t63539_10k.htm


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, 2008
Commission file number 000-04217

ACETO CORPORATION
(Exact name of registrant as specified in its charter)

New York
 
11-1720520
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
     
One Hollow Lane, Lake Success, NY 11042
(Address of principal executive offices)

(516) 627-6000
(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 Global Select Market
(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 o  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 o  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 o

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.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o                                                    Accelerated filer x

Non-accelerated filer o                                                      Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x
 



 


The aggregate market value of the voting stock of the Company held by non-affiliates of the Company based on the closing price of the common stock on December 31, 2007 as reported on the NASDAQ Global Select Market, was approximately $192,485,400.

The Registrant has 24,445,572 shares of common stock outstanding as of September 2, 2008.

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 4, 2008.
 


2

 
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2008
 
 
TABLE OF CONTENTS

   
Page
 
PART I.
     
       
Item 1.
Business
4
 
Item 1A.
Risk Factors
6
 
Item 1B.
Unresolved Staff Comments
11
 
Item 2.
Properties
11
 
Item 3.
Legal Proceedings
11
 
Item 4.
Submission of Matters to a Vote of Security Holders
12
 
       
PART II.
     
       
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
13
 
Item 6.
Selected Financial Data
15
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
28
 
Item 8.
Financial Statements and Supplementary Data
29
 
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
29
 
Item 9A.
Controls and Procedures
29
 
Item 9B.
Other Information
32
 
       
PART III.
     
       
Item 10.
Directors, Executive Officers and Corporate Governance
32
 
Item 11.
Executive Compensation
32
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
32
 
Item 13.
Certain Relationships and Related Transactions and Director Independence
32
 
Item 14.
Principal Accountant Fees and Services
32
 
       
PART IV.
     
       
Item 15.
Exhibits and Financial Statement Schedules
32
 
Signatures
     
 
3

 
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, competitive product offerings and pricing actions, 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 leader in the sourcing, quality assurance, regulatory support, marketing and distribution of chemically derived pharmaceuticals, biopharmaceuticals, specialty chemicals and crop protection products.  Our business is organized along product lines into three principal segments: Health Sciences, Chemicals & Colorants and Crop Protection.
 
The Health Sciences segment is our largest segment in terms of both sales and gross profit. Products that fall within this segment include active pharmaceutical ingredients (APIs), pharmaceutical intermediates, nutraceuticals and biopharmaceuticals.   
 
We typically partner with both customers and suppliers years in advance of a drug coming off patent to provide the generic equivalent.  We believe we have a pipeline of new APIs 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, we continue to explore opportunities to provide a second-source option for existing generic drugs with approved abbreviated new drug applications (ANDAs). The opportunities that we are looking for are to supply the APIs for the more mature generic drugs where pricing has stabilized following the dramatic decreases in price that these drugs experienced after coming off patent.  As is the case in the generic industry, the entrance into the market of other generic competition generally has a negative impact on the pricing of the affected products.  By leveraging our worldwide sourcing, quality assurance and regulatory capabilities, we believe we can be an alternative lower cost, second-source provider of existing APIs to generic drug companies.
 
According to IMS Health, the global pharmaceutical market is expected to grow 5-6% in 2008 to approximately $745 billion.  In the United States, sales growth is expected to range from 4-5% which marks a historic low for the United States.  Key factors limiting the growth in this market include a leveling off of growth from the introduction of the Medicare Part D prescription drug benefit, patent expirations of branded products and an associated increase in the use of lower cost generic drugs, and an increased pressure from governmental authorities and managed care providers to control costs.
 
The Chemicals & Colorants segment is a major supplier to the many different industries that require outstanding performance from chemical raw materials and additives.  Products that fall within this segment include intermediates for dyes, pigments and agrochemicals.  We provide chemicals used to make plastics, surface coatings, textiles, lubricants, flavors and fragrances. Many of Aceto’s raw materials are also used in high-tech products like high-end electronic parts (circuit boards and computer chips) and binders for specialized rocket fuels. We are currently responding to the changing needs of our customers in the color producing industry by taking our resources and knowledge downstream as a supplier of select organic pigments. We expect that continued global Gross Domestic Product growth will drive higher demand for the chemical industry, especially in China and other emerging regions of the world. With supply growth limited, we expect that industry supply/demand balances will remain favorable. However, continued volatility in energy costs will add uncertainty to our profit outlook.
 
4

 
According to the American Chemistry Council, leading indicators of global industrial production continue to suggest a slowing down of activity.   Overall, on a year-over-year basis, global chemical industry production increased by a modest 2.5%.
 
The Crop Protection segment sells herbicides, fungicides, insecticides, and other agricultural chemicals to customers, primarily located in the United States and Western Europe. In fiscal 2007, we entered into a multi-year contract with a major agricultural chemical distributor and launched generic Asulam, an herbicide for sugar cane and the first generic registration that we have received.  Our plan is to continue to develop our pipeline and bring to market additional products in a similar manner. In May 2008, the Company sold an insecticide product to its patent owner in conjunction with litigation settlement involving an expired license.
 
According to the US Department of Agriculture, total acreage planted in 2008 increased by 1.3% to slightly more than 324 million acres.  The number of peanut acres planted in 2008 was up approximately 19% from 2007 levels, sugar cane acreage was down 0.9% from 2007 and potato acres planted in 2008 were down 10.6% from 2007 levels.
 
Our main business strengths are sourcing, quality assurance, regulatory support, marketing and distribution. With a physical presence in ten countries, we distribute over 1000 pharmaceuticals and chemicals used principally as raw materials in the pharmaceutical, agricultural, color, surface coating/ink and general chemical consuming industries. We believe that we are currently the largest buyer of pharmaceutical and specialty chemicals for export from China, purchasing from over 500 different manufacturers.

Our presence in China, Germany, France, the Netherlands, Singapore, India, Poland, Hong Kong, Japan, the United Kingdom and the United States, along with strategically located 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 crop protection products are readily accessible.  We are able to offer our customers competitive pricing, continuity of supply, and quality control.  We believe our 60 years of experience, our reputation for reliability and stability, and our long-term relationships with suppliers have fostered loyalty among our customers.

We remain confident about our business prospects.  We anticipate continued organic growth which will be enhanced through our plans to enter the market for companion animal vaccines,  the market for finished dosage form generic drugs,  the Japanese pharmaceutical market, the continued globalization of our Chemicals & Colorants business, the further globalization of our nutraceutical business, the  expansion of our crop protection segment by acquisition of product lines and intellectual property, the continued enhancement of our sourcing operations in China and India, and the steady improvement of our quality assurance and regulatory capabilities.

We believe 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 plans involve seeking strategic acquisitions that enhance our earnings and forming alliances with partners that add to our capabilities, when possible.

Information concerning revenue and gross profit attributable to each of our reportable segments is found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in Note 19 to the Consolidated Financial Statements, Part II, Item 8, “Financial Statements and Supplementary Data.”

Products and Customers

During the fiscal years ended June 30, 2008 and 2007, approximately 67% and 65%, respectively, of our purchases were from Asia and approximately 19% and 21%, respectively, were from Europe.

Our customers are primarily 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 2008 and 2007, sales made to customers in the United States totaled $165,287 and $153,147, respectively.  Sales made to customers outside the United States during fiscal years 2008 and 2007 totaled $194,304 and $160,326, respectively, of which, approximately 58% were to customers located in Europe.
 
5

 
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 standing relationships with many suppliers as well as our sourcing operations in both 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 2008, 2007 or 2006.  No single supplier accounted for as much as 10% of purchases in fiscal 2008 and 2007.

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 crop protection products 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 three such task force groups and historically, our payments have been in the range of $100 - $250 per year.  We may be required to make such additional payments in the future.

Employees

At June 30, 2008, we had 227 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.  Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also impair our business operations.  If any of the following risk factors occur, our business, financial condition, operating results and cash flows could be materially adversely affected.

If we are unable to compete effectively with our competitors, many of which have greater market presence and resources than us, our profitability and financial condition will be adversely affected.

Our financial condition and operating results are directly related to our ability to compete in the intensely competitive worldwide chemical market.  We face intense competition from global and regional distributors of chemical products, many of which are large chemical manufacturers as well as distributors.  Many of these companies have substantially greater resources than us, including greater financial, marketing and distribution resources. We cannot assure you that we will be able to compete successfully with any of these companies. In addition, increased competition could result in price reductions, reduced margins and loss of market share for our services, all of which would adversely affect our business, results of operations and financial condition.

