
(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, 2006
Allowance for doubtful accounts $ 427 $ 38 - $ 49(a) $ 416
====== ====== ==== ======
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
====== ====== ==== ======
(a) Specific accounts written off as uncollectible.
58
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).
59
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 BDO Seidman LLP.
23.2* 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
60
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 7, 2006
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 09-07-06
----------------------- Chief Executive Officer
Leonard S. Schwartz (Principal Executive Officer)
/s/ Douglas Roth Secretary/Treasurer and 09-07-06
----------------------- Chief Financial Officer
Douglas Roth (Principal Financial and
Accounting Officer)
/s/ Stanley Fischer Director 09-07-06
-----------------------
Stanley Fischer
/s/ Robert Wiesen Director 09-07-06
-----------------------
Robert Wiesen
/s/ Ira S. Kallem Director 09-07-06
-----------------------
Ira S. Kallem
/s/ Albert L. Eilender Director 09-07-06
-----------------------
Albert L. Eilender
/s/ Hans C. Noetzli Director 09-07-06
-----------------------
Hans C. Noetzli
/s/ William Britton Director 09-07-06
-----------------------
William Britton
61