Our distribution operations concentrate on generic products and therefore are subject to the risks of the generic industry.

The ability of our business to provide consistent, sequential quarterly growth is affected, in large part, by our participation in the launch of new products by generic manufacturers and the subsequent advent and extent of competition encountered by these products. This competition can result in significant and rapid declines in pricing with a corresponding decrease in net sales. Our margins can also be affected by the risks inherent to the generic industry.

Healthcare reform and a reduction in the reimbursement levels by governmental authorities, HMOs, MCOs or other third-party payors may adversely affect our business.

Third party payors increasingly challenge pricing of pharmaceutical products. The trend toward managed healthcare, the growth of organizations such as HMOs and MCOs and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. Such cost containment measures and healthcare reform could affect our ability to sell our products and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
 
6

 
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.

In fiscal 2008 and 2007, the Company received letters from the Pulvair Site Group, a group of potentially responsible parties (PRP Group) who are working with the State of Tennessee (the State) to remediate a contaminated property in Tennessee called the Pulvair site. The PRP Group has alleged that Aceto shipped hazardous substances to the site which were released into the environment.   The State had begun administrative proceedings against the members of the PRP group and Aceto with respect to the cleanup of the Pulvair site and the group has begun to undertake cleanup. The PRP Group is seeking a settlement of approximately $2,100 from the Company for its share to remediate the site contamination. Although the Company acknowledges that it shipped materials to the site for formulation over twenty years ago, the Company believes that the evidence does not show that the hazardous materials sent by Aceto to the site have significantly contributed to the contamination of the environment. Accordingly, the Company believes that the settlement offer is unreasonable. Alternatively, counsel to the PRP Group has proposed that Aceto join it as a participating member and pay 3.16% of the PRP Group's cost.  The Company believes that this percentage is high because it is based on the total volume of materials that Aceto sent to the site, most of which were non-hazardous substances and as such, believes that, at most, it is a de minimus contributor to the site contamination. 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.

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, Arsynco received notice from the EPA of its status as a 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 PRPs 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 PRPs and their financial strength.  Based on prior practice in similar situations, it is possible that the State may assert a claim for natural resource damages with respect to the Arsynco site itself, and either the federal government or the State (or both) may assert claims against Arsynco for natural resource damages in connection with Berry's Creek; any such claim with respect to Berry's Creek could also be asserted against the approximately 150 PRPs which the EPA has identified in connection with that site.  Any claim for natural resource damages with respect to the Arsynco site itself may also be asserted against BASF, the former owners of the Arsynco property. 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.
 
The distribution and sale of our products are subject to prior governmental approvals and thereafter ongoing governmental regulation.
 
Our products are subject to laws administered by federal, state and foreign governments, including regulations requiring registration and approval of many of our products. More stringent restrictions could make our products less desirable, which would adversely affect our revenues and profitability. Some of our products are subject to the EPA registration and re-registration requirements, and are registered in accordance with FIFRA. Such registration requirements are based, among other things, on data demonstrating that the product will not cause unreasonable adverse effects on human health or the environment when used according to approved label directions. Governmental regulatory authorities have required, and may require in the future, that certain scientific data requirements be performed on our products and this may require us on our behalf or in joint efforts with other registrants to perform additional testing.  Responding to such requirements may cause delays in or the cessation of the sales of one or more of our products which would adversely affect our profitability. We can provide no assurance that any testing approvals or registrations will be granted on a timely basis, if at all, or that our resources will be adequate to meet the costs of regulatory compliance or that the economic benefit of complying with the requirement will exceed our cost.
 
7

 
Tax legislation and 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. From time to time, various legislative initiatives may be proposed that could adversely affect our tax positions. There can be no assurance that our effective tax rate will not be adversely affected by these initiatives.

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.

 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 and related gross profit 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. In addition, certain of our products carry a higher gross margin than other products, particularly in the Health Sciences segment. Reduced sales of these higher margin products could have a significant impact on our operating results. 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.
 
8

 
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, including manufacturing delays caused by plant shutdowns and issues that may arise due to the restrictions of transporting chemicals related to the 2008 Summer Olympics in Beijing, may occur with these and other outside sources. If such problems occur, we cannot assure 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 ”directors and officers” insurance policies 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 give rise to product liability claims not covered by insurance or indemnity agreements.

The marketing, distribution and use of chemical products involves substantial risk of product liability claims. A successful product liability claim that we have not insured against, that exceeds our levels of insurance or that we are not indemnified for may require us to pay a substantial amount of damages. In the event that we are forced to pay such damages, this payment may have a material adverse effect on our financial and operating results.

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 2008 and 2007, approximately 54% and 53%, respectively, of our revenues were attributable to operations conducted abroad and to sales generated from the United States to foreign countries.  In addition, in fiscal year 2008, approximately 67% and 19% of our purchases came from Asia and Europe, 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.

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 suppliers’ 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 suppliers’ facilities, which in turn could have a material adverse effect on our business, financial condition and results of operations.
 
9

 
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:

 
·
quarterly fluctuations in our operating income and earnings per share results
 
·
technological innovations or new product introductions by us or our competitors
 
·
economic conditions
 
·
disputes concerning patents or proprietary rights
 
·
changes in earnings estimates and market growth rate projections by market research analysts
 
·
sales of common stock by existing security holders
 
·
loss of key personnel
 
·
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 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 report on 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.
 
10

 
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Complying with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations will require the Company to expend additional resources. We are committed to maintaining the highest standards of corporate governance and public disclosure. As a result, we will continue to invest necessary resources to comply with evolving laws, regulations and standards, and this investment may result in increased expenses and a diversion of management time and attention from revenue-generating activities.

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 100 F Street, NE, 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.

In November 2007, we purchased approximately 2,300 gross square meters of land along with 12,000 gross square feet of office space in Mumbai, India to develop our infrastructure in order to capitalize on the Indian pharmaceutical market.

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; Düsseldorf, Germany; Heemskerk, the Netherlands; Paris, France; Lyon, France; Singapore; and Warsaw, Poland.  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 fiscal 2008 and 2007, the Company received letters from the Pulvair Site Group, a group of potentially responsible parties (PRP Group) who are working with the State of Tennessee (the State) to remediate a contaminated property in Tennessee called the Pulvair site. The PRP Group has alleged that Aceto shipped hazardous substances to the site which were released into the environment.   The State had begun administrative proceedings against the members of the PRP group and Aceto with respect to the cleanup of the Pulvair site and the group has begun to undertake cleanup. The PRP Group is seeking a settlement of approximately $2,100 from the Company for its share to remediate the site contamination. Although the Company acknowledges that it shipped materials to the site for formulation over twenty years ago, the Company believes that the evidence does not show that the hazardous materials sent by Aceto to the site have significantly contributed to the contamination of the environment. Accordingly, the Company believes that the settlement offer is unreasonable. Alternatively, counsel to the PRP Group has proposed that Aceto join it as a participating member and pay 3.16% of the PRP Group's cost.  The Company believes that this percentage is high because it is based on the total volume of materials that Aceto sent to the site, most of which were non-hazardous substances and as such, believes that, at most, it is a de minimus contributor to the site contamination. 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.
 
11

 
In March 2006, Arsynco received notice from the EPA of its status as a 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 PRPs 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 PRPs and their financial strength.  Based on prior practice in similar situations, it is possible that the State may assert a claim for natural resource damages with respect to the Arsynco site itself, and either the federal government or the State (or both) may assert claims against Arsynco for natural resource damages in connection with Berry's Creek; any such claim with respect to Berry's Creek could also be asserted against the approximately 150 PRPs which the EPA has identified in connection with that site.  Any claim for natural resource damages with respect to the Arsynco site itself may also be asserted against BASF, the former owners of the Arsynco property. 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.

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.
 
12

 
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 Global Select Market using the symbol “ACET.”  The following table states the fiscal year 2008 and 2007 high and low sales prices of our common stock as reported by the NASDAQ Global Select Market for the periods indicated.

   
HIGH
   
LOW
   
FISCAL YEAR 2008
             
First Quarter
  $
9.82
    $ 8.28    
Second Quarter
   
9.39
      7.51    
Third Quarter
   
8.43
      5.79    
Fourth Quarter
    8.52       6.60    
                   
FISCAL YEAR 2007
                 
First Quarter
  $ 7.63     $ 6.54    
Second Quarter
    9.25       6.82    
Third Quarter
    9.98       7.22    
Fourth Quarter
    9.48       7.60    

Cash dividends of $0.10 per common share were paid in January 2008, cash dividends of $0.05 per common share were paid in March 2008 and cash dividends of $0.10 per common share were paid in June of 2008.  Cash dividends of $0.075 per common share were paid in January 2007 and cash dividends of $0.10 per common share were paid in June of 2007.  Cash dividends of $0.075 per common share were paid in January and June of fiscal year 2006.

As of September 2, 2008, there were 509 holders of record of our common stock.

22,363 shares of our common stock 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, 2008:
 
 
 
Plan category
 
Number of securities to
be issued upon exercise
of outstanding options
   
Weighted-average
exercise price of
outstanding options
   
Number of securities
remaining available for
future issuance under
equity compensation plans
 
 
Equity compensation plans approved by security holders
   
  2,879
    $ 7.59         524  
 
Equity compensation plans not approved by security holders
      -         -         -  
Total
    2,879     $ 7.59       524  
                         
Performance Graph

The following graph compares on a cumulative basis the yearly percentage change, assuming dividend reinvestment, over the last five fiscal years in (a) the total shareholder return on our common stock with (b) the total return on the Standard & Poor’s 500 Index and (c) the total return on a published line-of-business index – the Dow Jones U.S. Chemicals Index (the “Peer Group”).

The following graph assumes that $100 had been invested in each of the Company, the Standard & Poor’s 500 Index and the Peer Group on June 30, 2003.  The stock price performance included in this graph is not necessarily indicative of future stock price performance.
 
13

 
GRAPHIC
 
 
  ASSUMES $100 INVESTED ON JUNE 30, 2003
ASSUMES DIVIDEND REINVESTMENT
FISCAL YEAR ENDING JUNE 30, 2008
 
 
Aceto Corporation
 
 
S&P 500 Index
 
Dow Jones U.S.
Chemicals
June 30, 2003
100
 
100
 
100
June 30, 2004
144
 
119
 
126
June 30, 2005
  93
 
127
 
138
June 30, 2006
  88
 
138
 
146
June 30, 2007
120
 
166
 
194
June 30, 2008
102
 
144
 
225

14


Item 6.  Selected Financial Data
(In thousands, except per-share amounts)


Fiscal years ended June 30,
 
2008
   
2007
   
2006
   
2005
   
2004(1)
 
Net sales
  $ 359,591     $ 313,473     $ 297,328     $ 313,431     $ 296,646  
Operating income
    21,377       15,064       12,429       11,590       16,405  
Income from continuing operations
    13,473       10,212       9,264       10,625       13,111  
Net income
    13,473       10,212       9,237       10,015       13,067  
                                         
At year end
                                       
                                         
Working capital
  $ 128,786     $ 112,930     $ 104,707     $ 94,249     $ 86,420  
Total assets
    222,243       188,478       166,592       149,028       149,697  
Long-term liabilities
    16,836       15,548       15,140       3,982       2,877  
Shareholders’ equity
    140,409       124,827       115,053       107,655       100,266  
                                         
Income per common share(2)
                                       
                                         
Basic income per common share from continuing operations
  $ 0.55     $ 0.42     $ 0.38     $ 0.44     $ 0.55  
Basic income per common share from net income
  $ 0.55     $ 0.42     $ 0.38     $ 0.41     $ 0.55  
Diluted income per common share from continuing operations
  $ 0.54     $ 0.41     $ 0.38     $ 0.43     $ 0.53  
Diluted income per common share from net income
  $ 0.54     $ 0.41     $ 0.38     $ 0.41     $ 0.53  
Cash dividends
  $ 0.25     $ 0.175     $ 0.15     $ 0.15     $ 0.11  
                                         
(1) Includes the acquisition of Pharma Waldhof on December 31, 2003.
(2) Adjusted for stock splits, effected in the form of dividends, as appropriate.
 
   
   
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide the readers of our financial statements with a narrative discussion about our business. The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes.

We are reporting a $6,313 increase in operating income to $21,377 for the year ended June 30, 2008 as compared to $15,064 for the prior year.  This increase in operating income was achieved, despite a highly competitive environment, primarily through a significant increase in sales, improving our profit margin and our management of selling, general and administrative costs.  Net sales for fiscal 2008 were $359,591, an increase of $46,118 from fiscal 2007.  This increase in net sales also impacted our gross profit, which increased $12,812 to $67,305 for fiscal 2008.  Our net income increased to $13,473, or $0.54 per diluted share, an increase of $3,261 or 31.9% compared to fiscal year 2007.

Our financial position as of June 30, 2008, remains strong, as we had cash and short-term investments of $47,063, working capital of $128,786, no long-term debt and shareholders’ equity of $140,409.

Our business is separated into three principal segments:  Health Sciences, Chemicals & Colorants and Crop Protection.  The Health Sciences segment is our largest segment in terms of both sales and gross profits. Products that fall within this segment include APIs, pharmaceutical intermediates, nutraceuticals and biopharmaceuticals.
 
We typically partner with both customers and suppliers years in advance of a drug coming off patent to provide the generic equivalent.  We believe we have a pipeline of new APIs 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, we continue to explore opportunities to provide a second-source option for existing generic drugs with ANDAs. The opportunities that we are looking for are to supply the APIs for the more mature generic drugs where pricing has stabilized following the dramatic decreases in price that these drugs experienced after coming off patent.  As is the case in the generic industry, the entrance into the market of other generic competition generally has a negative impact on the pricing of the affected products.  By leveraging our worldwide sourcing, quality assurance and regulatory capabilities, we believe we can be an alternative lower cost, second-source provider of existing APIs to generic drug companies.
 
15

 
The Chemicals & Colorants segment is a major supplier to the many different industries that require outstanding performance from chemical raw materials and additives.  Products that fall within this segment include intermediates for dyes, pigments and agrochemicals.  We provide chemicals used to make plastics, surface coatings, textiles, lubricants, flavors and fragrances. Many of our raw materials are also used in high-tech products like high-end electronic parts (circuit boards and computer chips) and binders for specialized rocket fuels. We are currently responding to the changing needs of our customers in the color producing industry by taking our resources and knowledge downstream as a supplier of select organic pigments. We expect that continued global Gross Domestic Product growth will drive higher demand for the chemical industry, especially in China and other emerging regions of the world. With supply growth limited, we expect that industry supply/demand balances will remain favorable. However, continued volatility in energy costs will add uncertainty to our profit outlook.
 
The Crop Protection segment sells herbicides, fungicides, insecticides, and other agricultural chemicals to customers, primarily located in the United States and Western Europe. In fiscal 2007, we entered into a multi-year contract with a major agricultural chemical distributor and launched generic Asulam, an herbicide for sugar cane and the first generic registration that we have received.  Our plan is to continue to develop our pipeline and bring to market additional products in a similar manner. In May 2008, the Company sold an insecticide product to its patent owner in conjunction with litigation settlement involving an expired license.

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 business strengths are sourcing, quality assurance, regulatory support, marketing and distribution. With a physical presence in ten countries, we distribute over 1000 pharmaceuticals and chemicals used principally as raw materials in the pharmaceutical, agricultural, color, surface coating/ink and general chemical consuming industries. We believe that we are currently the largest buyer of pharmaceutical and specialty chemicals for export from China, purchasing from over 500 different manufacturers.

In this MD&A, we explain our general financial condition and results of operations, including the following:

 
·
factors that affect our business
 
·
our earnings and costs in the periods presented
 
·
changes in earnings and costs between periods
 
·
sources of earnings
 
·
the impact of these factors on our overall financial condition

As you read this MD&A, refer to the accompanying consolidated statements of income, which present the results of our operations for the three years ended June 30, 2008.  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 indefinite-life intangible assets, long-lived assets, environmental and other contingencies, income taxes and stock-based compensation.  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.
 
16

 
We believe the following critical accounting policies affected our more significant judgments and estimates used in preparing these consolidated financial statements.

Revenue Recognition

We recognize revenue from sales of any product when it is shipped and title and risk of loss pass to the customer.  We have no acceptance or other post-shipment obligations and we do not offer product warranties or services to our customers.

Sales are recorded net of returns of damaged goods from customers, which historically have been immaterial, and sales incentives offered to customers.  Sales incentives consist primarily of volume incentive rebates.  We record volume incentive rebates as the underlying revenue transactions that result in progress by the customer in earning the rebate are recorded, in accordance with Emerging Issues Task Force (EITF) 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products).”

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts relating to estimated losses resulting from customers being unable to make required payments.  Allowances for doubtful accounts are based on historical experience and known factors regarding specific customers and the industries in which those customers operate.  If the financial condition of our customers were to deteriorate, resulting in their ability to make payments being impaired, additional allowances would be required.

Inventories

Inventories, which consist principally of finished goods, are stated at the lower of cost (first-in first-out method) or market.  We write down our inventories for estimated excess and obsolete goods by an amount equal to the difference between the carrying cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions.  A significant sudden increase in demand for our products could result in a short-term increase in the cost of inventory purchases, while a significant decrease in demand could result in an increase in the excess inventory quantities on-hand.  Additionally, we may overestimate or underestimate the demand for our products which would result in our understating or overstating, respectively, the write-down required for excess and obsolete inventory.  Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and reported operating results.

Goodwill and Other Indefinite-Lived  Intangible Assets

Goodwill is calculated as the excess of the cost of purchased businesses over the value of their underlying net assets.  Other indefinite-lived intangible assets principally consist of trademarks.  Goodwill and other indefinite-lived intangible assets are not amortized.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” we test goodwill and other indefinite-lived 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.  If our estimates or our related assumptions change in the future, we may be required to record impairment charges for these assets.

Long-Lived Assets

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. Identifiable intangible assets principally consist of customer relationships, product rights and related intangibles, EPA registrations and related data, patent license and covenants not to compete.  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.
 
17

 
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, 2008, we had current net deferred tax assets of $686 and non-current net deferred tax assets of $2,347.  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.

German tax reform was enacted in August 2007 that reduces the corporate headline tax rate for businesses from 40% to 30%, as well as implementing a cap on interest deductions and tightening the tax basis for trade tax income. This tax rate reduction became effective for tax years ending after January 1, 2008. Due to the reduction in the overall German tax rate, the deferred income tax asset was revalued during the month of enactment of the tax reform, which was in the first quarter of fiscal 2008, and therefore was reduced by approximately $1,429, which is reflected in the consolidated financial statements for the year ended June 30, 2008.

In June 2006, the FASB issued FASB Interpretation (FIN) No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109”. FIN No. 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 on July 1, 2007 and determined that the adoption of FIN No. 48 did not have a material impact on its consolidated financial statements.

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, risk-free interest rate, expected life and dividend yield.  Expected stock-price volatility is based on the historical daily price changes of the underlying stock which are obtained from public data sources. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. We use historical data to estimate expected dividend yield, expected life and forfeiture rates. In fiscal 2007, we utilized the “simplified” method prescribed in SEC Staff Accounting Bulletin No. 107 to estimate the expected life. For stock option grants issued during fiscal 2008, we used an expected stock-price volatility of 46.0% and an expected life of 5.6 years.
 
18

 
Results of Operations

Fiscal Year Ended June 30, 2008 Compared to Fiscal Year Ended June 30, 2007

   
Net Sales by Segment
Year ended June 30,
 
                                     
                           
Comparison 2008
 
   
2008
   
2007
   
Over/(Under) 2007
 
         
% of
         
% of
   
$
     
%
 
Segment
 
Net sales
   
total
   
Net sales
   
Total
   
change
   
change
 
                                       
Health Sciences
  $ 211,481       58.8     $ 170,691       54.5 %   $ 40,790       23.9 %
Chemicals & Colorants
    129,662       36.1       123,299       39.3       6,363       5.2  
Crop Protection
    18,448       5.1       19,483       6.2       (1,035 )     (5.3 )
                                                 
                                                 
Net sales
  $ 359,591       100.0 %   $ 313,473       100.0 %   $ 46,118        14.7 %
                                                 
                                                 
   
Gross Profit by Segment
Year ended June 30,
 
                                                 
                                   
Comparison 2008
 
   
2008
   
2007
   
Over/(Under) 2007
 
   
Gross
   
% of
   
Gross
   
% of
     
$
     
%
Segment
 
Profit
   
Sales
   
Profit
   
sales
   
Change
   
change
 
                                                 
Health Sciences
  $ 44,612       21.1 %   $ 33,007       19.3 %   $ 11,605       35.2  
Chemicals & Colorants
    18,782       14.5       16,556       13.4       2,226       13.4  
Crop Protection
    3,911       21.2       4,930       25.3       (1,019 )     (20.7 )
                                                 
                                                 
Gross profit
  $ 67,305       18.7 %   $ 54,493       17.4 %   $ 12,812       23.5 %
                                                 

19


Net Sales

Net sales increased $46,118, or 14.7%, to $359,591 for the year ended June 30, 2008, compared with $313,473 for the prior year.  We reported sales increases in our Health Sciences and Chemicals & Colorants segments, which were partially offset by a slight sales decrease in our Crop Protection segment.

Health Sciences

Net sales for the Health Sciences segment increased by $40,790 for the year ended June 30, 2008, to $211,481, which represents a 23.9% increase over net sales of $170,691 for the prior year.  This increase is due to various factors including increased sales from our foreign operations of $23,475, specifically our European operations and a $4,679 rise in sales of our pharmaceutical intermediates. In addition, our domestic generics product group experienced an increase in sales of $12,004. The domestic sales increase for the year ended June 30, 2008 was due to the volume of re-orders for existing products as well as realization of new products from our pipeline. We expect the volume of re-orders for existing products to continue at a similar rate through the next fiscal year.

Chemicals & Colorants

Net sales for the Chemicals & Colorants segment were $129,662 for the year ended June 30, 2008, compared to $123,299 for the prior year.  Our chemical business is diverse in terms of products, customers and consuming markets.  The increase in sales from this segment is partially attributable to an increase of $5,049 in sales for chemicals used in aroma products, $5,723 in sales of pigment and dye intermediates, and a $1,032 rise in sales of chemicals used to make surface coatings.  In addition, the increase in sales is due to a rise in prices in the chemical industry due to increased demand for chemical products in China. This increase is offset in part by a $4,967 decline in sales of our products sold to the food, beverage and cosmetics industries as a result of the slowdown in the economy.

Crop Protection

Net sales for the Crop Protection segment decreased to $18,448 for the year ended June 30, 2008, a decrease of $1,035, or 5.3%, over net sales of $19,483 for the prior year.  The overall decrease in net sales was mainly attributable to decreased sales of an herbicide used for sugar cane as well as decreased sales related to an insecticide in which we were  involved in an antitrust case related to certain licensed technology.   These decreases were partially offset by an increase in sales of an herbicide which is primarily used on peanuts as the peanut acreage has increased from 2007.

Gross Profit

Gross profit by segment increased $12,812 to $67,305 (18.7% of net sales) for the year ended June 30, 2008, as compared to $54,493 (17.4% of net sales) for the prior year.

Health Sciences

Health Sciences’ gross profit of $44,612 for the year ended June 30, 2008, was $11,605 or 35.2 % higher than the prior year. This increase in gross profit was attributable to an $8,084 increase in gross profit primarily from our European operations as well as the overall increase in sales volume.  Gross margin increased to 21.1% in fiscal 2008 compared to a gross margin of 19.3% for the prior fiscal year due primarily to favorable product mix in our domestic nutraceutical products, as well as products sold by our European operations, which were more profitable than other products.

Chemicals & Colorants

Gross profit for the year ended June 30, 2008, increased by $2,226, or 13.4%, over the prior year.  Gross margin was 14.5% for the year ended June 30, 2008 compared to 13.4% for the prior period.   The increase in the gross profit and gross margin percentage primarily relates to the increase in sales volume and positive product mix on aroma chemicals. In addition, there was a $330 settlement of an anti-dumping claim included in the prior year cost of sales.
 
Crop Protection

Gross profit for the Crop Protection segment decreased to $3,911 for the year ended June 30, 2008, versus $4,930 for the prior year, a decrease of $1,019 or 20.7%.  Gross margin for the year ended June 30, 2008 was 21.2% compared to the prior period gross margin of 25.3%.The primary reason for the decrease in the gross profit and gross margin percentage primarily relates to a decline in sales volume of a particular herbicide and insecticide as described above in the Crop Protection net sales section.
 
20

 
Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) increased $6,004, or 15.2%, to $45,422 for the year ended June 30, 2008 compared to $39,418 for the prior year.  As a percentage of sales, SG&A remained consistent at 12.6% for fiscal 2008.  The increase in SG&A is partially attributed to an increase of $1,300 in legal expenses, the majority of which was incurred relating to an antitrust case that the Company previously commenced against the owner of certain licensed technology used with one of our crop protection products, which was settled in May 2008. SG&A also increased due to a $3,590 rise in personnel related costs, of which $1,849 relates to our foreign operations and $1,741 relates to various factors including annual salary increases, stock-based compensation and increased bonus expense as a result of increased profitability.   In addition, commission expense increased by $505 due to increased sales. Additionally, the prior year amount was reduced by $243 of proceeds received from credit insurance, of which there was no comparable amount received during the year ended June 30, 2008.

Research and Development Expenses

Research and development expenses (R&D) increased $495 over the prior year to $506 for the year ended June 30, 2008. R&D relates to the development of two finished dosage form generic pharmaceutical products to be distributed in Europe.

Operating Income

Fiscal 2008 operating income was $21,377 compared to $15,064 in the prior year, an increase of $6,313 or 41.9%.  This increase was due to the overall increase in gross profit of $12,812 offset in part by the $6,499 increase in SG&A and R&D expenses.

Interest and Other Income, Net

Interest and other income, net was $957 for fiscal 2008 versus $532 for fiscal 2007. The primary reason for this fluctuation is due to changing the functional currency of our Chinese subsidiaries from the Chinese Renminbi to the U.S. Dollar, since these subsidiaries primarily generate and expend cash in the U.S. Dollar.  As a result, we recorded a correction of an error in the third quarter of 2008, which resulted in additional interest and other income, net of approximately $559, which represented approximately $389 after tax profit. We did not deem this adjustment to be material to any prior quarters in fiscal 2008 based upon both quantitative and qualitative factors.  In addition, this adjustment does not impact the 2008 year-to-date reported results. This matter was not corrected for periods prior to June 30, 2007 due to the immateriality of the effects of this in earlier years.  Beginning in 2006, the Chinese government began to revalue the Chinese Renminbi against other currencies, including the U.S. Dollar. The decision by the Chinese government to no longer peg the Renminbi to the U.S. Dollar has caused a reduction in value of dollar denominated assets held in China, which was particularly experienced in fiscal 2008. The increase in interest and other income, net was partially offset by a $115 decrease in other income related to a government subsidy paid annually for doing business in a free trade zone in Shanghai, China and a $186 increase in unrealized loss on trading securities.
 
Provision for Income Taxes

The effective tax rate for fiscal 2008 increased to 39.3% from 33.8% for fiscal 2007.  The increase in the effective tax rate was primarily due to German tax reform, which was enacted in August 2007, that reduced the corporate headline tax rate for businesses from 40% to 30%, as well as implementing a cap on interest deductions and tightening the tax basis for trade tax income. This tax rate reduction became effective for tax years ending after January 1, 2008. Due to the future reduction in the overall German tax rate, the deferred income tax asset was revalued during the month of enactment of the tax reform, which was in the first quarter of fiscal 2008, and therefore was reduced by approximately $1,429, which is reflected in the consolidated financial statements for the year ended June 30, 2008.  Without this adjustment, the fiscal 2008 effective tax rate would have been 32.8%. Additionally, tax reform has taken place in China and effective January 1, 2008, the corporate headline tax rate was increased to 25% from 15%.

21

 
Results of Operations

Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended June 30, 2006

   
Net Sales by Segment
Year ended June 30,
 
                                     
                           
Comparison 2007
 
   
2007
   
2006
   
Over/(Under) 2006
 
         
% of
         
% of
   
$
     
%
Segment
 
Net sales
   
total
   
Net sales
   
total
   
change
   
change
 
                                       
Health Sciences
  $ 170,691       54.5 %   $ 166,725       56.1 %   $ 3,966       2.4 %
Chemicals & Colorants
    123,299       39.3       110,869       37.3       12,430       11.2  
Crop Protection
    19,483       6.2       19,734       6.6       (251 )     (1.3 )
                                                 
                                                 
Net sales
  $ 313,473       100.0 %   $ 297,328       100.0 %   $ 16,145        5.4 %
                                                 
   
Gross Profit by Segment
Year ended June 30,
 
                                                 
                                   
Comparison 2007
 
   
2007
   
2006
   
Over/(Under) 2006
 
   
Gross
   
% of
   
Gross
   
% of
     
$
     
%
 
Segment
 
profit
   
sales
   
Profit
   
sales
   
change
   
change
 
                                                 
Health Sciences
  $ 33,007       19.3 %   $ 32,313       19.4 %   $ 694       2.1 %
Chemicals & Colorants
    16,556       13.4       17,144       15.5       (588 )     (3.4 )
Crop Protection
    4,930       25.3       4,760       24.1       170       3.6  
                                                 
                                                 
Segment gross profit
    54,493       17.4       54,217       18.2       276       0.5  
                                                 
Freight and storage costs (1)
    -       -       (3,259 )     (1.1 )     3,259       100.0  
Gross profit
  $ 54,493       17.4 %   $ 50,958       17.1 %   $ 3,535       6.9 %
                                                 

(1) Prior to July 2006, certain freight and storage costs were not able to be allocated to the segments.  Effective July 2006, as a result of certain system improvements, all freight and storage costs are allocated to a particular segment.  Therefore, the unallocated portion of certain freight and storage costs for the year ended June 30, 2007 have now been identified to the segments as presented above.  Total Company gross profit and margin were not affected by this change in allocation of costs.  However, the comparison of gross profit by segment will be affected by the change in allocation of these costs.
 
22

 
Net Sales

Net sales increased $16,145, or 5.4%, to $313,473 for the year ended June 30, 2007, compared with $297,328 for the prior year.  We reported sales increases in our Health Sciences and Chemicals & Colorants segments, which were partially offset by a slight sales decrease in our Crop Protection segment.

Health Sciences

Net sales for the Health Sciences segment increased by $3,966 for the year ended June 30, 2007, to $170,691, which represents a 2.4% increase over net sales of $166,725 for the prior year.  The sales increase from the prior period is primarily related to increased sales from our foreign operations of $9,229, specifically our Germany and Singapore operations, and increased sales from the pharmaceutical intermediates and diagnostics products of $4,365.   These increases were partially offset by a decrease from one specific generic product of $9,906 due to its normal selling pattern.

Chemicals & Colorants

Net sales for the Chemicals & Colorants segment were $123,299 for the year ended June 30, 2007, compared to $110,869 for the prior year.  This increase of $12,430 or 11.2%, over the prior period is attributable to an increase in the number of products being offered by our foreign subsidiaries, namely Germany and Singapore. Sales of Chemicals & Colorants by our foreign subsidiaries for the year ended June 30, 2007 increased by $6,920 over the comparable prior year period.    The increase in sales for this segment also resulted from the increase in sales in the coatings product group of $7,350. The increase in Chemicals and Colorant sales is partially offset by one customer within our color-pigment and pigment-intermediate business, whose contract expired in fiscal 2006 and purchased $3,118 during 2006 as compared to zero in 2007.   Our chemical business is diverse in terms of products, customers and consuming markets.

Crop Protection

Net sales for the Crop Protection segment decreased to $19,483 for the year ended June 30, 2007, a decrease of $251, or 1.3%, over net sales of $19,734 for the prior year.  The overall decrease in net sales was mainly attributable to decreases in three products of $2,955 due to the unseasonable dry weather conditions, particularly in the southern U.S. region and the 10-20% reduction of peanut acreage in favor of corn due to the increased demand for ethanol.  These decreases were partially offset by the launch of our Asulam product in the first quarter of 2007 which resulted in sales of $2,802.

Gross Profit

Gross profit by segment increased $3,535 to $54,493 (17.4% of net sales) for the year ended June 30, 2007, as compared to $50,958 (17.1% of net sales) for the prior year.  The gross profit of each segment was negatively affected by the direct allocation of certain freight and storage costs in 2007 that had been reported as unallocated in prior years.  The Company’s overall gross profit and margin were not affected but the segmental comparisons to last year have been affected.

Health Sciences

Health Sciences’ gross profit of $33,007 for the year ended June 30, 2007, was $694 or 2.1% higher than the prior year. This increase in gross profit was directly attributable to the increase in the sales volume. The gross margin declined to 19.3% in fiscal 2007 compared to a gross margin of 19.4% for the prior fiscal year which is directly attributed to the direct allocation of certain freight and storage charges that are not included in last year’s comparable period.

Chemicals & Colorants

Gross profit for the year ended June 30, 2007, decreased by $588, or 3.4%, over the prior year due to the direct allocation of certain freight and storage charges not included in last year’s comparable period as well as settlement of an anti-dumping claim of $330.  Gross margin decreased from 15.5% in fiscal 2006 to 13.7% in fiscal 2007.  The foreign subsidiaries, primarily Germany and Singapore, contributed $625 or 19% more gross profit in 2007 as compared to 2006.  Additionally, the coatings product group reported an increase of $723 due to the sales increase previously mentioned above over the prior year.

Crop Protection

Gross profit for the Crop Protection segment increased to $4,930 for the year ended June 30, 2007, versus $4,760 for the prior year, an increase of $170 or 3.6%. The primary reason for the increase in gross profit was due to the launch of the Asulam product.    The gross profit was negatively affected by $1,028 related to the sales decline in the three products discussed earlier, which was partially offset by lower costs to maintain our EPA registered products of $338.
 
23

 
Unallocated freight and storage costs

Unallocated cost of sales was $0 for fiscal 2007 compared to $3,259 in 2006.  As a result of certain system improvements, certain freight and storage costs which were not able to be identified to a particular segment in the prior fiscal years, have now been included within the segments.  Therefore, there are no unallocated freight and storage costs in the current year.  Total Company gross profit and margin were not affected by this allocation.  This revision will affect the comparison of the segments’ gross profits, however.

Selling, General and Administrative Expenses

SG&A increased $909, or 2.4%, to $39,418 for the year ended June 30, 2007 compared to $38,509 for the prior year.  As a percentage of sales, SG&A decreased to 12.6% for fiscal 2007 versus 13.0% for fiscal 2006.  The increase in SG&A is primarily attributable to the increase of $1,244 in personnel costs including increased bonus expenses and additional employees, $415 increase in sales and marketing expenses, and $259 increased legal costs, partially offset by lower operating expenses of $952 resulting from the sale of one of our subsidiaries in August 2005 and a $537 charge for settlement of legal claims against one of our subsidiaries in 2006.

Operating Income

Fiscal 2007 operating income was $15,064 compared to $12,429 in the prior year, an increase of $2,635 or 21.2%.  This increase was due to the $3,535 increase in gross profit, which was partially offset by the overall increase in SG&A expenses and R&D expenses of $900.

Interest and Other Income, Net

Interest and other income was $532 for fiscal 2007, which represents a 44.4% decrease from $956 in fiscal 2006.  The decrease is primarily attributable to a decrease of $409 in a government subsidy paid annually for doing business in a free trade zone in Shanghai, China and net loss on foreign currency of $770, partially offset by an increase in interest income of $455 due to increased investments during the year and increased interest rates.

Provision for Income Taxes

The effective tax rate for fiscal 2007 increased to 33.8% from 30.1% for fiscal 2006.  The increase in the effective tax rate relates primarily to increased earnings in foreign tax jurisdictions with higher tax rates, primarily Germany.

Liquidity and Capital Resources

Cash Flows

At June 30, 2008, we had $46,515 in cash, of which $33,222 was outside the United States, $548 in short-term investments and no outstanding bank loans.

Our cash position at June 30, 2008 increased $14,195 from the amount at June 30, 2007.  Operating activities for the year ended June 30, 2008 provided cash of $15,418 as compared to cash provided by operations of $4,163 for the comparable 2007 period. The $15,418 was comprised of $13,473 in net income and $5,602 derived from adjustments for non-cash items, offset by a net $3,657 decrease from changes in operating assets and liabilities. The non-cash items included $2,378 in depreciation and amortization expense, $1,285 in stock compensation and $1,835 for the deferred income taxes provision.  Accounts receivable increased $7,326 during the year ended June 30, 2008, due to increased sales during the fourth quarter of 2008 as compared to the fourth quarter of 2007. Inventories increased by approximately $7,989 and accounts payable increased by $9,615 due to the increase in the Health Sciences segment for inventory on-hand related to our European operations as a result of a ramp-up in orders for products to be shipped in the first and second quarters of 2009.  In addition, the Company is carrying more stock for certain products of both the Chemicals and Colorants and Health Sciences segments that are purchased from China, due to a supplier interruption related to the Olympics to be held in China in the summer of 2008. Accrued expenses and other liabilities increased $4,853 during the year ended June 30, 2008, due primarily to an increase in accrued expenses for our foreign subsidiaries related to timing of income tax payments and an increase in accrued compensation related to increased performance payments, which are anticipated to be paid in the first quarter of 2009. Other receivables increased $1,647 due to an increase in VAT (value added tax) receivables in our European subsidiaries due to increased sales.  Other assets increased $1,832 due primarily to increases in retirement-related assets and an increase in long-term receivables related to the sale of intangible assets.  Our cash position at June 30, 2007 decreased $1,412 from the amount at June 30, 2006.  Operating activities for the year ended June 30, 2007 provided cash of $4,163 as compared to cash provided by operations of $16,028 for the comparable 2006 period. The $4,163 was comprised of $10,212 in net income and $3,878 derived from adjustments for non-cash items, offset by a net $9,927 decrease from changes in operating assets and liabilities. The non-cash items included $1,791 in depreciation and amortization expense and $1,692 for the deferred income taxes provision. Accounts receivable increased $6,973 during the year ended June 30, 2007, due to increased sales during the fourth quarter of 2007 as compared to the fourth quarter of 2006.  Inventories increased by approximately $12,565 and accounts payable increased by $7,884 as a result of a ramp-up in orders for products to be shipped in the first quarter of 2008 and an increase in products in which we have decided to carry stock. Accrued expenses and other liabilities increased $4,185 during the year ended June 30, 2007, due primarily to an increase in accrued expenses related to a joint venture, an increase in accrued expenses for our foreign subsidiaries related to increased sales and profitability overseas, as well as increase in accrued compensation related to increased performance payments, which are anticipated to be paid in the first quarter of 2008. Other receivables increased $1,726 due to an increase in VAT taxes receivables in our European subsidiaries, related to increased sales in that region.  Our cash position at June 30, 2006, increased $13,782 from the amount at June 30, 2005.  Operating activities provided cash of $16,028, primarily from net income of $9,237 and a decrease in inventory of $4,909.
 
24

 
Investing activities for the year ended June 30, 2008 provided cash of $1,404 primarily related to maturities and sales of available for sale investments of $2,200 and proceeds from sale of intangible assets of $400. Cash provided by investing activities is offset in part by the purchases of property and equipment of $1,197. We expect capital expenditures will be between $750 and $1,000 during fiscal 2009.  Investing activities for the year ended June 30, 2007 used cash of $2,591 primarily related to purchases of investments of $6,274 and purchases of property and equipment and intangibles of $704 and $2,468, respectively, including $2,000 for the Asulam product registration and related data filed with the United States Environmental Protection Agency and state regulatory agencies to support such registrations and other supporting data. The amount of cash used for investing activities is offset in part by $6,779 of maturities of available for sale investments. Investing activities for the year ended June 30, 2006 provided cash of $1,387, primarily as a result of proceeds from the sale of investments of $1,799.  This was partially offset by $485 of expenditures for property and equipment.

Financing activities for the year ended June 30, 2008 used cash of $6,030 primarily from the payments of dividends of $6,110. Financing activities for the year ended June 30, 2007 used cash of $3,991 primarily from the payments of dividends of $4,257. Financing activities for the year ended June 30, 2006 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 $22,844, as of June 30, 2008.  We are not subject to any financial covenants under these arrangements.

In June 2007, we amended our revolving credit agreement with a financial institution that expires June 30, 2010, and provides for available credit of $10,000.  At June 30, 2008, we had utilized $663 in letters of credit, leaving $9,337 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, guarantees, sale of assets, sales of receivables, and loans and investments.  We were in compliance with all covenants at June 30, 2008.

Working Capital Outlook

Working capital was $128,786 at June 30, 2008, versus $112,930 at June 30, 2007.  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.  In connection with our crop protection business, we plan to acquire product registration costs and related data filed with the United States Environmental Protection Agency as well as payments to various task force groups, which could approximate $11,200 in fiscal 2009.  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.
 
25

 
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, 2008, we had no significant obligations for capital expenditures.  At June 30, 2008, contractual cash obligations and other commercial commitments were as follows:

Payments Due and/or
Amount of Commitment
(Expiration per Period)

   
Total
   
Less than
1 year
   
1-3
Years
 
4-5
Years
 
After
5 years
                         
Operating leases
  $ 5,213     $ 2,131     $ 2,746   $ 171   $ 165  
                                       
Commercial letters of credit
     663        663       -     -     -  
                                       
Standby letters of credit
    169       169       -     -     -  
                                       
Unconditional purchase obligations
     79,168        79,168        -      -      -  
                                       
Total
  $ 85,213     $ 82,131     $ 2,746   $  171   $ 165  

Other significant commitments and contingencies include the following:

 
1.
One of our subsidiaries markets certain crop protection products which are subject to the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA). FIFRA requires that test data be provided to the 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 three such task force groups and historically, our payments have been in the range of $100 - $250 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.

 
3.
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 2008, 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 $7,846 and $9,574.  As of June 30, 2008 and 2007 a liability of $7,846 and $6,136, respectively, is included in the accompanying consolidated balance sheet.  In accordance with 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.

 
4.
In March 2006, Arsynco received notice from the EPA of its status as a 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 PRPs 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 PRPs and their financial strength.  Based on prior practice in similar situations, it is possible that the State may assert a claim for natural resource damages with respect to the Arsynco site itself, and either the federal government or the State (or both) may assert claims against Arsynco for natural resource damages in connection with Berry's Creek; any such claim with respect to Berry's Creek could also be asserted against the approximately 150 PRPs which the EPA has identified in connection with that site.  Any claim for natural resource damages with respect to the Arsynco site itself may also be asserted against BASF, the former owners of the Arsynco property. 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.
 
26

 
 
5.
In fiscal 2008 and 2007, the Company received letters from the Pulvair Site Group, a group of potentially responsible parties (PRP Group) who are working with the State of Tennessee (the State) to remediate a contaminated property in Tennessee called the Pulvair site. The PRP Group has alleged that Aceto shipped hazardous substances to the site which were released into the environment.   The State had begun administrative proceedings against the members of the PRP group and Aceto with respect to the cleanup of the Pulvair site and the group has begun to undertake cleanup. The PRP Group is seeking a settlement of approximately $2,100 from the Company for its share to remediate the site contamination. Although the Company acknowledges that it shipped materials to the site for formulation over twenty years ago, the Company believes that the evidence does not show that the hazardous materials sent by Aceto to the site have significantly contributed to the contamination of the environment. Accordingly, the Company believes that the settlement offer is unreasonable. Alternatively, counsel to the PRP Group has proposed that Aceto join it as a participating member and pay 3.16% of the PRP Group's cost.  The Company believes that this percentage is high because it is based on the total volume of materials that Aceto sent to the site, most of which were non-hazardous substances and as such, believes that, at most, it is a de minimus contributor to the site contamination. 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.



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 2008, 2007 and 2006, we incurred legal fees of $342, $329 and $315, 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 September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to US GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  In February 2008, the FASB provided a one-year deferral for the implementation of SFAS No. 157 for nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Management believes the adoption of this statement is not expected to have a material impact on the consolidated financial position or results of operations and that the impact in 2009 will only be on  Aceto’s disclosures.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115" (SFAS No. 159). SFAS No. 159 allows companies the choice to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. The provisions of SFAS No. 159 will be effective for fiscal years beginning after November 15, 2007.  The Company does not believe adopting the provisions of SFAS No. 159 will have a significant impact on its consolidated financial statements.

In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF No. 06-11). EITF No. 06-11 provides guidance regarding how an entity should recognize the tax benefit received as a result of dividends paid to holders of share-based compensation awards and charged to retained earnings according to SFAS No. 123(R), and will become effective in the first quarter of 2009. Management does not expect EITF No. 06-11 to have a material impact on the Company’s consolidated financial statements.
 
27

 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No 51” (SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a noncontrolling interest, calculation and disclosure of the consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained noncontrolling equity investment. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company must adopt these new requirements in its first quarter of fiscal 2010.  The adoption of this statement will impact the manner in which the Company presents noncontrolling interests, but will not impact its consolidated financial position or results of operations.

In December 2007, the FASB approved the issuance of SFAS No. 141 (revised 2007) “Business Combinations” (SFAS No. 141R). SFAS No. 141R establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The provisions for SFAS No. 141R are effective for fiscal years beginning after December 15, 2008 and are applied prospectively to business combinations completed on or after that date.  Early adoption is not permitted. SFAS No. 141R is effective for the Company beginning in the first quarter of fiscal 2010.  The Company is evaluating the impact of SFAS No. 141R on its results of operations and financial condition.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities— An Amendment of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS No. 161 on its 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 $548 at June 30, 2008.  Those short-term investments consisted of corporate equity securities, and 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 $55 as of June 30, 2008.  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, 2008, we had foreign currency contracts outstanding that had a notional amount of $20,768.  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, 2008, was not material.

In addition, we enter into cross currency interest rate swaps to reduce foreign currency exposure on inter-company transactions.  In May 2003 we entered into a five-year cross currency interest rate swap transaction,  for the purpose of hedging fixed-interest-rate, foreign-currency-denominated cash flows under inter-company loans.  This transaction expired in May 2008 when the underlying inter-company loan was repaid. Since our interest rate swap qualified as hedging activity, the change in its fair value, amounting to $161 in fiscal 2007 is recorded in accumulated other comprehensive income included in the accompanying consolidated balance sheet as of June 30, 2007.
 
28

 
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, 2008, we had translation exposure to various foreign currencies, with the most significant being the Euro.  The potential loss as of June 30, 2008, resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounted to $7,600.  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 later in this report.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed 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 rules and forms of the Securities and Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer, with assistance from other members of our management, have reviewed the effectiveness of our disclosure controls and procedures as of June 30, 2008 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective.
 
Changes in Internal Control over Financial Reporting

There were no 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, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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, 2008, the effectiveness of our internal control over financial reporting. This assessment was based on criteria established in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our assessment using those criteria, management concluded that our internal control over financial reporting as of June 30, 2008, was effective.
 
29

 
Our internal control over financial reporting as of June 30, 2008, has been audited by BDO Seidman LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

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:

 
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 
·
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

 
·
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.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met.  Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

30

 
Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders
Aceto Corporation:

We have audited Aceto Corporation's internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). 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, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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, Aceto Corporation maintained, in all material respects, effective internal control over financial reporting as of June 30, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Aceto Corporation as of June 30, 2008 and 2007, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2008 and our report dated September 4, 2008, expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLP

Melville, New York
September 4, 2008

31

 
Item 9B.  Other Information

None.

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

Incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission with respect to our annual meeting of shareholders scheduled to be held on December 4, 2008.
 
Item 11.  Executive Compensation

Incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission with respect to our annual meeting of shareholders scheduled to be held on December 4, 2008.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission with respect to our annual meeting of shareholders scheduled to be held on December 4, 2008.
 
Item 13.  Certain Relationships and Related Transactions, and Director Independence

Incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission with respect to our annual meeting of shareholders scheduled to be held on December 4, 2008.

Item 14.  Principal Accountant Fees and Services

Incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission with respect to our annual meeting of shareholders scheduled to be held on December 4, 2008.

PART IV

Item 15.  Exhibits and Financial Statement Schedules

The following documents are filed as part of this Report:
 
(a)
The financial statements listed in the Index to Consolidated Financial Statements are filed as part of this Annual Report. All
 
financial statement schedules have been included in the Consolidated Financial Statements or Notes thereto.
     
(b)
Exhibits
 
     
 
Exhibit
 
 
Number
    Description
 
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).
     
 
3.4
Amended and restated by-laws of Aceto Corporation, effective as of December 6, 2007 (incorporated by reference
   
to Exhibit 3.1 to the Company’s current report on Form 8-K dated December 6, 2007).
 
32

 
     
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).
 
     
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).
 
     
 
33

 
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).
   
10.20
Amendment and Waiver to Credit Agreement between Aceto Corporation and subsidiaries and JPMorgan Chase
 
Bank dated June 26, 2007.
   
10.21
Aceto Corporation 2007 Long-Term Performance Incentive Plan (incorporated by reference to Exhibit 4(i) to
 
Registration Statement No. 333-149586 on Form S-8).
   
21.1*
Subsidiaries of the Company.
   
23.1*
Consent of BDO Seidman, LLP.
   
31.1*
Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted
 
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2*
Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted
 
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
 
2002
   
32.2*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
 
2002
   
__________
*Filed herewith
 
34

 
ACETO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm

Consolidated financial statements:

Consolidated balance sheets as of June 30, 2008 and 2007

Consolidated statements of income for the years ended June 30, 2008, 2007 and 2006

Consolidated statements of cash flows for the years ended June 30, 2008, 2007 and 2006

Consolidated statements of shareholders’ equity and comprehensive income for the years ended June 30, 2008, 2007 and 2006

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.

35

 
Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders
Aceto Corporation:

We have audited the accompanying consolidated balance sheets of Aceto Corporation and subsidiaries as of June 30, 2008 and 2007 and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended June 30, 2008.  In connection with our audits of the consolidated financial statements, we have also audited the schedule as listed in the accompanying index.  These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and 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 and 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 schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. 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 at June 30, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2008, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, present 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, 2008, 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 4, 2008 expressed an unqualified opinion thereon.



/s/ BDO Seidman, LLP

Melville, New York
September 4, 2008

36

 
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2008 AND 2007
(in thousands, except per-share amounts)
 
             
   
2008
   
2007
 
ASSETS
           
Current assets:
           
  Cash and cash equivalents
  $ 46,515     $ 32,320  
  Investments
    548       3,036  
  Trade receivables:  less allowance for doubtful accounts (2008, $477;
               
       2007, $491)
    68,220       58,206  
      Other receivables
    4,819       3,123  
      Inventory
    71,109       60,679  
      Prepaid expenses and other current assets
    817       1,128  
      Deferred income tax asset, net
    1,756       2,541  
       Total current assets
    193,784       161,033  
                 
Long-term notes receivable
    347       449  
                 
Property and equipment, net
    4,307       4,406  
Property held for sale
    6,978       5,268  
Goodwill
    1,987       1,820  
Intangible assets, net
    5,421       5,817  
Deferred income tax asset, net
    4,098       5,958  
Other assets
    5,321       3,727  
                 
TOTAL ASSETS
  $ 222,243     $ 188,478  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 43,480     $ 32,539  
Short term bank loans
    -       25  
Note payable – related party
    500       500  
Accrued expenses
    19,948       14,154  
    Deferred income tax liability
    1,070       885  
Total current liabilities
    64,998       48,103  
                 
Long-term liabilities
    7,034       6,684  
Environmental remediation liability
    7,578       5,816  
Deferred income tax liability
    1,751       2,746  
Minority interest
    473       302  
Total liabilities
    81,834       63,651  
                 
Commitments and contingencies (Note 16)
               
                 
Shareholders’ equity:
               
Common stock, $.01 par value, 40,000 shares authorized; 25,644 shares issued; 24,446 and 24,330 shares
outstanding at June 30, 2008 and 2007, respectively
    256       256  
Capital in excess of par value
    56,832       56,854  
Retained earnings
    81,778       74,419  
Treasury stock, at cost, 1,198 and 1,314 shares at June 30, 2008 and 2007,  respectively
    (11,571 )     (12,693 )
Accumulated other comprehensive income
    13,114       5,991  
Total shareholders’ equity
    140,409       124,827  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 222,243     $ 188,478  
                 

See accompanying notes to consolidated financial statements.
 
37


ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2008, 2007 AND 2006
(in thousands, except per-share amounts)
 
                   
   
2008
   
2007
   
2006
 
                   
Net sales
  $ 359,591     $ 313,473     $ 297,328  
Cost of sales
    292,286       258,980       246,370  
Gross profit
    67,305       54,493       50,958  
                         
Selling, general and administrative expenses
    45,422       39,418       38,509  
Research and development expenses
     506        11        20  
Operating income
    21,377       15,064       12,429  
                         
Other income (expense):
                       
Interest expense
    (145 )     (173 )     (127 )
Interest and other income, net
     957        532        956  
       812        359        829  
                         
Income from continuing operations before income taxes
    22,189       15,423       13,258  
Provision for income taxes
     8,716        5,211        3,994  
Income from continuing operations
    13,473       10,212       9,264  
Loss from discontinued operations, net of income taxes (Note 3)
     -        -        (27 )
Net income
  $ 13,473     $ 10,212     $ 9,237  
                         
Basic income per common share:
                       
Income from continuing operations
  $ 0.55     $ 0.42     $ 0.38  
Loss from discontinued operations
     -        -        -  
    Net income
  $ 0.55     $ 0.42     $ 0.38  
                         
Diluted income per common share:
                       
Income from continuing operations
  $ 0.54     $ 0.41     $ 0.38  
Loss from discontinued operations
     -        -        -  
    Net income
  $ 0.54     $ 0.41     $ 0.38  
                         
Weighted average shares outstanding:
                       
Basic
    24,346       24,305       24,267  
Diluted
    24,800       24,711       24,590  
                         
                         

See accompanying notes to consolidated financial statements.
 
38

 
  ACETO CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  FOR THE YEARS ENDED JUNE 30, 2008, 2007 AND 2006
  (in thousands)
     
2008
   
2007
   
2006
 
                     
Operating activities:
                   
Net income
    $ 13,473     $ 10,212     $ 9,237  
Adjustments to reconcile net income to net cash provided by (used in)
                       
operating activities:
                         
Depreciation and amortization
    2,378       1,791       1,558  
Gain on sale of assets
      -       -       (66 )
Provision for doubtful accounts
    98       132       38  
Non-cash stock compensation
    1,285       443       278  
Unrealized loss (gain) on trading securities
    6       (180 )     (40 )
Deferred income taxes
      1,835       1,692       1,134  
Changes in assets and liabilities:
                       
Investments – trading securities
    324       -       -  
Trade accounts receivable
    (7,326 )     (6,973 )     (227 )
Other receivables
      (1,647 )     (1,726 )     129  
Inventory
      (7,989 )     (12,565 )     4,909  
Prepaid expenses and other current assets
    345       (96 )     (182 )
Other assets
      (1,832 )     (636 )     (719 )
Accounts payable
      9,615       7,884       (3,962 )
Accrued expenses and other liabilities
    4,853       4,185       3,941  
Net cash provided by operating activities
    15,418       4,163       16,028  
                           
Investing activities:
                         
Purchases of investments
      -       (6,274 )     -  
Proceeds from sale of investments
    1,000       -       1,799  
Maturities of investments
      1,200       6,779       -  
Payments received on notes receivable
    98       151       73  
Issuance of notes receivable
      -       (75 )     -  
Proceeds from sale of intangible assets
    400       -       -  
Purchase of intangible assets
      (97 )     (2,468 )     -  
Purchases of property and equipment, net
    (1,197 )     (704 )     (485 )
Net cash provided by (used in) investing activities
    1,404       (2,591 )     1,387  
                           
Financing activities:
                         
Proceeds from exercise of stock options
    87       217       250  
Excess income tax benefit on exercise of stock options
    18       24       85  
Payment of cash dividends
      (6,110 )     (4,257 )     (3,637 )
Payments for purchases of treasury stock
    -       -       (581 )
(Repayments) borrowings of short-term bank loans
    (25 )     25       (126 )
Net cash used in financing activities
    (6,030 )     (3,991 )     (4,009 )